<PAGE>
As filed with the Securities and Exchange Commission on July 29, 1997
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. 31
AND REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 32
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, 1997 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, 1997 on May 23, 1997.
================================================================================
<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 Funds - Performance
Information
<PAGE>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART A PROSPECTUS CAPTION ADDITIONAL INFORMATION
- ----------------- ------------------ ----------------------
(d) Condensed Financial *
Information
4 (a) The Funds; Investment *
Objective and Policies;
Investment Techniques
(b), (c) Investment Objective and *
Policies; Investment
Techniques
5 (a) The Funds; Management of the *
Funds -Investment Adviser
(b) Front Cover Page; Management *
of the Funds - Investment
Adviser; Back Cover Page
(c) Management of the Funds - *
Investment Adviser
(d) Management of the Funds; *
Administrator
(e) Management of the Funds - *
Shareholder Servicing Agent;
Back Cover Page
(f) Expense Summary; Condensed *
Financial Information;
Information Concerning Shares
of the Funds - Expenses
(g) Information Concerning Shares *
of the Funds - Purchases;
Investment Objective and
Policies - Portfolio Trading
5A (a), (b), (c) ** **
<PAGE>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART A PROSPECTUS CAPTION ADDITIONAL INFORMATION
- ----------------- ------------------ ----------------------
6 (a) Information Concerning Shares *
of the Funds - Description
of Shares, Voting Rights and
Liabilities; Information
Concerning Shares of the Funds -
Redemptions and Repurchases;
Information Concerning Shares
of the Funds - Purchases;
Information Concerning
Shares of the Funds - Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares *
of the Funds - Distributions;
Shareholder Services - Distribution
Options
(g) Information Concerning Shares *
of the Funds - Tax Status;
Information Concerning Shares
of the Funds - Distributions
(h) The Funds; Information Concerning *
Shares of the Funds - Purchases
7 (a) Front Cover Page; Management *
of the Funds - Distributor; Back
Cover Page
(b) Information Concerning Shares *
of the Funds - Purchases;
Information Concerning Shares
of the Funds - Net Asset Value
(c) Information Concerning Shares *
of the Funds - Purchases;
Information Concerning Shares
of the Funds - Exchanges;
Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the Funds -
Purchases; Shareholder Services
<PAGE>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART A PROSPECTUS CAPTION ADDITIONAL INFORMATION
- ----------------- ------------------ ----------------------
(e) Information Concerning Shares *
of the Funds - Distribution
Plan; Information Concerning
Shares of the Funds - Purchases;
Expense Summary; Expenses
(f) Information Concerning Shares *
of the Funds - Distribution
Plan
(g) Expense Summary; Information *
Concerning Shares of the Funds -
Purchases; Information Concerning
Shares of the Funds - Exchanges;
Information Concerning Shares of
the Funds - Redemptions and
Repurchases; Information
Concerning Shares of the Funds -
Distribution Plan; Information
Concerning Shares of the Funds
-Distributions; Information
Concerning Shares of the Funds
-Performance Information;
Shareholder Services
8 (a) Information Concerning Shares *
of the Funds - Redemptions
and Repurchases; Information
Concerning Shares of the Funds -
Purchases; Shareholder Services
(b), (c), (d) Information Concerning Shares *
of the Funds - Redemptions and
Repurchases
9 * *
<PAGE>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART B PROSPECTUS CAPTION ADDITIONAL INFORMATION
- ----------------- ------------------ ----------------------
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 Funds-
Trustees and Officers
(c) * Management of the Funds -
Trustees and Officers;
Trustee Compensation
Table
15 (a) * *
(b), (c) * Management of the Funds -
Trustees and Officers
16 (a) Management of the Funds - Management of the Funds -
Investment Adviser Investment Adviser;
Management of the Funds
Trustees and Officers
(b) Management of the Funds - Management of the Funds -
Investment Adviser Investment Adviser
(c) * *
(d) * Management of the Funds -
Investment Adviser
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Shares Distribution Plan
Shares of the Funds -
Distribution Plan
<PAGE>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART B PROSPECTUS CAPTION ADDITIONAL INFORMATION
- ----------------- ------------------ ----------------------
(g) * *
(h) * Management of the Funds -
Custodian; Independent
Auditors and Financial
Statements; Back Cover
Page
(i) * Management of the Funds -
Shareholder Servicing
Agent
17 (a), (c), (d) * Portfolio Transactions and
Brokerage Commissions
(b), (e) * *
18 (a) Information Concerning Shares Description of Shares,
of the Funds - Purchases; Voting Rights and Liabilities
Shareholder Services
(b) * *
19 (a) Information Concerning Shares Shareholder Services
of the Funds - Purchases;
Shareholder Services
(b) Information Concerning Shares Determination of Net Asset
of the Funds - Net Asset Value; Performance
Value; Information Concerning Information; Management
Shares of the Funds - Purchases the Funds - Distributor
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Funds -
Distributor; Distribution
Plan
(c) * *
22 (a) * *
<PAGE>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART B PROSPECTUS CAPTION ADDITIONAL INFORMATION
- ----------------- ------------------ ----------------------
(b) * Determination of Net
Asset Value; Performance
Information
23 * Independent Auditors
and Financial
Statements
- -----------------------------
* Not Applicable
** Contained in Annual Report
</TABLE>
<PAGE>
[Logo]
INVESTMENT MANAGEMENT Prospectus
We invented the mutual fund(SM) August 1, 1997
MFS(R) ALABAMA MUNICIPAL BOND FUND
MFS(R) ARKANSAS MUNICIPAL BOND FUND
MFS(R) CALIFORNIA MUNICIPAL BOND FUND
MFS(R) FLORIDA MUNICIPAL BOND FUND
MFS(R) GEORGIA MUNICIPAL BOND FUND
MFS(R) MARYLAND MUNICIPAL BOND FUND
MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND
MFS(R) MISSISSIPPI MUNICIPAL BOND FUND
MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) PENNSYLVANIA 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
[Graphic Omitted]
<PAGE>
PROSPECTUS
August 1, 1997
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 16 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"); MFS West Virginia Municipal Bond Fund (the "West
Virginia Fund") (collectively referred to as the "Funds") and MFS Municipal
Income Fund. 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 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
"Information Concerning Shares of the Trust -- 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, 1997, 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 83 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 .................................... 52
4. Management of the Trust .............................................. 59
5. Information Concerning Shares of the Trust ........................... 62
Purchases ........................................................ 62
Exchanges ........................................................ 68
Redemptions and Repurchases ...................................... 68
Distribution Plan ................................................ 71
Distributions .................................................... 73
Tax Status ....................................................... 74
Net Asset Value .................................................. 79
Description of Shares, Voting Rights and Liabilities ............. 80
Performance Information .......................................... 80
Expenses ......................................................... 81
6. Shareholder Services ................................................. 82
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
<TABLE>
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<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%
</TABLE>
THE FOLLOWING ANNUAL OPERATING EXPENSES FOR EACH CLASS OF SHARES OF EACH FUND
ARE SHOWN AFTER APPLICABLE FEE REDUCTIONS AND REIMBURSEMENTS, AS DESCRIBED IN
THE FOOTNOTES.
ANNUAL OPERATING EXPENSES OF CLASS A SHARES OF EACH FUND (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
ALABAMA ARKANSAS CALIFORNIA FLORIDA GEORGIA
FUND FUND FUND FUND FUND
------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Management Fees(2) ................................. 0.45% 0.45% 0.40% 0.45% 0.45%
Rule 12b-1 Fees(3) ................................. 0.25%(4) 0.10%(4) 0.00%(4) 0.00%(4) 0.25%(4)
Other Expenses(8) .................................. 0.30% 0.27% 0.26% 0.31% 0.29%
---- ---- ---- ---- ----
Total Operating Expenses(9) ........................ 1.00% 0.82% 0.66% 0.76% 0.99%
NORTH
MARYLAND MASSACHUSETTS MISSISSIPPI NEW YORK CAROLINA
FUND FUND FUND FUND FUND
-------- ------------- ----------- -------- --------
Management Fees(2) ................................. 0.45% 0.45% 0.45% 0.45% 0.45%
Rule 12b-1 Fees(3) ................................. 0.35% 0.35% 0.00%(4) 0.25%(4) 0.35%
Other Expenses(8) .................................. 0.29% 0.29% 0.31% 0.31% 0.25%
---- ---- ---- ---- ----
Total Operating Expenses(9) ........................ 1.09% 1.09% 0.76% 1.01% 1.05%
SOUTH WEST
PENNSYLVANIA CAROLINA TENNESSEE VIRGINIA VIRGINIA
FUND FUND FUND FUND FUND
------------ -------- --------- -------- --------
Management Fees(2) ................................. 0.45% 0.45% 0.45% 0.45% 0.45%
Rule 12b-1 Fees(3) ................................. 0.00%(4) 0.35% 0.35% 0.35% 0.35%
Other Expenses(8) .................................. 0.00%(5) 0.27% 0.27% 0.25% 0.27%
---- ---- ---- ---- ----
Total Operating Expenses(9) ........................ 0.45% 1.07% 1.07% 1.05% 1.07%
ANNUAL OPERATING EXPENSES OF CLASS B SHARES OF EACH FUND (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
ALABAMA ARKANSAS CALIFORNIA FLORIDA GEORGIA
FUND FUND FUND FUND FUND
------- -------- ---------- ------- -------
Management Fees(2) ................................. 0.45% 0.45% 0.40% 0.45% 0.45%
Rule 12b-1 Fees(6) ................................. 1.00% 0.84%(7) 0.83%(7) 0.81%(7) 1.00%
Other Expenses(8) .................................. 0.30% 0.27% 0.26% 0.31% 0.29%
---- ---- ---- ---- ----
Total Operating Expenses(9) ........................ 1.75% 1.56% 1.49% 1.57% 1.74%
NORTH
MARYLAND MASSACHUSETTS MISSISSIPPI NEW YORK CAROLINA
FUND FUND FUND FUND FUND
-------- ------------- ----------- -------- --------
Management Fees(2) ................................. 0.45% 0.45% 0.45% 0.45% 0.45%
Rule 12b-1 Fees(6) ................................. 1.00% 1.00% 0.80%(7) 1.00% 1.00%
Other Expenses(8) .................................. 0.29% 0.29% 0.31% 0.31% 0.25%
---- ---- ---- ---- ----
Total Operating Expenses(9) ........................ 1.74% 1.74% 1.56% 1.76% 1.70%
SOUTH WEST
PENNSYLVANIA CAROLINA TENNESSEE VIRGINIA VIRGINIA
FUND FUND FUND FUND FUND
------------ -------- --------- -------- --------
Management Fees(2) ................................. 0.45% 0.45% 0.45% 0.45% 0.45%
Rule 12b-1 Fees(6) ................................. 0.80%(7) 1.00% 1.00% 1.00% 1.00%
Other Expenses(8) .................................. 0.00%(5) 0.27% 0.27% 0.25% 0.27%
---- ---- ---- ---- ----
Total Operating Expenses(9) ........................ 1.25% 1.72% 1.72% 1.70% 1.72%
</TABLE>
<PAGE>
ANNUAL OPERATING EXPENSES OF CLASS C SHARES OF EACH FUND (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
NORTH
CALIFORNIA CAROLINA VIRGINIA
FUND FUND FUND
---------- -------- --------
<S> <C> <C> <C>
Management Fees(2) .................................................................. 0.40% 0.45% 0.45%
Rule 12b-1 Fees(6) .................................................................. 1.00% 1.00% 1.00%
Other Expenses(8) ................................................................... 0.26% 0.25% 0.25%
---- ---- ----
Total Operating Expenses(9) ......................................................... 1.66% 1.70% 1.70%
</TABLE>
- ------------
(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 1.00% 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 for an indefinite
period of time as follows:
<TABLE>
<CAPTION>
REDUCED ADVISORY FEE REDUCED ADVISORY FEE
AS A % OF AVERAGE AS A % OF AVERAGE
FUND DAILY NET ASSETS FUND DAILY NET ASSETS
- ---- -------------------- ---- --------------------
<S> <C> <C> <C>
Alabama ................................. 0.45% Mississippi ........................ 0.45%
Arkansas ................................ 0.45 New York ........................... 0.45
California .............................. 0.40 North Carolina ..................... 0.45
Florida ................................. 0.45 South Carolina ..................... 0.45
Georgia ................................. 0.45 Tennessee .......................... 0.45
Maryland ................................ 0.45 Virginia ........................... 0.45
Massachusetts ........................... 0.45 West Virginia ...................... 0.45
</TABLE>
Also the Adviser has reduced the Pennsylvania Fund's management fee to
0.35% per annum of the Fund's average daily net assets. Beginning October
1, 1997, the Adviser will reduce the Pennsylvania Fund's management fee to
0.45% per annum of the Fund's average daily net assets.
Absent these reductions, Management Fees would have been 0.55% for each
Fund. See "Management of the Trust" below.
(3)Each Fund has adopted a distribution plan for its shares in accordance
with Rule 12b-1 under the Investment Company Act of 1940, as amended (the
"1940 Act") (the "Distribution Plan"), 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. Currently, a portion of the fees attributable to Class A shares
payable under the Distribution Plan with respect to certain Funds are not
being imposed (see footnote 4 below). Distribution expenses paid under
this Plan, with respect to Class A shares, 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. See "Information Concerning Shares of the Trust --
Distribution Plan" below.
(4)For the California, Florida and Mississippi Funds, fees payable under the
Distribution Plan with respect to Class A shares 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
"Information Concerning Shares of the Trust -- Distribution Plan" below.
(5)The Adviser has agreed to bear the expenses for the Pennsylvania Fund,
subject to reimbursement by the Fund, such that "Other Expenses" do not
exceed 0.40% per annum of each Fund's average daily net assets during the
current fiscal year. While the Adviser is entitled to be reimbursed by the
Pennsylvania Fund for bearing the Fund's expenses, the Adviser is
currently waiving its right to reimbursement. Absent these arrangements,
"Other Expenses" would have been 0.44% for Class A shares and 0.44% for
Class B shares, respectively. See "Information Concerning Shares of the
Trust -- Expenses."
(6)The Distribution Plan provides 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 Class B shares and Class C
shares, respectively. Currently, a portion of the fees attributable to
Class B shares payable under the Distribution Plan with respect to certain
Funds are not being imposed (see footnote 7 below). Distribution expenses
paid under the Distribution Plan with respect to Class B or Class C
shares, 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. See "Information Concerning Shares of the
Trust -- Distribution Plan" below.
(7)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 in the first year, 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 in the first year, payment of the Class B service fee will be
suspended until such date as the Class A service fee first becomes payable
under the Distribution Plan. See "Information Concerning Shares to the Trust
-- Distribution Plan" below.
(8)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."
(9)Absent any fee reductions and/or expense reimbursement arrangements as
described above, "Total Operating Expenses" for Class A, Class B and Class
C shares of the Funds would have been as follows:
FUND CLASS A CLASS B CLASS C
- ---- ------- ------- -------
Alabama ............................... 1.10% 1.85% N/A
Arkansas .............................. 0.92 1.66 N/A
California ............................ 0.81 1.64 1.81%
Florida ............................... 0.86 1.67 N/A
Georgia ............................... 1.09 1.84 N/A
Maryland .............................. 1.19 1.84 N/A
Massachusetts ......................... 1.19 1.84 N/A
Mississippi ........................... 0.86 1.66 N/A
New York .............................. 1.11 1.86 N/A
North Carolina ........................ 1.15 1.80 1.79
Pennsylvania .......................... 0.99 1.79 N/A
South Carolina ........................ 1.17 1.82 N/A
Tennessee ............................. 1.17 1.82 N/A
Virginia .............................. 1.15 1.80 1.79
West Virginia ......................... 1.17 1.82 N/A
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a
hypothetical $1,000 investment in a Fund, assuming (a) 5% annual return and
(b) redemption at the end of each of the time periods indicated (unless
otherwise noted):
<TABLE>
<CAPTION>
ALABAMA ARKANSAS CALIFORNIA FLORIDA
FUND FUND FUND FUND
------------------------- -------------------------- ------------------------- ---------------------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS C CLASS A CLASS B
PERIOD ------- ----------------- ------- ----------------- ------- ---------------- ----------- ------- ------------------
- ------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (1) (1) (1) (1)
1 year .. $ 57 $ 58 $ 18 $ 55 $ 56 $ 16 $ 54 $ 55 $ 15 $ 27 $ 17 $ 55 $ 56 $ 16
3 years.. 78 85 55 72 79 49 68 77 47 52 52 71 80 50
5 years.. 100 115 95 91 105 85 83 101 81 90 90 88 106 86
10 years. 164 186(2) 186(2) 144 166(2) 166(2) 126 155(2) 155(2) 197 197 137 165(2) 165(2)
</TABLE>
<TABLE>
<CAPTION>
GEORGIA MARYLAND MASSACHUSETTS MISSISSIPPI
FUND FUND FUND FUND
---------------------- ------------------------- ------------------------- -------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
PERIOD ------- -------------- ------- ---------------- ------- ---------------- ------- ----------------
- ------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (1) (1) (1)
1 year ................. $ 57 $ 58 $ 18 $ 58 $ 58 $ 18 $ 58 $ 58 $ 18 $ 55 $ 56 $ 16
3 years ................ 78 85 55 81 85 55 81 85 55 71 79 49
5 years ................ 100 114 94 105 114 94 105 114 94 88 105 85
10 years ............... 163 185(2) 185(2) 174 188(2) 188(2) 174 188(2) 188(2) 137 164(2) 164(2)
</TABLE>
<TABLE>
<CAPTION>
NEW YORK NORTH CAROLINA PENNSYLVANIA SOUTH CAROLINA
FUND FUND FUND FUND
------------------------- --------------------------------------- ------------------------ -------------------------
CLASS A CLASS B CLASS A CLASS B CLASS C CLASS A CLASS B CLASS A CLASS B
PERIOD ------- ----------------- ------- ----------------- ----------- ------- ---------------- ------- -----------------
- ------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (1) (1) (1) (1)
1 year ... $ 57 $ 58 $ 18 $ 58 $ 57 $ 17 $ 27 $ 17 $ 52 $ 53 $ 13 $ 58 $ 57 $ 17
3 years .. 78 85 55 79 84 54 54 54 61 70 40 80 84 54
5 years .. 101 115 95 103 112 92 92 92 72 89 69 104 113 93
10 years . 165 187(2) 187(2) 170 183(2) 183(2) 201 201 101 129(2) 129(2) 172 186(2) 186(2)
</TABLE>
<TABLE>
<CAPTION>
TENNESSEE VIRGINIA WEST VIRGINIA
FUND FUND FUND
-------------------------- ------------------------------------------- ---------------------------
CLASS A CLASS B CLASS A CLASS B CLASS C CLASS A CLASS B
PERIOD ------- ----------------- ------- ------------------ ------------ ------- ------------------
- ------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (1) (1) (1)
1 year ................... $ 58 $ 57 $ 17 $ 58 $ 57 $ 17 $ 27 $ 17 $ 58 $ 57 $ 17
3 years .................. 80 84 54 79 84 54 54 54 80 84 54
5 years .................. 104 113 93 103 112 92 92 92 104 113 93
10 years ................. 172 186(2) 186(2) 170 183(2) 183(2) 201 201 172 186(2) 186(2)
</TABLE>
- -----------
(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.
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 Plan."
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 for sale to the general
public. In addition, the California Fund, the North Carolina Fund and the
Virginia Fund currently offer Class C shares for sale to the general 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 for the portfolio of that Fund. The
Trust's Board of Trustees provides broad supervision over the affairs of the
Trust and each Fund. The Adviser is responsible for the management of the
Funds' assets and the officers of the Funds are responsible for their
operations. The Adviser manages the portfolios from day to day in accordance
with each Fund's investment objectives and policies. The selection of
investments and the way they are managed depend on the conditions and trends
in the economy and the financial market places.
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 Institutional Advisors, 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 "Information Concerning Shares of the Trust
- -- 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 "Information Concerning
Shares of the Trust -- 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 "Information
Concerning Shares of the Trust -- 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 "Information
Concerning Shares of the Trust -- 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>
FINANCIAL HIGHLIGHTS
<CAPTION>
ALABAMA FUND
----------------------------------------------------------------------------------
TWO MONTHS
ENDED
YEAR ENDED MARCH 31, MARCH 31, YEAR ENDED JANUARY 31,
---------------------------- ----------- --------------------------------------
1997 1996 1995 1994 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ---- ----
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 .......... $ 10.52 $ 10.34 $ 10.27 $ 10.98 $ 10.33 $ 9.95 $ 9.65 $ 9.53
------- ------- ------- ------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) ...................... $ 0.56 $ 0.55 $ 0.56 $ 0.09 $ 0.55 $ 0.56 $ 0.60 $ 0.59
Net realized and unrealized gain (loss) on
investments .................................. 0.04 0.18 0.09 (0.71) 0.69 0.41 0.41 0.08
------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations ............ $ 0.60 $ 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) $ (0.55) $ (0.08) $ (0.54) $ (0.58) $ (0.65) $ (0.55)
From net realized gain on investments ......... (0.09) -- -- -- (0.04) (0.01) (0.06) --
In excess of net investment income(++) ........ -- -- -- (0.01) (0.01) -- (0.00) --
In excess of net realized gain on investments . -- -- (0.03) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total distributions declared to
shareholders .............................. $ (0.64) $ (0.55) $ (0.58) $ (0.09) $ (0.59) $ (0.59) $ (0.71) $ (0.55)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value -- end of period ................ $ 10.48 $ 10.52 $ 10.34 $ 10.27 $ 10.98 $ 10.33 $ 9.95 $ 9.65
======= ======= ======= ======= ======= ======= ======= =======
Total return(+) ................................. 5.82% 7.13% 6.51% (5.66)%++ 12.26% 10.08% 10.92% 7.31%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses## .................................... 1.10% 1.14% 1.15% 1.18%+ 1.21% 1.08% 0.95% 0.57%
Net investment income ......................... 5.28% 5.18% 5.47% 5.17%+ 5.13% 5.79% 6.19% 6.63%
PORTFOLIO TURNOVER .............................. 22% 37% 30% 4% 12% 17% 23% 64%
NET ASSETS AT END OF PERIOD (000 OMITTED) ....... $76,928 $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, are 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/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 ..................... -- $ 0.54 $ 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>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
ALABAMA FUND
------------------------------------------------------------
TWO MONTHS
ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
------------------------------ ---------- -----------
1997 1996 1995 1994 1994**
---- ---- ---- ---- ------
CLASS B
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ............................ $10.52 $10.34 $10.27 $10.98 $10.93
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income ........................................... $ 0.47 $ 0.46 $ 0.47 $ 0.08 $ 0.18
Net realized and unrealized gain (loss) on investments .......... 0.04 0.18 0.09 (0.71) 0.07
------ ------ ------ ------ ------
Total from investment operations .............................. $ 0.51 $ 0.64 $ 0.56 $(0.63) $ 0.25
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ...................................... $(0.47) $(0.46) $(0.46) $(0.08) $(0.18)
From net realized gain on investments ........................... (0.08) -- -- -- (0.02)
In excess of net realized gain on investments ................... -- -- (0.03) -- --
------ ------ ------ ------ ------
Total distributions declared to shareholders .................. $(0.55) $(0.46) $(0.49) $(0.08) $(0.20)
------ ------ ------ ------ ------
Net asset value -- end of period .................................. $10.48 $10.52 $10.34 $10.27 $10.98
====== ====== ====== ====== ======
Total return ...................................................... 4.98% 6.25% 5.64% (5.79)%++ 2.29%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ...................................................... 1.90% 1.96% 1.97% 2.01%+ 1.98%+
Net investment income ........................................... 4.48% 4.34% 4.63% 4.30%+ 3.98%+
PORTFOLIO TURNOVER ................................................ 22% 37% 30% 4% 12%
NET ASSETS AT END OF PERIOD (000 OMITTED) ......................... $7,281 $6,139 $4,396 $2,849 $2,269
- ----------
** For the period from the commencement of offering 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
ARKANSAS FUND
-------------------------------------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31, JANUARY 31,
----------------------------------------- ------------- ------------ -------------
1997 1996 1995 1994 1994 1993*
---- ---- ---- ---- ---- -----
CLASS A
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period ....... $ 9.75 $ 9.66 $ 9.69 $10.47 $ 9.88 $ 9.53
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) .. $ 0.50 $ 0.50 $ 0.53 $ 0.09 $ 0.56 $ 0.58
Net realized and
unrealized gain (loss)
on investments .......... (0.03) 0.09 0.02 (0.77) 0.60 0.35
------ ------ ------ ------ ------ ------
Total from investment
operations ............ $ 0.47 $ 0.59 $ 0.55 $(0.68) $ 1.16 $ 0.93
------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders--
From net investment income $(0.50) $(0.50) $(0.53) $(0.08) $(0.55) $(0.58)
From net realized gain
on investments(++) ..... -- -- -- -- (0.00) --
In excess of net
investment income ...... -- -- -- (0.02) (0.02) --
In excess of net realized
gain on investments(++). -- -- (0.05) -- (0.00) --
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ......... $(0.50) $(0.50) $(0.58) $(0.10) $(0.57) $(0.58)
------ ------ ------ ------ ------ ------
Net asset value -- end
of period ................ $ 9.72 $ 9.75 $ 9.66 $ 9.69 $10.47 $ 9.88
====== ====== ====== ====== ====== ======
Total return(+) ............ 4.87% 6.19% 5.90% (6.61)%++ 11.95% 10.11%++
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ............... 0.92% 0.93% 0.75% 0.75%+ 0.63% 0.16%+
Net investment income .... 5.14% 5.10% 5.51% 5.21%+ 5.30% 6.04%+
PORTFOLIO TURNOVER ......... 9% 6% 24% 1% 3% 10%
NET ASSETS AT END OF
PERIOD (000 OMITTED) ..... $144,263 $172,907 $187,105 $195,042 $203,542 $124,644
- ----------
* For the period from the commencement of investment operations, February 3, 1992, to January 31, 1993.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994, are 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 distribution from net realized gain on investments and in excess of net
realized gain on investments were $0.0015 and $0.0003, respectively.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management 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 $ 0.09 $ 0.53 $ 0.52
RATIOS (TO AVERAGE
NET ASSETS):
Expenses## ......... -- -- 0.82% 0.96%+ 0.91% 0.75%+
Net investment income -- -- 5.43% 5.01%+ 5.01% 5.45%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
ARKANSAS FUND
---------------------------------------------------------------------------
TWO MONTHS
ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
--------------------------------------- ------------- -------------
1997 1996 1995 1994 1994**
------ ------ ------ ------ ------
CLASS B
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value -- beginning of
period .......................... $ 9.75 $ 9.65 $ 9.69 $10.47 $10.42
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ........ $ 0.42 $ 0.42 $ 0.42 $ 0.07 $ 0.23
Net realized and unrealized gain
(loss) on investments ......... (0.03) 0.10 0.01 (0.78) (0.04)
------ ------ ------ ------ ------
Total from investment
operations .................. $ 0.39 $ 0.52 $ 0.43 $(0.71) $ 0.19
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ...... $(0.42) $(0.42) $(0.42) $(0.07) $(0.14)
From net realized gain on
investments(++) ............... -- -- -- -- (0.00)
In excess of net investment
income(+++) ................... -- -- -- (0.00) (0.00)
In excess of net realized gain on
investments(++) ............... -- -- (0.05) -- (0.00)
------ ------ ------ ------ ------
Total distributions declared to
shareholders ................ $(0.42) $(0.42) $(0.47) $(0.07) $(0.14)
------ ------ ------ ------ ------
Net asset value -- end of period .. $ 9.72 $ 9.75 $ 9.65 $ 9.69 $10.47
====== ====== ====== ====== ======
Total return ...................... 4.05% 5.43% 4.67% (6.81)%++ 2.18%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S)
Expenses## ...................... 1.71% 1.76% 1.84% 1.82%+ 1.75%+
Net investment income ........... 4.34% 4.27% 4.40% 4.11%+ 3.87%+
PORTFOLIO TURNOVER ................ 9% 6% 24% 1% 3%
NET ASSETS AT END OF PERIOD (000
OMITTED) .......................... $ 7,548 $ 7,950 $ 7,231 $ 5,895 $ 5,179
- ----------
** 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, are 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 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 $0.003, respectively.
(+++) For the period 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.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management 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 ....... -- -- $ 0.41 $ 0.07 $ 0.12
RATIOS (TO AVERAGE NET
ASSETS):
Expenses## ................ -- -- 1.91% 2.02%+ 3.44%+
Net investment income ..... -- -- 4.33% 3.91%+ 2.18%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CALIFORNIA FUND
---------------------------------------------------------------------------------------
TWO MONTHS ELEVEN MONTHS
ENDED ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31, FEBRUARY 28,
--------------------------------------- ------------- ----------- -------------
1997 1996 1995 1994 1994 1993
---- ---- ---- ---- ---- ----
CLASS A
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period ...... $ 5.52 $ 5.41 $ 5.47 $ 5.95 $ 5.88 $ 5.42
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) . $ 0.30 $ 0.30 $ 0.31 $ 0.05 $ 0.30 $ 0.34
Net realized and
unrealized gain (loss)
on investments ......... (0.05) 0.11 (0.05) (0.48) 0.14 0.47
------ ------ ------ ------ ------ ------
Total from investment
operations ........... $ 0.25 $ 0.41 $ 0.26 $(0.43) $ 0.44 $ 0.81
------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders --
From net investment income $(0.30) $(0.30) $(0.31) $(0.04) $(0.29) $(0.34)
From net realized
gain on investments -- -- -- -- (0.07) (0.01)
In excess of net
investment income(++) .. -- (0.00) (0.00) (0.01) (0.01) --
In excess of net realized
gain oninvestments ..... -- -- (0.01) -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.30) $(0.30) $(0.32) $(0.05) $(0.37) $(0.35)
------ ------ ------ ------ ------ ------
Net asset value --
end of period ............ $ 5.47 $ 5.52 $ 5.41 $ 5.47 $ 5.95 $ 5.88
====== ====== ====== ====== ====== ======
Total return(+) ............ 4.55% 7.86% 4.85% (7.21)%++ 7.64%++ 15.55%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ............... 0.66% 0.66% 0.69% 0.68%+ 0.60%+ 0.39%
Net investment income .... 5.36% 5.48% 5.80% 5.27%+ 4.99%+ 6.18%
PORTFOLIO TURNOVER ......... 78% 69% 57% 8% 38% 64%
NET ASSETS AT END OF
PERIOD (000 OMITTED) ....... $232,612 $259,817 $272,161 $313,790 $356,419 $272,179
- ----------
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994, are 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 distribution 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 $0.29 $ 0.30 $ 0.05 $ 0.29 $ 0.32
RATIOS (TO AVERAGE
NET ASSETS):
Expenses## ........... 0.81% 0.81% 0.84% 0.83%+ 0.78%+ 0.77%
Net investment income 5.21% 5.33% 5.65% 5.12%+ 4.82%+ 5.80%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CALIFORNIA FUND
---------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
---------------------------------------------------------------------------------
1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ----
CLASS A
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ......................... $ 5.26 $ 5.19 $ 5.06 $ 5.08 $ 5.38 $ 5.07
------ ------ ------ ------ ------ ------
Income from investment operations --
Net investment income(S) ....... $ 0.35 $ 0.33 $ 0.33 $ 0.32 $ 0.31 $ 0.32
Net realized and unrealized gain
(loss) on investments ........ 0.20 0.07 0.13 (0.02) (0.29) 0.34
------ ------ ------ ------ ------ ------
Total from investment
operations ................. $ 0.55 $ 0.40 $ 0.46 $(0.30) $ 0.02 $ 0.66
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ..... $(0.37) $(0.33) $(0.33) $(0.32) $(0.31) $(0.33)
From net realized gain on
investments .................. (0.02) -- -- -- (0.01) (0.02)
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders ............ $(0.39) $(0.33) $(0.33) $(0.32) $(0.32) $(0.35)
------ ------ ------ ------ ------ ------
Net asset value -- end of period . $ 5.42 $ 5.26 $ 5.19 $ 5.06 $ 5.08 $ 5.38
====== ====== ====== ====== ====== ======
Total return(+) .................. 10.69% 8.03% 9.28% 6.07% 0.83% 13.57%
RATIOS (TO AVERAGE NET ASSETS)
/SUPPLEMENTAL DATA(S):
Expenses ....................... 0.40% 0.87% 1.00% 1.28% 1.20% 1.04%
Net investment income .......... 6.53% 6.39% 6.35% 6.35% 6.33% 6.25%
PORTFOLIO TURNOVER ............... 73% 102% 243% 188% 240% 54%
NET ASSETS AT END OF PERIOD (000
OMITTED) ....................... $177,291 $84,551 $68,879 $59,212 $59,479 $62,368
- ----------
(+) 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 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 ........ $0.33 -- -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses ................... 0.79% -- -- -- -- --
Net investment income ...... 6.14% -- -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CALIFORNIA FUND
-----------------------------------------------------------------------------
TWO MONTHS
ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
------------------------------------------ ------------- ---------------
1997 1996 1995 1994 1994**
------ ------ ------ ------ ------
CLASS B
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value -- beginning of
period ...... .................. $ 5.52 $ 5.41 $ 5.47 $ 5.95 $ 6.02
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ....... $ 0.25 $ 0.26 $ 0.25 $ 0.04 $ 0.10
Net realized and unrealized gain
(loss) on investments ........ (0.05) 0.11 (0.05) (0.48) --
------ ------ ------ ------ ------
Total from investment
operations ................. $ 0.20 $ 0.37 $ 0.20 $(0.44) $ 0.10
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ..... $(0.25) $(0.26) $(0.25) $(0.04) $(0.10)
From net realized gain on
investments .................. -- -- -- -- (0.07)
In excess of net investment
income(++) ................... -- (0.00) -- (0.00) (0.00)
In excess of net realized gain
on investments ............... -- -- (0.01) -- --
------ ------ ------ ------ ------
Total distributions declared
to shareholders ............ $(0.25) $(0.26) $(0.26) $(0.04) $(0.17)
------ ------ ------ ------ ------
Net asset value -- end of period . $ 5.47 $ 5.52 $ 5.41 $ 5.47 $ 5.95
====== ====== ====== ====== ======
Total return ..................... 3.64% 6.93% 3.73% (7.38)%++ 1.68%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ..................... 1.54% 1.54% 1.76% 1.69%+ 1.60%+
Net investment income .......... 4.48% 4.59% 4.72% 4.18%+ 3.64%+
PORTFOLIO TURNOVER ............... 78% 69% 57% 8% 38%
NET ASSETS AT END OF PERIOD (000
OMITTED) ....................... $36,694 $34,675 $29,057 $21,252 $19,360
- ----------
** 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, are 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 $0.0041, $0.002 and $0.003, respectively.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management 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 ...... $ 0.24 $ 0.24 $ 0.04 $ 0.09 --
RATIOS (TO AVERAGE NET
ASSETS):
Expenses## ............... 1.69% 1.91% 1.83%+ 1.81%+ --
Net investment income .... 4.33% 4.57% 4.04%+ 3.43%+ --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CALIFORNIA FUND
-----------------------------------------------------------------------
TWO MONTHS PERIOD
ENDED ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
-------------------------------------- ------------ --------------
1997 1996 1995 1994 1994***
------ ------ ------ ------ ------
CLASS C
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period . $ 5.53 $ 5.42 $ 5.48 $ 5.95 $ 5.89
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ............. $ 0.24 $ 0.25 $ 0.26 $ 0.03 $ 0.01
Net realized and unrealized gain
(loss) on investments .............. (0.05) 0.11 (0.06) (0.46) 0.06
------ ------ ------ ------ ------
Total from investment operations ... $ 0.19 $ 0.36 $ 0.20 $(0.43) $ 0.07
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ........... $(0.24) $(0.25) $(0.25) $(0.04) $(0.01)
In excess of net investment income(++) -- (0.00) -- (0.00) (0.00)
In excess of net realized gain on
investments ........................ -- -- (0.01) -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders ..................... $(0.24) $(0.25) $(0.26) $(0.04) $(0.01)
------ ------ ------ ------ ------
Net asset value -- end of period ....... $ 5.48 $ 5.53 $ 5.42 $ 5.48 $ 5.95
====== ====== ====== ====== ======
Total return ........................... 3.51% 6.77% 3.79% (7.22)%++ 1.25%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ........................... 1.66% 1.67% 1.69% 1.64%+ 2.02%+
Net investment income ................ 4.37% 4.47% 4.79% 3.92%+ 1.78%+
PORTFOLIO TURNOVER ..................... 78% 69% 57% 8% 38%
NET ASSETS AT END OF PERIOD (000
OMITTED) ............................. $ 3,856 $ 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, are 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 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 ............ $ 0.23 $ 0.24 $ 0.25 $ 0.03 --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ..................... 1.81% 1.82% 1.84% 1.80%+ 3.53%+
Net investment income .......... 4.22% 4.32% 4.64% 3.77%+ 0.27%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
FLORIDA FUND
--------------------------------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH31, JANUARY 31, JANUARY 31,
---------------------------------- ------------- ------------- --------------
1997 1996 1995 1994 1994 1993*
------ ------ ------ ------ ------ ------
CLASS A
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period ... $ 9.82 $ 9.60 $ 9.65 $10.63 $ 9.89 $ 9.53
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) $ 0.51 $ 0.52 $ 0.54 $ 0.09 $ 0.57 $ 0.58
Net realized and
unrealized gain
(loss) on investments (0.18) 0.22 0.02 (0.98) 0.86 0.36
------ ------ ------ ------ ------ ------
Total from investment
operations ........ $ 0.33 $ 0.74 $ 0.56 $(0.89) $ 1.43 $ 0.94
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment
income .............. $(0.51) $(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 ...... $(0.51) $(0.52) $(0.61) $(0.09) $(0.69) $(0.58)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................ $ 9.64 $ 9.82 $ 9.60 $ 9.65 $10.63 $ 9.89
====== ====== ====== ====== ====== ======
Total return(+) ......... 3.43% 7.81% 6.07% (8.39)%++ 14.71% 10.28%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ............ 0.86% 0.86% 0.60% 0.77%+ 0.49% 0.05%+
Net investment income . 5.26% 5.26% 5.75% 5.15%+ 5.42% 6.27%+
PORTFOLIO TURNOVER ...... 24% 56% 131% 19% 53% 54%
NET ASSETS AT END OF
PERIOD (000 OMITTED) .. $80,342 $87,553 $89,894 $108,579 $124,131 $74,329
- ----------
* For the period from the commencement of offering of Class A shares, February 3, 1992, to January 31, 1993.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994, are 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 were $0.0015.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management 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>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
FLORIDA FUND
------------------------------------------------------------------------
TWO MONTHS
ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
-------------------------------------- ------------- -------------
1997 1996 1995 1994 1994**
------ ------ ------ ------ ------
CLASS B
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period $ 9.82 $ 9.60 $ 9.64 $10.62 $10.69
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ........... $ 0.43 $ 0.43 $ 0.43 $ 0.07 $ 0.18
Net realized and unrealized gain
(loss) on investments ............ (0.18) 0.22 0.04 (0.98) 0.03
------ ------ ------ ------ ------
Total from investment operations . $ 0.25 $ 0.65 $ 0.47 $(0.91) $ 0.21
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ......... $(0.43) $(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) $(0.43) $(0.51) $(0.07) $(0.28)
------ ------ ------ ------ ------
Net asset value -- end of period ..... $ 9.64 $ 9.82 $ 9.60 $ 9.64 $10.62
====== ====== ====== ====== ======
Total return ......................... 2.56% 6.88% 5.06% (8.55)%++ 4.87%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ......................... 1.72% 1.74% 1.68% 1.82%+ 1.64%+
Net investment income .............. 4.40% 4.36% 4.63% 4.08%+ 3.82%+
PORTFOLIO TURNOVER ................... 24% 56% 131% 19% 53%
NET ASSETS AT END OF PERIOD (000
OMITTED) ........................... $14,701 $14,448 $12,667 $ 7,995 $ 7,244
- ----------
** 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, are 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 was $0.0012.
(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 ............ -- $ 0.43 $ 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>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
GEORGIA FUND
------------------------------------------------------------
TWO MONTHS
ENDED
YEAR ENDED MARCH 31, MARCH 31,
----------------------------------------- ---------------
1997 1996 1995 1994
CLASS A
------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .... $10.47 $10.35 $10.38 $11.30
------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ................ $ 0.56 $ 0.54 $ 0.57 $ 0.09
Net realized and unrealized gain (loss)
on investments ........................ (0.10) 0.12 -- (0.92)
------ ------ ------ ------
Total from investment operations ...... $ 0.46 $ 0.66 $ 0.57 $(0.83)
------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income .............. $(0.55) $(0.54) $(0.56) $(0.06)
From net realized gain on investments ... -- -- (0.01) --
In excess of net investment income(++) .. -- (0.00) -- (0.03)
In excess of net realized gain on
investments ........................... -- -- (0.03) --
------ ------ ------ ------
Total distributions declared to
shareholders ........................ $(0.55) $(0.54) $(0.60) $(0.09)
------ ------ ------ ------
Net asset value -- end of period .......... $10.38 $10.47 $10.35 $10.38
====== ====== ====== ======
Total return(+) ........................... 4.47% 6.48% 5.65% (7.34)%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## .............................. 1.03% 1.17% 1.14% 1.18%+
Net investment income ................... 5.34% 5.11% 5.50% 5.05%+
PORTFOLIO TURNOVER ........................ 27% 65% 56% 5%
NET ASSETS AT END OF PERIOD (000 OMITTED) . $59,843 $68,183 $74,432 $85,878
- ----------
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994, are 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 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 ................. $ 0.55 $ 0.53 $ 0.56 $ 0.09
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .......................... 1.10% 1.27% 1.24% 1.28%+
Net investment income ............... 5.27% 5.01% 5.40% 4.95%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
GEORGIA FUND
---------------------------------------------------------------------------------
PERIOD ENDED
YEAR ENDED JANUARY 31, JANUARY 31,
---------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989*
CLASS A
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period .... $10.57 $10.22 $ 9.83 $ 9.73 $ 9.73 $ 9.53
------ ------ ------ ------ ------ ------
Income from investment operations --
Net investment income(S) $ 0.57 $ 0.58 $ 0.61 $ 0.63 $ 0.66 $ 0.32
Net realized and
unrealized gain (loss)
on investments ....... 0.75 0.38 0.46 0.12 0.02 0.14
------ ------ ------ ------ ------ ------
Total from investment
operations ......... $ 1.32 $ 0.96 $ 1.07 $ 0.75 $ 0.68 $ 0.46
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders --
From net investment
income ............... $(0.55) $(0.60) $(0.66) $(0.63) $(0.66) $(0.26)
From net realized gain
on investments ....... (0.01) (0.01) (0.02) (0.02) (0.02) --
In excess of net
investment income .... (0.03) -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders ....... $(0.59) $(0.61) $(0.68) $(0.65) $(0.68) $(0.26)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................... $11.30 $10.57 $10.22 $ 9.83 $ 9.73 $ 9.73
====== ====== ====== ====== ====== ======
Total return(+) .......... 12.71% 9.56% 11.29% 8.06% 7.19% 7.57%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses ............... 1.21% 1.08% 0.99% 0.74% 0.42% 0.40%+
Net investment income .. 5.10% 5.75% 6.08% 6.46% 6.72% 6.18%+
PORTFOLIO TURNOVER ....... 14% 27% 36% 71% 99% --
NET ASSETS AT END OF
PERIOD (000 OMITTED) ... $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.
(+)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 investment adviser and/or the distributor voluntarily waived a portion of their management 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 $ 0.56 $ 0.57 $ 0.60 $ 0.59 $ 0.57 $ 0.29
RATIOS (TO AVERAGE NET ASSETS):
Expenses ........... 1.31% 1.18% 1.09% 1.11% 1.31% 1.07%+
Net investment
income ................... 5.00% 5.65% 5.98% 6.09% 5.83% 5.51%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
GEORGIA FUND
------------------------------------------------------------------------------
TWO MONTHS
ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
------------------------------------ ---------- ------------
1997 1996 1995 1994 1994**
------ ------ ------ ------ ------
CLASS B
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period .................. $10.47 $10.36 $10.38 $11.30 $11.26
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ... $ 0.47 $ 0.45 $ 0.47 $ 0.07 $ 0.19
Net realized and unrealized
gain (loss) on investments (0.09) 0.12 0.02 (0.91) 0.05
------ ------ ------ ------ ------
Total from investment
operations ............. $ 0.38 $ 0.57 $ 0.49 $(0.84) $ 0.24
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income . $(0.47) $(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 $(0.47) $(0.46) $(0.51) $(0.08) $(0.20)
------ ------ ------ ------ ------
Net asset value -- end of
period ..................... $10.38 $10.47 $10.36 $10.38 $11.30
====== ====== ====== ====== ======
Total return ................. 3.63% 5.52% 4.88% (7.47)%++ 5.34%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ................. 1.83% 2.00% 1.96% 1.99%+ 1.97%+
Net investment income ...... 4.53% 4.27% 4.66% 4.17%+ 3.83%+
PORTFOLIO TURNOVER ........... 27% 65% 56% 5% 14%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .............. $ 9,995 $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, are 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 was $0.002.
(S) The investment adviser voluntarily waived a portion of its management fee for the period indicated. If this fee had
been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income .... $ 0.47 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ............. 1.90% -- -- -- --
Net investment income .. 4.46% -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
MARYLAND FUND
---------------------------------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MRCH 31, JANUARY 31,
----------------------------------------- ------------ ---------------------
1997 1996 1995 1994 1994 1993
------ ------ ------ ------ ------ ------
CLASS A
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period ... $11.04 $10.94 $10.89 $11.81 $11.40 $11.20
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) $ 0.57 $ 0.57 $ 0.59 $ 0.10 $ 0.62 $ 0.67
Net realized and
unrealized gain
(loss) on investments (0.16) 0.09 0.09 (0.92) 0.53 0.24
------ ------ ------ ------ ------ ------
Total from investment
operations ........ $ 0.41 $ 0.66 $ 0.68 $ (0.82) $ 1.15 $ 0.91
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders --
From net investment
income .............. $(0.56) $(0.56) $(0.59) $ (0.06) $(0.61) $(0.69)
From net realized gain
on investments ...... -- -- -- -- (0.07) (0.02)
In excess of net
investment income(++) -- -- (0.00) (0.04) (0.04) --
In excess of net
realized gain on
investments ......... -- -- (0.04) -- (0.02) --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.56) $(0.56) $(0.63) $ (0.10) $(0.74) $(0.71)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................ $10.89 $11.04 $10.94 $10.89 $11.81 $11.40
====== ====== ====== ====== ====== ======
Total return(+) ......... 3.75% 6.17% 6.51% (6.96)%++ 10.27% 8.34%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses##............. 1.12% 1.19% 1.21% 1.23%+ 1.25% 1.14%
Net investment income . 5.21% 5.10% 5.46% 4.97%+ 5.42% 6.13%
PORTFOLIO TURNOVER ...... 22% 15% 31% 1% 25% 5%
NET ASSETS AT END OF
PERIOD (000 OMITTED) .. $126,405 $139,297 $145,361 $161,290 $173,419 $145,794
- ----------
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994, are 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.
(S) The investment adviser voluntarily waived a portion of its management fee for the period indicated. If this fee had
been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.57 -- -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ........ 1.19% -- -- -- -- --
Net investment income 5.14% -- -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
MARYLAND FUND
-------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-------------------------------------------------------------------------
1992 1991 1990 1989 1988
------ ------ ------ ------ ------
CLASS A
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ......................... $10.97 $10.79 $10.76 $10.62 $11.20
------ ------ ------ ------ ------
Income from investment operations --
Net investment income .......... $ 0.70 $ 0.70 $ 0.69 $ 0.69 $ 0.68
Net realized and unrealized gain
(loss) on investments ........ 0.31 0.19 0.04 0.14 (0.57)
------ ------ ------ ------ ------
Total from investment
operations ................. $ 1.01 $ 0.89 $ 0.73 $ 0.83 $ 0.11
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income...... $(0.76) $(0.70) $(0.69) $(0.69) $(0.67)
From net realized gain on
investments .................. (0.02) (0.01) (0.01) -- (0.01)
From paid-in capital ........... -- -- -- -- (0.01)
------ ------ ------ ------ ------
Total distributions declared
to shareholders ............ $(0.78) $(0.71) $(0.70) $(0.69) $(0.69)
------ ------ ------ ------ ------
Net asset value -- end of period . $11.20 $10.97 $10.79 $10.76 $10.62
====== ====== ====== ====== ======
Total return(+) .................. 9.55% 8.51% 6.90% 8.15% 1.25%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses ....................... 1.16% 1.17% 1.18% 1.14% 1.10%
Net investment income .......... 6.32% 6.45% 6.33% 6.52% 6.47%
PORTFOLIO TURNOVER ............... 9% 41% 58% 34% 13%
NET ASSETS AT END OF PERIOD (000
OMITTED) ....................... $119,120 $101,742 $93,175 $84,380 $79,906
- ----------
(+) 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>
<CAPTION>
FINANCIAL HIGHLIGHTS
MARYLAND FUND
-------------------------------------------------------------------------------
TWO MONTHS
ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
----------------------------------------- --------------- ---------------
1997 1996 1995 1994 1994**
------ ------ ------ ------ ------
CLASS B
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value -- beginning
of period ................. $11.03 $10.93 $10.88 $11.80 $11.88
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) .. $ 0.50 $ 0.48 $ 0.51 $ 0.08 $ 0.22
Net realized and unrealized
gain (loss) on investments (0.17) 0.10 0.09 (0.91) (0.01)
------ ------ ------ ------ ------
Total from investment
operations ............ $ 0.33 $ 0.58 $ 0.60 $(0.83) $ 0.21
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income $(0.48) $(0.48) $(0.51) $(0.08) $(0.21)
From net realized gain on
investments ............. -- -- -- -- (0.05)
In excess of net investment
income(++) .............. -- -- (0.00) (0.01) (0.01)
In excess of net realized
gain on investments ..... -- -- (0.04) -- (0.02)
------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.48) $(0.48) $(0.55) $(0.09) $(0.29)
------ ------ ------ ------ ------
Net asset value -- end of
period .................... $10.88 $11.03 $10.93 $10.88 $11.80
====== ====== ====== ====== ======
Total return ................ 3.03% 5.41% 5.75% (7.08)%++ 4.45%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ................ 1.82% 1.91% 1.93% 1.95%+ 1.81%+
Net investment income ..... 4.50% 4.36% 4.73% 4.19%+ 4.23%+
PORTFOLIO TURNOVER .......... 22% 15% 31% 1% 25%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ............. $17,379 $13,694 $11,168 $ 6,478 $ 5,345
- ----------
** 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, are 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 in excess of net investment income was $0.003.
(S) The investment adviser voluntarily waived a portion of its management fee for the period indicated. If this fee had
been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income ... $ 0.49 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ............ 1.89% -- -- -- --
Net investment income . 4.43% -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
MASSACHUSETTS FUND
-----------------------------------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
-------------------------------------------- ---------------- ---------------------
1997 1996 1995 1994 1994 1993
------ ------ ------ ------ ------ ------
CLASS A
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ......................... $10.98 $10.84 $10.90 $11.75 $11.41 $11.05
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ....... $ 0.61 $ 0.60 $ 0.64 $ 0.11 $ 0.64 $ 0.68
Net realized and unrealized gain
(loss) on investments ........ (0.14) 0.14 (0.03) (0.85) 0.58 0.39
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.47 $ 0.74 $ 0.61 $(0.74) $ 1.22 $ 1.07
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ..... $(0.59) $(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) -- -- --
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders ............ $(0.59) $(0.60) $(0.67) $(0.11) $(0.88) $(0.71)
------ ------ ------ ------ ------ ------
Net asset value -- end of period $10.86 $10.98 $10.84 $10.90 $11.75 $11.41
====== ====== ====== ====== ====== ======
Total return(+) .................. 4.39% 6.95% 5.89% (6.34)%++ 11.02% 10.03%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ..................... 1.12% 1.17% 1.17% 1.19%+ 1.19% 1.08%
Net investment income .......... 5.55% 5.44% 6.01% 5.64%+ 5.71% 6.33%
PORTFOLIO TURNOVER ............... 33% 31% 31% 4% 30% 32%
NET ASSETS AT END OF PERIOD (000
OMITTED) ....................... $234,874 $249,497 $262,551 $277,748 $300,894 $270,778
- ----------
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994, are 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 $0.002.
(S) The investment adviser voluntarily waived a portion of its management fee for the period indicated. If this fee had been
incurred by the Fund, the net investment income per share and ratios would have been:
Net investment income ........ $ 0.60 -- -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................. 1.19% -- -- -- -- --
Net investment income ...... 5.48% -- -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
MASSACHUSETTS FUND
----------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------
1992 1991 1990 1989 1988
------ ------ ------ ------ ------
CLASS A
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ...................... $10.68 $10.58 $10.65 $10.60 $11.25
------ ------ ------ ------ ------
Income from investment operations --
Net investment income ....... $ 0.73 $ 0.71 $ 0.72 $ 0.72 $ 0.71
Net realized and unrealized
gain (loss) on investments 0.43 0.11 (0.07) 0.05 (0.65)
------ ------ ------ ------ ------
Total from investment
operations .............. $ 1.16 $ 0.82 $ 0.65 $ 0.77 $ 0.06
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income .. $(0.78) $(0.72) $(0.72) $(0.72) $(0.71)
From paid-in capital ........ (0.01) -- -- -- --
------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.79) $(0.72) $(0.72) $(0.72) $(0.71)
------ ------ ------ ------ ------
Net asset value -- end of
period ...................... $11.05 $10.68 $10.58 $10.65 $10.60
====== ====== ====== ====== ======
Total return(+) ............... 11.23% 8.12% 6.28% 7.65% 0.80%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses .................... 1.06% 1.07% 1.10% 1.07% 1.04%
Net investment income ....... 6.65% 6.74% 6.75% 6.90% 6.79%
PORTFOLIO TURNOVER ............ 51% 43% 52% 26% 27%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ............... $239,311 $213,679 $215,381 $212,763 $224,219
- ----------
(+) 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>
<CAPTION>
FINANCIAL HIGHLIGHTS
MASSACHUSETTS
-------------------------------------------------------------------------------
TWO MONTHS
ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
----------------------------------------- ------------ ------------
1997 1996 1995 1994 1994**
------ ------ ------ ------ ------
CLASS B
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period ................ $10.99 $10.84 $10.90 $11.75 $11.91
------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) . $ 0.53 $ 0.52 $ 0.55 $ 0.09 $ 0.23
Net realized and
unrealized gain (loss)
on investments ......... (0.13) 0.15 (0.02) (0.85) 0.04
------ ------ ------ ------ ------
Total from investment
operations ........... $ 0.40 $ 0.67 $ 0.53 $(0.76) $ 0.27
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income $(0.52) $(0.52) $(0.56) $(0.09) $(0.22)
From net realized gain on
investments ............ -- -- (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 $(0.52) $(0.52) $(0.59) $(0.09) $(0.43)
------ ------ ------ ------ ------
Net asset value -- end of
period ................... $10.87 $10.99 $10.84 $10.90 $11.75
====== ====== ====== ====== ======
Total return ............... 3.66% 6.27% 5.13% (6.46)%++ 5.89%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ............... 1.81% 1.90% 1.89% 1.91%+ 1.81%+
Net investment income .... 4.81% 4.71% 5.27% 4.89%+ 4.62%+
PORTFOLIO TURNOVER ......... 33% 51% 31% 4% 30%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ............ $15,204 $11,316 $ 8,676 $ 4,993 $ 4,191
- ----------
** 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, are 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 was $0.0013.
(S) The investment adviser voluntarily waived a portion of its management fee for the period indicated. If this fee
had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income .. $ 0.52 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ........... 1.88% -- -- -- --
Net investment income 4.74% -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
MISSISSIPPI FUND
---------------------------------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
----------------------------------------- ----------- -----------------------
1997 1996 1995 1994 1994 1993*
------ ------ ------ ------ ------ ------
CLASS A
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period ........... $ 9.35 $ 9.15 $ 9.19 $10.00 $ 9.38 $ 9.53
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ...... $ 0.48 $ 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 ................ $ 0.48 $ 0.72 $ 0.53 $(0.72) $ 1.17 $ 0.09
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income(++) $(0.48) $(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 .. $(0.48) $(0.52) $(0.57) $(0.09) $(0.55) $(0.24)
------ ------ ------ ------ ------ ------
Net asset value -- end of period $ 9.35 $ 9.35 $ 9.15 $ 9.19 $10.00 $ 9.38
====== ====== ====== ====== ====== ======
Total return(+) ................. 5.22% 7.99% 6.08% (7.20)%++ 12.80% 5.00%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## .................... 0.87% 0.45% 0.22% 0.10%+ 0.03% 0.00%+
Net investment income ......... 5.14% 5.51% 5.99% 5.69%+ 5.68% 5.59%+
PORTFOLIO TURNOVER .............. 17% 31% 47% 2% 28% 14%
NET ASSETS AT END OF PERIOD (000
OMITTED) ...................... $66,630 $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.
+ 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 $0.0013 and
$0.0035, respectively.
(+++) For the year ended March 31, 1995, the per share distributions from net realized gain on investments was $0.0016.
(S) The investment adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.30% of average daily net
assets for Class A shares for certain of the periods indicated. 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>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
MISSISSIPPI FUND
---------------------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
------------------------------------- ------------ -------------
1997 1996 1995 1994 1994**
------ ------ ------ ------ ------
CLASS B
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period ................. $ 9.36 $ 9.16 $ 9.19 $ 9.99 $ 9.94
------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) .. $ 0.40 $ 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 ............ $ 0.40 $ 0.64 $ 0.45 $(0.72) $ 0.23
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income(++) $(0.40) $(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 .......... $(0.40) $(0.44) $(0.48) $(0.08) $(0.18)
------ ------ ------ ------ ------
Net asset value -- end of
period .................... $ 9.36 $ 9.36 $ 9.16 $ 9.19 $ 9.99
====== ====== ====== ====== ======
Total return................. 4.33% 7.11% 5.14% (7.27)%++ 2.33%++
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ................ 1.72% 1.28% 1.23% 1.10%+ 1.06%+
Net investment income ..... 4.29% 4.67% 4.97% 4.67%+ 4.29%+
PORTFOLIO TURNOVER .......... 17% 31% 47% 2% 28%
NET ASSETS AT END OF PERIOD
(000 OMITTED).............. $11,014 $11,475 $9,429 $6,526 $6,268
- ----------
** 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 years ended March 31, 1996 and 1995 and the two months ended March 31, 1994, the per share distributions
in excess of net investment income were $0.0011, $0.0029 and $0.002, respectively.
(+++) For the year ended March 31, 1995, the per share distribution from net realized gain on investments was $0.0016.
(S) The investment adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.95% of average
daily net assets for Class B shares for certain of the periods indicated. 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>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NEW YORK FUND
--------------------------------------------------
TWO MONTHS
ENDED
YEAR ENDED MARCH 31, MARCH 31,
-------------------------------- --------------
1997 1996 1995 1994
------ ------ ------ ------
CLASS A
----------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .................... $10.66 $10.49 $10.50 $11.34
------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ................................ $ 0.55 $ 0.55 $ 0.56 $ 0.09
Net realized and unrealized gain (loss) on investments .. (0.06) 0.17 0.05 (0.84)
------ ------ ------ ------
Total from investment operations ...................... $ 0.49 $ 0.72 $ 0.61 $(0.75)
------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income .............................. $(0.55) $(0.55) $(0.56) $(0.06)
In excess of net investment income(++) .................. -- (0.00) (0.01) (0.03)
In excess of net realized gain on investments ........... -- -- (0.05) --
------ ------ ------ ------
Total distributions declared to shareholders .......... $(0.55) $(0.55) $(0.62) $(0.09)
------ ------ ------ ------
Net asset value -- end of period .......................... $10.60 $10.66 $10.49 $10.50
====== ====== ====== ======
Total return(+) ........................................... 4.68% 6.98% 6.03% (6.58)%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## .............................................. 1.11% 1.10% 1.07% 1.03%+
Net investment income ................................... 5.18% 5.09% 5.43% 5.09%+
PORTFOLIO TURNOVER ........................................ 64% 102% 147% 15%
NET ASSETS AT END OF PERIOD (000 OMITTED) ................. $121,588 $134,449 $146,597 $162,621
- ----------
+ 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 $0.0058.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management 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 ............................... -- $ 0.54 $ 0.55 $ 0.07
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ........................................ -- 1.20% 1.18% 1.23%+
Net investment income ............................. -- 4.99% 5.31% 4.88%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NEW YORK FUND
-------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989*
CLASS A
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value -- beginning of
period ....................... $10.78 $10.25 $ 9.90 $ 9.74 $ 9.79 $ 9.53
------ ------ ------ ------ ------ ------
Income from investment
operations --
Net investment income(S) ..... $ 0.59 $ 0.63 $ 0.65 $ 0.65 $ 0.68 $ 0.29
Net realized and unrealized
gain on investments ........ 0.74 0.58 0.44 0.16 0.01 0.21
------ ------ ------ ------ ------ ------
Total from investment
operations ............... $ 1.33 $ 1.21 $ 1.09 $ 0.81 $ 0.69 $ 0.50
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ... $(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 ..................... (0.03) -- -- -- -- --
From paid-in capital ......... -- -- -- -- (0.01) --
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders .......... $(0.77) $(0.68) $(0.74) $(0.65) $(0.74) $(0.24)
------ ------ ------ ------ ------ ------
Net asset value -- end of period $11.34 $10.78 $10.25 $ 9.90 $ 9.74 $ 9.79
====== ====== ====== ====== ====== ======
Total return(+) ................ 12.69% 12.23% 11.42% 8.74% 7.33% 8.16%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses ..................... 0.93% 0.53% 0.65% 0.54% 0.40% 0.40%+
Net investment income ........ 5.21% 6.16% 6.44% 6.73% 6.88% 5.93%+
PORTFOLIO TURNOVER ............. 51% 61% 80% 188% 236% 32%
NET ASSETS AT END OF PERIOD (000
OMITTED) ..................... $184,523 $135,749 $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.
(+) 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 investment adviser and/or the distributor voluntarily waived a portion of their management 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 .... $ 0.56 $ 0.57 $ 0.60 $ 0.61 $ 0.59 $ 0.26
RATIOS (TO AVERAGE NET ASSETS):
Expenses ............... 1.23% 1.13% 1.16% 0.95% 1.32% 1.09%+
Net investment income .. 4.91% 5.56% 5.93% 6.33% 5.96% 5.24%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NEW YORK FUND
-----------------------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
----------------------------------------- ------------ -----------
1997 1996 1995 1994 1994**
------ ------ ------ ------ ------
CLASS B
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period .................. $10.66 $10.49 $10.50 $11.34 $11.46
------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) ... $ 0.47 $ 0.47 $ 0.47 $ 0.07 $ 0.18
Net realized and unrealized
gain (loss) on investments (0.07) 0.17 0.05 (0.83) 0.04
------ ------ ------ ------ ------
Total from investment
operations ............. $ 0.40 $ 0.64 $ 0.52 $(0.76) $ 0.22
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income . $(0.47) $(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) $(0.47) $(0.53) $(0.08) $(0.34)
------ ------ ------ ------ ------
Net asset value -- end of
period ..................... $10.59 $10.66 $10.49 $10.50 $11.34
====== ====== ====== ====== ======
Total return ................. 3.77% 6.10% 5.17% (6.71)%++ 5.20%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ................. 1.92% 1.92% 1.89% 1.87%+ 1.79%+
Net investment income ...... 4.37% 4.27% 4.58% 4.21%+ 3.90%+
PORTFOLIO TURNOVER ........... 64% 102% 147% 15% 51%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .............. $26,724 $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 was $0.0048.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management 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 .. -- -- $ 0.47 $ 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>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH CAROLINA FUND
--------------------------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
------------------------------------ --------- ---------------------
1997 1996 1995 1994 1994 1993
------ ------ ------ ------ ------ ------
CLASS A
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period ........ $11.57 $11.42 $11.48 $12.37 $11.80 $11.45
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) $ 0.59 $ 0.59 $ 0.61 $ 0.10 $ 0.64 $ 0.65
Net realized and unrealized
gain (loss) on investments (0.01) 0.15 0.03 (0.89) 0.58 0.37
------ ------ ------ ------ ------ ------
Total from investment
operations ............. $ 0.58 $ 0.74 $ 0.64 $(0.79) $ 1.22 $ 1.02
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income . $(0.59) $(0.59) $(0.60) $(0.07) $(0.61) $(0.67)
From net realized gain
on investments ........... -- -- (0.06) -- (0.01) --
In excess of net investment
income(++) (0.00) (0.00) -- (0.03) (0.03) --
In excess of net realized
gain on investments ...... -- -- (0.04) -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.59) $(0.59) $(0.70) $(0.10) $(0.65) $(0.67)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ..................... $11.56 $11.57 $11.42 $11.48 $12.37 $11.80
====== ====== ====== ====== ====== ======
Total return(+) .............. 5.09% 6.56% 5.86% (6.39)%++ 10.59% 9.23%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ................. 1.08% 1.17% 1.16% 1.16%+ 1.19% 1.07%
Net investment income ...... 5.05% 5.04% 5.38% 4.96%+ 5.21% 5.80%
PORTFOLIO TURNOVER ........... 33% 30% 58% 2% 12% 2%
NET ASSETS AT END OF
PERIOD (000 OMITTED) ....... $377,112 $409,347 $429,131 $460,321 $495,158 $398,352
- ----------
+ 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, 1997 and 1996, the per share distributions in excess of net investment income
were $0.002 and $0.002, respectively.
(S) The investment adviser voluntarily waived a portion of its management fee, 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 .......... $ 0.58 -- -- -- -- --
RATIOS (TO AVERAGE
NET ASSETS):
Expenses## ...... 1.15% -- -- -- -- --
Net investment income 4.98% -- -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH CAROLINA FUND
------------------------------------------------------------------------
1992 1991 1990 1989 1988
------ ------ ------ ------ ------
CLASS A
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $11.30 $11.18 $11.15 $11.13 $11.82
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income ............ $ 0.70 $ 0.72 $ 0.73 $ 0.74 $ 0.73
Net realized and unrealized gain
(loss) on investments .......... 0.26 0.17 0.03 0.02 (0.69)
------ ------ ------ ------ ------
Total from investment operations $ 0.96 $ 0.89 $ 0.76 $ 0.76 $ 0.04
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ....... $(0.76) $(0.72) $(0.73) $(0.74) $(0.73)
From net realized gain on
investments .................... (0.01) (0.05) -- -- --
From paid-in capital(++) ......... (0.04) (0.00) -- -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders ................. $(0.81) $(0.77) $(0.73) $(0.74) $(0.73)
------ ------ ------ ------ ------
Net asset value -- end of period ... $11.45 $11.30 $11.18 $11.15 $11.13
====== ====== ====== ====== ======
Total return(+) .................... 8.82% 8.34% 6.97% 7.12% 0.65%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses ......................... 1.09% 1.09% 1.12% 1.11% 1.08%
Net investment income ............ 6.17% 6.47% 6.48% 6.70% 6.71%
PORTFOLIO TURNOVER ................. 39% 44% 61% 25% 10%
NET ASSETS AT END OF PERIOD (000
OMITTED) ......................... $312,466 $226,806 $175,101 $129,287 $110,462
- ----------
(+) 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH CAROLINA FUND
--------------------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
-------------------------------------- --------- ----------
1997 1996 1995 1994 1994**
------ ------ ------ ------ ------
CLASS B
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value -- beginning of
period ........................ $11.56 $11.42 $11.47 $12.36 $12.36
------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) ...... $ 0.50 $ 0.50 $ 0.52 $ 0.08 $ 0.22
Net realized and unrealized
gain (loss) on investments .. -- 0.14 0.05 (0.89) 0.01
------ ------ ------ ------ ------
Total from investment
operations ................ $ 0.50 $ 0.64 $ 0.57 $(0.81) $ 0.23
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income .... $(0.51) $(0.50) $(0.52) $(0.08) $(0.21)
From net realized gain on
investments ................. -- -- (0.06) -- (0.01)
In excess of net investment
income(++) .................. (0.00) (0.00) -- (0.00) (0.01)
In excess of net realized gain
on investments .............. -- -- (0.04) -- --
------ ------ ------ ------ ------
Total distributions declared
to shareholders ........... $(0.51) $(0.50) $(0.62) $(0.08) $(0.23)
------ ------ ------ ------ ------
Net asset value -- end of period $11.55 $11.56 $11.42 $11.47 $12.36
====== ====== ====== ====== ======
Total return .................... 4.36% 5.70% 5.20% (6.51)%++ 4.58%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## .................... 1.78% 1.90% 1.88% 1.88%+ 1.84%+
Net investment income ......... 4.36% 4.30% 4.64% 4.18%+ 4.03%+
PORTFOLIO TURNOVER .............. 33% 30% 58% 2% 12%
NET ASSETS AT END OF PERIOD (000
OMITTED) ...................... $39,035 $33,847 $26,260 $15,866 $13,379
- ----------
** 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 years ended March 31, 1997 and 1996, and the two months ended March 31, 1994, the per share
distributions in excess of net investment income were $0.001, $0.002 and $0.004, respectively.
(S) The investment adviser voluntarily waived a portion of its management fee, 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 ..... $ 0.49 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .............. 1.85% -- -- -- --
Net investment income ... 4.29% -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH CAROLINA FUND
--------------------------------------------------------------------------
TWO MONTHS
ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
-------------------------------------- ---------- ------------
1997 1996 1995 1994 1994***
------ ------ ------ ------ ------
CLASS C
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value -- beginning of
period ........................ $11.56 $11.41 $11.47 $12.36 $12.24
------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) ...... $ 0.52 $ 0.51 $ 0.53 $ 0.10 $ 0.02
Net realized and unrealized
gain (loss) on investments .. (0.02) 0.15 0.04 (0.90) 0.12
------ ------ ------ ------ ------
Total from investment
operations ................ $ 0.50 $ 0.66 $ 0.57 $(0.80) $ 0.14
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income .... $(0.51) $(0.51) $(0.53) $(0.09) $(0.02)
From net realized gain on
investments ................. -- -- (0.06) -- --
In excess of net investment
income(++) .................. (0.00) (0.00) -- (0.00) (0.00)
In excess of net realized gain
on investments .............. -- -- (0.04) -- --
------ ------ ------ ------ ------
Total distributions declared
to shareholders ........... $(0.51) $(0.51) $(0.63) $(0.09) $(0.02)
------ ------ ------ ------ ------
Net asset value -- end of period $11.55 $11.56 $11.41 $11.47 $12.36
====== ====== ====== ====== ======
Total return(+) ................. 4.41% 5.87% 5.18% (6.50)%++ 16.50%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## .................... 1.73% 1.83% 1.81% 1.82%+ 1.44%+
Net investment income ......... 4.40% 4.38% 4.71% 4.25%+ 2.33%+
PORTFOLIO TURNOVER .............. 33% 30% 58% 2% 12%
NET ASSETS AT END OF PERIOD (000
OMITTED) ...................... $7,789 $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 years ended March 31, 1997 and 1996, 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 $0.002, $0.002, $0.002 and
$0.003, respectively.
(S) The investment adviser waived a portion of its management fee 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 ..... $ 0.51 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .............. 1.80% -- -- -- --
Net investment income ... 4.33% -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
PENNSYLVANIA FUND
-------------------------------------------------------------------------
TWO MONTHS
ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
-------------------------------------- ------------ ----------------
1997 1996 1995 1994 1994*
------ ------ ------ ------ ------
CLASS A
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period $ 9.37 $ 9.29 $ 9.15 $10.14 $ 9.53
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ........... $ 0.53 $ 0.54 $ 0.54 $ 0.09 $ 0.50
Net realized and unrealized gain
(loss) on investments ............ (0.10) 0.09 0.18 (0.99) 0.62
------ ------ ------ ------ ------
Total from investment operations . $ 0.43 $ 0.63 $ 0.72 $(0.90) $ 1.12
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ......... $(0.54) $(0.55) $(0.54) $(0.09) $(0.50)
From net realized gain on
investments ...................... -- -- (0.01) -- (0.01)
In excess of net investment income(++) (0.00) -- -- -- --
In excess of net realized gain on
investments ...................... -- -- (0.03) -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders ................... $(0.54) $(0.55) $(0.58) $(0.09) $(0.51)
------ ------ ------ ------ ------
Net asset value -- end of period ..... $ 9.26 $ 9.37 $ 9.29 $ 9.15 $10.14
====== ====== ====== ====== ======
Total return(+) ...................... 4.67% 6.85% 8.14% (8.91)%++ 12.12%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses ##......................... 0.10% 0.10% 0.01% 0.00%+ 0.00%+
Net investment income .............. 5.66% 5.76% 5.97% 5.43%+ 5.30%+
PORTFOLIO TURNOVER ................... 42% 40% 49% 1% 10%
NET ASSETS AT END OF PERIOD (000
OMITTED) ........................... $16,933 $18,030 $16,411 $13,961 $13,987
- ----------
* For the period from the commencement of investment operations, February 1, 1993, to January 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data for 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, 1997, the per share distributions in excess of net investment income was $0.003.
(S) The investment adviser voluntarily agreed to maintain expenses of the Fund at not more than 1.30% of average
daily net assets for Class A shares. 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 $ 0.45 $ 0.43 $ 0.06 $ 0.32
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................... 0.95% 1.00% 1.18% 1.84%+ 1.94%+
Net investment income ........ 4.81% 4.86% 4.80% 3.60%+ 3.36%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
PENNSYLVANIA FUND
--------------------------------------------------------------------------
TWO MONTHS
ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
------------------------------------- ---------- ------------
1997 1996 1995 1994 1994**
------ ------ ------ ------ ------
CLASS B
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value -- beginning of
period ........................ $ 9.39 $ 9.29 $ 9.15 $10.15 $10.06
------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) ...... $ 0.46 $ 0.50 $ 0.45 $ 0.06 $ 0.17
Net realized and unrealized
gain (loss) on investments .. (0.11) 0.07 0.18 (0.99) 0.10
------ ------ ------ ------ ------
Total from investment
operations ................ $ 0.35 $ 0.57 $ 0.63 $(0.93) $ 0.27
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income(++) $(0.46) $(0.47) $(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 ........... $(0.46) $(0.47) $(0.49) $(0.07) $(0.18)
------ ------ ------ ------ ------
Net asset value -- end of period $ 9.28 $ 9.39 $ 9.29 $ 9.15 $10.15
====== ====== ====== ====== ======
Total return .................... 3.83% 6.23% 7.07% (9.16)%++ 6.76%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## .................... 0.90% 0.88% 1.01% 1.00%+ 1.00%+
Net investment income ......... 4.86% 4.98% 4.96% 4.37%+ 4.22%+
PORTFOLIO TURNOVER .............. 42% 40% 49% 1% 10%
NET ASSETS AT END OF PERIOD (000
OMITTED) ........................ $24,898 $24,170 $7,699 $4,304 $3,401
- ----------
** 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, 1997, and the two months ended March 31, 1994, the per share distributions in
excess of net investment income were $0.002 and $0.001, respectively.
(S) The investment adviser voluntarily agreed to maintain expenses at not more than 1.95% of average daily net
assets for Class B shares. 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 $ 0.41 $ 0.34 $ 0.04 $ 0.05
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .............. 1.75% 1.85% 2.26% 2.91%+ 2.50%+
Net investment income ... 4.01% 4.01% 3.72% 2.47%+ 1.29%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SOUTH CAROLINA FUND
------------------------------------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
----------------------------------------- --------------- --------------------------
1997 1996 1995 1994 1994 1993
------ ------ ------ ------ ------ ------
CLASS A
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value --
beginning of period ........ $11.97 $11.86 $11.79 $12.74 $12.02 $11.74
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) ... $ 0.62 $ 0.62 $ 0.63 $ 0.08 $ 0.63 $ 0.67
Net realized and unrealized
gain (loss) on investments (0.10) 0.11 0.15 (0.92) 0.74 0.34
------ ------ ------ ------ ------ ------
Total from investment
operations ............. $ 0.52 $ 0.73 $ 0.78 $(0.84) $ 1.37 $ 1.01
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income . $(0.61) $(0.62) $(0.62) $(0.08) $(0.61) $(0.69)
From net realized gain on
investments .............. -- -- (0.06) -- (0.01) (0.04)
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 $(0.61) $(0.62) $(0.71) $(0.11) $(0.65) $(0.73)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ..................... $11.88 $11.97 $11.86 $11.79 $12.74 $12.02
====== ====== ====== ====== ====== ======
Total return(+) .............. 4.46% 6.20% 6.93% (6.65)%++ 11.69% 8.89%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ................. 1.10% 1.20% 1.19% 1.23%+ 1.22% 1.12%
Net investment income ...... 5.17% 5.10% 5.37% 5.09%+ 5.06% 5.74%
PORTFOLIO TURNOVER ........... 13% 18% 30% 4% 10% 11%
NET ASSETS AT END OF
PERIOD (000 OMITTED) ....... $148,908 $166,801 $171,045 $173,316 $187,307 $144,539
- ----------
+ 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.
(S) The investment adviser voluntarily waived a portion of its management fee 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 .. $ 0.16 -- -- -- -- --
RATIOS (TO AVERAGE
NET ASSETS):
Expenses## ........... 1.16% -- -- -- -- --
Net investment income 5.11% -- -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SOUTH CAROLINA FUND
-------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-------------------------------------------------------------------
1992 1991 1990 1989 1988
------ ------ ------ ------ ------
CLASS A
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period .......................... $11.45 $11.30 $11.24 $11.14 $11.54
------ ------ ------ ------ ------
Income from investment operations --
Net investment income ........... $ 0.70 $ 0.71 $ 0.72 $ 0.76 $ 0.77
Net realized and unrealized gain
(loss) on investments ......... 0.40 0.21 0.06 0.11 (0.36)
------ ------ ------ ------ ------
Total from investment operations $ 1.10 $ 0.92 $ 0.78 $ 0.87 $ 0.41
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ...... $(0.76) $(0.71) $(0.72) $(0.77) $(0.77)
From net realized gain on
investments ................... (0.05) (0.06) -- -- --
From paid-in capital ............ -- -- -- -- (0.04)
------ ------ ------ ------ ------
Total distributions declared to
shareholders ................ $(0.81) $(0.77) $(0.72) $(0.77) $(0.81)
------ ------ ------ ------ ------
Net asset value -- end of period .. $11.74 $11.45 $11.30 $11.24 $11.14
====== ====== ====== ====== ======
Total return(+) ................... 9.95% 8.46% 7.13% 8.18% 3.92%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ........................ 1.15% 1.18% 1.21% 0.97% 0.81%
Net investment income ........... 6.07% 6.30% 6.35% 6.90% 7.07%
PORTFOLIO TURNOVER ................ 22% 47% 54% 27% 12%
NET ASSETS AT END OF PERIOD (000
OMITTED) ........................ $101,434 $75,922 $57,675 $45,391 $34,025
- ----------
(+) 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>
<CAPTION>
FINANCIAL HIGHLIGHTS
SOUTH CAROLINA FUND
-------------------------------------------------------------------------------------
TWO MONTHS
ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
--------------------------------------- ---------- ------------
1997 1996 1995 1994 1994**
------ ------ ------ ------ ------
CLASS B
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ............................ $11.97 $11.86 $11.78 $12.73 $12.67
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) .......... $ 0.54 $ 0.52 $ 0.54 $ 0.08 $ 0.21
Net realized and unrealized gain
(loss) on investments ........... (0.10) 0.12 0.17 (0.94) 0.06
------ ------ ------ ------ ------
Total from investment operations. $ 0.44 $ 0.64 $ 0.71 $(0.86) $ 0.27
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ........ $(0.53) $(0.53) $(0.54) $(0.08) $(0.20)
From net realized gain on
investments...................... -- -- (0.06) -- --
In excess of net investment income(++) -- (0.00) (0.00) (0.01) (0.01)
In excess of net realized gain on
investments ..................... -- -- (0.03) -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders .................. $(0.53) $(0.53) $(0.63) $(0.09) $(0.21)
------ ------ ------ ------ ------
Net asset value -- end of period .... $11.88 $11.97 $11.86 $11.78 $12.73
====== ====== ====== ====== ======
Total return ........................ 3.73% 5.43% 6.26% (6.77)%++ 5.47%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ........................ 1.79% 1.92% 1.90% 1.96%+ 1.90%+
Net investment income.............. 4.48% 4.35% 4.63% 4.29%+ 3.86%+
PORTFOLIO TURNOVER................... 13% 18% 30% 4% 10%
NET ASSETS AT END OF PERIOD
(000 OMITTED)...................... $21,871 $18,420 $12,964 $10,085 $8,217
- ----------
** 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 years ended March 31, 1996 and 1995, the per share distributions in excess of net investment income were
$0.0005 and $0.00436, respectively.
(S) The investment adviser voluntarily waived a portion of its management fee 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.......... $ 0.53 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.85% -- -- -- --
Net investment income ....... 4.42% -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
TENNESSEE FUND
------------------------------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
------------------------------------ ----------- ---------------------
1997 1996 1995 1994 1994 1993
------ ------ ------ ------ ------ ------
CLASS A
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period .... $10.40 $10.27 $10.26 $10.94 $10.37 $10.10
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) $ 0.55 $ 0.54 $ 0.56 $ 0.09 $ 0.57 $ 0.57
Net realized and
unrealized gain (loss)
on investments ....... (0.09) 0.13 0.02 (0.68) 0.57 0.31
------ ------ ------ ------ ------ ------
Total from investment
operations ......... $ 0.46 $ 0.67 $ 0.58 $(0.59) $ 1.14 $ 0.88
------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders --
From net investment
income................ $(0.54) $(0.54) $(0.56) $(0.07) $(0.54) $(0.57)
From net realized gain
on investments(++).... -- -- (0.00) -- -- (0.01)
In excess of net
investment income(+++) -- (0.00) -- (0.02) (0.03) (0.03)
In excess of net realized
gain on investments .. -- -- (0.01) -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.54) $(0.54) $(0.57) $(0.09) $(0.57) $(0.61)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................. $10.32 $10.40 $10.27 $10.26 $10.94 $10.37
====== ====== ====== ====== ====== ======
Total return(+) .......... 4.48% 6.66% 5.86% (5.39)%++ 11.20% 9.03%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ............. 1.10% 1.21% 1.22% 1.21%+ 1.29% 1.14%
Net investment income .. 5.26% 5.18% 5.52% 5.31%+ 5.25% 5.89%
PORTFOLIO TURNOVER ....... 20% 20% 27% 4% 12% 9%
NET ASSETS AT END OF
PERIOD (000 OMITTED) ... $108,000 $109,811 $117,572 $117,117 $123,050 $99,443
- ----------
+ 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 March 31, 1996, the per share distribution in excess of net investment income was $0.0024.
(S) The investment adviser and/or distributor voluntarily waived a portion of their management, distribution and
expense reimbursement fees 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 $ 0.54 -- -- -- -- $ 0.61
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ....... 1.16% -- -- -- -- 1.17%
Net investment income 5.20% -- -- -- -- 6.23%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
TENNESSEE FUND
------------------------------------------------------
YEAR ENDED PERIOD ENDED
JANUARY 31, JANUARY 31,
---------------------------------- --------------
1992 1991 1990 1989*
------ ------ ------ ------
CLASS A
-------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ............. $ 9.90 $ 9.80 $ 9.68 $ 9.53
------ ------ ------ ------
Income from investment operations --
Net investment income(S) ......................... $ 0.61 $ 0.62 $ 0.67 $ 0.22
Net realized and unrealized gain on investments .. 0.30 0.13 0.11 0.10
------ ------ ------ ------
Total from investment operations ............... $ 0.91 $ 0.75 $ 0.78 $ 0.32
------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....................... $(0.66) $(0.63) $(0.66) $(0.17)
From net realized gain on investments ............ (0.05) (0.02) -- --
From paid-in capital(++) ......................... -- (0.00) -- --
------ ------ ------ ------
Total distributions declared to shareholders ... $(0.71) $(0.65) $(0.66) $(0.17)
------ ------ ------ ------
Net asset value -- end of period ................... $10.10 $ 9.90 $ 9.80 $ 9.68
====== ====== ====== ======
Total return(+) .................................... 9.50% 7.96% 8.30% 3.43%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses ......................................... 1.15% 1.03% 0.53% 0.40%+
Net investment income ............................ 6.11% 6.37% 6.70% 5.98%+
PORTFOLIO TURNOVER ................................. 42% 58% 78% 5%
NET ASSETS AT END OF PERIOD (000 OMITTED) .......... $87,898 $72,108 $56,048 $15,832
- ----------
* For the period from the commencement of investment operations, August 12, 1988, to January 31, 1989.
+ Annualized.
++ Not annualized.
(+) 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 $0.0013.
(S) The investment adviser voluntarily waived a portion of its management fee 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 ........................ -- -- $ 0.60 $ 0.20
RATIOS (TO AVERAGE NET ASSETS):
Expenses ................................... -- -- 1.24% 0.95%+
Net investment income ...................... -- -- 5.99% 5.43%+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
TENNESSEE FUND
---------------------------------------------------------------------------
TWO MONTHS
ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
-------------------------------------- -------------- ---------------
1997 1996 1995 1994 1994**
------ ------ ------ ------ ------
CLASS B
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ....................... $10.39 $10.26 $10.26 $10.95 $10.87
------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) ..... $ 0.47 $ 0.46 $ 0.48 $ 0.08 $ 0.19
Net realized and unrealized
gain (loss) on investments (0.09) 0.14 0.01 (0.69) 0.08
------ ------ ------ ------ ------
Total from investment
operations ............... $ 0.38 $ 0.60 $ 0.49 $(0.61) $ 0.27
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income(+++) $(0.46) $(0.47) $(0.48) $(0.08) $(0.19)
From net realized gain on
investments(++) ............ -- -- (0.00) -- --
In excess of net realized gain
on investments ............. -- -- (0.01) -- --
------ ------ ------ ------ ------
Total distributions declared
to shareholders .......... $(0.46) $(0.47) $(0.49) $(0.08) $(0.19)
------ ------ ------ ------ ------
Net asset value -- end of period $10.31 $10.39 $10.26 $10.26 $10.95
====== ====== ====== ====== ======
Total return ................... 3.76% 5.89% 5.00% (5.59)%++ 2.48%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ................... 1.79% 1.93% 1.94% 1.93%+ 1.93%+
Net investment income ........ 4.57% 4.43% 4.80% 4.49%+ 4.20%+
PORTFOLIO TURNOVER ............. 20% 20% 27% 4% 12%
NET ASSETS AT END OF PERIOD (000
OMITTED) ..................... $14,436 $12,935 $10,006 $5,294 $3,818
- ----------
** 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 voluntarily waived a portion of its management fee 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 .... $ 0.46 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ............. 1.85% -- -- -- --
Net investment income .. 4.51% -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
VIRGINIA FUND
------------------------------------------------------------------------------------------
TWO MONTHS
ENDED
YEAR ENDED MARCH 31, MARCH 31, YEAR ENDED JANUARY 31,
----------------------------------------- ------------- --------------------------
1997 1996 1995 1994 1994 1993
------ ------ ------ ------ ------ ------
CLASS A
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period ........ $11.21 $11.09 $11.15 $12.07 $11.72 $11.44
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) ... $ 0.59 $ 0.59 $ 0.56 $ 0.10 $ 0.65 $ 0.68
Net realized and unrealized
gain (loss) on investments (0.15) 0.13 0.04 (0.92) 0.56 0.30
------ ------ ------ ------ ------ ------
Total from investment
operations ............. $ 0.44 $ 0.72 $ 0.60 $(0.82) $ 1.21 $ 0.98
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income . $(0.59) $(0.60) $(0.61) $(0.06) $(0.62) $(0.70)
From net realized gain
on investments(+++) ...... -- -- (0.04) -- (0.20) (0.00)
In excess of net
investment income(++) .... -- (0.00) (0.00) (0.04) (0.04) --
In excess of net realized
gain on investments ...... -- -- (0.01) -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.59) $(0.60) $(0.66) $(0.10) $(0.86) $(0.70)
------ ------ ------ ------ ------ ------
Net asset value -- end of period $11.06 $11.21 $11.09 $11.15 $12.07 $11.72
====== ====== ====== ====== ====== ======
Total return(+) .............. 3.97% 6.52% 5.67% (6.80)%++ 10.67% 8.88%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ................. 1.08% 1.18% 1.16% 1.17%+ 1.18% 1.08%
Net investment income ...... 5.27% 5.20% 4.91% 5.33%+ 5.37% 6.02%
PORTFOLIO TURNOVER ........... 42% 42% 27% 5% 22% 20%
NET ASSETS AT END OF
PERIOD (000 OMITTED) ....... $379,185 $418,408 $430,688 $443,580 $479,333 $399,696
- ----------
+ 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 $0.005 and $0.003, respectively.
(+++) For the year ended January 31, 1993, the per share distribution from net realized gain on investments was $0.00348.
(S) The investment adviser voluntarily waived a portion of its management fee 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 .. $ 0.58 -- -- -- -- --
RATIOS (TO AVERAGE
NET ASSETS):
Expenses## ........... 1.14% -- -- -- -- --
Net investment income 5.21% -- -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
VIRGINIA FUND
------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
------------------------------------------------------------------------
1992 1991 1990 1989 1988
------ ------ ------ ------ ------
CLASS A
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ...................... $11.16 $10.97 $10.91 $10.75 $11.38
------ ------ ------ ------ ------
Income from investment operations --
Net investment income ....... $ 0.71 $ 0.73 $ 0.73 $ 0.74 $ 0.72
Net realized and unrealized
gain (loss) on investments 0.34 0.19 0.06 0.16 (0.57)
------ ------ ------ ------ ------
Total from investment
operations .............. $ 1.05 $ 0.92 $ 0.79 $ 0.90 $ 0.15
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income .. $(0.77) $(0.73) $(0.73) $(0.74) $(0.71)
From net realized gain on
investments ............... -- -- -- -- (0.05)
From paid-in capital ........ -- -- -- -- (0.02)
------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.77) $(0.73) $(0.73) $(0.74) $(0.78)
------ ------ ------ ------ ------
Net asset value -- end of
period ...................... $11.44 $11.16 $10.97 $10.91 $10.75
====== ====== ====== ====== ======
Total return(+) ............... 9.76% 8.74% 7.46% 8.76% 1.61%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses .................... 1.08% 1.11% 1.12% 1.09% 1.04%
Net investment income ....... 6.32% 6.64% 6.67% 6.91% 6.75%
PORTFOLIO TURNOVER ............ 13% 38% 41% 38% 11%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ............... $328,664 $275,202 $240,553 $207,680 $192,104
- ----------
(+) 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>
<CAPTION>
FINANCIAL HIGHLIGHTS
VIRGINIA FUND
-----------------------------------------------------------------------------
TWO MONTHS
ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
------------------------------------------ -------------- ---------------
1997 1996 1995 1994 1994**
------ ------ ------ ------ ------
CLASS B
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period ................. $11.21 $11.08 $11.14 $12.06 $12.14
------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) .. $ 0.51 $ 0.51 $ 0.53 $ 0.09 $ 0.22
Net realized and unrealized
gain (loss) on investments (0.15) 0.13 (0.01) (0.92) 0.01
------ ------ ------ ------ ------
Total from investment
operations............. $ 0.36 $ 0.64 $ 0.52 $(0.83) $ 0.23
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income. $(0.51) $(0.51) $(0.53) $(0.09) $(0.21)
From net realized gain on
investments ............. -- -- (0.04) -- (0.09)
In excess of net investment
income(++) .............. -- (0.00) (0.00) (0.00) (0.01)
In excess of net realized
gain on investments...... -- -- (0.01) -- --
------ ------ ------ ------ ------
Total distributions
declared to
shareholders .......... $(0.51) $(0.51) $(0.58) $(0.09) $(0.31)
------ ------ ------ ------ ------
Net asset value -- end of
period .................... $11.06 $11.21 $11.08 $11.14 $12.06
====== ====== ====== ====== ======
Total return................. 3.24% 5.85% 4.91% (6.92)%++ 4.93%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses## ................ 1.78% 1.90% 1.88% 1.88%+ 1.82%+
Net investment income...... 4.57% 4.46% 4.84% 4.52%+ 4.25%+
PORTFOLIO TURNOVER........... 42% 42% 27% 5% 22%
NET ASSETS AT END OF PERIOD
(000 OMITTED).............. $30,567 $28,420 $22,007 $13,337 $10,877
- ----------
** 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 years ended March 31, 1996 and 1995, and the two months ended March 31, 1994, the per share
distributions in excess of net investment income were $0.002, $0.005 and $0.002, respectively.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods
indicated. If these fees have been incurred by the Fund, the net investment income and the ratios would have
been:
Net investment income.. $ 0.50 -- -- -- --
RATIOS (TO AVERAGE NET
ASSETS):
Expenses## .......... 1.84% -- -- -- --
Net investment income 4.51% -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
VIRGINIA FUND
-------------------------------------------------------------------------
TWO MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
------------------------------------- ----------- -------------
1997 1996 1995 1994 1994***
------ ------ ------ ------ ------
CLASS C
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period ................. $11.21 $11.07 $11.14 $12.06 $11.94
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) .. $ 0.52 $ 0.51 $ 0.56 $ 0.08 $ 0.02
Net realized and unrealized
gain (loss) on
investments ............. (0.16) 0.15 (0.04) (0.91) 0.12
------ ------ ------ ------ ------
Total from investment
operations ............ $ 0.36 $ 0.66 $ 0.52 $(0.83) $ 0.14
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income(++) $(0.51) $(0.52) $(0.54) $(0.09) $(0.02)
From net realized gain on
investment income ....... -- -- (0.04) -- --
In excess of net realized
gain on investments ..... -- -- (0.01) -- --
------ ------ ------ ------ ------
Total distributions
declared to
shareholders .......... $(0.51) $(0.52) $(0.59) $(0.09) $(0.02)
------ ------ ------ ------ ------
Net asset value -- end of
period .................... $11.06 $11.21 $11.07 $11.14 $12.06
====== ====== ====== ====== ======
Total return ................ 3.30% 6.02% 4.85% (6.91)%++ 17.05%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA(S):
Expenses## ................ 1.72% 1.83% 1.80% 1.82%+ 1.18%+
Net investment income ..... 4.63% 4.53% 4.90% 4.48%+ 1.79%+
PORTFOLIO TURNOVER .......... 42% 42% 27% 5% 22%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ............. $3,182 $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 years ended March 31, 1996 and 1995, and January 31, 1994, the per share distributions in excess of
net investment income were $0.005, $0.002 and $0.002, respectively.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income and the ratios would have
been:
Net investment income.. $ 0.51 -- -- -- --
RATIOS (TO AVERAGE NET
ASSETS):
Expenses## .......... 1.78% -- -- -- --
Net investment income 4.57% -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
WEST VIRGINIA FUND
----------------------------------------------------------------------------------------
TWO MONTHS
ENDED
YEAR ENDED MARCH 31, MARCH 31, YEAR ENDED JANUARY 31,
-------------------------------------- ------------- ---------------------------
1997 1996 1995 1994 1994 1993
------ ------ ------ ------ ------ ------
CLASS A
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT EACH
PERIOD):
Net asset value --
beginning of period .. $11.33 $11.21 $11.19 $12.06 $11.50 $11.20
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income . $ 0.60 $ 0.61 $ 0.62 $ 0.01 $ 0.64 $ 0.66
Net realized and
unrealized gain (loss)
on investments ..... (0.02) 0.12 0.03 (0.78) 0.69 0.34
------ ------ ------ ------ ------ ------
Total from
investment operations $ 0.58 $ 0.73 $ 0.65 $(0.77) $ 1.33 $ 1.00
------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders --
From net investment
income ............. $(0.60) $(0.61) $(0.62) $(0.06) $(0.61) $(0.69)
From net realized gain
on investments ..... -- -- -- -- (0.12) (0.01)
In excess of net
investment income(++) -- (0.00) -- (0.04) (0.04) --
In excess of net
realized gain on
investments ........ -- -- (0.01) -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.60) $(0.61) $(0.63) $(0.10) $(0.77) $(0.70)
------ ------ ------ ------ ------ ------
Net asset value -- end
of period ............ $11.31 $11.33 $11.21 $11.19 $12.06 $11.50
====== ====== ====== ====== ====== ======
Total return(+) ........ 5.20% 6.58% 6.07% (6.37)%++ 11.80% 9.12%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA:
Expenses## ........... 1.17% 1.22% 1.19% 1.30%+ 1.24% 1.15%
Net investment income 5.28% 5.30% 5.62% 5.36%+ 5.30% 5.97%
PORTFOLIO TURNOVER ..... 21% 11% 23% 2% 26% 19%
NET ASSETS AT END OF
PERIOD (000 OMITTED) . $126,107 $134,514 $127,616 $130,726 $141,190 $115,289
- ----------
+ 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 was $0.002.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
WEST VIRGINIA FUND
------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
------------------------------------------------------------------------
1992 1991 1990 1989 1988
------ ------ ------ ------ ------
CLASS A
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ...................... $10.93 $10.72 $10.68 $10.51 $11.30
------ ------ ------ ------ ------
Income from investment operations --
Net investment income ....... $ 0.70 $ 0.71 $ 0.71 $ 0.77 $ 0.77
Net realized and unrealized
gain (loss) on investments 0.34 0.21 0.04 0.18 (0.72)
------ ------ ------ ------ ------
Total from investment operations $ 1.04 $ 0.92 $ 0.75 $ 0.95 $ 0.05
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income .. $(0.76) $(0.71) $(0.71) $(0.78) $(0.76)
From net realized gain on
investments ............... (0.01) -- -- -- (0.02)
From paid-in capital ........ -- -- -- -- (0.06)
------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.77) $(0.71) $(0.71) $(0.78) $(0.84)
------ ------ ------ ------ ------
Net asset value -- end of
period ...................... $11.20 $10.93 $10.72 $10.68 $10.51
====== ====== ====== ====== ======
Total return(+) ............... 9.84% 8.91% 7.26% 9.43% 0.76%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses .................... 1.17% 1.21% 1.22% 0.86% 0.79%
Net investment income ....... 6.33% 6.59% 6.63% 7.01% 7.32%
PORTFOLIO TURNOVER ............ 14% 37% 34% 9% 11%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ............... $80,440 $61,984 $52,398 $43,026 $36,276
- ----------
(+) 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>
<CAPTION>
FINANCIAL HIGHLIGHTS
WEST VIRGINIA FUND
-----------------------------------------------------------------------------
TWO MONTHS
ENDED PERIOD ENDED
YEAR ENDED MARCH 31, MARCH 31, JANUARY 31,
----------------------------------------- --------------- ---------------
1997 1996 1995 1994 1994**
------ ------ ------ ------ ------
CLASS B
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period ................. $11.33 $11.21 $11.19 $12.06 $12.13
------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income ..... $ 0.52 $ 0.52 $ 0.53 $ 0.01 $ 0.22
Net realized and unrealized
gain (loss) on investments (0.02) 0.12 0.04 (0.87) 0.05
------ ------ ------ ------ ------
Total from investment
operations............. $ 0.50 $ 0.64 $ 0.57 $(0.86) $ 0.27
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income $(0.52) $(0.52) $(0.54) $(0.01) $(0.21)
From net realized gain on
investments ............. -- -- -- -- (0.12)
In excess of net investment
income(++) .............. -- (0.00) (0.00) -- (0.01)
In excess of net realized
gain on investments ..... -- -- (0.01) -- --
------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.52) $(0.52) $(0.55) $(0.01) $(0.34)
------ ------ ------ ------ ------
Net asset value -- end of
period .................... $11.31 $11.33 $11.21 $11.19 $12.06
====== ====== ====== ====== ======
Total return................. 4.47% 5.81% 5.30% (6.48)%++ 5.59%+
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses## ................ 1.87% 1.94% 1.91% 2.02%+ 1.89%+
Net investment income...... 4.57% 4.56% 4.87% 4.56%+ 4.14%+
PORTFOLIO TURNOVER........... 21% 11% 23% 2% 26%
NET ASSETS AT END OF PERIOD
(000 OMITTED).............. $13,587 $12,647 $10,046 $5,456 $4,530
- ----------
** 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 years ended March 31, 1996 and 1995, the per share distributions in excess of net investment income
were $0.002 and $0.005, respectively.
</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, except that with respect to the Florida Fund, these obligations
may consist of other tax-exempt securities which are not subject to the
Florida intangibles tax. 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, 1997, 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 liquid
assets 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 changes in the value of 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 and could include the loss
of all or a portion of the principal amount of the investment.
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 notional 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 could be used 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"). A determination is made, 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, retains oversight, focusing on factors such as valuation, liquidity
and availability of information. Investing in Rule 144A securities 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 liquid assets 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. 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
(except that with respect to the Florida Fund, these obligations may consist
of other Municipal Obligations which are exempt from the Florida intangibles
tax), 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 Conduct Rules 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.
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.") Under
the Advisory Agreements, the Adviser provides each Fund with overall investment
advisory services.
The portfolio manager for each Fund is as follows:
YEAR BECAME PORTFOLIO
PORTFOLIO MANAGER FUND MANAGER OF THE FUND
David B. Smith* ............. Arkansas 1997
California 1993
Georgia 1996
Maryland 1997
Massachusetts 1993
South Carolina 1997
Tennessee 1997
Virginia 1993
West Virginia 1994
Geoffrey L. Schechter** ..... Alabama 1997
Florida 1997
Mississippi 1993
New York 1993
North Carolina 1993
Pennsylvania 1997
*Mr. Smith joined MFS in 1988.
**Prior to joining MFS in 1993, Mr. Schechter was a Senior Investment Analyst
at Liberty Mutual Insurance Company.
Messrs. Smith and Schechter, Vice Presidents of the Trust, are also Vice
Presidents of the Adviser.
Subject to such policies as the Trustees may determine, the Adviser makes
investment decisions for each Fund. For these services and facilities, the
Adviser receives a management fee from the Trust on behalf of each Fund
computed and paid monthly at an annual rate equal to 0.55% of 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
for the Funds for an indefinite period of time as follows:
<TABLE>
<CAPTION>
REDUCED ADVISORY FEE REDUCED ADVISORY FEE
AS A % OF AVERAGE AS A % OF AVERAGE
FUND DAILY NET ASSETS FUND DAILY NET ASSETS
<S> <C> <C> <C>
Alabama ................................... 0.45% Mississippi ........................... 0.45%
Arkansas .................................. 0.45 New York .............................. 0.45
California ................................ 0.40 North Carolina ........................ 0.45
Florida ................................... 0.45 South Carolina ........................ 0.45
Georgia ................................... 0.45 Tennessee ............................. 0.45
Maryland .................................. 0.45 Virginia .............................. 0.45
Massachusetts ............................. 0.45 West Virginia ......................... 0.45
</TABLE>
The Adviser has reduced the Pennsylvania Fund's Management fee to 0.35% per
annum of the Fund's average daily net assets. Beginning October 1, 1997, the
Adviser will reduce the Pennsylvania Fund's management fee to 0.45% per annum
of the Fund's average daily net assets.
These fee reductions may be revised or rescinded by the Adviser at any time
without notice to shareholders.
For the Trust's fiscal year ended March 31, 1997, MFS received fees under the
Advisory Agreements with respect to each Fund in the following amounts:
<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 .......................... $ 477,327 0.55% N/A N/A
Arkansas Fund ......................... 908,167 0.55 N/A N/A
California Fund ....................... 1,156,144 0.40 $432,694 0.15%
Florida Fund .......................... 549,091 0.55 N/A N/A
Georgia Fund .......................... 361,309 0.49 48,303 0.06
Maryland Fund ......................... 716,338 0.48 97,218 0.07
Massachusetts Fund .................... 1,244,262 0.48 169,487 0.07
Mississippi Fund ...................... 455,195 0.55 N/A N/A
New York Fund ......................... 856,664 0.55 N/A N/A
North Carolina Fund ................... 2,129,831 0.48 288,877 0.07
Pennsylvania Fund ..................... 43,590 0.10 192,560 0.45
South Carolina Fund ................... 864,108 0.48 116,415 0.07
Tennessee Fund ........................ 599,164 0.48 82,026 0.07
Virginia Fund ......................... 2,093,440 0.48 284,139 0.07
West Virginia Fund .................... 800,535 0.55 N/A N/A
</TABLE>
(1) After any applicable fee reduction.
MFS also serves as investment adviser to each of the other MFS Funds and to
MFS/Sun Life Series Trust, MFS Municipal Income Trust, MFS Multimarket Income
Trust, MFS Government Markets Income Trust, MFS Intermediate Income Trust, MFS
Charter Income
Trust, MFS Special Value Trust, MFS Institutional Trust, MFS Union Standard
Trust, MFS Variable Insurance Trust, 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 Institutional Advisors, 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 $60.39 billion on behalf of approximately 2.6 million investor
accounts as of June 30, 1997. As of such date, the MFS organization managed
approximately $19.6 billion of assets in fixed income securities and fixed
income securities of MFS Instititional Advisors, Inc., including approximately
$6.2 billion of assets in municipal securities. MFS is a subsidiary of Sun
Life of Canada (U.S.) a subsidiary of Sun Life of Canada (U.S.) Holdings,
Inc., 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 Donald A. Stewart. 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 Stewart 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 B. Smith,
Geoffrey L. Schechter, Daniel E. McManus, W. Thomas London, Stephen E. Cavan,
James R. Bordewick, Jr., and James O. Yost, Ellen M. Moynihan and Mark E.
Bradley, 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. MFS and Foreign & Colonial each have investment personnel
working in each other's offices in Boston and London, respectively.
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.
ADMINISTRATOR -- MFS provides each Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, the Fund pays MFS an administrative fee of up to 0.015%
per annum of such Fund's average daily net assets. This fee reimburses MFS for
a portion of the costs it incurs to provide such services.
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. As used in the Prospectus and any appendices thereto the term "dealer"
includes any broker, dealer, bank (including bank trust departments),
registered investment adviser, financial planner and any other financial
institutions having a selling agreement or other similar agreement with MFD.
Dealers may also charge their customers fees relating to investments in the
Funds.
Each Fund offers 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**
- ---------------------------------------------------------------------------------------------------------------------------
* 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:
</TABLE>
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
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 five 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, prior to July 1, 1996: (a) the plan had established
an account with the Shareholder Servicing Agent and (b) the
sponsoring organization had demonstrated to the satisfaction of MFD
that either (i) the employer had at least 25 employees or (ii) the
aggregate purchases by the retirement plan of Class A shares in the
MFS Funds would 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;
(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; AND
(v) 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, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and
(c) the sponsoring organization demonstrates to the satisfaction of
MFD that, at the time of purchase the employer has at least 200
eligible employees and the plan has aggregate assets of at least
$2,000,000.
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 the Distribution
Plan (see "Distribution Plan" 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
each Fund's 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 each Fund's
Distribution Plan. See "Distribution Plan" 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 Distribution Plan by a Fund
to MFD for the first year after purchase (see "Distribution Plan" 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 Class A and Class B
shares of each Fund and Class C shares of the California Fund, the North
Carolina Fund and the Virginia Fund.
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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-
free at (800) 225-2606. The minimum purchase amount is $50 and the maximum
purchase amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application and
designate thereon a bank and account number from which purchases will be made.
If a telephone purchase request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. 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.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. Each Fund and MFD each reserve
the right to reject any purchase or exchange request. In the event that the
Funds or MFD reject an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Funds are not designed for professional market timing organizations or
other entities using programmed or frequent exchanges. The Funds define a
"market timer" as an individual, or organization acting on behalf of one or
more individuals, if (i) the individual or organization makes three or more
exchange requests out of a Fund per calendar year and (ii) any one of such
exchange requests represents shares equal in value to 1/2 or 1% or more of
that Fund's net assets at the time of the request. Accounts under common
ownership or control, including accounts administered by market timers, will
be aggregated for purposes of this definition.
As noted above, each Fund and MFD each reserves the right to reject or
restrict any specific purchase and exchange request, and, in addition, may
impose specific limitations with respect to market timers, including delaying
for up to seven days the purchase side of an exchange request by market timers
or specifically rejecting or otherwise restricting purchase and exchange
requests by market timers. Other funds in the MFS Funds may have different
and/or more restrictive policies with respect to market timers than the Funds.
These policies are disclosed in the prospectuses of these other MFS Funds.
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.
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 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.
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: The Trust agrees to redeem shares of any Fund
solely in cash up to the lesser of $250,000 or 1% of the net asset value of
the Fund during any 90-day period for any one shareholder. The Fund has
reserved the right to pay other redemptions 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 or exchanges, 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 PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares of each Fund, as applicable, pursuant to Section 12(b) of the 1940 Act
and Rule 12b-1 thereunder (the "Distribution Plan"), after having concluded
that there is a reasonable likelihood that the Distribution Plan 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 CLASS OF SHARES: There are features of the
Distribution Plan that are common to each class of shares as described below.
SERVICE FEES. The 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 the 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. The 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 Plan, as
does the use by MFD of such distribution fees. Such amounts and uses are
described below in the discussion of the provisions of the Distribution Plan
relating to each class of shares. 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 the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The provisions of the Distribution Plan relating to operating policies
as well as initial approval, renewal, amendment and termination are
substantially identical as they relate to each Fund's class of shares covered
by the Distribution Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. 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 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 the 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 SHARES. 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 SHARES. Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Information Concerning Shares
of the Trust -- 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 the 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 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:
CLASS A CLASS B CLASS C
------- ------- -------
Alabama Fund ........... 0.25% 1.00%
Arkansas Fund .......... 0.10% 0.84%
California Fund ........ 0.00% 0.83% 1.00%
Florida Fund ........... 0.00% 0.81%
Georgia Fund ........... 0.25% 1.00%
Maryland Fund .......... 0.35% 1.00%
Massachusetts Fund ..... 0.35% 1.00%
Mississippi Fund ....... 0.00% 0.80%
New York Fund .......... 0.25% 1.00%
North Carolina Fund .... 0.35% 1.00% 1.00%
Pennsylvania Fund ...... 0.00% 0.80%
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%
For the California, Florida and Mississippi Funds, fees payable under the
Distribution Plan with respect to Class A shares 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 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 in the first year, 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 in the first
year, 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
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 an entity separate from the
other series of the Trust for federal income tax purposes. In order to
minimize the taxes that the Funds would otherwise be required to pay, each
Fund intends to qualify each year as a "regulated investment company" under
Subchapter M of the Code. Because each Fund intends to distribute all of its
net investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not
expected that any Fund will be required to pay entity-level federal income or
excise taxes.
Each Fund expects that dividends paid to 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 will be taxable to shareholders,
whether the distribution is paid in cash or reinvested in additional shares.
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, and 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 affect a corporate
shareholder's alternative minimum tax liability. Depending on the nature of
the distribution and the residence of the shareholder, certain Fund
distributions may be subject to state and local income taxes. Entities or
persons who are "substantial users" (or persons related to "substantial
users") of facilities financed by private activity bonds should consult their
tax advisors before purchasing shares of a Fund.
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 dividends
and distributions for the year, including 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, 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), and the amount, if
any, of federal income tax withheld.
Fund distributions will reduce a Fund's net asset value per share.
Shareholders who buy shares shortly before a 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.
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 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. Each Fund is also required in certain circumstances to apply backup
withholding at the 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. Backup
withholding will not, however, be applied to payments that have been subject
to 30% withholding. Prospective investors should read the Fund's Account
Application for additional information regarding backup withholding of federal
income tax and should consult their own tax advisers as to the tax
consequences 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 each
Fund 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.
In order to take advantage of the exemption from the intangibles tax in any
year, the Florida Fund must sell any non-exempt assets held in its portfolio
and reinvest the proceeds in exempt assets prior to January 1. Transaction
costs involved in restructuring the portfolio in this fashion would likely
reduce the Florida Fund's investment return and might exceed any increased
investment return the Florida Fund achieved by investing in non-exempt assets
during the year.
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 and in
other tax-exempt securities which are exempt from the Florida intangibles tax
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 the 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. Each Fund offers multiple
classes of shares which were initially offered for sale to the public on
different dates. The calculation of total rate of return for a class of shares
which initially was offered for sale to the public subsequent to another class
of shares of a Fund is based both on (i) the performance of a Fund's newer
class from the date it initially was offered for sale to the public and (ii)
the performance of a Fund's oldest class from the date it initially was
offered for sale to the public up to the date that the newer class initially
was offered for sale to the public. See the SAI for further information on the
calculation of total rate of return for share classes initially offered for
sale to the public on different dates.
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, 1997, 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.
Subject to termination or revision at the sole discretion of MFS, MFS has
agreed to bear the expenses for the Arkansas Fund, the Florida Fund, the
Mississippi Fund and the Pennsylvania Fund such that the respective Fund's
"Other Expenses," which are defined to include all of the respective Fund's
expenses, except for management fees, Rule 12b-1 fees, taxes, extraordinary
expenses, brokerage and termination costs, do not exceed 0.40% per annum of
the Fund's average daily net assets (the "Maximum Percentage"). The obligation
of MFS to bear these expenses for the Arkansas Fund, the Florida Fund, and the
Mississippi Fund terminates on December 31, 2001 and for the Pennsylvania
Fund, on December 31, 2002. The payments made by MFS on behalf of the
respective Fund under this arrangement are subject to reimbursement by the
Fund to MFS, which will be accomplished by the payment of an expense
reimbursement fee by such Fund to MFS computed and paid monthly at a
percentage of the respective Fund's average daily net assets for the then
current fiscal year, with a limitation that immediately after such payment the
respective Fund's "Other Expenses" will not exceed the appropriate Maximum
Percentage. While the Adviser is entitled to be reimbursed by the Pennsylvania
Fund for bearing the Fund's expenses, the Adviser is currently waving its
right to reimbursement. This expense reimbursement by each such Fund to MFS
terminates on the earlier of the date on which payment made by such Fund
equals the prior payment of such reimbursable expenses by MFS 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 Class A, B and C
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 on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur
on the first business day of the month. 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 six 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
Distribution Plan; (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). As used in this Appendix, the term "dealer"
includes any broker, dealer, bank (including bank trust departments),
registered investment adviser, financial planner and any other financial
institution having a selling agreement or other similar agreement with MFS
Fund Distributors, Inc. ("MFD").
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
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of the MFS Family of Funds ("MFS Funds") pursuant to
the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o 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:
o Officers, eligible directors, employees (including retired employees)
and agents of Massachusetts Financial Services Company ("MFS"), Sun
Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
o Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
o 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
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o 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")
o Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of 401(a) or ESP Plan participant;
o Loan from 401(a) or ESP Plan;
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o 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
o 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")
o Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o 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
o 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.
7. LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).
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. WRAP ACCOUNT INVESTMENTS AND OTHER SIMILAR PROGRAMS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund marketplace account or a
similar program under which such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans or trust accounts 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
o 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
o Distributions made on or after the IRA owner has attained the age of 59
1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(a) PLANS
o Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
o 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
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs where
the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account value at the time of
establishment.
2. DEATH OF OWNER
o 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
o 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
o 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")
o 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
o Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
TAX EQUIVALENT YIELD TABLES
(RATES FOR 1997 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
1997. 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
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED. & ST.
1997 1997 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- 24,650 19.11% 3.71% 4.94% 6.18% 7.42% 8.65% 9.89% 0.15 0.048376 0.1911
$ 0- 41,200 19.08 3.71 4.94 6.18 7.41 8.65 9.89 0.15 0.048058 0.1908
$ 24,650- 59,750 $ 41,200- 99,600 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000 0.3160
$ 59,750-124,650 $ 99,600-151,750 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000 0.3445
$124,650-271,050 $151,750-271,050 39.20 4.93 6.58 8.22 9.87 11.51 13.16 0.36 0.050000 0.3920
$271,050 & Over $271,050 & Over 42.62 5.23 6.97 8.71 10.46 12.20 13.94 0.396 0.050000 0.4262
* 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.
<CAPTION>
ARKANSAS
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED. & ST.
1997 1997 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- 24,650 18.65% 3.69% 4.92% 6.15% 7.38% 8.60% 9.83% 0.15 0.042963 0.1865
$ 0- 41,200 19.57 3.73 4.97 6.22 7.46 8.70 9.95 0.15 0.053739 0.1957
$ 24,650- 59,750 33.03 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.069901 0.3303
$ 41,200- 99,600 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000 0.3304
$ 59,750-124,650 $ 99,600-151,750 35.83 4.68 6.23 7.79 9.35 10.91 12.47 0.31 0.070000 0.3583
$124,650-271,050 $151,750-271,050 40.48 5.04 6.72 8.40 10.08 11.76 13.44 0.36 0.070000 0.4048
$271,050 & Over $271,050 & Over 43.83 5.34 7.12 8.90 10.68 12.46 14.24 0.396 0.070000 0.4383
* 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.
<CAPTION>
CALIFORNIA
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED. & ST.
1997**** 1997**** 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- 24,650 17.86% 3.65% 4.87% 6.09% 7.30% 8.52% 9.74% 0.15 0.033677 0.1786
$ 0- 41,200 17.42 3.63 4.84 6.05 7.27 8.48 9.69 0.15 0.028502 0.1742
$ 24,650- 59,750 34.46 4.58 6.10 7.63 9.15 10.68 12.21 0.28 0.089726 0.3446
$ 41,200- 99,600 34.08 4.55 6.07 7.58 9.10 10.62 12.14 0.28 0.084487 0.3408
$ 59,750-124,650 $99,600-151,750 37.42 4.79 6.39 7.99 9.59 11.19 12.78 0.31 0.093000 0.3742
$124,650-271,050 $151,750-271,050 41.95 5.17 6.89 8.61 10.34 12.06 13.78 0.36 0.093000 0.4195
$271,050 & Over $271,050 & Over 45.22 5.48 7.30 9.13 10.95 12.78 14.60 0.396 0.093000 0.4522
* 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 1996 information, since at this time 1997 information is not available.
<CAPTION>
GEORGIA
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED. & ST.
1997 1997 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- 24,650 19.44% 3.72% 4.97% 6.21% 7.45% 8.69% 9.93% 0.15 0.052292 0.1944
$ 0- 41,200 19.56 3.73 4.97 6.22 7.46 8.70 9.95 0.15 0.053689 0.1956
$ 24,650- 59,750 $ 41,200- 99,600 32.32 4.43 5.91 7.39 8.87 10.34 11.82 0.28 0.060000 0.3232
$ 59,750-124,650 $ 99,600-151,750 35.14 4.63 6.17 7.71 9.25 10.79 12.33 0.31 0.060000 0.3514
$124,650-271,050 $151,750-271,050 39.84 4.99 6.65 8.31 9.97 11.64 13.30 0.36 0.060000 0.3984
$271,050 & Over $271,050 & Over 43.22 5.28 7.04 8.81 10.57 12.33 14.09 0.396 0.060000 0.4322
* 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.
<CAPTION>
MARYLAND
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED. & ST.
1997 1997 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- 24,650 19.04% 3.71% 4.94% 6.18% 7.41% 8.65% 9.88% 0.15 0.047565 0.1904
$ 0- 41,200 19.13 3.71 4.95 6.18 7.42 8.66 9.89 0.15 0.048543 0.1913
$ 24,650- 59,750 $ 41,200- 99,600 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000 0.3160
$ 59,750-124,650 $ 99,600-151,750 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000 0.3445
$124,650-271,050 $151,750-271,050 39.20 4.93 6.58 8.22 9.87 11.51 13.16 0.36 0.050000 0.3920
$271,050 & Over $271,050 & Over 42.62 5.23 6.97 8.71 10.46 12.20 13.94 0.396 0.050000 0.4262
* 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.
<CAPTION>
MASSACHUSETTS
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED. & ST.
1997 1997 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- 24,650 $ 0- 41,200 25.20% 4.01% 5.35% 6.68% 8.02% 9.36% 10.70% 0.15 0.120000 0.2520
$ 24,650- 59,750 $ 41,200- 99,600 36.64 4.73 6.31 7.89 9.47 11.05 12.63 0.28 0.120000 0.3664
$ 59,750-124,650 $ 99,600-151,750 39.28 4.94 6.59 8.23 9.88 11.53 13.18 0.31 0.120000 0.3928
$124,650-271,050 $151,750-271,050 43.68 5.33 7.10 8.88 10.65 12.43 14.20 0.36 0.120000 0.4368
$271,050 & Over $271,050 & Over 46.85 5.64 7.53 9.41 11.29 13.17 15.05 0.396 0.120000 0.4685
* 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.
<CAPTION>
MISSISSIPPI
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED. & ST.
1997 1997 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- 24,650 18.73% 3.69% 4.92% 6.15% 7.38% 8.61% 9.84% 0.15 0.043914 0.1873
$ 0- 41,200 18.94 3.70 4.93 6.17 7.40 8.64 9.87 0.15 0.046358 0.1894
$ 24,650- 59,750 $ 41,200- 99,600 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000 0.3160
$ 59,750-124,650 $ 99,600-151,750 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000 0.3445
$124,650-271,050 $151,750-271,050 39.20 4.93 6.58 8.22 9.87 11.51 13.16 0.36 0.050000 0.3920
$271,050 & Over $271,050 & Over 42.62 5.23 6.97 8.71 10.46 12.20 13.94 0.396 0.050000 0.4262
* 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.
<CAPTION>
NEW YORK State Residents (except New York City residents)
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED. & ST.
1997 1997 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- 24,650 19.45% 3.72% 4.97% 6.21% 7.45% 8.69% 9.93% 0.15 0.052393 0.1945
$ 0- 41,200 19.18 3.71 4.95 6.19 7.42 8.66 9.90 0.15 0.049227 0.1918
$ 24,650- 59,750 32.93 4.47 5.96 7.45 8.95 10.44 11.93 0.28 0.068500 0.3293
$ 41,200- 99,600 32.93 4.47 5.96 7.45 8.95 10.44 11.93 0.28 0.068500 0.3293
$ 59,750-124,650 35.73 4.67 6.22 7.78 9.34 10.89 12.45 0.31 0.068500 0.3573
$ 99,600-151,750 35.73 4.67 6.22 7.78 9.34 10.89 12.45 0.31 0.068500 0.3573
$124,650-271,050 $151,750-271,050 40.38 5.03 6.71 8.39 10.06 11.74 13.42 0.36 0.068500 0.4038
$271,050 & Over $271,050 & Over 43.74 5.33 7.11 8.89 10.66 12.44 14.22 0.396 0.068500 0.4374
* 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.
<CAPTION>
NEW YORK -- NEW YORK CITY RESIDENTS ONLY
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- -------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE AVERAGE AVERAGE AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------- FEDERAL STATE CITY NYC ADD'L FED.&ST.
1997 1997 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE SURCHARGE SURCHARGE RATE
- ----------------- -------------- -------- ------------------------------------- ------- ----- -------- --------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,650 22.71% 3.88% 5.18% 6.47% 7.76% 9.06% 10.35% 0.15 0.052393 0.030078 0.003519 0.004704 0.2271
$ 0- 41,200 22.41 3.87 5.16 6.44 7.73 9.02 10.31 0.15 0.049227 0.029854 0.003455 0.004663 0.2241
$ 24,650- 59,750 36.11 4.70 6.26 7.83 9.39 10.96 12.52 0.28 0.068500 0.033634 0.005104 0.005423 0.3611
$ 41,200- 99,600 36.11 4.70 6.26 7.83 9.39 10.96 12.52 0.28 0.068500 0.033550 0.005126 0.005415 0.3611
$ 59,750-124,650 38.80 4.90 6.54 8.17 9.80 11.44 13.07 0.31 0.068500 0.034000 0.005100 0.005474 0.3880
$ 99,600-151,750 38.80 4.90 6.54 8.17 9.80 11.44 13.07 0.31 0.068500 0.034000 0.005100 0.005474 0.3880
$124,650-271,050 $151,750-271,050 43.24 5.29 7.05 8.81 10.57 12.33 14.09 0.36 0.068500 0.034000 0.005100 0.005474 0.4324
$271,050 & Over $271,050 & Over 46.43 5.60 7.47 9.33 11.20 13.07 14.93 0.396 0.068500 0.034000 0.005100 0.005474 0.4643
* 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.
<CAPTION>
NORTH CAROLINA
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED. & ST.
1997 1997 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- 24,650 20.51% 3.77% 5.03% 6.29% 7.55% 8.81% 10.06% 0.15 0.064825 0.2051
$ 0- 41,200 20.51 3.77 5.03 6.29 7.55 8.81 10.06 0.15 0.064841 0.2051
$ 24,650- 59,750 $ 41,200- 99,600 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000 0.3304
$ 59,750-124,650 36.35 4.71 6.28 7.86 9.43 11.00 12.57 0.31 0.077471 0.3635
$ 99,600-151,750 36.34 4.71 6.28 7.85 9.43 11.00 12.57 0.31 0.077442 0.3634
$124,650-271,050 $151,750-271,050 40.96 5.08 6.78 8.47 10.16 11.86 13.55 0.36 0.077500 0.4096
$271,050 & Over $271,050 & Over 44.28 5.38 7.18 8.97 10.77 12.56 14.36 0.396 0.077500 0.4428
* 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.
<CAPTION>
PENNSYLVANIA
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED. & ST.
1997 1997 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- 24,650 $ 0- 41,200 17.38% 3.63% 4.84% 6.05% 7.26% 8.47% 9.68% 0.15 0.028000 0.1738
$ 24,650- 59,750 $ 41,200- 99,600 30.02 4.29 5.72 7.14 8.57 10.00 11.43 0.28 0.028000 0.3002
$ 59,750-124,650 $ 99,600-151,750 32.93 4.47 5.96 7.45 8.95 10.44 11.93 0.31 0.028000 0.3293
$124,650-271,050 $151,750-271,050 37.79 4.82 6.43 8.04 9.64 11.25 12.86 0.36 0.028000 0.3779
$271,050 & Over $271,050 & Over 41.29 5.11 6.81 8.52 10.22 11.92 13.63 0.396 0.028000 0.4129
* 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.
<CAPTION>
SOUTH CAROLINA
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED. & ST.
1997 1997 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- 24,650 19.81% 3.74% 4.99% 6.24% 7.48% 8.73% 9.98% 0.15 0.056587 0.1981
$ 0- 41,200 20.27 3.76 5.02 6.27 7.53 8.78 10.03 0.15 0.061975 0.2027
$ 24,650- 59,750 $ 41,200- 99,600 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000 0.3304
$ 59,750-124,650 $ 99,600-151,750 35.83 4.68 6.23 7.79 9.35 10.91 12.47 0.31 0.070000 0.3583
$124,650-271,050 $151,750-271,050 40.48 5.04 6.72 8.40 10.08 11.76 13.44 0.36 0.070000 0.4048
$271,050 & Over $271,050 & Over 43.83 5.34 7.12 8.90 10.68 12.46 14.24 0.396 0.070000 0.4383
* 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.
<CAPTION>
TENNESSEE
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED. & ST.
1997 1997 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- 24,650 $ 0- 41,200 20.10% 3.75% 5.01% 6.26% 7.51% 8.76% 10.01% 0.15 0.060000 0.2010
$ 24,650- 59,750 $ 41,200- 99,600 32.32 4.43 5.91 7.39 8.87 10.34 11.82 0.28 0.060000 0.3232
$ 59,750-124,650 $ 99,600-151,750 35.14 4.63 6.17 7.71 9.25 10.79 12.33 0.31 0.060000 0.3514
$124,650-271,050 $151,750-271,050 39.84 4.99 6.65 8.31 9.97 11.64 13.30 0.36 0.060000 0.3984
$271,050 & Over $271,050 & Over 43.22 5.28 7.04 8.81 10.57 12.33 14.09 0.396 0.060000 0.4322
*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.
<CAPTION>
VIRGINIA
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED. & ST.
1997 1997 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- 24,650 19.00% 3.70% 4.94% 6.17% 7.41% 8.64% 9.88% 0.15 0.047053 0.1900
$ 0- 41,200 19.36 3.72 4.96 6.20 7.44 8.68 9.92 0.15 0.051250 0.1936
$ 24,650- 59,750 $ 41,200- 99,600 32.14 4.42 5.89 7.37 8.84 10.32 11.79 0.28 0.057500 0.3214
$ 59,750-124,650 $ 99,600-151,750 34.97 4.61 6.15 7.69 9.23 10.76 12.30 0.31 0.057500 0.3497
$124,650-271,050 $151,750-271,050 39.68 4.97 6.63 8.29 9.95 11.60 13.26 0.36 0.057500 0.3968
$271,050 & Over $271,050 & Over 43.07 5.27 7.03 8.78 10.54 12.30 14.05 0.396 0.057500 0.4307
* 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.
<CAPTION>
WEST VIRGINIA
1997 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED. & ST.
1997 1997 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- 24,650 18.06% 3.66% 4.88% 6.10% 7.32% 8.54% 9.76% 0.15 0.035942 0.1806
$ 0- 41,200 18.40 3.68 4.90 6.13 7.35 8.58 9.80 0.15 0.039975 0.1840
$ 24,650- 59,750 31.84 4.40 5.87 7.34 8.80 10.27 11.74 0.28 0.053390 0.3184
$ 41,200- 99,600 32.56 4.45 5.93 7.41 8.90 10.38 11.86 0.28 0.063390 0.3256
$ 59,750-124,650 35.48 4.65 6.20 7.75 9.30 10.85 12.40 0.31 0.064981 0.3548
$ 99,600-151,750 35.49 4.65 6.20 7.75 9.30 10.85 12.40 0.31 0.065000 0.3549
$124,650-271,050 $151,750-271,050 40.16 5.01 6.68 8.36 10.03 11.70 13.37 0.36 0.065000 0.4016
$271,050 & Over $271,050 & Over 43.53 5.31 7.08 8.85 10.63 12.40 14.17 0.396 0.065000 0.4353
* 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.
- -------------------
+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.
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.
<PAGE>
APPENDIX D
PORTFOLIO COMPOSITION CHARTS
The table below shows the percentages of the assets of each Fund listed below
at March 31, 1997, 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.
FLORIDA FUND:
<TABLE>
<CAPTION>
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
<S> <C> <C> <C>
AAA/Aaa 51.41% 0.00% 51.41%
AA/Aa 21.67% 0.00% 21.67%
A/A 3.09% 0.00% 3.09%
BBB/Baa 13.83% 0.00% 13.83%
BB/Ba 1.64% 0.78% 2.42%
B/B 2.83% 2.26% 5.09%
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: 94.47% 3.04% 97.51%
GEORGIA FUND:
<CAPTION>
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
<S> <C> <C> <C>
AAA/Aaa 38.89% 3.77% 42.66%
AA/Aa 19.52% 0.00% 19.52%
A/A 13.34% 1.47% 14.81%
BBB/Baa 7.97% 0.62% 8.59%
BB/Ba 4.43% 0.69% 5.12%
B/B 2.73% 3.04% 5.77%
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: 86.88% 9.59% 96.47%
MASSACHUSETTS FUND:
<CAPTION>
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
<S> <C> <C> <C>
AAA/Aaa 34.85% 3.89% 38.74%
AA/Aa 4.99% 0.38% 5.37%
A/A 31.82% 0.00% 31.82%
BBB/Baa 8.09% 1.40% 9.49%
BB/Ba 3.11% 3.74% 6.85%
B/B 0.00% 4.89% 4.89%
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% 0.98% 0.98%
------ ------ ------
Total: 82.86% 15.28% 98.14%
NEW YORK FUND:
<CAPTION>
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
<S> <C> <C> <C>
AAA/Aaa 36.93% 0.00% 36.93%
AA/Aa 10.05% 0.00% 10.05%
A/A 17.23% 2.61% 19.84%
BBB/Baa 23.14% 3.14% 26.28%
BB/Ba 2.69% 2.83% 5.52%
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% 0.06% 0.06%
------ ------ ------
Total: 90.04% 8.64% 98.68%
VIRGINIA FUND:
<CAPTION>
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
<S> <C> <C> <C>
AAA/Aaa 24.98% 1.14% 26.12%
AA/Aa 42.90% 0.00% 42.90%
A/A 10.77% 1.14% 11.91%
BBB/Baa 5.75% 1.61% 7.36%
BB/Ba 1.99% 4.46% 6.45%
B/B 0.00% 0.49% 0.49%
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: 86.39% 8.84% 95.23%
</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 1995, manufacturing accounted for 22.50% of Alabama's
Real Gross State Product (the total value of goods and services produced in
Alabama). During the 1960's and 1970's, the State's industrial base became
more diversified and balanced, moving away from primary textiles (including
apparel), chemicals, rubber and plastics. Since the early 1980's,
modernization of existing facilities and an increase in direct foreign
investments in the State has made the manufacturing sector more competitive in
domestic and international markets.
Among the leading manufacturing industries have been pulp and paper and
chemicals, the development and growth of which have been made possible by
abundant rainfall and a high pulpwood growth rate. In recent years Alabama has
ranked as the fifth largest producer of timber in the nation. Alabama has
fresh water availability of 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, 1995, that for the tenth 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 $3.8 billion in 1995,
of $2.6 billion in 1994 and $2.4 billion in 1993. These expenditures included
22,862 announced jobs created by 944 companies for 1994 and 21,290 announced
jobs by 913 companies in 1995. In the last six years, in excess of $16.4
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);
Mead Containerboard ($224 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
1991-1995, RGSP originating in manufacturing increased by 2.75% per year and
RGSP originating in all the non-manufacturing sectors also grew by 2.75% 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.
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 putative but not certified 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
many 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 that the State of Alabama 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
million. The trial court ruled in favor of the Department of Revenue and the
plaintiffs have appealed to the Alabama Supreme Court.
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
The following information is a general summary intended to provide a recent
historical description, and is not a discussion of specific factors that may
affect any particular issuer of California municipal securities. This
information is not intended to indicate continuing or future trends in the
condition, financial or otherwise, of the State of California. The
creditworthiness of obligation issued by a local California issuer may be
unrelated to the creditworthiness of obligations issued by the State of
California.
Because the California Fund expects to concentrate its investments in
California municipal securities, it will be susceptible to a number of complex
factors affecting the issuers of such securities, including national and local
political, economic, social, environmental and regulatory policies and
conditions. The California Fund cannot predict whether or to what extent such
factors or other factors may affect issuers of California municipal
securities, the market value or marketability of such securities or the
ability of the respective issuers of such securities to pay interest on, or
principal of, such securities.
From mid-1990 to late 1993, California suffered the most severe recession in
the State since the 1930's. The financial difficulties experienced by
California and municipal issuers during the recession resulted in the credit
ratings of certain of their obligations being downgraded significantly by the
major rating agencies. Although California has experienced a steady economic
recovery since 1994, as of the date of this Prospectus, rating agencies,
underwriters and investors appear to have lingering concerns about
California's creditworthiness. Major rating agencies have cited, among other
things, concerns about California's ability to withstand another economic
downturn, fiscal problems at the county level, and concern about California's
ability to pass a true balanced budget in light of federal funding cuts,
political influences and structural impediments under the California
Constitution.
The recession severely affected California revenues while California's health
and welfare costs were increasing. As a result, from the late 1980's until
fiscal 1993-94, California had a period of budget imbalance and reported
multibillion dollar year-end deficits. Although a substantial general fund
deficit was carried over into fiscal 1995-96 under a two-year budget plan for
fiscal 1994-95 and fiscal 1995-96, the previously stated deficit was
substantially reduced by the end of fiscal 1995-96. (The previously stated
deficit treated revenues mandated for schools as off-budget loans; pursuant to
a settlement of the issue, such amounts are to be included as liabilities). At
the date of this Prospectus, revised budget projections indicate that
California is expected to end fiscal 1996-97 with a surplus.
California's ability to raise revenues and reduce expenditures to the extent
necessary to balance the budget for any year depends upon numerous factors,
including economic conditions in the State and the nation, the accuracy of the
State's revenue predictions, as well as the impact of budgetary restrictions
imposed by voter-passed initiatives.
During the recession of the early 1990's, California faced severe economic and
fiscal conditions and experienced recurring budget deficits that caused it to
deplete its available cash resources and to become increasingly dependent upon
external borrowings to meet its cash needs. For well over a decade, California
has issued revenue anticipation notes (which must be issued and repaid during
the same fiscal year) to fund its operating budget during the fiscal year.
Beginning in 1992, California expanded its external borrowing to include
revenue anticipation warrants (which can be issued and redeemed in different
fiscal years). California was severely criticized by the major credit rating
agencies for California's reliance upon such external borrowings during the
recession. (California 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 California's
budget for fiscal 1992-1993.) In 1996, California fully repaid $4 billion of
revenue anticipation warrants issued in 1994. California did not need to use
such "cross-year" borrowing during the 1996-97 fiscal year and does not
anticipate that it will need to use such borrowing during the 1997-98 fiscal
year. It is not presently possible, however, to determine the extent to which
California will issue additional revenue anticipation warrants, short-term
interest-bearing notes or other instruments in future fiscal years.
The ability of the State of California and its political sub-divisions to
generate revenue through real property and other taxes and to increase
spending has been significantly restricted by various constitutional and
statutory amendments and voter-passed initiatives. Such limitations could
affect the ability of California state and municipal issuers to pay interest
or repay principal on their obligations.
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 taxes.
Article XIIIB of the California Constitution, originally adopted in 1979,
significantly limits spending by state and local governments. To the extent
that "proceeds of taxes" of California or a local government exceed its
Article XIIIB appropriations limit, such excess revenues must be rebated. In
1988 and 1990, Article XIIIB was modified substantially by Propositions 98 and
111, respectively. These initiatives changed the State's Article XIIIB
appropriations limit to require California to set aside a prudent reserve fund
for public education, and guarantee a minimum level of State funding for
public elementary and secondary schools and community colleges. Such
guaranteed spending is often cited as one of the long-term structural elements
responsible for California's recurring budget problems.
The effect of Article XIIIA, Article XIIIB, other constitutional and statutory
changes and budget developments on the ability of California issuers to pay
interest and principal on their obligations is uncertain and may depend, in
part, on whether a particular security is a general obligation or limited
obligation bond. There is no assurance that any California issuer will make
full or timely payments of principal or interest or remain solvent.
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.
Numerous factors may adversely affect the State and municipal economies. For
example, reductions in federal funding (such as those contemplated by welfare
reform enacted in 1996) could result in the loss of billions of dollars in
federal assistance otherwise available to the State.
In addition, natural disasters, such as earthquakes, have caused substantial
damage to parts of California and could create a major dislocation of the
California economy.
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 are reported to be $15.4 billion, a
4.0% increase over fiscal year 1994-95. With combined General Revenue, Working
Capital Fund and Budget Stabilization Fund appropriations reported at $14.7
billion, unencumbered reserves at the end of fiscal year 1995-96 are estimated
at $0.7 billion. For fiscal years 1996-97, the estimated General Revenue plus
Working Capital and Budget Stabilization funds available are reported to total
$16.6 billion, a 7.7% increase over fiscal year 1995-96. With combined General
Revenue Working Capital Fund and Budget Stabilization Fund appropriations
reported at $15.6 billion, unencumbered reserves at the end of fiscal year
1996-97 are estimated at $10 billion. The Florida and United States
unemployment rates for 1995 were 5.5% and 5.6%, respectively. The estimated
Florida and United States unemployment rates for 1996 and 1997 are reported to
be 5.3% and 5.4%, 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 increase 2.7% and 3.2% in fiscal years 1996-97 and
1997-98, respectively. The total number of visiting tourists is expected to
reach 42.6 million and 43.9 million during fiscal years 1996-97 and 1997-98,
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 ability of the State and its local units of government to satisfy its debt
obligations may be affected by numerous factors which impact on the economic
vitality of the State in general and the particular region of the State in
which the issuer of the debt obligations is located. South Florida is
particularly susceptible to international trade and currency imbalances and to
economic dislocations in Central and South America, due to its geographical
location and its involvement with foreign trade, tourism and investment
capital. North and Central Florida are impacted by problems in the
agricultural sector, particularly with regard to the citrus and sugar
industries. Short-term adverse economic conditions may be created in these
areas, and in the State as a whole, due to crop failures, severe weather
conditions or other agriculture-related problems. The State economy also has
historically been dependent on the tourism and construction industries and is,
therefore, sensitive to trends in those sectors.
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 April 1997, the total
indebtedness of the State of Georgia consisting of general obligation debt,
guaranteed revenue debt and remaining Authority Lease Obligations totalled
$4,976,385,000 and the highest aggregate annual payment for such debt equalled
5.37% of fiscal year 1997 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 1997 showed an increase of
1.41% over collections for the similar period in the previous fiscal year. A
part of the decline in growth is attributable to gradual elimination of sales
tax on food.
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 1996
comprised approximately 44.4% and 34.7%, respectively, of the total State tax
revenues.
The unemployment rate of the civilian labor force in the State as of November
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. 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.
Daniel Ratajczak, Director of the Economic Forecasting Center at Georgia State
University, has forecast that over 92,000 jobs would 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.
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 out-of-state producers of
alcoholic beverages seeking $96,000,000 in refunds of alcohol taxes, plus
interest, imposed under Georgia's post-Bacchus (468 U.S. 263) Statute,
O.C.G.A. (S)3-4-60, as amended in 1985. These claims constitute 99% of all
such taxes paid during the three years preceding those claims. In addition,
the claimants have filed administrative claims for an additional $23,000,000,
plus interest, for later time periods. These cases encompass all known or
anticipated claims for refund of such type within the apparently applicable
statutes of limitations. The two Age cases are still pending in the trial
court.
DeKalb County v. Schrenko. This suit, originally filed in Federal District
Court for the Northern District of Georgia, against the State School
Superintendent and the State of Georgia is based on a claim that the State's
funding formula for pupil transportation is unconstitutional and a local
school board's claim that the State should finance the major portion of the
costs of its desegregation program. The Plaintiffs are seeking approximately
$67,500,000 in restitution. The Federal District Court ruled that the State's
funding formula for pupil transportation is contrary to state law but ruled in
the State's favor on the school desegregation costs issue. 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, as of the date of decision. Notices of appeal
and briefs to the Eleventh Circuit Court of Appeals were filed by both sides,
and oral arguments on appeal were heard in October, 1996. The case is still
pending in the Eleventh Circuit, awaiting the appellate court's ruling. The
State intends to continue to defend the suit vigorously.
Buskirk and Estill v. State of Georgia, et al. On September 1, 1994,
plaintiffs in this case filed a civil action in the Superior Court of Fulton
County, Georgia, (No. E-31547) 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 were eligible to receive within grade pay
increases and who would have received same were it not for a freeze of within
grade pay increases." The trial court granted the State's motion to dismiss
and for summary judgment, which completely resolved the case in the State's
favor. The case was appealed to the Georgia Supreme Court. Oral argument
before the Supreme Court was heard in November, 1996, and, on March 10, 1997,
the Supreme Court affirmed the grant of summary judgment to the State. The
plaintiffs' motion for rehearing is pending. If the plaintiffs prevail, the
parties will conduct separate discovery on the issue of damages. The State
believes that it has good and adequate defenses to the claims 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, 1994, 1995
and 1996 were $12.351 billion, $13.528 billion and $14.169 billion,
respectively. As of February 14, 1997, it was estimated that total
expenditures for fiscal year 1997 would be $15.080 billion. The State's
General Fund had unreserved surpluses of $60 million, $132.5 million and $13.1
million in fiscal years 1994, 1995 and 1996, respectively. The State
Constitution mandates a balanced budget.
In April 1996, the General Assembly approved the $14.631 billion 1997 fiscal
year budget. The budget includes $2.9 billion in aid to local governments
(reflecting a $121.5 million increase in funding over 1996 that provides for
increases in education, health and police aid), and $13.2 million in general
fund deficiency appropriations for fiscal year 1996. The 1997 budget does not
include any proposed expenditures dependent on additional revenue from new or
broad-based taxes. Legislation enacted by the 1996 General Assembly
reorganized the State's personnel system and reformed the Welfare and Medicaid
programs; estimated fiscal year 1997 savings of $29 million ($19.5 million
general funds) are incorporated into the fiscal year 1997 Budget.
When the 1997 budget was enacted, it was estimated that the general fund
surplus on a budgetary basis at June 30, 1997, would be approximately $22.5
million. As of February 26, 1997, it is estimated that the general fund
surplus on a budgetary basis at June 30, 1997, will be $102.7 million.
In January 1997, the Governor submitted his proposed 1998 fiscal year budget
to the General Assembly. The budget includes $3.1 billion in aid to local
governments (reflecting a $169 million increase over 1997 and $0.4 million in
general fund deficiency appropriations for fiscal year 1997. As of February
26, 1997, it is estimated that the general fund surplus on a budgetary basis
at June 30, 1998, will be $7.6 million and that the balance in the Revenue
Stabilization Account of the State Reserve Fund at June 30, 1998, will be $631
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 obligation 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.
All of the foregoing information regarding the State's budget and public
indebtedness was obtained from the Official Statement with respect to State of
Maryland General Obligation Bonds dated February 26, 1997.
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.
While economic growth in the Commonwealth slowed considerably during the
recession of 1990-1991, indicators such as retail sales, housing permits,
construction, and unemployment levels suggest a strong and continued economic
recovery. As of May 1997, the Commonwealth's unadjusted unemployment rate was
3.8%, as compared to a national average of 4.7%. The Commonwealth's per capita
personal income is currently higher than the national average.
Ending fund balances in the budgeted operating funds for fiscal 1992 were
$549.4 million, after carrying forward $237.1 million in fund balances from
fiscal 1991. Fiscal 1993 and 1994 ended with positive fund balances of $562.5
million and $589.3 million, respectively.
In fiscal 1995, the total revenues of the budgeted operating funds of the
Commonwealth 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. In fiscal 1996, the total
revenues of the budgeted operating funds of the Commonwealth increased by
approximately 5.7% over the prior fiscal year to $17.328 billion. Expenditures
increased by 3.9% over the prior fiscal year to $16.881 billion. As a result,
the Commonwealth ended fiscal year 1996 with a positive closing fund balance
of $1.172 billion.
Budgeted revenues and other sources in fiscal 1997, which ended June 30, 1997,
were estimated as of June 24, 1997, by the Executive Office for Administration
and Finance to be approximately $17.585 billion, including tax revenues of
$12.507 billion. It is estimated that fiscal 1997 budgeted expenditures will
be $17.702 billion and that fiscal 1997 will end with fund balances of $979.6
million.
On July 10, 1997, Governor William Weld signed a new $18.4 billion budget into
law. The Commonwealth's eighth consecutive balanced budget represents an
overall spending increase of 3.8 percent over fiscal year 1997, including
increases of $259 million for education reform, $288 million more in aid to
cities and towns and about $50 million more for higher education.
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. 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 increased to $2.976 billion in fiscal 1995. Fiscal
1996 expenditures for direct local aid were $3.246 billion, which is an
increase of approximately 9.1% above the fiscal 1995 level. It is estimated
that fiscal 1997 expenditures for direct local aid will be $3.538 billion, an
increase of approximately 9.0% above the fiscal 1996 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 1992 through 1996 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 1997.
Certain of the Commonwealth's cities, counties and towns have at times
experienced serious financial difficulties which have adversely affected their
credit standing. The recurrence of such financial difficulties, or financial
difficulties of the Commonwealth, could adversely affect the market values and
marketability of outstanding obligations issued by the Commonwealth or its
public authorities or municipalities.
On December 13, 1996 Middlesex County, the Commonwealth's most populous
county, defaulted on $4.5 million in unrated county hospital revenue
anticipation notes. Following the default, the noteholders, together with
certain other creditors of the County, initiated legal action to attach County
assets valued at $20 million in satisfaction of various obligations of the
County. On July 11, 1997 Governor Weld signed legislation that immediately
abolished the Middlesex County government. The legislation also eliminates
Worcester and Hampden County governments within one year and sets the stage
for the abolition of the entire county system by 1999. In general, all
liabilities, debts, leases and contracts of an abolished county which are in
force immediately before the transfer date would become obligations of the
Commonwealth.
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 $6.720
billion as of January 1, 1996, 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 1997,
1998, 1999 and 2000 are estimated to be $965.9 million, $1.005 billion, $1.043
billion and $1.092 billion, respectively. The 1998 budget signed by Governor
Weld includes an accelerated pension funding schedule that would eliminate the
Commonwealth's unfunded liability by 2018 rather than 2028.
MISSISSIPPI FUND
Mississippi's unemployment rate for 1995 was 6.1%. Preliminary figures for
1996 show unemployment at a 17 year low of 6.0%, and projections for 1997
place the rate at 6.1%. The growth rate of State product for 1995 was 4.6%,
and growth is projected to slow slightly to 4.4% during 1996. Mississippi
continued to fall slightly behind the growth in per capita income for the
country. Per capita incomes increased 4.9% in 1995.
Approximately 14,800 new jobs were created in 1993, with much of that growth
in the gaming, service and construction sectors. Total employment in
Mississippi increased by 1.1% in 1995. In the U.S. as a whole, total
employment grew at a rate of 1.5%. Manufacturing accounts for 22% of
employment in Mississippi, although employment in the manufacturing sector
declined approximately 4% in 1996. 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 1996 employment and income statistics show that the Mississippi
economy slowed compared to 1995, the construction, agricultural and service
sectors have been strong enough to maintain positive growth in employment and
a rise in income levels close to the U.S. average. Although 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.
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 grew to
31,000 and monthly revenues increased to average $155 million, and in 1996,
the annual growth rate for employment in the gaming industry exceeded 10%.
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 2,720,000. 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 7.3%
for a total population of 2,800,000. Mississippi has a relatively young
population, with 29% of its total population below 18 years of age.
Employment in the service industries rose 3.0% during 1995, but employment in
service industries slowed its growth sharply from the 1994 growth rate of
12.4%. The leading gainer in 1995 was the construction segment which saw an
increase in employment of 4.1% as compared to 1994. The other large employment
sectors are government, wholesale and retail trade, construction and
transportation and communications. Although its importance has declined over
the last decade, 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. The State's exports have been enjoying double-digit
growth rates. In 1993-1995, Mississippi led the country in the growth rate of
exports, with a 70.4% increase, and the state ranked 40th in value of exports.
Total personal income in Mississippi increased 6.0% in 1995 compared to a 6.1%
increase in the U.S. over the same period. Projections for 1996 show the State
personal income growth trailing the national average slightly with a 4.8%
increase as compared to a 5.2% 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 growth in industry, employment and the gaming
industry, the State General Fund receipts are increasing significantly. 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, and this trend is expected to continue.
NEW YORK FUND
The fiscal stability of New York State is related, in part, to the fiscal
stability of its public 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.
A variety of 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 depends on state aid both to enable
the City to balance its budget and to meet its cash requirements. 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. Certain localities outside the City have experienced
financial problems and have requested and received additional State assistance
during the last several years.
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. The State is likely to be less
affected than the nation as a whole during an economic recession that is
concentrated in manufacturing and construction, but likely to be more affected
during a recession that is concentrated more in the service-producing sector.
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 1995, 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
slightly 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 economy
has continued to expand, but growth remains somewhat slower than in the
nation. Although the State has added approximately 240,000 jobs since late
1992, employment growth in the State has been hindered during recent years by
significant cutbacks in the computer and instrument manufacturing, utility,
defense, and banking industries. Government downsizing has also moderated
these job gains.
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 November 1996,
the voters of the State approved a constitutional amendment giving the
Governor the power to veto certain legislative matters, including budgetary
matters.
Since 1994, the State has had a budget surplus, in part as a result of new
taxes and fees and spending reductions put into place in the early 1990s. In
addition, the State, like the nation, has experienced economic recovery during
the 1990s. The General Fund balance at the end of the 1995-96 fiscal year was
reported at approximately $406 million. As of November 1996, the amount of
uncommitted funds of the State was $586 million.
In the 1996-97 Budget prepared by the Office of State Budget and Management,
it is projected that General Fund net revenues will increase 3% over 1995-96.
This increase is expected to result primarily from growth in the North
Carolina economy, despite a tax reduction package enacted by the legislature
during the 1996 legislative session. 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.
In 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 legislature provided specific
appropriations to counties and municipalities to replace the revenues
previously received for the intangibles tax. In addition, in the 1996 session
the legislature reduced the corporate income tax rate from 7.75% to 6.9%
(phased in over four years) and reduced the food tax from 4% to 3%.
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 Superior 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 Superior Court denied defendants' motion to dismiss, which was
reversed by the state Court of Appeals. An appeal from this decision is now
pending with the North Carolina Supreme Court. 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
federal court actions have been stayed pending the trial in state court. The
cases were consolidated for discretionary review by the State Supreme Court,
which ruled the alteration to the retirement systems constitutes a breach of
the contract formed with the employee when hired. The Court further decided
that the class represented by the plaintiffs may pursue claims for
underpayments for the three years preceding the commencement of their actions,
plus interest on such amounts. The State Attorney General's Office has stated
that payment of such amounts will be made from the state retirement systems
and not from general funds.
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 held that the tax violated
the Commerce Clause of the U.S. Constitution, and remanded the case to the
North Carolina Supreme Court for consideration of possible remedies, including
refunds. On remand, the North Carolina Supreme Court determined that the Court
of Appeals was correct in finding that all stock was taxable and, moreover,
that the tax must be applied retroactively. The Court offered that the
legislature could "forgive" the tax, but the Court did not have this ability.
The legislature has not responded as of this date. In the event that the
General Assembly forgives the tax, it is estimated that the cost to the State
would be $141 million to issue refunds to those taxpayers who filed protests
to the tax and $500 million to all taxpayers who paid the tax in the subject
years.
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, and in
1996 the legislature passed a special refund and tax credit bill that will
permit the retirees to recover, through credits or, in some cases, refunds,
the net tax previously paid that could not be recovered through usual claims.
The expected cost to the State is approximately $140 million.
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
have been from both sides and the North Carolina Supreme Court has allowed
discretionary review before hearing by the Court of Appeals. 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. In addition, it is anticipated that the decision reached in this
case will govern the resolution of tax refund claims made by retired state and
local government employees for taxes paid on retirement benefit income for tax
years after 1991. Furthermore, if the order of the Superior Court is upheld,
its provisions would apply prospectively to prevent future taxation of State
and local government retirement benefits that were vested before August 1989.
The North Carolina Attorney General's Office believes that sound legal
arguments support the State's position on the merits.
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.
This action is being held in abeyance pending the outcome in Bailey. Should
plaintiffs prevail in Bailey, such a result, these federal retirees allege,
would re-establish the disparity of treatment between state and federal
pension income which was held unconstitutional in Davis. Potential refunds
exceed $300 million.
The State is involved in numerous other claims and legal proceedings, many of
which normally occur in governmental operations; however, the North Carolina
Attorney General does not expect any of the outstanding lawsuits to materially
adversely affect the State's ability to meet its financial obligations.
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 July, 1996, is 7,322,317. Notwithstanding its rank in population size,
North Carolina is primarily a rural state, having only six 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 1996, the State labor force grew about 30% (from 2,855,200 to
3,718,000). Per capita income during the period 1985 to 1995 grew from $11,870
to $21,103, an increase of 77.8%.
The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of June, 1996, the State was reported to
rank eleventh 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 1992 JUNE 1993 JUNE 1994 JUNE 1995 JUNE 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Civilian Labor Force 3,495,000 3,504,000 3,560,000 3,578,000 3,704,000
Nonagricultural Employment 3,135,000 3,203,400 3,358,700 3,419,100 3,506,000
Goods Producing Occupations (mining,
construction and
manufacturing) 980,800 993,600 1,021,500 1,036,700 1,023,800
Service Occupations 2,154,200 2,209,800 2,337,200 2,382,400 2,482,400
Wholesale/Retail Occupations 715,100 723,200 749,000 776,900 809,100
Government Employees 513,400 515,400 554,600 555,300 570,800
Miscellaneous Services 638,300 676,900 731,900 742,200 786,100
Agricultural Employment 102,800 88,400 53,000 53,000 53,000
</TABLE>
The seasonally adjusted unemployment rate in October 1996 was estimated to be
4.0% of the labor force as compared with 5.2% nationwide.
North Carolina's economy continues to benefit from a vibrant manufacturing
section. Manufacturing firms employ approximately 25% of the total non-
agricultural workforce. North Carolina has a higher percentage of
manufacturing workers than any state in the nation. The State's annual value
of manufacturing shipments totals $142 billion, ranking the State eighth in
the nation. The State leads the nation in the production of textiles, tobacco
products, furniture and fiberoptic cable, and is among the largest producers
of pharmaceuticals, electronics and telecommunications equipment. More than
700 international firms have established a presence in the State. Charlotte is
now the second largest financial center in the country, based on assets of
banks headquartered there. The strength of the State's manufacturing sector
also supports the growth in exports; the latest annual statistics show $8.76
billion in exports, making North Carolina one of the few states with an export
trade surplus.
In 1995, the State's gross agricultural income of nearly $7.0 billion placed
it eighth in the nation in gross agricultural income. According to the State
Commissioner of Agriculture, in 1995 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, the production of cucumbers for
pickles, and net farm income; third in the value of poultry and egg products,
and greenhouse and nursery income; fourth in commercial broilers, peanuts,
blueberries and strawberries; and sixth in burley tobacco.
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 1995. The poultry industry is now the leading source
of gross agricultural income, at 29%, and the pork industry provides over 18%
of the total agricultural income. Tobacco farming in North Carolina has been
and is expected to continue to be affected by major Federal legislation and
regulatory measures regarding tobacco production and marketing and by
international competition. Measures adverse to tobacco farming could have
negative effects on farm income and the North Carolina economy generally.
The 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 $45 billion
annually to the State's economy.
The State Department of Commerce, Travel and Tourism Division reports that, in
1995, more than $9 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 161,000 people were employed in tourism-
related jobs. The effects of two severe hurricanes in 1996 may have an adverse
effect on tourism in certain areas of the State.
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 June 1995. 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%. From 1995 to 1996,
employment increased 3.4%. The growth in employment experienced in the
Commonwealth during such periods is slightly higher than 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 1996 level of 82.5% of total Commonwealth employment. Manufacturing,
which contributed 17.5% of 1996 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 1996, the services sector accounted for
30.3% of all non-agricultural employment in the Commonwealth while the trade
sector accounted for 18.5%.
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 1996, the annual average
unemployment rate in the Commonwealth was 5.3%, compared to 5.6% for the
United States. For April 1997, the unadjusted unemployment rate was 5.3% in
the Commonwealth and 4.8% in the United States, while the seasonally adjusted
unemployment rate for the Commonwealth was 5.3% and for the United States was
5.2%.
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, 1996, showed total fund balance and other credits
for the total governmental fund types of $1,986 million, a $277 million
increase from the balance at June 30, 1995. During fiscal 1996, total
government fund assets increased by $666 million to $5,793 million, while
government fund liabilities increased by $606 million to $3,806 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 FINANCIAL RESULTS. Commonwealth revenues (prior to tax refunds)
for the 1996 fiscal year increased by $113.9 million over the prior fiscal
year to $16,338.5 million representing a growth rate of 0.7 percent. Tax rate
reductions and other tax law changes substantially reduced the amount and rate
of growth for the fiscal year. The Commonwealth has estimated that tax changes
enacted for the 1996 fiscal year reduced Commonwealth revenues by $283.4
million representing 1.7 percentage points of fiscal 1996 growth in
Commonwealth revenues.
FISCAL 1997 BUDGET. For the fiscal year ended June 30, 1997, the Governor
signed a $16.54 billion General Fund budget, a 2% decrease from the fiscal
1996 budget. As of May 1997, the Governor estimates a $525 million surplus for
fiscal 1997.
FISCAL 1998 BUDGET. On May 6, 1997, the Governor signed a $17.16 billion
General Fund budget, an increase of approximately 3.7% from the fiscal 1997
budget. Areas receiving the largest budgetary increases are education and the
environment. In addition, the budget reduces taxes by an estimated $175
million.
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 28, 1997, Auditor
General certificate, the average annual tax revenues deposited in all funds in
the five fiscal years ended June 30, 1996, was approximately $18.9 billion,
and, therefore, the net debt limitation for the 1997 fiscal year is $33.1
billion. Outstanding net debt totaled $3.9 billion at June 30, 1996,
approximately equal to the net debt at June 30, 1994. At February 28, 1997,
the amount of debt authorized by law to be issued, but not yet incurred, was
$17.3 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 30,
1996. As of February 28, 1997, PICA has issued approximately $1,761.7 million
of its Special Tax Revenue Bonds.
The financial assistance has included the refunding of certain city general
obligation bonds, funding of capital projects and the liquidation of the
City's Cumulative General Fund balance deficit as of June 30, 1992 of $224.9
million.
No further PICA bonds are to be issued by PICA for the purpose of financing a
capital project or deficit as the authority for such bond sales expired on
December 31, 1994. PICA's authority to issue debt for the purpose of financing
a cash flow deficit expired on December 31, 1996. Its ability to refund
existing outstanding debt is unrestricted. PICA had $1,146.2 million in
Special Tax Revenue Bonds outstanding as of June 30, 1996.
The audited General Fund balance of the City as of June 30, 1994, 1995 and
1996 showed a surplus of approximately $15.4 million, $80.5 million and $118.5
million, respectively.
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 25, 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.
For the fiscal year ended June 30, 1995, the State had a budgetary surplus of
$393 million. The General Assembly has designated the application of all of
this surplus, including a transfer to the Capital Reserve Fund in the amount
of $73.4 million.
For the fiscal year ended June 30, 1996, the State had a budgetary surplus of
$316.7 million. The General Assembly has designated the application of all of
this surplus, including a transfer to the Capital Reserve Fund in the amount
of $80.5 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.
South Carolina is primarily a manufacturing state. In 1996, one-fifth 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.
Real Gross Domestic Product (GDP) nationwide increased a preliminary 2.4%
during 1996. The nation's output expanded a revised 2.0% in 1995 after a 3.5%
increase in 1994. Inflation as measured by the Consumer Price Index increased
at a rate of 2.9% during 1996 after increasing 2.8% in 1995 and 2.6% in 1994.
Through February 1997, the rate of inflation is 3.0%.
During all of 1995, personal income grew at a revised average annual rate of
6.2% in South Carolina. During the same period the nation's income grew 6.2%
and in the Southeast region grew 6.7%. During the period 1990-1995 personal
income in South Carolina rose at a compounded annual rate of 5.3%, outpacing
the 5.0% annual income growth in the United States for the same period but
below the 5.9% annual income growth for the Southeastern region.
1996 was a record year for announced capital investment in new plants and
expansions in the State. The South Carolina Department of Commerce reported
that manufacturers announced $5.698 billion in economic development projects
during 1996. This investment is expected to create 25,997 new jobs at 1,238
companies.
In 1996, employment increased 1.8% while the rate of employment growth in the
United States was 1.4%. Monthly unemployment rates in the State have recently
increased above comparable national rates during 1996 and early 1997. The
unemployment rate for January 1997, the latest month available for South
Carolina, was 5.5%, one-tenth of one percent higher than the 5.4% nationwide.
Through February of fiscal year 1996-97, General Fund Revenues have increased
at a rate of 4.9% over the same period last fiscal year, and are presently
running ahead of the schedule to meet the estimate in the fiscal year 1996-97
Appropriation Act.
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. 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. During the
latter half of 1995 and throughout calendar year 1996, the State's economy
generally became inconsistent in its performance. However, many experts
believe that the State will achieve modest economic gains for fiscal year
ending June 30, 1997.
The Tennessee index of coincident economic indicators, which gauges current
economic conditions throughout the State, has steadily risen each quarter
beginning the third calendar quarter of 1991, except for the second quarter of
calendar year 1996 when the coincident index declined slightly. For calendar
year 1994, the coincident index rose approximately 6.20% over 1993 figures,
while 1993, figures increased approximately 4.27% over 1992 figures and 1992
figures showed a 2.45% increase over the previous year's figures. In 1995,
figures for the coincident index showed a 2.97% increase over 1994 figures. In
1996, figures for the coincident index were up 2.18% over 1995 annual figures.
No monthly figures for the coincident index are currently available for 1997.
Tennessee taxable sales were approximately $44.16 billion in 1991,
approximately $46.96 billion in 1992, approximately $50.64 billion in 1993,
approximately $55.32 billion in 1994, approximately $59.65 billion in 1995,
and approximately $63.01 billion in 1996, representing percentage increases of
approximately 1.4%, 6.4%, 7.8%, 9.3%, 7.8% and 5.6%, respectively, over the
previous year's total. No Tennessee taxable sales figures are presently
confirmed for 1997.
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.
Seasonably-adjusted personal income grew approximately $6.89 billion from
calendar year 1993 averages to calendar year 1994 averages, representing an
approximate 7.03% increase and grew approximately $6.44 billion from calendar
year 1994 averages to calendar year 1995 averages, representing an approximate
6.42% increase. Comparative figures for calendar year 1996 versus calendar
year 1995 are not yet available.
From 1983 to 1993, Tennessee's per capita income 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%. In 1995, the year
for which the most current data is available, per capita income in Tennessee
registered $21,038 which equaled approximately 90.6% of the national level.
For the fiscal year ended June 30, 1996, however, Tennessee remained the
leading state in the nation in household bankruptcy filings (1 in every 45
households) with a rate more than twice the national average (1 in every 93
households).
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. At the end of calendar year 1995, the State's unemployment
rate stood at 5.2% with the national rate at 5.6%, and at December 1996 the
State's unemployment rate had declined slightly to 5.0% with the national rate
at 5.3%, and at December 1996 the State's unemployment rate had declined
slightly to 5.0% with the national rate at 5.3%. There currently is no
unemployment data for 1997. For the four year period beginning 1991 and ending
1994, average annual unemployment in Tennessee steadily decreased, from 6.6%
in 1991 to 6.4% in 1992, to 5.7% in 1993 to 4.8% in 1994. However, in 1995 the
average annual Tennessee unemployment rate rose to 5.2% but has since declined
again to 4.9% for calendar year 1996. 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 600,000 -
700,000 new jobs. These projections for Tennessee compare favorably to the
projections 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 20-25 years through increases in service sector and trade sector
employment, and decreases in manufacturing employment on a percentage of work
force basis. Service sector employment in Tennessee 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 1996 from approximately 2.18 million persons to approximately 2.60
million persons, representing percentage increases of approximately 2.8%,
3.7%, 4.0%, 3.3% and 4.0% for 1992, 1993, 1994, 1995 and 1996, 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. No data is currently available
for 1997 Tennessee non-agricultural employment figures.
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; 539,000 persons in
1994; 543,000 persons in 1995, and 531,000 persons in 1996. Comparatively,
these figures represent the following percentage changes from the previous
year's figures: approximately 2.4% (1992 vs. 1991), 2.7% (1993 vs. 1992), 1.9%
(1994 vs. 1993), .65% (1995 vs. 1994) and -2.28% (1996 vs. 1995). No
manufacturing employment figures are currently available for 1997.
The Tennessee index of leading economic indicators acts as a signal of the
health of the State's economy four 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. In 1995, figures for
the leading index rose a very small .02% over 1994 numbers. In this most
recent year, the 1996 leading index average showed an increase of .84% over
the 1995 leading index average.
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. Calendar year 1996 figures are unconfirmed at the
time of this publication. The State's rainy-day fund remained constant from
December 1994 to December 1996 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, 1996,
the State's population was estimated at approximately 5.4 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.
Tennessee's general obligation bonds are rated Aaa by Moody's and AA+ by
Standard & Poor's. Tennessee's smallest counties have Moody's lower ratings
ranging from Baa to B, in part due to these rural counties' limited economies
that make them vulnerable to economic downturns. Tennessee's four largest
counties (Shelby, Davidson, Knox and Hamilton) have the second highest of
Moody's nine investment grades, Aa. There can be no assurance that the
economic conditions on which these ratings are based will continue or that
particular obligations contained in the Tennessee Fund may not be adversely
affected by changes in economic or political conditions.
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 1997 session of the General
Assembly.
WEST VIRGINIA FUND
West Virginia's economy is heavily dependent upon coal mining manufacturing,
the government sector, tourism and retail trades, among other industries. West
Virginia's economy has come to benefit from a developing tourism industry. 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.
Data compiled by the State of West Virginia Bureau of Employment Programs
indicates that unemployment in West Virginia during 1996 (annual average) was
7.5%. This represents the lowest annual rate since 1979. The State's economic
development efforts have been aided by the location of significant
manufacturing and service facilities in West Virginia, including, for example,
Toyota Motor Corporation's $400 million engine plant in Putnam County which is
expected to employ approximately 300 people and the FBI Fingerprint Center in
Harrison County which is expected to employ approximately 3,000 people. In
1997 the State Legislature created further tax incentives to stimulate
economic development in manufacturing, including, specifically, consumer-ready
wood product manufacturing.
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. 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 1997 the State Legislature did not enact any significant new taxes or
increase the scope or amount of existing taxes. The State Legislature in 1997
enacted legislation which will exempt from ad valorem property taxes all
intangible personal property with tax situs in West Virginia. This exemption
will be phased in gradually from 1998 to 2003.
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 and investments have drawn the attention of the courts in
recent years. The West Virginia Supreme Court of Appeals' opinion in Booth v.
Sims, 456 S.E.2d 167, (W. Va. 1995) 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 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. In 1997, the West
Virginia Supreme Court of Appeals similarly ruled in the matter of West
Virginia Trust Fund, Inc. v. Honorable Larrie Bailey, Treasurer of the State
of West Virginia et al., 1997 W. Va. Lexis 46 (April 15, 1997) that a state
statute granting the West Virginia Trust Fund, Inc., as trustee of the funds
of five state employee pension funds and the state workers' compensation and
coal workers' pneumoconiosis funds, authority to place such funds in an
irrevocable trust which invests in part in corporate equities also violated
the state constitutional prohibition against the State becoming a stockholder
in any company or association. In response, the State Legislature in 1997
proposed an amendment to the State constitution which would eliminate the
current prohibition against investment of state funds in common stocks and
other equity investments. This proposed constitutional amendment must be
approved by West Virginia's voters.
<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) ALABAMA MUNICIPAL BOND FUND
MFS(R) ARKANSAS MUNICIPAL BOND FUND
MFS(R) CALIFORNIA MUNICIPAL BOND FUND
MFS(R) FLORIDA MUNICIPAL BOND FUND
MFS(R) GEORGIA MUNICIPAL BOND FUND
MFS(R) MARYLAND MUNICIPAL BOND FUND
MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND
MFS(R) MISSISSIPPI MUNICIPAL BOND FUND
MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) PENNSYLVANIA 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
[Logo]
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
500 BOYLSTON STREET
BOSTON, MA 02116
MST-1 8/97/145M
<PAGE>
[GRAPHIC OMITTED]
INVESTMENT MANAGEMENT
MFS(R) MUNICIPAL STATEMENT OF
SERIES TRUST ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) August 1, 1997
- --------------------------------------------------------------------------------
Page
----
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 ................................... 11
5. Management of the Trust ............................................... 11
Trustees ............................................................ 11
Officers ............................................................ 11
Trustee Compensation Table .......................................... 12
Investment Adviser .................................................. 15
Administrator ....................................................... 16
Custodian ........................................................... 16
Shareholder Servicing Agent ......................................... 16
Distributor ......................................................... 16
6. Taxation .............................................................. 17
7. Shareholder Services .................................................. 18
8. Description of Shares, Voting Rights and Liabilities .................. 21
9. Portfolio Transactions ................................................ 22
10. Distribution Plan ..................................................... 22
11. Independent Auditors and Financial Statements ......................... 23
Appendix A -- Performance Results and Quotations ...................... A-1
Appendix B -- Sales Charges ........................................... B-1
Appendix C -- Amounts Paid Under the Distribution Plans ............... C-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, 1997. 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, 1997, 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 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, their political
subdivisions, municipalities, agencies, instrumentalities or public
authorities, except that with respect to the Florida Fund these obligations
may consist of other tax-exempt securities which are exempt from the Florida
intangibles tax. 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, liquid assets 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 and could involve the loss of all or a
portion of the principal amount of investment. 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 in liquid assets 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 liquid assets 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 net 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.
One 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 liquid assets 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
Fund maintains the difference in liquid assets 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 liquid assets 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 liquid assets 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 net 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 15% 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) 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.
Each Fund offers multiple classes of shares which were initially offered for
sale to the public on different dates. The calculation of total rate of return
for a class of shares which initially was offered for sale to the public
subsequent to another class of shares of a Fund is based both on (i) the
performance of that Fund's newer class from the date it initially was offered
for sale to the public and (ii) the performance of that Fund's oldest class
from the date it initially was offered for sale to the public up to the date
that the newer class initially was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of each Fund's class of shares differ.
In calculating total rate of return for a newer class of shares in accordance
with certain formulas required by the SEC, the performance will be adjusted to
take into account the fact that the newer class is subject to a different
sales charge than the oldest class (e.g., if the newer class is Class A
shares, the total rate of return quoted will reflect the deduction of the
initial sales charge applicable to Class A shares; if the newer class is Class
B shares, the total rate of return quoted will reflect the deduction of the
CDSC applicable to Class B shares). However, the performance will not be
adjusted to take into account the fact that the newer class of share bears
different class specific expenses than the oldest class of shares (e.g., Rule
12b-1 fees). Therefore, the total rate of return quoted for a newer class of
shares will differ from the return that would be quoted had the newer class of
shares been outstanding for the entire period over which the calculation is
based (i.e., the total rate of return quoted for the newer class will be
higher than the return that would have been quoted had the newer class of
shares been outstanding for the entire period over which the calculation is
based if the class specific expenses for the newer class are higher than the
class specific expenses of the oldest class, and the total rate of return
quoted for the newer class will be lower than the return that would be quoted
had the newer class of shares been outstanding for this entire period if the
class specific expenses for the newer class are lower than the class specific
expenses of the oldest class).
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, 1996. 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 assume no CDSC
is paid. Yield quotations for each class of each Fund are presented in
Appendix A attached hereto under the heading "Performance Quotations."
TAX-EQUIVALENT YIELD: The tax-equivalent yield for a class of shares of a Fund
is calculated by determining the rate of return that would have to be achieved
on a fully taxable investment in such shares to produce the after-tax
equivalent of the yield of that class. In calculating tax-equivalent yield, a
Fund assumes certain federal tax brackets for shareholders and does not take
into account state taxes. Tax-equivalent yield quotations for each class of
each Fund are presented in Appendix A attached hereto under the heading
"Performance Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class
are reflected in the quoted "current distribution rate" for that class. The
current distribution rate for a class is computed by dividing the total amount
of dividends per share paid by the Fund to shareholders of that class during
the past 12 months by the maximum public offering price of that class at the
end of such period. Under certain circumstances, such as when there has been a
change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during
the past 12 months. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing,
short-term capital gains and return of invested capital, and is calculated
over a different period of time. The Fund's current distribution rate
calculation for Class A shares assumes a maximum sales charge of 4.75%. The
Fund's current distribution rate calculation for Class B 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 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 Planning(SM) 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
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,
Martin Luther King 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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D. (born 3/11/37)
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 (born 6/15/27)
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 (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III (born 8/18/26)
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* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President
Address: One Liberty Square, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
CYNTHIA M. BROWN,* Vice President (born 6/27/57)
Massachusetts Financial Services Company, Senior Vice President -- Investments
ROBERT A. DENNIS,* Vice President -- Investments (born 12/12/48)
Massachusetts Financial Services Company, Senior Vice President
GEOFFREY L. SCHECHTER,* Vice President (born 12/17/62)
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 (born 7/26/61)
Massachusetts Financial Services Company, Vice President
DANIEL E. McMANUS*, Assistant Vice President (born 2/15/61)
Massachusetts Financial Services Company, Assistant Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary and Assistant Clerk
(born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994).
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touche LLP, Senior Manager (until September 1996).
- ----------
*"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, of $833
per year plus $69 per meeting and per committee meeting attended 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 below is certain information concerning the cash compensation paid
to the Trustees and benefits accrued, and estimated benefits payable, under
the retirement plan.
TRUSTEE COMPENSATION TABLES
<TABLE>
ALABAMA FUND
<CAPTION>
TOTAL TRUSTEES
RETIREMENT BENEFIT ESTIMATED FEES FROM
TRUSTEES FEE ACCRUED AS PART OF CREDITED YEARS FUND
TRUSTEE FROM FUND FUND'S EXPENSES(1) OF SERVICE(2) COMPLEX(3)
- ----------------------------- ---------------- ---------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Richard B. Bailey ......... $1,431 $332 10 $247,168
A. Keith Brodkin .......... 0 0 N/A 0
Marshall N. Cohan ......... 1,783 540 12 149,258
Lawrence H. Cohn .......... 1,645 213 18 136,508
J. David Gibbons .......... 1,645 497 12 136,508
Abby M. O'Neill ........... 1,502 267 10 123,758
Walter E. Robb, III ....... 1,783 308 9 149,258
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 2,116 231 20 149,258
Ward Smith ................ 2,116 308 13 149,258
</TABLE>
<TABLE>
ARKANSAS AND FLORIDA FUNDS
<CAPTION>
TOTAL TRUSTEES
RETIREMENT BENEFIT FEES FROM
TRUSTEES FEE ACCRUED AS PART ESTIMATED FUNDS AND
FROM EACH OF EACH CREDITED YEARS FUND
TRUSTEE FUND FUND'S EXPENSES(1) OF SERVICE(2) COMPLEX(3)
- ----------------------------- ---------------- ---------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Richard B. Bailey ......... $1,431 $332 10 $247,168
A. Keith Brodkin .......... 0 0 N/A 0
Marshall N. Cohan ......... 1,783 385 10 149,258
Lawrence H. Cohn .......... 1,645 213 18 136,508
J. David Gibbons .......... 1,645 355 10 136,508
Abby M. O'Neill ........... 1,502 267 10 123,758
Walter E. Robb, III ....... 1,783 308 9 149,258
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 2,116 231 20 149,258
Ward Smith ................ 2,116 308 13 149,258
</TABLE>
<TABLE>
CALIFORNIA FUND
<CAPTION>
TOTAL TRUSTEES
TRUSTEES RETIREMENT BENEFIT ESTIMATED FEES FROM
FEES FROM ACCRUED AS PART OF CREDITED YEARS FUND
TRUSTEE FUND FUND'S EXPENSES(1) OF SERVICE(2) COMPLEX(3)
- ----------------------------- ---------------- ---------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Richard B. Bailey ......... $2,275 $ 786 10 $247,168
A. Keith Brodkin .......... 0 0 N/A 0
Marshall N. Cohan ......... 3,242 1,753 14 149,258
Lawrence H. Cohn .......... 2,950 517 18 136,508
J. David Gibbons .......... 2,950 1,378 13 136,508
Abby M. O'Neill ........... 2,500 629 10 123,758
Walter E. Robb, III ....... 3,242 1,948 17 149,258
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 3,575 584 20 149,258
Ward Smith ................ 3,575 779 13 149,258
</TABLE>
<TABLE>
GEORGIA AND NEW YORK FUNDS
<CAPTION>
TOTAL TRUSTEES
RETIREMENT BENEFIT FEES FROM
TRUSTEES FEE ACCRUED AS PART ESTIMATED FUNDS AND
FROM EACH OF EACH CREDITED YEARS FUND
TRUSTEE FUND FUND'S EXPENSES(1) OF SERVICE(2) COMPLEX(3)
- ----------------------------- ---------------- ---------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Richard B. Bailey ......... $1,431 $332 10 $247,168
A. Keith Brodkin .......... 0 0 N/A 0
Marshall N. Cohan ......... 1,783 694 14 149,258
Lawrence H. Cohn .......... 1,645 213 18 136,508
J. David Gibbons .......... 1,645 568 13 136,508
Abby M. O'Neill ........... 1,502 267 10 123,758
Walter E. Robb, III ....... 1,783 694 14 149,258
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 2,116 231 20 149,258
Ward Smith ................ 2,116 308 13 149,258
</TABLE>
<TABLE>
MASSACHUSETTS FUND
<CAPTION>
TOTAL TRUSTEES
RETIREMENT BENEFIT ESTIMATED FEES FROM
TRUSTEES FEE ACCRUED AS PART OF CREDITED YEARS FUND
TRUSTEE FROM FUND FUND'S EXPENSES(1) OF SERVICE(2) COMPLEX(3)
- ----------------------------- ---------------- ---------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Richard B. Bailey ......... $1,431 $332 10 $247,168
A. Keith Brodkin .......... 0 0 N/A 0
Marshall N. Cohan ......... 1,783 771 17 149,258
Lawrence H. Cohn .......... 1,645 213 18 136,508
J. David Gibbons .......... 1,645 568 13 136,508
Abby M. O'Neill ........... 1,502 267 10 123,758
Walter E. Robb, III ....... 1,783 771 17 149,258
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 2,116 231 20 149,258
Ward Smith ................ 2,116 308 13 149,258
</TABLE>
<TABLE>
MARYLAND, NORTH CAROLINA, SOUTH CAROLINA,
VIRGINIA AND WEST VIRGINIA FUNDS
<CAPTION>
TOTAL TRUSTEES
RETIREMENT BENEFIT FEES FROM
TRUSTEES FEE ACCRUED AS PART ESTIMATED FUNDS AND
FROM EACH OF EACH CREDITED YEARS FUND
TRUSTEE FUND FUND'S EXPENSES(1) OF SERVICE(2) COMPLEX(3)
- ----------------------------- ---------------- ---------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Richard B. Bailey ......... $1,431 $332 10 $247,168
A. Keith Brodkin .......... 0 0 N/A 0
Marshall N. Cohan ......... 1,783 694 14 149,258
Lawrence H. Cohn .......... 1,645 213 18 136,508
J. David Gibbons .......... 1,645 568 13 136,508
Abby M. O'Neill ........... 1,502 267 10 123,758
Walter E. Robb, III ....... 1,783 771 17 149,258
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 2,116 231 20 149,258
Ward Smith ................ 2,116 308 13 149,258
</TABLE>
<TABLE>
MISSISSIPPI AND PENNSYLVANIA FUNDS
<CAPTION>
TOTAL TRUSTEES
RETIREMENT BENEFIT FEES FROM
TRUSTEES FEE ACCRUED AS PART ESTIMATED FUNDS AND
FROM EACH OF EACH CREDITED YEARS FUND
TRUSTEE FUND FUND'S EXPENSES(1) OF SERVICE(2) COMPLEX(3)
- ----------------------------- ---------------- ---------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Richard B. Bailey ......... $1,431 $266 9 $247,168
A. Keith Brodkin .......... 0 0 N/A 0
Marshall N. Cohan ......... 1,783 308 9 149,258
Lawrence H. Cohn .......... 1,645 213 18 136,508
J. David Gibbons .......... 1,645 284 9 136,508
Abby M. O'Neill ........... 1,502 267 10 123,758
Walter E. Robb, III ....... 1,783 308 9 149,258
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 2,116 231 20 149,258
Ward Smith ................ 2,116 308 13 149,258
</TABLE>
TENNESSEE FUND
<TABLE>
<CAPTION>
TOTAL TRUSTEES
RETIREMENT BENEFIT ESTIMATED FEES FROM
TRUSTEES FEE ACCRUED AS PART OF CREDITED YEARS FUND
TRUSTEE FROM FUND FUND'S EXPENSES(1) OF SERVICE(2) COMPLEX(3)
- ----------------------------- ---------------- ---------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Richard B. Bailey ......... $1,431 $332 10 $247,168
A. Keith Brodkin .......... 0 0 N/A 0
Marshall N. Cohan ......... 1,783 617 13 149,258
Lawrence H. Cohn .......... 1,645 213 18 136,508
J. David Gibbons .......... 1,645 568 13 136,508
Abby M. O'Neill ........... 1,502 267 10 123,758
Walter E. Robb, III ....... 1,783 617 13 149,258
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 2,116 231 20 149,258
Ward Smith ................ 2,116 308 13 149,258
</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
- ------------------------------------------------------------------------------
$1,288 $193 $322 $451 $ 644
1,496 224 374 523 748
1,704 256 426 596 852
1,912 287 478 669 956
2,120 318 530 742 1,060
2,328 349 582 815 1,164
ESTIMATED ANNUAL BENEFITS PAYABLE BY THE CALIFORNIA FUND UPON RETIREMENT(4)
YEARS OF SERVICE
AVERAGE ----------------------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
- ------------------------------------------------------------------------------
$2,048 $307 $512 $ 717 $1,024
2,425 364 606 849 1,212
2,802 420 700 981 1,401
3,179 477 795 1,112 1,589
3,556 533 889 1,244 1,778
3,933 590 983 1,376 1,966
- ------------
(1) For fiscal year ended March 31, 1997.
(2) Based on normal retirement age of 75.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 41 funds within the MFS Fund complex (having aggregate net
assets at December 31, 1996, of approximately $15.0 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS Fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
billion).
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
As of July 1, 1997, 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, 1997.
<TABLE>
<CAPTION>
APPROXIMATE
FUND NUMBER % OF
OWNER & ADDRESS AND CLASS OF SHARES CLASS
- --------------- --------- --------- -----
<S> <C> <C> <C>
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Alabama 1,915,009 26.46
Lake Drive, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Alabama 261,716 37.04
Lake Drive, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Arkansas 2,844,492 19.83
Lake Drive, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Arkansas 251,690 33.43
Lake Drive, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer California 5,029,169 12.25
Lake Drive, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer California 1,032,607 15.19
Lake Drive, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer California 185,042 26.59
Lake Drive, Jacksonville, Florida Class C
Fu Hsin Chen, 921 Fallen Leaf, Arcadia, California California 35,360 5.08
Class C
Donaldson Lufkin Jenrette Securities Corp. California 40,055 5.76
Class C
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Florida 1,022,165 12.75
Lake Drive, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Florida 338,010 22.10
Lake Drive, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Georgia 511,900 9.00
Lake Drive, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Georgia 214,402 22.07
Lake Drive, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Maryland 979,450 8.65
Lake Drive, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Maryland 142,750 8.27
Lake Drive, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Massachusetts 3,101,059 14.49
Lake Drive, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Massachusetts 85,549 5.97
Lake Drive, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Mississippi 877,724 12.68
Lake Drive, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Mississippi 265,896 23.41
Lake Drive, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer New York 998,412 8.91
Lake Drive, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box New York 203,448 8.61
45286, Jacksonville, Florida Class B
J. C. Bradford & Co., North Carolina 31,183 5.28
330 Commorce Street, Class C
Nashville, TN
William B. Nivison, North Carolina 70,034 11.87
Mildred L. Nivison, Class C
Ten. Com.,
Raleigh, North Carolina
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer North Carolina 72,046 12.21
Lake Drive, Jacksonville, Florida Class C
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Pennsylvania 225,155 9.31
Lake Drive, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer South Carolina 1,043,263 8.38
Lake Drive, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer South Carolina 164,789 8.43
Lake Drive, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Tennessee 1,021,091 9.78
Lake Drive, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Tennessee 275,370 18.55
Lake Drive, Jacksonville, Florida Class B
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Virginia 2,542,508 7.62
Lake Drive, Jacksonville, Florida Class A
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Virginia 785,218 28.50
Lake Drive, Jacksonville, Florida Class B
Robert E. Hawkins, Virginia 17.691 5.67
Lynchburg, Virginia Class C
Ronile Inc. Virginia 22,925 7.34
Rocky Mount, VA Class C
Lynn Spradlin Virginia 17,301 5.54
Bedford, VA Class C
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Virginia 22,481 7.20
Lake Drive, Jacksonville, Florida Class C
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer West Virginia 654,820 5.91
Lake Drive, Jacksonville, Florida Class A
</TABLE>
The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, unless, as to liabilities to the Trust or its shareholders, it is
finally adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
with respect to any matter, unless it is adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interests of the Trust. In the case of settlement, such indemnification will
not be provided unless it has been determined by a court or other body
approving the settlement or other disposition or by a reasonable determination
pursuant to the Declaration of Trust, that such officers or Trustees have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management
dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) which is an
indirect 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 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.") Under the Advisory Agreements, the Adviser provides each Fund
with overall investment advisory services. Subject to such policies as the
Trustees may determine, the Adviser makes investment decisions for each Fund.
For these services 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 Funds. See "Management of the Trust -- Investment Adviser" in the
Prospectus.
For the Trust's fiscal years ended March 31, 1997, March 31, 1996 and March
31, 1995, MFS received the following aggregate advisory fees and MFS waived
the following advisory fees, in whole or in part, for the same periods:
For the fiscal year ended March 31, 1997:
<TABLE>
<CAPTION>
ADVISORY FEES ADVISORY FEES
RECEIVED BY WAIVED BY
FUND MFS(1) MFS
- ---- ------ ---
<S> <C> <C>
Alabama ................................................ $ 477,327 N/A
Arkansas ............................................... 908,167 N/A
California ............................................. 1,156,144 $432,694
Florida ................................................ 549,091 N/A
Georgia ................................................ 361,309 48,303
Maryland ............................................... 716,338 97,218
Massachusetts .......................................... 1,244,262 169,487
Mississippi ............................................ 455,195 N/A
New York ............................................... 856,664 N/A
North Carolina ......................................... 2,129,831 288,877
Pennsylvania ........................................... 43,590 192,560
South Carolina ......................................... 864,108 116,415
Tennessee .............................................. 599,164 82,026
Virginia ............................................... 2,093,440 284,139
West Virginia .......................................... 800,535 N/A
</TABLE>
For the fiscal year ended March 31, 1996:
<TABLE>
<CAPTION>
ADVISORY FEES ADVISORY FEES
RECEIVED BY WAIVED BY
FUND MFS(1) MFS
- ---- ------ ---
<S> <C> <C>
Alabama ................................................ $ 500,417 N/A
Arkansas ............................................... 1,060,604 N/A
California ............................................. 1,225,235 $457,078
Florida ................................................ 536,315 38,724
Georgia ................................................ 458,694 N/A
Maryland ............................................... 863,230 N/A
Massachusetts .......................................... 1,484,656 N/A
Mississippi ............................................ 384,073 113,594
New York ............................................... 934,490 N/A
North Carolina ......................................... 2,550,849 N/A
Pennsylvania ........................................... 39,790 177,800
South Carolina ......................................... 1,031,063 N/A
Tennessee .............................................. 697,496 N/A
Virginia ............................................... 2,540,788 N/A
West Virginia .......................................... 795,243 N/A
</TABLE>
For the fiscal year ended March 31, 1995:
<TABLE>
<CAPTION>
ADVISORY FEES ADVISORY FEES
RECEIVED BY WAIVED BY
FUND MFS(1) MFS
- ---- ------ ---
<S> <C> <C>
Alabama ................................................ $ 474,038 N/A
Arkansas ............................................... 941,231 $152,542
California ............................................. 1,269,573 476,700
Florida ................................................ 350,879 248,214
Georgia ................................................ 477,819 N/A
Maryland ............................................... 889,796 N/A
Massachusetts .......................................... 1,495,879 N/A
Mississippi ............................................ 195,245 283,718
New York ............................................... 873,267 21,059
North Carolina ......................................... 2,592,068 N/A
Pennsylvania ........................................... 1,952 117,301
South Carolina ......................................... 1,001,540 N/A
Tennessee .............................................. 692,926 N/A
Virginia ............................................... 2,504,233 N/A
West Virginia .......................................... 741,684 N/A
</TABLE>
(1)After any applicable fee reduction.
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, 1998 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.
ADMINISTRATOR
MFS provides each Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997. Under this Agreement,
each Fund pays MFS an administrative fee of up to 0.015% per annum of such
Fund's average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services. For the period ended March 31, 1997,
MFS received the following amounts under the Master Administrative Services
Agreement from the Funds:
FUND FEES RECEIVED BY MFS
- ---- --------------------
Alabama $1,119
Arkansas 2,041
California 3,698
Florida 1,271
Georgia 924
Maryland 1,917
Massachusetts 3,335
Mississippi 1,033
New York 1,978
North Carolina 5,652
Pennsylvania 486
South Carolina 2,269
Tennessee 1,627
Virginia 5,513
West Virginia 1,895
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 Fund at an annual rate of
0.13%. 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. 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, 1998 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 Code by
meeting all applicable requirements of Subchapter M, including the
requirements as to the nature of each Fund's gross income, the amount of each
Fund's distributions (as a percentage of both the Fund's overall income and
its tax-exempt income) and the composition and holding period of the Fund's
portfolio assets. Because 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.
The portion of a Fund's distribution of net investment income that is
attributable to interest from tax-exempt securities 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 as 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 a tax preference for shareholders under 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 of net investment income made during each fiscal year and may differ from
the percentage of distributions consisting of tax-exempt interest in any
particular month. Shareholders are required to report exempt-interest
dividends received from the Fund on their federal income tax returns.
A 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 normally will
have to pay federal income taxes on the non-exempt interest dividends and
capital gain distributions they receive from a 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 are taxable to
shareholders as ordinary income for federal income tax purposes, whether the
distributions are paid in cash or reinvested in additional shares. Because
each 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 net
long-term capital gains over net short-term capital losses), whether paid in
cash or reinvested in additional shares, are taxable to shareholders as long-
term capital gains for federal income tax purposes without regard to the
length of time the shareholders have held their shares. Any Fund dividend that
is declared in October, November or December of any calendar year that is
payable to shareholders of record in such a month, and that is paid the
following January will be treated as if received by shareholders on December
31 of the year in which the dividend is declared. Each Fund will notify
shareholders regarding the federal tax status of its distributions after the
end of each calendar year.
Any Fund distribution of net capital gains or net short-term capital gains
will have the effect of reducing the per share net asset value of shares in 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.
Interest on indebtedness incurred by shareholders or 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 of a
Fund.
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 a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a disposition of shares in a 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 a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of a Fund within 90 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 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 will affect the amount,
timing and character of distributions to shareholders, and may under certain
circumstances make an economic return of capital taxable to shareholders. Any
investment in zero coupon bonds, deferred interest bonds and certain
securities purchased at a market discount will cause a Fund to recognize
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, such a 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.
A 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 a Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40% short-
term capital gain or loss. Certain positions held by a 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. 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.
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 U.S. Federal income tax at the rate of 30% on taxable
dividends and other payments to Non-U.S. Persons that are subject to such
withholding, regardless of whether a lower rate may be permitted under
applicable treaty. Any amounts overwithheld may be recovered by such persons
by filing a claim for refund with the U.S. Internal Revenue Service within the
time period appropriate to such claims. Distributions received from the Trust
by Non-U.S. Persons may also be subject to tax under the laws of their own
jurisdictions. The Trust is also required in certain circumstances to apply
backup withholding at the rate of 31% on taxable dividends and redemption
proceeds paid to any shareholder (including a Non-U.S. Person) who does not
furnish to the Trust 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.
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.
Distributions of a 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. 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.
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 dividend which represents interest received by a regulated
investment company on its holdings of securities of that state and its
political subdivisions and instrumentalities. Each shareholder is advised to
consult his own tax adviser regarding the exemption of exempt-interest
dividends under applicable state and local laws.
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 Class A, B and C
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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-
free at (800) 225-2606. The minimum purchase amount is $50 and the maximum
purchase amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application and
designate thereon a bank and account number from which purchases will be made.
If a telephone purchase request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. 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.
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 six
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 and if the
purchaser is eligible to purchase the class of shares), 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
employees of the Adviser, who are appointed and supervised by its senior
officers. Changes in each Fund's investments are reviewed by the Board of
Trustees. A Fund's portfolio manager 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 Conduct
Rules 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 PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares, (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act
and Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit each Fund and
the respective class of shareholders. The provisions of the Distribution Plan
are severable with respect to each Fund and each class of shares offered by
each Fund. The Distribution Plan is 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 Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, 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 Class B shares, 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 the 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 Plan 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: The Distribution Plan will remain in effect until August 1, 1998, 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"). The Distribution Plan 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. The Distribution Plan 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 the Distribution Plan 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 the Distribution Plan 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. The Distribution Plan may not 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 not 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 shares of each Fund under the Distribution Plan for
the fiscal year ended March 31, 1997.
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, 1997, the Statements
of Assets and Liabilities at March 31, 1997, the Statements of Operations for
the year ended March 31, 1997, the Statements of Changes in Net Assets for the
years ended March 31, 1997 and March 31, 1996, 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
December 31, 1996 10,580 267 5,057 15,904
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
December 31, 1996 9,850 52 3,036 12,938
CALIFORNIA FUND
December 31, 1987 $ 8,840 $ 21 $ 568 $ 9,429
December 31, 1988 9,202 22 1,229 10,453
December 31, 1989 9,492 23 1,966 11,481
December 31, 1990 9,474 23 2,721 12,218
December 31, 1991 9,909 63 3,754 13,726
December 31, 1992 10,144 84 4,752 14,980
December 31, 1993 10,706 146 6,056 16,908
December 31, 1994 9,293 140 6,112 15,545
December 31, 1995 10,362 156 7,827 18,345
December 31, 1996 10,108 152 8,623 18,883
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
December 31, 1996 9,840 105 3,201 13,146
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
December 31, 1996 10,540 129 6,697 17,366
MARYLAND FUND
December 31, 1987 $ 8,918 $ 14 $ 586 $ 9,518
December 31, 1988 9,256 14 1,276 10,546
December 31, 1989 9,463 22 2,010 11,495
December 31, 1990 9,429 30 2,763 12,222
December 31, 1991 9,723 56 3,747 13,526
December 31, 1992 9,792 75 4,634 14,501
December 31, 1993 10,147 156 5,705 16,008
December 31, 1994 8,987 194 5,847 15,028
December 31, 1995 9,818 212 7,271 17,301
December 31, 1996 9,593 207 7,967 17,767
MASSACHUSETTS FUND
December 31, 1987 $ 8,885 $ 1 $ 613 $ 9,499
December 31, 1988 9,152 1 1,333 10,486
December 31, 1989 9,239 1 2,086 11,326
December 31, 1990 9,187 1 2,874 12,062
December 31, 1991 9,602 1 3,953 13,556
December 31, 1992 9,775 1 4,933 14,709
December 31, 1993 10,077 229 6,051 16,357
December 31, 1994 8,936 245 6,253 15,434
December 31, 1995 9,801 268 7,840 17,909
December 31, 1996 9,550 262 8,593 18,405
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
December 31, 1996 9,490 31 2,663 12,184
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
December 31, 1996 10,780 314 7,285 18,379
NORTH CAROLINA FUND
December 31, 1987 $ 8,917 $ 0 $ 608 $ 9,525
December 31, 1988 9,148 0 1,303 10,451
December 31, 1989 9,355 0 2,049 11,404
December 31, 1990 9,280 53 2,794 12,127
December 31, 1991 9,586 112 3,759 13,457
December 31, 1992 9,677 113 4,614 14,404
December 31, 1993 10,157 126 5,673 15,956
December 31, 1994 8,942 236 5,765 14,943
December 31, 1995 9,876 260 7,237 17,373
December 31, 1996 9,719 256 8,002 17,977
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
December 31, 1996 9,410 39 2,338 11,787
SOUTH CAROLINA FUND
December 31, 1987 $ 9,093 $ 38 $ 657 $ 9,788
December 31, 1988 9,403 39 1,415 10,857
December 31, 1989 9,622 40 2,183 11,845
December 31, 1990 9,563 98 2,940 12,601
December 31, 1991 9,916 159 3,940 14,015
December 31, 1992 10,025 217 4,832 15,074
December 31, 1993 10,629 248 5,973 16,850
December 31, 1994 9,437 328 6,130 15,895
December 31, 1995 10,386 361 7,675 18,422
December 31, 1996 10,151 352 8,439 18,942
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
December 31, 1996 10,470 120 6,503 17,093
VIRGINIA FUND
December 31, 1987 $ 8,971 $ 56 $ 619 $ 9,646
December 31, 1988 9,305 58 1,361 10,724
December 31, 1989 9,520 60 2,150 11,730
December 31, 1990 9,511 60 2,956 12,527
December 31, 1991 9,854 62 3,985 13,901
December 31, 1992 9,957 67 4,909 14,933
December 31, 1993 10,274 309 5,986 16,569
December 31, 1994 9,031 340 6,091 15,462
December 31, 1995 9,991 376 7,682 18,049
December 31, 1996 9,648 363 8,347 18,358
WEST VIRGINIA FUND
December 31, 1987 $ 8,798 $ 73 $ 659 $ 9,530
December 31, 1988 9,115 76 1,443 10,634
December 31, 1989 9,313 77 2,228 11,618
December 31, 1990 9,330 78 3,024 12,432
December 31, 1991 9,656 90 4,048 13,794
December 31, 1992 9,793 98 4,985 14,876
December 31, 1993 10,274 213 6,158 16,645
December 31, 1994 9,193 211 6,359 15,763
December 31, 1995 10,017 230 7,879 18,126
December 31, 1996 9,828 225 8,684 18,737
- ------------
(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.
PERFORMANCE QUOTATIONS
All performance quotations are for the periods ended March 31, 1997.
<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 (INCLUDING (WITHOUT ANY WAIVERS) ANY WAIVERS) CURRENT
LIFE OF ANY ANY ---------------- ------------------ DISTRIBUTION
FUND 1 YEAR 5 YEAR FUND(1) 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 ....... 0.83% 6.05% 6.76% -- 4.81% -- -- 6.68% 6.97% 5.02%
Alabama Fund Class A
without sales charge .... 5.82 7.08 7.48 -- -- -- -- -- -- --
Alabama Fund Class B with
CDSC ...................... 0.99 6.15(2) 7.04(2) -- -- -- -- -- -- --
Alabama Fund Class B without
CDSC ...................... 4.98 6.46(2) 7.04(2) -- 4.29 -- -- 5.96 6.22 4.46
Arkansas Fund Class A with
sales charge ............... -0.15 5.30 5.11 -- 5.16 -- -- 7.17 7.48 4.86
Arkansas Fund Class A
without sales charge ....... 4.78 6.33 6.10 -- -- -- -- -- -- --
Arkansas Fund Class B with
CDSC ...................... 0.06 5.30(2) 5.27(2) -- -- -- -- -- -- --
Arkansas Fund Class B
without CDSC .............. 4.05 5.63(2) 5.42(2) -- 4.91 -- -- 6.82 7.12 4.30
California Fund Class A with
sales charge .............. -0.49 5.39 6.24 5.13 4.98 7.13 7.43 6.92 7.22 5.17
California Fund Class A
without sales charge ...... 4.55 6.42 6.76 -- -- -- -- -- -- --
California Fund Class B with
CDSC ...................... -0.32 5.37(2) 6.39(2) -- -- -- -- -- -- --
California Fund Class B
without CDSC ............. 3.64 5.69(2) 6.39(2) 4.50 4.35 6.25 6.52 6.04 6.30 4.54
California Fund Class C with
CDSC ...................... 2.52 5.73(3) 6.41(3) -- -- -- -- -- -- --
California Fund Class C
without CDSC .............. 3.51 5.73(3) 6.41(3) 4.35 4.20 6.04 6.30 5.83 6.09 4.41
Florida Fund Class A with
sales charge .............. -1.49 5.55 5.29 -- 4.91 -- -- 6.82 7.12 5.05
Florida Fund Class A without
sales charge .............. 3.43 6.58 6.29 -- -- -- -- -- -- --
Florida Fund Class B with
CDSC ...................... -1.37 5.53(2) 5.43(2) -- -- -- -- -- -- --
Florida Fund Class B without
CDSC ...................... 2.56 5.85(2) 5.59(2) -- 4.54 -- -- 6.31 6.58 4.44
Georgia Fund Class A with
sales charge .............. -0.47 5.08 6.43 5.32 5.22 7.39 7.71 7.25 7.57 5.04
Georgia Fund Class A without
sales charge .............. 4.47 6.10 7.02 -- -- -- -- -- -- --
Georgia Fund Class B with
CDSC ...................... -0.33 5.16(2) 6.67(2) -- -- -- -- -- -- --
Georgia Fund Class B without
CDSC ...................... 3.63 5.48(2) 6.67(2) 4.83 4.73 6.71 7.00 6.57 6.86 4.48
Maryland Fund Class A with
sales charge .............. -1.17 4.40 5.61 4.81 4.71 6.68 6.97 6.54 6.83 4.87
Maryland Fund Class A
without sales charge ...... 3.75 5.42 6.13 -- -- -- -- -- -- --
Maryland Fund Class B with
CDSC ...................... -0.92 4.54(2) 5.85(2) -- -- -- -- -- -- --
Maryland Fund Class B
without CDSC .............. 3.03 4.87(2) 5.85(2) 4.39 4.29 6.10 6.36 5.96 6.22 4.41
Massachusetts Fund Class A
with sales charge.......... -0.58 5.16 5.94 5.18 5.08 7.19 7.51 7.06 7.36 5.21
Massachusetts Fund Class A
without sales charge....... 4.39 6.19 6.46 -- -- -- -- -- -- --
Massachusetts Fund Class B
with CDSC ................. -0.30 5.35(2) 6.20(2) -- -- -- -- -- -- --
Massachusetts Fund Class B
without CDSC .............. 3.66 5.67(2) 6.20(2) 4.76 4.66 6.61 6.90 6.47 6.75 4.75
Mississippi Fund Class A
with sales charge ......... 0.18 N/A 4.29 -- 5.46 -- -- 7.58 7.91 4.88
Mississippi Fund Class A
without sales charge ...... 5.22 N/A 5.38 -- -- -- -- -- -- --
Mississippi Fund Class B
with CDSC ................. 0.33 N/A 4.31(2) -- -- -- -- -- -- --
Mississippi Fund Class B
without CDSC .............. 4.33 N/A 4.67(2) -- 4.71 -- -- 6.54 6.83 4.27
New York Fund Class A with
sales charge .............. -0.28 5.83 7.09 -- 4.88 -- -- 6.78 7.07 4.94
New York Fund Class A
without sales charge ...... 4.68 6.86 7.69 -- -- -- -- -- -- --
New York Fund Class B with
CDSC ...................... -0.21 5.91(2) 7.32(2) -- -- -- -- -- -- --
New York Fund Class B
without CDSC .............. 3.77 6.22(2) 7.32(2) -- 4.37 -- -- 6.07 6.33 4.40
North Carolina Fund Class A
with sales charge ......... 0.07 4.98 5.70 4.86 4.77 6.75 7.04 6.63 6.91 4.86
North Carolina Fund Class A
without sales charge....... 5.09 6.01 6.22 -- -- -- -- -- -- --
North Carolina Fund Class B
with CDSC ................. 0.36 5.12(2) 5.93(2) -- -- -- -- -- -- --
North Carolina Fund Class B
without CDSC .............. 4.36 5.44(2) 5.93(2) 4.44 4.34 6.17 6.43 6.03 6.29 4.40
North Carolina Fund Class C
with CDSC ................. 3.42 5.51(3) 5.97(3) -- -- -- -- -- -- --
North Carolina Fund Class C
without CDSC .............. 4.41 5.51(3) 5.97(3) 4.45 4.35 6.18 6.45 6.04 6.30 4.45
Pennsylvania Fund Class A
with sales charge ......... -0.33% N/A 3.98% 5.54% 4.65% 7.69% 8.03% 6.46% 6.74% 5.54%
Pennsylvania Fund Class A
without sales charge....... 4.67 N/A 5.21 -- -- -- -- -- -- --
Pennsylvania Fund Class B
with CDSC ................. -0.12 N/A 4.05(2) -- -- -- -- -- -- --
Pennsylvania Fund Class B
without CDSC .............. 3.83 N/A 4.46(2) 4.99 4.07 6.93 7.23 5.65 5.90 5.00
South Carolina Fund Class A
with sales charge ......... -0.53 5.09 6.24 5.11 4.99 7.10 7.41 6.93 7.23 4.92
South Carolina Fund Class A
without sales charge ...... 4.46 6.12 6.76 -- -- -- -- -- -- --
South Carolina Fund Class B
with CDSC ................. -0.24 5.25(2) 6.48(2) -- -- -- -- -- -- --
South Carolina Fund Class B
without CDSC .............. 3.73 5.58(2) 6.48(2) 4.70 4.00 6.53 6.81 5.56 5.80 4.46
Tennessee Fund Class A with
sales charge .............. -0.49 5.09 6.40 5.40 5.31 7.50 7.83 7.38 7.70 4.95
Tennessee Fund Class A
without sales charge ...... 4.48 6.12 7.00 -- -- -- -- -- -- --
Tennessee Fund Class B with
CDSC ...................... -0.21 5.23(2) 6.67(2) -- -- -- -- -- -- --
Tennessee Fund Class B
without CDSC .............. 3.76 5.55(2) 6.67(2) 5.01 4.91 6.96 7.26 6.82 7.12 4.50
Virginia Fund Class A with
sales charge .............. -0.98 4.62 5.92 4.99 4.88 6.93 7.23 6.78 7.07 5.06
Virginia Fund Class A
without sales charge ...... 3.97 5.64 6.43 -- -- -- -- -- -- --
Virginia Fund Class B with
CDSC ...................... -0.70 4.78(2) 6.16(2) -- -- -- -- -- -- --
Virginia Fund Class B
without CDSC .............. 3.24 5.10(2) 6.16(2) 4.56 4.46 6.33 6.61 6.19 6.46 4.60
Virginia Fund Class C with
CDSC ...................... 2.31 5.15(3) 6.19(3) -- -- -- -- -- -- --
Virginia Fund Class C
without CDSC .............. 3.30 5.15(3) 6.19(3) 4.54 4.43 6.31 6.58 6.15 6.42 4.65
West Virginia Fund Class A
with sales charge ......... 0.16 5.24 6.23 -- 5.10 -- -- 7.08 7.39 5.03
West Virginia Fund Class A
without sales charge....... 5.20 6.27 6.75 -- -- -- -- -- -- --
West Virginia Fund Class B
with CDSC ................. 0.48 5.40(2) 6.48(2) -- -- -- -- -- -- --
West Virginia Fund Class B
without CDSC .............. 4.47 5.72(2) 6.48(2) -- 4.68 -- -- 6.50 6.78 4.58
</TABLE>
- ----------
(1)For the period from the commencement of investment operations of Class A
shares to March 31, 1997, or for the 10 years ended March 31, 1997,
whichever is shorter, as noted below:
FUND PERIOD
---- ------
Alabama ................................ From February 1, 1990
Arkansas ............................... From February 3, 1992
California ............................. 10 years
Florida ................................ From February 3, 1992
Georgia ................................ From June 6, 1988
Maryland ............................... 10 years
Massachusetts .......................... 10 years
Mississippi ............................ From August 6, 1992
New York ............................... From June 6, 1988
North Carolina ......................... 10 years
Pennsylvania ........................... From February 1, 1993
South Carolina ......................... 10 years
Tennessee .............................. From August 12, 1988
Virginia ............................... 10 years
West Virginia .......................... 10 years
(2)Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class B shares
on September 7, 1993. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class B shares differ. Class B share
performance has been adjusted to reflect that Class B shares generally are
subject to a CDSC (unless the performance quotation does not give effect to
the CDSC) whereas Class A shares generally are subject to an initial sales
charge. Class B share performance has not, however, been adjusted to
reflect differences in operating expenses (e.g., Rule 12b-1 fees), which
generally are lower for Class A shares.
(3)Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class C shares
on January 3, 1994. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class C shares differ. Class C share
performance has been adjusted to reflect that Class C shares generally are
subject to a CDSC (unless the performance quotation does not give effect to
the CDSC) whereas Class A shares generally are subject to an initial sales
charge. Class C share performance has not, however, been adjusted to
reflect differences in operating expenses (e.g., Rule 12b-1 fees), which
generally are lower for Class A shares.
<PAGE>
APPENDIX B
SALES CHARGES
<TABLE>
<CAPTION>
CDSC CDSC CDSC CDSC CDSC
IMPOSED ON IMPOSED ON IMPOSED ON IMPOSED ON IMPOSED ON
REDEMPTION REDEMPTION REDEMPTION REDEMPTION REDEMPTION
OF CLASS B OF CLASS B OF CLASS B OF CLASS C OF CLASS A
SHARES SHARES SHARES SHARES SHARES
12 MONTHS 12 MONTHS 12 MONTHS 12 MONTHS 12 MONTHS
FUND ENDED 3/31/97 ENDED 3/31/96 ENDED 3/31/95 ENDED 3/31/97 ENDED 3/31/97
- ----------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Alabama Fund....................... $ 7,246 $ 2,531 $ 22,060 $ -- $ --
Arkansas Fund ..................... 24,877 4,215 12,360 -- --
California Fund ................... 171,782 96,292 137,206 3,203 16,440
Florida Fund ...................... 50,353 52,478 26,736 -- 10
Georgia Fund ...................... 45,183 10,865 22,152 -- 244
Maryland Fund ..................... 39,109 59,233 28,095 -- --
Massachusetts Fund ................ 29,809 14,743 31,362 -- 47
Mississippi Fund .................. 48,353 24,336 14,243 -- --
New York Fund ..................... 95,716 29,930 37,704 -- 51
North Carolina Fund ............... 103,158 66,144 61,014 1,076 --
Pennsylvania Fund ................. 33,143 18,579 10,091 -- 11,294
South Carolina Fund ............... 40,979 37,842 32,652 -- 683
Tennessee Fund .................... 53,602 19,385 13,716 -- --
Virginia Fund ..................... 89,149 46,610 56,011 -- --
West Virginia Fund ................ 54,376 33,870 24,295 -- --
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS A
SALES CHARGES SALES CHARGES CLASS A CLASS A
RECEIVED BY RECEIVED GROSS SALES FUND ASSETS
MFD BY DEALERS(1) CHARGES SOLD
12 MONTHS 12 MONTHS 12 MONTHS 12 MONTHS
FUND ENDED 3/31/97 ENDED 3/31/97 ENDED 3/31/97 ENDED 3/31/97
- ----------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Alabama Fund....................... $13,874 $65,389 $ 79,263 $ 3,984,222
Arkansas Fund ..................... 34,851 178,324 213,175 12,090,143
California Fund ................... 47,656 347,772 395,428 23,368,452
Florida Fund ...................... 18,617 86,868 105,485 5,945,687
Georgia Fund ...................... 13,894 61,423 75,317 4,190,865
Maryland Fund ..................... 29,470 141,691 171,161 7,799,351
Massachusetts Fund ................ 38,548 177,166 215,714 15,707,865
Mississippi Fund .................. 18,104 84,467 102,571 5,480,086
New York Fund ..................... 19,546 158,491 178,037 9,931,009
North Carolina Fund ............... 72,935 335,785 408,720 26,128,993
Pennsylvania Fund ................. 11,850 69,828 81,678 3,612,890
South Carolina Fund ............... 36,896 175,202 212,098 11,285,379
Tennessee Fund .................... 25,070 114,729 139,799 9,461,974
Virginia Fund ..................... 62,832 293,803 356,635 21,450,042
West Virginia Fund ................ 38,916 181,111 220,027 9,414,262
</TABLE>
<TABLE>
<CAPTION>
CDSC
IMPOSED ON CLASS A CLASS A CLASS A
REDEMPTION SALES CHARGES SALES CHARGES CLASS A FUND ASSETS
OF CLASS A RECEIVED BY RECEIVED GROSS SALES SOLD
SHARES MFD BY DEALERS(1) CHARGES 12 MONTHS
12 MONTHS 12 MONTHS 12 MONTHS 12 MONTHS ENDED
FUND ENDED 3/31/96 ENDED 3/31/96 ENDED 3/31/96 ENDED 3/31/96 3/31/96
- ----------------------------------- ------------- ------------- ------------- ------------- -------
<S> <C> <C> <C> <C> <C>
Alabama Fund ...................... $ 8 $ 20,941 $111,575 $132,516 $ 6,180,746
Arkansas Fund ..................... -- 47,633 241,665 289,298 12,797,880
California Fund ................... 4,819 62,858 479,564 542,422 25,864,991
Florida Fund ...................... 4 36,111 179,736 215,847 10,930,910
Georgia Fund ...................... 1 20,236 102,368 122,604 5,726,082
Maryland Fund ..................... -- 38,119 186,547 224,666 9,023,095
Massachusetts Fund ................ -- 48,834 234,208 283,042 16,244,497
Mississippi Fund .................. 17,464 43,109 182,722 225,831 10,037,301
New York Fund ..................... 186 29,107 225,222 254,329 14,634,501
North Carolina Fund ............... 2,053 112,097 542,002 654,099 35,984,389
Pennsylvania Fund ................. 3 13,598 66,068 79,666 2,559,887
South Carolina Fund ............... 430 53,628 256,423 310,051 14,027,135
Tennessee Fund .................... 4 31,401 144,547 175,948 7,191,545
Virginia Fund ..................... -- 91,953 460,556 552,509 29,719,388
West Virginia Fund ................ 4 56,110 263,988 320,098 16,356,290
</TABLE>
<TABLE>
<CAPTION>
CDSC
IMPOSED ON CLASS A CLASS A CLASS A
REDEMPTION SALES CHARGES SALES CHARGES CLASS A FUND ASSETS
OF CLASS A RECEIVED BY RECEIVED GROSS SALES SOLD
SHARES MFD BY DEALERS(1) CHARGES 12 MONTHS
12 MONTHS 12 MONTHS 12 MONTHS 12 MONTHS ENDED
FUND ENDED 3/31/95 ENDED 3/31/95 ENDED 3/31/95 ENDED 3/31/95 3/31/95
- ----------------------------------- ------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Alabama Fund ...................... $ 4 $29,302 $158,463 $187,765 $ 9,763,525
Arkansas Fund ..................... 2,159 100,116 470,358 570,474 29,001,659
California Fund ................... 15,182 74,444 575,987 650,431 34,477,254
Florida Fund ...................... 4,332 44,219 249,572 293,791 14,166,753
Georgia Fund ...................... 2,683 39,551 209,120 248,671 10,440,522
Maryland Fund ..................... -- 45,665 219,460 265,125 11,534,129
Massachusetts Fund ................ -- 53,182 248,636 301,818 19,252,318
Mississippi Fund .................. 1,770 53,458 257,984 311,442 16,656,129
New York Fund ..................... 6,408 35,466 298,728 334,194 16,810,290
North Carolina Fund ............... 70 137,516 646,626 784,142 39,754,173
Pennsylvania Fund ................. -- 14,379 98,601 112,980 3,547,968
South Carolina Fund ............... 7,826 61,952 306,738 368,690 18,559,628
Tennessee Fund .................... -- 41,320 250,702 292,022 16,571,914
Virginia Fund ..................... -- 128,244 606,377 734,621 33,148,823
West Virginia Fund ................ 457,411 269,466 326,877 13,277,508
</TABLE>
- ----------
(1)Includes dealers, banks and other financial institutions.
<PAGE>
APPENDIX C
AMOUNTS PAID UNDER THE DISTRIBUTION PLAN
FOR THE 12 MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
TOTAL
PAID(3)
UNDER % OF AVG. AMOUNT AMOUNT
DISTRIBUTION DAILY NET PAID AMOUNT PAID RETAINED
FUND PLAN ASSETS TO MFD TO DEALERS(1) BY MFD
- ---------------------------------- --------------- ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Alabama Fund Class A ............. $ 199,904 0.25% $-- $142,329 $57,575
Alabama Fund Class B ............. 68,255 1.00 51,191 12,911 4,153
Arkansas Fund Class A ............ 157,360 0.10 -- 120,762 36,598
Arkansas Fund Class B ............ 65,101 0.84 58,209 4,193 2,699
California Fund Class A .......... -- -- -- -- --
California Fund Class B .......... 296,124 0.83 268,333 27,791 --
California Fund Class C .......... 40,308 1.00 -- 31,882 8,426
Florida Fund Class A ............. -- -- -- -- --
Florida Fund Class B ............. 117,638 0.81 108,642 8,996 --
Georgia Fund Class A ............. 160,929 0.25 -- 141,429 19,500
Georgia Fund Class B ............. 102,425 1.00 76,818 21,481 4,126
Maryland Fund Class A ............ 463,635 0.35 132,048 280,126 51,461
Maryland Fund Class B ............ 155,707 1.00 116,780 34,247 4,680
Massachusetts Fund Class A ....... 852,786 0.35 243,653 436,713 172,420
Massachusetts Fund Class B ....... 138,902 1.00 104,176 32,890 1,836
Mississippi Fund Class A ......... -- -- -- -- --
Mississippi Fund Class B ......... 91,722 0.80 86,249 5,473 --
New York Fund Class A ............ 320,773 0.25 -- 274,451 46,322
New York Fund Class B ............ 274,467 1.00 205,852 60,276 8,339
North Carolina Fund Class A ...... 1,382,786 0.35 395,084 921,284 66,418
North Carolina Fund Class B ...... 361,436 1.00 271,077 84,770 5,589
North Carolina Fund Class C ...... 93,824 1.00 -- 89,191 4,633
Pennsylvania Fund Class A ........ -- -- -- -- --
Pennsylvania Fund Class B ........ 199,947 0.80 188,101 11,846 --
South Carolina Fund Class A ...... 554,405 0.35 158,401 350,391 45,613
South Carolina Fund Class B ...... 202,154 1.00 151,615 45,069 5,470
Tennessee Fund Class A ........... 386,650 0.35 110,472 238,792 37,386
Tennessee Fund Class B ........... 136,253 1.00 102,190 28,228 5,835
Virginia Fund Class A ............ 1,398,269 0.35 398,255 900,939 99,075
Virginia Fund Class B ............ 295,898 1.00 221,924 58,663 15,311
Virginia Fund Class C ............ 35,136 1.00 -- 33,681 1,455
West Virginia Fund Class A ....... 462,774 0.35 132,221 303,500 27,053
West Virginia Fund Class B ....... 133,305 1.00 99,979 30,719 2,607
</TABLE>
- ------------
(1) Includes securities dealers, certain banks and other financial
institutions.
<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
[GRAPHIC OMITTED]
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) MUNICIPAL SERIES TRUST
500 Boylston Street
Boston, MA 02116
MST-13-8/97/525
<PAGE>
[Logo MFS INVESTMENT MANAGEMENT]
Annual Report
for Year Ended
March 31, 1997
MFS(R) Municipal Series Trust
For the States of: Alabama, Arkansas, California, Florida, Georgia, Maryland
and Massachusetts
[GRAPHIC Money]
Learning financial basics the easy way (see page 55)
<PAGE>
Table of Contents
Letter from the Chairman 1
Portfolio Managers' Overview 2
Portfolio Managers' Profiles 2
Performance Summary 3
Fund Facts 4
Portfolio of Investments 12
Financial Statements 25
Notes to Financial Statements 48
Independent Auditors' Report 54
The ABCs of Investing 55
The MFS Family of Funds(R) 56
Trustees and Officers 57
Highlights
[bullet] The municipal bond market experienced significant volatility during
the past 12 months, with yields on high-grade municipals ranging
from a high of almost 6% in June to a low of 5.3% in November,
before ending the year at 5.7%.
[bullet] The diminished concern about tax reform, as well as the improved
fiscal positions of most state and local governments, contributed to
the municipal bond market's strong relative performance.
[bullet] Demand for municipal securities by casualty insurance companies has
been strong, a result of these companies' continued profitability
and desire to reduce taxable income.
[bullet] The Funds are seeking to protect asset values when interest rates
rise by increasing their cash positions. We are also selectively
purchasing higher-yielding credits that, in the opinion of our
research group, have proven to be the best investments in most
markets.
<PAGE>
Letter from the Chairman
[photo of A. Keith Brodkin]
Dear Shareholders:
After more than six years of expansion, the U.S. economy is experiencing
another year of moderate growth in 1997, although a few signs point to the
possibility of a modest rise in inflation during the year. On the positive
side, the pattern of moderate growth and inflation set over the past few
years now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain
on track for some time. Also, gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be
seen in the continuing high levels of consumer debt and rising personal
bankruptcies, as well as in the ongoing tightness in the labor market, which
could add some inflationary pressures to the economy. Given these somewhat
conflicting indicators, we expect real (inflation-adjusted) growth to revolve
around 2% in 1997, with more strength occurring earlier in the year.
In the bond markets, conflicting signals over the strength of the economy
have created near-term volatility, and the Federal Reserve Board has begun
taking measured steps to control inflation by raising short-term interest
rates. Should additional signs of more rapid economic growth and,
particularly, of higher inflation appear, we would expect the Fed to continue
its anti-inflationary stance. While inflationary forces largely remained in
check in 1996, the continued strength in the labor market means that a pickup
in inflation is still possible. At the same time, the U.S. budget deficit
continues to decline and, as a percentage of gross domestic product, is now
less than 2%, which we consider a positive development for the bond markets.
Although interest rates may move higher over the coming months, we believe
that, at current levels, fixed-income markets remain equitably valued.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
April 14, 1997
1
<PAGE>
7
Portfolio Managers' Overview
Dear Shareholders:
The municipal bond market experienced significant volatility during the
fiscal year ended March 31, 1997. High-grade municipal yields ranged from a
high of almost 6% in June to a low of 5.3% in November, before ending the
year at 5.7%. Municipals outperformed U.S. Treasuries during the period, as
yields on 30-year Treasury bonds rose approximately 50 basis points (0.50%)
to 7.1% (although principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity).
The primary reason for the strong relative performance of municipals was
the diminished concern about tax reform and its potential impact on the
market. This caused the ratio of municipal to Treasury yields to drop from a
fiscal-year high of approximately 85% last April to 82.5% by early May. This
relationship, like absolute yields, ranged widely during the fiscal year.
Generally, we witnessed strong demand for municipals and good relative
performance when yields rose, and underperformance by municipals when yields
declined. This trend was most visible during the fall of 1996, when the ratio
reached almost 80% and Treasury yields were close to their fiscal-year high
of 7.15%. The government market then rallied sharply, as a number of
statistics indicated a slowing economy. Municipals lagged, and the yield
ratio moved to over 84%, with yields on Treasuries dropping to 6.35%. The
ratio ended the fiscal year at about 80%.
During the year, demand for municipal securities by casualty insurance
companies was strong owing to these companies' continued profitability and
desire to reduce taxable income. Individual investors were also major buyers
when yields increased. During this period, mutual funds had generally flat
cash flows, as the equity market captivated the interest of most fund
investors. The supply of new municipal issues was essentially unchanged over
the period, while the redemption of older issues continued to run relatively
high. These factors helped create favorable supply/demand conditions for
municipals during the year.
Credit quality in the municipal market has generally continued its
improving trend, with most state and local budgets in very good shape. Health
care providers and utilities have come under pressure in particular markets,
while most corporate-backed industrial revenue bonds have done well. Unlike
some previous years, there has been no major credit event to impact the
market. This factor, combined with the increase in the issuance of insured
bonds from 43% of the market in 1995 to 47% currently, has caused yield
spreads for quality issues to continue narrowing, while lower-quality bonds
have outperformed.
Last year, our strategy was to remain fully invested and reduce interest
rate exposure by hedging in the futures market. This was effective when the
market sold off but, in many cases, the positive impact was more than offset
when the market rallied. This year, we are seeking to protect asset values
when rates rise by increasing our cash positions. Finally, we believe that
bond insurers will continue to grow market share and that credit spreads will
remain tight. In light of this expectation, we are selectively purchasing
higher-yielding credits recommended by our research group.
Respectfully,
/s/ David R. King and David B. Smith
David R. King and David B. Smith
Portfolio Managers
Portfolio Managers' Profiles
David R. 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 and Vice President - Investments in 1988. Mr. King is a
Chartered Financial Analyst (C.F.A.) and currently has portfolio management
responsibilities for the Alabama, Arkansas, Florida, and Maryland state
Funds.
David B. 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, Georgia, and Massachusetts state Funds.
2
<PAGE>
Performance Summary
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 Brothers Municipal Bond Index (the Lehman Index), an unmanaged index
of municipal bond investments rated "Baa" or higher. However, while 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.
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.
Alabama
For the fiscal year ended March 31, 1997 the Fund provided a total return of
5.82% for Class A shares and 4.98% for Class B shares. These returns assume
the reinvestment of dividends and capital gains but exclude the effects of
any sales charges. The average Alabama fund returned 5.28%, according to
Lipper Analytical Services, an independent firm that reports mutual fund
performance, while the Lehman Index returned 5.45% over the same period. The
Fund benefited from its holdings of higher-yielding bonds relative to its
competitors.
Arkansas
For the fiscal year ended March 31, 1997 the Fund's Class A shares provided a
total return of 4.87%, while Class B shares returned 4.05%. These returns
assume the reinvestment of dividends and capital gains but exclude the
effects of any sales charges. These figures compare to a 5.04% return for the
average index for other states, according to Lipper Analytical Services, and
to a 5.45% return for the Lehman Index over the same period. Many
higher-yielding bonds performed well, while some shorter-maturity,
pre-refunded bonds underperformed.
California
The Fund's total returns for the fiscal year ended March 31, 1997 were 4.55%
for Class A shares, 3.64% for Class B shares, and 3.51% for Class C shares.
These returns assume the reinvestment of dividends and capital gains but
exclude the effects of any sales charges. These figures compare to a 5.23%
return for the average California fund, according to Lipper Analytical
Services, and to a 5.45% return for the Lehman Index over the same period.
The Fund's high average credit quality and longer-maturity bonds were a
disadvantage to its performance during the first three fiscal quarters
because lower-quality and shorter-maturity bonds outperformed during this
period. Our strategy of hedging the Fund's longer-maturity bonds augmented
performance through September 1996, but the severe underperformance of the
municipal market at the end of October caused this move to backfire. In
November, we shifted gears by unwinding the Fund's hedges, and in December we
shortened durations by moving our holdings into shorter-maturity bonds and
increasing our cash position. We are also looking to augment the Fund's
performance by increasing its holdings of lower-rated, investment-grade bonds
at appropriate yield spreads. This strategy has allowed the Fund to
outperform during the period's last fiscal quarter.
Florida
The Fund provided a total return of 3.43% for Class A shares and 2.56% for
Class B shares for the fiscal year ended March 31, 1997. These returns assume
the reinvestment of dividends and capital gains but exclude the effects of
any sales charges. These figures compare to a 4.79% return for the average
Florida fund, according to Lipper Analytical Services, and to a 5.45% return
for the Lehman Index over the same period. The underperformance was primarily
attributable to the defensive posture taken during the fourth quarter, when
interest rates declined dramatically.
Georgia
The Fund's total returns for the fiscal year ended March 31, 1997 were 4.47%
for Class A shares and 3.63% for Class B shares. These returns assume the
reinvestment of dividends and capital gains but exclude the effects of any
sales charges. These figures compare to a 4.89% return for the average
Georgia fund, according to Lipper Analytical Services, and to a 5.45% return
for the Lehman Index over the same period. We maintained the Fund's holdings
of high-quality, longer-maturity bonds during the fiscal year, hedging its
interest rate exposure during times of volatility. This strategy caused the
Fund to underperform holdings of lower-quality, shorter-maturity bonds. In
November, we shifted gears by unwinding the Fund's hedges, and in December we
shortened duration by moving our holdings into shorter-maturity bonds. We are
also looking to augment the Fund's performance by increasing its holdings of
lower-rated, investment-grade bonds at appropriate yield spreads. This
strategy has allowed the Fund to outperform during the period's last fiscal
quarter.
Maryland
For the fiscal year ended March 31, 1997 the Fund's Class A shares provided a
total return of 3.75%, and its Class B shares returned 3.03%. These returns
assume the reinvestment of dividends and capital gains but exclude the
effects of any sales charges. These figures compare to a 4.54% return for the
average Maryland fund, according to Lipper Analytical Services, and to a
5.45% return for the Lehman Index over the same period. The underperformance
was primarily attributable to the defensive posture taken during the fourth
quarter, when interest rates declined dramatically.
3
<PAGE>
Performance Summary -- continued
Massachusetts
The Fund's total returns for the fiscal year ended March 31, 1997 were 4.39%
for Class A shares and 3.66% for Class B shares. These figures compare to a
5.12% return for the average Massachusetts fund, according to Lipper
Analytical Services, and to a 5.45% return for the Lehman Index over the same
period. These returns assume the reinvestment of dividends and capital gains
but exclude the effects of any sales charges. We maintained the Fund's
holdings of high-quality, longer-maturity bonds during the fiscal year,
hedging its interest rate exposure during times of volatility. This strategy
caused the Fund to underperform holdings of lower-quality, shorter-maturity
bonds. In November, we shifted gears by unwinding the Fund's hedges, and in
December we reduced its holdings of short-dated pre-refunded bonds and
increased its cash position. We are also looking to augment the Fund's
performance by increasing its holdings of lower-rated, investment-grade bonds
at appropriate yield spreads. This strategy has allowed the Fund to improve
its relative performance during the period's last fiscal quarter.
Fund Facts
<TABLE>
<CAPTION>
Strategy: 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.
Commencement of investment operations:
<S> <C> <C> <C> <C> <C>
Alabama Class A: February 1, 1990 Georgia Class A: June 6, 1988
Class B: September 7, 1993 Class B: September 7, 1993
Arkansas Class A: February 3, 1992 Maryland Class A: October 31, 1984
Class B: September 7, 1993 Class B: September 7, 1993
California Class A: June 18, 1985 Massachusetts Class A: April 9, 1985
Class B: September 7, 1993 Class B: September 7, 1993
Class C: January 3, 1994
Florida Class A: February 3, 1992
Class B: September 7, 1993
</TABLE>
Net assets as of March 31, 1997
Alabama: $ 84.2 million
Arkansas: $151.8 million
California: $273.2 million
Florida: $ 95.0 million
Georgia: $ 69.8 million
Maryland: $143.8 million
Massachusetts: $250.1 million
Tax Form Summary
In January 1997, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1996.
Federal Income Tax Information on Distributions
The MFS Alabama Municipal Bond Fund has designated $694,193 as a long-term
capital gain.
Exempt-Interest Dividends
For federal income tax purposes, approximately 98.9% of the total dividends
paid by each Fund from net investment income during the year ended March
31, 1997, is designated as an exempt-interest dividend.
4
<PAGE>
Performance Summary -- continued
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. The performance of other share 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. It is
not possible to invest in an index.
MFS(R) ALABAMA MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from February 1,
1990 through March 31, 1997)
[3 Line Graph]
MFS Alabama Lehman Brothers
Municipal Bond Consumer Price Municipal
Fund - Class A Index -- U.S. Bond Index
2/1/90 9525 10000 10000
3/29/91 10289 10597 11023
3/31/93 12849 11272 13643
3/31/95 14080 11884 14996
3/31/97 15978 12564 17140
Average Annual Total Returns
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years Life of Fund++
-------------------------------------------------------------------------- -------- --------- --------- ----------------
<S> <C> <C> <C> <C>
MFS Alabama Municipal Bond Fund (Class A) including 4.75% sales charge +0.83% +4.78% +6.05% +6.76%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
MFS Alabama Municipal Bond Fund (Class A) at net asset value +5.82% +6.49% +7.08% +7.48%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
MFS Alabama Municipal Bond Fund (Class B) with CDSC +0.99% +4.72% +6.15% +7.04%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
MFS Alabama Municipal Bond Fund (Class B) at net asset value +4.98% +5.62% +6.46% +7.04%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
Average Alabama tax-exempt municipal bond fund** +5.28% +6.05% +7.08% +7.06%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +7.17% +7.81%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
Consumer Price Index* +2.91% +2.83% +2.82% +3.24%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
</TABLE>
++For the period from the commencement of the Fund's investment operations,
February 1, 1990, to March 31, 1997.
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
Class B share results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods prior to the
commencement of offering of Class B shares. Because operating expenses
attributable to Class A shares are lower than those of Class B shares, Class
B share performance generally would have been lower than Class A share
performance. The Class A share performance included within the Class B share
performance with CDSC has been adjusted to reflect the CDSC generally
applicable to Class B shares rather than the sales charge generally
applicable to Class A shares.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
5
<PAGE>
Performance Summary - continued
MFS(R) ARKANSAS MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from March 1,
1992 through March 31, 1997)
[3 Line Graph]
MFS Arkansas Lehman Brothers
Municipal Bond Consumer Price Municipal
Fund - Class A Index -- U.S. Bond Index
3/92 9525 10000 10000
3/93 10792 10398 11260
3095 11611 10963 12377
3/97 12956 11549 14142
Average Annual Total Returns
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years Life of Fund++
--------------------------------------------------------------------------- -------- --------- --------- ----------------
<S> <C> <C> <C> <C>
MFS Arkansas Municipal Bond Fund (Class A) including 4.75% sales charge -0.15% +3.96% +5.30% +5.11%
--------------------------------------------------------------------------- -------- --------- --------- ----------------
MFS Arkansas Municipal Bond Fund (Class A) at net asset value +4.78% +5.65% +6.33% +6.10%
--------------------------------------------------------------------------- -------- --------- --------- ----------------
MFS Arkansas Municipal Bond Fund (Class B) with CDSC+++ +0.06% +3.79% +5.30% +5.27%
--------------------------------------------------------------------------- -------- --------- --------- ----------------
MFS Arkansas Municipal Bond Fund (Class B) at net asset value +4.05% +4.71% +5.63% +5.42%
--------------------------------------------------------------------------- -------- --------- --------- ----------------
Average other state tax-exempt municipal bond fund** +5.04% +5.95% +6.31% +6.09%
--------------------------------------------------------------------------- -------- --------- --------- ----------------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +7.17% +6.96%
--------------------------------------------------------------------------- -------- --------- --------- ----------------
Consumer Price Index* +2.91% +2.83% +2.82% +2.90%
--------------------------------------------------------------------------- -------- --------- --------- ----------------
</TABLE>
++For the period from the commencement of the Fund's investment operations,
February 3, 1992 to March 31, 1997.
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
+++These returns reflect the current maximum Class B contingent deferred
sales charge (CDSC) of 2%.
Class B share results with CDSC include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods
prior to the commencement of offering of Class B shares. Because operating
expenses attributable to Class A shares are lower than those of Class B
shares, Class B share performance generally would have been lower than Class
A share performance. The Class A share performance included within the Class
B share performance with CDSC, has been adjusted to reflect the CDSC
generally applicable to Class B shares rather than the sales charge generally
applicable to Class A shares.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
6
<PAGE>
Performance Summary - continued
MFS(R) CALIFORNIA MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the 5-year period ended
March 31, 1997)
[3 Line Graph]
MFS California Lehman Brothers
Municipal Bond Consumer Price Municipal
Fund - Class A Index -- U.S. Bond Index
3/92 9523 10000 10000
3/93 10852 10309 11252
3/94 10994 10567 11513
3/95 11527 10869 12369
3/96 12433 11165 13406
3/97 12999 11491 14137
Growth of a Hypothetical $10,000 Investment (For the 10-year period ended
March 31, 1997)
[3 Line Graph]
MFS California Lehman Brothers
Municipal Bond Consumer Price Municipal
Fund - Class A Index -- U.S. Bond Index
3/31/87 9532 10000 10000
3/31/89 10252 10904 10989
3/29/91 12150 12036 13270
3/31/93 15302 12803 16424
3/31/95 16253 13498 18053
3/31/97 18328 14272 20634
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 -0.49% +4.06% +5.39% +6.24%
- ------------------------------------------------------------------------------ -------- --------- --------- -----------
MFS California Municipal Bond Fund (Class A) at net asset value +4.55% +5.74% +6.42% +6.76%
- ------------------------------------------------------------------------------ -------- --------- --------- -----------
MFS California Municipal Bond Fund (Class B) with CDSC -0.32% +3.84% +5.37% +6.39%
- ------------------------------------------------------------------------------ -------- --------- --------- -----------
MFS California Municipal Bond Fund (Class B) at net asset value +3.64% +4.76% +5.69% +6.39%
- ------------------------------------------------------------------------------ -------- --------- --------- -----------
MFS California Municipal Bond Fund (Class C) with CDSC++ +2.52% +4.68% +5.73% +6.41%
- ------------------------------------------------------------------------------ -------- --------- --------- -----------
MFS California Municipal Bond Fund (Class C) at net asset value +3.51% +4.68% +5.73% +6.41%
- ------------------------------------------------------------------------------ -------- --------- --------- -----------
Average California tax-exempt municipal bond fund** +5.23% +6.21% +6.61% +6.56%
- ------------------------------------------------------------------------------ -------- --------- --------- -----------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +7.17% +7.51%
- ------------------------------------------------------------------------------ -------- --------- --------- -----------
Consumer Price Index* +2.91% +2.83% +2.82% +3.62%
- ------------------------------------------------------------------------------ -------- --------- --------- -----------
</TABLE>
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
++Class C shares have no initial sales charge but will be subject to a 1%
CDSC if redeemed within 12 months of purchase.
Class B and Class C share results include the performance and operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods
prior to the commencement of offering of Class B shares and Class C shares.
Because operating expenses attributable to Class B and Class C shares are
higher than those of Class A shares, Class B and Class C share performance
generally would have been lower than Class A share performance. These results
represent the percentage change in net asset value. Returns would have been
lower had sales charges been reflected.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
7
<PAGE>
Performance Summary - continued
MFS(R) FLORIDA MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from March 1,
1992 through March 31, 1997)
[3 Line Graph]
MFS Florida Lehman Brothers
Municipal Bond Consumer Price Municipal
Fund - Class A Index -- U.S. Bond Index
3/92 9525 10000 10000
3/93 10855 10398 11260
3/95 11701 10963 12377
3/97 13087 11549 14142
Average Annual Total Returns
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years Life of Fund++
-------------------------------------------------------------------------- -------- --------- --------- ----------------
<S> <C> <C> <C> <C>
MFS Florida Municipal Bond Fund (Class A) including 4.75% sales charge -1.49% +4.06% +5.55% +5.29%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
MFS Florida Municipal Bond Fund (Class A) at net asset value +3.43% +5.75% +6.58% +6.29%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
MFS Florida Municipal Bond Fund (Class B) with CDSC+++ -1.37% +3.90% +5.53% +5.43%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
MFS Florida Municipal Bond Fund (Class B) at net asset value +2.56% +4.81% +5.85% +5.59%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
Average Florida tax-exempt municipal bond fund** +4.79% +6.35% +6.79% +6.09%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +7.17% +6.96%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
Consumer Price Index* +2.91% +2.83% +2.82% +2.90%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
</TABLE>
++For the period from the commencement of the Fund's investment operations,
February 3, 1992, to March 31, 1997.
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
+++These returns reflect the current maximum Class B contingent deferred
sales charge (CDSC) of 2%.
Class B share results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods prior to the
commencement of offering of Class B shares. Because operating expenses
attributable to Class A shares are lower than those of Class B shares, Class
B share performance generally would have been lower than Class A share
performance. The Class A share performance included within the Class B share
SEC performance has been adjusted to reflect the CDSC generally applicable to
Class B shares rather than the sales charge generally applicable to Class A
shares.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
8
<PAGE>
Performance Summary - continued
MFS(R) GEORGIA MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the period from July 1, 1988
through March 31, 1997)
[3 Line Graph]
MFS Georgia Lehman Brothers
Municipal Bond Consumer Price Municipal
Fund - Class A Index -- U.S. Bond Index
7/88 9525 10000 10000
3/90 10838 10953 11798
3/92 12888 11855 14173
3/95 15580 12885 17530
3/97 17348 13565 19748
Average Annual Total Returns
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years Life of Fund++
-------------------------------------------------------------------------- -------- --------- --------- ----------------
<S> <C> <C> <C> <C>
MFS Georgia Municipal Bond Fund (Class A) including 4.75% sales charge -0.47% +3.83% +5.08% +6.43%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
MFS Georgia Municipal Bond Fund (Class A) at net asset value +4.47% +5.53% +6.10% +7.02%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
MFS Georgia Municipal Bond Fund (Class B) with CDSC -0.33% +3.75% +5.16% +6.67%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
MFS Georgia Municipal Bond Fund (Class B) at net asset value +3.63% +4.68% +5.48% +6.67%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
Average Georgia tax-exempt municipal bond fund** +4.89% +6.16% +6.38% +6.62%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +7.17% +8.20%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
Consumer Price Index* +2.91% +2.83% +2.82% +3.57%
-------------------------------------------------------------------------- -------- --------- --------- ----------------
</TABLE>
++For the period from the commencement of the Fund's investment operations,
June 6, 1988, to March 31, 1997.
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
Class B share results with CDSC include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods
prior to the commencement of offering of Class B shares. Because operating
expenses attributable to Class A shares are lower than those of Class B
shares, Class B share performance generally would have been lower than Class
A share performance. The Class A share performance included within the Class
B share SEC performance has been adjusted to reflect the CDSC generally
applicable to Class B shares rather than the sales charge generally
applicable to Class A shares.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
9
<PAGE>
Performance Summary - continued
MFS(R) MARYLAND MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the 5-year period ended
March 31, 1997)
[3 Line Graph]
MFS Maryland Lehman Brothers
Municipal Bond Consumer Price Municipal
Fund - Class A Index -- U.S. Bond Index
3/31/92 9528 10000 10000
3/31/93 10537 10309 11252
3/31/94 10576 10567 11513
3/31/95 11264 10869 12369
3/29/96 11960 11165 13406
3/31/97 12408 11491 14137
Growth of a Hypothetical $10,000 Investment (For the 10-year period ended
March 31, 1997)
[3 Line Graph]
MFS Maryland Lehman Brothers
Municipal Bond Consumer Price Municipal
Fund - Class A Index -- U.S. Bond Index
3/31/87 9528 10000 10000
3/31/89 10369 10904 13270
3/29/91 12218 12036 13270
3/31/93 14667 12803 16424
3/31/95 15680 13498 18063
3/31/97 17271 14272 20634
Average Annual Total Returns
<TABLE>
<CAPTION>
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 -1.17% +3.78% +4.40% +5.61%
--------------------------------------------------------------------------- -------- --------- --------- -----------
MFS Maryland Municipal Bond Fund (Class A) at net asset value +3.75% +5.47% +5.42% +6.13%
--------------------------------------------------------------------------- -------- --------- --------- -----------
MFS Maryland Municipal Bond Fund (Class B) with CDSC -0.92% +3.80% +4.54% +5.85%
--------------------------------------------------------------------------- -------- --------- --------- -----------
MFS Maryland Municipal Bond Fund (Class B) at net asset value +3.03% +4.72% +4.87% +5.85%
--------------------------------------------------------------------------- -------- --------- --------- -----------
Average Maryland tax-exempt municipal bond fund** +4.54% +5.98% +6.45% +6.27%
--------------------------------------------------------------------------- -------- --------- --------- -----------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +7.17% +7.51%
--------------------------------------------------------------------------- -------- --------- --------- -----------
Consumer Price Index* +2.91% +2.83% +2.82% +3.62%
--------------------------------------------------------------------------- -------- --------- --------- -----------
</TABLE>
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
Class B share results with CDSC include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods
prior to the commencement of offering of Class B shares. Because operating
expenses attributable to Class A shares are lower than those of Class B
shares, Class B share performance generally would have been lower than Class
A share performance. The Class A share performance included within the Class
B share performance with CDSC has been adjusted to reflect the CDSC generally
applicable to Class B shares rather than the sales charge generally
applicable to Class A shares.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
10
<PAGE>
Performance Summary - continued
MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND
Growth of a Hypothetical $10,000 Investment (For the 5-year period ended
March 31, 1997)
[3 Line Graph]
MFS Massachusetts Lehman Brothers
Municipal Bond Consumer Price Municipal
Fund - Class A Index -- U.S. Bond Index
3/31/92 9522 10000 10000
3/31/93 10702 10309 11252
3/31/94 10875 10869 12369
3/31/95 11515 10869 12369
3/29/96 12315 11165 13406
3/31/97 12856 11491 14137
Growth of a Hypothetical $10,000 Investment (For the 10-year period ended
March 31, 1997)
[3 Line Graph]
MFS Massachusetts Lehman Brothers
Municipal Bond Consumer Price Municipal
Fund - Class A Index -- U.S. Bond Index
3/31/87 9523 10000 10000
3/31/89 10243 10904 10989
3/29/91 11984 12036 13270
3/31/93 14824 12803 16424
3/31/95 15950 13498 18053
3/31/97 17808 14272 20634
Average Annual Total Returns
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------- -------- --------- --------- -----------
<S> <C> <C> <C> <C>
MFS Massachusetts Municipal Bond Fund (Class A) including 4.75% sales charge -0.58% +4.05% +5.16% +5.94%
- --------------------------------------------------------------------------------- -------- --------- --------- -----------
MFS Massachusetts Municipal Bond Fund (Class A) at net asset value +4.39% +5.74% +6.19% +6.46%
- --------------------------------------------------------------------------------- -------- --------- --------- -----------
MFS Massachusetts Municipal Bond Fund (Class B) with CDSC -0.30% +4.10% +5.35% +6.20%
- --------------------------------------------------------------------------------- -------- --------- --------- -----------
MFS Massachusetts Municipal Bond Fund (Class B) at net asset value +3.66% +5.02% +5.67% +6.20%
- --------------------------------------------------------------------------------- -------- --------- --------- -----------
Average Massachusetts tax-exempt municipal bond fund** +5.12% +6.21% +6.73% +6.60%
- --------------------------------------------------------------------------------- -------- --------- --------- -----------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +7.17% +7.51%
- --------------------------------------------------------------------------------- -------- --------- --------- -----------
Consumer Price Index* +2.91% +2.83% +2.82% +3.62%
- --------------------------------------------------------------------------------- -------- --------- --------- -----------
</TABLE>
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
Class B share results with CDSC include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods
prior to the commencement of offering of Class B shares. Because operating
expenses attributable to Class A shares are lower than those of Class B
shares, Class B share performance generally would have been lower than Class
A share performance. The Class A share performance included within the Class
B share performance with CDSC has been adjusted to reflect the CDSC generally
applicable to Class B shares rather than the sales charge generally
applicable to Class A shares.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
11
<PAGE>
Portfolio of Investments - March 31, 1997
MFS ALABAMA MUNICIPAL BOND FUND
Municipal Bonds - 96.8%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
General Obligation - 11.2%
Birmingham, AL, 8s, 2015 $1,150 $ 1,188,537
Hoover, AL, AMBAC, 5s, 2020 1,120 999,118
Huntsville, AL, 5.5s, 2020 1,500 1,415,985
Shelby County, AL, 7.4s, 2007 1,000 1,095,510
Shelby County, AL, 7.7s, 2017 800 875,376
Shelby County, AL, MBIA, 0s, 2011 3,000 1,244,280
State of Alabama, 0s, 2004 2,500 1,700,350
State of Alabama, 0s, 2006 1,165 683,249
State of Alabama, 7.1s, 2010### 250 270,290
-----------
$ 9,472,695
- -------------------------------------------------------------------------------
State and Local Appropriation - 4.4%
Alabama Building Renovation Finance Authority
Rev. (Fitch Light), 7.45s, 2011 $1,500 $ 1,640,175
Montgomery County, AL, Department of Human
Resources Rev., 7s, 2007 1,000 1,083,100
Puerto Rico Public Buildings Authority,
Education & Health, 5.6s, 2008 500 508,940
Puerto Rico Public Buildings Authority,
Education & Health, 5.5s, 2021 500 473,705
-----------
$ 3,705,920
- -------------------------------------------------------------------------------
Refunded and Special Obligations - 14.1%
Alabama Mental Health Finance Authority,
7.375s, 1999 $ 250 $ 268,235
Alexander City, AL, 0s, 2001 1,000 333,390
Alexander City, AL, 0s, 2001 1,000 310,030
Alexander City, AL, 0s, 2001 1,250 360,375
Baldwin County, AL, Eastern Shore Health Care
Authority (Thomas), 8.5s, 2001 1,000 1,146,430
Birmingham, AL, 7.4s, 1999 1,000 1,072,430
Birmingham, AL, Historical Preservation
Authority Rev. (Kelly Ingram/Civil Rights),
7.2s, 2001 1,000 1,098,030
Birmingham, AL, Public Parks & Recreation
Board Rev. (Legion Park), 7.25s, 1999 400 430,952
Birmingham, AL, Waterworks & Sewer Board Rev.,
7.2s, 2000 500 540,180
Gadsden East, AL, Medical Clinic Board Rev.
(Baptist Hospital), 7.8s, 2001 2,000 2,273,380
Hoover, AL, Board of Education, AMBAC, 6.625s,
2001 1,000 1,080,440
Morgan County-Decatur, AL, Hospital Board
Rev., 7.875s, 1999 750 809,872
Puerto Rico Highway & Transportation
Authority, 6.5s, 2002 1,000 1,093,000
University of Alabama, University Housing
Rev., MBIA, 7.1s, 2001 1,000 1,102,950
-----------
$11,919,694
- -------------------------------------------------------------------------------
Airport and Port Revenue - 5.6%
Alabama Docks Department, Docks Facilities
Rev., BIGI, 7.6s, 2012 $1,600 $ 1,692,944
Birmingham, AL, Airport Rev., AMBAC, 5.25s,
2020 1,000 913,460
Mobile, AL, Airport Authority Rev., 7.375s,
2012 1,000 1,055,490
Mobile, AL, Airport Authority Rev., 8.875s,
2015 1,000 1,082,180
-----------
$ 4,744,074
- -------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 3.4%
DeKalb & Cherokee County, AL, Gas Rev., AMBAC,
5.4s, 2016 $2,000 $ 1,899,620
Puerto Rico Telephone Authority Rev., AMBAC,
5.43s, 2004++++ 1,000 965,840
-----------
$ 2,865,460
- -------------------------------------------------------------------------------
Health Care Revenue - 6.9%
Baldwin County, AL, Eastern Shore Health Care
(Thomas Hospital), 6.75s, 2015 $1,000 $ 1,025,610
Birmingham, AL, Special Care Facilities
(Daughters of Charity-St. Vincents), 5.25s,
2015 1,000 926,810
Cullman, AL, Medical Park South Clinic, "A",
6.5s, 2023 1,000 998,610
Montgomery, AL, Medical Clinic Board Rev.
(Jackson Hospital & Clinic), 7s, 2015 695 748,119
Montgomery, AL, Medical Clinic Board Rev.
(Jackson Hospital & Clinic), 7s, 2015 2,030 2,105,394
-----------
$ 5,804,543
- -------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 9.8%
Butler, AL, Industrial Development Board,
Solid Waste Rev. (James River Corp.), 8s,
2028 $1,000 $ 1,117,060
Camden, AL, Industrial Development Board
Pollution Control Rev.
(Macmillian Bloedel), 7.75s, 2009 500 534,355
Courtland, AL, Industrial Development Board
Solid Waste Disposal Rev. (Champion
International Corp.), 5.9s, 2017 1,000 961,220
Courtland, AL, Industrial Development Board
Solid Waste Disposal Rev. (Champion
International Corp.), 7.75s, 2020 1,485 1,574,516
Mobile, AL, Industrial Development Board, Dock
& Wharf Rev. (Ideal Basic Industries Inc.),
6.75s, 2004 270 270,931
Mobile, AL, Industrial Development Board, Dock
& Wharf Rev. (Ideal Basic Industries Inc.),
6.875s, 2009 1,075 1,079,139
Piedmont, AL, Industrial Development Board
Rev. (Springs Industries Project),
8.25s, 2010 1,000 1,080,230
Tarrant City, AL, Industrial Development Board
Rev. (Vulcan Materials Co.), 7.5s, 2011 1,500 1,626,165
-----------
$ 8,243,616
- -------------------------------------------------------------------------------
Insured Health Care Revenue - 6.6%
Alabama Special Care Facilities Financing
Authority (Daughters of Charity), AMBAC, 5s,
2025 $1,500 $ 1,307,085
Huntsville, AL, Health Care Facilities Rev.,
MBIA, 6.375s, 2022 850 884,425
Lauderdale County & Florence, AL (Eliza Coffee
Memorial Hospital), MBIA, 5.75s, 2014 1,000 985,740
Montgomery, AL, Medical Clinic Board Rev.
(Jackson Hospital & Clinic), AMBAC, 5.875s,
2016 1,000 1,000,680
University of Alabama, Hospital Rev.
(Birmingham), MBIA, 5s, 2014 1,500 1,365,765
-----------
$ 5,543,695
- -------------------------------------------------------------------------------
12-AL
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------
Multi-Family Housing Revenue - 2.2%
Alabama Housing Finance Authority,
Multi-Family Residential Development Rev.
(St. Jude), FHA, 7.25s, 2023 $1,405 $ 1,482,626
Puerto Rico Housing Finance Corp.,
Multi-Family Mortgage Rev., 7.5s, 2015 355 371,160
-----------
$ 1,853,786
- -------------------------------------------------------------------------------
Single Family Housing Revenue - 5.4%
Alabama Housing Finance Authority, Single
Collateral Home Mortgage Program, 5.7s, 2015 $1,700 $ 1,676,608
Alabama Housing Finance Authority, Single
Family Mortgage Rev., 6.55s, 2014 985 1,026,025
Alabama Housing Finance Authority, Single
Family Mortgage Rev., GNMA, 7.4s, 2022 705 716,569
Alabama Housing Finance Authority, Single
Family Mortgage Rev., GNMA, 7.5s, 2022 470 486,220
Alabama Housing Finance Authority, Single
Family Mortgage Rev., GNMA, 7.6s, 2022 150 158,412
Alabama Housing Finance Authority, Single
Family Mortgage Rev., GNMA, 7.75s, 2022 390 403,662
Alabama Housing Finance Authority, Single
Family Mortgage Rev., GNMA, 7.9s, 2022 40 41,402
-----------
$ 4,508,898
- -------------------------------------------------------------------------------
Universities - 6.8%
Alabama Agriculture & Mechanics University,
MBIA, 5.75s, 2013### $ 500 $ 499,345
Alabama Agriculture & Mechanics University,
MBIA, 5.5s, 2020 2,545 2,434,776
Alabama Board of Education Rev. (Shelton State
Community College), MBIA, 6s, 2014 1,000 1,025,670
Homewood, AL, Educational Building Authority,
Educational Facilities Rev. (Samford
University), 6.5s, 2016 1,000 1,038,420
University of Southern Alabama, Tuition Rev.,
AMBAC, 5s, 2015 775 703,134
-----------
$ 5,701,345
- -------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 17.5%
Alabama Water Pollution Control Authority,
7.75s, 2012 $ 920 $ 968,125
Alabama Water Pollution Control Authority,
Revolving Fund Loan, AMBAC, 5.5s, 2020 1,500 1,431,585
Arab, AL, Waterworks Board, Water Rev., MBIA,
7.05s, 2016 1,000 1,083,100
Bessemer, AL, Water Rev., AMBAC, 5.75s, 2026 1,000 983,340
Birmingham, AL, Waterworks & Sewer Board Rev.,
5.375s, 2020 2,000 1,843,080
Fairview, AL, Water Rev. (East Cullman),
AMBAC, 8s, 2020 1,000 1,067,240
Jefferson County, AL, Sewer Rev., FGIC,
5.375s, 2027 2,190 2,029,473
Limestone County, AL, Water Authority Rev.,
FGIC, 7.7s, 2019 900 947,133
Limestone County, AL, Water Authority Rev.,
FGIC, 5.5s, 2026 2,650 2,516,573
Madison, AL, Water & Waste Board, MBIA, 5.5s,
2019 1,000 955,030
Orange Beach, AL, Water & Sewer Rev., AMBAC,
5.4s, 2020 1,000 942,040
-----------
$14,766,719
- -------------------------------------------------------------------------------
Miscellaneous Revenue - 2.9%
Birmingham, AL, Downtown Redevelopment
Authority, Social Security Administration
Building Rev., 0s, 2010 $2,435 $ 2,406,243
- -------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $77,526,506) $81,536,688
- -------------------------------------------------------------------------------
Floating Rate Demand Notes - 1.9%
Lincoln County, WY, Pollution Control Rev.,
(Exxon), due 11/01/14 $ 300 $ 300,000
Unita County, WY, Pollution Control Rev.
(Chevron), due 8/15/20 1,300 1,300,000
- -------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Identified Cost $ 1,600,000
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $79,126,506) $83,136,688
Other Assets, Less Liabilities - 1.3% 1,072,500
- -------------------------------------------------------------------------------
Net Assets - 100.0% $84,209,188
- -------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
Portfolio of Investments - March 31, 1997
MFS ARKANSAS MUNICIPAL BOND FUND
Municipal Bonds - 98.2%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
General Obligation - 2.9%
Arkansas College Savings, "A", 0s, 2009 $1,146 $ 593,788
Arkansas College Savings, "A", 0s, 2015 2,575 914,872
Arkansas College Savings, "B", 0s, 2012 1,200 517,152
Arkansas College Savings, "B", 0s, 2013 1,000 404,500
Arkansas College Savings, "B", 0s, 2014 1,150 436,172
Arkansas College Savings, "B", 0s, 2015 1,600 568,464
Mississippi County, AR, Community College
District, AMBAC, 6s, 2018 1,000 1,027,060
----------
$4,462,008
- -------------------------------------------------------------------------------
State and Local Appropriation - 4.4%
Arkansas Development Finance Authority,
Correctional Facilities Rev., MBIA, 7.125s,
2010 $2,000 $2,181,360
Arkansas Development Finance Authority, Local
Government Rev., 7.1s, 2008 2,440 2,621,268
Puerto Rico Public Buildings Authority, Public
Education & Health Rev., 6.45s, 2016++++ ss 2,000 1,874,880
----------
$6,677,508
- -------------------------------------------------------------------------------
Refunded and Special Obligations - 15.8%
Arkansas Development Finance Authority, Water
& Sewer Rev., MBIA, 7s, 2001 $2,900 $3,169,642
Arkansas Development Finance Authority, Water
& Sewer Rev., MBIA, 6.4s, 2002 2,000 2,157,400
Arkansas Housing Development Agency, Single
Family Mortgage Rev., ETM, 8.375s, 2010 800 944,096
Arkansas Housing Development Agency, Single
Family Mortgage Rev., ETM, 8.375s, 2011 1,000 1,234,850
Arkansas Waste Disposal & Pollution Control
Rev., 6.25s, 2002 4,000 4,260,000
Arkansas Water Resources Development
Authority, 6.375s, 2002### 1,000 1,046,990
Beaver, AR, Water District, Benton &
Washington Counties, Water Rev., 6.625s,
1999 500 534,435
Beaver, AR, Water District, Benton &
Washington Counties, Water Rev., 6.75s, 1999 1,750 1,875,860
Harrison, AR, Residential Housing Facilities
Board, Single Family Mortgage Rev., FGIC,
ETM, 7.4s, 2011 4,000 4,614,040
Sherwood, AR, Residential Housing Facilities
Board, Single Family Mortgage Rev., MBIA,
7.5s, 2010 1,250 1,458,262
13-AR
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------
Refunded and Special Obligations - continued
University of Arkansas, University Rev., 7.2s,
2000 $ 2,500 $ 2,747,250
-----------
$24,042,825
- -------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 15.9%
Jefferson County, AR, Pollution Control Rev.
(Arkansas Power & Light Co.), 6.3s, 2018 $ 1,050 $ 1,068,480
North Little Rock, AR, Electric Rev., MBIA,
6.5s, 2010 2,000 2,229,700
North Little Rock, AR, Electric Rev., MBIA,
6.5s, 2010 1,000 1,079,160
North Little Rock, AR, Electric Rev., MBIA,
6.5s, 2015 6,000 6,589,500
Pope County, AR, Solid Waste Disposal Rev.
(Arkansas Power & Light Co.), 8s, 2020 1,780 1,954,369
Pope County, AR, Solid Waste Disposal Rev.
(Arkansas Power & Light Co.), FSA, 8s, 2021 3,000 3,309,990
Puerto Rico Electric Power Authority Rev.,
5.25s, 2021 3,000 2,703,330
Puerto Rico Telephone Authority Rev., AMBAC,
5.43s, 2004++++ 4,000 3,863,360
West Memphis, AR, Public Utility Systems Rev.,
MBIA, 6.6s, 2009 1,250 1,362,625
-----------
$24,160,514
- -------------------------------------------------------------------------------
Health Care Revenue - 6.1%
Baxter County, AR, Hospital Rev.,
7.5s, 2021 $ 3,145 $ 3,354,111
Little Rock, AR, Health Facilities Board
(Baptist Medical Center), 6.9s, 2009 1,400 1,531,250
Little Rock, AR, Health Facilities Board
(Baptist Medical Center), 7s, 2017 3,250 3,437,395
Pulaski County, AR, Hospital Rev. (Children's
Hospital), 6.15s, 2017 1,000 1,005,520
-----------
$ 9,328,276
- -------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 7.0%
Blytheville, AR, Solid Waste Recycling &
Sewerage Treatment Rev. (Nucor Corp.), 6.9s,
2021 $ 2,000 $ 2,105,840
Blytheville, AR, Solid Waste Recycling &
Sewerage Treatment Rev. (Nucor Corp.),
6.375s, 2023 3,565 3,650,810
Camden, AR, Environmental Improvement Rev.
(International Paper), 7.625s, 2018 1,000 1,112,530
Jonesboro, AR, Industrial Development Rev.
(Anheuser-Busch Co.), 6.5s, 2012 3,500 3,757,285
-----------
$10,626,465
- -------------------------------------------------------------------------------
Insured Health Care Revenue - 8.4%
Arkansas Development Finance Authority, Health
Facilities Rev. (Sisters of Mercy), MBIA,
5s, 2013 $ 6,340 $ 5,860,569
Arkansas Development Finance Authority, Health
Facilities Rev. (Sisters of Mercy), MBIA,
5s, 2019 5,500 4,922,500
North Little Rock, AR, Health Facilities Rev.
(Baptist), MBIA, 5.5s, 2021 1,000 959,560
Pulaski County, AR, Health Facilities Board
Rev. (Sisters of Charity), MBIA, 6s, 2012 1,000 1,028,710
-----------
$12,771,339
- -------------------------------------------------------------------------------
Multi-Family Housing Revenue - 0.3%
West Memphis, AR, Public Facilities Board
Mortgage Rev., AMBAC, 0s, 2011 $ 1,090 $ 454,683
- -------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 3.7%
Little Rock, AR, Hotel & Restaurant Gross
Receipts Tax Rev., 7.375s, 2015 $ 4,790 $ 5,562,388
- -------------------------------------------------------------------------------
Single Family Housing Revenue - 17.6%
Arkansas Development Finance Authority, Single
Family Mortgage Rev., 0s, 2011 $ 5,000 $ 1,785,050
Arkansas Development Finance Authority, Single
Family Mortgage Rev., GNMA, 7.4s, 2023 1,310 1,364,142
Arkansas Development Finance Authority, Single
Family Mortgage Rev., GNMA, 7.45s, 2027 1,710 1,838,780
Arkansas Development Finance Authority, Single
Family Mortgage Rev., GNMA, 6.1s, 2030 1,000 981,980
Arkansas Development Finance Authority, Single
Family Mortgage Rev., GNMA, FNMA, 6.7s, 2027 2,870 2,941,607
Arkansas Housing Development Agency,
Residential Mortgage Rev., 0s, 2015 21,425 3,090,128
Jefferson County, AR, Health Care &
Residential Facilities Board, 7.25s, 2011 985 1,020,844
Lonoke County, AR, Residential Housing
Facilities Board, 7.375s, 2011 262 273,098
Lonoke County, AR, Residential Housing
Facilities Board, 7.9s, 2011 945 1,022,779
Mississippi County, AR, Public Facilities
Board, Mortgage Rev., 7.2s, 2010 1,265 1,382,101
North Little Rock, AR, Residential Housing
Facilities Board, 0s, 2010 21,925 8,995,827
Pulaski County, AR, Public Facilities Board
Rev., 0s, 2014 2,750 888,085
Saline County, AR, Residential Housing
Facilities Board, 7.875s, 2011 1,030 1,092,624
-----------
$26,677,045
- -------------------------------------------------------------------------------
Student Loan Revenue - 2.7%
Arkansas Student Loan Authority Rev., 7.15s,
2002 $ 835 $ 878,295
Arkansas Student Loan Authority Rev., 6.75s,
2006 1,190 1,221,820
Arkansas Student Loan Authority Rev., 6.25s,
2010 2,000 2,000,120
-----------
$ 4,100,235
- -------------------------------------------------------------------------------
Universities - 0.7%
Conway, AR, Public Facilities Rev., (Hendrix
College), 5.85s, 2016 $ 1,000 $ 995,190
- -------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 10.0%
Arkansas Development Finance Authority, Water
& Sewer Rev., MBIA, 5s, 2012 $ 1,000 $ 949,650
Arkansas Development Finance Authority, Water
& Sewer Rev., MBIA, 5s, 2015 2,000 1,853,040
Arkansas Water Resources Development
Authority, 6.375s, 2021 1,000 1,044,660
Beaver, AR, Water District, Benton &
Washington Counties, Water & Sewer Rev.,
MBIA, 5.85s, 2008 2,000 2,068,100
Fort Smith, AR, Water & Sewer Rev., MBIA, 6s,
2012 2,250 2,341,777
Russellville, AR, Water Systems Rev., AMBAC,
6.25s, 2012 1,365 1,428,950
South Sebastian County, AR, Water Users Assn.,
5.95s, 2013 2,425 2,419,932
14-AR
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------
Water and Sewer Utility Revenue - continued
South Sebastian County, AR, Water Users Assn.,
6.15s, 2023 $1,000 $ 1,007,070
Texarkana, AR, Public Facilities Board,
Waterworks Facilities Rev.,
MBIA, 7s, 2007 2,000 2,058,640
-----------
$ 15,171,819
- -------------------------------------------------------------------------------
Miscellaneous Revenue - 2.7%
Arkansas Development Finance Authority,
Wastewater & Sewer Rev., 5.85s, 2019 $3,130 $ 3,114,068
Little Rock, Wastewater & Sewer Rev., 5.8s,
2016 1,000 1,000,640
------------
$ 4,114,708
- -------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $144,066,525) $149,145,003
- -------------------------------------------------------------------------------
Floating Rate Demand Notes - 0.9%
- -------------------------------------------------------------------------------
Unita County, WY, Pollution Control Rev.
(Chevron), due 8/15/20, at Identified Cost $1,300 $ 1,300,000
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $145,366,525) $150,445,003
Other Assets, Less Liabilities - 0.9% $ 1,365,753
- -------------------------------------------------------------------------------
Net Assets - 100.0% $151,810,756
- -------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
Portfolio of Investments - March 31, 1997
MFS CALIFORNIA MUNICIPAL BOND FUND
Municipal Bonds - 93.9%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
General Obligations - 7.3%
Palos Verdes, CA, Library District, 6.7s, 2016 $1,250 $ 1,313,063
State of California, 10s, 2007 1,055 1,465,300
State of California, 6.5s, 2010 1,235 1,359,043
State of California, 5.25s, 2017 2,500 2,333,225
State of California, AMBAC, 7.2s, 2008 1,600 1,863,408
State of California, AMBAC, 6.3s, 2010 6,000 6,532,680
State of California, AMBAC, 7s, 2010 2,000 2,311,800
State of California, FGIC, 5.25s, 2014 1,000 949,140
Walnut Valley, CA, AMBAC, 6s, 2011 1,600 1,676,448
-----------
$19,804,107
- -------------------------------------------------------------------------------
State and Local Appropriation - 13.4%
Banning, CA, Certificates of Participation,
Water System Improvement, AMBAC, 8s, 2019 $1,000 $ 1,275,840
California Public Works Board, Lease Rev.,
5.375s, 2013 2,000 1,913,800
California Public Works Board, Lease Rev.
(Department of Corrections), 7.4s, 2010 5,000 5,844,600
Fortuna, Parlier & Susanville, CA,
Certificates of Participation, "B", 7.375s,
2017 930 970,976
Grossmont, CA, Union High School District,
Certificates of Participation, MBIA, 0s,
2006 6,000 3,586,740
Los Angeles, CA, Building Authority, MBIA,
5.625s, 2011 3,375 3,428,122
Los Angeles, CA, Convention & Exhibition
Center Authority, Certificates of
Participation, AMBAC, 0s, 2005 2,400 1,558,968
Pasadena, CA, Certificates of Participation
(Pasadena Parking Facilities), 6.25s, 2018 $3,460 $ 3,565,461
Pomona, CA, Public Financing, 6.25s, 2010 4,020 4,099,556
Riverside County, CA, Asset Leasing Corp.,
"A", 6.25s, 2019 1,210 1,211,561
San Bernardino County, California Certificates
(Medical Center Financing), 5.5s, 2024 3,400 3,092,096
San Joaquin County, CA, Certificates of
Participation (General Hospital), 6.625s,
2020 2,000 2,064,460
Tulare County, CA, Certificates of
Participation (Capital Improvements
Program), MBIA, 6s, 2016 1,000 1,010,600
Visalia, CA, Utility Systems Department,
Certificates of Participation, MBIA, 0s,
2005 4,655 2,953,225
-----------
$36,576,005
- -------------------------------------------------------------------------------
Refunded and Special Obligations - 14.0%
Apple Valley, CA, Hospital Rev. (St. Mary's
Hospital), Certificates of Participation,
6.75s, 2001 $4,880 $ 5,364,438
California Educational Facilities Authority
Rev. (St. Mary's College), 7.5s, 2000 1,000 1,112,090
California Health Facilities Financing
Authority (Aids Hospice Foundation), CHFC,
7.15s, 2000 2,960 3,206,065
California Health Facilities Financing
Authority (St. Joseph Hospital), 6.75s, 2001 2,710 2,967,965
California Health Facilities Financing
Authority (Valley Memorial Hospital), 7.9s,
1997 500 511,535
California Statewide Community Development
Authority Rev., Certificates of
Participation (United Western Medical
Center), CHFC, 6.75s, 2001 3,000 3,305,460
Corona, CA, Certificates of Participation
(Corona Community Hospital), 8s, 2005 585 697,209
Hemet Valley, CA, Hospital District (Moreno
Valley Regional Medical Center), 8.25s, 1998 4,380 4,682,264
Los Angeles, CA, Convention & Exhibition
Center Authority, Certificates of
Participation, 9s, 2005 1,900 2,424,115
Los Angeles County, CA, Redevelopment Agency
Rev., Tax Allocation, ETM, MBIA, 0s, 2013 3,380 1,246,577
Mojave, CA, Water Agency Rev. (Morongo Basin),
6.6s, 2002 1,400 1,545,362
Northern California Power Agency, Public Power
Rev. (Hydro-Electric), 8s, 1998 290 303,989
Pomona, CA, Public Financing Authority Rev.,
"J", 7.875s, 2000 3,155 3,541,046
Pomona, CA, Single Family Mortgage Rev., FNMA,
GNMA, 7.375s, 2010 2,000 2,307,100
Pomona, CA, Single Family Mortgage Rev., GNMA,
7.5s, 2000 2,000 2,422,280
Southern California Public Power Transmission
Rev., Zero Coupon Prerefunded Series A, 2005 3,795 2,479,425
-----------
$38,116,920
- -------------------------------------------------------------------------------
15-CA
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------
Airport and Port Revenue - 11.8%
California Maritime Infrastructure, San
Diegouni Port District, AMBAC, 5.375s, 2012 $3,250 $ 3,121,463
Long Beach, CA, Harbor Department Rev., MBIA,
5.375s, 2020 5,000 4,593,650
Los Angeles, CA, Department Airports Rev.,
Ontario International Airport, FGIC, 6s,
2017 6,600 6,616,038
Los Angeles, CA, Harbor Department Revenue,
5.375s, 2015 5,000 4,667,500
Los Angeles, CA, Harbor Department Rev.,
6.625s, 2025 2,000 2,092,220
Port Oakland, CA, Port Rev., MBIA, 5.5s, 2011 6,000 5,874,420
Port Oakland, CA, Port Rev., MBIA, 6.5s, 2016 1,000 1,047,360
San Francisco, CA, City & County Airports
Commission, International Airport Rev.,
FGIC, 6.5s, 2019 4,000 4,204,600
-----------
$32,217,251
- -------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 5.6%
California Pollution Control Financing
Authority Rev., 6.625s, 2009 $1,000 $ 1,057,190
Los Angeles, CA, Department of Water & Power,
Electric Plant Rev., 7.25s, 2030 1,000 1,095,660
Los Angeles, CA, Department of Water & Power,
Electric Plant Rev., 7.1s, 2031 1,050 1,148,175
M-S-R Public Power Agency (San Juan), MBIA,
6.75s, 2020 3,000 3,353,040
Redding California Joint Powers Financing
Authority, MBIA, 5.25s, 2015 1,000 937,410
Southern California Public Power Authority
(Southern Transmission Project), 0s, 2005 4,205 2,646,753
Southern California Public Power Authority,
Transmission Project Rev., RIBS, 7.812s,
2012++++ 5,000 5,133,500
-----------
$15,371,728
- -------------------------------------------------------------------------------
Health Care Revenue - 3.1%
California Health Facilities Financing
Authority (Downey Community Hospital),
5.625s, 2008 $3,000 $ 2,942,460
California Health Facilities Financing
Authority (Kaiser Permanente), 7s, 2018 1,000 1,061,850
California Statewide Community Development
Authority (St. Joseph's), 6.625s, 2021 4,205 4,427,192
-----------
$ 8,431,502
- -------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 0.4%
California Pollution Control Financing
Authority (Frito-Lay, Inc.), 6.375s, 2004 $1,025 $ 1,090,323
- -------------------------------------------------------------------------------
Insured Health Care Revenue - 5.6%
California Health Facilities Financing
Authority (American Baptist Homes West),
CHFC, 7.65s, 2014 $4,420 $ 4,611,121
California Health Facilities Financing
Authority (Sutter Health), MBIA, 7s, 2009 1,000 1,052,980
California Health Facilities Financing
Authority (Unihealth America), AMBAC,
7.625s, 2015 45 47,549
California Statewide Community Development
Authority, Certificates of Participation,
CHFC, 0s, 2007 6,645 3,482,844
California Statewide Community Development
Authority, Certificates of Participation,
CHFC, 0s, 2008 $6,345 $ 3,090,015
Desert Hospital District, CA, Hospital Rev.
(Desert Hospital Corp.), Certificates of
Participation, FSA, MVRIC, 9.104s, 2020++++ 3,000 3,127,110
-----------
$15,411,619
- -------------------------------------------------------------------------------
Multi-Family Housing Revenue - 6.4%
California Housing Finance Agency (Multi-Unit
Rental Housing),
6.7s, 2015 $2,750 $ 2,857,250
Palmdale, CA, Multi-Family Housing Rev., FNMA,
7.375s, 2024 1,000 1,061,030
Thousand Oaks, CA, Redevelopment Agency
(Shadow Hills Project), 7s, 2021 8,900 9,185,156
Yolo County, CA, Housing Authority Mortgage
Rev. (Walnut Park Apartments), FHA, 7.2s,
2033 4,150 4,375,511
-----------
$17,478,947
- -------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 1.8%
Los Angeles County CA, Metropolitan
Transportation Authority Rev., Refunding
General Union Station "A", FSA, 5.25s, 2013 $5,245 $ 5,016,790
- -------------------------------------------------------------------------------
Single Family Housing Revenue - 2.7%
California Housing Finance Agency, 7.75s, 2010 $ 905 $ 953,978
California Housing Finance Agency, "A", 6s,
2020 2,500 2,471,800
California Housing Finance Agency, MBIA, 6s,
2010 1,400 1,402,772
California Housing Finance Agency, MBIA, 6s,
2016 2,000 1,990,260
Riverside, CA, Single Family Mortgage Rev.,
0s, 2014 625 94,804
San Bernardino County, CA, Single Family
Mortgage Rev., GNMA, 7.65s, 2023 225 233,806
Santa Ana, CA, Home Mortgage Rev., "A", FGIC,
8.875s, 2017 5 5,115
Southern California Home Finance Authority,
Single Family Mortgage Rev., GNMA, 7.625s,
2023 225 236,131
-----------
$ 7,388,666
- -------------------------------------------------------------------------------
Special Assessment District - 3.3%
Anaheim, CA, Public Finance Authority Rev.
(Redevelopment Project Alpha), MBIA, 0s,
2005 $3,210 $ 2,045,123
Brea, CA, Public Finance Authority Rev., MBIA,
0s, 2005 2,235 1,454,717
Brea, CA, Public Finance Authority Rev., MBIA,
0s, 2006 3,415 2,101,693
Concord, CA, Redevelopment Agency, Tax
Allocation, BIGI, 8s, 2018 40 42,378
Santa Cruz County, CA, Redevelopment Agency,
Subordinated Linve Oak/Soquel Community,
5.6s, 2017 1,455 1,363,961
Walnut Valley, CA, Public Finance Authority
(Walnut Improvement), MBIA, 0s, 2007 1,150 658,904
Walnut Valley, CA, Public Finance Authority
(Walnut Improvement), MBIA, 0s, 2008 1,125 604,294
Walnut Valley, CA, Public Finance Authority
(Walnut Improvement), MBIA, 0s, 2009 1,175 590,555
-----------
$ 8,861,625
- -------------------------------------------------------------------------------
16-CA
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------
Turnpike Revenue - 2.0%
Foothill/Eastern Transportation Corridor
Agency, CA, 0s, 2011 $ 5,000 $ 3,234,700
Foothill/Eastern Transportation Corridor
Agency, CA, 0s, 2020 10,000 2,291,100
------------
$ 5,525,800
- -------------------------------------------------------------------------------
Universities - 2.6%
California Education Facilities Authority Rev.
(College & University), 6s, 2012 $ 1,400 $ 1,371,566
California State University Housing System
Rev., 6.75s, 2010 1,705 1,821,435
California State University Housing System
Rev., 6.75s, 2011 3,570 3,813,795
------------
$ 7,006,796
- -------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 9.6%
California Department of Water Resources,
Central Valley Project Rev., 7s, 2012 $ 1,495 $ 1,697,363
Fairfield-Suisun, CA, Sewer District Rev.,
MBIA, 0s, 2006 2,080 1,291,098
Metropolitan Water District, Linked Savers,
RIBS, 5.75s, 2018 10,000 9,854,500
Metropolitan Water District, South California,
5.75s, 2009 3,000 3,152,370
Metropolitan Water District, Waterworks Rev.,
5s, 2020 9,000 7,846,020
Pittsburg, CA, Public Financing Authority,
5.125s, 2015 2,700 2,507,733
------------
$ 26,349,084
- -------------------------------------------------------------------------------
Miscellaneous Revenue - 4.3%
California Public Capital Improvements
Financing Authority Rev., BIGI, 8.1s, 2018 $ 1,855 $ 1,938,419
Los Angeles County, CA, Public Works Rev.,
MBIA, "A", 5.25s, 2014 6,860 6,476,801
Los Angeles County, CA, Public Works Rev.,
MBIA, "A", 5.25s, 2016 1,230 1,150,198
South Coast Air Quality Management District,
AMBAC, 0s, 2005 3,480 2,255,840
------------
$ 11,821,258
- -------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $245,674,326) $256,468,421
- -------------------------------------------------------------------------------
Rights - 0.1%
Shares
- -------------------------------------------------------------------------------
State of New Jersey, "D", due 2003,
(Identified Cost, $255,000) 2,000 $ 291,000
- -------------------------------------------------------------------------------
Floating Rate Demand Notes - 2.7%
Principal Amount
(000 Omitted)
- -------------------------------------------------------------------------------
California Health Facilities Financing
Authority Rev. (St. Joseph
Health Systems), "A", due 7/01/13 $ 2,835 $ 2,835,000
California Pollution Control Financing
Authority Rev. (Shell Oil Corp.), due
10/01/11 1,250 1,250,000
California Statewide Community Development
Authority (Sutter Health Obligation Group),
due 7/01/15 2,800 2,800,000
Orange County, CA, Sanitation District, due
8/01/16 600 600,000
- -------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Identified Cost $ 7,485,000
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $253,414,326) $264,244,421
- -------------------------------------------------------------------------------
Other Assets, Less Liabilities - 3.3% $ 8,917,253
- -------------------------------------------------------------------------------
Net Assets - 100.0% $273,161,674
- -------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
Portfolio of Investments - March 31, 1997
MFS FLORIDA MUNICIPAL BOND FUND
Municipal Bonds - 95.8%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
General Obligations - 11.2%
Broward County, FL, Expressway Authority,
9.875s, 2009 $1,100 $ 1,557,314
Florida Board of Education, Capital Outlay,
9.125s, 2014 2,600 3,574,038
Marion County, FL, Public Improvement Rev.,
FSA, 5.3s, 2014 1,250 1,195,588
Palm Beach County, FL, 6.5s, 2010 2,000 2,183,140
State of Florida, Jacksonville Transportation,
6.4s, 2022 2,000 2,118,061
-----------
$10,628,141
- -------------------------------------------------------------------------------
State and Local Appropriation - 4.4%
Bay County, FL, School Board, Certificates of
Participation, AMBAC, 6.75s, 2012 $1,000 $ 1,107,600
Palm Beach County, FL, School Board
Certificates of Participation, AMBAC,
5.375s, 2015 1,000 955,270
Palm Beach County, FL, School Board,
Certificates of Participation, AMBAC,
6.375s, 2015 2,000 2,100,920
-----------
$ 4,163,790
- -------------------------------------------------------------------------------
Refunded and Special Obligations - 11.2%
Altamonte Springs FL, Health Facilities
Hospital Rev., ETM, "1", 5.7s, 2012 $1,175 $ 1,197,818
Brevard County, FL, Health Facilities
Authority Rev. (Wuesthoff Memorial), "B",
MBIA, 7.2s, 2002 1,000 1,122,190
Broward County, FL, School District, 7.125s,
1999 250 266,765
Charlotte County, FL Utility Rev., FGIC,
6.875s, 2003 500 563,750
Florida Board of Education, Capital Outlay,
7.25s, 2000 510 557,654
Florida Board of Education, Capital Outlay,
ETM, 9.125s, 2014 400 553,640
Florida Turnpike Authority Rev. (Fitch Light),
AMBAC, 7.125s, 2001 1,250 1,384,275
Gainesville, FL, Utility Systems Rev., AMBAC,
7.25s, 1998 500 531,790
Hillsborough County, FL, Capital Improvement
Rev. (County Center Project), 6.75s, 2002 1,500 1,647,900
Orange County, FL, Tourist Development Tax
Rev., AMBAC, 7.25s, 2000 500 550,340
Puerto Rico Electric Power Authority Rev., 7s,
2001 240 265,620
Puerto Rico Highway & Transportation
Authority, Highway Rev., 6.625s, 2002 1,000 1,098,750
Puerto Rico Highway & Transportation
Authority, Highway Rev., 6.625s, 2002 100 109,875
Puerto Rico Public Buildings Authority Rev.,
6.875s, 2002 740 821,578
-----------
$10,671,945
- -------------------------------------------------------------------------------
17-FL
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------
Airport and Port Revenue - 5.8%
Dade County, FL, Aviation Authority Rev.
(Miami International), MBIA, 6.6s, 2022 $ 500 $ 530,895
Municipal Bonds - continuedHillsborough
County, FL, Aviation Authority Rev. (Delta
Airlines), 6.8s, 2024 1,500 1,533,150
Hillsborough County, FL, Aviation Authority
Rev. (Tampa International Airport), FGIC,
5.875s, 2015 750 750,915
Hillsborough County, FL, Aviation Authority
Rev. (USAir), 8.6s, 2022 2,400 2,650,032
------------
$ 5,464,992
- -------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 24.7%
Escambia County, FL, Utility Systems Rev.,
FGIC, 0s, 2015 $2,000 $ 711,460
Escambia County, FL, Utility Systems Rev.,
FGIC, 6.25s, 2015 1,500 1,606,605
Hillsborough County, FL, Industrial
Development Authority, Pollution Control
Rev. (Tampa Electric Co.), 8s, 2022 3,000 3,445,440
Jacksonville, FL, Electric Authority Rev.
(St. Johns River Power), 0s, 2010 4,995 2,324,223
Lakeland, FL, Electricity & Water Rev.,
Capital Appreciation, 0s, 2011 5,000 2,161,450
Lakeland, FL, Electricity & Water Rev.,
Capital Appreciation, 0s, 2012 3,000 1,211,130
Martin County, FL, Industrial Development
Authority (Indiantown Cogeneration
Project), 7.875s, 2025 3,625 4,116,659
Orlando, FL, Utility Commission, Water &
Electric Rev., 6.75s, 2017 1,500 1,697,025
Palm Beach County, FL, Solid Waste Development
(Osceola Power Project), 6.85s, 2014 2,000 1,547,720
Puerto Rico Electric Power Authority Rev.,
FSA, 6s, 2016 2,000 2,041,380
Puerto Rico Electric Power Authority Rev.,
MBIA, 6.125s, 2008 2,400 2,593,752
-----------
$23,456,844
- -------------------------------------------------------------------------------
Health Care Revenue - 8.3%
Brevard County, FL, Health Facilities
Authority Rev. (Friendly Village), 9.25s,
2012 $ 375 $ 387,368
Escambia County, FL, Health Facilities Rev.
(Baptist Hospital), 6s, 2014 2,500 2,432,975
Escambia County, FL, Health Facilities Rev.
(Baptist Hospital & Baptist Manor), 6.75s,
2014 1,000 1,034,720
Jacksonville, FL, Health Facilities Authority,
Industrial Development Rev. (Cypress
Village), 7s, 2014 1,250 1,299,250
Jacksonville, FL, Health Facilities Authority,
Industrial Development Rev. (National
Benevolent), 6.4s, 2016 1,825 1,821,423
Orange County, FL, Industrial Development
Authority Rev. (Friendly Village), 9.25s,
2012 335 345,971
St. Petersburg, FL, Health Facilities Rev.
(Swanholm Nursing), 10s, 2022 490 553,337
-----------
$ 7,875,044
- -------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 2.2%
Escambia County, FL, Pollution Control
Rev. (Champion International Corp.),
6.95s, 2007 $1,000 $ 1,069,570
Escambia County, FL, Pollution Control Rev.
(Champion International Corp.), 6.85s, 2012 1,000 1,061,680
-----------
$ 2,131,250
- -------------------------------------------------------------------------------
Insured Health Care Revenue - 12.0%
Brevard County, FL, Health Facilities
Authority Rev. (Wuesthoff Memorial), MBIA,
6.5s, 2007 $1,000 $ 1,078,700
Brevard County, FL, Health Facilities
Authority Rev. (Wuesthoff Memorial), MBIA,
5s, 2013 1,000 927,640
Charlotte County, FL, Health Care Facilities
Rev. (Bon Secours), FSA, 8.167s, 2027++++ 2,500 2,484,525
Hillsborough County, FL, Industrial
Development Rev. (University Community
Hospital), MBIA, 6.5s, 2019 1,000 1,089,800
Jacksonville, FL, Hospital Rev. (Baptist
Medical Center), MBIA, 7.3s, 2019 1,900 2,019,605
Jacksonville, FL, Hospital Rev. (University
Medical Center), Connie Lee, 6.6s, 2013 500 528,490
North Broward, FL, Hospital District Rev.,
Refunding & Improvement, MBIA, 5.375s, 2024 1,165 1,078,673
Tallahassee, FL, Health Facilities Authority
Rev. (Tallahassee Memorial Regional Medical
Center), MBIA, 6.625s, 2013 1,000 1,096,670
Tampa, FL, Allegheny Health System
(St. Joseph), MBIA, 6.5s, 2023 1,000 1,081,600
-----------
$11,385,703
- -------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 4.4%
Dade County, FL, Special Obligation, Capital
Appreciation Board, AMBAC, 0s, 2027 $5,500 $ 805,200
Jacksonville, FL, Excise Taxes Rev., FGIC, 0s,
2010 1,000 461,040
Jacksonville, FL, Excise Taxes Rev., FGIC, 0s,
2011 1,000 431,680
Puerto Rico Highway & Transportation Authority
Rev., MBIA, 5.5s, 2008 1,000 976,840
Puerto Rico Highway & Transportation Authority
Rev., MBIA, 5.5s, 2015 1,500 1,487,745
-----------
$ 4,162,505
- -------------------------------------------------------------------------------
Single Family Housing Revenue - 0.9%
Dade County, FL, Housing Finance Authority,
Mortgage Rev., FNMA, GNMA, 7s, 2024 $ 75 $ 77,888
Dade County, FL, Housing Finance Authority,
Mortgage Rev., FSA, 6.95s, 2012 765 805,622
-----------
$ 883,510
- -------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 6.0%
Lee County, FL, Industrial Development
Authority Rev. (Bonita Springs Utilities
Project), MBIA, 6.05s, 2015 $1,000 $ 1,017,000
Miramar, FL, Wastewater Improvement Rev.,
FGIC, 6.75s, 2016 1,500 1,627,830
Seminole, FL, Water & Sewer Improvement Rev.,
MBIA, 6s, 2019 3,000 3,101,880
-----------
$ 5,746,710
- -------------------------------------------------------------------------------
18-FL
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------
Miscellanous Revenue - 4.7%
Dade County, FL, Solid Waste Special
Obligation, Rev., AMBAC, 5.125s, 2010 $1,250 $ 1,198,013
Florida Department Environmental Preservation
Rev., MBIA, 5.5s, 2012 2,295 2,292,590
Palm Beach County, FL, Solid Waste Authority
Rev., "B", AMBAC,
5.375s, 2011 1,000 971,490
-----------
$ 4,462,093
- -------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $87,398,925) $91,032,527
- -------------------------------------------------------------------------------
Floating Rate Demand Notes - 2.9%
- -------------------------------------------------------------------------------
Hillsborough County, FL, Pollution Control
Rev. (Tampa Electric Co.), due 5/15/18 $2,600 $ 2,600,000
St. Lucie County, FL, Pollution Control Rev.
(Power & Light Co.), due 3/01/27 200 200,000
- -------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Identified Cost $ 2,800,000
- -------------------------------------------------------------------------------
Total Investments (Identified Cost,
$90,198,925) $93,832,527
Other Assets, Less Liabilities - 1.3% 1,210,054
- -------------------------------------------------------------------------------
Net Assets - 100.0% $95,042,581
- -------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
Portfolio of Investments - March 31, 1997
MFS GEORGIA MUNICIPAL BOND FUND
Municipal Bonds - 94.9%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
General Obligation - 9.0%
Fayette County, GA, School District, 6.125s,
2015 $1,500 $1,557,210
Fulton County, GA, School District, 6.375s,
2010 2,000 2,178,060
Fulton County, GA, School District, 6.375s,
2012 1,000 1,087,400
Fulton County, GA, School District, 6.375s,
2016 1,000 1,076,540
Territory of Virgin Islands, 7.75s, 2006 390 419,472
-----------
$6,318,682
- -------------------------------------------------------------------------------
State and Local Appropriation - 2.0%
Fulton County, GA, Building Authority Rev.
(Judicial Center), 0s, 2011 $3,000 $1,367,100
- -------------------------------------------------------------------------------
Refunded and Special Obligations - 10.9%
Columbia County, GA, Water and Sewer Rev.,
AMBAC, 6.9s, 2011 $1,000 $1,097,470
DeKalb County, GA, 7.5s, 2000 780 850,746
Hogansville, GA, Combined Public Utility
Systems Rev., 9s, 2000 2,200 2,536,666
Marietta, GA, Development Authority Rev. (Life
College, Inc.), CAPGTY, 7.2s, 1999 1,000 1,086,530
Marietta, GA, Development Authority Rev. (Life
College, Inc.), CAPGTY, 7.25s, 1999 1,000 1,087,770
Richmond County, GA, Development Authority
Rev., ETM, MBIA, 0s, 2021 5,000 934,000
-----------
$7,593,182
- -------------------------------------------------------------------------------
Airport and Port Revenue - 12.5%
Atlanta, GA, Airport Facilities Rev., 6.25s,
2021 $ 500 $ 502,905
Atlanta, GA, Airport Facilities Rev., AMBAC,
0s, 2010 6,000 2,799,600
Atlanta, GA, Airport Facilities Rev., MBIA,
0s, 2010 $5,100 $2,379,660
Atlanta, GA, Special Purpose Facilities Rev.
(Delta Airlines), 7.9s, 2018 1,000 1,071,480
Clayton County, GA, Development Authority,
Special Facilities Rev. (Delta Airlines),
7.625s, 2020 500 526,630
Puerto Rico Ports Authority (American
Airlines), 6.25s, 2026 1,425 1,430,386
-----------
$8,710,661
- -------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 13.1%
Appling County, GA, Development Authority
Pollution (Ogelthorpe Power Corp.), MBIA,
7.15s, 2021 $1,400 $1,539,818
Burke County, GA, Development Authority,
Pollution Control Rev. (Georgia Power
Vogel), 8.375s, 2017 1,000 1,028,130
Georgia Municipal Electric Authority, Power
Rev., AMBAC, 5.5s, 2009 1,225 1,238,157
Georgia Municipal Electric Authority, Power
Rev., AMBAC, 0s, 2013 1,675 674,623
Georgia Municipal Electric Authority, Power
Rev., BIGI, 0s, 2008 2,500 1,389,550
Georgia Municipal Electric Authority, Power
Rev., BIGI, 0s, 2009 1,500 780,450
Georgia Municipal Electric Authority, Power
Rev., MBIA, 6.5s, 2020 1,250 1,374,862
Monroe County, GA, Development Authority,
Pollution Control Rev. (Oglethorpe Power),
6.8s, 2012 1,000 1,111,410
------------
$9,137,000
- -------------------------------------------------------------------------------
Health Care Revenue - 4.1%
Richmond County, GA, Development Authority,
Nursing Home Refunding (Beverly
Enterprises), 8.75s, 2011 $1,190 $1,288,877
Royston, GA, Hospital Authority Rev. (Cobb
Health), 7.375s, 2014 1,565 1,620,479
-----------
$2,909,356
- -------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 17.8%
Adel County, GA, Industrial Development
Authority, Pollution Control Rev.
(Weyerhaeuser Co.), AMBAC, 9s, 2006 $1,000 $1,018,140
Cartersville, GA, Development Authority Rev.,
Water & Wastewater Facilities,
(Anheuser-Busch Cos., Inc.), 7.4s, 2010 500 592,475
Cartersville, GA, Development Authority Rev.,
Water & Wastewater Facilities
(Anheuser-Busch Cos., Inc.), 6.75s, 2012 1,000 1,064,140
Effingham County, GA, Development Authority,
Pollution Control Rev. (Fort Howard Corp.),
7.9s, 2005 1,750 1,835,802
Emanuel County, GA, Development Authority
(Figgie Properties), 7.95s, 2004 475 473,409
Richmond County, GA, Development Authority
(International Paper Company), 5.8s, 2020 2,500 2,379,175
Savannah, GA, Economic Development Authority,
Industrial Development Rev. (Hershey Foods
Corp.), 6.6s, 2012 1,150 1,220,564
Savannah, GA, Economic Development Authority,
Industrial Development Rev. (Stone Container
Corp.), 7.4s, 2026 750 770,280
19-GA
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - continued
Savannah, GA, Economic Development Authority,
Industrial Development Rev. (Union Camp
Corp.), 6.15s, 2017 $1,000 $ 1,032,440
Savannah, GA, Port Authority, Pollution
Control Rev. (Union Carbide Corp.), 7.55s,
2004 1,000 1,002,210
Wayne County, GA, Solid Waste Rev.
(ITT-Rayonier, Inc.), 8s, 2015 1,000 1,086,570
-----------
$12,475,205
- -------------------------------------------------------------------------------
Insured Health Care Revenue - 2.1%
Albany-Dougherty County Georgia Hospital
Authority Rev. (Phoebe Putney Memorial
Hospital, Inc.) CARS, AMBAC, 7.47s, 2013++++ $1,550 $ 1,474,717
- -------------------------------------------------------------------------------
Multi-Family Housing Revenue - 5.8%
Cobb County, GA, Housing Authority Rev.
(Signature Place Project), 6.875s, 2017 $1,500 $ 1,540,830
Hinesville, GA, Leased Housing Corp. Rev.
(Baytree Apartments), FHA, 6.7s, 2017 900 935,316
St. Mary's, GA (Cumberland Oaks Apartments),
FNMA, 7.375s, 2022 1,470 1,543,559
-----------
$ 4,019,705
- -------------------------------------------------------------------------------
Single Family Housing Revenue - 2.8%
DeKalb County, GA, Housing Authority, Single
Family Mortgage Rev., GNMA, 7.75s, 2022 $ 495 $ 520,873
Georgia Housing & Finance Authority, 0s, 2031 7,775 636,928
Georgia Residential Finance Authority Rev.,
8s, 2020 360 377,903
Georgia Residential Finance Authority Rev.,
7.25s, 2021 365 386,225
-----------
$ 1,921,929
- -------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 12.5%
Barnesville, GA, Water and Sewer Rev., 6.9s,
2022 $1,715 $ 1,782,074
Brunswick, GA, Water and Sewer Rev., MBIA,
6.1s, 2014 1,000 1,047,200
Cartersville, GA, Water and Sewer Rev., AMBAC,
7.2s, 2012 2,225 2,385,133
Fulton County, GA, Water and Sewer Rev., FGIC,
6.375s, 2014 3,250 3,516,955
-----------
$ 8,731,362
- -------------------------------------------------------------------------------
Miscellaneous Revenue - 2.3%
George L. Smith II/Georgia World Congress
Center Authority (Domed Stadium Project),
7.875s, 2020 $1,475 $ 1,608,783
- -------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $62,373,938) $66,267,682
- -------------------------------------------------------------------------------
Floating Rate Demand Notes - 2.2%
- -------------------------------------------------------------------------------
Burke County, Development Authority, Pollution
Control Rev., due 9/01/26 $ 700 $ 700,000
Georgia Hospital Financing Authority Rev.
(Hospital Loan Program), due 3/01/01 858 858,000
- -------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Identified Cost $ 1,558,000
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $63,931,938) $67,825,682
- -------------------------------------------------------------------------------
Other Assets, Less Liabilities - 2.9% $ 2,011,942
- -------------------------------------------------------------------------------
Net Assets - 100.0% $69,837,624
- -------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
Portfolio of Investments - March 31, 1997
MFS MARYLAND MUNICIPAL BOND FUND
Municipal Bonds - 95.5%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
General Obligation - 12.6%
Anne Arundel County, MD, 4.9s, 2011 $1,005 $ 940,841
Baltimore, MD, Consolidated Public
Improvement, 7.15s, 2009 2,120 2,447,243
Baltimore, MD, Consolidated Public
Improvement, FGIC, 5.3s, 2009 700 690,032
Baltimore, MD, Consolidated Public
Improvement, FGIC, 5.3s, 2010 815 795,245
Baltimore, MD, Consolidated Public
Improvement, FGIC, 5.375s, 2011 900 879,516
Baltimore, MD, Consolidated Public
Improvement, FGIC, 5.375s, 2013 770 746,299
Baltimore, MD, Consolidated Public
Improvement, MBIA, 7s, 2009 1,000 1,148,730
Howard County, MD, Metropolitan District, 0s,
2008 1,975 1,076,493
Montgomery County, MD, Public Improvement, 0s,
2009 4,000 2,058,320
Prince George's County, MD, 0s, 2007 5,110 2,977,750
Prince George's County, MD, Public
Improvement, AMBAC, 5.5s, 2013 1,000 993,260
State of Maryland, 9s, 1999 350 387,356
Washington, MD, Suburban Sanitation District,
6.1s, 2015 1,070 1,115,422
Washington, MD, Suburban Sanitation District,
5.25s, 2016 865 817,736
Washington, MD, Suburban Sanitation District,
5.625s, 2020 1,000 975,260
-----------
$18,049,503
- -------------------------------------------------------------------------------
State and Local Appropriation - 14.7%
Calvert County, MD, Community Lease Rev.,
7.2s, 2010 $ 750 $ 809,670
Howard County, MD, Certificates of
Participation, 8.15s, 2021 450 579,672
Howard County, MD, Certificates of
Participation, "A", 8s, 2019 805 1,016,095
Howard County, MD, Certificates of
Participation, "B", 8s, 2019 385 485,959
Howard County, MD, Certificates of
Participation, "C", 8s, 2019 680 858,316
Maryland Stadium Authority, Sports Facilities
Leasing Rev., 7.6s, 2019 2,580 2,774,661
Maryland Stadium Authority, Sports Facilities
Leasing Rev., AMBAC, 5.875s, 2012 1,000 1,017,020
Prince George's County, MD, Certificates of
Participation, MBIA, 0s, 2005 2,495 1,620,677
Prince George's County, MD, Certificates of
Participation, MBIA, 0s, 2006 2,490 1,535,135
Prince George's County, MD, Certificates of
Participation, MBIA, 0s, 2011 3,675 1,643,681
Prince George's County, MD, Industrial
Development Authority, MBIA, 0s, 2004 980 675,455
Prince George's County, MD, Industrial
Development Authority, MBIA, 0s, 2006 1,800 1,109,736
20-MD
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------
State and Local Appropriation - continued
Prince George's County, MD, Industrial
Development Authority, MBIA, 0s, 2009 $ 1,500 $ 768,315
Prince George's County, MD, Industrial
Development Authority, MBIA, 0s, 2010 2,730 1,307,042
Prince George's County, MD, Industrial
Development Authority, MBIA, 0s, 2011 2,810 1,265,568
Prince George's County, MD, Industrial
Development Authority, MBIA, 0s, 2012 2,000 845,420
Puerto Rico Public Buildings Authority,
Education & Health Rev., 6.45s, 2016ss 3,000 2,812,320
-----------
$21,124,742
- -------------------------------------------------------------------------------
Refunded and Special Obligations - 11.1%
Baltimore, MD, Water Utility Rev., MBIA, 6.5s,
2000 $ 540 $ 570,045
Howard County, MD, Metropolitan District,
7.15s, 2000 500 540,475
Maryland Health & Higher Education Facilities
Authority Rev. (Sinai Hospital/ Baltimore),
7s, 2000 2,000 2,175,560
Maryland Health & Higher Education Facilities
Authority Rev. (University of Maryland
Medical System), FGIC, 6.5s, 2001 1,000 1,067,250
Maryland Health & Higher Education Facilities
Authority Rev. (University of Maryland
Medical System), FGIC, 7s, 2001 1,840 2,028,913
Montgomery County, MD, Revenue Authority Lease
Rev. (Regional Indoor Swim Center), 7.6s,
1998 750 786,975
Morgan, MD, State University Academic &
Auxiliary Facilities & Fees Rev., MBIA, 0s,
2006 1,135 707,911
Morgan, MD, State University Academic &
Auxiliary Facilities & Fees Rev., MBIA, 0s,
2008 1,400 771,456
Prince George's County, MD, Hospital Rev.
(Dimensions Health Corp.), 7.25s, 2002 2,000 2,252,800
Puerto Rico Aqueduct & Sewer Authority Rev.,
10.25s, 2009 500 679,235
Puerto Rico Electric Power Authority Rev., 8s,
1998 500 533,640
Puerto Rico Electric Power Authority Rev., 7s,
2001 1,000 1,106,750
Puerto Rico Public Improvement Rev., 6.8s,
2002 1,500 1,660,185
Washington, MD, Suburban Sanitation District,
6.9s, 2001 1,045 1,146,856
-----------
$16,028,051
- -------------------------------------------------------------------------------
Health Care Revenue - 11.7%
Berlin, MD, Hospital Rev. (Atlantic General
Hospital), 8.375s, 2022 $ 1,360 $ 1,403,153
Maryland Health & Higher Education Facilities
Authority Rev. (Doctors Community Hospital),
5.5s, 2024 2,000 1,790,060
Maryland Health & Higher Education Facilities
Authority Rev. (Good Samaritan Hospital),
5.7s, 2009 1,085 1,098,432
Maryland Health & Higher Education Facilities
Authority Rev. (Johns Hopkins Hospital), 0s,
2010 2,000 954,920
Maryland Health & Higher Education Facilities
Authority Rev. (Johns Hopkins Hospital), 5s,
2023 2,250 1,951,290
Maryland Health & Higher Education Facilities
Authority Rev. (Kennedy Institute), 6.75s,
2022 $ 500 $ 507,320
Maryland Health & Higher Education Facilities
Authority Rev. (Medlantic Hospital Care),
8.375s, 2014 3,540 3,635,722
Prince George's County, MD, Hospital Rev.
(Dimensions Health Corp.), 5.3s, 2024 3,000 2,671,650
Prince George's County, MD, Hospital Rev.
(Greater Southeast Healthcare System),
6.375s, 2023 2,900 2,798,152
-----------
$16,810,699
- -------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 4.5%
Baltimore, MD, Industrial Revenue Board
(Weyerhaeuser), 9s, 2006 $ 3,150 $ 3,202,322
Baltimore, MD, Port Facilities Rev. (duPont
(E.I.) de Nemours & Co.), 6.5s, 2011 1,500 1,605,540
Cecil County, MD, Commissioners Industrial
Development Revenue Board, 5.25s, 2006 1,000 998,150
Upper Potomac, MD, River Commission, Pollution
Control Rev. (Westvaco), 10.5s, 2004 150 156,954
Upper Potomac, MD, River Commission, Pollution
Control Rev. (Westvaco), 9.125s, 2015 500 517,835
-----------
$ 6,480,801
- -------------------------------------------------------------------------------
Insured Health Care Revenue - 6.4%
Maryland Health & Higher Education Facilities
Authority Rev. (Frederick Memorial
Hospital), FGIC, 5.25s, 2013 $ 4,550 $ 4,407,539
Maryland Health & Higher Education Facilities
Authority Rev. (University of Maryland
Medical Center), FGIC, 5s, 2020 1,000 886,660
Maryland Health & Higher Education Facilities
Authority Rev., (Mercy Medical Center), FSA,
5.625s, 2017 2,000 1,951,080
Maryland Health & Higher Education Facilities
Authority Rev., (Mercy Medical Center), FSA,
5.75s, 2026 500 487,625
Maryland Industrial Development Finance
Authority, Economic Development Rev., (Bon
Secours Health System), FSA, 7.924s,
2022++++ 1,400 1,398,978
-----------
$ 9,131,882
- -------------------------------------------------------------------------------
Multi-Family Housing Revenue - 4.6%
Baltimore, MD, City Housing, Multi-Family
Housing Rev., FNMA, 7.25s, 2023 $ 1,220 $ 1,273,936
Baltimore, MD, City Housing, Multi-Family
Housing Rev. (Greenhill), FHA, 7.75s, 2009 980 995,592
Maryland Community Development Administration,
Multi-Family Housing Rev., 7.375s, 2021 330 350,278
Maryland Community Development Administration,
Multi-Family Housing Rev., 8.4s, 2029 1,320 1,351,430
Maryland Community Development Administration,
Multi-Family Housing Rev., 0s, 2032 11,605 802,022
Maryland Community Development Administration,
Multi-Family Housing Rev., 7.8s, 2032 1,190 1,271,146
Montgomery County, MD, Housing Opportunities
Commission, Multi-Family Mortgage Rev.,
7.375s, 2032 510 536,326
-----------
$ 6,580,730
- -------------------------------------------------------------------------------
21-MD
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.7%
Puerto Rico Highway & Transportation Authority
Rev., 6.625s, 2012 $1,000 $ 1,066,230
- -------------------------------------------------------------------------------
Single Family Housing Revenue - 7.6%
Maryland Community Development Administration,
Single Family Housing Rev., 7.7s, 2015 $ 615 $ 647,343
Maryland Community Development Administration,
Single Family Housing Rev., 5.875s, 2016 2,000 1,994,780
Maryland Community Development Administration,
Single Family Housing Rev., 8.25s, 2017 1,300 1,334,424
Maryland Community Development Administration,
Single Family Housing Rev., 7.625s, 2020 2,255 2,332,594
Maryland Community Development Administration,
Single Family Housing Rev., 8.25s, 2020 480 493,354
Maryland Community Development Administration,
Single Family Housing Rev., 6.75s, 2026 2,250 2,322,428
Maryland Community Development Administration,
Single Family Housing Rev., 7.625s, 2029 905 934,548
Maryland Community Development Administration,
Single Family Housing Rev., 7.85s, 2029 520 544,804
Montgomery County, MD, Housing Opportunities
Commission, Single Family Mortgage Rev.,
7.5s, 2017 365 383,589
------------
$ 10,987,864
- -------------------------------------------------------------------------------
Solid Waste Revenue - 7.3%
Northeast Maryland, Waste Disposal Authority
Solid Waste Rev., (Montgomery County
Project), 6s, 2006 $1,000 $ 1,016,560
Northeast Maryland, Waste Disposal Authority
Solid Waste Rev., (Montgomery County
Project), MBIA, 6.3s, 2016 5,000 5,086,600
Northeast Maryland, Waste Disposal Authority
(Southwest County Resource Recovery), MBIA,
7.2s, 2005 1,000 1,120,160
Prince George's County, MD, Solid Waste
Management, FSA, 5.25s, 2013 3,500 3,322,235
------------
$ 10,545,555
- -------------------------------------------------------------------------------
Universities - 4.1%
Maryland Health & Higher Education Facilities
Authority Rev., (Loyola College), MBIA,
5.5s, 2016 $3,000 $ 2,922,390
Maryland Health & Higher Education Facilities
Authority Rev. (Mount St. Mary's College),
6.5s, 2009 714 711,913
Morgan, MD, State University Academic &
Auxiliary Facilities Rev., MBIA, 6.05s, 2015 1,500 1,576,140
University of Maryland, Auxiliary Facilities &
Tuition Rev., 0s, 2004 1,000 685,370
------------
$ 5,895,813
- -------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 4.1%
Baltimore, MD, Wastewater Rev., FGIC, 6s, 2015 $1,000 $ 1,049,790
Baltimore, MD, Wastewater Rev., MBIA, 5.65s,
2020++++ 2,000 1,951,760
Baltimore, MD, Wastewater Rev., MBIA, 7.58s,
2020++++ 3,000 2,837,460
------------
$ 5,839,010
- -------------------------------------------------------------------------------
Miscellaneous Revenue - 6.1%
Baltimore, MD, Parking Rev., 5.375s, 2013 $1,600 $ 1,513,632
Maryland Industrial Development Finance
Authority (American Center for Physics
Headquarters), 6.625s, 2017 1,500 1,533,870
Maryland Industrial Development Finance
Authority (YMCA/Baltimore), 8s, 2012 2,825 2,990,489
Maryland Industrial Development Finance
Authority (YMCA/Baltimore), 8.25s, 2012 895 948,011
Washington, D.C., Metropolitan Area Transit
Authority, Gross Rev., FGIC, 5.25s, 2014 1,900 1,790,408
------------
$ 8,776,410
- -------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost $130,967,278) $137,317,290
- -------------------------------------------------------------------------------
Floating Rate Demand Notes - 2.9%
- -------------------------------------------------------------------------------
Lincoln County, WY, Pollution Control Rev.
(Exxon), due 11/01/14 $1,700 $ 1,700,000
New York City, NY, Water Finance Authority,
due 6/15/24 1,200 1,200,000
Unita County, WY, Pollution Control Rev.
(Chevron), due 8/15/20 1,300 1,300,000
- -------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Identified Cost $ 4,200,000
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $135,167,278) $141,517,290
Other Assets, Less Liabilities - 1.6% 2,266,272
- -------------------------------------------------------------------------------
Net Assets - 100.0% $143,783,562
- -------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
Portfolio of Investments - March 31, 1997
MFS MASSACHUSETTS MUNICIPAL BOND FUND
Municipal Bonds - 96.6%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
General Obligation - 16.2%
Belmont, MA, 5s, 2015 $ 2,165 $1,993,662
Commonwealth of Massachusetts,
0s, 2004 10,000 6,730,800
Commonwealth of Massachusetts,
0s, 2005 2,000 1,290,160
Commonwealth of Massachusetts,
0s, 2005 2,000 1,267,780
Commonwealth of Massachusetts, AMBAC, 6s, 2008 3,000 3,185,700
Commonwealth of Massachusetts, AMBAC, 6.75s,
2009 2,500 2,736,175
Commonwealth of Massachusetts, AMBAC, 5s, 2016 2,000 1,813,460
Commonwealth of Massachusetts, FGIC, 0s, 2006 4,000 2,472,040
Commonwealth of Massachusetts, FGIC, 7s, 2009 1,250 1,436,363
Commonwealth of Massachusetts, MBIA, 7.5s,
2004 2,850 3,267,040
Gloucester, MA, AMBAC, 7s, 2009 225 244,037
Gloucester, MA, AMBAC, 7s, 2010 215 233,191
Haverhill, MA, FGIC, 7s, 2012 1,250 1,352,937
Holyoke, MA, 8s, 2001 595 625,958
Holyoke, MA, MBIA, 8s, 2001 1,700 1,905,887
Holyoke, MA, MBIA, 8.1s, 2005 500 584,775
Lawrence, MA, AMBAC, 9.75s, 2002 600 723,252
Lowell, MA, 8.4s, 2009 1,000 1,126,070
Lowell, MA, 5s, 2012 3,010 2,803,273
Mashpee, MA, 6.25s, 2008 1,530 1,676,390
22-MA
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------
General Obligation - continued
North Attleborough, MA, 5s, 2013 $ 2,240 $ 2,073,882
Northbridge, MA, 7.6s, 2001 325 354,429
Princeton, MA, AMBAC, 7.25s, 2009 490 530,205
-----------
$40,427,466
- -------------------------------------------------------------------------------
State and Local Appropriation - 8.3%
Massachusetts Bay Transportation Authority,
6.2s, 2016 $10,400 $10,995,296
Massachusetts Bay Transportation Authority,
7s, 2021 5,000 5,772,250
Massachusetts Bay Transportation Authority,
AMBAC, 5.25s, 2017 3,370 3,144,176
Massachusetts Industrial Finance Agency
(Vinfen Corp.), 7.1s, 2018 695 705,710
-----------
$20,617,432
- -------------------------------------------------------------------------------
Refunded and Special Obligations - 11.9%
Boston, MA, MBIA, 7.75s, 2008 $ 500 $ 531,820
Commonwealth of Massachusetts, 6.875s, 2010 4,000 4,391,640
Holyoke, MA, 9.85s, 2008 380 400,246
Lowell, MA, 7.625s, 2010 4,875 5,490,030
Massachusetts Federally Assisted Housing, 0s,
2023 4,995 870,828
Massachusetts Health & Education Facilities
Authority, 8s, 2010 1,750 1,939,823
Massachusetts Health & Education Facilities
Authority (Boston College), 5.25s, 2003 4,350 3,900,253
Massachusetts Industrial Finance Agency (Cape
Cod Health System), 8.5s, 2000 500 571,290
Massachusetts Industrial Finance Agency,
Tunnel Rev. (Mass. Turnpike), 9s, 2000 8,130 9,359,907
Massachusetts Port Authority, ETM, 12.75s,
2002 485 623,662
Massachusetts Port Authority, ETM, 13s, 2013 780 1,291,407
Palmer, MA, AMBAC, 7.7s, 2010 500 557,520
-----------
$29,928,426
- -------------------------------------------------------------------------------
Airport and Port Revenue - 4.8%
Massachusetts Port Authority,
5s, 2015 $ 5,600 $ 5,039,720
Massachusetts Port Authority, FGIC, 7.5s, 2020 4,500 4,852,935
Massachusetts Port Authority (USAir Project),
5.625s, 2011 2,140 2,092,128
-----------
$11,984,783
- -------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 0.4%
Puerto Rico Electric Power Authority, 5s, 2012 $ 1,035 $ 938,859
- -------------------------------------------------------------------------------
Health Care Revenue - 18.0%
Boston, MA, Industrial Development Finance
Authority Rev. (Alzheimers Center Project),
FHA, 5.5s, 2012 $ 750 $ 722,265
Boston, MA, Industrial Development Finance
Authority Rev. (Stonehedge Convalescent
Center), 10.75s, 2011 710 758,117
Massachusetts Health & Education Facilities
Authority (Beth Israel Hospital), 7s, 2014 3,000 3,147,870
Massachusetts Health & Education Facilities
Authority (Charlton Memorial Hospital),
7.25s, 2013 1,700 1,827,092
Massachusetts Health & Education Facilities
Authority (Children's Hospital), 6.125s,
2012 2,285 2,321,103
Massachusetts Health & Education Facilities
Authority (Emerson Hospital), ETM, 8s, 2018 $ 1,745 $ 1,947,350
Massachusetts Health & Education Facilities
Authority (Fairview Extended Care Facility),
10.25s, 2021 2,000 2,251,160
Massachusetts Health & Education Facilities
Authority (Massachusetts Eye & Ear
Infirmary), 7.375s, 2011 3,000 3,030,030
Massachusetts Health & Education Facilities
Authority (New England Deaconess Hospital),
6.875s, 2022 5,600 5,921,440
Massachusetts Health & Education Facilities
Authority (New England Deaconess Hospital),
7.2s, 2022 2,500 2,682,425
Massachusetts Health & Education Facilities
Authority (North Adams Regional Hospital),
6.625s, 2018 1,000 1,018,420
Massachusetts Industrial Finance Agency
(Beverly Enterprises), 8.375s, 2009 4,040 4,327,365
Massachusetts Industrial Finance Agency
(Continental Healthcare), 11.875s, 2015 5,320 5,429,326
Massachusetts Industrial Finance Agency
(Evanswood), 7.625s, 2014 1,200 1,190,616
Massachusetts Industrial Finance Agency
(Martha's Vineyard Long-Term Care Facility),
9.25s, 2022++ 3,000 2,122,500
Massachusetts Industrial Finance Agency
(Massachusetts Biomedical Research), 0s,
2004 5,000 3,348,650
Massachusetts Industrial Finance Agency
(Massachusetts Biomedical Research), 0s,
2010 5,300 2,382,032
Massachusetts Industrial Finance Agency
(Needham/Hamilton House), 11s, 2010 600 613,530
-----------
$45,041,291
------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 2.8%
Massachusetts Industrial Finance Agency
(Automatic Data Processing, Inc.), 8.25s,
2019 $ 900 $ 919,152
Massachusetts Industrial Finance Agency,
Pollution Control Rev. (Boston Edison Co.),
5.75s, 2014 1,900 1,831,505
Puerto Rico Ports Authority (American
Airlines), 6.3s, 2023 2,370 2,383,343
Puerto Rico Ports Authority (American
Airlines), 6.25s, 2026 1,500 1,505,670
Springfield, MA, Industrial Development
Finance Agency (Terminal Building), 10s,
2001 327 329,881
-----------
$ 6,969,551
- -------------------------------------------------------------------------------
Insured Health Care Revenue - 3.6%
Massachusetts Health & Education Facilities
Authority (Beth Israel Hospital), AMBAC,
8.218s, 2025++++ $ 5,000 $ 4,936,650
Massachusetts Health & Education Facilities
Authority (Brigham & Women's Hospital),
MBIA, 6.75s, 2024 2,900 3,095,692
Massachusetts Health & Education Facilities
Authority (Newton Wellesley Hospital),
6.125s, 2015 1,000 1,030,030
-----------
$ 9,062,372
- -------------------------------------------------------------------------------
23-MA
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------------------
Multi-Family Housing Revenue - 3.8%
Massachusetts Housing Finance Agency, 8.4s,
2021 $ 2,190 $ 2,286,579
Massachusetts Housing Finance Agency, 8.8s,
2021 1,995 2,091,777
Massachusetts Housing Finance Agency, 8.2s,
2027 720 751,997
Massachusetts Housing Finance Agency, AMBAC,
6.65s, 2019 1,500 1,561,230
Massachusetts Housing Finance Agency, FNMA,
6.9s, 2025 1,700 1,781,039
Somerville, MA, Housing Authority Rev.
(Clarendon Hill), 7.85s, 2010 1,000 1,059,770
------------
$ 9,532,392
- -------------------------------------------------------------------------------
Single Family Housing Revenue - 4.2%
Massachusetts Housing Finance Agency, 8.1s,
2020 $ 2,270 $ 2,362,707
Massachusetts Housing Finance Agency, 8.1s,
2021 2,000 2,098,860
Massachusetts Housing Finance Agency, 7.95s,
2023 945 1,005,026
Massachusetts Housing Finance Agency, MBIA,
6.1s, 2015 2,000 2,028,280
Massachusetts Industrial Finance Agency, MBIA,
6.35s, 2022 3,000 3,013,620
------------
$ 10,508,493
- -------------------------------------------------------------------------------
Student Loan Revenue
Massachusetts Education Loan Authority, 9s,
2001 $ 85 $ 85,678
- -------------------------------------------------------------------------------
Universities - 6.6%
Massachusetts Health & Education Facilities
Authority (Boston University), MBIA, 9.335s,
2031++++ $ 5,000 $ 5,530,750
Massachusetts Health & Education Facilities
Authority (Wheaton College), 5.25s, 2019 1,000 920,940
Massachusetts Industrial Finance Agency
(Babson College Series), 5.375s, 2017 2,000 1,877,400
Massachusetts Industrial Finance Agency
(Brandeis University), 0s, 2004 1,000 682,870
Massachusetts Industrial Finance Agency
(Brandeis University), 0s, 2005 1,000 643,180
Massachusetts Industrial Finance Agency
(Brandeis University), 0s, 2009 1,000 503,340
Massachusetts Industrial Finance Agency
(Brandeis University), 0s, 2010 1,000 467,760
Massachusetts Industrial Finance Agency
(Brandeis University), 0s, 2011 500 219,840
Massachusetts Industrial Finance Agency (Curry
College), 8s, 2010 590 587,540
Massachusetts Industrial Finance Agency (Curry
College), 8s, 2014 1,945 1,967,912
Massachusetts Industrial Finance Agency
(Emerson College), 8.9s, 2018 1,000 1,093,850
Massachusetts Industrial Finance Agency
(Lesley College), 6.3s, 2025 2,000 2,026,420
------------
$ 16,521,802
- -------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 9.0%
Massachusetts Water Pollution, Loan Program,
5.25s, 2014 $ 5,160 $ 4,925,942
Massachusetts Water Resources Authority, 6.5s,
2019 8,470 9,095,425
Massachusetts Water Resources Authority,
AMBAC, 5.25s, 2015 5,000 4,814,100
Massachusetts Water Resources Authority, MBIA,
5.25s, 2020 4,000 3,641,320
------------
$ 22,476,787
- -------------------------------------------------------------------------------
Miscellaneous Revenue - 7.0%
Martha's Vineyard, MA, Land Bank, (Land
Acquisition), 8.125s, 2011 $ 3,900 $ 3,997,695
Massachusetts Health & Education Facilities
Authority, 9.25s, 2014 2,250 2,395,845
Massachusetts Health & Education Facilities
Authority (Learning Center for Deaf
Children), 8s, 2020 1,500 1,500,360
Massachusetts Industrial Finance Agency (Park
School), 5.9s, 2026 3,385 3,293,300
Massachusetts Industrial Finance Agency
(Dexter School), 7.5s, 2011 1,720 1,817,404
Massachusetts Industrial Finance Agency
(Dexter School), 7.5s, 2021 2,900 3,066,373
Nantucket Island, MA, Land Bank, 7.75s, 2020 1,200 1,324,092
-------------
$ 17,395,069
- -------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $229,796,491) $241,490,401
- -------------------------------------------------------------------------------
Rights - 0.1%
- -------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------------
Georgia Municipal Electric Authority Power
Co., due 2016 (Identified Cost, $131,400) 10,000 $ 255,800
- -------------------------------------------------------------------------------
Floating Rate Demand Note - 1.0%
- -------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -------------------------------------------------------------------------------
Massachusetts Health & Education Facilities
Authority, due 1/01/35, at Identified Cost $ 2,600 $ 2,600,000
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $232,527,891) $244,346,201
Other Assets, Less Liabilities - 2.3% $ 5,731,618
- -------------------------------------------------------------------------------
Net Assets - 100.0% $250,077,819
- -------------------------------------------------------------------------------
Portfolio Footnotes:
ss Indexed security.
++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
24-MA
<PAGE>
Financial Statements
Statements of Assets and Liabilities
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Alabama Arkansas California Florida Georgia Maryland Massachusetts
March 31, 1997 Fund Fund Fund Fund Fund Fund Fund
- ---------------------------------- ------------ ------------- ------------- ------------ ------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Investments -
Identified cost $79,126,506 $145,366,525 $253,414,326 $90,198,925 $63,931,938 $135,167,278 $232,527,891
Unrealized appreciation 4,010,182 5,078,478 10,830,095 3,633,602 3,893,744 6,350,012 11,818,310
------------ ------------- ------------- ------------ ------------------------- -------------
Total, at value $83,136,688 $150,445,003 $264,244,421 $93,832,527 $67,825,682 $141,517,290 $244,346,201
Cash 84,729 84,275 40,322 91,319 2,344 34,348 57,188
Receivable for Fund shares sold 49,328 74,040 295,384 93,461 168,708 171,307 266,015
Receivable for investments sold 1,733,600 18,116 12,467,976 785,850 953,260 452,714 2,592,111
Interest receivable 1,413,328 2,252,334 3,802,145 1,655,756 1,105,884 2,177,384 3,916,395
Other assets 1,002 2,074 3,355 13,470 898 1,705 2,944
------------ ------------- ------------- ------------ ------------------------- -------------
Total assets $86,418,675 $152,875,842 $280,853,603 $96,472,383 $70,056,776 $144,354,748 $251,180,854
------------ ------------- ------------- ------------ ------------------------- -------------
Liabilities:
Distributions payable $ 220,386 $ 350,988 $ 692,964 $ 256,237 $ 144,110 $ 280,967 $ 615,214
Payable for Fund shares
reacquired 209,117 622,362 999,973 119,662 755 193,510 364,590
Payable for investments purchased 1,697,450 -- 5,851,656 986,303 -- -- --
Payable for daily variation
margin on open futures contracts 11,250 5,000 -- -- -- -- --
Payable to affiliates -
Management fee 5,081 9,171 12,007 5,727 3,438 7,091 12,321
Administrative fee 139 250 450 156 115 236 411
Shareholder servicing agent fee 1,201 2,168 3,902 1,354 993 2,048 3,620
Distribution and service fee 2,906 3,110 10,648 3,661 2,728 6,758 10,660
Accrued expenses and other
liabilities 61,957 72,037 120,329 56,702 67,013 80,576 96,219
------------ ------------- ------------- ------------ ------------------------- -------------
Total liabilities $ 2,209,487 $ 1,065,086 $ 7,691,929 $ 1,429,802 $ 219,152 $ 571,186 $ 1,103,035
------------ ------------- ------------- ------------ ------------------------- -------------
Net assets $84,209,188 $151,810,756 $273,161,674 $95,042,581 $69,837,624 $143,783,562 $250,077,819
============ ============= ============= ============ ========================= =============
Net assets consist of:
Paid-in capital $79,709,154 $154,706,572 $274,218,686 $98,703,387 $69,414,375 $143,012,764 $244,084,771
Unrealized appreciation on
investments and futures
contracts 3,908,651 5,037,750 10,830,095 3,633,602 3,893,744 6,350,012 11,818,310
Accumulated undistributed net
realized gain (loss) on
investments 411,611 (7,793,592) (11,509,098) (7,317,264) (3,429,047) (5,441,552) (5,217,806)
Accumulated undistributed
(distributions in excess of) net
investment income 179,772 (139,974) (378,009) 22,856 (41,448) (137,662) (607,456)
------------ ------------- ------------- ------------ ------------------------- -------------
Total $84,209,188 $151,810,756 $273,161,674 $95,042,581 $69,837,624 $143,783,562 $250,077,819
============ ============= ============= ============ ========================= =============
Shares of beneficial interest
outstanding:
Class A 7,339,789 14,835,381 42,498,099 8,335,775 5,765,143 11,612,305 21,628,872
Class B 694,527 776,303 6,703,433 1,525,437 962,443 1,597,546 1,399,249
Class C -- -- 703,318 -- -- -- --
------------ ------------- ------------- ------------ ------------------------- -------------
Total shares of beneficial
interest outstanding 8,034,316 15,611,684 49,904,850 9,861,212 6,727,586 13,209,851 23,028,121
============ ============= ============= ============ ========================= =============
Net assets:
Class A $76,928,225 $144,263,122 $232,611,902 $80,341,829 $59,842,922 $126,404,592 $234,873,541
Class B 7,280,963 7,547,634 36,693,746 14,700,752 9,994,702 17,378,970 15,204,278
Class C -- -- 3,856,026 -- -- -- --
------------ ------------- ------------- ------------ ------------------------- -------------
Total net assets $84,209,188 $151,810,756 $273,161,674 $95,042,581 $69,837,624 $143,783,562 $250,077,819
============ ============= ============= ============ ========================= =============
Class A shares:
Net asset value per share (net
assets / shares of beneficial
interest outstanding) $10.48 $ 9.72 $5.47 $ 9.64 $10.38 $10.89 $10.86
====== ====== ===== ====== ====== ====== ======
Offering price per share (100 /
95.25 of net asset value per
share) $11.00 $10.20 $5.74 $10.12 $10.90 $11.43 $11.40
====== ====== ===== ====== ====== ====== ======
Class B shares:
Net asset value and offering
price per share (net assets /
shares of beneficial interest
outstanding) $10.48 $ 9.72 $5.47 $ 9.64 $10.38 $10.88 $10.87
====== ====== ===== ====== ====== ====== ======
Class C shares:
Net asset value and offering
price per share (net assets /
shares of beneficial interest
outstanding) $ -- $ -- $5.48 $ -- $ -- $ -- $ --
====== ====== ===== ====== ====== ====== ======
</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, Class B, and Class C shares.
See notes to financial statements
25
<PAGE>
Financial Statements - continued
Statement of Operations
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Alabama Arkansas California Florida Georgia Maryland Massachusetts
Year Ended March 31, 1997 Fund Fund Fund Fund Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net investment income:
Interest income $5,537,347 $9,991,542 $17,384,392 $ 6,100,621 $ 4,739,761 $ 9,352,266 $17,148,239
---------- ---------- ----------- ----------- ----------- ----------- -----------
Expenses -
Management fee $ 477,327 $ 908,167 $ 1,588,838 $ 549,091 $ 409,612 $ 813,556 $ 1,413,749
Trustees' compensation 16,743 18,509 35,030 16,915 18,150 20,735 20,098
Shareholder servicing agent fee 27,357 50,392 91,023 31,877 22,785 47,034 82,011
Shareholder servicing agent fee
(Class A) 91,118 180,728 283,882 96,750 73,967 151,710 276,574
Shareholder servicing agent fee
(Class B) 10,992 12,920 58,663 23,792 17,106 24,811 22,268
Shareholder servicing agent fee
(Class C) -- -- 4,647 -- -- -- --
Distribution and service fee
(Class A) 199,904 157,360 -- -- 160,929 463,635 852,786
Distribution and service fee
(Class B) 68,255 65,101 296,124 117,638 102,425 155,707 138,902
Distribution and service fee
(Class C) -- -- 40,308 -- -- -- --
Administrative fee 1,119 2,041 3,698 1,271 924 1,917 3,335
Custodian fee 32,095 71,619 126,876 47,670 33,837 66,638 113,102
Auditing fees 28,330 29,417 29,581 29,219 29,186 33,601 45,101
Printing 4,809 11,170 20,850 9,704 7,576 13,332 27,400
Postage 4,476 11,805 17,558 6,724 -- 10,411 14,070
Legal fees 1,445 2,944 7,212 3,939 2,122 4,590 7,557
Amortization of organization
expenses -- 2,082 -- 1,928 -- -- --
Miscellaneous 49,437 60,006 102,040 48,919 23,479 59,528 128,487
---------- ---------- ----------- ----------- ----------- ----------- -----------
Total expenses $1,013,407 $1,584,261 $ 2,706,330 $ 985,437 $ 902,098 $ 1,867,205 $ 3,145,440
Fees paid indirectly (7,554) (14,652) (34,413) (9,623) (11,946) (34,547) (22,491)
Reduction of expenses by
investment adviser -- -- (432,694) -- (48,303) (97,218) (169,487)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net expenses $1,005,853 $1,569,609 $ 2,239,223 $ 975,814 $ 841,849 $ 1,735,440 $ 2,953,462
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net investment income $4,531,494 $8,421,933 $15,145,169 $ 5,124,807 $ 3,897,912 $ 7,616,826 $14,194,777
---------- ---------- ----------- ----------- ----------- ----------- -----------
Realized and unrealized gain (loss)
on investments:
Realized gain (loss) (identified
cost basis) -
Investment transactions $ 582,182 $ 273,482 $ 1,273,784 $ (284,305) $ 702,189 $ 345,471 $ 364,901
Futures contracts (87,997) (423,987) (1,833,990) (1,044,108) (310,522) (1,107,510) (703,960)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) on
investments $ 494,185 $ (150,505) $ (560,206) $(1,328,413) $ 391,667 $ (762,039) $ (339,059)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Change in unrealized appreciation
(depreciation) -
Investments $ (35,718) $ (354,925) $(1,533,353) $ (486,195) $(1,040,965) $(1,202,696) $(2,763,341)
Futures contracts (101,531) (40,728) 13,823 (60,055) 23,879 (286,761) (6,932)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net unrealized loss on
investments $ (137,249) $ (395,653) $(1,519,530) $ (546,250) $(1,017,086) $(1,489,457) $(2,770,273)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net realized and unrealized
gain (loss) on investments $ 356,936 $ (546,158) $(2,079,736) $(1,874,663) $ (625,419) $(2,251,496) $(3,109,332)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Increase in net assets
from operations $4,888,430 $7,875,775 $13,065,433 $ 3,250,144 $ 3,272,493 $ 5,365,330 $11,085,445
========== ========== =========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements
26
<PAGE>
Financial Statements - continued
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Alabama Arkansas California Florida Georgia Maryland Massachusetts
Year Ended March 31, 1997 Fund Fund Fund Fund Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net
assets:
From operations -
Net investment income $ 4,531,494 $ 8,421,933 $ 15,145,169 $ 5,124,807 $ 3,897,912 $ 7,616,826 $ 14,194,777
Net realized gain (loss)
on investments 494,185 (150,505) (560,206) (1,328,413) 391,667 (762,039) (339,059)
Net unrealized loss on
investments (137,249) (395,653) (1,519,530) (546,250) (1,017,086) (1,489,457) (2,770,273)
------------ ------------ ------------- ------------ ------------ ------------ ------------
Increase in net assets
from operations $ 4,888,430 $ 7,875,775 $ 13,065,433 $ 3,250,144 $ 3,272,493 $ 5,365,330 $ 11,085,445
------------ ------------ ------------- ------------ ------------ ------------ ------------
Distributions declared to
shareholders -
From net investment income
(Class A) $ (4,197,127) $ (7,990,669) $ (13,365,451) $ (4,467,721) $ (3,377,412) $ (6,713,171) $(13,195,047)
From net investment income
(Class B) (303,407) (332,561) (1,604,012) (634,657) (454,697) (679,183) (653,840)
From net investment income
(Class C) -- -- (175,706) -- -- -- --
From net realized gain on
investments (Class A) (638,656) -- -- -- -- -- --
From net realized gain on
investments (Class B) (55,537) -- -- -- -- -- --
In excess of net investment
income (Class A) -- -- (44,591) -- -- -- --
In excess of net investment
income (Class B) -- -- (5,352) -- -- -- --
In excess of net investment
income (Class C) -- -- (586) -- -- -- --
------------ ------------ ------------- ------------ ------------ ------------ ------------
Total distributions
declared to shareholders $ (5,194,727) $ (8,323,230) $ (15,145,169) $ (5,102,378) $ (3,832,109) $ (7,392,354) $(13,848,887)
------------ ------------ ------------- ------------ ------------ ------------ ------------
Fund share (principal)
transactions -
Net proceeds from sale of
shares $ 3,979,559 $ 9,627,230 $ 151,915,799 $ 43,852,042 $ 5,089,635 $ 11,277,965 $ 60,963,962
Net asset value of shares
issued to shareholders
in reinvestment of
distributions 2,180,791 3,747,332 6,490,899 1,953,163 2,000,992 3,935,520 6,335,241
Cost of shares reacquired (10,268,087) (41,972,562) (181,959,198) (50,911,287) (15,081,831) (22,393,495) (75,271,052)
------------ ------------ ------------- ------------ ------------ ------------ ------------
Decrease in net assets
from Fund share
transactions $ (4,107,737) $(28,598,000) $ (23,552,500) $ (5,106,082) $ (7,991,204) $ (7,180,010) $ (7,971,849)
------------ ------------ ------------- ------------ ------------ ------------ ------------
Total decrease in net
assets $ (4,414,034) $(29,045,455) $ (25,682,765) $ (6,958,316) $ (8,550,820) $ (9,207,034) $(10,735,291)
Net assets:
At beginning of period 88,623,222 180,856,211 298,844,439 102,000,897 78,388,444 152,990,596 260,813,110
------------ ------------ ------------- ------------ ------------ ------------ ------------
At end of period $ 84,209,188 $151,810,756 $ 273,161,674 $ 95,042,581 $ 69,837,624 $143,783,562 $250,077,819
============ ============ ============= ============ ============ ============ ============
Accumulated undistributed
(distributions in excess
of) net investment income
included in net assets at
end of period $ 179,772 $ (139,974) $ (378,009) $ 22,856 $ (41,448) $ (137,662) $ (607,456)
============ ============ ============= ============ ============ ============ ============
</TABLE>
See notes to financial statements
27
<PAGE>
Financial Statements - continued
Statements of Changes in Net Assets - continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Alabama Arkansas California Florida Georgia Maryland Massachusetts
Year Ended March 31, 1996 Fund Fund Fund Fund Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net
assets:
From operations -
Net investment income $ 4,645,750 $ 9,720,089 $ 16,357,698 $ 5,341,258 $ 4,164,450 $ 7,873,071 $ 14,526,680
Net realized gain (loss) on
investments 1,777,244 (1,676,263) 3,656,753 1,919,706 (260,587) (1,568,663) 3,156,482
Net unrealized gain (loss)
on investments (188,403) 3,646,737 2,718,243 532,266 1,210,949 3,005,501 533,091
----------- ------------ ------------- ------------ ------------ ------------ ------------
Increase in net assets from
operations $ 6,234,591 $ 11,690,563 $ 22,732,694 $ 7,793,230 $ 5,114,812 $ 9,309,909 $ 18,216,253
----------- ------------ ------------- ------------ ------------ ------------ ------------
Distributions declared to
shareholders -
From net investment income
(Class A) $(4,413,702) $ (9,375,278) $ (14,676,735) $ (4,746,329) $ (3,749,712) $ (7,300,383) $(14,053,457)
From net investment income
(Class B) (225,971) (326,899) (1,505,089) (605,261) (414,738) (552,380) 473,223)
From net investment income
(Class C) -- -- (175,874) -- -- -- --
In excess of net investment
income (Class A) -- -- (237,111) (4,074) (19,210) -- (35,743)
In excess of net investment
income (Class B) -- -- (24,316) (519) (2,125) -- (1,204)
In excess of net investment
income (Class C) -- -- (2,841) -- -- -- --
----------- ------------ ------------- ------------ ------------ ------------ ------------
Total distributions
declared to shareholders $(4,639,673) $ (9,702,177) $ (16,621,966) $ (5,356,183) $ (4,185,785) $ (7,852,763) $(14,563,627)
----------- ------------ ------------- ------------ ------------ ------------ ------------
Fund share (principal)
transactions -
Net proceeds from sale of
shares $ 6,801,657 $ 10,722,904 $ 95,667,192 $ 43,564,467 $ 9,527,957 $ 11,754,356 $ 41,490,140
Net asset value of shares
issued to shareholders in
reinvestment of
distributions 1,862,845 4,417,313 7,228,615 1,872,446 2,180,065 4,256,011 6,631,937
Cost of shares reacquired (9,836,700) (30,608,486) (115,238,042) (48,433,974) (17,375,838) (21,005,744) (62,188,200)
----------- ------------ ------------- ------------ ------------ ------------ ------------
Decrease in net assets from
Fund share transactions $(1,172,198) $(15,468,269) $ (12,342,235) $ (2,997,061) $ (5,667,816) $ (4,995,377) $(14,066,123)
----------- ------------ ------------- ------------ ------------ ------------ ------------
Total increase (decrease)
in net assets $ 422,720 $(13,479,883) $ (6,231,507) $ (560,014) $ (4,738,789) $ (3,538,231) $(10,413,497)
Net assets:
At beginning of period 88,200,502 194,336,094 305,075,946 102,560,911 83,127,233 156,528,827 271,226,607
----------- ------------ ------------- ------------ ------------ ------------ ------------
At end of period $88,623,222 $180,856,211 $ 298,844,439 $102,000,897 $ 78,388,444 $152,990,596 $260,813,110
=========== ============ ============= ============ ============ ============ ============
Accumulated undistributed
(distributions in excess
of) net investment income
included in net assets at
end of period $ 83,314 $ (261,708) $ (397,322) $ (4,593) $ (141,860) $ (523,799) $ (1,032,582)
=========== ============ ============= ============ ============ ============ ============
</TABLE>
See notes to financial statements
28
<PAGE>
Financial Statements - continued
Financial Highlights
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Alabama Fund
- ---------------------------------------------------------------- ----------------------------------------------------
Two Months
Ended
Year Ended March 31, March 31,
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
1997 1996 1995 1994
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
Class A
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.52 $ 10.34 $ 10.27 $ 10.98
------------ ------------ ------------ ------------
Income from investment operations# -
Net investment income ss $ 0.56 $ 0.55 $ 0.56 $ 0.09
Net realized and unrealized gain (loss) on investments 0.04 0.18 0.09 (0.71)
------------ ------------ ------------ ------------
Total from investment operations $ 0.60 $ 0.73 $ 0.65 $ (0.62)
------------ ------------ ------------ ------------
Less distributions declared to shareholders -
From net investment income $ (0.55) $ (0.55) $ (0.55) $ (0.08)
From net realized gain on investments (0.09) -- -- --
In excess of net investment income++++ -- -- -- (0.01)
In excess of net realized gain on investments -- -- (0.03) --
------------ ------------ ------------ ------------
Total distributions declared to shareholders $ (0.64) $ (0.55) $ (0.58) $ (0.09)
------------ ------------ ------------ ------------
Net asset value - end of period $ 10.48 $ 10.52 $ 10.34 $ 10.27
============ ============ ============ ============
Total return++ 5.82% 7.13% 6.51% (5.66)%+++
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.10% 1.14% 1.15% 1.18%+
Net investment income 5.28% 5.18% 5.47% 5.17%+
Portfolio turnover 22% 37% 30% 4%
Net assets at end of period (000 omitted) $76,928 $82,484 $83,805 $81,501
+Annualized.
+++Not annualized.
#Per share data for the periods subsequent to January 31, 1994, are 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.
ss The investment adviser and/or the distributor voluntarily waived a portion of their management 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 -- $0.54 $0.55 $0.09
Ratios (to average net assets):
Expenses## -- 1.24% 1.25% 1.28%+
Net investment income -- 5.08% 5.37% 5.07%+
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
- ---------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.33 $ 9.95 $ 9.65 $ 9.53
------------ ------------ ------------ ------------
Income from investment operations# -
Net investment income ss $ 0.55 $ 0.56 $ 0.60 $ 0.59
Net realized and unrealized gain (loss) on investments 0.69 0.41 0.41 0.08
------------ ------------ ------------ ------------
Total from investment operations $ 1.24 $ 0.97 $ 1.01 $ 0.67
------------ ------------ ------------ ------------
Less distributions declared to shareholders -
From net investment income $ (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) -- (0.00) --
In excess of net realized gain on investments -- -- -- --
------------ ------------ ------------ ------------
Total distributions declared to shareholders $ (0.59) $ (0.59) $ (0.71) $ (0.55)
------------ ------------ ------------ ------------
Net asset value - end of period $ 10.98 $ 10.33 $ 9.95 $ 9.65
============ ============ ============ ============
Total return++ 12.26% 10.08% 10.92% 7.31%
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.21% 1.08% 0.95% 0.57%
Net investment income 5.13% 5.79% 6.19% 6.63%
Portfolio turnover 12% 17% 23% 64%
Net assets at end of period (000 omitted) $87,344 $67,678 $48,476 $22,076
+Annualized.
+++Not annualized.
#Per share data for the periods subsequent to January 31, 1994, are 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.
ss The investment adviser and/or the distributor voluntarily waived a portion of their management 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 $0.54 $0.55 $0.59 $0.52
Ratios (to average net assets):
Expenses## 1.31% 1.18% 1.08% 1.33%
Net investment income 5.03% 5.69% 6.06% 5.87%
</TABLE>
See notes to financial statements
29
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
Alabama Fund
- -------------------------------------------------- ------------------------------------------------------------
Two Months
Ended Period Ended
Year Ended March 31, March 31, January 31,
- -------------------------------------------------- ------------------------------- ------------- --------------
1997 1996 1995 1994 1994**
- -------------------------------------------------- --------- --------- --------- ------------- --------------
Class B
- -------------------------------------------------- --------- --------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.52 $10.34 $10.27 $10.98 $10.93
--------- --------- --------- ------------- --------------
Income from investment operations# -
Net investment income $ 0.47 $ 0.46 $ 0.47 $ 0.08 $ 0.18
Net realized and unrealized gain (loss)
on investments 0.04 0.18 0.09 (0.71) 0.07
--------- --------- --------- ------------- --------------
Total from investment operations $ 0.51 $ 0.64 $ 0.56 $(0.63) $ 0.25
--------- --------- --------- ------------- --------------
Less distributions declared to
shareholders -
From net investment income $(0.47) $(0.46) $(0.46) $(0.08) $(0.18)
From net realized gain on investments (0.08) -- -- -- (0.02)
In excess of net realized gain on investments -- -- (0.03) -- --
--------- --------- --------- ------------- --------------
Total distributions declared to shareholders $(0.55) $(0.46) $(0.49) $(0.08) $(0.20)
--------- --------- --------- ------------- --------------
Net asset value - end of period $10.48 $10.52 $10.34 $10.27 $10.98
========= ========= ========= ============= ==============
Total return 4.98% 6.25% 5.64% (5.79)%+++ 2.29%+++
Ratios (to average net assets)/Supplemental data:
Expenses## 1.90% 1.96% 1.97% 2.01%+ 1.98%+
Net investment income 4.48% 4.34% 4.63% 4.30%+ 3.98%+
Portfolio turnover 22% 37% 30% 4% 12%
Net assets at end of period (000 omitted) $7,281 $6,139 $4,396 $2,849 $2,269
**For the period from the commencement of offering 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.
</TABLE>
See notes to financial statements
30
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Arkansas Fund
------------------------------------------------------------------------------------------------------------------------------
Two Months
Ended Year Ended Period Ended
Year Ended March 31, March 31, January 31, January 31,
--------------------------------------------- ----------- ----------- ------------------------ -------------- --------------
1997 1996 1995 1994 1994 1993*
--------------------------------------------- ----------- ----------- ------------------------ -------------- --------------
Class A
--------------------------------------------- ----------- ----------- ------------------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.75 $ 9.66 $ 9.69 $ 10.47 $ 9.88 $ 9.53
----------- ----------- ------------------------ -------------- --------------
Income from investment operations# -
Net investment income ss $ 0.50 $ 0.50 $ 0.53 $ 0.09 $ 0.56 $ 0.58
Net realized and unrealized gain (loss) on
investments (0.03) 0.09 0.02 (0.77) 0.60 0.35
----------- ----------- ------------------------ -------------- --------------
Total from investment operations $ 0.47 $ 0.59 $ 0.55 $ (0.68) $ 1.16 $ 0.93
----------- ----------- ------------------------ -------------- --------------
Less distributions declared to shareholders -
From net investment income $ (0.50) $ (0.50) $ (0.53) $ (0.08) $ (0.55) $ (0.58)
From net realized gain on investments++++ -- -- -- -- (0.00) --
In excess of net investment income -- -- -- (0.02) (0.02) --
In excess of net realized gain on
investments++++ -- -- (0.05) -- (0.00) --
----------- ----------- ------------------------ -------------- --------------
Total distributions declared to
shareholders $ (0.50) $ (0.50) $ (0.58) $ (0.10) $ (0.57) $ (0.58)
----------- ----------- ------------------------ -------------- --------------
Net asset value - end of period $ 9.72 $ 9.75 $ 9.66 $ 9.69 $ 10.47 $ 9.88
=========== =========== ======================== ============== ==============
Total return++ 4.87% 6.19% 5.90% (6.61)%+++ 11.95% 10.11%+++
Ratios (to average net assets)/Supplemental data ss:
Expenses## 0.92% 0.93% 0.75% 0.75%+ 0.63% 0.16%+
Net investment income 5.14% 5.10% 5.51% 5.21%+ 5.30% 6.04%+
Portfolio turnover 9% 6% 24% 1% 3% 10%
Net assets at end of period (000 omitted) $144,263 $172,907 $187,105 $195,042 $203,542 $124,644
*For the period from the commencement of investment operations, February 3, 1992, to January 31, 1993.
+Annualized.
+++Not annualized.
#Per share data for the periods subsequent to January 31, 1994, are 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
realized gain on investments were $0.0015 and $0.0003, respectively.
ss The investment adviser and/or the distributor voluntarily waived a portion of their management 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 $0.09 $0.53 $0.52
Ratios (to average net assets):
Expenses## -- -- 0.82% 0.96%+ 0.91% 0.75%+
Net investment income -- -- 5.43% 5.01%+ 5.01% 5.45%+
</TABLE>
See notes to financial statements
31
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Arkansas Fund
----------------------------------------------------------- -----------------------------------------------------------
Two Months
Ended Period Ended
Year Ended March 31, March 31, January 31,
----------------------------------------------------------- --------- --------- --------- ------------ --------------
1997 1996 1995 1994 1994**
----------------------------------------------------------- --------- --------- --------- ------------ --------------
Class B
----------------------------------------------------------- --------- --------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.75 $ 9.65 $ 9.69 $10.47 $10.42
--------- --------- --------- ------------ --------------
Income from investment operations# -
Net investment income ss $ 0.42 $ 0.42 $ 0.42 $ 0.07 $ 0.23
Net realized and unrealized gain (loss) on investments (0.03) 0.10 0.01 (0.78) (0.04)
--------- --------- --------- ------------ --------------
Total from investment operations $ 0.39 $ 0.52 $ 0.43 $(0.71) $ 0.19
--------- --------- --------- ------------ --------------
Less distributions declared to shareholders -
From net investment income $(0.42) $(0.42) $(0.42) $(0.07) $(0.14)
From net realized gain on investments++++ -- -- -- -- (0.00)
In excess of net investment income++++++ -- -- -- (0.00) (0.00)
In excess of net realized gain on investments++++ -- -- (0.05) -- (0.00)
--------- --------- --------- ------------ --------------
Total distributions declared to shareholders $(0.42) $(0.42) $(0.47) $(0.07) $(0.14)
--------- --------- --------- ------------ --------------
Net asset value - end of period $ 9.72 $ 9.75 $ 9.65 $ 9.69 $10.47
========= ========= ========= ============ ==============
Total return 4.05% 5.43% 4.67% (6.81)%+++ 2.18%+++
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.71% 1.76% 1.84% 1.82%+ 1.75%+
Net investment income 4.34% 4.27% 4.40% 4.11%+ 3.87%+
Portfolio turnover 9% 6% 24% 1% 3%
Net assets at end of period (000 omitted) $7,548 $7,950 $7,231 $5,895 $5,179
**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, are 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 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 $0.003, respectively.
++++++For the period 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.
ss The investment adviser and/or the distributor voluntarily waived a portion of their management 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 -- -- $0.41 $0.07 $0.12
Ratios (to average net assets):
Expenses## -- -- 1.91% 2.02%+ 3.44%+
Net investment income -- -- 4.33% 3.91%+ 2.18%+
</TABLE>
See notes to financial statements
32
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
California Fund
- -------------------------------------------------- -----------------------------------------------------------------------------
Two Months Eleven Months
Ended Ended Year Ended
Year Ended March 31, March 31, January 31, February 28,
- -------------------------------------------------- ----------- ----------- ----------------------- --------------- --------------
1997 1996 1995 1994 1994 1993
- -------------------------------------------------- ----------- ----------- ----------------------- --------------- --------------
Class A
- -------------------------------------------------- ----------- ----------- ----------------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.52 $ 5.41 $ 5.47 $ 5.95 $ 5.88 $ 5.42
----------- ----------- ----------------------- --------------- --------------
Income from investment operations# -
Net investment income ss $ 0.30 $ 0.30 $ 0.31 $ 0.05 $ 0.30 $ 0.34
Net realized and unrealized gain (loss)
on investments (0.05) 0.11 (0.05) (0.48) 0.14 0.47
----------- ----------- ----------------------- --------------- --------------
Total from investment operations $ 0.25 $ 0.41 $ 0.26 $ (0.43) $ 0.44 $ 0.81
----------- ----------- ----------------------- --------------- --------------
Less distributions declared to shareholders -
From net investment income $ (0.30) $ (0.30) $ (0.31) $ (0.04) $ (0.29) $ (0.34)
From net realized gain on investments -- -- -- -- (0.07) (0.01)
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) $ (0.30) $ (0.32) $ (0.05) $ (0.37) $ (0.35)
----------- ----------- ----------------------- --------------- --------------
Net asset value - end of period $ 5.47 $ 5.52 $ 5.41 $ 5.47 $ 5.95 $ 5.88
=========== =========== ======================= =============== ==============
Total return++ 4.55% 7.86% 4.85% (7.21)%+++ 7.64%+++ 15.55%
Ratios (to average net assets)/Supplemental data ss:
Expenses## 0.66% 0.66% 0.69% 0.68%+ 0.60%+ 0.39%
Net investment income 5.36% 5.48% 5.80% 5.27%+ 4.99%+ 6.18%
Portfolio turnover 78% 69% 57% 8% 38% 64%
Net assets at end of period (000 omitted) $232,612 $259,817 $272,161 $313,790 $356,419 $272,179
+Annualized.
+++Not annualized.
#Per share data for the periods subsequent to January 31, 1994, are 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.
ss 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 $0.29 $0.30 $0.05 $0.29 $0.32
Ratios (to average net assets):
Expenses## 0.81% 0.81% 0.84% 0.83%+ 0.78%+ 0.77%
Net investment income 5.21% 5.33% 5.65% 5.12%+ 4.82%+ 5.80%
</TABLE>
See notes to financial statements
33
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
California Fund
- -------------------------------------------------- -----------------------------------------------------------------
Year Ended February 28, 1992 1991 1990 1989 1988 1987
- -------------------------------------------------- ----------- --------- --------- --------- --------- ----------
Class A
- -------------------------------------------------- ----------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.26 $ 5.19 $ 5.06 $ 5.08 $ 5.38 $ 5.07
----------- --------- --------- --------- --------- ----------
Income from investment operations -
Net investment income ss $ 0.35 $ 0.33 $ 0.33 $ 0.32 $ 0.31 $ 0.32
Net realized and unrealized gain (loss)
on investments 0.20 0.07 0.13 (0.02) (0.29) 0.34
----------- --------- --------- --------- --------- ----------
Total from investment operations $ 0.55 $ 0.40 $ 0.46 $ (0.30) $ 0.02 $ 0.66
----------- --------- --------- --------- --------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.37) $ (0.33) $ (0.33) $ (0.32) $ (0.31) $ (0.33)
From net realized gain on investments (0.02) -- -- -- (0.01) (0.02)
----------- --------- --------- --------- --------- ----------
Total distributions declared to shareholders $ (0.39) $ (0.33) $ (0.33) $ (0.32) $ (0.32) $ (0.35)
----------- --------- --------- --------- --------- ----------
Net asset value - end of period $ 5.42 $ 5.26 $ 5.19 $ 5.06 $ 5.08 $ 5.38
=========== ========= ========= ========= ========= ==========
Total return++ 10.69% 8.03% 9.28% 6.07% 0.83% 13.57%
Ratios (to average net assets)/Supplemental data ss:
Expenses 0.40% 0.87% 1.00% 1.28% 1.20% 1.04%
Net investment income 6.53% 6.39% 6.35% 6.35% 6.33% 6.25%
Portfolio turnover 73% 102% 243% 188% 240% 54%
Net assets at end of period (000 omitted) $177,291 $84,551 $68,879 $59,212 $59,479 $62,368
++ 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.
ss 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 $0.33 -- -- -- -- --
Ratios (to average net assets):
Expenses 0.79% -- -- -- -- --
Net investment income 6.14% -- -- -- -- --
</TABLE>
See notes to financial statements
34
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
California Fund
- -------------------------------------------------- -----------------------------------------------------------
Two Months
Ended Period Ended
Year Ended March 31, March 31, January 31,
- -------------------------------------------------- --------- --------- --------- ------------ --------------
1997 1996 1995 1994 1994**
- -------------------------------------------------- --------- --------- --------- ------------ --------------
Class B
- -------------------------------------------------- --------- --------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.52 $ 5.41 $ 5.47 $ 5.95 $ 6.02
--------- --------- --------- ------------ --------------
Income from investment operations# -
Net investment income ss $ 0.25 $ 0.26 $ 0.25 $ 0.04 $ 0.10
Net realized and unrealized gain (loss)
on investments (0.05) 0.11 (0.05) (0.48) --
--------- --------- --------- ------------ --------------
Total from investment operations $ 0.20 $ 0.37 $ 0.20 $ (0.44) $ 0.10
--------- --------- --------- ------------ --------------
Less distributions declared to shareholders -
From net investment income $ (0.25) $ (0.26) $ (0.25) $ (0.04) $ (0.10)
From net realized gain on investments -- -- -- -- $ (0.07)
In excess of net investment income++++ -- (0.00) -- (0.00) (0.00)
In excess of net realized gain on investments -- -- (0.01) -- --
--------- --------- --------- ------------ --------------
Total distributions declared to shareholders $ (0.25) $ (0.26) $ (0.26) $ (0.04) $ (0.17)
--------- --------- --------- ------------ --------------
Net asset value - end of period $ 5.47 $ 5.52 $ 5.41 $ 5.47 $ 5.95
========= ========= ========= ============ ==============
Total return 3.64% 6.93% 3.73% (7.38)%+++ 1.68%+++
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.54% 1.54% 1.76% 1.69%+ 1.60%+
Net investment income 4.48% 4.59% 4.72% 4.18%+ 3.64%+
Portfolio turnover 78% 69% 57% 8% 38%
Net assets at end of period (000 omitted) $36,694 $34,675 $29,057 $21,252 $19,360
**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, are 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 $0.0041, $0.002 and $0.003,
respectively.
ss 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 $0.24 $0.24 $0.04 $0.09 --
Ratios (to average net assets):
Expenses## 1.69% 1.91% 1.83%+ 1.81%+ --
Net investment income 4.33% 4.57% 4.04%+ 3.43%+ --
</TABLE>
See notes to financial statements
35
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
California Fund
- -------------------------------------------------- -----------------------------------------------------------
Two Months
Ended Period Ended
Year Ended March 31, March 31, January 31,
- -------------------------------------------------- --------- --------- --------- ------------ --------------
1997 1996 1995 1994 1994***
- -------------------------------------------------- --------- --------- --------- ------------ --------------
Class C
- -------------------------------------------------- --------- --------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.53 $ 5.42 $ 5.48 $ 5.95 $ 5.89
--------- --------- --------- ------------ --------------
Income from investment operations# -
Net investment income ss $ 0.24 $ 0.25 $ 0.26 $ 0.03 $ 0.01
Net realized and unrealized gain (loss)
on investments (0.05) 0.11 (0.06) (0.46) 0.06
--------- --------- --------- ------------ --------------
Total from investment operations $ 0.19 $ 0.36 $ 0.20 $(0.43) $ 0.07
--------- --------- --------- ------------ --------------
Less distributions declared to
shareholders -
From net investment income $(0.24) $(0.25) $(0.25) $(0.04) $(0.01)
In excess of net investment income++++ -- (0.00) -- (0.00) (0.00)
In excess of net realized gain on investments -- -- (0.01) -- --
--------- --------- --------- ------------ --------------
Total distributions declared to shareholders $(0.24) $(0.25) $(0.26) $(0.04) $(0.01)
--------- --------- --------- ------------ --------------
Net asset value - end of period $ 5.48 $ 5.53 $ 5.42 $ 5.48 $ 5.95
========= ========= ========= ============ ==============
Total return 3.51% 6.77% 3.79% (7.22)%+++ 1.25%+++
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.66% 1.67% 1.69% 1.64%+ 2.02%+
Net investment income 4.37% 4.47% 4.79% 3.92%+ 1.78%+
Portfolio turnover 78% 69% 57% 8% 38%
Net assets at end of period (000 omitted) $3,856 $4,353 $3,858 $1,701 $ 917
***For the period from the commencement of offering Class C shares, January 3, 1994, to January 31, 1994.
+Annualized.
+++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 are 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 $0.0008, $0.004, $0.001 and
$0.003, respectively.
ss 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 $ 0.23 $ 0.24 $ 0.25 $ 0.03 $ --
Ratios: (to average net assets):
Expenses## 1.81% 1.82% 1.84% 1.80%+ 3.53%+
Net investment income 4.22% 4.32% 4.64% 3.77%+ 0.27%+
</TABLE>
See notes to financial statements
36
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Florida Fund
------------------------------------------------- ------------------------------------------------------------------------------
Two Months Period
Ended Year Ended Ended
Year Ended March 31, March 31, January 31, January 31,
------------------------------------------------- ----------- ----------- ------------------------ -------------- -------------
1997 1996 1995 1994 1994 1993*
------------------------------------------------- ----------- ----------- ------------------------ -------------- -------------
Class A
------------------------------------------------- ----------- ----------- ------------------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.82 $ 9.60 $ 9.65 $ 10.63 $ 9.89 $ 9.53
----------- ----------- ------------------------ -------------- -------------
Income from investment operations# -
Net investment income ss $ 0.51 $ 0.52 $ 0.54 $ 0.09 $ 0.57 $ 0.58
Net realized and unrealized gain (loss) on
investments (0.18) 0.22 0.02 (0.98) 0.86 0.36
----------- ----------- ------------------------ -------------- -------------
Total from investment operations $ 0.33 $ 0.74 $ 0.56 $ (0.89) $ 1.43 $ 0.94
----------- ----------- ------------------------ -------------- -------------
Less distributions declared to
shareholders -
From net investment income $ (0.51) $ (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 $ (0.51) $ (0.52) $ (0.61) $ (0.09) $ (0.69) $ (0.58)
----------- ----------- ------------------------ -------------- -------------
Net asset value - end of period $ 9.64 $ 9.82 $ 9.60 $ 9.65 $ 10.63 $ 9.89
=========== =========== ======================== ============== =============
Total return++ 3.43% 7.81% 6.07% (8.39)%+++ 14.71% 10.28%+
Ratios (to average net assets)/Supplemental data ss:
Expenses## 0.86% 0.86% 0.60% 0.77%+ 0.49% 0.05%+
Net investment income 5.26% 5.26% 5.75% 5.15%+ 5.42% 6.27%+
Portfolio turnover 24% 56% 131% 19% 53% 54%
Net assets at end of period (000 omitted) $80,342 $87,553 $89,894 $108,579 $124,131 $74,329
*For the period from the commencement of offering Class A shares, February 3, 1992, to January 31, 1993.
+Annualized.
+++Not annualized.
#Per share data for the periods subsequent to January 31, 1994, are 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 $0.0015.
ss 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 $0.52 $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>
See notes to financial statements
37
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Florida Fund
- -------------------------------------------------- -----------------------------------------------------------------
Two Months
Ended Period Ended
Year Ended March 31, March 31, January 31,
- -------------------------------------------------- ----------- ----------- ----------- ------------ --------------
1997 1996 1995 1994 1994**
- -------------------------------------------------- ----------- ----------- ----------- ------------ --------------
Class B
- -------------------------------------------------- ----------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.82 $ 9.60 $ 9.64 $10.62 $10.69
----------- ----------- ----------- ------------ --------------
Income from investment operations# -
Net investment income ss $ 0.43 $ 0.43 $ 0.43 $ 0.07 $ 0.18
Net realized and unrealized gain (loss)
on investments (0.18) 0.22 0.04 (0.98) 0.03
----------- ----------- ----------- ------------ --------------
Total from investment operations $ 0.25 $ 0.65 $ 0.47 $(0.91) $ 0.21
----------- ----------- ----------- ------------ --------------
Less distributions declared to
shareholders -
From net investment income $ (0.43) $ (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) $ (0.43) $ (0.51) $(0.07) $(0.28)
----------- ----------- ----------- ------------ --------------
Net asset value - end of period $ 9.64 $ 9.82 $ 9.60 $ 9.64 $10.62
=========== =========== =========== ============ ==============
Total return 2.56% 6.88% 5.06% (8.55)%+++ 4.87%+
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.72% 1.74% 1.68% 1.82%+ 1.64%+
Net investment income 4.40% 4.36% 4.63% 4.08%+ 3.82%+
Portfolio turnover 24% 56% 131% 19% 53%
Net assets at end of period (000 omitted) $14,701 $14,448 $12,667 $7,995 $7,244
**For the period from the commencement of offering Class B shares, September 7, 1993, to January 31, 1994.
+Annualized.
+++Not annualized.
#Per share data for the periods subsequent to January 31, 1994, are 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 was $0.0012.
ss 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
38
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Georgia Fund
- -------------------------------------------------- ---------------------------------------------------
Two Months
Ended
Year Ended March 31, March 31,
- -------------------------------------------------- ----------- ----------- ----------- ------------
1997 1996 1995 1994
- -------------------------------------------------- ----------- ----------- ----------- ------------
Class A
- -------------------------------------------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.47 $ 10.35 $ 10.38 $ 11.30
----------- ----------- ----------- ------------
Income from investment operations# -
Net investment income ss $ 0.56 $ 0.54 $ 0.57 $ 0.09
Net realized and unrealized gain (loss)
on investments (0.10) 0.12 -- (0.92)
----------- ----------- ----------- ------------
Total from investment operations $ 0.46 $ 0.66 $ 0.57 $ (0.83)
----------- ----------- ----------- ------------
Less distributions declared to shareholders -
From net investment income $ (0.55) $ (0.54) $ (0.56) $ (0.06)
From net realized gain on investments -- -- (0.01) --
In excess of net investment income++++ -- (0.00) -- (0.03)
In excess of net realized gain on investments -- -- (0.03) --
----------- ----------- ----------- ------------
Total distributions declared to shareholders $ (0.55) $ (0.54) $ (0.60) $ (0.09)
----------- ----------- ----------- ------------
Net asset value - end of period $ 10.38 $ 10.47 $ 10.35 $ 10.38
=========== =========== =========== ============
Total return++ 4.47% 6.48% 5.65% (7.34)%+++
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.03% 1.17% 1.14% 1.18%+
Net investment income 5.34% 5.11% 5.50% 5.05%+
Portfolio turnover 27% 65% 56% 5%
Net assets at end of period (000 omitted) $59,843 $68,183 $74,432 $85,878
+Annualized.
+++Not annualized.
#Per share data for the periods subsequent to January 31, 1994, are based on average shares
outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without 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.
ss 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 $0.55 $0.53 $0.56 $0.09
Ratios (to average net assets):
Expenses## 1.10% 1.27% 1.24% 1.28%+
Net investment income 5.27% 5.01% 5.40% 4.95%+
</TABLE>
See notes to financial statements
39
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Georgia Fund
- --------------------------------------------- -----------------------------------------------------------------------------
Period Ended
Year Ended January 31, January 31,
- --------------------------------------------- -----------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989*
- --------------------------------------------- -----------------------------------------------------------------------------
Class A
- --------------------------------------------- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.57 $ 10.22 $ 9.83 $ 9.73 $ 9.73 $ 9.53
----------- ----------- ----------- ----------- ----------- --------------
Income from investment operations -
Net investment income ss $ 0.57 $ 0.58 $ 0.61 $ 0.63 $ 0.66 $ 0.32
Net realized and unrealized gain on
investments 0.75 0.38 0.46 0.12 0.02 0.14
----------- ----------- ----------- ----------- ----------- --------------
Total from investment operations $ 1.32 $ 0.96 $ 1.07 $ 0.75 $ 0.68 $ 0.46
----------- ----------- ----------- ----------- ----------- --------------
Less distributions declared to shareholders -
From net investment income $ (0.55) $ (0.60) $ (0.66) $ (0.63) $ (0.66) $(0.26)
From net realized gain on investments (0.01) (0.01) (0.02) (0.02) (0.02) --
In excess of net investment income (0.03) -- -- -- -- --
----------- ----------- ----------- ----------- ----------- --------------
Total distributions declared to
shareholders $ (0.59) $ (0.61) $ (0.68) $ (0.65) $ (0.68) $(0.26)
----------- ----------- ----------- ----------- ----------- --------------
Net asset value - end of period $ 11.30 $ 10.57 $ 10.22 $ 9.83 $ 9.73 $ 9.73
=========== =========== =========== =========== =========== ==============
Total return++ 12.71% 9.56% 11.29% 8.06% 7.19% 7.57%+
Ratios (to average net assets)/Supplemental data ss:
Expenses 1.21% 1.08% 0.99% 0.74% 0.42% 0.40%+
Net investment income 5.10% 5.75% 6.08% 6.46% 6.72% 6.18%+
Portfolio turnover 14% 27% 36% 71% 99% --
Net assets at end of period (000 omitted) $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.
++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.
ss The investment adviser and/or the distributor voluntarily waived a portion of their management 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 $ 0.56 $ 0.57 $ 0.60 $ 0.59 $ 0.57 $ 0.29
Ratios (to average net assets):
Expenses 1.31% 1.18% 1.09% 1.11% 1.31% 1.07%+
Net investment income 5.00% 5.65% 5.98% 6.09% 5.83% 5.51%+
</TABLE>
See notes to financial statements
40
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Georgia Fund
- --------------------------------------------- ---------------------------------------------------------------------
Two Months Period Ended
Year Ended March 31, Ended March 31, January 31,
- --------------------------------------------- ---------------------------------------------------------------------
1997 1996 1995 1994 1994**
- --------------------------------------------- ---------------------------------------------------------------------
Class B
- --------------------------------------------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.47 $ 10.36 $10.38 $11.30 $11.26
----------- ----------- --------------------------- --------------
Income from investment operations# -
Net investment income ss $ 0.47 $ 0.45 $ 0.47 $ 0.07 $ 0.19
Net realized and unrealized gain (loss) on
investments (0.09) 0.12 0.02 (0.91) 0.05
----------- ----------- --------------------------- --------------
Total from investment operations $ 0.38 $ 0.57 $ 0.49 $(0.84) $ 0.24
----------- ----------- --------------------------- --------------
Less distributions declared to shareholders -
From net investment income $(0.47) $ (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 $(0.47) $ (0.46) $(0.51) $(0.08) $(0.20)
----------- ----------- --------------------------- --------------
Net asset value - end of period $10.38 $ 10.47 $10.36 $10.38 $11.30
=========== =========== =========================== ==============
Total return 3.63% 5.52% 4.88% (7.47)%+++ 5.34%+
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.83% 2.00% 1.96% 1.99%+ 1.97%+
Net investment income 4.53% 4.27% 4.66% 4.17%+ 3.83%+
Portfolio turnover 27% 65% 56% 5% 14%
Net assets at end of period (000 omitted) $9,995 $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, are 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 was $0.002.
ss The investment adviser voluntarily waived a portion of its management fee for the period indicated. If this fee
had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.47 -- -- -- --
Ratios: (to average net assets):
Expenses## 1.90% -- -- -- --
Net investment income 4.46% -- -- -- --
</TABLE>
See notes to financial statements
41
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Maryland Fund
- ----------------------------------------------------------------------------------------------------------------------
Two Months
Ended
Year Ended March 31, March 31, Year Ended January 31,
- --------------------------------------------- -----------------------------------------------------------------------
1997 1996 1995 1994 1994 1993
- --------------------------------------------- -----------------------------------------------------------------------
Class A
- --------------------------------------------- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.04 $ 10.94 $ 10.89 $ 11.81 $ 11.40 $ 11.20
---------- ----------- ----------- ------------ ----------- -----------
Income from investment operations# -
Net investment income ss $ 0.57 $ 0.57 $ 0.59 $ 0.10 $ 0.62 $ 0.67
Net realized and unrealized gain (loss) on
investments (0.16) 0.09 0.09 (0.92) 0.53 0.24
---------- ----------- ----------- ------------ ----------- -----------
Total from investment operations $ 0.41 $ 0.66 $ 0.68 $ (0.82) $ 1.15 $ 0.91
---------- ----------- ----------- ------------ ----------- -----------
Less distributions declared to shareholders -
From net investment income $ (0.56) $ (0.56) $ (0.59) $ (0.06) $ (0.61) $ (0.69)
From net realized gain on investments -- -- -- -- (0.07) (0.02)
In excess of net investment income++++ -- -- (0.00) (0.04) (0.04) --
In excess of net realized gain on
investments -- -- (0.04) -- (0.02) --
---------- ----------- ----------- ------------ ----------- -----------
Total distributions declared to
shareholders $ (0.56) $ (0.56) $ (0.63) $ (0.10) $ (0.74) $ (0.71)
---------- ----------- ----------- ------------ ----------- -----------
Net asset value - end of period $ 10.89 $ 11.04 $ 10.94 $ 10.89 $ 11.81 $ 11.40
========== =========== =========== ============ =========== ===========
Total return++ 3.75% 6.17% 6.51% (6.96)%+++ 10.27% 8.34%
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.12% 1.19% 1.21% 1.23%+ 1.25% 1.14%
Net investment income 5.21% 5.10% 5.46% 4.97%+ 5.42% 6.13%
Portfolio turnover 22% 15% 31% 1% 25% 5%
Net assets at end of period (000 omitted) $126,405 $139,297 $145,361 $161,290 $173,419 $145,794
+Annualized.
+++Not annualized.
#Per share data for the periods subsequent to January 31, 1994, are 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.
ss The investment adviser voluntarily waived a portion of its management fee for the period indicated. If this fee
had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $0.57 -- -- -- -- --
Ratios: (to average net assets):
Expenses## 1.19% -- -- -- -- --
Net investment income 5.14% -- -- -- -- --
</TABLE>
See notes to financial statements
42
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Maryland Fund
- --------------------------------------------- -------------------------------------------------------
Year Ended January 31, 1992 1991 1990 1989 1988
- --------------------------------------------- ---------------------- --------- --------- ----------
Class A
- --------------------------------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.97 $ 10.79 $ 10.76 $ 10.62 $ 11.20
---------- ----------- --------- --------- ----------
Income from investment operations -
Net investment income $ 0.70 $ 0.70 $ 0.69 $ 0.69 $ 0.68
Net realized and unrealized gain (loss) on
investments 0.31 0.19 0.04 0.14 (0.57)
---------- ----------- --------- --------- ----------
Total from investment operations $ 1.01 $ 0.89 $ 0.73 $ 0.83 $ 0.11
---------- ----------- --------- --------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.76) $ (0.70) $ (0.69) $ (0.69) $ (0.67)
From net realized gain on investments (0.02) (0.01) (0.01) -- (0.01)
From paid-in capital -- -- -- -- (0.01)
---------- ----------- --------- --------- ----------
Total distributions declared to
shareholders $ (0.78) $ (0.71) $ (0.70) $ (0.69) $ (0.69)
---------- ----------- --------- --------- ----------
Net asset value - end of period $ 11.20 $ 10.97 $ 10.79 $ 10.76 $ 10.62
========== =========== ========= ========= ==========
Total return++ 9.55% 8.51% 6.90% 8.15% 1.25%
Ratios (to average net assets)/Supplemental data:
Expenses 1.16% 1.17% 1.18% 1.14% 1.10%
Net investment income 6.32% 6.45% 6.33% 6.52% 6.47%
Portfolio turnover 9% 41% 58% 34% 13%
Net assets at end of period (000 omitted) $119,120 $101,742 $93,175 $84,380 $79,906
++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>
See notes to financial statements
43
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Maryland Fund
- --------------------------------------------- -----------------------------------------------------------
Two Months
Ended Period Ended
Year Ended March 31, March 31, January 31,
- --------------------------------------------- -----------------------------------------------------------
1997 1996 1995 1994 1994**
- --------------------------------------------- -----------------------------------------------------------
Class B
- --------------------------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.03 $ 10.93 $ 10.88 $11.80 $11.88
--------- --------- --------- ------------ --------------
Income from investment operations# -
Net investment income ss $ 0.50 $ 0.48 $ 0.51 $ 0.08 $ 0.22
Net realized and unrealized gain (loss) on
investments (0.17) 0.10 0.09 (0.91) (0.01)
--------- --------- --------- ------------ --------------
Total from investment operations $ 0.33 $ 0.58 $ 0.60 $(0.83) $ 0.21
--------- --------- --------- ------------ --------------
Less distributions declared to shareholders -
From net investment income $ (0.48) $ (0.48) $ (0.51) $(0.08) $(0.21)
From net realized gain on investments -- -- -- -- (0.05)
In excess of net investment income++++ -- -- (0.00) (0.01) (0.01)
In excess of net realized gain on
investments -- -- (0.04) -- (0.02)
--------- --------- --------- ------------ --------------
Total distributions declared to
shareholders $ (0.48) $ (0.48) $ (0.55) $(0.09) $(0.29)
--------- --------- --------- ------------ --------------
Net asset value - end of period $ 10.88 $ 11.03 $ 10.93 $10.88 $11.80
========= ========= ========= ============ ==============
Total return 3.03% 5.41% 5.75% (7.08)%+++ 4.45%+
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.82% 1.91% 1.93% 1.95%+ 1.81%+
Net investment income 4.50% 4.36% 4.73% 4.19%+ 4.23%+
Portfolio turnover 22% 15% 31% 1% 25%
Net assets at end of period (000 omitted) $17,379 $13,694 $11,168 $6,478 $5,345
**For the period from the commencement of offering Class B shares, September 7, 1993, to January 31,
1994.
+Annualized.
+++Not annualized.
#Per share data for the periods subsequent to January 31, 1994, are 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 in excess of net investment income was
$0.003.
ss The investment adviser voluntarily waived a portion of its management fee for the period indicated.
If this fee had been incurred by the Fund, the net investment income per share and the ratios would
have been:
Net investment income $ 0.49 -- -- -- --
Ratios: (to average net assets):
Expenses## 1.89% -- -- -- --
Net investment income 4.43% -- -- -- --
</TABLE>
See notes to financial statements
44
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Massachusetts Fund
- --------------------------------------------- ------------------------------------------------------------------------
Two Months
Ended
Year Ended March 31, March 31, Year Ended January 31,
- --------------------------------------------- ------------------------------------------------------------------------
1997 1996 1995 1994 1994 1993
- --------------------------------------------- ------------------------------------------------------------------------
Class A
- --------------------------------------------- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.98 $ 10.84 $ 10.90 $ 11.75 $ 11.41 $ 11.05
---------- ----------- ----------- ------------- ----------- -----------
Income from investment operations# -
Net investment income ss $ 0.61 $ 0.60 $ 0.64 $ 0.11 $ 0.64 $ 0.68
Net realized and unrealized gain (loss) on
investments (0.14) 0.14 (0.03) (0.85) 0.58 0.39
---------- ----------- ----------- ------------- ----------- -----------
Total from investment operations $ 0.47 $ 0.74 $ 0.61 $ (0.74) $ 1.22 $ 1.07
---------- ----------- ----------- ------------- ----------- -----------
Less distributions declared to shareholders -
From net investment income $ (0.59) $ (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) -- -- --
---------- ----------- ----------- ------------- ----------- -----------
Total distributions declared to
shareholders $ (0.59) $ (0.60) $ (0.67) $ (0.11) $ (0.88) $ (0.71)
---------- ----------- ----------- ------------- ----------- -----------
Net asset value - end of period $ 10.86 $ 10.98 $ 10.84 $ 10.90 $ 11.75 $ 11.41
========== =========== =========== ============= =========== ===========
Total return++ 4.39% 6.95% 5.89% (6.34)%+++ 11.02% 10.03%
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.12% 1.17% 1.17% 1.19%+ 1.19% 1.08%
Net investment income 5.55% 5.44% 6.01% 5.64%+ 5.71% 6.33%
Portfolio turnover 33% 31% 31% 4% 30% 32%
Net assets at end of period (000 omitted) $234,874 $249,497 $262,551 $277,748 $300,894 $270,778
+Annualized.
+++Not annualized.
#Per share data for the periods subsequent to January 31, 1994, are 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 $0.002.
ss The investment adviser voluntarily waived a portion of its management fee for the period indicated. If this fee
had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $0.60 -- -- -- -- --
Ratios: (to average net assets):
Expenses## 1.19% -- -- -- -- --
Net investment income 5.48% -- -- -- -- --
</TABLE>
See notes to financial statements
45
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Massachusetts Fund
- --------------------------------------------- -----------------------------------------------------------
Year Ended January 31, 1992 1991 1990 1989 1988
- --------------------------------------------- ---------------------- ----------- ----------- ------------
Class A
- --------------------------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.68 $ 10.58 $ 10.65 $ 10.60 $ 11.25
---------- ----------- ----------- ----------- -----------
Income from investment operations -
Net investment income $ 0.73 $ 0.71 $ 0.72 $ 0.72 $ 0.71
Net realized and unrealized gain (loss) on
investments 0.43 0.11 (0.07) 0.05 (0.65)
---------- ----------- ----------- ----------- -----------
Total from investment operations $ 1.16 $ 0.82 $ 0.65 $ 0.77 $ 0.06
---------- ----------- ----------- ----------- -----------
Less distributions declared to shareholders -
From net investment income $ (0.78) $ (0.72) $ (0.72) $ (0.72) $ (0.71)
From paid-in capital (0.01) -- -- -- --
---------- ----------- ----------- ----------- -----------
Total distributions declared to
shareholders $ (0.79) $ (0.72) $ (0.72) $ (0.72) $ (0.71)
---------- ----------- ----------- ----------- -----------
Net asset value - end of period $ 11.05 $ 10.68 $ 10.58 $ 10.65 $ 10.60
========== =========== =========== =========== ===========
Total return++ 11.23% 8.12% 6.28% 7.65% 0.80%
Ratios (to average net assets)/Supplemental data:
Expenses 1.06% 1.07% 1.10% 1.07% 1.04%
Net investment income 6.65% 6.74% 6.75% 6.90% 6.79%
Portfolio turnover 51% 43% 52% 26% 27%
Net assets at end of period (000 omitted) $239,311 $213,679 $215,381 $212,763 $224,219
++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>
See notes to financial statements
46
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Massachusetts Fund
- --------------------------------------------- -----------------------------------------------------------
Two Months
Ended Period Ended
Year Ended March 31, March 31, January 31,
- --------------------------------------------- -----------------------------------------------------------
1997 1996 1995 1994 1994**
- --------------------------------------------- -----------------------------------------------------------
Class B
- --------------------------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.99 $ 10.84 $10.90 $11.75 $11.91
--------- --------- --------- ------------ --------------
Income from investment operations# -
Net investment income ss $ 0.53 $ 0.52 $ 0.55 $ 0.09 $ 0.23
Net realized and unrealized gain (loss) on
investments (0.13) 0.15 (0.02) (0.85) 0.04
--------- --------- --------- ------------ --------------
Total from investment operations $ 0.40 $ 0.67 $ 0.53 $(0.76) $ 0.27
--------- --------- --------- ------------ --------------
Less distributions declared to shareholders -
From net investment income $ (0.52) $ (0.52) $(0.56) $(0.09) $(0.22)
From net realized gain on investments -- -- (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 $ (0.52) $ (0.52) $(0.59) $(0.09) $(0.43)
--------- --------- --------- ------------ --------------
Net asset value - end of period $ 10.87 $ 10.99 $10.84 $10.90 $11.75
========= ========= ========= ============ ==============
Total return 3.66% 6.27% 5.13% (6.46)%+++ 5.89%+
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.81% 1.90% 1.89% 1.91%+ 1.81%+
Net investment income 4.81% 4.71% 5.27% 4.89%+ 4.62%+
Portfolio turnover 33% 51% 31% 4% 30%
Net assets at end of period (000 omitted) $15,204 $11,316 $8,676 $4,993 $4,191
**For the period from the commencement of offering Class B shares, September 7, 1993, to January 31,
1994.
+Annualized.
+++Not annualized.
#Per share data for the periods subsequent to January 31, 1994, are based on average shares
outstanding.
##For fiscal year ending after September 1, 1995, the Fund's expenses are calculated without reduction
of fees paid indirectly.
++++For the year ended March 31, 1996, the per share distribution in excess of net investment income was
$0.0013.
ss The investment adviser voluntarily waived a portion of its management fee for the period indicated.
If this fee had been incurred by the Fund, the net investment income per share and the ratios would
have been:
Net investment income $0.52 -- -- -- --
Ratios: (to average net assets):
Expenses## 1.88% -- -- -- --
Net investment income 4.74% -- -- -- --
</TABLE>
See notes to financial statements
47
<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 sixteen 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* (California Fund), MFS
Florida Municipal Bond Fund* (Florida Fund), MFS Georgia Municipal Bond Fund*
(Georgia Fund), MFS Maryland Municipal Bond Fund* (Maryland Fund), MFS
Massachusetts Municipal Bond Fund* (Massachusetts 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, 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, political 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 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. 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.
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. 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.
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
48
<PAGE>
Notes to Financial Statements - continued
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, 1997, the following amounts were reclassified
from accumulated distributions in excess of net investment income to
accumulated net realized loss on investments due to timing differences
between book and tax accounting for accrued market discount on disposal of
securities:
<TABLE>
<CAPTION>
Alabama Arkansas California Florida Georgia Maryland Massachusetts
Fund Fund Fund Fund Fund Fund Fund
========== ========= ============ ======== ========= =========== ===============
<S> <C> <C> <C> <C> <C> <C>
$65,498 $23,031 $69,842 $5,020 $34,609 $161,664 $79,236
</TABLE>
These changes had no effect on the net assets or the net asset value per
share of the Funds.
At March 31, 1997, 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>
Alabama Arkansas California Florida Georgia Maryland Massachusetts
Expiration Date Fund Fund Fund Fund Fund Fund Fund
================= ======== ============= ============== ============= ============= ============= ===============
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 2002 $ -- $ -- $ 277,504 $ -- $ -- $ -- $ --
March 31, 2003 -- -- $10,212,078 5,923,777 2,089,918 -- 3,052,342
March 31, 2004 -- 2,618,347 403,290 -- 1,339,129 4,231,087 1,732,935
March 31, 2005 -- 215,971 588,165 1,290,661 -- 1,055,172 405,182
-------- ----------- -------------- ------------- ------------- ------------- -----------------
Total $ $2,834,318 $11,481,037 $7,214,438 $3,429,047 $ 5,286,259 $5,190,459
======== =========== ============== ============= ============= ============= =================
</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 distribution and service
fees. All shareholders bear the common expenses of the Fund pro rata based on
settled shares outstanding of each class, without distinction between share
classes. Dividends are declared separately for each class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(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 waived a
portion of its fee with respect to the California, Georgia, Maryland and
Massachusetts Funds, which is reflected as a reduction of expenses in the
Statement of Operations.
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 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, 1997,
is a net periodic pension expense for each Fund, as follows:
Alabama Arkansas California Florida Georgia Maryland Massachusetts
Fund Fund Fund Fund Fund Fund Fund
========= ========= ============ ======== ======== ========= ===============
$3,721 $3,198 $11,432 $3,201 $5,090 $5,425 $20,098
Administrator -- Effective March 1, 1997, the Trust has an administrative
services agreement with MFS to provide the Trust with certain financial,
legal, compliance, shareholder communications and other administrative
services. As a partial reimbursement for the cost of providing these
services, the Fund pays MFS an administrative fee up to 0.015% per annum of
the Fund's average daily net assets, provided that the administrative fee is
not assessed on Fund assets that exceed $3 billion.
Distributor -- MFD, a wholly owned subsidiary of MFS, as distributor,
received $65,389, $178,324, $347,772, $86,868, $61,423, $141,691 and $177,166
as its portion of the sales charge on sales of Class A shares of the Alabama,
Arkansas, California, Georgia, Florida, Maryland and Massachusetts Funds,
respectively, for the year ended March 31, 1997.
49
<PAGE>
Notes to Financial Statements - continued
The Trustees have adopted a 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:
Each Fund's 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 $57,575, $36,598, $19,500, $51,461 and $172,420 for the
Alabama, Arkansas, Georgia, Maryland and Massachusetts Funds for the year
ended March 31, 1997. Fees incurred under the distribution plan during the
year ended March 31, 1997 were 0.25%, 0.10%, 0.00%, 0.00%, 0.25%, 0.35% and
0.35% of each Fund's average daily net assets attributable to Class A shares
on an annualized basis for the Alabama, Arkansas, California, Florida,
Georgia, Maryland and Massachusetts Funds. Payments of the 0.10% per annum
distribution fee will commence on such date as the Trustees may determine for
the Alabama, Arkansas and Georgia Funds. Payments of the 0.35% per annum
distribution and service fee by the California and Florida Funds will
commence on such date as the Trustees may determine. In the case of the
Arkansas Fund, a portion of the service fee is currently being paid by the
Fund; payment of the remaining portion of the service fee will become payable
on such date as the Trustees may determine.
Each Fund's distribution plan provides 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. Except in the case of the up
to 0.25% per annum first year service fee, payments by the California and
Florida Funds will commence on such date to be determined by the Trustees. In
the case of the Arkansas Fund, except in the case of the up to 0.25% per
annum first year service fee, the service fee is currently 0.10% per annum on
Class B shares held over one year. 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 $4,153, $2,699,
$4,126, $4,680 and $1,836 for the Alabama, Arkansas, Georgia, Maryland and
Massachusetts Funds, respectively for Class B shares. MFS retains the service
fee for accounts not attributable to a securities dealer, which amounted to
$8,426 for the California Fund for Class C shares. Fees incurred under the
distribution plan during the year ended March 31, 1997, were 1.00%, 0.84%,
0.83%, 0.80%, 1.00%, 1.00% and 1.00%, of each of the Fund's average daily net
assets attributable to Class B shares for the Alabama, Arkansas, California,
Florida, Georgia, Maryland and Massachusetts Funds, respectively on an
annualized basis. Fees incurred under the distribution plan during the year
ended March 31, 1997 were 1.00% of the Fund's average daily net assets
attributable to Class C shares for the California Fund on an annualized
basis.
Purchases over $1 million of Class A shares 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. A contingent deferred sales charge
is imposed on shareholder redemptions of Class C shares in the event of a
shareholder redemption within 12 months of purchases made on or after April
1, 1996. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended March 31, 1997 on Class
A, Class B and Class C shares were as follows:
<TABLE>
<CAPTION>
Alabama Arkansas California Florida Georgia Maryland Massachusetts
CDSC imposed Fund Fund Fund Fund Fund Fund Fund
================ ======== ========= ============ ========= ========= ========= ===============
<S> <C> <C> <C> <C> <C> <C> <C>
Class A $ -- $ -- $ 16,440 $ 10 $ 244 $ -- $ 47
-------- --------- ------------ --------- --------- --------- ---------------
Class B $7,246 $24,877 $171,782 $50,353 $45,183 $39,109 $29,809
-------- --------- ------------ --------- --------- --------- ---------------
Class C $ -- $ -- $ 3,203 $ -- $ -- $ -- $ --
======== ========= ============ ========= ========= ========= ===============
</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 each Fund's average daily net assets at an effective
annual rate of 0.13%. Prior to January 1, 1997, the fee was calculated as a
percentage of each Fund's 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>
Alabama Arkansas California Florida Georgia Maryland Massachusetts
Fund Fund Fund Fund Fund Fund Fund
============ ========= ========= ============ ========= ========= ========= ===============
<S> <C> <C> <C> <C> <C> <C> <C>
Purchases $18,212 $14,435 $217,495 $23,004 $19,667 $30,967 $82,682
Sales 24,547 43,069 253,260 30,192 29,372 43,184 90,133
</TABLE>
50
<PAGE>
Notes to Financial Statements - continued
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 California Florida Georgia Maryland Massachusetts
Fund Fund Fund Fund Fund Fund Fund
=============================== ========== ========== ============ ========= ========= =========== ===============
<S> <C> <C> <C> <C> <C> <C> <C>
Aggregate cost $79,124 $145,330 $253,441 $90,193 $63,932 $135,167 $232,542
========== ========= ============ ========= ========= =========== ===============
Gross unrealized appreciation $ 4,529 $ 5,929 $ 11,948 $ 4,250 $ 4,142 $ 7,102 $ 13,631
Gross unrealized depreciation (516) (814) (1,145) (610) (248) (752) (1,827)
---------- --------- ------------ --------- --------- ----------- ---------------
Net unrealized appreciation $ 4,013 $ 5,115 $ 10,803 $ 3,640 $ 3,894 $ 6,350 $ 11,804
========== ========= ============ ========= ========= =========== ===============
</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
Alabama Fund Arkansas Fund California Fund
-------------------- ---------------------- ------------------------
Year Ended March 31, 1997
(000 Omitted) Shares Amount Shares Amount Shares Amount
=============================== ======= =========== ========= ============ =========== ============
<S> <C> <C> <C> <C> <C> <C>
Shares sold 241 $ 2,533 892 $ 8,719 25,463 $ 140,414
Shares issued to shareholders
in reinvestment
of distributions 192 2,024 368 3,589 1,024 5,658
Shares reacquired (933) (9,831) (4,159) (40,524) (31,073) (171,472)
------- ----------- --------- ------------ ----------- ------------
Net decrease (500) $(5,274) (2,899) $(28,216) (4,586) $ (25,400)
======= =========== ========= ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
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 14,785 $ 82,615
Shares issued to shareholders
in reinvestment
of distributions 167 1,774 433 4,248 1,157 6,424
Shares reacquired (893) (9,492) (3,027) (29,685) (19,147) (106,882)
------- ----------- --------- ------------ ----------- ------------
Net decrease (265) $ (2,864) (1,642) $(16,120) (3,205) $ (17,843)
======= =========== ========= ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
Florida Fund Georgia Fund Maryland Fund
-------------------- ---------------------- ------------------------
Year Ended March 31, 1997
(000 Omitted) Shares Amount Shares Amount Shares Amount
=============================== ======= =========== ========= ============ =========== ============
<S> <C> <C> <C> <C> <C> <C>
Shares sold 4,179 $40,872 285 $2,988 483 $5,314
Shares issued to shareholders
in reinvestment
of distributions 175 1,710 169 1,776 323 3,556
Shares reacquired (4,933) (48,215) (1,204) (12,622) (1,816) (19,969)
------- ----------- --------- ------------ ----------- ------------
Net decrease (579) $ (5,633) (750) $ (7,858) (1,010) $(11,099)
======= =========== ========= ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31, 1996
(000 Omitted) Shares Amount Shares Amount Shares Amount
=============================== ======= =========== ========= ============ =========== ============
<S> <C> <C> <C> <C> <C> <C>
Shares sold 4,022 $ 39,659 599 $ 6,335 576 $ 6,386
Shares issued to shareholders
in reinvestment
of distributions 164 1,624 186 1,962 358 3,959
Shares reacquired (4,632) (45,774) (1,458) (15,415) (1,602) (17,764)
------- ----------- --------- ------------ ----------- ------------
Net decrease (446) $ (4,491) (673) $ (7,118) (668) (7,419)
======= =========== ========= ============ =========== ============
</TABLE>
51
<PAGE>
Notes to Financial Statements - continued
<TABLE>
<CAPTION>
Class A Shares - continued
Massachusetts Fund
---------------------------
Year Ended March 31, 1997
(000 Omitted) Shares Amount
==================================================== ========= ================
<S> <C> <C>
Shares sold 5,022 $ 54,988
Shares issued to shareholders in reinvestment of
distributions 543 5,952
Shares reacquired (6,660) (72,947)
--------- ----------------
Net decrease (1,095) $(12,007)
========= ================
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31, 1996
(000 Omitted) Shares Amount
==================================================== ========= ================
<S> <C> <C>
Shares sold 3,359 $ 37,357
Shares issued to shareholders in reinvestment of
distributions 576 6,381
Shares reacquired (5,434) (60,354)
--------- ----------------
Net decrease (1,499) $(16,616)
========= ================
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Alabama Fund Arkansas Fund California Fund
------------------ ------------------- ---------------------
Year Ended March 31, 1997
(000 Omitted) Shares Amount Shares Amount Shares Amount
==================================================== ======== ======== ======== ========= ========= ==========
<S> <C> <C> <C> <C> <C> <C>
Shares sold 137 $ 1,447 93 $ 908 1,772 $ 9,775
Shares issued to shareholders in reinvestment of
distributions 15 156 16 158 136 753
Shares reacquired (41) (437) (148) (1,448) (1,490) (8,212)
-------- -------- -------- --------- --------- ----------
Net increase (decrease) 111 $ 1,166 (39) $ (382) 418 $ 2,316
======== ======== ======== ========= ========= ==========
Year Ended March 31, 1996
(000 Omitted) Shares Amount Shares Amount Shares Amount
==================================================== ======== ======== ======== ========= ========= ==========
Shares sold 183 $ 1,948 143 $ 1,406 1,980 $11,011
Shares issued to shareholders in reinvestment of
distributions 8 88 17 169 130 724
Shares reacquired (33) (345) (94) (923) (1,194) (6,655)
-------- -------- -------- --------- --------- ----------
Net increase 158 $ 1,691 66 $ 652 916 $ 5,080
======== ======== ======== ========= ========= ==========
Florida Fund Georgia Fund Maryland Fund
------------------ ------------------- ---------------------
Year Ended March 31, 1997
(000 Omitted) Shares Amount Shares Amount Shares Amount
==================================================== ======== ======== ======== ========= ========= ==========
Shares sold 298 $ 2,980 201 $ 2,101 542 $ 5,964
Shares issued to shareholders in reinvestment of
distributions 25 243 22 225 34 379
Shares reacquired (269) (2,696) (236) (2,459) (220) (2,424)
-------- -------- -------- --------- --------- ----------
Net increase (decrease) 54 $ 527 (13) $ (133) 356 $ 3,919
======== ======== ======== ========= ========= ==========
Year Ended March 31, 1996
(000 Omitted) Shares Amount Shares Amount Shares Amount
==================================================== ======== ======== ======== ========= ========= ==========
Shares sold 396 $ 3,905 301 $ 3,193 485 $ 5,368
Shares issued to shareholders in reinvestment of
distributions 25 249 21 218 27 297
Shares reacquired (269) (2,660) (186) (1,961) (292) (3,242)
-------- -------- -------- --------- --------- ----------
Net increase 152 $ 1,494 136 $ 1,450 220 $ 2,423
======== ======== ======== ========= ========= ==========
</TABLE>
52
<PAGE>
Notes to Financial Statements - continued
Class B Shares - continued
Massachusetts Fund
--------------------
Year Ended March 31, 1997
(000 Omitted) Shares Amount
==================================================== ======== ==========
Shares sold 546 $ 5,976
Shares issued to shareholders in reinvestment of
distributions 35 383
Shares reacquired (212) (2,324)
-------- ----------
Net increase 369 $ 4,035
======== ==========
Year Ended March 31, 1996
(000 Omitted) Shares Amount
==================================================== ======== ==========
Shares sold 374 $ 4,133
Shares issued to shareholders in reinvestment of
distributions 23 251
Shares reacquired (166) (1,834)
-------- ----------
Net increase 231 $ 2,550
======== ==========
Class C Shares
California Fund
------------------
Year Ended March 31, 1997
(000 Omitted) Shares Amount
==================================================== ======== =========
Shares sold 312 $ 1,727
Shares issued to shareholders in reinvestment of
distributions 14 80
Shares reaquired (411) (2,275)
-------- ---------
Net decrease (85) $ (468)
======== =========
Year Ended March 31, 1996
(000 Omitted) Shares Amount
==================================================== ======== =========
Shares sold 368 $ 2,042
Shares issued to shareholders in reinvestment of
distributions 14 80
Shares reaquired (307) (1,701)
-------- ---------
Net increase 75 $ 421
======== =========
(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 $400 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 each of the Funds for the year ended March 31, 1997, ranged from $0 to
$2,853.
(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.
<TABLE>
<CAPTION>
Futures Contracts Unrealized
Fund Description Expiration Contracts Position Depreciation
================== ========================== =============== ============== ============= =================
<S> <C> <C> <C> <C> <C>
Alabama Fund Municipal Bond Index June 1997 45 Long $101,531
Arkansas Fund Municipal Bond Index June 1997 20 Long $40,728
</TABLE>
At March 31, 1997, 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, 1997.
<TABLE>
<CAPTION>
Principal Amount Unrealized
Fund Description Index (000 Omitted) Value Depreciation
=========== ================================================= ================= ================ ============= ===============
<S> <C> <C> <C> <C> <C>
Arkansas Puerto Rico Public Buildings Authority
Public Education and Health Rev., 6.45s, 2016 PSA Municipal Swap $2,000 $1,874,880 $(125,120)
Maryland Puerto Rico Public Buildings Authority
Public Education and Health Rev., 6.45s, 2016 PSA Municipal Swap 3,000 2,812,320 (187,680)
</TABLE>
53
<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 California Municipal Bond Fund, MFS
Florida Municipal Bond Fund, MFS Georgia Municipal Bond Fund, MFS Maryland
Municipal Bond Fund and MFS Massachusetts Municipal Bond Fund (portfolios of
MFS Municipal Series Trust) as of March 31, 1997, the related statements of
operations for the year then ended, the statements of changes in net assets
for the years ended March 31, 1997, and 1996, and the financial highlights
for each of the years in the three-year period ended March 31, 1997, the two
months ended March 31, 1994, and each of the years in the seven-year period
ended January 31, 1994, (except for MFS California Municipal Bond Fund which
is for each of the years in the three-year period ended March 31, 1997, the
two months ended March 31, 1994, the eleven months ended January 31, 1994,
and for each of the years in the seven-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, 1997 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, 1997,
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 25, 1997
-----------------------------------------------------------
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.
54
<PAGE>
Introducing a quick and easy way to learn some financial basics:
The ABCs of Investing
part of MFS(R) Heritage Planning(SM)
[LOGO OF JUGGLING BLOCKS]
This series of brief messages provides an overview of investment topics,
including:
(bullet) Dollar-cost Averaging: a simple method of investing that could work
for anyone
(bullet) Interest Rate Changes: what every fixed-income investor should know
(bullet) Lump-sum Rollovers: how to handle a windfall
(bullet) Professional Financial Advisers: why even smart investors may need one
(bullet) Straw into Gold: tips for weaving small lifestyle changes into dollars
to invest
(bullet) Weathering Market Downturns: how to maintain perspective
(bullet) Basic Steps Smart Investors Take Automatically
The series will include messages on other topics as they become available.
You can read through each topic quickly - in five minutes at most. Of course,
these materials are not designed to turn you into an expert. Your financial
adviser can provide more information on any of the ABC subjects. A conversation
with your adviser might also provide an opportune occasion to review your
portfolio and to assess your present and future financial needs.
To request your free copy of The ABCs of Investing series, call MFS at
1-800-225-2606 any business day from 8 a.m. to 8 p.m. Eastern time.
As part of MFS Heritage Planning, your adviser has access to a wide range of MFS
materials he or she would be happy to share with you on topics related to the
intergenerational concerns of people today. These include financing college
tuition and a secure retirement, eldercare, tax-smart gifting strategies, estate
and health care planning, and other issues.
55
<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 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
Stock
- -------------------------------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Capital Growth Fund
MFS(R) Emerging Growth Fund
MFS(R) Gold & Natural Resources Fund
MFS(R) Growth Opportunities Fund
MFS(R) Managed Sectors Fund
MFS(R) OTC Fund
MFS(R) Research Fund
MFS(R) Research Growth and Income Fund
MFS(R) Strategic Growth Fund
MFS(R) Value Fund
Stock and Bond
- -------------------------------------------------------------------------------
MFS(R) Total Return Fund
MFS(R) Utilities Fund
Bond
- -------------------------------------------------------------------------------
MFS(R) Bond Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Securities Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
Limited Maturity Bond
- -------------------------------------------------------------------------------
MFS(R) Government Limited Maturity Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
World
- -------------------------------------------------------------------------------
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
MFS(R)/Foreign & Colonial International Growth Fund
MFS(R)/Foreign & Colonial International Growth and Income Fund
MFS(R) World Asset Allocation Fundsm
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
National Tax-Free Bond
- -------------------------------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
State Tax-Free Bond
- -------------------------------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina, Pennsylvania, South Carolina, Tennessee,
Virginia, West Virginia
Money Market
- -------------------------------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
56
<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 advisers)
Walter E. Robb, III - President and Treasurer, Benchmark Advisors, Inc.
(corporate financial consultants); President, Benchmark Consulting Group, Inc.
(office services); 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*
David B. Smith*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
*Affiliated with the Investment Adviser
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.
World Wide Web
www.mfs.com
[MFS DALBAR LOGO]
For the third year in a row, MFS earned a #1 ranking in the DALBAR, Inc.
Broker/Dealer Survey, Main Office Operations Service Quality Category. The firm
achieved a 3.48 overall score on a scale of 1 to 4 in the 1996 survey. A
total of 110 firms responded, offering input on the quality of service they
received from 29 mutual fund companies nationwide. The survey contained
questions about service quality in 15 categories, including "knowledge of
phone service contacts," "accuracy of transaction processing," and "overall
ease of doing business with the firm."
57
<PAGE>
MFS(R) Municipal
Series Trust
[DALBAR Logo]
500 Boylston Street
Boston, MA 02116-3741
MFS(R) Alabama Municipal Bond Fund
MFS(R) Arkansas Municipal Bond Fund
MFS(R) California Municipal Bond Fund
MFS(R) Florida Municipal Bond Fund
MFS(R) Georgia Municipal Bond Fund
MFS(R) Maryland Municipal Bond Fund
MFS(R) Massachusetts Municipal Bond Fund
[MFS INVESTMENT MANAGEMENT Logo]
We invented the mutual fund(SM)
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
54/254
55/255
27/227/327
40/240
56/256
45/245
(c) 1997 MFS Fund Distributors, Inc., 500 Boylston Street,
Boston, MA 02116-3741
MST-2A-5/97-52M
<PAGE>
[logo MFS INVESTMENT MANAGEMENT]
Annual Report
for Year Ended
March 31, 1997
MFS(R) Municipal Series Trust
For the States of: Mississippi, New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Virginia and West Virginia
[GRAPHIC Money]
<PAGE>
Table of Contents
Letter from the Chairman 1
Portfolio Managers' Overview 2
Portfolio Managers' Profiles 2
Performance Summary 3
Fund Facts 4
Portfolio of Investments 13
Financial Statements 29
Notes to Financial Statements 61
Independent Auditors' Report 68
Trustees and Officers 69
Highlights
[bullet] The municipal bond market experienced significant volatility during
the past 12 months, with yields on high-grade municipals ranging
from a high of almost 6% in June to a low of 5.3% in November,
before ending the year at 5.7%.
[bullet] The diminished concern about tax reform, as well as the improved
fiscal positions of most state and local governments, contributed to
the municipal market's strong relative performance.
[bullet] Demand for municipal securities by casualty insurance companies has
been strong, a result of these companies' continued profitability
and desire to reduce taxable income.
[bullet] The Funds are seeking to protect asset values when interest rates
rise by increasing their cash positions. We are also selectively
purchasing higher-yielding credits that, in the opinion of our
research group, have proven to be the best investments in most
markets.
<PAGE>
Letter from the Chairman
[photo of A. Keith Brodkin]
Dear Shareholders:
After more than six years of expansion, the U.S. economy is experiencing
another year of moderate growth in 1997, although a few signs point to the
possibility of a modest rise in inflation during the year. On the positive
side, the pattern of moderate growth and inflation set over the past few
years now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain
on track for some time. Also, gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be
seen in the continuing high levels of consumer debt and rising personal
bankruptcies, as well as in the ongoing tightness in the labor market, which
could add some inflationary pressures to the economy. Given these somewhat
conflicting indicators, we expect real (inflation-adjusted) growth to revolve
around 2% in 1997, with more strength occurring earlier in the year.
In the bond markets, conflicting signals over the strength of the economy
have created near-term volatility, and the Federal Reserve Board has begun
taking measured steps to control inflation by raising short-term interest
rates. Should additional signs of more rapid economic growth and,
particularly, of higher inflation appear, we would expect the Fed to continue
its anti-inflationary stance. While inflationary forces largely remained in
check in 1996, the continued strength in the labor market means that a pickup
in inflation is still possible. At the same time, the U.S. budget deficit
continues to decline and, as a percentage of gross domestic product, is now
less than 2%, which we consider a positive development for the bond markets.
Although interest rates may move higher over the coming months, we believe
that, at current levels, fixed-income markets remain equitably valued.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[/s/ A. Keith Brodkin]
A. Keith Brodkin
Chairman and President
April 14, 1997
1
<PAGE>
Portfolio Managers' Overview
Dear Shareholders:
The municipal bond market experienced significant volatility during the
fiscal year ended March 31, 1997. High-grade municipal yields ranged from a
high of almost 6% in June to a low of 5.3% in November, before ending the
year at 5.7%. Municipals outperformed U.S. Treasuries during the period, as
yields on 30-year Treasury bonds rose approximately 50 basis points (0.50%)
to 7.1% (although principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity).
The primary reason for the strong relative performance of municipals was
the diminished concern about tax reform and its potential impact on the
market. This caused the ratio of municipal to Treasury yields to drop from a
fiscal-year high of approximately 85% last April to 82.5% by early May. This
relationship, like absolute yields, ranged widely during the fiscal year.
Generally, we witnessed strong demand for municipals and good relative
performance when yields rose, and underperformance by municipals when yields
declined. This trend was most visible during the fall of 1996, when the ratio
reached almost 80% and Treasury yields were close to their fiscal-year high
of 7.15%. The government market then rallied sharply, as a number of
statistics indicated a slowing economy. Municipals lagged, and the yield
ratio moved to over 84%, with yields on Treasuries dropping to 6.35%. The
ratio ended the fiscal year at about 80%.
During the year, demand for municipal securities by casualty insurance
companies was strong owing to these companies' continued profitability and
desire to reduce taxable income. Individual investors were also major buyers
when yields increased. During this period, mutual funds had generally flat
cash flows, as the equity market captivated the interest of most fund
investors. The supply of new municipal issues was essentially unchanged over
the period, while the redemption of older issues continued to run relatively
high. These factors helped create favorable supply/demand conditions for
municipals during the year.
Credit quality in the municipal market has generally continued its
improving trend, with most state and local budgets in very good shape. Health
care providers and utilities have come under pressure in particular markets,
while most corporate-backed industrial revenue bonds have done well. Unlike
some previous years, there has been no major credit event to impact the
market. This factor, combined with the increase in the issuance of insured
bonds from 43% of the market in 1995 to 47% currently, has caused yield
spreads for quality issues to continue narrowing, while lower-quality bonds
have outperformed.
Last year, our strategy was to remain fully invested and reduce interest
rate exposure by hedging in the futures market. This was effective when the
market sold off but, in many cases, the positive impact was more than offset
when the market rallied. This year, we are seeking to protect asset values
when rates rise by increasing our cash positions. Finally, we believe that
bond insurers will continue to grow market share and that credit spreads will
remain tight. In light of this expectation, we are selectively purchasing
higher-yielding credits recommended by our research group.
Respectfully,
[/s/ David R. King, Geoffrey L. Schechter, and David B. Smith]
David R. King, Geoffrey L. Schechter, and David B. Smith
Portfolio Managers
Portfolio Managers' Profiles
David R. 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 and Vice President - Investments in 1988. Mr. King is a
Chartered Financial Analyst (C.F.A.) and currently has portfolio management
responsibilities for the Pennsylvania, South Carolina, and Tennessee state
Funds.
Geoffrey L. 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. Mr. Schechter is a Certified Public Accountant (C.P.A.) and a C.F.A.
and currently has portfolio management responsibilities for the Mississippi,
New York, and North Carolina state Funds.
David B. 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.
2
<PAGE>
Performance Summary
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 Brothers Municipal Bond Index (the Lehman Index), an unmanaged index
of municipal bond investments rated "Baa" or higher. However, while 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.
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.
Mississippi
The Fund's total returns for the fiscal year ended March 31, 1997 of 5.22%
for Class A shares and 4.33% for Class B shares underperformed the 5.45%
return of the Lehman Index, as well as the 5.04% average return for other
state tax-exempt municipal bond funds over the same period, as reported by
Lipper Analytical Services, an independent firm that reports mutual fund
performance. These returns assume the reinvestment of dividends and capital
gains but exclude the effects of any sales charges. The Fund's
underperformance relative to the Lehman Index is primarily attributable to
the aggressively defensive posture taken during the fourth quarter of the
calendar year, a period when interest rates declined dramatically.
New York
The Fund's total returns for the fiscal year ended March 31, 1997 of 4.68%
for Class A shares and 3.77% for Class B shares underperformed the 5.45%
return of the Lehman Index, as well as the 4.82% average return for New York
state tax-exempt municipal bond funds over the same period, as reported by
Lipper Analytical Services. These returns assume the reinvestment of
dividends and capital gains but exclude the effects of any sales charges. The
Fund's underperformance relative to the Lehman Index is primarily
attributable to the aggressively defensive posture taken during the fourth
quarter of the calendar year, a period when interest rates declined
dramatically.
North Carolina
The Fund's total returns for the fiscal year ended March 31, 1997 of 5.09%
for Class A shares, 4.36% for Class B shares, and 4.41% for Class C shares
underperformed the 5.45% return of the Lehman Index over the same period.
These returns assume the reinvestment of dividends and capital gains but
exclude the effects of any sales charges. Class A shares outperformed the
4.79% average return over the same period for North Carolina state tax-exempt
municipal bond funds, as reported by Lipper Analytical Services, while Class
B and Class C shares modestly underperformed the average. The Fund's
underperformance relative to the Lehman Index is primarily attributable to
the aggressively defensive posture taken during the fourth quarter of the
calendar year, a period when interest rates declined dramatically.
Pennsylvania
For the fiscal year ended March 31, 1997 the Fund's Class A shares provided a
total return of 4.67%, and Class B shares returned 3.83%. These figures
compare to a 4.95% return for the average Pennsylvania fund, according to
Lipper Analytical Services, and to a 5.45% return for the Lehman Index over
the same period. These returns assume the reinvestment of dividends and
capital gains but exclude the effects of any sales charges. The
underperformance was primarily attributable to the defensive posture taken
during the fourth quarter, when interest rates declined dramatically.
South Carolina
For the fiscal year ended March 31, 1997 the Fund's Class A shares provided a
total return of 4.46%, and Class B shares returned 3.73%. These figures
compare to a 5.04% return for the average South Carolina fund, according to
Lipper Analytical Services, and to a 5.45% return for the Lehman Index over
the same period. These returns assume the reinvestment of dividends and
capital gains but exclude the effects of any sales charges. The primary
reason for the underperformance was the defensive posture taken during the
fourth quarter, when interest rates declined dramatically.
Tennessee
For the fiscal year ended March 31, 1997 the Fund's Class A shares provided a
total return of 4.48%, and Class B shares returned 3.76%. These returns
assume the reinvestment of dividends and capital gains but exclude the
effects of any sales charges. These figures compare to a 4.82% return for the
average Tennessee fund, according to Lipper Analytical Services, and to a
5.45% return for the Lehman Index over the same period. The underperformance
was primarily attributable to the defensive posture taken during the fourth
quarter, when interest rates declined dramatically.
3
<PAGE>
Performance Summary - continued
Virginia
The Fund's total returns for the fiscal year ended March 31, 1997 were 3.97%
for Class A shares, 3.24% for Class B shares, and 3.30% for Class C shares.
These returns assume the reinvestment of dividends and capital gains but
exclude the effects of any sales charges. These figures compare to a 4.92%
return for the average Virginia fund, according to Lipper Analytical
Services, and to a 5.45% return for the Lehman Index over the same period. We
maintained the Fund's holdings of high-quality longer-maturity bonds during
the fiscal year to support its dividend, hedging its interest rate exposure
during times of volatility. This strategy caused the Fund to underperform
holdings of shorter-maturity bonds. In November, we shifted gears by
unwinding the Fund's hedges, and in December we reduced its holdings of
short-dated pre-refunded bonds, reduced its holdings of longer-maturity
bonds, and increased its cash position. We are also looking to augment the
Fund's performance by increasing its holdings of lower-rated investment-grade
bonds at appropriate yield spreads.
West Virginia
The Fund's total returns for the fiscal year ended March 31, 1997 were 5.20%
for Class A shares and 4.47% for Class B shares. These figures compare to a
5.45% return for the Lehman Index and a 5.04% return for the average other
state tax-exempt fund, as reported by Lipper Analytical Services, over the
same period. These returns assume the reinvestment of dividends and capital
gains but exclude the effects of any sales charges. We maintained the Fund's
holdings of high-quality longer-maturity bonds during the fiscal year to
support its dividend, hedging its interest rate exposure during times of
volatility. In a low-issuance environment, the Fund participated in new deals
to improve its call protection and sold shorter-call bonds. In November, we
shifted gears by unwinding the Fund's hedges and increasing its cash
position. We are also looking to augment the Fund's performance by increasing
its holdings of lower-rated, investment-grade bonds at appropriate yield
spreads.
Fund Facts
Strategy: 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.
Commencement of investment operations:
<TABLE>
<S> <C> <C> <C>
Mississippi Class A: August 6, 1992 South Carolina Class A: October 31, 1984
Class B: September 7, 1993 Class B: September 7, 1993
New York Class A: June 6, 1988 Tennessee Class A: August 12, 1988
Class B: September 7, 1993 Class B: September 7, 1993
North Carolina Class A: October 31, 1984 Virginia Class A: October 31, 1984
Class B: September 7, 1993 Class B: September 7, 1993
Class C: January 3, 1994 Class C: January 3, 1994
Pennsylvania Class A: February 1, 1993 West Virginia Class A: October 31, 1984
Class B: September 7, 1993 Class B: September 7, 1993
</TABLE>
Net assets as of March 31, 1997
Mississippi: $ 77.6 million
New York: $148.3 million
North Carolina: $423.9 million
Pennsylvania: $ 41.8 million
South Carolina: $170.8 million
Tennessee: $122.4 million
Virginia: $412.9 million
West Virginia: $139.7 million
Tax Form Summary
In January 1997, a Tax Form Summary was mailed to shareholders reporting the
federal tax status of all distributions paid during the calendar year 1996.
Exempt-Interest Dividends
For federal income tax purposes, approximately 98.9% of the total dividends
paid by each Fund from net investment income during the year ended March 31,
1997 is designated as an exempt-interest dividend.
4
<PAGE>
Performance Summary - continued
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. The performance of other share 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. It is
not possible to invest in an index.
MFS(R) Mississippi Municipal Bond Fund
Growth of a Hypothetical $10,000 Investment (For the period from September 1,
1992 through March 31, 1997)
[3 line graph]
<TABLE>
<CAPTION>
MFS Mississippi Municipal Lehman Brothers Municipal
Bond Fund - Class A Consumer Price Index - U.S. Bond Index
<S> <C> <C> <C>
9/6/92 9525 10000 10000
3/31/93 9852 10221 10526
3/31/94 10085 10477 10770
3/31/95 10699 10776 11570
3/29/96 11553 11069 12540
3/31/97 12430 11361 13354
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
1 Year 3 Years Life of Fund@
- -------------------------------------------------------------------------- ------ ------- -------------
<S> <C> <C> <C>
MFS Mississippi Municipal Bond Fund (Class A) including 4.75% sales charge +0.18% +4.70% +4.29%
- -------------------------------------------------------------------------- ------- ------- -------------
MFS Mississippi Municipal Bond Fund (Class A) at net asset value +5.22% +6.42% +5.38%
- -------------------------------------------------------------------------- ------- ------- -------------
MFS Mississippi Municipal Bond Fund (Class B) with CDSC@@ +0.33% +4.61% +4.31%
- -------------------------------------------------------------------------- ------- ------- -------------
MFS Mississippi Municipal Bond Fund (Class B) at net asset value +4.33% +5.52% +4.67%
- -------------------------------------------------------------------------- ------- ------- -------------
Average other state tax-exempt municipal bond fund** +5.04% +5.95% +6.18%
- -------------------------------------------------------------------------- ------- ------- -------------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +6.19%
- -------------------------------------------------------------------------- ------- ------- -------------
Consumer Price Index* +2.91% +2.83% +2.84%
- -------------------------------------------------------------------------- ------- ------- -------------
</TABLE>
@For the period from the commencement of the Fund's investment operations,
August 6, 1992, to March 31, 1997.
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
@@These returns reflect the current maximum Class B contingent deferred
sales charge (CDSC) of 2%.
Class B share results with CDSC include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods
prior to the commencement of offering of Class B shares. Because operating
expenses attributable to Class A shares are lower than those of Class B
shares, Class B share performance generally would have been lower than Class
A share performance. The Class A share performance included within the Class
B share performance with CDSC has been adjusted to reflect the contingent
deferred sales charge (CDSC) generally applicable to Class B shares rather
than the sales charge generally applicable to Class A shares.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
5
<PAGE>
Performance Summary - continued
MFS(R) New York Municipal Bond Fund
Growth of a Hypothetical $10,000 Investment (For the period from July 1, 1988
through March 31, 1997)
[3 line graph]
<TABLE>
<CAPTION>
MFS New York Municipal Lehman Brothers Municipal
Bond Fund - Class A Consumer Price Index - U.S. Bond Index
<S> <C> <C> <C>
7/6/88 9525 10000 10000
3/30/90 10825 10953 11798
3/31/92 13136 11855 14173
3/31/93 15085 12221 15948
3/31/95 16347 12885 17530
3/31/97 18323 13565 19748
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years Life of Fund@
- ----------------------------------------------------------------------- ------ ------- ------- -------------
<S> <C> <C> <C> <C>
MFS New York Municipal Bond Fund (Class A) including 4.75% sales charge -0.28% +4.20% +5.83% +7.09%
- ----------------------------------------------------------------------- ------ ------- ------- -------------
MFS New York Municipal Bond Fund (Class A) at net asset value +4.68% +5.89% +6.86% +7.69%
- ----------------------------------------------------------------------- ------ ------- ------- -------------
MFS New York Municipal Bond Fund (Class B) with CDSC -0.21% +4.09% +5.91% +7.32%
- ----------------------------------------------------------------------- ------ ------- ------- -------------
MFS New York Municipal Bond Fund (Class B) at net asset value +3.77% +5.01% +6.22% +7.32%
- ----------------------------------------------------------------------- ------ ------- ------- -------------
Average New York tax-exempt municipal bond fund** +4.82% +5.72% +6.59% +6.47%
- ----------------------------------------------------------------------- ------ ------- ------- -------------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +7.17% +8.20%
- ----------------------------------------------------------------------- ------ ------- ------- -------------
Consumer Price Index* +2.91% +2.83% +2.82% +3.57%
- ----------------------------------------------------------------------- ------ ------- ------- -------------
</TABLE>
@For the period from the commencement of the Fund's investment operations,
June 6, 1988, to March 31, 1997.
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
Class B share results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods prior to the
commencement of offering of Class B shares. Because operating expenses
attributable to Class A shares are lower than those of Class B shares, Class
B share performance generally would have been lower than Class A share
performance. The Class A share performance included within the Class B share
performance with CDSC has been adjusted to reflect the contingent deferred
sales charge (CDSC) generally applicable to Class B shares rather than the
sales charge generally applicable to Class A shares.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
6
<PAGE>
Performance Summary - continued
MFS(R) North Carolina Municipal Bond Fund
Growth of a Hypothetical $10,000 Investment (For the 5-year period ended
March 31, 1997)
[3 line graph]
<TABLE>
<CAPTION>
MFS North Carolina Municipal Lehman Brothers Municipal
Bond Fund - Class A Consumer Price Index - U.S. Bond Index
<S> <C> <C> <C>
3/31/92 9522 10000 10000
3/31/93 10614 10309 11252
3/31/94 10752 10567 11513
3/31/95 11383 10869 12369
3/29/96 12129 11165 13406
3/31/97 12747 11491 14137
</TABLE>
Growth of a Hypothetical $10,000 Investment (For the 10-year period ended
March 31, 1997)
[3 line graph]
<TABLE>
<CAPTION>
MFS North Carolina Municipal Lehman Brothers Municipal
Bond Fund - Class A Consumer Price Index - U.S. Bond Index
<S> <C> <C> <C>
3/31/87 9527 10000 10000
3/31/89 10252 10904 10989
3/29/91 12035 12036 13270
3/31/93 14501 12803 16424
3/31/95 15551 13498 18053
3/31/97 17415 14272 20634
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
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 +0.07% +4.14% +4.98% +5.70%
- ------------------------------------------------------------------- ------ ------- ------- ---------
MFS North Carolina Municipal Bond Fund (Class A) at net asset value +5.09% +5.84% +6.01% +6.22%
- ------------------------------------------------------------------- ------ ------- ------- ---------
MFS North Carolina Municipal Bond Fund (Class B) with CDSC +0.36% +4.17% +5.12% +5.93%
- ------------------------------------------------------------------- ------ ------- ------- ---------
MFS North Carolina Municipal Bond Fund (Class B) at net asset value +4.36% +5.08% +5.44% +5.93%
- ------------------------------------------------------------------- ------ ------- ------- ---------
MFS North Carolina Municipal Bond Fund (Class C) with CDSC@ +3.42% +5.15% +5.51% +5.97%
- ------------------------------------------------------------------- ------ ------- ------- ---------
MFS North Carolina Municipal Bond Fund (Class C) at net asset value +4.41% +5.15% +5.51% +5.97%
- ------------------------------------------------------------------- ------ ------- ------- ---------
Average North Carolina tax-exempt municipal bond fund** +4.79% +5.95% +6.25% +6.11%
- ------------------------------------------------------------------- ------ ------- ------- ---------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +7.17% +7.51%
- ------------------------------------------------------------------- ------ ------- ------- ---------
Consumer Price Index* +2.91% +2.83% +2.82% +3.62%
- ------------------------------------------------------------------- ------ ------- ------- ---------
</TABLE>
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
@Class C shares have no initial sales charge but will be subject to a 1%
CDSC if redeemed within 12 months of purchase.
Class B and Class C share results with CDSC include the performance and
operating expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for
periods prior to the commencement of offering of Class B shares and Class C
shares. Because operating expenses attributable to Class B and Class C shares
are higher than those of Class A shares, Class B and Class C share
performance generally would have been lower than Class A share performance.
These results represent the percentage change in net asset value. Returns
would have been lower had sales charges been reflected.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
7
<PAGE>
Performance Summary - continued
MFS(R) Pennsylvania Municipal Bond Fund
Growth of a Hypothetical $10,000 Investment (For the period from February 1,
1993 through March 31, 1997)
[3 line graph]
<TABLE>
<CAPTION>
MFS Pennsylvania Municipal Lehman Brothers Municipal
Bond Fund - Class A Consumer Price Index - U.S. Bond Index
<S> <C> <C> <C>
2/1/93 9525 10000 10000
3/31/93 9502 10070 10252
3/31/94 9728 10323 10490
3/31/95 10520 10617 11269
3/29/96 11240 10906 12214
3/31/97 11765 11225 12881
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
1 Year 3 Years Life of Fund@
- --------------------------------------------------------------------------- ------- ------- -------------
<S> <C> <C> <C>
MFS Pennsylvania Municipal Bond Fund (Class A) including 4.75% sales charge -0.33% +4.81% +3.98%
- --------------------------------------------------------------------------- ------- ------- -------------
MFS Pennsylvania Municipal Bond Fund (Class A) at net asset value +4.67% +6.54% +5.21%
- --------------------------------------------------------------------------- ------- ------- -------------
MFS Pennsylvania Municipal Bond Fund (Class B) with CDSC@@ -0.12% +4.80% +4.05%
- --------------------------------------------------------------------------- ------- ------- -------------
MFS Pennsylvania Municipal Bond Fund (Class B) at net asset value +3.83% +5.70% +4.46%
- --------------------------------------------------------------------------- ------- ------- -------------
Average Pennsylvania tax-exempt municipal bond fund** +4.95% +6.19% +6.52%
- --------------------------------------------------------------------------- ------- ------- -------------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +6.27%
- --------------------------------------------------------------------------- ------- ------- -------------
Consumer Price Index* +2.91% +2.83% +2.82%
- --------------------------------------------------------------------------- ------- ------- -------------
</TABLE>
@For the period from the commencement of the Fund's investment operations
February 1, 1993, to March 31, 1997.
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
@@These returns reflect the current maximum Class B contingent deferred
sales charge (CDSC) of 3%.
Class B share results with CDSC include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods
prior to the commencement of offering of Class B shares. Because operating
expenses attributable to Class A shares are lower than those of Class B
shares, Class B share performance generally would have been lower than Class
A share performance. The Class A share performance included within the Class
B share performance with CDSC has been adjusted to reflect the CDSC generally
applicable to Class B shares rather than the sales charge generally
applicable to Class A shares.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
8
<PAGE>
Performance Summary - continued
MFS(R) South Carolina Municipal Bond Fund
Growth of a Hypothetical $10,000 Investment (For the 5-year period ended
March 31, 1997)
[3 line graph]
<TABLE>
<CAPTION>
MFS South Carolina Municipal Lehman Brothers Municipal
Bond Fund - Class A Consumer Price Index - U.S. Bond Index
<S> <C> <C> <C>
3/31/92 9525 10000 10000
3/31/92 10641 10309 11252
3/31/94 10808 10567 11513
3/31/95 11557 10869 12369
3/29/96 12273 11165 13406
3/31/97 12820 11491 14137
</TABLE>
Growth of a Hypothetical $10,000 Investment (For the 10-year period ended
March 31, 1997)
[3 line graph]
<TABLE>
<CAPTION>
MFS South Carolina Municipal Lehman Brothers Municipal
Bond Fund - Class A Consumer Price Index - U.S. Bond Index
<S> <C> <C> <C>
3/31/87 9527 10000 10000
3/31/89 10592 10904 10989
3/29/91 12471 12036 13270
3/31/93 15207 12803 16424
3/31/95 16516 13498 18053
3/31/97 18320 14272 20634
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
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 -0.53% +4.15% +5.09% +6.24%
- ----------------------------------------------------------------------------- ------ ------- ------- --------
MFS South Carolina Municipal Bond Fund (Class A) at net asset value +4.46% +5.85% +6.12% +6.76%
- ----------------------------------------------------------------------------- ------ ------- ------- --------
MFS South Carolina Municipal Bond Fund (Class B) with CDSC -0.24% +4.22% +5.25% +6.48%
- ----------------------------------------------------------------------------- ------ ------- ------- --------
MFS South Carolina Municipal Bond Fund (Class B) at net asset value +3.73% +5.13% +5.58% +6.48%
- ----------------------------------------------------------------------------- ------ ------- ------- --------
Average South Carolina tax-exempt municipal bond fund** +5.04% +6.40% +6.48% +6.73%
- ----------------------------------------------------------------------------- ------ ------- ------- --------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +7.17% +7.51%
- ----------------------------------------------------------------------------- ------ ------- ------- --------
Consumer Price Index* +2.91% +2.83% +2.82% +3.62%
- ----------------------------------------------------------------------------- ------ ------- ------- --------
</TABLE>
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
Class B share results with CDSC include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods
prior to the commencement of offering of Class B shares. Because operating
expenses attributable to Class A shares are lower than those of Class B
shares, Class B share performance generally would have been lower than Class
A share performance. The Class A share performance included within the Class
B share performance with CDSC has been adjusted to reflect the CDSC generally
applicable to Class B shares rather than the sales charge generally
applicable to Class A shares.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
9
<PAGE>
Performance Summary - continued
MFS(R) Tennessee Municipal Bond Fund
Growth of a Hypothetical $10,000 Investment (For the period from September 1,
1988 through March 31, 1997)
[3 line graph]
<TABLE>
<CAPTION>
MFS Tennessee Municipal Lehman Brothers Municipal
Bond Fund - Class A Consumer Price Index - U.S. Bond Index
<S> <C> <C> <C>
9/12/88 9525 10000 10000
3/30/90 10810 10861 11552
3/31/92 12702 11755 13878
3/31/95 15316 12776 17166
3/31/97 17103 13451 19603
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years Life of Fund@
- ------------------------------------------------------------------------ ------- ------- ------- -------------
<S> <C> <C> <C> <C>
MFS Tennessee Municipal Bond Fund (Class A) including 4.75% sales charge -0.49% +3.97% +5.09% +6.40%
- ------------------------------------------------------------------------ ------- ------- ------- -------------
MFS Tennessee Municipal Bond Fund (Class A) at net asset value +4.48% +5.66% +6.12% +7.00%
- ------------------------------------------------------------------------ ------- ------- ------- -------------
MFS Tennessee Municipal Bond Fund (Class B) with CDSC -0.21% +3.96% +5.23% +6.67%
- ------------------------------------------------------------------------ ------- ------- ------- -------------
MFS Tennessee Municipal Bond Fund (Class B) at net asset value +3.76% +4.88% +5.55% +6.67%
- ------------------------------------------------------------------------ ------- ------- ------- -------------
Average Tennessee tax-exempt municipal bond fund** +4.82% +6.05% +6.35% +6.94%
- ------------------------------------------------------------------------ ------- ------- ------- -------------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +7.17% +8.11%
- ------------------------------------------------------------------------ ------- ------- ------- -------------
Consumer Price Index* +2.91% +2.83% +2.82% +3.54%
- ------------------------------------------------------------------------ ------- ------- ------- -------------
</TABLE>
@For the period from the commencement of the Fund's investment operations,
August 12, 1988 to March 31, 1997.
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
Class B share results with CDSC include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods
prior to the commencement of offering of Class B shares. Because operating
expenses attributable to Class A shares are lower than those of Class B
shares, Class B share performance generally would have been lower than Class
A share performance. The Class A share performance included within the Class
B share performance with CDSC has been adjusted to reflect the CDSC generally
applicable to Class B shares rather than the sales charge generally
applicable to Class A shares.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
10
<PAGE>
Performance Summary - continued
MFS(R) Virginia Municipal Bond Fund
Growth of a Hypothetical $10,000 Investment (For the 5-year period ended
March 31, 1997)
[3 line graph]
<TABLE>
<CAPTION>
MFS Virginia Municipal Lehman Brothers Municipal
Bond Fund - Class A Consumer Price Index - U.S. Bond Index
<S> <C> <C> <C>
3/31/92 9528 10000 10000
3/31/93 10609 10309 11252
3/31/94 10713 10567 11513
3/31/95 11320 10869 12369
3/29/96 12059 11165 13406
3/31/97 12537 11491 14137
</TABLE>
Growth of a Hypothetical $10,000 Investment (For the 10-year period ended
March 31, 1997)
[3 line graph]
<TABLE>
<CAPTION>
MFS Virginia Municipal Lehman Brothers Municipal
Bond Fund - Class A Consumer Price Index - U.S. Bond Index
<S> <C> <C> <C>
3/31/87 9524 10000 10000
3/31/89 10489 10904 10989
3/29/91 12404 12036 13270
3/31/93 15034 12803 16424
3/31/95 16043 13498 18053
3/31/97 17767 14272 20634
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
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 -0.98% +3.67% +4.62% +5.92%
- ----------------------------------------------------------------------- ------- ------- ------- --------
MFS Virginia Municipal Bond Fund (Class A) at net asset value +3.97% +5.38% +5.64% +6.43%
- ----------------------------------------------------------------------- ------- ------- ------- --------
MFS Virginia Municipal Bond Fund (Class B) with CDSC -0.70% +3.75% +4.78% +6.16%
- ----------------------------------------------------------------------- ------- ------- ------- --------
MFS Virginia Municipal Bond Fund (Class B) at net asset value +3.24% +4.66% +5.10% +6.16%
- ----------------------------------------------------------------------- ------- ------- ------- --------
MFS Virginia Municipal Bond Fund (Class C) with CDSC@ +2.31% +4.72% +5.15% +6.19%
- ----------------------------------------------------------------------- ------- ------- ------- --------
MFS Virginia Municipal Bond Fund (Class C) at net asset value +3.30% +4.72% +5.15% +6.19%
- ----------------------------------------------------------------------- ------- ------- ------- --------
Average Virginia tax-exempt municipal bond fund** +4.92% +6.06% +6.57% +6.57%
- ----------------------------------------------------------------------- ------- ------- ------- --------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +7.17% +7.51%
- ----------------------------------------------------------------------- ------- ------- ------- --------
Consumer Price Index* +2.91% +2.83% +2.82% +3.62%
- ----------------------------------------------------------------------- ------- ------- ------- --------
</TABLE>
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
@Class C shares have no initial sales charge but will be subject to a 1%
CDSC if redeemed within 12 months of purchase.
Class B and Class C share results with CDSC include the performance and
operating expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for
periods prior to the commencement of offering of Class B shares and Class C
shares. Because operating expenses attributable to Class B and Class C shares
are higher than those of Class A shares, Class B and Class C share
performance generally would have been lower than Class A share performance.
These results represent the percentage change in net asset value. Returns
would have been lower had sales charges been reflected.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
11
<PAGE>
Performance Summary - continued
MFS(R) West Virginia Municipal Bond Fund
Growth of a Hypothetical $10,000 Investment (For the 5-year period ended
March 31, 1997)
[3 line graph]
<TABLE>
<CAPTION>
MFS West Virginia Municipal Lehman Brothers Municipal
Bond Fund - Class A Consumer Price Index - U.S. Bond Index
<S> <C> <C> <C>
3/31/92 9528 10000 10000
3/31/93 10625 10309 11252
3/31/94 10859 10567 11513
3/31/95 11518 10869 12369
3/29/96 12276 11165 13406
3/31/97 12915 11491 14137
</TABLE>
Growth of a Hypothetical $10,000 Investment (For the 10-year period ended
March 31, 1997)
[3 line graph]
<TABLE>
<CAPTION>
MFS West Virginia Municipal Lehman Brothers Municipal
Bond Fund - Class A Consumer Price Index - U.S. Bond Index
<S> <C> <C> <C>
3/31/87 9522 10000 10000
3/31/89 10460 10904 10989
3/29/91 12330 12036 13270
3/31/93 15057 12803 16424
3/31/95 16322 13498 18053
3/31/97 18302 14272 20634
</TABLE>
Average Annual Total Returns
<TABLE>
<CAPTION>
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 +0.16% +4.24% +5.24% +6.23%
- ---------------------------------------------------------------------------- ------- ------- ------- --------
MFS West Virginia Municipal Bond Fund (Class A) at net asset value +5.20% +5.95% +6.27% +6.75%
- ---------------------------------------------------------------------------- ------- ------- ------- --------
MFS West Virginia Municipal Bond Fund (Class B) with CDSC +0.48% +4.28% +5.40% +6.48%
- ---------------------------------------------------------------------------- ------- ------- ------- --------
MFS West Virginia Municipal Bond Fund (Class B) at net asset value +4.47% +5.19% +5.72% +6.48%
- ---------------------------------------------------------------------------- ------- ------- ------- --------
Average other state tax-exempt municipal bond fund** +5.04% +5.95% +6.31% +6.77%
- ---------------------------------------------------------------------------- ------- ------- ------- --------
Lehman Brothers Municipal Bond Index*** +5.45% +7.08% +7.17% +7.51%
- ---------------------------------------------------------------------------- ------- ------- ------- --------
Consumer Price Index* +2.91% +2.83% +2.82% +3.62%
- ---------------------------------------------------------------------------- ------- ------- ------- --------
</TABLE>
*The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
**Source: Lipper Analytical Services.
***Source: CDA/Wiesenberger.
Class B share results with CDSC include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods
prior to the commencement of offering of Class B shares. Because operating
expenses attributable to Class A shares are lower than those of Class B
shares, Class B share performance generally would have been lower than Class
A share performance. The Class A share performance included within the Class
B share performance with CDSC has been adjusted to reflect the CDSC generally
applicable to Class B shares rather than the sales charge generally
applicable to Class A shares.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time. All results are historical and
assume the reinvestment of dividends and capital gains. Investment return and
principal value will fluctuate, and shares, when redeemed, may be worth more
or less than their original cost. Past performance is no guarantee of future
results.
12
<PAGE>
Portfolio of Investments - March 31, 1997
MFS MISSISSIPPI MUNICIPAL BOND FUND
Municipal Bonds - 96.2%
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------- ---------------- ---------------
<S> <C> <C>
General Obligation - 7.3%
Commonwealth of Puerto Rico, MBIA, 8.284s,
2008++++ $2,000 $ 2,099,200
Hinds County, MS, MBIA, 6.25s, 2010 1,660 1,771,336
Hinds County, MS, MBIA, 6.25s, 2011 1,285 1,369,386
Jackson County, MS, Road Improvement, 6.5s, 2008 425 441,830
-----------
$ 5,681,752
- -------------------------------------------------- ----------- -----------
State and Local Appropriation - 13.0%
Hinds Community College, MS, Conference and
Training Center, 6.5s, 2014 $1,320 $ 1,334,375
Medical Center Educational Building Corp., MS
(University of Mississippi Medical Center),
MBIA, 5.65s, 2009 2,000 2,015,340
Medical Center Educational Building Corp., MS
(University of Mississippi Medical Center),
MBIA, 5.9s, 2023 3,250 3,206,905
State of Mississippi, Certificates of
Participation (Marshall County Correctional
Facility), MBIA, 5.625s, 2015 1,560 1,510,485
State of Mississippi, Certificates of
Participation (Rehabilitation Services), 6.1s,
2014 2,000 2,007,660
-----------
$10,074,765
- -------------------------------------------------- ----------- -----------
Refunded and Special Obligations - 11.6%
Adams County, MS, Hospital Rev. (Jefferson Davis
Memorial Hospital), 8s, 2001 $1,000 $ 1,140,650
Commonwealth of Puerto Rico, Public Improvement
Rev., 6.8s, 2002 1,500 1,660,185
Puerto Rico Highway & Transportation Authority
Rev., 6.625s, 2002 1,900 2,087,625
State of Mississippi, 6s, 2002 2,000 2,115,200
State of Mississippi, 6.75s, 2004 1,800 1,994,652
-----------
$ 8,998,312
- -------------------------------------------------- ----------- -----------
Airport and Port Revenue - 2.6%
Puerto Rico Ports Authority (American Airlines),
6.25s, 2026 $2,000 $ 2,007,560
- -------------------------------------------------- ----------- -----------
Electric and Gas Utility Revenue - 6.2%
Claiborne County, MS, Pollution Control Rev.
(System Energy Resources, Inc.), 7.3s, 2025 $1,000 $ 1,041,190
Claiborne County, MS, Pollution Control Rev.
(System Energy Resources, Inc.), 6.2s, 2026 500 479,895
Puerto Rico Electric Power Authority Power, FSA,
8.328s, 2023++++ 1,000 991,930
Warren Counties, MS, Pollution Control Rev.
(Mississippi Power & Light), 7s, 2022 1,000 1,047,100
Washington County, MS, Pollution Control Rev.
(Mississippi Power & Light), 7s, 2022 1,230 1,287,933
-----------
$ 4,848,048
- -------------------------------------------------- ----------- -----------
Health Care Revenue - 1.9%
Mississippi Hospital Equipment & Facilities
Authority Rev. (Magnolia Regional Health
Center), 7.375s, 2021 $1,500 $ 1,519,725
- -------------------------------------------------- ----------- -----------
Industrial Revenue (Corporate Guarantee) - 7.3%
Lowndes County, MS, Solid Waste Disposal &
Pollution Control Rev. (Weyerhauser), 6.8s,
2022 $3,250 $ 3,617,120
Mississippi Business Finance Corp. (Jackson
Municipal Airport/Airborne Freight), 7.15s,
2007 985 1,049,045
Warren County, MS, Pollution Control Rev
(International Paper), 6.6s, 2019 1,000 1,021,510
-----------
$ 5,687,675
- -------------------------------------------------- ----------- -----------
Insured Health Care Revenue - 17.4%
Alcorn County, Corinth (Magnolia Regional Health
Center), AMBAC, 5.75s, 2013 $2,000 $ 1,995,360
Gulfport, MS, Hospital Facilities (Memorial
Hospital), MBIA, 6.125s, 2015 2,250 2,321,438
Gulfport, MS, Hospital Facilities (Memorial
Hospital), MBIA, 6.2s, 2018 1,000 1,033,460
Hinds County, MS, Rev. (Methodist Hospital &
Rehabilitition Center), AMBAC, 5.6s, 2012 3,055 3,038,717
Mississippi Development Bank, Special Obligation
(Adams County Hospital), FSA, 5.75s, 2016 1,000 975,900
Mississippi Hospital Equipment & Facilities
Authority Rev. (Baptist), MBIA, 6.5s, 2010 1,190 1,286,259
Mississippi Hospital Equipment & Facilities
Authority Rev. (Baptist), MBIA, 6s, 2013 750 764,355
Mississippi Hospital Equipment & Facilities
Authority Rev. (Rush Medical Foundation),
Connie Lee, 6.7s, 2018 2,000 2,092,020
-----------
$13,507,509
- --------------------------------------------------- ----------- -----------
Multi-Family Housing Revenue - 5.1%
Gulfport, MS, Community Development (Oakview
Apartments), FNMA, 7.4s, 2025 $1,755 $ 1,862,827
Jackson, MS, Elderly Housing Corp., Mortgage
Rev. (Delhaven Manor), "C", FHA, 7.375s, 2024 1,965 2,075,905
-----------
$ 3,938,732
- --------------------------------------------------- ----------- -----------
Single Family Housing Revenue - 7.0%
Mississippi Home Corp., GNMA, 6.5s, 2024 $2,650 $ 2,701,065
Mississippi Home Corp., GNMA, 6s, 2027 1,225 1,311,069
Mississippi Home Corp., GNMA, 6.625s, 2027 1,350 1,391,931
-----------
$ 5,404,065
- --------------------------------------------------- ----------- -----------
Universities - 2.1%
University of Mississippi, Educational Building
Corp., MBIA, 5s, 2016 $ 680 $ 616,359
University of Mississippi, Educational Building
Corp. (Athletic Facilities), 6.2s, 2016 1,000 1,003,790
-----------
$ 1,620,149
- --------------------------------------------------- ----------- -----------
Water and Sewer Utility Revenue - 14.7%
Clarksdale, MS, Sewer & Wastewater Treatment
System Rev., MBIA, 6.1s, 2012 $1,885 $ 1,936,196
Columbus, MS, Water & Sewer Rev., MBIA, 6.5s,
2013 1,000 1,070,880
Gautier, MS, Utility District, Utility Systems
Rev., FGIC, 6.375s, 2019 1,300 1,350,843
Harrison County, MS, Wastewater Management
District, Wastewater Treatment, FGIC, 6.5s,
2006 1,375 1,464,719
Harrison County, MS, Wastewater Management
District, Wastewater Treatment, FGIC, 5.875s,
2025 3,000 2,981,700
Meridian, MS, Water & Sewer Rev., AMBAC, 6s,
2010 1,500 1,542,990
Meridian, MS, Water & Sewer Rev., AMBAC, 6.2s,
2012 650 678,392
Meridian, MS, Water & Sewer Rev., AMBAC, 6.2s,
2013 400 416,300
-----------
$11,442,020
- --------------------------------------------------- ----------- -----------
Total Municipal Bonds (Identified Cost $72,067,324) $74,730,312
- --------------------------------------------------- ----------- -----------
13-MI
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------------------------
Floating Rate Demand Note - 2.2%
- -----------------------------------------------------------------------------------------------
Jackson County, MS, Pollution Control Rev
(Chevron USA, Inc.), due 12/01/2016,
at Identified Cost $ 1,700 $ 1,700,000
- --------------------------------------------------------- ----------- -----------
Total Investments (Identified Cost, $73,767,324) $76,430,312
Other Assets, Less Liabilities - 1.6% 1,213,014
- ------------------------------------- -----------
Net assets - 100.0% $77,643,326
- ------------------------------------- -----------
See portfolio footnotes and notes to financial statements
</TABLE>
Portfolio of Investments - March 31, 1997
MFS NEW YORK MUNICIPAL BOND FUND
Municipal Bonds - 97.2%
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------- ----------------- ---------------
<S> <C> <C>
General Obligation - 11.6%
Cheektowaga, NY, Central School District, FGIC,
5.875s, 2014 $ 650 $ 650,156
Cheektowaga, NY, Central School District, FGIC,
5.875s, 2015 750 750,180
New York, NY, 7.2s, 2008 1,000 1,085,050
New York, NY, 7.3s, 2010 365 419,195
New York, NY, 7.3s, 2010 515 556,705
New York, NY, 7.3s, 2011 5,000 5,420,450
New York, NY, 7.375s, 2013 1,600 1,732,656
New York, NY, 8.25s, 2016 160 181,269
New York, NY, FGIC, 6s, 2007 1,175 1,243,444
Oswego County, NY, 6.7s, 2009 1,000 1,104,900
Port Byron, NY, Central School District, AMBAC,
7.4s, 2012 500 592,830
Port Byron, NY, Central School District, AMBAC,
7.4s, 2013 500 593,715
Port Byron, NY, Central School District, AMBAC,
7.4s, 2014 500 597,245
Port Byron, NY, Central School District, AMBAC,
7.4s, 2015 500 597,375
Territory of Virgin Islands, 7.75s, 2006 390 419,472
Washingtonville, NY, Central School District,
FGIC, 7.35s, 2008 550 642,884
Washingtonville, NY, Central School District,
FGIC, 7.35s, 2009 550 643,489
---------------
$17,231,015
- -------------------------------------------------- ----------------- ---------------
State and Local Appropriation - 18.0%
Metropolitan Transportation Authority, NY,
Service Contract, 7.375s, 2008 $2,000 $ 2,247,720
Metropolitan Transportation Authority, NY,
Service Contract, 0s, 2012 2,200 886,644
Metropolitan Transportation Authority, NY,
Service Contract, 5.75s, 2013 1,825 1,786,693
Metropolitan Transportation Authority, NY,
Service Contract, 0s, 2014 4,750 1,670,908
Metropolitan Transportation Authority, NY,
Service Contract, 0s, 2014 3,500 1,231,195
Metropolitan Transportation Authority, NY,
Service Contract, 5.5s, 2017 1,200 1,123,248
New York Dormitory Authority Rev. (City
University), 5.75s, 2013 4,250 4,160,792
New York Dormitory Authority Rev. (City
University), 5.625s, 2016 1,450 1,380,096
New York Dormitory Authority Rev. (City
University), AMBAC, 5.75s, 2018 1,000 1,001,080
New York Dormitory Authority Rev. (City
University), AMBAC, 5.75s, 2018 800 800,864
State and Local Appropriation - continued
New York Dormitory Authority Rev. (State
University), 5.875s, 2017 $2,565 $ 2,552,585
New York Medical Care Facilities Finance Agency,
MBIA, 6s, 2025 1,300 1,311,752
New York Medical Care Facilities Finance Agency,
Mental Health Services, 6.375s, 2014 1,000 1,017,340
New York Urban Development Corp. (Correctional
Facilities), AMBAC, 0s, 2009 5,000 2,631,500
New York Urban Development Corp. (State
Facilities), AMBAC, 5.6s, 2015 2,750 2,731,135
Triborough Bridge & Tunnel Authority, NY, 0s,
2012 360 147,136
Troy, NY, Certificates of Participation,
Recreational Facilities Rev., 9.75s, 2010**++ 900 90,000
---------------
$26,770,688
- -------------------------------------------------- ----------------- ---------------
Refunded and Special Obligations - 14.7%
New York Local Government Assistance Corp.,
7.25s, 2001 $2,500 $ 2,768,325
New York Medical Care Facilities Finance Agency
(Montefiore Medical), FHA, 7.25s, 1999 3,175 3,391,979
New York Medical Care Facilities Finance Agency
(Montefiore Medical), FHA, 7.25s, 1999 1,750 1,869,595
New York Medical Care Facilities Finance Agency
(Presbyterian Hospital), FHA, 7.7s, 2000 750 833,812
New York Medical Care Facilities Finance Agency
(St. Luke's Hospital), FHA, 7.45s, 2000 2,600 2,840,110
New York Medical Care Facilities Finance Agency,
Mental Health Services, 7.875s, 2000 340 379,828
New York Medical Care Facilities Finance Agency,
Mental Health Services, 7.875s, 2000 560 625,598
New York Medical Care Facilities Finance Agency,
Mental Health Services, 7.3s, 2001 750 837,412
New York Urban Development Corp., State
Facilities Rev., 7.5s, 2001 1,000 1,116,340
New York, NY, 8s, 2001 490 556,968
New York, NY, 8.25s, 2001 1,840 2,123,747
New York, NY, Municipal Water & Sewer Finance
Authority, 7s, 2001 530 578,585
New York, NY, Municipal Water & Sewer Finance
Authority, 7s, 2001 225 245,626
New York, NY, Municipal Water & Sewer Finance
Authority, 7.375s, 2013 2,000 2,223,820
Puerto Rico Aqueduct & Sewer Authority Rev., 9s,
2005 250 312,693
Triborough Bridge & Tunnel Authority, NY,
7.375s, 2000 1,000 1,083,110
---------------
$21,787,548
- -------------------------------------------------- ----------------- ---------------
Airport and Port Revenue - 1.2%
Albany County, NY Airport Authority, FSA,
5.375s, 2017 $ 750 $ 687,195
New York, NY, Industrial Development Agency,
Special Facilities Rev. (American Airlines),
6.9s, 2024 1,000 1,069,080
---------------
$ 1,756,275
------------------------------------------------ ----------------- ---------------
</TABLE>
14-NY
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Electric and Gas Utility Revenue - 7.9%
New York Energy Research and Development
Authority, Electrical Facilities Rev. (Long
Island Lighting), 7.15s, 2022 $2,700 $ 2,875,014
New York Power Authority, FGIC, 6.5s, 2008 2,500 2,789,050
Port Authority NY & NJ, Special Obligation,
6.75s, 2019 1,750 1,794,240
Puerto Rico Electric Power Authority 0s, 2017 500 148,390
Puerto Rico Electric Power Authority, FSA,
8.328s, 2023++++ 1,500 1,487,895
Virgin Islands Water & Power Authority, Electric
Systems Rev., 7.4s, 2011 2,450 2,597,367
-----------
$11,691,956
- -------------------------------------------------- ----------- -----------
Health Care Revenue - 2.3%
Albany, NY, Industrial Development Authority,
Civic Facilities Rev., 8.25s, 2004 $1,965 $ 2,104,731
New York Medical Care Facilities Finance Agency,
Mental Health Services (Huntington Mortgage),
6.5s, 2014 1,250 1,265,463
-----------
$ 3,370,194
- -------------------------------------------------- ----------- -----------
Industrial Revenue (Corporate Guarantee) - 2.2%
Allegany County, NY, Industrial Development
Authority, Solid Waste Rev. (Atlantic
Richfield), 6.625s, 2016 $1,000 $ 1,042,880
Fulton County, NY, Industrial Development Agency
(Crossroads Incubator), 8.75s, 2009 1,075 1,141,510
Monroe County, NY, Industrial Development Agency
(Weyerhauser Co.), 9s, 2006 1,000 1,014,410
-----------
$ 3,198,800
- -------------------------------------------------- ----------- -----------
Insured Health Care Revenue - 6.4%
New York City Health & Hospital Corp., AMBAC,
7.54s, 2023++++ $3,200 $ 2,868,640
New York Dormitory Authority Rev. (Menorah
Campus), FHA, 7.4s, 2031 1,095 1,190,385
New York Dormitory Authority Rev. (St. Vincent's
Hospital), FHA, 7.375s, 2011 2,500 2,700,275
New York Medical Care Facilities Finance Agency
(New York Hospital), AMBAC, 6.5s, 2029 2,550 2,702,873
-----------
$ 9,462,173
- -------------------------------------------------- ----------- -----------
Multi-Family Housing Revenue - 0.4%
New York, NY, Housing Development Corp. (South
Bronx Cooperatives), 8.1s, 2023 $ 580 $ 603,119
- -------------------------------------------------- ----------- -----------
Sales and Excise Tax Revenue - 0.6%
Municipal Assistance Corp., City of Troy, MBIA,
0s, 2019 $1,935 $ 514,729
Municipal Assistance Corp., City of Troy, MBIA,
0s, 2020 1,690 436,392
-----------
$ 951,121
- -------------------------------------------------- ----------- -----------
Single Family Housing Revenue - 4.0%
New York Mortgage Agency Rev., 7.375s, 2011 $1,295 $ 1,359,387
New York Mortgage Agency Rev., 8.05s, 2011 135 139,444
New York Mortgage Agency Rev., 6.45s, 2017 2,355 2,448,376
New York Mortgage Agency Rev., 8.05s, 2021 320 334,765
New York Mortgage Agency Rev., 8.05s, 2022 555 588,056
New York Mortgage Agency Rev., 7.75s, 2023 995 1,049,954
-----------
$ 5,919,982
- -------------------------------------------------- ----------- -----------
Turnpike Revenue - 6.3%
Triborough Bridge & Tunnel Authority, NY, 5.5s,
2017 $8,000 $ 7,791,760
Triborough Bridge & Tunnel Authority, NY, MBIA,
0s, 2017 2,035 636,894
Virgin Islands Public Finance Authority, Highway
Rev., 7.7s, 2004 800 856,800
-----------
$ 9,285,454
- -------------------------------------------------- ----------- -----------
Universities - 4.7%
Hempstead Town, NY, Civic Facilities Rev
(Hofstra University), MBIA, 5.8s, 2015 $1,500 $ 1,504,110
Islip, NY, Community Development Agency Rev
(New York Institute of Technology), 7.5s, 2026 2,000 2,044,160
New York Dormitory Authority Rev. (Cornell
University), 7.375s, 2020 1,500 1,627,095
New York Dormitory Authority Rev. (Ithaca
College), AMBAC, 5s, 2013 1,895 1,756,930
-----------
$ 6,932,295
- -------------------------------------------------- ----------- -----------
Water and Sewer Utility Revenue - 14.2%
Buffalo, NY, Municipal Water Authority, FGIC,
5s, 2025 $1,000 $ 881,860
New York Environmental Facilities Corp. AMBAC,
6.25s, 2012 1,500 1,602,465
New York Enviromental Facilities Corp.,
Pollution Control Rev., 5.75s, 2010 3,235 3,342,725
New York Environmental Facilities Corp.,
Pollution Control Rev., 6.875s, 2010 2,000 2,178,240
New York Environmental Facilities Corp.,
Pollution Control Rev., 5.75s, 2012 1,100 1,118,403
New York Environmental Facilities Corp., Water
Facilities Rev., 8.85s, 2015 2,500 2,750,500
New York, NY, Municipal Water & Sewer Finance
Authority, 6s, 2010 620 647,987
New York, NY, Municipal Water & Sewer Finance
Authority, 7.1s, 2012 2,000 2,170,760
New York, NY, Municipal Water & Sewer Finance
Authority, 7s, 2015 745 804,347
New York, NY, Municipal Water & Sewer Finance
Authority, 7.6s, 2020 470 504,897
New York, NY, Municipal Water & Sewer Finance
Authority, 5.5s, 2023 1,500 1,382,790
Suffolk County, NY Water Authority, MBIA, 5.1s,
2012 1,895 1,818,973
Suffolk County, NY Water Authority, MBIA, 5.1s,
2013 2,000 1,906,220
-----------
$21,110,167
- -------------------------------------------------- ----------- -----------
Other - 2.7%
Dutchess, NY, Industrial Development Agency,
8.625s, 2016 $1,105 $ 1,169,897
New York City Industrial Development Civic
(YMCA), 5.8s, 2016 1,500 1,429,050
New York City Trust Cultural Resources (Museum
of Modern Art), AMBAC, 5.5s, 2021 1,500 1,427,355
------------
$ 4,026,302
- -------------------------------------------------------------------- ------------
Total Municipal Bonds (Identified Cost, $137,682,657) $144,097,089
------------
Shares
- -------------------------------------------------------------------- ------------
Rights - 0.3%
- -------------------------------------------------------------------- ------------
Georgia Municipal Electric Authority, due 2016 1,000 $ 17,906
North Carolina Eastern Power Agency, due 2018 5,000 140,400
State of New Jersey, "D", due 2013 2,000 291,000
- -------------------------------------------------------------------- ------------
Total Rights (Identified Cost, $400,200) $ 449,306
- -------------------------------------------------------------------- ------------
Principal Amount
(000 Omitted)
- -------------------------------------------------------------------- ------------
Floating Rate Demand Note - 0.8%
- ----------------------------------------------------------------------------------------
New York City Municipal Water Finance Authority,
due 06/15/23, at Identified Cost $ 1,200 $ 1,200,000
- --------------------------------------------------------------------- ------------
Total Investments (Identified Cost, $139,282,857 ) $145,746,395
Other Assets, Less Liabilities - 1.7% 2,565,387
- ----------------------------------------------------------------------------------------
Net assets - 100.0% $148,311,782
------------
See portfolio footnotes and notes to financial statements
</TABLE>
15-NY
<PAGE>
Portfolio of Investments - March 31, 1997
MFS NORTH CAROLINA MUNICIPAL BOND FUND
Municipal Bonds - 97.9%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------- ---------------- ---------------
<S> <C> <C>
General Obligation - 6.0%
Charlotte, NC, Water and Sewer, 5.8s, 2013 $ 1,780 $ 1,837,245
Charlotte, NC, Water and Sewer, 5.8s, 2014 5,050 5,197,763
Charlotte, NC, Water and Sewer, 5.6s, 2017 2,035 2,022,505
Charlotte, NC, Water and Sewer, 5.9s, 2019 2,820 2,893,940
Durham, NC, 5.9s, 2013 2,400 2,488,680
Durham, NC, 5.9s, 2014 2,400 2,480,904
Hertford County, NC, 9.5s, 2000 100 101,963
Hertford County, NC, 9.5s, 2001 100 102,822
Hertford County, NC, 9.5s, 2002 100 102,395
North Carolina Capital Improvement,
5.1s, 2015 8,875 8,389,005
---------------
$25,617,222
- --------------------------------------------------------------------- ---------------
State and Local Appropriation - 8.5%
Charlotte, NC, Certificates of Participation
(Convention Facilities Project), AMBAC,
0s, 2004 $ 3,435 $ 2,303,373
Charlotte, NC, Certificates of Participation
(Convention Facilities Project), AMBAC,
0s, 2005 4,810 3,036,120
Charlotte, NC, Certificates of Participation
(Convention Facilities Project), AMBAC,
0s, 2006 1,075 640,496
Charlotte, NC, Certificates of Participation
(Convention Facilities Project), AMBAC,
0s, 2008 3,000 1,578,900
Cumberland County, NC, Certificates of
Participation (Civic Center), AMBAC, 6.375s,
2010 1,100 1,180,146
Cumberland County, NC, Certificates of
Participation (Civic Center), AMBAC,
0s, 2011 425 185,109
Cumberland County, NC, Certificates of
Participation (Civic Center), AMBAC,
0s, 2013 1,000 380,140
Dare County, NC, MBIA, 6.6s, 2006 2,100 2,244,501
Durham, NC, Certificates of Participation
(Hospital and Office Facilities), 5.875s, 2009 1,460 1,500,237
Durham, NC, Certificates of Participation (New
Durham Corp.), 6.875s, 2009 1,750 1,890,910
Fayetteville, NC, Finance Corp. (Municipal
Building), MBIA, 5.625s, 2018 310 301,249
Franklin County, NC, Certificates of Participation
(Jail and School), FGIC,
6.625s, 2014 2,000 2,138,220
Greensboro, NC, Certificates of Participation
(Coliseum Arena Project), 6.25s, 2011 2,180 2,254,665
Harnett County, NC, Certificates of Participation,
AMBAC, 6.2s, 2006 1,000 1,066,020
Harnett County, NC, Certificates of Participation,
AMBAC, 6.2s, 2009 1,500 1,570,140
Pasquotank County, NC, Certificates of
Participation, MBIA, 5s, 2015+ 1,500 1,362,780
Puerto Rico Housing, Bank and Finance Agency,
7.5s, 2006 7,000 7,890,330
Puerto Rico Public Buildings Authority,
5.5s, 2007 2,550 2,572,440
Scotland County, NC, Certificates of Participation
(Jail/Courthouse Project), FSA, 6.75s, 2011 1,000 1,063,200
Union County, NC, Certificates of Participation,
AMBAC, 6.375s, 2012 1,000 1,056,720
---------------
$36,215,696
- --------------------------------------------------------------------- ---------------
Refunded and Special Obligations - 14.0%
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street Project), 8.125s, 2000 $ 1,630 $ 1,841,330
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street Project), 8.25s, 2000 3,305 3,747,242
Charlotte, NC, Certificates of Participation
(Convention Facilities Project), AMBAC, 6.75s,
2021 4,250 4,673,342
Craven, NC, Regional Medical Authority, MBIA,
7.2s, 2000 1,500 1,648,620
Dare County, NC, School Bonds, MBIA,
6.9s, 2000 800 862,888
Dare County, NC, School Bonds, MBIA,
6.9s, 2000 800 862,888
Dare County, NC, School Bonds, MBIA,
6.9s, 2000 500 539,305
Fayetteville, NC, Public Works Rev., FGIC, 7s,
2000 2,000 2,162,600
Greensboro, NC, 6.3s, 2011 4,165 4,495,493
North Carolina Eastern Municipal Power Agency,
7.75s, 1999 2,900 3,115,876
North Carolina Eastern Municipal Power Agency,
7.5s, 2010 2,595 3,044,143
North Carolina Eastern Municipal Power Agency, 5s,
2017 9,010 8,256,133
North Carolina Medical Care Commission, Hospital
Rev. (Gaston Health Care),
7.25s, 1999 1,400 1,495,676
North Carolina Medical Care Commission, Hospital
Rev. (Gaston Health Care), 0s, 2007 500 266,425
North Carolina Medical Care Commission, Hospital
Rev. (Mercy Hospital), 6.5s, 2015 1,000 1,063,570
North Carolina Medical Care Commission, Hospital
Rev. (Presbyterian Health),
7.3s, 2000 1,000 1,102,270
North Carolina Medical Care Commission, Hospital
Rev. (Presbyterian Health),
7.375s, 2000 12,315 13,604,011
Pender County, NC, Certificates of Participation
(Pender County Prison),
7.6s, 2001 1,900 2,131,059
Pender County, NC, Certificates of Participation
(Pender County Prison),
7.7s, 2001 1,000 1,125,340
Pitt County, NC, Hospital Rev. (Pitt Memorial
Hospital), MBIA, 6.75s, 2001 2,800 3,085,096
---------------
$59,123,307
- --------------------------------------------------------------------- ---------------
Airport and Port Revenue - 1.2%
Puerto Rico Ports Authority (American Airlines),
6.25s, 2026 $ 5,075 $ 5,094,183
- --------------------------------------------------------------------- ---------------
Electric and Gas Utility Revenue - 16.6%
Lincolnton, NC, Enterprise Systems, MBIA, 5.375s,
2021 $ 750 $ 703,320
New Hanover County, NC, Industrial Facilities Rev.
(Carolina Power and Light Co.), 6.9s, 2009 1,000 1,056,010
North Carolina Eastern Municipal Power Agency,
AMBAC, 6s, 2018 14,245 14,532,179
North Carolina Eastern Municipal Power Agency,
MBIA, 7s, 2007 5,000 5,670,300
North Carolina Eastern Municipal Power, MBIA,
7.25s, 2007 5,000 5,723,650
North Carolina Eastern Municipal Power, MBIA,
7.5s, 2010 3,005 3,543,256
16-NC
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- ---------------------------------------------------------------------- ---------------
Electric and Gas Utility Revenue - continued
North Carolina Municipal Power Agency,
No. 1, Catawba Electric Rev., AMBAC,
7.625s, 2014 $ 180 $ 187,076
North Carolina Municipal Power Agency, No. 1,
Catawba Electric Rev., FSA, 6.2s, 2018 4,300 4,408,317
North Carolina Municipal Power Agency, No. 1,
Catawba Electric Rev., MBIA, 0s, 2008 10,150 5,647,460
North Carolina Municipal Power Agency, No. 1,
Catawba Electric Rev., MBIA, 0s, 2009 10,000 5,209,000
North Carolina Municipal Power Agency, No. 1,
Catawba Electric Rev., MBIA, 6s, 2011 8,000 8,324,320
North Carolina Municipal Power Agency,
No. 1, Catawba Electric Rev., MBIA,
6.97s, 2012++++ 9,000 8,322,570
Puerto Rico Electric Power Authority Rev., FSA,
6s, 2016 5,000 5,103,450
Wake County, NC, Industrial Facilities Rev.
(Carolina Power and Light), 6.9s, 2009 2,000 2,134,340
---------------
$70,565,248
- --------------------------------------------------------------------- ---------------
Health Care Revenue - 20.0%
North Carolina Medical Care Commission, Hospital
Rev. (Carolina Medicorp), 6s, 2021 $19,000 $19,067,070
North Carolina Medical Care Commission, Hospital
Rev. (Duke University), 5.25s, 2021 10,000 9,142,800
North Carolina Medical Care Commission, Hospital
Rev. (Gaston Health Care), 5.5s, 2015 8,040 7,735,766
North Carolina Medical Care Commission, Hospital
Rev. (Gaston Health Care), 5.5s, 2019 8,000 7,589,040
North Carolina Medical Care Commission, Hospital
Rev. (Halifax Memorial), 6.75s, 2014 1,355 1,377,385
North Carolina Medical Care Commission, Hospital
Rev. (Halifax Memorial), 6.75s, 2024 4,500 4,558,545
North Carolina Medical Care Commission, Hospital
Rev. (Moore Memorial Hospital), 9.1s, 1999 800 825,736
North Carolina Medical Care Commission, Hospital
Rev. (Rex Hospital), 6.25s, 2017 6,850 7,043,786
North Carolina Medical Care Commission, Hospital
Rev. (Valdese General), 8.75s, 2016 5,475 6,103,147
North Carolina Medical Care Commission, Hospital
Rev. (Well Spring Retirement), 6.25s, 2017 2,500 2,427,175
North Carolina Medical Care Commission, Hospital
Rev. (Well Spring Retirement), 6.25s, 2021 2,500 2,406,625
Northern Hospital District, Surry County, NC,
Health Care Facilities Rev., 7.875s, 2021 4,530 4,796,908
Pitt County, NC, Hospital Rev. (Memorial
Hospital), 5.25s, 2021 8,050 7,285,894
University of North Carolina, Chapel Hill,
Hospital Rev. (University Hospital), 5.25s, 2026 5,000 4,558,400
---------------
$84,918,277
- --------------------------------------------------------------------- ---------------
Industrial Revenue (Corporate Guarantee) - 10.0%
Chatham County, NC, Industrial Facilities and
Pollution Control (Weyerhaeuser), 9s, 2006 $ 1,260 $ 1,278,157
Columbus County, NC, Industrial Facilities and
Pollution Control (International Paper), 5.8s,
2016 4,000 3,866,600
Gaston County, NC, Industrial Facilities and
Pollution Control Finance Authority (Combustion
Engineering, Inc.), 8.85s, 2015 $ 1,000 $ 1,120,900
Halifax County, NC, Industrial Facilities and
Pollution Control Finance Authority (Champion
International Corp.), 8.15s, 2019 1,500 1,611,300
Haywood County, NC, Industrial Facilities and
Pollution Control Finance Authority (Champion
International Corp.), 8.1s, 2009 2,500 2,673,825
Haywood County, NC, Industrial Facilities and
Pollution Control Finance Authority (Champion
International Corp.), 5.75s, 2025 11,500 10,736,745
Martin County, NC, Industrial Facilities and
Pollution Control Finance Authority
(Weyerhaeuser Co.), 7.25s, 2014 7,000 7,589,610
Martin County, NC, Industrial Facilities and
Pollution Control Finance Authority
(Weyerhaeuser Co.), 6.8s, 2024 7,500 7,998,825
Mecklenburg County, NC, Industrial Facilities and
Pollution Control Finance Authority (Precision
Steel), 7.75s, 2014 2,600 2,791,724
Surry County, NC, Industrial Facilities and
Pollution Control Finance Authority
(Weyerhaeuser Co.), 9.25s, 2002 1,500 1,733,580
Wake County, NC, Industrial Facilities and
Pollution Control Finance Authority
(Mallinkcodt), 6.75s, 2012 1,100 1,152,602
---------------
$42,553,868
- --------------------------------------------------------------------- ---------------
Insured Health Care Revenue - 2.7%
Cumberland County, NC, Hospital Facilities Rev.
(Cumberland County Hospital), MBIA, 0s, 2009 $ 1,800 $ 883,134
Cumberland County, NC, Hospital Facilities Rev.
(Cumberland County Hospital), MBIA, 6s, 2021 4,000 4,037,240
New Hanover County, NC, Hospital Facilities Rev.
(New Hanover Regional Medical Center), AMBAC,
5.75s, 2026 4,625 4,522,741
North Carolina Medical Care Commission, Hospital
Rev. (Wilson Memorial Hospital), AMBAC, 0s, 2013 1,000 381,980
North Carolina Medical Care Commission, Hospital
Rev. (Wilson Memorial Hospital), AMBAC, 0s, 2014 3,055 1,101,144
North Carolina Medical Care Commission, Hospital
Rev. (Wilson Memorial Hospital), AMBAC, 0s, 2015 1,140 384,226
---------------
$11,310,465
- --------------------------------------------------------------------- ---------------
Multi-Family Housing Revenue - 4.1%
Asheville, NC, Housing Authority (Asheville
Terrace Apartments), 7.1s, 2011 $ 5,000 $ 5,222,750
North Carolina Housing Finance Agency, FHA, 6.9s,
2024 4,880 5,122,146
North Carolina Housing Finance Agency, FHA, 6.05s,
2028 5,000 5,018,300
Salisbury, NC, Housing Corp. (Yadkin Senior
Citizens), FNMA, 6.75s, 2022 2,100 2,131,248
---------------
$17,494,444
- --------------------------------------------------------------------- ---------------
17-NC
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- ---------------------------------------------------------------------- ---------------
Single Family Housing Revenue - 4.0%
North Carolina Housing Finance Agency,
6.7s, 2018 $ 1,785 $ 1,859,702
North Carolina Housing Finance Agency, 8.125s,
2019 1,745 1,800,055
North Carolina Housing Finance Agency,
7.7s, 2021 2,215 2,280,542
North Carolina Housing Finance Agency,
7.8s, 2021 2,100 2,158,506
North Carolina Housing Finance Agency, 7.85s, 2028 5,640 5,842,983
North Carolina Housing Finance Agency,
7.6s, 2032 2,780 2,881,915
---------------
$ 16,823,703
- --------------------------------------------------------------------- ---------------
Solid Waste Revenue - 0.3%
Iredell, NC, Solid Waste Systems Rev.,
6.25s, 2012 $ 1,250 $ 1,272,000
- --------------------------------------------------------------------- ---------------
Turnpike Revenue - 0.6%
Puerto Rico Highway and Transportation Authority
Rev., 6.523s, 2007++++ $ 2,750 $ 2,735,535
- --------------------------------------------------------------------- ---------------
Universities - 5.9%
Appalachian State University, NC, MBIA, 6.1s, 2014 $ 1,140 $ 1,173,003
Appalachian State University, NC, MBIA, 6.125s,
2019 4,370 4,479,206
North Carolina Education Facilities Finance Agency
(Duke University), 6.75s, 2021 11,500 12,437,135
University of North Carolina (Centennial Campus),
MBIA, 5.125s, 2016 1,810 1,665,218
University of North Carolina (Chapel Hill),
0s, 2012 9,105 3,575,352
University of North Carolina (Chapel Hill),
0s, 2013 4,285 1,564,839
---------------
$ 24,894,753
- --------------------------------------------------------------------- ---------------
Water and Sewer Utility Revenue - 3.9%
Asheville, NC, Water and Sewer Systems Rev., FGIC,
5.7s, 2025 $ 2,500 $ 2,445,050
Charlotte, NC, Water and Sewer Systems Rev.,
5.25s, 2021 3,000 2,766,120
Kanapolis, NC, Certificates of Participation,
MBIA, 7.375s, 2010 5,000 5,333,050
Raleigh, NC, Water and Sewer Systems Rev., 5.125s,
2022 2,000 1,807,180
Winston-Salem, NC, Water and Sewer Systems Rev.,
6.25s, 2012 4,000 4,134,120
---------------
$ 16,485,520
- --------------------------------------------------------------------- ---------------
Total Municipal Bonds (Identified cost, $395,567,120) $415,104,221
- ---------------------------------------------------------------------- ---------------
Floating Rate Demand Notes - 0.6%
- --------------------------------------------------------------------------------------
Uinta County, WY, Pollution Control Rev.
(Chevron), due 8/15/00 $ 700 $ 700,000
Uinta County, WY, Pollution Control Rev.
(Chevron), due 12/01/22 2,000 2,000,000
- --------------------------------------------------------------------- ---------------
Total Floating Rate Demand Notes, at Identified Cost $ 2,700,000
- --------------------------------------------------------------------- ---------------
Total Investments (Identified Cost, $398,267,120) $417,804,221
Other Assets, Less Liabilities - 1.5% 6,131,119
- --------------------------------------------------------------------- ---------------
Net assets - 100.0% $423,935,340
- ---------------------------------------------------------------------- ---------------
See portfolio footnotes and notes to financial statements
</TABLE>
Portfolio of Investments - March 31, 1997
MFS PENNSYLVANIA MUNICIPAL BOND FUND
Municipal Bonds - 93.8%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------- ---------------- --------------
<S> <C> <C>
General Obligation - 13.0%
Beaver County, PA, MBIA, 5.75s, 2015 $ 250 $ 249,553
Central Greene, PA, School District, AMBAC, 5.25s,
2024 750 692,250
Chester County, PA, 5.65s, 2011 500 506,495
Commonwealth of Puerto Rico, 6.35s, 2010 1,350 1,419,457
Dauphin County, PA, General Authority Rev., 5.8s,
2026 400 386,340
Dauphin County, PA, General Authority Rev., MBIA,
0s, 2020 240 59,815
Delaware County, PA, 5.125s, 2016 500 464,465
Greene County, PA, 6s, 2010 100 99,944
Northeastern York County, PA, School District,
FGIC, 0s, 2012 415 176,151
Oley Valley, PA, School District, AMBAC,
0s, 2011 810 365,350
Southeastern Area, PA, Special Schools Authority
Rev., 0s, 2007 360 201,395
State of Pennsylvania, 6.25s, 2010 300 325,497
Valley View, PA, School District, FGIC,
5.5s, 2014 500 486,605
--------------
$5,433,317
- --------------------------------------------------------------------- --------------
State and Local Appropriation - 2.1%
Philadelphia, PA, Municipal Authority Rev.
(Justice Lease), 8.625s, 2016 $ 345 $ 381,711
State of Pennsylvania, Certificates of
Participation, AMBAC, 5.4s, 2009 500 500,645
--------------
$ 882,356
- --------------------------------------------------------------------- --------------
Refunded and Special Obligations - 12.8%
Allegheny County, PA, Sanitation Authority, FGIC,
7.45s, 1999 $ 200 $ 212,088
Allegheny County, PA, Sanitation Authority, ETM,
0s, 2014 2,835 1,047,136
Bethlehem, PA, Water Authority Rev., MBIA, 6.1s,
2002 500 529,620
Philadelphia, PA, Gas Works Rev., ETM, 6s, 2013 1,645 1,702,871
Philadelphia, PA, Hospital and Higher Educational
Facilities, 7.25s, 2001 500 554,155
Puerto Rico Highways and Transportation Authority
Rev., 6.5s, 2002 250 273,250
Schuylkill County, PA, Redevelopment Authority
Rev., FGIC, 7s, 2007 300 329,151
Westmoreland County, PA, FGIC, ETM,
0s, 2018 1,000 290,450
Westmoreland County, PA, MBIA, ETM, 5.25s, 2009 400 395,888
--------------
$5,334,609
- --------------------------------------------------------------------- --------------
Airport and Port Revenue - 1.8%
Allegheny County, PA, Airport Rev. (Greater
Pittsburgh), FGIC, 7.75s, 2019 $ 750 $ 768,120
- --------------------------------------------------------------------- --------------
Electric and Gas Utility Revenue - 4.4%
Luzerne County, PA, Industrial Development
Authority, 6.05s, 2019 $ 300 $ 289,710
Luzerne County, PA, Industrial Development
Authority, AMBAC, 7.2s, 2017 500 549,385
Philadelphia, PA, Gas Works Rev.,
6.375s, 2014 750 764,610
Philadelphia, PA, Gas Works Rev.,
5.25s, 2015 250 226,410
--------------
$1,830,115
- --------------------------------------------------------------------- --------------
18-PA
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- ---------------------------------------------------------------------- --------------
Health Care Revenue - 10.3%
Butler County, PA, Industrial Development
Authority (Sherwood Oaks), 5.75s, 2011 $ 400 $ 379,624
Chester County, PA, Health and Education (Main
Line), 5.5s, 2015 335 317,915
Cumberland County, PA, Municipal Refunding
(Carlisle Hospital), 6.8s, 2023 500 511,815
Montgomery County, PA, Industrial Development
Authority, Health Facilities Rev. (AHF/Ambler),
8.5s, 2023 210 212,638
Pennsylvania Higher Education Rev., 5.7s, 2011 550 551,199
Philadelphia, PA, Health and Educational
Facilities Authority (Children's Hospital),
5.375s, 2014 500 477,075
Philadelphia, PA, Health and Educational
Facilities Authority (Jeans Health),
6.6s, 2010 500 516,575
Philadelphia, PA, Health and Educational
Facilities Authority (Temple University),
6.625s, 2023 250 254,857
Philadelphia, PA, Hospitals and Higher Educational
Facilities Authority (Graduate Health), 6.25s,
2018 300 288,300
Scranton-Lackawanna, PA (Allied Health), 7.125s,
2005 500 530,755
Union County, PA, Hospital Authority Rev.
(Evangelical Community Hospital),
5.875s, 2023 300 275,046
--------------
$4,315,799
- --------------------------------------------------------------------- --------------
Industrial Revenue (Corporate Guarantee) - 5.1%
Erie County, PA, Industrial Development Authority,
Environmental Improvement (International Paper),
7.625s, 2018 $ 250 $ 278,132
Hampden, PA, Industrial Development Authority
(Kmart), 5.75s, 2008 250 240,338
New Morgan, PA, Industrial Development Authority
(Browning Ferris Co.), 6.5s, 2019 500 512,435
Northampton County, PA, Industrial Development
Authority (Bethlehem Steel), 7.55s, 2017 800 838,304
Pennsylvania Economic Development Authority
(MacMillan Bloedel), 7.6s, 2020 250 276,008
--------------
$2,145,217
- --------------------------------------------------------------------- --------------
Insured Health Care Revenue - 11.3%
Allegheny County, PA, Hospital Authority (Magee
Women's), FGIC, 0s, 2015 $1,000 $ 329,060
Allegheny County, PA, Hospital Authority (South
Hills Health System), MBIA,
5.8s, 2016 500 493,665
Allegheny County, PA, Hospital Authority
(University of Pittsburgh), MBIA,
5.35s, 2015 400 376,932
Blair County, PA, Hospital Authority (Altoona),
AMBAC, 5.5s, 2008 470 474,080
Dauphin County, PA, General Authority Hospital
Rev. (Hapsco Project), MBIA,
5.8s, 2002 355 369,477
Dauphin County, PA, General Authority Hospital
Rev. (Hapsco Project), MBIA,
5.5s, 2013 1,000 967,360
Delaware County, PA, Hospital Rev. (Crozer
Chester), MBIA, 5.3s, 2020 500 459,505
Doylestown, PA, Hospital Authority Rev., AMBAC,
5s, 2023 $ 500 $ 439,635
Lancaster County, PA, Hospital Rev. (Masonic),
AMBAC, 5s, 2020 400 353,908
Lehigh County, PA, Hospital Rev. (Lehigh Valley),
MBIA, 7s, 2016 250 283,852
Sayre, PA, Health Care Facilities (VHA, PA),
AMBAC, 6.375s, 2022 160 165,352
--------------
$4,712,826
- --------------------------------------------------------------------- --------------
Multi-Family Housing Revenue - 0.6%
Montgomery County, PA, Redevelopment Authority
(KBF Associates), 6.5s, 2025 $ 250 $ 245,215
- --------------------------------------------------------------------- --------------
Sales and Excise Tax Revenue - 3.5%
Puerto Rico Highway & Transportation Authority,
5.5s, 2008 $ 500 $ 488,420
Puerto Rico Highway & Transportation Authority,
5.5s, 2013 500 489,860
Puerto Rico Highway & Transportation Authority,
5.5s, 2015 500 495,915
--------------
$1,474,195
- --------------------------------------------------------------------- --------------
Single Family Housing Revenue - 8.0%
Pennsylvania Housing Finance Agency, 6.75s, 2014 $ 500 $ 521,540
Pennsylvania Housing Finance Agency, 6.4s, 2016 500 513,890
Pennsylvania Housing Finance Agency, 6.65s, 2021 250 258,415
Pennsylvania Housing Finance Agency, 6.125s, 2024 480 482,587
Pennslyvania Housing Finance Agency, FHA, VA,
5.75s, 2013 1,000 995,490
Philadelphia, PA, Redevelopment Authority, 6.1s,
2010 200 198,382
Pittsburgh, PA, Urban Development Corp., 5.5s,
2010 400 386,780
--------------
$3,357,084
- --------------------------------------------------------------------- --------------
Solid Waste Revenue - 2.3%
Harrisburg, PA, 5.875s, 2021 $1,000 $ 962,910
- --------------------------------------------------------------------- --------------
Turnpike Revenue - 2.5%
Delaware River Junction, Toll Bridge (Pennsylvania
Bridge), FGIC, 6.25s, 2012 $1,000 $1,035,630
- --------------------------------------------------------------------- --------------
Universities - 3.2%
Cumberland County, PA, Municipal Authority
(Messiah College), AMBAC, 5.125s, 2015 $ 300 $ 277,476
Pennsylvania Higher Education Facilities Authority
Rev. (Thomas Jefferson University), 6s, 2019 625 628,013
Pennsylvania Higher Education Facilities Authority
Rev. (University of Pennsylvania), 7s, 2008 400 447,320
--------------
$1,352,809
- --------------------------------------------------------------------- --------------
Water and Sewer Utility Revenue - 7.0%
Lancaster, PA, Sewer Authority, FGIC,
6.85s, 2011 $ 250 $ 255,500
Meadville, PA, Area Water Authority, FSA, 5.125s,
2014 250 232,455
Philadelphia, PA, Water Rev., 5.75s, 2013 275 264,465
Philadelphia, PA, Water Rev., FSA,
5.75s, 2013 300 298,344
Philadelphia, PA, Water Rev., MBIA,
5.5s, 2014 1,000 967,200
West View, PA, Water Rev., FGIC,
5.15s, 2017 1,000 926,760
--------------
$2,944,724
- --------------------------------------------------------------------- --------------
19-PA
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- ---------------------------------------------------------------------- --------------
Other - 5.9%
Pennsylvania Convention Center Rev.,
6.75s, 2019 $ 250 $ 265,277
Pennsylvania Finance Authority Rev.,
6.6s, 2009 900 950,049
Pennsylvania Industrial Development Authority,
AMBAC, 7s, 2007 300 340,218
Pennsylvania Industrial Development Authority,
AMBAC, 5.8s, 2009 400 412,892
Philadelphia, PA, Industrial Development Authority
Lease, MBIA, 5.35s, 2012 500 482,920
--------------
$ 2,451,356
- --------------------------------------------------------------------- --------------
Total Municipal Bonds (Identified Cost, $38,851,870) $39,246,282
- ---------------------------------------------------------------------- --------------
Floating Rate Demand Note - 2.4%
- -------------------------------------------------------------------------------------
Allegheny County, due 3/01/20,
at Identified Cost $1,000 $ 1,000,000
- --------------------------------------------------------------------- --------------
Total Investments (Identified Cost, $39,851,870) $40,246,282
Other Assets, Less Liabilities - 3.8% 1,585,108
- ---------------------------------------------------------------------- --------------
Net assets - 100.0% $41,831,390
- ---------------------------------------------------------------------- --------------
See portfolio footnotes and notes to financial statements
</TABLE>
Portfolio of Investments - March 31, 1997
MFS SOUTH CAROLINA MUNICIPAL BOND FUND
Municipal Bonds - 97.4%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------- ---------------- ---------------
<S> <C> <C>
General Obligation - 3.2%
Charleston County, SC, 5.5s, 2014### $1,250 $ 1,234,450
Commonwealth of Puerto Rico, 5.4s, 2025 1,500 1,381,935
Puerto Rico Public Buildings Authority,
5.7s, 2009 1,000 1,018,980
Richland County, SC, School District No. 1, 5s,
2016 1,975 1,800,529
---------------
$ 5,435,894
- -------------------------------------------------- ---------------- ---------------
State and Local Appropriation - 7.5%
Berkeley County, SC, School District, AMBAC,
6.3s, 2016 $1,800 $ 1,881,828
Greenville County, SC, Certificates of
Participation (Courthouse & Detention Center),
AMBAC, 5.7s, 2017 1,750 1,701,018
Greenville County, SC, Certificates of
Participation (Greenville Technical College),
AMBAC, 5.9s, 2019 850 845,818
Hilton Head Island, SC, Public Finance Corp.,
Certificates of Participation, AMBAC, 5.75s,
2014 1,750 1,740,217
Lexington County, SC, School District No. 1,
Certificates of Participation (Gilbert Middle
School), MBIA, 6.65s, 2012 1,000 1,050,510
Myrtle Beach, SC, Public Finance Corp.,
Certificates of Participation (Convention
Center), 6.875s, 2017 2,500 2,574,525
Puerto Rico Public Buildings Authority,
5.5s, 2021 1,000 947,410
Williamsburg County, SC, School District Public
Facilities Corp., Certificates of
Participation, 7.5s, 2006 175 177,229
Williamsburg County, SC, School District Public
Facilities Corp., Certificates of
Participation, 7.5s, 2007 190 192,421
Williamsburg County, SC, School District Public
Facilities Corp., Certificates of
Participation, 7.5s, 2008 $ 205 $ 207,612
Williamsburg County, SC, School District Public
Facilities Corp., Certificates of
Participation, 7.5s, 2009 220 222,266
Williamsburg County, SC, School District Public
Facilities Corp., Certificates of
Participation, 7.5s, 2012 270 271,474
Williamsburg County, SC, School District Public
Facilities Corp., Certificates of
Participation, 7.5s, 2014 315 316,720
Williamsburg County, SC, School District Public
Facilities Corp., Certificates of
Participation, 7.5s, 2018 635 638,467
---------------
$12,767,515
- -------------------------------------------------- ---------------- ---------------
Refunded and Special Obligations - 20.2%
Calhoun, SC, Solid Waste Disposal Rev. (Eastman
Kodak), 6.75s, 2017 $1,000 $ 1,110,510
Charlestown County, SC, Alumax Project, 6.5s,
2001 1,315 1,420,923
Charlestown County, SC, Certificates of
Participation (Charlestown Public Facilities
Corp.), MBIA, 7.1s, 2001 2,000 2,209,880
Columbia, SC, Waterworks & Sewer Rev.,
0s, 2004 1,500 1,073,190
Columbia, SC, Waterworks & Sewer Rev.,
0s, 2006 2,045 1,302,808
Commonwealth of Puerto Rico, Public Improvement
Rev., 6.8s, 2002 425 470,386
Greenville Hospital System, SC, Hospital
Facilities Rev., "A", FGIC, 7.8s, 1998 1,950 2,064,036
Greenville Hospital System, SC, Hospital
Facilities Rev., "B", FGIC, 7.8s, 1998 1,500 1,587,720
Greenwood County, SC, Hospital Rev. (Self
Memorial Hospital), BIGI, 8.25s, 1997 500 520,405
Laurens, SC, Utility Systems Rev., FGIC, 7.625s,
1998 1,100 1,161,908
Lexington County, SC, School District No. 1,
Certificates of Participation (White Knoll
Middle School), CGIC, 7.65s, 1999 1,400 1,508,738
Myrtle Beach, SC, Water & Sewer Rev., MBIA, 6s,
2000 1,780 1,845,611
Myrtle Beach, SC, Water & Sewer Rev., MBIA, 6s,
2000 1,750 1,814,505
North Charleston, SC, Sewer Rev., MBIA, 7.75s,
1998 1,250 1,333,138
Puerto Rico Aqueduct & Sewer Authority Rev., 9s,
2005 750 938,078
Puerto Rico Highway & Transportation Authority,
Highway Rev., 6.625s, 2002 300 329,625
Richland County, SC, 6.25s, 2000 1,260 1,335,209
Richland County, SC, Certificates of
Participation, FGIC, 0s, 2005 1,160 774,683
Richland County, SC, Certificates of
Participation, FGIC, 0s, 2006 1,160 729,535
Richland County, SC, Certificates of
Participation, FGIC, 0s, 2007 1,160 688,959
South Carolina Jobs Economic Development
Authority (Carolina Hospital System Project),
7.55s, 2002 2,000 2,281,960
South Carolina Public Service Authority (Santee
Cooper), 6.625s, 2002 4,000 4,391,040
South Carolina Public Service Authority, "C"
(Santee Cooper), 7.1s, 2001 1,220 1,349,893
20-SC
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------- ---------------
Refunded and Special Obligations - continued
Spartanburg County, SC, Hospital Facilities Rev.
(Mary Black Hospital), 8.25s, 1998 $ 500 $ 538,205
St. Andrews, SC, Public Services District, Sewer
System Rev., FGIC, 7.75s, 2018 1,000 1,047,470
York County, SC, School District No. 3,
7.5s, 1998 575 608,344
---------------
$34,436,759
- -------------------------------------------------- ---------------- ---------------
Airport and Port Revenue - 0.6%
Richland Lexington, SC, Airport Rev. (Columbia
Airport), "A", AMBAC,
5.7s, 2026 $1,000 $ 953,830
- -------------------------------------------------- ---------------- ---------------
Electric and Gas Utility Revenue - 13.1%
Camden, SC, Public Utility Rev., Refunding &
Improvement, MBIA, 5.5s, 2017 $1,500 $ 1,436,760
Colleton & Dorchester Counties, SC, Pollution
Control Rev., 6.6s, 2014 3,000 3,169,890
Fairfield County, SC, Pollution Control Rev.
(South Carolina Electric Co.), 6.5s, 2014 1,250 1,322,875
Oconee County, SC, Pollution Control Rev. (Duke
Power Co.), 7.5s, 2017 1,000 1,072,100
Piedmont Municipal Power Agency, SC, Electric
Rev., FGIC, 6.25s, 2021 4,600 4,895,826
Piedmont Municipal Power Agency, SC, Electric
Rev., FGIC, 5s, 2022 2,300 2,032,004
Puerto Rico Electric Power Authority, "S", MBIA,
6.125s, 2008 1,025 1,107,748
Puerto Rico Telephone Authority Rev., AMBAC,
5.87s, 2004 ss 1,000 965,840
South Carolina Public Service Authority, "A",
MBIA, 5.75s, 2022 500 490,900
South Carolina Public Service Authority, "B",
AMBAC, 5.5s, 2023 1,000 949,830
South Carolina Public Service Authority, FGIC,
5.875s, 2023 2,000 1,995,960
South Carolina Public Service Authority, MBIA,
7.193s, 2013++++ 3,000 2,838,810
---------------
$22,278,543
- -------------------------------------------------- ---------------- ---------------
Health Care Revenue - 7.0%
Greenville County, SC, First Mortgage Rev.
(Chestnut Hill), 10.125s, 2016 $1,895 $ 1,909,212
Greenville Hospital System, SC, Hospital
Facilities Rev., 6s, 2020 5,400 5,453,784
Horry County, SC, Hospital Facilities Rev.
(Conway Hospital), 6.75s, 2012 4,500 4,636,125
---------------
$11,999,121
- -------------------------------------------------- ---------------- ---------------
Industrial Revenue (Corporate Guarantee) - 10.9%
Chester County, SC, Industrial Development Rev.
(Springs Industries, Inc), 7.35s, 2014 $1,000 $ 1,069,140
Chester County, SC, Industrial Development Rev.
(Springs Industries, Inc.), 7.8s, 2014 1,025 1,103,115
Darlington County, SC, Industrial Development
Rev. (Nucor Corp.),
5.75s, 2023 2,000 1,923,920
Darlington County, SC, Industrial Development
Rev. (Sonoco Products Co.), 6.125s, 2025 1,500 1,523,910
Fairfield County, SC, Industrial Development
Rev. (Rite Aid, Inc.), 7.9s, 2016 2,950 3,021,154
Florence County, SC, Industrial Development Rev.
(Stone Container Corp.), 7.375s, 2007 945 989,330
Greenville County, SC, Industrial Development
Rev. (Kroger Co.), 7.85s, 2015 500 563,935
Lexington County, SC, Industrial Rev. (J. B.
White & Co.), 8s, 2005 600 649,638
Richland County, SC, Pollution Control Rev.
(Union Camp Corp.), 6.55s, 2020 $1,800 $ 1,886,220
Richland County, SC, Solid Waste Facilities Rev.
(Union Camp Corp.), 6.75s, 2022 2,000 2,071,000
York City, SC, Industrial Development Rev.
(Hoechst Celanese), 5.7s, 2024 4,000 3,866,920
---------------
$18,668,282
- -------------------------------------------------- ---------------- ---------------
Insured Health Care Revenue - 7.7%
Charleston County, SC, Hospital Facilities Rev.
(Medical Society Health Project), MBIA, 5s,
2022 $2,450 $ 2,123,317
Pickens & Richland Counties, SC, Hospital
Facilities Rev. (Baptist Hospital), AMBAC,
5.75s, 2021 3,000 2,949,630
South Carolina Jobs Economic Development
Authority, Hospital Facilities Rev. (Anderson
Area Medical Center), MBIA, 5.25s, 2015 1,750 1,632,382
South Carolina Jobs Economic Development
Authority, Hospital Facilities Rev. (Tuomey
Regional Medical Center), MBIA, 5.5s, 2020 3,390 3,214,093
Spartanburg County, SC, Health Service Rev.,
AMBAC, 5.3s, 2025 1,000 913,130
Spartanburg County, SC, Hospital Facilities
Rev., Health Services District Inc., AMBAC,
5.3s, 2020 2,500 2,315,100
---------------
$13,147,652
- -------------------------------------------------- ---------------- ---------------
Multi-Family Housing Revenue - 2.5%
South Carolina Housing Finance & Development
Authority (Fairway Apartments), FHA, 7.625s,
2033 $1,955 $ 2,046,025
South Carolina Housing Finance & Development
Authority (Hunting Ridge Apartments), 6.75s,
2025 1,000 1,015,020
South Carolina Housing Finance & Development
Authority (Runaway Bay Apartments), 6.125s,
2015 1,300 1,281,670
---------------
$ 4,342,715
- -------------------------------------------------- ---------------- ---------------
Sales and Excise Tax Revenue - 0.5%
Puerto Rico Highway & Transportation Authority
Rev., 5.5s, 2026 $1,000 $ 930,100
- -------------------------------------------------- ---------------- ---------------
Single Family Housing Revenue - 4.6%
South Carolina Housing Finance & Development
Authority Rev., 7.55s, 2011 $1,750 $ 1,810,253
South Carolina Housing Finance & Development
Authority Rev., 8.6s, 2019 620 638,631
South Carolina Housing Finance & Development
Authority Rev., 7.75s, 2022 2,650 2,759,551
South Carolina Housing Finance & Development
Authority Rev., 7.8s, 2022 1,000 1,036,190
South Carolina Housing Finance & Development
Authority Rev., 7.9s, 2032 1,610 1,675,543
---------------
$ 7,920,168
- -------------------------------------------------- ---------------- ---------------
Solid Waste Revenue - 1.1%
Charleston County, SC, Resource Recovery Rev.
(Foster Wheeler), 9.25s, 2010 $1,750 $ 1,851,640
- -------------------------------------------------- ---------------- ---------------
Universities - 0.9%
Coastal Carolina University, SC, MBIA, 6.875s,
2026 $1,000 $ 1,079,700
University of South Carolina, University Rev.,
MBIA, 5.75s, 2026 515 499,432
---------------
$ 1,579,132
- -------------------------------------------------- ---------------- ---------------
21-SC
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------- ---------------
Water and Sewer Utility Revenue - 17.6%
Cayce, SC, Waterworks & Sewer Rev., AMBAC,
5.25s, 2015 $1,000 $ 938,310
Charleston County, SC, Waterworks & Sewer Rev.,
6s, 2012 2,000 2,039,220
Charleston County, SC, Waterworks & Sewer Rev.,
MBIA, 5s, 2022 3,150 2,771,811
Columbia, SC, Waterworks & Sewer Rev.,
0s, 2005 2,245 1,498,133
Columbia, SC, Waterworks & Sewer Rev.,
0s, 2006 9,330 5,862,599
Columbia, SC, Waterworks & Sewer Rev., 5.375s,
2012 3,500 3,443,510
Greenville, SC, Waterworks Rev., 5.5s, 2022 1,000 940,650
Laurens County, SC, Water & Sewer Commission,
Sewer System Rev., 5.5s, 2014 1,080 1,017,068
Myrtle Beach, SC, Water & Sewer Rev., MBIA,
5.5s, 2013 1,000 978,970
South Carolina Water Resources Authority Rev.
(Local Government Program),
7.25s, 2020 3,000 3,173,730
Spartanburg, SC, Waterworks Rev., FGIC, 6.05s,
2018 2,750 2,804,423
Western Carolina Regional Sewer Authority Rev.,
AMBAC, 0s, 2007 4,400 2,564,364
York County, SC, Water & Sewer Rev.,
6.5s, 2025 2,000 1,964,120
---------------
$ 29,996,908
- --------------------------------------------------- ---------------- ---------------
Total Municipal Bonds (Identified Cost, $158,311,434) $166,308,259
- -------------------------------------------------------------------- ---------------
Floating Rate Demand Note - 1.0%
- ------------------------------------------------------------------------------------
Charleston County, SC, Industrial Rev. (Massey
Coal), due 1/01/07, at Identified Cost $1,700 $ 1,700,000
- -------------------------------------------------- ---------------- ---------------
Total Investments (Identified Cost, $160,011,434) $168,008,259
Other Assets, Less Liabilities - 1.6% 2,771,126
- -------------------------------------------------------------------- ---------------
Net assets - 100.0% $170,779,385
- -------------------------------------------------------------------- ---------------
See portfolio footnotes and notes to financial statements
</TABLE>
Portfolio of Investments - March 31, 1997
MFS TENNESSEE MUNICIPAL BOND FUND
Municipal Bonds - 97.9%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------- ----------------- ---------------
<S> <C> <C>
General Obligation - 8.7%
Huntington, TN, School District, AMBAC, 5.35s,
2021 $1,050 $ 994,465
McKenzie, TN, High School District, FSA, 5.625s,
2017 500 491,375
Memphis, TN, 5.25s, 2012 800 771,056
Metropolitan Government of Nashville & Davidson
County, TN, 6.125s, 2014 1,000 1,029,660
Metropolitan Government of Nashville & Davidson
County, TN, 6.125s, 2019 1,255 1,284,819
Rutherford County, TN, 0s, 2015 1,500 507,000
Sevier County, TN, Public Building Authority,
AMBAC, 5.6s, 2015 800 783,648
Shelby County, TN, 5.125s, 2015 1,000 935,560
Shelby County, TN, Capital Appreciation
Refundings, "B", 0s, 2013 3,960 1,522,541
Shelby County, TN, Public Improvement, "B",
5.75s, 2021 1,000 987,060
Territory of Virgin Islands, 7.75s, 2006 390 419,472
Union County, TN, AMBAC, 5.25s, 2020 1,000 932,940
---------------
$10,659,596
- ---------------------------------------------------- ----------------- ---------------
State and Local Appropriation - 3.2%
Gatlinburg, TN, Public Building Authority
(Gatlinburg Convention Center), AMBAC, 6.9s,
2012 $1,000 $ 1,070,630
Puerto Rico Public Buildings Authority,
5.5s, 2021 1,000 947,410
Puerto Rico Public Buildings Authority, Public
Education & Health Refunding, 6.45s, 2016 ss 2,000 1,874,880
---------------
$ 3,892,920
- ---------------------------------------------------- ----------------- ---------------
Refunded and Special Obligations - 23.2%
Bristol, TN, Health & Educational Facilities
Board Rev. (Bristol Memorial), FGIC,
7s, 2001 $ 500 $ 548,395
Gladeville, TN, Utility District, Waterworks
Rev., FGIC, 7.4s, 2000 500 544,210
Knox County, TN, Health, Education & Housing
Facilities Board (Baptist East),
8.5s, 1999 1,180 1,289,835
Knox County, TN, Health, Education & Housing
Facilities Board (Baptist East),
8.6s, 1999 710 777,741
Knox County, TN, Health, Education & Housing
Facilities Board (Fort Sanders), MBIA, 8s, 1998 2,000 2,088,100
Knox County, TN, Health, Education & Housing
Facilities Board (Mercy Health), AMBAC, 7.6s,
1999 3,500 3,809,645
Knox County, TN, Industrial Development Board,
0s, 2016 8,325 2,291,706
Memphis, TN, Electric Systems Rev.,
6.75s, 2000 1,500 1,605,375
Memphis-Shelby County, TN, Airport Authority,
MBIA, 8s, 1998 3,500 3,671,850
Mt. Juliet, TN, Public Building Authority
(Madison), MBIA, 7.7s, 2004 1,100 1,353,605
Mt. Juliet, TN, Public Building Authority
(Madison), MBIA, 7.8s, 2004 3,500 4,326,980
Mt. Juliet, TN, Public Building Authority
(Popular Grove), 8.375s, 1999 1,430 1,552,937
New Tazewell, TN, Health, Educational & Housing
Facilities Board (Lincoln),
7.25s, 1997 2,000 2,040,000
Puerto Rico Highway & Transportation Authority
Rev., 8.125s, 1998 670 716,083
22-TN
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- ---------------------------------------------------------------------- ---------------
Refunded and Special Obligations - continued
Shelby County, TN, 6.5s, 1999 $1,120 $ 1,183,638
Wilson County, TN, Water & Wastewater Authority,
8s, 1999 500 541,050
---------------
$28,341,150
- ---------------------------------------------------- ----------------- ---------------
Electric and Gas Utility Revenue - 5.9%
Bolivar, TN, Electric Systems Rev., MBIA, 5.25s,
2016 $ 730 $ 680,805
Jackson, TN, Electric Systems Rev., Refunding &
Improvement, MBIA, 5s, 2018 1,000 895,840
Lawrenceburg, TN, Electric Rev., 5.5s, 2026 1,255 1,192,125
Metropolitan Government of Nashville & Davidson
County, TN, 0s, 2010 2,480 1,186,482
Metropolitan Government of Nashville & Davidson
County, TN, 0s, 2012 3,305 1,382,283
Puerto Rico Telephone Authority Rev., AMBAC,
5.87s, 2004 ss 2,000 1,931,680
---------------
$ 7,269,215
- ---------------------------------------------------- ----------------- ---------------
Health Care Revenue - 3.2%
Cookeville, TN, Industrial Development Board Rev.
(Cookeville General Hospital), 5.625s, 2016 $1,000 $ 948,130
Cookeville, TN, Industrial Development Board,
Hospital Rev. (Cookeville General), 5.75s, 2010 2,000 1,967,340
Knox County, TN, Health, Educational & Housing
Facilities Board (East Tennessee Children's),
6.5s, 2012 1,000 1,019,460
---------------
$ 3,934,930
- ---------------------------------------------------- ----------------- ---------------
Industrial Revenue (Corporate Guarantee) - 11.7%
Bristol, TN, Industrial Development Authority
(K-Mart Corp.), 7.5s, 2008 $1,105 $ 1,120,293
Hardeman County, TN (Correctional Facilities
Corp.), 7.75s, 2017 1,000 994,290
Humphreys County, TN, Certificates of
Participation (duPont), 6.7s, 2024 1,750 1,851,657
Knox County, TN, Industrial Development Board
(Kroger Co.), 8.1s, 2003 2,000 2,247,960
Lawrenceburg, TN, Industrial Development Board
(Tridon, Inc.), 9.875s, 2006 1,000 1,042,230
McMinn County, TN, Industrial Development Board,
Pollution Control Rev. (Bowater), 7.625s, 2016 1,000 1,063,770
Memphis-Shelby County, TN, Airport Authority
(Federal Express Corp.), 7.875s, 2009 2,755 3,051,218
Memphis-Shelby County, TN, Airport Authority
(Federal Express Corp.), 6.2s, 2014 1,000 1,003,780
Metropolitan Government of Nashville & Davidson
County, TN (Wilson Sporting), 7.75s, 2014 1,000 1,080,420
Puerto Rico Industrial, Medical & Environmental
Pollution Control Facilities, Finance Authority
Rev. (Baxter Travenol Laboratories), 8s, 2012 750 803,895
---------------
$14,259,513
- ---------------------------------------------------- ----------------- ---------------
Insured Health Care Revenue - 9.4%
Bristol, TN, Health, Education & Housing
Facilities Board (Bristol Memorial), FGIC,
7s, 2021 $2,825 $ 2,769,743
Johnson City, TN, Health & Education Financing
Authority (Johnson City Medical Center
Hospital), MBIA, 5.25s, 2016 1,375 1,269,648
Knox County, TN, Health, Educational & Housing
Facilities Board (Fort Sanders), MBIA, 5.75s,
2014 $3,250 $ 3,256,012
Knox County, TN, Health, Educational & Housing
Facilities Board (Fort Sanders), MBIA, 5.25s,
2023 1,750 1,600,147
Metropolitan Government of Nashville & Davidson
County, TN, Health & Education (Meharry Medical
College), AMBAC,
5s, 2024 3,000 2,648,550
---------------
$11,544,100
- ---------------------------------------------------- ----------------- ---------------
Multi-Family Housing Revenue - 5.8%
Franklin, TN, Industrial Development (Landings
Apartments), FSA, 6s, 2026 $1,000 $ 983,880
Franklin, TN, Industrial Development (Sussex
Downs), FHA, 6.75s, 2027 1,000 1,040,690
Jackson, TN, Health, Education & Housing
Facilities Board (Posthouse Apartments), FHA,
7.1s, 2028 1,610 1,682,386
Metropolitan Government of Nashville & Davidson
County, TN, Health & Education (Herman Street),
FHA, 7.25s, 2032 495 516,290
Metropolitan Government of Nashville & Davidson
County, TN, Industrial Development Board, FHA,
6.95s, 2026 1,000 1,042,580
Metropolitan Government of Nashville & Davidson
County, TN, Industrial Development Board, FHA,
7.5s, 2029 695 724,315
Metropolitan Government of Nashville & Davidson
County, TN, Industrial Development Board, FHA,
7.7s, 2029 1,000 1,042,000
---------------
$ 7,032,141
- ---------------------------------------------------- ----------------- ---------------
Sales and Excise Tax Revenue - 1.9%
Puerto Rico Highway & Transportation Authority
Rev., 5.5s, 2026 $1,400 $ 1,302,140
Tennessee Local Development Authority Rev.,
Community Provider Loan, 7s, 2021 1,000 1,058,380
---------------
$ 2,360,520
- ---------------------------------------------------- ----------------- ---------------
Single Family Housing Revenue - 3.4%
Shelby County, TN, Single Family Mortgage Rev.,
FHA, 0s, 2015 $8,445 $ 1,345,373
Tennessee Housing Development Agency, 7.65s, 2022 950 985,558
Tennessee Housing Development Agency, 7.375s,
2023 1,000 1,037,520
Tennessee Housing Development Agency, 7.125s,
2026 800 846,008
---------------
$ 4,214,459
- ---------------------------------------------------- ----------------- ---------------
Universities - 2.4%
Jackson, TN, Health, Educational & Housing
Facilities Board (Lambuth University), Asset
Guaranty, 5.9s, 2015 $1,000 $ 988,730
Metropolitian Government of Nashville & Davidson
County, TN, Health, Educational & Housing
Facilities Board (Vanderbilt University),
7.625s, 2016 1,000 1,048,810
Metropolitan Government of Nashville & Davidson
County, TN, Health, Educational & Housing
Facilities Board (Vanderbilt University), 5.2s,
2018 1,000 932,760
---------------
$ 2,970,300
- ---------------------------------------------------- ----------------- ---------------
23-TN
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- ---------------------------------------------------------------------- ---------------
Water and Sewer Utility Revenue - 19.1%
Madison, TN, Utility Waterworks Refunding, MBIA,
5s, 2019 $2,750 $ 2,488,530
Metropolitan Government of Nashville, TN, Water &
Sewer Rev., AMBAC, 6.075s, 2022 2,000 1,997,880
Metropolitan Government of Nashville & Davidson
County, TN, Water & Sewer Rev., FGIC, 5.2s,
2013 2,000 1,914,320
Metropolitan Government of Nashville & Davidson
County, TN, Water & Sewer Rev., FGIC, 5.1s,
2016 2,565 2,344,282
Metropolitan Government of Nashville & Davidson
County, TN, Water & Sewer Rev., RIBS, AMBAC,
8.429s, 2022++++ 1,000 999,690
Mt. Juliet, TN, Public Building Authority
(Cumberland), 7.55s, 2024 1,205 1,272,106
Mt. Juliet, TN, Public Building Authority
(Hermitage), MBIA, 7.5s, 2009 300 318,612
Mt. Juliet, TN, Public Building Authority
(Milcroft), 7.55s, 2024 2,030 2,143,051
Mt. Juliet, TN, Public Building Authority (New
Market), 8.375s, 2024 560 599,122
Mt. Juliet, TN, Public Building Authority
(Tipton), 7.5s, 2004 330 348,094
Poplar Grove, TN, Utility District, Waterworks
Rev., 6.375s, 2011 500 508,240
Puerto Rico Aqueduct & Sewer Rev.,
6.25s, 2012 1,000 1,070,020
West Knox Utility District, TN, Water & Sewer
Rev., MBIA, 0s, 2002 1,315 978,465
West Knox Utility District, TN, Water & Sewer
Rev., MBIA, 0s, 2003 1,045 735,753
West Knox Utility District, TN, Water & Sewer
Rev., MBIA, 0s, 2004 1,920 1,273,133
West Knox Utility District, TN, Water & Sewer
Rev., MBIA, 0s, 2005 1,920 1,196,678
West Knox Utility District, TN, Water & Sewer
Rev., MBIA, 0s, 2006 1,920 1,127,904
West Knox Utility District, TN, Water & Sewer
Rev., MBIA, 0s, 2007 1,920 1,062,048
Wilson County, TN, Water & Wastewater Authority,
6s, 2014 1,000 992,180
---------------
$ 23,370,108
- ---------------------------------------------------- ----------------- ---------------
Total Municipal Bonds (Identified Cost, $115,312,773) $119,848,952
- ---------------------------------------------------------------------- ---------------
Shares
- ---------------------------------------------------- ----------------- ---------------
Right - 0.2%
- ---------------------------------------------------- ----------------- ---------------
State of New Jersey, "D", due 2013
(Identified Cost, $125,600) 2,000 $ 291,000
- ---------------------------------------------------- ----------------- ---------------
Principal Amount
(000 Omitted)
- ---------------------------------------------------- ----------------- ---------------
Floating Rate Demand Notes - 1.5%
- --------------------------------------------------------------------------------------
Lincoln County, WY, Pollution Control Rev., "D"
(Exxon), due 11/01/14 $ 600 $ 600,000
Uinta County, WY, Pollution Control Rev.
(Chevron), due 8/15/20 1,200 1,200,000
- ---------------------------------------------------- ----------------- ---------------
Total Floating Rate Demand Notes, at Identified Cost $ 1,800,000
- ---------------------------------------------------------------------- ---------------
Total Investments (Identified Cost, $117,238,373) $121,939,952
Other Assets, Less Liabilities - 0.4% 495,865
- ---------------------------------------------------------------------- ---------------
Net assets - 100.0% $122,435,817
- ---------------------------------------------------------------------- ---------------
See portfolio footnotes and notes to financial statements
</TABLE>
Portfolio of Investments - March 31, 1997
MFS VIRGINIA MUNICIPAL BOND FUND
Municipal Bonds - 94.0%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------- ----------------- ---------------
<S> <C> <C>
General Obligation - 11.5%
Chesapeake, VA, Public Improvement,
5.375s, 2013 $ 3,500 $ 3,390,275
Lebanon, VA, 6.375s, 2011 1,625 1,604,752
Norfolk, VA, 5.25s, 2013 1,000 958,460
Norfolk, VA, 5.25s, 2014 2,750 2,631,777
Norfolk VA, 5.25s, 2015 3,000 2,866,920
Norfolk VA, 5.25s, 2016 2,930 2,779,750
Portsmouth, VA, 6.375s, 2012 1,555 1,621,196
Richmond, VA, 0s, 2006 3,500 2,168,810
Richmond, VA, 6.5s, 2006 4,000 4,251,920
Richmond, VA, 0s, 2007 5,280 3,095,717
Richmond, VA, 0s, 2008 7,270 3,994,283
Richmond, VA, 0s, 2009 5,175 2,659,122
Spotsylvania County, VA, FGIC, 6s, 2009 4,270 4,510,700
State of Virginia, 5.375s, 2015 3,160 3,081,980
State of Virginia (Higher Educational
Institute), 0s, 1998 1,295 1,236,233
State of Virginia (Higher Educational
Institute), 0s, 1999 1,300 1,183,039
Suffolk, VA, 6.5s, 2006 1,250 1,294,750
Virginia Public School Authority, 6.5s, 2013 1,875 2,004,094
Virginia Public School Authority, "A",
5.375s, 2017 2,295 2,184,014
---------------
$47,517,792
- ------------------------------------------------- ----------------- ---------------
State and Local Appropriation - 8.2%
Chesapeake, VA, Industrial Development
Authority (Chesapeake Court House), MBIA,
6.25s, 2011 $ 3,985 $ 4,227,567
Chesterfield County, VA, Industrial Development
Authority, Public Facilities, 7.5s, 2008 1,720 1,887,476
Henrico County, VA, Industrial Development
Authority, Lease Rev., 6.5s, 2010 5,000 5,419,650
New Kent County, VA, Industrial Development
Authority, Public Facilities, 7.5s, 2011 700 743,141
Virginia Biotechnology Research Park (Biotech
Two), 5.25s, 2018 8,800 8,208,816
Virginia Public Building Authority, MBIA, 0s,
2007 13,305 7,618,842
Virginia Public Building Authority, MBIA, 0s,
2008 10,650 5,715,003
---------------
$33,820,495
- ------------------------------------------------- ----------------- ---------------
Refunded and Special Obligations - 10.9%
Arlington County, VA, Industrial Development
Authority (Arlington Hospital), 7.125s, 2001 $ 4,450 $ 4,941,992
Carroll County, VA, Solid Waste Authority Rev.,
7.5s, 2001 2,265 2,544,048
Chesapeake, VA, Industrial Development
Authority (Sentara Life Care Corp.),
10s, 1997 1,080 1,126,926
Fairfax County, VA, Redevelopment & Housing
Authority (Little River Glen), 8.95s, 1999 3,805 3,904,843
Henrico County, Industrial Development
Authority (St. Mary's Hospital), 7.5s, 2007 790 870,098
Newport News, VA, 6.5s, 2000 5,405 5,826,212
Norfolk, VA, Industrial Development Authority
(Sentara Life Care Corp.),
10s, 1997 4,130 4,309,448
24-VA
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------- ---------------
Refunded and Special Obligations - continued
Portsmouth, VA, 6.9s, 2000 $1,500 $ 1,627,095
Puerto Rico Aqueduct & Sewer Authority Rev.,
9s, 2005 4,150 5,190,695
Puerto Rico Aqueduct & Sewer Authority Rev.,
10.25s, 2009 400 543,388
Roanoke, VA, Industrial Development Authority,
Hospital Rev. (Memorial),
7.25s, 2000 1,750 1,916,635
Roanoke, VA, Industrial Development Authority,
Hospital Rev. (Roanoke Memorial), 7.5s, 2000 1,245 1,370,845
Virginia Beach, VA, Certificates of
Participation (Judical Center Project), FGIC,
7.25s, 2000 4,955 5,444,752
Virginia Beach, VA, Water & Sewer Rev., 6.625s,
2002 2,400 2,616,024
Virginia College Building Authority (Hampton
University), 7.75s, 1999 750 810,023
Virginia Resources Authority, Water & Sewer
System Rev., 7.875s, 1998 800 857,432
Virginia Resources Authority, Water & Sewer
System Rev., 7.5s, 1999 1,180 1,271,415
---------------
$45,171,871
- ------------------------------------------------- ----------------- ---------------
Airport and Port Revenue - 6.4%
Metropolitan Washington, DC, Airport Rev.,
7.6s, 2014 $5,030 $ 5,448,194
Metropolitan Washington, DC, Airport Rev.,
BIGI, 8.2s, 2018 3,500 3,744,825
Metropolitan Washington, DC, Airport Rev.,
MBIA, 5.75s, 2020 7,000 6,729,660
Peninsula Airport Commission, VA,
7.3s, 2021 2,400 2,601,456
Puerto Rico Ports Authority (American
Airlines), 6.3s, 2023 2,000 2,011,260
Puerto Rico Ports Authority (American
Airlines), 6.25s, 2026 6,000 6,022,680
---------------
$26,558,075
- ------------------------------------------------- ----------------- ---------------
Electric and Gas Utility Revenue - 5.0%
Halifax County, VA, Industrial Authority Rev.
(Old Dominion Electric), 6s, 2022 $5,000 $ 4,935,350
Pittsylvania County, VA, Industrial Development
Authority Rev., 7.5s, 2014 8,000 8,315,200
Puerto Rico Electric Power Authority,
5s, 2012 2,020 1,832,362
Puerto Rico Electric Power Authority,
6s, 2015 1,000 1,003,950
Puerto Rico Electric Power Authority,
5.5s, 2016 5,000 4,731,950
---------------
$20,818,812
- ------------------------------------------------- ----------------- ---------------
Health Care Revenue - 4.8%
Chesapeake, VA, Industrial Development
Authority (Sentara Life Care Corp.),
7.875s, 2008 $1,000 $ 1,066,110
Chesapeake, VA, Industrial Development
Authority (Sentara Life Care Corp.), 8s, 2018 4,000 4,251,120
Fairfax, Fauquier & Loudoun Counties, VA,
Health Center Commission, Nursing Home Rev.,
9s, 2020 1,890 1,975,012
Lynchburg, VA, Industrial Development Authority
(Central Health, Inc.), 8.125s, 2016 1,400 1,470,294
Martinsville, VA, Industrial Development
Authority, 6.75s, 2004 1,230 1,258,253
Norfolk, VA, Industrial Development Authority
(Sentara Life Care Corp.), "A", 7.875s, 2008 $1,000 $ 1,060,120
Norfolk, VA, Industrial Development Authority
(Sentara Life Care Corp.), "A", 7.9s, 2018 2,000 2,098,860
Peninsula Ports Authority, VA, Hospital
Facilities Rev. (Mary Immaculate),
7.375s, 2017 3,000 3,068,760
Peninsula Ports, VA, Health Care Rev.
(Riverside Health System), 6.625s, 2010 1,500 1,591,095
Suffolk, VA, Industrial Development Authority
(Louise Obici Memorial Hospital), 7.875s,
2005 1,740 1,822,337
---------------
$19,661,961
- ------------------------------------------------- ----------------- ---------------
Industrial Revenue (Corporate Guarantee) - 4.7%
Halifax, VA, Industrial Development Authority
(Tandy Corp.), 8.25s, 2008 $3,500 $ 3,727,325
Henrico County, VA, Industrial Development
Authority, 5.875s, 2017 2,250 2,193,908
Isle Wight County, VA, Industrial Development
(Union Camp), 6.55s, 2024 8,000 8,282,320
Lynchburg, VA, Industrial Development Authority
(Kroger Co.), 7.9s, 2011 1,000 1,117,630
Virginia Beach, VA, Development Authority
(Beverly Enterprises), 10s, 2010 1,315 1,445,632
West Point, VA, Industrial Development
Authority Solid Waste Disposal Rev.
(Chesapeake Corp. Project), 6.375s, 2019 2,600 2,631,200
---------------
$19,398,015
- ------------------------------------------------- ----------------- ---------------
Insured Health Care Revenue - 7.7%
Albemarle County, VA, Industrial Development
Authority, First Mortgage Rev., FHA, 8.9s,
2026 $2,150 $ 2,383,920
Front Royal-Warren County, VA, Industrial
Development Authority, FHA, 9.45s, 2024 1,000 1,091,750
Hanover County, VA, Industrial Development
Authority, MBIA, 6s, 2009 1,550 1,632,476
Hanover County, VA, Industrial Development
Authority (Memorial Regional Medical Center),
MBIA, 6.5s, 2008 1,000 1,088,280
Hanover County, VA, Industrial Development
Authority (Memorial Regional Medical Center),
MBIA, 6.5s, 2009 1,510 1,657,859
Henrico County, VA, Industrial Development
Authority Rev. (Bon Secours), MBIA,
6.25s, 2020 1,500 1,593,735
Henrico County, VA, Industrial Development
Authority Rev. (Bon Secours), FSA, RIBS,
8.005s, 2027++++ 8,700 8,646,843
Peninsula Ports Authority, VA, Hospital
Facilities Rev. (Wittaker Memorial), FHA,
8.7s, 2023 2,100 2,164,092
Roanoke, VA, Industrial Development Authority,
Hospital Rev. (Roanoke Memorial), MBIA,
6.125s, 2017 6,000 6,303,240
Winchester, VA, Industrial Development
Authority, AMBAC, 9.246s, 2014++++ 4,900 5,404,994
---------------
$31,967,189
- ------------------------------------------------- ----------------- ---------------
Multi-Family Housing Revenue - 3.2%
Alexandria, VA, Redevelopment & Housing Finance
Authority (Jefferson Village Apartments), 9s,
2018 $4,000 $ 4,105,440
25-VA
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- -------------------------------------------------------------------- ---------------
Multi-Family Housing Revenue - continued
Norfolk, VA, Redevelopment & Housing Authority
(Dockside Apartments), FHA, 7.375s, 2028 $ 2,000 $ 2,098,380
Virginia Housing Development Authority, 6.5s,
2013 2,300 2,347,840
Virginia Housing Development Authority, 6.6s,
2022 4,635 4,772,845
---------------
$ 13,324,505
- ------------------------------------------------- ----------------- ---------------
Sales and Excise Tax Revenue - 2.5%
Puerto Rico Highway & Transportation Authority
Rev., 5.5s, 2026 $ 2,000 $ 1,860,200
Virginia Port Authority, 8.2s, 2008 4,500 4,776,030
Virginia Transportation Board, Transportation
Contract Rev., 6.5s, 2018 3,500 3,655,260
---------------
$ 10,291,490
- ------------------------------------------------- ----------------- ---------------
Single Family Housing Revenue - 9.7%
Puerto Rico Housing Finance Corp., GNMA, 7.8s,
2021 $ 5 $ 5,178
Virginia Housing Development Authority, 7.22s,
2019++++ 7,500 6,966,525
Virginia Housing Development Authority, 6.2s,
2021 15,000 15,100,350
Virginia Housing Development Authority, 7.1s,
2022 2,000 2,070,440
Virginia Housing Development Authority, 6.3s,
2025 8,500 8,567,150
Virginia Housing Development Authority, 6.375s,
2026 7,000 7,096,740
Virginia Housing Development Authority, 0s,
2029 3,615 267,293
Virginia Housing Development Authority, 7.8s,
2038 100 103,322
---------------
$ 40,176,998
- ------------------------------------------------- ----------------- ---------------
Solid Waste Revenue - 0.8%
State of Virginia Research Authority, Waste
Disposal System Rev., FGIC, 5.5s, 2015 $ 3,230 $ 3,093,662
- ------------------------------------------------- ----------------- ---------------
Turnpike Revenue - 2.2%
Chesapeake Bay, VA, Bridge & Tunnel Authority,
FGIC, 0s, 2005 $ 4,535 $ 2,912,377
Chesapeake Bay, VA, Bridge & Tunnel, FGIC, 6s,
2007 5,700 6,055,623
---------------
$ 8,968,000
- ------------------------------------------------- ----------------- ---------------
Universities - 6.1%
Albemarle County, VA, Industrial Development
Authority Health Services Rev., 6.5s, 2022 $ 1,000 $ 1,020,060
Hampton Roads, VA, Medical College General
Rev., 6.875s, 2016 2,000 2,108,200
Hampton Roads, VA, Medical College General
Rev., 6.875s, 2016 1,500 1,581,150
Loudoun County, VA, Industrial Development
Authority, University Facilities, 6.25s, 2012 2,710 2,771,707
Rockingham County, VA, Industrial Development
Authority Rev. (Bridgewater), 6s, 2023 6,610 6,314,929
University of Virginia, University Rev.,
5.375s, 2014 5,190 4,971,501
Virginia College Building Authority,
Educational Facilities Rev. (Marymount),
7s, 2022 2,500 2,608,725
Virginia Polytechnic Institute, 5.5s, 2016 1,410 1,353,078
Virginia University, 5.4s, 2010 1,120 1,102,999
Virginia University, 5.4s, 2010 1,135 1,119,121
---------------
$ 24,951,470
- ------------------------------------------------- ----------------- ---------------
Water and Sewer Utility Revenue - 8.0%
Chesterfield County, VA, Water & Sewer Rev.,
0s, 2004 $ 5,025 $ 3,416,950
Chesterfield County, VA, Water & Sewer Rev.,
0s, 2005 4,815 3,086,174
Chesterfield County, VA, Water & Sewer Rev.,
0s, 2006 4,000 2,411,880
Chesterfield County, VA, Water & Sewer Rev.,
0s, 2007 6,000 3,379,320
Chesterfield County, VA, Water & Sewer Rev.,
0s, 2008 6,135 3,254,679
Chesterfield County, VA, Water & Sewer Rev.,
0s, 2009 6,135 3,043,880
Chesterfield County, VA, Water & Sewer Rev.,
0s, 2010 9,005 4,170,396
Fairfax County, VA, Water Authority Rev.,
6s, 2022 10,000 10,051,500
---------------
$ 32,814,779
- ------------------------------------------------- ----------------- ---------------
Other - 2.3%
Danville, VA, Industrial Development Authority,
Industrial Development Rev.,
8s, 2013 $ 3,040 $ 3,026,442
Loudoun, VA, Industrial Development Authority,
Industrial Development Rev., 7.125s, 2015 4,000 3,994,120
Pamunkey, VA, Regional Jail Authority, MBIA,
5.75s, 2018 2,500 2,466,425
---------------
$ 9,486,987
- ------------------------------------------------- ----------------- ---------------
Total Municipal Bonds (Identified Cost, $372,114,891) $388,022,101
- -------------------------------------------------------------------- ---------------
Shares
- ------------------------------------------------- ----------------- ---------------
Rights - 0.3%
- ------------------------------------------------------------------------------------
Georgia Municipal Electric Authority,
due 2016 20,000 $ 511,600
State of New Jersey, "D", due 2013 5,000 727,500
- ------------------------------------------------- ----------------- ---------------
Total Rights (Identified Cost, $576,800) $ 1,239,100
- -------------------------------------------------------------------- ---------------
Principal Amount
(000 Omitted)
- ------------------------------------------------- ----------------- ---------------
Floating Rate Demand Notes - 2.5%
- ------------------------------------------------------------------------------------
Peninsula Ports Authority, VA (Shell Oil Co.),
due 12/01/05 $ 5,000 $ 5,000,000
Peninsula Ports Authority, VA (Shell Oil Co.),
due 7/01/16 5,300 5,300,000
- ------------------------------------------------- ----------------- ---------------
Total Floating Rate Demand Notes, at Identified Cost $ 10,300,000
- -------------------------------------------------------------------- ---------------
Total Investments (Identified Cost, $382,991,691) $399,561,201
Other Assets, Less Liabilities - 3.2% 13,373,131
- -------------------------------------------------------------------- ---------------
Net assets - 100.0% $412,934,332
- -------------------------------------------------------------------- ---------------
See portfolio footnotes and notes to financial statements
</TABLE>
26-VA
<PAGE>
Portfolio of Investments - March 31, 1997
MFS WEST VIRGINIA MUNICIPAL BOND FUND
Municipal Bonds - 96.4%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ----------------------------------------------- ---------------- ---------------
<S> <C> <C>
General Obligation - 11.7%
Cabell, WV, Board of Education, MBIA,
6s, 2006 $ 500 $ 529,605
Charleston, WV, Public Improvement,
7.2s, 2008 1,240 1,426,186
Charleston, WV, Public Improvement,
7.2s, 2009 1,140 1,309,495
Jefferson County, WV, Board of Education,
FGIC, 6.85s, 2009 1,680 1,885,347
Monongalia County, WV, Board of Education,
MBIA, 7s, 2005 500 557,350
Ohio County, WV, Board of Education, MBIA,
5.25s, 2018 1,180 1,124,776
State of West Virginia, FGIC, 5s, 2021 2,000 1,786,700
State of West Virginia, FGIC, 5.25s, 2026 5,000 4,647,150
State of West Virginia, Water Development
Authority Rev., FSA, 6.2s, 2024 3,000 3,094,440
---------------
$16,361,049
- ----------------------------------------------- ---------------- ---------------
State and Local Appropriation - 6.5%
West Virginia Building Commission, Lease Rev.
(West Virginia Regional Jail), MBIA, 0s,
2007 $3,150 $ 1,806,462
West Virginia Building Commission, Lease Rev.
(West Virginia Regional Jail), MBIA, 0s,
2008 3,050 1,638,796
West Virginia Building Commission, Lease Rev.
(West Virginia Regional Jail), MBIA, 0s,
2009 2,500 1,241,200
West Virginia Building Commission, Lease Rev.
(West Virginia Regional Jail), MBIA, 7s,
2015 1,000 1,075,830
West Virginia School Building Authority,
6.75s, 2015 3,000 3,267,360
---------------
$ 9,029,648
- ----------------------------------------------- ---------------- ---------------
Refunded and Special Obligations - 8.6%
Kanawha County, WV, Building Commission (St.
Francis Hospital), ETM, 7.5s, 2007 $ 250 $ 279,088
Puerto Rico Aqueduct & Sewer Authority Rev.,
9s, 2005 1,500 1,876,155
South Charleston, WV, Hospital Rev. (Herbert
J. Thomas Memorial Hospital), BIGI, 8s,
1998 500 536,410
West Virginia Hospital Finance Authority
(Monogalia General Hospital), BIGI,
8.6s, 1997 1,000 1,011,220
West Virginia Parkways, Economic Development
& Tourism Authority, FGIC, 0s, 2005 2,250 1,464,862
West Virginia Parkways, Economic Development
& Tourism Authority, FGIC, 0s, 2007 2,000 1,144,680
West Virginia Parkways, Economic Development
Authority, FGIC, 0s, 2006 2,500 1,531,375
West Virginia Parkways, Economic Development
Authority, FGIC, 0s, 2008 610 332,468
West Virginia Water Development Authority,
8.125s, 1998 1,750 1,885,642
West Virginia Water Development Authority,
8.625s, 1998 750 813,795
West Virginia Water Development Authority,
7.4s, 2001 750 841,980
West Virginia Water Development Authority,
ETM, 7.1s, 2009 250 280,073
---------------
$11,997,748
- ----------------------------------------------- ---------------- ---------------
Electric and Gas Utility Revenue - 13.3%
Marshall County, WV, Pollution Control Rev.
(Ohio Power Co.), 6.85s, 2022 $2,000 $ 2,110,780
Marshall County, WV, Pollution Control Rev.
(Ohio Power Co.), MBIA, 6.85s, 2022 3,150 3,360,168
Mason County, WV, Pollution Control Rev.
(Appalachian Power), MBIA, 6.6s, 2022 7,000 7,340,690
McDowell County, WV, Industrial Development
Rev. (War Telephone Co.), 13.5s, 2001 365 366,504
Pleasants County, WV, Pollution Control Rev.
(West Penn Power), AMBAC, 6.15s, 2015 2,000 2,056,380
Putnam County, WV, Pollution Control Rev.
(Appalachian Power Co.), MBIA, 6.6s, 2019 3,200 3,364,608
---------------
$18,599,130
- ----------------------------------------------- ---------------- ---------------
Health Care Revenue - 9.9%
Berkeley County,WV, Building Commission,
Hospital Rev. (City Hospital Project),
6.5s, 2022 $2,500 $ 2,500,975
Hampshire County, WV, First Mortgage Rev.
(Rommey Health Care), 9.5s, 2022 1,280 1,348,352
Monongalia County, WV, Health Facilities Rev.
(Beverly Enterprises, Inc.), 10s, 2007 865 938,482
West Virginia Hospital Finance Authority
(Charleston Area Medical Center), 6.5s,
2023 2,000 2,071,020
West Virginia Hospital Finance Authority
(Fairmont General Hospital), 6.625s, 2019 2,000 1,922,240
West Virginia Hospital Finance Authority
(Logan General Hospital), 7.25s, 2020 5,000 5,099,000
---------------
$13,880,069
- ----------------------------------------------- ---------------- ---------------
Industrial Revenue (Corporate Guarantee) - 14.6%
Braxton County, WV, Solid Waste Disposal
(Weyerhaeuser), 6.5s, 2025 $2,000 $ 2,061,740
Jackson County, WV, Pollution Control Rev.
(Kaiser Aluminum & Chemical Corp.),
6.5s, 2008 1,330 1,299,969
Kanawha County, WV, Commercial Development
Rev. (Kroger Co.), 8s, 2011 1,000 1,120,030
Kanawha County, WV, Commercial Development
Rev. (May Department Stores Co.), 6.5s,
2003 3,000 3,231,630
Kanawha County, WV, Pollution Control Rev.
(Union Carbide Corp.), 8s, 2020 2,000 2,154,780
Monongalia County, WV, Commercial Development
Rev. (Kroger Co.), 7.7s, 2012 2,000 2,232,660
Ohio County, WV, Industrial Development Rev.
(Kroger Co.), 8.125s, 2011 2,000 2,253,340
Putnam County, WV, Industrial Development
Rev. (Rite Aid Corp.), 10.375s, 2002 590 592,596
South Charleston, WV, Pollution Control Rev.
(Union Carbide Corp.), 7.625s, 2005 2,500 2,830,300
Wierton, WV, Pollution Control Rev. (Weirton
Steel), 8.625s, 2014 2,550 2,642,284
---------------
$20,419,329
- ----------------------------------------------- ---------------- ---------------
Insured Health Care Revenue - 7.8%
Monongalia County, WV, Building Commission,
Health Rev. (Monongalia General Hospital),
MBIA, 6.625s, 2011 $1,000 $ 1,066,150
West Virginia Hospital Finance Authority
(Cabell Huntington Hospital), AMBAC, 6.25s,
2019 5,000 5,201,450
27-WV
<PAGE>
Portfolio of Investments - continued
Municipal Bonds - continued
- ---------------------------------------------------------------- ---------------
Insured Health Care Revenue - continued
West Virginia Hospital Finance Authority
(West Virginia University Hospital Corp.),
MBIA, 5s, 2016 $2,225 $ 1,996,381
West Virginia Hospital Finance Authority
(West Virginia University Medical Corp.),
MBIA, 7.875s, 2007 1,500 1,570,275
West Virginia Hospital Finance Authority
(West Virginia University Medical Corp.),
MBIA, 7.875s, 2018 1,000 1,046,850
---------------
$ 10,881,106
- ----------------------------------------------- ---------------- ---------------
Multi-Family Housing Revenue - 1.0%
Huntington, WV, Housing Corp., Multi- Family
Rev., FNMA, 7.5s, 2024 $ 800 $ 837,448
Webster County, WV, Housing Development Rev.
(Circlebrook), FHA, 6.35s, 2008 555 563,436
---------------
$ 1,400,884
- ----------------------------------------------- ---------------- ---------------
Single Family Housing Revenue - 8.2%
Berkeley County, WV, Residential Mortgage
Rev., 7.875s, 2012 $ 305 $ 312,091
Berkeley, Brooke & Fayette Counties, WV,
FGIC, 9.1s, 2011 65 66,730
Charles Town, WV, Residential Mortgage Rev.,
6.2s, 2011 845 853,349
Mason County, WV, 0s, 2014 1,700 457,266
West Virginia Housing Development Fund,
7.85s, 2014 840 861,739
West Virginia Housing Development Fund,
7.95s, 2017 1,590 1,651,676
West Virginia Housing Development Fund, 7.2s,
2018 5,000 5,235,100
West Virginia Housing Development Fund, 7.2s,
2020 2,000 2,094,040
---------------
$ 11,531,991
- ----------------------------------------------- ---------------- ---------------
Turnpike Revenue - 3.1%
West Virginia Parkways, Economic Development
& Tourism Authority, FGIC, 0s, 2006 $1,885 $ 1,149,115
West Virginia Parkways, Economic Development
& Tourism Authority, RIBS, FGIC, 7.555s,
2019++++ 3,300 3,130,809
---------------
$ 4,279,924
- ----------------------------------------------- ---------------- ---------------
Universities - 0.8%
West Virginia University Rev. (West Virginia
University Dormitory Project), MBIA,
6.75s, 2017 $1,000 $ 1,056,590
- ----------------------------------------------- ---------------- ---------------
Water and Sewer Utility Revenue - 8.1%
Beckley, WV, Industrial Development Rev.
(Beckley Water Co.), 7s, 2017 $2,000 $ 2,126,020
Charleston, WV, Sewer Rev., MBIA,
6.5s, 2017 2,260 2,396,436
West Virginia Water Development Authority,
7.625s, 2009 500 555,560
West Virginia Water Development Authority,
CGIC, 7.5s, 2009 1,100 1,176,472
West Virginia Water Development Authority,
FSA, 5s, 2018 1,270 1,125,614
West Virginia Water Development Authority,
FSA, 5.625s, 2033 2,300 2,202,571
West Virginia Water Development Authority,
FSA, 5.25s, 2035 2,000 1,800,440
---------------
$ 11,383,113
- ----------------------------------------------- ---------------- ---------------
Other - 2.8%
West Virginia Building Commission, Lottery
Rev., MBIA, 5.25s, 2010 $1,750 $ 1,695,680
West Virginia Hospital Finance Authority
(General Division Medical Building),
7.25s, 2014 2,000 2,180,540
---------------
$ 3,876,220
- ----------------------------------------------- ---------------- ---------------
Total Municipal Bonds (Identified Cost, $127,222,862) $134,696,801
- ---------------------------------------------------------------- ---------------
Floating Rate Demand Note - 1.7%
- ---------------------------------------------------------------------------------
Harris County, TX, Hospital Rev. (Methodist
Hospital), due 12/01/25, at Identified Cost $2,400 $ 2,400,000
--------------------------------------------- ---------------- ---------------
Total Investments (Identified Cost, $129,622,862) $137,096,801
Other Assets, Less Liabilities - 1.9% 2,596,906
Net assets - 100.0% $139,693,707
- ----------------------------------------------- ---------------- ---------------
Portfolio Footnotes:
**Non-income producing security - in default.
###Security segregated as collateral for an open futures contract.
+Restricted security.
ss Indexed security.
++Security valued by or at the direction of the Trustees.
++++Inverse floating rate security.
See notes to financial statements
</TABLE>
28-WV
<PAGE>
Financial Statements
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Mississippi New York North Carolina Pennsylvania
March 31, 1997 Fund Fund Fund Fund
- ------------------------------------------------- -------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Assets:
Investments -
Identified cost $73,767,324 $139,282,857 $398,267,120 $39,851,870
Unrealized appreciation 2,662,988 6,463,538 19,537,101 394,412
-------------- --------------- ---------------- --------------
Total, at value $76,430,312 $145,746,395 $417,804,221 $40,246,282
Cash 7,914 216 88,364 911,077
Receivable for Fund shares sold 152,650 439,858 267,786 102,274
Receivable for investments sold -- 553,255 1,010,243 10,000
Interest receivable 1,415,843 2,240,894 7,210,616 642,253
Deferred organization expenses 1,218 -- -- 1,478
Other assets 18,743 1,846 5,017 455
-------------- --------------- ---------------- --------------
Total assets $78,026,680 $148,982,464 $426,386,247 $41,913,819
-------------- --------------- ---------------- --------------
Liabilities:
Distributions payable $ 181,216 $ 263,064 $ 739,448 $ 75,308
Payable for Fund shares reacquired 128,032 182,028 1,541,378 --
Payable to affiliates -
Management fee 4,671 8,921 20,929 1,142
Administrative fee 127 243 698 --
Shareholder servicing agent fee 1,104 2,109 6,046 --
Distribution and service fee 2,129 6,244 19,601 4,753
Accrued expenses and other liabilities 66,075 208,073 122,807 1,226
-------------- --------------- ---------------- --------------
Total liabilities $ 383,354 $ 670,682 $ 2,450,907 $ 82,429
-------------- --------------- ---------------- --------------
Net assets $77,643,326 $148,311,782 $423,935,340 $41,831,390
============== =============== ================ ==============
Net assets consist of:
Paid-in capital $79,286,211 $145,466,637 $415,111,865 $43,423,898
Unrealized appreciation on investments 2,662,988 6,463,538 19,537,101 394,412
Accumulated net realized loss on investments (4,342,088) (3,280,303) (9,998,905) (2,003,122)
Accumulated undistributed (distributions in
excess of) net investment income 36,215 (338,090) (714,721) 16,202
-------------- --------------- ---------------- --------------
Total $77,643,326 $148,311,782 $423,935,340 $41,831,390
============== =============== ================ ==============
Shares of beneficial interest outstanding:
Class A 7,125,487 11,475,221 32,631,174 1,828,105
Class B 1,176,682 2,522,769 3,379,267 2,682,075
Class C -- -- 674,343 --
-------------- --------------- ---------------- --------------
Total shares of beneficial interest
outstanding 8,302,169 13,997,990 36,684,784 4,510,180
============== =============== ================ ==============
Net assets:
Class A $66,629,742 $121,587,728 $377,111,536 $16,933,331
Class B 11,013,584 26,724,054 39,035,211 24,898,059
Class C -- -- 7,788,593 --
-------------- --------------- ---------------- --------------
Total net assets $77,643,326 $148,311,782 $423,935,340 $41,831,390
============== =============== ================ ==============
Class A shares:
Net asset value per share (net assets / shares
of beneficial interest outstanding) $9.35 $10.60 $11.56 $9.26
-------------- --------------- ---------------- --------------
Offering price per share (100 / 95.25 of net
asset value per share) $9.82 $11.13 $12.14 $9.72
-------------- --------------- ---------------- --------------
Class B shares:
Net asset value and offering price per share
(net assets / shares of beneficial interest
outstanding) $9.36 $10.59 $11.55 $9.28
-------------- --------------- ---------------- --------------
Class C shares:
Net asset value and offering price per share
(net assets / shares of beneficial interest
outstanding) $ -- $ -- $11.55 $ --
-------------- --------------- ---------------- --------------
</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, Class B, and Class C shares.
See notes to financial statements
29
<PAGE>
Financial Statements - continued
Statements of Assets and Liabilities - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
South Carolina Tennessee Virginia West Virginia
March 31, 1997 Fund Fund Fund Fund
- ------------------------------------------------- ---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Assets:
Investments -
Identified cost $160,011,434 $117,238,373 $382,991,691 $129,622,862
Unrealized appreciation 7,996,825 4,701,579 16,569,510 7,473,939
---------------- --------------- --------------- ---------------
Total, at value $168,008,259 $121,939,952 $399,561,201 $137,096,801
Cash 32,458 10,571 2,564 62,515
Receivable for Fund shares sold 134,782 35,677 80,158 19,448
Receivable for investments sold 520,000 120,000 8,490,823 506,257
Interest receivable 2,645,175 1,778,596 6,398,614 2,722,949
Other assets 2,063 1,370 5,076 1,584
---------------- --------------- --------------- ---------------
Total assets $171,342,737 $123,886,166 $414,538,436 $140,409,554
---------------- --------------- --------------- ---------------
Liabilities:
Distributions payable $ 332,770 $ 272,622 $ 928,550 $ 281,163
Payable for Fund shares reacquired 126,521 169,492 513,108 135,299
Payable for investments purchased -- 925,555 -- 206,898
Payable for daily variation margin on open
futures contracts 5,000 -- -- --
Payable to affiliates -
Management fee 8,411 6,036 20,350 8,410
Administrative fee 280 204 678 229
Shareholder servicing agent fee 2,430 1,744 5,879 1,988
Distribution and service fee 8,097 5,725 18,228 6,317
Accrued expenses and other liabilities 79,843 68,971 117,311 75,543
---------------- --------------- --------------- ---------------
Total liabilities $ 563,352 $ 1,450,349 $ 1,604,104 $ 715,847
---------------- --------------- --------------- ---------------
Net assets $170,779,385 $122,435,817 $412,934,332 $139,693,707
---------------- --------------- --------------- ---------------
Net assets consist of:
Paid-in capital $166,354,327 $118,844,972 $410,455,974 $136,248,851
Unrealized appreciation on investments 7,956,099 4,701,579 16,569,510 7,473,939
Accumulated net realized loss on investments (3,319,812) (1,094,486) (12,833,937) (3,599,403)
Accumulated distributions in excess of net
investment income (211,229) (16,248) (1,257,215) (429,680)
---------------- --------------- --------------- ---------------
Total $170,779,385 $122,435,817 $412,934,332 $139,693,707
---------------- --------------- --------------- ---------------
Shares of beneficial interest outstanding:
Class A 12,533,883 10,469,429 34,278,440 11,150,306
Class B 1,841,229 1,400,227 2,764,192 1,201,777
Class C -- -- 287,703 --
---------------- --------------- --------------- ---------------
Total shares of beneficial interest
outstanding 14,375,112 11,869,656 37,330,335 12,352,083
---------------- --------------- --------------- ---------------
Net assets:
Class A $148,908,081 $108,000,038 $379,185,138 $126,106,518
Class B 21,871,304 14,435,779 30,567,275 13,587,189
Class C -- -- 3,181,919 --
---------------- --------------- --------------- ---------------
Total net assets $170,779,385 $122,435,817 $412,934,332 $139,693,707
---------------- --------------- --------------- ---------------
Class A shares:
Net asset value per share (net assets / shares
of beneficial interest outstanding) $11.88 $10.32 $11.06 $11.31
---------------- --------------- --------------- ---------------
Offering price per share (100 / 95.25 of net
asset value per share) $12.47 $10.83 $11.61 $11.87
---------------- --------------- --------------- ---------------
Class B shares:
Net asset value and offering price per share
(net assets / shares of beneficial interest
outstanding) $11.88 $10.31 $11.06 $11.31
---------------- --------------- --------------- ---------------
Class C shares:
Net asset value and offering price per share
(net assets / shares of beneficial interest
outstanding) $ -- $ -- $11.06 $ --
---------------- --------------- --------------- ---------------
</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, Class B, and Class C shares.
See notes to financial statements
30
<PAGE>
Financial Statements - continued
Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Mississippi New York North Carolina Pennsylvania
Year Ended March 31, 1997 Fund Fund Fund Fund
- ------------------------------------------------------ ------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net investment income:
Interest income $4,966,003 $ 9,787,701 $26,975,679 $2,472,558
------------- --------------- ---------------- --------------
Expenses -
Management fee $ 455,195 $ 856,664 $ 2,418,708 $ 236,150
Trustees' compensation 17,356 20,092 20,449 17,482
Shareholder servicing agent fee 25,460 48,750 139,356 13,032
Shareholder servicing agent fee (Class A) 82,498 146,204 449,338 20,628
Shareholder servicing agent fee (Class B) 19,336 45,733 58,534 41,832
Shareholder servicing agent fee (Class C) -- -- 10,874 --
Distribution and service fee (Class A) -- 320,773 1,382,796 --
Distribution and service fee (Class B) 91,722 274,467 361,436 199,947
Distribution and service fee (Class C) -- -- 93,824 --
Administrative fee 1,033 1,978 5,652 486
Custodian fee 37,863 69,920 146,209 21,822
Auditing fees 32,369 46,871 42,929 24,758
Printing 3,841 21,078 45,783 5,118
Postage 6,742 9,672 24,551 5,416
Legal fees 4,222 4,710 5,206 3,976
Amortization of organization expenses 3,558 -- -- 1,759
Miscellaneous 33,501 87,123 155,480 32,850
------------- --------------- ---------------- --------------
Total expenses $ 814,696 $ 1,954,035 $ 5,361,125 $ 625,256
Fees paid indirectly (5,095) (13,902) (42,863) (5,705)
Reduction of expenses by investment adviser -- -- (288,877) (376,017)
------------- --------------- ---------------- --------------
Net expenses $ 809,601 $ 1,940,133 $ 5,029,385 $ 243,534
------------- --------------- ---------------- --------------
Net investment income $4,156,402 $ 7,847,568 $21,946,294 $2,229,024
------------- --------------- ---------------- --------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 152,232 $ (97,546) $ 1,824,548 $ 171,938
Futures contracts (302,018) (387,086) (804,918) (743,528)
------------- --------------- ---------------- --------------
Net realized gain (loss) on investments $ (149,786) $ (484,632) $ 1,019,630 $ (571,590)
------------- --------------- ---------------- --------------
Change in unrealized appreciation (depreciation) -
Investments $ 174,966 $ (591,419) $(1,335,706) $ 182,944
Futures contracts 27,512 55,025 140,620 (32,023)
------------- --------------- ---------------- --------------
Net unrealized gain (loss) on investments $ 202,478 $ (536,394) $(1,195,086) $ 150,921
------------- --------------- ---------------- --------------
Net realized and unrealized gain (loss) on
investments $ 52,692 $(1,021,026) $ (175,456) $ (420,669)
------------- --------------- ---------------- --------------
Increase in net assets from operations $4,209,094 $ 6,826,542 $21,770,838 $1,808,355
============= =============== ================ ==============
</TABLE>
See notes to financial statements
31
<PAGE>
Financial Statements - continued
Statements of Operations - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
South Carolina Tennessee Virginia West Virginia
Year Ended March 31, 1997 Fund Fund Fund Fund
- ------------------------------------------------------ ---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net investment income:
Interest income $11,171,075 $ 7,867,854 $27,409,816 $9,368,813
---------------- --------------- --------------- ---------------
Expenses -
Management fee $ 980,523 $ 681,190 $ 2,377,579 $ 800,535
Trustees' compensation 20,449 18,818 17,449 20,449
Shareholder servicing agent fee 55,802 39,856 135,950 46,642
Shareholder servicing agent fee (Class A) 181,324 125,013 457,481 149,631
Shareholder servicing agent fee (Class B) 32,584 22,211 48,544 21,821
Shareholder servicing agent fee (Class C) -- -- 3,970 --
Distribution and service fee (Class A) 554,405 386,650 1,398,269 462,774
Distribution and service fee (Class B) 202,154 136,253 295,898 133,305
Distribution and service fee (Class C) -- -- 35,136 --
Administrative fee 2,269 1,627 5,513 1,895
Custodian fee 77,159 52,824 183,693 62,488
Auditing fees 33,630 27,369 32,581 31,270
Printing 12,924 1,483 25,166 10,232
Postage 10,284 8,174 21,331 8,579
Legal fees 5,676 2,522 4,870 4,237
Miscellaneous 45,355 33,875 135,984 41,221
---------------- --------------- --------------- ---------------
Total expenses $ 2,214,538 $ 1,537,865 $ 5,179,414 $1,795,079
Fees paid indirectly (15,818) (17,928) (67,464) (11,108)
Reduction of expenses by investment adviser (116,415) (82,026) (284,139) --
---------------- --------------- --------------- ---------------
Net expenses $ 2,082,305 $ 1,437,911 $ 4,827,811 $1,783,971
---------------- --------------- --------------- ---------------
Net investment income $ 9,088,770 $ 6,429,943 $22,582,005 $7,584,842
---------------- --------------- --------------- ---------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 391,815 $ 609,471 $ (314,126) $ (535,635)
Futures contracts (896,342) (632,595) (1,956,129) (202,933)
---------------- --------------- --------------- ---------------
Net realized loss on investments $ (504,527) $ (23,124) $(2,270,255) $ (738,568)
---------------- --------------- --------------- ---------------
Change in unrealized appreciation (depreciation) -
Investments $ (787,134) $(1,079,488) $(3,468,141) $ 427,849
Futures contracts (40,726) -- 66,028 23,878
---------------- --------------- --------------- ---------------
Net unrealized gain (loss) on investments $ (827,860) $(1,079,488) $(3,402,113) $ 451,727
---------------- --------------- --------------- ---------------
Net realized and unrealized loss on investments $(1,332,387) $(1,102,612) $(5,672,368) $ (286,841)
---------------- --------------- --------------- ---------------
Increase in net assets from operations $ 7,756,383 $ 5,327,331 $16,909,637 $7,298,001
================ =============== =============== ===============
</TABLE>
See notes to financial statements
32
<PAGE>
Financial Statements - continued
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Mississippi New York North Carolina Pennsylvania
Year Ended March 31, 1997 Fund Fund Fund Fund
- --------------------------------------------------------- ---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 4,156,402 $ 7,847,568 $ 21,946,294 $ 2,229,024
Net realized gain (loss) on investments (149,786) (484,632) 1,019,630 (571,590)
Net unrealized gain (loss) on investments 202,478 (536,394) (1,195,086) 150,921
---------------- --------------- --------------- ----------------
Increase in net assets from operations $ 4,209,094 $ 6,826,542 $ 21,770,838 $ 1,808,355
---------------- --------------- --------------- ----------------
Distributions declared to shareholders -
From net investment income (Class A) $ (3,636,582) $ (6,608,917) $ (19,960,583) $(1,021,497)
From net investment income (Class B) (488,656) (1,193,195) (1,572,775) (1,235,549)
From net investment income (Class C) -- -- (412,936) --
In excess of net investment income (Class A) -- -- (57,101) (5,499)
In excess of net investment income (Class B) -- -- (4,500) (6,652)
In excess of net investment income (Class C) -- -- (1,180) --
---------------- --------------- --------------- ----------------
Total distributions declared to shareholders $ (4,125,238) $ (7,802,112) $ (22,009,075) $ (2,269,197)
---------------- --------------- --------------- ----------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 5,147,902 $ 18,795,107 $ 150,297,565 $ 6,941,408
Net asset value of shares issued to shareholders in
reinvestment of distributions 1,796,462 4,479,249 12,769,917 1,339,280
Cost of shares reacquired (15,295,259) (36,503,476) (191,439,457) (8,188,392)
---------------- --------------- --------------- ----------------
Increase (decrease) in net assets from Fund share
transactions $ (8,350,895) $(13,229,120) $ (28,371,975) $ 92,296
---------------- --------------- --------------- ----------------
Total decrease in net assets $ (8,267,039) $(14,204,690) $ (28,610,212) $ (368,546)
Net assets:
At beginning of period 85,910,365 162,516,472 452,545,552 42,199,936
---------------- --------------- --------------- ----------------
At end of period $ 77,643,326 $148,311,782 $ 423,935,340 $41,831,390
---------------- --------------- --------------- ----------------
Accumulated undistributed (distributions in excess of)
net investment income included in net assets at end of
period $ 36,215 $ (338,090) $ (714,721) $ 16,202
================ =============== =============== ================
</TABLE>
See notes to financial statements
33
<PAGE>
Financial Statements - continued
Statements of Changes in Net Assets - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
South Carolina Tennessee Virginia West Virginia
Year Ended March 31, 1997 Fund Fund Fund Fund
------------------------------------------------------------------------ --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 9,088,770 $ 6,429,943 $ 22,582,005 $ 7,584,842
Net realized loss on investments (504,527) (23,124) (2,270,255) (738,568)
Net unrealized gain (loss) on investments (827,860) (1,079,488) (3,402,113) 451,727
---------------- --------------- ---------------- ---------------
Increase in net assets from operations $ 7,756,383 $ 5,327,331 $ 16,909,637 $ 7,298,001
---------------- --------------- ---------------- ---------------
Distributions declared to shareholders -
From net investment income (Class A) $ (8,123,664) $ (5,716,145) $ (21,012,643) $ (6,960,660)
From net investment income (Class B) (895,171) (609,095) (1,346,865) (608,405)
From net investment income (Class C) -- -- (161,724) --
---------------- --------------- ---------------- ---------------
Total distributions declared to shareholders $ (9,018,835) $ (6,325,240) $ (22,521,232) $ (7,569,065)
---------------- --------------- ---------------- ---------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 14,266,849 $ 12,503,086 $ 158,319,115 $ 8,573,897
Net asset value of shares issued to shareholders in
reinvestment of distributions 4,940,927 3,089,989 10,962,194 4,100,851
Cost of shares reacquired (32,386,589) (14,905,124) (200,929,656) (19,870,458)
---------------- --------------- ---------------- ---------------
Increase (decrease) in net assets from Fund share
transactions $(13,178,813) $ 687,951 $ (31,648,347) $ (7,195,710)
---------------- --------------- ---------------- ---------------
Total decrease in net assets $(14,441,265) $ (309,958) $ (37,259,942) $ (7,466,774)
Net assets:
At beginning of period 185,220,650 122,745,775 450,194,274 147,160,481
---------------- --------------- ---------------- ---------------
At end of period $170,779,385 $122,435,817 $ 412,934,332 $139,693,707
---------------- --------------- ---------------- ---------------
Accumulated distributions in excess of net investment
income included in net assets at end of period $ (211,229) $ (16,248) $ (1,257,215) $ (429,680)
================ =============== ================ ===============
</TABLE>
See notes to financial statements
34
<PAGE>
Financial Statements - continued
Statements of Changes in Net Assets - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Mississippi New York North Carolina Pennsylvania
Year Ended March 31, 1996 Fund Fund Fund Fund
- --------------------------------------------------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 4,874,834 $ 8,386,733 $ 22,978,702 $ 2,103,242
Net realized gain (loss) on investments (468,604) 4,046,405 4,503,226 (391,379)
Net unrealized gain (loss) on investments 2,480,286 (907,958) 1,749,598 786,766
--------------- --------------- ---------------- ---------------
Increase in net assets from operations $ 6,886,516 $ 11,525,180 $ 29,231,526 $ 2,498,629
--------------- --------------- ---------------- ---------------
Distributions declared to shareholders -
From net investment income (Class A) $ (4,360,203) $ (7,263,571) $ (21,314,451) $ (990,676)
From net investment income (Class B) (514,631) (1,123,162) (1,292,311) (1,117,148)
From net investment income (Class C) -- -- (371,940) --
In excess of net investment income (Class A) (11,291) (76,432) (76,544) --
In excess of net investment income (Class B) (1,333) (11,819) (4,641) --
In excess of net investment income (Class C) -- -- (1,336) --
--------------- --------------- ---------------- ---------------
Total distributions declared to shareholders $ (4,887,458) $ (8,474,984) $ (23,061,223) $(2,107,824)
--------------- --------------- ---------------- ---------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 10,936,455 $ 34,552,591 $ 97,550,746 $ 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 2,349,051 5,133,804 13,374,416 1,301,093
Cost of shares reacquired (17,836,086) (53,386,143) (128,090,675) (4,865,944)
--------------- --------------- ---------------- ---------------
Increase (decrease) in net assets from Fund share
transactions $ (4,550,580) $ 984,818 $ (17,165,513) $17,700,073
--------------- --------------- ---------------- ---------------
Total increase (decrease) in net assets $ (2,551,522) $ 4,035,014 $ (10,995,210) $18,090,878
Net assets:
At beginning of period 88,461,887 158,481,458 463,540,762 24,109,058
--------------- --------------- ---------------- ---------------
At end of period $ 85,910,365 $162,516,472 $ 452,545,552 $42,199,936
--------------- --------------- ---------------- ---------------
Accumulated undistributed (distributions in excess of)
net investment income included in net assets at end of
period $ (33,004) $ (430,606) $ (1,035,031) $ 28,022
=============== =============== ================ ===============
</TABLE>
See notes to financial statements
35
<PAGE>
Financial Statements - continued
Statements of Changes in Net Assets - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
South Carolina Tennessee Virginia West Virginia
Year Ended March 31, 1996 Fund Fund Fund Fund
------------------------------------------------------------------------ --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 9,387,094 $ 6,446,216 $ 23,707,705 $ 7,530,240
Net realized gain (loss) on investments (27,045) 870,217 3,901,116 207,892
Net unrealized gain on investments 1,723,191 888,249 1,645,937 1,172,683
---------------- --------------- ---------------- ---------------
Increase in net assets from operations $ 11,083,240 $ 8,204,682 $ 29,254,758 $ 8,910,815
---------------- --------------- ---------------- ---------------
Distributions declared to shareholders -
From net investment income (Class A) $ (8,720,747) $ (5,935,131) $ (22,461,025) $ (6,996,162)
From net investment income (Class B) (666,347) (511,085) (1,128,382) (534,078)
From net investment income (Class C) -- -- (118,298) --
In excess of net investment income (Class A) (7,833) (26,378) (205,431) (26,236)
In excess of net investment income (Class B) (598) (2,271) (10,320) (2,003)
In excess of net investment income (Class C) -- -- (1,082) --
---------------- --------------- ---------------- ---------------
Total distributions declared to shareholders $ (9,395,525) $ (6,474,865) $ (23,924,538) $ (7,558,479)
---------------- --------------- ---------------- ---------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 19,862,472 $ 9,264,655 $ 92,397,697 $ 17,491,754
Net asset value of shares issued to shareholders in
reinvestment of distributions 5,148,735 3,118,511 12,033,414 4,098,096
Cost of shares reacquired (25,486,913) (18,945,783) (114,561,422) (13,443,792)
---------------- --------------- ---------------- ---------------
Increase (decrease) in net assets from Fund share
transactions $ (475,706) $ (6,562,617) $ (10,130,311) $ 8,146,058
---------------- --------------- ---------------- ---------------
Total increase (decrease) in net assets $ 1,212,009 $ (4,832,800) $ (4,800,091) $ 9,498,394
Net assets:
At beginning of period 184,008,641 127,578,575 454,994,365 137,662,087
---------------- --------------- ---------------- ---------------
At end of period $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 $ (329,568) $ (176,038) $ (1,467,910) $ (445,457)
================ =============== ================ ===============
</TABLE>
See notes to financial statements
36
<PAGE>
Financial Statements - continued
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Mississippi Fund
- ----------------------------------------------------- -------------------- ------------------------------------------------
Two Months
Ended
Year Ended March 31, March 31, Year Ended January 31,
- ----------------------------------------------------- ------------------------------- ------------ -------------------------
1997 1996 1995 1994 1994 1993*
- ----------------------------------------------------- --------- --------- --------------------- ------------ ------------
Class A
- ----------------------------------------------------- --------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.35 $ 9.15 $ 9.19 $ 10.00 $ 9.38 $ 9.53
--------- --------- --------------------- ------------ ------------
Income from investment operations# -
Net investment income ss $ 0.48 $ 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 $ 0.48 $ 0.72 $ 0.53 $ (0.72) $ 1.17 $ 0.09
--------- --------- --------------------- ------------ ------------
Less distributions declared to shareholders -
From net investment income++++ $ (0.48) $ (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 $ (0.48) $ (0.52) $ (0.57) $ (0.09) $ (0.55) $ (0.24)
--------- --------- --------------------- ------------ ------------
Net asset value - end of period $ 9.35 $ 9.35 $ 9.15 $ 9.19 $ 10.00 $ 9.38
========= ========= ===================== ============ ============
Total return++ 5.22% 7.99% 6.08% (7.20)%+++ 12.80% 5.00%+++
Ratios (to average net assets)/Supplemental data ss:
Expenses## 0.87% 0.45% 0.22% 0.10%+ 0.03% 0.00%+
Net investment income 5.14% 5.51% 5.99% 5.69%+ 5.68% 5.59%+
Portfolio turnover 17% 31% 47% 2% 28% 14%
Net assets at end of period (000 omitted) $66,630 $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.
+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
$0.0013, and $0.0035, respectively.
++++++For the year ended March 31, 1995, the per share distribution from net realized gain on investments was $0.0016.
ssThe investment adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.30% of average daily
net assets for Class A shares for certain of the periods indicated. 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>
See notes to financial statements
37
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Mississippi Fund
- ----------------------------------------------------- -------------------- --------------------------------------
Two Months
Ended Year Ended
Year Ended March 31, March 31, January 31,
- ----------------------------------------------------- ------------------------------- ------------ --------------
1997 1996 1995 1994 1994**
- ----------------------------------------------------- --------- --------- --------------------- --------------
Class B
- ----------------------------------------------------- --------- ------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.36 $ 9.16 $ 9.19 $ 9.99 $ 9.94
--------- --------- --------------------- --------------
Income from investment operations# -
Net investment income ss $ 0.40 $ 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 $ 0.40 $ 0.64 $ 0.45 $(0.72) $ 0.23
--------- --------- --------------------- --------------
Less distributions declared to shareholders -
From net investment income++++ $ (0.40) $ (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 $ (0.40) $ (0.44) $(0.48) $(0.08) $(0.18)
--------- --------- --------------------- --------------
Net asset value - end of period $ 9.36 $ 9.36 $ 9.16 $ 9.19 $ 9.99
========= ========= ===================== ==============
Total return 4.33% 7.11% 5.14% (7.27)%+++ 2.33%+++
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.72% 1.28% 1.23% 1.10%+ 1.06%+
Net investment income 4.29% 4.67% 4.97% 4.67%+ 4.29%+
Portfolio turnover 17% 31% 47% 2% 28%
Net assets at end of period (000 omitted) $11,014 $11,475 $9,429 $6,526 $6,268
**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 years ended March 31, 1996 and 1995 and the two months ended March 31, 1994, the per share
distributions in excess of net investment income were $0.0011, $0.0029 and $0.002, respectively.
++++++For the year ended March 31, 1995, the per share distribution from net realized gain on investments was
$0.0016.
ss The investment adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.95% of
average daily net assets for Class B shares for certain of the periods indicated. 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
38
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
New York Fund
---------------------------------------------------------- ---------------------- ----------- ------------
Two Months
Ended
Year Ended March 31, March 31,
---------------------------------------------------------- ---------------------------------- ------------
1997 1996 1995 1994
--------------------------------------------------------------------- ----------- ----------- ------------
Class A
--------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.66 $ 10.49 $ 10.50 $ 11.34
----------- ----------- ----------- ------------
Income from investment operations # -
Net investment income ss $ 0.55 $ 0.55 $ 0.56 $ 0.09
Net realized and unrealized gain (loss) on investments (0.06) 0.17 0.05 (0.84)
----------- ----------- ----------- ------------
Total from investment operations $ 0.49 $ 0.72 $ 0.61 $ (0.75)
----------- ----------- ----------- ------------
Less distributions declared to shareholders -
From net investment income $ (0.55) $ (0.55) $ (0.56) $ (0.06)
In excess of net investment income++++ -- (0.00) (0.01) (0.03)
In excess of net realized gain on investments -- -- (0.05) --
----------- ----------- ----------- ------------
Total distributions declared to shareholders $ (0.55) $ (0.55) $ (0.62) $ (0.09)
----------- ----------- ----------- ------------
Net asset value - end of period $ 10.60 $ 10.66 $ 10.49 $ 10.50
=========== =========== =========== ============
Total return++ 4.68% 6.98% 6.03% (6.58)%+++
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.11% 1.10% 1.07% 1.03%+
Net investment income 5.18% 5.09% 5.43% 5.09%+
Portfolio turnover 64% 102% 147% 15%
Net assets at end of period (000 omitted) $121,588 $134,449 $146,597 $162,621
+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
$0.0058.
ss The investment adviser and/or the distributor voluntarily waived a portion of their management 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 -- $0.54 $0.55 $0.07
Ratios (to average net assets):
Expenses## -- 1.20% 1.18% 1.23%+
Net investment income -- 4.99% 5.31% 4.88%+
</TABLE>
See notes to financial statements
39
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
New York Fund
- ----------------------------------------------------- ---------------------- ------------------------------------------
Year Ended January 31, 1994 1993 1992 1991 1990 1989*
- ----------------------------------------------------- ----------- ----------- --------- --------- --------- ----------
Class A
- ----------------------------------------------------- ----------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.78 $ 10.25 $ 9.90 $ 9.74 $ 9.79 $ 9.53
----------- ----------- --------- --------- --------- ----------
Income from investment operations -
Net investment income ss $ 0.59 $ 0.63 $ 0.65 $ 0.65 $ 0.68 $ 0.29
Net realized and unrealized gain on investments 0.74 0.58 0.44 0.16 0.01 0.21
----------- ----------- --------- --------- --------- ----------
Total from investment operations $ 1.33 $ 1.21 $ 1.09 $ 0.81 $ 0.69 $ 0.50
----------- ----------- --------- --------- --------- ----------
Less distributions declared to shareholders -
From net investment income $ (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 (0.03) -- -- -- -- --
From paid-in capital -- -- -- -- (0.01) --
----------- ----------- --------- --------- --------- ----------
Total distributions declared to shareholders $ (0.77) $ (0.68) $ (0.74) $ (0.65) $ (0.74) $(0.24)
----------- ----------- --------- --------- --------- ----------
Net asset value - end of period $ 11.34 $ 10.78 $ 10.25 $ 9.90 $ 9.74 $ 9.79
=========== =========== ========= ========= ========= ==========
Total return++ 12.69% 12.23% 11.42% 8.74% 7.33% 8.16%+
Ratios (to average net assets)/Supplemental data ss:
Expenses 0.93% 0.53% 0.65% 0.54% 0.40% 0.40%+
Net investment income 5.21% 6.16% 6.44% 6.73% 6.88% 5.93%+
Portfolio turnover 51% 61% 80% 188% 236% 32%
Net assets at end of period (000 omitted) $184,523 $135,749 $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.
++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.
ss The investment adviser and/or distributor voluntarily waived a portion of their management 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 $0.56 $0.57 $0.60 $0.61 $0.59 $0.26
Ratios (to average net assets):
Expenses 1.23% 1.13% 1.16% 0.95% 1.32% 1.09%+
Net investment income 4.91% 5.56% 5.93% 6.33% 5.96% 5.24%+
</TABLE>
See notes to financial statements
40
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
New York Fund
---------------------------------------------------------- -------------------- --------- ------------ --------------
Two Months
Ended Year Ended
Year Ended March 31, March 31, January 31,
----------------------------------------------------------------------------------------- ------------ --------------
1997 1996 1995 1994 1994**
---------------------------------------------------------- --------- --------- --------- ------------ --------------
Class B
---------------------------------------------------------- --------- --------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.66 $ 10.49 $ 10.50 $11.34 $11.46
--------- --------- --------- ------------ --------------
Income from investment operations# -
Net investment income ss $ 0.47 $ 0.47 $ 0.47 $ 0.07 $ 0.18
Net realized and unrealized gain (loss) on investments (0.07) 0.17 0.05 (0.83) 0.04
--------- --------- --------- ------------ --------------
Total from investment operations $ 0.40 $ 0.64 $ 0.52 $(0.76) $ 0.22
--------- --------- --------- ------------ --------------
Less distributions declared to shareholders -
From net investment income $ (0.47) $ (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) $ (0.47) $ (0.53) $(0.08) $(0.34)
--------- --------- --------- ------------ --------------
Net asset value - end of period $ 10.59 $ 10.66 $ 10.49 $10.50 $11.34
========= ========= ========= ============ ==============
Total return 3.77% 6.10% 5.17% (6.71)%+++ 5.20%+
Ratios (to average net assets)/Supplemental data ss:
Expenses ## 1.92% 1.92% 1.89% 1.87%+ 1.79%+
Net investment income 4.37% 4.27% 4.58% 4.21%+ 3.90%+
Portfolio turnover 64% 102% 147% 15% 51%
Net assets at end of period (000 omitted) $26,724 $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 was $0.0048.
ss The investment adviser and/or distributor voluntarily waived a portion of their management 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 -- -- $0.47 $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
41
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
North Carolina Fund
- --------------------------------------------------- ---------------------- ----------- -------------------------- -----------
Two Months
Ended Year Ended
Year Ended March 31, March 31, January 31,
- --------------------------------------------------- ---------------------------------- -------------------------- -----------
1997 1996 1995 1994 1994 1993
- --------------------------------------------------- ----------- ----------- ----------- -------------------------- -----------
Class A
- --------------------------------------------------- ----------- ----------- ----------- -------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each
period):
Net asset value - beginning of period $ 11.57 $ 11.42 $ 11.48 $ 12.37 $ 11.80 $ 11.45
----------- ----------- ----------- -------------------------- -----------
Income from investment operations# -
Net investment income ss $ 0.59 $ 0.59 $ 0.61 $ 0.10 $ 0.64 $ 0.65
Net realized and unrealized gain (loss) on
investments (0.01) 0.15 0.03 (0.89) 0.58 0.37
----------- ----------- ----------- -------------------------- -----------
Total from investment operations $ 0.58 $ 0.74 $ 0.64 $ (0.79) $ 1.22 $ 1.02
----------- ----------- ----------- -------------------------- -----------
Less distributions declared to shareholders -
From net investment income $ (0.59) $ (0.59) $ (0.60) $ (0.07) $ (0.61) $ (0.67)
From net realized gain on investments -- -- (0.06) -- (0.01) --
In excess of net investment income++++ (0.00) (0.00) -- (0.03) (0.03) --
In excess of net realized gain on investments -- -- (0.04) -- -- --
----------- ----------- ----------- -------------------------- -----------
Total distributions declared to shareholders $ (0.59) $ (0.59) $ (0.70) $ (0.10) $ (0.65) $ (0.67)
----------- ----------- ----------- -------------------------- -----------
Net asset value - end of period $ 11.56 $ 11.57 $ 11.42 $ 11.48 $ 12.37 $ 11.80
=========== =========== =========== ========================== ===========
Total return++ 5.09% 6.56% 5.86% (6.39)%+++ 10.59% 9.23%
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.08% 1.17% 1.16% 1.16%+ 1.19% 1.07%
Net investment income 5.05% 5.04% 5.38% 4.96%+ 5.21% 5.80%
Portfolio turnover 33% 30% 58% 2% 12% 2%
Net assets at end of period (000 omitted) $377,112 $409,347 $429,131 $460,321 $495,158 $398,352
+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, 1997 and 1996, the per share distributions in excess of net investment income were $0.002
and $0.002, respectively.
ss The investment adviser voluntarily waived a portion of its management fee, 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 $0.58 -- -- -- -- --
Ratios (to average net assets):
Expenses## 1.15% -- -- -- -- --
Net investment income 4.98% -- -- -- -- --
</TABLE>
See notes to financial statements
42
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
North Carolina Fund
---------------------------------------------------------- ---------------------- ----------- ----------- -----------
Year Ended January 31, 1992 1991 1990 1989 1988
--------------------------------------------------------------------- ----------- ----------- ----------- -----------
Class A
--------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.30 $ 11.18 $ 11.15 $ 11.13 $ 11.82
----------- ----------- ----------- ----------- -----------
Income from investment operations -
Net investment income $ 0.70 $ 0.72 $ 0.73 $ 0.74 $ 0.73
Net realized and unrealized gain (loss) on investments 0.26 0.17 0.03 0.02 (0.69)
----------- ----------- ----------- ----------- -----------
Total from investment operations $ 0.96 $ 0.89 $ 0.76 $ 0.76 $ 0.04
----------- ----------- ----------- ----------- -----------
Less distributions declared to shareholders -
From net investment income $ (0.76) $ (0.72) $ (0.73) $ (0.74) $ (0.73)
From net realized gain on investments (0.01) (0.05) -- -- --
From paid-in capital++++ (0.04) (0.00) -- -- --
----------- ----------- ----------- ----------- -----------
Total distributions declared to shareholders $ (0.81) $ (0.77) $ (0.73) $ (0.74) $ (0.73)
----------- ----------- ----------- ----------- -----------
Net asset value - end of period $ 11.45 $ 11.30 $ 11.18 $ 11.15 $ 11.13
=========== =========== =========== =========== ===========
Total return++ 8.82% 8.34% 6.97% 7.12% 0.65%
Ratios (to average net assets)/Supplemental data:
Expenses 1.09% 1.09% 1.12% 1.11% 1.08%
Net investment income 6.17% 6.47% 6.48% 6.70% 6.71%
Portfolio turnover 39% 44% 61% 25% 10%
Net assets at end of period (000 omitted) $312,466 $226,806 $175,101 $129,287 $110,462
++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.
</TABLE>
See notes to financial statements
43
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
North Carolina Fund
---------------------------------------------------------- -------------------- --------- ------------- --------------
Two Months
Ended Year Ended
Year Ended March 31, March 31, January 31,
----------------------------------------------------------------------------------------- ------------- --------------
1997 1996 1995 1994 1994**
---------------------------------------------------------- --------- --------- --------- ------------- --------------
Class B
---------------------------------------------------------- --------- --------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.56 $ 11.42 $ 11.47 $ 12.36 $ 12.36
--------- --------- --------- ------------- --------------
Income from investment operations# -
Net investment income ss $ 0.50 $ 0.50 $ 0.52 $ 0.08 $ 0.22
Net realized and unrealized gain (loss) on investments -- 0.14 0.05 (0.89) 0.01
--------- --------- --------- ------------- --------------
Total from investment operations $ 0.50 $ 0.64 $ 0.57 $ (0.81) $ 0.23
--------- --------- --------- ------------- --------------
Less distributions declared to shareholders -
From net investment income $ (0.51) $ (0.50) $ (0.52) $ (0.08) $ (0.21)
From net realized gain on investments -- -- (0.06) -- (0.01)
In excess of net investment income++++ (0.00) (0.00) -- (0.00) (0.01)
In excess of net realized gain on investments -- -- (0.04) -- --
--------- --------- --------- ------------- --------------
Total distributions declared to shareholders $ (0.51) $ (0.50) $ (0.62) $ (0.08) $ (0.23)
--------- --------- --------- ------------- --------------
Net asset value - end of period $ 11.55 $ 11.56 $ 11.42 $ 11.47 $ 12.36
========= ========= ========= ============= ==============
Total return 4.36% 5.70% 5.20% (6.51)%+++ 4.58%+
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.78% 1.90% 1.88% 1.88%+ 1.84%+
Net investment income 4.36% 4.30% 4.64% 4.18%+ 4.03%+
Portfolio turnover 33% 30% 58% 2% 12%
Net assets at end of period (000 omitted) $39,035 $33,847 $26,260 $15,866 $13,379
**For the period from the commencement of offering 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 years ended March 31, 1997 and 1996, and the two months ended March 31, 1994, the per share distributions in
excess of net investment income were $0.001, $0.002 and $0.004, respectively.
ss The investment adviser voluntarily waived a portion of its management fee, 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 $0.49 -- -- -- --
Ratios (to average net assets):
Expenses## 1.85% -- -- -- --
Net investment income 4.29% -- -- -- --
</TABLE>
See notes to financial statements
44
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
North Carolina Fund
---------------------------------------------------------- -------------------- --------- ------------- ---------------
Two Months
Ended Period Ended
Year Ended March 31, March 31, January 31,
----------------------------------------------------------------------------------------- ------------- ---------------
1997 1996 1995 1994 1994***
---------------------------------------------------------- --------- --------- --------- ------------- ---------------
Class C
---------------------------------------------------------- --------- --------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $11.56 $11.41 $11.47 $12.36 $ 12.24
--------- --------- --------- ------------- ---------------
Income from investment operations# -
Net investment income ss $ 0.52 $ 0.51 $ 0.53 $ 0.10 $ 0.02
Net realized and unrealized gain (loss) on investments (0.02) 0.15 0.04 (0.90) 0.12
--------- --------- --------- ------------- ---------------
Total from investment operations $ 0.50 $ 0.66 $ 0.57 $(0.80) $ 0.14
--------- --------- --------- ------------- ---------------
Less distributions declared to shareholders -
From net investment income $(0.51) $(0.51) $(0.53) $(0.09) $ (0.02)
From net realized gain on investments -- -- (0.06) -- --
In excess of net investment income++++ (0.00) (0.00) -- (0.00) (0.00)
In excess of net realized gain on investments -- -- (0.04) -- --
--------- --------- --------- ------------- ---------------
Total distributions declared to shareholders $(0.51) $(0.51) $(0.63) $(0.09) $ (0.02)
--------- --------- --------- ------------- ---------------
Net asset value - end of period $11.55 $11.56 $11.41 $11.47 $ 12.36
========= ========= ========= ============= ===============
Total return 4.41% 5.87% 5.18% (6.50)%+++ 16.50%+
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.73% 1.83% 1.81% 1.82%+ 1.44%+
Net investment income 4.40% 4.38% 4.71% 4.25%+ 2.33%+
Portfolio turnover 33% 30% 58% 2% 12%
Net assets at end of period (000 omitted) $7,789 $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 years ended March 31, 1997 and 1996, 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 $0.002, $0.002, $0.002 and $0.003,
respectively.
ss The investment adviser waived a portion of its management fee 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 $0.51 -- -- -- --
Ratios (to average net assets):
Expenses## 1.80% -- -- -- --
Net investment income 4.33% -- -- -- --
</TABLE>
See notes to financial statements
45
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Pennsylvania Fund
---------------------------------------------------------- -------------------- --------- ------------- ---------------
Two Months
Ended Period Ended
Year Ended March 31, March 31, January 31,
----------------------------------------------------------------------------------------- ------------- ---------------
1997 1996 1995 1994 1994*
---------------------------------------------------------- --------- --------- --------- ------------- ---------------
Class A
---------------------------------------------------------- --------- --------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.37 $ 9.29 $ 9.15 $ 10.14 $ 9.53
--------- --------- --------- ------------- ---------------
Income from investment operations# -
Net investment income ss $ 0.53 $ 0.54 $ 0.54 $ 0.09 $ 0.50
Net realized and unrealized gain (loss) on investments (0.10) 0.09 0.18 (0.99) 0.62
--------- --------- --------- ------------- ---------------
Total from investment operations $ 0.43 $ 0.63 $ 0.72 $ (0.90) $ 1.12
--------- --------- --------- ------------- ---------------
Less distributions declared to shareholders -
From net investment income $ (0.54) $ (0.55) $ (0.54) $ (0.09) $ (0.50)
From net realized gain on investments -- -- (0.01) -- (0.01)
In excess of net investment income++++ (0.00) -- -- -- --
In excess of net realized gain on investments -- -- (0.03) -- --
--------- --------- --------- ------------- ---------------
Total distributions declared to shareholders $ (0.54) $ (0.55) $ (0.58) $ (0.09) $ (0.51)
--------- --------- --------- ------------- ---------------
Net asset value - end of period $ 9.26 $ 9.37 $ 9.29 $ 9.15 $ 10.14
========= ========= ========= ============= ===============
Total return++ 4.67% 6.85% 8.14% (8.91)%+++ 12.12%+
Ratios (to average net assets)/Supplemental data ss:
Expenses## 0.10% 0.10% 0.01% 0.00%+ 0.00%+
Net investment income 5.66% 5.76% 5.97% 5.43%+ 5.30%+
Portfolio turnover 42% 40% 49% 1% 10%
Net assets at end of period (000 omitted) $16,933 $18,030 $16,411 $13,961 $13,987
*For the period from the commencement of investment operations, February 1, 1993, to January 31, 1994.
+Annualized.
+++Not annualized.
#Per share data for 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, 1997, the per share distributions in excess of net investment income was $0.003.
ss The investment adviser voluntarily agreed to maintain expenses of the Fund at not more than 1.30% of average daily
net assets for Class A shares. 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 $0.45 $0.43 $0.06 $0.32
Ratios (to average net assets):
Expenses## 0.95% 1.00% 1.18% 1.84%+ 1.94%+
Net investment income 4.81% 4.86% 4.80% 3.60%+ 3.36%+
</TABLE>
See notes to financial statements
46
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Pennsylvania Fund
---------------------------------------------------------- -------------------- --------- ------------- ---------------
Two Months
Ended Period Ended
Year Ended March 31, March 31, January 31,
----------------------------------------------------------------------------------------- ------------- ---------------
1997 1996 1995 1994 1994**
---------------------------------------------------------- --------- --------- --------- ------------- ---------------
Class B
---------------------------------------------------------- --------- --------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.39 $ 9.29 $ 9.15 $10.15 $10.06
--------- --------- --------- ------------- ---------------
Income from investment operations# -
Net investment income ss $ 0.46 $ 0.50 $ 0.45 $ 0.06 $ 0.17
Net realized and unrealized gain (loss) on investments (0.11) 0.07 0.18 (0.99) 0.10
--------- --------- --------- ------------- ---------------
Total from investment operations $ 0.35 $ 0.57 $ 0.63 $(0.93) $ 0.27
--------- --------- --------- ------------- ---------------
Less distributions declared to shareholders -
From net investment income++++ $ (0.46) $ (0.47) $(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 $ (0.46) $ (0.47) $(0.49) $(0.07) $(0.18)
--------- --------- --------- ------------- ---------------
Net asset value - end of period $ 9.28 $ 9.39 $ 9.29 $ 9.15 $10.15
========= ========= ========= ============= ===============
Total return 3.83% 6.23% 7.07% (9.16)%+++ 6.76%+
Ratios (to average net assets)/Supplemental data ss:
Expenses## 0.90% 0.88% 1.01% 1.00%+ 1.00%+
Net investment income 4.86% 4.98% 4.96% 4.37%+ 4.22%+
Portfolio turnover 42% 40% 49% 1% 10%
Net assets at end of period (000 omitted) $24,898 $24,170 $7,699 $4,304 $3,401
**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, 1997, and the two months ended March 31, 1994, the per share distributions in excess of
net investment income were $0.002 and $0.001, respectively.
ss The investment adviser voluntarily agreed to maintain expenses of at not more than 1.95% of average daily net assets
for Class B shares. 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 $0.41 $0.34 $0.04 $0.05
Ratios (to average net assets):
Expenses## 1.75% 1.85% 2.26% 2.91%+ 2.50%+
Net investment income 4.01% 4.01% 3.72% 2.47%+ 1.29%+
</TABLE>
See notes to financial statements
47
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
South Carolina Fund
- -------------------------------------------------- ---------------------- ----------------------- ----------- -----------
Two Months
Ended
Year Ended March 31, March 31, Year Ended January 31,
- -------------------------------------------------- ---------------------------------------------- -----------------------
1997 1996 1995 1994 1994 1993
- -------------------------------------------------- ----------- ----------- ----------------------- -----------------------
Class A
- -------------------------------------------------- ----------- ----------- ----------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.97 $ 11.86 $ 11.79 $ 12.74 $ 12.02 $ 11.74
----------- ----------- ----------------------- ----------- -----------
Income from investment operations# -
Net investment income ss $ 0.62 $ 0.62 $ 0.63 $ 0.08 $ 0.63 $ 0.67
Net realized and unrealized gain (loss) on
investments (0.10) 0.11 0.15 (0.92) 0.74 0.34
----------- ----------- ----------------------- ----------- -----------
Total from investment operations $ 0.52 $ 0.73 $ 0.78 $ (0.84) $ 1.37 $ 1.01
----------- ----------- ----------------------- ----------- -----------
Less distributions declared to shareholders -
From net investment income $ (0.61) $ (0.62) $ (0.62) $ (0.08) $ (0.61) $ (0.69)
From net realized gain on investments -- -- (0.06) -- (0.01) (0.04)
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 $ (0.61) $ (0.62) $ (0.71) $ (0.11) $ (0.65) $ (0.73)
----------- ----------- ----------------------- ----------- -----------
Net asset value - end of period $ 11.88 $ 11.97 $ 11.86 $ 11.79 $ 12.74 $ 12.02
=========== =========== ======================= =========== ===========
Total return++ 4.46% 6.20% 6.93% (6.65)%+++ 11.69% 8.89%
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.10% 1.20% 1.19% 1.23%+ 1.22% 1.12%
Net investment income 5.17% 5.10% 5.37% 5.09%+ 5.06% 5.74%
Portfolio turnover 13% 18% 30% 4% 10% 11%
Net assets at end of period (000 omitted) $148,908 $166,801 $171,045 $173,316 $187,307 $144,539
+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.
ss The investment adviser voluntarily waived a portion of its management fee 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 $ 0.16 -- -- -- -- --
Ratios (to average net assets):
Expenses## 1.16% -- -- -- -- --
Net investment income 5.11% -- -- -- -- --
</TABLE>
See notes to financial statements
48
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
South Carolina Fund
----------------------------------------------------------- -----------------------------------------------------
Year Ended January 31, 1992 1991 1990 1989 1988
----------------------------------------------------------- ----------- --------- --------- --------- ----------
Class A
----------------------------------------------------------- ----------- ------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.45 $ 11.30 $ 11.24 $ 11.14 $ 11.54
----------- --------- --------- --------- ----------
Income from investment operations -
Net investment income $ 0.70 $ 0.71 $ 0.72 $ 0.76 $ 0.77
Net realized and unrealized gain (loss) on investments 0.40 0.21 0.06 0.11 (0.36)
----------- --------- --------- --------- ----------
Total from investment operations $ 1.10 $ 0.92 $ 0.78 $ 0.87 $ 0.41
----------- --------- --------- --------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.76) $ (0.71) $ (0.72) $ (0.77) $ (0.77)
From net realized gain on investments (0.05) (0.06) -- -- --
From paid-in capital -- -- -- -- (0.04)
----------- --------- --------- --------- ----------
Total distributions declared to shareholders $ (0.81) $ (0.77) $ (0.72) $ (0.77) $ (0.81)
----------- --------- --------- --------- ----------
Net asset value - end of period $ 11.74 $ 11.45 $ 11.30 $ 11.24 $ 11.14
=========== ========= ========= ========= ==========
Total return++ 9.95% 8.46% 7.13% 8.18% 3.92%
Ratios (to average net assets)/Supplemental data:
Expenses 1.15% 1.18% 1.21% 0.97% 0.81%
Net investment income 6.07% 6.30% 6.35% 6.90% 7.07%
Portfolio turnover 22% 47% 54% 27% 12%
Net assets at end of period (000 omitted) $101,434 $75,922 $57,675 $45,391 $34,025
++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>
See notes to financial statements
49
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
South Carolina Fund
----------------------------------------------------------- ----------------------------------------------------------
Two Months
Ended Period Ended
Year Ended March 31, March 31, January 31,
----------------------------------------------------------- ------------------------------- ------------ --------------
1997 1996 1995 1994 1994**
----------------------------------------------------------- --------- --------- --------- ------------ --------------
Class B
----------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.97 $ 11.86 $ 11.78 $ 12.73 $12.67
--------- --------- --------- ------------ --------------
Income from investment operations# -
Net investment income ss $ 0.54 $ 0.52 $ 0.54 $ 0.08 $ 0.21
Net realized and unrealized gain (loss) on investments (0.10) 0.12 0.17 (0.94) 0.06
--------- --------- --------- ------------ --------------
Total from investment operations $ 0.44 $ 0.64 $ 0.71 $ (0.86) $ 0.27
--------- --------- --------- ------------ --------------
Less distributions declared to shareholders -
From net investment income $ (0.53) $ (0.53) $ (0.54) $ (0.08) $(0.20)
From net realized gain on investments -- -- (0.06) -- --
In excess of net investment income++++ -- (0.00) (0.00) (0.01) (0.01)
In excess of net realized gain on investments -- -- (0.03) -- --
--------- --------- --------- ------------ --------------
Total distributions declared to shareholders $ (0.53) $ (0.53) $ (0.63) $ (0.09) $(0.21)
--------- --------- --------- ------------ --------------
Net asset value - end of period $ 11.88 $ 11.97 $ 11.86 $ 11.78 $12.73
========= ========= ========= ============ ==============
Total return 3.73% 5.43% 6.26% (6.77)%+++ 5.47%+
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.79% 1.92% 1.90% 1.96%+ 1.90%+
Net investment income 4.48% 4.35% 4.63% 4.29%+ 3.86%+
Portfolio turnover 13% 18% 30% 4% 10%
Net assets at end of period (000 omitted) $21,871 $18,420 $12,964 $10,085 $8,217
**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 years ended March 31, 1996 and 1995, the per share distributions in excess of net investment income were
$0.0005 and $0.00436, respectively.
ss The investment adviser voluntarily waived a portion of its management fee 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 $ 0.53 -- -- -- --
Ratios (to average net assets):
Expenses## 1.85% -- -- -- --
Net investment income 4.42% -- -- -- --
</TABLE>
See notes to financial statements
50
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Tennessee Fund
- -------------------------------------------------- ---------------------- ----------------------------------------------
Two Months
Ended
Year Ended March 31, March 31, Year Ended January 31,
- -------------------------------------------------- ---------------------------------------------- ----------------------
1997 1996 1995 1994 1994 1993
- -------------------------------------------------- ----------- ----------- ----------------------- ----------- ----------
Class A
- -------------------------------------------------- ----------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.40 $ 10.27 $ 10.26 $ 10.94 $ 10.37 $ 10.10
----------- ----------- ----------------------- ----------- ----------
Income from investment operations# -
Net investment income ss $ 0.55 $ 0.54 $ 0.56 $ 0.09 $ 0.57 $ 0.57
Net realized and unrealized gain (loss) on
investments (0.09) 0.13 0.02 (0.68) 0.57 0.31
----------- ----------- ----------------------- ----------- ----------
Total from investment operations $ 0.46 $ 0.67 $ 0.58 $ (0.59) $ 1.14 $ 0.88
----------- ----------- ----------------------- ----------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.54) $ (0.54) $ (0.56) $ (0.07) $ (0.54) $ (0.57)
From net realized gain on investments++++ -- -- (0.00) -- -- (0.01)
In excess of net investment income++++++ -- (0.00) -- (0.02) (0.03) (0.03)
In excess of net realized gain on investments -- -- (0.01) -- -- --
----------- ----------- ----------------------- ----------- ----------
Total distributions declared to shareholders $ (0.54) $ (0.54) $ (0.57) $ (0.09) $ (0.57) $ (0.61)
----------- ----------- ----------------------- ----------- ----------
Net asset value - end of period $ 10.32 $ 10.40 $ 10.27 $ 10.26 $ 10.94 $ 10.37
=========== =========== ======================= =========== ==========
Total return++ 4.48% 6.66% 5.86% (5.39)%+++ 11.20% 9.03%
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.10% 1.21% 1.22% 1.21%+ 1.29% 1.14%
Net investment income 5.26% 5.18% 5.52% 5.31%+ 5.25% 5.89%
Portfolio turnover 20% 20% 27% 4% 12% 9%
Net assets at end of period (000 omitted) $108,000 $109,811 $117,572 $117,117 $123,050 $99,443
+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 March 31, 1996, the per share distribution in excess of net investment income was $0.0024.
ss The investment adviser and/or distributor voluntarily waived a portion their management, distribution and expense
reimbursement fees 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 $ 0.54 -- -- -- -- $ 0.61
Ratios (to average daily net assets):
Expenses## 1.16% -- -- -- -- 1.17%
Net investment income 5.20% -- -- -- -- 6.23%
</TABLE>
See notes to financial statements
51
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Tennessee Fund
- ---------------------------------------------------- ------------------------------- --------------
Period Ended
January 31,
Year Ended January 31, 1992 1991 1990 1989*
- ---------------------------------------------------- --------- --------- --------- --------------
Class A
- ---------------------------------------------------- --------- ------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.90 $ 9.80 $ 9.68 $ 9.53
--------- --------- --------- --------------
Income from investment operations -
Net investment income ss $ 0.61 $ 0.62 $ 0.67 $ 0.22
Net realized and unrealized gain on investments 0.30 0.13 0.11 0.10
--------- --------- --------- --------------
Total from investment operations $ 0.91 $ 0.75 $ 0.78 $ 0.32
--------- --------- --------- --------------
Less distributions declared to shareholders -
From net investment income $ (0.66) $ (0.63) $ (0.66) $ (0.17)
From net realized gain on investments (0.05) (0.02) -- --
From paid-in capital++++ -- (0.00) -- --
--------- --------- --------- --------------
Total distributions declared to shareholders $ (0.71) $ (0.65) $ (0.66) $ (0.17)
--------- --------- --------- --------------
Net asset value - end of period $ 10.10 $ 9.90 $ 9.80 $ 9.68
========= ========= ========= ==============
Total return++ 9.50% 7.96% 8.30% 3.43%+++
Ratios (to average net assets)/Supplemental data ss:
Expenses 1.15% 1.03% 0.53% 0.40%+
Net investment income 6.11% 6.37% 6.70% 5.98%+
Portfolio turnover 42% 58% 78% 5%
Net assets at end of period (000 omitted) $87,898 $72,108 $56,048 $15,832
*For the period from the commencement of investment operations, August 12, 1988, to January 31,
1989.
+Annualized.
+++Not annualized.
++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
$0.0013.
ss The investment adviser voluntarily waived a portion of its management fee 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 -- -- $ 0.60 $ 0.20
Ratios (to average daily net assets):
Expenses -- -- 1.24% 0.95%+
Net investment income -- -- 5.99% 5.43%+
</TABLE>
See notes to financial statements
52
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Tennessee Fund
----------------------------------------------------------- ----------------------------------------------------------
Two Months
Ended Period Ended
Year Ended March 31, March 31, January 31,
----------------------------------------------------------- ------------------------------- ------------ --------------
1997 1996 1995 1994 1994**
----------------------------------------------------------- --------- --------- --------- ------------ --------------
Class B
----------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.39 $ 10.26 $ 10.26 $10.95 $10.87
--------- --------- --------- ------------ --------------
Income from investment operations# -
Net investment income ss $ 0.47 $ 0.46 $ 0.48 $ 0.08 $ 0.19
Net realized and unrealized gain (loss) on investments (0.09) 0.14 0.01 (0.69) 0.08
--------- --------- --------- ------------ --------------
Total from investment operations $ 0.38 $ 0.60 $ 0.49 $(0.61) $ 0.27
--------- --------- --------- ------------ --------------
Less distributions declared to shareholders -
From net investment income++++++ $ (0.46) $ (0.47) $ (0.48) $(0.08) $(0.19)
From net realized gain on investments++++ -- -- (0.00) -- --
In excess of net realized gain on investments -- -- (0.01) -- --
--------- --------- --------- ------------ --------------
Total distributions declared to shareholders $ (0.46) $ (0.47) $ (0.49) $(0.08) $(0.19)
--------- --------- --------- ------------ --------------
Net asset value - end of period $ 10.31 $ 10.39 $ 10.26 $10.26 $10.95
========= ========= ========= ============ ==============
Total return 3.76% 5.89% 5.00% (5.59)%+++ 2.48%+++
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.79% 1.93% 1.94% 1.93%+ 1.93%+
Net investment income 4.57% 4.43% 4.80% 4.49%+ 4.20%+
Portfolio turnover 20% 20% 27% 4% 12%
Net assets at end of period (000 omitted) $14,436 $12,935 $10,006 $5,294 $3,818
**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.
ss The investment adviser voluntarily waived a portion of its management fee 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 $ 0.46 -- -- -- --
Ratios (to average net assets):
Expenses## 1.85% -- -- -- --
Net investment income 4.51% -- -- -- --
</TABLE>
See notes to financial statements
53
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Virginia Fund
- ------------------------------------------------- ---------------------- -----------------------------------------------
Two Months
Ended
Year Ended March 31, March 31, Year Ended January 31,
- ------------------------------------------------- ---------------------------------------------- -----------------------
1997 1996 1995 1994 1994 1993
- ------------------------------------------------- ----------- ---------------------- ------------ -----------------------
Class A
- ------------------------------------------------- ----------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.21 $ 11.09 $ 11.15 $ 12.07 $ 11.72 $ 11.44
----------- ---------------------- ------------ ----------- -----------
Income from investment operations# -
Net investment income ss $ 0.59 $ 0.59 $ 0.56 $ 0.10 $ 0.65 $ 0.68
Net realized and unrealized gain (loss) on
investments (0.15) 0.13 0.04 (0.92) 0.56 0.30
----------- ---------------------- ------------ ----------- -----------
Total from investment operations $ 0.44 $ 0.72 $ 0.60 $ (0.82) $ 1.21 $ 0.98
----------- ---------------------- ------------ ----------- -----------
Less distributions declared to shareholders -
From net investment income $ (0.59) $ (0.60) $ (0.61) $ (0.06) $ (0.62) $ (0.70)
From net realized gain on investments++++++ -- -- (0.04) -- (0.20) (0.00)
In excess of net investment income++++ -- (0.00) (0.00) (0.04) (0.04) --
In excess of net realized gain on investments -- -- (0.01) -- -- --
----------- ---------------------- ------------ ----------- -----------
Total distributions declared to shareholders $ (0.59) $ (0.60) $ (0.66) $ (0.10) $ (0.86) $ (0.70)
----------- ---------------------- ------------ ----------- -----------
Net asset value - end of period $ 11.06 $ 11.21 $ 11.09 $ 11.15 $ 12.07 $ 11.72
=========== ====================== ============ =========== ===========
Total return++ 3.97% 6.52% 5.67% (6.80)%+++ 10.67% 8.88%
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.08% 1.18% 1.16% 1.17%+ 1.18% 1.08%
Net investment income 5.27% 5.20% 4.91% 5.33%+ 5.37% 6.02%
Portfolio turnover 42% 42% 27% 5% 22% 20%
Net assets at end of period (000 omitted) $379,185 $418,408 $430,688 $443,580 $479,333 $399,696
+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
$0.005 and $0.003, respectively.
++++++For the year ended January 31, 1993, the per share distribution from net realized gain on investments was $0.00348.
ss The investment adviser voluntarily waived a portion of its management 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 $ 0.58 -- -- -- -- --
Ratios (to average net assets):
Expenses## 1.14% -- -- -- -- --
Net investment income 5.21% -- -- -- -- --
</TABLE>
See notes to financial statements
54
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Virginia Fund
- -------------------------------------------------- ---------------------- -----------------------------------
Year Ended January 31, 1992 1991 1990 1989 1988
- -------------------------------------------------- ----------- ----------- ---------------------- -----------
Class A
- -------------------------------------------------- ----------- ----------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.16 $ 10.97 $ 10.91 $ 10.75 $ 11.38
----------- ----------- ---------------------- -----------
Income from investment operations -
Net investment income $ 0.71 $ 0.73 $ 0.73 $ 0.74 $ 0.72
Net realized and unrealized gain (loss) on
investments 0.34 0.19 0.06 0.16 (0.57)
----------- ----------- ---------------------- -----------
Total from investment operations $ 1.05 $ 0.92 $ 0.79 $ 0.90 $ 0.15
----------- ----------- ---------------------- -----------
Less distributions declared to shareholders -
From net investment income $ (0.77) $ (0.73) $ (0.73) $ (0.74) $ (0.71)
From net realized gain on investments -- -- -- -- (0.05)
From paid-in capital -- -- -- -- (0.02)
----------- ----------- ---------------------- -----------
Total distributions declared to shareholders $ (0.77) $ (0.73) $ (0.73) $ (0.74) $ (0.78)
----------- ----------- ---------------------- -----------
Net asset value - end of period $ 11.44 $ 11.16 $ 10.97 $ 10.91 $ 10.75
=========== =========== ====================== ===========
Total return++ 9.76% 8.74% 7.46% 8.76% 1.61%
Ratios (to average net assets)/Supplemental data:
Expenses 1.08% 1.11% 1.12% 1.09% 1.04%
Net investment income 6.32% 6.64% 6.67% 6.91% 6.75%
Portfolio turnover 13% 38% 41% 38% 11%
Net assets at end of period (000 omitted) $328,664 $275,202 $240,553 $207,680 $192,104
++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>
See notes to financial statements
55
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Virginia Fund
- -------------------------------------------------- ----------------------------------------------------------
Two Months
Ended Period Ended
Year Ended March 31, March 31, January 31,
- -------------------------------------------------- ------------------------------- ------------ --------------
1997 1996 1995 1994 1994**
- -------------------------------------------------- --------- --------- --------- ------------ --------------
Class B
- -------------------------------------------------- --------- -------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.21 $ 11.08 $ 11.14 $ 12.06 $ 12.14
--------- --------- --------- ------------ --------------
Income from investment operations# -
Net investment income ss $ 0.51 $ 0.51 $ 0.53 $ 0.09 $ 0.22
Net realized and unrealized gain (loss) on
investments (0.15) 0.13 (0.01) (0.92) 0.01
--------- --------- --------- ------------ --------------
Total from investment operations $ 0.36 $ 0.64 $ 0.52 $ (0.83) $ 0.23
--------- --------- --------- ------------ --------------
Less distributions declared to shareholders -
From net investment income $ (0.51) $ (0.51) $ (0.53) $ (0.09) $ (0.21)
From net realized gain on investments -- -- (0.04) -- (0.09)
In excess of net investment income++++ -- (0.00) (0.00) (0.00) (0.01)
In excess of net realized gain on investments -- -- (0.01) -- --
--------- --------- --------- ------------ --------------
Total distributions declared to shareholders $ (0.51) $ (0.51) $ (0.58) $ (0.09) $ (0.31)
--------- --------- --------- ------------ --------------
Net asset value - end of period $ 11.06 $ 11.21 $ 11.08 $ 11.14 $ 12.06
========= ========= ========= ============ ==============
Total return 3.24% 5.85% 4.91% (6.92)%+++ 4.93%+
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.78% 1.90% 1.88% 1.88%+ 1.82%+
Net investment income 4.57% 4.46% 4.84% 4.52%+ 4.25%+
Portfolio turnover 42% 42% 27% 5% 22%
Net assets at end of period (000 omitted) $30,567 $28,420 $22,007 $13,337 $10,877
**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 years ended March 31, 1996 and 1995, and the two months ended March 31, 1994, the per share
distributions in excess of net investment income were $0.002, $0.005 and $0.002, respectively.
ss The investment adviser voluntarily waived a portion of its management fee for certain of the periods
indicated. If these fees have been incurred by the Fund, the net investment income and the ratios would
have been:
Net investment income $ 0.50 -- -- -- --
Ratios (to average net assets):
Expenses## 1.84% -- -- -- --
Net investment income 4.51% -- -- -- --
</TABLE>
See notes to financial statements
56
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Virginia Fund
- -------------------------------------------------- ----------------------------------------------------------
Two Months
Ended Year Ended
Year Ended March 31, March 31, January 31,
- -------------------------------------------------- ------------------------------- ------------ --------------
1997 1996 1995 1994 1994***
- -------------------------------------------------- --------- --------- --------- ------------ --------------
Class C
- -------------------------------------------------- --------- -------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $11.21 $11.07 $11.14 $12.06 $ 11.94
--------- --------- --------- ------------ --------------
Income from investment operations# -
Net investment income ss $ 0.52 $ 0.51 $ 0.56 $ 0.08 $ 0.02
Net realized and unrealized gain (loss) on
investments (0.16) 0.15 (0.04) (0.91) 0.12
--------- --------- --------- ------------ --------------
Total from investment operations $ 0.36 $ 0.66 $ 0.52 $(0.83) $ 0.14
--------- --------- --------- ------------ --------------
Less distributions declared to shareholders -
From net investment income++++ $(0.51) $(0.52) $(0.54) $(0.09) $ (0.02)
From net realized gain on investment income -- -- (0.04) -- --
In excess of net realized gain on investments -- -- (0.01) -- --
--------- --------- --------- ------------ --------------
Total distributions declared to shareholders $(0.51) $(0.52) $(0.59) $(0.09) $ (0.02)
--------- --------- --------- ------------ --------------
Net asset value - end of period $11.06 $11.21 $11.07 $11.14 $ 12.06
========= ========= ========= ============ ==============
Total return 3.30% 6.02% 4.85% (6.91)%+++ 17.05%+
Ratios (to average net assets)/Supplemental data ss:
Expenses## 1.72% 1.83% 1.80% 1.82%+ 1.18%+
Net investment income 4.63% 4.53% 4.90% 4.48%+ 1.79%+
Portfolio turnover 42% 42% 27% 5% 22%
Net assets at end of period (000 omitted) $3,182 $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 years ended March 31, 1996 and 1995, and January 31, 1994, the per share distributions in excess
of net investment income were $0.005, $0.002 and $0.002, respectively.
ss The investment adviser voluntarily waived a portion of its management fee for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income and the ratios would
have been:
Net investment income $ 0.51 -- -- -- --
Ratios (to average net assets):
Expenses## 1.78% -- -- -- --
Net investment income 4.57% -- -- -- --
</TABLE>
See notes to financial statements
57
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
West Virginia Fund
- -------------------------------------------------- ---------------------- -----------------------------------------------
Two Months
Ended
Year Ended March 31, March 31, Year Ended January 31,
- -------------------------------------------------- ---------------------------------------------- -----------------------
1997 1996 1995 1994 1994 1993
- -------------------------------------------------- ----------- ----------- ----------------------- -----------------------
Class A
- -------------------------------------------------- ----------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.33 $ 11.21 $ 11.19 $ 12.06 $ 11.50 $ 11.20
----------- ----------- ----------------------- ----------- -----------
Income from investment operations# -
Net investment income $ 0.60 $ 0.61 $ 0.62 $ 0.01 $ 0.64 $ 0.66
Net realized and unrealized gain (loss) on
investments (0.02) 0.12 0.03 (0.78) 0.69 0.34
----------- ----------- ----------------------- ----------- -----------
Total from investment operations $ 0.58 $ 0.73 $ 0.65 $ (0.77) $ 1.33 $ 1.00
----------- ----------- ----------------------- ----------- -----------
Less distributions declared to shareholders -
From net investment income $ (0.60) $ (0.61) $ (0.62) $ (0.06) $ (0.61) $ (0.69)
From net realized gain on investments -- -- -- -- (0.12) (0.01)
In excess of net investment income++++ -- (0.00) -- (0.04) (0.04) --
In excess of net realized gain on investments -- -- (0.01) -- -- --
----------- ----------- ----------------------- ----------- -----------
Total distributions declared to shareholders $ (0.60) $ (0.61) $ (0.63) $ (0.10) $ (0.77) $ (0.70)
----------- ----------- ----------------------- ----------- -----------
Net asset value - end of period $ 11.31 $ 11.33 $ 11.21 $ 11.19 $ 12.06 $ 11.50
=========== =========== ======================= =========== ===========
Total return++ 5.20% 6.58% 6.07% (6.37)%+++ 11.80% 9.12%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.17% 1.22% 1.19% 1.30%+ 1.24% 1.15%
Net investment income 5.28% 5.30% 5.62% 5.36%+ 5.30% 5.97%
Portfolio turnover 21% 11% 23% 2% 26% 19%
Net assets at end of period (000 omitted) $126,107 $134,514 $127,616 $130,726 $141,190 $115,289
+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 was $0.002.
</TABLE>
See notes to financial statements
58
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
West Virginia Fund
- -------------------------------------------------- -------------------- -------------------------------
Year Ended January 31, 1992 1991 1990 1989 1988
- -------------------------------------------------- --------- --------- --------- --------- ----------
Class A
- -------------------------------------------------- --------- ------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.93 $ 10.72 $ 10.68 $ 10.51 $ 11.30
--------- --------- --------- --------- ----------
Income from investment operations -
Net investment income $ 0.70 $ 0.71 $ 0.71 $ 0.77 $ 0.77
Net realized and unrealized gain (loss) on
investments 0.34 0.21 0.04 0.18 (0.72)
--------- --------- --------- --------- ----------
Total from investment operations $ 1.04 $ 0.92 $ 0.75 $ 0.95 $ 0.05
--------- --------- --------- --------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.76) $ (0.71) $ (0.71) $ (0.78) $ (0.76)
From net realized gain on investments (0.01) -- -- -- (0.02)
From paid-in capital -- -- -- -- (0.06)
--------- --------- --------- --------- ----------
Total distributions declared to shareholders $ (0.77) $ (0.71) $ (0.71) $ (0.78) $ (0.84)
--------- --------- --------- --------- ----------
Net asset value - end of period $ 11.20 $ 10.93 $ 10.72 $ 10.68 $ 10.51
========= ========= ========= ========= ==========
Total return++ 9.84% 8.91% 7.26% 9.43% 0.76%
Ratios (to average net assets)/Supplemental data:
Expenses 1.17% 1.21% 1.22% 0.86% 0.79%
Net investment income 6.33% 6.59% 6.63% 7.01% 7.32%
Portfolio turnover 14% 37% 34% 9% 11%
Net assets at end of period (000 omitted) $80,440 $61,984 $52,398 $43,026 $36,276
++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>
See notes to financial statements
59
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
West Virginia Fund
- -------------------------------------------------- ----------------------------------------------------------
Two Months
Ended Period Ended
Year Ended March 31, March 31, January 31,
- -------------------------------------------------- ------------------------------- ------------ --------------
1997 1996 1995 1994 1994**
- -------------------------------------------------- --------- --------- --------- ------------ --------------
Class B
- -------------------------------------------------- --------- -------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.33 $ 11.21 $ 11.19 $12.06 $12.13
--------- --------- --------- ------------ --------------
Income from investment operations# -
Net investment income $ 0.52 $ 0.52 $ 0.53 $ 0.01 $ 0.22
Net realized and unrealized gain (loss) on
investments (0.02) 0.12 0.04 (0.87) 0.05
--------- --------- --------- ------------ --------------
Total from investment operations $ 0.50 $ 0.64 $ 0.57 $(0.86) $ 0.27
--------- --------- --------- ------------ --------------
Less distributions declared to shareholders -
From net investment income $ (0.52) $ (0.52) $ (0.54) $(0.01) $(0.21)
From net realized gain on investments -- -- -- -- (0.12)
In excess of net investment income++++ -- (0.00) (0.00) -- (0.01)
In excess of net realized gain on investments -- -- (0.01) -- --
--------- --------- --------- ------------ --------------
Total distributions declared to shareholders $ (0.52) $ (0.52) $ (0.55) $(0.01) $(0.34)
--------- --------- --------- ------------ --------------
Net asset value - end of period $ 11.31 $ 11.33 $ 11.21 $11.19 $12.06
========= ========= ========= ============ ==============
Total return 4.47% 5.81% 5.30% (6.48)%+++ 5.59%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.87% 1.94% 1.91% 2.02%+ 1.89%+
Net investment income 4.57% 4.56% 4.87% 4.56%+ 4.14%+
Portfolio turnover 21% 11% 23% 2% 26%
Net assets at end of period (000 omitted) $13,587 $12,647 $10,046 $5,456 $4,530
**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 years ended March 31, 1996 and 1995, the per share distributions in excess of net investment
income were $0.002 and $0.005, respectively.
</TABLE>
See notes to financial statements
60
<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 sixteen 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 Maryland Municipal Bond Fund, MFS Massachusetts Municipal Bond
Fund, MFS Mississippi Municipal Bond Fund* (Mississippi Fund), MFS New York
Municipal Bond Fund* (New York Fund), MFS North Carolina Municipal Bond Fund*
(North Carolina Fund), MFS Pennsylvania Municipal Bond Fund* (Pennsylvania
Fund), MFS South Carolina Municipal Bond Fund* (South Carolina Fund), MFS
Tennessee Municipal Bond Fund* (Tennessee Fund), MFS Virginia Municipal Bond
Fund* (Virginia 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 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, political 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 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. Investments in equity 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.
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.
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
61
<PAGE>
Notes to Financial Statements - continued
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, 1997, the following amounts were 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 for accrued market discount on disposal of securities:
Mississippi New York North Carolina Pennsylvania
Fund Fund Fund Fund
========== ============= ========= ================ ==============
$38,055 $47,060 $383,091 $28,353
South Carolina Tennessee
Fund Fund
========== ================ ===========
$48,404 $55,087
With respect to the Virginia Fund, $149,922 was reclassified from accumulated
distributions in excess of net investment income, and $149,999 and $77 were
reclassified to accumulated net realized loss of investments and paid-in
capital, respectively, due to differences between book and tax accounting for
accrued market discount on disposal of securities.
These changes had no effect on the net assets or the net asset value per
share of the Funds.
At March 31, 1997, 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.
Mississippi New York North Carolina Pennsylvania
Expiration Date Fund Fund Fund Fund
================ ============= ============================= ==============
March 31, 2003 $ 940,501 $2,754,263 $9,778,287 $ 111,447
March 31, 2004 3,163,964 -- -- 1,259,709
March 31, 2005 228,833 502,292 -- 533,472
------------- ----------------------------- --------------
Total $4,333,298 $3,256,555 $9,778,287 $1,904,628
============= ============================= ==============
South Carolina Tennessee Virginia West Virginia
Expiration Date Fund Fund Fund Fund
================ ================ ============= ============== =============
March 31, 2003 $ -- $ 381,262 $ 6,639,093 $ 295,369
March 31, 2004 2,709,187 635,012 3,840,742 2,589,345
March 31, 2005 593,657 78,212 2,350,366 714,690
---------------- ------------- -------------- -------------
Total $3,302,844 $1,094,486 $12,830,201 $3,599,404
================ ============= ============== =============
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 distribution
and service fees. All shareholders bear the common expenses of the Fund pro
rata based on settled shares outstanding of each class, without distinction
between share classes. Dividends are declared separately for each class. No
class has preferential dividend rights; differences in per share dividend
rates are generally due to differences in separate class expenses.
(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 effective annual rate
of 0.55% of each Fund's average daily net assets. The investment adviser
waived a portion of its fee with respect to the North Carolina, Pennsylvania,
South Carolina, Tennessee and Virginia 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 Pennsylvania Fund's operating expenses,
exclusive of management, distribution and service 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 Pennsylvania Fund's actual expenses, the excess will be
applied to amounts paid by MFS in prior years. At March 31, 1997, the
aggregate unreimbursed expenses owed to MFS by the Pennsylvania Fund amounted
to $229,169, including $12,289 incurred in the current year. During the year
ended March 31, 1997, MFS voluntarily waived the reimbursement fee of
$171,165.
62
<PAGE>
Notes to Financial Statements - continued
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 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, 1997
is a net periodic pension expense for each Fund, as follows:
North
Mississippi New York Carolina Pennsylvania
Fund Fund Fund Fund
========== ============= ========= ========= ==============
$3,045 $4,781 $5,138 $3,284
South West
Carolina Tennessee Virginia Virginia
Fund Fund Fund Fund
========== ========= =========== ========== =========
$5,136 $4,507 $5,138 $5,138
Administrator -- Effective March 1, 1997, the Trust has an administrative
services agreement with MFS to provide the Trust with certain financial,
legal, compliance, shareholder communications, and other administrative
services. As a partial reimbursement for the cost of providing these
services, each Fund pays MFS an administrative fee up to 0.015% per annum of
each Fund's average daily net assets, provided that the administrative fee is
not assessed on Fund assets that exceed $3 billion.
Distributor -- MFD, a wholly owned subsidiary of MFS, as distributor,
received $18,104, $19,546, $72,935, $11,850, $36,896, $25,070, $62,832 and
$38,916 as its portion of the sales charge on sales of Class A shares of the
Mississippi, New York, North Carolina, Pennsylvania, South Carolina,
Tennessee, Virginia and West Virginia Funds, respectively, for the year ended
March 31, 1997.
The Trustees have adopted a 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:
Each Fund's 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 $46,322, $66,418, $45,613, $37,386, $99,075 and $27,053 for
the New York, North Carolina, South Carolina, Tennessee, Virginia and West
Virginia Funds for the year ended March 31, 1997. Fees incurred under the
distribution plan during the year ended March 31, 1997 were 0.00%, 0.25%,
0.35%, 0.00%, 0.35%, 0.35%, 0.35%, and 0.35% of each Fund's average daily net
assets attributable to Class A shares on an annualized basis for the
Mississippi, New York, North Carolina, Pennsylvania, South Carolina,
Tennessee, Virginia, and West Virginia Funds. Payments of the 0.35% per annum
of the distribution/service fee by the Mississippi Fund will commence on such
date to be determined by the Trustees. In the case of the New York and
Pennsylvania Funds, payments of up to 0.10% per annum of the distribution fee
will commence on such date to be determined by the Trustees. For the
Pennsylvania Fund, payments of up to 0.25% per annum of the service fee will
commence when the value of the net assets of the Fund attributable to Class A
shares first equals or exceeds $50 million.
Each Fund's distribution plan provides 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. Except in the case of the up
to 0.25% per annum first year service fee, payments by the Mississippi Fund
will commence on such date to be determined by the Trustees. In the case of
the Pennsylvania Fund, except in the case of the up to 0.25% per annum first
year service fee, payments will commence when the value of the net assets of
the Pennsylvania Fund attributable to Class A shares first equals or exceeds
$50 million. 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 $8,339, $5,589, $5,470, $5,835, $15,311, and $2,607
for the New York, North Carolina, South Carolina, Tennessee, Virginia, and
West Virginia Funds, respectively for Class B shares. MFS retains the service
fee for accounts not attributable to a securities dealer, which amounted to
$4,633 and $1,455 for the North Carolina and Virginia Funds, respectively,
for Class C shares. Fees incurred under the distribution plan during the year
ended March 31, 1997 were 0.80%, 1.00%, 1.00%, 0.80%, 1.00%, 1.00%, 1.00% and
1.00%, of each of the Fund's average daily net assets attributable to Class B
shares for the Mississippi, New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Virginia, and West Virginia Funds, respectively on an
annualized basis. Fees incurred under the distribution plan during the year
ended March 31, 1997 were 1.00% and 1.00% of each of the Fund's average daily
net assets attributable to Class C shares for the North Carolina and Virginia
Fund, respectively, on an annualized basis.
Purchases over $1 million of Class A shares 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. A contingent deferred sales charge
is imposed on shareholder redemptions of Class C shares in the event of a
shareholder redemption within 12 months of purchases made on or after April
1, 1996. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended March 31, 1997, on Class
A, Class B and Class C shares were as follows:
63
<PAGE>
Notes to Financial Statements - continued
North
Mississippi New York Carolina Pennsylvania
CDSC Imposed Fund Fund Fund Fund
============================ ========= =========== ==============
Class A $ -- $ 51 $ -- $11,294
============= ========= =========== ==============
Class B $48,353 $95,716 $103,158 $33,143
============= ========= =========== ==============
Class C $ -- $ -- $ 1,076 $ --
============= ========= =========== ==============
South West
Carolina Tennessee Virginia Virginia
CDSC Imposed Fund Fund Fund Fund
=============== ========= =========== ========= ==========
Class A $ 683 $ -- $ -- $ --
========= =========== ========= ==========
Class B $40,979 $53,602 $89,149 $54,376
========= =========== ========= ==========
Class C $ -- $ -- $ -- $ --
========= =========== ========= ==========
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 each Fund's average daily net assets at an effective
annual rate of 0.13%. Prior to January 1, 1997, the fee was calculated as a
percentage of each Fund's 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):
North
Mississippi New York Carolina Pennsylvania
Fund Fund Fund Fund
========================= ========= =========== ==============
Purchases $13,914 $ 98,698 $142,694 $17,494
Sales 22,542 114,931 173,363 19,597
South West
Carolina Tennessee Virginia Virginia
Fund Fund Fund Fund
============ ========= =========== =========== ==========
Purchases $23,175 $25,171 $175,712 $29,666
Sales 36,328 23,823 213,973 39,183
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
Mississippi New York Carolina Pennsylvania
Fund Fund Fund Fund
================================ ============= ====================== ==============
<S> <C> <C> <C> <C>
Aggregate cost $73,775 $139,305 $398,472 $39,850
============= ====================== ==============
Gross unrealized appreciation $ 2,791 $ 7,764 $ 20,959 $ 752
Gross unrealized depreciation (136) (1,323) (1,627) (356)
------------- ---------------------- --------------
Net unrealized appreciation $ 2,655 $ 6,441 $ 19,332 $ 396
============= ====================== ==============
</TABLE>
South West
Carolina Tennessee Virginia Virginia
Fund Fund Fund Fund
=============================== ====================== =========== ===========
Aggregate cost $160,068 $117,236 $382,979 $129,623
====================== =========== ===========
Gross unrealized appreciation $ 8,606 $ 5,429 $ 17,955 $ 7,984
Gross unrealized depreciation (666) (725) (1,373) (510)
---------------------- ----------- -----------
Net unrealized appreciation $ 7,940 $ 4,704 $ 16,582 $ 7,474
====================== =========== ===========
(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 Mississippi Fund New York Fund North Carolina Fund
---------------------- ---------------------- ------------------------
Year Ended March 31, 1997 (000 Omitted) Shares Amount Shares Amount Shares Amount
========================================= ========= ============ ========= ============ =========== ============
<S> <C> <C> <C> <C> <C> <C>
Shares sold 420 $ 3,942 1,336 $ 14,245 11,938 $ 138,759
Shares issued to shareholders in
reinvestment of distributions 170 1,601 355 3,792 989 11,523
Shares reacquired (1,427) (13,419) (2,824) (30,108) (15,681) (182,342)
--------- ------------ --------- ------------ ----------- ------------
Net decrease (837) $ (7,876) (1,133) $(12,071) (2,754) $ (32,060)
========= ============ ========= ============ =========== ============
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
========================================= ========= ============ ========= ============ =========== ============
Shares sold 877 $ 8,180 2,667 $ 28,693 7,027 $ 82,500
Shares issued to shareholders in
reinvestment of distributions 228 2,141 415 4,457 1,060 12,349
Shares reacquired (1,776) (16,709) (4,446) (47,873) (10,276) (120,480)
--------- ------------ --------- ------------ ----------- ------------
Net decrease (671) $ (6,388) (1,364) $(14,723) (2,189) $ (25,631)
========= ============ ========= ============ =========== ============
</TABLE>
64
<PAGE>
Notes to Financial Statements - continued
<TABLE>
<CAPTION>
Class A Shares -- continued Pennsylvania Fund South Carolina Fund Tennessee Fund
------------------- --------------------------------------------
Year Ended March 31, 1997 (000 Omitted) Shares Amount Shares Amount Shares Amount
======================================= ======== ========= ===================== ========= ===========
<S> <C> <C> <C> <C> <C> <C>
Shares sold 379 $ 3,531 747 $ 8,956 819 $ 8,497
Shares issued to shareholders in
reinvestment of distributions 70 653 368 4,404 266 2,759
Shares reacquired (546) (5,091) (2,517) (30,161) (1,175) (12,195)
-------- --------- --------------------- --------- -----------
Net decrease (97) $ (907) (1,402) $(16,801) (90) $ (939)
======== ========= ===================== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
======================================= ======== ========= ==================== ========= ===========
<S> <C> <C> <C> <C> <C> <C>
Shares sold 302 $ 2,857 1,071 $ 12,906 527 $ 5,493
Shares issued to shareholders in
reinvestment of distributions 70 659 395 4,764 271 2,835
Shares reacquired (213) (2,014) (1,950) (23,552) (1,692) (17,696)
-------- --------- -------------------- --------- -----------
Net increase (decrease) 159 $ 1,502 (484) $ (5,882) (894) $ (9,368)
======== ========= ==================== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Virginia Fund West Virginia Fund
------------------------- ----------------------
Year Ended March 31, 1997 (000 Omitted) Shares Amount Shares Amount
========================================= =========== ============= ====================
<S> <C> <C> <C> <C>
Shares sold 13,538 $ 151,104 537 $ 6,100
Shares issued to shareholders in
reinvestment of distributions 921 10,293 326 3,704
Shares reacquired (17,500) (195,457) (1,584) (17,969)
----------- ------------- --------------------
Net decrease (3,041) $ (34,060) (721) $ (8,165)
=========== ============= ====================
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount
========================================= =========== ============= ====================
Shares sold 7,192 $ 82,090 1,206 $ 13,870
Shares issued to shareholders in
reinvestment of distributions 1,009 11,447 328 3,752
Shares reacquired (9,726) (111,003) (1,047) (11,988)
----------- ------------- --------------------
Net increase (decrease) (1,525) $ (17,466) 487 $ 5,634
=========== ============= ====================
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Mississippi Fund New York Fund North Carolina Fund
------------------- ----------------------------------------
Year Ended March 31, 1997 (000 Omitted) Shares Amount Shares Amount Shares Amount
============================================ ======== ========= ======== =========== ======== ==========
<S> <C> <C> <C> <C> <C> <C>
Shares sold 129 $ 1,206 427 $ 4,550 800 $ 9,310
Shares issued to shareholders in
reinvestment of distributions 21 195 64 687 84 973
Shares reacquired (199) (1,876) (600) (6,395) (432) (5,013)
-------- --------- -------- ----------- -------- ----------
Net increase (decrease) (49) $ (475) (109) $(1,158) 452 $ 5,270
======== ========= ======== =========== ======== ==========
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
============================================ ======== ========= ======== =========== ======== ==========
Shares sold 295 $ 2,757 544 $ 5,859 952 $11,119
Issued in connection with the acquisition of
the Advantage Fund -- -- 1,405 14,685 -- --
Shares issued to shareholders in
reinvestment of distributions 22 208 63 676 70 821
Shares reacquired (120) (1,127) (513) (5,513) (395) (4,599)
-------- --------- -------- ----------- -------- ----------
Net increase 197 $ 1,838 1,499 $15,707 627 $ 7,341
======== ========= ======== =========== ======== ==========
</TABLE>
65
<PAGE>
Notes to Financial Statements - continued
<TABLE>
<CAPTION>
Pennsylvania Fund South Carolina Fund Tennessee Fund
------------------- -----------------------------------------
Year Ended March 31, 1997 (000 Omitted) Shares Amount Shares Amount Shares Amount
============================================ ======== ========= ======== ========= ======== ==========
<S> <C> <C> <C> <C> <C> <C>
Shares sold 364 $ 3,410 443 $ 5,311 385 $ 4,006
Shares issued to shareholders in
reinvestment of distributions 73 686 45 537 32 331
Shares reacquired (330) (3,097) (186) (2,226) (261) (2,710)
-------- --------- -------- --------- -------- ----------
Net increase 107 $ 999 302 $ 3,622 156 $ 1,627
======== ========= ======== ========= ======== ==========
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount Shares Amount
============================================ ======== ========= ======== ========= ======== ==========
Shares sold 376 $ 3,589 575 $ 6,957 362 $ 3,771
Issued in connection with the acquisition of
the Advantage Fund 1,604 14,819 -- -- -- --
Shares issued to shareholders in
reinvestment of distributions 68 642 32 384 27 284
Shares reacquired (300) (2,852) (161) (1,935) (120) (1,249)
-------- --------- -------- --------- -------- ----------
Net increase 1,748 $16,198 446 $ 5,406 269 $ 2,806
======== ========= ======== ========= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Virginia Fund West Virginia Fund
---------------------------------------
Year Ended March 31, 1997 (000 Omitted) Shares Amount Shares Amount
========================================= ======== ========= ======== ==========
<S> <C> <C> <C> <C>
Shares sold 552 $ 6,182 218 $ 2,474
Shares issued to shareholders in
reinvestment of distributions 51 567 35 397
Shares reacquired (375) (4,195) (167) (1,902)
-------- --------- -------- ----------
Net increase 228 $ 2,554 86 $ 969
======== ========= ======== ==========
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount
========================================= ======== ========= ======== ==========
Shares sold 706 $ 8,043 317 $ 3,621
Shares issued to shareholders in
reinvestment of distributions 43 494 30 346
Shares reacquired (199) (2,269) (127) (1,455)
-------- --------- -------- ----------
Net increase 550 $ 6,268 220 $ 2,512
======== ========= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
Class C North Carolina Fund Virginia Fund
----------------------------------------
Year Ended March 31, 1997 (000 Omitted) Shares Amount Shares Amount
========================================= =================== ======== ==========
<S> <C> <C> <C> <C>
Shares sold 191 $ 2,228 93 $ 1,033
Shares issued to shareholders in
reinvestment of distributions 24 274 9 102
Shares reacquired (350) (4,084) (114) (1,277)
------------------- -------- ----------
Net decrease (135) $(1,582) (12) $ (142)
=================== ======== ==========
Year Ended March 31, 1996 (000 Omitted) Shares Amount Shares Amount
========================================= =================== ======== ==========
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
=================== ======== ==========
</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 $400 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 each of the Funds for the year ended March 31, 1997, ranged from $0 to
$4,781.
(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.
66
<PAGE>
Notes to Financial Statements - continued
Futures Contracts
<TABLE>
<CAPTION>
Unrealized
Fund Description Expiration Contracts Position Depreciation
===================== ================================== ============ =========== ===============
<S> <C> <C> <C> <C> <C>
South Carolina Fund Municipal Bond Index June 1997 20 Long $40,726
</TABLE>
At March 31, 1997, the South Carolina 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, 1997:
<TABLE>
<CAPTION>
Principal
Amount Unrealized
Fund Description Index (000 Omitted) Value Depreciation
===================== ========================================= ================================= ============= ==============
<S> <C> <C> <C> <C> <C>
South Carolina Fund Puerto Rico Telephone Authority
Rev., AMBAC, 5.87s, 2004 J.J. Kenny $1,000 $ 965,840 $ 34,160
Tennessee Fund Puerto Rico Public Building Authority,
Public Education & Health Refunding,
6.45s, 2016 PSA Municipal Swap $2,000 $1,874,880 $125,120
Puerto Rico Telephone Authority
Rev., 5.87s, 2004 J.J. Kenny $2,000 $1,931,680 $ 68,320
</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,
1997, the North Carolina Fund owned the following restricted security
(constituting 0.32% of its net assets). The North Carolina 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.
<TABLE>
<CAPTION>
Principal
Date of Amount
Fund Description Acquisition (000 Omitted) Cost Value
===================== ===================================== ============== ============== ============= ============
<S> <C> <C> <C> <C> <C>
North Carolina Fund Pasquotank County, NC, Certificates
of Participation, MBIA, 5s, 2015 12/14/95 $1,500 $1,398,430 $1,362,780
</TABLE>
(9) Acquisition
At close of business on April 28, 1995, the New York Fund acquired all 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
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.
67
<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 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,
and MFS West Virginia Municipal Bond Fund (portfolios of MFS Municipal Series
Trust) as of March 31, 1997, the related statements of operations for the
year then ended, the statements of changes in net assets for the years ended
March 31, 1997 and 1996, and the financial highlights for each of the years
in the three-year period ended March 31, 1997, the two months ended March 31,
1994, and each of the years in the seven-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, 1997 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, 1997,
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 25, 1997
------------------------------------------------
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.
68
<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 advisers)
Walter E. Robb, III - President and Treasurer, Benchmark Advisors, Inc.
(corporate financial consultants); President, Benchmark Consulting Group, Inc.
(office services); 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*
Assistant Treasurer
James O. Yost*
*Affiliated with the Investment Adviser
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.
World Wide Web
www.mfs.com
[Dalbar logo]
For the third year in a row, MFS earned a #1 ranking in the DALBAR, Inc.
Broker/Dealer Survey, Main Office Operations Service Quality Category. The firm
achieved a 3.48 overall score on a scale of 1 to 4 in the 1996 survey. A total
of 110 firms responded, offering input on the quality of service they received
from 29 mutual fund companies nationwide. The survey contained questions about
service quality in 15 categories, including "knowledge of phone service
contacts," "accuracy of transaction processing," and "overall ease of doing
business with the firm."
<PAGE>
MFS(R) Municipal [Dalbar logo]
Series Trust
500 Boylston Street
Boston, MA 02116-3741
MFS(R) Mississippi Municipal Bond Fund
MFS(R) New York Municipal Bond Fund
MFS(R) North Carolina Municipal Bond Fund
MFS(R) Pennsylvania 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
[Logo MFS(R) INVESTMENT MANAGEMENT]
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
58/258
52/252
41/241/341
30/230
42/242
53/253
43/243/343
44/244
MST-2B-5/97-51M
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
<PAGE>
PROSPECTUS
August 1, 1997
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 ................................................ 12
7. Information Concerning Shares of the Fund ............................. 14
Purchases ........................................................ 14
Exchanges ........................................................ 19
Redemptions and Repurchases ...................................... 20
Distribution Plan ................................................ 22
Distributions .................................................... 24
Tax Status ....................................................... 24
Net Asset Value .................................................. 25
Description of Shares, Voting Rights and Liabilities ............. 25
Performance Information .......................................... 26
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,
COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT
RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY
CONSIDER THESE RISKS BEFORE INVESTING (see "Investment Objective and Policies"
below). The minimum initial investment generally is $1,000 per account (see
"Information Concerning Shares of the Fund -- 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, 1997, 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) ..................................................... 0.31% 0.31% 0.31%
---- ---- ----
Total Operating Expenses .............................................. 1.31% 2.06% 2.06%
</TABLE>
- ------------
(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 "Information Concerning Shares of the Fund -- Purchases"
below.
(2) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), 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 Class A distribution fee will
commence on such date as the Trustees of the Trust may determine.
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. See "Information Concerning Shares of the Fund
-- Distribution Plan" below.
(3) The Fund's Distribution Plan provides 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
and Class C shares, respectively. Distribution expenses paid under the
Distribution Plan with respect to Class B or Class C shares, 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. See "Information Concerning Shares of the Fund -- Distribution
Plan" below.
(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>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
- ------ ------- -------------------- -------------------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year ............................... $ 60 $ 61 $ 21 $ 31 $ 21
3 years .............................. 87 95 65 65 65
5 years .............................. 116 131 111 111 111
10 years .............................. 198 219(2) 219(2) 239 239
</TABLE>
- ------------
(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.
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
Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
2. THE FUND
The Fund is a 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 for sale 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 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 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.
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, YEAR ENDED YEAR ENDED MARCH 31, YEAR ENDED
------------------------------------- NOVEMBER 30,------------------------------------ NOVEMBER 30,
1997 1996 1995 1994+++ 1993** 1997 1996 1995 1994+++ 1993
---- ---- ---- ------- ----------- ---- ---- ---- ------- ----------
CLASS A CLASS B
---------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period .................. $ 8.62 $ 8.56 $ 8.56 $ 8.99 $ 9.15 $ 8.63 $ 8.57 $ 8.56 $ 8.99 $ 8.73
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ... $ 0.49 $ 0.51 $ 0.50 $ 0.15 $ 0.12 $ 0.43 $ 0.43 $ 0.44 $ 0.14 $ 0.42
Net realized and unrealized
gain (loss) on investments (0.12) 0.05 0.02 (0.51) (0.16) (0.13) 0.06 -- (0.51) 0.42
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ............. $ 0.37 $ 0.56 $ 0.52 $(0.36) $(0.04) $ 0.30 $ 0.49 $ 0.44 $(0.37) $ 0.84
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income.. $(0.49) $(0.50)(++)$(0.52) $(0.02) $(0.11) $(0.42) $(0.43)(++) $(0.43) $(0.01) $(0.45)
From net realized gain on
investments .............. -- -- -- (0.01) -- -- -- -- (0.01) (0.10)
In excess of net investment
income ................... -- -- -- -- -- -- -- -- -- (0.03)
In excess of net realized
gain on investments ......
-- -- -- ++ (0.04) (0.01) -- -- -- (0.04) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.49) $(0.50) $(0.52) $(0.07) $(0.12) $(0.42) $(0.43) $(0.43) $(0.06) $ (0.58)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end of
period ..................... $ 8.50 $ 8.62 $ 8.56 $ 8.56 $ 8.99 $ 8.51 $ 8.63 $ 8.57 $ 8.56 $ 8.99
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN(+) .............. 4.28% 6.81% 6.33% (7.90)%+ (1.80)%+ 3.44% 5.87% 5.32% (8.97)%+ 9.95%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:(S)
Expenses## ................. 1.31% 1.28% 1.13% 1.07% + 0.76%+ 2.11% 2.13% 2.16% 2.24% + 2.11%
Net investment income ...... 5.75% 5.75% 6.20% 5.31% + 4.94%+ 4.95% 4.90% 5.15% 4.74% + 4.92%
PORTFOLIO TURNOVER ........... 30% 23% 25% 9% 30% 30% 23% 25% 9% 30%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .............. $152,039 $121,903 $25,270 $5,595 $461 $226,138 $306,889 $412,965 $479,478 $518,179
**For the period from the commencement of offering 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, 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.
(+)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.
(++)Includes distributions in excess of net investment income of $0.0003 per share for Class A and Class B shares for the
year ended March 31, 1996.
(S)The distributor did not impose the Class A distribution fee of 0.10% per annum 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.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
CLASS B AND CLASS C SHARES
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, YEAR ENDED MARCH 31,
-------------------------------------------------------------- ------------------------------------
1992 1991 1990 1989 1988 1987* 1997 1996 1995 1994**
CLASS B CLASS C
-------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period ... $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.47 $ 8.64 $ 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 $ 0.43 $ 0.44 $ 0.09
Net realized and
unrealized gain
(loss) on investments
..................... 0.26 0.25 (0.15) 0.30 0.43 (0.83) (0.12) 0.07 0.01 (0.59)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ........ $ 0.73 $ 0.74 $ 0.34 $ 0.81 $ 0.93 $(0.45) $ 0.31 $ 0.50 $ 0.45 $(0.50)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders
From net investment
income .................. $(0.48) $(0.49) $(0.50) $(0.51) $(0.49) $(0.35) $(0.43) $(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) $(0.49) $(0.35) $(0.43) $(0.43) $(0.44) $(0.01)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................ $ 8.73 $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.52 $ 8.64 $ 8.57 $ 8.56
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN ............ 8.82% 9.21% 4.18% 10.24% 12.53% (5.79)%+ 3.62% 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%+ 2.06% 2.05% 2.09% 2.18%+
Net investment income . 5.50% 5.82% 5.99% 6.09% 6.38% 6.00%+ 5.00% 4.95% 5.23% 4.62%+
PORTFOLIO TURNOVER ...... 52% 73% 91% 127% 171% 138% 30% 23% 25% 9%
NET ASSETS AT END OF
PERIOD
(000 OMITTED) ......... $449,949 $409,084 $379,239 $343,887 $244,825 $183,935 $19,159 $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.
(++)Includes distributions in excess of net investment income of $0.0003 per share for 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 net assets under normal circumstances) in debt securities
issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
or instrumentalities, the interest on which is exempt from federal income tax
("Municipal 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"), by 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");
(ii) notes of issuers having an issue of outstanding Municipal Bonds
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;
(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 four highest grades of S&P, Fitch, Duff & Phelps 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, Duff & Phelps 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, 1997, 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 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"). A determination is made, 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, retains
oversight, focusing on factors such as valuation, liquidity and availability
of information. Investing in Rule 144A securities 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, Duff &
Phelps 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, Duff & Phelps 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
Additional information about certain of the investment techniques described
below can be found under the caption "Investment Techniques" in the SAI.
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).
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).
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 liquid assets equal to the amount of the commitments to
purchase "when-issued" securities.
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.
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.
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 changes in the value of 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 and could involve the loss
of all or a portion of the principal amount of the investment.
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.
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. However, the writing of options
constitutes only a partial hedge, up to the amount of premium, less any
transaction costs. 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. 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.
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").
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 Conduct
Rules 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"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. 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, 1997, the investment advisory fees received under
the Advisory Agreement were $3,180,446 (of which $1,265,934 was based on
average daily net assets and $1,914,512 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 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 Institutional Advisors, 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 $60.39 billion on behalf of approximately 2.6 million investor
accounts as of June 30, 1997. As of such date, the MFS organization managed
approximately $36.5 billion of assets invested in equity securities and
approximately $19.6 billion of assets invested in fixed income securities.
Approximately $6.0 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 Donald A. Stewart. 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 Stewart 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, Daniel E. McManus,
Geoffrey L. Schechter, David B. Smith, W. Thomas London, Stephen E. Cavan,
James R. Bordewick, Jr., James O. Yost, Ellen M. Moynihan and Mark E. Bradley,
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. MFS and Foreign & Colonial each have investment personnel
working in each other's offices in Boston and London, respectively.
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.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, the Fund pays MFS an administrative fee of up to 0.015%
per annum of the Fund's average daily net assets. This fee reimburses MFS for
a portion of the costs it incurs to provide such services.
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
Class A, Class B and Class C shares of the Fund may be purchased at the public
offering price through any dealer. As used in the Prospectus and any
appendices thereto, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser, financial
planner and any other financial institutions having a selling agreement or
other similar agreement with MFD. Dealers may also charge their customers fees
relating to investments in the Fund.
This Prospectus offers 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**
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*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.
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 five 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, prior to July 1, 1996: (a) the plan had established
an account with the Shareholder Servicing Agent and (b) the
sponsoring organization had demonstrated to the satisfaction of MFD
that either (i) the employer had at least 25 employees or (ii) the
aggregate purchases by the retirement plan of Class A shares of
Funds in the MFS Funds would 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;
(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 PURCHASE 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; AND.
(v) 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, 1997; (b) such plan's
records are maintained on a pooled basis by the Shareholder Servicing
Agent; and (c) the sponsoring organization demonstrates to the
satisfaction of MFD that, at the time of purchase the employer has at
least 200 eligible employees and the plan has aggregate assets of at
least $2,000,000.
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, and certifies to, 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
Distribution Plan (see "Distribution Plan" 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 Fund's 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 organization 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 Fund's Distribution
Plan (see "Distribution Plan" 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 Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" 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.
SUBSEQUENT INVESTMENT BY TELEPHONE. Each shareholder may purchase
additional shares of any MFS Fund by telephoning the Shareholder Servicing
Agent toll-free at (800) 225-2606. The minimum purchase amount is $50 and the
maximum purchase amount is $100,000. Shareholders wishing to avail themselves
of this telephone purchase privilege must so elect on their Account
Application and designate thereon a bank and account number from which
purchases will be made. If a telephone purchase request is received by the
Shareholder Servicing Agent on any business day prior to the close of regular
trading on the Exchange (generally, 4:00 p.m., Eastern time), the purchase
will occur at the closing net asset value of the shares purchased on that day.
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.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserves
the right to reject or restrict any specific purchase or exchange request. In
the event that the Fund or MFD rejects an exchange request, neither the
redemption nor the purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more
exchange requests out of the Fund per calendar year and (ii) any one of such
exchange requests represents shares equal in value to 1/2 of 1% or more of
the Fund's net assets at the time of the request. Accounts under common
ownership or control, including accounts administered by market timers, will
be aggregated for purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request, and, in addition, may impose
specific limitations with respect to market timers, including delaying for up
to seven days the purchase side of an exchange request by market timers or
specifically rejecting or otherwise restricting purchase and exchange requests
by market timers. In the event that any individual or entity is determined
either by the Fund or MFD, in its sole discretion, to be a market timer with
respect to any calendar year, the Fund and/or MFD will reject all exchange
requests into the Fund during the remainder of that calendar year. Other funds
in the MFS Funds may have different and/or more restrictive policies with
respect to market timers than the Fund. These policies are disclosed in the
prospectuses of these other MFS Funds.
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.
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.
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: The Trust agrees to redeem shares of the Fund
solely in cash up to the lesser of $250,000 or 1% of the net asset value of
the Fund during any 90-day period for any one shareholder. The Fund has
reserved the right to pay other redemptions, 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 or exchanges, 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 PLAN
The Trustees have adopted a Distribution Plan 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 Plan"), after having concluded that there is a reasonable
likelihood that the Plan 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 CLASS OF SHARES: There are features of the
Distribution Plan that are common to each class of shares, as described below.
SERVICE FEES. The 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 the
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. The Distribution Plan provides that the Fund may pay
MFD a distribution fee based on the average daily net assets attributable to
the Designated Class as partial consideration for distribution services
performed and expenses incurred in the performance of MFD's obligations under
its distribution agreement with the Fund. 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 Plan, as does the
use by MFD of such distribution fees. Such amounts and uses are described
below in the discussion of the provisions of the Distribution Plan relating to
each class of shares. 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 the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The provisions of the Distribution Plan relating to operating policies
as well as initial approval, renewal, amendment and termination are
substantially identical as they relate to each class of shares covered by the
Distribution Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. 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 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 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 SHARES. 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 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 SHARES. Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Information Concerning Shares
of the Fund -- 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 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 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. Because the
Fund intends to distribute all of its net investment income and net realized
capital gains to its shareholders in accordance with the timing requirements
imposed by the Code, it is not expected that the Fund will be required to pay
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 the distribution is paid in cash or reinvested in
additional shares. 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, and 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 affect a corporate
shareholder's alternative minimum tax liability. 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.
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 year, including 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, 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) and the amount, if
any, of federal income tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution of
net capital gains or net short-term capital gains may thus pay the full price
for the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund
is also required in certain circumstances to apply backup withholding at the
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. Backup
withholding will not, however, be applied to payments that have been subject
to 30% withholding. Prospective investors should read the Fund's 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 which it offers to the general public,
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 the 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. The Fund offers multiple classes of shares which were initially
offered for sale to the public on different dates. The calculation of total
rate of return for a class of shares which initially was offered for sale to
the public subsequent to another class of shares of the Fund is based both on
(i) the performance of the Fund's newer class from the date it initially was
offered for sale to the public and (ii) the performance of the Fund's oldest
class from the date it initially was offered for sale to the public up to the
date that the newer class initially was offered for sale to the public. See
the SAI for further information on the calculation of total rate of return for
share classes initially offered for sale to the public on different dates.
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,
1997, 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 Class A, B and C
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 on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur
on the first business day of the month. 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 six 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 Distribution Plan, (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). As used in this Appendix, the term "dealer" includes any
broker, dealer, bank (including bank trust departments), registered investment
adviser, financial planner and any other financial institutions having a
selling agreement or similar agreement with MFS Fund Distributors Inc.
("MFD").
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
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o 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:
o Officers, eligible directors, employees (including retired employees)
and agents of Massachusetts Financial Services Company ("MFS"), Sun
Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
o Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
o 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
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o 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")
o Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of 401(a) or ESP Plan participant;
o Loan from 401(a) or ESP Plan;
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o 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
o 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")
o Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o 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
o 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.
7. LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).
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. WRAP ACCOUNT INVESTMENTS AND OTHER SIMILAR PROGRAMS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund marketplace account or
a similar program under which such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans or trust accounts 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
o 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
o Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(a) PLANS
o Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
o 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
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs
where the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account value at the time of
establishment.
2. DEATH OF OWNER
o 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
o 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
o 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")
o 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
o 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.
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.
<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 1997)
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 1997. (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* TAX-EXEMPT YIELD
- ------------------------------------------------------ INCOME -----------------------------------------------------------
SINGLE JOINT TAX
1997 1997 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%
---- ---- --------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24,650 $ 0 - 41,200 15.0% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 24,650 - 59,750 $ 41,200 - 99,600 28.0% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11%
$ 59,750 - 124,650 $ 99,600 - 151,750 31.0% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59%
$124,650 - 271,050 $151,750 - 271,050 36.0% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50%
$271,050 & Over $271,050 & Over 39.6% 4.97% 6.62% 8.28% 9.93% 11.59% 13.25%
</TABLE>
*Net amount subject to Federal personal income tax after deductions and
exemptions.
**Effective Federal Tax Bracket.
<PAGE>
APPENDIX E
MFS MUNICIPAL INCOME FUND
PORTFOLIO COMPOSITION CHART
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
The table below shows the percentages of the Fund's assets at March 31, 1997,
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 39.41% 1.41% 40.82%
AA/Aa 13.43 0.00 13.43
A/A 12.99 0.00 12.99
BBB/Baa 11.30 0.28 11.58
BB/Ba 10.43 4.27 14.70
B/B 0.56 5.53 6.09
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 88.12% 11.88% 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>
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
[Logo]
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) MUNICIPAL INCOME FUND
500 Boylston Street
Boston, MA 02116
MFS(R) MUNICIPAL INCOME FUND
Prospectus
August 1, 1997
MMI-1-8/97/55M 02/202/302
<PAGE>
[GRAPHIC OMITTED]
MFS(R) MUNICIPAL STATEMENT OF
INCOME FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) August 1, 1997
- --------------------------------------------------------------------------------
Page
1. Definitions ......................................................... 2
2. Investment Techniques ............................................... 2
3. Investment Restrictions ............................................. 8
4. Management of the Fund .............................................. 9
Trustees ......................................................... 9
Officers ......................................................... 10
Trustee Compensation Table ....................................... 10
Investment Adviser ............................................... 11
Administrator .................................................... 11
Custodian ........................................................ 11
Shareholder Servicing Agent ...................................... 12
Distributor ...................................................... 12
5. Portfolio Transactions and Brokerage Commissions .................... 13
6. Shareholder Services ................................................ 14
Investment and Withdrawal Programs ............................... 14
Exchange Privilege ............................................... 16
Tax-Deferred Retirement Plans .................................... 16
7. Tax Status .......................................................... 16
8. Determination of Net Asset Value; Performance Information ........... 18
9. Distribution Plan ................................................... 20
10. Description of Shares, Voting Rights and Liabilities ................ 21
11. Independent Auditors and Financial Statements ....................... 22
12. Appendix A .......................................................... A-1
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, 1997. 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, 1997,
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 liquid assets 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 liquid assets in a segregated account with its
custodian. A put option written by the Fund is "covered" if the Fund maintains
liquid assets 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 liquid assets 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 liquid
assets. 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 liquid assets 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 liquid assets 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 liquid assets 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 to effectively 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 net 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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN (born 3/11/37)
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 (born 6/15/27)
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 (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III (born 8/18/26)
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* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President
Address: One Liberty Square, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
CYNTHIA M. BROWN*, Vice President (born 6/27/57)
Massachusetts Financial Services Company, Senior Vice President
ROBERT A. DENNIS*, Vice President (born 12/12/48)
Massachusetts Financial Services Company, Senior Vice President
GEOFFREY L. SCHECHTER*, Vice President (born 12/17/62)
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 (born 7/26/61)
Massachusetts Financial Services Company, Vice President
DANIEL E. McMANUS*, Assistant Vice President (born 2/15/61)
Massachusetts Financial Services Company, Assistant Vice President
STEPHEN E. CAVAN*, Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.*, Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
W. THOMAS LONDON*, Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President and Assistant
Treasurer
JAMES O. YOST*, Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994).
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touche LLP, Senior Manager (until September 1996).
- ----------
*"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.
TRUSTEE COMPENSATION TABLE
RETIREMENT
BENEFIT TOTAL TRUSTEE
ACCRUED AS ESTIMATED FEES FROM FUND
TRUSTEE FEES PART OF FUND CREDITED YEARS AND FUND
TRUSTEE FROM FUND(1) EXPENSE(1) OF SERVICE(2) COMPLEX(3)
- -----------------------------------------------------------------------------
Richard B. Bailey $3,275 $ 837 10 $247,168
A. Keith Brodkin --0-- --0-- N/A --0--
Marshall N. Cohan 4,400 1,845 14 149,258
Lawrence H. Cohn 3,950 547 18 136,508
J. David Gibbons 3,950 1,460 13 136,508
Abby M. O'Neill 3,500 670 10 123,758
Walter E. Robb, III 4,400 2,050 15 149,258
Arnold D. Scott --0-- --0-- N/A --0--
Jeffrey L. Shames --0-- --0-- N/A --0--
J. Dale Sherratt 5,525 615 20 149,258
Ward Smith 5,525 820 13 149,258
- ------------
(1) For fiscal year ended March 31, 1997.
(2) Based on normal retirement age of 75.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 41 funds within the MFS Fund complex (having aggregate net
assets at December 31, 1996, of approximately $15.0 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS Fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
----------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- ------------------------------------------------------------------------------
$2,947 $442 $ 737 $1,032 $1,474
3,573 536 893 1,251 1,787
4,199 630 1,050 1,470 2,100
4,825 724 1,206 1,689 2,413
5,451 818 1,363 1,908 2,726
6,077 912 1,519 2,127 3,039
- ------------
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
As of July 1, 1997, the Trustees and officers, as a group, owned less than 1%
of the outstanding shares of the Fund. As of July 1, 1997, Merrill Lynch
Pierce Fenner & Smith Inc., P.O. Box 45286, Jacksonville, FL owned 12.08%,
6.63% and 13.37% of the outstanding Class A, Class B and Class C shares of the
Fund, respectively. Also as of July 1, 1997, Smith Barney, Inc., 388 Greenwich
Street, New York, New York, owned 6.03% 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"). Under the Advisory Agreement, the Adviser provides the Fund with
overall investment advisory services. 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.
For the Fund's fiscal year ended March 31, 1997, MFS received $3,180,446 on an
annualized basis (of which $1,265,934 was based on average daily net assets
and $1,914,512 on gross income) under the Advisory Agreement.
For the Fund's fiscal year ended March 31, 1996, MFS received $3,495,983 on an
annualized basis (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 on an
annualized basis (of which $1,390,697 was based on average daily net assets
and $2,154,549 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,
1998, 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.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997. Under this Agreement,
the Fund pays MFS an administrative fee of up to 0.015% per annum of the
Fund's average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services. For the period ended March 31, 1997,
MFS received $4,646 under the Agreement, equivalent to 0.001% of the Fund's
average daily net assets.
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 the Fund at an
effective annual rate of 0.13%. 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. 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, 1997, MFD and dealers and certain other
financial institutions received sales charges of $20,133 and $94,349,
respectively (as their concession on gross sales charges of $114,482), for
selling Class A shares of the Fund. The Fund received $9,371,851 representing
the aggregate net asset value of such 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 fiscal years ended March 31, 1997, 1996 and 1995, the contingent
deferred sales charge ("CDSC") imposed on redemption of Class B shares was
$492,585, $634,226 and $708,357, respectively. During the fiscal year ended
March 31, 1997, the CDSC imposed on the redemption of Class C shares was
$5,259.
The Distribution Agreement will remain in effect until August 1, 1998 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.
Consistent with the foregoing primary consideration, the Conduct Rules of the
National Association of Securities Dealers, Inc. ("NASD") and such other
policies as the Trustees may determine, the Adviser may consider sales of
shares of the Fund and of the other investment company clients of MFD as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
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 $39,100 of commission business
from the MFS Funds to the Pershing Division of Donaldson, Lufkin & Jenrette as
consideration for the annual renewal of certain publications provided by
Lipper Analytical Securities Corporation (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, 1997, 1996, and March 31, 1995, 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 Class A, B and C 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-
free at (800) 225-2606. The minimum purchase amount is $50 and the maximum
purchase amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application and
designate thereon a bank and account number from which purchases will be made.
If a telephone purchase request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. 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.
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 six
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 and if the purchaser is eligible
to purchase the class of shares) 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 both 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 of the Fund
and may differ from the percentage of distributions consisting of tax-exempt
interest in any particular month. Shareholders are required to report exempt-
interest dividends received from the Fund on their federal income tax returns.
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. However, the Fund does not expect that the non-tax-exempt
portion of its 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 are taxable to
shareholders as ordinary income for federal income tax purposes, whether the
distributions are made in cash or reinvested in 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 reinvested in additional shares, are taxable to shareholders as long-
term capital gains for federal income tax purposes without regard to the
length of time shareholders have held their shares. Any Fund dividend that is
declared in October, November, or December of any calendar year, that is
payable to shareholders of record in such a month, and that is paid the
following January will be treated as if received by shareholders on December
31 of the year in which the dividend is declared. The Fund will notify
shareholders regarding the federal tax status of its distributions after the
end of each calendar year.
Any Fund distribution of net capital gains or net short-term capital gains
will have the effect of reducing the per share net asset value of shares in
the Fund by the amount of the distribution. Shareholders purchasing shares
shortly before the record date of any such distribution may thus pay the full
price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution.
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 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 a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Fund held for
six months or less will be disallowed to the extent of any exempt-interest
dividends received with respect to those shares. If not disallowed, any such
loss will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within 90 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. Any
investment in zero coupon bonds and certain securities purchased at a market
discount will cause the Fund to recognize income prior to the receipt of cash
payments with respect to 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 that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40% short-
term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles" and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods
of Fund securities, and conversion of short-term into long-term capital
losses. Certain tax elections exist for straddles that may alter the effects
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 the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable
treaty. Any amounts overwithheld may be recovered by such persons by filing a
claim for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims. Distributions received from the Fund by Non-U.S.
Persons may also be subject to tax under the laws of their own jurisdictions.
The Fund is also required in certain circumstances to apply backup withholding
at the rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder including a non-U.S. person who does not furnish to the Fund
certain information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
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. Each shareholder is
advised to consult his own tax adviser regarding the exemption of exempt-
interest dividends under applicable state and local law.
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, Martin Luther
King 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 Stock Market, 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) 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 on
Class A shares) 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 Fund offers multiple classes of shares which were initially offered for
sale to the public on different dates. The calculation of total rate of return
for a class of shares which initially was offered for sale to the public
subsequent to another class of shares of the Fund is based both on (i) the
performance of the Fund's newer class from the date it initially was offered
for sale to the public and (ii) the performance of the Fund's oldest class
from the date it initially was offered for sale to the public up to the date
that the newer class initially was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares differ.
In calculating total rate of return for a newer class of shares in accordance
with certain formulas required by the SEC, the performance will be adjusted to
take into account the fact that the newer class is subject to a different
sales charge than the oldest class (e.g., if the newer class is Class A
shares, the total rate of return quoted will reflect the deduction of the
initial sales charge applicable to Class A shares; if the newer class is Class
B shares, the total rate of return quoted will reflect the deduction of the
CDSC applicable to Class B shares). However, the performance will not be
adjusted to take into account the fact that the newer class of shares bears
different class specific expenses than the oldest class of shares (e.g., Rule
12b-1 fees). Therefore, the total rate of return quoted for a newer class of
shares will differ from the return that would have been quoted had the newer
class of shares been outstanding for the entire period over which the
calculation is based (i.e., the total rate of return quoted for the newer
class will be higher than the return that would have been quoted had the newer
class of shares been outstanding for the entire period over which the
calculation is based if the class specific expenses for the newer class are
higher than the class specific expenses of the oldest class, and the total
rate of return quoted for the newer class will be lower than the return that
would be quoted had the newer class of shares been outstanding for this entire
period if the class specific expenses for the newer class are lower than the
class specific expenses of the oldest class).
Total rate of return quotations for each class of shares are presented in
Appendix A attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS
The performance results in Appendix A attached hereto under the heading
"Performance Results" for Class B shares assume an initial investment of
$10,000 in Class B shares, cover the period from January 1, 1987 through
December 31, 1996. 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).
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.
Yield quotations for each class of shares is presented in Appendix A attached
hereto under the heading "Performance Quotations."
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.
Tax-equivalent yield for each class of shares is presented in Appendix A
attached hereto under the heading "Performance Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class
are reflected in the quoted "current distribution rate" for that class. The
current distribution rate for a class is computed by dividing the total amount
of dividends per share paid by the Fund to shareholders of that class during
the past 12 months by the maximum public offering price of that class at the
end of such period. Under certain circumstances, such as when there has been a
change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during
the past 12 months. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing,
short-term capital gains and return of invested capital, and is calculated
over a different period of time. The Fund's current distribution rate
calculation for Class A shares assumes a maximum sales charge of 4.75%.
Current distribution rate quotations for each class of shares are presented in
Appendix A attached hereto under the heading "Performance Quotations."
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
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 PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act
and Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and
the respective class of shareholders. The provisions of the Distribution Plan
are severable with respect to each class of shares offered by the Fund. The
Distribution Plan is 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 Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, 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 Class B shares, 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 the 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 Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expense and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR:
During the fiscal year ended March 31, 1997, 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
CLASSES OF SHARES -----------------------------------------
Class A Shares $ 337,983 $ 74,623 $263,360
Class B Shares $2,700,976 $2,115,670 $585,306
Class C Shares $ 167,150 $ 11,658 $155,492
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, 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"). The Distribution Plan 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. The Distribution Plan 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 the Distribution Plan entered into between the Fund or
MFD and other organizations must be approved by the Board of Trustees,
including a majority of the Distribution Plan Qualified Trustees. Agreements
under the Distribution Plan 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. The Distribution Plan may not 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 not 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 Plan 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, 1997, the Statement of Assets and
Liabilities at March 31, 1997, the Statement of Operations for the year ended
March 31, 1997, the Statement of Changes in Net Assets for the years ended
March 31, 1997 and 1996, 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
PERFORMANCE INFORMATION
The performance results and quotations below 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. See
"Determination of Net Asset Value" in the SAI.
PERFORMANCE RESULTS -- CLASS B SHARES
<TABLE>
<CAPTION>
VALUE OF INITIAL VALUE OF CAPITAL VALUE OF REINVESTED
YEAR ENDED $10,000 INVESTMENT GAIN DISTRIBUTIONS DIVIDENDS TOTAL VALUE
---------- ------------------ ------------------ ------------------- -----------
<S> <C> <C> <C> <C>
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
December 31, 1996 ................................. 10,271 204 7,590 18,065
</TABLE>
Explanatory Notes: The results in the table assume that income dividends
and capital gain distributions were invested in additional shares. No
adjustment has been made for any income taxes, if any, payable by
shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are for the fiscal year ended March 31, 1997.
<TABLE>
<CAPTION>
TAX EQUIVALENT
AVERAGE ANNUAL TOTAL RETURNS 30-DAY YIELD CURRENT
-------------------------------- 30-DAY ---------------- DISTRIBUTION
1 YEAR 5 YEAR 10 YEAR YIELD 28% 31% RATE
------ ------ ------- ------ --- --- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Fund Class A with sales charge ........................ (0.67%) 5.21%(1) 5.76%(1) 5.25% 7.29% 7.61% 5.52%
Fund Class A without sales charge ..................... 4.28% 6.24%(1) 6.28%(1) - - - -
Fund Class B with CDSC ................................ (0.50%) 5.23% 5.94% - - - -
Fund Class B without CDSC ............................. 3.44% 5.56% 5.94% 4.72% 6.56% 6.84% 4.97%
Fund Class C with CDSC ................................ 2.63% 5.60%(2) 5.96%(2) - - - -
Fund Class C without CDSC ............................. 3.62% 5.60%(2) 5.96%(2) 4.74% 6.58% 6.87% 5.02%
</TABLE>
(1)Class A share performance includes the performance of the Fund's Class B
shares for periods prior to the commencement of offering of Class A shares
on September 7, 1993. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class B shares differ. Class A share
performance has been adjusted to reflect that Class A shares generally are
subject to an initial sales charge (unless the performance quotation does
not give effect to the initial sales charge) whereas Class B shares
generally are subject to a CDSC. Class A share performance has not,
however, been adjusted to reflect differences in operating expenses (e.g.,
Rule 12b-1 fees), which generally are higher for Class B shares.
(2)Class C share performance includes the performance of the Fund's Class B
shares for periods to the commencement of offering of Class C shares on
January 3, 1994. Sales charges, expenses and expense ratios, and therefore
performance, for Class B and Class C shares differ. Class C share
performance has been adjusted to reflect that Class C shares generally are
subject to a lower CDSC (unless the performance quotation does not give
effect to the CDSC) than Class B shares. Class C share performance has not,
however, been adjusted to reflect differences in operating expenses, which
generally are not significantly different between Class B and Class C
shares.
<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
[GRAPHIC OMITTED]
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) MUNICIPAL INCOME FUND
500 Boylston Street
Boston, MA 02116
MMI-13-8/97/525 02/202/302
<PAGE>
<PAGE>
[Logo] MFS SM Annual Report
INVESTMENT MANAGEMENT for Year Ended
March 31, 1997
MFS(R) MUNICIPAL INCOME FUND
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
A Discussion with the Portfolio Manager .................................... 2
Portfolio Manager's Profile ................................................ 5
Fund Facts ................................................................. 5
Performance Summary ........................................................ 6
Portfolio of Investments ................................................... 8
Financial Statements .......................................................15
Notes to Financial Statements ..............................................22
Independent Auditors' Report ...............................................28
Trustees and Officers ......................................................29
HIGHLIGHTS
* FOR THE YEAR ENDED MARCH 31, 1997, CLASS A SHARES OF THE FUND PROVIDED
A TOTAL RETURN AT NET ASSET VALUE OF 4.28%, CLASS B SHARES 3.44%, AND
CLASS C SHARES 3.62%.
* THE MUNICIPAL MARKET EXPERIENCED A QUIET YEAR, WITH NO MAJOR CREDIT
DISASTERS LIKE THE ORANGE COUNTY BANKRUPTCY OF 1994. FURTHERMORE, THE
FLAT-TAX SCARE OF 1995 FADED AWAY IN 1996, ALLOWING MUNICIPALS TO
OUTPERFORM U.S. TREASURIES ON A RELATIVE BASIS (ALTHOUGH PRINCIPAL
VALUE AND INTEREST ON TREASURY SECURITIES ARE GUARANTEED BY THE U.S.
GOVERNMENT IF HELD TO MATURITY).
* IN GENERAL, THE FINANCIAL STRENGTH AND CREDIT QUALITY OF MUNICIPAL
ENTITIES ARE BETTER THAN THEY HAVE BEEN IN MANY YEARS, A RESULT OF
STRONG REVENUE GROWTH, ECONOMIC EXPANSION, AND CONSERVATIVE FISCAL
MANAGEMENT.
* THE FUND'S AVERAGE DURATION (A MEASURE OF INTEREST-RATE SENSITIVITY)
IS APPROXIMATELY SEVEN YEARS, OR ABOUT 5% LESS THAN THAT OF THE LEHMAN
BROTHERS MUNICIPAL BOND INDEX, BECAUSE OF OUR CONCERN THAT THE PACE OF
ECONOMIC GROWTH MAY CAUSE THE FEDERAL RESERVE BOARD TO RAISE INTEREST
RATES AGAIN.
<PAGE>
LETTER FROM THE CHAIRMAN
- ---------------------------
[Photo of A. Keith Brodkin]
- ---------------------------
Dear Shareholders:
After more than six years of expansion, the U.S. economy is experiencing
another year of moderate growth in 1997, although a few signs point to the
possibility of a modest rise in inflation during the year. On the positive
side, the pattern of moderate growth and inflation set over the past few years
now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Also, gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be
seen in the continuing high levels of consumer debt and rising personal
bankruptcies, as well as in the ongoing tightness in the labor market, which
could add some inflationary pressures to the economy. Given these somewhat
conflicting indicators, we expect real (inflation-adjusted) growth to revolve
around 2% in 1997, with more strength occurring earlier in the year.
In the bond markets, conflicting signals over the strength of the economy
have created near-term volatility, and the Federal Reserve Board has begun
taking measured steps to control inflation by raising short-term interest
rates. Should additional signs of more rapid economic growth and,
particularly, of higher inflation appear, we would expect the Fed to continue
its anti-inflationary stance. While inflationary forces largely remained in
check in 1996, the continued strength in the labor market means that a pickup
in inflation is still possible. At the same time, the U.S. budget deficit
continues to decline and, as a percentage of gross domestic product, is now
less than 2%, which we consider a positive development for the bond markets.
Although interest rates may move higher over the coming months, we believe
that, at current levels, fixed-income markets remain equitably valued.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[Graphic Omitted]
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
April 14, 1997
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Graphic Omitted]
Geoffrey L. Schechter
For the year ended March 31, 1997, Class A shares of the Fund provided a total
return of 4.28%, Class B shares 3.44%, and Class C shares 3.62%. These returns
assume the reinvestment of distributions but exclude the effects of any sales
charges and compare to a 5.43% return for the Lehman Brothers Municipal Bond
Index (the Lehman Index), an unmanaged index of national municipal bond
investments rated "Baa" or higher, and a 4.81% return for the average tax-
exempt municipal bond fund as reported by Lipper Analytical Services, an
independent firm that reports mutual fund performance.
Q. WHAT DO YOU SEE AS SOME OF THE REASONS FOR THIS PERFORMANCE?
A. There were two primary reasons. The first was the Fund's defensive posture
during the fall of 1996. At that time, investors in the fixed-income markets
were concerned that the pace of economic growth, combined with low
unemployment, would lead to an increase in the rate of inflation. However, the
markets rallied strongly when subsequent economic data pointed to a moderation
in growth, thereby allaying inflationary concerns. The second cause of the
underperformance was deterioration in the value of a couple of the Fund's
holdings due to credit concerns. These issues have since been resolved.
Q. IN GENERAL, HOW WOULD YOU DESCRIBE THE PAST YEAR'S FIXED-INCOME
ENVIRONMENT?
A. "Volatile" best describes that environment. Yields on the 30-year U.S.
Treasury bond, a proxy for the fixed-income markets, traded in a range between
6.35% and 7.20%. Rates generally rose during the spring and summer due to
concerns that strong growth would lead to an increase in inflation. Rates then
fell during the fall as economic growth moderated, hitting their lows in
November. Most recently, rates have been rising as inflation fears have
resurfaced in light of the recent uptick in economic activity and the Federal
Reserve Board's decision to raise interest rates.
Q. AND WHAT ABOUT THE MUNICIPAL ENVIRONMENT? HAVE YOU SEEN ANY IMPORTANT
DEVELOPMENTS THERE?
A. The municipal bond market had a very quiet year, especially compared to the
previous three years, with no major credit disasters like the Orange County
bankruptcy of 1994. Furthermore, the flat-tax scare of 1995 faded away in
1996, allowing municipals to outperform U.S. Treasuries on a relative basis
(although principal value and interest on Treasury securities are guaranteed
by the U.S. government if held to maturity). As of March 31, 1997, the ratio
of "Aaa"-rated tax-exempt securities to the 30-year U.S. Treasury bond stood
at approximately 80%, down significantly from the 86% ratio at the beginning
of the fiscal year.
Q. HOW WOULD YOU DESCRIBE THE CURRENT CONDITION OF THE MUNICIPAL MARKET, IN
TERMS OF FINANCIAL STRENGTH AND QUALITY OF ISSUES?
A. In general, the financial strength and credit quality of municipal entities
are better than they have been in many years. This can be attributed to the
combination of strong revenue growth at the state and local levels, the
economic expansion of the past six years, and conservative fiscal management,
an offspring of lessons learned during the recession of the late 1980s.
Q. LAST YEAR, WE SAW A FAIRLY DRAMATIC DECLINE IN THE YIELD RATIO OF THE
MUNICIPAL MARKET TO COMPARABLE-MATURITY U.S. TREASURIES. WHY DID THIS HAPPEN,
AND WHERE DOES THAT RATIO STAND NOW?
A. As we mentioned briefly above, tax-exempt securities outperformed U.S.
Treasuries during the past 12 months. This was primarily due to the
diminishment of the flat-tax scare. Also, there was a reduction in the
tradeable supply of municipal bonds. For the third straight year, more bonds
were redeemed, were due to mature, or were being called in before maturity
than were issued. This caused a decline in the number of outstanding municipal
bonds. The market also saw strong demand from property and casualty insurance
companies, resulting from their profitability and need for tax-exempt income.
Individual investors were also a factor in the municipal market's strong
relative performance, especially when yield levels approached 6%.
Q. DO YOU EXPECT TO SEE MUCH CHANGE IN THE 80% RATIO OF TOP-RATED MUNICIPALS
TO COMPARABLE-MATURITY TREASURIES IN THE COMING YEAR? IF SO, WHY?
A. We expect the ratio to remain at or near the current 80% level. However,
events that might cause a dramatic change in this ratio cannot be foreseen.
For example, a re-emergence of significant tax-reform proposals in Washington
or a credit disaster on the scale of the Orange County bankruptcy would shake
investors' confidence. At this time, we do not foresee any such event and,
thus, we believe municipals will maintain their recent valuations relative to
taxable securities going forward.
Q. IN YOUR LAST REPORT, YOU NOTED THAT IT WAS GETTING MORE DIFFICULT TO FIND
ATTRACTIVE VALUATIONS AND UNUSUAL OPPORTUNITIES IN THE INVESTMENT-GRADE
SEGMENT OF THE MUNICIPAL MARKET. WHY DID THIS HAPPEN?
A. The primary reason was the increased participation of bond insurers in
recent years. During 1996, insured issues accounted for 47% of all new issues.
The effect of this has been twofold. First, and quite simply, the availability
of securities that are not enhanced by bond insurers has been reduced. As
institutional investors continue to seek opportunities for higher income, the
strong demand for uninsured securities has outstripped the available supply,
thereby reducing credit spreads. Second, with so many bonds being insured, the
opportunities to trade between sectors, as credits improve or decline, have
been diminished because the majority of insured bonds trade generically.
Q. HAS THAT SITUATION CHANGED AT ALL, AND DO YOU SEE ANY REASON IT MIGHT
CHANGE IN THE COMING YEAR?
A. We don't see any reason for this situation to change in the foreseeable
future. Bond insurers continue to seek market share, and most of them are
insuring securities that were considered uninsurable in past years. As long as
insurers maintain their strong market share, it is difficult to construct a
scenario in which the current situation would change.
Q. WHAT ABOUT THE FUND'S DURATION? WHERE DOES IT STAND RELATIVE TO YOUR
BENCHMARK, AND WHY ARE YOU AT THAT LEVEL? AND DO YOU SEE THAT CHANGING IN THE
NEAR FUTURE?
A. The Fund is currently taking a slightly defensive posture, with its average
duration (a measure of interest-rate sensitivity) at approximately seven
years, which makes it approximately 5% less than that of the Lehman Index. We
are positioned this way because of our concern that the recent pace of
economic growth may cause the Federal Reserve to raise interest rates further
in the near term. However, we believe that the Federal Reserve's recent step
to tighten monetary policy and help control inflation is a positive one in the
long run. Should we see signs that economic growth is beginning to moderate,
we will begin to lengthen the Fund's duration.
/s/ Geoffrey L. Schechter
Geoffrey L. Schechter
Portfolio Manager
<PAGE>
PORTFOLIO MANAGER'S PROFILE
Geoffrey L. 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.
He became portfolio manager of MFS(R) Municipal Income Fund in February 1996.
Mr. Schechter is a Certified Public Accountant (C.P.A.) and a Chartered
Financial Analyst (C.F.A.).
TAX FORM SUMMARY
IN JANUARY 1997, SHAREHOLDERS WERE MAILED A TAX FORM SUMMARY REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 1996.
EXEMPT-INTEREST DIVIDENDS
FOR FEDERAL INCOME TAX PURPOSES, 99.1% OF THE TOTAL DIVIDENDS PAID BY
THE FUND FROM NET INVESTMENT INCOME DURING THE YEAR ENDED MARCH 31,
1997, WERE DESIGNATED AS EXEMPT-INTEREST DIVIDENDS.
FUND FACTS
STRATEGY: THE FUND'S OBJECTIVE 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.
COMMENCEMENT OF
INVESTMENT OPERATIONS: CLASS A: SEPTEMBER 7, 1993
CLASS B: DECEMBER 29, 1986
CLASS C: JANUARY 3, 1994
SIZE: $397.3 MILLION NET ASSETS AS OF MARCH 31, 1997
<PAGE>
PERFORMANCE SUMMARY
The information below and 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 5-year graph reflect the
current maximum contingent deferred sales charge (CDSC) of 2%. Fund results in
the 10-year graph do not reflect the deduction of any CDSC since the CDSC is
not applicable after a six-year period. Benchmark comparisons are unmanaged
and do not reflect any fees or expenses. The performance of other share
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. It is not possible to invest in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-Year Period Ended March 31, 1997)
[Graphic Omitted]
MFS Lehman Consumer
Municipal Brothers Price
Income Municipal Index -
Fund - Class B Bond Index U.S.
-------------- ---------- --------
3/92 10000.0 10000.0 10000.0
3/93 11163.0 11252.0 10309.0
3/94 11361.0 11513.0 10567.0
3/95 11966.0 12369.0 10869.0
3/96 12669.0 13406.0 11165.0
3/97 13105.0 14137.0 11491.0
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period Ended March 31, 1997)
[Graphic Omitted]
MFS Lehman Consumer
Municipal Brothers Price
Income Municipal Index -
Fund - Class B Bond Index U.S.
-------------- ---------- --------
3/87 10000.0 10000.0 10000.0
3/89 10841.0 10989.0 10904.0
3/91 12426.0 13270.0 12036.0
3/93 15165.0 16424.0 12803.0
3/95 16256.0 18053.0 13498.0
3/97 17803.0 20634.0 14272.0
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Municipal Income Fund (Class A)
including 4.75% sales charge -0.67% +4.08% +5.21% +5.76%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class A) at net asset value +4.28% +5.80% +6.24% +6.28%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class B) with CDSC -0.50% +3.96% +5.23% +5.94%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class B) at net asset value +3.44% +4.87% +5.56% +5.94%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class C) with CDSC +2.63% +4.98% +5.60% +5.96%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class C) at net asset value +3.62% +4.98% +5.60% +5.96%
- --------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ +5.43% +7.08% +7.17% +7.15%
- --------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index*+ +2.91% +2.83% +2.82% +3.62%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*The Consumer Price Index is measured by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
+Source: CDA/Wiesenberger.
All results are historical and assume the reinvestment of dividends and
capital gains. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost.
Past performance is no guarantee of future results.
Class B share results reflect the applicable contingent deferred sales charge
(CDSC), which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%.
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 are subject to a 1% CDSC if redeemed within 12 months of purchase.
Class A and Class C share results include the performance and operating expenses
(e.g., Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class A and Class C shares. Because operating
expenses attributable to Class A shares are lower than those of Class B shares,
Class A share performance generally would have been higher than Class B share
performance. Operating expenses attributable to Class C shares are not
significantly different from those of Class B shares. These results represent
the percentage change in net asset value. Returns would have been lower had
sales charges been reflected.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time.
<PAGE>
PORTFOLIO OF INVESTMENTS - MARCH 31, 1997
Municipal Bonds - 98.3%
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ----------------------------------------------------------------------------------------------
General Obligation - 8.0%
<S> <C> <C>
Commonwealth of Massachusetts, 7s, 2007 $ 725 $ 790,286
Crowley, TX, Independent School District, Capital
Appreciation, FGIC, 0s, 2015 3,690 1,248,548
Escondido, CA, Unified High School District, Capital
Appreciation, MBIA, 0s, 2018 2,000 556,000
Escondido, CA, Unified High School District, Capital
Appreciation, MBIA, 0s, 2020 2,000 488,080
Harris County, TX, Certificates of Obligation
(Astrodome Improvements Project), 8.1s, 2008 1,385 1,483,654
Lewisville, TX, Independent School District, 0s, 2019 2,500 644,650
New Orleans, LA, AMBAC, 0s, 2015 5,800 1,970,434
New York, NY, 8.2s, 2003 4,145 4,676,638
New York, NY, 7.5s, 2008 1,350 1,485,918
Northwest Texas Independent School District, 0s, 2011 3,000 1,310,160
Rio, CA, School District, Certificates of
Participation, FSA, 0s, 2028 1,140 675,803
State of Texas, 7.625s, 2018 14,405 15,440,287
State of Wisconsin, 7.6s, 2020 980 1,016,495
-------------
$ 31,786,953
- ----------------------------------------------------------------------------------------------
State and Local Appropriation - 2.3%
New York Dormitory Authority Rev. (City University),
7.5s, 2010 $ 2,500 $ 2,883,150
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2008 410 451,939
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.75s, 2020 680 735,032
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2020 1,860 2,032,701
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.5s, 2021 540 590,409
Philadelphia, PA, Regional Port Authority Lease
Rev., MBIA, 8.58s, 2020 2,500 2,537,050
-------------
$ 9,230,281
- ----------------------------------------------------------------------------------------------
Refunded and Special Obligation - 24.2%
Adams County, CO, Single Family Mortgage Rev.,
8.875s, 2011 $ 2,510 $ 3,236,269
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street Project), 8.125s, 2013 915 1,033,630
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street Project), 8.25s, 2023 1,000 1,133,810
Colorado Health and Retirement Facilities, 0s, 2020 2,150 436,149
Colquitt County, GA, Development Authority Rev., "A", 0s, 2021 2,815 525,842
Colquitt County, GA, Development Authority Rev., "C", 0s, 2021 5,725 1,069,430
Commonwealth of Massachusetts, 7s, 2007 1,865 2,052,694
Commonwealth of Massachusetts, 7.5s, 2007 1,990 2,213,776
Commonwealth of Massachusetts, 7.5s, 2007 2,010 2,236,025
Fredericksburg, VA, Industrial Development
Authority, Hospital Facilities Rev., FGIC, INFLOS,
9.24s, 2023* 1,500 1,745,640
Illinois Education and Facilities Authority, 8.75s, 2015 60 61,501
Massachusetts Health & Education Facilities
Authority (Suffolk University), 8s, 2010 1,000 1,108,470
Massachusetts Industrial Finance Agency, Tunnel Rev.
(Mass. Turnpike), 9s, 2020 2,840 3,269,635
Massachusetts Water Resources Authority, 7.625s, 2014 3,200 3,520,896
New York Local Government Assistance Corp., 7.25s, 2018 2,750 3,045,158
New York Medical Care Facilities Finance Agency,
7.75s, 2020 1,375 1,512,926
New York Medical Care Facilities Finance Agency,
7.5s, 2021 1,460 1,625,637
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2008 1,005 1,122,726
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2020 4,265 4,764,602
New York Urban Development Corp., 7.5s, 2011 2,500 2,790,850
New York Urban Development Corp., 7.75s, 2014 5,000 5,485,350
New York Urban Development Corp. (Correctional
Facilities), 7.3s, 2008 2,340 2,619,513
New York, NY, 8.2s, 2003 855 985,097
New York, NY, 8.25s, 2010 4,140 4,778,429
New York, NY, 8s, 2018 2,970 3,378,880
Pennsylvania Industrial Development Authority Rev.,
7s, 2011 7,000 7,690,270
Philadelphia, PA, Municipal Authority Rev., 7s, 2004 2,000 2,214,000
Richmond County, GA, Development Authority Rev., 0s, 2021 9,000 1,681,200
Richmond County, GA, Development Authority Rev., 0s, 2021 8,185 1,528,958
Savannah, GA, Economic Development Authority, 0s, 2021 6,125 1,144,150
Texas Turnpike Authority (Houston Ship Channel
Bridge), 12.625s, 2020 3,000 4,084,590
Washington County, PA, AMBAC, 7.45s, 2018 1,200 1,328,652
Washington Public Power Supply System
(Nuclear Project #1), 14.375s, 2001 1,000 1,219,630
Washington Public Power Supply System
(Nuclear Project #1), 7.25s, 2015 3,350 3,627,983
Washington Public Power Supply System
(Nuclear Project #2), 7.375s, 2012 5,355 5,876,363
Washington Public Power Supply System
(Nuclear Project #3), 7s, 2011 4,050 4,399,110
Washington Public Power Supply System
(Nuclear Project #3), 7.25s, 2015 5,000 5,414,900
-------------
$ 95,962,741
- ----------------------------------------------------------------------------------------------
Airport and Port Revenue - 14.4%
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (American Airlines), 7.875s, 2025 $ 3,500 $ 3,713,745
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 1,960 2,110,861
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 2,840 3,169,781
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), "84-B", 8.85s,
2018 6,300 7,031,556
Cleveland, OH, Airport Special Facilities Rev.
(Continental Airlines), 9s, 2019 4,300 4,649,332
Connecticut Airport Rev. (Bradley International
Airport), FGIC, 7.65s, 2012 1,000 1,137,970
Dallas-Fort Worth, TX, International Airport
(American Airlines), 7.5s, 2025 5,000 5,307,200
Denver, CO, City & County Airport Rev., 8.75s, 2023 4,750 5,545,483
Hawaii Airport Systems Rev., FGIC, 7.5s, 2020 5,350 5,816,360
Hillsborough County, FL, Aviation Authority Rev.
(USAir), 8.6s, 2022 2,000 2,208,360
Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 1,000 1,066,660
Lake Charles, LA, Harbor & Terminal District Port
(Occidental Petroleum), 7.2s, 2020 1,000 1,077,090
St. Augustine, FL, Airport Authority (Grumman Repair
Facility), 11s, 2004 500 517,045
Tulsa, OK, Municipal Airport Trust Rev. (American
Airlines), 7.375s, 2020 10,000 10,565,200
Virginia Port Authority, 8.2s, 2008 3,000 3,184,020
-------------
$ 57,100,663
- ----------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 13.4%
Austin, TX, Utility Systems Rev., AMBAC, 0s, 2010 $ 7,500 $ 3,461,100
Austin, TX, Utility Systems Rev., AMBAC, 6.75s,
2011** 3,325 3,649,753
Chicago, IL, Gas Supply Rev. (People's Gas), 8.1s,
2020 2,000 2,189,820
Georgia Municipal Electric Power Authority Rev.,
6.375s, 2016 2,000 2,160,700
Georgia Municipal Electric Power Authority Rev.,
MBIA-IBC, 6.5s, 2020 7,350 8,084,192
Intermountain Power Agency, Power Supply Rev., MBIA,
6s, 2016 4,000 4,043,480
Midland, MI, Environmental Development Authority,
Pollution Control Rev. (Midland Cogeneration),
9.5s, 2009 2,000 2,173,060
Montana Board of Investment Resources Recovery Rev.
(Yellowstone Energy), 7s, 2019 100 95,894
North Carolina Eastern Municipal Power Agency, MBIA-
IBC, 7s, 2007 3,250 3,685,695
Pittsylvania County, VA, Industrial Development
Authority Rev., 7.5s, 2014 6,000 6,236,400
Southern Minnesota Municipal Power Agency, MBIA,
0s, 2019 15,500 4,302,955
Southern Minnesota Municipal Power Agency, MBIA,
0s, 2020 13,500 3,532,950
Southern Minnesota Municipal Power Agency, MBIA,
0s, 2021 10,660 2,629,822
Southern Minnesota Municipal Power Agency, MBIA,
0s, 2025 6,400 1,229,888
Tampa, FL, Utility Tax, Capital Appreciation, AMBAC,
0s, 2017 2,110 644,394
Texas Municipal Power Agency Rev., AMBAC, 0s, 2011 5,930 2,626,990
Washington Public Power Supply System, BIGI, 0s,
2013 4,000 1,492,600
Washington Public Power Supply System, BIGI, 0s,
2014 3,350 1,166,638
-------------
$ 53,406,331
- ----------------------------------------------------------------------------------------------
Health Care Revenue - 4.2%
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 10.5s, 2018 $ 1,870 $ 1,496,000
Bell County, TX, Health Facilities Development Corp.
(Kings Daughters Hospital), 9.25s, 2008 1,575 1,708,544
Gadsden County, FL, Industrial Development Authority
(RHA/FLA Properties), 10.45s, 2018 1,925 1,987,948
Louisiana Public Facilities Authority (Southwest
Medical Center), 11s, 2006 1,473 500,097
Massachusetts Health & Education Facilities Authority
(New England Deaconess Hospital), 6.875s, 2022 4,140 4,377,636
Montgomery County, PA, Industrial Development
Authority, Health Facilities Rev., 8.5s, 2023 300 303,768
Philadelphia, PA, Industrial Development Authority,
10.25s, 2018 1,920 1,975,546
Philadelphia, PA, Industrial Development Authority,
10.25s, 2018 1,465 1,497,201
Tennessee State Veterans Home Board Rev. (Humboldt
Project), 6.75s, 2021 1,000 1,033,900
Torrance, CA, Hospital Rev., 6.875s, 2015 1,740 1,819,657
-------------
$ 16,700,297
- ----------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 4.3%
Burns Habor, IN, Solid Waste Disposal Facilities
Rev. (Bethlehem Steel), 8s, 2024 $ 3,000 $ 3,193,260
Dayton, OH, Special Facilities Rev. (Emery Air
Freight), 12.5s, 2009 1,000 1,116,440
East Chicago, IN, Exempt Facilities Rev. (Inland
Steel Co.), 6.7s, 2012 2,070 2,054,786
Erie County, PA (International Paper), 7.875s, 2016 1,200 1,293,780
Farmington, NM, Pollution Control Rev. (Public
Service Co. of NM), 6.375s, 2022 2,500 2,498,925
Northampton County, PA, Industrial Development
Authority (Bethlehem Steel), 7.55s, 2017 1,200 1,257,456
Port of New Orleans, LA (Avondale Industries), 8.5s,
2014 2,000 2,296,240
Port of New Orleans, LA (Continental Grain Co.),
7.5s, 2013 1,000 1,069,950
West Side Calhoun County, TX, Navigation District
(Union Carbide), 8.2s, 2021 2,000 2,190,180
-------------
$ 16,971,017
- ----------------------------------------------------------------------------------------------
Insured Health Care Revenue - 3.1%
Clermont County, OH, Hospital Facilities Rev. (Mercy
Health Systems), AMBAC, MURICs, 9.443s, 2021* $ 1,500 $ 1,685,700
Henrico County, VA, Industrial Development Authority
Rev., FSA, RIBs, 8.005s, 2027* 5,000 4,969,450
Jefferson County, KY, Hospital Rev. (Alliant Health
System), MBIA, INFLOS, 9.039s, 2014* 1,500 1,593,165
Mississippi Hospital Equipment & Facilities
Authority Rev. (Rush Medical Foundation), Connie
Lee, 6.7s, 2018 1,000 1,046,010
Rio Grande Valley, TX, Health Facilities Development
Corp., MBIA, 8.1074s, 2015++ 2,800 2,881,844
-------------
$ 12,176,169
- ----------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 4.1%
Colorado Housing Finance Authority, FHA, 8.3s, 2023 $ 2,750 $ 2,874,383
Maryland Community Development Administration,
8.5s, 2028 3,000 3,063,180
Pennsylvania Housing Finance Agency, 7.6s, 2013 1,000 1,064,430
Texas State Department of Housing & Community
Affairs, 10s, 2026 2,325 2,316,281
Vermont Housing Finance Agency, 8.375s, 2020 2,685 2,772,209
Wisconsin Housing & Economic Development Authority,
7.2s, 2013 4,000 4,156,720
-------------
$ 16,247,203
- ----------------------------------------------------------------------------------------------
Single-Family Housing Revenue - 7.6%
Berkeley, Brookes, & Fayette Counties, WV, Single
Family Mortgage Rev., MBIA, 0s, 2016 $14,000 $ 1,713,180
Chicago, IL, Residential Mortgage Rev., MBIA, 0s,
2009 3,275 1,377,989
Cook County, IL, Single Family Housing Rev., 0s,
2015 7,220 971,740
De Kalb, IL, Single Family Mortgage Rev., 7.45s,
2009 225 236,826
Delaware Housing Authority Rev., 9.125s, 2018 740 755,851
Harris County, TX, Housing Finance Corp., 9.625s,
2003 205 205,875
Harris County, TX, Housing Finance Corp., 9.875s,
2014 360 361,534
Kentucky Housing Corp., 7.45s, 2023 5,005 5,131,977
Minnesota Housing Finance Agency, 9s, 2018 4,655 4,745,447
Mississippi Home Corp., Single Family Rev., 7.1s,
2023 675 705,301
New Hampshire Housing Finance Authority, 7.2s, 2010 6,250 6,524,750
New Hampshire Housing Finance Authority, 8.625s, 2013 720 741,967
Utah Housing Finance Agency, 8.625s, 2019 1,035 1,076,700
Utah Housing Finance Agency, 9.125s, 2019 90 93,443
Utah Housing Finance Agency, 9.25s, 2019 55 57,236
West Virginia Housing Development Fund, 7.85s, 2014 5,185 5,319,188
-------------
$ 30,019,004
- ----------------------------------------------------------------------------------------------
Solid Waste Revenue - 0.9%
Charleston County, SC, Resource Recovery Rev.
(Foster Wheeler), 9.25s, 2010 $ 3,200 $ 3,385,856
- ----------------------------------------------------------------------------------------------
Student Loan Revenue - 1.5%
Pennsylvania State Higher Educational Assistance
Agency, AMBAC, RIBS, 9.863s, 2026 $ 5,500 $ 6,107,090
- ----------------------------------------------------------------------------------------------
Transportation - 4.6%
Foothill/Eastern Transportation Corridor Agency, CA,
0s, 2012 $ 5,000 $ 3,226,850
Foothill/Eastern Transportation Corridor Agency, CA,
0s, 2013 5,000 3,251,500
Foothill/Eastern Transportation Corridor Agency, CA,
0s, 2029 20,080 2,522,851
New Jersey Turnpike Authority Rev., MBIA, 6.5s, 2016 1,450 1,587,576
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2004 3,000 1,953,930
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2005 1,800 1,100,322
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2009 6,750 3,048,368
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2014 5,000 1,704,150
-------------
$ 18,395,547
- ----------------------------------------------------------------------------------------------
Universities - 0.8%
Islip, NY, Community Development Agency Rev. (New
York Institute of Technology), 7.5s, 2026 $ 2,000 $ 2,044,160
St. Joseph County, IN, Educational Facilities Rev.
(University of Notre Dame), 6.5s, 2026 1,000 1,090,530
-------------
$ 3,134,690
- ----------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 3.0%
Massachusetts Water Resources Authority, 6.5s, 2019 $ 7,495 $ 8,048,431
Salt Lake County, UT, Water Conservancy District
Rev., AMBAC, 0s, 2008 2,100 1,110,396
Salt Lake County, UT, Water Conservancy District
Rev., AMBAC, 0s, 2009 3,800 1,873,514
Westmoreland County, PA, Municipal Authority, FGIC,
0s, 2022 5,000 1,101,600
-------------
$ 12,133,941
- ----------------------------------------------------------------------------------------------
Other - 1.9%
Dade County, FL, Special Obligation, 0s, 2032 $ 6,000 $ 629,880
Illinois State Dedicated Tax (Civic Center), AMBAC,
0s, 2016 5,000 1,524,400
Martha's Vineyard, MA, Land Bank (Land Acquisition),
8.125s, 2011 1,800 1,845,090
Massachusetts Health & Education Facilities
Authority (Learning Center for the Deaf), 9.25s,
2014 1,000 1,064,812
Metropolitan Pier & Exposition Authority, IL,
Capital Appreciation, MBIA, 0s, 2016 8,400 2,634,492
-------------
$ 7,698,674
- ----------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $362,977,849) $ 390,456,457
- ----------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 1.1%
- ----------------------------------------------------------------------------------------------
East Baton Rouge, LA, Pollution Control Rev.
(Exxon), due 3/1/22 $ 800 $ 800,000
Harris County, TX, Health Facilities Development
Corp. (Methodist Hospital), due 12/1/25 2,000 2,000,000
Jackson County, MS, Pollution Control Rev.
(Chevron), due 6/1/23 1,000 1,000,000
New York, NY, Municipal Water Finance Authority,
due 6/15/23 300 300,000
New York, NY, Municipal Water Finance Authority,
due 6/15/24 50 50,000
Perry County, GA, Pollution Control Rev. (Leaf River
Forest), due 3/1/02 200 200,000
Uinta County, WY, Pollution Control Rev. (Chevron),
due 8/15/20 100 100,000
- ----------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Cost $ 4,450,000
- ----------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $367,427,849) $ 394,906,457
Other Assets, Less Liabilities - 0.6% 2,429,459
- ----------------------------------------------------------------------------------------------
Net Assets - 100% $ 397,335,916
- ----------------------------------------------------------------------------------------------
++Indexed security.
*Inverse floating rate security.
**When-issued security. At March 31, 1997, the Fund had sufficient cash and/or securities at
least equal to the value of the when-issued security.
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ---------------------------------------------------------------------------------------------
March 31, 1997
- ---------------------------------------------------------------------------------------------
Assets:
<S> <C>
Investments, at value (identified cost, $367,427,849) $394,906,457
Cash 34,836
Receivable for Fund shares sold 182,986
Receivable for investments sold 948,548
Interest receivable 6,826,937
Other assets 5,031
------------
Total assets $402,904,795
------------
Liabilities:
Distributions payable $ 780,031
Payable for Fund Shares reacquired 1,045,839
Payable for when-issued investments purchased 3,488,125
Payable to affiliates -
Management fee 32,903
Shareholder servicing agent fee 5,679
Distribution fee 31,170
Accrued expenses and other liabilities 185,132
------------
Total liabilities $ 5,568,879
------------
Net assets $397,335,916
============
Net assets consist of:
Paid-in capital $384,287,071
Unrealized appreciation on investments 27,478,608
Accumulated net realized loss on investments (14,583,208)
Accumulated undistributed net investment income 153,445
------------
Total $397,335,916
============
Shares of beneficial interest outstanding 46,698,290
==========
Class A shares:
Net asset value per share
(net assets of $152,039,035 / 17,881,552 shares of beneficial
interest outstanding) $8.50
=====
Offering price per share (100 / 95.25) $8.92
=====
Class B shares:
Net asset value and offering price per share
(net assets of $226,137,649 / 26,567,509 shares of beneficial
interest outstanding) $8.51
=====
Class C shares:
Net asset value and offering price per share
(net assets of $19,159,232 / 2,249,229 shares of beneficial interest
outstanding) $8.52
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B, and Class C shares.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Operations
- ------------------------------------------------------------------------------------------
Year Ended March 31, 1997
- ------------------------------------------------------------------------------------------
Net investment income:
<S> <C>
Interest income $ 29,774,688
------------
Expenses -
Management fee $ 3,180,446
Trustees' compensation 47,141
Shareholder servicing agent fee (Common) 131,078
Shareholder servicing agent fee (Class A) 148,400
Shareholder servicing agent fee (Class B) 462,174
Shareholder servicing agent fee (Class C) 18,246
Distribution and service fee (Class A) 337,983
Distribution and service fee (Class B) 2,700,976
Distribution and service fee (Class C) 167,150
Administrative fee 4,646
Custodian fee 197,944
Postage 46,985
Auditing fees 33,458
Printing 21,225
Legal fees 5,945
Miscellaneous 313,603
------------
Total expenses $ 7,817,400
Fees paid indirectly (31,139)
------------
Net expenses $ 7,786,261
------------
Net investment income $ 21,988,427
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (4,185,956)
Futures contracts 619,956
------------
Net realized loss on investments $ (3,566,000)
------------
Change in unrealized appreciation (depreciation) -
Investments $ (2,534,741)
Futures contracts 129,375
------------
Net unrealized loss on investments $ (2,405,366)
------------
Net realized and unrealized loss on investments $ (5,971,366)
------------
Increase in net assets from operations $ 16,017,061
============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------
Year Ended March 31, 1997 1996
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
<S> <C> <C>
Net investment income $ 21,988,427 $ 23,512,793
Net realized gain (loss) on investments and futures
transactions (3,566,000) 196,458
Net unrealized gain (loss) on investments and futures
transactions (2,405,366) 2,512,218
------------- -------------
Increase in net assets from operations $ 16,017,061 $ 26,221,469
------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (7,739,363) $ (5,156,665)
From net investment income (Class B) (13,259,117) (17,735,118)
From net investment income (Class C) (829,094) (621,010)
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)
------------- -------------
Total distributions declared to shareholders $ (21,827,574) $ (23,528,963)
------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 116,212,889 $ 192,708,458
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 11,859,004 12,674,803
Cost of shares reacquired (170,221,627) (240,907,535)
------------- -------------
Decrease in net assets from Fund share transactions $ (42,149,734) $ (6,567,815)
------------- -------------
Total decrease in net assets $ (47,960,247) $ (3,875,309)
Net assets:
At beginning of period 445,296,163 449,171,472
------------- -------------
At end of period (including accumulated undistributed
(distributions in excess of) net investment income of
$153,445 and $(242,580), respectively) $ 397,335,916 $445,296,163
============= ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, Year Ended
---------------------------------------------------------------------- November 30,
1997 1996 1995 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 $ 8.62 $ 8.56 $ 8.56 $ 8.99 $ 9.15
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.49 $ 0.51 $ 0.50 $ 0.15 $ 0.12
Net realized and unrealized
gain (loss) on investments (0.12) 0.05 0.02 (0.51) (0.16)
------ ------ ------ ------ ------
Total from investment
operations $ 0.37 $ 0.56 $ 0.52 $(0.36) $(0.04)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.49) $(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 $(0.49) $(0.50) $(0.52) $(0.07) $(0.12)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.50 $ 8.62 $ 8.56 $ 8.56 $ 8.99
====== ====== ====== ====== ======
Total return(+) 4.28% 6.81% 6.33% (7.90)%+ (1.80)%+
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.31% 1.28% 1.13% 1.07%+ 0.76%+
Net investment income 5.75% 5.75% 6.20% 5.31%+ 4.94%+
Portfolio turnover 30% 23% 25% 9% 30%
Net assets at end of period
(000 omitted) $152,039 $121,903 $25,270 $5,595 $461
**For the period from the commencement of offering 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, 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.
(+)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.
(++)Includes distributions in excess of net investment income of $0.0003 per share for Class
A shares for the year ended March 31, 1996.
(S)The distributor did not impose the Class A distribution fee of 0.10% per annum 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.
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended
Year Ended March 31, November 30,
------------------------------------------------------------------- -------------------------------
1997 1996 1995 1994+++ 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
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 $ 8.63 $ 8.57 $ 8.56 $ 8.99 $ 8.73 $ 8.50
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.43 $ 0.43 $ 0.44 $ 0.14 $ 0.42 $ 0.47
Net realized and unrealized
gain (loss) on investments (0.13) 0.06 -- (0.51) 0.42 0.26
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.30 $ 0.49 $ 0.44 $(0.37) $ 0.84 $ 0.73
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment
income $(0.42) $(0.43)(++) $(0.43) $(0.01) $(0.45) $(0.48)
From net realized gain
on investments -- -- -- (0.01) (0.10) --
In excess of net
investment income -- -- -- -- (0.03) --
In excess of net
realized gain on
investments -- -- -- (0.04) -- --
From paid-in-capital -- -- -- -- -- (0.02)
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.42) $(0.43) $(0.43) $(0.06) $(0.58) $(0.50)
------ ------ ------ ------ ------ ------
Net asset value - end of
period $ 8.51 $ 8.63 $ 8.57 $ 8.56 $ 8.99 $ 8.73
====== ====== ====== ====== ====== ======
Total return 3.44% 5.87% 5.32% (8.97)%+ 9.95% 8.82%
Ratios (to average net assets)/Supplemental data:
Expenses## 2.11% 2.13% 2.16% 2.24%+ 2.11% 2.03%
Net investment income 4.95% 4.90% 5.15% 4.74%+ 4.92% 5.50%
Portfolio turnover 30% 23% 25% 9% 30% 52%
Net assets at end of
period (000 omitted) $226,138 $306,889 $412,965 $479,478 $518,179 $449,949
+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
B shares for the year ended March 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
---------------------------------------------------------------------------
1991 1990 1989 1988 1987*
- ---------------------------------------------------------------------------------------------------------------------
Class B
- ---------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.47
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.49 $ 0.49 $ 0.51 $ 0.50 $ 0.38
Net realized and unrealized gain
(loss) on investments 0.25 (0.15) 0.30 0.43 (0.83)
------ ------ ------ ------ ------
Total from investment operations $ 0.74 $ 0.34 $ 0.81 $ 0.93 $(0.45)
------ ------ ------ ------ ------
Less distributions declared to shareholders
from net investment income $(0.49) $(0.50) $(0.51) $(0.49) $(0.35)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67
====== ====== ====== ====== ======
Total return 9.21% 4.18% 10.24% 12.53% (5.79)%+
Ratios (to average net assets)/Supplemental data:
Expenses 2.04% 2.05% 2.07% 2.09% 2.03%+
Net investment income 5.82% 5.99% 6.09% 6.38% 6.00%+
Portfolio turnover 73% 91% 127% 171% 138%
Net assets at end of period
(000 omitted) $409,084 $379,239 $343,887 $244,825 $183,935
</TABLE>
*For the period from the commencement of investment operations, December 29,
1986, to November 30, 1987.
+Annualized.
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------------
Year Ended March 31,
-------------------------------------------------------------------
1997 1996 1995 1994**
- -------------------------------------------------------------------------------------------------------------------
Class C
- -------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.64 $ 8.57 $ 8.56 $ 9.07
------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.43 $ 0.43 $ 0.44 $ 0.09
Net realized and unrealized gain (loss) on
investments (0.12) 0.07 0.01 (0.59)
------ ------ ------ ------
Total from investment operations $ 0.31 $ 0.50 $ 0.45 $(0.50)
------ ------ ------ ------
Less distributions declared to shareholders from
net investment income $(0.43) $(0.43)(++) $(0.44) $(0.01)
------ ------ ------ ------
Net asset value - end of period $ 8.52 $ 8.64 $ 8.57 $ 8.56
====== ====== ====== ======
Total return 3.62% 5.94% 5.39% (19.42)%+
Ratios (to average net assets)/Supplemental data:
Expenses## 2.06% 2.05% 2.09% 2.18%+
Net investment income 5.00% 4.95% 5.23% 4.62%+
Portfolio turnover 30% 23% 25% 9%
Net assets at end of period (000 omitted) $19,159 $16,504 $10,936 $6,393
**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 the fiscal periods ending after September 1, 1995, the Fund's expenses are calculated
without reductions for fees paid indirectly.
(++)Includes distributions in excess of net investment income of $0.0003 per share for 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
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.
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, 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.
Futures Contracts - The 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, 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 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 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. 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 payments-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 owed 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 paid by the Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for federal
income tax purposes because the Fund intends to meet certain requirements of the
Code applicable to regulated investment companies, which will enable the Fund to
pay exempt-interest dividends. The portion of such interest, if any, earned on
private activity bonds issued after August 7, 1986, may be considered a
tax-preference item to shareholders. Distributions to shareholders are recorded
on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a 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, 1997, $235,172 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, 1997, the Fund, for federal income tax purposes, had capital loss
carryforward of $11,911,166, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of their utilization or
expiration on March 31, 2002 ($1,415,952), March 31, 2003 ($6,517,530), March
31, 2004 ($2,228,612) and March 31, 2005 ($1,749,072).
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 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 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 effective annual rate of
0.30% of the Fund's 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 Trust 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 its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $11,490 for the year ended
March 31, 1997.
Administrator - Effective March 1, 1997, the Fund has an administrative services
agreement with MFS to provide the Fund with certain financial, legal,
compliance, shareholder communications, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$20,133 as its portion of the sales charge on sales of Class A shares for the
year ended March 31, 1997.
The Trustees have adopted a 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 Fund's 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 $74,623 for the year ended March 31,
1997. Payment of the 0.10% per annum Class A distribution fee will commence on
such date as the Trustees of the Trust may determine. Fees incurred under the
distribution plan during the year ended March 31, 1997, were 0.25% of the Fund's
average daily net assets attributable to Class A shares on an annualized basis.
The Fund's distribution plan provides 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 $89,938 and $11,658 for Class B and Class C shares,
respectively, for the year ended March 31, 1997. Fees incurred under the
distribution plan during the year ended March 31, 1997, were 1.00% of the Fund's
average daily net assets attributable to Class B and Class C shares on an
annualized basis.
Purchases over $1 million of Class A shares 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. A contingent deferred sales charge is imposed on
shareholder redemptions of Class C shares in the event of a shareholder
redemption within 12 months of purchases made on or after April 1, 1996. MFD
receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended March 31, 1997, were $0, $492,585, and
$5,259, on Class A, Class B and Class C 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 Fund's average daily net assets at an effective annual rate of
0.13%. Prior to January 1, 1997, the fee was 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
$124,039,466 and $168,981,038, respectively.
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:
Aggregate cost $367,423,057
============
Gross unrealized appreciation $ 29,370,120
Gross unrealized depreciation (1,886,720)
------------
Net unrealized appreciation $ 27,483,400
============
(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
<TABLE>
<CAPTION>
Year Ended March 31, 1997 Year Ended March 31, 1996
--------------------------------- ----------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Shares sold 10,598,452 $ 91,183,934 17,027,633 $ 148,288,168
Shares issued to shareholders
in reinvestment of distributions 421,941 3,631,704 261,154 2,281,429
Shares reacquired (7,272,704) (62,547,556) (6,107,403) (53,310,814)
---------- ------------ ---------- -------------
Net increase 3,747,689 $ 32,268,082 11,181,384 $ 97,258,783
========== ============ ========== =============
<CAPTION>
Class B Shares
Year Ended March 31, 1997 Year Ended March 31, 1996
--------------------------------- ----------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,742,931 $ 15,013,335 3,291,894 $ 30,271,749
Share issued in connection with
the acquisition of Advantage Fund -- -- 3,398,645 28,956,459
Shares issued to shareholders
in reinvestment of distributions 885,494 7,626,737 1,143,435 9,961,921
Shares reacquired (11,607,867) (99,999,564) (20,493,625) (178,612,133)
----------- ------------ ---------- -------------
Net decrease (8,979,442) $(77,359,492) (12,659,651) $(109,422,004)
=========== ============ ========== =============
<CAPTION>
Class C Shares
Year Ended March 31, 1997 Year Ended March 31, 1996
-------------------------------- ----------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,159,265 $10,015,620 1,614,476 $14,148,541
Shares issued to shareholders
in reinvestment of distributions 69,652 600,563 49,315 431,453
Shares reacquired (890,281) (7,674,507) (1,029,259) (8,984,588)
---------- ----------- ---------- -----------
Net increase 338,636 $ 2,941,676 634,532 $ 5,595,406
========== =========== ========== ===========
</TABLE>
(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 $400 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,
1997, was $4,166.
(7) Financial Instruments
The Fund 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, 1997:
<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, 8.1074s, 2015 J.J. Kenny $2,800 $2,881,844 $115,080
========
</TABLE>
(8) Acquisitions
At the 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, 1997, the related
statement of operations for the year then ended, the statement of changes in net
assets for the years ended March 31, 1997 and 1996, and the financial highlights
for each of the years in the three-year period ended March 31, 1997, the
four-month period 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, 1997, 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, 1997, 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 25, 1997
--------------------------------------------
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 INCOME FUND
<TABLE>
<CAPTION>
<S> <C>
TRUSTEES ASSISTANT SECRETARY
A. Keith Brodkin* - Chairman and President James R. Bordewick, Jr.*
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), CUSTODIAN
Massachusetts Financial Services Company; State Street Bank and Trust Company
Director, Cambridge Bancorp;
Director, Cambridge Trust Company AUDITORS
Marshall N. Cohan - Private Investor Deloitte & Touche LLP
Lawrence H. Cohn, M.D. - Chief of Cardiac
Surgery, Brigham and Women's Hospital; INVESTOR INFORMATION
Professor of Surgery, Harvard Medical School For MFS stock and bond market outlooks,
The Hon. Sir J. David Gibbons, KBE - Chief call toll free: 1-800-637-4458 anytime from
Executive Officer, Edmund Gibbons Ltd.; a touch-tone telephone.
Chairman, Bank of N.T. Butterfield & Son Ltd.
Abby M. O'Neill - Private Investor; For information on MFS mutual funds,
Director, Rockefeller Financial Services, Inc. call your financial adviser or, for an
(investment advisers) information kit, call toll free:
Walter E. Robb, III - President and Treasurer, 1-800-637-2929 any business day from
Benchmark Advisors, Inc. (corporate financial 9 a.m. to 5 p.m. Eastern time (or leave
consultants); President, Benchmark Consulting a message anytime).
Group, Inc. (office services); Trustee,
Landmark Funds (mutual funds) INVESTOR SERVICE
Arnold D. Scott* - Senior Executive Vice MFS Service Center, Inc.
President, Director and Secretary, P.O. Box 2281
Massachusetts Financial Services Company Boston, MA 02107-9906
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company For general information, call toll free:
J. Dale Sherratt - President, Insight Resources, Inc. 1-800-225-2606 any business day from
(acquisition planning specialists) 8 a.m. to 8 p.m. Eastern time.
Ward Smith - Former Chairman (until 1994),
NACCO Industries; Director, Sundstrand For service to speech- or hearing-impaired,
Corporation call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
INVESTMENT ADVISER (To use this service, your phone must be equipped
Massachusetts Financial Services Company with a Telecommunications Device for the Deaf.)
500 Boylston Street
Boston, MA 02116-3741 For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
DISTRIBUTOR (1-800-637-8255) anytime from a touch-tone
MFS Fund Distributors, Inc. telephone.
500 Boylston Street
Boston, MA 02116-3741 WORLD WIDE WEB
www.mfs.com
PORTFOLIO MANAGER
Geoffrey L. Schecter For the third year in a row,
[DALBAR MFS earned a #1 ranking in the
TREASURER LOGO] DALBAR, Inc. Broker/Dealer
W. Thomas London* Survey, Main Office Operations
Service Quality Category. The
ASSISTANT TREASURER firm achieved a 3.48 overall score on a
James O. Yost* scale of 1 to 4 in the 1996 survey. A total
of 110 firms responded, offering input on the
SECRETARY quality of service they received from 29
Stephen E. Cavan* mutual fund companies nationwide. The survey
contained questions about service quality in
15 categories, including "knowledge of phone
service contracts," "accuracy of transaction
processing," and "overall ease of doing
*Affiliated with the Investment Adviser business with the firm."
</TABLE>
<PAGE>
MFS(R) MUNICIPAL -------------
INCOME FUND [DALBAR BULK RATE
LOGO] U.S. POSTAGE
P A I D
PERMIT #55638
500 Boylston Street BOSTON, MA
Boston, MA 02116-3741 -------------
[LOGO]
WE INVENTED THE MUTUAL FUND(SM)
MMI-2 5/97 25M 02/202/302
(C) 1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
<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 throughout the
ten-year period ended March 31, 1997;
each of the Georgia and New York Funds throughout the
period from the commencement of investment operations,
June 6, 1988, to March 31, 1997;
the Tennessee Fund throughout the period from the
commencement of investment operations, August 12, 1988,
to March 31, 1997;
the Alabama Fund throughout the period from the
commencement of investment operations, February 1, 1990,
to March 31, 1997;
each of the Arkansas and Florida Funds throughout the
period from the commencement of investment operations,
February 3, 1992, to March 31, 1997;
the Mississippi Fund throughout the period from the
commencement of investment operations, August 6, 1992,
to March 31, 1997;
the Pennsylvania Fund throughout the period from the
commencement of investment operations, February 1, 1993,
to March 31, 1997;
the MFS Municipal Income Fund throughout the ten-year
period ended March 31, 1997.
<PAGE>
FINANCIAL STATEMENTS INCLUDED IN PART B:
MFS MUNICIPAL SERIES TRUST (ALL SERIES)
At March 31, 1997:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended March 31, 1997:
Statement of Changes in Net Assets*
For the year ended March 31, 1997:
Statement of Operations*
- ----------------------------
* Incorporated herein by reference to the Funds' Annual Reports to
Shareholders dated March 31, 1997 which were filed with the Securities and
Exchange Commission ("SEC") via EDGAR on June 10, 1997.
(B) EXHIBITS
1 Amended and Restated Declaration of Trust, dated
February 3, 1995. (1)
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)
- ------------------
*No longer in existence
<PAGE>
(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) Dealer Agreement between MFS Fund Distributors, Inc.
("MFD") and a dealer and The Mutual Fund Agreement
between MFD and a bank or NASD affiliate, as amended
on April 11, 1997. (7)
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
January 1, 1997; filed herewith.
(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) Third Amendment dated February 14, 1997 to Loan
Agreement dated February 21, 1995 by and among the
Banks named therein and The First National Bank of
Boston. (8)
(f) Master Administrative Services Agreement dated March
1, 1997. (9)
(g) Dividend Disbursing Agency Agreement, dated February
1, 1986. (4)
10 Opinion and Consent of Counsel previously filed on
May 23, 1997 with Rule 24f-2 Notice for the fiscal
year ended March 31, 1997.
11 Consent of Deloitte & Touche LLP; filed herewith.
12 Not Applicable.
13 Investment Representation Letter. (4)
14 Not Applicable.
15 Master Distribution Plan pursuant to Rule 12b-1 under
the Investment Company Act of 1940 effective January
1, 1997. (5)
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 Schedule for all Series; filed
herewith.
18 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940. (6)
Power of Attorney, dated August 11, 1994. (2)
- -------------------------------
(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.
(5) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 27 filed with the SEC via EDGAR
on December 27, 1996.
(6) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 25 filed with the SEC via EDGAR
on August 27, 1996.
(7) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 24 filed with the SEC via EDGAR
on May 29, 1997.
(8) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 28 filed with the SEC via EDGAR
on June 26, 1997.
(9) Incorporated by reference to MFS/Sun Life Series Trust (File Nos.
2-83616 and 811-3732) Post-Effective Amendment No. 19 filed with the SEC
via EDGAR on March 18, 1997.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
(As of June 30, 1997)
<TABLE>
<CAPTION>
CLASS A SHARES
<S> <C> <C>
Shares of Beneficial Interest Alabama Series 1,250
(without par value) Arkansas Series 2,881
California Series 3,786
Florida Series 1,418
Georgia Series 1,432
Maryland Series 3,552
Massachusetts Series 4,258
Mississippi Series 1,659
New York Series 2,858
North Carolina Series 8,352
Pennsylvania Series 632
South Carolina Series 3,127
Tennessee Series 2,147
Virginia Series 8,312
West Virginia Series 2,871
MFS Municipal Income Fund 4,759
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLASS B SHARES
<S> <C> <C>
Shares of Beneficial Interest Alabama Series 147
(without par value) Arkansas Series 165
California Series 740
Florida Series 269
Georgia Series 289
Maryland Series 570
Massachusetts Series 363
Mississippi Series 263
New York Series 857
North Carolina Series 999
Pennsylvania Series 868
South Carolina Series 552
Tennessee Series 292
Virginia Series 680
West Virginia Series 440
MFS Municipal Income Fund 6,629
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES
<S> <C> <C>
Shares of Beneficial Interest California Series 95
(without par value) North Carolina Series 201
Virginia Series 98
MFS Municipal Income Fund 502
</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 as amended.
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, The MFS Series Trust
(which has one series: MFS Aggressive Small Cap Equity Fund), MFS Series Trust I
(which has thirteen 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, MFS Special
Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund, MFS New
Discovery Fund, MFS Science and Technology Fund and MFS Research International
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
MFS 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"). 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 MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series
Trust ("MFS/SL"), 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 of the
aforementioned funds is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of Bermuda and a subsidiary of MFS, whose principal
business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves
as investment adviser to and distributor for MFS American Funds (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Funds-U.S. Research 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, MFS Meridian Research Fund, MFS
Meridian U.S. High Yield Fund and MFS Emerging Markets Debt 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 Institutional Advisors, Inc. ("MFSI"), 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, Donald A. Stewart 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., Patricia A. Zlotin, John W. Ballen, Thomas J. Cashman, Jr., Joseph W. Dello
Russo and Kevin R. Parke are Executive Vice Presidents, Stephen E. Cavan is a
Senior Vice President, General Counsel and an Assistant Secretary, Robert T.
Burns is a Senior Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Treasurer of
MFS.
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, Ellen M.
Moynihan and Mark E. Bradley, Vice Presidents of MFS, are the Assistant
Treasurers, James R. Bordewick, Jr., Senior 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, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, 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, 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, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, 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, and Bernard Scozzafava, Vice President of MFS, are Vice
Presidents, Sheila Burns-Magnan, Assistant Vice President of MFS, and Daniel E.
McManus, Vice President of MFS, are Assistant Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, 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, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers 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, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers 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, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers 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, Vice President of MFS, is an Assistant Vice President, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr., is the Assistant Secretary.
<PAGE>
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, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers 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, 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, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames
and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
John D. McNeil, Chairman and Director of Sun Life Assurance
Company of Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley
are the Assistant Treasurers and James R. Bordewick, Jr., is the Assistant
Secretary.
<PAGE>
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
John D. McNeil is the Chairman, Stephen E. Cavan is the
Secretary, and James R. Bordewick, Jr., is the Assistant Secretary.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott
and Jeffrey L. Shames are Directors, Thomas J. Cashman, Jr., an Executive 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, Executive Vice President and Chief Financial Officer of MFS, 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, 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.
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 and James O. Yost is the Assistant Treasurer.
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.
MFSI
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 (who is an Executive Vice President of
MFS) 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.
In addition, the following persons, Directors or officers of MFS,
have the affiliations indicated:
<TABLE>
<S> <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
Donald A. Stewart President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada (Mr.
Stewart is also an officer and/or Director
of various subsidiaries and affiliates of
Sun Life)
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; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in whole
or in part, at the office of the Registrant and the following locations:
NAME ADDRESS
---- -------
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
State Street Bank and State Street South
Trust Company (custodian) 5 - West
North Quincy, MA 02171
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
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 9th day of July, 1997.
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 9, 1997.
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
<PAGE>
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>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
9 (b) Amendment to Shareholder Servicing Agreement, dated
January 1, 1997.
11 Consent of Deloitte & Touche LLP.
17 Financial Data Schedule for all Series.
<PAGE>
EXHIBIT NO. 99.9(b)
MFS MUNICIPAL SERIES TRUST
500 BOYLSTON STREET o BOSTON o MASSACHUSETTS o 02116
(617) o 954-5000
January 1, 1997
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder Servicing
Agent Agreement between us, dated August 1, 1985, as amended, is hereby amended,
effective immediately, to read in its entirety as set forth on Attachment 1
hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS MUNICIPAL SERIES TRUST
By: W. THOMAS LONDON
-----------------------
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: JOSEPH W. DELLO RUSSO
-----------------------
Joseph W. Dello Russo
Treasurer
<PAGE>
ATTACHMENT 1
January 1, 1997
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS MUNICIPAL SERIES TRUST (THE "FUND")
The fees to be paid by the Fund on behalf of its series with respect to all
shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be 0.13% of the average daily net assets of the Fund.
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 31 to Registration Statement No. 2-92915 of MFS Municipal Series Trust of
our reports each dated April 25, 1997 appearing in the annual reports to
shareholders for the year ended March 31, 1997, 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 25, 1997
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