<PAGE>
As filed with the Securities and Exchange Commission on July 20, 1998
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. 32
AND REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 33
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, 1998 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
================================================================================
<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)
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ -----------------------
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 ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ -----------------------
(d) Condensed Financial Information *
4 (a) The Funds; Investment Objective *
and Policies
(b), (c) Investment Objective and *
Policies
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) ** **
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
<PAGE>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ -----------------------
(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
(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
<PAGE>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ -----------------------
(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 ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ -----------------------
10 (a), (b) * Front Cover Page
11 * Front Cover Page or
Table of Contents
12 * The Trust; Definitions
13 (a), (b), (c) * Certain Securities and
Investment Techniques;
Investment Restrictions
(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 ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION 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
Shareholder Services Liabilities
(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 - of the Funds -
Purchases Distributor
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Funds -
Distributor; Distribution
Plan
(c) * *
22 (a) * *
<PAGE>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ -----------------------
(b) * Determination of Net
Asset Value; Performance
Information
23 * Independent Auditors and
Financial Statements
- -------
* Not Applicable
** Contained in Annual Report
<PAGE>
MFS(R) MUNICIPAL SERIES TRUST
AUGUST 1, 1998
PROSPECTUS
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
CLASS C SHARES OF BENEFICIAL INTEREST
(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).
(continued on next page)
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.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
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.
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, 1998, 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 98 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 (http://www.sec.gov) 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.
TABLE OF CONTENTS
Page
1. Synopsis ...................................................... 3
2. Condensed Financial Information ............................... 10
3. Investment Objective and Policies ............................. 54
4. Management of the Trust ....................................... 64
5. Information Concerning Shares of the Trust .................... 67
Purchases ................................................. 67
Exchanges ................................................. 75
Redemptions and Repurchases ............................... 77
Distribution Plan ......................................... 81
Distributions ............................................. 84
Tax Status ................................................ 84
Net Asset Value ........................................... 93
Description of Shares, Voting Rights and Liabilities .. 93
Performance Information ................................... 94
Provision of Annual and Semiannual Reports ................ 95
Expenses .................................................. 95
6. Shareholder Services .......................................... 96
Appendix A -- Waivers of Sales Charges ........................ A-1
Appendix B -- Tax Equivalent Yield Tables ..................... B-1
Appendix C -- Description of Municipal Obligations and Ratings C-1
Appendix D -- Portfolio Composition Charts .................... D-1
Appendix E -- Additional Information Concerning the Funds ..... E-1
<PAGE>
1. SYNOPSIS
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on
Purchases of Shares of each Fund (as a
percentage of offering price) .............. 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable) ........ See Below(1) 4.00% 1.00%
</TABLE>
THE FOLLOWING ANNUAL OPERATING EXPENSES FOR EACH CLASS OF SHARES OF EACH FUND
ARE SHOWN AFTER ANY 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(7) ...................... 0.34% 0.26% 0.24% 0.29% 0.32%
---- ---- ---- ---- ----
Total Operating Expenses(9) ............ 1.04% 0.81% 0.64% 0.74% 1.02%
<CAPTION>
MARYLAND MASSACHUSETTS MISSISSIPPI NEW YORK NORTH CAROLINA
FUND FUND FUND FUND FUND
------- ------------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
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(7) ...................... 0.28% 0.25% 0.29% 0.29% 0.22%
---- ---- ---- ---- ----
Total Operating Expenses(9) ............ 1.08% 1.05% 0.74% 0.99% 1.02%
<CAPTION>
PENNSYLVANIA SOUTH CAROLINA TENNESSEE VIRGINIA WEST VIRGINIA
FUND FUND FUND FUND FUND
------------ -------------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
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(7) ...................... 0.00%(8) 0.25% 0.26% 0.22% 0.26%
---- ---- ---- ---- ----
Total Operating Expenses(9) ............ 0.45% 1.05% 1.06% 1.02% 1.06%
<CAPTION>
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
------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Management Fees(2) ..................... 0.45% 0.45% 0.40% 0.45% 0.45%
Rule 12b-1 Fees(5) ..................... 1.00% 0.90%(6) 0.81%(6) 0.80%(6) 1.00%
Other Expenses(7) ...................... 0.34% 0.26% 0.24% 0.29% 0.32%
---- ---- ---- ---- ----
Total Operating Expenses(9) ............ 1.79% 1.61% 1.45% 1.54% 1.77%
<CAPTION>
MARYLAND MASSACHUSETTS MISSISSIPPI NEW YORK NORTH CAROLINA
FUND FUND FUND FUND FUND
------- ------------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
Management Fees(2) ..................... 0.45% 0.45% 0.45% 0.45% 0.45%
Rule 12b-1 Fees(5) ..................... 1.00% 1.00% 0.78%(6) 1.00% 1.00%
Other Expenses(7) ...................... 0.28% 0.25% 0.29% 0.29% 0.22%
---- ---- ---- ---- ----
Total Operating Expenses(9) ............ 1.73% 1.70% 1.52% 1.74% 1.67%
<CAPTION>
PENNSYLVANIA SOUTH CAROLINA TENNESSEE VIRGINIA WEST VIRGINIA
FUND FUND FUND FUND FUND
------------ -------------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Management Fees(2) ..................... 0.45% 0.45% 0.45% 0.45% 0.45%
Rule 12b-1 Fees(5) ..................... 0.79%(6) 1.00% 1.00% 1.00% 1.00%
Other Expenses(7) ...................... 0.00%(8) 0.25% 0.26% 0.22% 0.26%
---- ---- ---- ---- ----
Total Operating Expenses(9) ............ 1.24% 1.70% 1.71% 1.67% 1.71%
<CAPTION>
ANNUAL OPERATING EXPENSES OF CLASS C SHARES OF EACH FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
CALIFORNIA NORTH CAROLINA VIRGINIA
FUND FUND FUND
---------- -------------- --------
<S> <C> <C> <C>
Management Fees(2) ................................................... 0.40% 0.45% 0.45%
Rule 12b-1 Fees(5) ................................................... 1.00% 1.00% 1.00%
Other Expenses(7) .................................................... 0.24% 0.22% 0.22%
----- ----- -----
Total Operating Expenses(9) .......................................... 1.64% 1.67% 1.67%
</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 "Information Concerning Shares of the Trust -- Purchases"
below).
(2) The Adviser has voluntarily reduced its management fee for an indefinite
period of time as follows:
REDUCED ADVISORY
FEE AS A % OF
AVERAGE DAILY
FUND NET ASSETS
- ---- ----------------
Alabama .................................................. 0.45%
Arkansas ................................................. 0.45
California ............................................... 0.40
Florida .................................................. 0.45
Georgia .................................................. 0.45
Maryland ................................................. 0.45
Massachusetts ............................................ 0.45
Mississipi ............................................... 0.45
New York ................................................. 0.45
North Carolina ........................................... 0.45
Pennsylvania ............................................. 0.45
South Carolina ........................................... 0.45
Tennessee ................................................ 0.45
Virginia ................................................. 0.45
West Virginia ............................................ 0.45
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 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 6 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.
(6) 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.
(7) 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."
(8) 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 class' 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 0.40% for Class A and Class B shares. See
"Information Concerning Shares of the Trust -- Expenses" below.
(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 ............................ 1.14% 1.89% N/A
Arkansas ........................... 0.91 1.71 N/A
California ......................... 0.79 1.60 1.79%
Florida ............................ 0.84 1.64 N/A
Georgia ............................ 1.12 1.87 N/A
Maryland ........................... 1.18 1.83 N/A
Massachusetts ...................... 1.15 1.80 N/A
Mississippi ........................ 0.84 1.62 N/A
New York ........................... 1.09 1.84 N/A
North Carolina ..................... 1.12 1.77 1.77
Pennsylvania ....................... 0.95 1.74 N/A
South Carolina ..................... 1.15 1.80 N/A
Tennessee .......................... 1.16 1.81 N/A
Virginia ........................... 1.12 1.77 1.77
West Virginia ...................... 1.16 1.81 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 FUND ARKANSAS FUND CALIFORNIA FUND
-------------------------- ---------------------------- -----------------------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS C
- ------ -------- ----------------- -------- ------------------ -------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (1) (1) (1)
1 year ................... $ 58 $ 58 $ 18 $ 55 $ 56 $ 16 $ 54 $ 55 $ 15 $ 27 $ 17
3 years .................. 79 86 56 72 81 51 67 76 46 52 52
5 years .................. 102 117 97 90 107 87 81 99 79 89 89
10 years ................. 169 191(2) 191(2) 143 169(2) 169(2) 124 151(2) 151(2) 194 194
<CAPTION>
FLORIDA FUND GEORGIA FUND MARYLAND FUND
----------------------------- ------------------------------ ----------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
- ------ -------- -------------------- ------- ------------------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (1) (1)
1 year ................. $ 55 $ 56 $ 16 $ 57 $ 58 $ 18 $ 58 $ 58 $ 18
3 years ................ 70 79 49 78 86 56 80 84 54
5 years ................ 87 104 84 101 116 96 104 114 94
10 years ............... 135 162(2) 162(2) 166 188(2) 188(2) 173 187(2) 187(2)
<CAPTION>
MASSACHUSETTS FUND MISSISSIPPI FUND NEW YORK FUND
----------------------------- ------------------------------ ----------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
- ------ -------- -------------------- ------- ------------------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (1) (1)
1 year ................. $ 58 $ 57 $ 17 $ 55 $ 55 $ 15 $ 57 $ 58 $ 18
3 years ................ 79 84 54 70 78 48 78 85 55
5 years ................ 103 112 92 87 103 83 100 114 94
10 years ............... 170 183(2) 183(2) 135 160(2) 160(2) 163 185(2) 185(2)
<CAPTION>
NORTH CAROLINA FUND PENNSYLVANIA FUND SOUTH CAROLINA FUND
------------------------------------------ ------------------------- -------------------------
PERIOD CLASS A CLASS B CLASS C CLASS A CLASS B CLASS A CLASS B
- ------ ------- --------------- ------------ ------- ------------ -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (1) (1) (1)
1 year ................... $ 57 $ 57 $ 17 $ 27 $ 17 $ 52 $ 53 $ 13 $ 58 $ 57 $ 17
3 years .................. 78 83 53 53 53 61 69 39 79 84 54
5 years .................. 101 111 91 91 91 72 88 68 103 112 92
10 years ................. 166 180(2) 180(2) 198 198 101 127(2) 127(2) 170 183(2) 183(2)
<CAPTION>
TENNESSEE FUND VIRGINIA FUND WEST VIRGINIA FUND
------------------------- -------------------------------------------- --------------------------
PERIOD CLASS A CLASS B CLASS A CLASS B CLASS C CLASS A CLASS B
- ------ -------- --------------- ------ - --------------- ------------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) (1) (1) (1)
1 year ................... $ 58 $ 57 $ 17 $ 57 $ 57 $ 17 $ 27 $ 17 $ 58 $ 57 $ 17
3 years .................. 80 84 54 78 83 53 53 53 80 84 54
5 years .................. 103 113 93 101 111 91 91 91 103 113 93
10 years ................. 171 185(2) 185(2) 166 180(2) 180(2) 198 198 171 185(2) 185(2)
- ------------
(1)Assumes no redemption.
(2)Class B shares convert to Class A shares approximately eight years after purchase; therefore years nine and ten reflect Class
A expenses.
</TABLE>
THE "EXAMPLE" SET FORTH ABOVE REFLECTS THE IMPOSITION OF THE MAXIMUM SALES
CHARGE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES
OF A FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the expense table is to assist investors in understanding the
various costs and expenses that a shareholder in a Fund will bear directly or
indirectly. More complete descriptions of the following Trust expenses are set
forth in the following sections of the Prospectus: (i) varying sales charges on
share purchases -- "Information Concerning Shares of the Trust -- Purchases";
(ii) varying CDSCs -- "Information Concerning Shares of the Trust -- Purchases";
(iii) management fees -- "Management of the Trust -- Investment Adviser"; and
(iv) Rule 12b-1 (i.e., distribution plan) fees -- "Information Concerning Shares
of the Trust -- 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 Trust 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>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
ALABAMA FUND
--------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED YEAR ENDED JANUARY 31,
-------------------------------------- MARCH 31, ------------------------------------
1998 1997 1996 1995 1994 1994 1993 1992 1991
CLASS A
-------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning of
period ........................... $10.48 $10.52 $10.34 $10.27 $10.98 $10.33 $ 9.95 $ 9.65 $ 9.53
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.55 $ 0.56 $ 0.55 $ 0.56 $ 0.09 $ 0.55 $ 0.56 $ 0.60 $ 0.59
Net realized and unrealized gain
(loss) on investments .......... 0.45 0.04 0.18 0.09 (0.71) 0.69 0.41 0.41 0.08
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations $ 1.00 $ 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) $(0.55) $(0.08) $(0.54) $(0.58) $(0.65) $(0.55)
From net realized gain on
investments .................... (0.13) (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 .............. $(0.68) $(0.64) $(0.55) $(0.58) $(0.09) $(0.59) $(0.59) $(0.71) $(0.55)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $10.80 $10.48 $10.52 $10.34 $10.27 $10.98 $10.33 $ 9.95 $ 9.65
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return(+) .................... 9.72% 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## ....................... 1.04% 1.10% 1.14% 1.15% 1.18%+ 1.21% 1.08% 0.95% 0.57%
Net investment income ............ 5.12% 5.28% 5.18% 5.47% 5.17%+ 5.13% 5.79% 6.19% 6.63%
PORTFOLIO TURNOVER ................. 21% 22% 37% 30% 4% 12% 17% 23% 64%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $75,538 $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 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 ......... $ 0.54 -- $ 0.54 $ 0.55 $ 0.09 $ 0.54 $ 0.55 $ 0.59 $ 0.52
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.11% -- 1.24% 1.25% 1.28%+ 1.31% 1.18% 1.08% 1.33%
Net investment income ....... 5.05% -- 5.08% 5.37% 5.07%+ 5.03% 5.69% 6.06% 5.87%
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
ALABAMA FUND
----------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED PERIOD ENDED
---------------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994**
CLASS B
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .. $10.48 $10.52 $10.34 $10.27 $10.98 $10.93
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) .............. $ 0.47 $ 0.47 $ 0.46 $ 0.47 $ 0.08 $ 0.18
Net realized and unrealized gain (loss)
on investments ...................... 0.45 0.04 0.18 0.09 (0.71) 0.07
------ ------ ------ ------ ------ ------
Total from investment operations .... $ 0.92 $ 0.51 $ 0.64 $ 0.56 $(0.63) $ 0.25
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ............ $(0.47) $(0.47) $(0.46) $(0.46) $(0.08) $(0.18)
From net realized gain on investments . (0.13) (0.08) -- -- -- (0.02)
In excess of net realized gain on
investments ......................... -- -- -- (0.03) -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ...................... $(0.60) $(0.55) $(0.46) $(0.49) $(0.08) $(0.20)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ........ $10.80 $10.48 $10.52 $10.34 $10.27 $10.98
====== ====== ====== ====== ====== ======
Total return ............................ 8.91% 4.98% 6.25% 5.64% (5.79)%++ 2.29%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ............................ 1.79% 1.90% 1.96% 1.97% 2.01%+ 1.98%+
Net investment income ................. 4.36% 4.48% 4.34% 4.63% 4.30%+ 3.98%+
PORTFOLIO TURNOVER ...................... 21% 22% 37% 30% 4% 12%
NET ASSETS AT END OF PERIOD (000 OMITTED) $8,074 $7,281 $6,139 $4,396 $2,849 $2,269
- ------------
** For the period from the commencement of the Fund's offering of Class B shares, September 7, 1993, through
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.
(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 ............... $ 0.46 -- -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ........................ 1.86% -- -- -- -- --
Net investment
income ......................... 4.29% -- -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
ARKANSAS FUND
------------------------------------------------------------------------------------------------
TWO
MONTHS PERIOD
YEAR ENDED MARCH 31, ENDED YEAR ENDED ENDED
---------------------------------------------------- MARCH 31, JANUARY 31, JANUARY 31,
1998 1997 1996 1995 1994 1994 1993*
CLASS A
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period .................. $ 9.72 $ 9.75 $ 9.66 $ 9.69 $10.47 $ 9.88 $ 9.53
------ ------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ... $ 0.50 $ 0.50 $ 0.50 $ 0.53 $ 0.09 $ 0.56 $ 0.58
Net realized and unrealized
gain (loss) on investments 0.46 (0.03) 0.09 0.02 (0.77) 0.60 0.35
------ ------ ------ ------ ------ ------ ------
Total from investment
operations ............. $ 0.96 $ 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) $(0.50) $(0.53) $(0.08) $(0.55) $(0.58)
From net realized gain on
investments (+++) ........ -- -- -- -- -- (0.00) --
In excess of net investment
income(++) ............... (0.00) -- -- -- (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) $(0.50) $(0.58) $(0.10) $(0.57) $(0.58)
------ ------ ------ ------ ------ ------ ------
Net asset value -- end of
period ..................... $10.18 $ 9.72 $ 9.75 $ 9.66 $ 9.69 $10.47 $ 9.88
====== ====== ====== ====== ====== ====== ======
Total return(+) .............. 10.06% 4.87% 6.19% 5.90% (6.61)%++ 11.95% 10.11%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ................. 0.85% 0.92% 0.93% 0.75% 0.75%+ 0.63% 0.16%+
Net investment income ...... 4.97% 5.14% 5.10% 5.51% 5.21%+ 5.30% 6.04%+
PORTFOLIO TURNOVER ........... 15% 9% 6% 24% 1% 3% 10%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .............. $134,072 $144,263 $172,907 $187,105 $195,042 $203,542 $124,644
- ------------
* For the period from the commencement of the Fund's investment operations [inception of Class A], February 3, 1992,
through 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, 1998, the per share distribution in excess of the net investment income was $0.002.
(+++) 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 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 .. $ 0.49 -- -- $ 0.52 $ 0.09 $ 0.53 $ 0.52
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ............. 0.92% -- -- 0.82% 0.96%+ 0.91% 0.75%+
Net investment income .. 4.90% -- -- 5.43% 5.01%+ 5.01% 5.45%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
ARKANSAS FUND
------------------------------------------------------------------------------------------
TWO
MONTHS PERIOD
YEAR ENDED MARCH 31, ENDED ENDED
-------------------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994**
CLASS B
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value --
beginning of period .... $ 9.72 $ 9.75 $ 9.65 $ 9.69 $10.47 $10.42
------ ------ ------ ------ ------ ------
Income from investment
operations# --
Net investment income(S) $ 0.42 $ 0.42 $ 0.42 $ 0.42 $ 0.07 $ 0.23
Net realized and
unrealized gain (loss)
on investments ....... 0.46 (0.03) 0.10 0.01 (0.78) (0.04)
------ ------ ------ ------ ------ ------
Total from investment
operations ......... $ 0.88 $ 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) $(0.42) $(0.07) $(0.14)
From net realized gain
on investments(+++) .. -- -- -- -- -- (0.00)
In excess of net
investment income(++) .... (0.00) -- -- -- (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) $(0.42) $(0.47) $(0.07) $(0.14)
------ ------ ------ ------ ------ ------
Net asset value -- end of
period ................. $10.18 $ 9.72 $ 9.75 $ 9.65 $ 9.69 $10.47
====== ====== ====== ====== ====== ======
Total return ............. 9.18% 4.05% 5.43% 4.67% (6.81)%++ 2.18%++
RATIOS (TO AVERAGE NET
ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ............. 1.65% 1.71% 1.76% 1.84% 1.82%+ 1.75%+
Net investment income .. 4.15% 4.34% 4.27% 4.40% 4.11%+ 3.87%+
PORTFOLIO TURNOVER ....... 15% 9% 6% 24% 1% 3%
NET ASSETS AT END OF
PERIOD (000 OMITTED) $7,370 $7,548 $7,950 $7,231 $5,895 $5,179
- ------------
** For the period from the commencement of the Fund's offering of Class B shares, September 7, 1993, through 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 years ended March 31, 1998, and March 31, 1994, and the period ended January 31, 1994, the per share
distributions in excess of net investment income were $0.001, $0.002 and $0.004, respectively.
(+++) For the period 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 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 ........... $ 0.41 -- -- $ 0.41 $ 0.07 $ 0.12
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ....... 1.72% -- -- 1.91% 2.02%+ 3.44%+
Net investment
income ......... 4.08% -- -- 4.33% 3.91%+ 2.18%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
CALIFORNIA FUND
--------------------------------------------------------------------------------
TWO MONTHS PERIOD
YEAR ENDED MARCH 31, ENDED ENDED
----------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994
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 $ 5.47 $ 5.52 $ 5.41 $ 5.47 $ 5.95 $ 5.88
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ........... $ 0.29 $ 0.30 $ 0.30 $ 0.31 $ 0.05 $ 0.30
Net realized and unrealized gain
(loss) on investments ............ 0.33 (0.05) 0.11 (0.05) (0.48) 0.14
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.62 $ 0.25 $ 0.41 $ 0.26 $(0.43) $ 0.44
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ......... $(0.29) $(0.30) $(0.30) $(0.31) $(0.04) $(0.29)
From net realized gain on
investments .................... -- -- -- -- -- (0.07)
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 ................. $(0.29) $(0.30) $(0.30) $(0.32) $(0.05) $(0.37)
------ ------ ------ ------ ------ ------
Net asset value -- end of period .... $ 5.80 $ 5.47 $ 5.52 $ 5.41 $ 5.47 $ 5.95
====== ====== ====== ====== ====== ======
Total return(+) .................... 11.51% 4.55% 7.86% 4.85% (7.21)%++ 7.64%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ......................... 0.64% 0.66% 0.66% 0.69% 0.68%+ 0.60%+
Net investment income .............. 5.07% 5.36% 5.48% 5.80% 5.27%+ 4.99%+
PORTFOLIO TURNOVER ................. 49% 78% 69% 57% 8% 38%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $222,421 $232,612 $259,817 $272,161 $313,790 $356,419
- ------------
+ 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.
(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 ......... $ 0.28 $ 0.29 $ 0.29 $ 0.30 $ 0.05 $ 0.29
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................... 0.79% 0.81% 0.81% 0.84% 0.83%+ 0.78%+
Net investment income ........ 4.92% 5.21% 5.33% 5.65% 5.12%+ 4.82%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
CALIFORNIA FUND
-------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28,
-------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
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 .............................. $ 5.42 $ 5.26 $ 5.19 $ 5.06 $ 5.08 $ 5.38
------ ------ ------ ------ ------ ------
Income from investment operations --
Net investment income(S) .............. $ 0.34 $ 0.35 $ 0.33 $ 0.33 $ 0.32 $ 0.31
Net realized and unrealized
gain (loss) on investments .......... 0.47 0.20 0.07 0.13 (0.02) (0.29)
------ ------ ------ ------ ------ ------
Total from investment operations .... $ 0.81 $ 0.55 $ 0.40 $ 0.46 $ 0.30 $ 0.02
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income .......... $(0.34) $(0.37) $(0.33) $(0.33) $(0.32) $(0.31)
From net realized gain on
investments ....................... (0.01) (0.02) -- -- -- (0.01)
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders ..................... $(0.35) $(0.39) $(0.33) $(0.33) $(0.32) $(0.32)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ...... $ 5.88 $ 5.42 $ 5.26 $ 5.19 $ 5.06 $ 5.08
====== ====== ====== ====== ====== ======
Total return(+) ....................... 15.55% 10.69% 8.03% 9.28% 6.07% 0.83%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses ............................ 0.39% 0.40% 0.87% 1.00% 1.28% 1.20%
Net investment income ............... 6.18% 6.53% 6.39% 6.35% 6.35% 6.33%
PORTFOLIO TURNOVER .................... 64% 73% 102% 243% 188% 240%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ....................... $272,179 $177,291 $84,551 $68,879 $59,212 $59,479
- ------------
(+) Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior to
October 1, 1989). 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 ....... $ 0.32 $ 0.33 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses .................. 0.77% 0.79% -- -- -- --
Net investment income ..... 5.80% 6.14% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
CALIFORNIA FUND
-----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED PERIOD ENDED
---------------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994**
CLASS B
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period ........................ $ 5.47 $ 5.52 $ 5.41 $ 5.47 $ 5.95 $ 6.02
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ........... $ 0.24 $ 0.25 $ 0.26 $ 0.25 $ 0.04 $ 0.10
Net realized and unrealized gain
(loss) on investments ............ 0.33 (0.05) 0.11 (0.05) (0.48) --
------ ------ ------ ------ ------ ------
Total from investment operations . $ 0.57 $ 0.20 $ 0.37 $ 0.20 $(0.44) $ 0.10
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ......... $(0.24) $(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 ..... $(0.24) $(0.25) $(0.26) $(0.26) $(0.04) $(0.17)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $ 5.80 $ 5.47 $ 5.52 $ 5.41 $ 5.47 $ 5.95
====== ====== ====== ====== ====== ======
Total return ....................... 10.62% 3.64% 6.93% 3.73% (7.38)%++ 1.68%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $43,790 $36,694 $34,675 $29,057 $21,252 $19,360
- ------------
** For the period from the inception of Class B, September 7, 1993, through 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 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 ......... $ 0.23 $ 0.24 $ 0.24 $ 0.04 $ 0.09 --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................... 1.59% 1.69% 1.91% 1.83% 1.81%+ --
Net investment income ......... 4.11% 4.33% 4.57% 4.04% 3.43%+ --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
CALIFORNIA FUND
----------------------------------------------------------------------------------
TWO MONTHS PERIOD
YEAR ENDED MARCH 31, ENDED ENDED
------------------------------------------------ MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994***
CLASS C
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period ........................ $ 5.48 $ 5.53 $ 5.42 $ 5.48 $ 5.95 $ 5.89
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ........... $ 0.23 $ 0.24 $ 0.25 $ 0.26 $ 0.03 $ 0.01
Net realized and unrealized
gain (loss) on investments ....... 0.33 (0.05) 0.11 (0.06) (0.46) 0.06
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.56 $ 0.19 $ 0.36 $ 0.20 $(0.43) $ 0.07
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ......... $(0.23) $(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 ..... $(0.23) $(0.24) $(0.25) $(0.26) $(0.04) $(0.01)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $ 5.81 $ 5.48 $ 5.53 $ 5.42 $ 5.48 $ 5.95
====== ====== ====== ====== ====== ======
Total return ....................... 10.39% 3.51% 6.77% 3.79% (7.22)%++ 1.25%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.64% 1.66% 1.67% 1.69% 1.64%+ 2.02%+
Net investment income ............ 4.08% 4.37% 4.47% 4.79% 3.92%+ 1.78%+
PORTFOLIO TURNOVER ................. 49% 78% 69% 57% 8% 38%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $4,396 $3,856 $4,353 $3,858 $1,701 $ 917
- ------------
*** For the period from the inception of Class C, January 3, 1994, through 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 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 .............. $ 0.22 $ 0.23 $ 0.24 $ 0.25 $ 0.03 --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ....................... 1.79% 1.81% 1.82% 1.84% 1.80%+ 3.53%+
Net investment income ............ 3.93% 4.22% 4.32% 4.64% 3.77%+ 0.27%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
FLORIDA FUND
------------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED YEAR ENDED PERIOD ENDED
---------------------------------- MARCH 31, JANUARY 31, JANUARY 31,
1998 1997 1996 1995 1994 1994 1993*
CLASS A
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period .................. $ 9.64 $ 9.82 $ 9.60 $ 9.65 $10.63 $ 9.89 $ 9.53
------ ------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ..... $ 0.50 $ 0.51 $ 0.52 $ 0.54 $ 0.09 $ 0.57 $ 0.58
Net realized and unrealized
gain (loss) on investments . 0.46 (0.18) 0.22 0.02 (0.98) 0.86 0.36
------ ------ ------ ------ ------ ------ ------
Total from investment
operations ............. $ 0.96 $ 0.33 $ 0.74 $ 0.56 $(0.89) $ 1.43 $ 0.94
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income . $(0.50) $(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 ........ $(0.50) $(0.51) $(0.52) $(0.61) $(0.09) $(0.69) $(0.58)
------ ------ ------ ------ ------ ------ ------
Net asset value -- end of
period ..................... $10.10 $ 9.64 $ 9.82 $ 9.60 $ 9.65 $10.63 $ 9.89
====== ====== ====== ====== ====== ====== ======
Total return(+) .............. 10.16% 3.43% 7.81% 6.07% (8.39)%++ 14.71% 10.28%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ................. 0.78% 0.86% 0.86% 0.60% 0.77%+ 0.49% 0.05%+
Net investment income ...... 5.03% 5.26% 5.26% 5.75% 5.15%+ 5.42% 6.27%+
PORTFOLIO TURNOVER ........... 14% 24% 56% 131% 19% 53% 54%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .............. $77,711 $80,342 $87,553 $89,894 $108,579 $124,131 $74,329
- ------------
* For the period from the commencement of the Fund's investment operations [inception of Class A], February 3, 1992,
through January 31, 1993.
+ 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 March 31, 1996, the per share distribution in excess of net investment income was $0.0015.
(S) The investment adviser and/or 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 ... $ 0.49 -- $ 0.52 $ 0.52 $ 0.08 $ 0.52 $ 0.51
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ............ 0.85% -- 0.90% 0.83% 1.12%+ 0.93% 0.81%+
Net investment income . 4.96% -- 5.22% 5.52% 4.80%+ 4.97% 5.51%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
FLORIDA FUND
-----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED PERIOD ENDED
----------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994**
CLASS B
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period $ 9.64 $ 9.82 $ 9.60 $ 9.64 $10.62 $10.69
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ........... $ 0.42 $ 0.43 $ 0.43 $ 0.43 $ 0.07 $ 0.18
Net realized and unrealized gain
(loss) on investments ............ 0.45 (0.18) 0.22 0.04 (0.98) 0.03
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.87 $ 0.25 $ 0.65 $ 0.47 $(0.91) $ 0.21
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.42) $(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 ......... $(0.42) $(0.43) $(0.43) $(0.51) $(0.07) $(0.28)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $10.09 $ 9.64 $ 9.82 $ 9.60 $ 9.64 $10.62
====== ====== ====== ====== ====== ======
Total return ....................... 9.18% 2.56% 6.88% 5.06% (8.55)%++ 4.87%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.58% 1.72% 1.74% 1.68% 1.82%+ 1.64%+
Net investment income ............ 4.22% 4.40% 4.36% 4.63% 4.08%+ 3.82%+
PORTFOLIO TURNOVER ................. 14% 24% 56% 131% 19% 53%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $16,719 $14,701 $14,448 $12,667 $7,995 $7,244
- ------------
** For the period from the inception of Class B, September 7, 1993, through January 31, 1994.
+ 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.
(++) 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 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 ......... $ 0.41 -- $ 0.43 $ 0.41 $ 0.06 $ 0.16
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.65% -- 1.78% 1.91% 2.17%+ 2.09%+
Net investment income ....... 4.15% -- 4.33% 4.40% 3.72%+ 3.38%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
GEORGIA FUND
---------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED
-------------------------------------------------------- MARCH 31,
1998 1997 1996 1995 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 .......................... $10.38 $10.47 $10.35 $10.38 $11.30
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ........ $ 0.56 $ 0.56 $ 0.54 $ 0.57 $ 0.09
Net realized and unrealized gain
(loss) on investments ......... 0.56 (0.10) 0.12 -- (0.92)
------ ------ ------ ------ ------
Total from investment operations $ 1.12 $ 0.46 $ 0.66 $ 0.57 $(0.83)
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ...... $(0.55) $(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) $(0.55) $(0.54) $(0.60) $(0.09)
------ ------ ------ ------ ------
Net asset value -- end of period .. $10.95 $10.38 $10.47 $10.35 $10.38
====== ====== ====== ====== ======
Total return(+) ................... 11.02% 4.47% 6.48% 5.65% (7.34)%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ...................... 1.03% 1.03% 1.17% 1.14% 1.18%+
Net investment income ........... 5.14% 5.34% 5.11% 5.50% 5.05%+
PORTFOLIO TURNOVER ................ 18% 27% 65% 56% 5%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ................... $59,546 $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 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 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 ......... $ 0.55 $ 0.55 $ 0.53 $ 0.56 $ 0.09
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.13% 1.10% 1.27% 1.24% 1.28%+
Net investment income ....... 5.04% 5.27% 5.01% 5.40% 4.95%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
GEORGIA FUND
-----------------------------------------------------------------------------------
PERIOD
YEAR ENDED JANUARY 31, 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 ........................... $10.57 $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 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(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 the Fund's investment operations. June 6, 1988, through January 31, 1989.
+ Annualized.
(+) Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior
to October 31, 1989). 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 ......... $ 0.56 $ 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>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
GEORGIA FUND
------------------------------------------------------------------------------------
TWO MONTHS PERIOD
YEAR ENDED MARCH 31, ENDED ENDED
--------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994**
CLASS B
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $10.38 $10.47 $10.36 $10.38 $11.30 $11.26
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ........... $ 0.48 $ 0.47 $ 0.45 $ 0.47 $ 0.07 $ 0.19
Net realized and unrealized gain
(loss) on investments ............ 0.56 (0.09) 0.12 0.02 (0.91) 0.05
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.04 $ 0.38 $ 0.57 $ 0.49 $(0.84) $ 0.24
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.47) $(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) $(0.47) $(0.46) $(0.51) $(0.08) $(0.20)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $10.95 $10.38 $10.47 $10.36 $10.38 $11.30
====== ====== ====== ====== ====== ======
Total return ....................... 10.19% 3.63% 5.52% 4.88% (7.47)%++ 5.34%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.77% 1.83% 2.00% 1.96% 1.99%+ 1.97%+
Net investment income ............ 4.39% 4.53% 4.27% 4.66% 4.17%+ 3.83%+
PORTFOLIO TURNOVER ................. 18% 27% 65% 56% 5% 14%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $10,871 $9,995 $10,205 $8,695 $6,631 $5,766
- ------------
** For the period from the inception of Class B, September 7, 1993, through 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 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 ......... $ 0.47 $ 0.47 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.87% 1.90% -- -- -- --
Net investment income ....... 4.29% 4.46% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
MARYLAND FUND
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED YEAR ENDED
------------------------------------------------ MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994
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 .............. $10.89 $11.04 $10.94 $10.89 $11.81 $11.40
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.54 $ 0.57 $ 0.57 $ 0.59 $ 0.10 $ 0.62
Net realized and unrealized
gain (loss) on investments ..... 0.59 (0.16) 0.09 0.09 (0.92) 0.53
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.13 $ 0.41 $ 0.66 $ 0.68 $(0.82) $ 1.15
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.54) $(0.56) $(0.56) $(0.59) $(0.06) $(0.61)
From net realized gain on
investments ................... -- -- -- -- -- (0.07)
In excess of net investment
income(++) ..................... (0.01) -- -- (0.00) (0.04) (0.04)
In excess of net realized
gain on investments ............ -- -- -- (0.04) -- (0.02)
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ................. $(0.55) $(0.56) $(0.56) $(0.63) $(0.10) $(0.74)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $11.47 $10.89 $11.04 $10.94 $10.89 $11.81
====== ====== ====== ====== ====== ======
Total return(+) .................... 10.57% 3.75% 6.17% 6.51% (6.96)%++ 10.27%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.09% 1.12% 1.19% 1.21% 1.23%+ 1.25%
Net investment income ............ 4.79% 5.21% 5.10% 5.46% 4.97%+ 5.42%
PORTFOLIO TURNOVER ................. 21% 22% 15% 31% 1% 25%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $126,018 $126,405 $139,297 $145,361 $161,290 $173,419
- ------------
+ 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 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 ......... $ 0.53 $ 0.57 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.19% 1.19% -- -- -- --
Net investment income ....... 4.69% 5.14% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
MARYLAND FUND
-----------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
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 ........................... $11.20 $10.97 $10.79 $10.76 $10.62 $11.20
------ ------ ------ ------ ------ ------
Income from investment operations --
Net investment income ............ $ 0.67 $ 0.70 $ 0.70 $ 0.69 $ 0.69 $ 0.68
Net realized and unrealized gain
(loss) on investments .......... 0.24 0.31 0.19 0.04 0.14 (0.57)
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.91 $ 1.01 $ 0.89 $ 0.73 $ 0.83 $ 0.11
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.69) $(0.76) $(0.70) $(0.69) $(0.69) $(0.67)
From net realized gain on
investments .................... (0.02) (0.02) (0.01) (0.01) -- (0.01)
Paid-in capital .................. -- -- -- -- -- (0.01)
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders ..... $(0.71) $(0.78) $(0.71) $(0.70) $(0.69) $(0.69)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $11.40 $11.20 $10.97 $10.79 $10.76 $10.62
====== ====== ====== ====== ====== ======
Total return(+) .................... 8.34% 9.55% 8.51% 6.90% 8.15% 1.25%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ......................... 1.14% 1.16% 1.17% 1.18% 1.14% 1.10%
Net investment income ............ 6.13% 6.32% 6.45% 6.33% 6.52% 6.47%
PORTFOLIO TURNOVER ................. 5% 9% 41% 58% 34% 13%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $145,794 $119,120 $101,742 $93,175 $84,380 $79,906
- ------------
(+) Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior
to October 1, 1989). If the charge had been included, the results would have been lower.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
MARYLAND FUND
------------------------------------------------------------------------------------
TWO MONTHS PERIOD
YEAR ENDED MARCH 31, ENDED ENDED
------------------------------------------------ MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994**
CLASS B
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $10.88 $11.03 $10.93 $10.88 $11.80 $11.88
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.47 $ 0.50 $ 0.48 $ 0.51 $ 0.08 $ 0.22
Net realized and unrealized gain
(loss) on investments .......... 0.60 (0.17) 0.10 0.09 (0.91) (0.01)
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.07 $ 0.33 $ 0.58 $ 0.60 $(0.83) $ 0.21
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.47) $(0.48) $(0.48) $(0.51) $(0.08) $(0.21)
From net realized gain on
investments .................... -- -- -- -- -- (0.05)
In excess of net investment
income(++) ..................... (0.01) -- -- (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) $(0.48) $(0.55) $(0.09) $(0.29)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $11.47 $10.88 $11.03 $10.93 $10.88 $11.80
====== ====== ====== ====== ====== ======
Total return ....................... 9.96% 3.03% 5.41% 5.75% (7.08)%++ 4.45%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.74% 1.82% 1.91% 1.93% 1.95%+ 1.81%+
Net investment income ............ 4.12% 4.50% 4.36% 4.73% 4.19%+ 4.23%+
PORTFOLIO TURNOVER ................. 21% 22% 15% 31% 1% 25%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $21,622 $17,379 $13,694 $11,168 $6,478 $5,345
- ------------
** For the period from the inception of Class B, September 7, 1993, through 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 in excess of net investment income 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 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 $ 0.49 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................... 1.84% 1.89% -- -- -- --
Net investment income ........ 4.02% 4.43% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
MASSACHUSETTS FUND
----------------------------------------------------------------------------------
TWO MONTHS PERIOD
YEAR ENDED MARCH 31, ENDED ENDED
------------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994
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 ........................... $10.86 $10.98 $10.84 $10.90 $11.75 $11.41
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.58 $ 0.61 $ 0.60 $ 0.64 $ 0.11 $ 0.64
Net realized and unrealized gain
(loss) on investments .......... 0.48 (0.14) 0.14 (0.03) (0.85) 0.58
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.06 $ 0.47 $ 0.74 $ 0.61 $(0.74) $ 1.22
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.58) $(0.59) $(0.60) $(0.64) $(0.07) $(0.64)
From net realized gain on
investments .................... -- -- -- (0.02) -- (0.20)
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 .............. $(0.58) $(0.59) $(0.60) $(0.67) $(0.11) $(0.88)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $11.34 $10.86 $10.98 $10.84 $10.90 $11.75
====== ====== ====== ====== ====== ======
Total return(+) .................... 9.99% 4.39% 6.95% 5.89% (6.34)%++ 11.02%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.06% 1.12% 1.17% 1.17% 1.19%+ 1.19%
Net investment income ............ 5.18% 5.55% 5.44% 6.01% 5.64%+ 5.71%
PORTFOLIO TURNOVER ................. 24% 33% 31% 31% 4% 30%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $237,861 $234,874 $249,497 $262,551 $277,748 $300,894
- ------------
+ 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, 1998 and March 31, 1996, the per share distributions in excess of net investment
income were $0.002 and $0.002, respectively.
(S) The investment advisor 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 ratios would have been:
Net investment income ......... $ 0.57 $ 0.60 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.16% 1.19% -- -- -- --
Net investment income ....... 5.08% 5.48% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
MASSACHUSETTS FUND
----------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------
1993 1992 1991 1990 1989
CLASS A
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ...................... $11.05 $10.68 $10.58 $10.65 $10.60
------ ------ ------ ------ ------
Income from investment operations --
Net investment income ....... $ 0.68 $ 0.73 $ 0.71 $ 0.72 $ 0.72
Net realized and unrealized
gain (loss) on investments 0.39 0.43 0.11 (0.07) 0.05
------ ------ ------ ------ ------
Total from investment
operations .............. $ 1.07 $ 1.16 $ 0.82 $ 0.65 $ 0.77
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income .. $(0.71) $(0.78) $(0.72) $(0.72) $(0.72)
From net realized gain on
investments ............... -- (0.01) -- -- --
------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.71) $(0.79) $(0.72) $(0.72) $(0.72)
------ ------ ------ ------ ------
Net asset value -- end of
period ...................... $11.41 $11.05 $10.68 $10.58 $10.65
====== ====== ====== ====== ======
Total return(+) ............... 10.03% 11.23% 8.12% 6.28% 7.65%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses .................... 1.08% 1.06% 1.07% 1.10% 1.07%
Net investment income ....... 6.33% 6.65% 6.74% 6.75% 6.90%
PORTFOLIO TURNOVER ............ 32% 51% 43% 52% 26%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ............... $270,778 $239,311 $213,679 $215,381 $212,763
- ------------
(+) Total returns for Class A shares do not include the applicable sales charge (except for dividends prior to
October 1, 1989). If the charge had been included, the results would have been lower.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
MASSACHUSETTS FUND
---------------------------------------------------------------------------------
TWO MONTHS PERIOD
YEAR ENDED MARCH 31, ENDED ENDED
-------------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994*
CLASS B
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $10.87 $10.99 $10.84 $10.90 $11.75 $11.91
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.51 $ 0.53 $ 0.52 $ 0.55 $ 0.09 $ 0.23
Net realized and unrealized gain
(loss) on investments .......... 0.48 (0.13) 0.15 (0.02) (0.85) 0.04
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.99 $ 0.40 $ 0.67 $ 0.53 $(0.76) $ 0.27
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.51) $(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) -- (0.00) -- -- (0.01)
In excess of net realized gain on
investments .................... -- -- -- (0.01) -- --
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders .............. $(0.51) $(0.52) $(0.52) $(0.59) $(0.09) $(0.43)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $11.35 $10.87 $10.99 $10.84 $10.90 $11.75
====== ====== ====== ====== ====== ======
Total return ....................... 9.25% 3.66% 6.27% 5.13% (6.46)%++ 5.89%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.71% 1.81% 1.90% 1.89% 1.91%+ 1.81%+
Net investment income ............ 4.52% 4.81% 4.71% 5.27% 4.89%+ 4.62%+
PORTFOLIO TURNOVER ................. 24% 33% 51% 31% 4% 30%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $18,750 $15,204 $11,316 $8,676 $4,993 $4,191
- ------------
** For the period from the inception of Class B shares, September 7, 1993, through 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, 1998 and March 31, 1996, the per share distributions in excess of net investment
income were $0.0016 and $0.0013, 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 ......... $ 0.50 $ 0.52 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.81% 1.88% -- -- -- --
Net investment income ....... 4.42% 4.74% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
MISSISSIPPI FUND
-------------------------------------------------------------------------------------------
TWO MONTHS YEAR ENDED
YEAR ENDED MARCH 31, ENDED JANUARY 31,
------------------------------------------------ MARCH 31, ---------------------
1998 1997 1996 1995 1994 1994 1993*
CLASS A
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning
of period .................. $ 9.35 $ 9.35 $ 9.15 $ 9.19 $10.00 $ 9.38 $ 9.53
------ ------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ... $ 0.49 $ 0.48 $ 0.52 $ 0.54 $ 0.09 $ 0.55 $ 0.24
Net realized and unrealized
gain (loss) on investments 0.52 -- 0.20 (0.01) (0.81) 0.62 (0.15)
------ ------ ------ ------ ------ ------ ------
Total from investment
operations ............. $ 1.01 $ 0.48 $ 0.72 $ 0.53 $(0.72) $ 1.17 $ 0.09
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment
income(++) ............... $(0.48) $(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) $(0.48) $(0.52) $(0.57) $(0.09) $(0.55) $(0.24)
------ ------ ------ ------ ------ ------ ------
Net asset value -- end
of period .................. $ 9.88 $ 9.35 $ 9.35 $ 9.15 $ 9.19 $10.00 $ 9.38
====== ====== ====== ====== ====== ====== ======
Total return (+) ............. 11.02% 5.22% 7.99% 6.08% (7.20)%++ 12.80% 5.00%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ................. 0.78% 0.87% 0.45% 0.22% 0.10%+ 0.03% -- %+
Net investment income ...... 5.04% 5.14% 5.51% 5.99% 5.69%+ 5.68% 5.59%+
PORTFOLIO TURNOVER ........... 18% 17% 31% 47% 2% 28% 14%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .............. $66,061 $66,630 $74,435 $79,033 $79,541 $84,177 $41,212
- ------------
* For the period from the commencement of investment operations, August 6, 1992, through 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 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.
(S) Effective August 1, 1997, the investment adviser voluntarily waived a portion of its management fee. Prior to
March 31, 1997, the investment adviser voluntarily agreed to maintain expenses of the Fund, exclusive of
management, distribution, and services fees, at no more than 0.40% of average daily net assets. To the extent
actual expenses were over/under this limitation, and if the investment adviser was not waiving its fee, the net
investment income per share and the ratios would have been:
Net investment income .. $ 0.48 -- $ 0.48 $ 0.48 $ 0.08 $ 0.45 $ 0.19
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ........... 0.85% -- 0.88% 0.93% 0.88%+ 1.01% 1.17%+
Net investment income 4.97% -- 5.08% 5.28% 4.91%+ 4.69% 4.42%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
MISSISSIPPI FUND
------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED PERIOD ENDED
------------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994**
CLASS B
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $ 9.36 $ 9.36 $ 9.16 $ 9.19 $ 9.99 $ 9.94
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.41 $ 0.40 $ 0.44 $ 0.45 $ 0.07 $ 0.18
Net realized and unrealized gain
(loss) on investments .......... 0.53 -- 0.20 -- (0.79) 0.05
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.94 $ 0.40 $ 0.64 $ 0.45 $(0.72) $ 0.23
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income(++) ... $(0.41) $(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 .............. $(0.41) $(0.40) $(0.44) $(0.48) $(0.08) $(0.18)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $ 9.89 $ 9.36 $ 9.36 $ 9.16 $ 9.19 $ 9.99
====== ====== ====== ====== ====== ======
Total return ....................... 10.15% 4.33% 7.11% 5.14% (7.27)%++ 2.33%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.56% 1.72% 1.28% 1.23% 1.10%+ 1.06%+
Net investment income ............ 4.26% 4.29% 4.67% 4.97% 4.67%+ 4.29%+
PORTFOLIO TURNOVER ................. 18% 17% 31% 47% 2% 28%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $10,717 $11,014 $11,475 $9,429 $6,526 $6,268
- ------------
** For the period from the inception of Class B, September 7, 1993 through 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 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) Effective August 1, 1997, the investment adviser voluntarily waived a portion of its management fee. Prior to
March 31, 1997, the investment adviser voluntarily agreed to maintain expenses of the Fund, exclusive of
management, distribution, and service fees, at no more than 0.40% of average daily net assets. To the extent
actual expenses were over/under this limitation, and if the investment adviser was not waiving its fee, the net
investment income per share and the ratios would have been:
Net investment income ........ $ 0.40 -- $ 0.40 $ 0.38 $ 0.06 $ 0.14
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................. 1.63% -- 1.71% 2.01% 1.95%+ 2.12%+
Net investment income ...... 4.19% -- 4.24% 4.19% 3.82%+ 3.23%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
NEW YORK FUND
-------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED
---------------------------------------------------- MARCH 31,
1998 1997 1996 1995 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 ........................... $10.60 $10.66 $10.49 $10.50 $11.34
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.57 $ 0.55 $ 0.55 $ 0.56 $ 0.09
Net realized and unrealized gain
(loss) on investments .......... 0.64 (0.06) 0.17 0.05 (0.84)
------ ------ ------ ------ ------
Total from investment operations $ 1.21 $ 0.49 $ 0.72 $ 0.61 $(0.75)
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ....... $(0.55) $(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) $(0.55) $(0.62) $(0.09)
------ ------ ------ ------ ------
Net asset value -- end of period ... $11.26 $10.60 $10.66 $10.49 $10.50
====== ====== ====== ====== ======
Total return(+) .................... 11.59% 4.68% 6.98% 6.03% (6.58)%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.03% 1.11% 1.10% 1.07% 1.03%+
Net investment income ............ 5.14% 5.18% 5.09% 5.43% 5.09%+
PORTFOLIO TURNOVER ................. 41% 64% 102% 147% 15%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $119,376 $121,588 $134,449 $146,597 $162,621
- ------------
+ 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 $0.0058.
(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 ........ $ 0.56 -- $ 0.54 $ 0.55 $ 0.07
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................. 1.10% -- 1.20% 1.18% 1.23%+
Net investment income ...... 5.07% -- 4.99% 5.31% 4.88%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
NEW YORK FUND
--------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, PERIOD 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 the Fund's investment operations, June 6, 1988 through 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>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
NEW YORK FUND
-----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED PERIOD ENDED
------------------------------------------------ MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994**
CLASS B
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $10.59 $10.66 $10.49 $10.50 $11.34 $11.46
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.49 $ 0.47 $ 0.47 $ 0.47 $ 0.07 $ 0.18
Net realized and unrealized gain
(loss) on investments .......... 0.64 (0.07) 0.17 0.05 (0.83) 0.04
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.13 $ 0.40 $ 0.64 $ 0.52 $(0.76) $ 0.22
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.46) $(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 ................. $(0.46) $(0.47) $(0.47) $(0.53) $(0.08) $(0.34)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $11.26 $10.59 $10.66 $10.49 $10.50 $11.34
====== ====== ====== ====== ====== ======
Total return ....................... 10.78% 3.77% 6.10% 5.17% (6.71)%++ 5.20%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.78% 1.92% 1.92% 1.89% 1.87%+ 1.79%+
Net investment income ............ 4.39% 4.37% 4.27% 4.58% 4.21%+ 3.90%+
PORTFOLIO TURNOVER ................. 41% 64% 102% 147% 15% 51%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $26,618 $26,724 $28,068 $11,885 $6,265 $4,828
- ------------
** For the period from the inception of Class B, September 7, 1993, through 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 $0.0048.
(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 .............. $ 0.48 -- -- $ 0.47 $ 0.07 $ 0.17
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ....................... 1.85% -- -- 1.91% 1.97%+ 2.00%+
Net investment income ............ 4.32% -- -- 4.57% 4.11%+ 3.69%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
NORTH CAROLINA FUND
-----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED YEAR ENDED
------------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994
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 ........................... $11.56 $11.57 $11.42 $11.48 $12.37 $11.80
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.59 $ 0.59 $ 0.59 $ 0.61 $ 0.10 $ 0.64
Net realized and unrealized gain
(loss) on investments .......... 0.59 (0.01) 0.15 0.03 (0.89) 0.58
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.18 $ 0.58 $ 0.74 $ 0.64 $(0.79) $ 1.22
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.59) $(0.59) $(0.59) $(0.60) $(0.07) $(0.61)
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) $(0.59) $(0.70) $(0.10) $(0.65)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $12.15 $11.56 $11.57 $11.42 $11.48 $12.37
====== ====== ====== ====== ====== ======
Total return(+) .................... 10.36% 5.09% 6.56% 5.86% (6.39)%++ 10.59%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.03% 1.08% 1.17% 1.16% 1.16%+ 1.19%
Net investment income ............ 4.92% 5.05% 5.04% 5.38% 4.96%+ 5.21%
PORTFOLIO TURNOVER ................. 24% 33% 30% 58% 2% 12%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $380,595 $377,112 $409,347 $429,131 $460,321 $495,158
- ------------
+ 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, 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 $ 0.58 -- -- -- --
RATIOS (TO AVERAGE
NET ASSETS):
Expenses## ................. 1.13% 1.15% -- -- -- --
Net investment income ...... 4.82% 4.98% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
NORTH CAROLINA FUND
------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
------------------------------------------------------------------------
1993 1992 1991 1990 1989
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 $11.18 $11.15 $11.13
------ ------ ------ ------ ------
Income from investment operations --
Net investment income ............ $ 0.65 $ 0.70 $ 0.72 $ 0.73 $ 0.74
Net realized and unrealized gain
(loss) on investments .......... 0.37 0.26 0.17 0.03 0.02
------ ------ ------ ------ ------
Total from investment operations $ 1.02 $ 0.96 $ 0.89 $ 0.76 $ 0.76
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.67) $(0.76) $(0.72) $(0.73) $(0.74)
From net realized gain on
investments .................... -- (0.01) (0.05) -- --
From paid-in capital(++) ......... -- (0.04) (0.00) -- --
----- ----- ----- ----- -----
Total distributions declared to
shareholders ................. $(0.67) $(0.81) $(0.77) $(0.73) $(0.74)
----- ----- ----- ----- -----
Net asset value -- end of period ... $11.80 $11.45 $11.30 $11.18 $11.15
====== ====== ====== ====== ======
Total return(+) .................... 9.23% 8.82% 8.34% 6.97% 7.12%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ......................... 1.07% 1.09% 1.09% 1.12% 1.11%
Net investment income ............ 5.80% 6.17% 6.47% 6.48% 6.70%
PORTFOLIO TURNOVER ................. 2% 39% 44% 61% 25%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $398,352 $312,466 $226,806 $175,101 $129,287
- ------------
(+) 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>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
NORTH CAROLINA FUND
----------------------------------------------------------------------------------
TWO MONTHS PERIOD
YEAR ENDED MARCH 31, ENDED ENDED
----------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994**
CLASS B
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $11.55 $11.56 $11.42 $11.47 $12.36 $12.36
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.51 $ 0.50 $ 0.50 $ 0.52 $ 0.08 $ 0.22
Net realized and unrealized gain
(loss) on investments .......... 0.60 -- 0.14 0.05 (0.89) 0.01
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.11 $ 0.50 $ 0.64 $ 0.57 $(0.81) $ 0.23
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.51) $(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) $(0.51) $(0.50) $(0.62) $(0.08) $(0.23)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $12.15 $11.55 $11.56 $11.42 $11.47 $12.36
====== ====== ====== ====== ====== ======
Total return ....................... 9.75% 4.36% 5.70% 5.20% (6.51)%++ 4.58%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.68% 1.78% 1.90% 1.88% 1.88%+ 1.84%+
Net investment income ............ 4.27% 4.36% 4.30% 4.64% 4.18%+ 4.03%+
PORTFOLIO TURNOVER ................. 24% 33% 30% 58% 2% 12%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $44,238 $39,035 $33,847 $26,260 $15,866 $13,379
- ------------
** For the period from the inception of Class B, September 7, 1993, through 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 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 ......... $ 0.50 $ 0.49 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.78% 1.85% -- -- -- --
Net investment income ....... 4.17% 4.29% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
NORTH CAROLINA FUND
-----------------------------------------------------------------------------------
TWO MONTHS PERIOD
YEAR ENDED MARCH 31, ENDED ENDED
------------------------------------------------ MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994***
CLASS C
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $11.55 $11.56 $11.41 $11.47 $12.36 $12.24
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.51 $ 0.52 $ 0.51 $ 0.53 $ 0.10 $ 0.02
Net realized and unrealized gain
(loss) on investments .......... 0.60 (0.02) 0.15 0.04 (0.90) 0.12
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.11 $ 0.50 $ 0.66 $ 0.57 $(0.80) $ 0.14
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income(++) ... $(0.51) $(0.51) $(0.51) $(0.53) $(0.09) $(0.02)
From net realized gain on
investments .................... -- -- -- (0.06) -- --
In excess of net realized gain on
investments .................... -- -- -- (0.04) -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ................. $(0.51) $(0.51) $(0.51) $(0.63) $(0.09) $(0.02)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $12.15 $11.55 $11.56 $11.41 $11.47 $12.36
====== ====== ====== ====== ====== ======
Total return ....................... 9.75% 4.41% 5.87% 5.18% (6.50)%++ 16.50%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.68% 1.73% 1.83% 1.81% 1.82%+ 1.44%+
Net investment income ............ 4.27% 4.40% 4.38% 4.71% 4.25%+ 2.33%+
PORTFOLIO TURNOVER ................. 24% 33% 30% 58% 2% 12%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $8,143 $7,789 $9,352 $8,149 $6,661 $4,584
- ------------
*** For the period from the inception of Class C, January 3, 1994, through 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 years ended March 31, 1997, and 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 $0.002, $0.002, $0.002 and $0.003,
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 ........ $ 0.50 $ 0.51 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................. 1.78% 1.80% -- -- -- --
Net investment income ...... 4.17% 4.33% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
PENNSYLVANIA FUND
-----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED PERIOD ENDED
----------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994*
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 ........................ $ 9.26 $ 9.37 $ 9.29 $ 9.15 $10.14 $ 9.53
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.50 $ 0.53 $ 0.54 $ 0.54 $ 0.09 $ 0.50
Net realized and unrealized gain
(loss) on investments .......... 0.56 (0.10) 0.09 0.18 (0.99) 0.62
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.06 $ 0.43 $ 0.63 $ 0.72 $(0.90) $ 1.12
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income(++) ... $(0.50) $(0.54) $(0.55) $(0.54) $(0.09) $(0.50)
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 ................. $(0.50) $(0.54) $(0.55) $(0.58) $(0.09) $(0.51)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $ 9.82 $ 9.26 $ 9.37 $ 9.29 $ 9.15 $10.14
====== ====== ====== ====== ====== ======
Total return(+) .................... 11.65% 4.67% 6.85% 8.14% (8.91)%++ 12.12%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses ......................... 0.40% 0.10% 0.10% 0.01% 0.00%+ 0.00%+
Net investment income ............ 5.15% 5.66% 5.76% 5.97% 5.43%+ 5.30%+
PORTFOLIO TURNOVER ................. 31% 42% 40% 49% 1% 10%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $18,918 $16,933 $18,030 $16,411 $13,961 $13,987
- ------------
* For the period from the commencement of the Fund's investment operations, February 1, 1993, through January 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data for 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, 1997, the per share distribution in excess of net investment income was $0.003.
(S) Subject to reimbursement by the Fund, the investment adviser voluntarily agreed to maintain expenses of the Fund,
exclusive of management, distribution, and service fees, at not more than 0.00% of average daily net assets.
Effective October 31, 1997, the investment adviser voluntarily waived a portion of its management fee. If this fee
had been incurred by the Fund and to the extent actual expenses were over/under this expense limitation, the net
investment income per share and the ratios would have been:
Net investment income ........ $ 0.44 $ 0.45 $ 0.45 $ 0.43 $ 0.06 $ 0.32
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................. 0.99% 0.95% 1.00% 1.18% 1.84%+ 1.94%+
Net investment income ...... 4.56% 4.81% 4.86% 4.80% 3.60%+ 3.36%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
PENNSYLVANIA FUND
-----------------------------------------------------------------------------------
TWO MONTHS PERIOD
YEAR ENDED MARCH 31, ENDED ENDED
----------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994**
CLASS B
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $ 9.28 $ 9.39 $ 9.29 $ 9.15 $10.15 $10.06
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.42 $ 0.46 $ 0.50 $ 0.45 $ 0.06 $ 0.17
Net realized and unrealized gain
(loss) on investments .......... 0.56 (0.11) 0.07 0.18 (0.99) 0.10
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.98 $ 0.35 $ 0.57 $ 0.63 $(0.93) $ 0.27
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders --
From net investment income(++) ... $(0.42) $(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 ................. $(0.42) $(0.46) $(0.47) $(0.49) $(0.07) $(0.18)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $ 9.84 $ 9.28 $ 9.39 $ 9.29 $ 9.15 $10.15
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Total return ....................... 10.76% 3.83% 6.23% 7.07% (9.16)%++ 6.76%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.19% 0.90% 0.88% 1.01% 1.00%+ 1.00%+
Net investment income ............ 4.36% 4.86% 4.98% 4.96% 4.37%+ 4.22%+
PORTFOLIO TURNOVER ................. 31% 42% 40% 49% 1% 10%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $20,551 $24,898 $24,170 $7,699 $4,304 $3,401
- ------------
** For the period from the inception of Class B, September 7, 1993, through 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, 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) Subject to reimbursement by the Fund, the investment adviser voluntarily agreed to maintain expenses of the Fund,
exclusive of management, distribution, and service fees, at not more than 0.00% of average daily net assets.
Effective October 31, 1997, the investment adviser voluntarily waived a portion of its management fee. If this fee
had been incurred by the Fund and to the extent actual expenses were over/under this expense limitation, the net
investment income per share and the ratios would have been:
Net investment income ........ $ 0.36 $ 0.38 $ 0.41 $ 0.34 $ 0.04 $ 0.05
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................. 1.78% 1.75% 1.85% 2.26% 2.91%+ 2.50%+
Net investment income ...... 3.77% 4.01% 4.01% 3.72% 2.47%+ 1.29%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
SOUTH CAROLINA FUND
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED YEAR ENDED
------------------------------------------------ MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994
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 ........................... $11.88 $11.97 $11.86 $11.79 $12.74 $12.02
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.60 $ 0.62 $ 0.62 $ 0.63 $ 0.08 $ 0.63
Net realized and unrealized gain
(loss) on investments .......... 0.64 (0.10) 0.11 0.15 (0.92) 0.74
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.24 $ 0.52 $ 0.73 $ 0.78 $(0.84) $ 1.37
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.60) $(0.61) $(0.62) $(0.62) $(0.08) $(0.61)
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 .................... -- -- -- (0.03) -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ................. $(0.60) $(0.61) $(0.62) $(0.71) $(0.11) $(0.65)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $12.52 $11.88 $11.97 $11.86 $11.79 $12.74
====== ====== ====== ====== ====== ======
Total return(+) .................... 10.62% 4.46% 6.20% 6.93% (6.65)%++ 11.69%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.06% 1.10% 1.20% 1.19% 1.23%+ 1.22%
Net investment income ............ 4.86% 5.17% 5.10% 5.37% 5.09%+ 5.06%
PORTFOLIO TURNOVER ................. 29% 13% 18% 30% 4% 10%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $148,820 $148,908 $166,801 $171,045 $173,316 $187,307
- ------------
+ 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, 1998 and 1996, the per share distributions in excess of net investment income were
$0.0009 and $0.0006, respectively.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods 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 ........ $ 0.59 $ 0.16 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................. 1.16% 1.16% -- -- -- --
Net investment income ...... 4.76% 5.11% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
SOUTH CAROLINA FUND
-------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-------------------------------------------------------------------------
1993 1992 1991 1990 1989
CLASS A
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ......................... $11.74 $11.45 $11.30 $11.24 $11.14
------ ------ ------ ------ ------
Income from investment operations --
Net investment income .......... $ 0.67 $ 0.70 $ 0.71 $ 0.72 $ 0.76
Net realized and unrealized gain
on investments ............... 0.34 0.40 0.21 0.06 0.11
------ ------ ------ ------ ------
Total from investment
operations ................. $ 1.01 $ 1.10 $ 0.92 $ 0.78 $ 0.87
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ..... $(0.69) $(0.76) $(0.71) $(0.72) $(0.77)
From net realized gain on
investments .................. (0.04) (0.05) (0.06) -- --
------ ------ ------ ------ ------
Total distributions declared
to shareholders ............ $(0.73) $(0.81) $(0.77) $(0.72) $(0.77)
------ ------ ------ ------ ------
Net asset value -- end of period . $12.02 $11.74 $11.45 $11.30 $11.24
====== ====== ====== ====== ======
Total return(+) .................. 8.89% 9.95% 8.46% 7.13% 8.18%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ....................... 1.12% 1.15% 1.18% 1.21% 0.97%
Net investment income .......... 5.47% 6.07% 6.30% 6.35% 6.90%
PORTFOLIO TURNOVER ............... 11% 22% 47% 54% 27%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................. $144,539 $101,434 $75,922 $57,675 $45,391
- ------------
(+) 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>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
SOUTH CAROLINA FUND
----------------------------------------------------------------------------------
TWO MONTHS PERIOD
YEAR ENDED MARCH 31, ENDED ENDED
--------------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994**
CLASS B
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $11.88 $11.97 $11.86 $11.78 $12.73 $12.67
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.52 $ 0.54 $ 0.52 $ 0.54 $ 0.08 $ 0.21
Net realized and unrealized gain
(loss) on investments .......... 0.64 (0.10) 0.12 0.17 (0.94) 0.06
------ ------ ------ ------ ------ ------
Total from investment operations. $ 1.16 $ 0.44 $ 0.64 $ 0.71 $(0.86) $ 0.27
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.52) $(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) (0.00) (0.01) (0.01)
In excess of net realized gain on
investments .................... -- -- -- (0.03) -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ................. $(0.52) $(0.53) $(0.53) $(0.63) $(0.09) $(0.21)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $12.52 $11.88 $11.97 $11.86 $11.78 $12.73
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Total return ....................... 9.91% 3.73% 5.43% 6.26% (6.77)%++ 5.47%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.71% 1.79% 1.92% 1.90% 1.96%+ 1.90%+
Net investment income ............ 4.21% 4.48% 4.35% 4.63% 4.29%+ 3.86%+
PORTFOLIO TURNOVER ................. 29% 13% 18% 30% 4% 10%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $28,086 $21,871 $18,420 $12,964 $10,085 $8,217
- ------------
** For the period from the inception of Class B, September 7, 1993, through 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 years ended March 31, 1998, 1996 and 1995, the per share distributions in excess of net investment income
were $0.0008, $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
this fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income ......... $ 0.51 $ 0.53 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.81% 1.85% -- -- -- --
Net investment income ....... 4.11% 4.42% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
TENNESSEE FUND
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED YEAR ENDED
----------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994
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 ........................... $10.32 $10.40 $10.27 $10.26 $10.94 $10.37
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.53 $ 0.55 $ 0.54 $ 0.56 $ 0.09 $ 0.57
Net realized and unrealized gain
(loss) on investments .......... 0.60 (0.09) 0.13 0.02 (0.68) 0.57
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.13 $ 0.46 $ 0.67 $ 0.58 $(0.59) $ 1.14
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.53) $(0.54) $(0.54) $(0.56) $(0.07) $(0.54)
From net realized gain on
investments(++) ................ -- -- -- (0.00) -- --
In excess of net investment
income(+++) .................... (0.01) -- (0.00) -- (0.02) (0.03)
In excess of net realized gain on
investments .................... -- -- -- (0.01) -- --
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders .............. $(0.54) $(0.54) $(0.54) $(0.57) $(0.09) $(0.57)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $10.91 $10.32 $10.40 $10.27 $10.26 $10.94
====== ====== ====== ====== ====== ======
Total return(+) .................... 11.11% 4.48% 6.66% 5.86% (5.39)%++ 11.20%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.07% 1.10% 1.21% 1.22% 1.21%+ 1.29%
Net investment income ............ 4.97% 5.26% 5.18% 5.52% 5.31%+ 5.25%
PORTFOLIO TURNOVER ................. 26% 20% 20% 27% 4% 12%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $108,871 $108,000 $109,811 $117,572 $117,117 $123,050
- ------------
+ 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 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 voluntarily waived a portion of its management fee for certain of the periods 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 $ 0.54 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................. 1.17% 1.16% -- -- -- --
Net investment income ...... 4.87% 5.20% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
TENNESSEE FUND
-----------------------------------------------------------------------
YEAR ENDED JANUARY 31, PERIOD ENDED
---------------------------------------------------- JANUARY 31,
1993 1992 1991 1990 1989*
CLASS A
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period . $10.10 $ 9.90 $ 9.80 $ 9.68 $ 9.53
------ ------ ------ ------ ------
Income from investment operations --
Net investment income(S) ............. $ 0.57 $ 0.61 $ 0.62 $ 0.67 $ 0.22
Net realized and unrealized gain on
investments ........................ 0.31 0.30 0.13 0.11 0.10
------ ------ ------ ------ ------
Total from investment operations ... $ 0.88 $ 0.91 $ 0.75 $ 0.78 $ 0.32
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ........... $(0.57) $(0.66) $(0.63) $(0.66) $(0.17)
From net realized gain on investments (0.01) (0.05) (0.02) -- --
In excess of net investment income ... (0.03) -- -- -- --
From paid-in capital(++) ............. -- -- (0.00) -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders ..................... $(0.61) $(0.71) $(0.65) $(0.66) $(0.17)
------ ------ ------ ------ ------
Net asset value -- end of period ....... $10.37 $10.10 $ 9.90 $ 9.80 $ 9.68
====== ====== ====== ====== ======
Total return(+) ........................ 9.03% 9.50% 7.96% 8.30% 3.43%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses ............................. 1.14% 1.15% 1.03% 0.53% 0.40%+
Net investment income ................ 5.89% 6.11% 6.37% 6.70% 5.98%+
PORTFOLIO TURNOVER ..................... 9% 42% 58% 78% 5%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ........................ $99,443 $87,898 $72,108 $56,048 $15,832
- ------------
* For the period from the commencement of the Fund's investment operations, August 12, 1988, through
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 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 ............ $ 0.61 -- -- $ 0.60 $ 0.20
RATIOS (TO AVERAGE NET ASSETS):
Expenses ....................... 1.17% -- -- 1.24% 0.95%+
Net investment income .......... 6.23% -- -- 5.99% 5.43%+
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
TENNESSEE FUND
-----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED PERIOD ENDED
----------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994**
CLASS B
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $10.31 $10.39 $10.26 $10.26 $10.95 $10.87
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.46 $ 0.47 $ 0.46 $ 0.48 $ 0.08 $ 0.19
Net realized and unrealized gain
(loss) on investments .......... 0.61 (0.09) 0.14 0.01 (0.69) 0.08
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.07 $ 0.38 $ 0.60 $ 0.49 $(0.61) $ 0.27
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.46) $(0.46) $(0.47) $(0.48) $(0.08) $(0.19)
From net realized gain on
investments(++) ................ -- -- -- (0.00) -- --
In excess of net investment
income+++ ...................... (0.01) -- (0.00) -- -- --
In excess of net realized gain on
investments .................... -- -- -- (0.01) -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ................. $(0.47) $(0.46) $(0.47) $(0.49) $(0.08) $(0.19)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $10.91 $10.31 $10.39 $10.26 $10.26 $10.95
====== ====== ====== ====== ====== ======
Total return ....................... 10.51% 3.76% 5.89% 5.00% (5.59)%++ 2.48%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.72% 1.79% 1.93% 1.94% 1.93%+ 1.93%+
Net investment income ............ 4.32% 4.57% 4.43% 4.80% 4.49%+ 4.20%+
PORTFOLIO TURNOVER ................. 26% 20% 20% 27% 4% 12%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $18,198 $14,436 $12,935 $10,006 $5,294 $3,818
- ------------
** For the period from the inception of Class B, September 7, 1993, through 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 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
this fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income ........ $ 0.45 $ 0.46 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ................. 1.82% 1.85% -- -- -- --
Net investment income ...... 4.22% 4.51% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
VIRGINIA FUND
-----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED YEAR ENDED
----------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994
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 ........................... $11.06 $11.21 $11.09 $11.15 $12.07 $11.72
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.57 $ 0.59 $ 0.59 $ 0.56 $ 0.10 $ 0.65
Net realized and unrealized gain
(loss) on investments .......... 0.55 (0.15) 0.13 0.04 (0.92) 0.56
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.12 $ 0.44 $ 0.72 $ 0.60 $(0.82) $ 1.21
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.57) $(0.59) $(0.60) $(0.61) $(0.06) $(0.62)
From net realized gain on
investments .................... -- -- -- (0.04) -- (0.20)
In excess of net investment
income(++) ..................... (0.00) -- (0.00) (0.00) (0.04) (0.04)
In excess of net realized gain on
investments .................... -- -- -- (0.01) -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ................. $(0.57) $(0.59) $(0.60) $(0.66) $(0.10) $(0.86)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $11.61 $11.06 $11.21 $11.09 $11.15 $12.07
====== ====== ====== ====== ====== ======
Total return(+) .................... 10.32% 3.97% 6.52% 5.67% (6.80)%++ 10.67%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.03% 1.08% 1.18% 1.16% 1.17%+ 1.18%
Net investment income ............ 4.97% 5.27% 5.20% 4.91% 5.33%+ 5.37%
PORTFOLIO TURNOVER ................. 39% 42% 42% 27% 5% 22%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $373,024 $379,185 $418,408 $430,688 $443,580 $479,333
- ------------
+ 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, 1998, 1996 and 1995, the per share distributions in excess of net investment income
were $0.002, $0.005 and $0.003, respectively.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods 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 ......... $ 0.56 $ 0.58 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.13% 1.14% -- -- -- --
Net investment income ....... 4.87% 5.21% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
VIRGINIA FUND
----------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------
1993 1992 1991 1990 1989
CLASS A
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ...................... $11.44 $11.16 $10.97 $10.91 $10.75
------ ------ ------ ------ ------
Income from investment operations --
Net investment income ....... $ 0.68 $ 0.71 $ 0.73 $ 0.73 $ 0.74
Net realized and unrealized
gain on investments ....... 0.30 0.34 0.19 0.06 0.16
------ ------ ------ ------ ------
Total from investment
operations .............. $ 0.98 $ 1.05 $ 0.92 $ 0.79 $ 0.90
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income .. $(0.70) $(0.77) $(0.73) $(0.73) $(0.74)
From net realized gain on
investments(++) ........... (0.00) -- -- -- --
------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.70) $(0.77) $(0.73) $(0.73) $(0.74)
------ ------ ------ ------ ------
Net asset value -- end of
period ...................... $11.72 $11.44 $11.16 $10.97 $10.91
====== ====== ====== ====== ======
Total return(+) ............... 8.88% 9.76% 8.74% 7.46% 8.76%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses .................... 1.08% 1.08% 1.11% 1.12% 1.09%
Net investment income ....... 6.02% 6.32% 6.64% 6.67% 6.91%
PORTFOLIO TURNOVER ............ 20% 13% 38% 41% 38%
NET ASSETS AT END OF PERIOD
(000 OMITTED) $399,696 $328,664 $275,202 $240,553 $207,680
- ------------
(+) 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, 1993, the per share distribution from net realized gain on investments was $0.00348.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
VIRGINIA FUND
------------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED PERIOD ENDED
------------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994**
CLASS B
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $11.06 $11.21 $11.08 $11.14 $12.06 $12.14
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.49 $ 0.51 $ 0.51 $ 0.53 $ 0.09 $ 0.22
Net realized and unrealized gain
(loss) on investments .......... 0.56 (0.15) 0.13 (0.01) (0.92) 0.01
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.05 $ 0.36 $ 0.64 $ 0.52 $(0.83) $ 0.23
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.49) $(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 (++) .................... (0.01) -- (0.00) (0.00) (0.00) (0.01)
In excess of net realized gain on
investments .................... -- -- -- (0.01) -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ................. $(0.50) $(0.51) $(0.51) $(0.58) $(0.09) $(0.31)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $11.61 $11.06 $11.21 $11.08 $11.14 $12.06
====== ====== ====== ====== ====== ======
Total return ....................... 9.61% 3.24% 5.85% 4.91% (6.92)%++ 4.93%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.68% 1.78% 1.90% 1.88% 1.88%+ 1.82%+
Net investment income ............ 4.32% 4.57% 4.46% 4.84% 4.52%+ 4.25%+
PORTFOLIO TURNOVER ................. 39% 42% 42% 27% 5% 22%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ................... $32,902 $30,567 $28,420 $22,007 $13,337 $10,877
- ------------
** For the period from the inception of Class B, September 7, 1993, through 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 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
this fee had been incurred by the Fund, the net investment income and the ratios would have been:
Net investment income ......... $ 0.48 $ 0.50 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.78% 1.84% -- -- -- --
Net investment income ....... 4.22% 4.51% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
VIRGINIA FUND
-----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED PERIOD ENDED
------------------------------------------------ MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994***
CLASS C
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $11.06 $11.21 $11.07 $11.14 $12.06 $11.94
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.49 $ 0.52 $ 0.51 $ 0.56 $ 0.08 $ 0.02
Net realized and unrealized gain
(loss) on investments .......... 0.56 (0.16) 0.15 (0.04) (0.91) 0.12
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.05 $ 0.36 $ 0.66 $ 0.52 $(0.83) $ 0.14
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.49) $(0.51) $(0.52) $(0.54) $(0.09) $(0.02)
From net realized gain on
investment income .............. -- -- -- (0.04) -- --
In excess of net investment
income(++) ..................... (0.01) -- (0.00) (0.00) -- (0.00)
In excess of net realized gain on
investments .................... -- -- -- (0.01) -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ................. $(0.50) $(0.51) $(0.52) $(0.59) $(0.09) $(0.02)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $11.61 $11.06 $11.21 $11.07 $11.14 $12.06
====== ====== ====== ====== ====== ======
Total return ....................... 9.61% 3.30% 6.02% 4.85% (6.91)%++ 17.05%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.68% 1.72% 1.83% 1.80% 1.82%+ 1.18%+
Net investment income ............ 4.32% 4.63% 4.53% 4.90% 4.48%+ 1.79%+
PORTFOLIO TURNOVER ................. 39% 42% 42% 27% 5% 22%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $3,082 $3,182 $3,366 $2,300 $1,760 $ 833
- ------------
*** For the period from the inception of Class C, January 3, 1994, through 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 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
this fee had been incurred by the Fund, the net investment income and the ratios would have been:
Net investment income ......... $ 0.48 $ 0.51 -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.78% 1.78% -- -- -- --
Net investment income ....... 4.22% 4.57% -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
WEST VIRGINIA FUND
-----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED YEAR ENDED
----------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994
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 ........................... $11.31 $11.33 $11.21 $11.19 $12.06 $11.50
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.58 $ 0.60 $ 0.61 $ 0.62 $ 0.01 $ 0.64
Net realized and unrealized gain
(loss) on investments .......... 0.47 (0.02) 0.12 0.03 (0.78) 0.69
------ ------ ------ ------ ------ ------
Total from investment operations $ 1.05 $ 0.58 $ 0.73 $ 0.65 $(0.77) $ 1.33
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.58) $(0.60) $(0.61) $(0.62) $(0.06) $(0.61)
From net realized gain on
investments .................... -- -- -- -- -- (0.12)
In excess of net investment
income(++) ..................... (0.01) -- (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) $(0.61) $(0.63) $(0.10) $(0.77)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $11.77 $11.31 $11.33 11.21 $11.19 $12.06
====== ====== ====== ===== ====== ======
Total return(+) .................... 9.42% 5.20% 6.58% 6.07% (6.37)%++ 11.80%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.10% 1.17% 1.22% 1.19% 1.30%+ 1.24%
Net investment income ............ 4.98% 5.28% 5.30% 5.62% 5.36%+ 5.30%
PORTFOLIO TURNOVER ................. 17% 21% 11% 23% 2% 26%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $130,002 $126,107 $134,514 $127,616 $130,726 $141,190
- ------------
+ 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 certain of the periods indicated. If
this fee had been incurred by the Fund, the net investment income and the ratios would have been:
Net investment income ......... $ 0.57 -- -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 1.17% -- -- -- -- --
Net investment income ....... 4.91% -- -- -- -- --
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
WEST VIRGINIA FUND
----------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------
1993 1992 1991 1990 1989
CLASS A
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ...................... $11.20 $10.93 $10.72 $10.68 $10.51
------ ------ ------ ------ ------
Income from investment operations --
Net investment income ....... $ 0.66 $ 0.70 $ 0.71 $ 0.71 $ 0.77
Net realized and unrealized
gain on investments ....... 0.34 0.34 0.21 0.04 0.18
------ ------ ------ ------ ------
Total from investment
operations .............. $ 1.00 $ 1.04 $ 0.92 $ 0.75 $ 0.95
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income .. $(0.69) $(0.76) $(0.71) $(0.71) $(0.78)
From net realized gain on
investments ............... (0.01) (0.01) -- -- --
------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.70) $(0.77) $(0.71) $(0.71) $(0.78)
------ ------ ------ ------ ------
Net asset value -- end of
period ...................... $11.50 $11.20 $10.93 $10.72 $10.68
====== ====== ====== ====== ======
Total return(+) ............... 9.12% 9.84% 8.91% 7.26% 9.43%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses .................... 1.15% 1.17% 1.21% 1.22% 0.86%
Net investment income ....... 5.97% 6.33% 6.59% 6.63% 7.01%
PORTFOLIO TURNOVER ............ 19% 14% 37% 34% 9%
NET ASSETS AT END OF PERIOD
(000 OMITTED) $115,289 $80,440 $61,984 $52,398 $43,026
- ------------
(+) 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>
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
WEST VIRGINIA FUND
----------------------------------------------------------------------------------
TWO MONTHS
YEAR ENDED MARCH 31, ENDED PERIOD ENDED
--------------------------------------------------- MARCH 31, JANUARY 31,
1998 1997 1996 1995 1994 1994**
CLASS B
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ........................... $11.31 $11.33 $11.21 $11.19 $12.06 $12.13
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ......... $ 0.51 $ 0.52 $ 0.52 $ 0.53 $ 0.01 $ 0.22
Net realized and unrealized gain
(loss) on investments .......... 0.46 (0.02) 0.12 0.04 (0.87) 0.05
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.97 $ 0.50 $ 0.64 $ 0.57 $(0.86) $ 0.27
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ....... $(0.51) $(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) (0.00) -- (0.01)
In excess of net realized gain on
investments .................... -- -- -- (0.01) -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ................. $(0.51) $(0.52) $(0.52) $(0.55) $(0.01) $(0.34)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ... $11.77 $11.31 $11.33 $11.21 $11.19 $12.06
====== ====== ====== ====== ====== ======
Total return ....................... 8.72% 4.47% 5.81% 5.30% (6.48)%++ 5.59%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses## ....................... 1.75% 1.87% 1.94% 1.91% 2.02%+ 1.89%+
Net investment income ............ 4.33% 4.57% 4.56% 4.87% 4.56%+ 4.14%+
PORTFOLIO TURNOVER ................. 17% 21% 11% 23% 2% 26%
NET ASSETS AT END OF PERIOD
(000 OMITTED) .................... $15,472 $13,587 $12,647 $10,046 $5,456 $4,530
- ----------
** For the period from the inception of Class B, September 7, 1993, through 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 years ended March 31, 1998, 1996, and 1995, the per share distributions in excess of net investment income
were $0.005, $0.002 and $0.005, respectively.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If
this fee had 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## .................. 1.82% -- -- -- -- --
Net investment income ....... 4.26% -- -- -- -- --
</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 IBCA ("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, Duff & Phelps 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, 1998, 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 maintenance of a sufficient level of occupancy, sound management
of the developments, timely and adequate increases in rents to cover increases
in operating expenses, including taxes, utility rates and maintenance costs,
changes in applicable laws and governmental regulations and social and economic
trends.
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. While awaiting delivery
of securities purchased on such bases, a Fund will segregate liquid assets
sufficient to cover its commitments. Although a Fund does not intend to make
such purchases for speculative purposes, purchases of securities on such bases
may involve more risk than other types of purchases.
INDEXED SECURITIES: The Trust may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, securities, 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, or interest on, 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 of the liquidity determinations, 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.
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 Commodity Futures Trading Commission
(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 "Information Concerning Shares of the Trust -- Tax Status"
below). 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. Except with respect to a Fund's policies on
borrowing and investing in illiquid securities, each 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
----------------- ---- -------------------
John P. Kihn* and Geoffrey L. Schechter** Alabama 1998
Arkansas 1998
California 1998
Georgia 1998
Maryland 1998
Massachusetts 1998
Mississippi 1998
North Carolina 1998
Pennsylvania 1998
South Carolina 1998
Virginia 1998
West Virginia 1998
John P. Kihn* .......................... Florida 1997
New York 1998
Tennessee 1997
*Prior to joining MFS in 1997, Mr. Kihn was a Quantitative Analyst and Vice
President of Putnam Investment Management, Inc., from 1996 to 1997; from 1992
to 1996, he attended the London School of Economics where he was awarded a
doctorate in Finance; and from 1994 to 1995, he was an Associate Portfolio
Manager with Colonial Management Associates, Inc.
**Mr. Schechter has been employed as a portfolio manager with the Adviser
since 1993. Prior to 1993, Mr. Schechter was a Senior Analyst at Liberty
Mutual Insurance Company.
Messrs. Kihn and Schechter are 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:
REDUCED ADVISORY
FEE AS A % OF
AVERAGE DAILY
FUND NET ASSETS
- ---- ----------------
Alabama ............................................... 0.45%
Arkansas .............................................. 0.45
California ............................................ 0.40
Florida ............................................... 0.45
Georgia ............................................... 0.45
Maryland .............................................. 0.45
Massachusetts ......................................... 0.45
Mississipi ............................................ 0.45
New York .............................................. 0.45
North Carolina ........................................ 0.45
Pennsylvania .......................................... 0.45
South Carolina ........................................ 0.45
Tennessee ............................................. 0.45
Virginia .............................................. 0.45
West Virginia ......................................... 0.45
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, 1998, MFS received fees under the
Advisory Agreements with respect to each Fund in the following amounts:
ADVISORY ADVISORY
FEES RECEIVED % OF AVERAGE FEES WAIVED % OF AVERAGE
BY MFS(1) NET ASSETS(1) BY MFS NET ASSETS
------------- ------------- ----------- ------------
Alabama Fund ........... $ 406,678 0.48 55,426 0.07
Arkansas Fund .......... 706,877 0.48 95,452 0.07
California Fund ........ 1,492,065 0.40 407,800 0.15
Florida Fund ........... 459,188 0.48 63,157 0.07
Georgia Fund ........... 390,188 0.45 71,098 0.10
Maryland Fund .......... 657,155 0.45 146,404 0.10
Massachusetts Fund ..... 1,141,991 0.45 254,419 0.10
Mississippi Fund ....... 371,239 0.48 50,559 0.07
New York Fund .......... 710,454 0.48 96,880 0.07
North Carolina Fund .... 1,927,622 0.45 429,491 0.10
Pennsylvania Fund ...... 149,076 0.37 70,220 0.18
South Carolina Fund .... 786,866 0.45 175,283 0.10
Tennessee Fund ......... 565,280 0.45 125,923 0.10
Virginia Fund .......... 1,849,480 0.45 412,175 0.10
West Virginia Fund ..... 692,403 0.48 95,657 0.07
(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
Variable Insurance Trust, and seven variable accounts each of which is a
registered investment company established by Sun Life Assurance Company of
Canada, a subsidiary of Sun Life Assurance Company of Canada ("Sun Life"), 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
$87.7 billion on behalf of approximately 3.3 million investor accounts as of
June 30, 1998. As of such date, the MFS organization managed approximately $19.5
billion of assets in fixed income securities and fixed income securities of MFS
Instititional Advisors, Inc., including approximately $6.3 billion of assets in
municipal securities. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial
Services Holdings, Inc., which in turn is a wholly owned subsidiary of Sun Life.
The Directors of MFS are John W. Ballen, Jeffrey L. Shames, Arnold D. Scott,
John D. McNeil and Donald A. Stewart. Mr. Shames is the Chairman, President and
Chief Executive Officer of MFS, Mr. Ballen is an Executive Vice President of
MFS, 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.
Mr. Shames and Mr. Scott are Trustees of the Trust. Geoffrey L. Schechter,
Daniel E. McManus, W. Thomas London, Stephen E. Cavan, James R. Bordewick,
Jr., James O. Yost, Ellen Moynihan and Mark E. Bradley, all of whom are
officers of MFS, are officers of the Trust.
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. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, 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, as amended. 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: 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 Funds.
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:
SALES CHARGE*
AS PERCENTAGE OF: DEALER ALLOWANCE
-------------------------- AS A PERCENTAGE
OFFERING PRICE NET AMOUNT OF OFFERING
AMOUNT OF PURCHASE (1) INVESTED PRICE(1)
------------------ -------------- ---------- ----------------
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:
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, 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)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the Plan makes a
complete redemption of all of its shares in the MFS Funds, or (b) with respect
to plans which established an account with the Shareholder Servicing Agent prior
to November 1, 1997, in the event that there is a change in law or regulation
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 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:
CONTINGENT
YEAR OF 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 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 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 New York Stock
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.
THE FOLLOWING POLICY WILL REMAIN IN EFFECT UNTIL SEPTEMBER 15, 1998:
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.
Because an exchange request involves both a request to redeem shares of one fund
and to purchase shares of another fund, the Fund considers the underlying
redemption request to be conditioned upon the acceptance of the underlying
purchase request. Therefore, 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.
EFFECTIVE SEPTEMBER 15, 1998, THE FUND WILL ADOPT THE FOLLOWING NEW MARKET
TIMING POLICY WHICH WILL REPLACE THE CURRENT POLICY AS DISCLOSED ABOVE:
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject or restrict any specific purchase or exchange request. Because
an exchange request involves both a request to redeem shares of one fund and to
purchase shares of another fund, the Fund considers the underlying redemption
request to be conditioned upon the acceptance of the underlying purchase
request. Therefore, 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 MFS Family of Funds is not designed for professional market timing
organizations or other entities using programmed or frequent exchanges. The MFS
Family of Funds defines a "market timer" as an individual or organization acting
on behalf of one or more individuals, if (i) the individual or organization
makes six or more exchange requests among the MFS Family of Funds or three or
more exchange requests out of any of the MFS high yield bond funds or MFS
municipal bond funds per calendar year and (ii) any one of such exchange
requests represents shares equal in value to $1 million or more. 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 (i) delaying for up to
seven days the purchase side of an exchange request by market timers, (ii)
rejecting or otherwise restricting purchase or exchange requests by market
timers; and (iii) permitting exchanges by market timers only into certain 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 or arrange for the sale of
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 and other
employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees 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 and other employees 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 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 New York Stock 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 New York Stock 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 NEW YORK STOCK
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 "Information
Concerning Shares of the Trust -- 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 "Information Concerning Shares of the
Trust -- 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 "Information Concerning Shares
of the Trust -- 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 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 "Information Concerning Shares of
the Trust -- 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% 0.90%
California Fund .................... 0.00% 0.81% 1.00%
Florida Fund ....................... 0.00% 0.80%
Georgia Fund ....................... 0.25% 1.00%
Maryland Fund ...................... 0.35% 1.00%
Massachusetts Fund ................. 0.35% 1.00%
Mississippi Fund ................... 0.00% 0.78%
New York Fund ...................... 0.25% 1.00%
North Carolina Fund ................ 0.35% 1.00% 1.00%
Pennsylvania Fund .................. 0.00% 0.79%
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 the shareholders, whether the
distribution is paid in cash or reinvested in additional shares. Each Fund
expects that none of its distributions will be eligible for the dividends
received deduction for corporations.
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 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 (as well as the rate category or categories under which such gain is
taxable), the portion, if any, representing a return of capital (which is
generally free of current taxes but which results in a basis reduction), and the
amount, if any, of federal income tax withheld.
Fund distributions of net capital gains or net short-term capital gains will
reduce a Fund's net asset value per share. Shareholders who buy shares shortly
before a Fund makes such a 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.
Each Fund intends to withhold U.S. federal income tax at the rate of 30% (or any
lower rate permitted under an applicable treaty) on taxable 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. 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 to them 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, individual
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 individual California residents will be subject to California
personal income taxation. Gains realized by individual 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 individual
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 the Florida 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 Maryland corporate 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.
All distributions from the Massachusetts Fund will be included in computing the
income component of the Massachusetts corporate excise tax for corporate
shareholders.
Interest on indebtedness incurred or continued to purchase or carry shares of
the Massachusetts Fund will not be deductible for Massachusetts personal income
or corporate excise tax purposes.
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.
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 New York Stock Exchange is open for trading. This determination
is made once each day as of the close of regular trading on the New York Stock
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 "Information Concerning Shares of the Trust -- 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, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares that has a
later class inception date than another class of shares of a Fund is based both
on (i) the performance of a Fund's newer class from its inception date and (ii)
the performance of a Fund's oldest class from its inception date to the class
inception date of the newer class. See the SAI for further information on the
calculation of total rate of return for share classes with different class
inception 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, 1998, please see the Trust's Annual Reports. A copy of the
Annual Reports 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.
PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
To avoid sending duplicate copies of materials to households, effective
September 15, 1998, only one copy of each Fund annual and semiannual report may
be mailed to shareholders having the same residential address on the Fund's
records. However, any shareholder may call the Shareholder Servicing Agent at
1-800-225-2606 to request that copies of such reports be sent personally to that
shareholder.
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: advisory and administrative services fees; 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 (after taking into account any compensating balance and
offset arrangements) 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
transaction costs, do not exceed 0.40% per annum of the Fund's average daily net
assets (the "Maximum Percentage"). 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. The
obligation of MFS to bear such Fund's "Other Expenses" pursuant to this
arrangement and such Fund's obligation to pay the reimbursement fees to MFS
terminates on December 31, 2001 (in the case of the Arkansas, Florida and
Mississippi Funds) or December 31, 2002 (in the case of the Pennsylvania Fund),
provided that in no event will MFS receive reimbursement fees from a Fund that
exceed the amount of fees borne by MFS on behalf of such Fund. 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.
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:
o Dividends and capital gain distributions reinvested in additional
shares of that Fund. This option will be assigned if no other option is
specified.
o Dividends in cash; capital gain distributions reinvested in additional
shares of that Fund.
o 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, Class B and Class 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 "Information Concerning
Shares of the Trust -- 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). Some of the following information will not
apply to certain Funds in the MFS Family of Funds, depending on which classes
of shares are offered by such Fund. 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 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 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 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;
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 FUND "SUPERMARKET" INVESTMENTS
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 "supermarket" 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.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases Subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund,
MFS Municipal Limited Maturity Fund, MFS Money Market Fund, MFS
Government Money Market Fund and MFS Cash Reserve Fund.
5. BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
6. INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions
of Class A shares, are waived with respect to Class A shares acquired
of any of the MFS Funds through the immediate reinvestment of the
proceeds of a redemption of Class I shares of any of the MFS Funds.
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 1998 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
1998. 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 -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------ FEDERAL STATE FED. & ST.
1998 1998 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- 25,350 19.12% 3.71% 4.95% 6.18% 7.42% 8.65% 9.89% 0.15 0.048421 0.1912
$ 0- 42,350 19.09 3.71 4.94 6.18 7.42 8.65 9.89 0.15 0.048111 0.1909
$ 25,350- 61,400 $ 42,350-102,300 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000 0.3160
$ 61,400-128,100 $102,300-155,950 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000 0.3445
$128,100-278,450 $155,950-278,450 39.20 4.93 6.58 8.22 9.87 11.51 13.16 0.36 0.050000 0.3920
$278,450 & Over $278,450 & 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 -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------ FEDERAL STATE FED. & ST.
1998 1998 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- 25,350 18.70% 3.69% 4.92% 6.15% 7.38% 8.61% 9.84% 0.15 0.043572 0.1870
$ 0- 42,350 19.61 3.73 4.98 6.22 7.46 8.71 9.95 0.15 0.054181 0.1961
$ 25,350- 61,400 $ 42,350-102,300 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000 0.3304
$ 61,400-128,100 $102,300-155,950 35.83 4.68 6.23 7.79 9.35 10.91 12.47 0.31 0.070000 0.3583
$128,100-278,450 $155,950-278,450 40.48 5.04 6.72 8.40 10.08 11.76 13.44 0.36 0.070000 0.4048
$278,450 & Over $278,450 & 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 -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------ FEDERAL STATE FED. & ST.
1998**** 1998**** 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- 25,350 17.88% 3.65% 4.87% 6.09% 7.31% 8.52% 9.74% 0.15 0.033840 0.1788
$ 0- 42,350 17.44 3.63 4.84 6.06 7.27 8.48 9.69 0.15 0.028683 0.1744
$ 25,350- 61,400 34.47 4.58 6.10 7.63 9.16 10.68 12.21 0.28 0.089886 0.3447
$ 42,350-102,300 34.10 4.55 6.07 7.59 9.10 10.62 12.14 0.28 0.084659 0.3410
$ 61,400-128,100 $102,300-155,950 37.42 4.79 6.39 7.99 9.59 11.19 12.78 0.31 0.093000 0.3742
$128,100-278,450 $155,950-278,450 41.95 5.17 6.89 8.61 10.34 12.06 13.78 0.36 0.093000 0.4195
$278,450 & Over $278,450 & 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 -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------ FEDERAL STATE FED. & ST.
1998 1998 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- 25,350 19.46% 3.72% 4.97% 6.21% 7.45% 8.69% 9.93% 0.15 0.052505 0.1946
$ 0- 42,350 19.58 3.73 4.97 6.22 7.46 8.70 9.95 0.15 0.053860 0.1958
$ 25,350- 61,400 $ 42,350-102,300 32.32 4.43 5.91 7.39 8.87 10.34 11.82 0.28 0.060000 0.3232
$ 61,400-128,100 $102,300-155,950 35.14 4.63 6.17 7.71 9.25 10.79 12.33 0.31 0.060000 0.3514
$128,100-278,450 $155,950-278,450 39.84 4.99 6.65 8.31 9.97 11.64 13.30 0.36 0.060000 0.3984
$278,450 & Over $278,450 & 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 -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------ FEDERAL STATE FED. & ST.
1998 1998 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- 25,350 19.01% 3.70% 4.94% 6.17% 7.41% 8.64% 9.88% 0.15 0.047192 0.1901
$ 0- 42,350 19.09 3.71 4.94 6.18 7.42 8.65 9.89 0.15 0.048118 0.1909
$ 25,350- 61,400 $ 42,350-102,300 31.56 4.38 5.84 7.31 8.77 10.23 11.69 0.28 0.049500 0.3156
$ 61,400-128,100 $102,300-155,950 34.42 4.57 6.10 7.62 9.15 10.67 12.20 0.31 0.049500 0.3442
$128,100-278,450 $155,950-278,450 39.17 4.93 6.58 8.22 9.86 11.51 13.15 0.36 0.049500 0.3917
$278,450 & Over $278,450 & Over 42.59 5.23 6.97 8.71 10.45 12.19 13.93 0.396 0.049500 0.4259
* 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 -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------ FEDERAL STATE FED. & ST.
1998 1998 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- 25,350 $ 0- 42,350 25.20% 4.01% 5.35% 6.68% 8.02% 9.36% 10.70% 0.15 0.120000 0.2520
$ 25,350- 61,400 $ 42,350-102,300 36.64 4.73 6.31 7.89 9.47 11.05 12.63 0.28 0.120000 0.3664
$ 61,400-128,100 $102,300-155,950 39.28 4.94 6.59 8.23 9.88 11.53 13.18 0.31 0.120000 0.3928
$128,100-278,450 $155,950-278,450 43.68 5.33 7.10 8.88 10.65 12.43 14.20 0.36 0.120000 0.4368
$278,450 & Over $278,450 & 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.
*** Combined Federal and Massachusetts rate assumes itemization of state tax deduction.
<CAPTION>
MISSISSIPPI -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------ FEDERAL STATE FED. & ST.
1998 1998 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- 25,350 18.75% 3.69% 4.92% 6.15% 7.38% 8.62% 9.85% 0.15 0.044082 0.1875
$ 0- 42,350 18.95 3.70 4.94 6.17 7.40 8.64 9.87 0.15 0.046457 0.1895
$ 25,350- 61,400 $ 42,350-102,300 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000 0.3160
$ 61,400-128,100 $102,300-155,950 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000 0.3445
$128,100-278,450 $155,950-278,450 39.20 4.93 6.58 8.22 9.87 11.51 13.16 0.36 0.050000 0.3920
$278,450 & Over $278,450 & 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) -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------ FEDERAL STATE FED. & ST.
1998 1998 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- 25,350 19.49% 3.73% 4.97% 6.21% 7.45% 8.69% 9.94% 0.15 0.052838 0.1949
$ 0- 42,350 19.23 3.71 4.95 6.19 7.43 8.67 9.90 0.15 0.049751 0.1923
$ 25,350- 61,400 $ 42,350-102,300 32.93 4.47 5.96 7.45 8.95 10.44 11.93 0.28 0.068500 0.3293
$ 61,400-128,100 $102,300-155,950 35.73 4.67 6.22 7.78 9.34 10.89 12.45 0.31 0.068500 0.3573
$128,100-278,450 $155,950-278,450 40.38 5.03 6.71 8.39 10.06 11.74 13.42 0.36 0.068500 0.4038
$278,450 & Over $278,450 & 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 -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* TAX-EXEMPT YIELD
- ---------------------------------- ------------------------------------- COMBINED
INCOME AVERAGE AVERAGE AVERAGE AVERAGE FED. &
SINGLE JOINT TAX FEDERAL STATE CITY NYC ADD'L ST.
1998 1998 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- 25,350 22.75% 3.88% 5.18% 6.47% 7.77% 9.06% 10.36% 0.15 0.052838 0.030119 0.003546 0.004713 0.2275
$ 0- 42,350 22.47 3.87 5.16 6.45 7.74 9.03 10.32 0.15 0.049751 0.029939 0.003511 0.004683 0.2247
$ 25,350- 61,400 36.11 4.70 6.26 7.83 9.39 10.96 12.52 0.28 0.068500 0.033658 0.005100 0.005426 0.3611
$ 42,350-102,300 36.11 4.70 6.26 7.83 9.39 10.96 12.52 0.28 0.068500 0.033580 0.005118 0.005418 0.3611
$ 61,400-128,100 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
$102,300-155,950 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
$128,100-278,450 $155,950-278,450 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
$278,450 & Over $278,450 & 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 -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ------------------------------------ INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED. & ST.
1998 1998 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- 25,350 20.52% 3.77% 5.03% 6.29% 7.55% 8.81% 10.07% 0.15 0.064968 0.2052
$ 0- 42,350 20.52 3.77 5.03 6.29 7.55 8.81 10.07 0.15 0.064981 0.2052
$ 25,350- 61,400 33.06 4.48 5.98 7.47 8.96 10.46 11.95 0.28 0.070291 0.3306
$ 42,350-102,300 33.06 4.48 5.98 7.47 8.96 10.46 11.95 0.28 0.070288 0.3306
$ 61,400-128,100 $102,300-155,950 36.35 4.71 6.28 7.86 9.43 11.00 12.57 0.31 0.077500 0.3635
$128,100-278,450 $155,950-278,450 40.96 5.08 6.78 8.47 10.16 11.86 13.55 0.36 0.077500 0.4096
$278,450 & Over $278,450 & 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 -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ------------------------------------ INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED. & ST.
1998 1998 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- 25,350 $ 0- 42,350 17.38% 3.63% 4.84% 6.05% 7.26% 8.47% 9.68% 0.15 0.028000 0.1738
$ 25,350- 61,400 $ 42,350-102,300 30.02 4.29 5.72 7.14 8.57 10.00 11.43 0.28 0.028000 0.3002
$ 61,400-128,100 $102,300-155,950 32.93 4.47 5.96 7.45 8.95 10.44 11.93 0.31 0.028000 0.3293
$128,100-278,450 $155,950-278,450 37.79 4.82 6.43 8.04 9.64 11.25 12.86 0.36 0.028000 0.3779
$278,450 & Over $278,450 & 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 -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ------------------------------------ INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED. & ST.
1998 1998 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- 25,350 19.83% 3.74% 4.99% 6.24% 7.48% 8.73% 9.98% 0.15 0.056586 0.1983
$ 0- 42,350 20.28 3.76 5.02 6.27 7.53 8.78 10.04 0.15 0.062090 0.2028
$ 25,350- 61,400 $ 42,350-102,300 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000 0.3304
$ 61,400-128,100 $102,300-155,950 35.83 4.68 6.23 7.79 9.35 10.91 12.47 0.31 0.070000 0.3583
$128,100-278,450 $155,950-278,450 40.48 5.04 6.72 8.40 10.08 11.76 13.44 0.36 0.070000 0.4048
$278,450 & Over $278,450 & 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 -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- ------------------------------------ INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE FED. & ST.
1998 1998 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- 25,350 $ 0- 42,350 20.10% 3.75% 5.01% 6.26% 7.51% 8.76% 10.01% 0.15 0.060000 0.2010
$ 25,350- 61,400 $ 42,350-102,300 32.32 4.43 5.91 7.39 8.87 10.34 11.82 0.28 0.060000 0.3232
$ 61,400-128,100 $102,300-155,950 35.14 4.63 6.17 7.71 9.25 10.79 12.33 0.31 0.060000 0.3514
$128,100-278,450 $155,950-278,450 39.84 4.99 6.65 8.31 9.97 11.64 13.30 0.36 0.060000 0.3984
$278,450 & Over $278,450 & 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 -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------ FEDERAL STATE FED. & ST.
1998 1998 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- 25,350 19.02% 3.70% 4.94% 6.17% 7.41% 8.64% 9.88% 0.15 0.047341 0.1902
$ 0- 42,350 19.37 3.72 4.96 6.20 7.44 8.68 9.92 0.15 0.051419 0.1937
$ 25,350- 61,400 $ 42,350-102,300 32.14 4.42 5.89 7.37 8.84 10.32 11.79 0.28 0.057500 0.3214
$ 61,400-128,100 $102,300-155,950 34.97 4.61 6.15 7.69 9.23 10.76 12.30 0.31 0.057500 0.3497
$128,100-278,450 $155,950-278,450 39.68 4.97 6.63 8.29 9.95 11.60 13.26 0.36 0.057500 0.3968
$278,450 & Over $278,450 & 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 -- 1998 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ------------------------------------------------ FEDERAL STATE FED. & ST.
1998 1998 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- 25,350 18.07% 3.66% 4.88% 6.10% 7.32% 8.54% 9.76% 0.15 0.036123 0.1807
$ 0- 42,350 18.44 3.68 4.90 6.13 7.36 8.58 9.81 0.15 0.040519 0.1844
$ 25,350- 61,400 31.71 4.39 5.86 7.32 8.79 10.25 11.71 0.28 0.051574 0.3171
$ 42,350-102,300 32.57 4.45 5.93 7.42 8.90 10.38 11.86 0.28 0.063528 0.3257
$ 61,400-128,100 $102,300-155,950 35.49 4.65 6.20 7.75 9.30 10.85 12.40 0.31 0.065000 0.3549
$128,100-278,450 $155,950-278,450 40.16 5.01 6.68 8.36 10.03 11.70 13.37 0.36 0.065000 0.4016
$278,450 & Over $278,450 & 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.
S&P
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility, Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50% -- 90% of such outstandings,
and D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/
or interest payments.
DP: Preferred stock with dividend arrearages.
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
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.
S&P
A S&P note rating reflects the liquidity concerns and market-access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment.
o Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
o 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
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
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation 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
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:
o Leading market positions in well established industries.
o High rates of return on funds employed.
o Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
o 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.
S&P
A S&P 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, 1998, invested in bonds assigned to the various rating categories
by Moody's, S&P, Fitch and Duff & Phelps and in unrated bonds determined by
MFS to be of comparable quality. The highest of the four rating services is
used with respect to each rating.
FLORIDA FUND:
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
AAA/Aaa 50.61% 0.00% 50.61%
AA/Aa 21.92 0.00 21.92
A/A 2.92 0.00 2.92
BBB/Baa 14.66 0.53 15.19
BB/Ba 1.74 0.78 2.52
B/B 2.95 0.47 3.42
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: 94.80% 1.78% 96.58%
GEORGIA FUND:
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
AAA/Aaa 39.17% 3.69% 42.86%
AA/Aa 18.71 0.00 18.71
A/A 10.64 1.45 12.09
BBB/Baa 11.13 0.59 11.72
BB/Ba 1.56 2.17 3.73
B/B 2.74 4.80 7.54
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: 83.95% 12.70% 96.65%
MARYLAND FUND:
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
AAA/Aaa 44.94% 0.00% 44.94%
AA/Aa 18.55 0.00 18.55
A/A 10.60 0.00 10.60
BBB/Baa 8.39 2.89 11.28
BB/Ba 0.00 3.92 3.92
B/B 0.00 1.00 1.00
CCC/Caa 0.00 0.00 0.00
CC/Ca 0.00 0.00 0.00
C/C 0.00 0.00 0.00
D 0.00 0.00 0.00
------ ------ ------
Total: 82.48% 7.81% 90.29%
MASSACHUSETTS FUND:
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
AAA/Aaa 34.30% 3.70% 38.00%
AA/Aa 13.21 0.00 13.21
A/A 25.91 1.12 27.03
BBB/Baa 7.52 0.44 7.96
BB/Ba 1.27 2.09 3.36
B/B 0.00 4.76 4.76
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: 82.21% 12.11% 94.32%
NEW YORK FUND:
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
AAA/Aaa 40.49% 0.00% 40.49%
AA/Aa 16.81 0.00 16.81
A/A 14.17 0.71 14.88
BBB/Baa 13.81 3.90 17.71
BB/Ba 2.06 4.25 6.31
B/B 0.00 0.00 0.00
CCC/Caa 0.00 0.00 0.00
CC/Ca 0.00 0.00 0.00
C/C 0.00 0.00 0.00
D 0.00 0.00 0.00
------ ------ ------
Total: 87.34% 8.86% 96.20%
PENNSYLVANIA FUND:
UNRATED SECURITIES
RATING RATED BONDS OF COMPARABLE QUALITY TOTAL
------ ----------- --------------------- -----
AAA/Aaa 47.22% 0.00% 47.22%
AA/Aa 18.75 0.00 18.75
A/A 20.56 0.00 20.56
BBB/Baa 6.61 0.00 6.61
BB/Ba 0.00 4.94 4.94
B/B 0.00 0.00 0.00
CCC/Caa 0.00 0.00 0.00
CC/Ca 0.00 0.00 0.00
C/C 0.00 0.00 0.00
D 0.00 0.00 0.00
------ ------ ------
Total: 93.14% 4.94% 98.08%
These charts do not necessarily indicate what the composition of 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 1997, manufacturing accounted for 22.82% 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, 1996, that for the eleventh 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 $2.6 billion
in 1996, $3.8 billion in 1995, and $2.6 billion in 1994. These expenditures
included 17,750 announced jobs created by 622 companies for 1996 and 21,290
announced jobs by 913 companies in 1995. Preliminary figures indicate there
will be approximately $2.8 billion in announced investment and creation of
approximately 21,000 jobs by approximately 600 companies in 1997. This would
make the past three years the best in the State's history in terms of total
announced capital investment by manufacturing firms. Some of the largest
investments in the 1990's include Champion International ($550 million);
Mercedes Benz ($520 million); Trico Steel Co. LLC ($450 million); The Boeing
Company ($450 million); Boise Cascade Corp. ($400 million); Amoco Chemicals
($350 million); EXXON Company, USA ($300 million); Mead Containerboard ($224
million); Acustar Inc. ($200 million); United States Steel Corp. ($200
million); Courtaulds Fibers, Inc. ($170 million); Worthington Industries ($150
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
1993-1997, RGSP originating in manufacturing increased by 5.2% per year and
RGSP originating in all the non-manufacturing sectors grew by 4.0% 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.
SIGNIFICANT LITIGATION
South Central Bell Telephone Co. v. State. Circuit Court of Montgomery County,
Alabama, CV-89-2600-G (Judge William R. Gordon). This case has been
consolidated with other cases involving BellSouth corporations and CSX
corporations. The plaintiffs are asking the Court to declare that the
Department's application of Code of Alabama 1975, (S)40-14-40, which levies a
franchise tax on domestic corporations, based on the par value of the shares
of capital stock, while the franchise tax on the foreign corporations is
levied pursuant to Code of Alabama 1975, (S)40-14-41, based on the capital
employed in the State of Alabama, violates the Commerce Clause of the U.S.
Constitution.
The plaintiffs contend that because "capital employed" includes surplus and
undivided profits, long-term debts, related party debts, and accelerated
depreciation, while the par value of stock does not include these items, the
franchise tax is unconstitutional. The taxpayers are attempting to overturn
White v. Reynolds Metals Company, 558 So. 2d 373 (Ala. 1989), which upheld the
franchise tax on foreign corporations, by challenging the Department's use of
par value as the basis for the capital stock of the domestic corporations. The
potential refund exceeds $300 million.
The State's Motion for Summary Judgment was argued on June 3, 1994, and was
under submission to the circuit court at the time of trial, which was held on
December 14, 1994. On December 3, 1996, the trial court ruled that the
plaintiffs' claims are barred under the doctrine of res judicata. The
plaintiffs filed a notice of appeal to the Court of Civil Appeals and a motion
to transfer the appeal to the Supreme Court. The case was transferred to the
Supreme Court, where the ruling of the trial court was affirmed on March 20,
1998.
Gladwin Corp. v. Lyons, Circuit Court of Montgomery County, CV-96-1065-TH.
This is a class action challenging the constitutionality of the franchise tax
on the same grounds as South Central Bell. The trial court (Judge Thomas)
granted the State's motion to stay the action pending a decision in South
Central Bell, and placed it on the administrative docket. The case has since
been assigned to Judge Greenhaw, who granted the plaintiff's motion to
conditionally certify the case as a class action; allowed discovery to
proceed; and ordered that all foreign franchise taxes collected be placed in
escrow.
Hispan Corp. v. H.E. Monroe, etc., Circuit Court of Montgomery County,
CV-97-5445-PR. This is a class action challenging the constitutionality of the
franchise tax on the same grounds as South Central Bell. The complaint was
served on March 28, 1997. By order dated May 6, 1997, Judge Price granted the
Department's motion to stay the action pending a ruling from the Supreme Court
in South Central Bell.
Melof v. Hunt, et al., Circuit Court of Montgomery County, CV-89-707 (Judge
Reese). This is a class action based on Davis v. Michigan, 109 S.Ct. 1500
(1989), in which the U.S. Supreme Court held that states may not tax income
received from the federal government at a higher rate than they tax income
received from the state without violating the Intergovernmental Tax Immunity
Doctrine. The Davis decision did not involve the income taxation of private
pension income.
The remaining subclasses in the Melof action (recipients of private non-
governmental retirement benefits and certain local governmental retirement
benefits) rely on the Davis decision and the Equal Protection Clause to argue
that Alabama's income tax scheme improperly imposes tax on private and local
governmental pensions while exempting governmental retirement benefits. By
amendment to their complaint, they also rely on Ala. Const. 1901, Amendment
No. 25, which states:
In the event the legislature levies an income tax,
such tax must be levied upon the salaries, income,
fees, or other compensation of state, county and
municipal officers and employees, on the same basis as
such income taxes are levied on other persons
. . . .
The Department maintains that neither the Intergovernmental Tax Immunity
Doctrine nor the Equal Protection Clause forbid the income taxation of private
non-governmental retirement benefits while exempting state and federal
government retirement benefits. The U.S. Supreme Court has declined to review
an Oklahoma case that upheld Oklahoma's exemption of state and federal
retirement benefits. The Oklahoma court ruled that the exemption did not
impermissibly discriminate against recipients of private non-governmental
retirement benefits, which were not exempt from Oklahoma tax. Sullivan, cert.
denied U.S. Supreme Ct. April 19, 1993.
Both the plaintiffs and the State filed motions for summary judgment. The
State's motion was granted on September 8, 1997, when the court issued an
order upholding the tax. The potential refund in this class action is probably
in excess of $300 million.
Valhalla Cemetery Company, Inc., et al., v. G. Sage Lyons, Civil Action No.
CV-97-940-GR, Circuit Court of Montgomery County. On May 8, 1997, the
plaintiff filed a class action to obtain consumer use tax refunds with
interest, and to permanently enjoin assessment and collection of this tax
against the plaintiff and other similarly situated entities. Plaintiff's main
allegation is that the use tax does not apply to sales in Alabama. Rather, the
sales tax applies to sales made in Alabama by all merchants except merchants
who do not have sufficient contacts with Alabama to justify imposition of the
sales tax. Therefore, plaintiff and class members contend that they are
entitled to declaratory relief that Ala. Code (S)40-23-61 is void and illegal;
a permanent injunction against the continuing collection of use tax; and
refunds of the use taxes collected pursuant to (S)40-23-61, together with
interest thereon.
The potential revenue impact, if plaintiff prevails, is millions of dollars in
lost revenues. Approximately $350 million in use taxes have been collected
over the past three years. However, Act No. 97-301, signed into law by
Governor Fob James on May 7, 1997, amended the use tax exemption, codified in
Ala. Code (S)40-23-62, to clarify that sales by out-of-state vendors are
exempted from use tax only if the sales taxes are actually paid to a licensed
sales tax account holder. In addition, in the case of Yelverton's Inc. v.
Jefferson County, Alabama, issued May 9, 1997, the Alabama Court of Civil
Appeals specifically held that "the taxable event in the imposition of the use
tax is not the sale of the good, but is the storage, use, or consumption of
that good within the taxing jurisdiction." The case was conditionally
certified on May 30, 1997. The State's motion for summary judgment has not
been set for hearing.
Two other class actions involving issues identical to those in this case have
been filed in Montgomery County Circuit Court, styled Sessions Corp. v. Monroe
(Judge Price), stayed pending Valhalla; and A.G. Industries v. Monroe (Judge
Reese), set for hearing on July 8, 1997, on class certification.
A case regarding employment discrimination litigation against the State of
Alabama, Eugene Crum, Jr., et al., v. State of Alabama, et al., CV-97-T-356-N,
is a class action suit pending in the United States District Court for the
Middle District of Alabama. In this case approximately twenty state
departments are charged with racial discrimination in all aspects of their
employment practices. This case is in the discovery stage and no estimate can
be made at this time concerning any financial liability the State of Alabama
may ultimately incur.
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 1,1993, 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 affirmed the trial court's Remedy Order.
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 Remedy Order, including attorneys'
fees. A Motion for rehearing on the Remedy Order is pending and the attorney
fee issue is on appeal.
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 jobs 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 slightly above 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, third in
turkey production and fifth 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 obligations 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.
During the first half of the 1990s, 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 and California's credit
rating has climbed from the lows experienced during the recession, as of the
date of this Prospectus, rating agencies, underwriters and investors appear to
have lingering concerns about California's creditworthiness. Major rating
agencies continue to cite, among other things, concerns about California's
lack of contingency planning (such as adequate reserves), missed budget
deadlines and on-going structural budget impediments.
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 now included as liabilities). At
the date of this Prospectus, revised budget projections indicate that
California may have ended fiscal 1997-98 with a significant surplus. A
substantial portion of such surplus appears to be the result of one-time
revenues from higher-than-expected tax receipts paid on capital gains. State
officials have yet to determine to what extent any such surplus will be used
to support tax cuts and increased expenditures.
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 nearly a decade and a half,
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 or 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 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 could result in the loss of 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 1997-98, the estimated General Revenue and Working Capital is
reported to be $17.78 billion. The Florida Consumers Estimating Conference
projects the year end balance of the combined General Revenue Fund and Working
Capital Fund to be $669.9 million. Including the $686 million balance
currently in the Budget Stabilization Fund, total reserves are projected to
stand at $1.35 billion, a 3.4 percent increase over fiscal year 1997-98. The
fiscal year 1998-99 budget incorporates a 4.4 percent increase in revenues
over fiscal year 1997-98. The Florida and United States unemployment rates for
1997-98 were estimated at 4.7%. The estimated Florida and United States
unemployment rates for 1998-99 are reported to be 5.0% and 5.1%, 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.
General obligations of Florida have been rated AA2, AA+ and AA by Moody's, S&P
and Fitch, respectively. S&P presently regards the outlook for the State as
stable.
In recent years, Florida has emerged as one of the world's fastest growing
markets, experiencing substantial growth as a principal trust of the
Southeastern United States. With gross state product of $368.9 billion, if
Florida were a sovereign nation, it would rank as the world's 16th largest
market economy. 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.
Taking advantage of a number of favorable factors - a strong national economy,
a waning fear of crime among visitors and improved local marketing - the state
has increased the number of tourists. For fiscal year 1996-97, the number of
tourists visiting Florida increased to 44.3 million, a 7.2 percent increase
over fiscal year 1995-96. For fiscal year 97-98 expected tourist arrivals are
projected at 48.5 million, a 9.4 percent increase over 1996-97. For fiscal
year 1998-99, expected tourist arrivals are projected at 49.7 million, a 2.6
increase over 1997-98.
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%. In fiscal year 1996-97,
the share remained at approximately 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 June 1998, the total
indebtedness of the State of Georgia consisting of general obligation debt,
guaranteed revenue debt and remaining Authority Lease Obligations totalled
$5,017,710,000 and the highest aggregate annual payment for such debt equalled
5.49% of fiscal year 1997 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.
Treasury receipts for the fiscal year 1997 showed an increase of 6.62% 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 1997,
income tax receipts and sales tax receipts of the State for fiscal year 1997
comprised approximately 46% and 36.4%, respectively, of the total State tax
revenues.
The unemployment rate of the civilian labor force in the State as of March
1998 was 4% 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, services, wholesale and retail trade, 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", "AAA" 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.
The State from time to time is named as a party in certain lawsuits, which may
or may not have a material adverse impact on the financial position of the
State if decided in a manner adverse to the State's interests. Certain of such
lawsuits which could have a significant impact on the State's financial
position are summarized below.
Abbott Laboratories v. Georgia Department of Administrative Services, et al.
The plaintiff is seeking unspecified damages against the Department of
Administrative Services ("DOAS") and the Department of Human Resources under
breach of contract and promissory estoppel theories. The case arises out of
DOAS' issuance of a notice of award to Abbott Laboratories, Ross Products
Division in connection with WIC Infant Formula Rebate Program. The Director of
State Purchasing subsequently ordered cancellation of the notice of award and
rebid because of conflicting information that created a contradiction in the
bidding specifications. The damages sought are unspecified and speculative.
Discovery is ongoing in this matter. The State intends of file a motion for
summary judgment at the close of discovery.
Age International, Inc. v. State (two cases). Two suits for refund have been
filed in state court against the State of Georgia by out-of-state producers of
alcoholic beverages. The first suit for refund seeks $96 million 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 3 years preceding these claims. In
addition, the claimants have filed a second suit for refund for an additional
$23 million, plus interest, for later time periods. These two cases encompass
all known or anticipated claims for refund of such type within the apparently
applicable statute of limitations for the years in question, i.e., 1989
through January, 1993. The trail court has granted the State's motions for
summary judgment, and the claimants have requested that the trial court extend
the time for filing a notice of appeal from such decisions.
Cobb County, et al. v. Georgia et al. In related cases, each County and
certain of its officials has sued the State of Georgia, the Department of
Revenue, Zell Miller (in his official capacity as Governor), T. Jerry Jackson
(in his personal capacity and in his official capacity as Revenue
Commissioner), Claude L. Vickers (in his official capacity as State Auditor),
and the Department of Audits (collectively "the State") in connection with the
State's collection and distribution of special local option sales taxes to the
counties. In Cobb, the County sought an accounting, a writ of mandamus,
injunctive relief and additional based upon theories of unjust enrichment and
bailment. Cobb's claims related to the State's administraiton of state and
local option sales taxes from April 1, 1995 to the present. Cobb sought $19
million in relief. In Dekalb, the County asserts similar grounds for relief
with the addition of a claim for declaratory relief. DeKalb's claims relate to
the State's administration of state and local option sales taxes from July 1,
1997 to the present. DeKalb seeks unspecified monetary relief but estimates a
shortfall in distributions from the State of $15 million. The State filed
motions to dismiss in both cases and additionally, in Cobb, filed a
counterclaim against the County for $10.4 million. The trial court has granted
the State's motions to dismiss in both actions. DeKalb County has appealed
this ruling, claiming that certain of its claims were meritorious and seeking
to litigate those claims. The State believes that the period for Cobb County
to appeal has lapsed, although a motion by Cobb County remains pending in the
trial court. The State intends to contest all claims against it vigorously.
The State believes that the substance of Plaintiff's claims in both cases is
unsubstantiated.
George Jackson, et al. v. Georgia Lottery Corporation. Plaintiffs sought a
court order declaring that two games sponsored by the Georgia Lottery
Corporation, "Quick Cash" and "Cash Three," are unconstitutional and enjoining
the lottery from further offering of these games. Plaintiffs also sought the
return of all monies played on these games during a specified period,
approximately $1,703,462,781. On an interlocutory appeal, the Georgia Court of
Appeals ruled that the Lottery Corporation does not have sovereign immunity
but ruled for the Corporation on the merits. The Plaintiffs petitioned for a
writ of certiorari to the Supreme Court of Georgia, and the Supreme Court
denied the petition. The remittitur of the Court of Appeals has been returned
to the trial court.
W.J. Luke, an individual, v. Georgia Department of Natural Resources, et al.
This civil action was filed in October, 1997, on behalf of W.J. Luke and all
other contributors to the Georgia Underground Storage Tank Trust Fund,
established under the Georgia Underground Storage Tank Act, O.C.G.A.
(S)12-13-1, et seq., for refund of all monies collected under that Act,
interest, and attorney's fees. From the time of its inception in 1988 to the
present, the Fund has collected approximately $82 million. The State believes
that it has substantial defenses to assert and intends to defend the case
vigorously. The State was granted a motion to dismiss the action, on the
grounds that no justiciable controversy exists, and the Plaintiff has filed an
appeal with the Georgia Supreme Court. The State has filed a motion to
transfer the case to the Georgia Court of Appeals.
Pursuant to a review of the Georgia Department of Revenue's revenue collection
information systems by the State Auditor, it was determined that from April,
1995 to May, 1996 the Department did not maintain an adequate accounting
system to determine the accuracy of the amounts of Local Option Sales Tax,
Special Purpose Local Option Sales Tax and MARTA Sales Tax collected by the
Department on behalf of local governments and the disbursements of those taxes
to local governments imposing the sales-based taxes. The Department of Revenue
during this period estimated collections and disbursements to local
governments by reviewing the payment pattern to the local governments for the
previous twenty-four month period and followed that pattern, adjusting for
known growth in sales tax collections. The Department is working to correct
this situation and has ceased using estimates for making payments to the local
governments. Additionally, during this same period, a review of the Department
of Revenue's computer processing systems revealed significant internal control
weaknesses. Procedures are being studied to correct these problems.
As a result of the findings by the State Auditor, a task force appointed by
the Governor in September 1996 engaged KPMG Peat Marwick to make
recommendations to modernize the Department of Revenue's revenue collection
system. Peat Marwick has completed its study and the implementation of its
recommendations is underway. The Governor requested and the legislature
approved expenditures of $15,000,000 in the Amended Fiscal Year 1997 budget
and $6,000,000 was requested and approved in the Fiscal Year 1998 budget to
begin the process of updating the Revenue Department's computer system.
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, 1995, 1996
and 1997 were $13.528 billion, $14.169 billion and $14.787 billion,
respectively. As of February 6, 1998, it was estimated that total expenditures
for fiscal year 1998 would be $15.743 billion. The State's General Fund had
unreserved surpluses of $132.5 million, $13.1 million and $207.2 million in
fiscal years 1995, 1996 and 1997, respectively. The State Constitution
mandates a balanced budget.
In April 1997, the General Assembly approved the $15.438 billion 1998 fiscal
year budget. The budget includes $3.1 billion in aid to local governments
(reflecting a $206 million increase in funding over 1997 that provides for
increases in education, health and police aid). The 1998 budget does not
include any proposed expenditures dependent on additional revenue from new or
broad-based taxes. The 1998 budget incorporates one-half year of the five-year
phase-in of a 10% reduction in personal income taxes estimated to result in a
reduction of revenues of $38.5 million in fiscal year 1998 (and $450 million
when fully phased in).
When the 1998 budget was enacted, it was estimated that the general fund
surplus on a budgetary basis at June 30, 1998, would be approximately $27.9
million. As of February 6, 1998, it is estimated that the general fund surplus
on a budgetary basis at June 30, 1998, will be $283.0 million.
In January 1998, the Governor submitted his proposed 1999 fiscal year budget
to the General Assembly. The budget includes $3.3 billion in aid to local
governments (reflecting a $166.7 million increase over 1998 and $40.7 million
in general fund deficiency appropriations for fiscal year 1997. As of February
6, 1998, it is estimated that the general fund surplus on a budgetary basis at
June 30, 1999, will be $1.3 million and that the balance in the Revenue
Stabilization Account of the State Reserve Fund at June 30, 1999, will be $696
million. The Revenue Stabilization Account of the State Reserve Fund was
established by the General Assembly in its 1986 session for the purpose of
retaining state revenues for future needs and to reduce the need for future
tax increases.
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 Preliminary Official Statement with respect
to State of Maryland General Obligation Bonds dated February 6, 1998.
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 employment levels suggest a strong and continued economic
recovery. As of May 1998, the Commonwealth's unadjusted unemployment rate was
3.3%, as compared to a national average of 4.2%. The Commonwealth's per capita
personal income is currently higher than the national average.
Accounted for on a statutory basis, ending fund balances in the budgeted
operating funds for fiscal 1993 were $562.5 million. Fiscal 1994 and 1995
ended with positive fund balances of $589.3 million and $726.0 million,
respectively.
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. In fiscal 1997, the total
revenues of the budgeted operating funds of the Commonwealth increased by
approximately 4.9% over the prior fiscal year to $18.170 billion. Expenditures
increased by 6.3% over the prior fiscal year to $17.949 billion. As a result,
the Commonwealth ended fiscal year 1997 with a positive closing fund balance
of $1.394 billion.
Budgeted revenues and other sources in fiscal 1998, which ended June 30, 1998,
were estimated as of May 5, 1998, by the Executive Office for Administration
and Finance to be approximately $18.909 billion, including tax revenues of
$13.3 billion. It is estimated that fiscal 1998 budgeted expenditures will be
$18.930 billion and that fiscal 1998 will end with fund balances of $1.215
billion.
On January 27, 1998, Acting Governor Cellucci filed his fiscal 1999 budget
recommendations with the House of Representatives. The proposal calls for
budgeted expenditures of approximately $19.06 billion, or total fiscal 1999
spending of $19.49 billion after adjusting for shifts to and from off-budget
accounts. Budgeted revenues for fiscal 1999 are projected to be $18.961
billion, or $19.291 billion after adjusting for shifts to and from off-budget
accounts. The Governor's proposal projects a fiscal 1999 ending balance in the
budgeted funds of $906.3 million.
S&P and Moody's have rated general obligation bonds issued by the Commonwealth
as AA- and Aa3, 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 $3.246 billion in fiscal 1996. Fiscal
1997 expenditures for direct local aid were $3.558 billion, which is an
increase of approximately 9.6% above the fiscal 1996 level. It is estimated
that fiscal 1998 expenditures for direct local aid will be $3.912 billion, an
increase of approximately 9.9% above the fiscal 1997 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. Because the provisions
of the legislative enactment are essentially superseded by those of the
initiative petition, Acting Governor Cellucci has proposed, as part of his
fiscal 1999 budget recommendations, that the tax revenue limitations
provisions of the legislative enactment be repealed. The House Committee on
Ways and Means included such recommendation in its proposed fiscal 1999 budget
released on April 27, 1998. Commonwealth tax revenues in fiscal years 1993
through 1997 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 1998.
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, then Governor Weld signed legislation that
immediately abolished the Middlesex County government. The legislation also
eliminates Worcester and Hampden County governments on July 1, 1998 (or
sooner, if such county defaults on a bond or a note) 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 1998,
1999, 2000 and 2001, are estimated to be $1.046 billion, $1.059 billion,
$1.073 billion and $1.088 billion, respectively. Pension funding legislation
was revised in July 1997 as part of the fiscal 1998 budget, to include 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 indicate a
continued decline to 5.9% in 1998. The growth rate of State product for 1997
was 4.5%, with the same growth rate being projected for 1998. An increased
growth rate of 5.0% is expected in 1999. Mississippi continued to fall
slightly behind the growth in per capita income for the country. Per capita
incomes increased an estimated 5.8% in 1997; in 1998, personal income is
projected to grow slightly less than 5.0%.
The growing importance of telecommunications, the increase of international
trade and the tremendous increase in gaming and tourism have significantly
impacted the state's economic position. 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. This trend is not expected to continue, however. In fact, unlike the
remainder of the nation, manufacturing employment in Mississippi is expected
to increase between 1998 and 2003. 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%.
Gross gaming revenues in 1997 exceeded the previous year's revenues by 6.8
percent. Three additional gaming facility projects were announced during 1997
which will require an initial aggregate investment of $1250 million.
While the number of workers involved directly in agriculture has declined, it
remains a significant factor in the State's economy. Cotton was the number one
producer of farm income in 1990, poultry and eggs were second while forestry
was third. Research and promotion have provided the State with a number of new
farming alternatives. The production of catfish, poultry, rice, blueberries
and muscadines have grown dramatically in recent years. Timber continues to be
Mississippi's largest natural resource, with the State leading the nation in
the number of tree farms. Of Mississippi's total land area 56% (approximately
17 million acres) is classified as commercial forest.
All or part of 20 states and 136 metropolitan areas lie within 550 miles of
Mississippi. Mississippi is in an excellent location to service this market
area with four interstate highways, which provide access in every direction,
19 railroads, including four of the nation's largest carriers, and seven
commercial airports. International and domestic waterborne commerce is served
by Mississippi's nine major ports.
The population of the State is estimated to be 2,720,000. 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 more than 50% since 1990 and
accounts for 23% of the state's employment, but employment in service
industries slowed its growth sharply from the 1994 growth rate of 12.4%. The
leading gainer in 1997 was the hotel and lodging segment which saw an increase
in employment of 10.7% as compared to 1996. 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. The state has
also increased its involvement in the international marketplace. In 1996, $2.8
billion in goods were exported to Russia. Exports to China also increased
significantly, substantial levels of exports to Canada and Mexico,
historically Mississippi's leading export markets, continued.
Total personal income in Mississippi increased 5.1% in 1997 compared to a 5.8%
increase in the U.S. over the same period. Projections for 1998 show the State
personal income growth to be slightly lower at 5.0%, but followed by slightly
higher increases in 1999. 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, 1995, State General Fund receipts were
budgeted at approximately $2,624,245,900 and State General Fund Disbursements
were budgeted at approximately $2,601,771,800, and State Special Fund Receipts
and Disbursements were estimated to be approximately $4,853,475,900 and
$4,385,847,900, 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, 1996 and June 30, 1997, General Fund
receipts had increased to approximately $2,701,640,500 and $2,862,297,700,
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.
The State economy has continued to expand, but growth remains somewhat slower
than in the nation. Although the State has added approximately 300,000 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. In
addition, the North Carolina Fund is concentrated on obligations of North
Carolina issuers and is subject to additional risk from decreased
diversification as well as factors that may be particular to North Carolina
or, in the case of revenue bonds payable excessively from private party
revenues or from specific state non-tax revenue, factors that may be
particular to the related activity or payment party.
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. 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 State budget is based upon estimated revenues and a multitude
of existing and assumed State and non-State factors, including State and
national economic conditions, international activity and federal government
policies and legislation. The unreserved General Fund balance at June 30,
1997, the end of the 1996-97 fiscal year, was approximately $292.2 million and
the reserved balance of the General Fund was approximately $880.8 million.
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 from state revenues to replace
the revenues those political subdivisions 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% and eliminated most privilege license taxes
as of January 1, 1997. As a result of the comprehensive tax reductions,
General Fund tax collections for 1995-96 grew by only 1.0% over 1994-95, as
opposed to the 6.4% growth that would have occurred if such measures had not
been taken.
In the 1996-97 Budget prepared by the Office of State Budget and Management,
it was projected that General Fund net revenues would increase 3% over
1995-96. In fact, actual General Fund net revenues for 1996-97 increased 8.3%
over 1995-96. This increase resulted primarily from growth in the North
Carolina economy, which resulted in increased personal and corporate income
tax receipts.
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. The following are cases pending in which the State faces the risk
of either a loss of revenue or an unanticipated expenditure. In the opinion of
the Department of State Treasurer, an adverse decision in any of these cases
would not materially adversely affect the State's ability to meets its
financial obligations.
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. On July 24, 1997, the North Carolina
Supreme Court issued a decision in the case. The Court upheld the present
funding system against the claim that it unlawfully discriminated against low
wealth counties on the basis that the constitution does not require
substantially equal funding and educational advantages in all school
districts. The Court remanded the case for trial on the claim for relief based
on the Court's conclusion that the Constitution guarantees every child of the
state an opportunity to receive a sound basic education in North Carolina
public schools. Five other counties intervened and now allege claims for
relief on behalf of their students' rights to a sound basic education on the
basis of the high proportion of at-risk students in their counties' systems.
The North Carolina Attorney General's Office believes that sound legal
arguments support the State's position on the outstanding claims.
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.
Discovery is underway, but no trial date has been set. The North Carolina
Attorney General's Office believes that sound legal arguments support the
State's position.
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 Superior Court issued an order ruling in favor of plaintiffs. The
Order was affirmed by the North Carolina Supreme Court. A determination of the
actual amount of the State's liability and the payment process is being
determined by the parties. The plaintiffs have submitted documentation to the
court asserting that the cost in damages and higher prospective benefit
payments to the plaintiffs and class members would amount to $407 million.
These amounts would be payable from the funds of the Retirement systems.
The Bailey Case -- 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.
Potential refunds and interest are estimated to be $287.56 million for the
period through fiscal year 1997. Until this matter is resolved, any additional
potential refunds and interest will continue to accrue. 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 v. Michigan (1989). In
Davis, 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. Potential refunds and interest are estimated to be
$585 million for the period through fiscal year 1997. Until this matter is
resolved, any additional potential refunds and interest will continue to
accrue. The repeal of the exemptions is challenged by state and local
government retirees in the Bailey case.
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 United States Supreme Court held that
the tax violated the Commerce Clause of the United States Constitution, and
remanded the case to the North Carolina Supreme Court for consideration of
possible remedies, including refunds. On February 2, 1997, the North Carolina
Supreme Court issued a decision determining that the unconstitutional portion
of the statute is severable and referred the matter to the North Carolina
General Assembly for legislative action. Refunds are being paid to taxpayers
who paid the tax, but took appropriate steps to claim that a refund was due.
These refunds, with interest, will total approximately $150 million. As of
September 24, 1997, the Department of Revenue has refunded in excess of $100
million and expects to make total refunds and payment of interest before the
end of 1997.
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 other 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
5,895,195 to 6,656,810 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, 1997, is 7,436,690. 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 33% (from 2,855,200 to
3,796,200). Per capita income during the period 1985 to 1996 grew from $11,870
to $22,010, an increase of 85.4%.
The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of July, 1997, the State was reported to
rank tenth 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 1993 JUNE 1994 JUNE 1995 JUNE 1996 JUNE 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Civilian Labor Force 3,504,000 3,560,000 3,578,000 3,704,000 3,797,000
Nonagricultural Employment 3,203,400 3,358,700 3,419,100 3,506,000 3,620,300
Goods Producing Occupations
(mining, construction and
manufacturing) 993,600 1,021,500 1,036,700 1,023,800 1,041,000
Service Occupations 2,209,800 2,337,200 2,382,400 2,482,400 2,579,300
Wholesale/Retail Occupations 723,200 749,000 776,900 809,100 813,500
Government Employees 515,400 554,600 555,300 570,800 579,600
Miscellaneous Services 676,900 731,900 742,200 786,100 852,500
Agricultural Employment 88,400 53,000 53,000 53,000 not available
</TABLE>
The seasonally adjusted unemployment rate in July 1997 was estimated to be
3.7% of the labor force as compared with 4.8% nationwide.
North Carolina's economy continues to benefit from a vibrant manufacturing
sector. Manufacturing firms employ approximately 24% of the total non-
agricultural workforce. North Carolina has the second highest percentage of
manufacturing workers 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 1996, the State's gross agricultural income of nearly $8.0 billion placed
it eighth in the nation in gross agricultural income. The State ranks third in
the nation in net farm income. According to the State Commissioner of
Agriculture, in 1996 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; third in the value
of net farm income, 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 22% 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. The tobacco industry remains important to North
Carolina providing approximately 13% of gross agricultural income.
The number of farms has been decreasing; in 1997 there were approximately
57,000 farms in the State, down from approximately 72,000 in 1987 (a decrease
of about 20% in ten years). However, a strong agribusiness sector supports
farmers with farm inputs (agricultural chemicals and fertilizer, farm
machinery and building supplies) 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 North Carolina Department of Commerce, Travel and Tourism Division,
indicates that travel and tourism is increasingly important to the State's
economy. Travel and tourism's $9.8 billion economic impact in 1996 represents
a 6.5% increase over 1995. The North Carolina travel and tourism industry
directly supports 167,100 jobs or 4.7% of total non-agricultural employment.
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 1996. 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
1990 to 1992, employment in the Commonwealth declined 1.8%. From 1992 to 1997,
employment increased 7.7%. 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 March 1998, the unadjusted unemployment rate was 5.1% in
the Commonwealth and 5.0% in the United States, while the seasonally adjusted
unemployment rate for the Commonwealth was 4.8% and for the United States was
4.7%.
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 FINANCIAL RESULTS. The unappropriated balance of Commonwealth
revenues increased during the 1997 fiscal year by $432.9 million. Higher than
estimated revenues and slightly lower expenditures than budgeted caused the
increase. The unappropriated balance rose from an adjusted amount of $158.5
million at the beginning of fiscal 1997, to $591.4 million (prior to reserves
for transfer to the Tax Stabilization Reserve Fund) at the close of the fiscal
year. Transfers to the Tax Stabilization Reserve Fund for fiscal 1997
operations are expected to be $88.7 million, which represents the normal
fifteen percent of the ending unappropriated balance, plus an additional $100
million authorized by the General Assembly when it enacted the fiscal 1998
budget.
Commonwealth revenues (prior to tax refunds) during the fiscal year totaled
$17,320.6 million, $576.1 (3.4 percent) above the estimate made at the time
the budget was enacted. Revenue from taxes was the largest contributor to
higher than estimated receipts. Tax revenue in fiscal 1997 grew 6.1 percent
over tax revenues in fiscal 1996. This rate of increase was not adjusted for
legislated tax reductions that affected receipts during both of those fiscal
years and therefore understates the actual underlying rate of growth of tax
revenue during fiscal 1997. Receipts from the personal income tax produced the
largest single component of higher revenues for the fiscal year. Personal
income collections were $236.3 million over estimate representing a 6.9%
increase over fiscal 1996 receipts. Receipts of the sales and use tax were
$185.6 million over estimate representing a 6.2% increase. Collections of
corporate taxes, led by the capital stock and franchise and the gross receipts
taxes, also exceeded their estimates for the fiscal year. Non-tax revenues
were $19.8 million (5.8 percent) over estimate mostly due to higher than
anticipated interest earnings.
FISCAL 1998 BUDGET. The budget for fiscal 1998 was enacted in May 1997.
Commonwealth revenues for the fiscal year at the time were estimated to be
$17,435.4 million before reserves for tax refunds. That estimate represented
an increase over estimated fiscal 1997 Commonwealth revenues of 1.0 percent.
Although fiscal 1997 revenues exceeded the fiscal 1998 budget estimate, the
adopted fiscal 1998 budget revenue estimate remains unchanged and represents a
0.7 percent increase over actual fiscal 1997 revenues. Fiscal 1998 estimates
for Commonwealth revenues are based on an economic forecast for national
economic growth to slow through the remainder of calendar year 1997. A growth
rate of just above 1.0 percent is anticipated by the Commonwealth to be
maintained for the last two quarters of the 1998 fiscal year and result in a
1.2 percent growth rate in real gross domestic product for the second calendar
quarter of 1998 over the second quarter of 1997. This anticipated rate of
economic growth is a result of anticipated slowing of gains in consumer
spending, business investment and residential housing. Inflation is projected
to remain modest and the unemployment rate is expected to reach 6.0 percent by
the second calendar quarter of 1998.
The rate of anticipated growth of Commonwealth revenues is also affected by
the enactment of tax reductions and tax revenue dedications effective for the
1998 fiscal year. Excluding these newly enacted changes, revenues are
projected to increase by 2.4 percent during fiscal 1998. Tax reductions
enacted for the 1998 fiscal year budget totaled an estimated $170.6 million,
including $16.2 million that is reflected in higher projected tax refunds. In
addition, $75 million of existing sales tax revenue has been earmarked for
mass transit funding and one cent of the cigarette tax ($10.8 million) has
been earmarked for a children's health program and are no longer included in
the General Fund. Major changes to taxes enacted for fiscal 1998 include: (i)
the repeal of the sales and use tax on computer services ($79.1 million); (ii)
an increase in the amount of income that is exempt from the personal income
tax for low-income families ($25.4 million); (iii) enactment of a research and
development tax credit program for business ($15.0 million); (iv) conforming
state tax laws to federal laws for sub-chapter S and limited liability
companies ($16.3 million); and various other miscellaneous changes. Most
changes are effective beginning in July 1997 although some are effective
retroactively to January 1997.
Appropriations enacted for fiscal 1998 are 3.7 percent ($618 million) above
appropriations enacted for fiscal 1997 (including supplemental
appropriations). Major funding increases provided by the fiscal 1998 budget
include: (i) $166 million of appropriations for elementary and secondary
education plus an estimated $51 million in reduced employer retirement
contributions payable by local school districts due to a reduction in the
contribution rate; (ii) $42 million for higher education institutions plus $16
million for student scholarships; (iii) $70 million for higher caseload,
utilization, and cost of nursing home care; (iv) $60 million for economic
development assistance through programs providing incentive grants and loans;
and (v) $38 million for corrections including $17 million for operating costs
for new and expanded facilities. The balance of the increase is spread over
many other departments and program operations.
Based on current expectations and the adopted budget for fiscal 1998 and
excluding any estimate for appropriation lapses during the fiscal year, the
unappropriated surplus is projected to decline from $402.7 million at the
beginning of the fiscal year to $16.7 million at fiscal year-end (prior to
transfer to the Tax Stabilization Reserve Fund).
FISCAL 1999 BUDGET. On April 22, 1998, the Governor signed a $17.96 billion
General Fund budget, an increase of 4.7% from the fiscal 1998 budget. Areas
receiving the largest budgetary increases are education and workforce
development. In addition, approximately $222 million of tax cuts were signed
as part of the budget package, reducing taxes on individuals by approximately
$100 million. The remainder of the tax cuts primarily affect businesses.
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 August 29, 1997, Auditor General
certificate, the average annual tax revenues deposited in all funds in the
five fiscal years ended June 30, 1997, was approximately $19.6 billion, and,
therefore, the net debt limitation for the 1998 fiscal year is $30.6 billion.
Outstanding net debt totaled $3.7 billion at June 30, 1997, approximately
equal to the net debt at June 30, 1996. At August 29, 1997, the amount of debt
authorized by law to be issued, but not yet incurred, was $17.1 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
illegal. 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.
For the fiscal year ended June 30, 1997, the State had a budgetary surplus of
$297.8 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 $83.6 million. The $83.6 million Capital Reserve Fund appropriation for the
fiscal year ended June 30, 1997 included an appropriation of $13.1 million for
debt service payments occurring in the fiscal year ending June 30, 1998 on
State Capital Improvement Bonds. The total of all debt service payments on
State Capital Improvement Bonds for the fiscal year ending June 30, 1998
amounts to $145,633,779.
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 3.8% during 1997. The
nation's output expanded a revised 2.8% in 1996 after a 2.0% increase in 1995.
Inflation as measured by the Consumer Price Index increased at a rate of 2.3%
during 1997 after increasing 2.9% in 1996 and 2.8% in 1995.
During all of 1996, personal income grew at a revised average annual rate of
4.7% in South Carolina. During the same period the nation's income grew 5.4%
and in the Southeast region grew 5.6%. During the period 1991-1996 personal
income in South Carolina rose at a compounded annual rate of 5.5%, outpacing
the 5.4% annual income growth in the United States for the same period but
below the 6.1% 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 $5.502 billion in economic development projects
during 1997. This investment is expected to create 29,303 new jobs at 1,337
companies.
In 1997, employment increased 1.8% while the rate of employment growth in the
United States was 2.2%. Monthly unemployment rates in the State have recently
decreased below comparable national rates during 1997. The unemployment rate
for South Carolina in 1997 was 4.7%, two-tenths of one percent lower than the
4.9% nationwide.
General Fund Revenues increased at a rate of 5.6% during fiscal year 1996-97
over the previous fiscal year. The State finished fiscal year 1996-97 with a
revenue excess of $158 million above the fiscal year 1996-97 Appropriation
Act. Through January 1998, revenues have increased at a rate of 5.0% during
fiscal year 1997-98. The State is expecting a revenue excess of $60 million
above the fiscal year 1997-98 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. In 1997, the State's economy
began to reaccelerate. Many experts believe that the State will achieve modest
economic gains for fiscal year ending June 30, 1998, but a sharp upturn is not
expected.
Tennessee taxable sales were approximately $50.64 billion in 1993,
approximately $55.32 billion in 1994, approximately $59.65 billion in 1995,
approximately $63.01 billion in 1996, approximately $63.01 billion in 1996,
and approximately $65.96 billion in 1997, representing percentage increases of
approximately 7.8%, 9.3%, 7.8%, 5.6% and 8.76%, respectively, over the
previous year's total. No Tennessee taxable sales figures are presently
confirmed for 1997.
The positive affects of Tourist and Tourism expenditures in Tennessee are
substantial. It is difficult for economists to clearly identify all tourism
expenditures, however, Tennessee is generally considered to be in the second
quartile of all states in terms of tourism revenue. Annual 1997 expenditures
are thought to exceed 8 billion dollars.
Quarterly personal income for Tennessee seasonally adjusted at annual rates
has increased continuously for all of 1995, 1996, and for the first three
quarters of 1997.
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 1996, the year
for which the most current data is available, per capita income in Tennessee
registered $22,032 an increase of 3.19% over 1995. 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. For the past several years, the Tennessee
unemployment rate has generally stabilized in the range of 5.0 percent.
Tennessee's overall average unemployment rate for 1997 was 5.4%; the rate for
March 1998 is 4.7%. The 27 metropolitan counties averaged 4.3% in unemployment
rates in 1997; non-metropolitan counties experienced a 7.8% unemployment rate
in 1997. 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 manufacturing employment in Tennessee has steadily declined 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 has increased in terms of number of jobs in
each year for the period 1991-5. There was a slight decrease in manufacturing
jobs in 1996. No manufacturing employment figures are currently available for
1997.
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 March 1, 1997,
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 S&P.
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 1998 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 1997 (annual average) was
6.9%. This represents the lowest annual rate during the 1980s and 1990s. 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 continues to be enhanced by the construction and
improvement of roadways in the State, including a $6.0 billion program to
complete the Appalachian Corridor highway system from 1992-2001. In 1997, the
State approved the sale of $550 million in general obligation road bonds over
the next few years. 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.
Significant attention has been directed in recent years towards altering the
State's current system of obtaining approximately twenty-five percent of
statewide funding for primary and secondary public education from ad valorem
property tax revenues. Litigation is pending in circuit court on this issue,
and it is anticipated that the court will review proposals expected to be
submitted by the Governor's Commission on Fair Taxation and others before a
decision is rendered.
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. Bailey 485 S.E. 2d 407 (W. Va. 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 has been
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
MST-1-8/98/147M
<PAGE>
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
MFS(R) MUNICIPAL STATEMENT OF
SERIES TRUST ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) August 1, 1998
- -------------------------------------------------------------------------------
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 Tables ..................................... 12
Investment Adviser .............................................. 14
Administrator ................................................... 15
Custodian ....................................................... 15
Shareholder Servicing Agent ..................................... 15
Distributor ..................................................... 16
6. Taxation .......................................................... 16
7. Shareholder Services .............................................. 18
8. Description of Shares, Voting Rights and Liabilities .............. 20
9. Portfolio Transactions ............................................ 21
10. Distribution Plan ................................................. 21
11. Independent Auditors and Financial Statements ..................... 22
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, 1998. 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, 1998, 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. 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 indexes 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, or interest on, the 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 negotiated 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 segregate liquid assets 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 segregate liquid assets 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 segregate
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 amount 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 collateral.
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 30 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 (approximately two times) of 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 segregated by the 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 liquid assets representing the
difference are segregated by the Fund. A put option written by a Fund is
"covered" if the Fund segregates 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 segregated by the
Fund. 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 that 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 indexes, 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 segregates liquid assets representing the difference. The Fund 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 liquid assets representing the difference is segregated by the
Fund. 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, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC-regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona fide
hedging positions does not exceed 5% of the liquidation value of the Fund's
assets, after taking into account unrealized profits and unrealized losses on
any such contracts the Fund has entered into, and excluding, in computing such
5%, the in-the-money amount with respect to an option that is in-the-money at
the time of purchase.
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.
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 delegate), 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, 25% or more 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) and the non-fundamental investment policy regarding illiquid securities,
these investment restrictions are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
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, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which
initially has a later inception date than another class of shares of a Fund is
based both on (i) the performance of that Fund's newer class from its
inception date and (ii) the performance of that Fund's oldest class from its
inception date up to the class inception date of the newer class.
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, 1997. 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); business 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 to 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(R) Union Standard(R) Equity
Fund, the first fund 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
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 1991)
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; Colonial Insurance Company,
Ltd., Director and 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; CitiFunds and
CitiSelect Folios (mutual funds), 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, Chairman, Chief Executive Officer
and President
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President;
Wellfleet Investments (investor in health care companies), Managing General
Partner (since 1993)
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: 36080 Shaker Boulevard, Hunting Valley, Ohio
OFFICERS
GEOFFREY L. SCHECHTER,* Vice President (born 12/17/62)
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. Shames, the Chairman and a Director
of MFD, Mr. Scott, a Director 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.), a subsidiary of Sun
Life Assurance Company of Canada ("Sun Life ").
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 $67 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. 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>
<CAPTION>
ALABAMA FUND
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 ......... $1,500 $429 10 $242,022
Marshall N. Cohan ......... 1,700 660 12 148,067
Lawrence H. Cohn .......... 1,433 296 18 123,917
J. David Gibbons .......... 450 600 12 129,842
Abby M. O'Neill ........... 1,500 358 10 129,842
Walter E. Robb, III ....... 1,767 413 9 148,067
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 1,833 357 20 184,067
Ward Smith ................ 1,767 446 13 184,067
<CAPTION>
ARKANSAS AND FLORIDA FUNDS
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 ......... $1,500 $429 10 $242,022
Marshall N. Cohan ......... 1,700 495 10 148,067
Lawrence H. Cohn .......... 1,433 296 18 123,917
J. David Gibbons .......... 450 450 10 129,842
Abby M. O'Neill ........... 1,500 358 10 129,842
Walter E. Robb, III ....... 1,767 413 9 148,067
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 1,833 357 20 184,067
Ward Smith ................ 1,767 446 13 184,067
<CAPTION>
CALIFORNIA FUND
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 ......... $1,500 $773 10 $242,022
Marshall N. Cohan ......... 1,700 1,584 14 148,067
Lawrence H. Cohn .......... 1,433 556 18 123,917
J. David Gibbons .......... 450 1,260 13 129,842
Abby M. O'Neill ........... 1,500 644 10 129,842
Walter E. Robb, III ....... 1,767 1,584 17 148,067
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 1,833 660 20 184,067
Ward Smith ................ 1,767 825 13 184,067
<CAPTION>
GEORGIA AND NEW YORK FUNDS
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 ......... $1,500 $429 10 $242,022
Marshall N. Cohan ......... 1,700 825 14 148,067
Lawrence H. Cohn .......... 1,433 296 18 123,917
J. David Gibbons .......... 450 675 13 129,842
Abby M. O'Neill ........... 1,500 358 10 129,842
Walter E. Robb, III ....... 1,767 825 14 148,067
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 1,833 357 20 184,067
Ward Smith ................ 1,767 446 13 184,067
<CAPTION>
MASSACHUSETTS FUND
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 ......... $1,500 $429 10 $242,022
Marshall N. Cohan ......... 1,700 825 17 148,067
Lawrence H. Cohn .......... 1,433 296 18 123,917
J. David Gibbons .......... 450 675 13 129,842
Abby M. O'Neill ........... 1,500 358 10 129,842
Walter E. Robb, III ....... 1,767 825 17 148,067
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 1,833 357 20 184,067
Ward Smith ................ 1,767 446 13 184,067
<CAPTION>
MARYLAND, NORTH CAROLINA, SOUTH CAROLINA,
VIRGINIA AND WEST VIRGINIA FUNDS
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 ......... $1,500 $429 10 $242,022
Marshall N. Cohan ......... 1,700 825 14 148,067
Lawrence H. Cohn .......... 1,433 296 18 123,917
J. David Gibbons .......... 450 675 13 129,842
Abby M. O'Neill ........... 1,500 358 10 129,842
Walter E. Robb, III ....... 1,767 825 17 148,067
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 1,833 357 20 184,067
Ward Smith ................ 1,767 446 13 184,067
<CAPTION>
MISSISSIPPI AND PENNSYLVANIA FUNDS
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 ......... $1,500 $357 9 $242,022
Marshall N. Cohan ......... 1,700 413 9 148,067
Lawrence H. Cohn .......... 1,433 296 18 123,917
J. David Gibbons .......... 450 375 9 129,842
Abby M. O'Neill ........... 1,500 358 10 129,842
Walter E. Robb, III ....... 1,767 413 9 148,067
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 1,833 357 20 184,067
Ward Smith ................ 1,767 446 13 184,067
<CAPTION>
TENNESSEE FUND
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 ......... $1,500 $429 10 $242,022
Marshall N. Cohan ......... 1,700 825 14 148,067
Lawrence H. Cohn .......... 1,433 296 18 123,917
J. David Gibbons .......... 450 675 13 129,842
Abby M. O'Neill ........... 1,500 358 10 129,842
Walter E. Robb, III ....... 1,767 825 14 148,067
Arnold D. Scott ........... 0 0 N/A 0
Jeffrey L. Shames ......... 0 0 N/A 0
J. Dale Sherratt .......... 1,833 357 20 184,067
Ward Smith ................ 1,767 446 13 184,067
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY EACH FUND UPON RETIREMENT(4)
YEARS OF SERVICE
AVERAGE ----------------------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
- ------------------------------------------------------------------------------
$1,290 $193 $322 $451 $ 645
1,435 215 359 502 718
1,580 237 395 553 790
1,726 259 431 604 863
1,871 281 468 655 935
2,016 302 504 706 1,008
- ------------
(1) For fiscal year ended March 31, 1998.
(2) Based on normal retirement age of 75. See the table below for the
estimated annual benefits payable upon retirement by a Fund to a Trustee
based on his or her estimated credited years of service.
(3) For calendar year 1997. All Trustees receiving compensation served as
Trustees of 42 funds within the MFS Fund complex (having aggregate net
assets at December 31, 1997, of approximately $19 billion) except Mr.
Bailey, who served as Trustee of 69 funds within the MFS Fund complex
(having aggregate net assets at December 31, 1997, of approximately $48
billion).
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
As of July 1, 1998, 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, 1998.
<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
Lake Drive, Jacksonville, Florida Class A 1,649,812 23.92%
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Alabama
Lake Drive, Jacksonville, Florida Class B 274,435 34.11
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Arkansas
Lake Drive, Jacksonville, Florida Class A 2,275,168 17.86
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Arkansas
Lake Drive, Jacksonville, Florida Class B 250,563 33.48
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer California
Lake Drive, Jacksonville, Florida Class A 4,470,285 11.66
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer California
Lake Drive, Jacksonville, Florida Class B 1,391,933 17.66%
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer California
Lake Drive, Jacksonville, Florida Class C 226,053 25.81
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Florida
Lake Drive, Jacksonville, Florida Class A 1,003,141 13.38
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Florida
Lake Drive, Jacksonville, Florida Class B 366,411 21.70
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Georgia
Lake Drive, Jacksonville, Florida Class A 434,664 7.91
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Georgia
Lake Drive, Jacksonville, Florida Class B 271,871 25.32
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Maryland
Lake Drive, Jacksonville, Florida Class A 1,007,223 8.99
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Maryland
Lake Drive, Jacksonville, Florida Class B 150,240 7.74
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Massachusetts
Lake Drive, Jacksonville, Florida Class A 2,837,739 13.41
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Massachusetts
Lake Drive, Jacksonville, Florida Class B 192,106 10.68
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Mississippi
Lake Drive, Jacksonville, Florida Class A 926,219 14.00
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Mississippi
Lake Drive, Jacksonville, Florida Class B 295,775 27.66
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer New York
Lake Drive, Jacksonville, Florida Class A 1,079,923 10.42
Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box New York
45286, Jacksonville, Florida Class B 265,213 10.95
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer North Carolina
Lake Drive, Jacksonville, Florida Class B 229,326 5.94
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer North Carolina
Lake Drive, Jacksonville, Florida Class C 118,257 15.75
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Pennsylvania
Lake Drive, Jacksonville, Florida Class B 246,861 11.88
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer South Carolina
Lake Drive, Jacksonville, Florida Class A 805,574 6.80
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer South Carolina
Lake Drive, Jacksonville, Florida Class B 258,403 10.90
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Tennessee
Lake Drive, Jacksonville, Florida Class A 967,858 9.82%
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Tennessee
Lake Drive, Jacksonville, Florida Class B 260,486 15.06
Smith Barney Inc., Tennessee
388 Greenwich Street Class B
New York, NY 94,097 5.44
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Virginia
Lake Drive, Jacksonville, Florida Class A 2,300,473 7.24
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Virginia
Lake Drive, Jacksonville, Florida Class B 762,860 26.90
Robert E. Hawkins, Virginia
Lynchburg, Virginia Class C 18,456 5.95
Martha Scott Virginia
Springfield, VA Class C 21,042 6.78
Gerald/Alice Stahr Virginia
Springfield, VA Class C 31,238 10.07
Merrill Lynch Pierce Fenner & Smith, Inc., 4800 Deer Virginia
Lake Drive, Jacksonville, Florida Class C 32,795 10.57
</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.) Financial
Services Holdings, Inc., which in turn is an indirect wholly owned subsidiary
of 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, 1998, March 31, 1997 and March
31, 1996, 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, 1998:
ADVISORY FEES ADVISORY FEES
RECEIVED BY WAIVED BY
FUND MFS(1) MFS
- ---- ----------- ------------
Alabama ................................. $ 406,678 $ 55,426
Arkansas ................................ 706,877 95,452
California .............................. 1,492,065 407,800
Florida ................................. 459,188 63,152
Georgia ................................. 390,188 71,098
Maryland ................................ 657,155 146,404
Massachusetts ........................... 1,141,991 254,419
Mississippi ............................. 371,239 50,559
New York ................................ 710,454 96,880
North Carolina .......................... 1,927,622 429,491
Pennsylvania ............................ 149,076 70,220
South Carolina .......................... 786,867 175,283
Tennessee ............................... 565,280 125,923
Virginia ................................ 1,849,480 412,175
West Virginia ........................... 692,403 96,657
For the fiscal year ended March 31, 1997:
ADVISORY FEES ADVISORY FEES
RECEIVED BY WAIVED BY
FUND MFS(1) MFS
- ---- ----------- ------------
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
For the fiscal year ended March 31, 1996:
ADVISORY FEES ADVISORY FEES
RECEIVED BY WAIVED BY
FUND MFS(1) MFS
- ---- ----------- ------------
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
(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 and effecting
the portfolio transactions of the Funds. 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, 1999 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, as amended. 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 periods ended March
31, 1998 and 1997, MFS received the following amounts under the Master
Administrative Services Agreement from the Funds:
FEES RECEIVED BY MFS
----------------------------------
FOR
FOR THE MARCH 1, 1997
YEAR ENDED THROUGH
FUND MARCH 31, 1998 MARCH 31, 1997
- ---- -------------- --------------
Alabama $11,875 $1,119
Arkansas 20,632 2,041
California 38,331 3,698
Florida 13,397 1,271
Georgia 10,002 924
Maryland 20,597 1,917
Massachusetts 35,807 3,335
Mississippi 10,839 1,033
New York 20,744 1,978
North Carolina 60,449 5,652
Pennsylvania 5,618 486
South Carolina 24,661 2,269
Tennessee 17,714 1,627
Virginia 58,011 5,513
West Virginia 20,233 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.
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
0.1125%. 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 disbursing agent 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, 1999 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
"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 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 distributions of net investment income that is
attributable to interest from tax-exempt securities will be designated by the
Fund as an "exempt-interest dividend" under the Code and will generally be
exempt from federal income tax in the hands of shareholders so long as at
least 50% of the total value of the Fund's assets consists of tax-exempt
securities at the close of each quarter of the Fund's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as an item of a 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 a 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 a 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, and any state or local 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 exempt-interest dividends
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. Such capital gains
will generally be taxable to shareholders as if the shareholders had directly
realized gains from the same sources from which they were realized by the
Fund. 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 the
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 12 months and otherwise as a short-term capital gain or loss; a
long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than 18
months. 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 (including purchases by exchange or by reinvestment)
without payment of an additional sales charge 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).
Each 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, 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, 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.
A Fund's transactions in options, Futures Contracts and swaps and related
transactions will be subject to special tax rules that may affect the amount,
timing, and character of Fund income and distributions to shareholders. For
example, certain positions held by 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%. Each Fund
intends to withhold U.S. federal income tax at the rate of 30% (or any lower
rate permitted under an applicable treaty) on taxable dividends and other
payments to Non-U.S. Persons that are subject to such withholding. 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 a Fund by Non-U.S. Persons may also
be subject to tax under the laws of their own jurisdictions. 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 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, no
Fund will be required to pay Massachusetts income or excise taxes.
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 tax-exempt securities of that state and
its political subdivisions and instrumentalities. Therefore, each Fund will
report annually to its shareholders the percentage of interest income earned
by the Fund during the preceding year from 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 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, the
following:
Traditional Individual Retirement Accounts (IRAs) (for individuals 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);
Roth Individual Retirement Accounts (Roth IRAs) (for individuals who desire
to make limited contributions to a tax-favored retirement program);
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
willful 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, 1999, 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, 1998.
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, 1998, the Statements
of Assets and Liabilities at March 31, 1998, the Statements of Operations for
the year ended March 31, 1998, the Statements of Changes in Net Assets for the
years ended March 31, 1998 and March 31, 1997, 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
December 31, 1997 10,840 465 6,051 17,356
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
December 31, 1997 10,210 54 3,836 14,100
CALIFORNIA FUND
December 31, 1988 $ 9,921 $ 0 $ 645 $10,566
December 31, 1989 10,234 0 1,371 11,605
December 31, 1990 10,214 0 2,136 12,350
December 31, 1991 10,683 40 3,151 13,874
December 31, 1992 10,937 60 4,145 15,142
December 31, 1993 11,542 121 5,428 17,091
December 31, 1994 10,019 119 5,575 15,713
December 31, 1995 11,171 132 7,240 18,543
December 31, 1996 10,898 129 8,060 19,087
December 31, 1997 11,367 135 9,454 20,956
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
December 31, 1997 10,140 108 4,007 14,255
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
December 31. 1997 11,010 135 7,960 19,105
MARYLAND FUND
December 31, 1988 $ 9,889 $ 0 $ 668 $10,557
December 31, 1989 10,110 7 1,390 11,507
December 31, 1990 10,073 15 2,147 12,235
December 31, 1991 10,388 40 3,112 13,540
December 31, 1992 10,462 59 3,996 14,517
December 31, 1993 10,841 139 5,045 16,025
December 31, 1994 9,602 179 5,263 15,044
December 31, 1995 10,489 196 6,634 17,319
December 31, 1996 10,249 192 7,345 17,786
December 31, 1997 10,656 199 8,572 19,427
MASSACHUSETTS FUND
December 31, 1988 $ 9,814 $ 0 $ 703 $10,517
December 31, 1989 9,907 0 1,452 11,359
December 31, 1990 9,851 0 2,246 12,097
December 31, 1991 10,296 0 3,300 13,596
December 31, 1992 10,481 0 4,272 14,753
December 31, 1993 10,806 228 5,371 16,405
December 31, 1994 9,582 244 5,653 15,479
December 31, 1995 10,509 268 7,185 17,962
December 31, 1996 10,240 261 7,958 18,459
December 31, 1997 10,574 269 9,253 20,096
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
December 31, 1997 9,890 32 3,422 13,344
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
December 31, 1997 11,280 329 8,606 20,215
NORTH CAROLINA FUND
December 31, 1988 $ 9,770 $ 0 $ 679 $10,449
December 31, 1989 9,991 0 1,411 11,402
December 31, 1990 9,911 52 2,161 12,124
December 31, 1991 10,238 112 3,104 13,454
December 31, 1992 10,335 113 3,953 14,401
December 31, 1993 10,847 126 4,979 15,952
December 31, 1994 9,549 236 5,155 14,940
December 31, 1995 10,547 260 6,562 17,369
December 31, 1996 10,379 256 7,339 17,974
December 31, 1997 10,767 266 8,561 19,594
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
December 31, 1997 9,820 40 3,114 12,974
SOUTH CAROLINA FUND
December 31, 1988 $ 9,850 $ 0 $ 715 $10,565
December 31, 1989 10,079 0 1,447 11,526
December 31, 1990 10,017 56 2,189 12,262
December 31, 1991 10,386 114 3,138 13,638
December 31, 1992 10,501 170 3,997 14,668
December 31, 1993 11,134 198 5,065 16,397
December 31, 1994 9,885 280 5,303 15,468
December 31, 1995 10,879 308 6,740 17,927
December 31, 1996 10,633 301 7,498 18,432
December 31, 1997 11,029 312 8,752 20,093
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
December 31, 1997 10,930 126 7,716 18,772
VIRGINIA FUND
December 31, 1988 $ 9,881 $ 0 $ 710 $10,591
December 31, 1989 10,109 0 1,476 11,585
December 31, 1990 10,100 0 2,272 12,372
December 31, 1991 10,464 0 3,265 13,729
December 31, 1992 10,573 4 4,170 14,747
December 31, 1993 10,909 241 5,213 16,363
December 31, 1994 9,590 279 5,402 15,271
December 31, 1995 10,609 309 6,907 17,825
December 31, 1996 10,245 298 7,588 18,131
December 31, 1997 10,600 309 8,826 19,735
WEST VIRGINIA FUND
December 31, 1988 $ 9,869 $ 0 $ 761 $10,630
December 31, 1989 10,083 0 1,530 11,613
December 31, 1990 10,102 0 2,325 12,427
December 31, 1991 10,455 9 3,325 13,789
December 31, 1992 10,604 16 4,250 14,870
December 31, 1993 11,124 127 5,387 16,638
December 31, 1994 9,953 134 5,669 15,756
December 31, 1995 10,845 146 7,127 18,118
December 31, 1996 10,641 143 7,946 18,730
December 31, 1997 10,985 148 9,219 20,352
- ------------
(1) Based on initial investment made on February 1, 1990, the initial public
offering date of Class A shares.
(2) Based on initial investment made on February 3, 1992, the initial public
offering date of Class A shares.
(3) Based on initial investment made on June 6, 1988, the initial public
offering date of Class A shares.
(4) Based on initial investment made on February 1, 1993, the initial public
offering date of Class A shares.
(5) Based on initial investment made on August 6, 1992, the initial public
offering date of Class A shares.
(6) Based on initial investment made on August 12, 1988, the initial public
offering date of Class A shares.
EXPLANATORY NOTES:
The results in the table assume that income dividends and capital gain
distributions were invested in additional shares. The results also assume that
the initial investment in Class A shares was reduced by the current maximum
applicable sales charge. No adjustment has been made for any income taxes, if
any, payable by shareholders.
<PAGE>
PERFORMANCE QUOTATIONS
<TABLE>
All performance quotations are as of March 31, 1998.
<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% 32% 28% 32%
--- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama Fund Class A
with sales charge . 4.51% 5.36% 7.11% 4.46% 4.37% 6.19% 6.56% 6.07% 6.43% 4.88%
Alabama Fund Class A
without sales
charge ............ 9.72 6.39 7.75 -- -- -- -- -- -- --
Alabama Fund Class B
with CDSC ......... 4.91 5.27(2) 7.22(2) -- -- -- -- -- -- --
Alabama Fund Class B
without CDSC ...... 8.91 5.61(2) 7.22(2) 3.92 3.82 5.44 5.76 5.31 5.62 4.37
Arkansas Fund Class
A with sales charge 4.83 4.66 5.90 4.65 4.56 6.46 6.84 6.33 6.71 4.68
Arkansas Fund Class
A without sales
charge ............ 10.06 5.69 6.74 -- -- -- -- -- -- --
Arkansas Fund Class
B with CDSC ....... 5.18 4.47(2) 5.96(2) -- -- -- -- -- -- --
Arkansas Fund Class
B without CDSC .... 9.18 4.82(2) 5.96(2) 3.81 3.70 5.29 5.60 5.29 5.44 4.11
California Fund
Class A with sales
charge ............ 6.21 4.93 7.54 4.35 4.21 6.04 6.40 5.85 6.19 4.74
California Fund
Class A without
sales charge ...... 11.51 5.96 8.06 -- -- -- -- -- -- --
California Fund
Class B with CDSC . 6.62 4.71(2) 7.61(2) -- -- -- -- -- -- --
California Fund
Class B without
CDSC .............. 10.62 5.07(2) 7.61(2) 3.82 3.67 5.31 5.62 5.10 5.40 4.18
California Fund
Class C with CDSC . 9.39 5.07(3) 7.61(3) -- -- -- -- -- -- --
California Fund
Class C without
CDSC .............. 10.39 5.07(3) 7.61(3) 3.65 3.50 5.07 5.37 4.86 5.15 3.99
Florida Fund Class A
with sales charge . 4.93 4.75 6.07 4.63 4.54 6.43 6.81 6.31 6.68 4.74
Florida Fund Class A
without sales
charge ............ 10.16 5.78 6.91 -- -- -- -- -- -- --
Florida Fund Class B
with CDSC ......... 5.18 4.51(2) 6.09(2) -- -- -- -- -- -- --
Florida Fund Class B
without CDSC ...... 9.18 4.87(2) 6.09(2) 4.07 3.97 5.65 5.99 5.51 5.84 4.18
Georgia Fund Class A
with sales charge . 5.74 4.81 6.89 4.60 4.50 6.39 6.76 6.25 6.62 4.82
Georgia Fund Class A
without sales
charge ............ 11.02 5.83 7.43 -- -- -- -- -- -- --
Georgia Fund Class B
with CDSC ......... 6.19 4.71(2) 6.98(2) -- -- -- -- -- -- --
Georgia Fund Class B
without CDSC ...... 10.19 5.06(2) 6.98(2) 4.10 4.00 5.69 6.03 5.56 5.88 4.32
Maryland Fund Class
A with sales charge 5.31 4.40 6.64 4.39 4.30 6.10 5.97 6.46 6.32 4.58
Maryland Fund Class
A without sales
charge ............ 10.57 5.42 7.16 -- -- -- -- -- -- --
Maryland Fund Class
B with CDSC ....... 5.96 4.40(2) 6.82(2) -- -- -- -- -- -- --
Maryland Fund Class
B without CDSC .... 9.96 4.75(2) 6.82(2) 3.95 3.85 5.49 5.81 5.35 5.66 4.16
Massachusetts Fund
Class A with sales
charge............. 4.76 4.71 7.00 4.63 4.53 6.43 6.81 6.29 6.66 4.92
Massachusetts Fund
Class A without
sales charge....... 9.99 5.73 7.52 -- -- -- -- -- -- --
Massachusetts Fund
Class B with CDSC . 5.25 4.72(2) 7.18(2) -- -- -- -- -- -- --
Massachusetts Fund
Class B without
CDSC .............. 9.25 5.07(2) 7.18(2) 4.17 4.07 5.79 6.13 5.65 5.99 4.49
Mississippi Fund
Class A with sales
charge ............ 5.74 5.47 5.45 4.66 4.56 6.47 6.85 6.33 6.71 4.64
Mississippi Fund
Class A without
sales charge ...... 11.02 6.50 6.36 -- -- -- -- -- -- --
Mississippi Fund
Class B with CDSC . 6.15 5.32(2) 5.40(2) -- -- -- -- -- -- --
Mississippi Fund
Class B without
CDSC .............. 10.15 5.67(2) 5.55(2) 4.14 4.04 5.75 6.09 5.61 5.94 4.11
New York Fund Class
A with sales charge 6.29 5.22 7.55 4.56 4.46 6.33 6.71 6.19 6.56 4.63
New York Fund Class
A without sales
charge ............ 11.59 6.25 8.08 -- -- -- -- -- -- --
New York Fund Class
B with CDSC ....... 6.78 5.12(2) 7.63(2) -- -- -- -- -- -- --
New York Fund Class
B without CDSC .... 10.78 5.46(2) 7.63(2) 4.03 3.93 5.60 5.93 5.46 5.78 4.13
North Carolina Fund
Class A with sales
charge ............ 5.12 4.77 6.78 4.40 4.30 6.11 6.47 5.97 6.32 4.60
North Carolina Fund
Class A without
sales charge....... 10.36 5.80 7.30 -- -- -- -- -- -- --
North Carolina Fund
Class B with CDSC . 5.75 4.77(2) 6.95(2) -- -- -- -- -- -- --
North Carolina Fund
Class B without
CDSC .............. 9.75 5.12(2) 6.95(2) 3.98 3.88 5.53 5.85 5.39 5.71 4.19
North Carolina Fund
Class C with CDSC . 8.75 5.19(3) 6.99(3) -- -- -- -- -- -- --
North Carolina Fund
Class C without
CDSC .............. 9.75 5.19(3) 6.99(3) 3.96 3.86 5.50 5.82 5.36 5.68 4.19
Pennsylvania Fund
Class A with sales
charge ............ 6.35 5.66 5.42 4.68 4.16 6.50 6.88 5.78 6.12 4.84
Pennsylvania Fund
Class A without
sales charge....... 11.65 6.69 6.42 -- -- -- -- -- -- --
Pennsylvania Fund
Class B with CDSC . 6.76 5.54(2) 5.35(2) -- -- -- -- -- -- --
Pennsylvania Fund
Class B without
CDSC .............. 10.76 5.89(2) 5.52(2) 4.12 3.57 5.72 6.06 4.96 5.25 4.29
South Carolina Fund
Class A with sales
charge ............ 5.36 4.89 7.05 4.28 4.18 5.94 6.29 5.81 6.15 4.56
South Carolina Fund
Class A without
sales charge ...... 10.62 5.91 7.57 -- -- -- -- -- -- --
South Carolina Fund
Class B with CDSC . 5.91 4.89(2) 7.22(2) -- -- -- -- -- -- --
South Carolina Fund
Class B without
CDSC .............. 9.91 5.23(2) 7.22(2) 3.82 3.72 5.31 5.62 5.17 5.47 4.14
Tennessee Fund Class
A with sales charge 5.83 5.05 6.89 4.48 4.38 6.22 6.59 6.08 6.44 4.68
Tennessee Fund Class
A without sales
charge ............ 11.11 6.08 7.43 -- -- -- -- -- -- --
Tennessee Fund Class
B with CDSC ....... 6.51 5.05(2) 7.04(2) -- -- -- -- -- -- --
Tennessee Fund Class
B without CDSC .... 10.51 5.40(2) 7.04(2) 4.04 3.94 5.61 5.94 5.47 5.79 4.27
Virginia Fund Class
A with sales charge 5.08 4.43 6.90 4.40 4.30 6.11 6.47 5.97 6.32 4.68
Virginia Fund Class
A without sales
charge ............ 10.32 5.45 7.42 -- -- -- -- -- -- --
Virginia Fund Class
B with CDSC ....... 5.61 4.42(2) 7.08(2) -- -- -- -- -- -- --
Virginia Fund Class
B without CDSC .... 9.61 4.77(2) 7.08(2) 3.96 3.86 5.50 5.82 5.36 5.68 4.28
Virginia Fund Class
C with CDSC ....... 8.61 4.84(3) 7.11(3) -- -- -- -- -- -- --
Virginia Fund Class
C without CDSC .... 9.61 4.84(3) 7.11(3) 3.97 3.87 5.51 5.84 5.38 5.69 4.28
West Virginia Fund
Class A with sales
charge ............ 4.22 4.84 7.09 4.47 4.37 6.21 6.57 6.07 6.43 4.74
West Virginia Fund
Class A without
sales charge....... 9.42 5.87 7.62 -- -- -- -- -- -- --
West Virginia Fund
Class B with CDSC . 4.72 4.84(2) 7.27(2) -- -- -- -- -- -- --
West Virginia Fund
Class B without
CDSC .............. 8.72 5.19(2) 7.27(2) 4.04 3.94 5.61 5.94 5.47 5.79 4.34
- ----------
(1) For the period from the inception of Class A shares to March 31, 1998, or for the 10 years ended March 31, 1998, 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 inception 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 inception 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.
</TABLE>
<PAGE>
APPENDIX B
<TABLE>
SALES CHARGES
<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 C
SHARES SHARES SHARES SHARES SHARES
12 MONTHS 12 MONTHS 12 MONTHS 12 MONTHS 12 MONTHS
FUND ENDED 3/31/98 ENDED 3/31/97 ENDED 3/31/96 ENDED 3/31/98 ENDED 3/31/97
- -------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Alabama Fund ....... $ 8,330 $ 7,246 $ 2,531 N/A N/A
Arkansas Fund ...... 25,612 24,877 4,215 N/A N/A
California Fund .... 84,822 171,782 96,292 $2,944 $3,203
Florida Fund ....... 41,233 50,353 52,478 N/A N/A
Georgia Fund ....... 46,591 45,183 10,865 N/A N/A
Maryland Fund ...... 49,229 39,109 59,233 N/A N/A
Massachusetts Fund . 36,343 29,809 14,743 N/A N/A
Mississippi Fund ... 48,915 48,353 24,336 N/A N/A
New York Fund ...... 64,504 95,716 29,930 N/A N/A
North Carolina Fund 104,578 103,158 66,144 4,497 1,076
Pennsylvania Fund .. 26,291 33,143 18,579 N/A N/A
South Carolina Fund 48,837 40,979 37,842 N/A N/A
Tennessee Fund ..... 34,989 53,602 19,385 N/A N/A
Virginia Fund ...... 81,775 89,149 46,610 3,974 N/A
West Virginia Fund . 34,856 54,376 33,870 N/A N/A
<CAPTION>
CDSC
IMPOSED ON CLASS A CLASS A
REDEMPTION SALES CHARGES SALES CHARGES CLASS A CLASS A
OF CLASS A RECEIVED BY RECEIVED GROSS SALES FUND ASSETS
SHARES MFD BY DEALERS(1) CHARGES SOLD
12 MONTHS 12 MONTHS 12 MONTHS 12 MONTHS 12 MONTHS
FUND ENDED 3/31/98 ENDED 3/31/98 ENDED 3/31/98 ENDED 3/31/98 ENDED 3/31/98
- -------------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Alabama Fund ....... $ 0 $ 14,663 $ 65,110 $ 79,773 $ 2,929,506
Arkansas Fund ...... 2 23,166 102,888 126,054 6,174,585
California Fund .... 14,977 45,709 380,213 425,922 17,015,288
Florida Fund ....... 12 18,009 83,171 101,180 3,281,794
Georgia Fund ....... 0 16,416 75,863 92,279 3,063,418
Maryland Fund ...... 1 40,185 180,441 220,626 7,534,403
Massachusetts Fund . 0 43,427 224,145 267,572 14,119,637
Mississippi Fund ... 0 17,405 84,425 101,830 3,771,296
New York Fund ...... 4,763 13,837 126,463 140,300 6,726,852
North Carolina Fund 0 102,313 483,176 585,489 27,570,391
Pennsylvania Fund .. 82 19,765 88,671 108,436 2,813,902
South Carolina Fund 82 39,848 193,945 233,793 10,300,699
Tennessee Fund ..... 0 35,227 154,612 189,839 7,466,002
Virginia Fund ...... 0 81,631 368,627 450,258 16,198,465
West Virginia Fund . 9 48,338 220,813 269,151 9,414,983
<CAPTION>
CDSC
IMPOSED ON CLASS A CLASS A
REDEMPTION SALES CHARGES SALES CHARGES CLASS A CLASS A
OF CLASS A RECEIVED BY RECEIVED GROSS SALES FUND ASSETS
SHARES MFD BY DEALERS(1) CHARGES SOLD
12 MONTHS 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 ENDED 3/31/97
- -------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Alabama Fund ....... $ 0 $13,874 $ 65,389 $ 79,263 $ 3,984,222
Arkansas Fund ...... 0 34,851 178,324 213,175 12,090,143
California Fund .... 16,440 47,656 347,772 395,428 23,368,452
Florida Fund ....... 10 18,617 86,868 105,485 5,945,687
Georgia Fund ....... 244 13,894 61,423 75,317 4,190,865
Maryland Fund ...... 0 29,470 141,691 171,161 7,799,351
Massachusetts Fund . 47 38,548 177,166 215,714 15,707,865
Mississippi Fund ... 0 18,104 84,467 102,571 5,480,086
New York Fund ...... 51 19,546 158,491 178,037 9,931,009
North Carolina Fund 0 72,935 335,785 408,720 26,128,993
Pennsylvania Fund .. 11,294 11,850 69,828 81,678 3,612,890
South Carolina Fund 683 36,896 175,202 212,098 11,285,379
Tennessee Fund ..... 0 25,070 114,729 139,799 9,461,974
Virginia Fund ...... 0 62,832 293,803 356,635 21,450,042
West Virginia Fund . 0 38,916 181,111 220,027 9,414,262
<CAPTION>
CDSC
IMPOSED ON CLASS A CLASS A
REDEMPTION SALES CHARGES SALES CHARGES CLASS A CLASS A
OF CLASS A RECEIVED BY RECEIVED GROSS SALES FUND ASSETS
SHARES MFD BY DEALERS(1) CHARGES SOLD
12 MONTHS 12 MONTHS 12 MONTHS 12 MONTHS 12 MONTHS
FUND ENDED 3/31/96 ENDED 3/31/96 ENDED 3/31/96 ENDED 3/31/96 ENDED 3/31/96
- -------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Alabama Fund ....... $ 8 $ 20,941 $111,575 $132,516 $ 6,180,746
Arkansas Fund ...... 0 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 ...... 0 38,119 186,547 224,666 9,023,095
Massachusetts Fund . 0 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 ...... 0 91,953 460,556 552,509 29,719,388
West Virginia Fund . 4 56,110 263,988 320,098 16,356,290
- ----------
(1) Includes dealers, banks and other financial institutions.
</TABLE>
<PAGE>
APPENDIX C
AMOUNTS PAID UNDER THE DISTRIBUTION PLAN
FOR THE 12 MONTHS ENDED MARCH 31, 1998
% OF
TOTAL PAID AVG.
UNDER DAILY AMOUNT AMOUNT AMOUNT
DISTRIBUTION NET PAID PAID TO RETAINED
FUND PLAN ASSETS TO MFD DEALERS(1) BY MFD
- --------------------------- ---------- ------- -------- -------- --------
Alabama Fund Class A ...... $ 247,832 0.25% $ 0 $191,668 $ 56,164
Alabama Fund Class B ...... 83,182 1.00 56,071 18,690 8,421
Arkansas Fund Class A ..... 138,581 0.10 0 106,935 31,646
Arkansas Fund Class B ..... 67,455 0.90 53,429 11,153 2,873
California Fund Class A ... 0 0.00 0 0 0
California Fund Class B ... 323,302 0.81 300,105 23,197 0
California Fund Class C ... 39,404 1.00 0 31,281 8,123
Florida Fund Class A ...... 0 0.00 0 0 0
Florida Fund Class B ...... 125,871 0.80 117,493 8,378 0
Georgia Fund Class A ...... 150,448 0.25 0 131,357 19,091
Georgia Fund Class B ...... 107,303 1.00 80,477 20,952 5,874
Maryland Fund Class A ..... 442,077 0.35 78,746 315,769 47,562
Maryland Fund Class B ..... 197,267 1.00 142,786 49,316 5,165
Massachusetts Fund Class A 994,461 0.35 237,100 592,750 164,611
Massachusetts Fund Class B 168,978 1.00 125,070 41,690 2,218
Mississippi Fund Class A .. 0 0.00 0 0 0
Mississippi Fund Class B .. 84,274 0.78 81,143 3,131 0
New York Fund Class A ..... 301,149 0.25 0 257,287 43,862
New York Fund Class B ..... 265,454 1.00 199,090 55,293 11,071
North Carolina Fund Class A 1,326,584 0.35 379,024 876,926 70,634
North Carolina Fund Class B 422,774 1.00 317,080 97,808 7,886
North Carolina Fund Class C 70,592 1.00 0 64,356 6,236
Pennsylvania Fund Class A . 0 0.00 0 0 0
Pennsylvania Fund Class B . 174,490 0.79 165,641 8,849 0
South Carolina Fund Class A 523,940 0.35 149,697 333,355 40,888
South Carolina Fund Class B 251,617 1.00 188,713 56,950 5,954
Tennessee Fund Class A .... 382,368 0.35 109,248 233,822 39,298
Tennessee Fund Class B .... 163,701 1.00 122,776 35,711 5,214
Virginia Fund Class A ..... 1,317,039 0.35 376,294 843,270 97,475
Virginia Fund Class B ..... 314,433 1.00 235,825 57,075 21,533
Virginia Fund Class C ..... 32,548 1.00 0 31,825 723
West Virginia Fund Class A 450,793 0.35 128,798 295,046 26,949
West Virginia Fund Class B 147,016 1.00 110,262 33,917 2,837
- ----------
(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
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) MUNICIPAL SERIES TRUST
500 Boylston Street
Boston, MA 02116
MST-13-8/98/.6M
<PAGE>
MFS(R) MUNICIPAL INCOME FUND
AUGUST 1, 1998
PROSPECTUS
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B+ SHARES OF BENEFICIAL INTEREST
CLASS C++ SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
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
(continued on next page)
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.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
August 1, 1998, which contains more detailed information about the Trust and
the Fund and is incorporated into this Prospectus by reference. See page 42
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 (http://www.sec.gov) 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.
TABLE OF CONTENTS
Page
1. Expense Summary ....................................................... 3
2. Condensed Financial Information ....................................... 4
3. The Fund .............................................................. 8
4. Investment Objective and Policies ..................................... 9
5. Certain Securities and Investment Techniques .......................... 13
6. Management of the Fund ................................................ 19
7. Information Concerning Shares of the Fund ............................. 21
Purchases ........................................................ 21
Exchanges ........................................................ 29
Redemptions and Repurchases ...................................... 30
Distribution Plan ................................................ 34
Distributions .................................................... 36
Tax Status ....................................................... 37
Net Asset Value .................................................. 38
Description of Shares, Voting Rights and Liabilities ............. 38
Performance Information .......................................... 39
Provision of Annual and Semiannual Reports ....................... 40
8. Shareholder Services .................................................. 40
Appendix A ............................................................ A-1
Appendix B ............................................................ B-1
Appendix C ............................................................ C-1
Appendix D ............................................................ D-1
Appendix E ............................................................ E-1
<PAGE>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
CLASS A CLASS B CLASS 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 See Below
proceeds, as applicable) ........... (1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ...................... 0.73% 0.73% 0.73%
Rule 12b-1 Fees ...................... 0.25%(2) 1.00%(3) 1.00%(3)
Other Expenses(4) .................... 0.24% 0.24% 0.24%
---- ---- ----
Total Operating Expenses ............. 1.22% 1.97% 1.97%
- ------------
(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):
PERIOD CLASS A CLASS B CLASS C
- ------ ------- ---------------- --------------
(1) (1)
1 year ..................
$ 59 $ 60 $ 20 $ 30 $ 20
3 years ................. 84 92 62 62 62
5 years ................. 111 126 106 106 106
10 years ................. 188 210(2) 210(2) 230 230
- ------------
(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. 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.
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
<CAPTION>
YEAR ENDED MARCH 31, YEAR ENDED
------------------------------------------------------------------ NOVEMBER 30,
1998 1997 1996 1995 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 .............................. $ 8.50 $ 8.62 $ 8.56 $ 8.56 $ 8.99 $ 9.15
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income .............. $ 0.48 $ 0.49 $ 0.51 $ 0.50 $ 0.15 $ 0.12
Net realized and unrealized
gain (loss) on investments ........ 0.49 (0.12) 0.05 0.02 (0.51) (0.16)
------ ------ ------ ------ ------ ------
Total from investment
operations ...................... $ 0.97 $ 0.37 $ 0.56 $ 0.52 $(0.36) $(0.04)
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income(++) ..... $(0.48) $(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(+++) ............... -- -- -- (0.00) (0.04) (0.01)
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders ................. $(0.48) $(0.49) $(0.50) $(0.52) $(0.07) $(0.12)
------ ------ ------ ------ ------ ------
Net asset value - end of period ...... $ 8.99 $ 8.50 $ 8.62 $ 8.56 $ 8.56 $ 8.99
------ ------ ------ ------ ------ ------
TOTAL RETURN(+) ...................... 11.61% 4.28% 6.81% 6.33% (7.90)%+ (1.80)%+
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses## ......................... 1.23% 1.31% 1.28% 1.13% 1.07%+ 0.76%+
Net investment income .............. 5.44% 5.75% 5.75% 6.20% 5.31%+ 4.94%+
PORTFOLIO TURNOVER ................... 23% 30% 23% 25% 9% 30%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ....................... $189,056 $152,039 $121,903 $25,270 $5,595 $461
*For the period from the inception of Class A, September 7, 1993, through November 30,
1993.
+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 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 $0.0003.
(+++)For the year ended March 31, 1995, the per share distributions in excess of net realized
gains were less than $0.01.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS - CONTINUED
<CAPTION>
YEAR ENDED
YEAR ENDED MARCH 31, NOVEMBER 30,
------------------------------------------------------------------ -------------------
1998 1997 1996 1995 1994+++ 1993 1992
------ ------ ------ ------ ------- ------ ------
CLASS B
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value -
beginning of period ........... $ 8.51 $ 8.63 $ 8.57 $ 8.56 $ 8.99 $ 8.73 $ 8.50
------ ------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income ........ $ 0.42 $ 0.43 $ 0.43 $ 0.44 $ 0.14 $ 0.42 $ 0.47
Net realized and
unrealized gain (loss)
on investments .............. 0.48 (0.13) 0.06 -- (0.51) 0.42 0.26
------ ------ ------ ------ ------ ------ ------
Total from investment
operations ................ $ 0.90 $ 0.30 $ 0.49 $ 0.44 $(0.37) $ 0.84 $ 0.73
------ ------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders
------
From net investment
income ...................... $(0.41) $(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(++) .................. -- -- (0.00) -- -- (0.03) --
In excess of net realized
gain on investments ......... -- -- -- -- (0.04) -- --
From paid-in capital ......... -- -- -- -- -- -- (0.02)
------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders .............. $(0.41) $(0.42) $(0.43) $(0.43) $(0.06) $(0.58) $(0.50)
------ ------ ------ ------ ------ ------ ------
Net asset value - end of
period ........................ $ 9.00 $ 8.51 $ 8.63 $ 8.57 $ 8.56 $ 8.99 $ 8.73
------ ------ ------ ------ ------ ------ ------
TOTAL RETURN ................... 10.77% 3.44% 5.87% 5.32% (8.97)%+ 9.95% 8.82%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses## ................... 1.98% 2.11% 2.13% 2.16% 2.24%+ 2.11% 2.03%
Net investment income ........ 4.69% 4.95% 4.90% 5.15% 4.74%+ 4.92% 5.50%
PORTFOLIO TURNOVER ............. 23% 30% 23% 25% 9% 30% 52%
NET ASSETS AT END OF
PERIOD
(000 OMITTED) .................$172,339 $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 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 $0.0003.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS - CONTINUED
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------
1991 1990 1989 1988
------ ------ ------ ------
CLASS B
---------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value - beginning of period .............. $ 8.25 $ 8.41 $ 8.11 $ 7.67
------ ------ ------ ------
Income from investment operations -
Net investment income ............................ $ 0.49 $ 0.49 $ 0.51 $ 0.50
Net realized and unrealized gain (loss) on
investments .................................... 0.25 (0.15) 0.30 0.43
------ ------ ------ ------
Total from investment operations ............... $ 0.74 $ 0.34 $ 0.81 $ 0.93
------ ------ ------ ------
Less distributions declared to shareholders from
net investment income ............................ $(0.49) $(0.50) $(0.51) $(0.49)
------ ------ ------ ------
Net asset value - end of period .................... $ 8.50 $ 8.25 $ 8.41 $ 8.11
------ ------ ------ ------
TOTAL RETURN ....................................... 9.21% 4.18% 10.24% 12.53%
RATIOS (TO AVERAGE NET ASSETS)/ SUPPLEMENTAL DATA:
Expenses ......................................... 2.04% 2.05% 2.07% 2.09%
Net investment income ............................ 5.82% 5.99% 6.09% 6.38%
PORTFOLIO TURNOVER ................................. 73% 91% 127% 171%
NET ASSETS AT END OF PERIOD (000 OMITTED) ......... $409,084 $379,239 $343,887 $244,825
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS - CONTINUED
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 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 ....... $ 8.52 $ 8.64 $ 8.57 $ 8.56 $ 9.07
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income ..................... $ 0.41 $ 0.43 $ 0.43 $ 0.44 $ 0.09
Net realized and unrealized gain (loss)
on investments .......................... 0.49 (0.12) 0.07 0.01 (0.59)
------ ------ ------ ------ ------
Total from investment operations ........ $ 0.90 $ 0.31 $ 0.50 $ 0.45 $(0.50)
------ ------ ------ ------ ------
Less distributions declared to shareholders
from net investment income(++) ............ $(0.41) $(0.43) $(0.43) $(0.44) $(0.01)
------ ------ ------ ------ ------
Net asset value - end of period ............. $ 9.01 $ 8.52 $ 8.64 $ 8.57 $ 8.56
------ ------ ------ ------ ------
TOTAL RETURN ................................ 10.75% 3.62% 5.94% 5.39% (19.42)%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ................................ 1.98% 2.06% 2.05% 2.09% 2.18%+
Net investment income ..................... 4.69% 5.00% 4.95% 5.23% 4.62%+
PORTFOLIO TURNOVER .......................... 23% 30% 23% 25% 9%
NET ASSETS AT END OF PERIOD (000 OMITTED) . $21,802 $19,159 $16,504 $10,936 $6,393
***For the period from the inception of Class C, January 3, 1994, through March 31, 1994.
+Annualized.
#Per share data 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 distributions in excess of net investment
income were $0.0003.
</TABLE>
3. 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 a 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.
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"), Fitch IBCA ("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, 1998, with the debt securities separated into rating categories, see
Appendix E to this Prospectus. See "Certain Securities and Investment
Techniques -- 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 and
securities purchased on a "when-issued" or on a "forward delivery" basis. The
Fund may also invest in variable and floating rate obligations and inverse
floating rate obligations. 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. 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. Gains recognized from options and
futures transactions engaged in by the Fund are taxable income to
shareholders. See "Certain Securities and Investment Techniques" below.
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
maintenance of a sufficient level of occupancy, sound management of the
developments, timely and adequate increases in rents to cover increases in
operating expenses, including taxes, utility rates and maintenance costs,
changes in applicable laws and governmental regulations and social and
economic trends.
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.
5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Additional information about certain of the securities transactions and
investment techniques described below can be found under the caption "Certain
Securities and Investment Techniques" in the SAI.
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 of the liquidity determinations, 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.
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.
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.
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
securities purchased on such bases, the Fund will segregate liquid assets
sufficient to cover its commitments. Although the Fund does not intend to make
such purchases for speculative purposes, purchases of securities on such bases
may involve more risk than other types of purchases.
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, indexes 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 or interest on 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.
In addition, the use of options, futures contracts and options on futures
contracts may result in the loss of principal, particularly where such
instruments are traded for other than hedging purposes (e.g., to enhance
current yield).
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").
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.
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). Except with respect to the Fund's policies on borrowing and
illiquid securities, 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. John P. Kihn has been the Fund's portfolio manager since
March 4, 1998. Mr. Kihn, a Vice President of the Adviser, has been employed as
a portfolio manager by the Adviser since October 1997. From 1996 to 1997, he
worked as a Senior Quantitative Analyst and Vice President of Putnam
Investment Management, Inc; from 1992 to 1996, he attended the London School
of Economics where he was awarded a doctorate in finance; and from 1994 to
1995, he was an associate portfolio manager with Colonial Management
Associates, Inc. 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, 1998, the investment advisory fees received under
the Advisory Agreement were $2,841,328 (of which $1,168,451 was based on
average daily net assets and $1,672,877 on gross income), equal to, on an
annualized basis, 0.73% 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/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.), a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"), 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 $87.7 billion on behalf of approximately 3.3 million investor
accounts as of June 30, 1998. As of such date, the MFS organization managed
approximately $61.9 billion of assets invested in equity securities and
approximately $19.5 billion of assets invested in fixed income securities.
Approximately $5.1 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.) Financial
Services Holdings, Inc., which in turn is an indirect wholly owned subsidiary
of Sun Life. The Directors of MFS are John W. Ballen, Jeffrey L. Shames,
Arnold D. Scott, John D. McNeil and Donald A. Stewart. Mr. Ballen is an
Executive Vice President of MFS, Mr. Shames is the Chairman, Chief Executive
Officer and President of MFS 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.
Messrs. Shames and Scott are Trustees of the Trust. Daniel E. McManus,
Geoffrey L. Schechter, 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.
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. Some simultaneous
transactions are inevitable when several clients receive investment advice
from MFS, 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, as
amended. 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 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 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)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the Plan makes
a complete redemption of all of its shares in the MFS Funds, or (b) with
respect to plans which established an account with the Shareholder Servicing
Agent prior to November 1, 1997, 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 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:
CONTINGENT
YEAR OF 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
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.
THE FOLLOWING POLICY WILL REMAIN IN EFFECT UNTIL SEPTEMBER 15, 1998:
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. Because an exchange request involves both a request to
redeem shares of one fund and to purchase shares of another fund, the Fund
considers the underlying redemption request to be conditioned upon the
acceptance of the underlying purchase request. Therefore, 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.
EFFECTIVE SEPTEMBER 15, 1998, THE FUND WILL ADOPT THE FOLLOWING NEW MARKET
TIMING POLICY WHICH WILL REPLACE THE CURRENT POLICY AS DISCLOSED ABOVE:
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject or restrict any specific purchase or exchange request. Because
an exchange request involves both a request to redeem shares of one fund and
to purchase shares of another fund, the Fund considers the underlying
redemption request to be conditioned upon the acceptance of the underlying
purchase request. Therefore, 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 MFS Family of Funds is not designed for professional market timing
organizations or other entities using programmed or frequent exchanges. The
MFS Family of Funds defines a "market timer" as an individual or organization
acting on behalf of one or more individuals, if (i) the individual or
organization makes six or more exchange requests among the MFS Family of Funds
or three or more exchange requests out of any of the MFS high yield bond funds
or MFS municipal bond funds per calendar year and (ii) any one of such
exchange requests represents shares equal in value to $1 million or more.
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 (i) delaying for
up to seven days the purchase side of an exchange request by market timers,
(ii) rejecting or otherwise restricting purchase or exchange requests by
market timers; and (iii) permitting exchanges by market timers only into
certain 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
or arrange for the sale of 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 and other employees, payment for travel expenses, including
lodging, incurred by registered representatives and other employees 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 and other employees 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 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 Exchange
(generally, 4:00 p.m., Eastern time), 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
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 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
any 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. The Fund expects that none of its distributions will be
eligible for the dividends received deduction for corporations.
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. Depending on the nature of
the distribution and the residence of the shareholders, 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 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 (as well as the rate category or categories under which such gain
is taxable), the portion, if any, representing a return of capital (which
generally is free of current taxes but which results in a basis reduction) and
the amount, if any, of federal income tax withheld.
Fund distributions of net capital gains or net short-term capital gains will
reduce the Fund's net asset value per share. Shareholders who buy shares
shortly before the Fund makes such a 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.
The Fund intends to withhold U.S. federal income tax at the rate of 30% (or
any lower rate permitted under an applicable treaty) on taxable 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. 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
additional information regarding backup withholding of federal income tax and
should consult their own tax advisers as to the tax consequences to them 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, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which
has a later class inception date than another class of shares of the Fund is
based both on (i) the performance of the Fund's newer class from its inception
date and (ii) the performance of the Fund's oldest class from its inception
date up to the class inception date of the newer class. See the SAI for
further information on the calculation of total rate of return for share
classes with different class inception 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,
1998, 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.
PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
To avoid sending duplicate copies of materials to households, effective
September 15, 1998, only one copy of each Fund annual and semiannual report
may be mailed to shareholders having the same residential address on the
Fund's records. However, any shareholder may call the Shareholder Servicing
Agent at 1-800-225-2606 to request that copies of such reports be sent
personally to that shareholder.
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:
o Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
o Dividends in cash; capital gain distributions reinvested in additional
shares; or
o 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, Class B and
Class 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). Some of the following information will not
apply to certain funds in the MFS Family of Funds, depending on which classes
of shares are offered by such Fund. 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 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;
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 FUND "SUPERMARKET" INVESTMENTS
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 "supermarket" 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.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases Subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund,
MFS Municipal Limited Maturity Fund, MFS Money Market Fund, MFS
Government Money Market Fund and MFS Cash Reserve Fund.
5. BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust deparments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefits of their trust account clients.
6. INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the
proceeds of a redemption of Class I shares of any of the MFS Funds.
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, Fitch and Duff & Phelps 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
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.
S&P'S
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless 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 or the taking of a similar action if
payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility, Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50% -- 90% of such outstandings,
and D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/
or interest payments.
DP: Preferred stock with dividend arrearages.
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
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.
S&P
A S&P note rating reflects the liquidity concerns and market-access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment.
o Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
o 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
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
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
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:
o Leading market positions in well established industries.
o High rates of return on funds employed.
o Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
o 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.
S&P
A S&P 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".
<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.
<PAGE>
APPENDIX D
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1998)
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 1998. (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
1998 1998 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%
------ ----- --------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 25,350 $ 0 - 42,350 15.0% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 25,350 - 61,400 $ 42,350 - 102,300 28.0% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11%
$ 61,400 - 128,100 $102,300 - 155,950 31.0% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59%
$128,100 - 278,450 $155,950 - 278,450 36.0% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50%
$278,450 & Over $278,450 & 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, 1998
The table below shows the percentages of the Fund's assets at March 31, 1998,
invested in bonds assigned to the various rating categories by Moody's, S&P,
Fitch and Duff & Phelps and in unrated bonds determined by MFS to be of
comparable quality. The highest of the four rating services is used with
respect to each rating.
UNRATED
BONDS OF
RATED COMPARABLE
RATING BONDS QUALITY TOTAL
------ ----- ----------- -----
AAA/Aaa 41.22% 1.43% 42.65%
AA/Aa 12.94 0.00 12.94
A/A 6.15 0.00 6.15
BBB/Baa 17.43 0.38 17.81
BB/Ba 1.29 8.34 9.63
B/B 0.88 5.07 5.95
CCC/Caa 0.00 0.00 0.00
CC/Ca 0.00 0.00 0.00
C/C 0.00 0.00 0.00
Default 0.00 0.00 0.00
---- ---- -----
Total 79.91% 15.22% 95.13%
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
MM1-1-8/98/65M 02/202/302
<PAGE>
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
MFS(R) MUNICIPAL STATEMENT OF
INCOME FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) August 1, 1998
- -------------------------------------------------------------------------------
Page
----
1. Definitions ....................................................... 2
2. Certain Securities and Investment Techniques ...................... 2
3. Investment Restrictions ........................................... 8
4. Management of the Fund ............................................ 9
Trustees ....................................................... 9
Officers ....................................................... 10
Trustee Compensation Table ..................................... 10
Investment Adviser ............................................. 10
Administrator .................................................. 11
Custodian ...................................................... 11
Shareholder Servicing Agent .................................... 11
Distributor .................................................... 12
5. Portfolio Transactions and Brokerage Commissions .................. 12
6. Shareholder Services .............................................. 13
Investment and Withdrawal Programs ............................. 13
Exchange Privilege ............................................. 15
Tax-Deferred Retirement Plans .................................. 16
7. Tax Status ........................................................ 16
8. Determination of Net Asset Value; Performance Information ......... 18
9. Distribution Plan ................................................. 20
10. Description of Shares, Voting Rights and Liabilities .............. 21
11. Independent Auditors and Financial Statements ..................... 21
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, 1998. 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, 1998, as
amended or supplemented from time to time.
2. CERTAIN SECURITIES AND 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. The Fund would also receive a fee from the
borrower or compensation based on investment of cash collateral, less a fee paid
to the borrower, if the collateral is in the form of cash. 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
amount 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 collateral.
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 indexes, 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 and could involve
the loss of all or a portion of the principal amount of, or interest on, the
investment. 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 segregated by the 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 liquid assets representing the difference are segregated
by the Fund. A put option written by the Fund is "covered" if the Fund
segregates 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 where the exercise price of the put held is
less than the exercise price of the put written if liquid assets representing
the difference are segregated by the Fund. 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 counterparty 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 liquid assets representing the difference are
segregated by the Fund. 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 liquid assets representing the difference
are segregated by the Fund. 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, Options on Futures Contracts and Options
on Foreign Currencies traded on a CFTC-regulated exchange only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for non-bona fide
hedging purposes, provided that the aggregate initial margin and premiums to
establish such non-bona fide hedging positions do not exceed 5% of the
liquidation value of the Fund's assets, after taking into account unrealized
profits and unrealized losses on any such contracts the Fund has entered into,
and excluding, in computing such 5%, the in-the-money amount with respect to an
option that is in-the-money at the time of purchase.
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) and the Fund's non-fundamental policy on
restricted securities, 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 non-fundamental policies, the Fund will not knowingly (i) 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 and (ii) invest 25% or more
of the market value of its total assets in securities of issuers in any one
industry.
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
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 1991)
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; Colonial Insurance Company,
Ltd., Director and 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; CitiFunds and
CitiSelect Folios (mutual funds), 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, Chairman, Chief Executive Officer
and President
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President;
Wellfleet Investments (investor in health care companies), Managing General
Partner (since 1993)
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), Director
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
GEOFFREY L. SCHECHTER*, Vice President (born 12/17/62)
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
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. 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.), a subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
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. 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 $3,500 $1,050 10 $242,022
Marshall N. Cohan 4,175 2,125 14 148,067
Lawrence H. Cohn 3,275 730 18 123,917
J. David Gibbons 3,500 1,676 13 129,842
Abby M. O'Neill 3,500 875 10 129,842
Walter E. Robb, III 4,400 2,125 15 148,067
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 4,625 940 20 184,067
Ward Smith 4,400 1,175 13 184,067
- ------------
(1) For fiscal year ended March 31, 1998.
(2) Based on normal retirement age of 75. See the table below for the estimated
annual benefits payable upon retirement by the Fund to a Trustee based on
his or her estimated credited years of service.
(3) For calendar year 1997. All Trustees receiving compensation served as
Trustees of 42 funds within the MFS Fund complex (having aggregate net
assets at December 31, 1997, of approximately $19 billion) except Mr.
Bailey, who served as Trustee of 69 funds within the MFS Fund complex
(having aggregate net assets at December 31, 1997, of approximately $48
billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
----------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- --------------------------------------------------------------------------------
$2,948 $442 $ 737 $1,032 $1,474
3,376 506 844 1,181 1,688
3,804 571 951 1,331 1,902
4,232 635 1,058 1,481 2,116
4,660 699 1,165 1,631 2,330
5,088 763 1,272 1,781 2,544
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
As of July 1, 1998, the Trustees and officers, as a group, owned less than 1% of
the outstanding shares of the Fund. As of July 1, 1998, Merrill Lynch Pierce
Fenner & Smith Inc., P.O. Box 45286, Jacksonville, FL owned 10.36%, 7.18% and
10.57% of the outstanding Class A, Class B and Class C shares of the Fund,
respectively. Also as of July 1, 1998, Peter B. Foster, Dunwoody, Georgia, owned
10.61% of the outstanding Class A 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.)
Financial Services Holdings, Inc., which in turn is an indirect wholly owned
subsidiary of Sun Life.
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, 1998, MFS received $2,841,328 on an
annualized basis (of which $1,168,451 was based on average daily net assets and
$1,672,877 on gross income) under the Advisory Agreement.
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.
The Fund pays all of its expenses (other than those assumed by the Adviser or
MFD) including: advisory and administrative fees; 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 and effecting its portfolio
transactions.
The Advisory Agreement with the Fund will remain in effect until August 1, 1999,
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, as amended. 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 periods ended March 31,
1997 and 1998, MFS received $4,646 and $55,640, respectively, under the
Agreement, equivalent to 0.001% and 0.01%, respectively, 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.
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 0.1125%. 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 agent 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, 1998, MFD and dealers and certain other
financial institutions received sales charges of $27,449 and $131,280,
respectively (as their concession on gross sales charges of $158,729), for
selling Class A shares of the Fund. The Fund received $8,273,076 representing
the aggregate net asset value of such 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.
During the fiscal years ended March 31, 1998, 1997 and 1996, the contingent
deferred sales charge ("CDSC") imposed on redemption of Class A shares was $185,
$0 and $0, respectively. During the fiscal years ended March 31, 1998, 1997 and
1996, the CDSC imposed on redemption of Class B shares was $249,736, $492,585
and $634,226, respectively. During the fiscal years ended March 31, 1998 and
1997, the CDSC imposed on the redemption of Class C shares was $11,733 and
$5,259, respectively.
The Distribution Agreement will remain in effect until August 1, 1999 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 $54,160 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, 1998, 1997 and 1996, 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,
Class B and Class 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 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 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 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 is 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 adviser 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, the following:
Traditional Individual Retirement Accounts (IRAs) (for individuals 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);
Roth Individual Retirement Accounts (Roth IRAs) (for individuals who desire
to make limited contributions to a tax-favored retirement program);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
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 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 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 the shareholders.
The portion of the Fund's distributions of net investment income that is
attributable to interest from tax-exempt securities will be designated by the
Fund as an "exempt-interest dividend" under the Code and will generally be
exempt from federal income tax in the hands of shareholders so long as at least
50% of the total value of the Fund's assets consists of tax-exempt securities at
the close of each quarter of the Fund's taxable year. Distributions of
tax-exempt interest earned from certain securities may, however, be treated as
an item of tax preference for shareholders under the federal alternative minimum
tax, and all exempt-interest dividends 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
normally 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 exempt-interest dividends and
any distributions from net short-term capital gains are taxable to the Fund's
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 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. Such capital gains will
generally be taxable to shareholders as if the shareholders had directly
realized gains from the same sources from which they were realized by the Fund.
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 the
shareholders on December 31 of the year in which the dividend is declared. The
Fund will notify shareholders regarding the federal tax status of its
distributions after the end of each calendar year.
Any Fund distribution 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 12 months and otherwise as a short-term capital gain or loss; a
long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than 18 months.
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 (including purchases by exchange or by reinvestment)
without payment of an additional sales charge 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% (or any lower rate
permitted under an applicable treaty) on taxable dividends and other payments to
Non-U.S. Persons that are subject to such withholding. 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. 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 or 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, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which has
a later class inception date than another class of shares of the Fund is based
both on (i) the performance of the Fund's newer class from its inception date
and (ii) the performance of the Fund's oldest class from its inception date up
to the inception date of the newer class.
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, 1988 through December 31,
1997. 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 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 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 indexes 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(R) Equity Fund, the
first fund 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, 1998, 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 $ 426,466 $ 93,979 $332,487
Class B Shares $1,992,428 $1,567,226 $425,202
Class C Shares $ 197,552 $ 14,451 $183,101
GENERAL: The Distribution Plan will remain in effect until August 1, 1999, 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" above). 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" above) 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"
above) 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, 1998, the Statement of Assets and
Liabilities at March 31, 1998, the Statement of Operations for the year ended
March 31, 1998, the Statement of Changes in Net Assets for the years ended March
31, 1998 and 1997, 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.
<TABLE>
<CAPTION>
PERFORMANCE RESULTS -- CLASS B SHARES
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, 1988 .......... $10,609 $ 0 $ 682 $11,291
December 31, 1989 .......... 10,907 0 1,429 12,336
December 31, 1990 .......... 10,635 0 2,139 12,774
December 31, 1991 .......... 11,154 34 3,043 14,231
December 31, 1992 .......... 11,258 213 3,882 15,353
December 31, 1993 .......... 11,802 223 5,003 17,028
December 31, 1994 .......... 10,635 201 5,290 16,126
December 31, 1995 .......... 11,517 218 6,619 18,354
December 31, 1996 .......... 11,284 214 7,383 18,881
December 31, 1997 .......... 11,712 222 8,611 20,545
</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 as of March 31, 1998.
<TABLE>
<CAPTION>
TAX EQUIVALENT
AVERAGE ANNUAL TOTAL RETURNS 30-DAY YIELD CURRENT
------------------------------ 30-DAY -------------- DISTRIBUTION
1 YEAR 5 YEAR 10 YEAR YIELD 28% 32% RATE
------ ------ ------- ---- --- --- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fund Class A with sales charge ........................ 6.31% 5.21%(1) 7.05%(1) 5.00% 6.94% 7.35% 5.06%
Fund Class A without sales charge ..................... 11.61% 6.24%(1) 7.57%(1)
Fund Class B with CDSC ................................ 6.77% 5.07% 7.14%
Fund Class B without CDSC ............................. 10.77% 5.39% 7.14% 4.46% 6.19% 6.56% 4.57%
Fund Class C with CDSC ................................ 9.75% 5.45%(2) 7.17%(2)
Fund Class C without CDSC ............................. 10.75% 5.45%(2) 7.17%(2) 4.46% 6.19% 6.56% 4.56%
(1) Class A share performance includes the performance of the Fund's Class B shares for periods prior to the inception 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 inception 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.
</TABLE>
<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] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) MUNICIPAL INCOME FUND
500 Boylston Street
Boston, MA 02116
MMI-13-8/98/.5M 02/202/302
<PAGE>
PART C
Item 24. Financial Statements and Exhibits
(a) *Financial Statements included in Part A:
MFS Municipal Series Trust (all series)
*Financial Highlights for a share of beneficial interest
of:
each of the California, Georgia, Maryland, Massachusetts,
New York, North Carolina, South Carolina, Tennessee,
Virginia and West Virginia Funds and MFS Municipal Income
Fund throughout the ten-year period ended March 31, 1998;
the Alabama Fund throughout the period from the year ended
January 31, 1991 to March 31, 1998;
each of the Arkansas and Florida Funds throughout the period
from the commencement of investment operations, February 3,
1992, to March 31, 1998;
the Mississippi Fund throughout the period from the
commencement of investment operations, August 6, 1992, to
March 31, 1998;
the Pennsylvania Fund throughout the period from the
commencement of investment operations, February 1, 1993, to
March 31, 1998.
Financial Statements included in Part B:
MFS Municipal Series Trust (all series)
At March 31, 1998:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended March 31, 1998:
Statement of Changes in Net Assets*
For the year ended March 31, 1998:
Statement of Operations*
- -------
* Incorporated herein by reference to the Funds' Annual Reports to
Shareholders dated March 31, 1998 which were filed with the Securities and
Exchange Commission ("SEC") via EDGAR on June 2, 1998, (MFS Municipal Income
Fund); June 4, 1998 (Alabama, Arkansas, Georgia, Massachusetts, New York and
Pennsylvania); and June 8, 1998 (Maryland, North Carolina, South Carolina,
Tennessee, Virginia and West Virginia).
<PAGE>
(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)
(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)
- -------
*No longer in existence
<PAGE>
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. (5)
(c) Exchange Privilege Agreement, dated July 30, 1997.
(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, as amended. (10)
(g) Dividend Disbursing Agency Agreement, dated February
1, 1986. (4)
10 Opinion and Consent of Counsel, dated June 30, 1998;
filed herewith.
11 Consent of Deloitte & Touche LLP; filed herewith.
<PAGE>
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, as amended and restated May 27, 1998. (6)
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 effective September 6, 1996, as
amended and restated May 27, 1998. (6)
Power of Attorney, dated August 11, 1994. (2)
Power of Attorney, dated February 19, 1998; filed
herewith.
- -------
(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 Post-Effective Amendment No. 31 filed with
the SEC via EDGAR on July 29, 1997.
(6) Incorporated by reference to MFS Series Trust II (File Nos. 33-7637 and
811-4775) Post-Effective Amendment No. 27 filed with the SEC via EDGAR on
May 29, 1998.
(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 Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 65 filed
with the SEC via EDGAR on March 30, 1998.
(10) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 64 filed
with the SEC via EDGAR on October 29, 1997.
Item 25. Persons Controlled by or under Common Control with Registrant
Not applicable.
<PAGE>
Item 26. Number of Holders of Securities
(1) (2)
Title of Class Number of Record Holders
(As of June 30, 1998)
Class A Shares
--------------
Shares of Beneficial Interest Alabama Series 1,163
(without par value) Arkansas Series 2,652
California Series 3,480
Florida Series 1,266
Georgia Series 1,335
Maryland Series 3,286
Massachusetts Series 4,015
Mississippi Series 1,539
New York Series 2,576
North Carolina Series 7,592
Pennsylvania Series 625
South Carolina Series 2,912
Tennessee Series 1,968
Virginia Series 7,671
West Virginia Series 2,675
MFS Municipal Income Fund 5,251
Class B Shares
--------------
Shares of Beneficial Interest Alabama Series 160
(without par value) Arkansas Series 163
California Series 784
Florida Series 272
Georgia Series 283
Maryland Series 569
Massachusetts Series 419
Mississippi Series 243
New York Series 812
North Carolina Series 1,055
Pennsylvania Series 662
South Carolina Series 621
Tennessee Series 332
Virginia Series 675
West Virginia Series 702
MFS Municipal Income Fund 4,975
<PAGE>
Class C Shares
--------------
Shares of Beneficial Interest California Series 123
(without par value) North Carolina Series 224
Virginia Series 108
MFS Municipal Income Fund 547
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 (except the Vertex Funds mentioned below):
Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Growth Opportunities Fund, MFS Government Securities Fund, MFS Government
Limited Maturity Fund, MFS Series Trust I (which has thirteen series: MFS
Managed Sectors Fund, MFS Cash Reserve Fund, MFS World Asset Allocation Fund,
MFS Strategic 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 three series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund and MFS
Intermediate Income 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 Mid Cap Growth Fund), MFS Series Trust V (which has
six series: MFS Total Return Fund, MFS Research Fund, MFS International
Opportunities Fund, MFS International Strategic Growth Fund, MFS International
Value Fund and MFS Asia Pacific 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 eight series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS
International Growth Fund, MFS International Growth and Income Fund, MFS Real
Estate Investment Fund, MFS Strategic Value Fund, MFS Small Cap Value Fund and
MFS Emerging Markets Debt Fund), MFS Series Trust XI (which has six series: MFS
Union Standard Equity Fund, Vertex All Cap Fund, Vertex Research All Cap Fund,
Vertex Growth Fund, Vertex Discovery Fund and Vertex Contrarian Fund (the Vertex
Funds are expected to be declared effective April 28, 1998)), 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 open-end
Funds: MFS Institutional Trust ("MFSIT") (which has seven series) and MFS
Variable Insurance Trust ("MVI") (which has thirteen series). The principal
business address of each of the aforementioned funds is 500 Boylston Street,
Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series
Trust ("MFS/SL") (which has 26 series), 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 (collectively, the
"Accounts"). The principal business address of MFS/SL is 500 Boylston Street,
Boston, Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
Vertex Investment Management, Inc., a Delaware corporation and a
wholly owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex Research All Cap Fund, Vertex Growth Fund, Vertex
Discovery Fund and Vertex Contrarian Fund, each a series of MFS Series Trust XI.
The principal business address of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
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 Governments 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, MFS Meridian Emerging Markets Debt Fund, MFS
Meridian Strategic Growth Fund and MFS Meridian World Asset Allocation 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 Institutional Advisors (Australia) Ltd. ("MFSI-Australia"), a
private limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, N5W2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.
MFS Holdings Australia Pty Ltd. ("MFS Holdings Australia"), a
private limited company organized pursuant to the Corporations Law of New South
Wales, Australia whose current address is Level 37, Governor Phillip Tower, One
Farrer Place, Sydney, NSW2000 Australia, and whose function is to serve
primarily as a holding company.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of
MFS, serves as distributor for the MFS Funds, MVI and MFSIT.
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of
MFS, serves as shareholder servicing agent to the MFS Funds, the MFS
Closed-End Funds, MFSIT and MVI.
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 Jeffrey L. Shames, Arnold D. Scott, John
W. Ballen, Donald A. Stewart and John D. McNeil. Mr. Shames is the Chairman,
Chief Executive Officer and President, Mr. Scott is a Senior Executive Vice
President and Secretary, William W. Scott, Jr., 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.
<PAGE>
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
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
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
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
James T. Swanson, Robert J. Manning 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
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.
<PAGE>
MFS Series Trust VII
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
Jeffrey L. Shames, Leslie J. Nanberg and James T. Swanson and
John D. Laupheimer, Jr., a Senior 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
Robert A. Dennis is Vice President, David B. Smith and Geoffrey
L. Schechter, 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.
MFS Variable Insurance Trust
MFS Series Trust XI
MFS Institutional Trust
Jeffrey L. Shames is the President and 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.
MFS Municipal Income Trust
Robert J. Manning is 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 Multimarket Income Trust
MFS Charter Income Trust
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
Robert J. Manning is 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/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.
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.
Vertex
Jeffrey L. Shames and Arnold D. Scott are the Directors, Jeffrey
L. Shames is the President, Kevin R. Parke and John W. Ballen are Executive
Vice Presidents, John F. Brennan, Jr., and John D. Laupheimer are Senior Vice
Presidents, Brian E. Stack is a 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.
MIL
Arnold D. Scott, Jeffrey L. Shames and Thomas J. Cashman, Jr. are
Directors, Stephen E. Cavan is a Director, Senior Vice President and the
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
Thomas J. Cashman, Jr. is President and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director and
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is
the Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFSI - Australia
Thomas J. Cashman, Jr. is President and a Director, Graham E.
Lenzer, John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is
the Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
<PAGE>
MFS Holdings - Australia
Jeffrey L. Shames is the President and a Director, Arnold D.
Scott, Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E.
Cavan is the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, and Robert T. Burns is the Assistant
Secretary.
MIL Funds
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 O. Yost,
Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James
R. Bordewick, Jr. is the Assistant Secretary.
MFS Meridian Funds
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, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers.
MFD
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.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the 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
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, Kevin R. Parke is the
Executive Vice President and a Managing Director, George F. Bennett, Jr.,
John A. Gee, Brianne Grady, Joseph A. Kosciuszek and Joseph J. Trainor 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
Arnold D. Scott is the Chairman and a Director, Martin E.
Beaulieu is the President, William W. Scott, Jr. is a Director, 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.
In addition, the following persons, Directors or officers of MFS,
have the affiliations indicated:
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)
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
<PAGE>
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>
POWER OF ATTORNEY
MFS Municipal Series Trust
The undersigned officer of MFS Municipal Series Trust (the
"Registrant") hereby severally constitutes and appoints Jeffrey L. Shames,
Arnold D. Scott, W. Thomas London, and James R. Bordewick, Jr., and each of them
singly, as true and lawful attorneys, with full power to them and each of them
to sign for the undersigned, in the name of, and in the capacity indicated
below, any Registration Statement and any and all amendments thereto and to file
the same with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission for the purpose of registering the
Registrant as a management investment company under the Investment Company Act
of 1940 and/or the shares issued by the Registrant under the Securities Act of
1933 granting unto my said attorneys, and each of them, acting alone, full power
and authority to do and perform each and every act and thing requisite or
necessary or desirable to be done in the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys or any of them may lawfully do or cause to be
done by virtue thereof.
In WITNESS WHEREOF, the undersigned has hereunto set his hand on this
19th day of February, 1998.
Signature Title
--------- -----
STEPHEN E. CAVAN Principal Executive Officer
------------------------
Stephen E. Cavan
<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 17th day of July, 1998.
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 17, 1998.
SIGNATURE TITLE
--------- -----
STEPHEN E. CAVAN* Principal Executive Officer
- --------------------------------
Stephen E. Cavan
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
(i) a Power of Attorney dated August
11, 1994 incorporated by reference to
the Registrants Post- Effective
Amendment No. 27 filed electronically
with the Securities and Exchange
Commission on May 31, 1995 and (ii) a
Power of Attorney dated February 19,
1998; filed herewith.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
10 Opinion and Consent of Counsel, dated
June 30, 1998.
11 Consent of Deloitte & Touche LLP.
17 Financial Data Schedules for each class of each Series of
the Trust.
<PAGE>
EXHIBIT NO. 99.10
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street, Boston, Massachusetts 02116-3741
(617) 954-5182/Facsimile (617) 954-7760 [email protected]
James R. Bordewick, Jr.
Senior Vice President and
Associate General Counsel
June 30, 1998
MFS Municipal Series Trust
500 Boylston Street
Boston, MA 02116
Gentlemen:
I am a Senior Vice President and Associate General Counsel of
Massachusetts Financial Services Company, which serves as investment adviser to
MFS Municipal Series Trust (the "Trust"), and the Assistant Secretary of the
Trust. I am admitted to practice law in The Commonwealth of Massachusetts. The
Trust was created under a written Declaration of Trust dated August 23, 1984,
executed and delivered in Boston, Massachusetts, as amended and restated
February 3, 1995, as amended (the "Declaration of Trust"). The beneficial
interest thereunder is represented by transferable shares without par value. The
Trustees have the powers set forth in the Declaration of Trust, subject to the
terms, provisions and conditions therein provided.
I am of the opinion that the legal requirements have been complied with in
the creation of the Trust, and that said Declaration of Trust is legal and
valid.
Under Article III, Section 3.4 and Article VI, Section 6.4 of the
Declaration of Trust, the Trustees are empowered, in their discretion, from time
to time to issue shares of the Trust for such amount and type of consideration,
at such time or times and on such terms as the Trustees may deem best. Under
Article VI, Section 6.1, it is provided that the number of shares of beneficial
interest authorized to be issued under the Declaration of Trust is unlimited.
By vote adopted on February 2, 1995, the Trustees of the Trust determined
to sell to the public the authorized but unissued shares of beneficial interest
of the Trust for cash at a price which will net the Trust (before taxes) not
less than the net asset value thereof, as defined in the Trust's By-Laws,
determined next after the sale is made or at some later time after such sale.
<PAGE>
MFS Municipal Series Trust
June 30, 1998
Page Two
The Trust has registered an indefinite number of shares of beneficial
interest under the Securities Act of 1933 (the "Shares").
I am of the opinion that all necessary Trust action precedent to the issue
of all the authorized but unissued Shares of the Trust has been duly taken, and
that all the Shares were legally and validly issued, and when sold, will be
fully paid and non-assessable, assuming the receipt by the Trust of the cash
consideration therefor in accordance with the terms of the February 2, 1995 vote
of the Trustees described above, except as described below. I express no opinion
as to compliance with the Securities Act of 1933, the Investment Company Act of
1940, or applicable state "Blue Sky" or securities laws in connection with the
sale of the Shares.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
the Trust property for all loss and expense of any shareholder held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
I consent to your filing this opinion with the Securities and Exchange
Commission.
Very truly yours,
JAMES R. BORDEWICK, JR.
----------------------------
James R. Bordewick, Jr.
JRB/bjn
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 32 to Registration Statement No. 2-92915 of MFS Municipal Series Trust, of
our reports dated May 8, 1998, appearing in the annual reports to shareholders
for the year ended March 31, 1998, and to the references to us under the
headings "Condensed Financial Information" in the Prospectuses and "Independent
Accountants and Financial Statements" in the Statements of Additional
Information, all of which are part of such Registration Statement.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Boston, Massachusetts
July 17, 1998
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