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[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
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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.
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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% 31% 28% 31%
--- --- --- ---
<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% 6.46% 6.07% 6.33% 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 5.68 5.31 5.54 4.37
Arkansas Fund Class
A with sales charge 4.83 4.66 5.90 4.65 4.56 6.46 6.74 6.33 6.61 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 5.52 5.14 5.36 4.11
California Fund
Class A with sales
charge ............ 6.21 4.93 7.54 4.35 4.21 6.04 6.30 5.85 6.10 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 5.54 5.10 5.32 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 5.29 4.86 5.07 3.99
Florida Fund Class A
with sales charge . 4.93 4.75 6.07 4.63 4.54 6.43 6.71 6.31 6.58 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 5.90 5.51 5.75 4.18
Georgia Fund Class A
with sales charge . 5.74 4.81 6.89 4.60 4.50 6.39 6.67 6.25 6.52 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 5.94 5.56 5.80 4.32
Maryland Fund Class
A with sales charge 5.31 4.40 6.64 4.39 4.30 6.10 6.36 5.47 6.23 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 5.72 5.35 5.58 4.16
Massachusetts Fund
Class A with sales
charge............. 4.76 4.71 7.00 4.63 4.53 6.43 6.71 6.29 6.57 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 6.04 5.65 5.90 4.49
Mississippi Fund
Class A with sales
charge ............ 5.74 5.47 5.45 4.66 4.56 6.47 6.75 6.33 6.61 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 6.00 5.61 5.86 4.11
New York Fund Class
A with sales charge 6.29 5.22 7.55 4.56 4.46 6.33 6.61 6.19 6.46 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 5.84 5.46 5.70 4.13
North Carolina Fund
Class A with sales
charge ............ 5.12 4.77 6.78 4.40 4.30 6.11 6.38 5.97 6.23 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 5.77 5.39 5.62 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 5.74 5.36 5.59 4.19
Pennsylvania Fund
Class A with sales
charge ............ 6.35 5.66 5.42 4.68 4.16 6.50 6.78 5.78 6.03 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 5.97 4.96 5.17 4.29
South Carolina Fund
Class A with sales
charge ............ 5.36 4.89 7.05 4.28 4.18 5.94 6.20 5.81 6.06 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 5.54 5.17 5.39 4.14
Tennessee Fund Class
A with sales charge 5.83 5.05 6.89 4.48 4.38 6.22 6.49 6.08 6.35 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 5.86 5.47 5.71 4.27
Virginia Fund Class
A with sales charge 5.08 4.43 6.90 4.40 4.30 6.11 6.38 5.97 6.23 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 5.74 5.36 5.59 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 5.75 5.38 5.61 4.28
West Virginia Fund
Class A with sales
charge ............ 4.22 4.84 7.09 4.47 4.37 6.21 6.48 6.07 6.33 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 5.86 5.47 5.71 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>
[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% 31% 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% 7.25% 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% 6.46% 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% 6.46% 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
