<PAGE>
As filed with the Securities and Exchange Commission on May 14, 1999
1933 Act File No. 2-92915
1940 Act File No. 811-4096
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 33
AND REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 34
MFS(R) MUNICIPAL SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
500 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (617) 954-5000
Stephen E. Cavan, Massachusetts Financial Services Company,
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|_| on [date] pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on , 1999 pursuant to paragraph (a)(i)
|X| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
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<PAGE>
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MFS(R) MUNICIPAL SERIES TRUST
- -----------------------------
AUGUST 1, 1999
PROSPECTUS
CLASS A
CLASS B
CLASS C
MFS ALABAMA MUNICIPAL BOND FUND
MFS ARKANSAS MUNICIPAL BOND FUND
MFS CALIFORNIA MUNICIPAL BOND FUND
MFS FLORIDA MUNICIPAL BOND FUND
MFS GEORGIA MUNICIPAL BOND FUND
MFS MARYLAND MUNICIPAL BOND FUND
MFS MASSACHUSETTS MUNICIPAL BOND FUND
MFS MISSISSIPPI MUNICIPAL BOND FUND
MFS NEW YORK MUNICIPAL BOND FUND
MFS NORTH CAROLINA MUNICIPAL BOND FUND
MFS PENNSYLVANIA MUNICIPAL BOND FUND
MFS SOUTH CAROLINA MUNICIPAL BOND FUND
MFS TENNESSEE MUNICIPAL BOND FUND
MFS VIRGINIA MUNICIPAL BOND FUND
MFS WEST VIRGINIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
This Prospectus describes each of the funds listed above. The investment
objective of each fund is to provide current income exempt from federal income
taxes and personal income taxes, if any, of the state to which its name refers.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE FUNDS' SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU
OTHERWISE IS COMMITTING A CRIME.
<PAGE>
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TABLE OF CONTENTS
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Page
I Risk Return Summary ...................................... 1
Bar Charts and Performance Tables
1. MFS Alabama Municipal Bond Fund ................... 7
2. MFS Arkansas Municipal Bond Fund .................. 9
3. MFS California Municipal Bond Fund ................ 11
4. MFS Florida Municipal Bond Fund ................... 13
5. MFS Georgia Municipal Bond Fund ................... 15
6. MFS Maryland Municipal Bond Fund .................. 17
7. MFS Massachusetts Municipal Bond Fund ............. 19
8. MFS Mississippi Municipal Bond Fund ............... 21
9. MFS New York Municipal Bond Fund .................. 23
10. MFS North Carolina Municipal Bond Fund ............ 25
11. MFS Pennsylvania Municipal Bond Fund .............. 27
12. MFS South Carolina Municipal Bond Fund ............ 29
13. MFS Tennessee Municipal Bond Fund ................. 31
14. MFS Virginia Municipal Bond Fund .................. 33
15. MFS West Virginia Municipal Bond Fund ............. 35
II Expense Summary .......................................... 37
III Certain Investment Strategies and Risks .................. 45
IV Management of the Funds .................................. 46
V Description of Share Classes ............................. 48
VI How to Purchase, Exchange and Redeem Shares .............. 53
VII Investor Services and Programs ........................... 57
VIII Other Information ........................................ 59
IX Financial Highlights ..................................... 66
Appendix A -- Investment Techniques and Practices ........ A-1
Appendix B -- Tax Equivalent Yield Tables ................ B-1
<PAGE>
I RISK RETURN SUMMARY
o INVESTMENT OBJECTIVE
The investment objective of each fund is to provide current income exempt
from federal income tax and personal income tax, if any, of the state to
which its name refers. Each fund's objective may be changed without
shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
Each fund invests, under normal market conditions, at least 80% of its net
assets in municipal securities and participation interests in municipal
securities issued by banks, the interest on which is exempt from federal
income tax and personal income tax, if any, of the state to which its name
refers. Municipal securities are bonds or other debt obligations of a U.S.
state or political subdivision, such as a county, city, town, village, or
authority. Participation interests in municipal securities are interests in
holdings of municipal obligations backed by a letter of credit or guarantee
from the issuing bank. Although each fund seeks to invest in municipal
securities whose income is exempt from federal income tax and state personal
income tax in its namesake state (and the Florida intangibles tax in the
case of the Florida fund), the interest on certain of these municipal
securities may be subject to an alternative tax. For a comparison of yields
on Municipal Bonds and taxable securities, see the Tax Equivalent Yield
Tables attached as Appendix B to this Prospectus.
While each fund seeks to invest all its assets in the types of securities
described in the preceding paragraph, market conditions may from time to
time limit the availability of such obligations. During periods when a fund
is unable to invest as described above, the fund will seek to invest its
assets in municipal securities that are exempt from federal income tax but
are subject to personal income tax in the fund's namesake state. Under
normal market conditions, each fund will invest substantially all of its
assets in:
(i) municipal securities rated in one of the top three credit ratings by
credit rating agencies (or which are unrated and considered by the
fund's investment adviser, Massachusetts Financial Services Company
(referred to as MFS of the adviser), to be of comparable quality);
(ii) securities of issuers who have securities that are rated in one of
the top three credit ratings by credit rating agencies or which are
guaranteed by the U.S. government;
(iii) speculative and lower rated tax-exempt securities;
(iv) U.S. government securities; and
(v) commercial paper, obligations of banks (including certificates of
deposit, bankers' acceptances and repurchase agreements) with $1
billion of assets and cash.
Speculative securities are securities rated in the lowest investment grade
category by credit rating agencies or which are unrated and considered by
MFS to be comparable to speculative securities. Lower rated bonds, commonly
known as junk bonds, are bonds assigned credit ratings below the four
highest credit ratings by credit rating agencies or which are unrated and
considered by MFS to be comparable to lower rated bonds.
In selecting fixed income investments for each fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager(s) of MFS' fixed income
oriented funds (including each of the funds) as a tool in making or
adjusting a fund's asset allocations to various segments of the fixed income
markets. In assessing the credit quality of fixed income securities, MFS
does not rely solely on the credit ratings assigned by credit rating
agencies, but rather performs its own independent credit analysis.
Each fund is a non-diversified mutual fund. This means that each fund may
invest a relatively high percentage of its assets in a small number of
issuers.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in each fund and the circumstances
reasonably likely to cause the value of your investment in a fund to decline
are described below. As with any non-money market mutual fund, the share
price of a fund will change daily based on market conditions and other
factors. Please note that there are many circumstances which could cause the
value of your investment in a fund to decline, and which could prevent the
fund from achieving its objective, that are not described here.
The principal risks of investing in each of the funds are:
o Municipal Securities Risk
> Interest Rate Risk: As with any fixed income security, the prices of
municipal securities in each fund's portfolio will generally fall when
interest rates rise. Conversely, when interest rates fall, the prices
of municipal securities in a fund's portfolio will generally rise.
> Maturity Risk: Interest rate risk will generally affect the price of a
municipal security more if the security has a longer maturity.
Municipal securities with longer maturities will therefore be more
volatile than other fixed income securities with shorter maturities.
Conversely, municipal securities with shorter maturities will be less
volatile but generally provide lower returns than municipal securities
with longer maturities. The average maturity of each fund's municipal
security investments will affect the volatility of the fund's share
price.
> Credit Risk: Credit risk is the risk that the issuer of a municipal
security will not be able to pay principal and interest when due.
Rating agencies assign credit ratings to certain municipal securities
to indicate their credit risk. The price of a municipal security will
generally fall if the issuer defaults on its obligation to pay
principal or interest, the rating agencies downgrade the issuer's
credit rating or other news affects the market's perception of the
issuer's credit risk. A participation interest is also subject to the
risk of default by the issuing bank.
> General Obligations and Revenue Obligations Risk: Each fund may invest
in municipal bonds that are general obligations backed by the full
faith and credit of the municipal issuer. Each fund may also invest in
municipal bonds called revenue obligations which are subject to a
higher degree of credit risk than general obligations. Revenue
obligations finance specific projects, such as building a hospital,
and are not backed by the full faith and credit of the municipal
issuer. Because revenue obligations are repaid from the revenues from
a facility, they are subject to a risk of default in payments of
principal and interest if the facility does not generate enough
income.
> Municipal Lease Obligations Risk: Each fund's investments in municipal
securities may include municipal lease obligations. Municipal lease
obligations are undivided interests issued by a state or municipality
in a lease or installment purchase which generally relates to
equipment or facilities. When a fund invests in municipal lease
obligations, it may have limited recourse in the event of default or
termination. In some cases, payments under municipal leases do not
have to be made unless the appropriate legislative body specifically
approves money for that purpose.
o Concentration Risk: As more fully described below, because each fund
concentrates in securities of municipal issuers in its namesake state,
certain factors with respect to that state will disproportionately affect
the value of the fund's investments, including local economic factors or
policy changes, erosion of a state's tax base, or changes in the credit
ratings assigned to the state's municipal issuers. Thus, each fund's
performance will be closely tied to the economic and political conditions
in its namesake state and will be more volatile than the performance of a
more geographically diversified fund. The principal economic factors
affecting each state are as follows:
> Alabama: Alabama's economy relies in part on the textile, automobile
and forest products industries, which may be affected by cyclical
changes. While average per capita income of Alabama residents has
improved in recent years, certain areas of Alabama are among the
poorest in the nation.
> Arkansas: The Arkansas economy is reliant in part on the food
processing and lumber and wood products industries. Downturns in these
industries could adversely affect the state's economy. The limits to
growth in Arkansas are primarily related to labor supply shortages and
infrastructure constrictions rather than external factors. Arkansas
production and wealth prospects could be adversely affected if
consumer confidence declines.
> California: Issuers of California municipal obligations experienced
severe financial difficulties in the early 1990's. During that time,
California experienced recurring budget deficits. Although
California's economy has been recovering, there is no assurance that
this will continue. Many municipal issuers depend upon real property
taxes as a source of revenue. Voter-passed initiatives have limited
real property taxes. This limit and other voter-passed initiatives
also make it difficult for California to balance its budget. For
example, the state and local governments are subject to limits on
spending. In addition, California is required to guarantee a minimum
level of spending on public education.
> Florida: Florida does not impose an individual income tax on Florida
residents. This could affect Florida's ability to pay principal and
interest in a timely manner, if an economic downswing occurs.
Florida's economy is heavily dependent on the tourism and construction
industries. South Florida is susceptible to economic difficulties from
international trade and currency imbalances. North and Central Florida
are impacted by damage to agriculture, especially the citrus and sugar
industries.
> Georgia: Georgia's economy relies in part on a large military presence
within the state and a significant volume of defense contracting.
Should there be a severe decline in defense spending or a large number
of military base closings in Georgia, such changes could result in
increased unemployment levels within the state.
> Maryland: Average per capita personal income of Maryland residents
ranks as the fifth highest in the nation, and has been so ranked for
each of the previous nine years. However, with respect to such
personal income, Maryland is more reliant on the service and
government sectors than the nation as a whole, while the manufacturing
sector is much less significant in Maryland than nationwide.
> Massachusetts: The Massachusetts economy has shown to be particularly
susceptible to downturns in the U.S. economy, and has experienced
financial difficulty and high unemployment levels during these
downturns. The Massachusetts economy is particularly susceptible to
trends in the high-technology, financial services, biotechnology and
health care industries.
> Mississippi: Because Mississippi's economy relies heavily on the
manufacturing and service industries, its economy is sensitive to
trends in those industries. Also, Mississippi's financial strength in
recent years is partially the result of substantial growth in the
gaming and tourism industries and is therefore subject to changes in
those industries. While Mississippi's financial condition has
improved, it still ranks last among the states in per capita income.
> New York: Because the fund invests primarily in the securities of New
York issuers, its performance may be disproportionately affected by
local, state and regional factors. These may include state or local
legislation or policy changes, economics, erosion of the city's or
state's tax base, natural disasters, and the possibility of credit
problems. New York City and certain localities outside New York City
have experienced financial problems. These problems may affect the
fiscal health of New York State.
> North Carolina: North Carolina has seen significant growth over the
past twenty-five years, including increases in population, labor
force, and per capita income. Nonetheless, it remains primarily a
rural state. North Carolina's economy consists of a combination of
industry, agriculture and tourism.
> Pennsylvania: Although Pennsylvania has been historically identified
as a heavy-industry state, over 82% of total state employment is
non-manufacturing employment. Thus, Pennsylvania's economy may be
disproportionately affected by economic downturns in non-
manufacturing industries. Although Pennsylvania's employment rate and
bond ratings are generally above the national median, certain areas
within the Commonwealth, particularly those areas that are more
heavily reliant on a manufacturing economy, have lower employment
rates and bond ratings.
> South Carolina: South Carolina relies heavily on manufacturing, still
largely related to the textile industry. Accordingly, the State's
manufacturing economy remains vulnerable to cycles. The State also has
initiated an ambitious property tax relief program, though the funding
level is determined annually.
> Tennessee: Tennessee is facing a large budget deficit for the current
year which could lead to financial difficulty for the state. Tennessee
is reliant upon tourism and manufacturing for revenue, each of which
is sensitive to the strength of the economy as a whole. Tennessee's
economic growth has slowed over the past couple of years and has
fallen behind the rate of economic growth for the nation.
> Virginia: The economy of Virginia is significantly dependent on the
government sector and could be affected adversely by reductions in
defense spending, particularly military base closings.
> West Virginia: West Virginia's economic indicators are typically below
national averages. Although the State's economy continues to
diversify, it is sensitive to trends in various industries such as
mineral production, manufacturing and tourism. According to the State
Treasurer, compared to other states, West Virginia has an average
amount of tax-supported debt outstanding.
o Non-Diversified Status Risk: Because a fund may invest its assets in a
small number of issuers, the fund is more susceptible to any single
economic, political or regulatory event affecting those issuers than
is a diversified fund.
o Speculative Municipal Securities Risk: Speculative bonds are subject to a
higher risk that the issuer will default on payments of principal and
interest than higher rated investment grade bonds. Although the issuer's
ability to make interest and principal payments appears adequate, an
adverse change in economic conditions or other circumstances is more
likely to cause a default by the issuer of a speculative bond than the
issuer of a higher rated investment grade bond.
o Liquidity Risk: The fixed income securities purchased by each fund may be
traded in the over-the-counter market rather than on an organized
exchange and are subject to liquidity risk. This means that they may be
harder to purchase or sell at a fair price. The inability to purchase or
sell these fixed income securities at a fair price could have a negative
impact on a fund's performance.
o Lower Rated Municipal Securities Risk
> Higher Credit Risk: Junk bonds are subject to a substantially higher
degree of credit risk than higher rated bonds. During recessions, a
high percentage of issuers of junk bonds may default on payments of
principal and interest. The price of a junk bond may therefore
fluctuate drastically due to bad news about the issuer or the economy
in general.
> Higher Liquidity Risk: During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will
be harder to value or sell at a fair price.
o As with any mutual fund, you could lose money on your investment in a
fund.
An investment in a fund is not a bank deposit and it not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
<PAGE>
1. MFS ALABAMA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each calendar year since class A shares were first offered. The
chart and related notes do not take into account any sales charges (loads)
that you may be required to pay upon purchase or redemption of the fund's
shares, but do include the reinvestment of distributions. Any sales charge
will reduce your return. The return of the fund's other classes of shares
will differ from the class A returns shown in the bar chart, depending upon
the expenses of those classes.
1991 11.73%
1992 8.84%
1993 12.58%
1994 (4.74)%
1995 16.08%
1996 3.64%
1997 9.13%
1998 4.95%
During the period shown in the bar chart, the highest quarterly return was
6.50% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (4.97)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.97%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Alabama tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years Life*
MFS ALABAMA MUNICIPAL BOND FUND
Class A shares (0.03)% 4.57% 6.96%
Class B shares 0.10 4.43 7.04
Lehman Brothers Municipal Bond Index+**
Average Alabama tax-exempt municipal bond fund++
------
* For the period from the commencement of the fund's investment operations on
February 1, 1990, through December 31, 1998.
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
** The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based index
comprised of 8,000 actual bonds (with no floating or zero coupons) which
are investment-grade, fixed-rate bonds with long-term maturities (greater
than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on February 1, 1990 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of the
fund's class A shares for periods prior to the offering of class B shares.
This blended class B share performance has been adjusted to take into
account the CDSC applicable to class B shares, rather than the initial sales
charge (load) applicable to class A shares. This blended performance has not
been adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class B shares are higher than those
of class A shares, this blended class B share performance is higher than the
performance of class B shares would have been had class B shares been
offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
2. MFS ARKANSAS MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each calendar year since class A shares were first offered. The
chart and related notes do not take into account any sales charges (loads)
that you may be required to pay upon purchase or redemption of the fund's
shares, but do include the reinvestment of distributions. Any sales charge
will reduce your return. The return of the fund's other classes of shares
will differ from the class A returns shown in the bar chart, depending upon
the expenses of those classes.
1993 12.41%
1994 (6.06)%
1995 14.96%
1996 3.17%
1997 8.98%
1998 4.70%
During the period shown in the bar chart, the highest quarterly return was
6.45% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.58)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.83%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average other
state tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years Life*
MFS ARKANSAS MUNICIPAL BOND FUND
Class A shares (0.27)% 3.90% 5.80%
Class B shares (0.06) 3.69 5.84
Lehman Brothers Municipal Bond Index+**
Average other state tax-exempt municipal
bond fund++
------
* For the period from the commencement of the fund's investment
operations on February 3, 1992, through December 31, 1998.
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
** The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero
coupons) which are investment-grade, fixed-rate bonds with long-term
maturities (greater than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on February 3, 1992 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of the
fund's class A shares for periods prior to the offering of class B shares.
This blended class B share performance has been adjusted to take into
account the CDSC applicable to class B shares, rather than the initial sales
charge (load) applicable to class A shares. This blended performance has not
been adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class B shares are higher than those
of class A shares, this blended class B share performance is higher than the
performance of class B shares would have been had class B shares been
offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
3. MFS CALIFORNIA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each of the last ten calendar years. The chart and related
notes do not take into account any sales charges (loads) that you may be
required to pay upon purchase or redemption of the fund's shares, but do
include the reinvestment of distributions. Any sales charge will reduce your
return. The return of the fund's other classes of shares will differ from
the class A returns shown in the bar chart, depending upon the expenses of
those classes.
1989 9.84%
1990 6.42%
1991 12.34%
1992 9.13%
1993 12.87%
1994 (8.06)%
1995 18.01%
1996 2.93%
1997 9.79%
1998 6.46%
During the period shown in the bar chart, the highest quarterly return was
7.00% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (6.18)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 1.02%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
California tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years 10 Years
MFS CALIFORNIA MUNICIPAL BOND FUND
Class A shares 1.40% 4.45% 7.24%
Class B shares 1.60 4.19 7.56
Class C shares 4.39 4.43 7.55
Lehman Brothers Municipal Bond Index+*
Average California tax-exempt municipal
bond fund++
------
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%. Class
C share performance takes into account the deduction of the 1% CDSC.
The fund commenced investment operations on June 18, 1985 with the offering
of class A shares, and subsequently offered class B shares on September 7,
1993 and class C shares on January 3, 1994. Class B and class C share
performance includes the performance of the fund's class A shares for
periods prior to the offering of class B and class C shares. This blended
class B and class C share performance has been adjusted to take into account
the CDSC applicable to class B and class C shares, rather than the initial
sales charge (load) applicable to class A shares. This blended performance
has not been adjusted to take into account differences in class specific
operating expenses. Because operating expenses of class B and C shares are
higher than those of class A shares, this blended class B and C share
performance is higher than the performance of class B and C shares would
have been had class B and C shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
4. MFS FLORIDA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each calendar year since class A shares were first offered. The
chart and related notes do not take into account any sales charges (loads)
that you may be required to pay upon purchase or redemption of the fund's
shares, but do include the reinvestment of distributions. Any sales charge
will reduce your return. The return of the fund's other classes of shares
will differ from the class A returns shown in the bar chart, depending upon
the expenses of those classes.
1993 14.88%
1994 (8.78)%
1995 18.72%
1996 2.12%
1997 8.43%
1998 5.47%
During the period shown in the bar chart, the highest quarterly return was
7.91% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (7.20)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.62%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Florida tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years Life*
MFS FLORIDA MUNICIPAL BOND FUND
Class A shares 0.46% 3.80% 6.08%
Class B shares 0.64 3.57 6.09
Lehman Brothers Municipal Bond Index+**
Average Florida tax-exempt municipal
bond fund++
------
* For the period from the commencement of the fund's investment operations
on February 3, 1992, through December 31, 1998.
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
** The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on February 3, 1992 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of the
fund's class A shares for periods prior to the offering of class B shares.
This blended class B share performance has been adjusted to take into
account the CDSC applicable to class B shares, rather than the initial sales
charge (load) applicable to class A shares. This blended performance has not
been adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class B shares are higher than those
of class A shares, this blended class B share performance is higher than the
performance of class B shares would have been had class B shares been
offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
5. MFS GEORGIA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each of the last ten calendar years. The chart and related
notes do not take into account any sales charges (loads) that you may be
required to pay upon purchase or redemption of the fund's shares, but do
include the reinvestment of distributions. Any sales charge will reduce your
return. The return of the fund's other classes of shares will differ from
the class A returns shown in the bar chart, depending upon the expenses of
those classes.
1989 9.07%
1990 6.24%
1991 12.33%
1992 8.12%
1993 12.83%
1994 (6.88)%
1995 15.86%
1996 2.38%
1997 10.02%
1998 5.07%
During the period shown in the bar chart, the highest quarterly return was
6.41% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (6.20)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.55%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Georgia tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years 10 Years
MFS GEORGIA MUNICIPAL BOND FUND
Class A shares 0.08% 3.99% 6.80%
Class B shares 0.29 3.84 6.88
Lehman Brothers Municipal Bond Index+*
Average Georgia tax-exempt municipal
bond fund++
------
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on June 6, 1988 with the offering
of class A shares, and subsequently offered class B shares on September 7,
1993. Class B share performance includes the performance of the fund's class
A shares for periods prior to the offering of class B shares. This blended
class B share performance has been adjusted to take into account the CDSC
applicable to class B shares, rather than the initial sales charge (load)
applicable to class A shares. This blended performance has not been adjusted
to take into account differences in class specific operating expenses.
Because operating expenses of class B shares are higher than those of class
A shares, this blended class B share performance is higher than the
performance of class B shares would have been had class B shares been
offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
6. MFS MARYLAND MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each of the last ten calendar years. The chart and related
notes do not take into account any sales charges (loads) that you may be
required to pay upon purchase or redemption of the fund's shares, but do
include the reinvestment of distributions. Any sales charge will reduce your
return. The return of the fund's other classes of shares will differ from
the class A returns shown in the bar chart, depending upon the expenses of
those classes.
1989 8.99%
1990 6.33%
1991 10.67%
1992 7.21%
1993 10.39%
1994 (6.12)%
1995 15.12%
1996 2.70%
1997 9.22%
1998 5.35%
During the period shown in the bar chart, the highest quarterly return was
6.73% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.92)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.28%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Maryland tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years 10 Years
MFS MARYLAND MUNICIPAL BOND FUND
Class A shares 0.34% 4.00% 6.32%
Class B shares 0.67 3.96 6.44
Lehman Brothers Municipal Bond Index+*
Average Maryland tax-exempt municipal
bond fund++
------
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on October 31, 1984 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of the
fund's class A shares for periods prior to the offering of class B shares.
This blended class B share performance has been adjusted to take into
account the CDSC applicable to class B shares, rather than the initial sales
charge (load) applicable to class A shares. This blended performance has not
been adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class B shares are higher than those
of class A shares, this blended class B share performance is higher than the
performance of class B shares would have been had class B shares been
offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
7. MFS MASSACHUSETTS MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each of the last ten calendar years. The chart and related
notes do not take into account any sales charges (loads) that you may be
required to pay upon purchase or redemption of the fund's shares, but do
include the reinvestment of distributions. Any sales charge will reduce your
return. The return of the fund's other classes of shares will differ from
the class A returns shown in the bar chart, depending upon the expenses of
those classes.
1989 8.01%
1990 6.50%
1991 12.39%
1992 8.51%
1993 11.20%
1994 (5.65)%
1995 16.04%
1996 2.77%
1997 8.87%
1998 4.89%
During the period shown in the bar chart, the highest quarterly return was
6.41% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.18)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.85%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Massachusetts tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years 10 Years
MFS MASSACHUSETTS MUNICIPAL BOND FUND
Class A shares (0.09)% 4.12% 6.68%
Class B shares 0.22 4.10 6.82
Lehman Brothers Municipal Bond Index+*
Average Massachusetts tax-exempt
municipal bond fund++
------
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on April 9, 1985 with the offering
of class A shares, and subsequently offered class B shares on September 7,
1993. Class B share performance includes the performance of the fund's class
A shares for periods prior to the offering of class B shares. This blended
class B share performance has been adjusted to take into account the CDSC
applicable to class B shares, rather than the initial sales charge (load)
applicable to class A shares. This blended performance has not been adjusted
to take into account differences in class specific operating expenses.
Because operating expenses of class B shares are higher than those of class
A shares, this blended class B share performance is higher than the
performance of class B shares would have been had class B shares been
offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
8. MFS MISSISSIPPI MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each calendar year since class A shares were first offered. The
chart and related notes do not take into account any sales charges (loads)
that you may be required to pay upon purchase or redemption of the fund's
shares, but do include the reinvestment of distributions. Any sales charge
will reduce your return. The return of the fund's other classes of shares
will differ from the class A returns shown in the bar chart, depending upon
the expenses of those classes.
1993 13.13%
1994 (7.14)%
1995 17.96%
1996 3.55%
1997 9.52%
1998 6.13%
During the period shown in the bar chart, the highest quarterly return was
7.25% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (6.12)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.64%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average other
state tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years Life*
MFS MISSISSIPPI MUNICIPAL BOND FUND
Class A shares 1.08% 4.66% 5.59%
Class B shares 1.31 4.49 5.65
Lehman Brothers Municipal Bond Index+**
Average other state tax-exempt municipal
bond fund++
------
* For the period from the commencement of the fund's investment operations
on August 6, 1992, through December 31, 1998.
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
** The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on August 6, 1992 with the offering
of class A shares, and subsequently offered class B shares on September 7,
1993. Class B share performance includes the performance of the fund's class
A shares for periods prior to the offering of class B shares. This blended
class B share performance has been adjusted to take into account the CDSC
applicable to class B shares, rather than the initial sales charge (load)
applicable to class A shares. This blended performance has not been adjusted
to take into account differences in class specific operating expenses.
Because operating expenses of class B shares are higher than those of class
A shares, this blended class B share performance is higher than the
performance of class B shares would have been had class B shares been
offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
9. MFS NEW YORK MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each of the last ten calendar years. The chart and related
notes do not take into account any sales charges (loads) that you may be
required to pay upon purchase or redemption of the fund's shares, but do
include the reinvestment of distributions. Any sales charge will reduce your
return. The return of the fund's other classes of shares will differ from
the class A returns shown in the bar chart, depending upon the expenses of
those classes.
1989 9.72%
1990 6.04%
1991 13.66%
1992 9.84%
1993 13.23%
1994 (6.14)%
1995 16.79%
1996 2.67%
1997 9.99%
1998 5.53%
During the period shown in the bar chart, the highest quarterly return was
6.65% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.60)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.67%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average New
York tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years 10 Years
MFS NEW YORK MUNICIPAL BOND FUND
Class A shares 0.52% 4.47% 7.42%
Class B shares 0.75 4.31 7.49
Lehman Brothers Municipal Bond Index+*
Average New York tax-exempt municipal bond
fund++
------
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on June 6, 1988 with the offering
of class A shares, and subsequently offered class B shares on September 7,
1993. Class B share performance includes the performance of the fund's class
A shares for periods prior to the offering of class B shares. This blended
class B share performance has been adjusted to take into account the CDSC
applicable to class B shares, rather than the initial sales charge (load)
applicable to class A shares. This blended performance has not been adjusted
to take into account differences in class specific operating expenses.
Because operating expenses of class B shares are higher than those of class
A shares, this blended class B share performance is higher than the
performance of class B shares would have been had class B shares been
offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
10. MFS NORTH CAROLINA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each of the last ten calendar years. The chart and related
notes do not take into account any sales charges (loads) that you may be
required to pay upon purchase or redemption of the fund's shares, but do
include the reinvestment of distributions. Any sales charge will reduce your
return. The return of the fund's other classes of shares will differ from
the class A returns shown in the bar chart, depending upon the expenses of
those classes.
1989 9.12%
1990 6.34%
1991 10.97%
1992 7.03%
1993 10.78%
1994 (6.35)%
1995 16.26%
1996 3.48%
1997 9.01%
1998 4.94%
During the period shown in the bar chart, the highest quarterly return was
6.95% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.38)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.60%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average North
Carolina tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years 10 Years
MFS NORTH CAROLINA MUNICIPAL BOND FUND
Class A shares (0.04)% 4.19% 6.48%
Class B shares 0.27 4.13 6.60
Class C shares 3.27 4.49 6.64
Lehman Brothers Municipal Bond Index+*
Average North Carolina tax-exempt
municipal bond fund++
------
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%. Class
C share performance takes into account the deduction of the 1% CDSC.
The fund commenced investment operations on October 31, 1984 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993 and class C shares on January 3, 1994. Class B and class C
share performance includes the performance of the fund's class A shares for
periods prior to the offering of class B and class C shares. This blended
class B and class C share performance has been adjusted to take into account
the CDSC applicable to class B and class C shares, rather than the initial
sales charge (load) applicable to class A shares. This blended performance
has not been adjusted to take into account differences in class specific
operating expenses. Because operating expenses of class B and C shares are
higher than those of class A shares, this blended class B and C share
performance is higher than the performance of class B and C shares would
have been had class B and C shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
11. MFS PENNSYLVANIA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each calendar year since class A shares were first offered. The
chart and related notes do not take into account any sales charges (loads)
that you may be required to pay upon purchase or redemption of the fund's
shares, but do include the reinvestment of distributions. Any sales charge
will reduce your return. The return of the fund's other classes of shares
will differ from the class A returns shown in the bar chart, depending upon
the expenses of those classes.
1994 (7.05)%
1995 16.86%
1996 2.97%
1997 10.07%
1998 6.31%
During the period shown in the bar chart, the highest quarterly return was
7.39% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (7.70)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.81%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Pennsylvania tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years Life*
MFS PENNSYLVANIA MUNICIPAL BOND FUND
Class A shares 1.26% 4.51% 5.58%
Class B shares 1.47 4.35 5.54
Lehman Brothers Municipal Bond Index+**
Average Pennsylvania tax-exempt municipal
bond fund++
------
* For the period from the commencement of the fund's investment operations
on February 1, 1993, through December 31, 1998.
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
** The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on February 1, 1993 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of the
fund's class A shares for periods prior to the offering of class B shares.
This blended class B share performance has been adjusted to take into
account the CDSC applicable to class B shares, rather than the initial sales
charge (load) applicable to class A shares. This blended performance has not
been adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class B shares are higher than those
of class A shares, this blended class B share performance is higher than the
performance of class B shares would have been had class B shares been
offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
12. MFS SOUTH CAROLINA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each of the last ten calendar years. The chart and related
notes do not take into account any sales charges (loads) that you may be
required to pay upon purchase or redemption of the fund's shares, but do
include the reinvestment of distributions. Any sales charge will reduce your
return. The return of the fund's other classes of shares will differ from
the class A returns shown in the bar chart, depending upon the expenses of
those classes.
1989 9.09%
1990 6.38%
1991 11.22%
1992 7.55%
1993 11.78%
1994 (5.67)%
1995 15.90%
1996 2.82%
1997 9.01%
1998 4.87%
During the period shown in the bar chart, the highest quarterly return was
6.93% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.67)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.48%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average South
Carolina tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years 10 Years
MFS SOUTH CAROLINA MUNICIPAL BOND FUND
Class A shares (0.12)% 4.13% 6.63%
Class B shares 0.11 4.07 6.74
Lehman Brothers Municipal Bond Index+*
Average South Carolina tax-exempt municipal
bond fund++
------
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on October 31, 1984 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of the
fund's class A shares for periods prior to the offering of class B shares.
This blended class B share performance has been adjusted to take into
account the CDSC applicable to class B shares, rather than the initial sales
charge (load) applicable to class A shares. This blended performance has not
been adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class B shares are higher than those
of class A shares, this blended class B share performance is higher than the
performance of class B shares would have been had class B shares been
offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
13. MFS TENNESSEE MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each of the last ten calendar years. The chart and related
notes do not take into account any sales charges (loads) that you may be
required to pay upon purchase or redemption of the fund's shares, but do
include the reinvestment of distributions. Any sales charge will reduce your
return. The return of the fund's other classes of shares will differ from
the class A returns shown in the bar chart, depending upon the expenses of
those classes.
1989 9.76%
1990 6.35%
1991 10.52%
1992 8.25%
1993 10.78%
1994 (4.08)%
1995 14.80%
1996 2.87%
1997 9.82%
1998 5.13%
During the period shown in the bar chart, the highest quarterly return was
5.82% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (4.11)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.71%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Tennessee tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years 10 Years
MFS TENNESSEE MUNICIPAL BOND FUND
Class A shares 0.13% 4.49% 6.78%
Class B shares 0.46 4.45 6.89
Lehman Brothers Municipal Bond Index+*
Average Tennessee tax-exempt municipal
bond fund++
------
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on August 12, 1988 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of the
fund's class A shares for periods prior to the offering of class B shares.
This blended class B share performance has been adjusted to take into
account the CDSC applicable to class B shares, rather than the initial sales
charge (load) applicable to class A shares. This blended performance has not
been adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class B shares are higher than those
of class A shares, this blended class B share performance is higher than the
performance of class B shares would have been had class B shares been
offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
14. MFS VIRGINIA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each of the last ten calendar years. The chart and related
notes do not take into account any sales charges (loads) that you may be
required to pay upon purchase or redemption of the fund's shares, but do
include the reinvestment of distributions. Any sales charge will reduce your
return. The return of the fund's other classes of shares will differ from
the class A returns shown in the bar chart, depending upon the expenses of
those classes.
1989 9.39%
1990 6.79%
1991 10.97%
1992 7.42%
1993 10.96%
1994 (6.68)%
1995 16.73%
1996 1.71%
1997 8.85%
1998 5.03%
During the period shown in the bar chart, the highest quarterly return was
6.69% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.77)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.56%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Virginia tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years 10 Years
MFS VIRGINIA MUNICIPAL BOND FUND
Class A shares 0.04% 3.83% 6.43%
Class B shares 0.36 3.81 6.55
Class C shares 3.35 4.13 6.58
Lehman Brothers Municipal Bond Index+*
Average Virginia tax-exempt municipal
bond fund++
------
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%. Class
C share performance takes into account the deduction of the 1% CDSC.
The fund commenced investment operations on October 31, 1984 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993 and class C shares on January 3, 1994. Class B and class C
share performance includes the performance of the fund's class A shares for
periods prior to the offering of class B and class C shares. This blended
class B and class C share performance has been adjusted to take into account
the CDSC applicable to class B and class C shares, rather than the initial
sales charge (load) applicable to class A shares. This blended performance
has not been adjusted to take into account differences in class specific
operating expenses. Because operating expenses of class B and C shares are
higher than those of class A shares, this blended class B and C share
performance is higher than the performance of class B and C shares would
have been had class B and C shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
15. MFS WEST VIRGINIA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table is
based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each of the last ten calendar years. The chart and related
notes do not take into account any sales charges (loads) that you may be
required to pay upon purchase or redemption of the fund's shares, but do
include the reinvestment of distributions. Any sales charge will reduce your
return. The return of the fund's other classes of shares will differ from
the class A returns shown in the bar chart, depending upon the expenses of
those classes.
1989 9.25%
1990 7.01%
1991 10.96%
1992 7.84%
1993 11.89%
1994 (5.30)%
1995 14.99%
1996 3.38%
1997 8.66%
1998 4.84%
During the period shown in the bar chart, the highest quarterly return was
6.12% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.26)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.69%.
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average other
state tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years 10 Years
MFS WEST VIRGINIA MUNICIPAL BOND FUND
Class A shares (0.14)% 4.08% 6.70%
Class B shares 0.17 4.04 6.81
Lehman Brothers Municipal Bond Index+*
Average other state tax-exempt municipal
bond fund++
------
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the deduction
of the 4.75% maximum sales charge. Class B share performance takes into
account the deduction of the applicable contingent deferred sales charge
(referred to as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on October 31, 1984 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of the
fund's class A shares for periods prior to the offering of class B shares.
This blended class B share performance has been adjusted to take into
account the CDSC applicable to class B shares, rather than the initial sales
charge (load) applicable to class A shares. This blended performance has not
been adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class B shares are higher than those
of class A shares, this blended class B share performance is higher than the
performance of class B shares would have been had class B shares been
offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
-------------------
II EXPENSE SUMMARY
-------------------
o EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of one of the funds.
SHAREHOLDER FEES APPLICABLE TO EACH FUND (fees paid directly from your
investment)
............................................................................
CLASS A CLASS B CLASS C
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage
of offering price)......................... 4.75% 0.00% 0.00%
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase
price or redemption proceeds, whichever
is less) .................................. See Below(1) 4.00% 1.00%
<TABLE>
ANNUAL FUND OPERATING EXPENSES OF CLASS A FOR EACH FUND
(expenses that are deducted from fund assets)
..........................................................................................................................
<CAPTION>
ALABAMA ARKANSAS CALIFORNIA FLORIDA GEORGIA
FUND FUND FUND FUND FUND
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Management Fees ............................. 0.55% 0.55% 0.55% 0.55% 0.55%
Distribution and Service (12b-1) Fees(2) .... 0.25% 0.10% 0.10% 0.00% 0.25%
Other Expenses (3) .......................... 0.26% 0.23% 0.21% 0.25% 0.28%
------ ------ ------ ------ ------
Total Annual Fund Operating Expenses ........ 1.06% 0.88% 0.86% 0.80% 1.08%
Fee Waiver and/or Expense Reimbursement(4) .. (0.15)% (0.15)% (0.35)% (0.15)% (0.15)%
Net Expenses ................................ 0.91% 0.73% 0.51% 0.65% 0.93%
<CAPTION>
MARYLAND MASSACHUSETTS MISSISSIPPI NEW YORK NORTH CAROLINA
FUND FUND FUND FUND FUND
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Management Fees ............................. 0.55% 0.55% 0.55% 0.55% 0.55%
Distribution and Service (12b-1) Fees(2) .... 0.35% 0.35% 0.00% 0.25% 0.35%
Other Expenses (3) .......................... 0.24% 0.21% 0.29% 0.24% 0.19%
------ ------ ------ ------ ------
Total Annual Fund Operating Expenses ...... 1.14% 1.11% 0.84% 1.04% 1.09%
Fee Waiver and/or Expens Reimbursement(4) . (0.15)% (0.15)% (0.15)% (0.15)% (0.15)%
------ ------ ------ ------ ------
Net Expenses .............................. 0.99% 0.96% 0.69% 0.89% 0.94%
<CAPTION>
PENNSYLVANIA SOUTH CAROLINA TENNESSEE VIRGINIA WEST VIRGINIA
FUND FUND FUND FUND FUND
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Management Fees ............................. 0.55% 0.55% 0.55% 0.55% 0.55%
Distribution and Service (12b-1) Fees(2) .... 0.00% 0.35% 0.35% 0.35% 0.35%
Other Expenses (3) .......................... 0.40% 0.23% 0.23% 0.20% 0.23%
------ ------ ------ ------ ------
Total Annual Fund Operating Expenses ........ 0.95% 1.13% 1.13% 1.10% 1.13%
Fee Waiverand/or Expense Reimbursement(4) . (0.55)% (0.15)% (0.15)% (0.15)% (0.15)%
------ ------ ------ ------ ------
Net Expenses .............................. 0.40% 0.98% 0.98% 0.95% 0.98%
</TABLE>
<PAGE>
<TABLE>
ANNUAL FUND OPERATING EXPENSES OF CLASS B FOR EACH FUND
(expenses that are deducted from fund assets)
..........................................................................................................................
<CAPTION>
ALABAMA ARKANSAS CALIFORNIA FLORIDA GEORGIA
FUND FUND FUND FUND FUND
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Management Fees ............................. 0.55% 0.55% 0.55% 0.55% 0.55%
Distribution and Service (12b-1) Fees(2) .... 1.00% 0.85% 0.85% 0.80% 1.00%
Other Expenses (3) .......................... 0.26% 0.23% 0.21% 0.25% 0.28%
------ ------ ------ ------ ------
Total Annual Fund Operating Expenses ........ 1.81% 1.63% 1.61% 1.60% 1.83%
Fee Waiver and/or Expense Reimbursement(4) (0.15)% (0.15)% (0.35)% (0.15)% (0.15)%
------ ------ ------ ------ ------
Net Expenses .............................. 1.66% 1.48% 1.26% 1.45% 1.68%
NORTH
MARYLAND MASSACHUSETTS MISSISSIPPI NEW YORK CAROLINA
FUND FUND FUND FUND FUND
------ ------ ------ ------ ------
Management Fees ............................. 0.55% 0.55% 0.55% 0.55% 0.55%
Distribution and Service (12b-1) Fees(2) .... 1.00% 1.00% 0.78% 1.00% 1.00%
Other Expenses (3) .......................... 0.24% 0.21% 0.29% 0.24% 0.19%
------ ------ ------ ------ ------
Total Annual Fund Operating Expenses ........ 1.79% 1.76% 1.62% 1.79% 1.74%
Fee Waiver and/or Expense Reimbursement(4) (0.15)% (0.15)% (0.15)% (0.15)% (0.15)%
------ ------ ------ ------ ------
Net Expenses .............................. 1.64% 1.61% 1.47% 1.64% 1.59%
SOUTH WEST
PENNSYLVANIA CAROLINA TENNESSEE VIRGINIA VIRGINIA
FUND FUND FUND FUND FUND
------ ------ ------ ------ ------
Management Fees ............................. 0.55% 0.55% 0.55% 0.55% 0.55%
Distribution and Service (12b-1) Fees(2) .... 0.78% 1.00% 1.00% 1.00% 1.00%
Other Expenses (3) .......................... 0.40% 0.23% 0.23% 0.20% 0.23%
------ ------ ------ ------ ------
Total Annual Fund Operating Expenses ........ 1.73% 1.78% 1.78% 1.75% 1.78%
Fee Waiver and/or Expense Reimbursement(4) (0.55)% (0.15)% (0.15)% (0.15)% (0.15)%
------ ------ ------ ------ ------
Net Expenses .............................. 1.18% 1.63% 1.63% 1.60% 1.63%
<CAPTION>
ANNUAL FUND OPERATING EXPENSES OF CLASS C FOR EACH FUND
(expenses that are deducted from fund assets)
........................................................................................
CALIFORNIA NORTH CAROLINA VIRGINIA
FUND FUND FUND
------ ------ ------
<S> <C> <C> <C>
Management Fees ..... 0.55% 0.55% 0.55%
Distribution and Service (12b-1) Fees(2) 1.00% 1.00% 1.00%
Other Expenses (3) .... 0.21% 0.19% 0.20%
------ ------ ------
Total Annual Fund Operating Expenses ........ 1.76% 1.74% 1.75%
Fee Waiver and/or Expense Reimbursement(4) . (0.35)% (0.15)% (0.15)%
------ ------ ------
Net Expenses ............................... 1.41% 1.59% 1.60%
------
(1) An initial sales charge will not be deducted from your purchase if you buy $1 million or more of class A shares, or if
you are investing through a retirement plan and your class A purchase meets certain requirements. However, in this case,
a contingent deferred sales charge (referred to as a CDSC) of 1% may be deducted from your redemption
proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it to pay marketing and other fees to support the sale
and distribution of class A, B and C shares and the services provided to you by your financial adviser (referred to as
distribution and service fees).
(3) The fund has an expense offset arrangement which reduces the fund's custodian fee based upon the amount of cash
maintained by the fund with its custodian and dividend disbursing agent. The fund may enter into other similar
arrangements and directed brokerage arrangements, which would also have the effect of reducing the fund's expenses.
"Other Expenses" do not take into account these expense reductions, and are therefore higher than the actual expenses of
the fund.
(4) MFS has contractually agreed to waive its right to receive the management fee to a maximum of 0.20% for the California
Fund and 0.40% for each other fund annually of such fund's average daily net assets. MFS has contractually agreed,
subject to reimbursement, to bear the Pennsylvania Fund's expenses such that "Other Expenses" do not exceed 0.40%
annually. These contractual fee arrangements will remain in effect until at least August 1, 2000, absent an earlier
modification approved by the Board of Trustees which oversees the funds.
</TABLE>
<PAGE>
o EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in a
fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS ALABAMA MUNICIPAL BOND FUND
Class A shares $563 $782 $1,018 $1,695
Class B shares
Assuming redemption at end of period 569 855 1,166 1,917
Assuming no redemption 169 555 966 1,917
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS ARKANSAS MUNICIPAL BOND FUND
Class A shares $546 $728 $ 925 $1,495
Class B shares
Assuming redemption at end of period 551 800 1,072 1,719
Assuming no redemption 151 500 872 1,719
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS CALIFORNIA MUNICIPAL BOND FUND
Class A shares $525 $703 $ 896 $1,455
Class B shares
Assuming redemption at end of period 528 774 1,403 1,680
Assuming no redemption 128 474 843 1,680
Class C shares
Assuming redemption at end of period 244 520 921 2,044
Assuming no redemption 144 520 921 2,044
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS FLORIDA MUNICIPAL BOND FUND
Class A shares $538 $704 $ 884 $1,404
Class B shares
Assuming redemption at end of period 548 790 1,057 1,673
Assuming no redemption 148 490 857 1,673
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS GEORGIA MUNICIPAL BOND FUND
Class A shares $565 $788 $1,028 $1,717
Class B shares
Assuming redemption at end of period 571 861 1,176 1,939
Assuming no redemption 171 561 976 1,939
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS MARYLAND MUNICIPAL BOND FUND
Class A shares $571 $806 $1,059 $1,783
Class B shares
Assuming redemption at end of period 567 849 1,156 1,922
Assuming no redemption 167 549 956 1,922
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS MASSACHUSETTS MUNICIPAL BOND FUND
Class A shares $568 $797 $1,044 $1,750
Class B shares
Assuming redemption at end of period 564 840 1,140 1,889
Assuming no redemption 164 540 940 1,889
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS MISSISSIPPI MUNICIPAL BOND FUND
Class A shares $542 $716 $ 905 $1,450
Class B shares
Assuming redemption at end of period 550 796 1,067 1,700
Assuming no redemption 150 496 867 1,700
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS NEW YORK MUNICIPAL BOND FUND
Class A shares $562 $776 $1,008 $1,673
Class B shares
Assuming redemption at end of period 567 849 1,156 1,895
Assuming no redemption 167 549 956 1,895
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS NORTH CAROLINA MUNICIPAL BOND FUND
Class A shares $566 $791 $1,033 $1,728
Class B shares
Assuming redemption at end of period 562 833 1,130 1,867
Assuming no redemption 162 533 930 1,867
Class C shares
Assuming redemption at end of period 262 533 930 2,039
Assuming no redemption 162 533 930 2,039
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS PENNSYLVANIA MUNICIPAL BOND FUND
Class A shares $514 $703 $ 907 $1,497
Class B shares
Assuming redemption at end of period 520 783 1,070 1,747
Assuming no redemption 120 483 870 1,747
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS SOUTH CAROLINA MUNICIPAL BOND FUND
Class A shares $570 $803 $1,054 $1,772
Class B shares
Assuming redemption at end of period 566 846 1,150 1,911
Assuming no redemption 166 546 950 1,911
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS TENNESSEE MUNICIPAL BOND FUND
Class A shares $556 $758 $ 977 $1,606
Class B shares
Assuming redemption at end of period 551 800 1,072 1,745
Assuming no redemption 151 500 872 1,745
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS VIRGINIA MUNICIPAL BOND FUND
Class A shares $567 $794 $1,039 $1,739
Class B shares
Assuming redemption at end of period 563 836 1,135 1,878
Assuming no redemption 163 536 935 1,878
Class C shares
Assuming redemption at end of period 263 536 935 2,050
Assuming no redemption 163 536 935 2,050
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------------
MFS WEST VIRGINIA MUNICIPAL BOND FUND
Class A shares $570 $803 $1,054 $1,772
Class B shares
Assuming redemption at end of period 566 846 1,150 1,911
Assuming no redemption 166 546 950 1,911
<PAGE>
--------------------------------------------
III CERTAIN INVESTMENT STRATEGIES AND RISKS
--------------------------------------------
Each fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of the
fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which a fund may
engage, including the principal investment techniques and practices discussed
above, are identified in Appendix A to this Prospectus, and are discussed,
together with their risks, in the funds' Statement of Additional Information
(referred to as the SAI), which you may obtain by contacting MFS Service
Center, Inc. (see back cover for address and phone number).
In addition, each fund may depart from its principal investment strategies
by temporarily investing for defensive purposes when adverse market, economic
or political conditions exist. While a fund invests defensively, it may not
be able to pursue its investment objective. When such conditions exist the
fund may invest up to 50% of its total assets in the following short-term
investments:
o U.S. government securities; and
o commercial paper, obligations of banks (including certificates of
deposit, bankers' acceptances and repurchase agreements) with $1 billion
of assets and cash.
Interest income from these short-term investments will be taxable to
shareholders as ordinary income. A fund's defensive investment position may
not be effective in protecting its value.
Each fund may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to a fund
with less active trading policies, which would increase your tax liability.
Frequent trading also increases transaction costs, which could detract from a
fund's performance.
<PAGE>
---------------------------
IV MANAGEMENT OF THE FUNDS
---------------------------
o INVESTMENT ADVISER
Massachusetts Financial Services Company (referred to as MFS or the adviser)
is each fund's investment adviser. MFS is America's oldest mutual fund
organization. MFS and its predecessor organizations have a history of money
management dating from 1924 and the founding of the first mutual fund,
Massachusetts Investors Trust. Net assets under the management of the MFS
organization were approximately $ billion on behalf of approximately
million investor accounts as of June 30, 1999. As of such date, the MFS
organization managed approximately $ billion of net assets in equity funds
and equity portfolios and $ billion of net assets in fixed income funds and
fixed income portfolios, including $ billion of net assets in municipal
securities. Approximately $ billion of the assets managed by MFS are
invested in securities of foreign issuers and foreign denominated securities
of U.S. issuers. MFS is located at 500 Boylston Street, Boston,
Massachusetts 02116.
MFS provides investment management and related administrative services and
facilities to each fund, including portfolio management and trade execution.
For these services each fund pays MFS an annual management fee at the rate
of 0.55% of such fund's average daily net assets on an annualized basis for
the fund's then-current fiscal year end. MFS has agreed to waive its right
to receive a portion of this fee as described under "Expense Summary."
o PORTFOLIO MANAGER
Christopher J. Mier and Michael L. Dawson are the portfolio managers for the
following funds:
o MFS Alabama Municipal Bond Fund o MFS Mississippi Municipal Bond Fund
o MFS Arkansas Municipal Bond Fund o MFS New York Municipal Bond Fund
o MFS California Municipal Bond Fund o MFS Pennsylvania Municipal Bond Fund;
o MFS Florida Municipal Bond Fund and
o MFS Maryland Municipal Bond Fund o MFS Tennessee Municipal Bond Fund
o MFS Massachusetts Municipal Bond Fund
Geoffrey L. Schechter and Michael L. Dawson are the portfolio managers for
the following funds:
o MFS South Carolina Municipal Bond Fund o MFS Virginia Municipal Bond Fund;
and
o MFS North Carolina Municipal Bond Fund o MFS West Virginia Municipal Bond
o MFS Georgia Municipal Bond Fund Fund
Mr. Dawson, a Vice President of the Adviser, has been a portfolio manager
of each fund since January 1, 1999. Mr. Dawson has been employed as a
portfolio manager with the adviser since September, 1998. Mr. Dawson was
employed as a sales representative in the Institutional Sales Group at
Fidelity Capital Markets from March, 1997 to May, 1998. From January, 1993
to March, 1997, Mr. Dawson was employed by Goldman Sachs & Co. in the
Institutional Sales-Fixed Income Division. Mr. Schechter, a Vice President
of the Adviser, became a portfolio manager of each fund referenced above
on of May 1, 1999. Mr. Schechter has been employed as a portfolio manager
with the Adviser since June, 1993. Mr. Mier, a Senior Vice President of
the Adviser, became a portfolio manager of each fund referenced above on
May 1, 1999. Mr. Mier has been employed as a portfolio manager with the
Adviser since April, 1999. Prior to April, 1999, Mr. Mier was a managing
director and portfolio manager in the municipal bond department at Scudder
Kemper Investments, Inc.
o ADMINISTRATOR
MFS provides each fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by each fund for a portion of the costs it incurs in providing
these services.
o DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of each fund.
o SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary of
MFS, performs transfer agency and certain other services for each fund, for
which it receives compensation from each fund.
<PAGE>
- ---------------------------------
V DESCRIPTION OF SHARE CLASSES
- ---------------------------------
Each fund offers class A and B shares through this prospectus. In addition,
the California fund, the North Carolina fund and the Virginia fund offers
Class C shares.
o SALES CHARGES
You may be subject to an initial sales charge when you purchase, or a CDSC
when you redeem, class A, B or C shares. These sales charges are described
below. In certain circumstances, these sales charges are waived. These
circumstances are described in the SAI. Special considerations concerning
the calculation of the CDSC that apply to each of these classes of shares
are described below under the heading "Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other concessions
which are paid from various sources, such as from the sales charges and
distribution and service fees, or from MFS or MFD. These commissions and
concessions are described in the SAI.
o CLASS A SHARES
You may purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), but in some cases you may
purchase class A shares without an initial sales charge but subject to a 1%
CDSC upon redemption within one year. Class A shares have annual
distribution and service fees up to a maximum of 0.35% of net assets
annually.
PURCHASES SUBJECT TO AN INITIAL SALES CHARGE. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon the
amount you invest, as follows:
SALES CHARGE* AS PERCENTAGE OF:
-------------------------------
Offering Net Amount
Amount of Purchase Price Invested
Less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 2.95 3.04
$500,000 but less than $1,000,000 2.20 2.25
$1,000,000 or more None** None**
------
* Because of rounding in the calculation of offering price, actual sales
charges you pay may be more or less than those calculated using these
percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
PURCHASES SUBJECT TO A CDSC (BUT NOT AN INITIAL SALES CHARGE). You pay no
initial sales charge when you invest $1 million or more in class A shares.
However, a CDSC of 1% will be deducted from your redemption proceeds if you
redeem within 12 months of your purchase. In addition, purchases made under
the following four categories are not subject to an initial sales charge.
However, a CDSC of 1% will be deducted from redemption proceeds if the
redemption is made within 12 months of purchase:
o Investments in class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended (referred to
as ERISA), if, prior to July 1, 1996
> the plan had established an account with MFSC; and
> the sponsoring organization had demonstrated to the satisfaction of
MFD that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan of class A shares of the
MFS Family of Funds (the MFS Funds) would be in the amount of at
least $250,000 within a reasonable period of time, as determined by
MFD in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the retirement plan and/or sponsoring organization participates in the
MFS Fundamental 401(k) Program or any similar recordkeeping system
made available by MFSC (referred to as the MFS participant
recordkeeping system);
> the plan establishes an account with MFSC on or after July 1, 1996;
> the total purchases by the retirement plan of class A shares of the
MFS Funds will be in the amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole
discretion; and
> the plan has not redeemed its class B shares in the MFS Funds in order
to purchase class A shares under this category.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the plan establishes an account with MFSC on or after July 1, 1996;
and
> the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds.
THE RETIREMENT PLAN WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN
OR ITS SPONSORING ORGANIZATION INFORMS MFSC PRIOR TO THE PURCHASES
THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED IN
SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS; MFSC HAS NO
OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES
UNDER THIS CATEGORY; AND
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the plan establishes an account with MFSC on or after July 1, 1997;
> the plan's records are maintained on a pooled basis by MFSC; and
> the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
o CLASS B SHARES
You may purchase class B shares at net asset value without an initial sales
charge, but if you redeem your shares within the first six years you may be
subject to a CDSC (declining from 4.00% during the first year to 0% after
six years). Class B shares have annual distribution and service fees up to a
maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
----------------------------------------------------------------------------
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
If you hold class B shares for approximately eight years, they will convert
to class A shares of that fund. All class B shares you purchased through the
reinvestment of dividends and distributions will be held in a separate
sub-account. Each time any class B shares in your account convert to class A
shares, a proportionate number of the class B shares in the sub-account will
also convert to class A shares.
o CLASS C SHARES
You may purchase class C shares of the California Fund, the North Carolina
Fund or the Virginia Fund at net asset value without an initial sales
charge, but if you redeem your shares within the first year you may be
subject to a CDSC of 1.00%. Class C shares have annual distribution and
service fees up to a maximum of 1.00% of net assets annually. Class C shares
do not convert to any other class of shares of the fund.
o CALCULATION OF CDSC
As discussed above, certain investments in class A, B and C shares will be
subject to a CDSC. Three different aging schedules apply to the calculation
of the CDSC:
o Purchases of class A shares made on any day during a calendar month will
age one month on the last day of the month, and each subsequent month.
o Purchases of class C shares, and purchases of class B shares on or after
January 1, 1993, made on any day during a calendar month will age one
year at the close of business on the last day of that month in the
following calendar year, and each subsequent year.
o Purchases of class B shares prior to January 1, 1993 made on any day
during a calendar year will age one year at the close of business on
December 31 of that year, and each subsequent year.
No CDSC is assessed on the value of your account represented by appreciation
or additional shares acquired through the automatic reinvestment of
dividends or capital gain distributions. Therefore, when you redeem your
shares, only the value of the shares in excess of these amounts (i.e., your
direct investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being
imposed at the lowest possible rate, which means that the CDSC will be
applied against the lesser of your direct investment or the total cost of
your shares. The applicability of a CDSC will not be affected by exchanges
or transfers of registration, except as described in the SAI.
o DISTRIBUTION AND SERVICE FEES
Each fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class A, B
and C shares and the services provided to you by your financial adviser.
These annual distribution and service fees may equal up to 0.35% for class A
shares (a 0.10% distribution fee and a 0.25% service fee) and up to 1.00%
for each of class B and class C shares (a 0.75% distribution fee and a 0.25%
service fee), and are paid out of the assets of these classes. Over time,
these fees will increase the cost of your shares and may cost you more than
paying other types of sales charges.
Each Fund's class A, class B and class C distribution and service fees for
its current fiscal year are as follows:
CLASS A CLASS B CLASS C
------- ------- ------
Alabama Fund ................... 0.25% 1.00%
Arkansas Fund .................. 0.10% 0.85%
California Fund ................ 0.10% 0.85% 1.00%
Florida Fund ................... 0.00% 0.80%
Georgia Fund ................... 0.25% 1.00%
Maryland Fund .................. 0.35% 1.00%
Massachusetts Fund ............. 0.35% 1.00%
Mississippi Fund ............... 0.00% 0.78%
New York Fund .................. 0.25% 1.00%
North Carolina Fund ............ 0.35% 1.00% 1.00%
Pennsylvania Fund .............. 0.00% 0.78%
South Carolina Fund ............ 0.35% 1.00%
Tennessee Fund ................. 0.35% 1.00%
Virginia Fund .................. 0.35% 1.00% 1.00%
West Virginia Fund ............. 0.35% 1.00%
For the Florida and Mississippi funds:
o the 0.25% per annum class A service fee and the 0.10% per annum class A
distribution fee will commence on such date or dates as the Trustees of
the funds may determine.
For the Pennsylvania fund:
o the 0.25% per annum class A service fee will commence when net assets
attributable to class A shares first equal or exceed $50 million and
payment of the 0.10% per annum class A distribution fee will commence on
such date as the Trustees of the fund may determine.
o except in the case of the 0.25% per annum Class B service fee paid by the
fund upon the sale of class B shares in the first year, payment of the
class B service fee will be suspended until such date as its class A
service fee first becomes payable.
For the Arkansas fund:
o a portion of the class A service fee equal to 0.10% per annum is
currently being paid; payment of the remaining portion of the class A
service fee and payment of the 0.10% per annum class A distribution fee
will commence on such date or dates as the Trustees of the funds may
determine.
For the Alabama, Georgia and New York funds:
o payment of the 0.10% per annum class A distribution fee will commence on
such date or dates as the Trustees of the funds may determine.
For the Arkansas, Florida and Mississippi funds:
o except in the case of the 0.25% per annum class B service fee paid by the
fund upon the sale of class B shares in the first year, payment of the
class B service fee:
o is not currently imposed on the Florida and Mississippi funds; and
o has been set at 0.10% for the Arkansas fund
each until such date or dates as the Trustees of the funds may determine.
For the California fund:
o a portion of Class A service fee equal to 0.10% per annum is currently
being paid; payment of the remaining portion of Class A service fee and
payment of the 0.10% per annum Class A distribution fee will commence on
such dates as the Trustees of the fund may determine.
o except in the case of the 0.25% per annum Class B service fee paid by the
Fund for the sale of Class B shares in the first year, payment of Class B
service fee has been set at 0.10% for the Fund.
<PAGE>
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
You may purchase, exchange and redeem class A, B and C shares of a fund in
the manner described below. In addition, you may be eligible to participate
in certain investor services and programs to purchase, exchange and redeem
these classes of shares, which are described in the next section under the
caption "Investor Services and Programs."
o HOW TO PURCHASE SHARES
INITIAL PURCHASE. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is $1,000.
However, in the following circumstances the minimum initial investment is
only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
> tax-deferred retirement programs (other than IRAs) where investments
are made by means of group remittal statements; or
> employer sponsored investment programs.
The minimum initial investment for IRAs is $250 per account. The maximum
investment in class C shares is $1,000,000 per transaction. Class C shares
are not available for purchase by any retirement plan qualified under
Section 401(a) or 403(b) of the Internal Revenue Code if the plan or its
sponsor subscribes to certain recordkeeping services made available by MFSC,
such as the MFS Fundamental 401(k) Plan.
ADDING TO YOUR ACCOUNT. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first for
instructions); or
o authorize transfers by phone between your bank account and your MFS
account (the maximum purchase amount for this method is $100,000). You
must elect this privilege on your account application if you wish to use
it.
o HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of certain other
MFS funds at net asset value by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange amount
is generally $1,000 ($50 for exchanges made under the automatic exchange
plan). Shares otherwise subject to a CDSC will not be charged a CDSC in an
exchange. However, when you redeem the shares acquired through the exchange,
the shares you redeem may be subject to a CDSC, depending upon when you
originally purchased the shares you exchanged. For purposes of computing the
CDSC, the length of time you have owned your shares will be measured from
the date of original purchase and will not be affected by any exchange.
Sales charges may apply to exchanges made from the MFS money market funds.
Certain qualified retirement plans may make exchanges between the MFS funds
and the MFS Fixed Fund, a bank collective investment fund, and sales charges
may also apply to these exchanges. Call MFSC for information concerning
these sales charges.
Exchanges may be subject to certain limitations and are subject to the MFS
funds' market timing policies, which are policies designed to protect the
funds and their shareholders from the adverse effect of frequent exchanges.
These limitations and market timing policies are described below under the
captions "Right to Reject or Restrict Purchase and Exchange Orders" and
"Market Timing Policies." You should read the prospectus of the MFS fund
into which you are exchanging and consider the differences in objectives,
policies and rules before making any exchange.
o HOW TO REDEEM SHARES
You may redeem your shares either by having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in good
order. "Good order" generally means that the stock power, written request
for redemption, letter of instruction or certificate must be endorsed by the
record owner(s) exactly as the shares are registered. In addition, you need
to have your signature guaranteed and/or submit additional documentation to
redeem your shares. See "Signature Guarantee/ Additional Documentation"
below, or contact MFSC for details (see back cover page for address and
phone number).
Under unusual circumstances such as when the New York Stock Exchange is
closed, trading on the Exchange is restricted or if there is an emergency,
the fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, the fund may delay the payment of the
redemption proceeds until the check has cleared, which may take up to 15
days from the purchase date.
REDEEMING DIRECTLY THROUGH MFSC.
o BY TELEPHONE. You can call MFSC to have shares redeemed from your account
and the proceeds wired or mailed (depending on the amount redeemed)
directly to a pre- designated bank account. MFSC will request personal or
other information from you and will generally record the calls. MFSC will
be responsible for losses that result from unauthorized telephone
transactions if it does not follow reasonable procedures designed to
verify your identity. You must elect this privilege on your account
application if you wish to use it.
o BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the
name of your fund, your account number, and the number of shares or
dollar amount to be sold.
REDEEMING THROUGH YOUR FINANCIAL ADVISER. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser will
be responsible for furnishing all necessary documents to MFSC and may charge
you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. In order to protect against
fraud, each fund requires that your signature be guaranteed in order to
redeem your shares. Your signature may be guaranteed by an eligible bank,
broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency, or savings association. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
o OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. Purchases and
exchanges should be made for investment purposes only. The MFS funds each
reserve the right to reject or restrict any specific purchase or exchange
request. Because an exchange request involves both a request to redeem
shares of one fund and to purchase shares of another fund, the MFS funds
consider the underlying redemption and purchase requests conditioned upon
the acceptance of each of these underlying requests. Therefore, in the event
that the MFS funds reject an exchange request, neither the redemption nor
the purchase side of the exchange will be processed. When a fund determines
that the level of exchanges is detrimental to its remaining shareholders,
the fund may delay the payment of exchange proceeds for up to seven days to
permit cash to be raised through the orderly liquidation of its portfolio
securities to pay the redemption proceeds. In this case, the purchase side
of the exchange will be delayed until the exchange proceeds are paid by the
redeeming fund.
MARKET TIMING POLICIES. The MFS funds are not designed for professional
market timing organizations or other entities using programmed or frequent
exchanges. The MFS funds define a "market timer" as an individual, or
organization acting on behalf of one or more individuals, if:
o the individual or organization makes during the calendar year either (i)
six or more exchange requests among the MFS funds or (ii) three or more
exchange requests out of any of the MFS high yield bond funds or MFS
municipal bond funds; and
o any one of such exchange requests represents shares equal in value to $1
million or more.
Accounts under common ownership or control, including accounts administered
by market timers, will be aggregated for purposes of this definition.
The MFS funds may impose specific limitations on market timers, including:
o delaying for up to seven days the purchase side of an exchange request by
market timers;
o rejecting or otherwise restricting purchase or exchange requests by
market timers; and
o permitting exchanges by market timers only into certain MFS funds.
REINSTATEMENT PRIVILEGE. After you have redeemed shares, you have a one-time
right to reinvest the proceeds within 90 days of the redemption at the
current net asset value (without an initial sales charge). If the redemption
involved a CDSC, your account will be credited with the appropriate amount
of the CDSC paid; however, your new shares will be subject to a CDSC which
will be determined from the date you originally purchased the shares
redeemed. This privilege applies to shares of the MFS money market funds
only under certain circumstances.
IN-KIND DISTRIBUTIONS. The MFS funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that a fund makes an in-kind distribution,
you could incur the brokerage and transaction charges when converting the
securities to cash. None of the funds expects to make in-kind distributions,
and if a fund does, it will pay, during any 90-day period, your redemption
proceeds in cash up to either $250,000 or 1% of the fund's net assets,
whichever is less.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Because it is costly to maintain
small accounts, the MFS funds have generally reserved the right to
automatically redeem shares and close your account when it contains less
than $500 due to your redemptions or exchanges. Before making this automatic
redemption, you will be notified and given 60 days to make additional
investments to avoid having your shares redeemed.
<PAGE>
-----------------------------------
VII INVESTOR SERVICES AND PROGRAMS
-----------------------------------
As a shareholder of a fund, you have available to you a number of services
and investment programs. Some of these services and programs may not be
available to you if your shares are held in the name of your financial
adviser or if your investment in a fund is made through a retirement plan.
o DISTRIBUTION OPTIONS
The following distribution options are generally available to all accounts
and you may change your distribution option as often as you desire by
notifying MFSC:
o Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
o Dividends in cash; capital gain distributions reinvested in additional
shares; or
o Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value as
of the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of that fund. If you have elected to receive dividends
and/or capital gain distributions in cash, and the postal or other delivery
service is unable to deliver checks to your address of record, or you do not
respond to mailings from MFSC with regard to uncashed distribution checks,
your distribution option will automatically be converted to having all
dividends and other distributions reinvested in additional shares. Your
request to change a distribution option must be received by MFSC by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
o PURCHASE AND REDEMPTION PROGRAMS
For your convenience, the following purchase and redemption programs are
made available to you with respect to class A, B and C shares, without extra
charge:
AUTOMATIC INVESTMENT PLAN. You can make cash investments of $50 or more
through your checking account or savings account on any day of the month. If
you do not specify a date, the investment will automatically occur on the
first business day of the month.
AUTOMATIC EXCHANGE PLAN. If you have an account balance of at least $5,000
in any MFS fund, you may participate in the automatic exchange plan, a
dollar-cost averaging program. This plan permits you to make automatic
monthly or quarterly exchanges from your account in an MFS fund for shares
of the same class of shares of other MFS funds. You may make exchanges of at
least $50 to up to six different funds under this plan. Exchanges will
generally be made at net asset value without any sales charges. If you
exchange shares out of the MFS Money Market Fund or MFS Government Money
Market Fund, or if you exchange class A shares out of the MFS Cash Reserve
Fund, into class A shares of any other MFS fund, you will pay the initial
sales charge if you have not already paid this charge on these shares.
REINVEST WITHOUT A SALES CHARGE. You can reinvest dividend and capital gain
distributions into your account without a sales charge to add to your
investment easily and automatically.
DISTRIBUTION INVESTMENT PROGRAM. You may purchase shares of any MFS fund
without paying an initial sales charge or a CDSC upon redemption by
automatically reinvesting a minimum of $50 of dividend and capital gain
distributions from the same class of another MFS fund.
LETTER OF INTENT (LOI). If you intend to invest $50,000 or more in the MFS
funds (including the MFS Fixed Fund) within 13 months, you may buy class A
shares of the funds at the reduced sales charge as though the total amount
were invested in class A shares in one lump sum. If you intend to invest $1
million or more under this program, the time period is extended to 36
months. If the intended purchases are not completed within the time period,
shares will automatically be redeemed from a special escrow account
established with a portion of your investment at the time of purchase to
cover the higher sales charge you would have paid had you not purchased your
shares through this program.
RIGHT OF ACCUMULATION. You will qualify for a lower sales charge on your
purchases of class A shares when your new investment in class A shares,
together with the current (offering price) value of all your holdings in the
MFS funds (including the MFS Fixed Fund), reaches a reduced sales charge
level.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to automatically receive (or
designate someone else to receive) regular periodic payments of at least
$100. Each payment under this systematic withdrawal is funded through the
redemption of your fund shares. For class B and C shares, you can receive up
to 10% (15% for certain IRA distributions) of the value of your account
through these payments in any one year (measured at the time you establish
this plan). You will incur no CDSC on class B and C shares redeemed under
this plan. For class A shares, there is no similar percentage limitation;
however, you may incur the CDSC (if applicable) when class A shares are
redeemed under this plan.
FREE CHECKWRITING. You may redeem your class A or class C shares by writing
checks against your account. Checks must be for a least $500 and investments
made by check must have been in your account for at least 15 days before you
can write checks against them. There is no charge for this service. To
authorize your account for checkwriting, contact MFSC (see back cover page
for address and phone number).
Shares in your account equal in value to the amount of the check plus the
applicable CDSC (if any) and any income tax required to be withheld (if any)
are redeemed to cover the amount of the check. If your account value is not
great enough to cover these amounts, your check will be dishonored.
<PAGE>
-----------------------
VIII OTHER INFORMATION
-----------------------
o PRICING OF FUND SHARES
The price of each class of each fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange is open
for trading (generally, 4:00 p.m., Eastern time) (referred to as the
valuation time). To determine net asset value, each fund values its assets
at current market values, or at fair value as determined by the Adviser
under the direction of the Board of Trustees that oversees the fund if
current market values are unavailable. Fair value pricing may be used by a
fund when current market values are unavailable or when an event occurs
after the close of the exchange on which the fund's portfolio securities are
principally traded that is likely to have changed the value of the
securities. The use of fair value pricing by a fund may cause the net asset
value of its shares to differ significantly from the net asset value that
would be calculated using current market values.
You will receive the net asset value next calculated, after the deduction
of applicable sales charges and any required tax withholding, if your order
is complete (has all required information) and MFSC receives your order by:
o the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) received your order
by the valuation time.
o DISTRIBUTIONS
Each fund intends to declare daily and pay to its shareholders substantially
all of its net income as dividends on a monthly basis. Dividends generally
are distributed on the first business day of the following month. Any
realized net capital gains are distributed at least annually.
o FEDERAL TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax
adviser regarding the effect that an investment in a fund may have on your
particular tax situation.
TAXABILITY OF DISTRIBUTIONS. As long as a fund qualifies for treatment as a
regulated investment company (which each Fund has in the past and intends to
do in the future), it pays no federal income tax on the earnings it
distributes to shareholders.
You may receive three different types of distributions from a fund:
exempt-interest dividends, ordinary dividends and capital gain dividends.
Most distributions will be exempt-interest dividends, which are exempt from
federal income tax. Ordinary dividends are normally subject to both federal
income tax at ordinary income tax rates. Distributions designated as capital
gain dividends are taxable as long-term capital gains. Any taxes that you
pay on a distribution will be the same whether you take the distribution in
cash or have it reinvested in additional shares of the fund. Some dividends
paid in January may be taxable as if they had been paid the previous
December.
The Form 1099 that is mailed to you every January details your distributions
and how they are treated for federal tax purposes.
Each fund's distributions of net capital gains or net short-term capital
gains will reduce such fund's net asset value per share. Therefore, if you
buy shares shortly before the record date of such a distribution, you may
pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
If you are neither a citizen nor a resident of the U.S., each fund will
withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments that are subject to such withholding. You may be able to
arrange for a lower withholding rate under an applicable tax treaty if you
supply the appropriate documentation required by the fund. Each fund is also
required in certain circumstances to apply backup withholding at the rate of
31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the
U.S.) who does not furnish to that fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject
to 30% withholding. Prospective investors should read a fund's Account
Application for additional information regarding backup withholding of
federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it is
generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, sell or exchange, you may
have a gain or a loss on the transaction. You are responsible for any tax
liabilities generated by your transaction.
OTHER TAX ISSUES. Exempt-interest dividends that you receive may affect your
alternative minimum tax calculation. Also, if you are receiving social
security or railroad retirement benefits, your exempt-interest dividends may
increase the tax on your benefits. If you borrow money to purchase or carry
shares of a fund, your deduction for interest paid on those borrowings will
be limited.
o STATE TAX CONSIDERATIONS
As long as a fund qualifies for treatment as a regulated investment company,
it will not need to pay Massachusetts income or corporate excise tax.
Your distributions from a fund, including exempt-interest dividends, will
generally be subject to state income tax if you live in a state other than
the state to which the fund is targeted.
If you redeem, sell or exchange shares of a fund, you will normally need to
take your resulting gain or loss into account in computing your state income
tax.
The following discussion for each fund is very general and is directed at
shareholders who are residents of the namesake state. You are urged to
consult your tax adviser regarding the effect that an investment in a fund
may have on your particular tax situation.
ALABAMA FUND:
If the fund meets certain requirements of Alabama law, dividends that you
receive from the fund that meet those requirements will be exempt from
Alabama personal income tax. The fund will provide information to you
annually regarding the percentage of your dividends that meet the
requirements to be tax-exempt. Distributions resulting from capital gains on
qualifying fund investments and from all income and gains from fund
investments that do not qualify will be subject to Alabama personal income
tax.
If you sell shares of the fund, capital gains are taxable and capital losses
may be deductible. You cannot deduct interest paid on money you borrow to
buy or hold shares of the fund.
ARKANSAS FUND:
Distributions of interest that you receive from obligations of the State of
Arkansas or the United States or its possessions are exempt from Arkansas
income tax. This exemption was confirmed by the Department of Finance and
Administration in a letter ruling dated December 13, 1991 addressed to
counsel to the fund.
In determining your Arkansas income tax liabilities, you must account for
capital gain distributions you receive from the fund and for capital gains
and losses that you realize redemptions, sales or exchanges of shares of the
fund.
CALIFORNIA FUND:
If the fund meets certain conditions, you will be able to exclude from
income, for California personal income tax purposes, dividends received from
the fund which are derived from income from "California exempt- interest
securities." California exempt-interest securities are municipal obligations
held by the fund that, if held by an individual, would pay interest which is
exempt from California taxation. The conditions that the fund must meet
include a requirement that the fund continue to qualify as a regulated
investment company, a requirement that at the close of each quarter of its
taxable year, at least 50% of the fund's assets be invested in California
exempt-interest securities, and a requirement that the dividends
("California exempt-interest dividends") be designated as such by the fund
by written notice to sharholders within 60 days after the close of the
fund's fiscal year. Other distributions you receive from the fund to
California residents will be subject to California personal income tax,
whether or not such dividends are reinvested. Interest on indebtedness
incurred or continued in connection with the purchase or carry of shares of
the fund will not be deductible for California personal income tax purposes.
FLORIDA FUND:
Florida does not impose an individual income tax on Florida residents.
Florida does impose a tax on intangible personal property owned, managed, or
controlled by Florida residents. Fund shares owned by Florida residents will
be exempt from the Florida intangible personal property tax only if:
o As of January 1 of each year the fund's portfolio consists solely of
assets that are exempt from the Florida intangible personal property tax,
such as State of Florida tax exempt securities and U.S. Government
securities.
In order to take advantage of the exemption from the intangible personal
property tax, the fund in normal circumstances intends to sell any
non-exempt assets held in its portfolio and reinvest the proceeds in exempt
assets prior to January 1. Therefore, your shares should normally be exempt
from the Florida intangible personal property tax. However, there are likely
to be transaction costs involved in restructuring the portfolio in this
manner. These transaction costs may reduce the fund's investment return and
exceed any increased investment return the fund achieved by investing in
non-exempt assets during the year.
GEORGIA FUND:
Under existing laws, you will not be subject to Georgia income tax on
distributions on shares of the fund if those distributions constitute
exempt-interest dividends for federal income tax purposes that are derived
from interest on debt obligations issued by or on behalf of the State of
Georgia or its political subdivisions. This treatment also will apply to
dividends on shares of the fund that are derived from interest on debt
obligations issued by territories or possessions of the United States where
federal law provides an exemption from state income taxation. Generally you
will, however, be subject to Georgia income tax on distributions that are
derived from gains on sales of debt obligations by the fund.
MARYLAND FUND:
Under existing Maryland law, distributions that you receive from the fund
are generally not subject to Maryland State or local taxes provided that tax
distributions are exemption-interest dividends for federal income tax
purposes and are attributable to i) interest on Maryland tax-exempt
obligations, ii) interest on obligations of the United States, iii) interest
on obligations of possessions or territories of the United States, iv) gains
from the disposition of Maryland tax-exempt obligations, and v) gains from
the disposition of obligations of the United States. However, interest on
certain Maryland tax-exempt obligations which are qualified private activity
bonds constitutes a tax preference, and 50% of any distributions of the fund
attributable to interest from such private activity bonds may be subject to
Maryland state and local income taxes. All of your other income from the
fund and gains from the redemption or sale of your shares of the fund will
generally be subject to Maryland individual income tax.
MASSACHUSETTS FUND:
As long as the fund qualifies for treatment as a regulated investment
company, it will not need to pay Massachusetts income or corporate excise
tax.
Your distributions from the fund, including exempt-interest dividends, will
generally be subject to state income tax if you live in a state other than
Massachusetts.
If you redeem, sell or exchange shares of the fund, you will normally need
to take your resulting gain or loss into account in computing your state
income tax.
Most of your distributions from the fund will be exempt from Massachusetts
personal income tax. A portion of your exempt-interest dividends will be
subject to Massachusetts tax if the fund invests in municipal securities of
other states. Ordinary dividends that are attributable to interest on U.S.
government securities will be exempt from Massachusetts personal income tax.
A portion of capital gain dividends may also be exempt depending on the
municipal securities in which the fund invests. You will receive a statement
each January or February showing which distributions are subject to
Massachusetts income tax and which are exempt.
Companies that pay Massachusetts corporate excise tax will generally need to
pay tax on include all distributions from the fund in calculating the income
measure of the tax. Companies generally will not include distributions in
calculating their sales factors.
If you borrow money to purchase or carry shares of the fund, any deduction
you would normally take for interest paid on those borrowings will be
limited. This is true even for companies that have to pay corporate excise
tax on distributions from the fund.
MISSISSIPPI FUND:
You will not have to pay Mississippi income taxes on distributions you
receive from the fund to the extent that the interest you receive by the
fund on government obligations is itself exempt from Mississippi income tax.
Any other distributions you receive from the fund will be subject to
Mississippi income taxes.
NEW YORK FUND:
Under existing New York laws, you will not be subject to New York State or
New York City personal income taxes on the fund's dividends to the extent
that such dividends qualify as exempt-interest dividends for federal income
tax purposes and represent interest income attributable to obligations of
the State of New York and its political subdivisions, or certain other
obligations the interest on which is exempt from New York State and New York
City personal income taxes, such as, for example, certain obligations of The
Commonwealth of Puerto Rico. To the extent you receive distributions from
the fund that are derived from other income, including long-term or
short-term capital gains, such distributions will not be exempt from New
York State or New York City personal income tax.
Fund dividends are not excluded from net income in determining New York
State or New York City franchise taxes on corporations or financial
institutions.
Any capital gains or losses you realize upon a redemption, sale or exchange
of your shares in the fund will be required to be taken into account for New
York State personal income tax purposes, if you are a New York State
resident, and for New York City personal income tax purposes, if you are a
resident of New York City.
You should also note that interest you incur to purchase or retain shares of
the fund will not be deductible for New York State or New York City personal
income tax purposes.
NORTH CAROLINA FUND:
Your income from the fund will not be subject to North Carolina individual
income tax to the extent that the income is attributable to (i) interest
earned on obligations that are tax-exempt for both federal and North
Carolina income tax purposes, (ii) interest earned on direct obligations of
the United States, or (iii) capital gains from the sale by the fund of an
obligation the profit from which is exempt from North Carolina individual
income tax. All of your other income from the fund and gains from the
redemption or sale of your shares of the fund generally will be subject to
North Carolina individual income tax.
PENNSYLVANIA FUND:
You will not be subject to personal income tax on the fund's distribution of
income and gains arising from most state and federal obligations. However,
you will be subject to tax on the fund's distributions from any other
sources including capital gain distributions. Residents of Philadelphia will
not be subject to the Philadelphia School District Investment Net Income Tax
on the fund's distributions from most state and federal obligations.
Corporate shareholders will not be subject to corporate net income tax on
the fund's interest distributions arising from most state and federal
obligations if such distributions are not included in the corporation's
Federal taxable income determined before net operating loss carryovers and
special deductions.
SOUTH CAROLINA FUND:
You will not be subject to personal income tax on the fund's distribution of
income and gains arising from most state and federal obligations. However,
any capital gains distributed by the fund, or gains realized by a
shareholder from a redemption or sale of shares of the fund, will be subject
to South Carolina income taxation.
In addition, because your shares of the fund are considered intangible
personal property, the shares are exempt from any and all ad valorem
taxation in South Carolina.
You should also note that interest you incur to purchase or retain shares of
the fund generally will not be deductible for South Carolina income tax
purposes.
TENNESSEE FUND:
Your income from the fund will not be subject to Tennessee individual income
tax, also known as the Hall Income Tax, to the extent that the income is
attributable to interest earned on obligations of (i) Tennessee or any
county, municipality, or political subdivision of Tennessee or (ii) the
United States government or any agency or instrumentality of the United
States. The administrative position of the Tennessee Department of Revenue
is that your income from the fund also will not be subject to Tennessee
indivdual income tax to the extent that the income is attributable to
capital gains from the sale by the fund of any of those obligations. All of
your other income from the fund generally will be subject to Tennessee
individual income tax.
VIRGINIA FUND:
Your income from the fund will not be subject to Virginia individual income
tax to the extent that the income is attributable to interest earned on
either (i) obligations that are tax-xempt for both federal and Virginia
income tax purposes or (ii) direct obligations of the United States. All of
your other income from the fund and gains from the redemption or sale of
your shares of the fund generally will be subject to Virginia individual
income tax.
WEST VIRGINIA FUND:
The West Virginia Department of Tax and Revenue has created a list of
obligations of the United States and its possessions and of West Virginia
which, when invested in by an investor, do not create West Virginia Personal
Income Tax liability for interest or dividend income.
As long as the fund qualifies as a regulated investment company
distributions you receive from the fund are not subject to West Virginia
Personal Income Tax provided that the income is attributable to obligations
which appear on the Department's list.
o UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have similar
investment goals and principal investment policies and risks similar to a
fund, and which may be managed by the fund's portfolio manager(s). While
each fund may have many similarities to these other funds, its investment
performance will differ from their investment performance. This is due to a
number of differences between the funds, including differences in sales
charges, expense ratios and cash flows.
o YEAR 2000 READINESS DISCLOSURE
Each fund could be adversely affected if the computer systems used by MFS,
the fund's other service providers or the companies in which the fund
invests do not properly process date-related information from and after
January 1, 2000. MFS recognizes the importance of the Year 2000 issue and,
to address Year 2000 compliance, created a separately funded Year 2000
Program Management Office in 1996 comprised of a specialized staff reporting
directly to MFS senior management. The Office, with the help of external
consultants, is responsible for overall coordination, strategy formulation,
communications and issue resolution with respect to Year 2000 issues. While
MFS systems will be tested for Year 2000 readiness before the turn of the
century, there are significant systems interdependencies in the domestic and
foreign markets for securities, the business environments in which companies
held by each fund operate and in MFS' own business environment. MFS has been
working with each fund's other service providers to identify and respond to
potential problems with respect to Year 2000 readiness and to develop
contingency plans. Year 2000 readiness is also one of the factors considered
by MFS in its ongoing assessment of companies in which each fund invests.
There can be no assurance, however, that these steps will be sufficient to
avoid any adverse impact on a fund.
o PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
To avoid sending duplicate copies of materials to households, only one copy
of a fund's annual and semiannual report will be mailed to shareholders
having the same residential address on a fund's records. However, any
shareholder may contact MFSC (see back cover for address and phone number)
to request that copies of these reports be sent personally to that
shareholder.
<PAGE>
- ----------------------------
IX FINANCIAL HIGHLIGHTS
- ----------------------------
The financial highlights table is intended to help you understand a fund's
financial performance for the past 5 years, or, if a fund has not been in
operation that long, since the time it commenced investment operations.
Certain information reflects financial results for a single fund share.
The total returns in the table represent the rate by which an investor
would have earned (or lost) on an investment in a fund (assuming
reinvestment of all distributions). This information has been audited by
each fund's independent auditors, whose report, together with the fund's
financial statements, are included in the fund's annual report to
shareholders. The funds' annual report is available upon request by
contacting MFS Service Center, Inc. (see back cover for address and
telephone number). These financial statements are incorporated by
reference into the SAI. The fund's independent auditors are Deloitte &
Touche LLP.
<PAGE>
<TABLE>
ALABAMA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.80 $ 10.48 $ 10.52 $ 10.34 $ 10.27
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.54 $ 0.55 $ 0.56 $ 0.55 $ 0.56
Net realized and unrealized gain (loss) on
investments (0.01) 0.45 0.04 0.18 0.09
------- ------- ------- ------- -------
Total from investment operations $ 0.53 $ 1.00 $ 0.60 $ 0.73 $ 0.65
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income $ (0.54) $ (0.55) $ (0.55) $ (0.55) $ (0.55)
From net realized gain on investments (0.03) (0.13) (0.09) -- --
In excess of net realized gain on
investments -- -- -- -- (0.03)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.57) $ (0.68) $ (0.64) $ (0.55) $ (0.58)
------- ------- ------- ------- -------
Net asset value -- end of period $ 10.76 $ 10.80 $ 10.48 $ 10.52 $ 10.34
======= ======= ======= ======= =======
Total return(+) 5.03% 9.72% 5.82% 7.13% 6.51%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 0.95% 1.04% 1.10% 1.14% 1.15%
Net investment income 5.04% 5.12% 5.28% 5.18% 5.47%
Portfolio turnover 23% 21% 22% 37% 30%
Net assets at end of period (000 omitted) $73,851 $75,538 $76,928 $82,484 $83,805
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.53 $ 0.54 -- $ 0.54 $ 0.55
Ratios (to average net assets):
Expenses## 1.07% 1.11% -- 1.24% 1.25%
Net investment income 4.92% 5.05% -- 5.08% 5.37%
</TABLE>
<PAGE>
<TABLE>
ALABAMA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.80 $10.48 $10.52 $10.34 $10.27
------- ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) $ 0.46 $ 0.47 $ 0.47 $ 0.46 $ 0.47
Net realized and unrealized gain (loss) on
investments (0.01) 0.45 0.04 0.18 0.09
------- ------ ------ ------ ------
Total from investment operations $ 0.45 $ 0.92 $ 0.51 $ 0.64 $ 0.56
------- ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income $ (0.46) $(0.47) $(0.47) $(0.46) $(0.46)
From net realized gain on investments (0.03) (0.13) (0.08) -- --
In excess of net realized gain on investments -- -- -- -- (0.03)
------- ------ ------ ------ ------
Total distributions declared to shareholders $ (0.49) $(0.60) $(0.55) $(0.46) $(0.49)
------- ------ ------ ------ ------
Net asset value -- end of period $ 10.76 $10.80 $10.48 $10.52 $10.34
======= ====== ====== ====== ======
Total return 4.25% 8.91% 4.98% 6.25% 5.64%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.69% 1.79% 1.90% 1.96% 1.97%
Net investment income 4.29% 4.36% 4.48% 4.34% 4.63%
Portfolio turnover 23% 21% 22% 37% 30%
Net assets at end of period (000 omitted) $11,452 $8,074 $7,281 $6,139 $4,396
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.45 $ 0.46 -- -- --
Ratios (to average net assets):
Expenses## 1.81% 1.86% -- -- --
Net investment income 4.17% 4.29% -- -- --
</TABLE>
<PAGE>
<TABLE>
ARKANSAS FUND
..............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.18 $ 9.72 $ 9.75 $ 9.66 $ 9.69
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) $ 0.50 $ 0.50 $ 0.50 $ 0.50 $ 0.53
Net realized and unrealized gain (loss)
on investments (0.04) 0.46 (0.03) 0.09 0.02
-------- -------- -------- -------- --------
Total from investment operations $ 0.46 $ 0.96 $ 0.47 $ 0.59 $ 0.55
-------- -------- -------- -------- --------
Less distributions declared to
shareholders --
From net investment income $ (0.50) $ (0.50) $ (0.50) $ (0.50) $ (0.53)
In excess of net investment income -- (0.00)+ -- -- --
In excess of net realized gain on
investments -- -- -- -- (0.05)
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (0.50) $ (0.50) $ (0.50) $ (0.50) $ (0.58)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 10.14 $ 10.18 $ 9.72 $ 9.75 $ 9.66
======== ======== ======== ======== ========
Total return(+) 4.60% 10.06% 4.87% 6.19% 5.90%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.77% 0.85% 0.92% 0.93% 0.75%
Net investment income 4.92% 4.97% 5.14% 5.10% 5.51%
Portfolio turnover 12% 15% 9% 6% 24%
Net assets at end of period (000
omitted) $124,644 $134,072 $144,263 $172,907 $187,105
----------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.49 $ 0.49 -- -- $ 0.52
Ratios (to average net assets):
Expenses## 0.89% 0.92% -- -- 0.82%
Net investment income 4.80% 4.90% -- -- 5.43%
</TABLE>
<PAGE>
<TABLE>
ARKANSAS FUND
............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.18 $ 9.72 $ 9.75 $ 9.65 $ 9.69
------- ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) $ 0.43 $ 0.42 $ 0.42 $ 0.42 $ 0.42
Net realized and unrealized gain (loss) on
investments (0.04) 0.46 (0.03) 0.10 0.01
------- ------ ------ ------ ------
Total from investment operations $ 0.39 $ 0.88 $ 0.39 $ 0.52 $ 0.43
------- ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income $ (0.43) $(0.42) $(0.42) $(0.42) $(0.42)
In excess of net investment income -- 0.00+ -- -- --
In excess of net realized gain on investments -- -- -- -- (0.05)
------- ------ ------ ------ ------
Total distributions declared to shareholders $ (0.43) $(0.42) $(0.42) $(0.42) $(0.47)
------- ------ ------ ------ ------
Net asset value -- end of period $ 10.14 $10.18 $ 9.72 $ 9.75 $ 9.65
======= ====== ====== ====== ======
Total return 3.91% 9.18% 4.05% 5.43% 4.67%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.43% 1.65% 1.71% 1.76% 1.84%
Net investment income 4.26% 4.15% 4.34% 4.27% 4.40%
Portfolio turnover 12% 15% 9% 6% 24%
Net assets at end of period (000 omitted) $10,609 $7,370 $7,548 $7,950 $7,231
- ----------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.42 $ 0.41 -- -- $ 0.41
Ratios (to average net assets):
Expenses## 1.55% 1.72% -- -- 1.91%
Net investment income 4.14% 4.08% -- -- 4.33%
</TABLE>
<PAGE>
<TABLE>
CALIFORNIA FUND
..............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 5.80 $ 5.47 $ 5.52 $ 5.41 $ 5.47
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) $ 0.29 $ 0.29 $ 0.30 $ 0.30 $ 0.31
Net realized and unrealized gain (loss)
on investments 0.09 0.33 (0.05) 0.11 (0.05)
-------- -------- -------- -------- --------
Total from investment operations $ 0.38 $ 0.62 $ 0.25 $ 0.41 $ 0.26
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income $ (0.29) $ (0.29) $ (0.30) $ (0.30) $ (0.31)
From net realized gain on investments -- -- -- -- --
In excess of net investment income (0.00)+ -- -- (0.00)+ (0.00)+
In excess of net realized gain on
investments -- -- -- -- (0.01)
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (0.29) $ (0.29) $ (0.30) $ (0.30) $ (0.32)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 5.89 $ 5.80 $ 5.47 $ 5.52 $ 5.41
======== ======== ======== ======== ========
Total return(+) 6.59% 11.51% 4.55% 7.86% 4.85%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.60% 0.64% 0.66% 0.66% 0.69%
Net investment income 4.82% 5.07% 5.36% 5.48% 5.80%
Portfolio turnover 26% 49% 78% 69% 57%
Net assets at end of period (000
omitted) $226,903 $222,421 $232,612 $259,817 $272,161
- ----------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.27 $ 0.28 $ 0.29 $ 0.29 $ 0.30
Ratios (to average net assets):
Expenses## 0.77% 0.79% 0.81% 0.81% 0.84%
Net investment income 4.65% 4.92% 5.21% 5.33% 5.65%
</TABLE>
<PAGE>
<TABLE>
CALIFORNIA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 5.80 $ 5.47 $ 5.52 $ 5.41 $ 5.47
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.24 $ 0.24 $ 0.25 $ 0.26 $ 0.25
Net realized and unrealized gain (loss) on
investments 0.09 0.33 (0.05) 0.11 (0.05)
------- ------- ------- ------- -------
Total from investment operations $ 0.33 $ 0.57 $ 0.20 $ 0.37 $ 0.20
------- ------- ------- ------- -------
Less distributions declared to shareholders
-------
From net investment income $ (0.24) $ (0.24) $ (0.25) $ (0.26) $ (0.25)
From net realized gain on investments -- -- -- -- --
In excess of net investment income (0.00)+ -- -- (0.00)+ --
In excess of net realized gain on
investments -- -- -- -- (0.01)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.24) $ (0.24) $ (0.25) $ (0.26) $ (0.26)
------- ------- ------- ------- -------
Net asset value -- end of period $ 5.89 $ 5.80 $ 5.47 $ 5.52 $ 5.41
======= ======= ======= ======= =======
Total return 5.74% 10.62% 3.64% 6.93% 3.73%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.39% 1.44% 1.54% 1.54% 1.76%
Net investment income 4.02% 4.26% 4.48% 4.59% 4.72%
Portfolio turnover 26% 49% 78% 69% 57%
Net assets at end of period (000 omitted) $61,458 $43,790 $36,694 $34,675 $29,057
- ----------
+ Per share amount was less than $0.01
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.22 $ 0.23 $ 0.24 $ 0.24 $ 0.04
Ratios (to average net assets):
Expenses## 1.56% 1.59% 1.69% 1.91% 1.83%
Net investment income 3.85% 4.11% 4.33% 4.57% 4.04%
</TABLE>
<PAGE>
<TABLE>
CALIFORNIA FUND
............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of period $ 5.81 $ 5.48 $ 5.53 $ 5.42 $ 5.48
------- ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) $ 0.23 $ 0.23 $ 0.24 $ 0.25 $ 0.26
Net realized and unrealized gain (loss) on
investments 0.09 0.33 (0.05) 0.11 (0.06)
------- ------ ------ ------ ------
Total from investment operations $ 0.32 $ 0.56 $ 0.19 $ 0.36 $ 0.20
------- ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income $ (0.23) $(0.23) $(0.24) $(0.25) $(0.25)
In excess of net investment income (0.00)+ -- -- (0.00)+ --
In excess of net realized gain on investments -- -- -- -- (0.01)
------- ------ ------ ------ ------
Total distributions declared to shareholders $ (0.23) $(0.23) $(0.24) $(0.25) $(0.26)
------- ------ ------ ------ ------
Net asset value -- end of period $ 5.90 $ 5.81 $ 5.48 $ 5.53 $ 5.42
======= ====== ====== ====== ======
Total return 5.54% 10.39% 3.51% 6.77% 3.79%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.56% 1.64% 1.66% 1.67% 1.69%
Net investment income 3.84% 4.08% 4.37% 4.47% 4.79%
Portfolio turnover 26% 49% 78% 69% 57%
Net assets at end of period (000 omitted) $10,178 $4,396 $3,856 $4,353 $3,858
- ----------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.21 $ 0.22 $ 0.23 $ 0.24 $ 0.25
Ratios (to average net assets):
Expenses## 1.74% 1.79% 1.81% 1.82% 1.84%
Net investment income 3.66% 3.93% 4.22% 4.32% 4.64%
</TABLE>
<PAGE>
<TABLE>
FLORIDA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.10 $ 9.64 $ 9.82 $ 9.60 $ 9.65
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.50 $ 0.50 $ 0.51 $ 0.52 $ 0.54
Net realized and unrealized gain (loss) on
investments 0.02 0.46 (0.18) 0.22 0.02
------- ------- ------- ------- -------
Total from investment operations $ 0.52 $ 0.96 $ 0.33 $ 0.74 $ 0.56
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income $ (0.50) $ (0.50) $ (0.51) $ (0.52) $ (0.54)
From net realized gain on investments -- -- -- -- (0.04)
In excess of net investment income -- -- -- (0.00)+ --
In excess of net realized gain on
investments -- -- -- -- (0.03)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.50) $ (0.50) $ (0.51) $ (0.52) $ (0.61)
------- ------- ------- ------- -------
Net asset value -- end of period $ 10.12 $ 10.10 $ 9.64 $ 9.82 $ 9.60
======= ======= ======= ======= =======
Total return(+) 5.25% 10.16% 3.43% 7.81% 6.07%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 0.69% 0.78% 0.86% 0.86% 0.60%
Net investment income 4.96% 5.03% 5.26% 5.26% 5.75%
Portfolio turnover 23% 14% 24% 56% 131%
Net assets at end of period (000 omitted) $77,628 $77,711 $80,342 $87,553 $89,894
- ----------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly. The Fund has an expense offset arrangement
which reduces the Fund's custodian fee based upon the amount of cash maintained by the Fund with its custodian and
dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.49 $ 0.49 -- $ 0.52 $ 0.52
Ratios (to average net assets):
Expenses## 0.81% 0.85% -- 0.90% 0.83%
Net investment income 4.84% 4.96% -- 5.22% 5.52%
</TABLE>
<PAGE>
<TABLE>
FLORIDA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.09 $ 9.64 $ 9.82 $ 9.60 $ 9.64
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.42 $ 0.42 $ 0.43 $ 0.43 $ 0.43
Net realized and unrealized gain (loss) on
investments 0.02 0.45 (0.18) 0.22 0.04
------- ------- ------- ------- -------
Total from investment operations $ 0.44 $ 0.87 $ 0.25 $ 0.65 $ 0.47
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income $ (0.42) $ (0.42) $ (0.43) $ (0.43) $ (0.44)
From net realized gain on investments -- -- -- -- (0.04)
In excess of net investment income -- -- -- (0.00)+ --
In excess of net realized gain on
investments -- -- -- -- (0.03)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.42) $ (0.42) $ (0.43) $ (0.43) $ (0.51)
------- ------- ------- ------- -------
Net asset value -- end of period $ 10.11 $ 10.09 $ 9.64 $ 9.82 $ 9.60
======= ======= ======= ======= =======
Total return 4.42% 9.18% 2.56% 6.88% 5.06%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.49% 1.58% 1.72% 1.74% 1.68%
Net investment income 4.16% 4.22% 4.40% 4.36% 4.63%
Portfolio turnover 23% 14% 24% 56% 131%
Net assets at end of period (000 omitted) $20,813 $16,719 $14,701 $14,448 $12,667
----------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.41 $ 0.41 -- $ 0.43 $ 0.41
Ratios (to average net assets):
Expenses## 1.61% 1.65% -- 1.78% 1.91%
Net investment income 4.04% 4.15% -- 4.33% 4.40%
</TABLE>
<PAGE>
<TABLE>
GEORGIA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.95 $ 10.38 $ 10.47 $ 10.35 $ 10.38
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.55 $ 0.56 $ 0.56 $ 0.54 $ 0.57
Net realized and unrealized gain (loss) on
investments (0.02) 0.56 (0.10) 0.12 --
------- ------- ------- ------- -------
Total from investment operations $ 0.53 $ 1.12 $ 0.46 $ 0.66 $ 0.57
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income $ (0.55) $ (0.55) $ (0.55) $ (0.54) $ (0.56)
From net realized gain on investments -- -- -- -- (0.01)
In excess of net investment income (0.00)+ -- -- (0.00)+ --
In excess of net realized gain on investments -- -- -- -- (0.03)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.55) $ (0.55) $ (0.55) $ (0.54) $ (0.60)
------- ------- ------- ------- -------
Net asset value -- end of period $ 10.93 $ 10.95 $ 10.38 $ 10.47 $ 10.35
======= ======= ======= ======= =======
Total return(+) 4.90% 11.02% 4.47% 6.48% 5.65%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 0.97% 1.03% 1.03% 1.17% 1.14%
Net investment income 4.97% 5.14% 5.34% 5.11% 5.50%
Portfolio turnover 35% 18% 27% 65% 56%
Net assets at end of period (000 omitted) $56,886 $59,546 $59,843 $68,183 $74,432
- ----------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.54 $ 0.55 $ 0.55 $ 0.53 $ 0.56
Ratios (to average net assets):
Expenses## 1.09% 1.13% 1.10% 1.27% 1.24%
Net investment income 4.85% 5.04% 5.27% 5.01% 5.40%
</TABLE>
<PAGE>
<TABLE>
GEORGIA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.95 $ 10.38 $10.47 $ 10.36 $10.38
------- ------- ------ ------- ------
Income from investment operations# --
Net investment income(S) $ 0.47 $ 0.48 $ 0.47 $ 0.45 $ 0.47
Net realized and unrealized gain (loss) on
investments (0.02) 0.56 (0.09) 0.12 0.02
------- ------- ------ ------- ------
Total from investment operations $ 0.45 $ 1.04 $ 0.38 $ 0.57 $ 0.49
------- ------- ------ ------- ------
Less distributions declared to shareholders --
From net investment income $ (0.47) $ (0.47) $(0.47) $ (0.46) $(0.47)
From net realized gain on investments -- -- -- -- (0.01)
In excess of net investment income (0.00)+ -- -- (0.00)+ --
In excess of net realized gain on investments -- -- -- -- (0.03)
------- ------- ------ ------- ------
Total distributions declared to shareholders $ (0.47) $ (0.47) $(0.47) $ (0.46) $(0.51)
------- ------- ------ ------- ------
Net asset value -- end of period $ 10.93 $ 10.95 $10.38 $ 10.47 $10.36
======= ======= ====== ======= ======
Total return 4.22% 10.19% 3.63% 5.52% 4.88%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.72% 1.77% 1.83% 2.00% 1.96%
Net investment income 4.22% 4.39% 4.53% 4.27% 4.66%
Portfolio turnover 35% 18% 27% 65% 56%
Net assets at end of period (000 omitted) $14,591 $10,871 $9,995 $10,205 $8,695
- ----------
+ Per share data amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.45 $ 0.47 $ 0.47 -- --
Ratios (to average net assets):
Expenses## 1.84% 1.87% 1.90% -- --
Net investment income 4.10% 4.29% 4.46% -- --
</TABLE>
<PAGE>
<TABLE>
MARYLAND FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.47 $ 10.89 $ 11.04 $ 10.94 $ 10.89
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) $ 0.54 $ 0.54 $ 0.57 $ 0.57 $ 0.59
Net realized and unrealized gain (loss)
on investments 0.02 0.59 (0.16) 0.09 0.09
-------- -------- -------- -------- --------
Total from investment operations $ 0.56 $ 1.13 $ 0.41 $ 0.66 $ 0.68
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income $ (0.54) $ (0.54) $ (0.56) $ (0.56) $ (0.59)
In excess of net investment income -- (0.01) -- -- (0.00)+
In excess of net realized gain on
investments -- -- -- -- (0.04)
-------- -------- -------- -------- --------
Total distributions declared to shareholders $ (0.54) $ (0.55) $ (0.56) $ (0.56) $ (0.63)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 11.49 $ 11.47 $ 10.89 $ 11.04 $ 10.94
======== ======== ======== ======== ========
Total return(+) 4.94% 10.57% 3.75% 6.17% 6.51%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.03% 1.09% 1.12% 1.19% 1.21%
Net investment income 4.67% 4.79% 5.21% 5.10% 5.46%
Portfolio turnover 14% 21% 22% 15% 31%
Net assets at end of period (000 omitted) $131,261 $126,018 $126,405 $139,297 $145,361
- ----------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.53 $ 0.53 $ 0.57 -- --
Ratios (to average net assets):
Expenses## 1.15% 1.19% 1.19% -- --
Net investment income 4.55% 4.69% 5.14% -- --
</TABLE>
<PAGE>
<TABLE>
MARYLAND FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.47 $ 10.88 $ 11.03 $ 10.93 $ 10.88
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.45 $ 0.47 $ 0.50 $ 0.48 $ 0.51
Net realized and unrealized gain (loss) on
investments 0.02 0.60 (0.17) 0.10 0.09
------- ------- ------- ------- -------
Total from investment operations $ 0.47 $ 1.07 $ 0.33 $ 0.58 $ 0.60
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income $ (0.46) $ (0.47) $ (0.48) $ (0.48) $ (0.51)
In excess of net investment income -- (0.01) -- -- (0.00)+
In excess of net realized gain on
investments -- -- -- -- (0.04)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.46) $ (0.48) $ (0.48) $ (0.48) $ (0.55)
------- ------- ------- ------- -------
Net asset value -- end of period $ 11.48 $ 11.47 $ 10.88 $ 11.03 $ 10.93
------- ------- ------- ------- -------
Total return 4.18% 9.96% 3.03% 5.41% 5.75%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.68% 1.74% 1.82% 1.91% 1.93%
Net investment income 4.01% 4.12% 4.50% 4.36% 4.73%
Portfolio turnover 14% 21% 22% 15% 31%
Net assets at end of period (000 omitted) $28,902 $21,622 $17,379 $13,694 $11,168
- ----------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.45 $ 0.46 $ 0.49 -- --
Ratios (to average net assets):
Expenses## 1.80% 1.84% 1.89% -- --
Net investment income 3.89% 4.02% 4.43% -- --
</TABLE>
<PAGE>
<TABLE>
MASSACHUSETTS FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.34 $ 10.86 $ 10.98 $ 10.84 $ 10.90
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) $ 0.58 $ 0.58 $ 0.61 $ 0.60 $ 0.64
Net realized and unrealized gain (loss)
on investments (0.01) 0.48 (0.14) 0.14 (0.03)
-------- -------- -------- -------- --------
Total from investment operations $ 0.57 $ 1.06 $ 0.47 $ 0.74 $ 0.61
-------- -------- -------- -------- --------
Less distributions declared to
shareholders --
From net investment income $ (0.56) $ (0.58) $ (0.59) $ (0.60) $ (0.64)
From net realized gain on investments -- -- -- -- (0.02)
In excess of net investment income -- (0.00)+ -- (0.00)+ --
In excess of net realized gain on investments -- -- -- -- (0.01)
-------- -------- -------- -------- --------
Total distributions declared to shareholders $ (0.56) $ (0.58) $ (0.59) $ (0.60) $ (0.67)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 11.35 $ 11.34 $ 10.86 $ 10.98 $ 10.84
======== ======== ======== ======== ========
Total return(+) 5.11% 9.99% 4.39% 6.95% 5.89%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.00% 1.06% 1.12% 1.17% 1.17%
Net investment income 5.08% 5.18% 5.55% 5.44% 6.01%
Portfolio turnover 28% 24% 33% 31% 31%
Net assets at end of period (000 omitted) $239,980 $237,861 $234,874 $249,497 $262,551
----------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.57 $ 0.57 $ 0.60 -- --
Ratios (to average net assets):
Expenses## 1.12% 1.16% 1.19% -- --
Net investment income 4.96% 5.08% 5.48% -- --
</TABLE>
<PAGE>
<TABLE>
MASSACHUSETTS FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.35 $ 10.87 $ 10.99 $ 10.84 $10.90
------- ------- ------- ------- ------
Income from investment operations# --
Net investment income(S) $ 0.50 $ 0.51 $ 0.53 $ 0.52 $ 0.55
Net realized and unrealized gain (loss) on
investments (0.01) 0.48 (0.13) 0.15 (0.02)
------- ------- ------- ------- ------
Total from investment operations $ 0.49 $ 0.99 $ 0.40 $ 0.67 $ 0.53
------- ------- ------- ------- ------
Less distributions declared to shareholders --
From net investment income $ (0.49) $ (0.51) $ (0.52) $ (0.52) $(0.56)
From net realized gain on investments -- -- -- -- (0.02)
In excess of net investment income -- (0.00)+ -- (0.00)+ --
In excess of net realized gain on investments -- -- -- -- (0.01)
------- ------- ------- ------- ------
Total distributions declared to shareholders $ (0.49) $ (0.51) $ (0.52) $ (0.52) $(0.59)
------- ------- ------- ------- ------
Net asset value -- end of period $ 11.35 $ 11.35 $ 10.87 $ 10.99 $10.84
======= ======= ======= ======= ======
Total return 4.43% 9.25% 3.66% 6.27% 5.13%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.64% 1.71% 1.81% 1.90% 1.89%
Net investment income 4.43% 4.52% 4.81% 4.71% 5.27%
Portfolio turnover 28% 24% 33% 51% 31%
Net assets at end of period (000 omitted) $25,616 $18,750 $15,204 $11,316 $8,676
- ----------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their fees for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have
been:
Net investment income $ 0.49 $ 0.50 $ 0.52 -- --
Ratios (to average net assets):
Expenses## 1.76% 1.81% 1.88% -- --
Net investment income 4.31% 4.42% 4.74% -- --
</TABLE>
<PAGE>
<TABLE>
MISSISSIPPI FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 9.88 $ 9.35 $ 9.35 $ 9.15 $ 9.19
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.49 $ 0.49 $ 0.48 $ 0.52 $ 0.54
Net realized and unrealized gain (loss) on
investments 0.06 0.52 0.00 0.20 (0.01)
------- ------- ------- ------- -------
Total from investment operations $ 0.55 $ 1.01 $ 0.48 $ 0.72 $ 0.53
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income(++) $ (0.50) $ (0.48) $ (0.48) $ (0.52) $ (0.54)
From net realized gain on investments(+++) -- -- -- -- (0.00)
In excess of net realized gain on investments -- -- -- -- (0.03)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.50) $ (0.48) $ (0.48) $ (0.52) $ (0.57)
------- ------- ------- ------- -------
Net asset value -- end of period $ 9.93 $ 9.88 $ 9.35 $ 9.35 $ 9.15
======= ======= ======= ======= =======
Total return(+) 5.62% 11.02% 5.22% 7.99% 6.08%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.73% 0.78% 0.87% 0.45% 0.22%
Net investment income 4.94% 5.04% 5.14% 5.51% 5.99%
Portfolio turnover 6% 18% 17% 31% 47%
Net assets at end of period (000 omitted) $66,869 $66,061 $66,630 $74,435 $79,033
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1,
1995, the Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the
results would have been lower.
(++) For the years ended March 31, 1996 and 1995, the per share distributions in excess of net investment income were less
than $0.01.
(+++) For the year ended March 31, 1995, the per share distribution from net realized gain on investments was less than $0.01.
(S) Subject to reimbursement by the Fund, the investment adviser agreed to maintain the expenses of the Fund, exclusive of
management and distribution and service fees, at not more than 0.40% of average daily net assets for certain of the
periods indicated. The investment adviser voluntarily waived a portion of its management fee for certain of the periods
indicated. To the extent actual expenses were over/under this limitation and the waiver had not been in place, the net
investment income per share and the ratios would have been:
Net investment income $ 0.48 $ 0.48 -- $ 0.48 $ 0.48
Ratios (to average net assets):
Expenses## 0.85% 0.85% -- 0.88% 0.93%
Net investment income 4.82% 4.97% -- 5.08% 5.28%
</TABLE>
<PAGE>
<TABLE>
MISSISSIPPI FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 9.89 $ 9.36 $ 9.36 $ 9.16 $ 9.19
------- ------- ------- ------- ------
Income from investment operations# --
Net investment income(S) $ 0.41 $ 0.41 $ 0.40 $ 0.44 $ 0.45
Net realized and unrealized gain on investments 0.06 0.53 0.00 0.20 0.00
------- ------- ------- ------- ------
Total from investment operations $ 0.47 $ 0.94 $ 0.40 $ 0.64 $ 0.45
------- ------- ------- ------- ------
Less distributions declared to shareholders --
From net investment income(+) $ (0.42) $ (0.41) $ (0.40) $ (0.44) $(0.45)
From net realized gain on investments(++) -- -- -- -- (0.00)
In excess of net realized gain on investments -- -- -- -- (0.03)
------- ------- ------- ------- ------
Total distributions declared to shareholders $ (0.42) $ (0.41) $ (0.40) $ (0.44) $(0.48)
------- ------- ------- ------- ------
Net asset value -- end of period $ 9.94 $ 9.89 $ 9.36 $ 9.36 $ 9.16
======= ======= ======= ======= ======
Total return 4.80% 10.15% 4.33% 7.11% 5.14%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.51% 1.56% 1.72% 1.28% 1.23%
Net investment income 4.16% 4.26% 4.29% 4.67% 4.97%
Portfolio turnover 6% 18% 17% 31% 47%
Net assets at end of period (000 omitted) $11,465 $10,717 $11,014 $11,475 $9,429
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) For the years ended March 31, 1996 and 1995, the per share distributions in excess of net investment income were less
than $0.01.
(++) For the year ended March 31, 1995, the per share distribution from net realized gain on investments was less than $0.01.
(S) Subject to reimbursement by the Fund, the investment adviser agreed to maintain the expenses of the Fund, exclusive of
management and distribution and service fees, at not more than 0.40% of average daily net assets for certain of the
periods indicated. The investment adviser voluntarily waived a portion of its management fee for certain of the periods
indicated. To the extent actual expenses were over/under this limitation and the waiver had not been in place, the net
investment income per share and the ratios would have been:
Net investment income $ 0.40 $ 0.40 -- $ 0.40 $ 0.38
Ratios (to average net assets):
Expenses## 1.63% 1.63% -- 1.71% 2.01%
Net investment income 4.04% 4.19% -- 4.24% 4.19%
</TABLE>
<PAGE>
<TABLE>
NEW YORK FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.26 $ 10.60 $ 10.66 $ 10.49 $ 10.50
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.56 $ 0.57 $ 0.55 $ 0.55 $ 0.56
Net realized and unrealized gain (loss)
on investments 0.01 0.64 (0.06) 0.17 0.05
------- ------- ------- ------- -------
Total from investment operations $ 0.57 $ 1.21 $ 0.49 $ 0.72 $ 0.61
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income $ (0.56) $ (0.55) $ (0.55) $ (0.55) $ (0.56)
In excess of net investment income(++) (0.00) -- -- (0.00) (0.01)
In excess of net realized gain on investments -- -- -- -- (0.05)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.56) $ (0.55) $ (0.55) $ (0.55) $ (0.62)
------- ------- ------- ------- -------
Net asset value -- end of period $ 11.27 $ 11.26 $ 10.60 $ 10.66 $ 10.49
======= ======= ======= ======= =======
Total return(+) 5.14% 11.59% 4.68% 6.98% 6.03%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.93% 1.03% 1.11% 1.10% 1.07%
Net investment income 4.93% 5.14% 5.18% 5.09% 5.43%
Portfolio turnover 26% 41% 64% 102% 147%
Net assets at end of period (000 omitted) $116,767 $119,376 $121,588 $134,449 $146,597
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) For the years ended March 31, 1999 and 1996, the per share distributions in excess of net investment income were less
than $0.01.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.55 $ 0.56 -- $ 0.54 $ 0.55
Ratios (to average net assets):
Expenses## 1.05% 1.10% -- 1.20% 1.18%
Net investment income 4.81% 5.07% -- 4.99% 5.31%
</TABLE>
<PAGE>
<TABLE>
NEW YORK FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.26 $ 10.59 $ 10.66 $ 10.49 $ 10.50
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.47 $ 0.49 $ 0.47 $ 0.47 $ 0.47
Net realized and unrealized gain (loss) on
investments 0.01 0.64 (0.07) 0.17 0.05
------- ------- ------- ------- -------
Total from investment operations $ 0.48 $ 1.13 $ 0.40 $ 0.64 $ 0.52
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income $ (0.47) $ (0.46) $ (0.47) $ (0.47) $ (0.47)
In excess of net investment income(+) (0.00) -- -- (0.00) (0.01)
In excess of net realized gain on investments -- -- -- -- (0.05)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.47) $ (0.46) $ (0.47) $ (0.47) $ (0.53)
------- ------- ------- ------- -------
Net asset value -- end of period $ 11.27 $ 11.26 $ 10.59 $ 10.66 $ 10.49
======= ======= ======= ======= =======
Total return 4.46% 10.78% 3.77% 6.10% 5.17%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.68% 1.78% 1.92% 1.92% 1.89%
Net investment income 4.18% 4.39% 4.37% 4.27% 4.58%
Portfolio turnover 26% 41% 64% 102% 147%
Net assets at end of period (000 omitted) $30,408 $26,618 $26,724 $28,068 $11,885
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) For the years ended March 31, 1999 and 1996, the per share distributions in excess of net investment income were less than
$0.01.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.46 $ 0.48 -- -- $ 0.47
Ratios (to average net assets):
Expenses## 1.80% 1.85% -- -- 1.91%
Net investment income 4.06% 4.32% -- -- 4.57%
</TABLE>
<PAGE>
<TABLE>
NORTH CAROLINA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 12.15 $ 11.56 $ 11.57 $ 11.42 $ 11.48
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) $ 0.59 $ 0.59 $ 0.59 $ 0.59 $ 0.61
Net realized and unrealized gain (loss)
on investments (0.02) 0.59 (0.01) 0.15 0.03
-------- -------- -------- -------- --------
Total from investment operations $ 0.57 $ 1.18 $ 0.58 $ 0.74 $ 0.64
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income(++) $ (0.58) $ (0.59) $ (0.59) $ (0.59) $ (0.60)
From net realized gain on investments -- -- -- -- (0.06)
In excess of net realized gain on investments -- -- -- -- (0.04)
-------- -------- -------- -------- --------
Total distributions declared to shareholders $ (0.58) $ (0.59) $ (0.59) $ (0.59) $ (0.70)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 12.14 $ 12.15 $ 11.56 $ 11.57 $ 11.42
======== ======== ======== ======== ========
Total return(+) 4.76% 10.36% 5.09% 6.56% 5.86%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.98% 1.03% 1.08% 1.17% 1.16%
Net investment income 4.76% 4.92% 5.05% 5.04% 5.38%
Portfolio turnover 30% 24% 33% 30% 58%
Net assets at end of period (000 omitted) $364,576 $380,595 $377,112 $409,347 $429,131
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) For the years ended March 31, 1997 and 1996, the per share distributions in excess of net investment income were less
than $0.01.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.57 $ 0.58 $ 0.58 -- --
Ratios (to average net assets):
Expenses## 1.10% 1.13% 1.15% -- --
Net investment income 4.64% 4.82% 4.98% -- --
</TABLE>
<PAGE>
<TABLE>
NORTH CAROLINA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 12.15 $ 11.55 $ 11.56 $ 11.42 $ 11.47
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.50 $ 0.51 $ 0.50 $ 0.50 $ 0.52
Net realized and unrealized gain (loss) on
investments (0.02) 0.60 0.00 0.14 0.05
------- ------- ------- ------- -------
Total from investment operations $ 0.48 $ 1.11 $ 0.50 $ 0.64 $ 0.57
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income(+) $ (0.50) $ (0.51) $ (0.51) $ (0.50) $ (0.52)
From net realized gain on investments -- -- -- -- (0.06)
In excess of net realized gain on investments -- -- -- -- (0.04)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.50) $ (0.51) $ (0.51) $ (0.50) $ (0.62)
------- ------- ------- ------- -------
Net asset value -- end of period $ 12.13 $ 12.15 $ 11.55 $ 11.56 $ 11.42
======= ======= ======= ======= =======
Total return 4.00% 9.75% 4.36% 5.70% 5.20%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.63% 1.68% 1.78% 1.90% 1.88%
Net investment income 4.11% 4.27% 4.36% 4.30% 4.64%
Portfolio turnover 30% 24% 33% 30% 58%
Net assets at end of period (000 omitted) $52,033 $44,238 $39,035 $33,847 $26,260
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) For the years ended March 31, 1997 and 1996, the per share distributions in excess of net investment income were less than
$0.01.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.49 $ 0.50 $ 0.49 -- --
Ratios (to average net assets):
Expenses## 1.75% 1.78% 1.85% -- --
Net investment income 3.99% 4.17% 4.29% -- --
</TABLE>
<PAGE>
<TABLE>
NORTH CAROLINA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 12.15 $ 11.55 $ 11.56 $ 11.41 $11.47
------- ------- ------- ------- ------
Income from investment operations# --
Net investment income(S) $ 0.50 $ 0.51 $ 0.52 $ 0.51 $ 0.53
Net realized and unrealized gain (loss) on
investments (0.02) 0.60 (0.02) 0.15 0.04
------- ------- ------- ------- ------
Total from investment operations $ 0.48 $ 1.11 $ 0.50 $ 0.66 $ 0.57
------- ------- ------- ------- ------
Less distributions declared to shareholders --
From net investment income(+) $ (0.50) $ (0.51) $ (0.51) $ (0.51) $(0.53)
From net realized gain on investments -- -- -- -- (0.06)
In excess of net realized gain on investments -- -- -- -- (0.04)
------- ------- ------- ------- ------
Total distributions declared to shareholders $ (0.50) $ (0.51) $ (0.51) $ (0.51) $(0.63)
------- ------- ------- ------- ------
Net asset value -- end of period $ 12.13 $ 12.15 $ 11.55 $ 11.56 $11.41
======= ======= ======= ======= ======
Total return 4.00% 9.75% 4.41% 5.87% 5.18%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.63% 1.68% 1.73% 1.83% 1.81%
Net investment income 4.11% 4.27% 4.40% 4.38% 4.71%
Portfolio turnover 30% 24% 33% 30% 58%
Net assets at end of period (000 omitted) $14,084 $ 8,143 $ 7,789 $ 9,352 $8,149
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) For the years ended March 31, 1997 and 1996, the per share distributions in excess of net investment income were less than
$0.01.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.49 $ 0.50 $ 0.51 -- --
Ratios (to average net assets):
Expenses## 1.75% 1.78% 1.80% -- --
Net investment income 3.99% 4.17% 4.33% -- --
</TABLE>
<PAGE>
<TABLE>
PENNSYLVANIA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 9.82 $ 9.26 $ 9.37 $ 9.29 $ 9.15
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.48 $ 0.50 $ 0.53 $ 0.54 $ 0.54
Net realized and unrealized gain (loss) on
investments 0.08 0.56 (0.10) 0.09 0.18
------- ------- ------- ------- -------
Total from investment operations $ 0.56 $ 1.06 $ 0.43 $ 0.63 $ 0.72
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income(++) $ (0.48) $ (0.50) $ (0.54) $ (0.55) $ (0.54)
From net realized gain on investments -- -- -- -- (0.01)
In excess of net realized gain on investments -- -- -- -- (0.03)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.48) $ (0.50) $ (0.54) $ (0.55) $ (0.58)
------- ------- ------- ------- -------
Net asset value -- end of period $ 9.90 $ 9.82 $ 9.26 $ 9.37 $ 9.29
======= ======= ======= ======= =======
Total return(+) 5.85% 11.65% 4.67% 6.85% 8.14%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.45% 0.40% 0.10% 0.10% 0.01%
Net investment income 4.85% 5.15% 5.66% 5.76% 5.97%
Portfolio turnover 8% 31% 42% 40% 49%
Net assets at end of period (000 omitted) $21,695 $18,918 $16,933 $18,030 $16,411
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) For the year ended March 31, 1997, the per share distribution in excess of net investment income was less than $0.01.
(S) Subject to reimbursement by the Fund, the investment adviser agreed to maintain expenses of the Fund, exclusive of
management and distribution and service fees, at not more than 0.00% of average daily net assets. Effective October 31,
1997, the investment adviser waived a portion of its management fee. To the extent actual expenses were over/under this
limitation and the waiver had not been in place, the net investment income per share and the ratios would have been:
Net investment income $ 0.43 $ 0.44 $ 0.45 $ 0.45 $ 0.43
Ratios (to average net assets):
Expenses## 0.93% 0.99% 0.95% 1.00% 1.18%
Net investment income 4.37% 4.56% 4.81% 4.86% 4.80%
</TABLE>
<PAGE>
<TABLE>
PENNSYLVANIA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 9.84 $ 9.28 $ 9.39 $ 9.29 $ 9.15
------- ------- ------- ------- ------
Income from investment operations# --
Net investment income(S) $ 0.41 $ 0.42 $ 0.46 $ 0.50 $ 0.45
Net realized and unrealized gain (loss) on
investments 0.08 0.56 (0.11) 0.07 0.18
------- ------- ------- ------- ------
Total from investment operations $ 0.49 $ 0.98 $ 0.35 $ 0.57 $ 0.63
------- ------- ------- ------- ------
Less distributions declared to shareholders --
From net investment income(+) $ (0.41) $ (0.42) $ (0.46) $ (0.47) $(0.45)
From net realized gain on investments -- -- -- -- (0.01)
In excess of net realized gain on investments -- -- -- -- (0.03)
------- ------- ------- ------- ------
Total distributions declared to shareholders $ (0.41) $ (0.42) $ (0.46) $ (0.47) $(0.49)
------- ------- ------- ------- ------
Net asset value -- end of period $ 9.92 $ 9.84 $ 9.28 $ 9.39 $ 9.29
------- ------- ------- ------- ------
Total return 5.02% 10.76% 3.83% 6.23% 7.07%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.23% 1.19% 0.90% 0.88% 1.01%
Net investment income 4.07% 4.36% 4.86% 4.98% 4.96%
Portfolio turnover 8% 31% 42% 40% 49%
Net assets at end of period (000 omitted) $23,983 $20,551 $24,898 $24,170 $7,699
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) For the year ended March 31, 1997, the per share distribution in excess of net investment income was less than $0.01.
(S) Subject to reimbursement by the Fund, the investment adviser voluntarily agreed to maintain expenses of the Fund,
exclusive of management and distribution and service fees, at not more than 0.00% of average daily net assets. Effective
October 31, 1997, the investment adviser voluntarily waived a portion of its management fee. To the extent actual expenses
were over/under this limitation and the waiver had not been in place, the net investment income per share and the ratios
would have been:
Net investment income $ 0.33 $ 0.36 $ 0.38 $ 0.41 $ 0.34
Ratios (to average net assets):
Expenses## 1.71% 1.78% 1.75% 1.85% 2.26%
Net investment income 3.59% 3.77% 4.01% 4.01% 3.72%
</TABLE>
<PAGE>
<TABLE>
SOUTH CAROLINA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 12.52 $ 11.88 $ 11.97 $ 11.86 $ 11.79
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) $ 0.57 $ 0.60 $ 0.62 $ 0.62 $ 0.63
Net realized and unrealized gain (loss)
on investments (0.04) 0.64 (0.10) 0.11 0.15
-------- -------- -------- -------- --------
Total from investment operations $ 0.53 $ 1.24 $ 0.52 $ 0.73 $ 0.78
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income(++) $ (0.57) $ (0.60) $ (0.61) $ (0.62) $ (0.62)
From net realized gain on investments -- -- -- -- (0.06)
In excess of net realized gain on investments -- -- -- -- (0.03)
-------- -------- -------- -------- --------
Total distributions declared to shareholders $ (0.57) $ (0.60) $ (0.61) $ (0.62) $ (0.71)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 12.48 $ 12.52 $ 11.88 $ 11.97 $ 11.86
======== ======== ======== ======== ========
Total return(+) 4.33% 10.62% 4.46% 6.20% 6.93%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.02% 1.06% 1.10% 1.20% 1.19%
Net investment income 4.55% 4.86% 5.17% 5.10% 5.37%
Portfolio turnover 25% 29% 13% 18% 30%
Net assets at end of period (000 omitted) $145,787 $148,820 $148,908 $166,801 $171,045
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) For the years ended March 31, 1999, 1998 and 1996, the per share distributions in excess of net investment income were
less than $0.01.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.56 $ 0.59 $ 0.16 -- --
Ratios (to average net assets):
Expenses## 1.14% 1.16% 1.16% -- --
Net investment income 4.43% 4.76% 5.11% -- --
</TABLE>
<PAGE>
<TABLE>
SOUTH CAROLINA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 12.52 $ 11.88 $ 11.97 $ 11.86 $ 11.78
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.48 $ 0.52 $ 0.54 $ 0.52 $ 0.54
Net realized and unrealized gain (loss) on
investments (0.04) 0.64 (0.10) 0.12 0.17
------- ------- ------- ------- -------
Total from investment operations $ 0.44 $ 1.16 $ 0.44 $ 0.64 $ 0.71
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income(+) $ (0.49) $ (0.52) $ (0.53) $ (0.53) $ (0.54)
From net realized gain on investments -- -- -- -- (0.06)
In excess of net realized gain on investments -- -- -- -- (0.03)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.49) $ (0.52) $ (0.53) $ (0.53) $ (0.63)
------- ------- ------- ------- -------
Net asset value -- end of period $ 12.47 $ 12.52 $ 11.88 $ 11.97 $ 11.86
======= ======= ======= ======= =======
Total return 3.57% 9.91% 3.73% 5.43% 6.26%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.67% 1.71% 1.79% 1.92% 1.90%
Net investment income 3.90% 4.21% 4.48% 4.35% 4.63%
Portfolio turnover 25% 29% 13% 18% 30%
Net assets at end of period (000 omitted) $36,226 $28,086 $21,871 $18,420 $12,964
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) For the years ended March 31, 1998, 1996 and 1995, the per share distributions in excess of net investment income were
less than $0.01.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.47 $ 0.51 $ 0.53 -- --
Ratios (to average net assets):
Expenses## 1.79% 1.81% 1.85% -- --
Net investment income 3.78% 4.11% 4.42% -- --
</TABLE>
<PAGE>
<TABLE>
TENNESSEE FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.91 $ 10.32 $ 10.40 $ 10.27 $ 10.26
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) $ 0.53 $ 0.53 $ 0.55 $ 0.54 $ 0.56
Net realized and unrealized gain (loss)
on investments (0.02) 0.60 (0.09) 0.13 0.02
-------- -------- -------- -------- --------
Total from investment operations $ 0.51 $ 1.13 $ 0.46 $ 0.67 $ 0.58
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income $ (0.52) $ (0.53) $ (0.54) $ (0.54) $ (0.56)
From net realized gain on investments(++) (0.03) -- -- -- (0.00)
In excess of net investment income(+++) -- (0.01) -- (0.00) --
In excess of net realized gain on investments -- -- -- -- (0.01)
-------- -------- -------- -------- --------
Total distributions declared to shareholders $ (0.55) $ (0.54) $ (0.54) $ (0.54) $ (0.57)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 10.87 $ 10.91 $ 10.32 $ 10.40 $ 10.27
======== ======== ======== ======== ========
Total return(+) 4.80% 11.11% 4.48% 6.66% 5.86%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.02% 1.07% 1.10% 1.21% 1.22%
Net investment income 4.79% 4.97% 5.26% 5.18% 5.52%
Portfolio turnover 16% 26% 20% 20% 27%
Net assets at end of period (000
omitted) $117,296 $108,871 $108,000 $109,811 $117,572
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1,
1995, the Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the
results would have been lower.
(++) For the year ended March 31, 1995, the per share distribution from net realized gain on investments was less than $0.01.
(+++) For the year ended March 31, 1996, the per share distribution in excess of net investment income was less than $0.01.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.51 $ 0.52 $ 0.54 -- --
Ratios (to average net assets):
Expenses## 1.14% 1.17% 1.16% -- --
Net investment income 4.67% 4.87% 5.20% -- --
</TABLE>
<PAGE>
<TABLE>
TENNESSEE FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.91 $ 10.31 $ 10.39 $ 10.26 $ 10.26
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.45 $ 0.46 $ 0.47 $ 0.46 $ 0.48
Net realized and unrealized gain (loss) on
investments (0.02) 0.61 (0.09) 0.14 0.01
------- ------- ------- ------- -------
Total from investment operations $ 0.43 $ 1.07 $ 0.38 $ 0.60 $ 0.49
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income $ (0.45) $ (0.46) $ (0.46) $ (0.47) $ (0.48)
From net realized gain on investments(+) (0.03) -- -- -- (0.00)
In excess of net investment income(++) -- (0.01) -- (0.00) --
In excess of net realized gain on investments -- -- -- -- (0.01)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.48) $ (0.47) $ (0.46) $ (0.47) $ (0.49)
------- ------- ------- ------- -------
Net asset value -- end of period $ 10.86 $ 10.91 $ 10.31 $ 10.39 $ 10.26
------- ------- ------- ------- -------
Total return(+) 4.04% 10.51% 3.76% 5.89% 5.00%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.67% 1.72% 1.79% 1.93% 1.94%
Net investment income 4.14% 4.32% 4.57% 4.43% 4.80%
Portfolio turnover 16% 26% 20% 20% 27%
Net assets at end of period (000 omitted) $22,765 $18,198 $14,436 $12,935 $10,006
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) For the year ended March 31, 1995, the per share distribution from net realized gain on investments was less than $0.01.
(++) For the year ended March 31, 1996, the per share distribution in excess of net investment income was less than $0.01.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.44 $ 0.45 $ 0.46 -- --
Ratios (to average net assets):
Expenses## 1.79% 1.82% 1.85% -- --
Net investment income 4.02% 4.22% 4.51% -- --
</TABLE>
<PAGE>
<TABLE>
VIRGINIA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.61 $ 11.06 $ 11.21 $ 11.09 $ 11.15
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) $ 0.55 $ 0.57 $ 0.59 $ 0.59 $ 0.56
Net realized and unrealized gain (loss)
on investments (0.01) 0.55 (0.15) 0.13 0.04
-------- -------- -------- -------- --------
Total from investment operations $ 0.54 $ 1.12 $ 0.44 $ 0.72 $ 0.60
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income(++) $ (0.55) $ (0.57) $ (0.59) $ (0.60) $ (0.61)
From net realized gain on investments -- -- -- -- (0.04)
In excess of net realized gain on investments -- -- -- -- (0.01)
-------- -------- -------- -------- --------
Total distributions declared to shareholders $ (0.55) $ (0.57) $ (0.59) $ (0.60) $ (0.66)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 11.60 $ 11.61 $ 11.06 $ 11.21 $ 11.09
======== ======== ======== ======== ========
Total return(+) 4.71% 10.32% 3.97% 6.52% 5.67%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.99% 1.03% 1.08% 1.18% 1.16%
Net investment income 4.73% 4.97% 5.27% 5.20% 4.91%
Portfolio turnover 25% 39% 42% 42% 27%
Net assets at end of period (000
omitted) $365,880 $373,024 $379,185 $418,408 $430,688
----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) For the years ended March 31, 1998, 1996 and 1995, the per share distributions in excess of net investment income were
less than $0.01.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.54 $ 0.56 $ 0.58 -- --
Ratios (to average net assets):
Expenses## 1.11% 1.13% 1.14% -- --
Net investment income 4.61% 4.87% 5.21% -- --
</TABLE>
<PAGE>
<TABLE>
VIRGINIA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.61 $ 11.06 $ 11.21 $ 11.08 $ 11.14
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.47 $ 0.49 $ 0.51 $ 0.51 $ 0.53
Net realized and unrealized gain (loss) on
investments (0.01) 0.56 (0.15) 0.13 (0.01)
------- ------- ------- ------- -------
Total from investment operations $ 0.46 $ 1.05 $ 0.36 $ 0.64 $ 0.52
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income $ (0.47) $ (0.49) $ (0.51) $ (0.51) $ (0.53)
From net realized gain on investments -- -- -- -- (0.04)
In excess of net investment income(+) -- (0.01) -- (0.00) (0.00)
In excess of net realized gain on investments -- -- -- -- (0.01)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.47) $ (0.50) $ (0.51) $ (0.51) $ (0.58)
------- ------- ------- ------- -------
Net asset value -- end of period $ 11.60 $ 11.61 $ 11.06 $ 11.21 $ 11.08
------- ------- ------- ------- -------
Total return 4.04% 9.61% 3.24% 5.85% 4.91%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.64% 1.68% 1.78% 1.90% 1.88%
Net investment income 4.08% 4.32% 4.57% 4.46% 4.84%
Portfolio turnover 25% 39% 42% 42% 27%
Net assets at end of period (000 omitted) $35,644 $32,902 $30,567 $28,420 $22,007
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) For the years ended March 31, 1996 and 1995, the per share distributions in excess of net investment income were less than
$0.01.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.46 $ 0.48 $ 0.50 -- --
Ratios (to average net assets):
Expenses## 1.76% 1.78% 1.84% -- --
Net investment income 3.96% 4.22% 4.51% -- --
</TABLE>
<PAGE>
<TABLE>
VIRGINIA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $11.61 $11.06 $11.21 $11.07 $11.14
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) $ 0.47 $ 0.49 $ 0.52 $ 0.51 $ 0.56
Net realized and unrealized gain (loss) on
investments (0.01) 0.56 (0.16) 0.15 (0.04)
------ ------ ------ ------ ------
Total from investment operations $ 0.46 $ 1.05 $ 0.36 $ 0.66 $ 0.52
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income $(0.47) $(0.49) $(0.51) $(0.52) $(0.54)
From net realized gain on investments -- -- -- -- (0.04)
In excess of net investment income(+) -- (0.01) -- (0.00) (0.00)
In excess of net realized gain on investments -- -- -- -- (0.01)
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.47) $(0.50) $(0.51) $(0.52) $(0.59)
------ ------ ------ ------ ------
Net asset value -- end of period $11.60 $11.61 $11.06 $11.21 $11.07
====== ====== ====== ====== ======
Total return 4.04% 9.61% 3.30% 6.02% 4.85%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.64% 1.68% 1.72% 1.83% 1.80%
Net investment income 4.08% 4.32% 4.63% 4.53% 4.90%
Portfolio turnover 25% 39% 42% 42% 27%
Net assets at end of period (000 omitted) $6,523 $3,082 $3,182 $3,366 $2,300
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) For the years ended March 31, 1996 and 1995, the per share distributions in excess of net investment income were less than
$0.01.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.46 $ 0.48 $ 0.51 -- --
Ratios (to average net assets):
Expenses## 1.76% 1.78% 1.78% -- --
Net investment income 3.96% 4.22% 4.57% -- --
</TABLE>
<PAGE>
<TABLE>
WEST VIRGINIA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.77 $ 11.31 $ 11.33 $ 11.21 $ 11.19
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) $ 0.56 $ 0.58 $ 0.60 $ 0.61 $ 0.62
Net realized and unrealized gain (loss)
on investments (0.01) 0.47 (0.02) 0.12 0.03
-------- -------- -------- -------- --------
Total from investment operations $ 0.55 $ 1.05 $ 0.58 $ 0.73 $ 0.65
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income $ (0.57) $ (0.58) $ (0.60) $ (0.61) $ (0.62)
In excess of net investment income(++) (0.00) (0.01) -- (0.00) --
In excess of net realized gain on investments -- -- -- -- (0.01)
-------- -------- -------- -------- --------
Total distributions declared to shareholders $ (0.57) $ (0.59) $ (0.60) $ (0.61) $ (0.63)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 11.75 $ 11.77 $ 11.31 $ 11.33 $ 11.21
======== ======== ======== ======== ========
Total return(+) 4.73% 9.42% 5.20% 6.58% 6.07%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.02% 1.10% 1.17% 1.22% 1.19%
Net investment income 4.78% 4.98% 5.28% 5.30% 5.62%
Portfolio turnover 13% 17% 21% 11% 23%
Net assets at end of period (000 omitted) $133,456 $130,002 $126,107 $134,514 $127,616
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) For the years ended March 31, 1999 and 1996, the per share distributions in excess of net investment income were less
than $0.01.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.55 $ 0.57 -- -- --
Ratios (to average net assets):
Expenses## 1.14% 1.17% -- -- --
Net investment income 4.66% 4.91% -- -- --
</TABLE>
<PAGE>
<TABLE>
WEST VIRGINIA FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.77 $ 11.31 $ 11.33 $ 11.21 $ 11.19
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.49 $ 0.51 $ 0.52 $ 0.52 $ 0.53
Net realized and unrealized gain (loss) on
investments (0.03) 0.46 (0.02) 0.12 0.04
------- ------- ------- ------- -------
Total from investment operations $ 0.46 $ 0.97 $ 0.50 $ 0.64 $ 0.57
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income(+) $ (0.49) $ (0.51) $ (0.52) $ (0.52) $ (0.54)
In excess of net realized gain on investments -- -- -- -- (0.01)
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.49) $ (0.51) $ (0.52) $ (0.52) $ (0.55)
------- ------- ------- ------- -------
Net asset value -- end of period $ 11.74 $ 11.77 $ 11.31 $ 11.33 $ 11.21
------- ------- ------- ------- -------
Total return 3.97% 8.72% 4.47% 5.81% 5.30%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.67% 1.75% 1.87% 1.94% 1.91%
Net investment income 4.13% 4.33% 4.57% 4.56% 4.87%
Portfolio turnover 13% 17% 21% 11% 23%
Net assets at end of period (000 omitted) $17,166 $15,472 $13,587 $12,647 $10,046
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) For the years ended March 31, 1999, 1998, 1996 and 1995, the per share distributions in excess of net investment income
were less than $0.01.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.48 $ 0.50 -- -- --
Ratios (to average net assets):
Expenses## 1.79% 1.82% -- -- --
Net investment income 4.01% 4.26% -- -- --
</TABLE>
<PAGE>
- ------------
APPENDIX A
- ------------
o INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, each fund may engage in the
following investment techniques and practices, which are described,
together with their risks, in the SAI. Investment techniques and practices
which are the principal focus of the fund are also described in the Risk
Return Summary of the Prospectus.
INVESTMENT TECHNIQUES/PRACTICES
..........................................................................
SYMBOLS x permitted -- not permitted
--------------------------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities --
Loans and Other Direct Indebtedness --
Lower Rated Bonds x
Municipal Bonds x
Speculative Bonds x
U.S. Government Securities x
Variable and Floating Rate Obligations x
Zero Coupon Bonds x
Equity Securities --
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities --
Emerging Markets --
Foreign Securities --
Forward Contracts --
Futures Contracts x
Indexed Securities/Structured Products x
Inverse Floating Rate Obligations x
Investment in Other Investment Companies
Open-End Funds --
Closed-End Funds x
Lending of Portfolio Securities --*
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies --
Options on Futures Contracts x
Options on Securities x
Options on Stock Indices --
Reset Options --
"Yield Curve" Options --
Repurchase Agreements x
Restricted Securities x
Short Sales --
Short Sales Against the Box --
Short Term Instruments x
Swaps and Related Derivative Instruments x
Temporary Borrowings x
Temporary Defensive Positions x
Warrants x
"When-Issued" Securities x
- ------------
* May only be changed with shareholder approval.
<PAGE>
- ------------
APPENDIX B
- ------------
TAX EQUIVALENT YIELD TABLES
(RATES FOR 1999 UNDER FEDERAL AND STATE INCOME TAX LAWS)
The tables below show the approximate taxable bond yields which are equivalent
to tax-exempt bond yields, for the ranges indicated, under federal and,
respectively, Alabama, Arkansas, California, Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina, Pennsylvania, South Carolina,
Tennessee, Virginia and West Virginia personal income tax laws that apply to
1999. The State of Florida does not currently impose an income tax on
individuals. Such yields will differ under the laws applicable to subsequent
years. Separate calculations, showing the applicable taxable income brackets,
are provided for investors who file joint returns and for those investors who
file individual returns. In each table, the effective marginal income tax rate
will be increased if personal exemptions are phased out (for the phase out
period only) and if a portion of itemized deductions is disallowed. This
increase in the marginal rates, if applicable, will cause a corresponding
increase in the equivalent taxable yields.
<TABLE>
<CAPTION>
ALABAMA -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 19.12% 3.71% 4.95% 6.18% 7.42% 8.65% 9.89% 0.15 0.048446 0.1912
$ 0- 43,050 19.09 3.71 4.94 6.18 7.42 8.65 9.89 0.15 0.048141 0.1909
$ 25,750- 62,450 $ 43,050-104,050 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000 0.3160
$ 62,450-130,250 $104,050-158,550 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000 0.3445
$130,250-283,150 $158,550-283,150 39.20 4.93 6.58 8.22 9.87 11.51 13.16 0.36 0.050000 0.3920
$283,150 & Over $283,150 & Over 42.62 5.23 6.97 8.71 10.46 12.20 13.94 0.396 0.050000 0.4262
* Net amount subject to Federal and Alabama personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Alabama rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARKANSAS -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 18.74% 3.69% 4.92% 6.15% 7.38% 8.61% 9.84% 0.15 0.043983 0.1874
$ 0- 43,050 19.63 3.73 4.98 6.22 7.47 8.71 9.95 0.15 0.054438 0.1963
$ 25,750- 62,450 $ 43,050-104,050 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000 0.3304
$ 62,450-130,250 $104,050-158,550 35.83 4.68 6.23 7.79 9.35 10.91 12.47 0.31 0.070000 0.3583
$130,250-283,150 $158,550-283,150 40.48 5.04 6.72 8.40 10.08 11.76 13.44 0.36 0.070000 0.4048
$283,150 & Over $283,150 & Over 43.83 5.34 7.12 8.90 10.68 12.46 14.24 0.396 0.070000 0.4383
* Net amount subject to Federal and Arkansas personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Arkansas rate assumes itemization of state tax deduction.
<CAPTION>
CALIFORNIA -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 17.86% 3.65% 4.87% 6.09% 7.30% 8.52% 9.74% 0.15 0.033654 0.1786
$ 0- 43,050 17.42 3.63 4.84 6.05 7.27 8.48 9.69 0.15 0.028483 0.1742
$ 25,750- 62,450 34.46 4.58 6.10 7.63 9.15 10.68 12.21 0.28 0.089706 0.3446
$ 43,050-104,050 34.08 4.55 6.07 7.58 9.10 10.62 12.14 0.28 0.084465 0.3408
$ 62,450-130,250 $104,050-158,550 37.42 4.79 6.39 7.99 9.59 11.19 12.78 0.31 0.093000 0.3742
$130,250-283,150 $158,550-283,150 41.95 5.17 6.89 8.61 10.34 12.06 13.78 0.36 0.093000 0.4195
$283,150 & Over $283,150 & Over 45.22 5.48 7.30 9.13 10.95 12.78 14.60 0.396 0.093000 0.4522
* Net amount subject to Federal and California personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and California rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GEORGIA -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 19.47% 3.73% 4.97% 6.21% 7.45% 8.69% 9.93% 0.15 0.052621 0.1947
$ 0- 43,050 19.59 3.73 4.97 6.22 7.46 8.71 9.95 0.15 0.053960 0.1959
$ 25,750- 62,450 $ 43,050-104,050 32.32 4.43 5.91 7.39 8.87 10.34 11.82 0.28 0.060000 0.3232
$ 62,450-130,250 $104,050-158,550 35.14 4.63 6.17 7.71 9.25 10.79 12.33 0.31 0.060000 0.3514
$130,250-283,150 $158,550-283,150 39.84 4.99 6.65 8.31 9.97 11.64 13.30 0.36 0.060000 0.3984
$283,150 & Over $283,150 & Over 43.22 5.28 7.04 8.81 10.57 12.33 14.09 0.396 0.060000 0.4322
* Net amount subject to Federal and Georgia personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Georgia rate assumes itemization of state tax deduction.
<CAPTION>
MARYLAND -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 18.98% 3.70% 4.94% 6.17% 7.41% 8.64% 9.87% 0.15 0.046786 0.1898
$ 0- 43,050 19.05 3.71 4.94 6.18 7.41 8.65 9.88 0.15 0.047675 0.1905
$ 25,750- 62,450 $ 43,050-104,050 31.53 4.38 5.84 7.30 8.76 10.22 11.68 0.28 0.049000 0.3153
$ 62,450-130,250 $104,050-158,550 34.38 4.57 6.10 7.62 9.14 10.67 12.19 0.31 0.049000 0.3438
$130,250-283,150 $158,550-283,150 39.14 4.93 6.57 8.22 9.85 11.50 13.14 0.36 0.049000 0.3914
$273,150 & Over $283,150 & Over 42.56 5.22 6.96 8.70 10.45 12.19 13.92 0.396 0.049000 0.4256
* Net amount subject to Federal and Maryland personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Maryland rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE MASSACHUSETTS RATE OF 5.95% IS BASED ON 1999 TAX RATES
MASSACHUSETTS -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 $ 0- 43,050 20.06% 3.75% 5.00% 6.25% 7.51% 8.76% 10.01% 0.15 0.059500 0.2006
$ 25,750- 62,450 $ 43,050-104,050 32.28 4.43 5.91 7.38 8.86 10.34 11.81 0.28 0.059500 0.3228
$ 62,450-130,250 $104,050-158,550 35.11 4.62 6.16 7.71 9.25 10.79 12.33 0.31 0.059500 0.3511
$130,250-283,150 $158,550-283,150 39.81 4.98 6.65 8.31 9.97 11.63 13.29 0.36 0.059500 0.3981
$283,150 & Over $283,150 & Over 43.19 5.28 7.04 8.80 10.56 12.32 14.08 0.396 0.059500 0.4319
* Net amount subject to Federal and Massachusetts personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Massachusetts rate assumes itemization of state tax deduction.
<CAPTION>
MISSISSIPPI -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 18.75% 3.69% 4.92% 6.15% 7.38% 8.62% 9.85% 0.15 0.044174 0.1875
$ 0- 43,050 18.95 3.70 4.94 6.17 7.40 8.64 9.87 0.15 0.046515 0.1895
$ 25,750- 62,450 $ 43,050-104,050 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000 0.3160
$ 62,450-130,250 $104,050-158,550 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000 0.3445
$130,250-283,150 $158,550-283,150 39.20 4.93 6.58 8.22 9.87 11.51 13.16 0.36 0.050000 0.3920
$283,150 & Over $283,150 & Over 42.62 5.23 6.97 8.71 10.46 12.20 13.94 0.396 0.050000 0.4262
* Net amount subject to Federal and Mississippi personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Mississippi rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NEW YORK STATE RESIDENTS (EXCEPT NEW YORK CITY RESIDENTS) -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 19.51% 3.73% 4.97% 6.21% 7.45% 8.70% 9.94% 0.15 0.053081 0.1951
$ 0- 43,050 19.25 3.72 4.95 6.19 7.43 8.67 9.91 0.15 0.050055 0.1925
$ 25,750- 62,450 $ 43,050-104,050 32.93 4.47 5.96 7.45 8.95 10.44 11.93 0.28 0.068500 0.3293
$ 62,450-130,250 $104,050-158,550 35.73 4.67 6.22 7.78 9.34 10.89 12.45 0.31 0.068500 0.3573
$130,250-283,150 $158,550-283,150 40.38 5.03 6.71 8.39 10.06 11.74 13.42 0.36 0.068500 0.4038
$283,150 & Over $283,150 & Over 43.74 5.33 7.11 8.89 10.66 12.44 14.22 0.396 0.068500 0.4374
* Net amount subject to Federal and New York personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
<CAPTION>
NEW YORK -- NEW YORK CITY RESIDENTS ONLY -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ---------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE AVERAGE AVERAGE FED. &
SINGLE JOINT TAX --------------------------------------- FEDERAL STATE CITY ADD'L ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE SURCHARGE RATE
- ------------------- ------------- -------- --------------------------------------- ------- ---------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 22.41% 3.87% 5.16% 6.44% 7.73% 9.02% 10.31% 0.15 0.053081 0.029874 0.004182 0.2241
$ 0- 43,050 22.13 3.85 5.14 6.42 7.71 8.99 10.27 0.15 0.050055 0.029652 0.004151 0.2213
$ 25,750- 62,450 35.66 4.66 6.22 7.77 9.33 10.88 12.43 0.28 0.068500 0.033245 0.004654 0.3566
$ 43,050-104,050 35.65 4.66 6.22 7.77 9.32 10.88 12.43 0.28 0.068500 0.033174 0.004644 0.3565
$ 62,450-130,250 38.37 4.87 6.49 8.11 9.74 11.36 12.98 0.31 0.068500 0.033575 0.004701 0.3837
$104,050-158,550 38.37 4.87 6.49 8.11 9.74 11.36 12.98 0.31 0.068500 0.033575 0.004701 0.3837
$130,250-283,150 $158,550-283,150 42.83 5.25 7.00 8.75 10.50 12.24 13.99 0.36 0.068500 0.033575 0.004701 0.4283
$283,150 & Over $283,150 & Over 46.05 5.56 7.41 9.27 11.12 12.97 14.83 0.396 0.068500 0.033575 0.004701 0.4605
* Net amount subject to Federal and New York personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NORTH CAROLINA -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ------------------------------------ INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX -------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ----------------- ----------------- -------- -------------------------------------------------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 20.53% 3.78% 5.03% 6.29% 7.55% 8.81% 10.07% 0.15 0.065046 0.2053
$ 0- 43,050 20.53 3.78 5.03 6.29 7.55 8.81 10.07 0.15 0.065062 0.2053
$ 25,750- 62,450 33.08 4.48 5.98 7.47 8.97 10.46 11.95 0.28 0.070501 0.3308
$ 43,050-104,050 33.08 4.48 5.98 7.47 8.97 10.46 11.95 0.28 0.070498 0.3308
$ 62,450-130,250 $104,050-158,550 36.35 4.71 6.28 7.86 9.43 11.00 12.57 0.31 0.077500 0.3635
$130,250-283,150 $158,550-283,150 40.96 5.08 6.78 8.47 10.16 11.86 13.55 0.36 0.077500 0.4096
$283,150 & Over $283,150 & Over 44.28 5.38 7.18 8.97 10.77 12.56 14.36 0.396 0.077500 0.4428
* Net amount subject to Federal and North Carolina personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and North Carolina rate assumes itemization of state tax deduction.
<CAPTION>
PENNSYLVANIA -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ------------------------------------ INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX -------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ----------------- ----------------- -------- -------------------------------------------------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 $ 0- 43,050 17.38% 3.63% 4.84% 6.05% 7.26% 8.47% 9.68% 0.15 0.028000 0.1738
$ 25,750- 62,450 $ 43,050-104,050 30.02 4.29 5.72 7.14 8.57 10.00 11.43 0.28 0.028000 0.3002
$ 62,450-130,250 $104,050-158,550 32.93 4.47 5.96 7.45 8.95 10.44 11.93 0.31 0.028000 0.3293
$130,250-283,150 $158,550-283,150 37.79 4.82 6.43 8.04 9.64 11.25 12.86 0.36 0.028000 0.3779
$283,150 & Over $283,150 & Over 41.29 5.11 6.81 8.52 10.22 11.92 13.63 0.396 0.028000 0.4129
* Net amount subject to Federal and Pennsylvania personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average rate for the Federal tax bracket.
*** Combined Federal and Pennsylvania rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTH CAROLINA -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ------------------------------------ INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX -------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ----------------- ----------------- -------- -------------------------------------------------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 19.84% 3.74% 4.99% 6.24% 7.49% 8.73% 9.98% 0.15 0.056991 0.1984
$ 0- 43,050 20.29 3.76 5.02 6.27 7.53 8.78 10.04 0.15 0.062219 0.2029
$ 25,750- 62,450 $ 43,050-104,050 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000 0.3304
$ 62,450-130,250 $104,050-158,550 35.83 4.68 6.23 7.79 9.35 10.91 12.47 0.31 0.070000 0.3583
$130,250-283,150 $158,550-283,150 40.48 5.04 6.72 8.40 10.08 11.76 13.44 0.36 0.070000 0.4048
$283,150 & Over $283,150 & Over 43.83 5.34 7.12 8.90 10.68 12.46 14.24 0.396 0.070000 0.4383
* Net amount subject to Federal and South Carolina personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and South Carolina rate assumes itemization of state tax deduction.
<CAPTION>
TENNESSEE -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ------------------------------------ INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX -------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ----------------- ----------------- -------- -------------------------------------------------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 $ 0- 43,050 20.10% 3.75% 5.01% 6.26% 7.51% 8.76% 10.01% 0.15 0.060000 0.2010
$ 25,750- 62,450 $ 43,050-104,050 32.32 4.43 5.91 7.39 8.87 10.34 11.82 0.28 0.060000 0.3232
$ 62,450-130,250 $104,050-158,550 35.14 4.63 6.17 7.71 9.25 10.79 12.33 0.31 0.060000 0.3514
$130,250-283,150 $158,550-283,150 39.84 4.99 6.65 8.31 9.97 11.64 13.30 0.36 0.060000 0.3984
$283,150 & Over $283,150 & Over 43.22 5.28 7.04 8.81 10.57 12.33 14.09 0.396 0.060000 0.4322
* Net amount subject to Federal and Tennessee personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Tennessee rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VIRGINIA -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 19.04% 3.71% 4.94% 6.18% 7.41% 8.65% 9.88% 0.15 0.047499 0.1904
$ 0- 43,050 19.38 3.72 4.96 6.20 7.44 8.68 9.92 0.15 0.051518 0.1938
$ 25,750- 62,450 $ 43,050-104,050 32.14 4.42 5.89 7.37 8.84 10.32 11.79 0.28 0.057500 0.3214
$ 62,450-130,250 $104,050-158,550 34.97 4.61 6.15 7.69 9.23 10.76 12.30 0.31 0.057500 0.3497
$130,250-283,150 $158,550-283,150 39.68 4.97 6.63 8.29 9.95 11.60 13.26 0.36 0.057500 0.3968
$283,150 & Over $283,150 & Over 43.07 5.27 7.03 8.78 10.54 12.30 14.05 0.396 0.057500 0.4307
* Net amount subject to Federal and Virginia personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Virginia rate assumes itemization of state tax deduction.
<CAPTION>
WEST VIRGINIA -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 18.08% 3.66% 4.88% 6.10% 7.32% 8.54% 9.77% 0.15 0.036261 0.1808
$ 0- 43,050 18.47 3.68 4.91 6.13 7.36 8.59 9.81 0.15 0.040836 0.1847
$ 25,750- 62,450 31.61 4.39 5.85 7.31 8.77 10.24 11.70 0.28 0.050170 0.3161
$ 43,050-104,050 32.58 4.45 5.93 7.42 8.90 10.38 11.87 0.28 0.063611 0.3258
$ 62,450-130,250 $104,050-158,550 35.49 4.65 6.20 7.75 9.30 10.85 12.40 0.31 0.065000 0.3549
$130,250-283,150 $158,550-283,150 40.16 5.01 6.68 8.36 10.03 11.70 13.37 0.36 0.065000 0.4016
$283,150 & Over $283,150 & Over 43.53 5.31 7.08 8.85 10.63 12.40 14.17 0.396 0.065000 0.4353
* Net amount subject to Federal and West Virginia personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and West Virginia rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
MFS(R) MUNICIPAL SERIES TRUST
If you want more information about the fund, the following documents are
available free
upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the fund's
actual investments. Annual reports discuss the effect of recent market
conditions and the fund's investment strategy on the fund's performance during
its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated August 1, 1999,
provides more detailed information about the fund and is incorporated into
this prospectus by reference.
YOU CAN GET FREE COPIES OF THE ANNUAL/SEMIANNUAL REPORTS, THE SAI AND OTHER
INFORMATION ABOUT THE FUND, AND MAKE INQUIRIES ABOUT THE FUND, BY CONTACTING:
MFS Service Center, Inc.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained
by calling the Commission at 1-800-SEC-0330. Reports and other information
about the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon
payment of a duplicating fee, by writing the Public Reference Section at
the above address.
The fund's Investment Company Act file number is 811-4096.
MWT-1 3/99 138 24/224/324/824
<PAGE>
- -----------------------------
MFS(R) MUNICIPAL SERIES TRUST
- -----------------------------
AUGUST 1, 1999
[Logo] M F S(R)
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
STATEMENT OF ADDITIONAL
INFORMATION
MFS ALABAMA MUNICIPAL BOND FUND
MFS ARKANSAS MUNICIPAL BOND FUND
MFS CALIFORNIA MUNICIPAL BOND FUND
MFS FLORIDA MUNICIPAL BOND FUND
MFS GEORGIA MUNICIPAL BOND FUND
MFS MARYLAND MUNICIPAL BOND FUND
MFS MASSACHUSETTS MUNICIPAL BOND FUND
MFS MISSISSIPPI MUNICIPAL BOND FUND
MFS NEW YORK MUNICIPAL BOND FUND
MFS NORTH CAROLINA MUNICIPAL BOND FUND
MFS PENNSYLVANIA MUNICIPAL BOND FUND
MFS SOUTH CAROLINA MUNICIPAL BOND FUND
MFS TENNESSEE MUNICIPAL BOND FUND
MFS VIRGINIA MUNICIPAL BOND FUND
MFS WEST VIRGINIA MUNICIPAL BOND FUND
500 BOYLSTON STREET, BOSTON, MA 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 Funds' Prospectus dated
August 1, 1999. This SAI should be read in conjunction with the Prospectus.
The Funds' financial statements are incorporated into this SAI by reference to
each Fund's most recent Annual Report to shareholders. A copy of each Annual
Report accompanies this SAI. You may obtain a copy of the Funds' Prospectus
and Annual Reports without charge by contacting MFS Service Center, Inc. (see
back cover of Part II of this SAI for address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Funds, while Part II contains
information that generally applies to each of the Funds in the MFS Family of
Funds (the "MFS Funds"). Each Part of the SAI has a variety of appendices
which can be found at the end of Part I and Part II, respectively.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Funds.
- -------------------
TABLE OF CONTENTS
- -------------------
Page
I Definitions .................................................... 3
II Management of the Funds ........................................ 3
The Funds ...................................................... 3
Trustees and Officers -- Identification and Background ......... 3
Trustees Compensation .......................................... 3
Affiliated Service Provider Compensation ....................... 3
III Sales Charges and Distribution Plan Payments ................... 3
Sales Charges .................................................. 3
Distribution Plan Payments .................................... 3
IV Portfolio Transactions and Brokerage Commissions ............... 3
V Share Ownership ................................................ 3
VI Performance Information ........................................ 3
VII Investment Techniques, Practices, Risks and Restrictions ....... 3
Investment Techniques, Practices and Risks ..................... 3
Investment Restrictions ........................................ 4
VIII Tax Considerations ............................................. 5
IX Independent Auditors and Financial Statements .................. 5
Appendix A -- Trustees and Officers -- Identification and
Background ....................................... A
Appendix B -- Trustee Compensation ............................. B
Appendix C -- Affiliated Service Provider Compensation ......... C
Appendix D -- Sales Charges and Distribution Plan Payments ..... D
Appendix E -- Portfolio Transactions and Brokerage Commissions . E
Appendix F -- Share Ownership .................................. F
Appendix G -- Performance Information .......................... G
Appendix H -- Additional Information Regarding the States ...... H
<PAGE>
I DEFINITIONS
"Funds" - MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond
Fund, MFS California Municipal Bond Fund, MFS Florida Municipal Bond Fund,
MFS Georgia Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS
Massachusetts Municipal Bond Fund, MFS Mississippi Municipal Bond Fund,
MFS New York Municipal Bond Fund, MFS North Carolina Municipal Bond Fund,
MFS Pennsylvania Municipal Bond Fund, MFS South Carolina Municipal Bond
Fund, MFS Tennessee Municipal Bond Fund, MFS Virginia Municipal Bond Fund,
and MFS West Virginia Municipal Bond Fund, each a series of the Trust.
"Trust" - MFS Municipal Series Trust, a Massachusetts business trust,
organized 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.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Funds, dated August 1, 1999, as
amended or supplemented from time to time.
II MANAGEMENT OF THE FUNDS
THE FUNDS
The Funds are non-diversified series of the Trust. The Trust is an open-
end management investment company.
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The identification and background of the Trustees and officers of the
Trust are set forth in Appendix A of this Part I.
TRUSTEE COMPENSATION
Compensation paid to the non-interested Trustees and to Trustees who are
not officers of the Trust, for certain specified periods, is set forth in
Appendix B of this Part I.
AFFILIATED SERVICE PROVIDER COMPENSATION
Compensation paid by each Fund to its affiliated service providers -- to
MFS, for investment advisory and administrative services, and to MFSC, for
transfer agency services -- for certain specified periods is set forth in
Appendix C to this Part I.
III SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
Sales charges paid in connection with the purchase and sale of Fund shares
for certain specified periods are set forth in Appendix D to this Part I,
together with the Funds' schedule of dealer reallowances.
DISTRIBUTION PLAN PAYMENTS
Payments made by each Fund under the Distribution Plan for its most recent
fiscal year end are set forth in Appendix D to this Part I.
IV PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by each Fund for certain specified periods, and
information concerning purchases by the Funds of securities issued by
their regular broker-dealers for the Funds' most recent fiscal year, are
set forth in Appendix E to this Part I.
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 from time to time through such broker-dealers, on
behalf of the Funds. The Trustees (together with the Trustees of certain
other MFS funds) have directed the Adviser to allocate a total of $53,050
of commission business from certain MFS funds (including the 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 Funds and the Adviser).
V SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and
officers of the Trust as a group, by investors who control a Fund, if any,
and by investors who own 5% or more of any class of Fund shares, if any,
is set forth in Appendix F to this Part I.
VI PERFORMANCE INFORMATION
Performance information, as quoted by the Funds in sales literature and
marketing materials, is set forth in Appendix G to this Part I.
VII INVESTMENT TECHNIQUES, PRACTICES, RISKS AND RESTRICTIONS
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
The investment objective and principal investment policies of each Fund
are described in the Prospectus. In pursuing its investment objective and
principal investment policies, a Fund may engage in a number of investment
techniques and practices, which involve certain risks. These investment
techniques and practices, which may be changed without shareholder
approval unless indicated otherwise, are identified in Appendix A to the
Prospectus, and are more fully described, together with their associated
risks, in Part II of this SAI. The following percentage limitations apply
to these investment techniques and practices for each Fund:
o Speculative Securities and Lower Rated Securities may not exceed 33%
of a Fund's net assets;
o Revenue Bonds may not exceed 100% of a Fund's net assets.
INVESTMENT RESTRICTIONS
Each 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 at which 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).
Terms used below (such as Options and Futures Contracts) are defined in
Part II of this SAI.
The Funds may not:
(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 invest for the
purpose of exercising control or management; or; (iii) 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, pledge, mortgage or hypothecate for any purpose in
excess of 15% of such Fund's net assets (taken at market value). 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.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Funds' independent auditors, providing audit
services, tax services, and assistance and consultation with respect to
the preparation of filings with the Securities and Exchange Commission.
For each Fund, the Portfolio of Investments and the Statement of Assets
and Liabilities at March 31, 1999, the Statement of Operations for the
year ended March 31, 1999, the Statement of Changes in Net Assets for the
two years ended March 31, 1999, the Notes to Financial Statements and the
Report of the Independent Auditors, each of which is included in the
Annual Report to Shareholders of each Fund, are incorporated by reference
into this SAI in reliance upon the report of Deloitte & Touche LLP,
independent auditors, given upon their authority as experts in accounting
and auditing. A copy of each Annual Report accompanies this SAI.
<PAGE>
- ---------------------
PART I - APPENDIX A
- ---------------------
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
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.)
TRUSTEES
JEFFREY L. SHAMES,* Chairman and President (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive
Officer
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former
Chairman and Director (prior to September 30, 1991); Cambridge Bancorp,
Director; Cambridge Trust Company, Director
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
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. (corporate 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
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: 294 Washington Street, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994);
Sundstrand Corporation (diversified mechanical
manufacturer), Director
Address: 36080 Shaker Blvd., Hunting Valley, Ohio
OFFICERS
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, Senior Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touch LLP, Senior Manager (prior to September 1996)
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 LLP, Senior Tax Manager (prior to September 1994)
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
GEOFFREY L. SCHECHTER, Vice President (born 12/17/62)
Massachusetts Financial Services Company, Vice President
----------------
* "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.
<PAGE>
- ---------------------
PART I - APPENDIX B
- ---------------------
TRUSTEE COMPENSATION
Each Fund pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, who currently receive from each Fund a
fee of $833 per year plus $67 per meeting and $67 per committee meeting
attended, together with such Trustee's out-of-pocket expenses. In addition,
the Trust has a retirement plan for these Trustees as described under the
caption "Management of the Funds -- Trustee Retirement Plan" in Part II. The
Retirement Age under the plan is 75.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLES
...................................................................................................................
ALABAMA FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $429 10 $259,430
Marshall N. Cohan 1,633 660 12 143,259
Lawrence H. Cohn 1,590 296 18 153,579
Sir J. David Gibbons 1,500 600 12 130,059
Abby M. O'Neill 1,500 358 10 130,059
Walter E. Robb, III 1,724 413 9 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,672 357 20 157,714
Ward Smith 1,606 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $675
1,459 219 365 511 730
1,569 235 392 549 784
1,678 252 419 587 839
1,787 268 447 625 894
1,896 284 474 664 948
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
..................................................................................................................
ARKANSAS FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $429 10 $259,430
Marshall N. Cohan 1,633 495 10 143,259
Lawrence H. Cohn 1,650 296 18 153,579
Sir J. David Gibbons 1,500 450 10 130,059
Abby M. O'Neill 1,500 358 10 130,059
Walter E. Robb, III 1,783 413 9 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,697 357 20 157,714
Ward Smith 1,631 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $675
1,472 221 368 515 736
1,595 239 399 558 797
1,717 258 429 601 858
1,839 276 460 644 920
1,961 294 490 686 981
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
..................................................................................................................
CALIFORNIA FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $ 773 10 $259,430
Marshall N. Cohan 1,633 556 14 143,259
Lawrence H. Cohn 1,796 556 18 153,579
Sir J. David Gibbons 1,500 1,260 13 130,059
Abby M. O'Neill 1,500 644 10 130,059
Walter E. Robb, III 1,929 1,425 17 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,760 660 20 157,714
Ward Smith 1,694 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $ 675
1,504 226 376 527 752
1,659 249 415 581 829
1,813 272 453 635 907
1,968 295 492 689 984
2,122 318 530 743 1,061
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<CAPTION>
..................................................................................................................
FLORIDA FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $429 10 $259,430
Marshall N. Cohan 1,633 495 10 143,259
Lawrence H. Cohn 1,601 296 18 153,579
Sir J. David Gibbons 1,500 450 10 130,059
Abby M. O'Neill 1,500 358 10 130,059
Walter E. Robb, III 1,734 413 9 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,676 357 20 157,714
Ward Smith 1,610 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $675
1,461 219 365 512 731
1,573 236 393 551 786
1,684 253 421 590 842
1,796 269 449 629 898
1,907 286 477 668 954
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
..................................................................................................................
GEORGIA FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $429 10 $259,430
Marshall N. Cohan 1,633 743 14 143,259
Lawrence H. Cohn 1,577 296 18 153,579
Sir J. David Gibbons 1,500 675 13 130,059
Abby M. O'Neill 1,500 358 10 130,059
Walter E. Robb, III 1,711 743 14 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,666 357 20 157,714
Ward Smith 1,600 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $675
1,456 218 364 510 728
1,563 234 391 547 781
1,669 250 417 584 835
1,776 266 444 621 888
1,882 282 471 659 941
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
..................................................................................................................
MARYLAND FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $429 10 $259,430
Marshall N. Cohan 1,633 743 14 143,259
Lawrence H. Cohn 1,660 296 18 153,579
Sir J. David Gibbons 1,500 675 13 130,059
Abby M. O'Neill 1,500 358 10 130,059
Walter E. Robb, III 1,794 743 17 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,702 357 20 157,714
Ward Smith 1,636 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $675
1,475 221 369 576 737
1,599 240 400 560 800
1,724 259 431 603 862
1,849 277 462 647 924
1,973 296 493 691 987
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
..................................................................................................................
MASSACHUSETTS FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $429 10 $259,430
Marshall N. Cohan 1,633 743 17 143,259
Lawrence H. Cohn 1,780 296 18 153,579
Sir J. David Gibbons 1,500 675 13 130,059
Abby M. O'Neill 1,500 358 10 130,059
Walter E. Robb, III 1,913 743 17 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,753 357 20 157,714
Ward Smith 1,687 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $ 675
1,501 225 375 525 750
1,652 248 413 578 826
1,803 270 451 631 901
1,953 293 488 684 977
2,104 316 526 737 1,052
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
..................................................................................................................
MISSISSIPPI FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $357 9 $259,430
Marshall N. Cohan 1,633 413 9 143,259
Lawrence H. Cohn 1,584 296 18 153,579
Sir J. David Gibbons 1,500 375 9 130,059
Abby M. O'Neill 1,500 358 10 130,059
Walter E. Robb, III 1,717 413 9 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,669 357 20 157,714
Ward Smith 1,603 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $675
1,458 219 364 510 729
1,565 235 391 548 783
1,673 251 418 586 837
1,781 267 445 623 890
1,889 283 472 661 944
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
..................................................................................................................
NEW YORK FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $429 10 $259,430
Marshall N. Cohan 1,633 743 14 143,259
Lawrence H. Cohn 1,656 296 18 153,579
Sir J. David Gibbons 1,500 675 13 130,059
Abby M. O'Neill 1,500 358 10 130,059
Walter E. Robb, III 1,790 743 14 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,700 357 20 157,714
Ward Smith 1,634 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $675
1,474 221 368 516 737
1,598 240 399 559 799
1,721 258 430 602 861
1,845 277 461 646 923
1,969 295 492 689 985
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
..................................................................................................................
NORTH CAROLINA FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $429 10 $259,430
Marshall N. Cohan 1,633 743 14 143,259
Lawrence H. Cohn 1,967 296 18 153,579
Sir J. David Gibbons 1,500 675 13 130,059
Abby M. O'Neill 1,500 358 10 130,059
Walter E. Robb, III 2,100 743 17 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,833 357 20 157,714
Ward Smith 1,767 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $ 675
1,542 231 386 540 771
1,734 260 434 607 867
1,926 289 482 674 963
2,118 318 530 741 1,059
2,310 347 578 809 1,155
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
..................................................................................................................
PENNSYLVANIA FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $357 9 $259,430
Marshall N. Cohan 1,633 413 9 143,259
Lawrence H. Cohn 1,543 296 18 153,579
Sir J. David Gibbons 1,500 375 9 130,059
Abby M. O'Neill 1,500 358 10 130,059
Walter E. Robb, III 1,676 413 9 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,651 357 20 157,714
Ward Smith 1,585 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $675
1,449 217 362 507 724
1,547 232 387 542 774
1,646 247 412 576 823
1,745 262 436 611 872
1,844 277 461 645 922
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
..................................................................................................................
SOUTH CAROLINA FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $429 10 $259,430
Marshall N. Cohan 1,633 743 14 143,259
Lawrence H. Cohn 1,693 296 18 153,579
Sir J. David Gibbons 1,500 675 13 130,059
Abby M. O'Neill 1,500 358 10 130,059
Walter E. Robb, III 1,827 743 17 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,716 357 20 157,714
Ward Smith 1,650 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $ 675
1,482 222 370 519 741
1,614 242 403 565 807
1,746 262 436 611 873
1,878 282 469 657 939
2,010 301 502 703 1,005
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
..................................................................................................................
TENNESSEE FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $429 10 $259,430
Marshall N. Cohan 1,633 743 13 143,259
Lawrence H. Cohn 1,636 296 18 153,579
Sir J. David Gibbons 1,500 675 13 130,059
Abby M. O'Neill 1,500 358 10 130,059
Walter E. Robb, III 1,769 743 13 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,691 357 20 157,714
Ward Smith 1,625 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $675
1,469 220 367 514 735
1,588 238 397 556 794
1,708 256 427 598 854
1,827 274 457 639 913
1,946 292 486 681 973
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
..................................................................................................................
VIRGINIA FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $429 10 $259,430
Marshall N. Cohan 1,633 743 14 143,259
Lawrence H. Cohn 1,941 296 18 153,579
Sir J. David Gibbons 1,500 675 13 130,059
Abby M. O'Neill 1,500 358 10 130,059
Walter E. Robb, III 2,074 743 17 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,822 357 20 157,714
Ward Smith 1,756 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $ 675
1,536 230 384 538 768
1,723 258 431 603 861
1,909 286 477 668 954
2,095 314 524 733 1,048
2,281 342 570 798 1,141
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
..................................................................................................................
WEST VIRGINIA FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $1,500 $429 10 $259,430
Marshall N. Cohan 1,633 743 14 143,259
Lawrence H. Cohn 1,657 296 18 153,579
Sir J. David Gibbons 1,500 675 13 130,059
Abby M. O'Neill 1,500 358 10 130,059
Walter E. Robb, III 1,790 743 17 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 1,700 357 20 157,714
Ward Smith 1,634 446 13 146,739
----------------
(1) For the fiscal year ending March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within
the MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion)
except Mr. Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at
December 31, 1998 of approximately $68.2 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
.................................................................................................................
YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,350 $203 $338 $473 $675
1,474 221 368 516 737
1,598 240 399 559 799
1,721 258 430 602 861
1,845 277 461 646 923
1,969 295 492 689 985
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
- ---------------------
PART I - APPENDIX C
- ---------------------
<TABLE>
<CAPTION>
AFFILIATED SERVICE PROVIDER COMPENSATION
...............................................................................................................................
Each Fund paid compensation to its affiliated service providers over the specified periods as follows:
PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER AMOUNT PAID TO
FISCAL YEAR ENDED FUND SERVICES BY MFS SERVICES AGENCY SERVICES MFS AND MFSC
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1999 Alabama Fund ......... $ 358,131 $101,206 $10,459 $ 93,747 $ 462,337
Arkansas Fund ........ 587,793 165,631 17,168 153,988 758,949
California Fund ...... 1,054,020 504,007 35,033 318,592 1,407,645
Florida Fund ......... 406,928 115,587 11,857 106,803 525,588
Georgia Fund ......... 308,234 86,945 8,988 80,775 397,997
Maryland Fund ........ 660,060 187,289 19,224 173,209 852,493
Massachusetts Fund ... 1,120,688 317,038 32,667 293,874 1,447,229
Mississippi Fund ..... 328,339 92,749 9,599 86,069 424,007
New York Fund ........ 619,382 174,958 18,071 162,359 799,812
North Carolina Fund .. 1,841,250 519,591 53,811 482,539 2,377,600
Pennsylvania Fund .... 29,272 199,040 5,215 46,896 229,842
South Carolina Fund .. 764,290 216,017 22,313 200,373 986,976
Tennessee Fund ....... 547,030 154,783 16,004 143,458 706,492
Virginia Fund ........ 1,741,013 491,314 50,821 456,269 2,248,103
West Virginia Fund ... 631,768 178,516 18,443 165,623 815,834
March 31, 1998 Alabama Fund ......... $ 406,678 $ 55,426 $11,875 $105,726 $ 524,279
Arkansas Fund ........ 706,877 95,452 20,632 183,675 911,184
California Fund ...... 1,084,265 407,800 38,331 340,548 1,463,149
Florida Fund ......... 459,188 63,152 13,397 119,388 591,973
Georgia Fund ......... 319,090 71,098 10,002 89,058 418,150
Maryland Fund ........ 657,155 146,404 20,597 183,384 861,136
Massachusetts Fund ... 1,141,991 254,419 35,807 318,677 1,496,475
Mississippi Fund ..... 371,239 50,559 10,839 96,505 478,583
New York Fund ........ 710,454 96,880 20,744 184,686 915,884
North Carolina Fund .. 1,927,622 429,491 60,449 538,011 2,526,082
Pennsylvania Fund .... 149,076 70,220 5,618 50,095 204,789
South Carolina Fund .. 786,867 175,283 24,661 219,563 1,031,091
Tennessee Fund ....... 565,280 125,923 17,714 157,738 740,732
Virginia Fund ........ 1,849,480 412,175 58,011 516,345 2,423,836
West Virginia Fund ... 692,403 95,657 20,233 180,179 892,815
March 31, 1997 Alabama Fund ......... $ 477,327 N/A $ 1,119* $129,467 $ 607,913
Arkansas Fund ........ 908,167 N/A 2,041* 244,040 1,154,248
California Fund ...... 1,156,144 $432,694 3,698* 438,215 1,598,057
Florida Fund ......... 549,091 N/A 1,271* 152,419 702,781
Georgia Fund ......... 361,309 48,303 924* 113,858 476,091
Maryland Fund ........ 716,338 97,218 1,917* 223,555 941,810
Massachusetts Fund ... 1,244,262 169,487 3,335* 380,853 1,628,450
Mississippi Fund ..... 455,195 N/A 1,033* 127,294 583,522
New York Fund ........ 856,664 N/A 1,978* 240,687 1,099,329
North Carolina Fund .. 2,129,831 288,877 5,652* 658,102 2,793,585
Pennsylvania Fund .... 43,590 192,560 486* 75,492 119,568
South Carolina Fund .. 864,108 116,415 2,269* 269,710 1,136,087
Tennessee Fund ....... 599,164 82,026 1,627* 187,080 787,871
Virginia Fund ........ 2,093,440 284,139 5,513* 645,945 2,744,898
West Virginia Fund ... 800,535 N/A 1,895* 218,094 1,020,524
--------------------
* From March 1, 1997, the commencement of the Master Administrative Services Agreement.
</TABLE>
<PAGE>
- ---------------------
PART I - APPENDIX D
- ---------------------
<TABLE>
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
Sales Charges
.......................................................................................................................
The following sales charges were paid during the specified periods:
<CAPTION>
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR ENDED FUND TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1999 Alabama Fund ......... $108,520 $ 19,748 $ 88,772 $ 0 $ 6,416 N/A
Arkansas Fund ........ 198,528 36,328 162,200 0 21,721 N/A
California Fund ...... 619,632 76,342 543,290 974 112,036 $4,652
Florida Fund ......... 202,508 37,542 164,966 0 57,452 N/A
Georgia Fund ......... 119,481 22,142 97,339 2,205 29,187 N/A
Maryland Fund ........ 346,428 62,533 283,895 3,442 51,486 N/A
Massachusetts Fund ... 341,909 64,725 277,184 0 53,610 N/A
Mississippi Fund ..... 166,909 32,149 134,760 0 15,166 N/A
New York Fund ........ 154,861 18,378 136,483 0 31,372 N/A
North Carolina Fund .. 505,625 93,621 412,004 442 82,72- 5,784
Pennsylvania Fund .... 123,147 22,079 101,068 0 0 N/A
South Carolina Fund .. 222,201 38,746 183,455 0 43,987 N/A
Tennessee Fund ....... 159,324 29,488 129,836 18 55,013 N/A
Virginia Fund ........ 573,270 100,381 472,889 0 85,371 177
West Virginia Fund ... 288,957 52,864 236,093 3 50,079 N/A
March 31, 1998 Alabama Fund ......... $ 79,773 $ 14,663 $ 65,110 $ 0 $ 8,330 N/A
Arkansas Fund ........ 126,054 23,166 102,888 2 25,612 N/A
California Fund ...... 425,922 45,709 380,213 14,977 84,822 $2,944
Florida Fund ......... 100,762 18,009 82,753 12 41,233 N/A
Georgia Fund ......... 92,279 16,416 75,863 0 46,591 N/A
Maryland Fund ........ 220,626 40,185 180,441 1 49,229 N/A
Massachusetts Fund ... 267,572 43,427 224,145 0 36,343 N/A
Mississippi Fund ..... 101,830 17,405 84,425 0 48,915 N/A
New York Fund ........ 140,300 13,837 126,463 4,763 64,504 N/A
North Carolina Fund .. 585,489 102,313 483,176 0 104,578 4,497
Pennsylvania Fund .... 108,436 19,765 88,671 0 26,291 N/A
South Carolina Fund .. 233,793 39,848 193,945 82 48,837 N/A
Tennessee Fund ....... 189,839 35,227 154,612 0 34,989 N/A
Virginia Fund ........ 450,258 81,631 368,627 0 81,775 3,974
West Virginia Fund ... 269,151 48,338 220,813 9 34,856 N/A
March 31, 1997 Alabama Fund ......... $ 79,263 $ 13,874 $ 65,389 $ 0 $ 7,246 N/A
Arkansas Fund ........ 213,175 34,851 178,324 0 24,877 N/A
California Fund ...... 395,428 47,656 347,772 16,440 171,782 $3,203
Florida Fund ......... 105,485 18,617 86,868 10 50,353 N/A
Georgia Fund ......... 75,317 13,894 61,423 244 45,183 N/A
Maryland Fund ........ 171,161 29,470 141,691 0 39,109 N/A
Massachusetts Fund ... 215,714 38,548 177,166 47 29,809 N/A
Mississippi Fund ..... 102,571 18,104 84,467 0 48,353 N/A
New York Fund ........ 178,037 19,546 158,491 51 95,716 N/A
North Carolina Fund .. 408,720 72,935 335,785 0 103,158 1,076
Pennsylvania Fund .... 81,678 11,850 69,828 11,294 33,143 N/A
South Carolina Fund .. 212,098 36,896 175,202 683 40,979 N/A
Tennessee Fund ....... 139,799 25,070 114,729 0 53,602 N/A
Virginia Fund ........ 356,635 62,832 293,803 0 89,149 N/A
West Virginia Fund ... 220,027 38,916 181,111 0 54,376 N/A
</TABLE>
<PAGE>
<TABLE>
DEALER REALLOWANCES
.......................................................................................................................
As shown above, MFD pays (or "reallows") a portion of the Class A initial sales charge to dealers. The dealer
reallowance as expressed as a percentage of the Class A shares' offering price is:
<CAPTION>
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
-----------------------------------------------------------------------------------------------------------------------
<S> <C>
Less than $100,000 4.00%
$100,000 but less than $250,000 3.20%
$250,000 but less than $500,000 2.25%
$500,000 but less than $1,000,000 1.70%
$1,000,000 or more None*
----------------
*A CDSC will apply to such purchase.
DISTRIBUTION PLAN PAYMENTS
.......................................................................................................................
During the fiscal year ended March 31, 1999, the Fund made the following Distribution Plan payments:
<CAPTION>
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alabama Fund Class A .................. $ 184,900 $ 4,105 180,795
Alabama Fund Class B .................. 94,949 526 94,423
Arkansas Fund Class A .................. 128,167 4,208 123,959
Arkansas Fund Class B .................. 66,444 761 65,683
California Fund Class A ................ 30,155 1,293 28,862
California Fund Class B ................ 414,404 126 414,278
California Fund Class C ................ 65,771 0 65,771
Florida Fund Class A ................... 0 0 0
Florida Fund Class B ................... 147,374 0 9,990
Georgia Fund Class A ................... 147,756 5,961 141,795
Georgia Fund Class B ................... 126,969 2,374 124,595
Maryland Fund Class A .................. 452,561 20,641 431,920
Maryland Fund Class B .................. 246,599 2,208 244,391
Massachusetts Fund Class A ............. 836,875 58,009 778,866
Massachusetts Fund Class B ............. 221,142 600 220,542
Mississippi Fund Class A ............... 0 0 0
Mississippi Fund Class B ............... 83,668 80,810 2,858
New York Fund Class A .................. 288,997 14,407 274,590
New York Fund Class B .................. 287,201 5,719 281,482
North Carolina Fund Class A ............ 1,293,941 26,486 1,267,455
North Carolina Fund Class B ............ 483,772 6,414 177,358
North Carolina Fund Class C ............ 108,492 51 108,441
Pennsylvania Fund Class A .............. 0 0 0
Pennsylvania Fund Class B .............. 170,157 163,197 6,960
South Carolina Fund Class A ............ 511,304 8,410 502,894
South Carolina Fund Class B ............ 320,229 2,550 317,679
Tennessee Fund Class A ................. 376,654 11,621 365,033
Tennessee Fund Class B ................. 199,023 2,106 196,917
Virginia Fund Class A .................. 1,284,437 28,038 1,256,399
Virginia Fund Class B .................. 341,856 3,139 338,717
Virginia Fund Class C .................. 44,052 0 44,052
West Virginia Fund Class A ............. 457,498 7,884 449,614
West Virginia Fund Class B ............. 165,063 3,233 161,830
Distribution plan payments retained by MFD are used to compensate MFD for commissions advanced by MFD to dealers
upon sale of fund shares.
</TABLE>
<PAGE>
- ---------------------
PART I - APPENDIX E
- ---------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
BROKERAGE COMMISSIONS
..........................................................................
The following brokerage commissions were paid by each Fund during the
specified time periods:
BROKERAGE COMMISSIONS
FISCAL YEAR END FUND PAID BY FUND
--------------------------------------------------------------------------
March 31, 1999 None
March 31, 1998 None
March 31, 1997 None
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
..........................................................................
During the fiscal year ended March 31, 1999, the Funds purchased
securities issued by the following regular broker-dealer of the Funds,
which had the following value as of March 31, 1999:
VALUE OF SECURITIES
BROKER-DEALER AS OF MARCH 31, 1999
-------------------------------------------------------------------------
$
<PAGE>
- ---------------------
PART I - APPENDIX F
- ---------------------
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of April 23, 1999, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Funds' shares.
25% OR GREATER OWNERSHIP
The following table identifies those investors who beneficially own 25% or
more of the Funds' shares (all share classes taken together) as of April
23, 1999, and are therefore presumed to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION PERCENTAGE OWNERSHIP
NAME AND ADDRESS OF INVESTOR (IF A COMPANY)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
None
5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any
class of the Funds' shares as of April 23, 1999:
<CAPTION>
NAME AND ADDRESS OF INVESTOR OWNERSHIP FUND PERCENTAGE
.......................................................................................................................
<S> <C> <C>
Merrill Lynch, Pierce Fenner & Smith, Inc. Alabama Fund -- Class A 21.30%
(For the Sole Benefit of its Customers) Alabama Fund -- Class B 29.87%
4800 Deer Lake Drive East Arkansas Fund -- Class A 17.92%
Jacksonville, FL 32246 Arkansas Fund -- Class B 26.98%
California Fund -- Class A 9.02%
California Fund -- Class B 18.89%
California Fund -- Class C 33.76%
Florida Fund -- Class A 11.36%
Florida Fund -- Class B 26.50%
Georgia Fund -- Class A 7.74%
Georgia Fund -- Class B 32.00%
Maryland Fund -- Class A 8.98%
Maryland Fund -- Class B 9.19%
Massachusetts Fund -- Class A 13.13%
Massachusetts Fund -- Class B 11.17%
Mississippi Fund -- Class A 14.45%
Mississippi Fund -- Class B 26.18%
New York Fund -- Class A 10.00%
New York Fund -- Class B 11.46%
North Carolina Fund -- Class B 6.52%
North Carolina Fund -- Class C 11.80%
Pennsylvania Fund -- Class B 13.99%
South Carolina Fund -- Class A 6.80%
South Carolina Fund -- Class B 12.04%
Tennessee Fund -- Class A 9.01%
Tennessee Fund -- Class B 15.50%
Virginia Fund -- Class A 7.72%
Virginia Fund -- Class B 28.19%
Virginia Fund -- Class C 10.17%
.......................................................................................................................
</TABLE>
<PAGE>
NAME AND ADDRESS OF INVESTOR OWNERSHIP FUND PERCENTAGE
................................................................................
Salomon Smith Barney Inc. Tennessee Fund -- Class A 5.64%
333 West 34th Street
New York, NY 10001
................................................................................
Martha S. Scott Virginia Fund -- Class C 6.39%
Springfield, VA 22150
................................................................................
L. J. Marhoefer Virginia Fund -- Class C 6.34%
Barbara Marhoefer
Reston, VA 20191
................................................................................
J.C. Bradford & Co., Custodian Virginia Fund -- Class C 5.87%
Gerald Stahr
330 Commerce Street
Nashville, TN 37201
................................................................................
James K. Shepherd Virginia Fund -- Class C 6.08%
Mary Ann Shepherd
Annandale, VA 22003
................................................................................
Ocean Pebbles Investment Properties Virginia Fund -- Class C 5.93%
300 W. Freemason Street
Norfolk, VA 23510
................................................................................
Charlottesville Investment Properties LP Virginia Fund -- Class C 7.95%
300 W. Freemason Street
Norfolk, VA 23510
................................................................................
<PAGE>
- ---------------------
PART I - APPENDIX G
- ---------------------
<TABLE>
PERFORMANCE INFORMATION
..................................................................................................................................
All performance quotations are as of March 31, 1999.
<CAPTION>
ACTUAL
AVERAGE ANNUAL TOTAL RETURNS ACTUAL TAX EQUIVALENT TAX EQUIVALENT
-------------------------------- 30-DAY 30-DAY 30-DAY YIELD 30-DAY YIELD
10 YEAR YIELD YIELD (INCLUDING (WITHOUT
OR (INCLUDING (WITHOUT ANY WAIVERS) ANY WAIVERS) CURRENT
LIFE OF ANY ANY ------------------ -------------------- DISTRIBUTION
FUND 1 YEAR 5 YEAR FUND(1) WAIVERS) WAIVERS) TAX BRACKETS: TAX BRACKETS: RATE
- -------------------- --------- --------- ----------- ---------- --------- ------------------ -------------------- -----------
28% 31% 28% 31%
--------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama Fund Class A
with sales charge .. 0.04% 5.80% 6.88% 4.49% 4.34% 6.24% 6.51% 6.03% 6.29% 5.04%
Alabama Fund Class A
without sales charge 5.03 6.84 7.45 -- -- -- -- -- -- --
Alabama Fund Class B
with CDSC ........ 0.26 5.67 6.93(2) -- -- -- -- -- -- --
Alabama Fund Class B
without CDSC ..... 4.25 5.99 6.93(2) 3.91 3.75 5.43 5.67 5.21 5.43 4.53
Arkansas Fund Class
A with sales charge (0.37) 5.28 5.72 4.71 4.56 6.54 6.83 6.33 6.61 4.68
Arkansas Fund Class
A without sales
charge ........... 4.60 6.31 6.44 -- -- -- -- -- -- --
Arkansas Fund Class
B with CDSC ...... (0.07) 5.10 5.73(2) -- -- -- -- -- -- --
Arkansas Fund Class
B without CDSC ... 3.91 5.43 5.73(2) 4.19 4.04 5.82 6.07 5.61 5.86 4.16
California Fund
Class A with sales
charge ........... 1.52 6.01 7.30 4.25 4.10 5.90 6.16 5.69 5.94 4.54
California Fund
Class A without
sales charge ..... 6.59 7.04 7.83 -- -- -- -- -- -- --
California Fund
Class B with CDSC 1.74 5.78 7.29(2) -- -- -- -- -- -- --
California Fund
Class B without CDSC 5.74 6.10 7.29(2) 3.64 3.49 5.06 5.28 4.85 5.06 4.12
California Fund
Class C with CDSC 4.54 5.97 7.27(3) -- -- -- -- -- -- --
California Fund
Class C without CDSC 5.54 5.97 7.27(3) 3.55 3.40 4.93 5.14 4.72 4.93 3.85
Florida Fund Class A
with sales charge 0.25 5.49 5.96 4.45 4.30 6.18 6.45 5.97 6.23 4.63
Florida Fund Class A
without sales charge 5.25 6.52 6.68 -- -- -- -- -- -- --
Florida Fund Class B
with CDSC ........ 0.42 5.27 5.92(2) -- -- -- -- -- -- --
Florida Fund Class B
without CDSC ..... 4.42 5.59 5.92(2) 3.83 3.67 5.32 5.55 5.10 5.32 4.15
Georgia Fund Class A
with sales charge (0.08) 5.45 6.83 4.41 4.26 6.13 6.39 5.92 6.17 4.52
Georgia Fund Class A
without sales charge 4.90 6.48 7.35 -- -- -- -- -- -- --
Georgia Fund Class B
with CDSC ........ 0.22 5.34 6.88(2) -- -- -- -- -- -- --
Georgia Fund Class B
without CDSC ..... 4.22 5.66 6.88(2) 3.86 3.71 5.36 5.59 5.15 5.38 3.98
Maryland Fund Class
A with sales charge (0.04) 5.33 6.29 4.02 3.88 5.58 5.83 5.39 5.62 4.33
Maryland Fund Class
A without sales
charge ........... 4.94 6.36 6.81 -- -- -- -- -- -- --
Maryland Fund Class
B with CDSC ...... 0.18 5.32 6.39(2) -- -- -- -- -- -- --
Maryland Fund Class
B without CDSC ... 4.18 5.64 6.39(2) 3.57 3.41 4.96 5.17 4.74 4.94 3.89
Massachusetts Fund
Class A with sales
charge............ 0.12 5.41 6.71 4.56 4.41 6.33 6.61 6.13 6.39 4.58
Massachusetts Fund
Class A without
sales charge...... 5.11 6.44 7.23 -- -- -- -- -- -- --
Massachusetts Fund
Class B with CDSC 0.43 5.41 6.83(2) -- -- -- -- -- -- --
Massachusetts Fund
Class B without CDSC 4.43 5.73 6.83(2) 4.14 3.99 5.75 6.00 5.54 5.78 4.15
Mississippi Fund
Class A with sales
charge ........... 0.60 6.13 5.47 4.63 4.49 6.43 6.71 6.24 6.51 4.78
Mississippi Fund
Class A without
sales charge ..... 5.62 7.16 6.25 -- -- -- -- -- -- --
Mississippi Fund
Class B with CDSC. 0.80 5.97 5.50(2) -- -- -- -- -- -- --
Mississippi Fund
Class B without CDSC 4.80 6.28 5.50(2) 4.07 3.92 5.65 5.90 5.44 5.68 4.21
New York Fund Class
A with sales charge 0.15 5.82 7.51 4.31 4.16 5.99 6.25 5.78 6.03 4.61
New York Fund Class
A without sales
charge ........... 5.14 6.86 8.04 -- -- -- -- -- -- --
New York Fund Class
B with CDSC ...... 0.46 5.71 7.57(2) -- -- -- -- -- -- --
New York Fund Class
B without CDSC ... 4.46 6.02 7.57(2) 3.78 3.64 5.25 5.48 5.06 5.28 4.08
North Carolina Fund
Class A with sales
charge ........... (0.22) 5.48% 6.46% 4.36% 4.21% 6.06% 6.32% 5.85% 6.10% 4.52%
North Carolina Fund
Class A without
sales charge...... 4.76 6.51 6.98 -- -- -- -- -- -- --
North Carolina Fund
Class B with CDSC. 0.01 5.46 6.56(2) -- -- -- -- -- -- --
North Carolina Fund
Class B without CDSC 4.00 5.78 6.56(2) 3.93 3.77 5.46 5.70 5.24 5.46 4.09
North Carolina Fund
Class C with CDSC 3.00 5.82 6.60(3) -- -- -- -- -- -- --
North Carolina Fund
Class C without CDSC 4.00 5.82 6.60(3) 3.93 3.78 5.46 5.70 5.25 5.48 4.09
Pennsylvania Fund
Class A with sales
charge ........... 0.82 6.37 5.49 4.54 4.01 5.78 6.58 5.57 5.81 4.62
Pennsylvania Fund
Class A without
sales charge...... 5.85 7.41 6.32 -- -- -- -- -- -- --
Pennsylvania Fund
Class B with CDSC 1.02 6.24 5.54(2) -- -- -- -- -- -- --
Pennsylvania Fund
Class B without CDSC 5.02 6.55 5.54(2) 3.99 3.43 5.54 5.78 4.76 4.97 4.05
South Carolina Fund
Class A with sales
charge ........... (0.63) 5.45 6.64 4.21 4.07 5.85 6.10 5.65 5.90 4.30
South Carolina Fund
Class A without
sales charge ..... 4.33 6.48 7.16 -- -- -- -- -- -- --
South Carolina Fund
Class B with CDSC (0.41) 5.43 6.74(2) -- -- -- -- -- -- --
South Carolina Fund
Class B without CDSC 3.57 5.75 6.74(2) 3.77 3.61 5.24 5.46 5.01 5.23 3.86
Tennessee Fund Class
A with sales charge (0.18) 5.52 6.85 4.07 3.92 5.65 5.90 5.44 5.68 4.42
Tennessee Fund Class
A without sales
charge ........... 4.80 6.55 7.37 -- -- -- -- -- -- --
Tennessee Fund Class
B with CDSC ...... 0.05 5.49 6.95(2) -- -- -- -- -- -- --
Tennessee Fund Class
B without CDSC ... 4.04 5.81 6.95(2) 3.65 3.50 5.07 5.29 4.86 5.07 3.98
Virginia Fund Class
A with sales charge (0.26) 5.19 6.42 4.20 4.05 5.83 6.09 5.63 5.87 4.48
Virginia Fund Class
A without sales
charge ........... 4.71 6.21 6.94 -- -- -- -- -- -- --
Virginia Fund Class
B with CDSC ...... 0.05 5.18 6.53(2) -- -- -- -- -- -- --
Virginia Fund Class
B without CDSC ... 4.04 5.51 6.53(2) 3.76 3.61 5.22 5.45 5.01 5.23 4.05
Virginia Fund Class
C with CDSC ...... 3.04 5.54 6.56(3) -- -- -- -- -- -- --
Virginia Fund Class
C without CDSC ... 4.04 5.54 6.56(3) 3.75 3.60 5.21 5.43 5.00 5.22 4.05
West Virginia Fund
Class A with sales
charge ........... (0.25) 5.36 6.68 4.30 4.16 5.97 6.23 5.77 6.03 4.57
West Virginia Fund
Class A without
sales charge...... 4.73 6.39 7.20 -- -- -- -- -- -- --
West Virginia Fund
Class B with CDSC (0.02) 5.32 6.78(2) -- -- -- -- -- -- --
West Virginia Fund
Class B without CDSC 3.97 5.64 6.78(2) 3.88 3.73 5.39 5.62 5.18 5.41 4.15
- ----------------
(1) For the period from the inception of Class A shares to March 31, 1999, or for the 10 years ended March 31, 1999, 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 ................................ 10 years
Maryland ............................... 10 years
Massachusetts .......................... 10 years
Mississippi ............................ From August 6, 1992
New York ............................... 10 years
North Carolina ......................... 10 years
Pennsylvania ........................... From February 1, 1993
South Carolina ......................... 10 years
Tennessee .............................. 10 years
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.
Class A share performance calculated according to Securities and Exchange Commission (referred to as the SEC) rules (referred to as
SEC performance) takes into account the deduction of the 4.75% maximum sales charge. Class B SEC performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to as a CDSC), which declines over six years from 4% to 0%.
Class C SEC performance takes into account the deduction of the 1% CDSC.
Performance results include any applicable expense subsidies and waivers, which may cause the results to be more favorable. Current
subsidies and waivers may be discontinued at any time.
</TABLE>
<PAGE>
- ---------------------
PART I - APPENDIX H
- ---------------------
ADDITIONAL INFORMATION CONCERNING THE STATES
..........................................................................
The following discussion regarding certain economic, financial and legal
matters pertaining to the relevant States and their governments is drawn
primarily from official statements relating to securities offerings of
those States and other publicly available documents, dated as of various
dates prior to the date of this Prospectus, and do not purport to be
complete descriptions. Discussions regarding the financial condition of a
particular State government may not be relevant to Municipal Obligations
issued by political subdivisions of that State. Moreover, the general
economic conditions discussed may or may not affect issuers of the
obligations of these States. None of the information is relevant to any
tax-exempt securities issued by territories and possessions of the United
States or the District of Columbia or their political subdivisions,
agencies or instrumentalities.
ALABAMA FUND
Alabama's economy has experienced a major trend toward industrialization
over the last two decades. In 1997, manufacturing accounted for 22.82% of
Alabama's Real Gross State Product (the total value of goods and services
produced in Alabama). During the 1960's and 1970's, the State's industrial
base became more diversified and balanced, moving away from primary
textiles (including apparel), chemicals, rubber and plastics. Since the
early 1980's, modernization of existing facilities and an increase in
direct foreign investments in the State has made the manufacturing sector
more competitive in domestic and international markets.
Among the leading manufacturing industries have been pulp and paper and
chemicals, the development and growth of which have been made possible by
abundant rainfall and a high pulpwood growth rate. In recent years Alabama
has ranked as the fifth largest producer of timber in the nation. Alabama
has fresh water availability of 20 times present usage. The State's
growing chemical industry has been the natural complement of production of
wood pulp and paper.
Mining, oil and gas production, textiles and apparel, rubber and plastics,
printing and publishing, steel, machinery and service industries are also
important to Alabama's economy. Coal mining is by far the most important
mining activity.
In recent years, the importance of service industries to the State's
economy has increased significantly. The major service industries in the
State are the general healthcare industries, most notably represented by
the University of Alabama medical complex in Birmingham, and the high
technology research and development industries concentrated in the
Huntsville area. The financial, insurance and real estate sectors have
also shown strong growth over the last several years.
The economy in the State of Alabama recovered quickly from the recession
of the early 1980's. The Alabama Development Office (ADO) reported as of
December 31, 1996, that for the eleventh consecutive year more than $2
billion in capital investment was announced in Alabama for new and
expanded industries. The State had new and expanding capital investments
of more than $2.6 billion in 1996, $3.8 billion in 1995, and $2.6 billion
in 1994. These expenditures included 17,750 announced jobs created by 622
companies for 1996 and 21,290 announced jobs by 913 companies in 1995.
Preliminary figures indicate there will be approximately $2.8 billion in
announced investment and creation of approximately 21,000 jobs by
approximately 600 companies in 1997. This would make the past three years
the best in the State's history in terms of total announced capital
investment by manufacturing firms. Some of the largest investments in the
1990's include Champion International ($550 million); Mercedes Benz ($520
million); Trico Steel Co. LLC ($450 million); The Boeing Company ($450
million); Boise Cascade Corp. ($400 million); Amoco Chemicals ($350
million); EXXON Company, USA ($300 million); Mead Containerboard ($224
million); Acustar Inc. ($200 million); United States Steel Corp. ($200
million); Courtaulds Fibers, Inc. ($170 million); Worthington Industries
($150 million); and USS Fairfield Works ($150 million).
Estimated per capita personal income in the State grew 157.9% from 1970 to
1980 and 95.0% from 1980 to 1990 as compared with growth nationwide of
141.3% and 88.4%, respectively. During 1990-94 the per capita personal
income in Alabama improved by 25.92% while nationally the improvement was
only 15.42%.
Real Gross State Product (RGSP) is a comprehensive measure of economic
performance for the State of Alabama. Alabama's RGSP is defined as the
total value of all final goods and services produced in the State in
constant dollar terms. Hence, the changes in RGSP reflect changes in final
output. From 1993-1997, RGSP originating in manufacturing increased by
5.2% per year and RGSP originating in all the non-manufacturing sectors
grew by 4.0% per year.
There was a significant decrease in unemployment in the period 1985-1989
due to the economic recovery from the recession of the early 1980's. Since
1989, unemployment rates have come down more gradually due to the general
nationwide reduction in activity and employment in the industrial sector.
SIGNIFICANT LITIGATION
The State from time to time is named as a party in certain lawsuits, which
may or may not have a material adverse impact on the financial position of
the State if decided in a manner adverse to the State's interests. Certain
of such lawsuits which could have a significant impact on the State's
financial position are summarized below.
South Central Bell Telephone Co. v. State. Circuit Court of Montgomery
County, Alabama, CV-89-2600-G (Judge William R. Gordon). This case has
been consolidated with other cases involving BellSouth corporations and
CSX corporations. The plaintiffs are asking the Court to declare that the
Department's application of Code of Alabama 1975, (S)40-14-40, which
levies a franchise tax on domestic corporations, based on the par value of
the shares of capital stock, while the franchise tax on the foreign
corporations is levied pursuant to Code of Alabama 1975, (S)40-14-41,
based on the capital employed in the State of Alabama, violates the
Commerce Clause of the U.S. Constitution.
The plaintiffs contend that because "capital employed" includes surplus
and undivided profits, long-term debts, related party debts, and
accelerated depreciation, while the par value of stock does not include
these items, the franchise tax is unconstitutional. The taxpayers are
attempting to overturn White v. Reynolds Metals Company, 558 So. 2d 373
(Ala. 1989), which upheld the franchise tax on foreign corporations, by
challenging the Department's use of par value as the basis for the capital
stock of the domestic corporations. The potential refund exceeds $300
million.
The State's Motion for Summary Judgment was argued on June 3, 1994, and
was under submission to the circuit court at the time of trial, which was
held on December 14, 1994. On December 3, 1996, the trial court ruled that
the plaintiffs' claims are barred under the doctrine of res judicata. The
plaintiffs filed a notice of appeal to the Court of Civil Appeals and a
motion to transfer the appeal to the Supreme Court. The case was
transferred to the Supreme Court, where the ruling of the trial court was
affirmed on March 20, 1998. The plaintiffs' writ of certiorari was granted
by the U.S. Supreme Court, which reversed and remanded the case to the
Alabama Supreme Court on March 23, 1999, effectively deciding that the
franchise tax is unconstitutional.
Melof v. Hunt, et al., Circuit Court of Montgomery County, CV-89-707
(Judge Reese). This is a class action based on Davis v. Michigan, 109
S.Ct. 1500 (1989), in which the U.S. Supreme Court held that states may
not tax income received from the federal government at a higher rate than
they tax income received from the state without violating the
Intergovernmental Tax Immunity Doctrine. The Davis decision did not
involve the income taxation of private pension income.
The remaining subclasses in the Melof action (recipients of private non-
governmental retirement benefits and certain local governmental retirement
benefits) rely on the Davis decision and the Equal Protection Clause to
argue that Alabama's income tax scheme improperly imposes tax on private
and local governmental pensions while exempting governmental retirement
benefits. By amendment to their complaint, they also rely on Ala. Const.
1901, Amendment No. 25, which states:
In the event the legislature levies an income tax,
such tax must be levied upon the salaries, income,
fees, or other compensation of state, county and
municipal officers and employees, on the same
basis as such income taxes are levied on other
persons . . . .
The Department maintains that neither the Intergovernmental Tax Immunity
Doctrine nor the Equal Protection Clause forbid the income taxation of
private non-governmental retirement benefits while exempting state and
federal government retirement benefits. The U.S. Supreme Court has
declined to review an Oklahoma case that upheld Oklahoma's exemption of
state and federal retirement benefits. The Oklahoma court ruled that the
exemption did not impermissibly discriminate against recipients of private
non-governmental retirement benefits, which were not exempt from Oklahoma
tax. Sullivan, cert. denied U.S. Supreme Ct. April 19, 1993.
Both the plaintiffs and the State filed motions for summary judgment. The
State's motion was granted on September 8, 1997, when the court issued an
order upholding the tax. The potential refund in this class action is
probably in excess of $300 million. The plaintiffs appealed to the Court
of Civil Appeals, which affirmed. The plaintiffs filed a petition in the
Supreme Court for a writ of certiorari on July 31, 1998. The case was
argued and submitted on February 8, 1999.
Valhalla Cemetery Company, Inc., et al., v. G. Sage Lyons, Civil Action
No. CV-97-940-GR, Circuit Court of Montgomery County. On May 8, 1997, the
plaintiff filed a class action to obtain consumer use tax refunds with
interest, and to permanently enjoin assessment and collection of this tax
against the plaintiff and other similarly situated entities. Plaintiff's
main allegation is that the use tax does not apply to sales in Alabama.
Rather, the sales tax applies to sales made in Alabama by all merchants
except merchants who do not have sufficient contacts with Alabama to
justify imposition of the sales tax. Therefore, plaintiff and class
members contend that they are entitled to declaratory relief that Ala.
Code (S)40-23-61 is void and illegal; a permanent injunction against the
continuing collection of use tax; and refunds of the use taxes collected
pursuant to (S)40-23-61, together with interest thereon.
The potential revenue impact, if plaintiff prevails, is millions of
dollars in lost revenues. Approximately $350 million in use taxes have
been collected over the past three years. However, Act No. 97-301, signed
into law by Governor Fob James on May 7, 1997, amended the use tax
exemption, codified in Ala. Code (S)40-23-62, to clarify that sales by
out-of-state vendors are exempted from use tax only if the sales taxes are
actually paid to a licensed sales tax account holder. In addition, in the
case of Yelverton's Inc. v. Jefferson County, Alabama, issued May 9, 1997,
the Alabama Court of Civil Appeals specifically held that "the taxable
event in the imposition of the use tax is not the sale of the good, but is
the storage, use, or consumption of that good within the taxing
jurisdiction." The case was conditionally certified on May 30, 1997. The
State's motion for summary judgment was denied and the plaintiff's was
granted. The Department filed a motion for rehearing on June 17, 1997
which was overruled on July 27, 1997. On July 3, 1997, a petition for writ
of certiorari was filed by the Alabama Supreme Court.
Two other class actions involving issues identical to those in this case
have been filed in Montgomery County Circuit Court, styled Sessions Corp.
v. Monroe (Judge Price), stayed pending Valhalla; and A.G. Industries v.
Monroe (Judge Reese), set for hearing on July 8, 1997, on class
certification.
A case regarding employment discrimination litigation against the State of
Alabama, Eugene Crum, Jr., et al., v. State of Alabama, et al., CV-97-
T-356-N, is a class action suit pending in the United States District
Court for the Middle District of Alabama. In this case approximately
twenty state departments are charged with racial discrimination in all
aspects of their employment practices. This case is in the discovery stage
and no estimate can be made at this time concerning any financial
liability the State of Alabama may ultimately incur.
In a case styled Alabama Coalition for Equity, Inc., et al, v. Folsom, et
al., CV-90-883-M, filed on May 3, 1990, in the Circuit Court of Montgomery
County, the plaintiffs have alleged that the State of Alabama's public
school funding structure is unconstitutional under the United States
Constitution and the Alabama State Constitution. The plaintiffs sought,
inter alia, an injunction prohibiting the State of Alabama from
implementing or maintaining any public school funding system perpetuating
the current funding structure; a ruling requiring the State of Alabama to
maintain a constitutional public school funding structure; and the payment
of the plaintiffs' attorneys' fees.
On August 13, 1991, the court granted partial summary judgment to the
plaintiffs on the constitutionality of Amendment 111, Section 256 of the
Alabama Constitution. The Court ruled that this provision violated the
Equal Protection Clause of the Fourteenth Amendment to the United States
Constitution. On December 1,1993, the Court made final its Remedy Order
which found the entire educational system of the State of Alabama to be
unconstitutional. The Court held that all school children have a right to
attend school in a liberal system of public schools required to be
provided by the State. The Alabama Supreme Court vacated the trial court's
remedy order but affirmed its judgment in the liability phase. Plaintiffs'
attorney fees have been paid pursuant to court order. The trial court was
directed to retain jurisdiction. The parties may petition the court to
reopen the case if the coordinate branches of government have not
formulated an educational system within a reasonable time complying with
the liability order.
ARKANSAS FUND
The information below is given to investors in view of the Arkansas Fund's
policy of concentrating its investments in Arkansas issuers. The
information constitutes only a brief summary, does not purport to be a
complete description. It is derived from sources that are generally
available to investors and is believed to be accurate. The Trust and the
Fund have not independently verified this information.
During the past two decades, Arkansas' economic base has shifted from
agriculture to light manufacturing. The State is now moving toward a
heavier manufacturing base involving more sophisticated processes and
products such as electrical machinery, transportation equipment,
fabricated metals, and electronics. Resource-related industries dominate
and the largest employers are the food products, lumber and paper goods
industries. The agricultural sector, though diminished in importance,
remains a significant contributor to state income. Chief products are
broilers, rice and soybeans. The health services, wholesale/retail trade
and service sectors have also grown in recent years. In addition, the
State has significant natural gas and oil producing interests, as well as
mining activities. The diversification of economic interests has lessened
the State's cyclical sensitivity to the impact of any single sector. The
unemployment rate for 1998 averaged 5.1%, compared to a national rate of
4.5%.
The State is prohibited by its Constitution from deficit spending.
Accordingly, spending is limited to actual revenues received by the State.
The State operates under a biennial budgeting system with July 1, 1999
beginning the current biennium.
The Constitution of the State does not limit the amount of general
obligation bonds which may be issued by the State; however, no such bonds
may be issued unless approved by the voters of the State at a general
election or a special election held for that purpose. There is no
constitutional limitation on the aggregate principal amount of revenue
bonds that may be issued by the State and its agencies. All revenue bonds
and notes are secured only by specific revenue streams and neither the
general revenues of the State nor its full faith and credit are pledged to
repayment.
The General Assembly has responsibility for legislating the level of State
services and appropriating the funds for operations of State agencies. The
Office of Budget prepares the Executive Budget with the advice and consent
of the Governor. The Office of Budget also monitors the level and type of
State expenditures. The Accounting Division has the responsibility for
maintaining fund and appropriation control and, through the Pre-Audit
Section and in conjunction with the Auditor of State, has responsibility
for the disbursement process. The Treasurer has responsibilities for
disbursement, bank reconciliation, and investment of State funds (with the
advice of the State Board of Finance). The Division of Legislative Audit
has responsibility for performing financial post-audits of State agencies.
State agencies submit biennial budget requests to the Office of Budget of
the Department of Finance and Administration. The Office of Budget
prepares the Executive Budget and an estimate of general revenues. The
Executive Budget contains the budget amount recommended by the Governor.
The General Assembly appropriates money after consideration of both the
Executive Budget and the revenue estimate. The appropriation process
begins in the joint House-Senate Budget Committee and then proceeds
through both houses of the General Assembly. Legislative appropriations
are subject to the Governor's approval or veto, including the authority of
line-item veto. The General Assembly also must enact legislation pursuant
to the Revenue Stabilization Act to provide for an allotment process of
funding appropriations in order to comply with state law prohibiting
deficit spending. The Governor may restrict spending to a level below the
level of appropriations.
The State's revenue stabilization law (the "Stabilization Act") and
related legislation govern the administration and distribution of State
revenues. Pursuant to the Stabilization Act, all general and special
revenues are deposited into the General Revenue Allotment Account and the
Special Revenue Allotment Account according to the type of revenue being
deposited.
From the General Revenue Fund, 3% of all general revenues are distributed
to the Constitutional Officers Fund and the Central Services Fund to
provide support for the State's elected officials, their staffs, and the
Department of Finance and Administration ("DFA"). The balance is then
distributed to separate funds proportionately as established by the
Stabilization Act.
From the Special Revenue Fund, 3% of special revenues collected by DFA and
1 1/2% of all special revenues collected by other agencies are first
distributed to provide support for the State's elected officials, their
staffs and DFA. The balance is then distributed to the funds for which the
special revenues were collected as provided by law. Special revenues,
which are primarily user taxes, are generally earmarked for the program or
agency providing the related service.
General revenues are transferred into funds established and maintained by
the Treasurer for major programs and agencies of the State in accordance
with funding priorities established by the General Assembly. Pursuant to
the Stabilization Act, the General Assembly establishes three levels of
priority for general revenue spending, levels "A," "B," and "C."
Successive levels of appropriations are funded only in the event
sufficient revenues have been generated to fully fund any prior level.
Accordingly, appropriations made to programs and agencies are only maximum
authorizations to spend. Actual expenditures are limited to the lesser of
(i) special revenues earmarked for a program or agencies' fund maintained
by the Treasurer or (ii) the maximum appropriation by the General
Assembly.
Because State revenues are not collected throughout the year in a pattern
consistent with program and agency expenditures, a budget revolving fund,
which receives interest earnings from State fund investments, has been
established and is utilized to assure proper cash flow during any period.
CALIFORNIA FUND
The following information is a general summary intended to provide a
recent historical description, and is not a discussion of specific factors
that may affect any particular issuer of California municipal securities.
This information is not intended to indicate continuing or future trends
in the condition, financial or otherwise, of the State of California. The
creditworthiness of obligations issued by a local California issuer may be
unrelated to the creditworthiness of obligations issued by the State of
California.
Because the California Fund expects to concentrate its investments in
California municipal securities, it will be susceptible to a number of
complex factors affecting the issuers of such securities, including
national and local political, economic, social, environmental and
regulatory policies and conditions. The California Fund cannot predict
whether or to what extent such factors or other factors may affect issuers
of California municipal securities, the market value or marketability of
such securities or the ability of the respective issuers of such
securities to pay interest on, or principal of, such securities.
During the first half of the 1990's, California suffered the most severe
recession in the State since the 1930's. The financial difficulties
experienced by California and municipal issuers during the recession
resulted in the credit ratings of certain of their obligations being
downgraded significantly by the major rating agencies. Although California
has experienced a steady economic recovery since 1994 and California's
credit rating has climbed from the lows experienced during the recession,
as of the date of this Prospectus, rating agencies, underwriters and
investors appear to have lingering concerns about California's
creditworthiness. Major rating agencies continue to cite, among other
things, concerns about California's lack of contingency planning (such as
adequate reserves), missed budget deadlines and on-going structural budget
impediments.
The recession severely affected California revenues while California's
health and welfare costs were increasing. As a result, from the late
1980's until fiscal 1995-96, California had a period of budget imbalance
and reported multibillion dollar year-end deficits. Since 1995 California
has generally experienced positive or close to break-even operating
results due, in part, to more conservative budgeting and improved economic
conditions.
California's ability to raise revenues and reduce expenditures to the
extent necessary to balance the budget for any year depends upon numerous
factors, including economic conditions in the State and the nation, the
accuracy of the State's revenue predictions, as well as the impact of
budgetary restrictions imposed by voter-passed initiatives.
During the recession of the early 1990's, California faced severe economic
and fiscal conditions and experienced recurring budget deficits that
caused it to deplete its available cash resources and to become
increasingly dependent upon external borrowings to meet its cash needs.
For nearly a decade and a half, California has issued revenue anticipation
notes (which must be issued and repaid during the same fiscal year) to
fund its operating budget during the fiscal year. Beginning in 1992,
California expanded its external borrowing to include revenue anticipation
warrants (which can be issued and redeemed in different fiscal years).
California was severely criticized by the major credit rating agencies for
California's reliance upon such external borrowings during the recession.
(California was also criticized for its issuance of registered warrants,
promissory notes with no specific maturity, to suppliers and other State
payees during a two-month delay that took place in enacting California's
budget for fiscal 1992-1993.) In 1996, California fully repaid $4 billion
of revenue anticipation warrants issued in 1994. California has not needed
to use such "cross-year" borrowing since 1996. It is not presently
possible, however, to determine the extent to which California will issue
additional revenue anticipation warrants, short-term interest-bearing
notes or other instruments in future fiscal years.
The ability of the State of California and its political sub-divisions to
generate revenue through real property and other taxes and to increase
spending has been significantly restricted by various constitutional and
statutory amendments and voter-passed initiatives. Such limitations could
affect the ability of California state and municipal issuers to pay
interest or repay principal on their obligations.
Certain of the securities in the California Fund's portfolio may be
obligations of issuers which rely, in whole or in part, directly or
indirectly, on ad valorem real property taxes as a source of revenue.
Article XIIIA of the California Constitution, adopted in 1978, limits ad
valorem taxes on real property and restricts the ability of taxing
entities to increase real property taxes.
Article XIIIB of the California Constitution, originally adopted in 1979,
significantly limits spending by state and local governments. To the
extent that "proceeds of taxes" of California or a local government exceed
its Article XIIIB appropriations limit, such excess revenues must be
rebated. In 1988 and 1990, Article XIIIB was modified substantially by
Propositions 98 and 111, respectively. These initiatives changed the
State's Article XIIIB appropriations limit to require California to set
aside a prudent reserve fund for public education, and guarantee a minimum
level of State funding for public elementary and secondary schools and
community colleges. Such guaranteed spending is often cited as one of the
long-term structural elements responsible for California's recurring
budget problems.
The effect of Article XIIIA, Article XIIIB, other constitutional and
statutory changes and budget developments on the ability of California
issuers to pay interest and principal on their obligations is uncertain
and may depend, in part, on whether a particular security is a general
obligation or limited obligation bond. There is no assurance that any
California issuer will make full or timely payments of principal or
interest or remain solvent.
In December 1994, Orange County, California filed for protection from
creditors under federal bankruptcy law. In June 1995, Orange County
negotiated a rollover of its short-term debt originally due at such time.
The major rating agencies considered the rollover a default. In June 1996,
the investors in such overdue notes were paid and the Orange County
bankruptcy ended. The California Fund did not hold such Orange County
obligations. However, the Orange County bankruptcy and such default had a
serious effect upon the market for California municipal obligations.
Numerous factors may adversely affect the State and municipal economies.
For example, reductions in federal funding could result in the loss of
federal assistance otherwise available to the State. In addition, natural
disasters, such as earthquakes, have caused substantial damage to parts of
California and could create a major dislocation of the California economy.
FLORIDA FUND
The information contained in this statement is being given to investors in
view of the Florida Fund's policy of concentrating its investments in
Florida issuers. The information should provide investors with a brief
summary, as opposed to a complete description, of the information
discussed herein. It has been derived from sources that are generally
available to investors and is believed to be accurate. The information has
not been independently verified by the Trust or the Fund.
Florida's financial operations are considerably different than most other
states as Florida does not impose an individual income tax. Specifically,
Florida's constitution prohibits the levy, under the authority of the
State, of an individual income tax upon the income of natural persons who
are residents or citizens of Florida in excess of amounts which may be
credited against or deducted from any similar tax levied by the United
States or any other state. Accordingly, a constitutional amendment would
be necessary to impose a state individual income tax in excess of the
foregoing constitutional limitations. The lack of an individual income tax
exposes total State tax collections to considerably more volatility than
would otherwise be the case and, in the event of an economic downswing,
could affect the State's ability to pay principal and interest in a timely
manner.
Financial operations of the State of Florida covering all receipts and
expenditures are maintained through the use of four funds (the General
Revenue Fund, Trust Funds, the Working Capital Fund and the Budget
Stabilization Fund). The General Revenue Fund receives the majority of
State tax revenues. The Trust Funds consist of monies received by the
State which under law or trust agreement are segregated for a purpose
authorized by law. Revenues in the General Revenue Fund which are in
excess of the amount needed to meet appropriations may be transferred to
the Working Capital Fund.
The Florida Constitution and Statutes mandate that the State budget as a
whole, and each separate fund within the State budget, be kept in balance
from currently available revenues each State fiscal year (July 1 -- June
30). Pursuant to a constitutional amendment which was ratified by the
voters on November 8, 1994, the rate of growth in state revenues in a
given fiscal year is limited to no more than the average annual growth
rate in Florida personal income over the previous five years (revenues
collected in excess of the limitation are generally deposited into the
Budget Stabilization Fund).
The following data is provided by the Florida Consensus Estimating
Conference, which adjusted and updated actual revenue and forecasts on
March 8, 1999, in order to support the state's budgeting and planning
process. For fiscal year 1998-99, the estimated General Revenue Fund and
Working Capital Fund is reported to be $18.80 billion. The projected year
end balance of the combined General Revenue Fund and Working Capital Fund
is $573.8 million. Including the $789.6 million balance currently in the
Budget Stabilization Fund, total reserves are projected to stand at $1.36
billion, or 7.5% of current year appropriations. For fiscal year
1999-2000, the estimated General Revenue Fund and Working Capital Fund is
$19.35 billion, a 2.9% increase over fiscal year 1998-99. The fiscal year
1999-2000 budget includes a 4.3% increase in Net General Revenue over
fiscal year 1998-99. For fiscal year 1998-99, the estimated Florida and
United States unemployment rates are 5.0% and 5.1%, respectively. For
fiscal year 1999-2000, the estimated Florida and United States
unemployment rates are both 5.5%.
In 1993, the State constitution was amended to limit the annual growth in
the assessed valuation of residential property. This amendment may, over
time, constrain the growth in property taxes, a major revenue source for
local governments. While no immediate ratings implications are expected,
the amendment could have a negative impact on the financial performance of
local governments over time and lead to ratings revisions which may have a
negative impact on the prices of affected bonds.
General obligations of Florida have been rated AA2, AA+ and AA by Moody's,
S&P and Fitch, respectively. S&P presently regards the outlook for the
State as stable.
Florida's economy is characterized by a large service sector, a dependence
on the tourism and construction industries, and a large retirement
population. The management of rapid growth has been the major challenge
facing state and local governments. While attracting many senior citizens,
Florida also offers a favorable business environment and growing
employment opportunities that have continued to generate working-age
population immigration. As this growth continues, particularly within the
retirement population, the demand for both public and private services
will increase, which may strain the service sector's capacity and impede
the State's budget balancing efforts.
Florida has a proportionally greater number of persons of retirement age;
a factor that makes Florida's property and transfer payment taxes a
relatively more important source of state funding. Because transfer
payments are typically less sensitive to the business cycle than
employment income, they may act as a stabilizing force in weak economic
periods.
Taking advantage of a number of favorable factors -- a strong national
economy, a waning fear of crime among visitors and improved local marketing
-- the state has increased the number of tourists. For fiscal year 1997-98,
the number of tourists visiting Florida was 48.7 million, a 10.0% increase
over fiscal year 1996-97. For fiscal year 1998-99 expected tourist arrivals
are projected at 49.9 million, a 2.4% increase over fiscal year 1997-98. For
fiscal year 1999-2000, expected tourist arrivals are projected at 51.5
million, a 3.2% increase over fiscal year 1998-99.
There has been a decline in Florida's dependency on highly cyclical
construction and construction-related manufacturing sectors. For example, in
1985, construction employment, as a share of total non-farm employment, was
7.5%. From 1990 through 1995, the share edged downward to an average of
5.1%. While the share for 1999 is expected to slightly increase to 5.5%, the
trend is expected to resume a downward slope and drop below the 5% level by
2002, as Florida's economy continues to diversify.
The ability of the State and its local units of government to satisfy its
debt obligations may be affected by numerous factors which impact on the
economic vitality of the State in general and the particular region of the
State in which the issuer of the debt obligations is located. South
Florida is particularly susceptible to international trade and currency
imbalances and to economic dislocations in Central and South America, due
to its geographical location and its involvement with foreign trade,
tourism and investment capital. North and Central Florida are impacted by
problems in the agricultural sector, particularly with regard to the
citrus and sugar industries. Short-term adverse economic conditions may be
created in these areas, and in the State as a whole, due to crop failures,
severe weather conditions or other agriculture-related problems. The State
economy also has historically been dependent on the tourism and
construction industries and is, therefore, sensitive to trends in those
sectors.
GEORGIA FUND
Since 1973, the State's long-term debt obligations have been issued in the
form of general obligation debt or guaranteed revenue debt. The State may
incur guaranteed revenue debt by guaranteeing the payment of certain
revenue obligations issued by an instrumentality of the State. Prior to
1973, all of the State's long-term debt obligations were issued by ten
separate State authorities and secured by lease rental agreements between
such authorities and various State departments and agencies ("Authority
Lease Obligations"). The Georgia Constitution since 1973 has prohibited
further Authority Lease Obligations. The Georgia Constitution prohibits
the incurring of any general obligation debt or guaranteed revenue debt if
the highest aggregate annual debt service requirement for the then-current
year or any subsequent fiscal year for outstanding general obligation debt
and guaranteed revenue debt, including the proposed debt, exceed 10% of
the total revenue receipts, less refunds, of the State treasury in the
fiscal year immediately preceding the year in which any such debt is to be
incurred. As of October 1998, the total indebtedness of the State of
Georgia consisting of general obligation debt and guaranteed revenue debt
(there is no remaining Authority Lease Obligations) totalled
$5,187,785,000 and the highest aggregate annual payment for such debt
equalled 5.05% of fiscal year 1998 State treasury receipts.
The Georgia Constitution also permits the State to incur public debt to
supply a temporary deficit in the State treasury in any fiscal year
created by a delay in collecting the taxes of that year. Such debt must
not exceed, in the aggregate, 5% of the total revenue receipts, less
refunds, of the State treasury in the fiscal year immediately preceding
the year in which such debt is incurred. The debt incurred must be repaid
on or before the last day of the fiscal year in which it is to be incurred
out of the taxes levied for that fiscal year. No such debt may be incurred
in any fiscal year if there is then outstanding unpaid debt from any
previous fiscal year which was incurred to supply a temporary deficit in
the State treasury. No such short-term debt has been incurred under this
provision since the inception of the constitutional authority permitting
it.
Virtually all of debt obligations of the State of Georgia and its
counties, municipalities and other political subdivisions and public
authorities are required by law to be validated and confirmed in a
judicial proceeding prior to issuance.
The State operates on a fiscal year beginning July 1 and ending June 30.
Treasury receipts for the fiscal year 1998 showed an increase of 4.81%
over collections for the similar period in the previous fiscal year. A
part of the decline in growth is attributable to gradual elimination of
sales tax on food.
Based on data of the Georgia Department of Revenue for fiscal year 1998,
income tax receipts and sales tax receipts of the State for fiscal year
1998 comprised approximately 51.5% and 36.3%, respectively, of the total
State tax revenues.
The unemployment rate of the civilian labor force in the State as of March
1998 was 4% according to data provided by the Georgia Department of Labor.
The Metropolitan Atlanta area, which is the largest employment center in
the area, comprised of Georgia and its five bordering states and which
accounts for approximately 46% of the State's population, has for some
time enjoyed a lower rate of unemployment than the State considered as a
whole. In descending order, services, wholesale and retail trade,
manufacturing, government and transportation comprise the largest sources
of employment within the State.
Moody's, S&P's and Fitch have given outstanding State of Georgia debt
ratings of "Aaa", "AAA" and "AAA", respectively.
The State from time to time is named as a party in certain lawsuits, which
may or may not have a material adverse impact on the financial position of
the State if decided in a manner adverse to the State's interests. The
status as of December 1998 of certain of such lawsuits which could have a
significant impact on the State's financial position are summarized below.
Abbott Laboratories v. Georgia Department of Administrative Services, et
al. The plaintiff is seeking unspecified damages against the Department of
Administrative Services ("DOAS") and the Department of Human Resources
under breach of contract and promissory estoppel theories. The case arises
out of DOAS' issuance of a notice of award to Abbott Laboratories, Ross
Products Division in connection with WIC Infant Formula Rebate Program.
The Director of State Purchasing subsequently ordered cancellation of the
notice of award and rebid because of conflicting information that created
a contradiction in the bidding specifications. The damages sought are
unspecified and speculative. Discovery is ongoing in this matter. The
State intends of file a motion for summary judgment at the close of
discovery.
Age International, Inc. v. State (two cases). Two suits for refund have
been filed in state court against the State of Georgia by out-of-state
producers of alcoholic beverages. The first suit for refund seeks $96
million in refunds of alcohol taxes, plus interest, imposed under
Georgia's post-Bacchus (468 U.S. 263) statute, O.C.G.A. (S) 3-4-60, as
amended in 1985. These claims constitute 99% of all such taxes paid during
the 3 years preceding these claims. In addition, the claimants have filed
a second suit for refund for an additional $23 million, plus interest, for
later time periods. These two cases encompass all known or anticipated
claims for refund of such type within the apparently applicable statute of
limitations for the years in question, i.e., 1989 through January, 1993.
The trail court has granted the State's motions for summary judgment, and
12 of the 23 claimants have appealed to the Georgia Supreme Court. The
total principal amount of the claims for refund by the 12 plaintiffs who
did not appeal now appears to be approximately $42 million. The total
principal dollar amount of claims for refund by the 11 plaintiffs who did
not appeal, which claims to be conclusively resolved in favor of the State
by virtue of the trial court's judgment, now appears to be approximately
$54 million.
Cobb County, et al. v. Georgia et al. In related cases, each County and
certain of its officials has sued the State of Georgia, the Department of
Revenue, Zell Miller (in his official capacity as Governor), T. Jerry
Jackson (in his personal capacity and in his official capacity as Revenue
Commissioner), Claude L. Vickers (in his official capacity as State
Auditor), and the Department of Audits (collectively "the State") in
connection with the State's collection and distribution of special local
option sales taxes to the counties. In Cobb, the County sought an
accounting, a writ of mandamus, injunctive relief and additional based
upon theories of unjust enrichment and bailment. Cobb's claims related to
the State's administraiton of state and local option sales taxes from
April 1, 1995 to the present. Cobb sought $19 million in relief. In
Dekalb, the County asserts similar grounds for relief with the addition of
a claim for declaratory relief. DeKalb's claims relate to the State's
administration of state and local option sales taxes from July 1, 1997 to
the present. DeKalb seeks unspecified monetary relief but estimates a
shortfall in distributions from the State of $15 million. The State filed
motions to dismiss in both cases and additionally, in Cobb, filed a
counterclaim against the County for $10.4 million. The trial court has
granted the State's motions to dismiss in both actions. DeKalb County has
appealed this ruling, claiming that certain of its claims were meritorious
and seeking to litigate those claims. The State believes that the period
for Cobb County to appeal has lapsed, although a motion by Cobb County
remains pending in the trial court. The State intends to contest all
claims against it vigorously. The State believes that the substance of
Plaintiff's claims in both cases is unsubstantiated. This appeal has been
fully briefed and argued, and decision is awaited from the Supreme Court
of Georgia.
George Jackson, et al. v. Georgia Lottery Corporation. Plaintiffs sought a
court order declaring that two games sponsored by the Georgia Lottery
Corporation, "Quick Cash" and "Cash Three," are unconstitutional and
enjoining the lottery from further offering of these games. Plaintiffs
also sought the return of all monies played on these games during a
specified period, approximately $1,703,462,781. On an interlocutory
appeal, the Georgia Court of Appeals ruled that the Lottery Corporation
does not have sovereign immunity but ruled for the Corporation on the
merits. The Plaintiffs petitioned for a writ of certiorari to the Supreme
Court of Georgia, and the Supreme Court denied the petition. The
remittitur of the Court of Appeals has been returned to the trial court.
W.J. Luke, an individual, v. Georgia Department of Natural Resources, et
al. This civil action was filed in October, 1997, on behalf of W.J. Luke
and all other contributors to the Georgia Underground Storage Tank Trust
Fund, established under the Georgia Underground Storage Tank Act, O.C.G.A.
(S)12-13-1, et seq., for refund of all monies collected under that Act,
interest, and attorney's fees. From the time of its inception in 1988 to
the present, the Fund has collected approximately $82 million. The State
believes that it has substantial defenses to assert and intends to defend
the case vigorously. The State was granted a motion to dismiss the action,
on the grounds that no justiciable controversy exists, and the Plaintiff
has filed an appeal with the Georgia Supreme Court which has heard oral
arguments and a decision by the Court is pending.
Many factors affect and could have an adverse impact on the financial
condition of the State and other issuers of long-term debt obligations
which may be held in the portfolio of the Georgia Fund, including
national, social, environmental, economic and political policies and
conditions, and Year 2000 compliance issues, many of which are not within
the control of the State or such issuers. It is not possible to predict
whether or to what extent those factors may affect the State and other
issuers of long-term debt obligations which may be held in the portfolio
of the Georgia Fund and the impact thereof on the ability of such issuers
to meet payment obligations.
MARYLAND FUND
The State's total expenditures for the fiscal years ending June 30, 1996,
1997 and 1998 were $14.169 billion, $14.787 billion and $6.851 billion,
respectively. The State's General Fund had unreserved surpluses of $13.1
million, $207.2 million and $419.8 million in fiscal years 1996, 1997 and
1998, respectively. The State Constitution mandates a balanced budget.
In April 1998, the General Assembly approved the $16.613 billion 1999
fiscal year budget. The budget includes $3.3 billion in aid to local
governments (reflecting a $163.2 million increase in funding over 1998).
The 1999 budget does not include any proposed expenditures dependent on
additional revenue from new or broad-based taxes. The 1999 budget
incorporates the first full year of the five-year phase-in of a 10%
reduction in personal income taxes estimated to result in a reduction of
revenues of $300 million in fiscal year 1998.
When the 1999 budget was enacted, it was estimated that the general fund
surplus on a budgetary basis at June 30, 1998, would be approximately
$14.5 million. As of February 12, 1999, it is estimated that the general
fund surplus on a budgetary basis at June 30, 1999, will be $249.5
million.
In January 1999, the Governor submitted his proposed 2000 fiscal year
budget to the General Assembly. The budget includes $3.0 billion in aid to
local governments and $70.4 million in net general fund deficiency
appropriations for fiscal year 1997. As of February 12, 1999, it is
estimated that the general fund surplus on a budgetary basis at June 30,
2000, will be $1.3 million and that the balance in the Revenue
Stabilization Account of the State Reserve Fund at June 30, 2000, will be
$622 million. The Revenue Stabilization Account of the State Reserve Fund
was established by the General Assembly in its 1986 session for the
purpose of retaining state revenues for future needs and to reduce the
need for future tax increases.
The public indebtedness of Maryland is divided into three basic types. The
State issues general obligation bonds for capital improvements and for
various State-sponsored projects. The Department of Transportation of
Maryland issues limited, special obligation bonds for transportation
purposes payable primarily from specific, fixed-rate excise taxes and
other revenues related mainly to highway use. Certain authorities issue
obligations solely from specific non-tax enterprise fund revenues and for
which the State has no liability and has given no moral obligation
assurance.
All of the foregoing information regarding the State's budget and public
indebtedness was obtained from the Preliminary Official Statement with
respect to State of Maryland General Obligation Bonds dated February 12,
1999.
MASSACHUSETTS FUND
Investments in Massachusetts Municipal Obligations may be affected by a
variety of factors, including the general economic health of the
Commonwealth and local governments and the availability of federal
funding.
While economic growth in the Commonwealth slowed considerably during the
recession of 1990-1991, indicators such as retail sales, housing permits,
construction, and employment levels suggest a strong and continued
economic recovery. As of March 1999, the Commonwealth's unadjusted
unemployment rate was 3.3%, as compared to a national average of 4.4%. The
Commonwealth's per capita personal income is currently higher than the
national average.
Accounted for on a statutory basis, ending fund balances in the budgeted
operating funds for fiscal 1994 were $589.3 million. Fiscal 1995 and 1996
ended with positive fund balances of $726.0 million and $1.172 billion,
respectively.
In fiscal 1997, the total revenues of the budgeted operating funds of the
Commonwealth increased by approximately 4.9% over the prior fiscal year to
$18.170 billion. Expenditures increased by 6.3% over the prior fiscal year
to $17.949 billion. As a result, the Commonwealth ended fiscal year 1997
with a positive closing fund balance of $1.394 billion. In fiscal 1998,
the total revenues of the budgeted operating funds of the Commonwealth
increased by approximately 5.9% over the prior fiscal year to $19.002
billion. Expenditures increased by 9.0% over the prior fiscal year to
$19.800 billion. As a result, the Commonwealth ended fiscal year 1998 with
a positive closing fund balance of $2.192 billion.
Budgeted revenues and other sources in fiscal 1999, which ended June 30,
1999, were estimated as of February 16, 1999, by the Executive Office for
Administration and Finance to be approximately $19.700 billion, including
tax revenues of $14.0 billion. It is estimated that fiscal 1999 budgeted
expenditures and other uses will be $20.151 billion and that fiscal 1999
will end with fund balances of $1.703 billion.
On January 27, 1999, Governor Cellucci filed his fiscal 2000 budget
recommendations with the House of Representatives. The proposal called for
budgeted expenditures of approximately $20.391 billion, or total fiscal
2000 spending of $20.556 billion after adjusting for shifts to and from
off-budget accounts. Budgeted revenues for fiscal 2000 are projected to be
$20.241 billion, or $20.332 billion after adjusting for shifts to and from
off-budget accounts. The Governor's proposal projected a fiscal 2000
ending balance in the budgeted funds of approximately $1.625 billion,
including a Stabilization Fund balance of approximately $1.390 billion.
S&P and Moody's have rated general obligation bonds issued by the
Commonwealth as AA- and Aa3, respectively. In response to budgetary
matters or other economic indicators, the rating agencies may change their
ratings from time to time.
In Massachusetts the tax on personal property and real estate is virtually
the only source of tax revenues available to cities and towns to meet
local costs. "Proposition 2 1/2," an initiative petition adopted by the
voters of the Commonwealth in November 1980, limits the power of
Massachusetts cities and towns and certain tax-supported districts and
public agencies to raise revenue from property taxes to support their
operations, including the payment of certain debt service. Proposition 2
1/2 required many cities and towns to reduce their property tax levies to
a stated percentage of the full and fair cash value of their taxable real
estate and personal property, and it limits the amount by which the total
property taxes assessed by all cities and towns might increase from year
to year.
The reductions in local revenues and anticipated reductions in local
personnel and services resulting from Proposition 2 1/2 created strong
demand for substantial increases in state-funded local aid, which
increased significantly from the fiscal 1981 level of $1.632 billion. The
effect of this increase in local aid was to shift a major part of the
impact of Proposition 2 1/2 to the Commonwealth, but this did not require
an increase in Massachusetts state taxes. Direct local aid increased to
$3.246 billion in fiscal 1996. Fiscal 1997 expenditures for direct local
aid were $3.558 billion, which is an increase of approximately 9.6% above
the fiscal 1996 level. Fiscal 1998 expenditures for direct local aid will
be $3.949 billion, an increase of approximately 11.0% above the fiscal
1997 level. It is estimated that fiscal 1999 expenditures for direct local
aid will be $4.272 billion, an increase of approximately 8.2% above the
fiscal 1998 level. In fiscal year 1999 approximately 21.5% of the
Commonwealth's budget is estimated to be allocated to direct local aid.
Limits on Commonwealth tax revenues were established by initiative
petition in November 1986, and added to the Commonwealth's General Laws as
Chapter 62F. Chapter 62F contains no exclusion for debt service on
Municipal Obligations of the Commonwealth. Tax revenues in fiscal 1994
through fiscal 1998 were lower than the limit set by Chapter 62F, and the
Executive Office for Administration and Finance currently estimates that
state tax revenues in fiscal 1999 will not reach such limit.
Certain of the Commonwealth's cities, counties and towns have at times
experienced serious financial difficulties which have adversely affected
their credit standing. The recurrence of such financial difficulties, or
financial difficulties of the Commonwealth, could adversely affect the
market values and marketability of outstanding obligations issued by the
Commonwealth or its public authorities or municipalities.
The aggregate unfunded actuarial liabilities of the pension systems of the
Commonwealth and the unfunded liability for the Commonwealth related to
local retirement systems are significant -- estimated to be approximately
$6.720 billion as of January 1, 1996, on the basis of certain actuarial
assumptions regarding, among other things, future investment earnings and
annual inflation rates, wage increases and cost of living increases. No
assurance can be given that these assumptions will be realized. The
legislature adopted a comprehensive pension bill addressing the issue in
January 1988, which requires the Commonwealth, beginning in fiscal 1989,
to fund future pension liabilities currently and amortize the
Commonwealth's unfunded liabilities over 40 years, in accordance with
funding schedules proposed by the Secretary of Administration and Finance
and approved by new legislation. The amounts required for funding of
current pension liabilities in fiscal years 1999, 2000, 2001 and 2002, are
estimated to be $1.059 billion, $1.073 billion, $1.088 billion and $1.104
billion, respectively. Pension funding legislation was revised in July
1997 as part of the fiscal 1998 budget, to include an accelerated pension
funding schedule that would eliminate the Commonwealth's unfunded
liability by 2018 rather than 2028.
MISSISSIPPI FUND
Mississippi's unemployment rate for 1997 was 5.7%, down from a rate of
6.1% in 1995. Unemployment in Mississippi is at its lowest rate since
1979. Projections indicate a continued decline to 5.9% in 1998. The growth
rate of State product for 1997 was 4.5%, with the same growth rate being
projected for 1998. An increased growth rate of 5.0% is expected in 1999.
Mississippi continued to fall slightly behind the growth in per capita
income for the country. Per capita incomes increased an estimated 5.8% in
1997; in 1998, personal income is projected to grow 4.1%.
The growing importance of telecommunications, the increase of
international trade and the tremendous increase in gaming and tourism have
significantly impacted the state's economic position. Total employment in
Mississippi increased by 1.1% in 1995 and is expected to increase by 1.2%
in 1998. In the U.S. as a whole, total employment grew at a rate of 1.5%.
Manufacturing accounts for 22% of employment in Mississippi, although
employment in the manufacturing sector declined approximately 4% in 1996.
This trend is not expected to continue, however. In fact, unlike the
remainder of the nation, manufacturing employment in Mississippi is
expected to increase between 1998 and 2003. In Mississippi, about 56% of
manufacturing employment is in durable goods, with the remainder in
nondurable goods. Mississippi's employment growth is expected to continue
in such sectors as services, finance, insurance, real estate and
construction.
Although 1996 employment and income statistics show that the Mississippi
economy slowed compared to 1995, the construction, agricultural and
service sectors have been strong enough to maintain positive growth in
employment and a rise in income levels close to the U.S. average. Although
the State did not outperform national averages, the Mississippi economy
has consistently outpaced the rest of the nation in recent years, with
growth rates of income and employment well above the national average.
U.S. News and World Report (11/8/93) ranked Mississippi number one in the
nation, based on six indicators of economic health. The strength of
Mississippi's economy is evident by the 9.8% rise in the corporate profits
during 1992, a similar growth rate for 1993, and strong growth in 1994 due
to further expansion of the gaming industry. U.S. News and World Report
(11/7/94) continued to rank Mississippi in the top ten states for economic
growth with its number eight ranking.
In recent years, the State has successfully expanded its economy through
technology-based research and education, and the Mississippi banking
system has exhibited strength and stability over the past several years, a
period characterized by a growing number of bank failures nationwide. As a
result of legislation passed in 1996, state banks are able to participate
in nationwide banking through the establishment of branches out-of-state,
and out-of-state banks are able to establish branches in Mississippi.
The gaming industry started up in Mississippi in August 1992, and as of
November 1993, it had already become a $500 million industry, providing
more than 12,000 jobs in direct employment and contributing over $60
million in State and local tax revenues annually. By December 1994,
employment in the gaming industry stabilized at 28,000 jobs. During 1995
employment grew to 31,000 and monthly revenues increased to average $155
million, and in 1996, the annual growth rate for employment in the gaming
industry exceeded 10%. Gross gaming revenues in 1997 exceeded the previous
year's revenues by 6.8 percent. Three additional gaming facility projects
were announced during 1997 which will require an initial aggregate
investment of $1250 million.
While the number of workers involved directly in agriculture has declined,
it remains a significant factor in the State's economy. Cotton was the
number one producer of farm income in 1990, poultry and eggs were second
while forestry was third. Research and promotion have provided the State
with a number of new farming alternatives. The production of catfish,
poultry, rice, blueberries and muscadines have grown dramatically in
recent years. Timber continues to be Mississippi's largest natural
resource, with the State leading the nation in the number of tree farms.
Cash receipts from both poultry and forestry were at record high levels in
1996. Of Mississippi's total land area 56% (approximately 17 million
acres) is classified as commercial forest.
All or part of 20 states and 136 metropolitan areas lie within 550 miles
of Mississippi. Mississippi is in an excellent location to service this
market area with four interstate highways, which provide access in every
direction, 19 railroads, including four of the nation's largest carriers,
and seven commercial airports. International and domestic waterborne
commerce is served by Mississippi's 12 major ports.
The population of the State is estimated to be 2,720,000. The population
increased an estimated 2.1% from 1980-1990; however, population
projections suggest a more dramatic growth in the 1990's. The projected
increase is 9.8% for a total population of 2,827,703 by the year 2000.
Mississippi has a relatively young population, with 28% of its total
population below 18 years of age.
Employment in the service industries rose more than 50% since 1990 and
accounts for 23% of the state's employment, but employment in service
industries slowed its growth sharply from the 1994 growth rate of 12.4%.
Although the manufacturing sector is the leading employer in the State,
the leading gainer in 1997 was the hotel and lodging segment which saw an
increase in employment of 10.7% as compared to 1996. The other large
employment sectors are government, wholesale and retail trade,
construction and transportation and communications. Although its
importance has declined over the last decade, agriculture continues to
contribute significantly to the State's economy. With the diversification
into livestock, soybeans, aquaculture, rice and other alternative crops,
there is now less dependence on cotton as the major crop. The State's
exports have been enjoying double-digit growth rates. In 1993-1995,
Mississippi led the country in the growth rate of exports, with a 70.4%
increase, and the state ranked 40th in value of exports. The state has
also increased its involvement in the international marketplace. In 1996,
$2.8 billion in goods were exported to Russia. Exports to China also
increased significantly, substantial levels of exports to Canada and
Mexico, historically Mississippi's leading export markets, continued.
Total personal income in Mississippi increased 4.1% in 1998 compared to a
5.8% increase in the U.S. over the same period. Projections for 1999 show
the State personal income growth to be slightly higher than the growth
experienced in Mississippi in 1998. Manufacturing, services and government
employment comprise the largest components of earned personal income in
Mississippi. Mississippi continues to rank 50th among the 50 states in per
capita total personal income. However, between 1970 and 1990, per capita
total personal income in Mississippi increased 87% from 1985 to 1996
compared to a 74% increase in the United States over the same period.
In the State of Mississippi, all State indebtedness must be authorized by
legislation governing the specific programs or projects to be financed.
Such debt may include short- and long-term indebtedness, self-supporting
general obligation bonds, highway bonds and other types of indebtedness.
The amount of bonded indebtedness that may be incurred by the State or any
of its direct agencies is limited by the Mississippi Constitution to an
amount equal to one and one-half times the sum of all revenue collected by
the State during any one of the preceding four fiscal years, whichever
year may be higher.
For the fiscal year ended June 30, 1996, State General Fund receipts were
budgeted at approximately $2,701,640 and State General Fund Disbursements
were budgeted at approximately $2,675,573, and State Special Fund Receipts
and Disbursements were estimated to be approximately $4,877,689 and
$4,760,510, respectively. With the growth in industry, employment and the
gaming industry, the State General Fund receipts are increasing
significantly. For the fiscal year ended June 30, 1997, General Fund
receipts had increased to approximately $2,862,297 and this trend is
expected to continue.
NEW YORK FUND
The fiscal stability of New York State is related, in part, to the fiscal
stability of its public localities and authorities. Various State
agencies, authorities and localities have issued large amounts of bonds
and notes either guaranteed or supported by the State through lease-
purchase arrangements, other contractual arrangements or moral obligation
provisions. While debt service is normally paid out of revenues generated
by projects of such State agencies, authorities and localities, the State
has had to provide special assistance in recent years, in some cases of a
recurring nature, to enable such agencies, authorities and localities to
meet their financial obligations and, in some cases, to prevent or cure
defaults. If any State agencies, authorities or localities were to default
on any of their financial obligations, or were to require State assistance
to meet their financial obligations, the ability of the State to meet its
own obligations as they become due or to obtain additional financing, as
well as market price of the State's outstanding debt, could be materially
adversely affected.
A variety of court actions have been brought against the State and certain
agencies and municipalities relating to financings, amount of real estate
tax, use of tax revenues and other matters, which could adversely affect
the ability of the State or such agencies or municipalities to pay their
obligations.
Both the State and New York City face potential economic problems which
could seriously affect the ability of both the State and City to meet
their respective financial obligations. The City depends on state aid both
to enable the City to balance its budget and to meet its cash
requirements. The City has had to face greater competition from other
major cities and the State economy has grown more slowly than that of the
nation as a whole, in part as a result of international and national
trends beyond the State's or City's control. Moreover, the current high
level of New York State and New York City taxes limits the ability of the
State and the City to impose higher taxes in the event of future
difficulties. The federal and State governments have proposed various
programs to alleviate these trends but no immediate reversal can be
expected. Further, various proposals relating to Federal tax and spending
policies that are currently being discussed and debated could, if enacted,
have a significant impact on the current and future financial condition of
the State and its localities. Certain localities outside the City have
experienced financial problems and have requested and received additional
State assistance during the last several years.
New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse
with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small
share of the nation's farming and mining activity. The State's location
and its excellent air transport facilities and natural harbors have made
it an important link in international commerce. Travel and tourism
constitute an important part of the economy. The State has a declining
proportion of its workforce engaged in manufacturing, and an increasing
proportion engaged in service industries. This transition reflects a
national trend. The State is likely to be less affected than the nation as
a whole during an economic recession that is concentrated in manufacturing
and construction, but likely to be more affected during a recession that
is concentrated more in the service-producing sector.
Although industry and commerce are broadly spread across the State,
particular activities are concentrated in certain areas. Westchester
County is headquarters for several major corporations. Buffalo's economy
relies on a diverse manufacturing base. Rochester leads the nation in the
manufacture of photographic and optical equipment. Syracuse and the Utica-
Rome area produce machinery and transportation equipment. The Albany-Troy-
Schenectady area is a governmental and educational center and produces
electrical products. Binghamton is the original site of the International
Business Machines Corporation and continues to have a concentration of
employment in computer and other high technology manufacturing.
New York City, which is the most populous city in the State and nation and
is the center of the nation's largest metropolitan area, accounts for a
large portion of both the State's population and personal income. It is
headquarters for the nation's securities business, and for a major portion
of the nation's major commercial banks, diversified financial institutions
and life insurance companies. In addition, the City houses the home
offices of the three major radio and television broadcasting networks,
most of the national magazines and a substantial portion of the nation's
book publishers. The City also retains leadership in the design and
manufacture of men's and women's apparel.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the
nation as a whole, gradually eroding its relative economic position.
Statewide, urban centers have experienced significant changes involving
migration of the more affluent to the suburbs and an influx of generally
less affluent residents. Regionally, the older Northeast cities have
suffered because of the relative success that the South and the West have
had in attracting people and business. The City has also had to face
greater competition as other major cities have developed financial and
business capabilities which make them less dependent on the specialized
services traditionally available almost exclusively in the City.
The State economy has continued to expand, but growth remains somewhat
slower than in the nation. Although the State has added approximately
300,000 jobs since late 1992, employment growth in the State has been
hindered during recent years by significant cutbacks in the computer and
instrument manufacturing, utility, defense, and banking industries.
Government downsizing has also moderated these job gains.
The State has for many years had a very high State and local tax burden
relative to other states. The State and its localities have used these
taxes to develop and maintain their transportation networks, public
schools and colleges, public health systems, other social services and
recreational facilities. Despite these benefits, the burden of State and
local taxation, in combination with the many other causes of regional
economic dislocation, may have contributed to the decisions of some
businesses and individuals to relocate outside, or not locate within, the
State.
NORTH CAROLINA FUND
General obligations of a city, town or county in North Carolina are
payable from the general revenues of the entity, including ad valorem tax
revenues on property within the jurisdiction. Revenue bonds issued by
North Carolina political subdivisions include (1) revenue bonds payable
exclusively from revenue-producing governmental enterprises and (2)
industrial revenue bonds, college and hospital revenue bonds and other
"private activity bonds" which are essentially non-governmental debt
issues and which are payable exclusively by private entities such as non-
profit organizations and business concerns of all sizes. State and local
governments have no obligation to provide for payment of such private
activity bonds and in many cases would be legally prohibited from doing
so. The value of such private activity bonds may be affected by a wide
variety of factors relevant to particular localities or industries,
including economic developments outside of North Carolina. In addition,
the North Carolina Fund is concentrated on Debt Obligations of North
Carolina issuers and is subject to additional risk from decreased
diversification as well as factors that may be particular to North
Carolina or, in the case of revenue bonds payable excessively from private
party revenues or from specific state non-tax revenue, factors that may be
particular to the related activity or payment party.
Section 23-48 of the North Carolina General Statutes appears to permit any
city, town, school district, county or other taxing district to avail
itself of the provisions of Chapter 9 of the United States Bankruptcy
Code, but only with the consent of the Local Government Commission of the
State and of the holders of such percentage or percentages of the
indebtedness of the issuer as may be required by the Bankruptcy Code (if
any such consent is required). Thus, although limitations apply, in
certain circumstances political subdivisions might be able to seek the
protection of the Bankruptcy Code.
State Budget and Revenues. The North Carolina State Constitution requires
that the total expenditures of the State for the fiscal period covered by
each budget not exceed the total of receipts during the fiscal period and
the surplus remaining in the State Treasury at the beginning of the
period. In November 1996, the voters of the State approved a
constitutional amendment giving the Governor the power to veto certain
legislative matters, including budgetary matters.
Since 1994, the State has had a budget surplus, in part as a result of new
taxes and fees and spending reductions put into place in the early 1990s.
In addition, the State, like the nation, has experienced economic recovery
during the 1990s. The State budget is based upon estimated revenues and a
multitude of existing and assumed State and non-State factors, including
State and national economic conditions, international activity and federal
government policies and legislation. The unreserved General Fund balance
at June 30, 1998, the end of the 1997-98 fiscal year, was approximately
$115.2 million and the reserved balance of the General Fund was
approximately $1.15 billion.
In 1995, the North Carolina General Assembly repealed, effective for
taxable years beginning on or after January 1, 1995, the tax levied on
various forms of intangible personal property. The legislature provided
specific appropriations to counties and municipalities from state revenues
to replace the revenues those political subdivisions previously received
for the intangibles tax. In addition, in the 1996 session the legislature
reduced the corporate income tax rate from 7.75% to 6.9% (phased in over
four years) and reduced the food tax from 4% to 3% and eliminated most
privilege license taxes as of January 1, 1997. As a result of the
comprehensive tax reductions, General Fund tax collections for 1995-96
grew by only 1.0% over 1994-95, as opposed to the 6.4% growth that would
have occurred if such measures had not been taken.
In the 1996-97 Budget prepared by the Office of State Budget and
Management, it was projected that General Fund net revenues would increase
3% over 1995-96. In fact, actual General Fund net revenues for 1996-97
increased 8.3% over 1995-96. This increase resulted primarily from growth
in the North Carolina economy, which resulted in increased personal and
corporate income tax receipts.
In the 1998 session the General Assembly eliminated the sales tax on food
and the inheritance tax. In addition, the budget for the 1998-99 year of
$12.5 billion calls for significant increases in spending. The tax
reductions and increase of almost $1 billion over the 1997-98 budget are
expected to be offset by strong projected tax revenue growth and the
conservative nature of the State's expenditures which historically have
come in under budget. The main areas of emphasis for spending include
reform to the juvenile justice system, Smart Start, an early childhood
program, and education, including a 6.5% increase in teacher salaries.
It is unclear what effect these developments at the State level may have
on the value of the Debt Obligations in the North Carolina Fund.
Litigation. The following are cases pending in which the State faces the
risk of either a loss of revenue or an unanticipated expenditure. In the
opinion of the Department of State Treasurer, an adverse decision in any
of these cases would not materially adversely affect the State's ability
to meets its financial obligations.
Leandro, et al. v. State of North Carolina and State Board of Education --
In May, 1994 students and boards of education in five counties in the
State filed suit in state Superior Court requesting a declaration that the
public education system of North Carolina, including its system of
funding, violates the North Carolina Constitution by failing to provide
adequate or substantially equal educational opportunities and denying due
process of law, and violates various statutes relating to public
education.
On July 24, 1997, the North Carolina Supreme Court issued a decision in
the case. The Court upheld the present funding system against the claim
that it unlawfully discriminated against low wealth counties on the basis
that the Constitution does not require substantially equal funding and
educational advantages in all school districts. The Court remanded the
case for trial on the claim for relief based on the Court's conclusion
that the Constitution guarantees every child of the state an opportunity
to receive a sound basic education in North Carolina public schools. Five
other counties intervened and now allege claims for relief on behalf of
their students' rights to a sound basic education on the basis of the high
proportion of at-risk students in their counties' systems. Trial on one of
the claims with respect to one plaintiff's County is set for August 1999.
The North Carolina Attorney General's Office believes that sound legal
arguments support the State's position on the outstanding claims.
Faulkenbury v. Teachers' and State Employees' Retirement System; Peele v.
Teachers' and State Employees' Retirement System; Woodard v. Local
Governmental Employees' Retirement System -- Plaintiffs are disability
retirees who brought class actions in state court challenging changes in
the formula for payment of disability retirement benefits and claiming
impairment of contract rights, breach of fiduciary duty, violation of
other federal constitutional rights, and violation of state constitutional
and statutory rights. The Superior Court issued an order ruling in favor
of plaintiffs. The Order was affirmed by the North Carolina Supreme Court.
The case went back to the Superior Court for calculations of benefits and
payment of retroactive benefits, along with determination of various
remedial issues. As a result of the remedial proceedings, there are now
two appeals pending in the appellate courts concerning calculation of the
retroactive benefits. The plaintiffs have submitted documentation to the
court asserting that the cost in damages and higher prospective benefit
payments to the plaintiffs and class members would amount to $407 million.
These amounts would be payable from the funds of the Retirement systems.
Calculations and payments so far indicate that retroactive benefits will
be significantly less than estimated, depending in part on the pending
appeals. Payments have been made by the State of approximately $73
million. The remaining liability for retroactive benefits is estimated by
the State not to exceed $42 million. All retroactive payments and future
benefit payments are payable from the funds of the Retirement systems.
Bailey/Emory/Patton Cases -- State Tax refunds -- State and Federal
Retirees. In 1992, State and local government retirees filed Bailey, et
al. v. North Carolina, et al., a class action lawsuit challenging repeal
of the income tax exemptions for State and local government retirement
benefits as a breach of contract and an unconstitutional impairment of
their contract rights and seeking tax refunds for taxes paid in tax years
1989 through 1991. The Bailey plaintiffs obtained judgment in May 1995 in
the Superior Court for Wake County, and on May 8, 1998, the Supreme Court
of North Carolina upheld the Superior Court's decision. Several additional
cases, also named Bailey, et al. v. North Carolina, et al., and one named
Emery, et al. v. North Carolina, et al., were filed by State and local
government retirees to preserve their refund claims for subsequent tax
years through tax year 1997. The outcome of these cases was controlled by
the outcome of the initial Bailey case.
In 1995, a group of federal government retirees filed Patton, et al. v.
North Carolina, et al., a class action tax refund lawsuit seeking refunds
of State taxes paid on federal pension income since tax year 1989. The
Patton plaintiffs claimed that if the Bailey plaintiffs prevailed on their
refund claims, then the disparity of tax treatment accorded state and
federal pension income held unconstitutional in Davis v. Michigan (1989)
would be reestablished. In Davis, the United States Supreme Court ruled
that a Michigan income tax statute that taxed federal retirement benefits
while exempting those paid by state and local governments violated the
constitutional doctrine of intergovernmental tax immunity. At the time of
the Davis decision, North Carolina law contained similar exemptions in
favor of State and local government retirees. The repeal of those
exemptions in 1989 resulted in the Bailey case.
On June 10, 1998, the General assembly reached an agreement settling the
Bailey, Emory, and Patton cases. The agreement, embodied in a consent
order, provided that the State would pay $799,000,000 in two installments,
one in 1998 and the other in 1999, to extinguish all liability for refunds
for tax years 1989 through 1997 of taxes paid by federal, State and local
government retirees who had five years creditable service in their
retirment system prior to August 12, 1989, the date of enactment of the
statute repealing the exemptions from taxation of State and local
government retirement benefits, or who have "vested" by that date in
certain "defined contribution" plans such as the State's 401(k) and
deferred compensation plans. The consent order was conditioned upon the
General Assembly appropriating the funds to make the payments set forth in
the consent order and court approval of the settlement following notice to
class members. The appropriation of the first installment of $400,000,000
was made, and the Superior Court approved the settlement on October 7,
1998.
N.C. School Boards Association, et al. v. Harlan E. Boyles, State
Treasurer, et al. -- Use of Administrative Payments. On December 14, 1998,
plaintiffs, including county school boards for Wake, Durham, Johnston,
Buncombe, Edgecombe and Lenoir Counties, filed suit in Superior Court
requesting a declaration that certain payments to State administrative
agencies must be distributed to the public schools on the theory that such
amounts are fines which under the North Carolina Constitution must be paid
to the schools.
Smith/Shaver Cases -- State Tax Refunds -- Intangibles Tax. The Smith case
is a class action tax refund lawsuit related to litigation in Fulton
Corporation v. Faulkner, a case filed by a single taxpayer and decided by
the United States Supreme Court in 1996 regarding the constitutionality of
intangibles taxes previously collected by the State on shares of stock. On
July 7, 1995, while the Fulton case was pending before the Unites States
Supreme Court, the Smith class action was commenced in North Carolina
Superior Court on behalf of all taxpayers who paid the tax and complied with
the requirements of the applicable tax refund statute, N.C. Gen. Stat. (S)
105-267, including its 30-day demand requirements. These original plaintiffs
were later designated Class A when a second group of taxpayers were added.
The new class, designated Class B, consisted of taxpayers who had paid the
tax but failed to comply with the refund statute's 30-day demand
requirement. On June 11, 1997, judgment was entered awarding the Class A
plaintiffs refunds totaling $120,000,000, with interest, and these refunds
have been paid. In a separate order also entered on June 11, 1997, Class B
was decertified and the refund claims of Class B taxpayers were dismissed.
Class counsel appealed the Class B decertification/dismissal order, and on
December 4, 1998, the North Carolina Supreme Court reversed the dismissal.
As a result of the Smith decision, the State will be required to pay refunds
to Class B intangibles taxpayers. The State estimates that its liability for
tax refunds, with interest through June 30, 1999, will be approximately
$350,000,000.
A second class action tax refund lawsuit, Shaver, et al. v. North
Carolina, et al., was filed on January 16, 1998, by the same taxpayers as
Class B plaintiffs in Smith under alternative theories of recovery for tax
years 1991 through 1994 and for refunds for one additional year, 1990.
Their additional claim for 1990 totals approximately $100,000,000. Given
the outcome of the Smith case, the North Carolina Attorney General's
Office believes that sound legal arguments support dismissal as moot of
the Shaver refund claims for tax years 1991 through 1994 and dismissal of
the claims for tax year 1990 as barred by the statute of limitations.
The State is involved in numerous other claims and legal proceedings, many
of which normally occur in governmental operations; however, the North
Carolina Attorney General does not expect any of the other outstanding
lawsuits to materially adversely affect the State's ability to meet its
financial obligations.
General. The population of the State has increased 13% from 1980, from
5,895,195 to 6,656,810 as reported by the 1990 federal census and the
State rose from twelfth to tenth in population. The State's estimate of
population as of July, 1998, is 7,544,360. Notwithstanding its rank in
population size, North Carolina is primarily a rural state, having only
six municipalities with populations in excess of 100,000.
The labor force has undergone significant change during recent years as
the State has moved from an agricultural to a service and goods producing
economy. Those persons displaced by farm mechanization and farm
consolidations have, in large measure, sought and found employment in
other pursuits. Due to the wide dispersion of non-agricultural employment,
the people have been able to maintain, to a large extent, their rural
habitation practices. During the period 1980 to 1996, the State labor
force grew about 33% (from 2,855,200 to 3,796,200). Per capita income
during the period 1985 to 1997 grew from $11,870 to $23,174, an increase
of 95.2%.
The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of December, 1998, the State was
reported to rank eleventh among the states in non-agricultural employment
and eighth in manufacturing employment. Employment indicators have varied
somewhat in the annual periods since June of 1990, but have demonstrated
an upward trend since 1991. The following table reflects the fluctuations
in certain key employment categories.
<TABLE>
<CAPTION>
CATEGORY (ALL SEASONALLY
ADJUSTED) JUNE 1994 JUNE 1995 JUNE 1996 JUNE 1997 JUNE 1998
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Civilian Labor Force 3,560,000 3,578,000 3,704,000 3,797,000 3,776,000
Nonagricultural Employment 3,358,700 3,419,100 3,506,000 3,620,300 3,758,800
Goods Producing Occupations
(mining, construction and
manufacturing) 1,021,500 1,036,700 1,023,800 1,041,000 1,045,400
Service Occupations 2,337,200 2,382,400 2,482,400 2,579,300 2,713,400
Wholesale/Retail
Occupations 749,000 776,900 809,100 813,500 848,300
Government Employees 554,600 555,300 570,800 579,600 594,800
Miscellaneous Services 731,900 742,200 786,100 852,500 923,100
Agricultural Employment 53,000 53,000 53,000 not available not available
</TABLE>
The seasonally adjusted unemployment rate in July 1998 was estimated to be
3.2% of the labor force as compared with 4.5% nationwide.
North Carolina's economy continues to benefit from a vibrant manufacturing
sector. Manufacturing firms employ approximately 22% of the total non-
agricultural workforce. North Carolina has the second highest percentage
of manufacturing workers in the nation. The State's annual value of
manufacturing shipments totals $142 billion, ranking the State eighth in
the nation. The State leads the nation in the production of textiles,
tobacco products, furniture and fiberoptic cable, and is among the largest
producers of pharmaceuticals, electronics and telecommunications
equipment. More than 700 international firms have established a presence
in the State. Charlotte is now the second largest financial center in the
country, based on assets of banks headquartered there. The strength of the
State's manufacturing sector also supports the growth in exports; the
latest annual statistics show $8.76 billion in exports, making North
Carolina one of the few states with an export trade surplus.
In 1997, the State's gross agricultural income of nearly $8.3 billion
placed it seventh in the nation in gross agricultural income. According to
the State Commissioner of Agriculture, in 1997 the State ranked first in
the nation in the production of flue-cured tobacco, total tobacco, turkeys
and sweet potatoes; second in hog production, trout sold, and hog and pig
income; third in poultry and egg products income, greenhouse and nursery
income; and the production of cucumbers and pickles; fourth in the value
of net farm income, commercial broilers, peanuts and strawberries; and
sixth in burley tobacco and blueberries.
The diversity of agriculture in North Carolina and a continuing push in
marketing efforts have protected farm income from some of the wide
variations that have been experienced in other states where most of the
agricultural economy is dependent on a small number of agricultural
commodities. North Carolina is the third most diversified agricultural
state in the nation.
Tobacco production, which had been the leading source of agricultural
income in the State, declined in 1995. The poultry industry is now the
leading source of gross agricultural income, at 26.6%, and the pork
industry provides 24% of the total agricultural income. Tobacco farming in
North Carolina has been and is expected to continue to be affected by
major Federal legislation and regulatory measures regarding tobacco
production and marketing, federal and state litigation settlements
regarding tobacco industry liability, and by international competition.
The tobacco industry remains important to North Carolina providing
approximately 14.4% of gross agricultural income.
The number of farms has been decreasing; in 1997 there were approximately
57,000 farms in the State, down from approximately 72,000 in 1987 (a
decrease of about 21% in ten years). However, a strong agribusiness sector
supports farmers with farm inputs (agricultural chemicals and fertilizer,
farm machinery and building supplies) and processing of commodities
produced by farmers (vegetable canning and cigarette manufacturing). North
Carolina's agriculture industry, including food, fiber and forest
products, contributes over $45 billion annually to the State's economy.
The North Carolina Department of Commerce, Travel and Tourism Division,
indicates that travel and tourism is increasingly important to the State's
economy. Travel and tourism's $10.1 billion economic impact in 1997
represents a 4.1% increase over 1996. The North Carolina travel and
tourism industry directly supports 171,000 jobs.
Bond Ratings. Currently, Moody's rates North Carolina general obligation
bonds as Aaa and S&P rates such bonds as AAA. S&P also reaffirmed its
stable outlook for the State in July 1998. S&P reports that North
Carolina's rating reflects the State's strong economic characteristics,
sound financial performance, and low debt levels.
PENNSYLVANIA FUND
State Economy. Pennsylvania has been historically identified as a heavy-
industry state although that reputation has changed recently as the
industrial composition of the Commonwealth diversified when the coal,
steel and railroad industries began to decline. The major new sources of
growth in the Commonwealth are in the service sector, including trade,
medical and the health services, education and financial institutions. The
Commonwealth's agricultural industries are also an important component of
its economic structure, accounting for more than $3.6 billion in crop and
livestock products annually while agribusiness and food related industries
support $39 billion in economic activity annually.
Employment within the Commonwealth increased steadily from 1984 to 1990.
From 1990 to 1992, employment in the Commonwealth declined 1.8%. From 1992
to 1998, employment increased 4.1%. The growth in employment experienced
in the Commonwealth during such periods is slightly higher than the growth
in employment in the Middle Atlantic region of the United States. Non-
manufacturing employment in the Commonwealth has increased steadily since
1980 to its 1998 level of 82.8% of total Commonwealth employment.
Manufacturing, which contributed 17.1% of 1998 non-agricultural
employment, has fallen behind both the services sector and the trade
sector as the largest single source of employment within the Commonwealth.
In 1998, the services sector accounted for 32.3% of all non-agricultural
employment in the Commonwealth while the trade sector accounted for 22.4%.
Economic strengths and weaknesses vary in different parts of the
Commonwealth. In general, heavy industry and manufacturing have been
facing increasing competition from foreign producers. During 1998, the
annual average unemployment rate in the Commonwealth was 4.6%, compared to
4.5% for the United States. For March 1999, the unadjusted unemployment
rate was 4.8% in the Commonwealth and 4.4% in the United States, while the
seasonally adjusted unemployment rate for the Commonwealth was 4.4% and
for the United States was 4.2%.
State Budget. The Commonwealth operates under an annual budget that is
formulated and submitted for legislative approval by the Governor each
February. The Pennsylvania Constitution requires that the Governor's
budget proposal consist of three parts: (i) a balanced operating budget
setting forth proposed expenditures and estimated revenues from all
sources and, if estimated revenues and available surplus are less than
proposed expenditures, recommending specific additional sources of revenue
sufficient to pay the deficiency; (ii) a capital budget setting forth
proposed expenditures to be financed from the proceeds of obligations of
the Commonwealth or its agencies or from operating funds; and (iii) a
financial plan for not less than the succeeding five fiscal years, that
includes for each year projected operating expenditures and estimated
revenues and projected expenditures for capital projects. The General
Assembly may add, change or delete any items in the budget prepared by the
Governor, but the Governor retains veto power over the individual
appropriations passed by the legislature. The Commonwealth's fiscal year
begins on July 1 and ends on June 30.
All funds received by the Commonwealth are subject to appropriation in
specific amounts by the General Assembly or by executive authorization by
the Governor. Total appropriations enacted by the General Assembly may not
exceed the ensuing year's estimated revenues, plus (less) the
unappropriated fund balance (deficit) of the preceding year, except for
constitutionally authorized debt service payments. Appropriations from the
principal operating funds of the Commonwealth (the General Fund, the Motor
License Fund and the State Lottery Fund) are generally made for one fiscal
year and are returned to the unappropriated surplus of the fund if not
spent or encumbered by the end of the fiscal year. The Constitution
specifies that a surplus of operating funds at the end of a fiscal year
must be appropriated for the ensuing year.
Pennsylvania uses the "fund" method of accounting for receipts and
disbursements. For purposes of government accounting, a "fund" is an
independent fiscal and accounting entity with a self-balancing set of
accounts, recording cash and/or other resources together with all related
liabilities and equities that are segregated for the purpose of carrying
on specific activities or attaining certain objectives in accordance with
the fund's special regulations, restrictions or limitations. In the
Commonwealth, over 150 funds have been established by legislative
enactment or in certain cases by administrative action for the purpose of
recording the receipt and disbursement of money's received by the
Commonwealth. Annual budgets are adopted each fiscal year for the
principal operating funds of the Commonwealth and several other special
revenue funds. Expenditures and encumbrances against these funds may only
be made pursuant to appropriation measures enacted by the General Assembly
and approved by the Governor. The General Fund, the Commonwealth's largest
fund, receives all tax revenues, non-tax revenues and federal grants and
entitlements that are not specified by law to be deposited elsewhere. The
majority of the Commonwealth's operating and administrative expenses are
payable from the General Fund. Debt service on all bond indebtedness of
the Commonwealth, except that issued for highway purposes or for the
benefit of other special revenue funds, is payable from the General Fund.
Financial information for the principal operation funds of the
Commonwealth are maintained on a budgetary basis of accounting, which is
used for the purpose of ensuring compliance with the enacted operating
budget. The Commonwealth also prepares annual financial statements in
accordance with generally accepted accounting principles ("GAAP").
Budgetary basis financial reports are based on a modified cash basis of
accounting as opposed to a modified accrual basis of accounting prescribed
by GAAP. Financial information is adjusted at fiscal year-end to reflect
appropriate accruals for financial reporting in conformity with GAAP.
Recent Financial Results. From fiscal 1984, when the Commonwealth first
prepared its financial statements on a GAAP basis, through fiscal 1989,
the Commonwealth reported a positive unreserved-undesignated fund balance
for its governmental fund types at each fiscal year end. Slowing economic
growth during 1990, leading to a national economic recession beginning in
fiscal 1991, reduced revenue growth and increased expenditures and
contributed to negative unreserved-undesignated fund balances at the end
of the 1990 and 1991 fiscal years. The negative unreserved-undesignated
fund balance was due largely to operating deficits in the General Fund and
the State Lottery Fund during those fiscal years. Actions taken during
fiscal 1992 to bring the General Fund back into balance, including tax
increases and expenditure restraints, resulted in a $1.1 billion reduction
to the unreserved-undesignated fund deficit for combined governmental fund
types at June 30, 1993, as a result of a $420.4 million increase in the
balance. These gains were produced by continued efforts to control
expenditure growth. The Combined Balance Sheet as of June 30, 1997, showed
total fund balance and other credits for the total governmental fund types
of $2,901 million, a $915 million increase from the balance at June 30,
1996. During fiscal 1997, total government fund assets increased by $782
million to $6,575 million, while government fund liabilities increased by
$132 million to $3,674 million.
Fiscal 1991 Financial Results. The Commonwealth experienced a $453.6
million General Fund deficit as of the end of its 1991 fiscal year. The
deficit reflected higher than budgeted expenditures, below-estimate
economic activity and growth rates of economic indicators and total tax
revenue shortfalls below those assumed in the enacted budget. Rising
demands on State programs caused by the economic recession, particularly
for medical assistance and cash assistance programs, and the increased
costs of special education programs and correction facilities and
programs, contributed to increased expenditures in fiscal 1991, while tax
revenues for the 1991 fiscal year were severely affected by the economic
recession. Total corporation tax receipts and sales and use tax receipts
during fiscal 1991 were, respectively, 7.3% and 0.9% below amounts
collected during fiscal 1990. Personal income tax receipts also were
affected by the recession but not to the extent of the other major General
Fund taxes, increasing only 2.0% over fiscal 1990 collections. A number of
actions were taken throughout the fiscal year by the Commonwealth to
mitigate the effects of the recession on budget revenues and expenditures.
The Commonwealth initiated a number of cost-saving measures, including the
firing of 2,000 state employees, deferral of paychecks and reduction of
funds to state universities, which resulted in approximately $871 million
cost savings.
Fiscal 1992 Financial Results. Actions taken during fiscal 1992 to bring
the General Fund budget back into balance, including tax increases and
expenditure restraints resulted in a $1.1 billion reduction for the
unreserved-undesignated fund deficit for combined governmental fund types
and a return to a positive fund balance. Total General Fund revenues for
fiscal 1992 were $14,516.8 million which is approximately 22% higher than
fiscal 1991 revenues of $11,877.3 million due in large part to tax
increases. The increased revenues funded substantial increases in
education, social services and corrections programs. As a result of the
tax increases and certain appropriation lapses, fiscal 1992 ended with an
$8.8 million surplus after having started the year with an unappropriated
General Fund balance deficit of $453.6 million.
Fiscal 1993 Financial Results. Fiscal 1993 closed with revenues higher
than anticipated and expenditures approximately as projected, resulting in
an ending unappropriated balance surplus of $242.3 million. A deduction in
the personal income tax rate in July 1992 and the one-time receipt of
revenues from retroactive corporate tax increases in fiscal 1992 were
responsible, in part, for the low growth in fiscal 1993.
Fiscal 1994 Financial Results. Commonwealth revenues during the 1994
fiscal year totaled $15,210.7 million, $38.6 million above the fiscal year
estimate, and 3.9% over Commonwealth revenues during the 1993 fiscal year.
The sales tax was an important contributor to the higher than estimated
revenues. The strength of collections from the sales tax offset the lower
than budgeted performance of the personal income tax that ended the 1994
fiscal year $74.4 million below estimate. The shortfall in the personal
income tax was largely due to shortfalls in income not subject to
withholding such as interest, dividends and other income. Expenditures,
excluding pooled financing expenditures and net of all fiscal 1994
appropriation lapses, totaled $14,934.4 million representing a 7.2%
increase over fiscal 1993 expenditures. Medical assistance and prison
spending contributed to the rate of spending growth for the 1994 fiscal
year. The Commonwealth maintained an operating balance on a budgetary
basis for fiscal 1994 producing a fiscal year ending unappropriated
surplus of $335.8 million.
Fiscal 1995 Financial Results. Commonwealth revenues for the 1995 fiscal
year were above estimate and exceeded fiscal year expenditures and
encumbrances. Fiscal 1995 was the fourth consecutive fiscal year the
Commonwealth reported an increase in the fiscal year-end unappropriated
balance. Prior to reserves for transfer to the Tax Stabilization Reserve
Fund, the fiscal 1995 closing unappropriated surplus was $540.0 million,
an increase of $204.2 million over the fiscal 1994 closing unappropriated
surplus prior to transfers. Commonwealth revenues during the 1995 fiscal
year were $459.4 million, 2.9%, above the estimate of revenues used at the
time the 1995 fiscal year budget was enacted. Corporation taxes
contributed $329.4 million of the additional receipts largely due to
higher receipts from the corporate net income tax. Fiscal 1995 revenues
from the corporate net income tax were 22.6% over collections in fiscal
1994 and include the effects of the reduction of the tax rate from 12.25%
to 11.99% that became effective with tax years beginning on and after
January 1, 1994. The sales and use tax and miscellaneous revenues also
showed strong year-over-year growth that produced above-estimate revenue
collections. Sales and use tax revenues were $5,526.9 million, $128.8
million above the enacted budget estimate and 7.9% over fiscal 1994
collections. Tax receipts from both motor vehicle and non-motor vehicle
sales contributed to the higher collections. Miscellaneous collections for
fiscal 1995 were $183.5 million, $44.9 million above estimates and were
largely due to additional investment earnings, escheat revenues and other
miscellaneous revenues.
Fiscal 1996 Financial Results. Commonwealth revenues (prior to tax
refunds) for the 1996 fiscal year increased by $113.9 million over the
prior fiscal year to $16,338.5 million representing a growth rate of 0.7
percent. Tax rate reductions and other tax law changes substantially
reduced the amount and rate of growth for the fiscal year. The
Commonwealth has estimated that tax changes enacted for the 1996 fiscal
year reduced Commonwealth revenues by $283.4 million representing 1.7
percentage points of fiscal 1996 growth in Commonwealth revenues.
Fiscal 1997 Financial Results. The unappropriated balance of Commonwealth
revenues increased during the 1997 fiscal year by $432.9 million. Higher
than estimated revenues and slightly lower expenditures than budgeted
caused the increase. The unappropriated balance rose from an adjusted
amount of $158.5 million at the beginning of fiscal 1997, to $591.4
million (prior to reserves for transfer to the Tax Stabilization Reserve
Fund) at the close of the fiscal year. Transfers to the Tax Stabilization
Reserve Fund for fiscal 1997 operations are expected to be $88.7 million,
which represents the normal fifteen percent of the ending unappropriated
balance, plus an additional $100 million authorized by the General
Assembly when it enacted the fiscal 1998 budget.
Commonwealth revenues (prior to tax refunds) during the fiscal year
totaled $17,320.6 million, $576.1 (3.4 percent) above the estimate made at
the time the budget was enacted. Revenue from taxes was the largest
contributor to higher than estimated receipts. Tax revenue in fiscal 1997
grew 6.1 percent over tax revenues in fiscal 1996. This rate of increase
was not adjusted for legislated tax reductions that affected receipts
during both of those fiscal years and therefore understates the actual
underlying rate of growth of tax revenue during fiscal 1997. Receipts from
the personal income tax produced the largest single component of higher
revenues for the fiscal year. Personal income collections were $236.3
million over estimate representing a 6.9% increase over fiscal 1996
receipts. Receipts of the sales and use tax were $185.6 million over
estimate representing a 6.2% increase. Collections of corporate taxes, led
by the capital stock and franchise and the gross receipts taxes, also
exceeded their estimates for the fiscal year. Non-tax revenues were $19.8
million (5.8 percent) over estimate mostly due to higher than anticipated
interest earnings.
Fiscal 1998 Financial Results. Operations during the 1998 fiscal year
increased the unappropriated balance of Commonwealth revenues during that
period by $86.4 million to $488.7 million at June 30, 1998 (prior to
reserves for transfer to the Tax Stabilization Reserve Fund). Higher than
estimated revenues, offset in part by increased reserves for tax refunds,
and slightly lower expenditures than budgeted were responsible for the
increase. Transfers to the Tax Stabilization Reserve Fund for fiscal 1998
operations will total $223.3 million consisting of $73.3 million
representing the required transfer of 15% of the ending unappropriated
surplus balance, plus an additional $150 million authorized by the General
Assembly when it enacted the fiscal 1999 budget. With these transfers, the
balance in the Tax Stabilization Reserve Fund will exceed $664 million and
represents 3.7% of fiscal 1998 revenues.
Commonwealth revenues (prior to tax refunds) during the 1998 fiscal year
totaled $18,123.2 million, $676.1 million (3.9%) above the estimate made
at the time the budget was enacted. Tax revenue received in fiscal 1998
grew 4.8% over tax revenues received during fiscal 1997. This rate of
increase includes the effect of legislated tax reductions that affected
receipts during both fiscal years and therefore understates the actual
underlying rate of growth of tax revenue during fiscal 1998. Receipts from
the personal income tax produced the largest single component of higher
revenues during fiscal 1998. Personal income tax collections were $416.6
million over estimate representing an 8.5% increase over fiscal 1997
receipts. Receipts of the sales and use tax were $6.2 million over
estimate representing a 1.9% increase. Collections of all corporate taxes
exceeded their estimate for the fiscal year, led by the capital stock and
franchise tax and the corporate net income tax which were over estimate by
7.8% and 2.7%, respectively. Non-tax revenues were $27.5 million (8.6%)
over estimate, mostly due to greater than anticipated interest earnings
for the fiscal year.
Expenditures from all fiscal 1998 appropriations of Commonwealth revenues
totaled $17,229.8 million (excluding pooled financing expenditures and net
of current year lapses). This amount represents an increase of 4.5% over
fiscal 1997 appropriation expenditures.
Fiscal 1999 Budget. The budget for fiscal 1999 was enacted in April 1998
at which time the official revenue estimate for the 1999 fiscal year was
established at $18,456.6 million. The official revenue estimate is based
on an economic forecast for national gross domestic product, on a year-
over-year basis, to slow from an estimated annualized 3.9% rate in the
fourth quarter of 1997 to a projected 1.8% annualized growth rate by the
second quarter of 1999. The forecast of slowing economic activity is based
on the expectation that consumers will reduce their pace of spending,
particularly on motor vehicles, housing and other durable goods. Business
is also expected to trim its spending on fixed investments. Foreign demand
for domestic goods is expected to decline in reaction to economic
difficulties in Asia and Latin America, while an economic recovery in
Europe is expected to proceed slowly. The underlying growth rate,
excluding any effect of scheduled or proposed tax changes for the General
Fund fiscal 1999 official revenue estimate of 3.0% over actual fiscal 1998
revenues. When adjusted to include the estimated effect of enacted tax
changes, fiscal 1999 Commonwealth revenues are projected to increase by
1.66% over actual Commonwealth revenues for fiscal 1998.
Tax reductions anticipated to be included in the enacted 1999 fiscal year
budget totaled an estimated $241.0 million for fiscal 1999. Of the
anticipated reductions, legislation representing tax reductions totaling
$15 million has not yet been passed by the General Assembly. All estimates
for fiscal 1999 assume enactment of those tax reductions currently pending
before the General Assembly.
Appropriations enacted for fiscal 1999 are 4.1% ($705.1 million) above the
appropriations enacted for fiscal 1998 (including supplemental
appropriations). Major increases in expenditures budgeted for fiscal 1999
include: (i) $249.5 million in direct support of local school district
education costs (local school districts will also benefit from an
estimated $104 million of reduced contributions by school districts to
their worker's retirement costs from a reduced employer contribution
rate); (ii) $60.4 million for higher education, including scholarship
grants; (iii) $56.5 million to fund the correctional system including $21
million to operate a new correctional facility; (iv) $121.1 million for
long-term care medical assistance costs; (v) $14.4 million for technology
and Year 2000 investments; (vi) $55.9 million to fund the first year's
costs of a July 1, 1998 annuitant cost of living increase for state and
school district employees and (vii) $20 million to replace bond funding
for equipment loans for volunteer fire and rescue companies. The balance
of the increase is spread over many departments and program operations.
The enacted fiscal 1999 budget assumes the draw down of the $265.4 million
beginning budgetary balance by $141.1 million to an estimated closing
balance, prior to transfer of the required portion to the Tax
Stabilization Reserve Fund, of $124.3 million. The amount of the
anticipated draw down does not consider the availability of appropriation
lapses normally occurring during a fiscal year that are used to fund
supplemental appropriations or increase unappropriated surplus.
Debt Limits and Outstanding Debt. The Pennsylvania Constitution permits
the issuance of the following types of debt: (i) debt to suppress
insurrection or rehabilitate areas affected by disaster; (ii) electorate
approved debt; (iii) debt for capital projects subject to an aggregate
outstanding debt limit of 1.75 times the annual average tax revenues of
the preceding five fiscal years; and (iv) tax anticipation notes payable
in the fiscal year of issuance.
Under the Pennsylvania Fiscal Code, the Auditor General is required to
certify to the Governor and the General Assembly certain information
regarding the Commonwealth's indebtedness. According to the August 26,
1998, Auditor General certificate, the average annual tax revenues
deposited in all funds in the five fiscal years ended August 26, 1998, was
approximately $20.4 billion, and, therefore, the net debt limitation for
the 1999 fiscal year is $32.0 billion. Outstanding net debt totaled $3.7
billion at June 30, 1998, approximately equal to the net debt at June 30,
1997. At August 26, 1998, the amount of debt authorized by law to be
issued, but not yet incurred, was $22.7 billion.
Debt Ratings. All outstanding general obligation bonds of the Commonwealth
are rated AA- by S&P and Aa3 by Moody's.
City of Philadelphia. The City of Philadelphia (the "City" or
"Philadelphia") is the largest city in the Commonwealth. Philadelphia
experienced a series of general fund deficits for fiscal years 1988
through 1992 which have culminated in the City's present serious financial
difficulties. In its 1992 Comprehensive Annual Financial Report,
Philadelphia reported a cumulative general fund deficit of $71.4 million
for fiscal year 1992.
In June 1991, the Pennsylvania legislature established the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), a five-member board, to
assist Philadelphia in remedying fiscal emergencies. PICA is designed to
provide assistance through the issuance of funding debt and to make
factual findings and recommendations to Philadelphia concerning its
budgetary and fiscal affairs. The legislation empowers PICA to issue notes
and bonds on behalf of Philadelphia, and also authorizes Philadelphia to
levy a 1% sales tax the proceeds of which would be used to pay off the
bonds. In return for PICA's fiscal assistance, Philadelphia is required,
among other things, to establish five-year financial plans that include
balanced annual budgets. Under the legislation, if Philadelphia does not
comply with such requirements, PICA may withhold bond revenues and certain
State funding. At this time, the City is operating under a five-year
fiscal plan approved by PICA on June 6, 1998. As of August 1, 1998, PICA
has issued approximately $1,761.7 million of its Special Tax Revenue
Bonds.
The financial assistance has included the refunding of certain city
general obligation bonds, funding of capital projects and the liquidation
of the City's Cumulative General Fund balance deficit as of June 30, 1992
of $224.9 million.
No further PICA bonds are to be issued by PICA for the purpose of
financing a capital project or deficit as the authority for such bond
sales expired on December 31, 1994. PICA's authority to issue debt for the
purpose of financing a cash flow deficit expired on December 31, 1996. Its
ability to refund existing outstanding debt is unrestricted. PICA had
$1,055.0 million in Special Tax Revenue Bonds outstanding as of June 30,
1998.
The audited General Fund balance of the City as of June 30, 1995, 1996 and
1997 showed a surplus of approximately $80.5 million, $118.5 million and
$128.8 million, respectively.
S&P's rating on Philadelphia's general obligation bonds is "BBB." Moody's
rating is currently "Baa2."
Litigation. The Commonwealth is a party to numerous lawsuits in which an
adverse final decision could materially affect the Commonwealth's
governmental operations and consequently its ability to pay debt service
on its obligations. The Commonwealth also faces tort claims made possible
by the limited waiver of sovereign immunity effected by Act 152, approved
September 28, 1978, as amended. Under Act 152, damages for any loss are
limited to $250,000 per person and $1 million for each accident.
SOUTH CAROLINA FUND
Article X, Section 7(a) of the South Carolina Constitution requires that
the General Assembly provide for a budgetary process to ensure that annual
expenditures of State government may not exceed annual State revenues.
Subsection (c) of Section 7 of Article X requires that the General
Assembly prescribe by law a spending limitation on appropriations for the
operation of State government such that annual increases in appropriations
may not exceed the annual growth rate of the economy of the State;
provided, however, that this limitation is subject to suspension by an
affirmative vote in each House of the General Assembly by two-thirds of
the members present and voting, but not less than three-fifths of the
total membership in each House. Subsection (d) of Section 7 of Article X
requires that the General Assembly shall prescribe by law a limitation on
the number of State employees such that the annual increase in such number
may not exceed the average growth rate of the population of the State;
provided, however, that this limitation is subject to suspension by an
affirmative vote in each House of the General Assembly by two-thirds of
the members present and voting, but not less than three-fifths of the
total membership in each House.
Article III, Section 36 of the South Carolina Constitution requires the
establishment of a General Reserve Fund for the purpose of covering
operating deficits of State Government and a separate and distinct Capital
Reserve Fund for the purpose of providing capital improvements or for
retiring State bonds previously issued. Amounts in the Capital Reserve
Fund may, as hereinafter described, be used to fund a year end deficit.
The General Reserve Fund is required to be funded in an amount equal to 3%
of the general fund revenue of the latest completed fiscal year. Funds may
be withdrawn from the General Reserve Fund only for the purpose of
covering operating deficits. The General Assembly is required to provide
for the orderly restoration of funds withdrawn from the General Reserve
Fund. The Constitutional provisions with respect to the General Reserve
Fund require that the General Assembly provide for a procedure to survey
the progress of the collection of revenue and the expenditure of funds and
require the General Assembly to authorize and direct reduction of
appropriations as may be necessary to prevent a deficit. Such provisions
require that, should a year end operating deficit occur, so much of the
General Reserve Fund as may be necessary must be used to cover the
deficit. The amount so used must be restored to the General Reserve Fund
within three fiscal years until the 3% requirement is again reached.
The Capital Reserve Fund is required to be funded in an amount equal to 2%
of the prior fiscal year's general fund revenues. The South Carolina
Constitution requires that the General Assembly provide that, if revenue
forecasts before April 1 project that revenues for the current fiscal year
will be less than expenditures authorized by appropriation for that fiscal
year, the current fiscal year's appropriation to the Capital Reserve Fund
shall be reduced to the extent necessary before any reduction is made in
operating appropriations. If it is determined that the fiscal year has
ended with an operating deficit, the South Carolina Constitution requires
that funds in the Capital Reserve Fund shall be applied, to the extent
necessary, to satisfy such deficit before withdrawing monies from the
General Reserve Fund for such purpose.
Fiscal responsibility in the State lies with the South Carolina State
Budget and Control Board. The Governor is required to submit an Executive
Budget to the General Assembly within five days after the beginning of
each regular session. Such budget is required to conform to the funding
requirements contained in Article III, Section 36 of the South Carolina
Constitution. Regular sessions of the General Assembly begin on the second
Tuesday of January in each year. In order to enable the Governor to
present his budget to the General Assembly at the time required, the
Governor is required, by law, to complete a survey of all departments,
bureaus, divisions, offices, boards, commissions, institutions and other
agencies to obtain information upon which to base his budget
recommendations no later than November 1 of each year. In this connection,
each of several State departments, bureaus, divisions, offices, boards,
commissions, institutions and other agencies receiving or requesting
financial aid from the State are required to report to the Governor in
itemized form, no later than November 1, of each year, the amount needed
or requested in the succeeding fiscal year. In addition, on or before
November 1 of each year the State Comptroller General is required to
furnish to the Governor detailed statements as to appropriations and
expenditures for certain prior fiscal years and appropriation years. The
State Comptroller General is also required to furnish to the Governor on
or before December 1 of each year an estimate of the financial needs of
the State itemized in accordance with the budget classifications adopted
by the Budget and Control Board.
The budget presented to the General Assembly by the Governor must be
accompanied by detailed statements of prior year's revenues and
expenditures, a statement of current assets and liabilities and other
information with respect to the State's finances and economic condition.
The General Assembly is authorized by law to increase or decrease items in
the budget bill. The South Carolina Constitution mandates the General
Assembly to provide a balanced budget and provides that if there be a
casual deficit, such deficit shall be provided for in the succeeding
fiscal year.
As noted above, the South Carolina Constitution requires a procedure for
the monitoring of revenues and expenditures with a view to a reduction of
appropriations as may be necessary to prevent a deficit. For the purpose
of providing projections and forecasts of revenues and expenditures and
advising the Budget and Control Board on economic trends, the General
Assembly established the Board of Economic Advisors. In particular with
respect to the Constitutional requirement of monitoring revenues,
statutory provisions require that the Board of Economic Advisors provide
to the Budget and Control Board quarterly estimates of State revenues. If
at the end of the first or second quarter of any fiscal year quarterly
revenue collections are 4% or more below the amount projected for such
quarter by the Board of Economic Advisors, the Budget and Control Board is
required, within 15 days of such determination, to take action to avoid a
deficit at the end of such fiscal year.
In 1993, the General Assembly provided that beginning with appropriations
for fiscal year 1994-95, appropriations in the annual general
appropriations act may not exceed the base revenue estimate. The base
revenue estimate is defined as the lesser of (i) the total of recurring
general fund revenues collected in the latest completed fiscal year before
the General Assembly first considers the annual general appropriations
bill plus an increase of 75% of the difference between the general fund
revenue estimate of the Board of Economic Advisors for the upcoming fiscal
year and the actual revenue collections from the latest completed fiscal
year; or (ii) the Board of Economic Advisors general fund revenue estimate
for the upcoming fiscal year.
For many years, each annual Appropriations Act has contained a provision
requiring the Budget and Control Board to monitor the collection of
revenues and the expenditure of funds. The Appropriations Act for Fiscal
Year 1994-95, Act 497 of 1994, Part I, provides that if, because of an
inaccurate estimate of revenues, a deficit appears likely, the Budget and
Control Board shall effect such reductions of appropriations as may be
necessary to prevent a deficit.
Actions taken by the Budget and Control Board in the fiscal year ended
June 30, 1992, reflect the required process of monitoring revenues and
making adjustments to avoid a deficit. The fiscal year 1991-92 budget
adopted in June 1991 was based on estimated revenues of $3.588 billion. On
July 25, 1991, the Board of Economic Advisors advised the Budget and
Control Board that it projected revenues to be $148.3 million less than
estimated in the 1991-92 Appropriations Act. In response, on July 30,
1991, the Budget and Control Board eliminated the Capital Reserve Fund
appropriation of $65.8 million, reduced agency appropriations by $33.6
million and required agencies to set aside additional appropriations of
$67.3 million. On February 10, 1992, the Board of Economic Advisors
advised the Budget and Control Board that it had again revised its
estimate of revenues downward by an additional $55 million. In response to
this revised estimate, on February 11, 1992, the Budget and Control Board
permanently reduced the $67.3 million in appropriations which were set
aside on July 30, 1991, and further reduced appropriations by $27.2
million. Despite such actions, expenditures exceeded revenues by $38.2
million and, as required by the South Carolina Constitution, such amount
was withdrawn from the General Reserve Fund to cover the shortfall.
For the fiscal year ended June 30, 1993, the Board of Economic Advisors on
August 19, 1992, advised the Budget and Control Board that it projected
revenues to be $195 million less than estimated in the 1992-93
Appropriations Act. On August 22, 1992, the Budget and Control Board
responded by sequestering the Capital Reserve Fund of $86.1 million,
reducing certain agency appropriations by $88.1 million based on each
agency's fiscal year 1992-93 appropriation growth and requiring certain
agencies to set aside an additional $88.1 million, also based on each
agency's fiscal year 1992-93 appropriation growth. The method of reducing
agency appropriations based on growth was challenged and the State Supreme
Court deemed that such method was inappropriate. In response, the Budget
and Control Board, on September 15, 1992, reduced agency appropriations on
an across-the-board method by 4%. On November 10, 1992, the Budget and
Control Board permanently reduced the $88.1 million in appropriations
which were set aside on August 22, 1992. This action along with improved
actual revenue collections created a budgetary surplus of $100,993,615.
For the fiscal year ended June 30, 1994, the State had a budgetary surplus
of $273.48 million. The General Assembly designated the application of
most of this surplus, including a transfer to the Capital Reserve Fund in
the amount of $66.83 million.
For the fiscal year ended June 30, 1995, the State had a budgetary surplus
of $393 million. The General Assembly designated the application of all of
this surplus, including a transfer to the Capital Reserve Fund in the
amount of $73.4 million.
For the fiscal year ended June 30, 1996, the State had a budgetary surplus
of $316.7 million. The General Assembly designated the application of all
of this surplus, including a transfer to the Capital Reserve Fund in the
amount of $80.5 million.
For the fiscal year ended June 30, 1997, the State had a budgetary surplus
of $297.8 million. The General Assembly designated the application of all
of this surplus, including a transfer to the Capital Reserve Fund in the
amount of $83.6 million. The $83.6 million Capital Reserve Fund
appropriation for the fiscal year ended June 30, 1997 included an
appropriation of $13.1 million for debt service payments occurring in the
fiscal year ending June 30, 1998 on State Capital Improvement Bonds. The
total of all debt service payments on State Capital Improvement Bonds for
the fiscal year ending June 30, 1998 amounts to $145,633,779.
For the fiscal year ended June 30, 1998, the State had a budgetary surplus
of $254 million.
South Carolina is primarily a manufacturing state. In 1998, 20% of all
jobs in the State were in the manufacturing industry, compared to 15%
nationally. While the textile industry is still the major industrial
employer in the State, since 1950, the State's economy has undergone a
gradual transition to other activities. The economic base of the State has
diversified into other areas such as trade, health care, services and
durable goods manufacturing. This development was assisted by the State's
lowering of its Corporate Income Tax rate and the providing of improved
tax incentives to encourage business development in the State during the
1980's. Now South Carolina's economy tends to resemble more closely that
of the United States.
Real Gross Domestic Product (GDP) nationwide increased 3.9% during 1997.
The nation's output expanded a revised 3.9% in 1997 after a 3.4% increase
in 1996. Inflation as measured by the Consumer Price Index increased at a
rate of 1.6% during 1998 after increasing 2.3% in 1997 and 3.0% in 1996.
During all of 1997, personal income grew at a revised average annual rate
of 5.8% in South Carolina. During the same period the nation's income grew
5.6% and in the Southeast grew 5.7%. During the period 1992-1997 personal
income in South Carolina rose at a compounded annual rate of 5.6%,
outpacing the 5.3% annual income growth in the United States for the same
period but below the 5.9% annual income growth for the Southeastern
region.
The year 1998 was a banner year for announced capital investment in new
plants and expansions in the State. The South Carolina Department of
Commerce reported that manufacturers announced $5.8 billion in economic
development projects during 1998. This investment is expected to create
31,632 new jobs at 1,395 companies.
In 1998, employment increased 4.1% while the rate of employment growth in
the United States was 2.6%. Monthly unemployment rates in the State have
recently decreased below comparable national rates during 1998. The
unemployment rate for South Carolina in 1998 was 3.5%, comparing favorably
to the 4.5% nationwide unemployment rate.
General Fund Revenues increased at a rate of 5.6% during fiscal year
1997-98 over the previous fiscal year. The State finished fiscal year
1997-98 with a revenue excess of $170 million above the fiscal year
1997-98 Appropriations Act. Through January 1999, revenues have increased
at a rate of 7.8% during fiscal year 1998-99. The State is expecting a
revenue excess of $70 million above the fiscal year 1998-99 Appropriations
Act.
TENNESSEE FUND
In 1978, the voters of the State of Tennessee approved an amendment to the
State Constitution requiring that (1) the total expenditures of the State
for any fiscal year shall not exceed the State's revenues and reserves,
including the proceeds of debt obligations issued to finance capital
expenditures and (2) in no year shall the rate of growth of appropriations
from State tax revenues exceed the estimated rate of growth of the State's
economy. That amendment also provided that no debt obligation may be
authorized for the current operation of any State service or program
unless repaid within the fiscal year of issuance. The state's fiscal year
runs from July 1 through June 30.
In response to public demand for better public education throughout the
State, the 1992 Tennessee General Assembly temporarily raised the State
sales tax by one-half of one percent to 6%, effective April 1, 1992. This
increase became permanent as a result of the 1993 legislative session.
Tennessee presently imposed an individual income tax on only interest and
dividends. However, due to a projected budget deficit of between $200 and
$400 million dollars for the fiscal year ending June 1, 1998, the
Tennessee legislature is holding a special session to determine whether to
raise money to reduce the deficit by imposing a broad-based individual
income tax.
The Tennessee economy generally tends to rise and fall in a roughly
parallel manner with the U.S. economy. Like the U.S. economy, the
Tennessee economy entered recession in the last half of 1990 and continued
throughout 1991 and into 1992 as the Tennessee indexes of coincident and
leading economic indicators trended downward throughout the period.
However, the Tennessee economy gained strength during the latter part of
1992 and this renewed vitality steadily continued through 1993, 1994 and
into 1995. During the latter half of 1995 and throughout calendar year
1996, the State's economy generally became inconsistent in its
performance. In 1997, the State's economy began to reaccelerate, but it
slowed in 1998, with only modest economic gains. Slower growth for the
State's economy is projected for the fiscal year ending June 30, 1999.
Tennessee taxable sales were approximately $50.64 billion in 1993,
approximately $55.32 billion in 1994, approximately $59.65 billion in
1995, approximately $63.01 billion in 1996, approximately $65.96 billion
in 1997, and approximately $66.05 billion in 1998. No Tennessee taxable
sales figures are presently confirmed for 1998.
The positive affects of Tourist and Tourism expenditures in Tennessee are
substantial. It is difficult for economists to clearly identify all
tourism expenditures, however, Tennessee is generally considered to be in
the second quartile of all states in terms of tourism revenue. The
Department of Tourism estimates that Tennessee had almost 40 million
visitors in 1997, generating approximately $8.5 billion in revenue.
Quarterly personal income for Tennessee seasonally adjusted at annual
rates has increased continuously for all of 1995, 1996, 1997 and 1998.
From 1983 to 1993, Tennessee's per capita income increased approximately
87.1% to $18,434, compared to the national per capita income of $20,817
which translates into a ten-year increase of approximately 70.3%. In 1997,
the year for which the most current data is available, per capita income
in Tennessee registered $23,112 an increase of 4.9% over 1996. Tennessee
Personal income is projected to rise 4.5% in 1999, up slightly from this
4.3% pace expected for 1998. For the fiscal year ended June 30, 1998,
however, Tennessee remained the leading state in the nation in household
bankruptcy filings and Memphis had the highest per capita rate of personal
bankruptcies in the country. The rate of bankruptcies in Tennessee is 9
per 1,000 people, compared to the national rate of 5 per 1,000 people. The
rate in Memphis is 18.45 bankruptcies per 1,000 people.
Tennessee's unemployment rate stood at 4.0% for December 1994, the lowest
figure since the 1980s. Tennessee's overall average unemployment rate for
1997 was 5.4% and for 1998 was 4.2%; the rate for February 1999 was 4.6%.
The Tennessee Department of Employment Security has projected minimum
growth of approximately 2.4% annually in Tennessee's total employment for
the years 1994 through 2005, with an increase of approximately 600,000 -
700,000 new jobs. These projections for Tennessee compare favorably to the
projections for national employment growth of 1.7% per year over the same
period.
Historically, the Tennessee economy has been characterized by a slightly
greater concentration in manufacturing employment than the U.S. as a
whole. The Tennessee economy, however, has been undergoing a structural
change in the last 20-25 years through increases in service sector and
trade sector employment, and manufacturing employment in Tennessee has
steadily declined on a percentage of work force basis. Service sector
employment in Tennessee has climbed steadily since 1973, increasing its
share of overall state non-agricultural employment from 14.5% to 26.4% in
1997. Over the same period, employment in manufacturing has declined from
33.9% to 20%, and employment in the trade sector has increased from 1973
to 1997 from 20.4% to 23.6% of non-agriculture employment. It is predicted
that the service industry sector will account for about 22% of the job
growth in Tennessee through the year 2005. Recently, overall Tennessee
non-agriculatural employment has grown in the period from 1991 to 1997
from approximately 2.18 million persons to approximately 2.60 million
persons. Accordingly, non-agricultural employment in Tennessee is
relatively uniformly diversified today with approximately 20% in the
manufacturing sector, approximately 26% in the service sector,
approximately 23% in the trade sector and approximately 15% in government.
Manufacturing employment is one component of non-agricultural employment.
Tennessee manufacturing employment has increased in terms of number of
jobs in each year for the period 1991-1995. There was a slight decrease in
manufacturing jobs in 1996 and 1997. No manufacturing employment figures
are currently available for 1998, but manufacturing employment is expected
to decrease by about 1% in 1999.
Tennessee's population increased approximately 6.2% from 1980 to 1990,
less than the national increase of 10.2% for the same period. As of July
1, 1998, the State's population was estimated at approximately 5.4
million. A U.S. census study projects that Tennessee will be the sixth
most popular destination for new residents coming from other states during
the period from 1995-2025 and the sixteenth most populous state by 2000.
Tennessee ranked sixteenth in population change from 1997 to 1998.
Population growth in Tennessee is expected to come mostly in the major
metropolitan areas (Memphis, Nashville, Knoxville and Chattanooga) over
the next 10-15 years. Tennessee is expected to have the ninth largest
population gain in the nation from 1995 to 2000. Greatest growth is
expected to occur in the Nashville MSA, which, in 1995, and for the first
time, passed the Memphis MSA as the largest metropolitan population center
in Tennessee. The largest population decline is expected in the rural
counties of northwest Tennessee.
Tennessee's general obligation bonds are rated Aaa by Moody's and AAA by
S&P. Tennessee's smallest counties have Moody's lower ratings ranging from
Baa to B, in part due to these rural counties' limited economies that make
them vulnerable to economic downturns. There can be no assurance that the
economic conditions on which these ratings are based will continue or that
particular obligations contained in the Tennessee Fund may not be
adversely affected by changes in economic or political conditions. Of
Tennessee's four largest counties, the Nashville and Davidson Country
Metropolitan Government has an AA rating, Shelby County has a AA+ rating,
Knox County has an AA rating and Hamilton County has an AAA rating by S&P.
VIRGINIA FUND
The Constitution of Virginia limits the ability of the Commonwealth to
create debt. An amendment to the Constitution requiring a balanced budget
was approved by the voters on November 6, 1984.
General obligations of cities, towns or counties are payable from the
general revenues of the entity, including ad valorem tax revenues on
property within the jurisdiction. The obligation to levy taxes could be
enforced by mandamus, but such a remedy may be impracticable and difficult
to enforce. Under the Code of Virginia, a holder of any general obligation
bond in default may file an affidavit setting forth such default with the
Governor. If, after investigating, the Governor determines that such
default exists, he is directed to order the State Comptroller to withhold
State funds appropriated and payable to the entity and apply the amount so
withheld to unpaid principal and interest.
The economy of the Commonwealth of Virginia is based primarily on
manufacturing, the government sector, agriculture, mining and tourism. The
government sector includes defense and could be affected adversely by
military base closings and other reductions in defense spending.
The Commonwealth has maintained a high level of fiscal stability for many
years due in large part to conservative financial operations and diverse
sources of revenue. No significant new taxes or increases in the scope or
amount of existing taxes were passed at the 1998 session of the General
Assembly.
WEST VIRGINIA FUND
West Virginia is among the nation's leading states in coal, oil and gas
production. However, West Virginia's economy continues to diversify and
its dependence on coal mining, oil and gas is diminishing, manufacturing
services, the government sector, tourism and retail trades, among other
industries constitute an increasing part of the State's economy.
Significant effort is also being made to enhance the wood products,
poultry processing, and technology industries. West Virginia's tourism
industry continues to grow and features skiing, whitewater rafting, biking
and other outdoor activities. The Governor's Office and the State
Legislature have placed great emphasis upon developing the tourism
industry in the State and the Legislature has enacted a number of statutes
designed to foster the growth in tourism.
Data compiled by the State of West Virginia Bureau of Employment Programs
indicates that unemployment in West Virginia during 1997 (annual average)
was 6.6%. This represents the state's lowest annual rate during the 1980s
and 1990s; however, West Virginia's unemployment rate remains above the
national average. The State's economic development efforts have been aided
by the location of significant manufacturing and service facilities in
West Virginia in recent years, including, for example, Toyota Motor
Corporation's engine plant in Putnam County.
West Virginia's economy continues to be enhanced by the construction and
improvement of roadways in the State, including a $6.0 billion program to
complete the Appalachian Corridor highway system from 1992-2001. In 1997,
the State approved the sale of $550 million in general obligation road
bonds over five years. In 1996, the State began sales of infrastructure
bonds as part of a $300 million program aimed at local water and sewer
projects as well as economic development projects.
According to the West Virginia Debt Capacity Report issued by the State
Treasurer in 1999, the State's general obligation bonds were recently
rated A1 by Moody's, AA- by S&P and AA- by Fitch.
In 1999 the State Legislature did not enact any significant new taxes or
increase the scope or amount of existing taxes. The State Legislature in
1997 enacted legislation which will exempt from ad valorem property taxes
all intangible personal property with tax situs in West Virginia. This
exemption will be phased in gradually from 1998 to 2003.
Since 1997, the Governor's Commission on Fair Taxation has reviewed the
State's complex system of taxation to determine whether changes promoting
fairness and simplicity, among other goals, should be made. The Commission
has recommended broad and sweeping changes to West Virginia's current tax
system. One such recommended revision is the repeal of the personal
property tax on automobiles and the phasing out of personal property taxes
on certain business assets such as machinery, equipment and inventory. The
Commission also supports replacement of the current personal income tax
with a progressive income tax on individuals. A simplified general excise
tax has also been recommended by the Commission to replace the State's
current consumers sales and use taxes which contain numerous exemptions.
With regard to business taxes, the Commission favors enactment of a single
business tax which would replace the current corporation net income tax
and numerous other special taxes on certain business activities. Other
changes are also recommended by the Commission. Such broad reform to the
State's tax system, if made, could have significant economic impact to the
State as well as its individual and business taxpayers. The Commission
desires that its proposed tax reforms be effective in the year 2001;
however, the proposed reforms require amendment to the State's
Constitution as well as significant legislation.
In 1995, the State Legislature substantially reformed the State's workers'
compensation program. The reform, aimed primarily at enforcing employers'
premium obligations and strengthening requirements for permanent total
disability awards, is intended to decrease the program's unfunded
liability and make the State's business climate more attractive.
In 1997 the State Constitution was amended to allow the investment of
certain state investment funds, such as pension funds and the workers'
compensation and coal-workers pneumoconiosis funds, in common stocks and
other equity investments. Statutory limitations on the amount of such
equity investments exist.
<PAGE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in
this Part II to a "Trust" means the Massachusetts business trust of which the
Fund is a series, or, if the Fund is not a series of a Massachusetts business
trust, references to a "Trust" shall mean the Fund.
- ---------------------
TABLE OF CONTENTS
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Page
I Management of the Fund ........................................... 1
Trustees/Officers ................................................ 1
Investment Adviser ............................................... 1
Administrator .................................................... 2
Custodian ........................................................ 2
Shareholder Servicing Agent ...................................... 2
Distributor ...................................................... 2
II Principal Share Characteristics .................................. 2
Class A Shares ................................................... 2
Class B Shares, Class C Shares and Class I Shares ................ 2
Waiver of Sales Charges .......................................... 3
Dealer Commissions and Concessions ............................... 3
General .......................................................... 3
III Distribution Plan ................................................ 3
Features Common to Each Class of Shares .......................... 3
Features Unique to Each Class of Shares .......................... 4
IV Investment Techniques, Practices and Risks ....................... 5
V Net Income and Distributions ..................................... 5
Money Market Funds ............................................... 5
Other Funds ...................................................... 5
VI Tax Considerations ............................................... 5
Taxation of the Fund ............................................. 5
Taxation of Shareholders ......................................... 6
Special Rules for Municipal Fund Distributions ................... 7
VII Portfolio Transactions and Brokerage Commissions ................. 8
VIII Determination of Net Asset Value ................................. 9
Money Market Funds ............................................... 9
Other Funds ...................................................... 10
IX Performance Information .......................................... 10
Money Market Funds ............................................... 10
Other Funds ...................................................... 11
General .......................................................... 12
MFS Firsts ....................................................... 12
X Shareholder Services ............................................. 13
Investment and Withdrawal Programs ............................... 13
Exchange Privilege ............................................... 15
Tax-Deferred Retirement Plans .................................... 16
XI Description of Shares, Voting Rights and Liabilities ............. 16
Appendix A -- Waivers of Sales Charges ........................... A-1
Appendix B -- Dealer Commissions and Concessions ................. B-1
Appendix C -- Investment Techniques, Practices and Risks ......... C-1
Appendix D -- Description of Bond Ratings ........................ D-1
<PAGE>
I MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS BOARD OVERSIGHT -- The Board of Trustees which oversees
the Fund provides broad supervision over the affairs of the Fund. The
Adviser is responsible for the investment management of the Fund's assets,
and the officers of the Trust are responsible for its operations.
TRUSTEE RETIREMENT PLAN -- The Trust has a retirement plan for Trustees
who are non-interested Trustees and Trustees who are not officers of the
Trust. Under this plan, a Trustee will retire upon reaching a specified
age (see Part I -- "Appendix B ") ("Retirement Age") and if the Trustee
has completed at least 5 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 his
Retirement Age and receive reduced payments if he has completed at least 5
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. The Fund will accrue
its allocable portion of compensation expenses under the retirement plan
each year to cover the current year's service and amortize past service
cost.
INDEMNIFICATION OF TRUSTEES AND OFFICERS -- The Declaration of Trust of
the 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 of the Trust or its shareholders, it is
determined 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 they have not engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
INVESTMENT ADVISER
The Trust has retained Massachusetts Financial Services Company ("MFS" or
the "Adviser") as the Fund's 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 of
Canada (an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment advisers
to assist MFS in the management of the Fund's assets. A description of
these sub-advisers, the services they provide and their compensation is
provided under the caption "Management of the Fund -- Sub-Adviser" in
Part I of this SAI for Funds which use sub-advisers.
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to
an Investment Advisory Agreement (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, as disclosed in the Prospectus under the heading
"Management of the Fund[s]."
The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer of the Adviser. 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 Trust pays the compensation of the Trustees who are not officers of
MFS and all expenses of the Fund (other than those assumed by MFS)
including but not limited to: advisory and administrative services;
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 prospectuses, 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 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 between the
series in a manner believed by management of the Trust to be fair and
equitable.
The Advisory Agreement has an initial two year term and continues 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 shares (as defined in "Investment Restrictions" in Part I of this
SAI) 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 shares
(as defined in "Investment Restrictions" in Part I of this SAI), 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
initials "MFS" and that MFS may render services to others and may permit
other fund clients to use the initials "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. Under this Agreement, the Fund
pays MFS an administrative fee 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.
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 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 acts
as the dividend disbursing agent of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is
the Fund's shareholder servicing agent, pursuant to an Amended and
Restated Shareholder Servicing Agreement (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, MFSC
will receive a fee calculated as a percentage of the average daily net
assets of the Fund at an effective annual rate of up to 0.1125%. In
addition, MFSC will be reimbursed by the Fund for certain expenses
incurred by MFSC on behalf of the Fund. The Custodian has contracted with
MFSC to perform certain dividend disbursing agent functions for the Fund.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues 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 shares (as defined in "Investment
Restrictions" in Part I of this SAI) 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.
II PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered by
the MFS Family of Funds. Some MFS Funds may not offer each class of shares
-- see the Prospectus of the Fund to determine which classes of shares the
Fund offers.
CLASS A SHARES
MFD acts as agent in selling Class A shares of the Fund to dealers. The
public offering price of 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
"How to Purchase, Exchange and Redeem Shares" 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 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" below). Certain
purchases of Class A shares may be subject to a 1% CDSC instead of an
initial sales charge, as described in the Fund's Prospectus.
CLASS B SHARES, CLASS C SHARES AND CLASS I SHARES
MFD acts as agent in selling Class B, Class C and Class I shares of the
Fund. The public offering price of Class B, Class C and Class I shares is
their net asset value next computed after the sale. Class B and C shares
are generally subject to a CDSC, as described in the Fund's Prospectus.
WAIVER OF SALES CHARGES
In certain circumstances, the initial sales charge imposed upon purchases
of Class A shares and the CDSC imposed upon redemptions of Class A, B and
C shares are waived. These circumstances are described in Appendix A of
this Part II. 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, because the sales effort, if any, involved in
making such sales is negligible, or in the case of certain CDSC waivers,
because the circumstances surrounding the redemption of Fund shares were
not foreseeable or voluntary.
DEALER COMMISSIONS AND CONCESSIONS
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concessions are described in Appendix
B of this Part II.
GENERAL
Neither MFD nor dealers are permitted to delay placing 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.
III 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 each 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 expense ratio to the extent 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.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current
distribution and service fees for each Fund are reflected under the
caption "Expense Summary" in the Prospectus.
FEATURES COMMON TO EACH CLASS OF SHARES
There are features of the Distribution Plan that are common to each Class
of shares, as described below.
SERVICE FEES -- The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to
the class of shares to which the Distribution Plan relates (i.e., Class A,
Class B or Class C shares, as appropriate) (the "Designated Class")
annually in order that MFD may pay expenses on behalf of the Fund relating
to the servicing of shares of the Designated Class. The service fee is
used by MFD to compensate dealers which enter into a sales agreement with
MFD in consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to shares of the Designated
Class owned by investors for whom such dealer is the dealer or holder of
record. MFD may from time to time reduce the amount of the service fees
paid for shares sold prior to a certain date. Service fees may be reduced
for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates
are entitled to retain all service fees payable under the Distribution
Plan for which there is no dealer of record or for which qualification
standards have not been met as partial consideration for personal services
and/or account maintenance services performed by MFD or its affiliates to
shareholder accounts.
DISTRIBUTION FEES -- The Distribution Plan provides that the Fund may pay
MFD a distribution fee in addition to the service fee described above
based on the average daily net assets attributable to the Designated Class
as partial consideration for distribution services performed and expenses
incurred in the performance of MFD's obligations under its distribution
agreement with the Fund. 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. The amount of the distribution fee
paid by the Fund with respect to each class differs under the Distribution
Plan, as does the use by MFD of such distribution fees. Such amounts and
uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any
year may be more or less than the expenses incurred by MFD under its
distribution agreement with the Fund, the Fund is not liable to MFD for
any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES -- Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the
Designated Class. The provisions of the Distribution Plan relating to
operating policies as well as initial approval, renewal, amendment and
termination are substantially identical as they relate to each Class of
shares covered by the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its
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" in Part I of this SAI).
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" in Part I of this
SAI) 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
the Distribution Plan or in any related agreement.
FEATURES UNIQUE TO EACH CLASS OF SHARES
There are certain features of the Distribution Plan that are unique to
each class of shares, as described below.
CLASS A SHARES -- Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid to
MFD). In addition to the initial sales charge, the dealer also generally
receives the ongoing 0.25% per annum service fee, as discussed above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or 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.
The distribution fee paid to MFD under the Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover distribution-
related expenses incurred by it under its distribution agreement with the
Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement plans
of Class A shares which are sold at net asset value but which are subject
to a 1% CDSC for one year after purchase). In addition, to the extent that
the aggregate service and distribution fees paid under the Distribution
Plan do not exceed 0.35% per annum of the average daily net assets of the
Fund attributable to Class A shares (0.50% per annum for certain Funds),
the Fund is permitted to pay such distribution-related expenses or other
distribution-related expenses.
CLASS B SHARES -- Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. MFD will advance to dealers
the first year service fee described above at a rate equal to 0.25% of the
purchase price of such shares and, as compensation therefor, MFD may
retain the service fee paid by the Fund with respect to such shares for
the first year after purchase. Dealers will become eligible to receive the
ongoing 0.25% per annum service fee with respect to such shares commencing
in the thirteenth month following purchase.
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.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal,
on an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class B shares. As noted above, this distribution fee may
be used by MFD to cover its distribution-related expenses under its
distribution agreement with the Fund (including the 3.75% commission it
pays to dealers upon purchase of Class B shares).
CLASS C SHARES -- Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC of 1.00% upon redemption during
the first year. MFD will pay a commission to dealers of 1.00% of the
purchase price of Class C shares purchased through dealers at the time of
purchase. In compensation for this 1.00% commission paid by MFD to
dealers, MFD will retain the 1.00% per annum Class C distribution and
service fees paid by the Fund with respect to such shares for the first
year after purchase, and dealers will become eligible to receive from MFD
the ongoing 1.00% per annum distribution and service fees paid by the Fund
to MFD with respect to such shares commencing in the thirteenth month
following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee
paid to MFD under the Distribution Plan (which MFD in turn pays to
dealers), as discussed above, and a distribution fee paid to MFD (which
MFD also in turn pays to dealers) under the Distribution Plan, equal, on
an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class C shares.
IV INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in pursuing
their investment objectives and principal investment policies, and the
risks associated with these investment techniques and practices. The Fund
will engage only in certain of these investment techniques and practices,
as identified in Part I. Investment practices and techniques that are not
identified in Part I do not apply to the Fund.
V NET INCOME AND DISTRIBUTIONS MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund
is determined each day during which the New York Stock Exchange is open
for trading (see "Determination of Net Asset Value" below for a list of
days the Exchange is closed).
For this purpose, the net income attributable to shares of a money
market fund (from the time of the immediately preceding determination
thereof) shall consist of (i) all interest income accrued on the portfolio
assets of the money market fund, (ii) less all actual and accrued expenses
of the money market fund determined in accordance with generally accepted
accounting principles, and (iii) plus or minus net realized gains and
losses and net unrealized appreciation or depreciation on the assets of
the money market fund, if any. Interest income shall include discount
earned (including both original issue and market discount) on discount
paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income
is determined, the net asset value per share (i.e., the value of the net
assets of the money market fund divided by the number of shares
outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares in the
shareholder's account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for any
reason the net income determined at any time is a negative amount, which
could occur, for instance, upon default by an issuer of a portfolio
security, the money market fund would first offset the negative amount
with respect to each shareholder account from the dividends declared
during the month with respect to each such account. If and to the extent
that such negative amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the money market fund could reduce the number of its
outstanding shares by treating each shareholder of the money market fund
as having contributed to its capital that number of full and fractional
shares of the money market fund in the account of such shareholder which
represents its proportion of such excess. Each shareholder of the money
market fund will be deemed to have agreed to such contribution in these
circumstances by its investment in the money market fund. This procedure
would permit the net asset value per share of the money market fund to be
maintained at a constant $1.00 per share.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute
to its shareholders dividends equal to all of its net investment income
with such frequency as is disclosed in the Fund's prospectus. These Funds'
net investment income consists of non-capital gain income less expenses.
In addition, these Funds intend to distribute net realized short- and
long-term capital gains, if any, at least annually. Shareholders will be
informed of the tax consequences of such distributions, including whether
any portion represents a return of capital, after the end of each calendar
year.
VI TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
TAXATION OF THE FUND
FEDERAL TAXES -- The Fund (even if it is a fund in a Trust with multiple
series) is treated as a separate entity for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund
has elected (or in the case of a new Fund, intends to elect) to be, and
intends to qualify to be treated 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 its distributions (as a percentage
of both its overall income and any tax-exempt income), and the composition
of its portfolio assets. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. The Fund's
foreign-source income, if any, may be subject to foreign withholding
taxes. If the Fund failed to qualify as a "regulated investment company"
in any year, it would incur a regular federal corporate income tax on all
of its taxable income, whether or not distributed, and Fund distributions
would generally be taxable as ordinary dividend income to the
shareholders.
MASSACHUSETTS TAXES -- 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.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Subject to the special rules discussed
below for Municipal Funds, shareholders of the Fund normally will have to
pay federal income tax and any state or local income taxes on the
dividends and capital gain distributions they receive from the Fund. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether paid in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), whether paid in cash or
reinvested in additional shares, are taxable to shareholders as long-term
capital gains for federal income tax purposes without regard to the length
of time the shareholders have held their shares. Any Fund dividend that is
declared in October, November, or December of any calendar year, payable
to shareholders of record in such a month, and paid during 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, other than dividends that are declared by the
Fund on a daily basis, will have the effect of reducing the per share net
asset value of Fund shares by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any such distribution
(other than an exempt-interest dividend) may thus pay the full price for
the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION -- If the Fund receives dividend income from
U.S. corporations, a portion of the Fund's ordinary income dividends is
normally eligible for the dividends-received deduction for corporations if
the recipient otherwise qualifies for that deduction with respect to its
holding of Fund shares. Availability of the deduction for particular
corporate shareholders is subject to certain limitations, and deducted
amounts may be subject to the alternative minimum tax or result in certain
basis adjustments.
DISPOSITION OF SHARES -- In general, any gain or loss realized upon a
disposition of Fund shares by a shareholder that holds such shares as a
capital asset will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a
disposition of Fund shares held for six months or less 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 Fund shares held for 90 days or less 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 any other shares of an
MFS Fund generally sold subject to a sales charge.
DISTRIBUTION/ACCOUNTING POLICIES -- The Fund's current distribution 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.
U.S. TAXATION OF NON-U.S. PERSONS -- Dividends and certain other payments
(but not including distributions of net capital gains) 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 at that rate on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. 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.
BACKUP WITHHOLDING -- The Fund is also required in certain circumstances
to apply backup withholding at the rate of 31% on taxable dividends and
capital gain distributions (and redemption proceeds, if applicable) paid
to any non-corporate 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.
FOREIGN INCOME TAXATION OF NON-U.S. PERSONS -- Distributions received from
the Fund by Non-U.S. Persons may also be subject to tax under the laws of
their own jurisdictions.
STATE AND LOCAL INCOME TAXES: U.S. GOVERNMENT SECURITIES -- Dividends paid
by the Fund that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but
generally not distributions of capital gains realized upon the disposition
of such obligations) may be exempt from state and local income taxes. The
Fund generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
CERTAIN SPECIFIC INVESTMENTS -- Any investment in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped
securities, 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. To distribute this income (as well as
non-cash income described in the next two paragraphs) 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. Any investment in residual
interests of a CMO that has elected to be treated as a real estate
mortgage investment conduit, or "REMIC," can create complex tax problems,
especially if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," 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 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, Futures Contracts, Forward Contracts, short
sales "against the box" and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect to
foreign investments by the Fund. Foreign exchange gains and losses
realized by the Fund may be treated as ordinary income and loss. Use of
foreign currencies for non-hedging purposes and investment by the Fund in
certain "passive foreign investment companies" may be limited in order to
avoid a tax on the Fund. The Fund may elect to mark to market any
investments in "passive foreign investment companies" on the last day of
each year. This election may cause the Fund to recognize income prior to
the receipt of cash payments with respect to those investments; 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.
FOREIGN INCOME TAXES -- Investment income received by the Fund and gains
with respect to foreign securities may be subject to foreign income taxes
withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of
tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance, since the
amount of the Fund's assets to be invested within various countries is not
known.
If the Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, it may elect to "pass
through" to its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by it and thus includable in their gross income for
federal income tax purposes. Shareholders who itemize deductions would
then be allowed to claim a deduction or credit (but not both) on their
federal income tax returns for such amounts, subject to certain
limitations. Shareholders who do not itemize deductions would (subject to
such limitations) be able to claim a credit but not a deduction. No
deduction will be permitted to individuals in computing their alternative
minimum tax liability. If the Fund is not eligible, or does not elect, to
"pass through" to its shareholders foreign income taxes it has paid,
shareholders will not be able to claim any deduction or credit for any
part of the foreign taxes paid by the Fund.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of funds whose objective
is to invest primarily in obligations that pay interest that is exempt
from federal income tax ("Municipal Funds").
TAX EXEMPT DISTRIBUTIONS -- The portion of a Municipal 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. Except when the Fund
provides actual monthly percentage breakdowns, 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.
TAXABLE DISTRIBUTIONS -- A Municipal Fund may also earn some income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may recognize 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 tax on the non-exempt-interest dividends and capital gain
distributions they receive from the Fund, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. 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.
CONSEQUENCES OF DISTRIBUTIONS BY A MUNICIPAL FUND: EFFECT OF ACCRUED TAX-
EXEMPT INCOME -- Shareholders redeeming shares after tax-exempt income has
been accrued but not yet declared as a dividend should be aware that a
portion of the proceeds realized upon redemption of the shares will
reflect the existence of such accrued tax-exempt income and that this
portion will be subject to tax as a capital gain even though it would have
been tax-exempt had it been declared as a dividend prior to the
redemption. For this reason, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after the Fund declares dividends
representing substantially all the ordinary income (including tax-exempt
income) accrued for that month.
CERTAIN ADDITIONAL INFORMATION FOR MUNICIPAL FUND SHAREHOLDERS -- Interest
on indebtedness incurred by shareholders to purchase or carry Fund shares
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 advisors before purchasing Fund shares.
CONSEQUENCES OF REDEMPTION OF SHARES -- Any loss realized on a redemption
of Municipal Fund shares 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.
STATE AND LOCAL INCOME TAXES: MUNICIPAL OBLIGATIONS -- The exemption of
exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of an
exempt-interest dividend that represents interest received by a regulated
investment company on its holdings of securities issued by that state and
its political subdivisions and instrumentalities. Therefore, the Fund will
report annually to its shareholders the percentage of interest income
earned by it during the preceding year on Municipal Bonds and will
indicate, on a state-by-state basis only, the source of such income.
VII PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other
clients of the Adviser, or any subsidiary of the Adviser in a similar
capacity. Changes in the Fund's investments are reviewed by the Trust's
Board of Trustees.
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. In the U.S. and in some other countries 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. In other countries both
debt and equity securities are traded on exchanges at fixed commission
rates. 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. The Adviser normally seeks to deal directly with the primary
market makers or on major exchanges unless, in its opinion, better prices
are available elsewhere. 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. At
present no arrangements for the recapture of commission payments 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 their respective
overall responsibilities to the Fund or to their 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 investing in, purchasing or
selling securities, and the availability of securities or 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 securities or 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 from time to time through such broker-dealers, on
behalf of the Fund.
The Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The Adviser sometimes uses
evaluations resulting from this effort as a consideration in the selection
of brokers to execute portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence
of the Adviser's receipt of brokerage and research service. To the extent
the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed
those that might otherwise be paid for such portfolio transactions, or for
such portfolio transactions and research, 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.
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 any subsidiary of the Adviser. 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,
the Fund believes that its ability to participate in volume transactions
will produce better executions for the Fund.
VIII DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each
day during which the New York Stock 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 each day as of the close
of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of
shares of the class outstanding.
MONEY MARKET FUNDS
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has determined in good faith constitutes fair value for
the purposes of complying with the 1940 Act. This valuation method will
continue to be used until such time as the Board of Trustees determines
that it does not constitute fair value for such purposes. Each money
market fund will limit its portfolio to those investments in U.S. dollar-
denominated instruments which its Board of Trustees determines present
minimal credit risks, and which are of high quality as determined by any
major rating service or, in the case of any instrument that is not so
rated, of comparable quality as determined by the Board of Trustees. Each
money market fund has also agreed to maintain a dollar-weighted average
maturity of 90 days or less and to invest only in securities maturing in
13 months or less. The Board of Trustees which oversees each money market
fund has established procedures designed to stabilize its net asset value
per share, as computed for the purposes of sales and redemptions, at $1.00
per share. If the Board determines that a deviation from the $1.00 per
share price may exist which may result in a material dilution or other
unfair result to investors or existing shareholders, it will take
corrective action it regards as necessary and appropriate, which action
could include the sale of instruments prior to maturity (to realize
capital gains or losses); shortening average portfolio maturity;
withholding dividends; or using market quotations for valuation purposes.
OTHER FUNDS
The following valuation techniques apply to each MFS Fund that is not a
money market fund.
Equity securities in the Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the Nasdaq
stock market system for unlisted national market issues, or at the last
quoted bid price for listed securities in which there were no sales during
the day or for unlisted securities not reported on the Nasdaq stock market
system. Bonds and other fixed income securities (other than short-term
obligations) of U.S. issuers 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-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. Forward Contracts will be valued using a
pricing model taking into consideration market data from an external
pricing source. Use of the pricing services has been approved by the Board
of Trustees.
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 (whether
domestic or foreign) 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 system, in which case they are valued at the last sale price
or, if no sales occurred during the day, at the last quoted bid price.
Short-term obligations in the Fund's portfolio are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Short-term obligations with a remaining maturity in excess of 60 days will
be valued upon dealer supplied valuations. Portfolio investments for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of regular trading on the
Exchange. Occasionally, events affecting the values of such securities may
occur between the times at which they are determined and the close of
regular trading on the Exchange which will not be reflected in the
computation of the Fund's net asset value unless the Trustees deem that
such event would materially affect the net asset value in which case an
adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. A share's net asset value is effective
for orders received by the dealer prior to its calculation and received by
MFD prior to the close of that business day.
IX PERFORMANCE INFORMATION
MONEY MARKET FUNDS
Each MFS Fund that is a money market fund will provide current annualized
and effective annualized yield quotations based on the daily dividends of
shares of the money market fund. These quotations may from time to time be
used in advertisements, shareholder reports or other communications to
shareholders.
Any current yield quotation of a money market fund which is used in such
a manner as to be subject to the provisions of Rule 482(d) under the 1933
Act shall consist of an annualized historical yield, carried at least to
the nearest hundredth of one percent based on a specific seven calendar
day period and shall be calculated by dividing the net change in the value
of an account having a balance of one share of that class at the beginning
of the period by the value of the account at the beginning of the period
and multiplying the quotient by 365/7. For this purpose the net change in
account value would reflect the value of additional shares purchased with
dividends declared on the original share and dividends declared on both
the original share and any such additional shares, but would not reflect
any realized gains or losses from the sale of securities or any unrealized
appreciation or depreciation on portfolio securities. In addition, any
effective yield quotation of a money market fund so used shall be
calculated by compounding the current yield quotation for such period by
multiplying such quotation by 7/365, adding 1 to the product, raising the
sum to a power equal to 365/7, and subtracting 1 from the result. These
yield quotations should not be considered as representative of the yield
of a money market fund in the future since the yield will vary based on
the type, quality and maturities of the securities held in its portfolio,
fluctuations in short-term interest rates and changes in the money market
fund's expenses.
OTHER FUNDS
Each MFS Fund that is not a money market fund may quote the following
performance results.
TOTAL RATE OF 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 any
applicable CDSC 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 any applicable sales charge 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.
The Fund offers multiple classes of shares which were initially offered
for sale to, and purchased by, the public on different dates (the class
"inception date"). The calculation of total rate of return for a class of
shares which has a later class inception date than another class of shares
of the Fund is based both on (i) the performance of the Fund's newer class
from its inception date and (ii) the performance of the Fund's oldest
class from its inception date up to the class inception date of the newer
class.
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 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).
Any 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 for the 30-
day period. The yield for each class of the Fund is calculated by dividing
the net investment income allocated to that class earned during the period
by the maximum offering price per share of that class of the Fund on the
last day of the 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 expense 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 Fund's yield calculations assume a maximum sales charge of
5.75% in the case of Class A shares and no payment of any CDSC in the case
of Class B and Class C shares.
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.
CURRENT DISTRIBUTION RATE -- Yield, which is calculated according to a
formula prescribed by the Securities and Exchange Commission, 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 (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result
by the maximum offering price or net asset value per share on the last day
of the period. 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 for
option writing, short-term capital gains and return of invested capital,
and may be calculated over a different period of time. The Fund's current
distribution rate calculation for Class B shares and Class C shares
assumes no CDSC is paid.
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 Securities
Corporation, 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. The Fund may
also quote evaluations mentioned in independent radio or television
broadcasts and 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. 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.
From time to time, the Fund 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 use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund
categories established by Morningstar (or other nationally recognized
statistical ratings organizations) and to other MFS Funds.
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
Planning(SM) program, an intergenerational financial planning assistance
program; issues with respect to insurance (e.g., disability and life
insurance and Medicare supplemental insurance); issues regarding financial
and health care management for elderly family members; and other similar
or related matters.
From time to time, the Fund may also advertise annual returns showing
the cumulative value of an initial investment in the Fund in various
amounts over specified periods, with capital gain and dividend
distributions invested in additional shares or taken in cash, and with no
adjustment for any income taxes (if applicable) payable by shareholders.
MFS FIRSTS
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
o 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard(R) Equity
Fund, the first fund to invest principally 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.
X 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 $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of 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 Account
Application or filing a separate Letter of Intent application (available
from MFSC) 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 MFSC 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 period 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, MFSC 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
MFSC. By completing and signing the Account Application or separate Letter
of Intent application, the shareholder irrevocably appoints MFSC 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,
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 discounts. A shareholder must provide MFSC
(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 MFSC 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 MFSC 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. MFSC 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. MFSC 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 shares of the same class of one of the other MFS
Funds, if shares of that 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 Program 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 MFSC 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 and Class C shares in any year pursuant
to a SWP generally are limited to 10% of the value of the account at the
time of 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) shares representing
reinvested distributions; (ii) shares representing undistributed capital
gains and income; and (iii) to the extent necessary, shares representing
direct investments subject to the lowest CDSC. 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 received 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, MFSC. 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 dollar amount of each payment. MFSC 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
MFSC 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 may be made at any
time by mailing a check payable to the Fund directly to MFSC. 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 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, 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 participate in 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 (if
available for sale). 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 transfer will
occur after receipt and processing by MFSC 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 the 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 MFSC 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 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 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 proceeds reinvested in 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 12 months
of the initial purchase in the case 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 a 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
the same class in an account with the Fund for which payment has been
received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the Class of shares) at
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 MFSC.
EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market
funds) -- No initial sales charge or CDSC will be imposed in connection
with an exchange from shares of an MFS Fund to shares of any other MFS
Fund, except with respect to exchanges from an MFS money market fund to
another MFS Fund which is not an MFS money market fund (discussed below).
With respect to an exchange involving shares subject to a CDSC, the CDSC
will be unaffected by the exchange and the holding period for purposes of
calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND -- Special rules apply with
respect to the imposition of an initial sales charge or a CDSC for
exchanges from an MFS money market fund to another MFS Fund which is not
an MFS money market fund. These rules are described under the caption "How
to Purchase, Exchange and Redeem Shares" in the Prospectuses of those MFS
money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND -- Class A shares of any MFS Fund
held by certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund)
(the "Units"), and Units may be exchanged for Class A shares of any MFS
Fund. With respect to exchanges between Class A shares subject to a CDSC
and Units, the CDSC will carry over to the acquired shares or Units and
will be deducted from the redemption proceeds when such shares or Units
are subsequently redeemed, assuming the CDSC is then payable (the period
during which the Class A shares and the Units were held will be aggregated
for purposes of calculating the applicable CDSC). In the event that a
shareholder initially purchases Units and then exchanges into Class A
shares subject to an initial sales charge of an MFS Fund, the initial
sales charge shall be due upon such exchange, but will not be imposed with
respect to any subsequent exchanges between such Class A shares and Units
with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC
period will commence upon such exchange, and the applicability of the CDSC
with respect to subsequent exchanges shall be governed by the rules set
forth above in this paragraph.
GENERAL -- 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 MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by MFSC) or all the shares in the
account. Each exchange involves the redemption of the shares of the Fund
to be exchanged and the purchase 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
the Exchange Request is received by MFSC prior to the close of regular
trading on the Exchange the exchange usually will occur on that day if all
the requirements 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 MFD may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the requirements set forth above.
Additional information with respect to any of the MFS Funds, including a
copy of its current prospectus, may be obtained from investment dealers or
MFSC. A shareholder considering an exchange should obtain and read the
prospectus of the other fund and consider the differences in objectives
and policies before making any exchange.
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 imposed
from time to time at the discretion of the Funds in order to protect the
Funds.
TAX-DEFERRED RETIREMENT PLANS
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:
o 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);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who
desire to make limited contributions to a tax-favored retirement
program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public school systems and certain non-profit organizations); and
o 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. 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.
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 Section 401(a) or
403(b) recordkeeping program made available by MFSC.
XI DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The 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 Declaration of
Trust further authorizes the Trustees to classify or reclassify any series
of shares into one or more classes. 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 of the Fund are entitled to share pro rata in the Fund's net
assets allocable to such class available for distribution to shareholders.
The Trust reserves the right to create and issue a number of series and
additional 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. To the extent a shareholder of the Fund owns a controlling
percentage of the Fund's shares, such shareholder may affect the outcome
of such matters to a greater extent than other Fund shareholders. Although
Trustees are not elected annually by the shareholders, the Declaration of
Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the
Trust. A meeting of shareholders will be called upon the request of
shareholders of record holding in the aggregate not less than 10% of the
outstanding voting securities of the Trust. No material amendment may be
made to the Declaration of Trust without the affirmative vote of a
majority of the Trust's outstanding shares (as defined in "Investment
Restrictions" in Part I of this SAI). The Trust or any series of the Trust
may be terminated (i) upon the merger or consolidation of the Trust or any
series of the Trust with another organization or upon the sale of 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 or the affected series' outstanding
shares voting as a single class, or of the affected series of the Trust,
except that if the Trustees 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 will be sufficient, or (ii) upon
liquidation and distribution of the assets of a Fund, if approved by the
vote of the holders of two-thirds of its outstanding shares of the Trust,
or (iii) by the Trustees by written notice to its shareholders. 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 the
Trust shall maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Trust and
its shareholders and the Trustees, officers, employees and agents of the
Trust 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 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
his willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
<PAGE>
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PART II - APPENDIX A
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WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
CDSC for Class A shares are waived (Section II), and the CDSC for Class B
and Class C shares is waived (Section III). Some of the following
information will not apply to certain funds in the MFS Family of Funds,
depending on which classes of shares are offered by such fund. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
I WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Funds pursuant to
the Distribution Investment Program.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
AFFILIATES OF AN MFS FUND/CERTAIN DEALERS.
Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses or
domestic partners identified above and certain trusts, pension,
profit-sharing or other retirement plans for the sole benefit of such
persons, provided the shares are not resold except to the MFS Fund
which issued the shares; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes
to the MFS FUNDamental 401(k) Plan or another similar recordkeeping
system made available by MFSC (the "MFS Participant Recordkeeping
System");
> Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the
later to occur of: (i) January 1, 1993 or (ii) the date such 401(a)
or ESP Plan first invests its assets in one or more of the MFS
Funds. The sales charges will be waived in the case of a redemption
of all of the 401(a) or ESP Plan's shares in all MFS Funds (i.e.,
all the assets of the 401(a) or ESP Plan invested in the MFS Funds
are withdrawn), unless immediately prior to the redemption, the
aggregate amount invested by the 401(a) or ESP Plan in shares of the
MFS Funds (excluding the reinvestment of distributions) during the
prior four years equals 50% or more of the total value of the 401(a)
or ESP Plan's assets in the MFS Funds, in which case the sales
charges will not be waived; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan recordkeeping
or administration services agreement with MFD or one of its
affiliates and (ii) the shares purchased or redeemed represent
transfers from or transfers to plan investments other than the MFS
Funds for which retirement plan recordkeeping services are provided
under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY).
Shares transferred:
o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by MFSC on behalf of individual participants of
such Plan, provided that the Plan sponsor subscribes to the MFS
FUNDamental 401(k) Plan or another similar recordkeeping system made
available by MFSC.
LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).
II WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account
or a similar program under which such clients pay a fee to such
dealer.
INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates. o Reinvestment of Distributions from
Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where the retirement plan and/or sponsoring organization
demonstrates to the satisfaction of, and certifies to, MFSC that the
retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes
of the MFS Family of Funds and aggregate assets of at least $10
million;
provided, however, that the CDSC will not be waived (i.e., it will be
imposed) (a) with respect to plans which establish an account with MFSC on
or after November 1, 1997, in the event that the plan makes a complete
redemption of all of its shares in the MFS Family of Funds, or (b) with
respect to plans which establish an account with MFSC prior to November 1,
1997, in the event that there is a change in law or regulations which
result in a material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring organization: (i)
becomes insolvent or bankrupt; (ii) is terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with any other entity.
PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund,
MFS Municipal Limited Maturity Fund, MFS Money Market Fund, MFS
Government Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the
proceeds of a redemption of Class I shares of any of the MFS Funds.
III WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs
where the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account value at the time of
establishment.
DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to MFSC).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to the
MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
provided, however, that the CDSC will not be waived (i.e., it will
be imposed) in the event that there is a change in law or
regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is
terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with any other entity.
> By a retirement plan whose sponsoring organization subscribes to the
MFS Recordkeeper Plus product and which established its account with
MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s) with
any MFS Fund which switches to the MFS Recordkeeper Plus product
will not become eligible for this waiver category.
<PAGE>
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PART II - APPENDIX B
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DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions made
to dealers by MFD in connection with the sale of Fund shares. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as
shown in Appendix D to Part I of this SAI. The difference between the
total amount invested and the sum of (a) the net proceeds to the Fund and
(b) the dealer reallowance, is the amount of the initial sales charge
retained by MFD (as shown in Appendix D to Part I of this SAI). Because of
rounding in the computation of offering price, the portion of the sales
charge retained by MFD 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 the offering price or as a percentage of the net amount
invested as listed in the Prospectus.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments made through such dealers as follows:
COMMISSION
PAID BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
------------------------------------------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to
dealers with respect to a shareholder's new investment in Class A shares
purchases for each shareholder account (and certain other accounts for
which the shareholder is a record or beneficial holder) will be aggregated
over a 12-month period (commencing from the date of the first such
purchase).
CLASS B SHARES
For purchases of Class B shares, MFD will pay commissions to dealers of
3.75% of the purchase price of Class B shares purchased through dealers.
MFD will also advance to dealers the first year service fee payable under
the Fund's Distribution Plan at a rate equal to 0.25% of the purchase
price of such shares. Therefore, the total amount paid to a dealer upon
the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the
purchase price).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and December
31, 1998, MFD pays an amount to dealers equal to 3.00% of the amount
purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement
of the first year service fee equal to 0.25% of the purchase price payable
under the Fund's Distribution Plan.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided
that the plan establishment paperwork is received by MFSC in good order on
or after November 15, 1998), MFD pays no up front commissions to dealers,
but instead pays an amount to dealers equal to 1% per annum of the average
daily net assets of the Fund attributable to plan assets, payable at the
rate of 0.25% at the end of each calendar quarter, in arrears. This
commission structure is not available with respect to a plan with a pre-
existing account(s) with any MFS Fund which seeks to switch to the MFS
Recordkeeper Plus product.
CLASS C SHARES
For purchases of Class C shares, MFD will pay dealers 1.00% of the
purchase price of Class C shares purchased through dealers and, as
compensation therefor, MFD will retain the 1.00% per annum distribution
and service fee paid under the Fund's Distribution Plan to MFD for the
first year after purchase.
ADDITIONAL DEALER COMMISSIONS/CONCESSIONS
Dealers may receive different compensation with respect to sales of Class
A, Class B and Class C shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified Funds sold by such dealer during a specified sales
period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of
all of the Class B and/or Class C shares of certain specified Funds sold
by such dealer during a specified sales period. In addition, from time to
time, MFD, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which
sell or arrange for the sale of shares of the Fund. Such concessions
provided by MFD may include financial assistance to dealers in connection
with preapproved conferences or seminars, sales or training programs for
invited registered representatives and other employees, payment for travel
expenses, including lodging, incurred by registered representatives and
other employees for such seminars or training programs, seminars for the
public, advertising and sales campaigns regarding one or more Funds, and/
or other dealer-sponsored events. From time to time, MFD may make expense
reimbursements for special training of a dealer's registered
representatives and other employees in group meetings or to help pay the
expenses of sales contests. Other concessions may be offered to the extent
not prohibited by state laws or any self-regulatory agency, such as the
NASD.
<PAGE>
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PART II - APPENDIX C
- ------------------------
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can
be expected to rise. Conversely, when interest rates rise, the value of
debt securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all
types of interest rate payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment in kind and
auction rate features.
ASSET-BACKED SECURITIES: The Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Fund may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized
by mortgage loans or mortgage pass-through securities (such collateral
referred to collectively as "Mortgage Assets"). Unless the context
indicates otherwise, all references herein to CMOs include multiclass
pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in
innumerable ways. In a common structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the
classes of a CMO in the order of their respective stated maturities or
final distribution dates, so that no payment of principal will be made on
any class of CMOs until all other classes having an earlier stated
maturity or final distribution date have been paid in full. Certain CMOs
may be stripped (securities which provide only the principal or interest
factor of the underlying security). See "Stripped Mortgage-Backed
Securities" below for a discussion of the risks of investing in these
stripped securities and of investing in classes consisting of interest
payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with
other CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special
purpose corporations, are backed by a pool of assets, such as credit card
and automobile loan receivables, representing the obligations of a number
of different parties. These securities present certain risks. For
instance, in the case of credit card receivables, these securities may not
have the benefit of any security interest in the related collateral.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due. Most
issuers of automobile receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities. The underlying assets (e.g., loans) are also
subject to prepayments which shorten the securities' weighted average life
and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on underlying assets to make payments,
the securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default ensures payment through
insurance policies or letters of credit obtained by the issuer or sponsor
from third parties. The Fund will not pay any additional or separate fees
for credit support. The degree of credit support provided for each issue
is generally based on historical information respecting the level of
credit risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated or failure of the credit support could
adversely affect the return on an investment in such a security.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-
through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer
or guarantor of the securities) as the mortgages in the underlying
mortgage pools are paid off. The average lives of mortgage pass-throughs
are variable when issued because their average lives depend on prepayment
rates. The average life of these securities is likely to be substantially
shorter than their stated final maturity as a result of unscheduled
principal prepayment. Prepayments on underlying mortgages result in a loss
of anticipated interest, and all or part of a premium if any has been
paid, and the actual yield (or total return) to the Fund may be different
than the quoted yield on the securities. Mortgage premiums generally
increase with falling interest rates and decrease with rising interest
rates. Like other fixed income securities, when interest rates rise the
value of a mortgage pass-through security generally will decline; however,
when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of
other fixed-income securities. In the event of an increase in interest
rates which results in a decline in mortgage prepayments, the anticipated
maturity of mortgage pass-through securities held by the Fund may
increase, effectively changing a security which was considered short or
intermediate-term at the time of purchase into a long-term security. Long-
term securities generally fluctuate more widely in response to changes in
interest rates than short or intermediate-term securities.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the
case of securities guaranteed by the Government National Mortgage
Association ("GNMA")); or guaranteed by agencies or instrumentalities of
the U.S. Government (such as the Federal National Mortgage Association
"FNMA") or the Federal Home Loan Mortgage Corporation, ("FHLMC") which are
supported only by the discretionary authority of the U.S. Government to
purchase the agency's obligations). Mortgage pass-through securities may
also be issued by non-governmental issuers (such as commercial banks,
savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers). Some of these
mortgage pass-through securities may be supported by various forms of
insurance or guarantees.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which
consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the
individual borrowers on their mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
prepayments of principal resulting from the sale, refinancing or
foreclosure of the underlying property, net of fees or costs which may be
incurred. Some mortgage pass-through securities (such as securities issued
by the GNMA) are described as "modified pass-through." These securities
entitle the holder to receive all interests and principal payments owed on
the mortgages in the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether the mortgagor actually makes the
payment.
The principal governmental guarantor of mortgage pass-through securities
is GNMA. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the
timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of Federal
Housing Administration ("FHA") insured or Veterans Administration ("VA")
guaranteed mortgages. These guarantees, however, do not apply to the
market value or yield of mortgage pass-through securities. GNMA securities
are often purchased at a premium over the maturity value of the underlying
mortgages. This premium is not guaranteed and will be lost if prepayment
occurs.
Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S. Government) include FNMA and FHLMC.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional residential
mortgages (i.e., mortgages not insured or guaranteed by any governmental
agency) from a list of approved seller/servicers which include state and
federally chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment by FNMA of
principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) for FHLMC's national portfolio. FHLMC guarantees timely
payment of interest and ultimate collection of principal regardless of the
status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also be
the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally offer
a higher rate of interest than government and government-related pools
because there are no direct or indirect government or agency guarantees of
payments in the former pools. However, timely payment of interest and
principal of mortgage loans in these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance and letters of credit. The insurance and guarantees
are issued by governmental entities, private insurers and the mortgage
poolers. There can be no assurance that the private insurers or guarantors
can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may also buy mortgage-related securities without
insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of
its assets in stripped mortgage-backed securities ("SMBS") which are
derivative multiclass mortgage securities issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including savings and loan institutions,
mortgage banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving some
of the interest and most of the principal from the Mortgage Assets, while
the other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "I0" class) while the other class will
receive all of the principal (the principal-only or "P0" class). The yield
to maturity on an I0 is extremely sensitive to the rate of principal
payments, including prepayments on the related underlying Mortgage Assets,
and a rapid rate of principal payments may have a material adverse effect
on such security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Fund may
fail to fully recoup its initial investment in these securities. The
market value of the class consisting primarily or entirely of principal
payments generally is unusually volatile in response to changes in
interest rates. Because SMBS were only recently introduced, established
trading markets for these securities have not yet developed, although the
securities are traded among institutional investors and investment banking
firms.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and
other direct indebtedness. In purchasing a loan, the Fund acquires some or
all of the interest of a bank or other lending institution in a loan to a
corporate, governmental or other borrower. Many such loans are secured,
although some may be unsecured. Such loans may be in default at the time
of purchase. Loans that are fully secured offer the Fund more protection
than an unsecured loan in the event of non-payment of scheduled interest
or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the corporate borrowers
obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on behalf
of the others in the syndicate, and for enforcing its and their other
rights against the borrower. Alternatively, such loans may be structured
as a novation, pursuant to which the Fund would assume all of the rights
of the lending institution in a loan or as an assignment, pursuant to
which the Fund would purchase an assignment of a portion of a lenders
interest in a loan either directly from the lender or through an
intermediary. The Fund may also purchase trade or other claims against
companies, which generally represent money owned by the company to a
supplier of goods or services. These claims may also be purchased at a
time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain
date or on demand. These commitments may have the effect of requiring the
Fund to increase its investment in a company at a time when the Fund might
not otherwise decide to do so (including at a time when the company's
financial condition makes it unlikely that such amounts will be repaid).
To the extent that the Fund is committed to advance additional funds, it
will at all times hold and maintain in a segregated account cash or other
high grade debt obligations in an amount sufficient to meet such
commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loans and other
direct indebtedness which the Fund will purchase, the Adviser will rely
upon its own (and not the original lending institution's) credit analysis
of the borrower. As the Fund may be required to rely upon another lending
institution to collect and pass onto the Fund amounts payable with respect
to the loan and to enforce the Fund's rights under the loan and other
direct indebtedness, an insolvency, bankruptcy or reorganization of the
lending institution may delay or prevent the Fund from receiving such
amounts. In such cases, the Fund will evaluate as well the
creditworthiness of the lending institution and will treat both the
borrower and the lending institution as an "issuer" of the loan for
purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly leveraged
nature of many such loans and other direct indebtedness may make such
loans and other direct indebtedness especially vulnerable to adverse
changes in economic or market conditions. Investments in such loans and
other direct indebtedness may involve additional risk to the Fund.
LOWER RATED BONDS: The Fund may invest in fixed income securities rated
Ba or lower by Moody's or BB or lower by S&P, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See
Appendix D for a description of bond ratings. No minimum rating standard
is required by the Fund. These securities are considered speculative and,
while generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including
the possibility of default or bankruptcy of the issuers of such
securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher
rating categories and because yields vary over time, no specific level of
income can ever be assured. These lower rated high yielding fixed income
securities generally tend to reflect economic changes (and the outlook for
economic growth), short-term corporate and industry developments and the
market's perception of their credit quality (especially during times of
adverse publicity) to a greater extent than higher rated securities which
react primarily to fluctuations in the general level of interest rates
(although these lower rated fixed income securities are also affected by
changes in interest rates). In the past, economic downturns or an increase
in interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in
the future, especially in the case of highly leveraged issuers. The prices
for these securities may be affected by legislative and regulatory
developments. The market for these lower rated fixed income securities may
be less liquid than the market for investment grade fixed income
securities. Furthermore, the liquidity of these lower rated securities may
be affected by the market's perception of their credit quality. Therefore,
the Adviser's judgment may at times play a greater role in valuing these
securities than in the case of investment grade fixed income securities,
and it also may be more difficult during times of certain adverse market
conditions to sell these lower rated securities to meet redemption
requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit
rating agencies, it is not the Fund's policy to rely exclusively on
ratings issued by these rating agencies, but rather to supplement such
ratings with the Adviser's own independent and ongoing review of credit
quality. To the extent a Fund invests in these lower rated securities, the
achievement of its investment objectives may be a more dependent on the
Adviser's own credit analysis than in the case of a fund investing in
higher quality fixed income securities. These lower rated securities may
also include zero coupon bonds, deferred interest bonds and PIK bonds.
MUNICIPAL BONDS: The Fund may invest in debt securities issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds"). Municipal Bonds include debt securities which pay
interest income that is subject to the alternative minimum tax. The Fund
may invest in Municipal Bonds whose issuers pay interest on the Bonds from
revenues from projects such as multifamily housing, nursing homes,
electric utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and
the revenue bond is also secured by a lien on the real estate comprising
the project, foreclosure by the indenture trustee on the lien for the
benefit of the bondholders creates additional risks associated with owning
real estate, including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because
of the impossibility of precisely predicting demand for mortgages from the
proceeds of such an issue, there is a risk that the proceeds of the issue
will be in excess of demand, which would result in early retirement of the
bonds by the issuer. Moreover, such housing revenue bonds depend for their
repayment upon the cash flow from the underlying mortgages, which cannot
be precisely predicted when the bonds are issued. Any difference in the
actual cash flow from such mortgages from the assumed cash flow could have
an adverse impact upon the ability of the issuer to make scheduled
payments of principal and interest on the bonds, or could result in early
retirement of the bonds. Additionally, such bonds depend in part for
scheduled payments of principal and interest upon reserve funds
established from the proceeds of the bonds, assuming certain rates of
return on investment of such reserve funds. If the assumed rates of return
are not realized because of changes in interest rate levels or for other
reasons, the actual cash flow for scheduled payments of principal and
interest on the bonds may be inadequate. The financing of multi-family
housing projects is affected by a variety of factors, including
satisfactory completion of construction within cost constraints, the
achievement and maintenance of a sufficient level of occupancy, sound
management of the developments, timely and adequate increases in rents to
cover increases in operating expenses, including taxes, utility rates and
maintenance costs, changes in applicable laws and governmental regulations
and social and economic trends.
Electric utilities face problems in financing large construction
programs in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost
of competing fuel sources, difficulty in obtaining sufficient rate
increases and other regulatory problems, the effect of energy conservation
and difficulty of the capital market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing
for the elderly which offer residents the independence of condominium life
style and, if needed, the comprehensive care of nursing home services.
Bonds to finance these facilities have been issued by various state
industrial development authorities. Since the bonds are secured only by
the revenues of each facility and not by state or local government tax
payments, they are subject to a wide variety of risks. Primarily, the
projects must maintain adequate occupancy levels to be able to provide
revenues adequate to maintain debt service payments. Moreover, in the case
of life care facilities, since a portion of housing, medical care and
other services may be financed by an initial deposit, there may be risk if
the facility does not maintain adequate financial reserves to secure
estimated actuarial liabilities. The ability of management to accurately
forecast inflationary cost pressures weighs importantly in this process.
The facilities may also be affected by regulatory cost restrictions
applied to health care delivery in general, particularly state regulations
or changes in Medicare and Medicaid payments or qualifications, or
restrictions imposed by medical insurance companies. They may also face
competition from alternative health care or conventional housing
facilities in the private or public sector. Hospital bond ratings are
often based on feasibility studies which contain projections of expenses,
revenues and occupancy levels. A hospital's gross receipts and net income
available to service its debt are influenced by demand for hospital
services, the ability of the hospital to provide the services required,
management capabilities, economic developments in the service area,
efforts by insurers and government agencies to limit rates and expenses,
confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid
and Medicare funding, and possible federal legislation limiting the rates
of increase of hospital charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from of a lease or
installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have special
risks not normally associated with general obligation or revenue bonds.
Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations are deemed to be inapplicable because of the inclusion in many
leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although
the obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or
foreclosure might, in some cases, prove difficult. There are, of course,
variations in the security of municipal lease securities, both within a
particular classification and between classifications, depending on
numerous factors.
The Fund may also invest in bonds for industrial and other projects,
such as sewage or solid waste disposal or hazardous waste treatment
facilities. Financing for such projects will be subject to inflation and
other general economic factors as well as construction risks including
labor problems, difficulties with construction sites and the ability of
contractors to meet specifications in a timely manner. Because some of the
materials, processes and wastes involved in these projects may include
hazardous components, there are risks associated with their production,
handling and disposal.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of
higher grade securities.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are backed
by the full faith and credit of the U.S. Government and (ii) U.S. Government
Securities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the GNMA; some of
which are backed only by the credit of the issuer itself, e.g., obligations
of the Student Loan Marketing Association; and some of which are supported
by the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the FNMA.
U.S. Government Securities also include interests in trust or other
entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Fund may invest in floating
or variable rate securities. Investments in floating or variable rate
securities normally will involve industrial development or revenue bonds
which provide that the rate of interest is set as a specific percentage of
a designated base rate, such as rates on Treasury Bonds or Bills or the
prime rate at a major commercial bank, and that a bondholder can demand
payment of the obligations on behalf of the Fund on short notice at par
plus accrued interest, which amount may be more or less than the amount
the bondholder paid for them. The maturity of floating or variable rate
obligations (including participation interests therein) is deemed to be
the longer of (i) the notice period required before the Fund is entitled
to receive payment of the obligation upon demand or (ii) the period
remaining until the obligation's next interest rate adjustment. If not
redeemed by the Fund through the demand feature, the obligations mature on
a specified date which may range up to thirty years from the date of
issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may
invest in zero coupon bonds, deferred interest bonds and bonds on which
the interest is payable in kind ("PIK bonds"). Zero coupon and deferred
interest bonds are debt obligations which are issued at a significant
discount from face value. The discount approximates the total amount of
interest the bonds will accrue and compound over the period until maturity
or the first interest payment date at a rate of interest reflecting the
market rate of the security at the time of issuance. While zero coupon
bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer may,
at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a
higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility
in market value than debt obligations which make regular payments of
interest. The Fund will accrue income on such investments for tax and
accounting purposes, which is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Fund's
distribution obligations.
EQUITY SECURITIES
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into
stocks; and depositary receipts for those securities. These securities may
be listed on securities exchanges, traded in various over-the-counter
markets or have no organized market.
FOREIGN SECURITIES EXPOSURE
The Fund may invest in various types of foreign securities, or securities
which provide the Fund with exposure to foreign securities or foreign
currencies, as discussed below:
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public
and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady
(the "Brady Plan"). Brady Plan debt restructurings have been implemented
to date in Argentina, Brazil, Bulgaria, Costa Rica, Croatia, Dominican
Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the
Philippines, Poland, Slovenia, Uruguay and Venezuela. Brady Bonds have
been issued only recently, and for that reason do not have a long payment
history. Brady Bonds may be collateralized or uncollateralized, are issued
in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S.
Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments;
and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constituting the "residual risk"). In light of
the residual risk of Brady Bonds and the history of defaults of countries
issuing Brady Bonds with respect to commercial bank loans by public and
private entities, investments in Brady Bonds may be viewed as speculative.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of
depositary receipts. ADRs are certificates by a U.S. depositary (usually a
bank) and represent a specified quantity of shares of an underlying non-
U.S. stock on deposit with a custodian bank as collateral. GDRs and other
types of depositary receipts are typically issued by foreign banks or
trust companies and evidence ownership of underlying securities issued by
either a foreign or a U.S. company. Generally, ADRs are in registered form
and are designed for use in U.S. securities markets and GDRs are in bearer
form and are designed for use in foreign securities markets. For the
purposes of the Fund's policy to invest a certain percentage of its assets
in foreign securities, the investments of the Fund in ADRs, GDRs and other
types of depositary receipts are deemed to be investments in the
underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of
U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and
voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the
deposited securities. The depository of an unsponsored ADR, on the other
hand, is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through
voting rights to ADR holders in respect of the deposited securities. The
Fund may invest in either type of ADR. Although the U.S. investor holds a
substitute receipt of ownership rather than direct stock certificates, the
use of the depositary receipts in the United States can reduce costs and
delays as well as potential currency exchange and other difficulties. The
Fund may purchase securities in local markets and direct delivery of these
ordinary shares to the local depositary of an ADR agent bank in foreign
country. Simultaneously, the ADR agents create a certificate which settles
at the Fund's custodian in five days. The Fund may also execute trades on
the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting
requirements in the United States as a domestic issuer. Accordingly,
information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its country and
the market value of an ADR may not reflect undisclosed material
information concerning the issuer of the underlying security. ADRs may
also be subject to exchange rate risks if the underlying foreign
securities are denominated in a foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in dollar-
denominated foreign debt securities. Investing in dollar-denominated
foreign debt represents a greater degree of risk than investing in
domestic securities, due to less publicly available information, less
securities regulation, war or expropriation. Special considerations may
include higher brokerage costs and thinner trading markets. Investments in
foreign countries could be affected by other factors including extended
settlement periods.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Such investments entail significant risks as described below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects
of the private sector through the ownership or control of many companies,
including some of the largest in any given country. As a result,
government actions in the future could have a significant effect on
economic conditions in emerging markets, which in turn, may adversely
affect companies in the private sector, general market conditions and
prices and yields of certain of the securities in the Fund's portfolio.
Expropriation, confiscatory taxation, nationalization, political, economic
or social instability or other similar developments have occurred
frequently over the history of certain emerging markets and could
adversely affect the Fund's assets should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse in the
event of a default with respect to certain debt obligations it may hold.
If the issuer of a fixed income security owned by the Fund defaults, the
Fund may incur additional expenses to seek recovery. Debt obligations
issued by emerging market governments differ from debt obligations of
private entities; remedies from defaults on debt obligations issued by
emerging market governments, unlike those on private debt, must be pursued
in the courts of the defaulting party itself. The Fund's ability to
enforce its rights against private issuers may be limited. The ability to
attach assets to enforce a judgment may be limited. Legal recourse is
therefore somewhat diminished. Bankruptcy, moratorium and other similar
laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political
context, expressed as an emerging market governmental issuer's willingness
to meet the terms of the debt obligation, for example, is of considerable
importance. In addition, no assurance can be given that the holders of
commercial bank debt may not contest payments to the holders of debt
obligations in the event of default under commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may be
denominated in foreign currencies and international currency units and the
Fund may invest a portion of its assets directly in foreign currencies.
Accordingly, the weakening of these currencies and units against the U.S.
dollar may result in a decline in the Fund's asset value.
Some emerging market countries also may have managed currencies, which are
not free floating against the U.S. dollar. In addition, there is risk that
certain emerging market countries may restrict the free conversion of
their currencies into other currencies. Further, certain emerging market
currencies may not be internationally traded. Certain of these currencies
have experienced a steep devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which a Fund's portfolio securities are
denominated may have a detrimental impact on the Fund's net asset value.
o Inflation -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had and may continue to
have adverse effects on the economies and securities markets of certain
emerging market countries. In an attempt to control inflation, wage and
price controls have been imposed in certain countries. Of these countries,
some, in recent years, have begun to control inflation through prudent
economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities markets
of emerging market countries are substantially smaller, less developed,
less liquid and more volatile than the major securities markets in the
U.S. Disclosure and regulatory standards are in many respects less
stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors
in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to
volume of trading in the securities of U.S. issuers could cause prices to
be erratic for reasons apart from factors that affect the soundness and
competitiveness of the securities issuers. For example, limited market
size may cause prices to be unduly influenced by traders who control large
positions. Adverse publicity and investors' perceptions, whether or not
based on in-depth fundamental analysis, may decrease the value and
liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Fund's securities in
such markets may not be readily available. The Fund may suspend redemption
of its shares for any period during which an emergency exists, as
determined by the Securities and Exchange Commission (the "SEC").
Accordingly, if the Fund believes that appropriate circumstances exist, it
will promptly apply to the SEC for a determination that an emergency is
present. During the period commencing from the Fund's identification of
such condition until the date of the SEC action, the Fund's securities in
the affected markets will be valued at fair value determined in good faith
by or under the direction of the Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high degree
of risk. The governmental entity that controls the repayment of sovereign
debt may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. A governmental
entity's willingness or ability to repay principal and interest due in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative
size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund and
the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce
principal and interest on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be
conditioned on a governmental entity's implementation of economic reforms
and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in
the cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently,
governmental entities may default on their sovereign debt. Holders of
sovereign debt (including the Fund) may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceedings by which sovereign debt on
which governmental entities have defaulted may be collected in whole or in
part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging market
governmental issuers have not been able to make payments of interest on or
principal of debt obligations as those payments have come due. Obligations
arising from past restructuring agreements may affect the economic
performance and political and social stability of those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access
to international credits and investments. An emerging market whose exports
are concentrated in a few commodities could be vulnerable to a decline in
the international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could
also adversely affect the country's exports and tarnish its trade account
surplus, if any. To the extent that emerging markets receive payment for
their exports in currencies other than dollars or non-emerging market
currencies, its ability to make debt payments denominated in dollars or
non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of
emerging markets to these forms of external funding may not be certain,
and a withdrawal of external funding could adversely affect the capacity
of emerging market country governmental issuers to make payments on their
obligations. In addition, the cost of servicing emerging market debt
obligations can be affected by a change in international interest rates
since the majority of these obligations carry interest rates that are
adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the
country. Fluctuations in the level of these reserves affect the amount of
foreign exchange readily available for external debt payments and thus
could have a bearing on the capacity of emerging market countries to make
payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be reduced by
a withholding tax on the source or other taxes imposed by the emerging
market countries in which the Fund makes its investments. The Fund's net
asset value may also be affected by changes in the rates or methods of
taxation applicable to the Fund or to entities in which the Fund has
invested. The Adviser will consider the cost of any taxes in determining
whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
FOREIGN SECURITIES: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing
in securities of domestic issuers. These include changes in currency
rates, exchange control regulations, securities settlement practices,
governmental administration or economic or monetary policy (in the United
States or abroad) or circumstances in dealings between nations. Costs may
be incurred in connection with conversions between various currencies.
Special considerations may also include more limited information about
foreign issuers, higher brokerage costs, different accounting standards
and thinner trading markets. Foreign securities markets may also be less
liquid, more volatile and less subject to government supervision than in
the United States. Investments in foreign countries could be affected by
other factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. As a result of its investments in foreign
securities, the Fund may receive interest or dividend payments, or the
proceeds of the sale or redemption of such securities, in the foreign
currencies in which such securities are denominated. Under certain
circumstances, such as where the Adviser believes that the applicable
exchange rate is unfavorable at the time the currencies are received or
the Adviser anticipates, for any other reason, that the exchange rate will
improve, the Fund may hold such currencies for an indefinite period of
time. While the holding of currencies will permit the Fund to take
advantage of favorable movements in the applicable exchange rate, such
strategy also exposes the Fund to risk of loss if exchange rates move in a
direction adverse to the Fund's position. Such losses could reduce any
profits or increase any losses sustained by the Fund from the sale or
redemption of securities and could reduce the dollar value of interest or
dividend payments received.
FORWARD CONTRACTS
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is
entered into (a "Forward Contract"), for hedging purposes (e.g., to
protect its current or intended investments from fluctuations in currency
exchange rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the Fund
seeks to protect against an anticipated increase in the exchange rate for
a specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, the Fund may enter
into a Forward Contract to purchase a given currency to protect against a
projected increase in the dollar value of securities denominated in such
currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline
in the dollar value of portfolio securities or the increase in the dollar
cost of securities to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, the Fund may be required to forego all or a portion of the
benefits which otherwise could have been obtained from favorable movements
in exchange rates. The Fund does not presently intend to hold Forward
Contracts entered into until the value date, at which time it would be
required to deliver or accept delivery of the underlying currency, but will
seek in most instances to close out positions in such Contracts by entering
into offsetting transactions, which will serve to fix the Fund's profit or
loss based upon the value of the Contracts at the time the offsetting
transaction is executed.
The Fund will also enter into transactions in Forward Contracts for
other than hedging purposes, which presents greater profit potential but
also involves increased risk. For example, the Fund may purchase a given
foreign currency through a Forward Contract if, in the judgment of the
Adviser, the value of such currency is expected to rise relative to the
U.S. dollar. Conversely, the Fund may sell the currency through a Forward
Contract if the Adviser believes that its value will decline relative to
the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, which will increase its gross income. Where exchange
rates do not move in the direction or to the extent anticipated, however,
the Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative and could involve
significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts ("Futures Contracts") on
stock indices, foreign currencies, interest rates or interest-rate related
instruments, indices of foreign currencies or commodities. The Fund may
also purchase and sell Futures Contracts on foreign or domestic fixed
income securities or indices of such securities including municipal bond
indices and any other indices of foreign or domestic fixed income
securities that may become available for trading. 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, foreign
currency or commodity, 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 provides for a specified settlement month in
which, in the case of the majority of commodities, interest rate and
foreign currency futures contracts, the underlying commodities, fixed
income securities or currency are delivered by the seller and paid for by
the purchaser, or on which, in the case of index futures contracts and
certain interest rate and foreign currency 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 "mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt
to protect the Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, the Fund may sell stock index
futures contracts in anticipation of or during a market decline to attempt
to offset the decrease in market value of the Fund's securities portfolio
that might otherwise result. If such decline occurs, the loss in value of
portfolio securities may be offset, in whole or part, by gains on the
futures position. When the Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock
index futures contracts in order to gain rapid market exposure that may,
in part or entirely, offset increases in the cost of securities that the
Fund intends to purchase. As such purchases are made, the corresponding
positions in stock index futures contracts will be closed out. In a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position, but under unusual
market conditions, a long futures position may be terminated without a
related purchase of securities.
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, subject to the correlation risks described
below, 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 may be more liquid than the cash market in certain
cases or at certain times, the use of interest rate futures contracts as a
hedging technique may allow the Fund to hedge its interest rate risk
without having to sell its portfolio securities.
The Fund may purchase and sell foreign currency futures contracts for
hedging purposes, to attempt to protect its current or intended
investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the dollar cost of foreign-
denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains
constant. The Fund may sell futures contracts on a foreign currency, for
example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the
dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in
part, by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in
part, the increased cost of such securities resulting from a rise in the
dollar value of the underlying currencies. Where the Fund purchases
futures contracts under such circumstances, however, and the prices of
securities to be acquired instead decline, the Fund will sustain losses on
its futures position which could reduce or eliminate the benefits of the
reduced cost of portfolio securities to be acquired.
The use by the Fund of Futures Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are
debt securities or deposits whose value at maturity or coupon rate is
determined by reference to a specific instrument or statistic. The Fund
may also purchase indexed deposits with similar characteristics. 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 determined 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. Certain indexed
securities may expose the Fund to the risk of loss of all or a portion of
the principal amount of its investment and/or the interest that might
otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values
may decline substantially if the issuer's creditworthiness deteriorates.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Fund may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an
obligation, a municipality issues a certain amount of debt and pays a
fixed interest rate. Half of the debt is issued as variable rate short
term obligations, the interest rate of which is reset at short intervals,
typically 35 days. The other half of the debt is issued as inverse
floating rate obligations, the interest rate of which is calculated based
on the difference between a multiple of (approximately two times) the
interest paid by the issuer and the interest paid on the short-term
obligation. Under usual circumstances, the holder of the inverse floating
rate obligation can generally purchase an equal principal amount of the
short term obligation and link the two obligations in order to create
long-term fixed rate bonds. Because the interest rate on the inverse
floating rate obligation is determined by subtracting the short-term rate
from a fixed amount, the interest rate will decrease as the short-term
rate increases and will increase as the short-term rate decreases. The
magnitude of increases and decreases in the market value of inverse
floating rate obligations may be approximately twice as large as the
comparable change in the market value of an equal principal amount of
long-term bonds which bear interest at the rate paid by the issuer and
have similar credit quality, redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio securities.
Such loans will usually be made only to member firms of the New York Stock
Exchange (the "Exchange") (and subsidiaries thereof) and member banks of
the Federal Reserve System, and would be required to be secured
continuously by collateral in cash, an irrevocable letter of credit or
United States ("U.S.") Treasury securities 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 not
usually exceed five business days). For the duration 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 from the investment of the 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 the Fund 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 of the securities 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 can be earned currently from securities loans of this
type justifies the attendant risk.
LEVERAGING TRANSACTIONS
The Fund may engage in the types of transactions described below, which
involve "leverage" because in each case the Fund receives cash which it
can invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Fund will generally cause
its net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can
be expected to cause the value of the Fund's shares and distributions on
the Fund's shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from these transactions fail to cover
the expenses associated with these transactions, the value of the Fund's
shares is likely to decrease more quickly than otherwise would be the case
and distributions thereon will be reduced or eliminated. Hence, these
transactions are speculative, involve leverage and increase the risk of
owning or investing in the shares of the Fund. These transactions also
increase the Fund's expenses because of interest and similar payments and
administrative expenses associated with them. Unless the appreciation and
income on assets purchased with proceeds from these transactions exceed
the costs associated with them, the use of these transactions by a Fund
would diminish the investment performance of the Fund compared with what
it would have been without using these transactions.
BANK BORROWINGS: The Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment objectives
and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost
interest by the difference between the current sales price and the lower
price for the future purchase (often referred to as the "drop") as well as
by the interest earned on, and gains from, the investment of the cash
proceeds of the initial sale. The Fund may also be compensated by receipt
of a commitment fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part
of the dollar roll, the use of this technique will diminish the investment
performance of the Fund compared with what the performance would have been
without the use of the dollar rolls. Dollar roll transactions involve the
risk that the market value of the securities the Fund is required to
purchase may decline below the agreed upon repurchase price of those
securities. If the broker/dealer to whom the Fund sells securities becomes
insolvent, the Fund's right to purchase or repurchase securities may be
restricted. Successful use of mortgage dollar rolls may depend upon the
Adviser's ability to correctly predict interest rates and prepayments.
There is no assurance that dollar rolls can be successfully employed.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund will sell
securities and receive cash proceeds, subject to its agreement to
repurchase the securities at a later date for a fixed price reflecting a
market rate of interest. There is a risk that the counter party to a
reverse repurchase agreement will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to the Fund. The Fund
will invest the proceeds received under a reverse repurchase agreement in
accordance with its investment objective and policies.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options,
Futures, Forwards, Swaps and Other Derivative Transactions" in this
Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-hedging purposes in a manner
similar to that in which Futures Contracts on foreign currencies, or
Forward Contracts, will be utilized. For example, a decline in the dollar
value of a foreign currency in which portfolio securities are denominated
will reduce the dollar value of such securities, even if their value in
the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Fund may purchase
put options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell such currency for a fixed
amount in dollars and will thereby offset, in whole in part, the adverse
effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Fund may purchase call options thereon.
The purchase of such options could offset, at least partially, the effect
of the adverse movements in exchange rates. As in the case of other types
of options, however, the benefit to the Fund deriving from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do
not move in the direction or to the extent anticipated, the Fund could
sustain losses on transactions in foreign currency options which would
require it to forego a portion or all of the benefits of advantageous
changes in such rates. The Fund may write options on foreign currencies
for the same types of hedging purposes. For example, where the Fund
anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates it could, instead
of purchasing a put option, write a call option on the relevant currency.
If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received less related transaction
costs. As in the case of other types of options, therefore, the writing of
Options on Foreign Currencies will constitute only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Fund
to hedge such increased cost up to the amount of the premium. Foreign
currency options written by the Fund will generally be covered in a manner
similar to the covering of other types of options. As in the case of other
types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only
if rates move in the expected direction. If this does not occur, the
option may be exercised and the Fund would be required to purchase or sell
the underlying currency at a loss which may not be offset by the amount of
the premium. Through the writing of options on foreign currencies, the
Fund also may be required to forego all or a portion of the benefits which
might otherwise have been obtained from favorable movements in exchange
rates. The use of foreign currency options for non-hedging purposes, like
the use of other types of derivatives for such purposes, presents greater
profit potential but also significant risk of loss and could be considered
speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "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 type (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 fund'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, or instruments 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 owns liquid and unencumbered assets equal to
the difference. The Fund may cover the writing of put Options on Futures
Contracts (a) through sales of the underlying Futures Contract, (b)
through the ownership of liquid and unencumbered assets 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 (i) is equal to or greater than the exercise price of the put written
or where the exercise price of the put held (ii) is less than the exercise
price of the put written if the Fund owns liquid and unencumbered assets
equal to the difference. 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 in 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.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call
options, and purchase put and call options, on 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 if the Fund owns liquid and unencumbered
assets equal to the amount of cash consideration) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written
or (b) is greater than the exercise price of the call written if the Fund
owns liquid and unencumbered assets equal to the difference. A put option
written by the Fund is "covered" if the Fund owns liquid and unencumbered
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 the Fund owns
liquid and unencumbered assets equal to the difference. 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 Fund owns liquid and
unencumbered 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 option
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 also 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 also 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.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast to
an option on a security, an option on a stock index provides the holder
with the right but not the obligation to make or receive a cash settlement
upon exercise of the option, rather than the right to purchase or sell a
security. The amount of this settlement is generally equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a call) or is below (in the case of a put) the closing
value of the underlying index on the date of exercise, multiplied by (ii)
a fixed "index multiplier." The Fund may cover written call options on
stock indices by owning securities whose price changes, in the opinion of
the Adviser, are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities
without additional cash consideration (or for additional cash
consideration if the Fund owns liquid and unencumbered assets equal to the
amount of cash consideration) upon conversion or exchange of other
securities in its portfolio. Where the Fund covers a call option on a
stock index through ownership of securities, such securities may not match
the composition of the index and, in that event, the Fund will not be
fully covered and could be subject to risk of loss in the event of adverse
changes in the value of the index. The Fund may also cover call options on
stock indices by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written
or (b) is greater than the exercise price of the call written if the Fund
owns liquid and unencumbered assets equal to the difference. The Fund may
cover put options on stock indices by owning liquid and unencumbered
assets with a value equal to the exercise price, or by holding a put on
the same stock index and in the same principal amount as the put written
where the exercise price of the put held (a) is equal to or greater than
the exercise price of the put written or (b) is less than the exercise
price of the put written if the Fund owns liquid and unencumbered assets
equal to the difference. Put and call options on stock indices may also be
covered in such other manner as may be in accordance with the rules of the
exchange on which, or the counterparty with which, the option is traded
and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on
which the Fund has written a call option falls or remains the same, the
Fund will realize a profit in the form of the premium received (less
transaction costs) that could offset all or a portion of any decline in
the value of the securities it owns. If the value of the index rises,
however, the Fund will realize a loss in its call option position, which
will reduce the benefit of any unrealized appreciation in the Fund's stock
investments. By writing a put option, the Fund assumes the risk of a
decline in the index. To the extent that the price changes of securities
owned by the Fund correlate with changes in the value of the index,
writing covered put options on indices will increase the Fund's losses in
the event of a market decline, although such losses will be offset in part
by the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the
premium paid for the option plus related transaction costs. The success of
this strategy will largely depend on the accuracy of the correlation
between the changes in value of the index and the changes in value of the
Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Fund holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Fund will also bear the risk
of losing all or a portion of the premium paid if the value of the index
does not rise. The purchase of call options on stock indices when the Fund
is substantially fully invested is a form of leverage, up to the amount of
the premium and related transaction costs, and involves risks of loss and
of increased volatility similar to those involved in purchasing calls on
securities the Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns
relative values to the stocks included in the index and the index
fluctuates with changes in the market values of the stocks so included.
The composition of the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write options on U.S.
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 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 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 for a reset option written by the Fund 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. Conversely, where the Fund purchases a reset
option, it could be required to pay a higher premium than would have been
the case at the initiation of the option.
"YIELD CURVE" OPTIONS: The Fund may also enter into options on the
"spread," or yield differential, between two fixed income securities, in
transactions referred to as "yield curve" options. In contrast to other
types of options, a yield curve option is based on the difference between
the yields of designated securities, rather than the prices of the
individual securities, and is settled through cash payments. Accordingly,
a yield curve option is profitable to the holder if this differential
widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Yield curve options may be used for the same purposes as other options
on securities. Specifically, the Fund may purchase or write such options
for hedging purposes. For example, the Fund may purchase a call option on
the yield spread between two securities, if it owns one of the securities
and anticipates purchasing the other security and wants to hedge against
an adverse change in the yield spread between the two securities. The Fund
may also purchase or write yield curve options for other than hedging
purposes (i.e., in an effort to increase its current income) if, in the
judgment of the Adviser, the Fund will be able to profit from movements in
the spread between the yields of the underlying securities. The trading of
yield curve options is subject to all of the risks associated with the
trading of other types of options. In addition, however, such options
present risk of loss even if the yield of one of the underlying securities
remains constant, if the spread moves in a direction or to an extent which
was not anticipated. Yield curve options written by the Fund will be
"covered". A call (or put) option is covered if the Fund holds another
call (or put) option on the spread between the same two securities and
owns liquid and unencumbered assets sufficient to cover the Fund's net
liability under the two options. Therefore, the Fund's liability for such
a covered option is generally limited to the difference between the amount
of the Fund's liability under the option written by the Fund less the
value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements
of the counterparty with which the option is traded and applicable laws
and regulations. Yield curve options are traded over-the-counter and
because they have been only recently introduced, established trading
markets for these securities have not yet developed.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are member
firms (or a subsidiary thereof) of the New York Stock 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 the 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 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.
RESTRICTED SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act ("Rule 144A securities") and
commercial paper issued under Section 4(2) of the 1933 Act ("4(2) Paper").
A determination is made, based upon a continuing review of the trading
markets for the Rule 144A security or 4(2) Paper, whether such security is
liquid and thus not subject to the Fund's limitation on investing in
illiquid investments. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the
liquidity of Rule 144A securities and 4(2) Paper. The Board, however,
retains oversight of the liquidity determinations focusing on factors such
as valuation, liquidity and availability of information. Investing in Rule
144A securities could have the effect of decreasing the level of liquidity
in the Fund to the extent that qualified institutional buyers become for a
time uninterested in purchasing these Rule 144A securities held in the
Fund's portfolio. Subject to the Fund's limitation on investments in
illiquid investments, the Fund may also invest in restricted securities
that may not be sold under Rule 144A, which presents certain risks. As a
result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair
value. In addition, market quotations are less readily available.
Therefore, judgment may at times play a greater role in valuing these
securities than in the case of unrestricted securities.
SHORT SALES
The Fund may seek to hedge investments or realize additional gains through
short sales. The Fund may make short sales, which are transactions in
which the Fund sells a security it does not own, in anticipation of a
decline in the market value of that security. To complete such a
transaction, the Fund must borrow the security to make delivery to the
buyer. The Fund then is obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The price at
such time may be more or less than the price at which the security was
sold by the Fund. Until the security is replaced, the Fund is required to
repay the lender any dividends or interest which accrue during the period
of the loan. To borrow the security, the Fund also may be required to pay
a premium, which would increase the cost of the security sold. The net
proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed
out. The Fund also will incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a
gain if the price of the security declines between those dates. The amount
of any gain will be decreased, and the amount of any loss increased, by
the amount of the premium, dividends or interest the Fund may be required
to pay in connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale,
equals the current market value of the security sold short.
SHORT SALES AGAINST THE BOX
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the Fund
enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is
required to hold such securities while the short sale is outstanding. The
Fund will incur transaction costs, including interest, in connection with
opening, maintaining, and closing short sales against the box.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other
types of available swap agreements, including swaps on securities,
commodities and indices, and related types of derivatives, such as caps,
collars and floors. A swap is an agreement between two parties pursuant to
which each party agrees to make one or more payments to the other on
regularly scheduled dates over a stated term, based on different interest
rates, currency exchange rates, security or commodity prices, the prices
or rates of other types of financial instruments or assets or the levels
of specified indices. Under a typical swap, one party may agree to pay a
fixed rate or a floating rate determined by reference to a specified
instrument, rate or index, multiplied in each case by a specified amount
(the "notional amount"), while the other party agrees to pay an amount
equal to a different floating rate multiplied by the same notional amount.
On each payment date, the obligations of parties are netted, with only the
net amount paid by one party to the other. All swap agreements entered
into by the Fund with the same counterparty are generally governed by a
single master agreement, which provides for the netting of all amounts
owed by the parties under the agreement upon the occurrence of an event of
default, thereby reducing the credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreement if the Adviser
determines it is consistent with the Fund's investment objective and
policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by
the Fund. In such an instance, the Fund would agree with a counterparty to
pay a fixed rate (multiplied by a notional amount) and the counterparty
would agree to pay a floating rate multiplied by the same notional amount.
If interest rates rise, resulting in a diminution in the value of the
Fund's portfolio, the Fund would receive payments under the swap that
would offset, in whole or part, such diminution in value. The Fund may
also enter into swaps to modify its exposure to particular markets or
instruments, such as a currency swap between the U.S. dollar and another
currency which would have the effect of increasing or decreasing the
Fund's exposure to each such currency. The Fund might also enter into a
swap on a particular security, or a basket or index of securities, in
order to gain exposure to the underlying security or securities, as an
alternative to purchasing such securities. Such transactions could be more
efficient or less costly in certain instances than an actual purchase or
sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps
and floors are similar to swaps, except that one party pays a fee at the
time the transaction is entered into and has no further payment
obligations, while the other party is obligated to pay an amount equal to
the amount by which a specified fixed or floating rate exceeds or is below
another rate (multiplied by a notional amount). Caps and floors,
therefore, are also similar to options. A collar is in effect a
combination of a cap and a floor, with payments made only within or
outside a specified range of prices or rates. A swaption is an option to
enter into a swap agreement. Like other types of options, the buyer of a
swaption pays a non-refundable premium for the option and obtains the
right, but not the obligation, to enter into the underlying swap on the
agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its
current obligations under swap and other over-the-counter derivative
transactions. If the Fund enters into a swap agreement on a net basis
(i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments), the
Fund will maintain liquid and unencumbered 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 maintain liquid and unencumbered 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 underlying price, rate or index level
that determines the amount of payments to be made under the arrangement.
If the Adviser 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
would decline, 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, but there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
TEMPORARY DEFENSIVE POSITIONS
During periods of unusual market conditions when the Adviser believes that
investing for temporary defensive purposes is appropriate, or in order to
meet anticipated redemption requests, a large portion or all of the assets
of the Fund may be invested in cash (including foreign currency) or cash
equivalents, including, but not limited to, obligations of banks
(including certificates of deposit, bankers' acceptances, time deposits
and repurchase agreements), commercial paper, short-term notes, U.S.
Government Securities and related repurchase agreements.
WARRANTS
The Fund may invest in warrants. Warrants are securities that give the
Fund the right to purchase equity securities from the issuer at a specific
price (the "strike price") for a limited period of time. The strike price
of warrants typically is much lower than the current market price of the
underlying securities, yet they are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities and may offer greater potential for capital appreciation as
well as capital loss. Warrants do not entitle a holder to dividends or
voting rights with respect to the underlying securities and do not
represent any rights in the assets of the issuing company. Also, the value
of the warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not
exercised prior to the expiration date. These factors can make warrants
more speculative than other types of investments.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities will be delivered to the
Fund at a future date usually beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. In general, the Fund does
not pay for such securities until received, and does not start earning
interest on the securities until the contractual settlement date. While
awaiting delivery of securities purchased on such bases, a Fund will
identify liquid and unencumbered assets equal to its forward delivery
commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO: The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and
other types of derivatives depends 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. In the case of derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on
fixed income securities, the portfolio securities which are being hedged
may not be the same type of obligation underlying such derivatives. The
use of derivatives for "cross hedging" purposes (such as a transaction in
a Forward Contract on one currency to hedge exposure to a different
currency) may involve greater correlation risks. 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 index or
obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience a
loss which is not completely offset by the put option. It is also possible
that there may be a negative correlation between the index or 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. It
should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry
group, may present greater risk than options or futures based on a broad
market index. This is due to the fact that a narrower index is more
susceptible to rapid and extreme fluctuations as a result of changes in
the value of a small number of securities. Nevertheless, where the Fund
enters into transactions in options or futures on narrowly-based indices
for hedging purposes, movements in the value of the index should, if the
hedge is successful, correlate closely with the portion of the Fund's
portfolio or the intended acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative and the price of the underlying index or 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 derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts 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, options on stock
indices, options on currencies 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, index 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 index or instrument. For
example, where the Fund covers a call option written on a stock index
through segregation of securities, such securities may not match the
composition of the index, 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, options on stock indices 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 forego 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. Furthermore, the
cost of using these techniques may make it economically infeasible for the
Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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 liquid and
unencumbered assets necessary to satisfy an option exercise will be
identified, unless the option is covered in such other manner as may be in
accordance with the rules of the exchange on which, or the counterparty
with 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. The Fund may also enter into futures,
Forward Contracts or swaps for non-hedging purposes. For example, the Fund
may enter into such a transaction as an alternative to purchasing or
selling the underlying instrument or to obtain desired exposure to an
index or market. In such instances, the Fund will be exposed to the same
economic risks incurred in purchasing or selling the underlying instrument
or instruments. However, transactions in futures, Forward Contracts or
swaps may be leveraged, which could expose the Fund to greater risk of
loss than such purchases or sales. Entering into transactions in
derivatives for other than hedging purposes, therefore, could expose the
Fund to significant risk of loss if the prices, rates or values of the
underlying instruments or indices do not move in the direction or to the
extent anticipated.
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 contract 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 to 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 establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) 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.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Fund enters
into transactions in exchange-traded futures or options, it is exposed to
the risk of the potential bankruptcy of the relevant exchange
clearinghouse or the broker through which the Fund has effected the
transaction. In that event, the Fund might not be able to recover amounts
deposited as margin, or amounts owed to the Fund in connection with its
transactions, for an indefinite period of time, and could sustain losses
of a portion or all of such amounts. Moreover, the performance guarantee
of an exchange clearinghouse generally extends only to its members and the
Fund could sustain losses, notwithstanding such guarantee, in the event of
the bankruptcy of its broker.
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 portfolios 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 IN FOREIGN CURRENCIES AND OVER-THE-COUNTER
DERIVATIVES AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES:
Transactions in Forward Contracts on foreign currencies, as well as
futures and options on foreign currencies and transactions executed on
foreign exchanges, are subject to all of the correlation, liquidity and
other risks outlined above. In addition, however, such transactions are
subject to the risk of governmental actions affecting trading in or the
prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the value
of positions held by the Fund. Further, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete
as the comparable data on which the Fund makes investment and trading
decisions in connection with other transactions. Moreover, because the
foreign currency market is a global, 24-hour market, events could occur in
that market which will not be reflected in the forward, futures or options
market until the following day, thereby making it more difficult for the
Fund to respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or
foreign currency options generally must occur within the country issuing
the underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives 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 and a trader of Forward Contracts 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, or Forward Contracts or
swaps entered into, 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.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be
traded on exchanges located in foreign countries. Such transactions may
not be conducted in the same manner as those entered into on U.S.
exchanges, and may be subject to different margin, exercise, settlement or
expiration procedures. As a result, many of the risks of over-the-counter
trading may be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders
on organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option positions entered
into on a national securities exchange are cleared and guaranteed by the
Options Clearing Corporation (the "OCC"), thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded
on a national securities exchange may be more readily available than in
the over-the-counter market, potentially permitting the Fund to liquidate
open positions at a profit prior to exercise or expiration, or to limit
losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign
currency market, possible intervention by governmental authorities and the
effects of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not presented
by the over-the-counter market. For example, exercise and settlement of
such options must be made exclusively through the OCC, which has
established banking relationships in applicable foreign countries for this
purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the
OCC or its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on
exercise.
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 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.
<PAGE>
PART II - APPENDIX D
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however,
that ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with
different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in
the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue. Should no rating be assigned, the reason may be one
of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment
on the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to
meet its financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality
and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on
this obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk -- such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. Securities are not meeting current obligations and
are extremely speculative. DDD designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, DD indicates expected recovery of 50% -- 90% of
such outstandings, and D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within this
category or into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company
developments.
DD: Defaulted debt-obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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
[Logo](R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street, Boston, MA 02116
GENERIC 1/22/99
<PAGE>
- ----------------------------
MFS(R) MUNICIPAL INCOME FUND
- ----------------------------
AUGUST 1, 1999
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
- ------------------------------------------------------------------------------
This Prospectus describes the MFS Municipal Income Fund. The investment
objective of the fund is to provide as high a level of current income exempt
from federal income taxes as is considered consistent with prudent investing
while seeking protection of shareholders' capital.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE FUND'S SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS
YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
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TABLE OF CONTENTS
- --------------------------
Page
I Risk Return Summary ............................ 1
II Expense Summary ................................ 7
III Certain Investment Strategies and Risks ........ 9
IV Management of the Fund ......................... 10
V Description of Share Classes ................... 11
VI How to Purchase, Exchange and Redeem Shares .... 15
VII Investor Services and Programs ................. 19
VIII Other Information .............................. 21
IX Financial Highlights ........................... 24
Appendix A -- Investment Techniques and
Practices ...................................... A-1
Appendix B -- Taxable Equivalent Yield Table ... B-1
<PAGE>
- --------------------------
I RISK RETURN SUMMARY
- --------------------------
O INVESTMENT OBJECTIVE
The fund's investment objective is to provide as high a level of current
income exempt from federal income taxes as is considered consistent with
prudent investing while seeking protection of shareholders' capital. The
fund's objective may be changed without shareholder approval.
O PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 80% of its net
assets in municipal securities and participation interests in municipal
securities issued by banks, the interest on which is exempt from federal
income tax. Municipal securities are bonds or other debt obligations of a
U.S. state or political subdivision, such as a county, city, town,
village, or authority. Participation interests in municipal securities are
interests in holdings of municipal obligations backed by a letter of
credit or guarantee from the issuing bank. The fund seeks to invest in
municipal securities whose income is exempt from federal personal income
taxes. However, the interest income on certain of these municipal
securities may be subject to an alternative minimum tax.
While the fund focuses on municipal securities rated, or issued by
issuers who have securities that are rated, in one of the top four credit
ratings by credit rating agencies, the fund may also invest in lower rated
bonds. Lower rated bonds, commonly known as junk bonds, are bonds assigned
credit ratings below the four highest credit ratings by credit rating
agencies or which are unrated and considered by the fund's investment
adviser, Massachusetts Financial Services Company (referred to as MFS or
the adviser), to be comparable to lower rated bonds.
In selecting fixed income investments for the fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager(s) of MFS' fixed income
oriented funds (including the fund) as a tool in making or adjusting a
fund's asset allocations to various segments of the fixed income markets.
In assessing the credit quality of fixed income securities, MFS does not
rely solely on the credit ratings assigned by credit rating agencies, but
rather performs its own independent credit analysis.
O PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. As with any non-money market mutual fund, the
share price of the fund will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the fund to decline, and which could
prevent the fund from achieving its objective, that are not described
here.
The principal risks of investing in the fund are:
o Municipal Securities Risk:
|> Interest Rate Risk: As with any fixed income security, the prices of
municipal securities in the fund's portfolio will generally fall when
interest rates rise. Conversely, when interest rates fall, the prices
of municipal securities in the fund's portfolio will generally rise.
|> Maturity Risk: Interest rate risk will generally affect the price of
a municipal security more if the security has a longer maturity.
Municipal securities with longer maturities will therefore be more
volatile than other fixed income securities with shorter maturities.
Conversely, municipal securities with shorter maturities will be less
volatile but generally provide lower returns than municipal
securities with longer maturities. The average maturity of the fund's
municipal security investments will affect the volatility of the
fund's share price.
|> Credit Risk: Credit risk is the risk that the issuer of a municipal
security will not be able to pay principal and interest when due.
Rating agencies assign credit ratings to certain municipal securities
to indicate their credit risk. The price of a municipal security will
generally fall if the issuer defaults on its obligation to pay
principal or interest, the rating agencies downgrade the issuer's
credit rating or other news affects the market's perception of the
issuer's credit risk. A participation interest is also subject to the
risk of default by the issuing bank.
|> General Obligations and Revenue Obligations Risk: The fund may invest
in municipal bonds that are general obligations backed by the full
faith and credit of the municipal issuer. The fund may also invest in
municipal bonds called revenue obligations which are subject to a
higher degree of credit risk than general obligations. Revenue
obligations finance specific projects, such as building a hospital,
and are not backed by the full faith and credit of the municipal
issuer. Because revenue obligations are repaid from the revenues from
a facility, they are subject to a risk of default in payments of
principal and interest if the facility does not generate enough
income.
|> Municipal Lease Obligations Risk: The fund's investments in municipal
securities may include municipal lease obligations. Municipal lease
obligations are undivided interests issued by a state or municipality
in a lease or installment purchase which generally relates to
equipment or facilities. When the fund invests in municipal lease
obligations, it may have limited recourse in the event of default or
termination. In some cases, payments under municipal leases do not
have to be made unless the appropriate legislative body specifically
approves money for that purpose.
o Speculative Bonds Risk: Bonds rated in the lowest investment grade
category (i.e. the fourth highest credit rating) by credit rating agencies
are called speculative bonds. Speculative bonds are subject to a higher
risk that the issuer will default on payments of principal and interest
than higher rated investment grade bonds. Although the issuer's ability to
make interest and principal payments appears adequate, an adverse change
in economic conditions or other circumstances is more likely to cause a
default by the issuer of a speculative bond than the issuer of a higher
rated investment grade bond.
o Liquidity Risk: The fixed income securities purchased by the fund may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on
the fund's performance.
o Lower Rated Bonds Risk:
|> Higher Credit Risk: Junk bonds are subject to a substantially higher
degree of credit risk than higher rated bonds. During recessions, a
high percentage of issuers of junk bonds may default on payments of
principal and interest. The price of a junk bond may therefore
fluctuate drastically due to bad news about the issuer or the economy
in general.
|> Higher Liquidity Risk: During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will
be harder to value or sell at a fair price.
o As with any mutual fund, you could lose money on your investment in the
fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
<PAGE>
O BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The fund's past performance does not necessarily indicate how
the fund will perform in the future. The performance information in the
chart and table is based upon calendar year periods, while the performance
information presented under the caption "Financial Highlights" and in the
fund's shareholder reports is based upon the fund's fiscal year.
Therefore, these performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class B shares for the last ten calendar years. The chart and related
notes do not take into account any sales charges (loads) that you may be
required to pay upon purchase or redemption of the fund's shares, but do
include the reinvestment of distributions. Any sales charge will reduce
your return. The return of the fund's other classes of shares will differ
from the class B returns shown in the bar chart, depending upon the
expenses of those classes.
1989 9.26%
1990 3.55%
1991 11.41%
1992 7.88%
1993 10.91%
1994 (5.30)%
1995 13.82%
1996 2.87%
1997 8.81%
1998 4.26%
During the period shown in the bar chart, the highest quarterly return was
5.86% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (4.82)% (for the calendar quarter ended March 31,
1994). The return for the quarter ended March 31, 1999 was 0.91%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compare to a broad measure of market performance and to the average
general municipal debt fund and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
............................................................................
1 Year 5 Year 10 Year
Class A shares 0.05% 4.56% 6.58%
Class B shares 0.27% 4.36% 6.61%
Class C shares 3.25% 4.75% 6.64%
Lehman Brothers Government/Corporate
Bond Index*+ 9.49% 7.31% 9.34%
Average general municipal debt fund++ 5.33% 5.33% (1.54)%
--------
* The Lehman Brothers Government/Corporate Bond Index is a broad based
unmanaged, market-value-weighted index of all debt obligations of the
U.S. Treasury and U.S. government agencies (excluding mortgage-backed
securities) and of all publicly issued fixed-rate, nonconvertible,
investment-grade domestic corporate debt.
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services, Inc.
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the
deduction of the 4.75% maximum sales charge. Class B share performance
takes into account the deduction of the applicable contingent deferred
sales charge (referred to as a CDSC), which declines over six years from
4% to 0%. Class C share performance takes into account the deduction of
the 1% CDSC.
The fund commenced investment operations on December 29, 1986 with the
offering of class B shares, and subsequently offered class A shares on
September 7, 1993 and class C shares on January 3, 1994. Class A and class
C share performance includes the performance of the fund's class B shares
for periods prior to the offering of class A and class C shares. This
blended class A and class C share performance has been adjusted to take
into account the initial sales charge (load) applicable to class A shares
and the lower CDSC applicable to class C shares, rather than the CDSC
applicable to class B shares. This blended performance has not been
adjusted to take into account differences in class specific operating
expenses. Class A share performance generally would have been higher than
class B share performance had class A shares been offered for the entire
period, because certain operating expenses (e.g., distribution and service
fees) attributable to class B shares are higher than those of class A
shares. Class C share performance generally would have been approximately
the same as class B share performance had class C shares been offered for
the entire period, because class C and B operating expenses (e.g.,
distribution and service fees) attributable to class C and B shares are
approximately the same.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
- --------------------------
II EXPENSE SUMMARY
- --------------------------
O EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment):
............................................................................
CLASS A CLASS B CLASS C
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering
price) ................................... 4.75% 0.00% 0.00%
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase
price or redemption proceeds, whichever
is less) ................................. See Below(1) 4.00% 1.00%
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets):
............................................................................
Management Fees .............................. 0.71% 0.71% 0.71%
Distribution and Service (12b-1) Fees(2) ..... 0.25% 1.00% 1.00%
Other Expenses(3) ............................ 0.24% 0.24% 0.24%
----- ----- -----
Total Annual Fund Operating Expenses ......... 1.20% 1.95% 1.95%
Fee Waiver(4) ............................ (0.31)% (0.31)% (0.31)%
Net Expenses ............................. 0.89% 1.64% 1.64%
--------
(1) An initial sales charge will not be deducted from your purchase if you
buy $1 million or more of class A shares, or if you are investing
through a retirement plan and your class A purchase meets certain
requirements. However, in this case, a contingent deferred sales
charge (referred to as a CDSC) of 1% may be deducted from your
redemption proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it
to pay marketing and other fees to support the sale and distribution
of class A, B and C shares and the services provided to you by your
financial adviser (referred to as distribution and service fees).
(3) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent. The fund may enter
into other similar arrangements and directed brokerage arrangements,
which would also have the effect of reducing the fund's expenses.
"Other Expenses" do not take into account these expense reductions,
and are therefore higher than the actual expenses of the fund.
(4) MFS has contractually agreed to reduce its management fee to 0.40%
annually of the average daily net assets of the fund. This contractual
fee arrangement will remain in effect until at least August 1, 2000
absent an earlier modification approved by the Board of Trustees which
oversees the fund.
<PAGE>
O EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
Class A shares $562 $809 $1,075 $1,834
Class B shares
Assuming redemption at end of
period $567 $882 $1,223 $2,055
Assuming no redemption $167 $582 $1,023 $2,055
Class C shares
Assuming redemption at end of
period $267 $582 $1,023 $2,250
Assuming no redemption $167 $582 $1,023 $2,250
<PAGE>
O III CERTAIN INVESTMENT STRATEGIES AND RISKS
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, in the fund's Statement of
Additional Information (referred to as the SAI), which you may obtain by
contacting MFS Service Center, Inc. (see back cover for address and phone
number).
In addition, the fund may depart from its principal investment
strategies by temporarily investing for defensive purposes when adverse
market, economic or political conditions exist. While the fund invests
defensively, it may not be able to pursue its investment objective. When
such conditions exist the fund may invest up to 50% of its total assets in
the following short-term investments:
o U.S. government securities; and
o commercial paper, obligations of banks (including certificates of deposit,
bankers' acceptances and repurchase agreements) with $1 billion of assets
and cash.
Interest income from these short-term investments will be taxable to
shareholders as ordinary income. The fund's defensive investment position
may not be effective in protecting its value.
The fund may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to a fund
with less active trading policies, which would increase your tax
liability. Frequent trading also increases transaction costs, which could
detract from the fund's performance.
- ------------------------------
IV MANAGEMENT OF THE FUND
- ------------------------------
O INVESTMENT ADVISER
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the fund's investment adviser. MFS is America's oldest mutual
fund organization. MFS and its predecessor organizations have a history of
money management dating from 1924 and the founding of the first mutual
fund, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $103.7 billion on behalf of
approximately 4.0 million investor accounts as of March 31, 1999. As of
such date, the MFS organization managed approximately $82.8 billion of net
assets in equity funds and equity portfolios and $20.9 billion of net
assets in fixed income funds and fixed income portfolios, including $6.3
billion of net assets in municipal securities. Approximately $4.0 billion
of the assets managed by MFS are invested in securities of foreign issuers
and foreign denominated securities of U.S. issuers. MFS is located at 500
Boylston Street, Boston, Massachusetts 02116.
MFS provides investment management and related administrative services
and facilities to the fund, including portfolio management and trade
execution. For these services, the fund has contracted to pay MFS an
annual management fee equal to 0.30% of the fund's average daily net
assets plus 6.43% of its gross income for its then-current fiscal year.
For fiscal year ended March 31, 1999, this fee was equivalent to 0.71% of
the fund's average daily net assets. MFS has contracted to waive its right
to receive a portion of this fee as described under "Expense Summary".
O PORTFOLIO MANAGER
The fund's portfolio manager is Christopher J. Mier, a Senior Vice
President of MFS. Mr. Mier joined MFS in April 1999. Prior to joining MFS,
he spent 13 years as a managing director and portfolio manager in the
municipal bond department at a major international money manager.
O ADMINISTRATOR
MFS provides the fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the fund for a portion of the costs it incurs in providing
these services.
O DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of the fund.
O SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for the fund,
for which it receives compensation from the fund.
<PAGE>
- -----------------------------------
V DESCRIPTION OF SHARE CLASSES
- -----------------------------------
The fund offers class A, B and C shares through this prospectus.
O SALES CHARGES
You may be subject to an initial sales charge when you purchase, or a CDSC
when you redeem, class A, B or C shares. These sales charges are described
below. In certain circumstances, these sales charges are waived. These
circumstances are described in the SAI. Special considerations concerning
the calculation of the CDSC that apply to each of these classes of shares
are described below under the heading "Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other concessions
which are paid from various sources, such as from the sales charges and
distribution and service fees, or from MFS or MFD. These commissions and
concessions are described in the SAI.
O CLASS A SHARES
You may purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), but in some cases you may
purchase class A shares without an initial sales charge but subject to a
1% CDSC upon redemption within one year. Class A shares have annual
distribution and service fees up to a maximum of 0.35% of net assets.
PURCHASES SUBJECT TO AN INITIAL SALES CHARGE. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon
the amount you invest, as follows:
SALES CHARGE* AS PERCENTAGE OF:
------------------------------
Offering Net Amount
Amount of Purchase Price Invested
Less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 2.95 3.04
$500,000 but less than $1,000,000 2.20 2.25
$1,000,000 or more None** None**
------
* Because of rounding in the calculation of offering price, actual sales
charges you pay may be more or less than those calculated using these
percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
PURCHASES SUBJECT TO A CDSC (BUT NOT AN INITIAL SALES CHARGE). You pay no
initial sales charge when you invest $1 million or more in class A shares.
However, a CDSC of 1% will be deducted from your redemption proceeds if
you redeem within 12 months of your purchase.
In addition, purchases made under the following four categories are not
subject to an initial sales charge; however, a CDSC of 1% will be deducted
from redemption proceeds if the redemption is made within 12 months of
purchase:
o Investments in class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended (referred to
as ERISA), if, prior to July 1, 1996
|> the plan had established an account with MFSC; and
|> the sponsoring organization had demonstrated to the satisfaction of
MFD that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan of class A shares of
the MFS Family of Funds (the MFS Funds) would be in the amount of
at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the retirement plan and/or sponsoring organization participates in
the MFS Fundamental 401(k) Program or any similar recordkeeping
system made available by MFSC (referred to as the MFS participant
recordkeeping system);
|> the plan establishes an account with MFSC on or after July 1, 1996;
|> the total purchases by the retirement plan of class A shares of the
MFS Funds will be in the amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole
discretion; and
|> the plan has not redeemed its class B shares in the MFS Funds in
order to purchase class A shares under this category.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the plan establishes an account with MFSC on or after July 1, 1996;
and
|> the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds.
THE RETIREMENT PLAN WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN
OR ITS SPONSORING ORGANIZATION INFORMS MFSC PRIOR TO THE PURCHASES
THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED IN
SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS; MFSC HAS NO
OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES
UNDER THIS CATEGORY; AND
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the plan establishes an account with MFSC on or after July 1, 1997;
|> the plan's records are maintained on a pooled basis by MFSC; and
|> the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
O CLASS B SHARES
You may purchase class B shares at net asset value without an initial
sales charge, but if you redeem your shares within the first six years you
may be subject to a CDSC (declining from 4.00% during the first year to 0%
after six years). Class B shares have annual distribution and service fees
up to a maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
----------------------------------------------------------------------------
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
If you hold class B shares for approximately eight years, they will
convert to class A shares of the fund. All class B shares you purchased
through the reinvestment of dividends and distributions will be held in a
separate sub-account. Each time any class B shares in your account convert
to class A shares, a proportionate number of the class B shares in the
sub-account will also convert to class A shares.
O CLASS C SHARES
You may purchase class C shares at net asset value without an initial
sales charge, but if you redeem your shares within the first year you may
be subject to a CDSC of 1.00%. Class C shares have annual distribution and
service fees up to a maximum of 1.00% of net assets annually. Class C
shares do not convert to any other class of shares of the fund.
O CALCULATION OF CDSC
As discussed above, certain investments in class A, B and C shares will be
subject to a CDSC. Three different aging schedules apply to the
calculation of the CDSC:
o Purchases of class A shares made on any day during a calendar month will
age one month on the last day of the month, and each subsequent month.
o Purchases of class C shares, and purchases of class B shares on or after
January 1, 1993, made on any day during a calendar month will age one year
at the close of business on the last day of that month in the following
calendar year, and each subsequent year.
o Purchases of class B shares prior to January 1, 1993 made on any day
during a calendar year will age one year at the close of business on
December 31 of that year, and each subsequent year.
No CDSC is assessed on the value of your account represented by
appreciation or additional shares acquired through the automatic
reinvestment of dividends or capital gain distributions. Therefore, when
you redeem your shares, only the value of the shares in excess of these
amounts (i.e., your direct investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being
imposed at the lowest possible rate, which means that the CDSC will be
applied against the lesser of your direct investment or the total cost of
your shares. The applicability of a CDSC will not be affected by exchanges
or transfers of registration, except as described in the SAI.
O DISTRIBUTION AND SERVICE FEES
The fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class A,
B and C shares and the services provided to you by your financial adviser.
These annual distribution and service fees may equal up to 0.35% for class
A shares (a 0.10% distribution fee and a 0.25% service fee) and 1.00% for
each of class B and class C shares (a 0.75% distribution fee and a 0.25%
service fee), and are paid out of the assets of these classes. Over time,
these fees will increase the cost of your shares and may cost you more
than paying other types of sales charges. The 0.10% per annum class A
distribution fee is currently not being imposed. The fund will begin
paying this fee on such date as the Trustees of the fund may determine.
<PAGE>
- ---------------------------------------------------
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
- ---------------------------------------------------
You may purchase, exchange and redeem class A, B and C shares of the fund
in the manner described below. In addition, you may be eligible to
participate in certain investor services and programs to purchase,
exchange and redeem these classes of shares, which are described in the
next section under the caption "Investor Services and Programs."
O HOW TO PURCHASE SHARES
INITIAL PURCHASE. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is $1,000.
However, in the following circumstances the minimum initial investment is
only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
|> tax-deferred retirement programs (other than IRAs) where investments
are made by means of group remittal statements; or
|> employer sponsored investment programs.
The minimum initial investment for IRAs is $250 per account. The maximum
investment in class C shares is $1,000,000 per transaction. Class C shares
are not available for purchase by any retirement plan qualified under
Section 401(a) or 403(b) of the Internal Revenue Code if the plan or its
sponsor subscribes to certain recordkeeping services made available by
MFSC, such as the MFS Fundamental 401(k) Plan.
ADDING TO YOUR ACCOUNT. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first for
instructions); or
o authorize transfers by phone between your bank account and your MFS
account (the maximum purchase amount for this method is $100,000). You
must elect this privilege on your account application if you wish to use
it.
O HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of certain other
MFS funds at net asset value by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC will not be charged a
CDSC in an exchange. However, when you redeem the shares acquired through
the exchange, the shares you redeem may be subject to a CDSC, depending
upon when you originally purchased the shares you exchanged. For purposes
of computing the CDSC, the length of time you have owned your shares will
be measured from the date of original purchase and will not be affected by
any exchange.
Sales charges may apply to exchanges made from the MFS money market
funds. Certain qualified retirement plans may make exchanges between the
MFS Funds and the MFS Fixed Fund, a bank collective investment fund, and
sales charges may also apply to these exchanges. Call MFSC for information
concerning these sales charges.
Exchanges may be subject to certain limitations and are subject to the
MFS Funds' market timing policies, which are policies designed to protect
the funds and their shareholders from the adverse effect of frequent
exchanges. These limitations and market timing policies are described
below under the captions "Right to Reject or Restrict Purchase and
Exchange Orders" and "Market Timing Policies." You should read the
prospectus of the MFS fund into which you are exchanging and consider the
differences in objectives, policies and rules before making any exchange.
O HOW TO REDEEM SHARES
You may redeem your shares either by having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature Guarantee/
Additional Documentation" below, or contact MFSC for details (see back
cover page for address and phone number).
Under unusual circumstances such as when the New York Stock Exchange is
closed, trading on the Exchange is restricted or if there is an emergency,
the fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, the fund may delay the payment of the
redemption proceeds until the check has cleared, which may take up to 15
days from the purchase date.
REDEEMING DIRECTLY THROUGH MFSC.
o BY TELEPHONE. You can call MFSC to have shares redeemed from your account
and the proceeds wired or mailed (depending on the amount redeemed)
directly to a pre- designated bank account. MFSC will request personal or
other information from you and will generally record the calls. MFSC will
be responsible for losses that result from unauthorized telephone
transactions if it does not follow reasonable procedures designed to
verify your identity. You must elect this privilege on your account
application if you wish to use it.
o BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the
name of your fund, your account number, and the number of shares or dollar
amount to be sold.
REDEEMING THROUGH YOUR FINANCIAL ADVISER. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser
will be responsible for furnishing all necessary documents to MFSC and may
charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. In order to protect against
fraud, the fund requires that your signature be guaranteed in order to
redeem your shares. Your signature may be guaranteed by an eligible bank,
broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency, or savings association. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
O OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. Purchases and
exchanges should be made for investment purposes only. The MFS Funds each
reserve the right to reject or restrict any specific purchase or exchange
request. Because an exchange request involves both a request to redeem
shares of one fund and to purchase shares of another fund, the MFS Funds
consider the underlying redemption and purchase requests conditioned upon
the acceptance of each of these underlying requests. Therefore, in the
event that the MFS Funds reject an exchange request, neither the
redemption nor the purchase side of the exchange will be processed. When a
fund determines that the level of exchanges is detrimental to its
remaining shareholders, the fund may delay the payment of exchange
proceeds for up to seven days to permit cash to be raised through the
orderly liquidation of its portfolio securities to pay the redemption
proceeds. In this case, the purchase side of the exchange will be delayed
until the exchange proceeds are paid by the redeeming fund.
MARKET TIMING POLICIES. The MFS Funds are not designed for professional
market timing organizations or other entities using programmed or frequent
exchanges. The MFS Funds define a "market timer" as an individual, or
organization acting on behalf of one or more individuals, if:
o the individual or organization makes during the calendar year either (i)
six or more exchange requests among the MFS Funds or (ii) three or more
exchange requests out of any of the MFS high yield bond funds or MFS
municipal bond funds; and
o any one of such exchange requests represents shares equal in value to $1
million or more.
Accounts under common ownership or control, including accounts
administered by market timers, will be aggregated for purposes of this
definition.
The MFS Funds may impose specific limitations on market timers,
including:
o delaying for up to seven days the purchase side of an exchange request by
market timers;
o rejecting or otherwise restricting purchase or exchange requests by market
timers; and
o permitting exchanges by market timers only into certain MFS Funds.
REINSTATEMENT PRIVILEGE. After you have redeemed shares, you have a one-
time right to reinvest the proceeds within 90 days of the redemption at
the current net asset value (without an initial sales charge). If the
redemption involved a CDSC, your account will be credited with the
appropriate amount of the CDSC paid; however, your new shares will be
subject to a CDSC which will be determined from the date you originally
purchased the shares redeemed. This privilege applies to shares of the MFS
money market funds only under certain circumstances.
IN-KIND DISTRIBUTIONS. The MFS Funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that the fund makes an in-kind
distribution, you could incur the brokerage and transaction charges when
converting the securities to cash. The fund does not expect to make in-
kind distributions, and if it does, the fund will pay, during any 90-day
period, your redemption proceeds in cash up to either $250,000 or 1% of
the fund's net assets, whichever is less.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Because it is costly to maintain
small accounts, the MFS Funds have generally reserved the right to
automatically redeem shares and close your account when it contains less
than $500 due to your redemptions or exchanges. Before making this
automatic redemption, you will be notified and given 60 days to make
additional investments to avoid having your shares redeemed.
<PAGE>
- ---------------------------------------
VII INVESTOR SERVICES AND PROGRAMS
- ---------------------------------------
As a shareholder of the fund, you have available to you a number of
services and investment programs. Some of these services and programs may
not be available to you if your shares are held in the name of your
financial adviser or if your investment in the fund is made through a
retirement plan.
O DISTRIBUTION OPTIONS
The following distribution options are generally available to all accounts
and you may change your distribution option as often as you desire by
notifying MFSC:
o Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
o Dividends in cash; capital gain distributions reinvested in additional
shares; or
o Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value
as of the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the fund. If you have elected to receive dividends
and/or capital gain distributions in cash, and the postal or other
delivery service is unable to deliver checks to your address of record, or
you do not respond to mailings from MFSC with regard to uncashed
distribution checks, your distribution option will automatically be
converted to having all dividends and other distributions reinvested in
additional shares. Your request to change a distribution option must be
received by MFSC by the record date for a dividend or distribution in
order to be effective for that dividend or distribution. No interest will
accrue on amounts represented by uncashed distribution or redemption
checks.
O PURCHASE AND REDEMPTION PROGRAMS
For your convenience, the following purchase and redemption programs are
made available to you with respect to class A, B and C shares, without
extra charge:
AUTOMATIC INVESTMENT PLAN. You can make cash investments of $50 or more
through your checking account or savings account on any day of the month.
If you do not specify a date, the investment will automatically occur on
the first business day of the month.
AUTOMATIC EXCHANGE PLAN. If you have an account balance of at least $5,000
in any MFS fund, you may participate in the automatic exchange plan, a
dollar-cost averaging program. This plan permits you to make automatic
monthly or quarterly exchanges from your account in an MFS fund for shares
of the same class of shares of other MFS funds. You may make exchanges of
at least $50 to up to six different funds under this plan. Exchanges will
generally be made at net asset value without any sales charges. If you
exchange shares out of the MFS Money Market Fund or MFS Government Money
Market Fund, or if you exchange class A shares out of the MFS Cash Reserve
Fund, into class A shares of any other MFS fund, you will pay the initial
sales charge if you have not already paid this charge on these shares.
REINVEST WITHOUT A SALES CHARGE. You can reinvest dividend and capital
gain distributions into your account without a sales charge to add to your
investment easily and automatically.
DISTRIBUTION INVESTMENT PROGRAM. You may purchase shares of any MFS fund
without paying an initial sales charge or a CDSC upon redemption by
automatically reinvesting a minimum of $50 of dividend and capital gain
distributions from the same class of another MFS fund.
LETTER OF INTENT (LOI). If you intend to invest $100,000 or more in the
MFS funds (including the MFS Fixed Fund) within 13 months, you may buy
class A shares of the funds at the reduced sales charge as though the
total amount were invested in class A shares in one lump sum. If you
intend to invest $1 million or more under this program, the time period is
extended to 36 months. If the intended purchases are not completed within
the time period, shares will automatically be redeemed from a special
escrow account established with a portion of your investment at the time
of purchase to cover the higher sales charge you would have paid had you
not purchased your shares through this program.
RIGHT OF ACCUMULATION. You will qualify for a lower sales charge on your
purchases of class A shares when your new investment in class A shares,
together with the current (offering price) value of all your holdings in
the MFS funds (including the MFS Fixed Fund), reaches a reduced sales
charge level.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to automatically receive (or
designate someone else to receive) regular periodic payments of at least
$100. Each payment under this systematic withdrawal is funded through the
redemption of your fund shares. For class B and C shares, you can receive
up to 10% (15% for certain IRA distributions) of the value of your account
through these payments in any one year (measured at the time you establish
this plan). You will incur no CDSC on class B and C shares redeemed under
this plan. For class A shares, there is no similar percentage limitation;
however, you may incur the CDSC (if applicable) when class A shares are
redeemed under this plan.
FREE CHECKWRITING. You may redeem your class A or class C shares by
writing checks against your account. Checks must be for at least $500 and
investments made by check must have been in your account for at least 15
days before you can write checks against them. There is no charge for this
service. To authorize your account for checkwriting, contact MFSC (see
back cover page for address and phone number).
Shares in your account equal in value to the amount of the check plus
the applicable CDSC (if any) and any income tax required to be withheld
(if any) are redeemed to cover the amount of the check. If your account
value is not great enough to cover these amounts, your check will be
dishonored.
<PAGE>
- ---------------------------
VIII OTHER INFORMATION
- ---------------------------
O PRICING OF FUND SHARES
The price of each class of the fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange is open
for trading (generally, 4:00 p.m., Eastern time) (referred to as the
valuation time). To determine net asset value, the fund values its assets
at current market values, or at fair value as determined by the Adviser
under the direction of the Board of Trustees that oversees the fund if
current market values are unavailable. Fair value pricing may be used by
the fund when current market values are unavailable or when an event
occurs after the close of the exchange on which the fund's portfolio
securities are principally traded that is likely to have changed the value
of the securities. The use of fair value pricing by the fund may cause the
net asset value of its shares to differ significantly from the net asset
value that would be calculated using current market values.
You will receive the net asset value next calculated, after the
deduction of applicable sales charges and any required tax withholding, if
your order is complete (has all required information) and MFSC receives
your order by:
o the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) received your order
by the valuation time.
The fund invests in certain securities which are primarily listed on
foreign exchanges that trade on weekends and other days when the fund does
not price its shares. Therefore, the value of the fund's shares may change
on days when you will not be able to purchase or redeem the fund's shares.
O DISTRIBUTIONS
The fund intends to pay substantially all of its net income (excluding any
realized net capital gains) to shareholders as dividends at least monthly.
Any realized net capital gains are distributed at least annually.
- --------------------------
O TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your
tax adviser regarding the effect that an investment in the fund may have
on your particular tax situation.
TAXABILITY OF DISTRIBUTIONS. As long as the fund qualifies for treatment
as a regulated investment company (which it has in the past and intends to
do in the future), it pays no federal income tax on the earnings it
distributes to shareholders.
You may receive three different types of distributions from the fund:
exempt-interest dividends, ordinary dividends and capital gain dividends.
Most distributions will be exempt-interest dividends, which are exempt
from federal income tax, but may be subject to state or local income
taxes. Ordinary dividends are normally subject to both federal income tax
and any state and local income taxes. Distributions designated as capital
gain dividends are taxable as long-term capital gains. Any taxes that you
pay on a distribution will be the same whether you take the distribution
in cash or have it reinvested in additional shares of the fund. Some
dividends paid in January may be taxable as if they had been paid the
previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if you buy shares shortly before the record date of a
distribution (other than an exempt interest dividend), you may pay the
full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
If you are neither a citizen nor a resident of the U.S., the fund will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able
to arrange for a lower withholding rate under an applicable tax treaty if
you supply the appropriate documentation required by the fund. The fund is
also required in certain circumstances to apply backup withholding at the
rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a
resident of the U.S.) who does not furnish to the fund certain information
and certifications or who is otherwise subject to backup withholding.
Backup withholding will not, however, be applied to payments that have
been subject to 30% withholding. Prospective investors should read the
fund's Account Application for additional information regarding backup
withholding of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it
is generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, sell or exchange, you
may have a gain or a loss on the transaction. You are responsible for any
tax liabilities generated by your transaction.
OTHER TAX ISSUES. Exempt-interest dividends that you receive may affect
your alternative minimum tax calculation. Also, if you are receiving
social security or railroad retirement benefits, your exempt-interest
dividends may increase the tax on your benefits. If you borrow money to
purchase or carry shares of the fund, your deduction for interest paid on
those borrowings will be limited.
O UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have similar
investment goals and principal investment policies and risks to the fund,
and which may be managed by the fund's portfolio manager(s). While the
fund may have many similarities to these other funds, its investment
performance will differ from their investment performance. This is due to
a number of differences between the funds, including differences in sales
charges, expense ratios and cash flows.
O YEAR 2000 READINESS DISCLOSURE
The fund could be adversely affected if the computer systems used by MFS,
the fund's other service providers or the companies in which the fund
invests do not properly process date-related information from and after
January 1, 2000. MFS recognizes the importance of the Year 2000 issue and,
to address Year 2000 compliance, created a separately funded Year 2000
Program Management Office in 1996 comprised of a specialized staff
reporting directly to MFS senior management. The Office, with the help of
external consultants, is responsible for overall coordination, strategy
formulation, communications and issue resolution with respect to Year 2000
issues. While MFS systems will be tested for Year 2000 readiness before
the turn of the century, there are significant systems interdependencies
in the domestic and foreign markets for securities, the business
environments in which companies held by the fund operate and in MFS' own
business environment. MFS has been working with the fund's other service
providers to identify and respond to potential problems with respect to
Year 2000 readiness and to develop contingency plans. Year 2000 readiness
is also one of the factors considered by MFS in its ongoing assessment of
companies in which the fund invests. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the
fund.
O PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
To avoid sending duplicate copies of materials to households, only one
copy of the fund's annual and semiannual report will be mailed to
shareholders having the same residential address on the fund's records.
However, any shareholder may contact MFSC (see back cover for address and
phone number) to request that copies of these reports be sent personally
to that shareholder.
<PAGE>
- ----------------------------
IX FINANCIAL HIGHLIGHTS
- ----------------------------
The financial highlights table is intended to help you understand the
fund's financial performance for the past 5 years. Certain information
reflects financial results for a single fund share. The total returns in
the table represent the rate by which an investor would have earned (or
lost) on an investment in the fund (assuming reinvestment of all
distributions). This information has been audited by the fund's
independent auditors, whose report, together with the fund's financial
statements, are included in the fund's Annual Report to shareholders. The
fund's Annual Report is available upon request by contacting MFS Service
Center, Inc. (see back cover for address and telephone number). These
financial statements are incorporated by reference into the SAI. The
fund's independent auditors are Deloitte & Touche LLP.
<PAGE>
<TABLE>
CLASS A SHARES
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 8.99 $ 8.50 $ 8.62 $ 8.56 $ 8.56
-------- -------- -------- -------- -------
Income from investment operations# --
Net investment income(S) $ 0.48 $ 0.48 $ 0.49 $ 0.51 $ 0.50
Net realized and unrealized gain (loss)
on investments (0.03) 0.49 (0.12) 0.05 0.02
-------- -------- -------- -------- -------
Total from investment operations $ 0.45 $ 0.97 $ 0.37 $ 0.56 $ 0.52
-------- -------- -------- -------- -------
Less distributions declared to
shareholders -
From net investment income $ (0.47) $ (0.48) $ (0.49) $ (0.50) $ (0.52)
In excess of net investment income -- -- -- (0.00)+ --
In excess of net realized gain on
investments -- -- -- -- (0.00)+
-------- -------- -------- -------- -------
Total distributions declared to
shareholders $ (0.47) $ (0.48) $ (0.49) $ (0.50) $ (0.52)
-------- -------- -------- -------- -------
Net asset value -- end of period $ 8.97 $ 8.99 $ 8.50 $ 8.62 $ 8.56
-------- -------- -------- -------- -------
Total return(+) 5.16% 11.61% 4.28% 6.81% 6.33%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.08% 1.23% 1.31% 1.28% 1.13%
Net investment income 5.35% 5.44% 5.75% 5.75% 6.20%
Portfolio turnover 31% 23% 30% 23% 25%
Net assets at end of period (000 omitted) $215,858 $189,056 $152,039 $121,903 $25,270
- --------
+ Per share amount was less than $0.01.
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly. The Fund has an expense offset arrangement
which reduces the Fund's custodian fee based upon the amount of cash maintained by the Fund with its custodian and
dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The investment adviser and/or distributor voluntarily waived a portion of their management fee and/or distribution fee,
respectively for certain of the periods indicated. If these fees had been incurred by the Fund, the net investment income
per share and the ratios would have been:
Net investment income $ 0.47 -- -- -- --
Ratios (to average net assets):
Expenses## 1.34% -- -- -- --
Net investment income 5.22% -- -- -- --
</TABLE>
<PAGE>
<TABLE>
CLASS B SHARES
..............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 9.00 $ 8.51 $ 8.63 $ 8.57 $ 8.56
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) $ 0.41 $ 0.42 $ 0.43 $ 0.43 $ 0.44
Net realized and unrealized gain (loss)
on investments (0.02) 0.48 (0.13) 0.06 --
-------- -------- -------- -------- --------
Total from investment operations $ 0.39 $ 0.90 $ 0.30 $ 0.49 $ 0.44
-------- -------- -------- -------- --------
Less distributions declared to
shareholders -
From net investment income $ (0.41) $ (0.41) $ (0.42) $ (0.43) $ (0.43)
In excess of net investment income -- -- -- (0.00)+ --
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (0.41) $ (0.41) $ (0.42) $ (0.43) $ (0.43)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 8.98 $ 9.00 $ 8.51 $ 8.63 $ 8.57
-------- -------- -------- -------- --------
Total return 4.38% 10.77% 3.44% 5.87% 5.32%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.83% 1.98% 2.11% 2.13% 2.16%
Net investment income 4.59% 4.69% 4.95% 4.90% 5.15%
Portfolio turnover 31% 23% 30% 23% 25%
Net assets at end of period (000
omitted) $140,871 $172,339 $226,138 $306,889 $412,965
- --------
+ Per share amount was less than $0.01
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly. The Fund has an expense offset arrangement
which reduces the Fund's custodian fee based upon the amount of cash maintained by the Fund with its custodian and
dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for this expense offset arrangement.
(S) The investment adviser and/or distributor voluntarily waived a portion of their management fee and/or distribution fee,
respectively, for certain of the periods indicated. If these fees had been incurred by the Fund, the net investment
income per share and the ratios would have been:
Net investment income $ 0.40 -- -- -- --
Ratios (to average net assets):
Expenses## 1.96% -- -- -- --
Net investment income 4.46% -- -- -- --
</TABLE>
<PAGE>
<TABLE>
CLASS C SHARES
.............................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 9.01 $ 8.52 $ 8.64 $ 8.57 $ 8.56
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income(S) $ 0.41 $ 0.42 $ 0.43 $ 0.43 $ 0.44
Net realized and unrealized gain (loss) on
investments (0.02) 0.49 (0.12) 0.07 0.01
------- ------- ------- ------- -------
Total from investment operations $ 0.39 $ 0.90 $ 0.31 $ 0.50 $ 0.45
------- ------- ------- ------- -------
Less distributions declared to shareholders
-------
From net investment income $ (0.41) $ (0.41) $ (0.43) $ (0.43) $ (0.44)
In excess of net investment income -- -- -- (0.00)+ --
------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.41) $ (0.41) $ (0.43) $ (0.43) $ (0.44)
------- ------- ------- ------- -------
Net asset value -- end of period $ 8.99 $ 9.01 $ 8.52 $ 8.64 $ 8.57
------- ------- ------- ------- -------
Total return 4.37% 10.75% 3.62% 5.94% 5.39%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.81% 1.98% 2.06% 2.05% 2.09%
Net investment income 4.59% 4.69% 5.00% 4.95% 5.23%
Portfolio turnover 31% 23% 30% 23% 25%
Net assets at end of period (000 omitted) $32,164 $21,802 $19,159 $16,504 $10,936
- --------
+ Per share amount was less than $0.01
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly. The Fund has an expense offset arrangement
which reduces the Fund's custodian fee based upon the amount of cash maintained by the Fund with its custodian and
dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for this expense offset arrangement.
(S) The investment adviser and/or distributor voluntarily waived a portion of their management fee and/or distribution fee,
respectively, for certain of the periods indicated. If these fees had been incurred by the Fund, the net investment
income per share and the ratios would have been:
Net investment income $ 0.40 -- -- -- --
Ratios (to average net assets):
Expenses## 1.94% -- -- -- --
Net investment income 4.46% -- -- -- --
</TABLE>
<PAGE>
- --------------
APPENDIX A
- --------------
O INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
investment techniques and practices, which are described, together with
their risks, in the SAI. Investment techniques and practices which are the
principal focus of the fund are also described in the Risk Return Summary
of the Prospectus.
INVESTMENT TECHNIQUES/PRACTICES
..........................................................................
SYMBOLS x permitted -- not permitted
--------------------------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities --
Loans and Other Direct Indebtedness --
Lower Rated Bonds x
Municipal Bonds x
Speculative Bonds x
U.S. Government Securities x
Variable and Floating Rate Obligations x
Zero Coupon Bonds x
Equity Securities --
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities --
Emerging Markets --
Foreign Securities --
Forward Contracts --
Futures Contracts x
Indexed Securities/Structured Products x
Inverse Floating Rate Obligations x
Investment in Other Investment Companies
Open-End Funds --*
Closed-End Funds x
Lending of Portfolio Securities x
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies --
Options on Futures Contracts x
Options on Securities x
Options on Stock Indices --
Reset Options x
"Yield Curve" Options x
Repurchase Agreements x
Restricted Securities x
Short Sales --*
Short Sales Against the Box x
Short Term Instruments x
Swaps and Related Derivative Instruments --
Temporary Borrowings x
Temporary Defensive Positions x
Warrants x
"When-Issued" Securities x
- --------
*May only be changed with shareholder approval.
<PAGE>
- --------------
APPENDIX B
- --------------
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1999)
The table below shows the approximate taxable bond yields which are equivalent
to tax-exempt bond yields from 3% to 8% under federal income tax laws that
apply to 1999. (Such yields may differ under the laws applicable to subsequent
years.) Separate calculations, showing the applicable taxable income brackets,
are provided for investors who file joint returns and for those investors who
file individual returns.
While it is expected that a substantial portion of the interest income
distributed to the fund's shareholders will be exempt from federal income
taxes, portions of such distributions from time to time may be subject to
federal income taxes or a federal alternative minimum tax.
<TABLE>
<CAPTION>
TAXABLE INCOME* INCOME TAX-EXEMPT YIELD
- --------------------------------------------- TAX ----------------------------------------------------------------------
SINGLE JOINT BRACKET** 3% 4% 5% 6% 7% 8%
- --------------------------------------------- ------------ ----------------------------------------------------------------------
1999 1999 EQUIVALENT TAXABLE YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 25,750 $ 0-$ 43,050 15.0% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 25,750-$ 62,450 $ 43,050-$104,050 28.0 4.17 5.56 6.94 8.33 9.72 11.11
$ 62,450-$130,250 $104,050-$158,550 31.0 4.35 5.80 7.25 8.70 10.14 11.59
$130,250-$283,150 $158,550-$283,150 36.0 4.69 6.25 7.81 9.38 10.94 12.50
$283,150 & Over $283,150 & Over 39.6 4.97 6.62 8.28 9.93 11.59 13.25
</TABLE>
*Net amount subject to Federal personal income tax after deductions and
exemptions.
**Effective Federal Tax Bracket.
<PAGE>
MFS(R) MUNICIPAL INCOME FUND
If you want more information about the fund, the following documents are
available free
upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the fund's
actual investments. Annual reports discuss the effect of recent market
conditions and the fund's investment strategy on the fund's performance during
its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated August 1, 1999,
provides more detailed information about the fund and is incorporated into
this prospectus by reference.
YOU CAN GET FREE COPIES OF THE ANNUAL/SEMIANNUAL REPORTS, THE SAI AND OTHER
INFORMATION ABOUT THE FUND, AND MAKE INQUIRIES ABOUT THE FUND, BY CONTACTING:
MFS Service Center, Inc.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: HTTP://WWW.MFS.COM
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the fund are available on the Commission's Internet website at HTTP://
WWW.SEC.GOV, and copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Section at the above address.
The fund's Investment Company Act file number is 811-4096.
MWT-1 3/99 138M 24/224/324/824
<PAGE>
- ----------------------------
MFS(R) MUNICIPAL INCOME FUND
- ----------------------------
AUGUST 1, 1999
[Logo] M F S(R)
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
STATEMENT OF ADDITIONAL
INFORMATION
A SERIES OF MFS MUNICIPAL SERIES TRUST
500 BOYLSTON STREET, BOSTON, MA 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, 1999. This SAI should be read in conjunction with the Prospectus. The
Fund's financial statements are incorporated into this SAI by reference to the
Fund's most recent Annual Report to shareholders. A copy of the Annual Report
accompanies this SAI. You may obtain a copy of the Fund's Prospectus and Annual
Report without charge by contacting MFS Service Center, Inc. (see back cover of
Part II of this SAI for address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Fund, while Part II contains information
that generally applies to each of the funds in the MFS Family of Funds (the "MFS
Funds"). Each Part of the SAI has a variety of appendices which can be found at
the end of Part I and Part II, respectively.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
MWT-13 3/99 475
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
Page
I Definitions ................................................... 3
II Management of the Fund ........................................ 3
The Fund ...................................................... 3
Trustees and Officers -- Identification and Background ........ 3
Trustees Compensation ......................................... 3
Affiliated Service Provider Compensation ...................... 3
III Sales Charges and Distribution Plan Payments .................. 3
Sales Charges ................................................. 3
Distribution Plan Payments ................................... 3
IV Portfolio Transactions and Brokerage Commissions .............. 3
V Share Ownership ............................................... 3
VI Performance Information ....................................... 3
VII Investment Techniques, Practices, Risks and Restrictions ...... 3
Investment Techniques, Practices and Risks .................... 3
Investment Restrictions ....................................... 4
VIII Tax Considerations ............................................ 5
IX Independent Auditors and Financial Statements ................. 5
Appendix A -- Trustees and Officers -- Identification and
Background .................................................. A
Appendix B -- Trustee Compensation ............................ B
Appendix C -- Affiliated Service Provider Compensation ........ C
Appendix D -- Sales Charges and Distribution Plan Payments .... D
Appendix E -- Portfolio Transactions and Brokerage Commissions E
Appendix F -- Share Ownership ................................. F
Appendix G -- Performance Information ......................... G
<PAGE>
I 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.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated August 1, 1999, as
amended or supplemented from time to time.
II MANAGEMENT OF THE FUND
THE FUND
The Fund is a diversified series of the Trust. The Trust is an open-end
management investment company.
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The identification and background of the Trustees and officers of the
Trust are set forth in Appendix A of this Part I.
TRUSTEE COMPENSATION
Compensation paid to the non-interested Trustees and to Trustees who are
not officers of the Trust, for certain specified periods, is set forth in
Appendix B of this Part I.
AFFILIATED SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund to its affiliated service providers -- to
MFS, for investment advisory and administrative services, and to MFSC, for
transfer agency services -- for certain specified periods is set forth in
Appendix C to this Part I.
III SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
Sales charges paid in connection with the purchase and sale of Fund shares
for certain specified periods are set forth in Appendix D to this Part I,
together with the Fund's schedule of dealer reallowances.
DISTRIBUTION PLAN PAYMENTS
Payments made by the Fund under the Distribution Plan for its most recent
fiscal year end are set forth in Appendix D to this Part I.
IV PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods, and
information concerning purchases by the Fund of securities issued by its
regular broker-dealers for its most recent fiscal year, are set forth in
Appendix E to this Part I.
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 from time to time through such broker-dealers, on
behalf of the Fund. The Trustees (together with the Trustees of certain
other MFS funds) have directed the Adviser to allocate a total of $53,050
of commission business from certain MFS funds (including the Fund) 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).
V SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and
officers of the Trust as a group, by investors who control the Fund, if
any, and by investors who own 5% or more of any class of Fund shares, if
any, is set forth in Appendix F to this Part I.
VI PERFORMANCE INFORMATION
Performance information, as quoted by the Fund in sales literature and
marketing materials, is set forth in Appendix G to this Part I.
VII INVESTMENT TECHNIQUES, PRACTICES, RISKS AND RESTRICTIONS
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
The investment objective and principal investment policies of the Fund are
described in the Prospectus. In pursuing its investment objective and
principal investment policies, the Fund may engage in a number of
investment techniques and practices, which involve certain risks. These
investment techniques and practices, which may be changed without
shareholder approval unless indicated otherwise, are identified in
Appendix A to the Prospectus, and are more fully described, together with
their associated risks, in Part II of this SAI. The following percentage
limitations apply to these investment techniques and practices.
o Lower Rated/Unrated Securities may not exceed 33 1/3% of the Fund's net
assets
o Lending of Portfolio Securities may not exceed 30% of the Fund's net
assets.
o Revenue Bonds may be up to 100% of the Fund's net assets.
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 at which 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.
Terms used below (such as Options and Futures Contracts) are defined in
Part II of this SAI.
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 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.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing
audit services, tax services, and assistance and consultation with respect
to the preparation of filings with the Securities and Exchange Commission.
The Portfolio of Investments and the Statement of Assets and Liabilities
at March 31, 1999, the Statement of Operations for the year ended March
31, 1999, the Statement of Changes in Net Assets for the two years ended
March 31, 1999, the Notes to Financial Statements and the Report of the
Independent Auditors, each of which is included in the Annual Report to
Shareholders of the Fund, are incorporated by reference into this SAI in
reliance upon the report of Deloitte & Touche LLP, independent auditors,
given upon their authority as experts in accounting and auditing. A copy
of the Annual Report accompanies this SAI.
<PAGE>
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PART I - APPENDIX A
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TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
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.)
TRUSTEES
JEFFREY L. SHAMES,* Chairman and President (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive
Officer
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former
Chairman and Director (prior to September 30, 1991); Cambridge Bancorp,
Director; Cambridge Trust Company, Director
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
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. (corporate 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
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: 294 Washington Street, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994);
Sundstrand Corporation (diversified mechanical
manufacturer), Director
Address: 36080 Shaker Blvd., Hunting Valley, Ohio
OFFICERS
GEOFFREY L. SCHECHTER*, Vice President (born 12/17/62)
Massachusetts Financial Services Company, Vice President
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, Senior Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touche LLP, Senior Manager (prior to September 1996)
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 LLP, Senior Tax Manager (prior to September 1994)
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
----------------
* "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.
<PAGE>
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PART I - APPENDIX B
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TRUSTEE COMPENSATION
The Fund pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, who currently receive a fee of $1,250
per year plus $225 per meeting and $225 per committee meeting attended,
together with such
Trustee's out-of-pocket expenses. In addition, the Trust has a retirement
plan for these Trustees as described under the caption "Management of the
Fund -- Trustee Retirement Plan" in Part II. The Retirement Age under the
plan is 75.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
...............................................................................................................................
RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,500 $1,050 10 $259,430
Marshall N. Cohan 3,950 1,912 14 143,259
Dr. Lawrence Cohn 3,909 730 18 153,579
Sir David Gibbons 3,500 1,676 13 130,059
Abby M. O'Neill 3,500 875 10 130,059
Walter E. Robb, III 4,359 1,912 15 171,154
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 4,125 940 20 157,714
Ward Smith 3,900 1,175 13 146,739
----------------
(1) For the fiscal year ended March 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within the MFS fund
complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion) except Mr. Bailey, who served
as Trustee of 74 funds within the MFS complex (having aggregate net assets at December 31, 1998 of approximately $68.2
billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
...............................................................................................................................
YEARS OF SERVICE
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
-----------------------------------------------------------------------------------------------------------------------------
$3,150 $473 $ 788 $1,103 $1,575
3,479 522 870 1,218 1,739
3,808 571 952 1,333 1,904
4,137 621 1,034 1,448 2,068
4,466 670 1,116 1,563 2,233
4,795 719 1,199 1,678 2,397
----------------
(4) Other funds in the MFS Fund complex provide similar retirement benefits to the Trustees.
</TABLE>
<PAGE>
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PART I - APPENDIX C
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<TABLE>
<CAPTION>
AFFILIATED SERVICE PROVIDER COMPENSATION
...............................................................................................................................
The Fund paid compensation to its affiliated service providers over the specified periods as follows:
PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FISCAL YEAR FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID TO
ENDED SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC MFS AND MFSC
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1999 $2,214,216 487,190 $47,527 $426,384 N/A $2,688,127
March 31, 1998 $2,841,328 N/A $55,640 $486,012 N/A $3,382,980
March 31, 1997 $3,180,446 N/A $ 4,646* $759,898 N/A $3,944,990
--------------------
* From March 1, 1997, the commencement of the Master Administrative Service Agreement.
</TABLE>
<PAGE>
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PART I - APPENDIX D
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<TABLE>
<CAPTION>
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
...............................................................................................................................
The following sales charges were paid during the specified periods:
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1999 $326,334 $49,981 $276,353 $ 1 $211,592 $11,502
March 31, 1998 149,847 27,449 122,398 185 249,736 11,733
March 31, 1997 114,482 20,133 94,349 0 492,585 5,259
DEALER REALLOWANCES
...............................................................................................................................
As shown above, MFD pays (or "reallows") a portion of the Class A initial sales charge to dealers. The dealer reallowance as
expressed as a percentage of the Class A shares' offering price is:
<CAPTION>
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
-------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Less than $100,000 4.00%
$100,000 but less than $250,000 3.20%
$250,000 but less than $500,000 2.25%
$500,000 but less than $1,000,000 1.70%
$1,000,000 or more None*
----------------
*A CDSC will apply to such purchase.
DISTRIBUTION PLAN PAYMENTS
...............................................................................................................................
During the fiscal year ended March 31, 1999, the Fund made the following Distribution Plan payments:
<CAPTION>
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares $ 492,877 $ 45,896 $446,981
Class B Shares $1,554,223 $1,195,669 $358,554
Class C Shares $ 264,345 $ 705 $263,640
Distribution plan payments retained by MFD are used to compensate MFD for commissions advanced by MFD to dealers upon sale of
fund shares.
</TABLE>
<PAGE>
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PART I - APPENDIX E
- ---------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
BROKERAGE COMMISSIONS
..........................................................................
The following brokerage commissions were paid by the Fund during the
specified time periods:
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
---------------------------------------------------------------------------
March 31, 1999 $0
March 31, 1998 $0
March 31, 1997 $0
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
..........................................................................
During the fiscal year ended March 31, 1999, the Fund purchased securities
issued by the following regular broker-dealer of the Fund, which had the
following value as of March 31, 1999:
VALUE OF SECURITIES
BROKER-DEALER AS OF MARCH 31, 1999
---------------------------------------------------------------------------
None N/A
<PAGE>
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PART I - APPENDIX F
- ---------------------
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of April 15, 1999, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares.
25% OR GREATER OWNERSHIP
The following table identifies those investors who own 25% or more of the
Fund's shares (all share classes taken together) as of April 15, 1999, and
are therefore presumed to control the Fund:
JURISDICTION OF
ORGANIZATION PERCENTAGE
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) OWNERSHIP
---------------------------------------------------------------------------
None
5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any
class of the Fund's shares as of April 15, 1999:
NAME AND ADDRESS OF INVESTOR OWNERSHIP PERCENTAGE
..........................................................................
MLPF&S for the Sole Benefit of its Customers 9.85% of Class A shares
Attn: Fund Administration 97CC1
4800 Deer Lake Dr E FL 3
Jacksonville, FL 32246-6484
..........................................................................
MLPF&S for the Sole Benefit of its Customers 7.28% of Class B shares
Attn: Fund Administration 971M6
4800 Deer Lake Dr E FL 3
Jacksonville, FL 32246-6484
..........................................................................
MLPF&S for the Sole Benefit of its Customers 16.75% of Class C shares
Attn: Fund Administration 97C52
4800 Deer Lake Dr E FL 3
Jacksonville, FL 32246-6484
..........................................................................
<PAGE>
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PART I - APPENDIX G
- ---------------------
<TABLE>
<CAPTION>
PERFORMANCE INFORMATION
...............................................................................................................................
All performance quotations are as of March 31, 1999.
ACTUAL
AVERAGE ANNUAL ACTUAL TAX EQUIVALENT TAX EQUIVALENT
TOTAL RETURNS 30-DAY 30-DAY 30-DAY YIELD 30-DAY YIELD
------------------------- YIELD YIELD (INCLUDING (WITHOUT
10 YEAR (INCLUDING (WITHOUT ANY WAIVERS) ANY WAIVERS) CURRENT
OR LIFE ANY ANY -------------- -------------- DISTRIBUTION
1 YEAR 5 YEAR OF FUND WAIVERS) WAIVERS) TAX BRACKETS: TAX BRACKETS: RATE+
------ ------ ------ ---------- -------- -------------- -------------- ------------
28% 31% 28% 31%
----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Shares, with initial sales
charge (SEC Performance) 0.17% 5.77% 6.61% 4.94% 4.64% 6.86% 7.16% 6.44% 6.72% 5.06%
Class A Shares, at net asset value 5.16% 6.81% 7.13% N/A N/A N/A N/A N/A N/A N/A
Class B Shares, with CDSC (SEC
Performance) 0.39% 5.61% 6.62% N/A N/A N/A N/A N/A N/A N/A
Class B Shares, at net asset value 4.38% 5.93% 6.62% 4.43% 4.12% 6.15% 6.42% 5.72% 5.97% 4.54%
Class C Shares, with CDSC (SEC
Performance) 3.37% 5.99% 6.65% N/A N/A N/A N/A N/A N/A N/A
Class C Shares, at net asset value 4.37% 5.99% 6.65% 4.42% 4.10% 6.14% 6.41% 5.69% 5.94% 4.53%
- --------------
+ Annualized, based upon the last distribution.
</TABLE>
Class A share performance calculated according to Securities and Exchange
Commission (referred to as the SEC) rules (referred to as SEC performance)
takes into account the deduction of the 4.75% maximum sales charge. Class B
SEC performance takes into account the deduction of the applicable contingent
deferred sales charge (referred to as a CDSC), which declines over six years
from 4% to 0%. Class C SEC performance takes into account the deduction of the
1% CDSC. The fund initially offered class B shares on December 29, 1986, class
A shares on September 7, 1993 and class C shares on January 3, 1994.
Class A and class C share performance include the performance of the fund's
class B shares for periods prior to the offering of class A and class C
shares. This blended class A share performance has been adjusted to take into
account the initial sales charge (load) applicable to class A shares rather
than the CDSC applicable to Class B shares. This blended class C share
performance has been adjusted to take into account the lower CDSC applicable
to class C shares rather than the CDSC applicable to class B shares. This
blended performance has not been adjusted to take into account differences in
class specific operating expenses. Class A share performance generally would
have been higher than class B share performance had class A shares been
offered for the entire period, because certain operating expenses (e.g.,
distribution and service fees) attributable to class B shares are higher than
those of class A shares. Class C share performance generally would have been
approximately the same as class B share performance had class C shares been
offered for the entire period, because class C and B operating expenses (e.g.,
distribution and service fees) attributable to class C and B shares are
approximately the same.
Performance results include any applicable expense subsidies and waivers,
which may cause the results to be more favorable.
<PAGE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in
this Part II to a "Trust" means the Massachusetts business trust of which the
Fund is a series, or, if the Fund is not a series of a Massachusetts business
trust, references to a "Trust" shall mean the Fund.
- ---------------------
TABLE OF CONTENTS
- ---------------------
Page
I Management of the Fund ........................................... 1
Trustees/Officers ................................................ 1
Investment Adviser ............................................... 1
Administrator .................................................... 2
Custodian ........................................................ 2
Shareholder Servicing Agent ...................................... 2
Distributor ...................................................... 2
II Principal Share Characteristics .................................. 2
Class A Shares ................................................... 2
Class B Shares, Class C Shares and Class I Shares ................ 2
Waiver of Sales Charges .......................................... 3
Dealer Commissions and Concessions ............................... 3
General .......................................................... 3
III Distribution Plan ................................................ 3
Features Common to Each Class of Shares .......................... 3
Features Unique to Each Class of Shares .......................... 4
IV Investment Techniques, Practices and Risks ....................... 5
V Net Income and Distributions ..................................... 5
Money Market Funds ............................................... 5
Other Funds ...................................................... 5
VI Tax Considerations ............................................... 5
Taxation of the Fund ............................................. 5
Taxation of Shareholders ......................................... 6
Special Rules for Municipal Fund Distributions ................... 7
VII Portfolio Transactions and Brokerage Commissions ................. 8
VIII Determination of Net Asset Value ................................. 9
Money Market Funds ............................................... 9
Other Funds ...................................................... 10
IX Performance Information .......................................... 10
Money Market Funds ............................................... 10
Other Funds ...................................................... 11
General .......................................................... 12
MFS Firsts ....................................................... 12
X Shareholder Services ............................................. 13
Investment and Withdrawal Programs ............................... 13
Exchange Privilege ............................................... 15
Tax-Deferred Retirement Plans .................................... 16
XI Description of Shares, Voting Rights and Liabilities ............. 16
Appendix A -- Waivers of Sales Charges ........................... A-1
Appendix B -- Dealer Commissions and Concessions ................. B-1
Appendix C -- Investment Techniques, Practices and Risks ......... C-1
Appendix D -- Description of Bond Ratings ........................ D-1
<PAGE>
I MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS BOARD OVERSIGHT -- The Board of Trustees which oversees
the Fund provides broad supervision over the affairs of the Fund. The
Adviser is responsible for the investment management of the Fund's assets,
and the officers of the Trust are responsible for its operations.
TRUSTEE RETIREMENT PLAN -- The Trust has a retirement plan for Trustees
who are non-interested Trustees and Trustees who are not officers of the
Trust. Under this plan, a Trustee will retire upon reaching a specified
age (see Part I -- "Appendix B ") ("Retirement Age") and if the Trustee
has completed at least 5 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 his
Retirement Age and receive reduced payments if he has completed at least 5
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. The Fund will accrue
its allocable portion of compensation expenses under the retirement plan
each year to cover the current year's service and amortize past service
cost.
INDEMNIFICATION OF TRUSTEES AND OFFICERS -- The Declaration of Trust of
the 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 of the Trust or its shareholders, it is
determined 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 they have not engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
INVESTMENT ADVISER
The Trust has retained Massachusetts Financial Services Company ("MFS" or
the "Adviser") as the Fund's 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 of
Canada (an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment advisers
to assist MFS in the management of the Fund's assets. A description of
these sub-advisers, the services they provide and their compensation is
provided under the caption "Management of the Fund -- Sub-Adviser" in
Part I of this SAI for Funds which use sub-advisers.
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to
an Investment Advisory Agreement (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, as disclosed in the Prospectus under the heading
"Management of the Fund[s]."
The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer of the Adviser. 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 Trust pays the compensation of the Trustees who are not officers of
MFS and all expenses of the Fund (other than those assumed by MFS)
including but not limited to: advisory and administrative services;
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 prospectuses, 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 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 between the
series in a manner believed by management of the Trust to be fair and
equitable.
The Advisory Agreement has an initial two year term and continues 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 shares (as defined in "Investment Restrictions" in Part I of this
SAI) 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 shares
(as defined in "Investment Restrictions" in Part I of this SAI), 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
initials "MFS" and that MFS may render services to others and may permit
other fund clients to use the initials "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. Under this Agreement, the Fund
pays MFS an administrative fee 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.
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 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 acts
as the dividend disbursing agent of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is
the Fund's shareholder servicing agent, pursuant to an Amended and
Restated Shareholder Servicing Agreement (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, MFSC
will receive a fee calculated as a percentage of the average daily net
assets of the Fund at an effective annual rate of up to 0.1125%. In
addition, MFSC will be reimbursed by the Fund for certain expenses
incurred by MFSC on behalf of the Fund. The Custodian has contracted with
MFSC to perform certain dividend disbursing agent functions for the Fund.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues 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 shares (as defined in "Investment
Restrictions" in Part I of this SAI) 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.
II PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered by
the MFS Family of Funds. Some MFS Funds may not offer each class of shares
-- see the Prospectus of the Fund to determine which classes of shares the
Fund offers.
CLASS A SHARES
MFD acts as agent in selling Class A shares of the Fund to dealers. The
public offering price of 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
"How to Purchase, Exchange and Redeem Shares" 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 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" below). Certain
purchases of Class A shares may be subject to a 1% CDSC instead of an
initial sales charge, as described in the Fund's Prospectus.
CLASS B SHARES, CLASS C SHARES AND CLASS I SHARES
MFD acts as agent in selling Class B, Class C and Class I shares of the
Fund. The public offering price of Class B, Class C and Class I shares is
their net asset value next computed after the sale. Class B and C shares
are generally subject to a CDSC, as described in the Fund's Prospectus.
WAIVER OF SALES CHARGES
In certain circumstances, the initial sales charge imposed upon purchases
of Class A shares and the CDSC imposed upon redemptions of Class A, B and
C shares are waived. These circumstances are described in Appendix A of
this Part II. 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, because the sales effort, if any, involved in
making such sales is negligible, or in the case of certain CDSC waivers,
because the circumstances surrounding the redemption of Fund shares were
not foreseeable or voluntary.
DEALER COMMISSIONS AND CONCESSIONS
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concessions are described in Appendix
B of this Part II.
GENERAL
Neither MFD nor dealers are permitted to delay placing 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.
III 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 each 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 expense ratio to the extent 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.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current
distribution and service fees for each Fund are reflected under the
caption "Expense Summary" in the Prospectus.
FEATURES COMMON TO EACH CLASS OF SHARES
There are features of the Distribution Plan that are common to each Class
of shares, as described below.
SERVICE FEES -- The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to
the class of shares to which the Distribution Plan relates (i.e., Class A,
Class B or Class C shares, as appropriate) (the "Designated Class")
annually in order that MFD may pay expenses on behalf of the Fund relating
to the servicing of shares of the Designated Class. The service fee is
used by MFD to compensate dealers which enter into a sales agreement with
MFD in consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to shares of the Designated
Class owned by investors for whom such dealer is the dealer or holder of
record. MFD may from time to time reduce the amount of the service fees
paid for shares sold prior to a certain date. Service fees may be reduced
for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates
are entitled to retain all service fees payable under the Distribution
Plan for which there is no dealer of record or for which qualification
standards have not been met as partial consideration for personal services
and/or account maintenance services performed by MFD or its affiliates to
shareholder accounts.
DISTRIBUTION FEES -- The Distribution Plan provides that the Fund may pay
MFD a distribution fee in addition to the service fee described above
based on the average daily net assets attributable to the Designated Class
as partial consideration for distribution services performed and expenses
incurred in the performance of MFD's obligations under its distribution
agreement with the Fund. 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. The amount of the distribution fee
paid by the Fund with respect to each class differs under the Distribution
Plan, as does the use by MFD of such distribution fees. Such amounts and
uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any
year may be more or less than the expenses incurred by MFD under its
distribution agreement with the Fund, the Fund is not liable to MFD for
any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES -- Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the
Designated Class. The provisions of the Distribution Plan relating to
operating policies as well as initial approval, renewal, amendment and
termination are substantially identical as they relate to each Class of
shares covered by the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its
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" in Part I of this SAI).
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" in Part I of this
SAI) 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
the Distribution Plan or in any related agreement.
FEATURES UNIQUE TO EACH CLASS OF SHARES
There are certain features of the Distribution Plan that are unique to
each class of shares, as described below.
CLASS A SHARES -- Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid to
MFD). In addition to the initial sales charge, the dealer also generally
receives the ongoing 0.25% per annum service fee, as discussed above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or 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.
The distribution fee paid to MFD under the Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover distribution-
related expenses incurred by it under its distribution agreement with the
Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement plans
of Class A shares which are sold at net asset value but which are subject
to a 1% CDSC for one year after purchase). In addition, to the extent that
the aggregate service and distribution fees paid under the Distribution
Plan do not exceed 0.35% per annum of the average daily net assets of the
Fund attributable to Class A shares (0.50% per annum for certain Funds),
the Fund is permitted to pay such distribution-related expenses or other
distribution-related expenses.
CLASS B SHARES -- Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. MFD will advance to dealers
the first year service fee described above at a rate equal to 0.25% of the
purchase price of such shares and, as compensation therefor, MFD may
retain the service fee paid by the Fund with respect to such shares for
the first year after purchase. Dealers will become eligible to receive the
ongoing 0.25% per annum service fee with respect to such shares commencing
in the thirteenth month following purchase.
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.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal,
on an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class B shares. As noted above, this distribution fee may
be used by MFD to cover its distribution-related expenses under its
distribution agreement with the Fund (including the 3.75% commission it
pays to dealers upon purchase of Class B shares).
CLASS C SHARES -- Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC of 1.00% upon redemption during
the first year. MFD will pay a commission to dealers of 1.00% of the
purchase price of Class C shares purchased through dealers at the time of
purchase. In compensation for this 1.00% commission paid by MFD to
dealers, MFD will retain the 1.00% per annum Class C distribution and
service fees paid by the Fund with respect to such shares for the first
year after purchase, and dealers will become eligible to receive from MFD
the ongoing 1.00% per annum distribution and service fees paid by the Fund
to MFD with respect to such shares commencing in the thirteenth month
following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee
paid to MFD under the Distribution Plan (which MFD in turn pays to
dealers), as discussed above, and a distribution fee paid to MFD (which
MFD also in turn pays to dealers) under the Distribution Plan, equal, on
an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class C shares.
IV INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in pursuing
their investment objectives and principal investment policies, and the
risks associated with these investment techniques and practices. The Fund
will engage only in certain of these investment techniques and practices,
as identified in Part I. Investment practices and techniques that are not
identified in Part I do not apply to the Fund.
V NET INCOME AND DISTRIBUTIONS MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund
is determined each day during which the New York Stock Exchange is open
for trading (see "Determination of Net Asset Value" below for a list of
days the Exchange is closed).
For this purpose, the net income attributable to shares of a money
market fund (from the time of the immediately preceding determination
thereof) shall consist of (i) all interest income accrued on the portfolio
assets of the money market fund, (ii) less all actual and accrued expenses
of the money market fund determined in accordance with generally accepted
accounting principles, and (iii) plus or minus net realized gains and
losses and net unrealized appreciation or depreciation on the assets of
the money market fund, if any. Interest income shall include discount
earned (including both original issue and market discount) on discount
paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income
is determined, the net asset value per share (i.e., the value of the net
assets of the money market fund divided by the number of shares
outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares in the
shareholder's account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for any
reason the net income determined at any time is a negative amount, which
could occur, for instance, upon default by an issuer of a portfolio
security, the money market fund would first offset the negative amount
with respect to each shareholder account from the dividends declared
during the month with respect to each such account. If and to the extent
that such negative amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the money market fund could reduce the number of its
outstanding shares by treating each shareholder of the money market fund
as having contributed to its capital that number of full and fractional
shares of the money market fund in the account of such shareholder which
represents its proportion of such excess. Each shareholder of the money
market fund will be deemed to have agreed to such contribution in these
circumstances by its investment in the money market fund. This procedure
would permit the net asset value per share of the money market fund to be
maintained at a constant $1.00 per share.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute
to its shareholders dividends equal to all of its net investment income
with such frequency as is disclosed in the Fund's prospectus. These Funds'
net investment income consists of non-capital gain income less expenses.
In addition, these Funds intend to distribute net realized short- and
long-term capital gains, if any, at least annually. Shareholders will be
informed of the tax consequences of such distributions, including whether
any portion represents a return of capital, after the end of each calendar
year.
VI TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
TAXATION OF THE FUND
FEDERAL TAXES -- The Fund (even if it is a fund in a Trust with multiple
series) is treated as a separate entity for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund
has elected (or in the case of a new Fund, intends to elect) to be, and
intends to qualify to be treated 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 its distributions (as a percentage
of both its overall income and any tax-exempt income), and the composition
of its portfolio assets. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. The Fund's
foreign-source income, if any, may be subject to foreign withholding
taxes. If the Fund failed to qualify as a "regulated investment company"
in any year, it would incur a regular federal corporate income tax on all
of its taxable income, whether or not distributed, and Fund distributions
would generally be taxable as ordinary dividend income to the
shareholders.
MASSACHUSETTS TAXES -- 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.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Subject to the special rules discussed
below for Municipal Funds, shareholders of the Fund normally will have to
pay federal income tax and any state or local income taxes on the
dividends and capital gain distributions they receive from the Fund. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether paid in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), whether paid in cash or
reinvested in additional shares, are taxable to shareholders as long-term
capital gains for federal income tax purposes without regard to the length
of time the shareholders have held their shares. Any Fund dividend that is
declared in October, November, or December of any calendar year, payable
to shareholders of record in such a month, and paid during 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, other than dividends that are declared by the
Fund on a daily basis, will have the effect of reducing the per share net
asset value of Fund shares by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any such distribution
(other than an exempt-interest dividend) may thus pay the full price for
the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION -- If the Fund receives dividend income from
U.S. corporations, a portion of the Fund's ordinary income dividends is
normally eligible for the dividends-received deduction for corporations if
the recipient otherwise qualifies for that deduction with respect to its
holding of Fund shares. Availability of the deduction for particular
corporate shareholders is subject to certain limitations, and deducted
amounts may be subject to the alternative minimum tax or result in certain
basis adjustments.
DISPOSITION OF SHARES -- In general, any gain or loss realized upon a
disposition of Fund shares by a shareholder that holds such shares as a
capital asset will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a
disposition of Fund shares held for six months or less 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 Fund shares held for 90 days or less 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 any other shares of an
MFS Fund generally sold subject to a sales charge.
DISTRIBUTION/ACCOUNTING POLICIES -- The Fund's current distribution 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.
U.S. TAXATION OF NON-U.S. PERSONS -- Dividends and certain other payments
(but not including distributions of net capital gains) 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 at that rate on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. 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.
BACKUP WITHHOLDING -- The Fund is also required in certain circumstances
to apply backup withholding at the rate of 31% on taxable dividends and
capital gain distributions (and redemption proceeds, if applicable) paid
to any non-corporate 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.
FOREIGN INCOME TAXATION OF NON-U.S. PERSONS -- Distributions received from
the Fund by Non-U.S. Persons may also be subject to tax under the laws of
their own jurisdictions.
STATE AND LOCAL INCOME TAXES: U.S. GOVERNMENT SECURITIES -- Dividends paid
by the Fund that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but
generally not distributions of capital gains realized upon the disposition
of such obligations) may be exempt from state and local income taxes. The
Fund generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
CERTAIN SPECIFIC INVESTMENTS -- Any investment in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped
securities, 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. To distribute this income (as well as
non-cash income described in the next two paragraphs) 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. Any investment in residual
interests of a CMO that has elected to be treated as a real estate
mortgage investment conduit, or "REMIC," can create complex tax problems,
especially if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," 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 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, Futures Contracts, Forward Contracts, short
sales "against the box" and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect to
foreign investments by the Fund. Foreign exchange gains and losses
realized by the Fund may be treated as ordinary income and loss. Use of
foreign currencies for non-hedging purposes and investment by the Fund in
certain "passive foreign investment companies" may be limited in order to
avoid a tax on the Fund. The Fund may elect to mark to market any
investments in "passive foreign investment companies" on the last day of
each year. This election may cause the Fund to recognize income prior to
the receipt of cash payments with respect to those investments; 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.
FOREIGN INCOME TAXES -- Investment income received by the Fund and gains
with respect to foreign securities may be subject to foreign income taxes
withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of
tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance, since the
amount of the Fund's assets to be invested within various countries is not
known.
If the Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, it may elect to "pass
through" to its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by it and thus includable in their gross income for
federal income tax purposes. Shareholders who itemize deductions would
then be allowed to claim a deduction or credit (but not both) on their
federal income tax returns for such amounts, subject to certain
limitations. Shareholders who do not itemize deductions would (subject to
such limitations) be able to claim a credit but not a deduction. No
deduction will be permitted to individuals in computing their alternative
minimum tax liability. If the Fund is not eligible, or does not elect, to
"pass through" to its shareholders foreign income taxes it has paid,
shareholders will not be able to claim any deduction or credit for any
part of the foreign taxes paid by the Fund.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of funds whose objective
is to invest primarily in obligations that pay interest that is exempt
from federal income tax ("Municipal Funds").
TAX EXEMPT DISTRIBUTIONS -- The portion of a Municipal 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. Except when the Fund
provides actual monthly percentage breakdowns, 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.
TAXABLE DISTRIBUTIONS -- A Municipal Fund may also earn some income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may recognize 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 tax on the non-exempt-interest dividends and capital gain
distributions they receive from the Fund, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. 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.
CONSEQUENCES OF DISTRIBUTIONS BY A MUNICIPAL FUND: EFFECT OF ACCRUED TAX-
EXEMPT INCOME -- Shareholders redeeming shares after tax-exempt income has
been accrued but not yet declared as a dividend should be aware that a
portion of the proceeds realized upon redemption of the shares will
reflect the existence of such accrued tax-exempt income and that this
portion will be subject to tax as a capital gain even though it would have
been tax-exempt had it been declared as a dividend prior to the
redemption. For this reason, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after the Fund declares dividends
representing substantially all the ordinary income (including tax-exempt
income) accrued for that month.
CERTAIN ADDITIONAL INFORMATION FOR MUNICIPAL FUND SHAREHOLDERS -- Interest
on indebtedness incurred by shareholders to purchase or carry Fund shares
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 advisors before purchasing Fund shares.
CONSEQUENCES OF REDEMPTION OF SHARES -- Any loss realized on a redemption
of Municipal Fund shares 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.
STATE AND LOCAL INCOME TAXES: MUNICIPAL OBLIGATIONS -- The exemption of
exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of an
exempt-interest dividend that represents interest received by a regulated
investment company on its holdings of securities issued by that state and
its political subdivisions and instrumentalities. Therefore, the Fund will
report annually to its shareholders the percentage of interest income
earned by it during the preceding year on Municipal Bonds and will
indicate, on a state-by-state basis only, the source of such income.
VII PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other
clients of the Adviser, or any subsidiary of the Adviser in a similar
capacity. Changes in the Fund's investments are reviewed by the Trust's
Board of Trustees.
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. In the U.S. and in some other countries 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. In other countries both
debt and equity securities are traded on exchanges at fixed commission
rates. 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. The Adviser normally seeks to deal directly with the primary
market makers or on major exchanges unless, in its opinion, better prices
are available elsewhere. 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. At
present no arrangements for the recapture of commission payments 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 their respective
overall responsibilities to the Fund or to their 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 investing in, purchasing or
selling securities, and the availability of securities or 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 securities or 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 from time to time through such broker-dealers, on
behalf of the Fund.
The Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The Adviser sometimes uses
evaluations resulting from this effort as a consideration in the selection
of brokers to execute portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence
of the Adviser's receipt of brokerage and research service. To the extent
the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed
those that might otherwise be paid for such portfolio transactions, or for
such portfolio transactions and research, 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.
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 any subsidiary of the Adviser. 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,
the Fund believes that its ability to participate in volume transactions
will produce better executions for the Fund.
VIII DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each
day during which the New York Stock 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 each day as of the close
of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of
shares of the class outstanding.
MONEY MARKET FUNDS
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has determined in good faith constitutes fair value for
the purposes of complying with the 1940 Act. This valuation method will
continue to be used until such time as the Board of Trustees determines
that it does not constitute fair value for such purposes. Each money
market fund will limit its portfolio to those investments in U.S. dollar-
denominated instruments which its Board of Trustees determines present
minimal credit risks, and which are of high quality as determined by any
major rating service or, in the case of any instrument that is not so
rated, of comparable quality as determined by the Board of Trustees. Each
money market fund has also agreed to maintain a dollar-weighted average
maturity of 90 days or less and to invest only in securities maturing in
13 months or less. The Board of Trustees which oversees each money market
fund has established procedures designed to stabilize its net asset value
per share, as computed for the purposes of sales and redemptions, at $1.00
per share. If the Board determines that a deviation from the $1.00 per
share price may exist which may result in a material dilution or other
unfair result to investors or existing shareholders, it will take
corrective action it regards as necessary and appropriate, which action
could include the sale of instruments prior to maturity (to realize
capital gains or losses); shortening average portfolio maturity;
withholding dividends; or using market quotations for valuation purposes.
OTHER FUNDS
The following valuation techniques apply to each MFS Fund that is not a
money market fund.
Equity securities in the Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the Nasdaq
stock market system for unlisted national market issues, or at the last
quoted bid price for listed securities in which there were no sales during
the day or for unlisted securities not reported on the Nasdaq stock market
system. Bonds and other fixed income securities (other than short-term
obligations) of U.S. issuers 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-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. Forward Contracts will be valued using a
pricing model taking into consideration market data from an external
pricing source. Use of the pricing services has been approved by the Board
of Trustees.
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 (whether
domestic or foreign) 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 system, in which case they are valued at the last sale price
or, if no sales occurred during the day, at the last quoted bid price.
Short-term obligations in the Fund's portfolio are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Short-term obligations with a remaining maturity in excess of 60 days will
be valued upon dealer supplied valuations. Portfolio investments for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of regular trading on the
Exchange. Occasionally, events affecting the values of such securities may
occur between the times at which they are determined and the close of
regular trading on the Exchange which will not be reflected in the
computation of the Fund's net asset value unless the Trustees deem that
such event would materially affect the net asset value in which case an
adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. A share's net asset value is effective
for orders received by the dealer prior to its calculation and received by
MFD prior to the close of that business day.
IX PERFORMANCE INFORMATION
MONEY MARKET FUNDS
Each MFS Fund that is a money market fund will provide current annualized
and effective annualized yield quotations based on the daily dividends of
shares of the money market fund. These quotations may from time to time be
used in advertisements, shareholder reports or other communications to
shareholders.
Any current yield quotation of a money market fund which is used in such
a manner as to be subject to the provisions of Rule 482(d) under the 1933
Act shall consist of an annualized historical yield, carried at least to
the nearest hundredth of one percent based on a specific seven calendar
day period and shall be calculated by dividing the net change in the value
of an account having a balance of one share of that class at the beginning
of the period by the value of the account at the beginning of the period
and multiplying the quotient by 365/7. For this purpose the net change in
account value would reflect the value of additional shares purchased with
dividends declared on the original share and dividends declared on both
the original share and any such additional shares, but would not reflect
any realized gains or losses from the sale of securities or any unrealized
appreciation or depreciation on portfolio securities. In addition, any
effective yield quotation of a money market fund so used shall be
calculated by compounding the current yield quotation for such period by
multiplying such quotation by 7/365, adding 1 to the product, raising the
sum to a power equal to 365/7, and subtracting 1 from the result. These
yield quotations should not be considered as representative of the yield
of a money market fund in the future since the yield will vary based on
the type, quality and maturities of the securities held in its portfolio,
fluctuations in short-term interest rates and changes in the money market
fund's expenses.
OTHER FUNDS
Each MFS Fund that is not a money market fund may quote the following
performance results.
TOTAL RATE OF 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 any
applicable CDSC 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 any applicable sales charge 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.
The Fund offers multiple classes of shares which were initially offered
for sale to, and purchased by, the public on different dates (the class
"inception date"). The calculation of total rate of return for a class of
shares which has a later class inception date than another class of shares
of the Fund is based both on (i) the performance of the Fund's newer class
from its inception date and (ii) the performance of the Fund's oldest
class from its inception date up to the class inception date of the newer
class.
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 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).
Any 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 for the 30-
day period. The yield for each class of the Fund is calculated by dividing
the net investment income allocated to that class earned during the period
by the maximum offering price per share of that class of the Fund on the
last day of the 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 expense 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 Fund's yield calculations assume a maximum sales charge of
5.75% in the case of Class A shares and no payment of any CDSC in the case
of Class B and Class C shares.
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.
CURRENT DISTRIBUTION RATE -- Yield, which is calculated according to a
formula prescribed by the Securities and Exchange Commission, 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 (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result
by the maximum offering price or net asset value per share on the last day
of the period. 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 for
option writing, short-term capital gains and return of invested capital,
and may be calculated over a different period of time. The Fund's current
distribution rate calculation for Class B shares and Class C shares
assumes no CDSC is paid.
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 Securities
Corporation, 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. The Fund may
also quote evaluations mentioned in independent radio or television
broadcasts and 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. 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.
From time to time, the Fund 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 use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund
categories established by Morningstar (or other nationally recognized
statistical ratings organizations) and to other MFS Funds.
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
Planning(SM) program, an intergenerational financial planning assistance
program; issues with respect to insurance (e.g., disability and life
insurance and Medicare supplemental insurance); issues regarding financial
and health care management for elderly family members; and other similar
or related matters.
From time to time, the Fund may also advertise annual returns showing
the cumulative value of an initial investment in the Fund in various
amounts over specified periods, with capital gain and dividend
distributions invested in additional shares or taken in cash, and with no
adjustment for any income taxes (if applicable) payable by shareholders.
MFS FIRSTS
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
o 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard(R) Equity
Fund, the first fund to invest principally 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.
X 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 $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of 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 Account
Application or filing a separate Letter of Intent application (available
from MFSC) 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 MFSC 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 period 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, MFSC 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
MFSC. By completing and signing the Account Application or separate Letter
of Intent application, the shareholder irrevocably appoints MFSC 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,
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 discounts. A shareholder must provide MFSC
(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 MFSC 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 MFSC 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. MFSC 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. MFSC 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 shares of the same class of one of the other MFS
Funds, if shares of that 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 Program 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 MFSC 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 and Class C shares in any year pursuant
to a SWP generally are limited to 10% of the value of the account at the
time of 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) shares representing
reinvested distributions; (ii) shares representing undistributed capital
gains and income; and (iii) to the extent necessary, shares representing
direct investments subject to the lowest CDSC. 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 received 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, MFSC. 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 dollar amount of each payment. MFSC 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
MFSC 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 may be made at any
time by mailing a check payable to the Fund directly to MFSC. 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 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, 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 participate in 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 (if
available for sale). 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 transfer will
occur after receipt and processing by MFSC 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 the 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 MFSC 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 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 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 proceeds reinvested in 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 12 months
of the initial purchase in the case 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 a 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
the same class in an account with the Fund for which payment has been
received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the Class of shares) at
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 MFSC.
EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market
funds) -- No initial sales charge or CDSC will be imposed in connection
with an exchange from shares of an MFS Fund to shares of any other MFS
Fund, except with respect to exchanges from an MFS money market fund to
another MFS Fund which is not an MFS money market fund (discussed below).
With respect to an exchange involving shares subject to a CDSC, the CDSC
will be unaffected by the exchange and the holding period for purposes of
calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND -- Special rules apply with
respect to the imposition of an initial sales charge or a CDSC for
exchanges from an MFS money market fund to another MFS Fund which is not
an MFS money market fund. These rules are described under the caption "How
to Purchase, Exchange and Redeem Shares" in the Prospectuses of those MFS
money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND -- Class A shares of any MFS Fund
held by certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund)
(the "Units"), and Units may be exchanged for Class A shares of any MFS
Fund. With respect to exchanges between Class A shares subject to a CDSC
and Units, the CDSC will carry over to the acquired shares or Units and
will be deducted from the redemption proceeds when such shares or Units
are subsequently redeemed, assuming the CDSC is then payable (the period
during which the Class A shares and the Units were held will be aggregated
for purposes of calculating the applicable CDSC). In the event that a
shareholder initially purchases Units and then exchanges into Class A
shares subject to an initial sales charge of an MFS Fund, the initial
sales charge shall be due upon such exchange, but will not be imposed with
respect to any subsequent exchanges between such Class A shares and Units
with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC
period will commence upon such exchange, and the applicability of the CDSC
with respect to subsequent exchanges shall be governed by the rules set
forth above in this paragraph.
GENERAL -- 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 MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by MFSC) or all the shares in the
account. Each exchange involves the redemption of the shares of the Fund
to be exchanged and the purchase 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
the Exchange Request is received by MFSC prior to the close of regular
trading on the Exchange the exchange usually will occur on that day if all
the requirements 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 MFD may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the requirements set forth above.
Additional information with respect to any of the MFS Funds, including a
copy of its current prospectus, may be obtained from investment dealers or
MFSC. A shareholder considering an exchange should obtain and read the
prospectus of the other fund and consider the differences in objectives
and policies before making any exchange.
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 imposed
from time to time at the discretion of the Funds in order to protect the
Funds.
TAX-DEFERRED RETIREMENT PLANS
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:
o 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);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who
desire to make limited contributions to a tax-favored retirement
program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public school systems and certain non-profit organizations); and
o 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. 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.
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 Section 401(a) or
403(b) recordkeeping program made available by MFSC.
XI DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The 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 Declaration of
Trust further authorizes the Trustees to classify or reclassify any series
of shares into one or more classes. 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 of the Fund are entitled to share pro rata in the Fund's net
assets allocable to such class available for distribution to shareholders.
The Trust reserves the right to create and issue a number of series and
additional 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. To the extent a shareholder of the Fund owns a controlling
percentage of the Fund's shares, such shareholder may affect the outcome
of such matters to a greater extent than other Fund shareholders. Although
Trustees are not elected annually by the shareholders, the Declaration of
Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the
Trust. A meeting of shareholders will be called upon the request of
shareholders of record holding in the aggregate not less than 10% of the
outstanding voting securities of the Trust. No material amendment may be
made to the Declaration of Trust without the affirmative vote of a
majority of the Trust's outstanding shares (as defined in "Investment
Restrictions" in Part I of this SAI). The Trust or any series of the Trust
may be terminated (i) upon the merger or consolidation of the Trust or any
series of the Trust with another organization or upon the sale of 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 or the affected series' outstanding
shares voting as a single class, or of the affected series of the Trust,
except that if the Trustees 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 will be sufficient, or (ii) upon
liquidation and distribution of the assets of a Fund, if approved by the
vote of the holders of two-thirds of its outstanding shares of the Trust,
or (iii) by the Trustees by written notice to its shareholders. 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 the
Trust shall maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Trust and
its shareholders and the Trustees, officers, employees and agents of the
Trust 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 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
his willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
<PAGE>
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PART II - APPENDIX A
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WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
CDSC for Class A shares are waived (Section II), and the CDSC for Class B
and Class C shares is waived (Section III). Some of the following
information will not apply to certain funds in the MFS Family of Funds,
depending on which classes of shares are offered by such fund. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
I WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Funds pursuant to
the Distribution Investment Program.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
AFFILIATES OF AN MFS FUND/CERTAIN DEALERS.
Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses or
domestic partners identified above and certain trusts, pension,
profit-sharing or other retirement plans for the sole benefit of such
persons, provided the shares are not resold except to the MFS Fund
which issued the shares; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes
to the MFS FUNDamental 401(k) Plan or another similar recordkeeping
system made available by MFSC (the "MFS Participant Recordkeeping
System");
> Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the
later to occur of: (i) January 1, 1993 or (ii) the date such 401(a)
or ESP Plan first invests its assets in one or more of the MFS
Funds. The sales charges will be waived in the case of a redemption
of all of the 401(a) or ESP Plan's shares in all MFS Funds (i.e.,
all the assets of the 401(a) or ESP Plan invested in the MFS Funds
are withdrawn), unless immediately prior to the redemption, the
aggregate amount invested by the 401(a) or ESP Plan in shares of the
MFS Funds (excluding the reinvestment of distributions) during the
prior four years equals 50% or more of the total value of the 401(a)
or ESP Plan's assets in the MFS Funds, in which case the sales
charges will not be waived; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan recordkeeping
or administration services agreement with MFD or one of its
affiliates and (ii) the shares purchased or redeemed represent
transfers from or transfers to plan investments other than the MFS
Funds for which retirement plan recordkeeping services are provided
under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY).
Shares transferred:
o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by MFSC on behalf of individual participants of
such Plan, provided that the Plan sponsor subscribes to the MFS
FUNDamental 401(k) Plan or another similar recordkeeping system made
available by MFSC.
LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).
II WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account
or a similar program under which such clients pay a fee to such
dealer.
INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates. o Reinvestment of Distributions from
Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where the retirement plan and/or sponsoring organization
demonstrates to the satisfaction of, and certifies to, MFSC that the
retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes
of the MFS Family of Funds and aggregate assets of at least $10
million;
provided, however, that the CDSC will not be waived (i.e., it will be
imposed) (a) with respect to plans which establish an account with MFSC on
or after November 1, 1997, in the event that the plan makes a complete
redemption of all of its shares in the MFS Family of Funds, or (b) with
respect to plans which establish an account with MFSC prior to November 1,
1997, in the event that there is a change in law or regulations which
result in a material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring organization: (i)
becomes insolvent or bankrupt; (ii) is terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with any other entity.
PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund,
MFS Municipal Limited Maturity Fund, MFS Money Market Fund, MFS
Government Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the
proceeds of a redemption of Class I shares of any of the MFS Funds.
III WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs
where the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account value at the time of
establishment.
DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to MFSC).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to the
MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
provided, however, that the CDSC will not be waived (i.e., it will
be imposed) in the event that there is a change in law or
regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is
terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with any other entity.
> By a retirement plan whose sponsoring organization subscribes to the
MFS Recordkeeper Plus product and which established its account with
MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s) with
any MFS Fund which switches to the MFS Recordkeeper Plus product
will not become eligible for this waiver category.
<PAGE>
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PART II - APPENDIX B
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DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions made
to dealers by MFD in connection with the sale of Fund shares. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as
shown in Appendix D to Part I of this SAI. The difference between the
total amount invested and the sum of (a) the net proceeds to the Fund and
(b) the dealer reallowance, is the amount of the initial sales charge
retained by MFD (as shown in Appendix D to Part I of this SAI). Because of
rounding in the computation of offering price, the portion of the sales
charge retained by MFD 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 the offering price or as a percentage of the net amount
invested as listed in the Prospectus.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments made through such dealers as follows:
COMMISSION
PAID BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
------------------------------------------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to
dealers with respect to a shareholder's new investment in Class A shares
purchases for each shareholder account (and certain other accounts for
which the shareholder is a record or beneficial holder) will be aggregated
over a 12-month period (commencing from the date of the first such
purchase).
CLASS B SHARES
For purchases of Class B shares, MFD will pay commissions to dealers of
3.75% of the purchase price of Class B shares purchased through dealers.
MFD will also advance to dealers the first year service fee payable under
the Fund's Distribution Plan at a rate equal to 0.25% of the purchase
price of such shares. Therefore, the total amount paid to a dealer upon
the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the
purchase price).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and December
31, 1998, MFD pays an amount to dealers equal to 3.00% of the amount
purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement
of the first year service fee equal to 0.25% of the purchase price payable
under the Fund's Distribution Plan.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided
that the plan establishment paperwork is received by MFSC in good order on
or after November 15, 1998), MFD pays no up front commissions to dealers,
but instead pays an amount to dealers equal to 1% per annum of the average
daily net assets of the Fund attributable to plan assets, payable at the
rate of 0.25% at the end of each calendar quarter, in arrears. This
commission structure is not available with respect to a plan with a pre-
existing account(s) with any MFS Fund which seeks to switch to the MFS
Recordkeeper Plus product.
CLASS C SHARES
For purchases of Class C shares, MFD will pay dealers 1.00% of the
purchase price of Class C shares purchased through dealers and, as
compensation therefor, MFD will retain the 1.00% per annum distribution
and service fee paid under the Fund's Distribution Plan to MFD for the
first year after purchase.
ADDITIONAL DEALER COMMISSIONS/CONCESSIONS
Dealers may receive different compensation with respect to sales of Class
A, Class B and Class C shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified Funds sold by such dealer during a specified sales
period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of
all of the Class B and/or Class C shares of certain specified Funds sold
by such dealer during a specified sales period. In addition, from time to
time, MFD, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which
sell or arrange for the sale of shares of the Fund. Such concessions
provided by MFD may include financial assistance to dealers in connection
with preapproved conferences or seminars, sales or training programs for
invited registered representatives and other employees, payment for travel
expenses, including lodging, incurred by registered representatives and
other employees for such seminars or training programs, seminars for the
public, advertising and sales campaigns regarding one or more Funds, and/
or other dealer-sponsored events. From time to time, MFD may make expense
reimbursements for special training of a dealer's registered
representatives and other employees in group meetings or to help pay the
expenses of sales contests. Other concessions may be offered to the extent
not prohibited by state laws or any self-regulatory agency, such as the
NASD.
<PAGE>
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PART II - APPENDIX C
- ------------------------
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can
be expected to rise. Conversely, when interest rates rise, the value of
debt securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all
types of interest rate payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment in kind and
auction rate features.
ASSET-BACKED SECURITIES: The Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Fund may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized
by mortgage loans or mortgage pass-through securities (such collateral
referred to collectively as "Mortgage Assets"). Unless the context
indicates otherwise, all references herein to CMOs include multiclass
pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in
innumerable ways. In a common structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the
classes of a CMO in the order of their respective stated maturities or
final distribution dates, so that no payment of principal will be made on
any class of CMOs until all other classes having an earlier stated
maturity or final distribution date have been paid in full. Certain CMOs
may be stripped (securities which provide only the principal or interest
factor of the underlying security). See "Stripped Mortgage-Backed
Securities" below for a discussion of the risks of investing in these
stripped securities and of investing in classes consisting of interest
payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with
other CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special
purpose corporations, are backed by a pool of assets, such as credit card
and automobile loan receivables, representing the obligations of a number
of different parties. These securities present certain risks. For
instance, in the case of credit card receivables, these securities may not
have the benefit of any security interest in the related collateral.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due. Most
issuers of automobile receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities. The underlying assets (e.g., loans) are also
subject to prepayments which shorten the securities' weighted average life
and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on underlying assets to make payments,
the securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default ensures payment through
insurance policies or letters of credit obtained by the issuer or sponsor
from third parties. The Fund will not pay any additional or separate fees
for credit support. The degree of credit support provided for each issue
is generally based on historical information respecting the level of
credit risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated or failure of the credit support could
adversely affect the return on an investment in such a security.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-
through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer
or guarantor of the securities) as the mortgages in the underlying
mortgage pools are paid off. The average lives of mortgage pass-throughs
are variable when issued because their average lives depend on prepayment
rates. The average life of these securities is likely to be substantially
shorter than their stated final maturity as a result of unscheduled
principal prepayment. Prepayments on underlying mortgages result in a loss
of anticipated interest, and all or part of a premium if any has been
paid, and the actual yield (or total return) to the Fund may be different
than the quoted yield on the securities. Mortgage premiums generally
increase with falling interest rates and decrease with rising interest
rates. Like other fixed income securities, when interest rates rise the
value of a mortgage pass-through security generally will decline; however,
when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of
other fixed-income securities. In the event of an increase in interest
rates which results in a decline in mortgage prepayments, the anticipated
maturity of mortgage pass-through securities held by the Fund may
increase, effectively changing a security which was considered short or
intermediate-term at the time of purchase into a long-term security. Long-
term securities generally fluctuate more widely in response to changes in
interest rates than short or intermediate-term securities.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the
case of securities guaranteed by the Government National Mortgage
Association ("GNMA")); or guaranteed by agencies or instrumentalities of
the U.S. Government (such as the Federal National Mortgage Association
"FNMA") or the Federal Home Loan Mortgage Corporation, ("FHLMC") which are
supported only by the discretionary authority of the U.S. Government to
purchase the agency's obligations). Mortgage pass-through securities may
also be issued by non-governmental issuers (such as commercial banks,
savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers). Some of these
mortgage pass-through securities may be supported by various forms of
insurance or guarantees.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which
consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the
individual borrowers on their mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
prepayments of principal resulting from the sale, refinancing or
foreclosure of the underlying property, net of fees or costs which may be
incurred. Some mortgage pass-through securities (such as securities issued
by the GNMA) are described as "modified pass-through." These securities
entitle the holder to receive all interests and principal payments owed on
the mortgages in the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether the mortgagor actually makes the
payment.
The principal governmental guarantor of mortgage pass-through securities
is GNMA. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the
timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of Federal
Housing Administration ("FHA") insured or Veterans Administration ("VA")
guaranteed mortgages. These guarantees, however, do not apply to the
market value or yield of mortgage pass-through securities. GNMA securities
are often purchased at a premium over the maturity value of the underlying
mortgages. This premium is not guaranteed and will be lost if prepayment
occurs.
Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S. Government) include FNMA and FHLMC.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional residential
mortgages (i.e., mortgages not insured or guaranteed by any governmental
agency) from a list of approved seller/servicers which include state and
federally chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment by FNMA of
principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) for FHLMC's national portfolio. FHLMC guarantees timely
payment of interest and ultimate collection of principal regardless of the
status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also be
the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally offer
a higher rate of interest than government and government-related pools
because there are no direct or indirect government or agency guarantees of
payments in the former pools. However, timely payment of interest and
principal of mortgage loans in these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance and letters of credit. The insurance and guarantees
are issued by governmental entities, private insurers and the mortgage
poolers. There can be no assurance that the private insurers or guarantors
can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may also buy mortgage-related securities without
insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of
its assets in stripped mortgage-backed securities ("SMBS") which are
derivative multiclass mortgage securities issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including savings and loan institutions,
mortgage banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving some
of the interest and most of the principal from the Mortgage Assets, while
the other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "I0" class) while the other class will
receive all of the principal (the principal-only or "P0" class). The yield
to maturity on an I0 is extremely sensitive to the rate of principal
payments, including prepayments on the related underlying Mortgage Assets,
and a rapid rate of principal payments may have a material adverse effect
on such security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Fund may
fail to fully recoup its initial investment in these securities. The
market value of the class consisting primarily or entirely of principal
payments generally is unusually volatile in response to changes in
interest rates. Because SMBS were only recently introduced, established
trading markets for these securities have not yet developed, although the
securities are traded among institutional investors and investment banking
firms.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and
other direct indebtedness. In purchasing a loan, the Fund acquires some or
all of the interest of a bank or other lending institution in a loan to a
corporate, governmental or other borrower. Many such loans are secured,
although some may be unsecured. Such loans may be in default at the time
of purchase. Loans that are fully secured offer the Fund more protection
than an unsecured loan in the event of non-payment of scheduled interest
or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the corporate borrowers
obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on behalf
of the others in the syndicate, and for enforcing its and their other
rights against the borrower. Alternatively, such loans may be structured
as a novation, pursuant to which the Fund would assume all of the rights
of the lending institution in a loan or as an assignment, pursuant to
which the Fund would purchase an assignment of a portion of a lenders
interest in a loan either directly from the lender or through an
intermediary. The Fund may also purchase trade or other claims against
companies, which generally represent money owned by the company to a
supplier of goods or services. These claims may also be purchased at a
time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain
date or on demand. These commitments may have the effect of requiring the
Fund to increase its investment in a company at a time when the Fund might
not otherwise decide to do so (including at a time when the company's
financial condition makes it unlikely that such amounts will be repaid).
To the extent that the Fund is committed to advance additional funds, it
will at all times hold and maintain in a segregated account cash or other
high grade debt obligations in an amount sufficient to meet such
commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loans and other
direct indebtedness which the Fund will purchase, the Adviser will rely
upon its own (and not the original lending institution's) credit analysis
of the borrower. As the Fund may be required to rely upon another lending
institution to collect and pass onto the Fund amounts payable with respect
to the loan and to enforce the Fund's rights under the loan and other
direct indebtedness, an insolvency, bankruptcy or reorganization of the
lending institution may delay or prevent the Fund from receiving such
amounts. In such cases, the Fund will evaluate as well the
creditworthiness of the lending institution and will treat both the
borrower and the lending institution as an "issuer" of the loan for
purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly leveraged
nature of many such loans and other direct indebtedness may make such
loans and other direct indebtedness especially vulnerable to adverse
changes in economic or market conditions. Investments in such loans and
other direct indebtedness may involve additional risk to the Fund.
LOWER RATED BONDS: The Fund may invest in fixed income securities rated
Ba or lower by Moody's or BB or lower by S&P, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See
Appendix D for a description of bond ratings. No minimum rating standard
is required by the Fund. These securities are considered speculative and,
while generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including
the possibility of default or bankruptcy of the issuers of such
securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher
rating categories and because yields vary over time, no specific level of
income can ever be assured. These lower rated high yielding fixed income
securities generally tend to reflect economic changes (and the outlook for
economic growth), short-term corporate and industry developments and the
market's perception of their credit quality (especially during times of
adverse publicity) to a greater extent than higher rated securities which
react primarily to fluctuations in the general level of interest rates
(although these lower rated fixed income securities are also affected by
changes in interest rates). In the past, economic downturns or an increase
in interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in
the future, especially in the case of highly leveraged issuers. The prices
for these securities may be affected by legislative and regulatory
developments. The market for these lower rated fixed income securities may
be less liquid than the market for investment grade fixed income
securities. Furthermore, the liquidity of these lower rated securities may
be affected by the market's perception of their credit quality. Therefore,
the Adviser's judgment may at times play a greater role in valuing these
securities than in the case of investment grade fixed income securities,
and it also may be more difficult during times of certain adverse market
conditions to sell these lower rated securities to meet redemption
requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit
rating agencies, it is not the Fund's policy to rely exclusively on
ratings issued by these rating agencies, but rather to supplement such
ratings with the Adviser's own independent and ongoing review of credit
quality. To the extent a Fund invests in these lower rated securities, the
achievement of its investment objectives may be a more dependent on the
Adviser's own credit analysis than in the case of a fund investing in
higher quality fixed income securities. These lower rated securities may
also include zero coupon bonds, deferred interest bonds and PIK bonds.
MUNICIPAL BONDS: The Fund may invest in debt securities issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds"). Municipal Bonds include debt securities which pay
interest income that is subject to the alternative minimum tax. The Fund
may invest in Municipal Bonds whose issuers pay interest on the Bonds from
revenues from projects such as multifamily housing, nursing homes,
electric utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and
the revenue bond is also secured by a lien on the real estate comprising
the project, foreclosure by the indenture trustee on the lien for the
benefit of the bondholders creates additional risks associated with owning
real estate, including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because
of the impossibility of precisely predicting demand for mortgages from the
proceeds of such an issue, there is a risk that the proceeds of the issue
will be in excess of demand, which would result in early retirement of the
bonds by the issuer. Moreover, such housing revenue bonds depend for their
repayment upon the cash flow from the underlying mortgages, which cannot
be precisely predicted when the bonds are issued. Any difference in the
actual cash flow from such mortgages from the assumed cash flow could have
an adverse impact upon the ability of the issuer to make scheduled
payments of principal and interest on the bonds, or could result in early
retirement of the bonds. Additionally, such bonds depend in part for
scheduled payments of principal and interest upon reserve funds
established from the proceeds of the bonds, assuming certain rates of
return on investment of such reserve funds. If the assumed rates of return
are not realized because of changes in interest rate levels or for other
reasons, the actual cash flow for scheduled payments of principal and
interest on the bonds may be inadequate. The financing of multi-family
housing projects is affected by a variety of factors, including
satisfactory completion of construction within cost constraints, the
achievement and maintenance of a sufficient level of occupancy, sound
management of the developments, timely and adequate increases in rents to
cover increases in operating expenses, including taxes, utility rates and
maintenance costs, changes in applicable laws and governmental regulations
and social and economic trends.
Electric utilities face problems in financing large construction
programs in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost
of competing fuel sources, difficulty in obtaining sufficient rate
increases and other regulatory problems, the effect of energy conservation
and difficulty of the capital market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing
for the elderly which offer residents the independence of condominium life
style and, if needed, the comprehensive care of nursing home services.
Bonds to finance these facilities have been issued by various state
industrial development authorities. Since the bonds are secured only by
the revenues of each facility and not by state or local government tax
payments, they are subject to a wide variety of risks. Primarily, the
projects must maintain adequate occupancy levels to be able to provide
revenues adequate to maintain debt service payments. Moreover, in the case
of life care facilities, since a portion of housing, medical care and
other services may be financed by an initial deposit, there may be risk if
the facility does not maintain adequate financial reserves to secure
estimated actuarial liabilities. The ability of management to accurately
forecast inflationary cost pressures weighs importantly in this process.
The facilities may also be affected by regulatory cost restrictions
applied to health care delivery in general, particularly state regulations
or changes in Medicare and Medicaid payments or qualifications, or
restrictions imposed by medical insurance companies. They may also face
competition from alternative health care or conventional housing
facilities in the private or public sector. Hospital bond ratings are
often based on feasibility studies which contain projections of expenses,
revenues and occupancy levels. A hospital's gross receipts and net income
available to service its debt are influenced by demand for hospital
services, the ability of the hospital to provide the services required,
management capabilities, economic developments in the service area,
efforts by insurers and government agencies to limit rates and expenses,
confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid
and Medicare funding, and possible federal legislation limiting the rates
of increase of hospital charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from of a lease or
installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have special
risks not normally associated with general obligation or revenue bonds.
Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations are deemed to be inapplicable because of the inclusion in many
leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although
the obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or
foreclosure might, in some cases, prove difficult. There are, of course,
variations in the security of municipal lease securities, both within a
particular classification and between classifications, depending on
numerous factors.
The Fund may also invest in bonds for industrial and other projects,
such as sewage or solid waste disposal or hazardous waste treatment
facilities. Financing for such projects will be subject to inflation and
other general economic factors as well as construction risks including
labor problems, difficulties with construction sites and the ability of
contractors to meet specifications in a timely manner. Because some of the
materials, processes and wastes involved in these projects may include
hazardous components, there are risks associated with their production,
handling and disposal.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of
higher grade securities.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are backed
by the full faith and credit of the U.S. Government and (ii) U.S. Government
Securities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the GNMA; some of
which are backed only by the credit of the issuer itself, e.g., obligations
of the Student Loan Marketing Association; and some of which are supported
by the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the FNMA.
U.S. Government Securities also include interests in trust or other
entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Fund may invest in floating
or variable rate securities. Investments in floating or variable rate
securities normally will involve industrial development or revenue bonds
which provide that the rate of interest is set as a specific percentage of
a designated base rate, such as rates on Treasury Bonds or Bills or the
prime rate at a major commercial bank, and that a bondholder can demand
payment of the obligations on behalf of the Fund on short notice at par
plus accrued interest, which amount may be more or less than the amount
the bondholder paid for them. The maturity of floating or variable rate
obligations (including participation interests therein) is deemed to be
the longer of (i) the notice period required before the Fund is entitled
to receive payment of the obligation upon demand or (ii) the period
remaining until the obligation's next interest rate adjustment. If not
redeemed by the Fund through the demand feature, the obligations mature on
a specified date which may range up to thirty years from the date of
issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may
invest in zero coupon bonds, deferred interest bonds and bonds on which
the interest is payable in kind ("PIK bonds"). Zero coupon and deferred
interest bonds are debt obligations which are issued at a significant
discount from face value. The discount approximates the total amount of
interest the bonds will accrue and compound over the period until maturity
or the first interest payment date at a rate of interest reflecting the
market rate of the security at the time of issuance. While zero coupon
bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer may,
at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a
higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility
in market value than debt obligations which make regular payments of
interest. The Fund will accrue income on such investments for tax and
accounting purposes, which is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Fund's
distribution obligations.
EQUITY SECURITIES
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into
stocks; and depositary receipts for those securities. These securities may
be listed on securities exchanges, traded in various over-the-counter
markets or have no organized market.
FOREIGN SECURITIES EXPOSURE
The Fund may invest in various types of foreign securities, or securities
which provide the Fund with exposure to foreign securities or foreign
currencies, as discussed below:
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public
and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady
(the "Brady Plan"). Brady Plan debt restructurings have been implemented
to date in Argentina, Brazil, Bulgaria, Costa Rica, Croatia, Dominican
Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the
Philippines, Poland, Slovenia, Uruguay and Venezuela. Brady Bonds have
been issued only recently, and for that reason do not have a long payment
history. Brady Bonds may be collateralized or uncollateralized, are issued
in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S.
Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments;
and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constituting the "residual risk"). In light of
the residual risk of Brady Bonds and the history of defaults of countries
issuing Brady Bonds with respect to commercial bank loans by public and
private entities, investments in Brady Bonds may be viewed as speculative.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of
depositary receipts. ADRs are certificates by a U.S. depositary (usually a
bank) and represent a specified quantity of shares of an underlying non-
U.S. stock on deposit with a custodian bank as collateral. GDRs and other
types of depositary receipts are typically issued by foreign banks or
trust companies and evidence ownership of underlying securities issued by
either a foreign or a U.S. company. Generally, ADRs are in registered form
and are designed for use in U.S. securities markets and GDRs are in bearer
form and are designed for use in foreign securities markets. For the
purposes of the Fund's policy to invest a certain percentage of its assets
in foreign securities, the investments of the Fund in ADRs, GDRs and other
types of depositary receipts are deemed to be investments in the
underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of
U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and
voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the
deposited securities. The depository of an unsponsored ADR, on the other
hand, is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through
voting rights to ADR holders in respect of the deposited securities. The
Fund may invest in either type of ADR. Although the U.S. investor holds a
substitute receipt of ownership rather than direct stock certificates, the
use of the depositary receipts in the United States can reduce costs and
delays as well as potential currency exchange and other difficulties. The
Fund may purchase securities in local markets and direct delivery of these
ordinary shares to the local depositary of an ADR agent bank in foreign
country. Simultaneously, the ADR agents create a certificate which settles
at the Fund's custodian in five days. The Fund may also execute trades on
the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting
requirements in the United States as a domestic issuer. Accordingly,
information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its country and
the market value of an ADR may not reflect undisclosed material
information concerning the issuer of the underlying security. ADRs may
also be subject to exchange rate risks if the underlying foreign
securities are denominated in a foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in dollar-
denominated foreign debt securities. Investing in dollar-denominated
foreign debt represents a greater degree of risk than investing in
domestic securities, due to less publicly available information, less
securities regulation, war or expropriation. Special considerations may
include higher brokerage costs and thinner trading markets. Investments in
foreign countries could be affected by other factors including extended
settlement periods.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Such investments entail significant risks as described below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects
of the private sector through the ownership or control of many companies,
including some of the largest in any given country. As a result,
government actions in the future could have a significant effect on
economic conditions in emerging markets, which in turn, may adversely
affect companies in the private sector, general market conditions and
prices and yields of certain of the securities in the Fund's portfolio.
Expropriation, confiscatory taxation, nationalization, political, economic
or social instability or other similar developments have occurred
frequently over the history of certain emerging markets and could
adversely affect the Fund's assets should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse in the
event of a default with respect to certain debt obligations it may hold.
If the issuer of a fixed income security owned by the Fund defaults, the
Fund may incur additional expenses to seek recovery. Debt obligations
issued by emerging market governments differ from debt obligations of
private entities; remedies from defaults on debt obligations issued by
emerging market governments, unlike those on private debt, must be pursued
in the courts of the defaulting party itself. The Fund's ability to
enforce its rights against private issuers may be limited. The ability to
attach assets to enforce a judgment may be limited. Legal recourse is
therefore somewhat diminished. Bankruptcy, moratorium and other similar
laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political
context, expressed as an emerging market governmental issuer's willingness
to meet the terms of the debt obligation, for example, is of considerable
importance. In addition, no assurance can be given that the holders of
commercial bank debt may not contest payments to the holders of debt
obligations in the event of default under commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may be
denominated in foreign currencies and international currency units and the
Fund may invest a portion of its assets directly in foreign currencies.
Accordingly, the weakening of these currencies and units against the U.S.
dollar may result in a decline in the Fund's asset value.
Some emerging market countries also may have managed currencies, which are
not free floating against the U.S. dollar. In addition, there is risk that
certain emerging market countries may restrict the free conversion of
their currencies into other currencies. Further, certain emerging market
currencies may not be internationally traded. Certain of these currencies
have experienced a steep devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which a Fund's portfolio securities are
denominated may have a detrimental impact on the Fund's net asset value.
o Inflation -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had and may continue to
have adverse effects on the economies and securities markets of certain
emerging market countries. In an attempt to control inflation, wage and
price controls have been imposed in certain countries. Of these countries,
some, in recent years, have begun to control inflation through prudent
economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities markets
of emerging market countries are substantially smaller, less developed,
less liquid and more volatile than the major securities markets in the
U.S. Disclosure and regulatory standards are in many respects less
stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors
in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to
volume of trading in the securities of U.S. issuers could cause prices to
be erratic for reasons apart from factors that affect the soundness and
competitiveness of the securities issuers. For example, limited market
size may cause prices to be unduly influenced by traders who control large
positions. Adverse publicity and investors' perceptions, whether or not
based on in-depth fundamental analysis, may decrease the value and
liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Fund's securities in
such markets may not be readily available. The Fund may suspend redemption
of its shares for any period during which an emergency exists, as
determined by the Securities and Exchange Commission (the "SEC").
Accordingly, if the Fund believes that appropriate circumstances exist, it
will promptly apply to the SEC for a determination that an emergency is
present. During the period commencing from the Fund's identification of
such condition until the date of the SEC action, the Fund's securities in
the affected markets will be valued at fair value determined in good faith
by or under the direction of the Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high degree
of risk. The governmental entity that controls the repayment of sovereign
debt may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. A governmental
entity's willingness or ability to repay principal and interest due in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative
size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund and
the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce
principal and interest on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be
conditioned on a governmental entity's implementation of economic reforms
and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in
the cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently,
governmental entities may default on their sovereign debt. Holders of
sovereign debt (including the Fund) may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceedings by which sovereign debt on
which governmental entities have defaulted may be collected in whole or in
part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging market
governmental issuers have not been able to make payments of interest on or
principal of debt obligations as those payments have come due. Obligations
arising from past restructuring agreements may affect the economic
performance and political and social stability of those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access
to international credits and investments. An emerging market whose exports
are concentrated in a few commodities could be vulnerable to a decline in
the international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could
also adversely affect the country's exports and tarnish its trade account
surplus, if any. To the extent that emerging markets receive payment for
their exports in currencies other than dollars or non-emerging market
currencies, its ability to make debt payments denominated in dollars or
non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of
emerging markets to these forms of external funding may not be certain,
and a withdrawal of external funding could adversely affect the capacity
of emerging market country governmental issuers to make payments on their
obligations. In addition, the cost of servicing emerging market debt
obligations can be affected by a change in international interest rates
since the majority of these obligations carry interest rates that are
adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the
country. Fluctuations in the level of these reserves affect the amount of
foreign exchange readily available for external debt payments and thus
could have a bearing on the capacity of emerging market countries to make
payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be reduced by
a withholding tax on the source or other taxes imposed by the emerging
market countries in which the Fund makes its investments. The Fund's net
asset value may also be affected by changes in the rates or methods of
taxation applicable to the Fund or to entities in which the Fund has
invested. The Adviser will consider the cost of any taxes in determining
whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
FOREIGN SECURITIES: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing
in securities of domestic issuers. These include changes in currency
rates, exchange control regulations, securities settlement practices,
governmental administration or economic or monetary policy (in the United
States or abroad) or circumstances in dealings between nations. Costs may
be incurred in connection with conversions between various currencies.
Special considerations may also include more limited information about
foreign issuers, higher brokerage costs, different accounting standards
and thinner trading markets. Foreign securities markets may also be less
liquid, more volatile and less subject to government supervision than in
the United States. Investments in foreign countries could be affected by
other factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. As a result of its investments in foreign
securities, the Fund may receive interest or dividend payments, or the
proceeds of the sale or redemption of such securities, in the foreign
currencies in which such securities are denominated. Under certain
circumstances, such as where the Adviser believes that the applicable
exchange rate is unfavorable at the time the currencies are received or
the Adviser anticipates, for any other reason, that the exchange rate will
improve, the Fund may hold such currencies for an indefinite period of
time. While the holding of currencies will permit the Fund to take
advantage of favorable movements in the applicable exchange rate, such
strategy also exposes the Fund to risk of loss if exchange rates move in a
direction adverse to the Fund's position. Such losses could reduce any
profits or increase any losses sustained by the Fund from the sale or
redemption of securities and could reduce the dollar value of interest or
dividend payments received.
FORWARD CONTRACTS
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is
entered into (a "Forward Contract"), for hedging purposes (e.g., to
protect its current or intended investments from fluctuations in currency
exchange rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the Fund
seeks to protect against an anticipated increase in the exchange rate for
a specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, the Fund may enter
into a Forward Contract to purchase a given currency to protect against a
projected increase in the dollar value of securities denominated in such
currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline
in the dollar value of portfolio securities or the increase in the dollar
cost of securities to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, the Fund may be required to forego all or a portion of the
benefits which otherwise could have been obtained from favorable movements
in exchange rates. The Fund does not presently intend to hold Forward
Contracts entered into until the value date, at which time it would be
required to deliver or accept delivery of the underlying currency, but will
seek in most instances to close out positions in such Contracts by entering
into offsetting transactions, which will serve to fix the Fund's profit or
loss based upon the value of the Contracts at the time the offsetting
transaction is executed.
The Fund will also enter into transactions in Forward Contracts for
other than hedging purposes, which presents greater profit potential but
also involves increased risk. For example, the Fund may purchase a given
foreign currency through a Forward Contract if, in the judgment of the
Adviser, the value of such currency is expected to rise relative to the
U.S. dollar. Conversely, the Fund may sell the currency through a Forward
Contract if the Adviser believes that its value will decline relative to
the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, which will increase its gross income. Where exchange
rates do not move in the direction or to the extent anticipated, however,
the Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative and could involve
significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts ("Futures Contracts") on
stock indices, foreign currencies, interest rates or interest-rate related
instruments, indices of foreign currencies or commodities. The Fund may
also purchase and sell Futures Contracts on foreign or domestic fixed
income securities or indices of such securities including municipal bond
indices and any other indices of foreign or domestic fixed income
securities that may become available for trading. 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, foreign
currency or commodity, 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 provides for a specified settlement month in
which, in the case of the majority of commodities, interest rate and
foreign currency futures contracts, the underlying commodities, fixed
income securities or currency are delivered by the seller and paid for by
the purchaser, or on which, in the case of index futures contracts and
certain interest rate and foreign currency 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 "mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt
to protect the Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, the Fund may sell stock index
futures contracts in anticipation of or during a market decline to attempt
to offset the decrease in market value of the Fund's securities portfolio
that might otherwise result. If such decline occurs, the loss in value of
portfolio securities may be offset, in whole or part, by gains on the
futures position. When the Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock
index futures contracts in order to gain rapid market exposure that may,
in part or entirely, offset increases in the cost of securities that the
Fund intends to purchase. As such purchases are made, the corresponding
positions in stock index futures contracts will be closed out. In a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position, but under unusual
market conditions, a long futures position may be terminated without a
related purchase of securities.
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, subject to the correlation risks described
below, 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 may be more liquid than the cash market in certain
cases or at certain times, the use of interest rate futures contracts as a
hedging technique may allow the Fund to hedge its interest rate risk
without having to sell its portfolio securities.
The Fund may purchase and sell foreign currency futures contracts for
hedging purposes, to attempt to protect its current or intended
investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the dollar cost of foreign-
denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains
constant. The Fund may sell futures contracts on a foreign currency, for
example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the
dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in
part, by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in
part, the increased cost of such securities resulting from a rise in the
dollar value of the underlying currencies. Where the Fund purchases
futures contracts under such circumstances, however, and the prices of
securities to be acquired instead decline, the Fund will sustain losses on
its futures position which could reduce or eliminate the benefits of the
reduced cost of portfolio securities to be acquired.
The use by the Fund of Futures Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are
debt securities or deposits whose value at maturity or coupon rate is
determined by reference to a specific instrument or statistic. The Fund
may also purchase indexed deposits with similar characteristics. 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 determined 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. Certain indexed
securities may expose the Fund to the risk of loss of all or a portion of
the principal amount of its investment and/or the interest that might
otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values
may decline substantially if the issuer's creditworthiness deteriorates.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Fund may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an
obligation, a municipality issues a certain amount of debt and pays a
fixed interest rate. Half of the debt is issued as variable rate short
term obligations, the interest rate of which is reset at short intervals,
typically 35 days. The other half of the debt is issued as inverse
floating rate obligations, the interest rate of which is calculated based
on the difference between a multiple of (approximately two times) the
interest paid by the issuer and the interest paid on the short-term
obligation. Under usual circumstances, the holder of the inverse floating
rate obligation can generally purchase an equal principal amount of the
short term obligation and link the two obligations in order to create
long-term fixed rate bonds. Because the interest rate on the inverse
floating rate obligation is determined by subtracting the short-term rate
from a fixed amount, the interest rate will decrease as the short-term
rate increases and will increase as the short-term rate decreases. The
magnitude of increases and decreases in the market value of inverse
floating rate obligations may be approximately twice as large as the
comparable change in the market value of an equal principal amount of
long-term bonds which bear interest at the rate paid by the issuer and
have similar credit quality, redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio securities.
Such loans will usually be made only to member firms of the New York Stock
Exchange (the "Exchange") (and subsidiaries thereof) and member banks of
the Federal Reserve System, and would be required to be secured
continuously by collateral in cash, an irrevocable letter of credit or
United States ("U.S.") Treasury securities 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 not
usually exceed five business days). For the duration 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 from the investment of the 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 the Fund 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 of the securities 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 can be earned currently from securities loans of this
type justifies the attendant risk.
LEVERAGING TRANSACTIONS
The Fund may engage in the types of transactions described below, which
involve "leverage" because in each case the Fund receives cash which it
can invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Fund will generally cause
its net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can
be expected to cause the value of the Fund's shares and distributions on
the Fund's shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from these transactions fail to cover
the expenses associated with these transactions, the value of the Fund's
shares is likely to decrease more quickly than otherwise would be the case
and distributions thereon will be reduced or eliminated. Hence, these
transactions are speculative, involve leverage and increase the risk of
owning or investing in the shares of the Fund. These transactions also
increase the Fund's expenses because of interest and similar payments and
administrative expenses associated with them. Unless the appreciation and
income on assets purchased with proceeds from these transactions exceed
the costs associated with them, the use of these transactions by a Fund
would diminish the investment performance of the Fund compared with what
it would have been without using these transactions.
BANK BORROWINGS: The Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment objectives
and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost
interest by the difference between the current sales price and the lower
price for the future purchase (often referred to as the "drop") as well as
by the interest earned on, and gains from, the investment of the cash
proceeds of the initial sale. The Fund may also be compensated by receipt
of a commitment fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part
of the dollar roll, the use of this technique will diminish the investment
performance of the Fund compared with what the performance would have been
without the use of the dollar rolls. Dollar roll transactions involve the
risk that the market value of the securities the Fund is required to
purchase may decline below the agreed upon repurchase price of those
securities. If the broker/dealer to whom the Fund sells securities becomes
insolvent, the Fund's right to purchase or repurchase securities may be
restricted. Successful use of mortgage dollar rolls may depend upon the
Adviser's ability to correctly predict interest rates and prepayments.
There is no assurance that dollar rolls can be successfully employed.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund will sell
securities and receive cash proceeds, subject to its agreement to
repurchase the securities at a later date for a fixed price reflecting a
market rate of interest. There is a risk that the counter party to a
reverse repurchase agreement will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to the Fund. The Fund
will invest the proceeds received under a reverse repurchase agreement in
accordance with its investment objective and policies.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options,
Futures, Forwards, Swaps and Other Derivative Transactions" in this
Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-hedging purposes in a manner
similar to that in which Futures Contracts on foreign currencies, or
Forward Contracts, will be utilized. For example, a decline in the dollar
value of a foreign currency in which portfolio securities are denominated
will reduce the dollar value of such securities, even if their value in
the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Fund may purchase
put options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell such currency for a fixed
amount in dollars and will thereby offset, in whole in part, the adverse
effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Fund may purchase call options thereon.
The purchase of such options could offset, at least partially, the effect
of the adverse movements in exchange rates. As in the case of other types
of options, however, the benefit to the Fund deriving from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do
not move in the direction or to the extent anticipated, the Fund could
sustain losses on transactions in foreign currency options which would
require it to forego a portion or all of the benefits of advantageous
changes in such rates. The Fund may write options on foreign currencies
for the same types of hedging purposes. For example, where the Fund
anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates it could, instead
of purchasing a put option, write a call option on the relevant currency.
If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received less related transaction
costs. As in the case of other types of options, therefore, the writing of
Options on Foreign Currencies will constitute only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Fund
to hedge such increased cost up to the amount of the premium. Foreign
currency options written by the Fund will generally be covered in a manner
similar to the covering of other types of options. As in the case of other
types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only
if rates move in the expected direction. If this does not occur, the
option may be exercised and the Fund would be required to purchase or sell
the underlying currency at a loss which may not be offset by the amount of
the premium. Through the writing of options on foreign currencies, the
Fund also may be required to forego all or a portion of the benefits which
might otherwise have been obtained from favorable movements in exchange
rates. The use of foreign currency options for non-hedging purposes, like
the use of other types of derivatives for such purposes, presents greater
profit potential but also significant risk of loss and could be considered
speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "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 type (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 fund'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, or instruments 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 owns liquid and unencumbered assets equal to
the difference. The Fund may cover the writing of put Options on Futures
Contracts (a) through sales of the underlying Futures Contract, (b)
through the ownership of liquid and unencumbered assets 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 (i) is equal to or greater than the exercise price of the put written
or where the exercise price of the put held (ii) is less than the exercise
price of the put written if the Fund owns liquid and unencumbered assets
equal to the difference. 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 in 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.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call
options, and purchase put and call options, on 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 if the Fund owns liquid and unencumbered
assets equal to the amount of cash consideration) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written
or (b) is greater than the exercise price of the call written if the Fund
owns liquid and unencumbered assets equal to the difference. A put option
written by the Fund is "covered" if the Fund owns liquid and unencumbered
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 the Fund owns
liquid and unencumbered assets equal to the difference. 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 Fund owns liquid and
unencumbered 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 option
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 also 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 also 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.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast to
an option on a security, an option on a stock index provides the holder
with the right but not the obligation to make or receive a cash settlement
upon exercise of the option, rather than the right to purchase or sell a
security. The amount of this settlement is generally equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a call) or is below (in the case of a put) the closing
value of the underlying index on the date of exercise, multiplied by (ii)
a fixed "index multiplier." The Fund may cover written call options on
stock indices by owning securities whose price changes, in the opinion of
the Adviser, are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities
without additional cash consideration (or for additional cash
consideration if the Fund owns liquid and unencumbered assets equal to the
amount of cash consideration) upon conversion or exchange of other
securities in its portfolio. Where the Fund covers a call option on a
stock index through ownership of securities, such securities may not match
the composition of the index and, in that event, the Fund will not be
fully covered and could be subject to risk of loss in the event of adverse
changes in the value of the index. The Fund may also cover call options on
stock indices by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written
or (b) is greater than the exercise price of the call written if the Fund
owns liquid and unencumbered assets equal to the difference. The Fund may
cover put options on stock indices by owning liquid and unencumbered
assets with a value equal to the exercise price, or by holding a put on
the same stock index and in the same principal amount as the put written
where the exercise price of the put held (a) is equal to or greater than
the exercise price of the put written or (b) is less than the exercise
price of the put written if the Fund owns liquid and unencumbered assets
equal to the difference. Put and call options on stock indices may also be
covered in such other manner as may be in accordance with the rules of the
exchange on which, or the counterparty with which, the option is traded
and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on
which the Fund has written a call option falls or remains the same, the
Fund will realize a profit in the form of the premium received (less
transaction costs) that could offset all or a portion of any decline in
the value of the securities it owns. If the value of the index rises,
however, the Fund will realize a loss in its call option position, which
will reduce the benefit of any unrealized appreciation in the Fund's stock
investments. By writing a put option, the Fund assumes the risk of a
decline in the index. To the extent that the price changes of securities
owned by the Fund correlate with changes in the value of the index,
writing covered put options on indices will increase the Fund's losses in
the event of a market decline, although such losses will be offset in part
by the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the
premium paid for the option plus related transaction costs. The success of
this strategy will largely depend on the accuracy of the correlation
between the changes in value of the index and the changes in value of the
Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Fund holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Fund will also bear the risk
of losing all or a portion of the premium paid if the value of the index
does not rise. The purchase of call options on stock indices when the Fund
is substantially fully invested is a form of leverage, up to the amount of
the premium and related transaction costs, and involves risks of loss and
of increased volatility similar to those involved in purchasing calls on
securities the Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns
relative values to the stocks included in the index and the index
fluctuates with changes in the market values of the stocks so included.
The composition of the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write options on U.S.
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 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 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 for a reset option written by the Fund 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. Conversely, where the Fund purchases a reset
option, it could be required to pay a higher premium than would have been
the case at the initiation of the option.
"YIELD CURVE" OPTIONS: The Fund may also enter into options on the
"spread," or yield differential, between two fixed income securities, in
transactions referred to as "yield curve" options. In contrast to other
types of options, a yield curve option is based on the difference between
the yields of designated securities, rather than the prices of the
individual securities, and is settled through cash payments. Accordingly,
a yield curve option is profitable to the holder if this differential
widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Yield curve options may be used for the same purposes as other options
on securities. Specifically, the Fund may purchase or write such options
for hedging purposes. For example, the Fund may purchase a call option on
the yield spread between two securities, if it owns one of the securities
and anticipates purchasing the other security and wants to hedge against
an adverse change in the yield spread between the two securities. The Fund
may also purchase or write yield curve options for other than hedging
purposes (i.e., in an effort to increase its current income) if, in the
judgment of the Adviser, the Fund will be able to profit from movements in
the spread between the yields of the underlying securities. The trading of
yield curve options is subject to all of the risks associated with the
trading of other types of options. In addition, however, such options
present risk of loss even if the yield of one of the underlying securities
remains constant, if the spread moves in a direction or to an extent which
was not anticipated. Yield curve options written by the Fund will be
"covered". A call (or put) option is covered if the Fund holds another
call (or put) option on the spread between the same two securities and
owns liquid and unencumbered assets sufficient to cover the Fund's net
liability under the two options. Therefore, the Fund's liability for such
a covered option is generally limited to the difference between the amount
of the Fund's liability under the option written by the Fund less the
value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements
of the counterparty with which the option is traded and applicable laws
and regulations. Yield curve options are traded over-the-counter and
because they have been only recently introduced, established trading
markets for these securities have not yet developed.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are member
firms (or a subsidiary thereof) of the New York Stock 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 the 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 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.
RESTRICTED SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act ("Rule 144A securities") and
commercial paper issued under Section 4(2) of the 1933 Act ("4(2) Paper").
A determination is made, based upon a continuing review of the trading
markets for the Rule 144A security or 4(2) Paper, whether such security is
liquid and thus not subject to the Fund's limitation on investing in
illiquid investments. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the
liquidity of Rule 144A securities and 4(2) Paper. The Board, however,
retains oversight of the liquidity determinations focusing on factors such
as valuation, liquidity and availability of information. Investing in Rule
144A securities could have the effect of decreasing the level of liquidity
in the Fund to the extent that qualified institutional buyers become for a
time uninterested in purchasing these Rule 144A securities held in the
Fund's portfolio. Subject to the Fund's limitation on investments in
illiquid investments, the Fund may also invest in restricted securities
that may not be sold under Rule 144A, which presents certain risks. As a
result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair
value. In addition, market quotations are less readily available.
Therefore, judgment may at times play a greater role in valuing these
securities than in the case of unrestricted securities.
SHORT SALES
The Fund may seek to hedge investments or realize additional gains through
short sales. The Fund may make short sales, which are transactions in
which the Fund sells a security it does not own, in anticipation of a
decline in the market value of that security. To complete such a
transaction, the Fund must borrow the security to make delivery to the
buyer. The Fund then is obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The price at
such time may be more or less than the price at which the security was
sold by the Fund. Until the security is replaced, the Fund is required to
repay the lender any dividends or interest which accrue during the period
of the loan. To borrow the security, the Fund also may be required to pay
a premium, which would increase the cost of the security sold. The net
proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed
out. The Fund also will incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a
gain if the price of the security declines between those dates. The amount
of any gain will be decreased, and the amount of any loss increased, by
the amount of the premium, dividends or interest the Fund may be required
to pay in connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale,
equals the current market value of the security sold short.
SHORT SALES AGAINST THE BOX
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the Fund
enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is
required to hold such securities while the short sale is outstanding. The
Fund will incur transaction costs, including interest, in connection with
opening, maintaining, and closing short sales against the box.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other
types of available swap agreements, including swaps on securities,
commodities and indices, and related types of derivatives, such as caps,
collars and floors. A swap is an agreement between two parties pursuant to
which each party agrees to make one or more payments to the other on
regularly scheduled dates over a stated term, based on different interest
rates, currency exchange rates, security or commodity prices, the prices
or rates of other types of financial instruments or assets or the levels
of specified indices. Under a typical swap, one party may agree to pay a
fixed rate or a floating rate determined by reference to a specified
instrument, rate or index, multiplied in each case by a specified amount
(the "notional amount"), while the other party agrees to pay an amount
equal to a different floating rate multiplied by the same notional amount.
On each payment date, the obligations of parties are netted, with only the
net amount paid by one party to the other. All swap agreements entered
into by the Fund with the same counterparty are generally governed by a
single master agreement, which provides for the netting of all amounts
owed by the parties under the agreement upon the occurrence of an event of
default, thereby reducing the credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreement if the Adviser
determines it is consistent with the Fund's investment objective and
policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by
the Fund. In such an instance, the Fund would agree with a counterparty to
pay a fixed rate (multiplied by a notional amount) and the counterparty
would agree to pay a floating rate multiplied by the same notional amount.
If interest rates rise, resulting in a diminution in the value of the
Fund's portfolio, the Fund would receive payments under the swap that
would offset, in whole or part, such diminution in value. The Fund may
also enter into swaps to modify its exposure to particular markets or
instruments, such as a currency swap between the U.S. dollar and another
currency which would have the effect of increasing or decreasing the
Fund's exposure to each such currency. The Fund might also enter into a
swap on a particular security, or a basket or index of securities, in
order to gain exposure to the underlying security or securities, as an
alternative to purchasing such securities. Such transactions could be more
efficient or less costly in certain instances than an actual purchase or
sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps
and floors are similar to swaps, except that one party pays a fee at the
time the transaction is entered into and has no further payment
obligations, while the other party is obligated to pay an amount equal to
the amount by which a specified fixed or floating rate exceeds or is below
another rate (multiplied by a notional amount). Caps and floors,
therefore, are also similar to options. A collar is in effect a
combination of a cap and a floor, with payments made only within or
outside a specified range of prices or rates. A swaption is an option to
enter into a swap agreement. Like other types of options, the buyer of a
swaption pays a non-refundable premium for the option and obtains the
right, but not the obligation, to enter into the underlying swap on the
agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its
current obligations under swap and other over-the-counter derivative
transactions. If the Fund enters into a swap agreement on a net basis
(i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments), the
Fund will maintain liquid and unencumbered 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 maintain liquid and unencumbered 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 underlying price, rate or index level
that determines the amount of payments to be made under the arrangement.
If the Adviser 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
would decline, 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, but there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
TEMPORARY DEFENSIVE POSITIONS
During periods of unusual market conditions when the Adviser believes that
investing for temporary defensive purposes is appropriate, or in order to
meet anticipated redemption requests, a large portion or all of the assets
of the Fund may be invested in cash (including foreign currency) or cash
equivalents, including, but not limited to, obligations of banks
(including certificates of deposit, bankers' acceptances, time deposits
and repurchase agreements), commercial paper, short-term notes, U.S.
Government Securities and related repurchase agreements.
WARRANTS
The Fund may invest in warrants. Warrants are securities that give the
Fund the right to purchase equity securities from the issuer at a specific
price (the "strike price") for a limited period of time. The strike price
of warrants typically is much lower than the current market price of the
underlying securities, yet they are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities and may offer greater potential for capital appreciation as
well as capital loss. Warrants do not entitle a holder to dividends or
voting rights with respect to the underlying securities and do not
represent any rights in the assets of the issuing company. Also, the value
of the warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not
exercised prior to the expiration date. These factors can make warrants
more speculative than other types of investments.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities will be delivered to the
Fund at a future date usually beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. In general, the Fund does
not pay for such securities until received, and does not start earning
interest on the securities until the contractual settlement date. While
awaiting delivery of securities purchased on such bases, a Fund will
identify liquid and unencumbered assets equal to its forward delivery
commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO: The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and
other types of derivatives depends 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. In the case of derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on
fixed income securities, the portfolio securities which are being hedged
may not be the same type of obligation underlying such derivatives. The
use of derivatives for "cross hedging" purposes (such as a transaction in
a Forward Contract on one currency to hedge exposure to a different
currency) may involve greater correlation risks. 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 index or
obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience a
loss which is not completely offset by the put option. It is also possible
that there may be a negative correlation between the index or 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. It
should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry
group, may present greater risk than options or futures based on a broad
market index. This is due to the fact that a narrower index is more
susceptible to rapid and extreme fluctuations as a result of changes in
the value of a small number of securities. Nevertheless, where the Fund
enters into transactions in options or futures on narrowly-based indices
for hedging purposes, movements in the value of the index should, if the
hedge is successful, correlate closely with the portion of the Fund's
portfolio or the intended acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative and the price of the underlying index or 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 derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts 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, options on stock
indices, options on currencies 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, index 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 index or instrument. For
example, where the Fund covers a call option written on a stock index
through segregation of securities, such securities may not match the
composition of the index, 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, options on stock indices 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 forego 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. Furthermore, the
cost of using these techniques may make it economically infeasible for the
Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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 liquid and
unencumbered assets necessary to satisfy an option exercise will be
identified, unless the option is covered in such other manner as may be in
accordance with the rules of the exchange on which, or the counterparty
with 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. The Fund may also enter into futures,
Forward Contracts or swaps for non-hedging purposes. For example, the Fund
may enter into such a transaction as an alternative to purchasing or
selling the underlying instrument or to obtain desired exposure to an
index or market. In such instances, the Fund will be exposed to the same
economic risks incurred in purchasing or selling the underlying instrument
or instruments. However, transactions in futures, Forward Contracts or
swaps may be leveraged, which could expose the Fund to greater risk of
loss than such purchases or sales. Entering into transactions in
derivatives for other than hedging purposes, therefore, could expose the
Fund to significant risk of loss if the prices, rates or values of the
underlying instruments or indices do not move in the direction or to the
extent anticipated.
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 contract 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 to 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 establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) 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.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Fund enters
into transactions in exchange-traded futures or options, it is exposed to
the risk of the potential bankruptcy of the relevant exchange
clearinghouse or the broker through which the Fund has effected the
transaction. In that event, the Fund might not be able to recover amounts
deposited as margin, or amounts owed to the Fund in connection with its
transactions, for an indefinite period of time, and could sustain losses
of a portion or all of such amounts. Moreover, the performance guarantee
of an exchange clearinghouse generally extends only to its members and the
Fund could sustain losses, notwithstanding such guarantee, in the event of
the bankruptcy of its broker.
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 portfolios 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 IN FOREIGN CURRENCIES AND OVER-THE-COUNTER
DERIVATIVES AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES:
Transactions in Forward Contracts on foreign currencies, as well as
futures and options on foreign currencies and transactions executed on
foreign exchanges, are subject to all of the correlation, liquidity and
other risks outlined above. In addition, however, such transactions are
subject to the risk of governmental actions affecting trading in or the
prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the value
of positions held by the Fund. Further, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete
as the comparable data on which the Fund makes investment and trading
decisions in connection with other transactions. Moreover, because the
foreign currency market is a global, 24-hour market, events could occur in
that market which will not be reflected in the forward, futures or options
market until the following day, thereby making it more difficult for the
Fund to respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or
foreign currency options generally must occur within the country issuing
the underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives 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 and a trader of Forward Contracts 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, or Forward Contracts or
swaps entered into, 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.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be
traded on exchanges located in foreign countries. Such transactions may
not be conducted in the same manner as those entered into on U.S.
exchanges, and may be subject to different margin, exercise, settlement or
expiration procedures. As a result, many of the risks of over-the-counter
trading may be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders
on organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option positions entered
into on a national securities exchange are cleared and guaranteed by the
Options Clearing Corporation (the "OCC"), thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded
on a national securities exchange may be more readily available than in
the over-the-counter market, potentially permitting the Fund to liquidate
open positions at a profit prior to exercise or expiration, or to limit
losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign
currency market, possible intervention by governmental authorities and the
effects of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not presented
by the over-the-counter market. For example, exercise and settlement of
such options must be made exclusively through the OCC, which has
established banking relationships in applicable foreign countries for this
purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the
OCC or its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on
exercise.
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 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.
<PAGE>
PART II - APPENDIX D
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however,
that ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with
different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in
the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue. Should no rating be assigned, the reason may be one
of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment
on the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to
meet its financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality
and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on
this obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk -- such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. Securities are not meeting current obligations and
are extremely speculative. DDD designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, DD indicates expected recovery of 50% -- 90% of
such outstandings, and D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within this
category or into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company
developments.
DD: Defaulted debt-obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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
[Logo](R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street, Boston, MA 02116
GENERIC 1/22/99
<PAGE>
PROSPECTUS
AUGUST 1, 1999
MFS(R) MASSACHUSETTS HIGH INCOME TAX FREE FUND
MFS(R) NEW YORK HIGH INCOME TAX FREE FUND
CLASS A SHARES
CLASS B SHARES
- --------------------------------------------------------------------------------
This Prospectus describes two funds:
o MFS Massachusetts High Income Tax Free Fund, which seeks high current income
exempt from federal income tax and Massachusetts personal income tax.
o MFS New York High Income Tax Free Fund, which seeks high current income
exempt from federal and New York State and City income taxes.
THIS PROSPECTUS DESCRIBES TWO CLASSES OF SHARES FOR EACH FUND. CURRENTLY, ONLY
CLASS A SHARES ARE AVAILABLE FOR PURCHASE. THESE CLASS A SHARES ARE ONLY
AVAILABLE FOR PURCHASE AT NET ASSET VALUE AND MAY ONLY BE SOLD TO RESIDENTS OF
MASSACHUSETTS OR NEW YORK (AS APPLICABLE) WHO ARE:
o EMPLOYEES (OR CERTAIN RELATIVES OF EMPLOYEES) OF MASSACHUSETTS FINANCIAL
SERVICES COMPANY (REFERRED TO AS MFS OR THE ADVISER) AND ITS AFFILIATES; OR
o MEMBERS OF THE GOVERNING BOARDS OF THE VARIOUS FUNDS SPONSORED BY MFS.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE FUNDS' SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS
YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
- ----------------------
TABLE OF CONTENTS
- ----------------------
Page
I Risk Return Summary .................................... 1
II Expense Summary ........................................ 5
III Certain Investment Strategies and Risks ................ 9
IV Management of the Funds ................................ 10
V Description of Share Classes ........................... 11
VI How to Purchase, Exchange and Redeem Shares ............ 15
VII Investor Services and Programs ......................... 19
VIII Other Information ...................................... 21
Appendix A -- Investment Techniques and Practices ...... A-1
Appendix B -- Tax Equivalent Yield Tables .............. B-1
<PAGE>
- ------------------------
I RISK RETURN SUMMARY
- ------------------------
o INVESTMENT OBJECTIVES
o MFS MASSACHUSETTS HIGH INCOME TAX FREE FUND - The investment objective of
the MFS Massachusetts High Income Tax Free Fund (referred to as the
Massachusetts fund) is to provide high current income exempt from federal
income tax and Massachusetts personal income tax.
o MFS NEW YORK HIGH INCOME TAX FREE FUND - The investment objective of the
MFS New York High Income Tax Free Fund (referred to as the New York fund)
is to provide high current income exempt from federal income taxes and New
York State and City income taxes.
Each fund's objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
o MASSACHUSETTS FUND - The Massachusetts fund invests, under normal market
conditions, at least 80% of its net assets in municipal securities and
participation interests in municipal securities issued by banks, the
interest on which is exempt from federal income tax and Massachusetts
personal income tax.
o NEW YORK FUND - The New York fund invests, under normal market conditions,
at least 80% of its net assets in municipal securities and participation
interests in municipal securities issued by banks, the interest on which
is exempt from federal income tax and New York State and City income
taxes.
o PRINCIPAL INVESTMENT STRATEGIES COMMON TO BOTH FUNDS
As described above, each of the funds invest in municipal securities and
participation interests in municipal securities issued by banks. Municipal
securities are bonds or other debt obligations of a U.S. state or
political subdivision, such as a county, city, town, village, or
authority. Participation interests in municipal securities are interests
in holdings of municipal obligations backed by a letter of credit or
guarantee from the issuing bank.
While each of the funds may invest in securities with any credit rating,
municipal securities offering the high current income sought by each of
the funds generally are speculative and lower rated bonds. Speculative
securities are securities rated in the lowest investment grade category by
credit rating agencies or which are unrated and considered by the fund's
investment adviser, Massachusetts Financial Services Company (referred to
as MFS or the adviser), to be comparable to speculative securities. Lower
rated bonds (i.e. bonds rated below investment grade), commonly known as
junk bonds, are bonds assigned lower credit ratings by credit rating
agencies or are unrated and considered by MFS to be comparable to lower
rated bonds. Each fund may invest up to 100% of its net assets in
speculative and lower rated bonds.
Although each fund seeks to invest in municipal securities that provide
income exempt from federal income tax and state (and, in the case of the
New York fund, New York city) personal income tax, the interest income on
certain of these municipal securities may be subject to an alternative
minimum tax. For a comparison of yields on Municipal Bonds and taxable
securities, see the Tax Equivalent Yield Tables attached as Appendix B to
this Prospectus.
While each fund seeks to invest all its assets in the types of
securities described above, market conditions may from time to time limit
the availability of such obligations. During periods when a fund is unable
to invest as described above, the fund will seek to invest its assets in
municipal securities that are exempt from federal income taxes but are
subject to its state (and city, if applicable) personal income taxes.
In selecting fixed income investments for each fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager(s) of MFS' fixed income
oriented funds (including each of the funds) as a tool in making or
adjusting a fund's asset allocations to various segments of the fixed
income markets. In assessing the credit quality of fixed income
securities, MFS does not rely solely on the credit ratings assigned by
credit rating agencies, but rather performs its own independent credit
analysis.
Each fund is a non-diversified mutual fund. This means that each fund
may invest a relatively high percentage of its assets in a small number of
issuers.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in each fund and the circumstances
reasonably likely to cause the value of your investment in a fund to
decline are described below. As with any non-money market mutual fund, the
share price of a fund will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in a fund to decline, and which could
prevent the fund from achieving its objective, that are not described
here.
The principal risks of investing in each of the funds are:
o Municipal Securities Risk
> Interest Rate Risk: As with any fixed income security, the prices of
municipal securities in each fund's portfolio will generally fall when
interest rates rise. Conversely, when interest rates fall, the prices
of municipal securities in a fund's portfolio will generally rise.
> Maturity Risk: Interest rate risk will generally affect the price of a
municipal security more if the security has a longer maturity.
Municipal securities with longer maturities will therefore be more
volatile than other fixed income securities with shorter maturities.
Conversely, municipal securities with shorter maturities will be less
volatile but generally provide lower returns than municipal securities
with longer maturities. The average maturity of each fund's municipal
security investments will affect the volatility of the fund's share
price.
> Credit Risk: Credit risk is the risk that the issuer of a municipal
security will not be able to pay principal and interest when due.
Rating agencies assign credit ratings to certain municipal securities
to indicate their credit risk. The price of a municipal security will
generally fall if the issuer defaults on its obligation to pay
principal or interest, the rating agencies downgrade the issuer's
credit rating or other news affects the market's perception of the
issuer's credit risk. A participation interest is also subject to the
risk of default by the issuing bank.
> General Obligations and Revenue Obligations Risk: Each fund may invest
in municipal bonds that are general obligations backed by the full
faith and credit of the municipal issuer. Each fund may also invest in
municipal bonds called revenue obligations which are subject to a
higher degree of credit risk than general obligations. Revenue
obligations finance specific projects, such as building a hospital,
and are not backed by the full faith and credit of the municipal
issuer. Because revenue obligations are repaid from the revenues from
a facility, they are subject to a risk of default in payments of
principal and interest if the facility does not generate enough
income.
> Municipal Lease Obligations Risk: Each fund's investments in municipal
securities may include municipal lease obligations. Municipal lease
obligations are undivided interests issued by a state or municipality
in a lease or installment purchase which generally relates to
equipment or facilities. When a fund invests in municipal lease
obligations, it may have limited recourse in the event of default or
termination. In some cases, payments under municipal leases do not
have to be made unless the appropriate legislative body specifically
approves money for that purpose.
o Concentration Risk
> Massachusetts Concentration Risk: Because the fund concentrates in
securities of municipal issuers in Massachusetts, certain factors with
respect to this state will disproportionately affect the value of the
fund's investments, including local economic factors or policy
changes, erosion of the state's tax base, or changes in the credit
ratings assigned to the state's municipal issuers. Thus, the fund's
performance will be closely tied to the economic and political
conditions in Massachusetts and will be more volatile than the
performance of a more geographically diversified fund. The
Massachusetts economy has shown to be particularly susceptible to
downturns in the U.S. economy, and has experienced financial
difficulty and high unemployment levels during these downturns. The
Massachusetts economy is particularly susceptible to trends in the
high-technology, financial services, biotechnology and health care
industries.
> New York Concentration Risk: Because the fund invests primarily in the
securities of New York issuers, its performance may be
disproportionately affected by local, state and regional factors.
These may include state or local legislation or policy changes,
economics, erosion of the city's or state's tax base, natural
disasters, and the possibility of credit problems. New York City and
certain localities outside New York City have experienced financial
problems. These problems may affect the fiscal health of New York
State. Thus, the fund's performance will be closely tied to the
economic and political conditions in the City and State of New York
and will be more volatile than the performance of a more
geographically diversified fund.
o Speculative Municipal Securities Risk: Speculative bonds are subject to a
higher risk that the issuer will default on payments of principal and
interest than higher rated investment grade bonds. Although the issuer's
ability to make interest and principal payments appears adequate, an
adverse change in economic conditions or other circumstances is more
likely to cause a default by the issuer of a speculative bond than the
issuer of a higher rated investment grade bond.
o Liquidity Risk: The fixed income securities purchased by each fund may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on a
fund's performance.
o Lower Rated Municipal Securities Risk
> Higher Credit Risk: Junk bonds are subject to a substantially higher
degree of credit risk than higher rated bonds. During recessions, a
high percentage of issuers of junk bonds may default on payments of
principal and interest. The price of a junk bond may therefore
fluctuate drastically due to bad news about the issuer or the economy
in general.
> Higher Liquidity Risk: During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will
be harder to value or sell at a fair price.
o Non-Diversified Status Risk: Because a fund may invest its assets in a
small number of issuers, the fund is more susceptible to any single
economic, political or regulatory event affecting those issuers than is a
diversified fund.
o As with any mutual fund, you could lose money on your investment in a
fund.
An investment in a fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table are not included because the funds
have not had a full calendar year of investment operations.
<PAGE>
- ---------------------
II EXPENSE SUMMARY
- ---------------------
o EXPENSE TABLES
These tables describe the fees and expenses that you may pay when you buy,
redeem and hold shares of one of the funds.
o MFS MASSACHUSETTS HIGH INCOME TAX FREE FUND
SHAREHOLDER FEES (fees paid directly from your investment):
...........................................................................
CLASS A CLASS B
Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price) ......................... 4.75% 0.00%
Maximum Deferred Sales Charge (Load) (as a percentage
of original purchase price or redemption proceeds,
whichever is less) .................................... See Below(1) 4.00%
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets):
..........................................................................
Management Fees ....................................... 0.40% 0.40%
Distribution and Service (12b-1) Fees(2) .............. 0.00% 1.00%
Other Expenses(3) ..................................... 3.12% 3.12%
----- -----
Total Annual Fund Operating Expenses(3) ............... 3.52% 4.52%
Fee Waiver and Expense Reimbursement(4) ............... (3.52)% (3.52)%
Net Expenses(3) ....................................... 0.00% 1.00%
------
(1) An initial sales charge will not be deducted from your purchase if you
buy $1 million or more of class A shares, or if you are investing
through a retirement plan and your class A purchase meets certain
requirements. However, in this case, a contingent deferred sales
charge (referred to as a CDSC) of 1% may be deducted from your
redemption proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it
to pay marketing and other fees to support the sale and distribution
of class A and B shares and the services provided to you by your
financial adviser (referred to as distribution and service fees).
(3) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent. The fund may enter
into other similar arrangements and directed brokerage arrangements,
which would also have the effect of reducing the fund's expenses. The
fund's expenses do not take into account these expense reductions, and
are therefore higher than the actual expenses of the fund.
(4) MFS has contractually agreed to waive its management fee and to bear
the fund's expenses such that "Other Expenses" do not exceed 0.00%
annually. These arrangements will continue until at least August 1,
2000, unless modified with the consent of the board of trustees which
oversees the fund.
o EXAMPLE OF EXPENSES
This example is intended to help you compare the cost of investing in the
Massachusetts fund with the cost of investing in other mutual funds.
The example assumes that:
o You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
SHARE CLASS YEAR 1 YEAR 3
---------------------------------------------------------------------------
MFS MASSACHUSETTS HIGH INCOME TAX FREE FUND
Class A shares $475 $1,190
Class B shares
Assuming redemption at end of period $502 $1,347
Assuming no redemption $102 $1,047
<PAGE>
o MFS NEW YORK HIGH INCOME TAX FREE FUND
SHAREHOLDER FEES (fees paid directly from your investment):
..........................................................................
CLASS A CLASS B
Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price) ......................... 4.75% 0.00%
Maximum Deferred Sales Charge (Load) (as a percentage
of original purchase price or redemption proceeds,
whichever is less) ....................................See Below(1) 4.00%
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets):
..........................................................................
Management Fees ....................................... 0.40% 0.40%
Distribution and Service (12b-1) Fees(2) .............. 0.00% 1.00%
Other Expenses(3) ..................................... 3.12% 3.12%
----- -----
Total Annual Fund Operating Expenses(3) ............... 3.52% 4.52%
Fee Waiver and Expense Reimbursement(4) ............... (3.52)% (3.52)%
Net Expenses(3) ....................................... 0.00% 1.00%
------
(1) An initial sales charge will not be deducted from your purchase if you
buy $1 million or more of class A shares, or if you are investing
through a retirement plan and your class A purchase meets certain
requirements. However, in this case, a contingent deferred sales
charge (referred to as a CDSC) of 1% may be deducted from your
redemption proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it
to pay marketing and other fees to support the sale and distribution
of class A and B shares and the services provided to you by your
financial adviser (referred to as distribution and service fees).
(3) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent. The fund may enter
into other similar arrangements and directed brokerage arrangements,
which would also have the effect of reducing the fund's expenses. The
fund's expenses do not take into account these expense reductions, and
are therefore higher than the actual expenses of the fund.
(4) MFS has contractually agreed to waive its management fee and to bear
the fund's expenses such that "Other Expenses" do not exceed 0.00%
annually. These arrangements will continue until at least August 1,
2000, unless modified with the consent of the board of trustees which
oversees the fund.
o EXAMPLE OF EXPENSES
This example is intended to help you compare the cost of investing in the
New York fund with the cost of investing in other mutual funds.
The example assumes that:
o You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
SHARE CLASS YEAR 1 YEAR 3
--------------------------------------------------------------------------
MFS NEW YORK HIGH INCOME TAX FREE FUND
Class A shares $475 $1,190
Class B shares
Assuming redemption at end of period $502 $1,347
Assuming no redemption $102 $1,047
<PAGE>
- ---------------------------------------------
III CERTAIN INVESTMENT STRATEGIES AND RISKS
- ---------------------------------------------
Each fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which a fund may
engage, including the principal investment techniques and practices
discussed above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, in the funds' Statement of Additional
Information (referred to as the SAI), which you may obtain by contacting
MFS Service Center, Inc. (see back cover for address and phone number).
In addition, each fund may depart from its principal investment
strategies by temporarily investing for defensive purposes when adverse
market, economic or political conditions exist. While a fund invests
defensively, it may not be able to pursue its investment objective. When
such conditions exist the fund may invest up to 50% of its total assets in
the following short-term investments:
o U.S. government securities; and
o commercial paper, obligations of banks (including certificates of
deposit, bankers' acceptances and repurchase agreements) with $1
billion of assets and cash.
Interest income from these short-term investments will be taxable to
shareholders as ordinary income. A fund's defensive investment position may
not be effective in protecting its value.
Each fund may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to a fund
with less active trading policies, which would increase your tax liability.
Frequent trading also increases transaction costs, which could detract from
a fund's performance.
- ----------------------------
IV MANAGEMENT OF THE FUND
- ----------------------------
o INVESTMENT ADVISER
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is each fund's investment adviser. MFS is America's oldest mutual
fund organization. MFS and its predecessor organizations have a history of
money management dating from 1924 and the founding of the first mutual
fund, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $ billion on behalf of
approximately million investor accounts as of June 30, 1999. As of
such date, the MFS organization managed approximately $ billion of net
assets in equity funds and equity portfolios and $ billion of net
assets in fixed income funds and fixed income portfolios, including $
billion of net assets in municipal securities. Approximately $ billion
of the assets managed by MFS are invested in securities of foreign issuers
and foreign denominated securities of U.S. issuers. MFS is located at 500
Boylston Street, Boston, Massachusetts 02116.
MFS provides investment management and related administrative services
and facilities to each fund, including portfolio management and trade
execution. For these services, each fund pays MFS an annual management fee
at the rate of [0.40%] of such fund's average daily net assets on an
annualized basis for the fund's then-current fiscal year end. MFS has
agreed to waive its right to receive this fee as described under "Expense
Summary."
o PORTFOLIO MANAGER
The portfolio manager for each fund, since inception, is Michael Roberge,
a Vice President of the Adviser. Mr. Roberge has been employed by the
Adviser as a portfolio manager since 1996. Prior to 1996, Mr. Roberge
worked as a municipal credit analyst and portfolio manager with Colonial
Investment Management.
o ADMINISTRATOR
MFS provides each fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by each fund for a portion of the costs it incurs in providing
these services.
o DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of each fund.
o SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for each fund,
for which it receives compensation from each fund.
<PAGE>
- ---------------------------------
V DESCRIPTION OF SHARE CLASSES
- ---------------------------------
Each fund offers class A and class B shares through this prospectus.
Currently, only Class A shares of each fund are available for sale.
o SALES CHARGES
You may be subject to an initial sales charge when you purchase, or a CDSC
when you redeem, class A or B shares. These sales charges are described
below. In certain circumstances, these sales charges are waived. These
circumstances are described in the SAI. Special considerations concerning
the calculation of the CDSC that apply to each of these classes of shares
are described below under the heading "Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other concessions
which are paid from various sources, such as from the sales charges and
distribution and service fees, or from MFS or MFD. These commissions and
concessions are described in the SAI.
o CLASS A SHARES
You may purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), but in some cases you may
purchase class A shares without an initial sales charge but subject to a
1% CDSC upon redemption within one year. Class A shares have annual
distribution and service fees up to a maximum of 0.35% of net assets
annually.
PURCHASES SUBJECT TO AN INITIAL SALES CHARGE. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon
the amount you invest, as follows:
SALES CHARGE* AS PERCENTAGE OF:
-------------------------------
Offering Net Amount
Amount of Purchase Price Invested
Less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 2.95 3.04
$500,000 but less than $1,000,000 2.20 2.25
$1,000,000 or more None** None**
------
* Because of rounding in the calculation of offering price, actual
sales charges you pay may be more or less than those calculated
using these percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
PURCHASES SUBJECT TO A CDSC (BUT NOT AN INITIAL SALES CHARGE). You pay no
initial sales charge when you invest $1 million or more in class A shares.
However, a CDSC of 1% will be deducted from your redemption proceeds if
you redeem within 12 months of your purchase. In addition, purchases made
under the following four categories are not subject to an initial sales
charge. However, a CDSC of 1% will be deducted from redemption proceeds if
the redemption is made within 12 months of purchase:
o Investments in class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended (referred to
as ERISA), if, prior to July 1, 1996
> the plan had established an account with MFSC; and
> the sponsoring organization had demonstrated to the satisfaction of
MFD that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan of class A shares of
the MFS Family of Funds (the MFS Funds) would be in the amount of
at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the retirement plan and/or sponsoring organization participates in the
MFS Fundamental 401(k) Program or any similar recordkeeping system
made available by MFSC (referred to as the MFS participant
recordkeeping system);
> the plan establishes an account with MFSC on or after July 1, 1996;
> the total purchases by the retirement plan of class A shares of the
MFS Funds will be in the amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole
discretion; and
> the plan has not redeemed its class B shares in the MFS Funds in order
to purchase class A shares under this category.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the plan establishes an account with MFSC on or after July 1, 1996;
and
> the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds.
THE RETIREMENT PLAN WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN
OR ITS SPONSORING ORGANIZATION INFORMS MFSC PRIOR TO THE PURCHASES
THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED IN
SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS; MFSC HAS NO
OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES
UNDER THIS CATEGORY; AND
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the plan establishes an account with MFSC on or after July 1, 1997;
> the plan's records are maintained on a pooled basis by MFSC; and
> the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
o CLASS B SHARES
You may purchase class B shares at net asset value without an initial
sales charge, but if you redeem your shares within the first six years you
may be subject to a CDSC (declining from 4.00% during the first year to 0%
after six years). Class B shares have annual distribution and service fees
up to a maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
---------------------------------------------------------------------------
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
If you hold class B shares for approximately eight years, they will
convert to class A shares of that fund. All class B shares you purchased
through the reinvestment of dividends and distributions will be held in a
separate sub-account. Each time any class B shares in your account convert
to class A shares, a proportionate number of the class B shares in the
sub-account will also convert to class A shares.
o CALCULATION OF CDSC
As discussed above, certain investments in class A and B shares will be
subject to a CDSC. Three different aging schedules apply to the
calculation of the CDSC:
o Purchases of class A shares made on any day during a calendar month will
age one month on the last day of the month, and each subsequent month.
o Purchases of class B shares on or after January 1, 1993, made on any day
during a calendar month, will age one year at the close of business on the
last day of that month in the following calendar year, and each subsequent
year.
o Purchases of class B shares prior to January 1, 1993, made on any day
during a calendar year, will age one year at the close of business on
December 31 of that year, and each subsequent year.
No CDSC is assessed on the value of your account represented by
appreciation or additional shares acquired through the automatic
reinvestment of dividends or capital gain distributions. Therefore, when
you redeem your shares, only the value of the shares in excess of these
amounts (i.e., your direct investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being
imposed at the lowest possible rate, which means that the CDSC will be
applied against the lesser of your direct investment or the total cost of
your shares. The applicability of a CDSC will not be affected by exchanges
or transfers of registration, except as described in the SAI.
o DISTRIBUTION AND SERVICE FEES
Each fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class A
and B shares and the services provided to you by your financial adviser.
These annual distribution and service fees may equal up to 0.35% for class
A shares (a 0.10% distribution fee and a 0.25% service fee) and 1.00% for
class B shares (a 0.75% distribution fee and a 0.25% service fee), and are
paid out of the assets of these classes. Over time, these fees will
increase the cost of your shares and may cost you more than paying other
types of sales charges. The 0.35% class A distribution and service fees
have not been implemented for either fund and may be implemented on such
date as the board of trustees which oversees the funds may determine.
<PAGE>
- -------------------------------------------------
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
- -------------------------------------------------
You may purchase, exchange and redeem class A and B shares of a fund in
the manner described below. In addition, you may be eligible to
participate in certain investor services and programs to purchase,
exchange and redeem these classes of shares, which are described in the
next section under the caption "Investor Services and Programs."
o HOW TO PURCHASE SHARES
INITIAL PURCHASE. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is $1,000.
However, in the following circumstances the minimum initial investment is
only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
> tax-deferred retirement programs (other than IRAs) where investments
are made by means of group remittal statements; or
> employer sponsored investment programs.
The minimum initial investment for IRAs is $250 per account.
ADDING TO YOUR ACCOUNT. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first for
instructions); or
o authorize transfers by phone between your bank account and your MFS
account (the maximum purchase amount for this method is $100,000). You
must elect this privilege on your account application if you wish to use
it.
o HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of certain other
MFS funds at net asset value by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC will not be charged a
CDSC in an exchange. However, when you redeem the shares acquired through
the exchange, the shares you redeem may be subject to a CDSC, depending
upon when you originally purchased the shares you exchanged. For purposes
of computing the CDSC, the length of time you have owned your shares will
be measured from the date of original purchase and will not be affected by
any exchange.
Sales charges may apply to exchanges made from the MFS money market
funds. Certain qualified retirement plans may make exchanges between the
MFS funds and the MFS Fixed Fund, a bank collective investment fund, and
sales charges may also apply to these exchanges. Call MFSC for information
concerning these sales charges.
Exchanges may be subject to certain limitations and are subject to the
MFS funds' market timing policies, which are policies designed to protect
the funds and their shareholders from the adverse effect of frequent
exchanges. These limitations and market timing policies are described
below under the captions "Right to Reject or Restrict Purchase and
Exchange Orders" and "Market Timing Policies." You should read the
prospectus of the MFS fund into which you are exchanging and consider the
differences in objectives, policies and rules before making any exchange.
o HOW TO REDEEM SHARES
You may redeem your shares either by having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature Guarantee/
Additional Documentation" below, or contact MFSC for details (see back
cover page for address and phone number).
Under unusual circumstances such as when the New York Stock Exchange is
closed, trading on the Exchange is restricted or if there is an emergency,
the fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, the fund may delay the payment of the
redemption proceeds until the check has cleared, which may take up to 15
days from the purchase date.
REDEEMING DIRECTLY THROUGH MFSC.
o BY TELEPHONE. You can call MFSC to have shares redeemed from your account
and the proceeds wired or mailed (depending on the amount redeemed)
directly to a pre- designated bank account. MFSC will request personal or
other information from you and will generally record the calls. MFSC will
be responsible for losses that result from unauthorized telephone
transactions if it does not follow reasonable procedures designed to
verify your identity. You must elect this privilege on your account
application if you wish to use it.
o BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the
name of your fund, your account number, and the number of shares or dollar
amount to be sold.
REDEEMING THROUGH YOUR FINANCIAL ADVISER. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser
will be responsible for furnishing all necessary documents to MFSC and may
charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. In order to protect against
fraud, each fund requires that your signature be guaranteed in order to
redeem your shares. Your signature may be guaranteed by an eligible bank,
broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency, or savings association. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
o OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. Purchases and
exchanges should be made for investment purposes only. The MFS funds each
reserve the right to reject or restrict any specific purchase or exchange
request. Because an exchange request involves both a request to redeem
shares of one fund and to purchase shares of another fund, the MFS funds
consider the underlying redemption and purchase requests conditioned upon
the acceptance of each of these underlying requests. Therefore, in the
event that the MFS funds reject an exchange request, neither the
redemption nor the purchase side of the exchange will be processed. When a
fund determines that the level of exchanges is detrimental to its
remaining shareholders, the fund may delay the payment of exchange
proceeds for up to seven days to permit cash to be raised through the
orderly liquidation of its portfolio securities to pay the redemption
proceeds. In this case, the purchase side of the exchange will be delayed
until the exchange proceeds are paid by the redeeming fund.
MARKET TIMING POLICIES. The MFS funds are not designed for professional
market timing organizations or other entities using programmed or frequent
exchanges. The MFS funds define a "market timer" as an individual, or
organization acting on behalf of one or more individuals, if:
o the individual or organization makes during the calendar year either (i)
six or more exchange requests among the MFS Funds or (ii) three or more
exchange requests out of any of the MFS high yield bond funds or MFS
municipal bond funds; and
o any one of such exchange requests represents shares equal in value to $1
million or more.
Accounts under common ownership or control, including accounts
administered by market timers, will be aggregated for purposes of this
definition.
The MFS funds may impose specific limitations on market timers,
including:
o delaying for up to seven days the purchase side of an exchange request by
market timers;
o rejecting or otherwise restricting purchase or exchange requests by market
timers; and
o permitting exchanges by market timers only into certain MFS funds.
REINSTATEMENT PRIVILEGE. After you have redeemed shares, you have a one-
time right to reinvest the proceeds within 90 days of the redemption at
the current net asset value (without an initial sales charge). If the
redemption involved a CDSC, your account will be credited with the
appropriate amount of the CDSC paid; however, your new shares will be
subject to a CDSC which will be determined from the date you originally
purchased the shares redeemed. This privilege applies to shares of the MFS
money market funds only under certain circumstances.
IN-KIND DISTRIBUTIONS. The MFS funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that a fund makes an in-kind
distribution, you could incur the brokerage and transaction charges when
converting the securities to cash. None of the funds expects to make in-
kind distributions, and if a fund does, it will pay, during any 90-day
period, your redemption proceeds in cash up to either $250,000 or 1% of
the fund's net assets, whichever is less.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Because it is costly to maintain
small accounts, the MFS funds have generally reserved the right to
automatically redeem shares and close your account when it contains less
than $500 due to your redemptions or exchanges. Before making this
automatic redemption, you will be notified and given 60 days to make
additional investments to avoid having your shares redeemed.
<PAGE>
- -------------------------------------
VII INVESTOR SERVICES AND PROGRAMS
- -------------------------------------
As a shareholder of a fund, you have available to you a number of services
and investment programs. Some of these services and programs may not be
available to you if your shares are held in the name of your financial
adviser or if your investment in a fund is made through a retirement plan.
o DISTRIBUTION OPTIONS
The following distribution options are generally available to all accounts
and you may change your distribution option as often as you desire by
notifying MFSC:
o Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
o Dividends in cash; capital gain distributions reinvested in additional
shares; or
o Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value
as of the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of that fund. If you have elected to receive dividends
and/or capital gain distributions in cash, and the postal or other
delivery service is unable to deliver checks to your address of record, or
you do not respond to mailings from MFSC with regard to uncashed
distribution checks, your distribution option will automatically be
converted to having all dividends and other distributions reinvested in
additional shares. Your request to change a distribution option must be
received by MFSC by the record date for a dividend or distribution in
order to be effective for that dividend or distribution. No interest will
accrue on amounts represented by uncashed distribution or redemption
checks.
o PURCHASE AND REDEMPTION PROGRAMS
For your convenience, the following purchase and redemption programs are
made available to you with respect to class A and B shares, without extra
charge:
AUTOMATIC INVESTMENT PLAN. You can make cash investments of $50 or more
through your checking account or savings account on any day of the month.
If you do not specify a date, the investment will automatically occur on
the first business day of the month.
AUTOMATIC EXCHANGE PLAN. If you have an account balance of at least $5,000
in any MFS fund, you may participate in the automatic exchange plan, a
dollar-cost averaging program. This plan permits you to make automatic
monthly or quarterly exchanges from your account in an MFS fund for shares
of the same class of shares of other MFS funds. You may make exchanges of
at least $50 to up to six different funds under this plan. Exchanges will
generally be made at net asset value without any sales charges. If you
exchange shares out of the MFS Money Market Fund or MFS Government Money
Market Fund, or if you exchange class A shares out of the MFS Cash Reserve
Fund, into class A shares of any other MFS fund, you will pay the initial
sales charge if you have not already paid this charge on these shares.
REINVEST WITHOUT A SALES CHARGE. You can reinvest dividend and capital
gain distributions into your account without a sales charge to add to your
investment easily and automatically.
DISTRIBUTION INVESTMENT PROGRAM. You may purchase shares of any MFS fund
without paying an initial sales charge or a CDSC upon redemption by
automatically reinvesting a minimum of $50 of dividend and capital gain
distributions from the same class of another MFS fund.
LETTER OF INTENT (LOI). If you intend to invest $50,000 or more in the MFS
funds (including the MFS Fixed Fund) within 13 months, you may buy class A
shares of the funds at the reduced sales charge as though the total amount
were invested in class A shares in one lump sum. If you intend to invest
$1 million or more under this program, the time period is extended to 36
months. If the intended purchases are not completed within the time
period, shares will automatically be redeemed from a special escrow
account established with a portion of your investment at the time of
purchase to cover the higher sales charge you would have paid had you not
purchased your shares through this program.
RIGHT OF ACCUMULATION. You will qualify for a lower sales charge on your
purchases of class A shares when your new investment in class A shares,
together with the current (offering price) value of all your holdings in
the MFS funds (including the MFS Fixed Fund), reaches a reduced sales
charge level.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to automatically receive (or
designate someone else to receive) regular periodic payments of at least
$100. Each payment under this systematic withdrawal is funded through the
redemption of your fund shares. For class B shares, you can receive up to
10% (15% for certain IRA distributions) of the value of your account
through these payments in any one year (measured at the time you establish
this plan). You will incur no CDSC on class B shares redeemed under this
plan. For class A shares, there is no similar percentage limitation;
however, you may incur the CDSC (if applicable) when class A shares are
redeemed under this plan.
FREE CHECKWRITING. You may redeem your class A shares by writing checks
against your account. Checks must be for a least $500 and investments made
by check must have been in your account for at least 15 days before you
can write checks against them. There is no charge for this service. To
authorize your account for checkwriting, contact MFSC (see back cover page
for address and phone number).
Shares in your account equal in value to the amount of the check plus
the applicable CDSC (if any) and any income tax required to be withheld
(if any) are redeemed to cover the amount of the check. If your account
value is not great enough to cover these amounts, your check will be
dishonored.
<PAGE>
- -------------------------
VIII OTHER INFORMATION
- -------------------------
o PRICING OF FUND SHARES
The price of each class of each fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange is open
for trading (generally, 4:00 p.m., Eastern time) (referred to as the
valuation time). To determine net asset value, each fund values its assets
at current market values, or at fair value as determined by the Adviser
under the direction of the Board of Trustees that oversees a fund if
current market values are unavailable. Fair value pricing may be used by
the fund when current market values are unavailable or when an event
occurs after the close of the exchange on which the fund's portfolio
securities are principally traded that is likely to have changed the value
of the securities. The use of fair value pricing by a fund may cause the
net asset value of its shares to differ significantly from the net asset
value that would be calculated using current market values.
You will receive the net asset value next calculated, after the
deduction of applicable sales charges and any required tax withholding, if
your order is complete (has all required information) and MFSC receives
your order by:
o the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) received your order
by the valuation time.
o DISTRIBUTIONS
Each fund intends to declare daily and pay to its shareholders
substantially all of its net income as dividends on a monthly basis.
Dividends generally are distributed on the first business day of the
following month. Any realized net capital gains are distributed at least
annually.
o FEDERAL TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your
tax adviser regarding the effect that an investment in a fund may have on
your particular tax situation.
TAXABILITY OF DISTRIBUTIONS. As long as a fund qualifies for treatment as
a regulated investment company (which both funds intend to do), it pays no
federal income tax on the earnings it distributes to shareholders.
You may receive three different types of distributions from a fund:
exempt-interest dividends, ordinary dividends and capital gain dividends.
Most distributions will be exempt-interest dividends, which are exempt
from federal income tax. Ordinary dividends are normally subject to
federal income tax at ordinary income tax rates. Distributions designated
as capital gain dividends are taxable as long-term capital gains. Any
taxes that you pay on a distribution will be the same whether you take the
distribution in cash or have it reinvested in additional shares of the
fund. Some dividends paid in January may be taxable as if they had been
paid the previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes.
Each Fund's distributions of net capital gains or net short-term capital
gains will reduce such fund's net asset value per share. Therefore, if you
buy shares shortly before the record date of such a distribution, you may
pay the full price for the shares and then effectively receive a portion
of the purchase price back as a taxable distribution.
If you are neither a citizen nor a resident of the U.S., each fund will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able
to arrange for a lower withholding rate under an applicable tax treaty if
you supply the appropriate documentation required by the fund. Each fund
is also required in certain circumstances to apply backup withholding at
the rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a
resident of the U.S.) who does not furnish to that fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments
that have been subject to 30% withholding. Prospective investors should
read a fund's Account Application for additional information regarding
backup withholding of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it
is generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, sell or exchange, you
may have a gain or a loss on the transaction. You are responsible for any
tax liabilities generated by your transaction.
OTHER TAX ISSUES. Exempt-interest dividends that you receive may affect
your alternative minimum tax calculation. Also, if you are receiving
social security or railroad retirement benefits, your exempt-interest
dividends may increase the tax on your benefits. If you borrow money to
purchase or carry shares of a fund, your deduction for interest paid on
those borrowings will be limited.
o STATE TAX CONSIDERATIONS
The following discussion for each fund is very general. You are urged to
consult your tax adviser regarding the effect that an investment in a fund
may have on your particular tax situation.
As long as a fund qualifies for treatment as a regulated investment
company, it will not need to pay Massachusetts income or corporate excise
tax.
Your distributions from a fund, including exempt-interest dividends,
will generally be subject to state income tax if you live in a state other
than the state to which the fund is targeted.
If you redeem, sell or exchange shares of a fund, you will normally need
to take your resulting gain or loss into account in computing your state
income tax.
MASSACHUSETTS FUND: Most of your distributions from the Massachusetts fund
will be exempt from Massachusetts personal income tax. A portion of your
exempt-interest dividends will be subject to Massachusetts tax if the fund
invests in municipal securities of other states. Ordinary dividends that are
attributable to interest on U.S. government securities will be exempt from
Massachusetts personal income tax. A portion of capital gain dividends may
also be exempt depending on the municipal securities in which the fund
invests. You will receive a statement each January or February showing which
distributions are subject to Massachusetts income tax and which are exempt.
Companies that pay Massachusetts corporate excise tax will generally need
to include all distributions from the fund in calculating the income
measure of the tax. Companies generally will not include distributions in
calculating their sales factors.
If you borrow money to purchase or carry shares of the fund, any deduction
you would normally take for interest paid on those borrowings will be
limited. This is true even for companies that have to pay corporate excise
tax on distributions from the fund.
NEW YORK FUND: Under existing New York laws, you will not be subject to
New York State or New York City personal income taxes on the fund's
dividends to the extent that such dividends qualify as exempt-interest
dividends for federal income tax purposes and represent interest income
attributable to obligations of the State of New York and its political
subdivisions, or certain other obligations the interest on which is exempt
from New York State and New York City personal income taxes, such as, for
example, certain obligations of The Commonwealth of Puerto Rico. To the
extent you receive distributions from the fund that are derived from other
income, including long-term or short-term capital gains, such
distributions will not be exempt from New York State or New York City
personal income tax.
Fund dividends are not excluded from net income in determining New York
State or New York City franchise taxes on corporations or financial
institutions.
Any capital gains or losses you realize upon a redemption, sale or
exchange of your shares in the fund will be required to be taken into
account for New York State personal income tax purposes, if you are a New
York State resident, and for New York City personal income tax purposes,
if you are a resident of New York City.
You should also note that interest you incur to purchase or retain shares
of the fund will not be deductible for New York State or New York City
personal income tax purposes.
o UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have similar
investment goals and principal investment policies and risks similar to a
fund, and which may be managed by the fund's portfolio manager(s). While
each fund may have many similarities to these other funds, its investment
performance will differ from their investment performance. This is due to
a number of differences between the funds, including differences in sales
charges, expense ratios and cash flows.
o YEAR 2000 READINESS DISCLOSURE
Each fund could be adversely affected if the computer systems used by MFS,
the funds' other service providers or the companies in which a fund
invests do not properly process date-related information from and after
January 1, 2000. MFS recognizes the importance of the Year 2000 issue and,
to address Year 2000 compliance, created a separately funded Year 2000
Program Management Office in 1996 comprised of a specialized staff
reporting directly to MFS senior management. The Office, with the help of
external consultants, is responsible for overall coordination, strategy
formulation, communications and issue resolution with respect to Year 2000
issues. While MFS systems will be tested for Year 2000 readiness before
the turn of the century, there are significant systems interdependencies
in the domestic and foreign markets for securities, the business
environments in which companies held by each fund operate and in MFS' own
business environment. MFS has been working with each fund's other service
providers to identify and respond to potential problems with respect to
Year 2000 readiness and to develop contingency plans. Year 2000 readiness
is also one of the factors considered by MFS in its ongoing assessment of
companies in which each fund invests. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on a fund.
o PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
To avoid sending duplicate copies of materials to households, only one
copy of the fund's annual and semiannual report will be mailed to
shareholders having the same residential address on the fund's records.
However, any shareholder may contact MFSC (see back cover for address and
phone number) to request that copies of these reports be sent personally
to that shareholder.
<PAGE>
- ------------
APPENDIX A
- ------------
o INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, each fund may engage in the
following investment techniques and practices, which are described,
together with their risks, in the SAI. Investment techniques and practices
which are the principal focus of the funds are also described in the Risk
Return Summary of the prospectus.
INVESTMENT TECHNIQUES/PRACTICES
..........................................................................
SYMBOLS x permitted -- not permitted
--------------------------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities --
Loans and Other Direct Indebtedness --
Lower Rated Bonds x
Municipal Bonds x
Speculative Bonds x
U.S. Government Securities x
Variable and Floating Rate Obligations x
Zero Coupon Bonds x
Equity Securities --
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities --
Emerging Markets --
Foreign Securities --
Forward Contracts --
Futures Contracts x
Indexed Securities/Structured Products x
Inverse Floating Rate Obligations x
Investment in Other Investment Companies
Open-End Funds x
Closed-End Funds x
Lending of Portfolio Securities x
Leveraging Transactions
Bank Borrowings --
Mortgage "Dollar-Roll" Transactions --
Reverse Repurchase Agreements --
Options
Options on Foreign Currencies --
Options on Futures Contracts x
Options on Securities x
Options on Stock Indices --
Reset Options --
"Yield Curve" Options --
Repurchase Agreements x
Restricted Securities x
Short Sales --
Short Sales Against the Box --
Short Term Instruments x
Swaps and Related Derivative Instruments x
Temporary Borrowings x
Temporary Defensive Positions x
Warrants x
"When-Issued" Securities x
<PAGE>
- ------------
APPENDIX B
- ------------
TAX EQUIVALENT YIELD TABLES
(RATES FOR 1999 UNDER FEDERAL AND STATE INCOME TAX LAWS)
The tables below show the approximate taxable bond yields which are equivalent
to tax-exempt bond yields, for the ranges indicated, under federal and,
respectively, Massachusetts and New York personal income tax laws that apply
to 1999. Such yields will differ under the laws applicable to subsequent
years. Separate calculations, showing the applicable taxable income brackets,
are provided for investors who file joint returns and for those investors who
file individual returns. In each table, the effective marginal income tax rate
will be increased if personal exemptions are phased out (for the phase out
period only) and if a portion of itemized deductions is disallowed. This
increase in the marginal rates, if applicable, will cause a corresponding
increase in the equivalent taxable yields.
<TABLE>
<CAPTION>
MASSACHUSETTS -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ----------------------------------------- INCOME MASSACHUSETTS TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX ------------------------------------------------- FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 $ 0- 43,050 20.06% 3.75% 5.00% 6.25% 7.51% 8.76% 10.01% 0.15 0.059500 0.2006
$ 25,750- 62,450 $ 43,050-104,050 32.28 4.43 5.91 7.38 8.86 10.34 11.81 0.28 0.059500 0.3228
$ 62,450-130,250 $104,050-158,550 35.11 4.62 6.16 7.71 9.25 10.79 12.33 0.31 0.059500 0.3511
$130,250-283,150 $158,550-283,150 39.81 4.98 6.65 8.31 9.97 11.63 13.29 0.36 0.059500 0.3981
$283,150 & Over $283,150 & Over 43.19 5.28 7.04 8.80 10.56 12.32 14.08 0.396 0.059500 0.4319
* Net amount subject to Federal and Massachusetts personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Massachusetts rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NEW YORK STATE RESIDENTS (EXCEPT NEW YORK CITY RESIDENTS) -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- --------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE FED. &
SINGLE JOINT TAX ------------------------------------------------ FEDERAL STATE ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE
- ------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 19.51% 3.73% 4.97% 6.21% 7.45% 8.70% 9.94% 0.15 0.053081 0.1951
$ 0- 43,050 19.25 3.72 4.95 6.19 7.43 8.67 9.91 0.15 0.050055 0.1925
$ 25,750- 62,450 $ 43,050-104,050 32.93 4.47 5.96 7.45 8.95 10.44 11.93 0.28 0.068500 0.3293
$ 62,450-130,250 $104,050-158,550 35.73 4.67 6.22 7.78 9.34 10.89 12.45 0.31 0.068500 0.3573
$130,250-283,150 $158,550-283,150 40.38 5.03 6.71 8.39 10.06 11.74 13.42 0.36 0.068500 0.4038
$283,150 & Over $283,150 & Over 43.74 5.33 7.11 8.89 10.66 12.44 14.22 0.396 0.068500 0.4374
* Net amount subject to Federal and New York personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
<CAPTION>
NEW YORK -- NEW YORK CITY RESIDENTS ONLY -- 1999 TAX YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* COMBINED
- ----------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE AVERAGE AVERAGE FED. &
SINGLE JOINT TAX --------------------------------------- FEDERAL STATE CITY ADD'L ST.
1999 1999 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE SURCHARGE RATE
- ----------------- ---------------- -------- ---------------------------------------- ------ -------- -------- --------- --------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 25,750 22.41% 3.87% 5.16% 6.44% 7.73% 9.02% 10.31% 0.15 0.053081 0.029874 0.004182 0.2241
$ 0- 43,050 22.13 3.85 5.14 6.42 7.71 8.99 10.27 0.15 0.050055 0.029652 0.004151 0.2213
$ 25,750- 62,450 35.66 4.66 6.22 7.77 9.33 10.88 12.43 0.28 0.068500 0.033245 0.004654 0.3566
$ 43,050-104,050 35.65 4.66 6.22 7.77 9.32 10.88 12.43 0.28 0.068500 0.033174 0.004644 0.3565
$ 62,450-130,250 38.37 4.87 6.49 8.11 9.74 11.36 12.98 0.31 0.068500 0.033575 0.004701 0.3837
$104,050-158,550 38.37 4.87 6.49 8.11 9.74 11.36 12.98 0.31 0.068500 0.033575 0.004701 0.3837
$130,250-283,150 $158,550-283,150 42.83 5.25 7.00 8.75 10.50 12.24 13.99 0.36 0.068500 0.033575 0.004701 0.4283
$283,150 & Over $283,150 & Over 46.05 5.56 7.41 9.27 11.12 12.97 14.83 0.396 0.068500 0.033575 0.004701 0.4605
* Net amount subject to Federal and New York personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
</TABLE>
<PAGE>
MFS(R) MASSACHUSETTS HIGH INCOME TAX FREE FUND
MFS(R) NEW YORK HIGH INCOME TAX FREE FUND
If you want more information about the funds, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the funds'
actual investments. Annual reports discuss the effect of recent market
conditions and the funds' investment strategy on the funds' performance during
their last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated August 1, 1999,
provides more detailed information about the funds and is incorporated into
this prospectus by reference.
YOU CAN GET FREE COPIES OF THE ANNUAL/SEMIANNUAL REPORTS, THE SAI AND OTHER
INFORMATION ABOUT THE FUNDS, AND MAKE INQUIRIES ABOUT THE FUNDS, BY
CONTACTING:
MFS Service Center, Inc.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the funds (including their prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained
by calling the Commission at 1-800-SEC-0330. Reports and other information
about the funds are available on the Commission's Internet website at
http:// www.sec.gov, and copies of this information may be obtained, upon
payment of a duplicating fee, by writing the Public Reference Section at
the above address.
The funds' Investment Company Act file number is 811-4096.
MWT-1 3/99 138M 24/224/324/824
<PAGE>
- -----------------------------
MFS(R) MUNICIPAL SERIES TRUST
- -----------------------------
AUGUST 1, 1999
[Logo] M F S(R)
INVESTMENT MANAGEMENT STATEMENT OF ADDITIONAL
75 YEARS INFORMATION
WE INVENTED THE MUTUAL FUND(R)
MFS NEW YORK HIGH INCOME TAX FREE FUND
MFS MASSACHUSETTS HIGH INCOME TAX FREE FUND
500 BOYLSTON STREET, BOSTON, MA 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 Funds' Prospectus dated
August 1, 1999. This SAI should be read in conjunction with the Prospectus. You
may obtain a copy of the Funds' Prospectus and Annual Report, when available,
without charge by contacting MFS Service Center, Inc. (see back cover of Part II
of this SAI for address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Fund, while Part II contains information
that generally applies to each of the Funds in the MFS Family of Funds (the "MFS
Funds"). Each Part of the SAI has a variety of appendices which can be found at
the end of Part I and Part II, respectively.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Funds.
TABLE OF CONTENTS
Page
I Definitions ......................................................... 3
II Management of the Funds ............................................. 3
The Funds ........................................................... 3
Trustees and Officers -- Identification and Background .............. 3
Trustees Compensation ............................................... 3
Affiliated Service Provider Compensation ............................ 3
III Sales Charges and Distribution Plan Payments ........................ 3
Sales Charges ....................................................... 3
Distribution Plan Payments ......................................... 3
IV Portfolio Transactions and Brokerage Commissions .................... 3
V Share Ownership ..................................................... 3
VI Performance Information ............................................. 3
VII Investment Techniques, Practices, Risks and Restrictions ............ 3
Investment Techniques, Practices and Risks .......................... 3
Investment Restrictions ............................................. 4
VIII Tax Considerations .................................................. 4
IX Independent Auditors and Financial Statements ....................... 4
Appendix A -- Trustees and Officers -- Identification and Background A-1
Appendix B -- Trustee Compensation .................................. B-1
Appendix C -- Affiliated Service Provider Compensation .............. C-1
Appendix D -- Sales Charges and Distribution Plan Payments .......... D-1
Appendix E -- Portfolio Transactions and Brokerage Commissions ...... E-1
Appendix F -- Share Ownership ....................................... F-1
Appendix G -- Performance Information ............................... G-1
Appendix H -- Additional Information Regarding the States ........... H-1
<PAGE>
I DEFINITIONS
"Funds" - MFS New York High Income Tax Free Fund and MFS Massachusetts High
Income Tax Free Fund, each a series of the Trust.
"Trust" - MFS Municipal Series Trust, a Massachusetts business trust,
organized 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.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Funds, dated August 1, 1999, as amended
or supplemented from time to time.
II MANAGEMENT OF THE FUNDS
THE FUNDS
The Funds are non-diversified series of the Trust. The Trust is an open-end
management investment company.
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The identification and background of the Trustees and officers of the Trust
are set forth in Appendix A of this Part I.
TRUSTEE COMPENSATION
Compensation paid to the non-interested Trustees and to Trustees who are not
officers of the Trust, for certain specified periods, is set forth in
Appendix B of this Part I.
AFFILIATED SERVICE PROVIDER COMPENSATION
Compensation paid by each Fund to its affiliated service providers -- to
MFS, for investment advisory and administrative services, and to MFSC, for
transfer agency services -- for certain specified periods is set forth in
Appendix C to this Part I.
III SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
Sales charges paid in connection with the purchase and sale of Fund shares
for certain specified periods are set forth in Appendix D to this Part I,
together with the Funds' schedule of dealer reallowances.
DISTRIBUTION PLAN PAYMENTS
Payments made by each Fund under the Distribution Plan for its most recent
fiscal year end are set forth in Appendix D to this Part I.
IV PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by each Fund for certain specified periods, and
information concerning purchases by the Funds of securities issued by their
regular broker-dealers for the Funds' most recent fiscal year, are set forth
in Appendix E to this Part I.
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 from time to time through such broker-dealers, on
behalf of the Funds. The Trustees (together with the Trustees of certain
other MFS funds) have directed the Adviser to allocate a total of $53,050 of
commission business from certain MFS funds (including the 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 Funds and the Adviser).
V SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and officers
of the Trust as a group, by investors who control the Fund, if any, and by
investors who own 5% or more of any class of Fund shares, if any, is set
forth in Appendix F to this Part I.
VI PERFORMANCE INFORMATION
Performance information, as quoted by the Funds in sales literature and
marketing materials, is set forth in Appendix G to this Part I.
VII INVESTMENT TECHNIQUES, PRACTICES, RISKS AND RESTRICTIONS
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
The investment objective and principal investment policies of each Fund are
described in the Prospectus. In pursuing its investment objective and
principal investment policies, a Fund may engage in a number of investment
techniques and practices, which involve certain risks. These investment
techniques and practices, which may be changed without shareholder approval
unless indicated otherwise, are identified in Appendix A to the Prospectus,
and are more fully described, together with their associated risks, in Part
II of this SAI. The following percentage limitations apply to these
investment techniques and practices for each Fund:
o Speculative Securities and Lower Rated Securities may not exceed 75%
of a Fund's net assets; and
o Revenue Bonds may not exceed 100% of a Fund's net assets.
INVESTMENT RESTRICTIONS
Each 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 at which 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).
Terms used below (such as Options and Futures Contracts) are defined in
Part II of this SAI.
The Funds may not:
(1) Borrow amounts from banks in excess of 33 1/3% of its total assets
including amounts borrowed.
(2) Underwrite securities issued by other persons except insofar as the
Trust may technically be deemed an underwriter under the Securities Act of
1933, as amended (the "1933 Act"), in selling a portfolio security.
(3) Purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts (excluding currencies and any
type of option, Futures Contracts and Forward Contracts) in the ordinary
course of business. Each Fund reserves the freedom of action to hold and to
sell real estate mineral leases, commodities or commodity contracts
(including currencies and any type of option, Futures Contracts and Forwards
Contracts) acquired as a result of the ownership of securities).
(4) Issue any senior securities except as permitted by the Investment
Company Act of 1940, as amended (the "1940 Act"). For purposes of this
restriction, collateral arrangements with respect to any type of swap,
option, Forward Contracts and Futures Contracts and collateral arrangements
with respect to initial and variation margin are not deemed to be the
issuance of a senior security.
(5) Make loans to other persons. For these purposes, the purchase of
commercial paper, the purchase of a portion or all of an issue of debt
securities, the lending of portfolio securities, or the investment of the
Fund's assets in repurchase agreements, shall not be considered the making
of a loan.
For purposes of the investment restrictions described above and the non-
fundamental restriction 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.
In addition, each Fund has adopted the following non-fundamental policy
which may be changed without shareholder approval:
o 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. Repurchase
agreements maturing in more than seven days will be deemed to be
illiquid for purposes of each Fund's limitation on investment in
illiquid securities. Securities that are not registered under the 1933
Act 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.
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.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Funds' independent auditors, providing audit
services, tax services, and assistance and consultation with respect to the
preparation of filings with the Securities and Exchange Commission.
<PAGE>
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PART I - APPENDIX A
-------------------
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
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.)
TRUSTEES
JEFFREY L. SHAMES,* Chairman and President (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive
Officer
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former
Chairman and Director (prior to September 30, 1991); Cambridge Bancorp,
Director; Cambridge Trust Company, Director
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
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. (corporate 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
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: 294 Washington Street, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994);
Sundstrand Corporation (diversified mechanical
manufacturer), Director
Address: 36080 Shaker Blvd., Hunting Valley, Ohio
OFFICERS
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, Senior Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touche LLP, Senior Manager (prior to September 1996)
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 LLP, Senior Tax Manager (prior to September 1994)
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
GEOFFREY L. SCHECHTER,* Vice President (born 12/17/62)
Massachusetts Financial Services Company, Vice President
----------------
*"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.
<PAGE>
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PART I - APPENDIX B
-------------------
TRUSTEE COMPENSATION
The Funds pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, who currently receive a fee of $833 per
year plus $67 per meeting and $67 per committee meeting attended, together
with such Trustee's out-of-pocket expenses. The Trustees are currently
waiving receipt of these fees. In addition, the Trust has a retirement plan
for these Trustees as described under the caption "Management of the Funds
-- Trustee Retirement Plan" in Part II. The Retirement Age under the plan is
75.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLES
...................................................................................................................
RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $ 0 $ 0 3 $259,430
Marshall N. Cohan 0 0 3 143,259
Dr. Lawrence Cohn 0 0 13 153,579
Sir David Gibbons 0 0 3 130,059
Abby M. O'Neill 0 0 4 130,059
Walter E. Robb, III 0 0 3 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 0 0 15 157,714
Ward Smith 0 0 4 146,739
----------------
(1)Estimated for the fiscal year ending March 31, 2000.
(2)Based upon normal retirement age (75).
(3)Information provided is provided for calendar year 1998. All Trustees served as Trustees of 43 funds within the
MFS fund complex (having aggregate net assets at December 31, 1998, of approximately $24.9 billion) except Mr.
Bailey, who served as Trustee of 74 funds within the MFS complex (having aggregate net assets at December 31,
1998 of approximately $68.2 billion).
</TABLE>
<PAGE>
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PART I - APPENDIX C
-------------------
AFFILIATED SERVICE PROVIDER COMPENSATION
..........................................................................
Each Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID TO
FISCAL YEAR ENDED FUND SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC MFS AND MFSC
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Not Applicable
</TABLE>
<PAGE>
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PART I - APPENDIX D
-------------------
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
..........................................................................
The following sales charges were paid during the specified periods:
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
RETAINED REALLOWED CLASS A CLASS B
FISCAL YEAR END FUND TOTAL BY MFD TO DEALERS SHARES SHARES
--------------------------------------------------------------------------
Not Applicable
DEALER REALLOWANCES
..........................................................................
As shown above, MFD pays (or "reallows") a portion of the Class A initial
sales charge to dealers. The dealer reallowance as expressed as a percentage
of the Class A shares' offering price is:
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
--------------------------------------------------------------------------
Less than $100,000 4.00%
$100,000 but less than $250,000 3.20%
$250,000 but less than $500,000 2.25%
$500,000 but less than $1,000,000 1.70%
$1,000,000 or more None*
----------------
*A CDSC will apply to such purchase.
DISTRIBUTION PLAN PAYMENTS
..........................................................................
During the fiscal year ended March 31, 1999, the Fund made the following
Distribution Plan payments:
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
--------------------------------------------------------------------------
The Funds are newly
organized and have
not made payments
under the Distribution
Plan as of the date
of this SAI.
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
<PAGE>
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PART I - APPENDIX E
-------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
BROKERAGE COMMISSIONS
..........................................................................
The Funds are newly organized and have not paid brokerage commissions as of
the date of this SAI.
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
..........................................................................
The Funds are newly organized and have not purchased securities issued by
their regular broker-dealers as of the date of this SAI.
<PAGE>
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PART I - APPENDIX F
-------------------
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
Not Applicable
25% OR GREATER OWNERSHIP
The following table identifies those investors who own 25% or more of a
Fund's shares (all share classes taken together) and are therefore presumed
to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Not Applicable
</TABLE>
5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any
class of a Fund's shares:
NAME AND ADDRESS OF INVESTOR OWNERSHIP PERCENTAGE
..............................................................................
Not Applicable
<PAGE>
-------------------
PART I - APPENDIX G
-------------------
PERFORMANCE INFORMATION
..........................................................................
The Funds are newly organized and have no performance as of the date of this
SAI.
<PAGE>
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PART I - APPENDIX H
-------------------
ADDITIONAL INFORMATION CONCERNING THE STATES
..........................................................................
The following discussion regarding certain economic, financial and legal
matters pertaining to the relevant States and their governments is drawn
primarily from official statements relating to securities offerings of those
States and other publicly available documents, dated as of various dates
prior to the date of this Prospectus, and do not purport to be complete
descriptions. Discussions regarding the financial condition of a particular
State government may not be relevant to Municipal Obligations issued by
political subdivisions of that State. Moreover, the general economic
conditions discussed may or may not affect issuers of the obligations of
these States. None of the information is relevant to any tax-exempt
securities issued by territories and possessions of the United States or the
District of Columbia or their political subdivisions, agencies or
instrumentalities.
MASSACHUSETTS FUND
Investments in Massachusetts Municipal Obligations may be affected by a
variety of factors, including the general economic health of the
Commonwealth and local governments and the availability of federal funding.
While economic growth in the Commonwealth slowed considerably during the
recession of 1990-1991, indicators such as retail sales, housing permits,
construction, and employment levels suggest a strong and continued economic
recovery. As of March 1999, the Commonwealth's unadjusted unemployment rate
was 3.3%, as compared to a national average of 4.4%. The Commonwealth's per
capita personal income is currently higher than the national average.
Accounted for on a statutory basis, ending fund balances in the budgeted
operating funds for fiscal 1994 were $589.3 million. Fiscal 1995 and 1996
ended with positive fund balances of $726.0 million and $1.172 billion,
respectively.
In fiscal 1997, the total revenues of the budgeted operating funds of the
Commonwealth increased by approximately 4.9% over the prior fiscal year to
$18.170 billion. Expenditures increased by 6.3% over the prior fiscal year
to $17.949 billion. As a result, the Commonwealth ended fiscal year 1997
with a positive closing fund balance of $1.394 billion. In fiscal 1998, the
total revenues of the budgeted operating funds of the Commonwealth increased
by approximately 5.9% over the prior fiscal year to $19.002 billion.
Expenditures increased by 9.0% over the prior fiscal year to $19.800
billion. As a result, the Commonwealth ended fiscal year 1998 with a
positive closing fund balance of $2.192 billion.
Budgeted revenues and other sources in fiscal 1999, which ended June 30,
1999, were estimated as of February 16, 1999, by the Executive Office for
Administration and Finance to be approximately $19.700 billion, including
tax revenues of $14.0 billion. It is estimated that fiscal 1999 budgeted
expenditures and other uses will be $20.151 billion and that fiscal 1999
will end with fund balances of $1.703 billion.
On January 27, 1999, Governor Cellucci filed his fiscal 2000 budget
recommendations with the House of Representatives. The proposal called for
budgeted expenditures of approximately $20.391 billion, or total fiscal 2000
spending of $20.556 billion after adjusting for shifts to and from
off-budget accounts. Budgeted revenues for fiscal 2000 are projected to be
$20.241 billion, or $20.332 billion after adjusting for shifts to and from
off-budget accounts. The Governor's proposal projected a fiscal 2000 ending
balance in the budgeted funds of approximately $1.625 billion, including a
Stabilization Fund balance of approximately $1.390 billion.
S&P and Moody's have rated general obligation bonds issued by the
Commonwealth as AA- and Aa3, respectively. In response to budgetary matters
or other economic indicators, the rating agencies may change their ratings
from time to time.
In Massachusetts the tax on personal property and real estate is virtually
the only source of tax revenues available to cities and towns to meet local
costs. "Proposition 2 1/2," an initiative petition adopted by the voters of
the Commonwealth in November 1980, limits the power of Massachusetts cities
and towns and certain tax-supported districts and public agencies to raise
revenue from property taxes to support their operations, including the
payment of certain debt service. Proposition 2 1/2 required many cities and
towns to reduce their property tax levies to a stated percentage of the full
and fair cash value of their taxable real estate and personal property, and
it limits the amount by which the total property taxes assessed by all
cities and towns might increase from year to year.
The reductions in local revenues and anticipated reductions in local
personnel and services resulting from Proposition 2 1/2 created strong
demand for substantial increases in state-funded local aid, which increased
significantly from the fiscal 1981 level of $1.632 billion. The effect of
this increase in local aid was to shift a major part of the impact of
Proposition 2 1/2 to the Commonwealth, but this did not require an increase
in Massachusetts state taxes. Direct local aid increased to $3.246 billion
in fiscal 1996. Fiscal 1997 expenditures for direct local aid were $3.558
billion, which is an increase of approximately 9.6% above the fiscal 1996
level. Fiscal 1998 expenditures for direct local aid will be $3.949 billion,
an increase of approximately 11.0% above the fiscal 1997 level. It is
estimated that fiscal 1999 expenditures for direct local aid will be $4.272
billion, an increase of approximately 8.2% above the fiscal 1998 level. In
fiscal year 1999 approximately 21.5% of the Commonwealth's budget is
estimated to be allocated to direct local aid.
Limits on Commonwealth tax revenues were established by initiative petition
in November 1986, and added to the Commonwealth's General Laws as Chapter
62F. Chapter 62F contains no exclusion for debt service on Municipal
Obligations of the Commonwealth. Tax revenues in fiscal 1994 through fiscal
1998 were lower than the limit set by Chapter 62F, and the Executive Office
for Administration and Finance currently estimates that state tax revenues
in fiscal 1999 will not reach such limit.
Certain of the Commonwealth's cities, counties and towns have at times
experienced serious financial difficulties which have adversely affected
their credit standing. The recurrence of such financial difficulties, or
financial difficulties of the Commonwealth, could adversely affect the
market values and marketability of outstanding obligations issued by the
Commonwealth or its public authorities or municipalities.
The aggregate unfunded actuarial liabilities of the pension systems of the
Commonwealth and the unfunded liability for the Commonwealth related to
local retirement systems are significant -- estimated to be approximately
$6.720 billion as of January 1, 1996, on the basis of certain actuarial
assumptions regarding, among other things, future investment earnings and
annual inflation rates, wage increases and cost of living increases. No
assurance can be given that these assumptions will be realized. The
legislature adopted a comprehensive pension bill addressing the issue in
January 1988, which requires the Commonwealth, beginning in fiscal 1989, to
fund future pension liabilities currently and amortize the Commonwealth's
unfunded liabilities over 40 years, in accordance with funding schedules
proposed by the Secretary of Administration and Finance and approved by new
legislation. The amounts required for funding of current pension liabilities
in fiscal years 1999, 2000, 2001 and 2002, are estimated to be $1.059
billion, $1.073 billion, $1.088 billion and $1.104 billion, respectively.
Pension funding legislation was revised in July 1997 as part of the fiscal
1998 budget, to include an accelerated pension funding schedule that would
eliminate the Commonwealth's unfunded liability by 2018 rather than 2028.
NEW YORK FUND
The fiscal stability of New York State is related, in part, to the fiscal
stability of its public localities and authorities. Various State agencies,
authorities and localities have issued large amounts of bonds and notes
either guaranteed or supported by the State through lease-purchase
arrangements, other contractual arrangements or moral obligation provisions.
While debt service is normally paid out of revenues generated by projects of
such State agencies, authorities and localities, the State has had to
provide special assistance in recent years, in some cases of a recurring
nature, to enable such agencies, authorities and localities to meet their
financial obligations and, in some cases, to prevent or cure defaults. If
any State agencies, authorities or localities were to default on any of
their financial obligations, or were to require State assistance to meet
their financial obligations, the ability of the State to meet its own
obligations as they become due or to obtain additional financing, as well as
market price of the State's outstanding debt, could be materially adversely
affected.
A variety of court actions have been brought against the State and certain
agencies and municipalities relating to financings, amount of real estate
tax, use of tax revenues and other matters, which could adversely affect the
ability of the State or such agencies or municipalities to pay their
obligations.
Both the State and New York City face potential economic problems which
could seriously affect the ability of both the State and City to meet their
respective financial obligations. The City depends on state aid both to
enable the City to balance its budget and to meet its cash requirements. The
City has had to face greater competition from other major cities and the
State economy has grown more slowly than that of the nation as a whole, in
part as a result of international and national trends beyond the State's or
City's control. Moreover, the current high level of New York State and New
York City taxes limits the ability of the State and the City to impose
higher taxes in the event of future difficulties. The federal and State
governments have proposed various programs to alleviate these trends but no
immediate reversal can be expected. Further, various proposals relating to
Federal tax and spending policies that are currently being discussed and
debated could, if enacted, have a significant impact on the current and
future financial condition of the State and its localities. Certain
localities outside the City have experienced financial problems and have
requested and received additional State assistance during the last several
years.
New York is the third most populous state in the nation and has a relatively
high level of personal wealth. The State's economy is diverse with a
comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small
share of the nation's farming and mining activity. The State's location and
its excellent air transport facilities and natural harbors have made it an
important link in international commerce. Travel and tourism constitute an
important part of the economy. The State has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries. This transition reflects a national trend. The State is
likely to be less affected than the nation as a whole during an economic
recession that is concentrated in manufacturing and construction, but likely
to be more affected during a recession that is concentrated more in the
service-producing sector.
Although industry and commerce are broadly spread across the State,
particular activities are concentrated in certain areas. Westchester County
is headquarters for several major corporations. Buffalo's economy relies on
a diverse manufacturing base. Rochester leads the nation in the manufacture
of photographic and optical equipment. Syracuse and the Utica- Rome area
produce machinery and transportation equipment. The Albany-Troy- Schenectady
area is a governmental and educational center and produces electrical
products. Binghamton is the original site of the International Business
Machines Corporation and continues to have a concentration of employment in
computer and other high technology manufacturing.
New York City, which is the most populous city in the State and nation and
is the center of the nation's largest metropolitan area, accounts for a
large portion of both the State's population and personal income. It is
headquarters for the nation's securities business, and for a major portion
of the nation's major commercial banks, diversified financial institutions
and life insurance companies. In addition, the City houses the home offices
of the three major radio and television broadcasting networks, most of the
national magazines and a substantial portion of the nation's book
publishers. The City also retains leadership in the design and manufacture
of men's and women's apparel.
The State has historically been one of the wealthiest states in the nation.
For decades, however, the State has grown more slowly than the nation as a
whole, gradually eroding its relative economic position. Statewide, urban
centers have experienced significant changes involving migration of the more
affluent to the suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people and
business. The City has also had to face greater competition as other major
cities have developed financial and business capabilities which make them
less dependent on the specialized services traditionally available almost
exclusively in the City.
The State economy has continued to expand, but growth remains somewhat
slower than in the nation. Although the State has added approximately
300,000 jobs since late 1992, employment growth in the State has been
hindered during recent years by significant cutbacks in the computer and
instrument manufacturing, utility, defense, and banking industries.
Government downsizing has also moderated these job gains.
The State has for many years had a very high State and local tax burden
relative to other states. The State and its localities have used these taxes
to develop and maintain their transportation networks, public schools and
colleges, public health systems, other social services and recreational
facilities. Despite these benefits, the burden of State and local taxation,
in combination with the many other causes of regional economic dislocation,
may have contributed to the decisions of some businesses and individuals to
relocate outside, or not locate within, the State.
<PAGE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in
this Part II to a "Trust" means the Massachusetts business trust of which the
Fund is a series, or, if the Fund is not a series of a Massachusetts business
trust, references to a "Trust" shall mean the Fund.
- ---------------------
TABLE OF CONTENTS
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Page
I Management of the Fund ........................................... 1
Trustees/Officers ................................................ 1
Investment Adviser ............................................... 1
Administrator .................................................... 2
Custodian ........................................................ 2
Shareholder Servicing Agent ...................................... 2
Distributor ...................................................... 2
II Principal Share Characteristics .................................. 2
Class A Shares ................................................... 2
Class B Shares, Class C Shares and Class I Shares ................ 2
Waiver of Sales Charges .......................................... 3
Dealer Commissions and Concessions ............................... 3
General .......................................................... 3
III Distribution Plan ................................................ 3
Features Common to Each Class of Shares .......................... 3
Features Unique to Each Class of Shares .......................... 4
IV Investment Techniques, Practices and Risks ....................... 5
V Net Income and Distributions ..................................... 5
Money Market Funds ............................................... 5
Other Funds ...................................................... 5
VI Tax Considerations ............................................... 5
Taxation of the Fund ............................................. 5
Taxation of Shareholders ......................................... 6
Special Rules for Municipal Fund Distributions ................... 7
VII Portfolio Transactions and Brokerage Commissions ................. 8
VIII Determination of Net Asset Value ................................. 9
Money Market Funds ............................................... 9
Other Funds ...................................................... 10
IX Performance Information .......................................... 10
Money Market Funds ............................................... 10
Other Funds ...................................................... 11
General .......................................................... 12
MFS Firsts ....................................................... 12
X Shareholder Services ............................................. 13
Investment and Withdrawal Programs ............................... 13
Exchange Privilege ............................................... 15
Tax-Deferred Retirement Plans .................................... 16
XI Description of Shares, Voting Rights and Liabilities ............. 16
Appendix A -- Waivers of Sales Charges ........................... A-1
Appendix B -- Dealer Commissions and Concessions ................. B-1
Appendix C -- Investment Techniques, Practices and Risks ......... C-1
Appendix D -- Description of Bond Ratings ........................ D-1
<PAGE>
I MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS BOARD OVERSIGHT -- The Board of Trustees which oversees
the Fund provides broad supervision over the affairs of the Fund. The
Adviser is responsible for the investment management of the Fund's assets,
and the officers of the Trust are responsible for its operations.
TRUSTEE RETIREMENT PLAN -- The Trust has a retirement plan for Trustees
who are non-interested Trustees and Trustees who are not officers of the
Trust. Under this plan, a Trustee will retire upon reaching a specified
age (see Part I -- "Appendix B ") ("Retirement Age") and if the Trustee
has completed at least 5 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 his
Retirement Age and receive reduced payments if he has completed at least 5
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. The Fund will accrue
its allocable portion of compensation expenses under the retirement plan
each year to cover the current year's service and amortize past service
cost.
INDEMNIFICATION OF TRUSTEES AND OFFICERS -- The Declaration of Trust of
the 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 of the Trust or its shareholders, it is
determined 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 they have not engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
INVESTMENT ADVISER
The Trust has retained Massachusetts Financial Services Company ("MFS" or
the "Adviser") as the Fund's 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 of
Canada (an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment advisers
to assist MFS in the management of the Fund's assets. A description of
these sub-advisers, the services they provide and their compensation is
provided under the caption "Management of the Fund -- Sub-Adviser" in
Part I of this SAI for Funds which use sub-advisers.
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to
an Investment Advisory Agreement (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, as disclosed in the Prospectus under the heading
"Management of the Fund[s]."
The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer of the Adviser. 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 Trust pays the compensation of the Trustees who are not officers of
MFS and all expenses of the Fund (other than those assumed by MFS)
including but not limited to: advisory and administrative services;
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 prospectuses, 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 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 between the
series in a manner believed by management of the Trust to be fair and
equitable.
The Advisory Agreement has an initial two year term and continues 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 shares (as defined in "Investment Restrictions" in Part I of this
SAI) 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 shares
(as defined in "Investment Restrictions" in Part I of this SAI), 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
initials "MFS" and that MFS may render services to others and may permit
other fund clients to use the initials "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. Under this Agreement, the Fund
pays MFS an administrative fee 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.
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 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 acts
as the dividend disbursing agent of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is
the Fund's shareholder servicing agent, pursuant to an Amended and
Restated Shareholder Servicing Agreement (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, MFSC
will receive a fee calculated as a percentage of the average daily net
assets of the Fund at an effective annual rate of up to 0.1125%. In
addition, MFSC will be reimbursed by the Fund for certain expenses
incurred by MFSC on behalf of the Fund. The Custodian has contracted with
MFSC to perform certain dividend disbursing agent functions for the Fund.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues 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 shares (as defined in "Investment
Restrictions" in Part I of this SAI) 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.
II PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered by
the MFS Family of Funds. Some MFS Funds may not offer each class of shares
-- see the Prospectus of the Fund to determine which classes of shares the
Fund offers.
CLASS A SHARES
MFD acts as agent in selling Class A shares of the Fund to dealers. The
public offering price of 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
"How to Purchase, Exchange and Redeem Shares" 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 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" below). Certain
purchases of Class A shares may be subject to a 1% CDSC instead of an
initial sales charge, as described in the Fund's Prospectus.
CLASS B SHARES, CLASS C SHARES AND CLASS I SHARES
MFD acts as agent in selling Class B, Class C and Class I shares of the
Fund. The public offering price of Class B, Class C and Class I shares is
their net asset value next computed after the sale. Class B and C shares
are generally subject to a CDSC, as described in the Fund's Prospectus.
WAIVER OF SALES CHARGES
In certain circumstances, the initial sales charge imposed upon purchases
of Class A shares and the CDSC imposed upon redemptions of Class A, B and
C shares are waived. These circumstances are described in Appendix A of
this Part II. 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, because the sales effort, if any, involved in
making such sales is negligible, or in the case of certain CDSC waivers,
because the circumstances surrounding the redemption of Fund shares were
not foreseeable or voluntary.
DEALER COMMISSIONS AND CONCESSIONS
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concessions are described in Appendix
B of this Part II.
GENERAL
Neither MFD nor dealers are permitted to delay placing 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.
III 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 each 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 expense ratio to the extent 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.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current
distribution and service fees for each Fund are reflected under the
caption "Expense Summary" in the Prospectus.
FEATURES COMMON TO EACH CLASS OF SHARES
There are features of the Distribution Plan that are common to each Class
of shares, as described below.
SERVICE FEES -- The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to
the class of shares to which the Distribution Plan relates (i.e., Class A,
Class B or Class C shares, as appropriate) (the "Designated Class")
annually in order that MFD may pay expenses on behalf of the Fund relating
to the servicing of shares of the Designated Class. The service fee is
used by MFD to compensate dealers which enter into a sales agreement with
MFD in consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to shares of the Designated
Class owned by investors for whom such dealer is the dealer or holder of
record. MFD may from time to time reduce the amount of the service fees
paid for shares sold prior to a certain date. Service fees may be reduced
for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates
are entitled to retain all service fees payable under the Distribution
Plan for which there is no dealer of record or for which qualification
standards have not been met as partial consideration for personal services
and/or account maintenance services performed by MFD or its affiliates to
shareholder accounts.
DISTRIBUTION FEES -- The Distribution Plan provides that the Fund may pay
MFD a distribution fee in addition to the service fee described above
based on the average daily net assets attributable to the Designated Class
as partial consideration for distribution services performed and expenses
incurred in the performance of MFD's obligations under its distribution
agreement with the Fund. 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. The amount of the distribution fee
paid by the Fund with respect to each class differs under the Distribution
Plan, as does the use by MFD of such distribution fees. Such amounts and
uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any
year may be more or less than the expenses incurred by MFD under its
distribution agreement with the Fund, the Fund is not liable to MFD for
any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES -- Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the
Designated Class. The provisions of the Distribution Plan relating to
operating policies as well as initial approval, renewal, amendment and
termination are substantially identical as they relate to each Class of
shares covered by the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its
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" in Part I of this SAI).
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" in Part I of this
SAI) 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
the Distribution Plan or in any related agreement.
FEATURES UNIQUE TO EACH CLASS OF SHARES
There are certain features of the Distribution Plan that are unique to
each class of shares, as described below.
CLASS A SHARES -- Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid to
MFD). In addition to the initial sales charge, the dealer also generally
receives the ongoing 0.25% per annum service fee, as discussed above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or 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.
The distribution fee paid to MFD under the Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover distribution-
related expenses incurred by it under its distribution agreement with the
Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement plans
of Class A shares which are sold at net asset value but which are subject
to a 1% CDSC for one year after purchase). In addition, to the extent that
the aggregate service and distribution fees paid under the Distribution
Plan do not exceed 0.35% per annum of the average daily net assets of the
Fund attributable to Class A shares (0.50% per annum for certain Funds),
the Fund is permitted to pay such distribution-related expenses or other
distribution-related expenses.
CLASS B SHARES -- Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. MFD will advance to dealers
the first year service fee described above at a rate equal to 0.25% of the
purchase price of such shares and, as compensation therefor, MFD may
retain the service fee paid by the Fund with respect to such shares for
the first year after purchase. Dealers will become eligible to receive the
ongoing 0.25% per annum service fee with respect to such shares commencing
in the thirteenth month following purchase.
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.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal,
on an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class B shares. As noted above, this distribution fee may
be used by MFD to cover its distribution-related expenses under its
distribution agreement with the Fund (including the 3.75% commission it
pays to dealers upon purchase of Class B shares).
CLASS C SHARES -- Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC of 1.00% upon redemption during
the first year. MFD will pay a commission to dealers of 1.00% of the
purchase price of Class C shares purchased through dealers at the time of
purchase. In compensation for this 1.00% commission paid by MFD to
dealers, MFD will retain the 1.00% per annum Class C distribution and
service fees paid by the Fund with respect to such shares for the first
year after purchase, and dealers will become eligible to receive from MFD
the ongoing 1.00% per annum distribution and service fees paid by the Fund
to MFD with respect to such shares commencing in the thirteenth month
following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee
paid to MFD under the Distribution Plan (which MFD in turn pays to
dealers), as discussed above, and a distribution fee paid to MFD (which
MFD also in turn pays to dealers) under the Distribution Plan, equal, on
an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class C shares.
IV INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in pursuing
their investment objectives and principal investment policies, and the
risks associated with these investment techniques and practices. The Fund
will engage only in certain of these investment techniques and practices,
as identified in Part I. Investment practices and techniques that are not
identified in Part I do not apply to the Fund.
V NET INCOME AND DISTRIBUTIONS MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund
is determined each day during which the New York Stock Exchange is open
for trading (see "Determination of Net Asset Value" below for a list of
days the Exchange is closed).
For this purpose, the net income attributable to shares of a money
market fund (from the time of the immediately preceding determination
thereof) shall consist of (i) all interest income accrued on the portfolio
assets of the money market fund, (ii) less all actual and accrued expenses
of the money market fund determined in accordance with generally accepted
accounting principles, and (iii) plus or minus net realized gains and
losses and net unrealized appreciation or depreciation on the assets of
the money market fund, if any. Interest income shall include discount
earned (including both original issue and market discount) on discount
paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income
is determined, the net asset value per share (i.e., the value of the net
assets of the money market fund divided by the number of shares
outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares in the
shareholder's account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for any
reason the net income determined at any time is a negative amount, which
could occur, for instance, upon default by an issuer of a portfolio
security, the money market fund would first offset the negative amount
with respect to each shareholder account from the dividends declared
during the month with respect to each such account. If and to the extent
that such negative amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the money market fund could reduce the number of its
outstanding shares by treating each shareholder of the money market fund
as having contributed to its capital that number of full and fractional
shares of the money market fund in the account of such shareholder which
represents its proportion of such excess. Each shareholder of the money
market fund will be deemed to have agreed to such contribution in these
circumstances by its investment in the money market fund. This procedure
would permit the net asset value per share of the money market fund to be
maintained at a constant $1.00 per share.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute
to its shareholders dividends equal to all of its net investment income
with such frequency as is disclosed in the Fund's prospectus. These Funds'
net investment income consists of non-capital gain income less expenses.
In addition, these Funds intend to distribute net realized short- and
long-term capital gains, if any, at least annually. Shareholders will be
informed of the tax consequences of such distributions, including whether
any portion represents a return of capital, after the end of each calendar
year.
VI TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
TAXATION OF THE FUND
FEDERAL TAXES -- The Fund (even if it is a fund in a Trust with multiple
series) is treated as a separate entity for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund
has elected (or in the case of a new Fund, intends to elect) to be, and
intends to qualify to be treated 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 its distributions (as a percentage
of both its overall income and any tax-exempt income), and the composition
of its portfolio assets. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. The Fund's
foreign-source income, if any, may be subject to foreign withholding
taxes. If the Fund failed to qualify as a "regulated investment company"
in any year, it would incur a regular federal corporate income tax on all
of its taxable income, whether or not distributed, and Fund distributions
would generally be taxable as ordinary dividend income to the
shareholders.
MASSACHUSETTS TAXES -- 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.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Subject to the special rules discussed
below for Municipal Funds, shareholders of the Fund normally will have to
pay federal income tax and any state or local income taxes on the
dividends and capital gain distributions they receive from the Fund. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether paid in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), whether paid in cash or
reinvested in additional shares, are taxable to shareholders as long-term
capital gains for federal income tax purposes without regard to the length
of time the shareholders have held their shares. Any Fund dividend that is
declared in October, November, or December of any calendar year, payable
to shareholders of record in such a month, and paid during 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, other than dividends that are declared by the
Fund on a daily basis, will have the effect of reducing the per share net
asset value of Fund shares by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any such distribution
(other than an exempt-interest dividend) may thus pay the full price for
the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION -- If the Fund receives dividend income from
U.S. corporations, a portion of the Fund's ordinary income dividends is
normally eligible for the dividends-received deduction for corporations if
the recipient otherwise qualifies for that deduction with respect to its
holding of Fund shares. Availability of the deduction for particular
corporate shareholders is subject to certain limitations, and deducted
amounts may be subject to the alternative minimum tax or result in certain
basis adjustments.
DISPOSITION OF SHARES -- In general, any gain or loss realized upon a
disposition of Fund shares by a shareholder that holds such shares as a
capital asset will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a
disposition of Fund shares held for six months or less 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 Fund shares held for 90 days or less 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 any other shares of an
MFS Fund generally sold subject to a sales charge.
DISTRIBUTION/ACCOUNTING POLICIES -- The Fund's current distribution 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.
U.S. TAXATION OF NON-U.S. PERSONS -- Dividends and certain other payments
(but not including distributions of net capital gains) 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 at that rate on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. 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.
BACKUP WITHHOLDING -- The Fund is also required in certain circumstances
to apply backup withholding at the rate of 31% on taxable dividends and
capital gain distributions (and redemption proceeds, if applicable) paid
to any non-corporate 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.
FOREIGN INCOME TAXATION OF NON-U.S. PERSONS -- Distributions received from
the Fund by Non-U.S. Persons may also be subject to tax under the laws of
their own jurisdictions.
STATE AND LOCAL INCOME TAXES: U.S. GOVERNMENT SECURITIES -- Dividends paid
by the Fund that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but
generally not distributions of capital gains realized upon the disposition
of such obligations) may be exempt from state and local income taxes. The
Fund generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
CERTAIN SPECIFIC INVESTMENTS -- Any investment in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped
securities, 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. To distribute this income (as well as
non-cash income described in the next two paragraphs) 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. Any investment in residual
interests of a CMO that has elected to be treated as a real estate
mortgage investment conduit, or "REMIC," can create complex tax problems,
especially if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," 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 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, Futures Contracts, Forward Contracts, short
sales "against the box" and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect to
foreign investments by the Fund. Foreign exchange gains and losses
realized by the Fund may be treated as ordinary income and loss. Use of
foreign currencies for non-hedging purposes and investment by the Fund in
certain "passive foreign investment companies" may be limited in order to
avoid a tax on the Fund. The Fund may elect to mark to market any
investments in "passive foreign investment companies" on the last day of
each year. This election may cause the Fund to recognize income prior to
the receipt of cash payments with respect to those investments; 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.
FOREIGN INCOME TAXES -- Investment income received by the Fund and gains
with respect to foreign securities may be subject to foreign income taxes
withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of
tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance, since the
amount of the Fund's assets to be invested within various countries is not
known.
If the Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, it may elect to "pass
through" to its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by it and thus includable in their gross income for
federal income tax purposes. Shareholders who itemize deductions would
then be allowed to claim a deduction or credit (but not both) on their
federal income tax returns for such amounts, subject to certain
limitations. Shareholders who do not itemize deductions would (subject to
such limitations) be able to claim a credit but not a deduction. No
deduction will be permitted to individuals in computing their alternative
minimum tax liability. If the Fund is not eligible, or does not elect, to
"pass through" to its shareholders foreign income taxes it has paid,
shareholders will not be able to claim any deduction or credit for any
part of the foreign taxes paid by the Fund.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of funds whose objective
is to invest primarily in obligations that pay interest that is exempt
from federal income tax ("Municipal Funds").
TAX EXEMPT DISTRIBUTIONS -- The portion of a Municipal 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. Except when the Fund
provides actual monthly percentage breakdowns, 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.
TAXABLE DISTRIBUTIONS -- A Municipal Fund may also earn some income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may recognize 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 tax on the non-exempt-interest dividends and capital gain
distributions they receive from the Fund, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. 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.
CONSEQUENCES OF DISTRIBUTIONS BY A MUNICIPAL FUND: EFFECT OF ACCRUED TAX-
EXEMPT INCOME -- Shareholders redeeming shares after tax-exempt income has
been accrued but not yet declared as a dividend should be aware that a
portion of the proceeds realized upon redemption of the shares will
reflect the existence of such accrued tax-exempt income and that this
portion will be subject to tax as a capital gain even though it would have
been tax-exempt had it been declared as a dividend prior to the
redemption. For this reason, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after the Fund declares dividends
representing substantially all the ordinary income (including tax-exempt
income) accrued for that month.
CERTAIN ADDITIONAL INFORMATION FOR MUNICIPAL FUND SHAREHOLDERS -- Interest
on indebtedness incurred by shareholders to purchase or carry Fund shares
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 advisors before purchasing Fund shares.
CONSEQUENCES OF REDEMPTION OF SHARES -- Any loss realized on a redemption
of Municipal Fund shares 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.
STATE AND LOCAL INCOME TAXES: MUNICIPAL OBLIGATIONS -- The exemption of
exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of an
exempt-interest dividend that represents interest received by a regulated
investment company on its holdings of securities issued by that state and
its political subdivisions and instrumentalities. Therefore, the Fund will
report annually to its shareholders the percentage of interest income
earned by it during the preceding year on Municipal Bonds and will
indicate, on a state-by-state basis only, the source of such income.
VII PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other
clients of the Adviser, or any subsidiary of the Adviser in a similar
capacity. Changes in the Fund's investments are reviewed by the Trust's
Board of Trustees.
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. In the U.S. and in some other countries 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. In other countries both
debt and equity securities are traded on exchanges at fixed commission
rates. 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. The Adviser normally seeks to deal directly with the primary
market makers or on major exchanges unless, in its opinion, better prices
are available elsewhere. 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. At
present no arrangements for the recapture of commission payments 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 their respective
overall responsibilities to the Fund or to their 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 investing in, purchasing or
selling securities, and the availability of securities or 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 securities or 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 from time to time through such broker-dealers, on
behalf of the Fund.
The Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The Adviser sometimes uses
evaluations resulting from this effort as a consideration in the selection
of brokers to execute portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence
of the Adviser's receipt of brokerage and research service. To the extent
the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed
those that might otherwise be paid for such portfolio transactions, or for
such portfolio transactions and research, 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.
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 any subsidiary of the Adviser. 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,
the Fund believes that its ability to participate in volume transactions
will produce better executions for the Fund.
VIII DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each
day during which the New York Stock 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 each day as of the close
of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of
shares of the class outstanding.
MONEY MARKET FUNDS
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has determined in good faith constitutes fair value for
the purposes of complying with the 1940 Act. This valuation method will
continue to be used until such time as the Board of Trustees determines
that it does not constitute fair value for such purposes. Each money
market fund will limit its portfolio to those investments in U.S. dollar-
denominated instruments which its Board of Trustees determines present
minimal credit risks, and which are of high quality as determined by any
major rating service or, in the case of any instrument that is not so
rated, of comparable quality as determined by the Board of Trustees. Each
money market fund has also agreed to maintain a dollar-weighted average
maturity of 90 days or less and to invest only in securities maturing in
13 months or less. The Board of Trustees which oversees each money market
fund has established procedures designed to stabilize its net asset value
per share, as computed for the purposes of sales and redemptions, at $1.00
per share. If the Board determines that a deviation from the $1.00 per
share price may exist which may result in a material dilution or other
unfair result to investors or existing shareholders, it will take
corrective action it regards as necessary and appropriate, which action
could include the sale of instruments prior to maturity (to realize
capital gains or losses); shortening average portfolio maturity;
withholding dividends; or using market quotations for valuation purposes.
OTHER FUNDS
The following valuation techniques apply to each MFS Fund that is not a
money market fund.
Equity securities in the Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the Nasdaq
stock market system for unlisted national market issues, or at the last
quoted bid price for listed securities in which there were no sales during
the day or for unlisted securities not reported on the Nasdaq stock market
system. Bonds and other fixed income securities (other than short-term
obligations) of U.S. issuers 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-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. Forward Contracts will be valued using a
pricing model taking into consideration market data from an external
pricing source. Use of the pricing services has been approved by the Board
of Trustees.
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 (whether
domestic or foreign) 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 system, in which case they are valued at the last sale price
or, if no sales occurred during the day, at the last quoted bid price.
Short-term obligations in the Fund's portfolio are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Short-term obligations with a remaining maturity in excess of 60 days will
be valued upon dealer supplied valuations. Portfolio investments for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of regular trading on the
Exchange. Occasionally, events affecting the values of such securities may
occur between the times at which they are determined and the close of
regular trading on the Exchange which will not be reflected in the
computation of the Fund's net asset value unless the Trustees deem that
such event would materially affect the net asset value in which case an
adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. A share's net asset value is effective
for orders received by the dealer prior to its calculation and received by
MFD prior to the close of that business day.
IX PERFORMANCE INFORMATION
MONEY MARKET FUNDS
Each MFS Fund that is a money market fund will provide current annualized
and effective annualized yield quotations based on the daily dividends of
shares of the money market fund. These quotations may from time to time be
used in advertisements, shareholder reports or other communications to
shareholders.
Any current yield quotation of a money market fund which is used in such
a manner as to be subject to the provisions of Rule 482(d) under the 1933
Act shall consist of an annualized historical yield, carried at least to
the nearest hundredth of one percent based on a specific seven calendar
day period and shall be calculated by dividing the net change in the value
of an account having a balance of one share of that class at the beginning
of the period by the value of the account at the beginning of the period
and multiplying the quotient by 365/7. For this purpose the net change in
account value would reflect the value of additional shares purchased with
dividends declared on the original share and dividends declared on both
the original share and any such additional shares, but would not reflect
any realized gains or losses from the sale of securities or any unrealized
appreciation or depreciation on portfolio securities. In addition, any
effective yield quotation of a money market fund so used shall be
calculated by compounding the current yield quotation for such period by
multiplying such quotation by 7/365, adding 1 to the product, raising the
sum to a power equal to 365/7, and subtracting 1 from the result. These
yield quotations should not be considered as representative of the yield
of a money market fund in the future since the yield will vary based on
the type, quality and maturities of the securities held in its portfolio,
fluctuations in short-term interest rates and changes in the money market
fund's expenses.
OTHER FUNDS
Each MFS Fund that is not a money market fund may quote the following
performance results.
TOTAL RATE OF 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 any
applicable CDSC 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 any applicable sales charge 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.
The Fund offers multiple classes of shares which were initially offered
for sale to, and purchased by, the public on different dates (the class
"inception date"). The calculation of total rate of return for a class of
shares which has a later class inception date than another class of shares
of the Fund is based both on (i) the performance of the Fund's newer class
from its inception date and (ii) the performance of the Fund's oldest
class from its inception date up to the class inception date of the newer
class.
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 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).
Any 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 for the 30-
day period. The yield for each class of the Fund is calculated by dividing
the net investment income allocated to that class earned during the period
by the maximum offering price per share of that class of the Fund on the
last day of the 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 expense 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 Fund's yield calculations assume a maximum sales charge of
5.75% in the case of Class A shares and no payment of any CDSC in the case
of Class B and Class C shares.
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.
CURRENT DISTRIBUTION RATE -- Yield, which is calculated according to a
formula prescribed by the Securities and Exchange Commission, 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 (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result
by the maximum offering price or net asset value per share on the last day
of the period. 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 for
option writing, short-term capital gains and return of invested capital,
and may be calculated over a different period of time. The Fund's current
distribution rate calculation for Class B shares and Class C shares
assumes no CDSC is paid.
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 Securities
Corporation, 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. The Fund may
also quote evaluations mentioned in independent radio or television
broadcasts and 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. 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.
From time to time, the Fund 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 use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund
categories established by Morningstar (or other nationally recognized
statistical ratings organizations) and to other MFS Funds.
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
Planning(SM) program, an intergenerational financial planning assistance
program; issues with respect to insurance (e.g., disability and life
insurance and Medicare supplemental insurance); issues regarding financial
and health care management for elderly family members; and other similar
or related matters.
From time to time, the Fund may also advertise annual returns showing
the cumulative value of an initial investment in the Fund in various
amounts over specified periods, with capital gain and dividend
distributions invested in additional shares or taken in cash, and with no
adjustment for any income taxes (if applicable) payable by shareholders.
MFS FIRSTS
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
o 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard(R) Equity
Fund, the first fund to invest principally 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.
X 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 $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of 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 Account
Application or filing a separate Letter of Intent application (available
from MFSC) 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 MFSC 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 period 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, MFSC 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
MFSC. By completing and signing the Account Application or separate Letter
of Intent application, the shareholder irrevocably appoints MFSC 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,
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 discounts. A shareholder must provide MFSC
(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 MFSC 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 MFSC 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. MFSC 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. MFSC 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 shares of the same class of one of the other MFS
Funds, if shares of that 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 Program 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 MFSC 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 and Class C shares in any year pursuant
to a SWP generally are limited to 10% of the value of the account at the
time of 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) shares representing
reinvested distributions; (ii) shares representing undistributed capital
gains and income; and (iii) to the extent necessary, shares representing
direct investments subject to the lowest CDSC. 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 received 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, MFSC. 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 dollar amount of each payment. MFSC 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
MFSC 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 may be made at any
time by mailing a check payable to the Fund directly to MFSC. 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 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, 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 participate in 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 (if
available for sale). 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 transfer will
occur after receipt and processing by MFSC 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 the 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 MFSC 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 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 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 proceeds reinvested in 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 12 months
of the initial purchase in the case 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 a 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
the same class in an account with the Fund for which payment has been
received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the Class of shares) at
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 MFSC.
EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market
funds) -- No initial sales charge or CDSC will be imposed in connection
with an exchange from shares of an MFS Fund to shares of any other MFS
Fund, except with respect to exchanges from an MFS money market fund to
another MFS Fund which is not an MFS money market fund (discussed below).
With respect to an exchange involving shares subject to a CDSC, the CDSC
will be unaffected by the exchange and the holding period for purposes of
calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND -- Special rules apply with
respect to the imposition of an initial sales charge or a CDSC for
exchanges from an MFS money market fund to another MFS Fund which is not
an MFS money market fund. These rules are described under the caption "How
to Purchase, Exchange and Redeem Shares" in the Prospectuses of those MFS
money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND -- Class A shares of any MFS Fund
held by certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund)
(the "Units"), and Units may be exchanged for Class A shares of any MFS
Fund. With respect to exchanges between Class A shares subject to a CDSC
and Units, the CDSC will carry over to the acquired shares or Units and
will be deducted from the redemption proceeds when such shares or Units
are subsequently redeemed, assuming the CDSC is then payable (the period
during which the Class A shares and the Units were held will be aggregated
for purposes of calculating the applicable CDSC). In the event that a
shareholder initially purchases Units and then exchanges into Class A
shares subject to an initial sales charge of an MFS Fund, the initial
sales charge shall be due upon such exchange, but will not be imposed with
respect to any subsequent exchanges between such Class A shares and Units
with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC
period will commence upon such exchange, and the applicability of the CDSC
with respect to subsequent exchanges shall be governed by the rules set
forth above in this paragraph.
GENERAL -- 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 MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by MFSC) or all the shares in the
account. Each exchange involves the redemption of the shares of the Fund
to be exchanged and the purchase 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
the Exchange Request is received by MFSC prior to the close of regular
trading on the Exchange the exchange usually will occur on that day if all
the requirements 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 MFD may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the requirements set forth above.
Additional information with respect to any of the MFS Funds, including a
copy of its current prospectus, may be obtained from investment dealers or
MFSC. A shareholder considering an exchange should obtain and read the
prospectus of the other fund and consider the differences in objectives
and policies before making any exchange.
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 imposed
from time to time at the discretion of the Funds in order to protect the
Funds.
TAX-DEFERRED RETIREMENT PLANS
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:
o 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);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who
desire to make limited contributions to a tax-favored retirement
program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public school systems and certain non-profit organizations); and
o 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. 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.
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 Section 401(a) or
403(b) recordkeeping program made available by MFSC.
XI DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The 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 Declaration of
Trust further authorizes the Trustees to classify or reclassify any series
of shares into one or more classes. 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 of the Fund are entitled to share pro rata in the Fund's net
assets allocable to such class available for distribution to shareholders.
The Trust reserves the right to create and issue a number of series and
additional 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. To the extent a shareholder of the Fund owns a controlling
percentage of the Fund's shares, such shareholder may affect the outcome
of such matters to a greater extent than other Fund shareholders. Although
Trustees are not elected annually by the shareholders, the Declaration of
Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the
Trust. A meeting of shareholders will be called upon the request of
shareholders of record holding in the aggregate not less than 10% of the
outstanding voting securities of the Trust. No material amendment may be
made to the Declaration of Trust without the affirmative vote of a
majority of the Trust's outstanding shares (as defined in "Investment
Restrictions" in Part I of this SAI). The Trust or any series of the Trust
may be terminated (i) upon the merger or consolidation of the Trust or any
series of the Trust with another organization or upon the sale of 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 or the affected series' outstanding
shares voting as a single class, or of the affected series of the Trust,
except that if the Trustees 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 will be sufficient, or (ii) upon
liquidation and distribution of the assets of a Fund, if approved by the
vote of the holders of two-thirds of its outstanding shares of the Trust,
or (iii) by the Trustees by written notice to its shareholders. 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 the
Trust shall maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Trust and
its shareholders and the Trustees, officers, employees and agents of the
Trust 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 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
his willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
<PAGE>
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PART II - APPENDIX A
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WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
CDSC for Class A shares are waived (Section II), and the CDSC for Class B
and Class C shares is waived (Section III). Some of the following
information will not apply to certain funds in the MFS Family of Funds,
depending on which classes of shares are offered by such fund. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
I WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Funds pursuant to
the Distribution Investment Program.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
AFFILIATES OF AN MFS FUND/CERTAIN DEALERS.
Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses or
domestic partners identified above and certain trusts, pension,
profit-sharing or other retirement plans for the sole benefit of such
persons, provided the shares are not resold except to the MFS Fund
which issued the shares; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes
to the MFS FUNDamental 401(k) Plan or another similar recordkeeping
system made available by MFSC (the "MFS Participant Recordkeeping
System");
> Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the
later to occur of: (i) January 1, 1993 or (ii) the date such 401(a)
or ESP Plan first invests its assets in one or more of the MFS
Funds. The sales charges will be waived in the case of a redemption
of all of the 401(a) or ESP Plan's shares in all MFS Funds (i.e.,
all the assets of the 401(a) or ESP Plan invested in the MFS Funds
are withdrawn), unless immediately prior to the redemption, the
aggregate amount invested by the 401(a) or ESP Plan in shares of the
MFS Funds (excluding the reinvestment of distributions) during the
prior four years equals 50% or more of the total value of the 401(a)
or ESP Plan's assets in the MFS Funds, in which case the sales
charges will not be waived; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan recordkeeping
or administration services agreement with MFD or one of its
affiliates and (ii) the shares purchased or redeemed represent
transfers from or transfers to plan investments other than the MFS
Funds for which retirement plan recordkeeping services are provided
under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY).
Shares transferred:
o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by MFSC on behalf of individual participants of
such Plan, provided that the Plan sponsor subscribes to the MFS
FUNDamental 401(k) Plan or another similar recordkeeping system made
available by MFSC.
LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).
II WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account
or a similar program under which such clients pay a fee to such
dealer.
INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates. o Reinvestment of Distributions from
Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where the retirement plan and/or sponsoring organization
demonstrates to the satisfaction of, and certifies to, MFSC that the
retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes
of the MFS Family of Funds and aggregate assets of at least $10
million;
provided, however, that the CDSC will not be waived (i.e., it will be
imposed) (a) with respect to plans which establish an account with MFSC on
or after November 1, 1997, in the event that the plan makes a complete
redemption of all of its shares in the MFS Family of Funds, or (b) with
respect to plans which establish an account with MFSC prior to November 1,
1997, in the event that there is a change in law or regulations which
result in a material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring organization: (i)
becomes insolvent or bankrupt; (ii) is terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with any other entity.
PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund,
MFS Municipal Limited Maturity Fund, MFS Money Market Fund, MFS
Government Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the
proceeds of a redemption of Class I shares of any of the MFS Funds.
III WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C
shares is waived:
SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs
where the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account value at the time of
establishment.
DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to MFSC).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to the
MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
provided, however, that the CDSC will not be waived (i.e., it will
be imposed) in the event that there is a change in law or
regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is
terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with any other entity.
> By a retirement plan whose sponsoring organization subscribes to the
MFS Recordkeeper Plus product and which established its account with
MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s) with
any MFS Fund which switches to the MFS Recordkeeper Plus product
will not become eligible for this waiver category.
<PAGE>
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PART II - APPENDIX B
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DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions made
to dealers by MFD in connection with the sale of Fund shares. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as
shown in Appendix D to Part I of this SAI. The difference between the
total amount invested and the sum of (a) the net proceeds to the Fund and
(b) the dealer reallowance, is the amount of the initial sales charge
retained by MFD (as shown in Appendix D to Part I of this SAI). Because of
rounding in the computation of offering price, the portion of the sales
charge retained by MFD 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 the offering price or as a percentage of the net amount
invested as listed in the Prospectus.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments made through such dealers as follows:
COMMISSION
PAID BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
------------------------------------------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to
dealers with respect to a shareholder's new investment in Class A shares
purchases for each shareholder account (and certain other accounts for
which the shareholder is a record or beneficial holder) will be aggregated
over a 12-month period (commencing from the date of the first such
purchase).
CLASS B SHARES
For purchases of Class B shares, MFD will pay commissions to dealers of
3.75% of the purchase price of Class B shares purchased through dealers.
MFD will also advance to dealers the first year service fee payable under
the Fund's Distribution Plan at a rate equal to 0.25% of the purchase
price of such shares. Therefore, the total amount paid to a dealer upon
the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the
purchase price).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and December
31, 1998, MFD pays an amount to dealers equal to 3.00% of the amount
purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement
of the first year service fee equal to 0.25% of the purchase price payable
under the Fund's Distribution Plan.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided
that the plan establishment paperwork is received by MFSC in good order on
or after November 15, 1998), MFD pays no up front commissions to dealers,
but instead pays an amount to dealers equal to 1% per annum of the average
daily net assets of the Fund attributable to plan assets, payable at the
rate of 0.25% at the end of each calendar quarter, in arrears. This
commission structure is not available with respect to a plan with a pre-
existing account(s) with any MFS Fund which seeks to switch to the MFS
Recordkeeper Plus product.
CLASS C SHARES
For purchases of Class C shares, MFD will pay dealers 1.00% of the
purchase price of Class C shares purchased through dealers and, as
compensation therefor, MFD will retain the 1.00% per annum distribution
and service fee paid under the Fund's Distribution Plan to MFD for the
first year after purchase.
ADDITIONAL DEALER COMMISSIONS/CONCESSIONS
Dealers may receive different compensation with respect to sales of Class
A, Class B and Class C shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified Funds sold by such dealer during a specified sales
period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of
all of the Class B and/or Class C shares of certain specified Funds sold
by such dealer during a specified sales period. In addition, from time to
time, MFD, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which
sell or arrange for the sale of shares of the Fund. Such concessions
provided by MFD may include financial assistance to dealers in connection
with preapproved conferences or seminars, sales or training programs for
invited registered representatives and other employees, payment for travel
expenses, including lodging, incurred by registered representatives and
other employees for such seminars or training programs, seminars for the
public, advertising and sales campaigns regarding one or more Funds, and/
or other dealer-sponsored events. From time to time, MFD may make expense
reimbursements for special training of a dealer's registered
representatives and other employees in group meetings or to help pay the
expenses of sales contests. Other concessions may be offered to the extent
not prohibited by state laws or any self-regulatory agency, such as the
NASD.
<PAGE>
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PART II - APPENDIX C
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INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can
be expected to rise. Conversely, when interest rates rise, the value of
debt securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all
types of interest rate payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment in kind and
auction rate features.
ASSET-BACKED SECURITIES: The Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Fund may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized
by mortgage loans or mortgage pass-through securities (such collateral
referred to collectively as "Mortgage Assets"). Unless the context
indicates otherwise, all references herein to CMOs include multiclass
pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in
innumerable ways. In a common structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the
classes of a CMO in the order of their respective stated maturities or
final distribution dates, so that no payment of principal will be made on
any class of CMOs until all other classes having an earlier stated
maturity or final distribution date have been paid in full. Certain CMOs
may be stripped (securities which provide only the principal or interest
factor of the underlying security). See "Stripped Mortgage-Backed
Securities" below for a discussion of the risks of investing in these
stripped securities and of investing in classes consisting of interest
payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with
other CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special
purpose corporations, are backed by a pool of assets, such as credit card
and automobile loan receivables, representing the obligations of a number
of different parties. These securities present certain risks. For
instance, in the case of credit card receivables, these securities may not
have the benefit of any security interest in the related collateral.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due. Most
issuers of automobile receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities. The underlying assets (e.g., loans) are also
subject to prepayments which shorten the securities' weighted average life
and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on underlying assets to make payments,
the securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default ensures payment through
insurance policies or letters of credit obtained by the issuer or sponsor
from third parties. The Fund will not pay any additional or separate fees
for credit support. The degree of credit support provided for each issue
is generally based on historical information respecting the level of
credit risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated or failure of the credit support could
adversely affect the return on an investment in such a security.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-
through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer
or guarantor of the securities) as the mortgages in the underlying
mortgage pools are paid off. The average lives of mortgage pass-throughs
are variable when issued because their average lives depend on prepayment
rates. The average life of these securities is likely to be substantially
shorter than their stated final maturity as a result of unscheduled
principal prepayment. Prepayments on underlying mortgages result in a loss
of anticipated interest, and all or part of a premium if any has been
paid, and the actual yield (or total return) to the Fund may be different
than the quoted yield on the securities. Mortgage premiums generally
increase with falling interest rates and decrease with rising interest
rates. Like other fixed income securities, when interest rates rise the
value of a mortgage pass-through security generally will decline; however,
when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of
other fixed-income securities. In the event of an increase in interest
rates which results in a decline in mortgage prepayments, the anticipated
maturity of mortgage pass-through securities held by the Fund may
increase, effectively changing a security which was considered short or
intermediate-term at the time of purchase into a long-term security. Long-
term securities generally fluctuate more widely in response to changes in
interest rates than short or intermediate-term securities.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the
case of securities guaranteed by the Government National Mortgage
Association ("GNMA")); or guaranteed by agencies or instrumentalities of
the U.S. Government (such as the Federal National Mortgage Association
"FNMA") or the Federal Home Loan Mortgage Corporation, ("FHLMC") which are
supported only by the discretionary authority of the U.S. Government to
purchase the agency's obligations). Mortgage pass-through securities may
also be issued by non-governmental issuers (such as commercial banks,
savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers). Some of these
mortgage pass-through securities may be supported by various forms of
insurance or guarantees.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which
consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the
individual borrowers on their mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
prepayments of principal resulting from the sale, refinancing or
foreclosure of the underlying property, net of fees or costs which may be
incurred. Some mortgage pass-through securities (such as securities issued
by the GNMA) are described as "modified pass-through." These securities
entitle the holder to receive all interests and principal payments owed on
the mortgages in the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether the mortgagor actually makes the
payment.
The principal governmental guarantor of mortgage pass-through securities
is GNMA. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the
timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of Federal
Housing Administration ("FHA") insured or Veterans Administration ("VA")
guaranteed mortgages. These guarantees, however, do not apply to the
market value or yield of mortgage pass-through securities. GNMA securities
are often purchased at a premium over the maturity value of the underlying
mortgages. This premium is not guaranteed and will be lost if prepayment
occurs.
Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S. Government) include FNMA and FHLMC.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional residential
mortgages (i.e., mortgages not insured or guaranteed by any governmental
agency) from a list of approved seller/servicers which include state and
federally chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment by FNMA of
principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) for FHLMC's national portfolio. FHLMC guarantees timely
payment of interest and ultimate collection of principal regardless of the
status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also be
the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally offer
a higher rate of interest than government and government-related pools
because there are no direct or indirect government or agency guarantees of
payments in the former pools. However, timely payment of interest and
principal of mortgage loans in these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance and letters of credit. The insurance and guarantees
are issued by governmental entities, private insurers and the mortgage
poolers. There can be no assurance that the private insurers or guarantors
can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may also buy mortgage-related securities without
insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of
its assets in stripped mortgage-backed securities ("SMBS") which are
derivative multiclass mortgage securities issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including savings and loan institutions,
mortgage banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving some
of the interest and most of the principal from the Mortgage Assets, while
the other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "I0" class) while the other class will
receive all of the principal (the principal-only or "P0" class). The yield
to maturity on an I0 is extremely sensitive to the rate of principal
payments, including prepayments on the related underlying Mortgage Assets,
and a rapid rate of principal payments may have a material adverse effect
on such security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Fund may
fail to fully recoup its initial investment in these securities. The
market value of the class consisting primarily or entirely of principal
payments generally is unusually volatile in response to changes in
interest rates. Because SMBS were only recently introduced, established
trading markets for these securities have not yet developed, although the
securities are traded among institutional investors and investment banking
firms.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and
other direct indebtedness. In purchasing a loan, the Fund acquires some or
all of the interest of a bank or other lending institution in a loan to a
corporate, governmental or other borrower. Many such loans are secured,
although some may be unsecured. Such loans may be in default at the time
of purchase. Loans that are fully secured offer the Fund more protection
than an unsecured loan in the event of non-payment of scheduled interest
or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the corporate borrowers
obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on behalf
of the others in the syndicate, and for enforcing its and their other
rights against the borrower. Alternatively, such loans may be structured
as a novation, pursuant to which the Fund would assume all of the rights
of the lending institution in a loan or as an assignment, pursuant to
which the Fund would purchase an assignment of a portion of a lenders
interest in a loan either directly from the lender or through an
intermediary. The Fund may also purchase trade or other claims against
companies, which generally represent money owned by the company to a
supplier of goods or services. These claims may also be purchased at a
time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain
date or on demand. These commitments may have the effect of requiring the
Fund to increase its investment in a company at a time when the Fund might
not otherwise decide to do so (including at a time when the company's
financial condition makes it unlikely that such amounts will be repaid).
To the extent that the Fund is committed to advance additional funds, it
will at all times hold and maintain in a segregated account cash or other
high grade debt obligations in an amount sufficient to meet such
commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loans and other
direct indebtedness which the Fund will purchase, the Adviser will rely
upon its own (and not the original lending institution's) credit analysis
of the borrower. As the Fund may be required to rely upon another lending
institution to collect and pass onto the Fund amounts payable with respect
to the loan and to enforce the Fund's rights under the loan and other
direct indebtedness, an insolvency, bankruptcy or reorganization of the
lending institution may delay or prevent the Fund from receiving such
amounts. In such cases, the Fund will evaluate as well the
creditworthiness of the lending institution and will treat both the
borrower and the lending institution as an "issuer" of the loan for
purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly leveraged
nature of many such loans and other direct indebtedness may make such
loans and other direct indebtedness especially vulnerable to adverse
changes in economic or market conditions. Investments in such loans and
other direct indebtedness may involve additional risk to the Fund.
LOWER RATED BONDS: The Fund may invest in fixed income securities rated
Ba or lower by Moody's or BB or lower by S&P, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See
Appendix D for a description of bond ratings. No minimum rating standard
is required by the Fund. These securities are considered speculative and,
while generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including
the possibility of default or bankruptcy of the issuers of such
securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher
rating categories and because yields vary over time, no specific level of
income can ever be assured. These lower rated high yielding fixed income
securities generally tend to reflect economic changes (and the outlook for
economic growth), short-term corporate and industry developments and the
market's perception of their credit quality (especially during times of
adverse publicity) to a greater extent than higher rated securities which
react primarily to fluctuations in the general level of interest rates
(although these lower rated fixed income securities are also affected by
changes in interest rates). In the past, economic downturns or an increase
in interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in
the future, especially in the case of highly leveraged issuers. The prices
for these securities may be affected by legislative and regulatory
developments. The market for these lower rated fixed income securities may
be less liquid than the market for investment grade fixed income
securities. Furthermore, the liquidity of these lower rated securities may
be affected by the market's perception of their credit quality. Therefore,
the Adviser's judgment may at times play a greater role in valuing these
securities than in the case of investment grade fixed income securities,
and it also may be more difficult during times of certain adverse market
conditions to sell these lower rated securities to meet redemption
requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit
rating agencies, it is not the Fund's policy to rely exclusively on
ratings issued by these rating agencies, but rather to supplement such
ratings with the Adviser's own independent and ongoing review of credit
quality. To the extent a Fund invests in these lower rated securities, the
achievement of its investment objectives may be a more dependent on the
Adviser's own credit analysis than in the case of a fund investing in
higher quality fixed income securities. These lower rated securities may
also include zero coupon bonds, deferred interest bonds and PIK bonds.
MUNICIPAL BONDS: The Fund may invest in debt securities issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds"). Municipal Bonds include debt securities which pay
interest income that is subject to the alternative minimum tax. The Fund
may invest in Municipal Bonds whose issuers pay interest on the Bonds from
revenues from projects such as multifamily housing, nursing homes,
electric utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and
the revenue bond is also secured by a lien on the real estate comprising
the project, foreclosure by the indenture trustee on the lien for the
benefit of the bondholders creates additional risks associated with owning
real estate, including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because
of the impossibility of precisely predicting demand for mortgages from the
proceeds of such an issue, there is a risk that the proceeds of the issue
will be in excess of demand, which would result in early retirement of the
bonds by the issuer. Moreover, such housing revenue bonds depend for their
repayment upon the cash flow from the underlying mortgages, which cannot
be precisely predicted when the bonds are issued. Any difference in the
actual cash flow from such mortgages from the assumed cash flow could have
an adverse impact upon the ability of the issuer to make scheduled
payments of principal and interest on the bonds, or could result in early
retirement of the bonds. Additionally, such bonds depend in part for
scheduled payments of principal and interest upon reserve funds
established from the proceeds of the bonds, assuming certain rates of
return on investment of such reserve funds. If the assumed rates of return
are not realized because of changes in interest rate levels or for other
reasons, the actual cash flow for scheduled payments of principal and
interest on the bonds may be inadequate. The financing of multi-family
housing projects is affected by a variety of factors, including
satisfactory completion of construction within cost constraints, the
achievement and maintenance of a sufficient level of occupancy, sound
management of the developments, timely and adequate increases in rents to
cover increases in operating expenses, including taxes, utility rates and
maintenance costs, changes in applicable laws and governmental regulations
and social and economic trends.
Electric utilities face problems in financing large construction
programs in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost
of competing fuel sources, difficulty in obtaining sufficient rate
increases and other regulatory problems, the effect of energy conservation
and difficulty of the capital market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing
for the elderly which offer residents the independence of condominium life
style and, if needed, the comprehensive care of nursing home services.
Bonds to finance these facilities have been issued by various state
industrial development authorities. Since the bonds are secured only by
the revenues of each facility and not by state or local government tax
payments, they are subject to a wide variety of risks. Primarily, the
projects must maintain adequate occupancy levels to be able to provide
revenues adequate to maintain debt service payments. Moreover, in the case
of life care facilities, since a portion of housing, medical care and
other services may be financed by an initial deposit, there may be risk if
the facility does not maintain adequate financial reserves to secure
estimated actuarial liabilities. The ability of management to accurately
forecast inflationary cost pressures weighs importantly in this process.
The facilities may also be affected by regulatory cost restrictions
applied to health care delivery in general, particularly state regulations
or changes in Medicare and Medicaid payments or qualifications, or
restrictions imposed by medical insurance companies. They may also face
competition from alternative health care or conventional housing
facilities in the private or public sector. Hospital bond ratings are
often based on feasibility studies which contain projections of expenses,
revenues and occupancy levels. A hospital's gross receipts and net income
available to service its debt are influenced by demand for hospital
services, the ability of the hospital to provide the services required,
management capabilities, economic developments in the service area,
efforts by insurers and government agencies to limit rates and expenses,
confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid
and Medicare funding, and possible federal legislation limiting the rates
of increase of hospital charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from of a lease or
installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have special
risks not normally associated with general obligation or revenue bonds.
Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations are deemed to be inapplicable because of the inclusion in many
leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although
the obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or
foreclosure might, in some cases, prove difficult. There are, of course,
variations in the security of municipal lease securities, both within a
particular classification and between classifications, depending on
numerous factors.
The Fund may also invest in bonds for industrial and other projects,
such as sewage or solid waste disposal or hazardous waste treatment
facilities. Financing for such projects will be subject to inflation and
other general economic factors as well as construction risks including
labor problems, difficulties with construction sites and the ability of
contractors to meet specifications in a timely manner. Because some of the
materials, processes and wastes involved in these projects may include
hazardous components, there are risks associated with their production,
handling and disposal.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of
higher grade securities.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are backed
by the full faith and credit of the U.S. Government and (ii) U.S. Government
Securities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the GNMA; some of
which are backed only by the credit of the issuer itself, e.g., obligations
of the Student Loan Marketing Association; and some of which are supported
by the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the FNMA.
U.S. Government Securities also include interests in trust or other
entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Fund may invest in floating
or variable rate securities. Investments in floating or variable rate
securities normally will involve industrial development or revenue bonds
which provide that the rate of interest is set as a specific percentage of
a designated base rate, such as rates on Treasury Bonds or Bills or the
prime rate at a major commercial bank, and that a bondholder can demand
payment of the obligations on behalf of the Fund on short notice at par
plus accrued interest, which amount may be more or less than the amount
the bondholder paid for them. The maturity of floating or variable rate
obligations (including participation interests therein) is deemed to be
the longer of (i) the notice period required before the Fund is entitled
to receive payment of the obligation upon demand or (ii) the period
remaining until the obligation's next interest rate adjustment. If not
redeemed by the Fund through the demand feature, the obligations mature on
a specified date which may range up to thirty years from the date of
issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may
invest in zero coupon bonds, deferred interest bonds and bonds on which
the interest is payable in kind ("PIK bonds"). Zero coupon and deferred
interest bonds are debt obligations which are issued at a significant
discount from face value. The discount approximates the total amount of
interest the bonds will accrue and compound over the period until maturity
or the first interest payment date at a rate of interest reflecting the
market rate of the security at the time of issuance. While zero coupon
bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer may,
at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a
higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility
in market value than debt obligations which make regular payments of
interest. The Fund will accrue income on such investments for tax and
accounting purposes, which is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Fund's
distribution obligations.
EQUITY SECURITIES
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into
stocks; and depositary receipts for those securities. These securities may
be listed on securities exchanges, traded in various over-the-counter
markets or have no organized market.
FOREIGN SECURITIES EXPOSURE
The Fund may invest in various types of foreign securities, or securities
which provide the Fund with exposure to foreign securities or foreign
currencies, as discussed below:
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public
and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady
(the "Brady Plan"). Brady Plan debt restructurings have been implemented
to date in Argentina, Brazil, Bulgaria, Costa Rica, Croatia, Dominican
Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the
Philippines, Poland, Slovenia, Uruguay and Venezuela. Brady Bonds have
been issued only recently, and for that reason do not have a long payment
history. Brady Bonds may be collateralized or uncollateralized, are issued
in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S.
Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments;
and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constituting the "residual risk"). In light of
the residual risk of Brady Bonds and the history of defaults of countries
issuing Brady Bonds with respect to commercial bank loans by public and
private entities, investments in Brady Bonds may be viewed as speculative.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of
depositary receipts. ADRs are certificates by a U.S. depositary (usually a
bank) and represent a specified quantity of shares of an underlying non-
U.S. stock on deposit with a custodian bank as collateral. GDRs and other
types of depositary receipts are typically issued by foreign banks or
trust companies and evidence ownership of underlying securities issued by
either a foreign or a U.S. company. Generally, ADRs are in registered form
and are designed for use in U.S. securities markets and GDRs are in bearer
form and are designed for use in foreign securities markets. For the
purposes of the Fund's policy to invest a certain percentage of its assets
in foreign securities, the investments of the Fund in ADRs, GDRs and other
types of depositary receipts are deemed to be investments in the
underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of
U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and
voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the
deposited securities. The depository of an unsponsored ADR, on the other
hand, is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through
voting rights to ADR holders in respect of the deposited securities. The
Fund may invest in either type of ADR. Although the U.S. investor holds a
substitute receipt of ownership rather than direct stock certificates, the
use of the depositary receipts in the United States can reduce costs and
delays as well as potential currency exchange and other difficulties. The
Fund may purchase securities in local markets and direct delivery of these
ordinary shares to the local depositary of an ADR agent bank in foreign
country. Simultaneously, the ADR agents create a certificate which settles
at the Fund's custodian in five days. The Fund may also execute trades on
the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting
requirements in the United States as a domestic issuer. Accordingly,
information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its country and
the market value of an ADR may not reflect undisclosed material
information concerning the issuer of the underlying security. ADRs may
also be subject to exchange rate risks if the underlying foreign
securities are denominated in a foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in dollar-
denominated foreign debt securities. Investing in dollar-denominated
foreign debt represents a greater degree of risk than investing in
domestic securities, due to less publicly available information, less
securities regulation, war or expropriation. Special considerations may
include higher brokerage costs and thinner trading markets. Investments in
foreign countries could be affected by other factors including extended
settlement periods.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Such investments entail significant risks as described below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects
of the private sector through the ownership or control of many companies,
including some of the largest in any given country. As a result,
government actions in the future could have a significant effect on
economic conditions in emerging markets, which in turn, may adversely
affect companies in the private sector, general market conditions and
prices and yields of certain of the securities in the Fund's portfolio.
Expropriation, confiscatory taxation, nationalization, political, economic
or social instability or other similar developments have occurred
frequently over the history of certain emerging markets and could
adversely affect the Fund's assets should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse in the
event of a default with respect to certain debt obligations it may hold.
If the issuer of a fixed income security owned by the Fund defaults, the
Fund may incur additional expenses to seek recovery. Debt obligations
issued by emerging market governments differ from debt obligations of
private entities; remedies from defaults on debt obligations issued by
emerging market governments, unlike those on private debt, must be pursued
in the courts of the defaulting party itself. The Fund's ability to
enforce its rights against private issuers may be limited. The ability to
attach assets to enforce a judgment may be limited. Legal recourse is
therefore somewhat diminished. Bankruptcy, moratorium and other similar
laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political
context, expressed as an emerging market governmental issuer's willingness
to meet the terms of the debt obligation, for example, is of considerable
importance. In addition, no assurance can be given that the holders of
commercial bank debt may not contest payments to the holders of debt
obligations in the event of default under commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may be
denominated in foreign currencies and international currency units and the
Fund may invest a portion of its assets directly in foreign currencies.
Accordingly, the weakening of these currencies and units against the U.S.
dollar may result in a decline in the Fund's asset value.
Some emerging market countries also may have managed currencies, which are
not free floating against the U.S. dollar. In addition, there is risk that
certain emerging market countries may restrict the free conversion of
their currencies into other currencies. Further, certain emerging market
currencies may not be internationally traded. Certain of these currencies
have experienced a steep devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which a Fund's portfolio securities are
denominated may have a detrimental impact on the Fund's net asset value.
o Inflation -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had and may continue to
have adverse effects on the economies and securities markets of certain
emerging market countries. In an attempt to control inflation, wage and
price controls have been imposed in certain countries. Of these countries,
some, in recent years, have begun to control inflation through prudent
economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities markets
of emerging market countries are substantially smaller, less developed,
less liquid and more volatile than the major securities markets in the
U.S. Disclosure and regulatory standards are in many respects less
stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors
in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to
volume of trading in the securities of U.S. issuers could cause prices to
be erratic for reasons apart from factors that affect the soundness and
competitiveness of the securities issuers. For example, limited market
size may cause prices to be unduly influenced by traders who control large
positions. Adverse publicity and investors' perceptions, whether or not
based on in-depth fundamental analysis, may decrease the value and
liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Fund's securities in
such markets may not be readily available. The Fund may suspend redemption
of its shares for any period during which an emergency exists, as
determined by the Securities and Exchange Commission (the "SEC").
Accordingly, if the Fund believes that appropriate circumstances exist, it
will promptly apply to the SEC for a determination that an emergency is
present. During the period commencing from the Fund's identification of
such condition until the date of the SEC action, the Fund's securities in
the affected markets will be valued at fair value determined in good faith
by or under the direction of the Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high degree
of risk. The governmental entity that controls the repayment of sovereign
debt may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. A governmental
entity's willingness or ability to repay principal and interest due in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative
size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund and
the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce
principal and interest on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be
conditioned on a governmental entity's implementation of economic reforms
and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in
the cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently,
governmental entities may default on their sovereign debt. Holders of
sovereign debt (including the Fund) may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceedings by which sovereign debt on
which governmental entities have defaulted may be collected in whole or in
part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging market
governmental issuers have not been able to make payments of interest on or
principal of debt obligations as those payments have come due. Obligations
arising from past restructuring agreements may affect the economic
performance and political and social stability of those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access
to international credits and investments. An emerging market whose exports
are concentrated in a few commodities could be vulnerable to a decline in
the international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could
also adversely affect the country's exports and tarnish its trade account
surplus, if any. To the extent that emerging markets receive payment for
their exports in currencies other than dollars or non-emerging market
currencies, its ability to make debt payments denominated in dollars or
non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of
emerging markets to these forms of external funding may not be certain,
and a withdrawal of external funding could adversely affect the capacity
of emerging market country governmental issuers to make payments on their
obligations. In addition, the cost of servicing emerging market debt
obligations can be affected by a change in international interest rates
since the majority of these obligations carry interest rates that are
adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the
country. Fluctuations in the level of these reserves affect the amount of
foreign exchange readily available for external debt payments and thus
could have a bearing on the capacity of emerging market countries to make
payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be reduced by
a withholding tax on the source or other taxes imposed by the emerging
market countries in which the Fund makes its investments. The Fund's net
asset value may also be affected by changes in the rates or methods of
taxation applicable to the Fund or to entities in which the Fund has
invested. The Adviser will consider the cost of any taxes in determining
whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
FOREIGN SECURITIES: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing
in securities of domestic issuers. These include changes in currency
rates, exchange control regulations, securities settlement practices,
governmental administration or economic or monetary policy (in the United
States or abroad) or circumstances in dealings between nations. Costs may
be incurred in connection with conversions between various currencies.
Special considerations may also include more limited information about
foreign issuers, higher brokerage costs, different accounting standards
and thinner trading markets. Foreign securities markets may also be less
liquid, more volatile and less subject to government supervision than in
the United States. Investments in foreign countries could be affected by
other factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. As a result of its investments in foreign
securities, the Fund may receive interest or dividend payments, or the
proceeds of the sale or redemption of such securities, in the foreign
currencies in which such securities are denominated. Under certain
circumstances, such as where the Adviser believes that the applicable
exchange rate is unfavorable at the time the currencies are received or
the Adviser anticipates, for any other reason, that the exchange rate will
improve, the Fund may hold such currencies for an indefinite period of
time. While the holding of currencies will permit the Fund to take
advantage of favorable movements in the applicable exchange rate, such
strategy also exposes the Fund to risk of loss if exchange rates move in a
direction adverse to the Fund's position. Such losses could reduce any
profits or increase any losses sustained by the Fund from the sale or
redemption of securities and could reduce the dollar value of interest or
dividend payments received.
FORWARD CONTRACTS
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is
entered into (a "Forward Contract"), for hedging purposes (e.g., to
protect its current or intended investments from fluctuations in currency
exchange rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the Fund
seeks to protect against an anticipated increase in the exchange rate for
a specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, the Fund may enter
into a Forward Contract to purchase a given currency to protect against a
projected increase in the dollar value of securities denominated in such
currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline
in the dollar value of portfolio securities or the increase in the dollar
cost of securities to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, the Fund may be required to forego all or a portion of the
benefits which otherwise could have been obtained from favorable movements
in exchange rates. The Fund does not presently intend to hold Forward
Contracts entered into until the value date, at which time it would be
required to deliver or accept delivery of the underlying currency, but will
seek in most instances to close out positions in such Contracts by entering
into offsetting transactions, which will serve to fix the Fund's profit or
loss based upon the value of the Contracts at the time the offsetting
transaction is executed.
The Fund will also enter into transactions in Forward Contracts for
other than hedging purposes, which presents greater profit potential but
also involves increased risk. For example, the Fund may purchase a given
foreign currency through a Forward Contract if, in the judgment of the
Adviser, the value of such currency is expected to rise relative to the
U.S. dollar. Conversely, the Fund may sell the currency through a Forward
Contract if the Adviser believes that its value will decline relative to
the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, which will increase its gross income. Where exchange
rates do not move in the direction or to the extent anticipated, however,
the Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative and could involve
significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts ("Futures Contracts") on
stock indices, foreign currencies, interest rates or interest-rate related
instruments, indices of foreign currencies or commodities. The Fund may
also purchase and sell Futures Contracts on foreign or domestic fixed
income securities or indices of such securities including municipal bond
indices and any other indices of foreign or domestic fixed income
securities that may become available for trading. 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, foreign
currency or commodity, 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 provides for a specified settlement month in
which, in the case of the majority of commodities, interest rate and
foreign currency futures contracts, the underlying commodities, fixed
income securities or currency are delivered by the seller and paid for by
the purchaser, or on which, in the case of index futures contracts and
certain interest rate and foreign currency 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 "mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt
to protect the Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, the Fund may sell stock index
futures contracts in anticipation of or during a market decline to attempt
to offset the decrease in market value of the Fund's securities portfolio
that might otherwise result. If such decline occurs, the loss in value of
portfolio securities may be offset, in whole or part, by gains on the
futures position. When the Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock
index futures contracts in order to gain rapid market exposure that may,
in part or entirely, offset increases in the cost of securities that the
Fund intends to purchase. As such purchases are made, the corresponding
positions in stock index futures contracts will be closed out. In a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position, but under unusual
market conditions, a long futures position may be terminated without a
related purchase of securities.
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, subject to the correlation risks described
below, 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 may be more liquid than the cash market in certain
cases or at certain times, the use of interest rate futures contracts as a
hedging technique may allow the Fund to hedge its interest rate risk
without having to sell its portfolio securities.
The Fund may purchase and sell foreign currency futures contracts for
hedging purposes, to attempt to protect its current or intended
investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the dollar cost of foreign-
denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains
constant. The Fund may sell futures contracts on a foreign currency, for
example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the
dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in
part, by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in
part, the increased cost of such securities resulting from a rise in the
dollar value of the underlying currencies. Where the Fund purchases
futures contracts under such circumstances, however, and the prices of
securities to be acquired instead decline, the Fund will sustain losses on
its futures position which could reduce or eliminate the benefits of the
reduced cost of portfolio securities to be acquired.
The use by the Fund of Futures Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are
debt securities or deposits whose value at maturity or coupon rate is
determined by reference to a specific instrument or statistic. The Fund
may also purchase indexed deposits with similar characteristics. 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 determined 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. Certain indexed
securities may expose the Fund to the risk of loss of all or a portion of
the principal amount of its investment and/or the interest that might
otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values
may decline substantially if the issuer's creditworthiness deteriorates.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Fund may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an
obligation, a municipality issues a certain amount of debt and pays a
fixed interest rate. Half of the debt is issued as variable rate short
term obligations, the interest rate of which is reset at short intervals,
typically 35 days. The other half of the debt is issued as inverse
floating rate obligations, the interest rate of which is calculated based
on the difference between a multiple of (approximately two times) the
interest paid by the issuer and the interest paid on the short-term
obligation. Under usual circumstances, the holder of the inverse floating
rate obligation can generally purchase an equal principal amount of the
short term obligation and link the two obligations in order to create
long-term fixed rate bonds. Because the interest rate on the inverse
floating rate obligation is determined by subtracting the short-term rate
from a fixed amount, the interest rate will decrease as the short-term
rate increases and will increase as the short-term rate decreases. The
magnitude of increases and decreases in the market value of inverse
floating rate obligations may be approximately twice as large as the
comparable change in the market value of an equal principal amount of
long-term bonds which bear interest at the rate paid by the issuer and
have similar credit quality, redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio securities.
Such loans will usually be made only to member firms of the New York Stock
Exchange (the "Exchange") (and subsidiaries thereof) and member banks of
the Federal Reserve System, and would be required to be secured
continuously by collateral in cash, an irrevocable letter of credit or
United States ("U.S.") Treasury securities 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 not
usually exceed five business days). For the duration 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 from the investment of the 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 the Fund 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 of the securities 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 can be earned currently from securities loans of this
type justifies the attendant risk.
LEVERAGING TRANSACTIONS
The Fund may engage in the types of transactions described below, which
involve "leverage" because in each case the Fund receives cash which it
can invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Fund will generally cause
its net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can
be expected to cause the value of the Fund's shares and distributions on
the Fund's shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from these transactions fail to cover
the expenses associated with these transactions, the value of the Fund's
shares is likely to decrease more quickly than otherwise would be the case
and distributions thereon will be reduced or eliminated. Hence, these
transactions are speculative, involve leverage and increase the risk of
owning or investing in the shares of the Fund. These transactions also
increase the Fund's expenses because of interest and similar payments and
administrative expenses associated with them. Unless the appreciation and
income on assets purchased with proceeds from these transactions exceed
the costs associated with them, the use of these transactions by a Fund
would diminish the investment performance of the Fund compared with what
it would have been without using these transactions.
BANK BORROWINGS: The Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment objectives
and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost
interest by the difference between the current sales price and the lower
price for the future purchase (often referred to as the "drop") as well as
by the interest earned on, and gains from, the investment of the cash
proceeds of the initial sale. The Fund may also be compensated by receipt
of a commitment fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part
of the dollar roll, the use of this technique will diminish the investment
performance of the Fund compared with what the performance would have been
without the use of the dollar rolls. Dollar roll transactions involve the
risk that the market value of the securities the Fund is required to
purchase may decline below the agreed upon repurchase price of those
securities. If the broker/dealer to whom the Fund sells securities becomes
insolvent, the Fund's right to purchase or repurchase securities may be
restricted. Successful use of mortgage dollar rolls may depend upon the
Adviser's ability to correctly predict interest rates and prepayments.
There is no assurance that dollar rolls can be successfully employed.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund will sell
securities and receive cash proceeds, subject to its agreement to
repurchase the securities at a later date for a fixed price reflecting a
market rate of interest. There is a risk that the counter party to a
reverse repurchase agreement will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to the Fund. The Fund
will invest the proceeds received under a reverse repurchase agreement in
accordance with its investment objective and policies.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options,
Futures, Forwards, Swaps and Other Derivative Transactions" in this
Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-hedging purposes in a manner
similar to that in which Futures Contracts on foreign currencies, or
Forward Contracts, will be utilized. For example, a decline in the dollar
value of a foreign currency in which portfolio securities are denominated
will reduce the dollar value of such securities, even if their value in
the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Fund may purchase
put options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell such currency for a fixed
amount in dollars and will thereby offset, in whole in part, the adverse
effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Fund may purchase call options thereon.
The purchase of such options could offset, at least partially, the effect
of the adverse movements in exchange rates. As in the case of other types
of options, however, the benefit to the Fund deriving from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do
not move in the direction or to the extent anticipated, the Fund could
sustain losses on transactions in foreign currency options which would
require it to forego a portion or all of the benefits of advantageous
changes in such rates. The Fund may write options on foreign currencies
for the same types of hedging purposes. For example, where the Fund
anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates it could, instead
of purchasing a put option, write a call option on the relevant currency.
If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received less related transaction
costs. As in the case of other types of options, therefore, the writing of
Options on Foreign Currencies will constitute only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Fund
to hedge such increased cost up to the amount of the premium. Foreign
currency options written by the Fund will generally be covered in a manner
similar to the covering of other types of options. As in the case of other
types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only
if rates move in the expected direction. If this does not occur, the
option may be exercised and the Fund would be required to purchase or sell
the underlying currency at a loss which may not be offset by the amount of
the premium. Through the writing of options on foreign currencies, the
Fund also may be required to forego all or a portion of the benefits which
might otherwise have been obtained from favorable movements in exchange
rates. The use of foreign currency options for non-hedging purposes, like
the use of other types of derivatives for such purposes, presents greater
profit potential but also significant risk of loss and could be considered
speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "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 type (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 fund'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, or instruments 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 owns liquid and unencumbered assets equal to
the difference. The Fund may cover the writing of put Options on Futures
Contracts (a) through sales of the underlying Futures Contract, (b)
through the ownership of liquid and unencumbered assets 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 (i) is equal to or greater than the exercise price of the put written
or where the exercise price of the put held (ii) is less than the exercise
price of the put written if the Fund owns liquid and unencumbered assets
equal to the difference. 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 in 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.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call
options, and purchase put and call options, on 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 if the Fund owns liquid and unencumbered
assets equal to the amount of cash consideration) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written
or (b) is greater than the exercise price of the call written if the Fund
owns liquid and unencumbered assets equal to the difference. A put option
written by the Fund is "covered" if the Fund owns liquid and unencumbered
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 the Fund owns
liquid and unencumbered assets equal to the difference. 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 Fund owns liquid and
unencumbered 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 option
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 also 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 also 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.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast to
an option on a security, an option on a stock index provides the holder
with the right but not the obligation to make or receive a cash settlement
upon exercise of the option, rather than the right to purchase or sell a
security. The amount of this settlement is generally equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a call) or is below (in the case of a put) the closing
value of the underlying index on the date of exercise, multiplied by (ii)
a fixed "index multiplier." The Fund may cover written call options on
stock indices by owning securities whose price changes, in the opinion of
the Adviser, are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities
without additional cash consideration (or for additional cash
consideration if the Fund owns liquid and unencumbered assets equal to the
amount of cash consideration) upon conversion or exchange of other
securities in its portfolio. Where the Fund covers a call option on a
stock index through ownership of securities, such securities may not match
the composition of the index and, in that event, the Fund will not be
fully covered and could be subject to risk of loss in the event of adverse
changes in the value of the index. The Fund may also cover call options on
stock indices by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written
or (b) is greater than the exercise price of the call written if the Fund
owns liquid and unencumbered assets equal to the difference. The Fund may
cover put options on stock indices by owning liquid and unencumbered
assets with a value equal to the exercise price, or by holding a put on
the same stock index and in the same principal amount as the put written
where the exercise price of the put held (a) is equal to or greater than
the exercise price of the put written or (b) is less than the exercise
price of the put written if the Fund owns liquid and unencumbered assets
equal to the difference. Put and call options on stock indices may also be
covered in such other manner as may be in accordance with the rules of the
exchange on which, or the counterparty with which, the option is traded
and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on
which the Fund has written a call option falls or remains the same, the
Fund will realize a profit in the form of the premium received (less
transaction costs) that could offset all or a portion of any decline in
the value of the securities it owns. If the value of the index rises,
however, the Fund will realize a loss in its call option position, which
will reduce the benefit of any unrealized appreciation in the Fund's stock
investments. By writing a put option, the Fund assumes the risk of a
decline in the index. To the extent that the price changes of securities
owned by the Fund correlate with changes in the value of the index,
writing covered put options on indices will increase the Fund's losses in
the event of a market decline, although such losses will be offset in part
by the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the
premium paid for the option plus related transaction costs. The success of
this strategy will largely depend on the accuracy of the correlation
between the changes in value of the index and the changes in value of the
Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Fund holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Fund will also bear the risk
of losing all or a portion of the premium paid if the value of the index
does not rise. The purchase of call options on stock indices when the Fund
is substantially fully invested is a form of leverage, up to the amount of
the premium and related transaction costs, and involves risks of loss and
of increased volatility similar to those involved in purchasing calls on
securities the Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns
relative values to the stocks included in the index and the index
fluctuates with changes in the market values of the stocks so included.
The composition of the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write options on U.S.
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 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 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 for a reset option written by the Fund 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. Conversely, where the Fund purchases a reset
option, it could be required to pay a higher premium than would have been
the case at the initiation of the option.
"YIELD CURVE" OPTIONS: The Fund may also enter into options on the
"spread," or yield differential, between two fixed income securities, in
transactions referred to as "yield curve" options. In contrast to other
types of options, a yield curve option is based on the difference between
the yields of designated securities, rather than the prices of the
individual securities, and is settled through cash payments. Accordingly,
a yield curve option is profitable to the holder if this differential
widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Yield curve options may be used for the same purposes as other options
on securities. Specifically, the Fund may purchase or write such options
for hedging purposes. For example, the Fund may purchase a call option on
the yield spread between two securities, if it owns one of the securities
and anticipates purchasing the other security and wants to hedge against
an adverse change in the yield spread between the two securities. The Fund
may also purchase or write yield curve options for other than hedging
purposes (i.e., in an effort to increase its current income) if, in the
judgment of the Adviser, the Fund will be able to profit from movements in
the spread between the yields of the underlying securities. The trading of
yield curve options is subject to all of the risks associated with the
trading of other types of options. In addition, however, such options
present risk of loss even if the yield of one of the underlying securities
remains constant, if the spread moves in a direction or to an extent which
was not anticipated. Yield curve options written by the Fund will be
"covered". A call (or put) option is covered if the Fund holds another
call (or put) option on the spread between the same two securities and
owns liquid and unencumbered assets sufficient to cover the Fund's net
liability under the two options. Therefore, the Fund's liability for such
a covered option is generally limited to the difference between the amount
of the Fund's liability under the option written by the Fund less the
value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements
of the counterparty with which the option is traded and applicable laws
and regulations. Yield curve options are traded over-the-counter and
because they have been only recently introduced, established trading
markets for these securities have not yet developed.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are member
firms (or a subsidiary thereof) of the New York Stock 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 the 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 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.
RESTRICTED SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act ("Rule 144A securities") and
commercial paper issued under Section 4(2) of the 1933 Act ("4(2) Paper").
A determination is made, based upon a continuing review of the trading
markets for the Rule 144A security or 4(2) Paper, whether such security is
liquid and thus not subject to the Fund's limitation on investing in
illiquid investments. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the
liquidity of Rule 144A securities and 4(2) Paper. The Board, however,
retains oversight of the liquidity determinations focusing on factors such
as valuation, liquidity and availability of information. Investing in Rule
144A securities could have the effect of decreasing the level of liquidity
in the Fund to the extent that qualified institutional buyers become for a
time uninterested in purchasing these Rule 144A securities held in the
Fund's portfolio. Subject to the Fund's limitation on investments in
illiquid investments, the Fund may also invest in restricted securities
that may not be sold under Rule 144A, which presents certain risks. As a
result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair
value. In addition, market quotations are less readily available.
Therefore, judgment may at times play a greater role in valuing these
securities than in the case of unrestricted securities.
SHORT SALES
The Fund may seek to hedge investments or realize additional gains through
short sales. The Fund may make short sales, which are transactions in
which the Fund sells a security it does not own, in anticipation of a
decline in the market value of that security. To complete such a
transaction, the Fund must borrow the security to make delivery to the
buyer. The Fund then is obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The price at
such time may be more or less than the price at which the security was
sold by the Fund. Until the security is replaced, the Fund is required to
repay the lender any dividends or interest which accrue during the period
of the loan. To borrow the security, the Fund also may be required to pay
a premium, which would increase the cost of the security sold. The net
proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed
out. The Fund also will incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a
gain if the price of the security declines between those dates. The amount
of any gain will be decreased, and the amount of any loss increased, by
the amount of the premium, dividends or interest the Fund may be required
to pay in connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale,
equals the current market value of the security sold short.
SHORT SALES AGAINST THE BOX
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the Fund
enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is
required to hold such securities while the short sale is outstanding. The
Fund will incur transaction costs, including interest, in connection with
opening, maintaining, and closing short sales against the box.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other
types of available swap agreements, including swaps on securities,
commodities and indices, and related types of derivatives, such as caps,
collars and floors. A swap is an agreement between two parties pursuant to
which each party agrees to make one or more payments to the other on
regularly scheduled dates over a stated term, based on different interest
rates, currency exchange rates, security or commodity prices, the prices
or rates of other types of financial instruments or assets or the levels
of specified indices. Under a typical swap, one party may agree to pay a
fixed rate or a floating rate determined by reference to a specified
instrument, rate or index, multiplied in each case by a specified amount
(the "notional amount"), while the other party agrees to pay an amount
equal to a different floating rate multiplied by the same notional amount.
On each payment date, the obligations of parties are netted, with only the
net amount paid by one party to the other. All swap agreements entered
into by the Fund with the same counterparty are generally governed by a
single master agreement, which provides for the netting of all amounts
owed by the parties under the agreement upon the occurrence of an event of
default, thereby reducing the credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreement if the Adviser
determines it is consistent with the Fund's investment objective and
policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by
the Fund. In such an instance, the Fund would agree with a counterparty to
pay a fixed rate (multiplied by a notional amount) and the counterparty
would agree to pay a floating rate multiplied by the same notional amount.
If interest rates rise, resulting in a diminution in the value of the
Fund's portfolio, the Fund would receive payments under the swap that
would offset, in whole or part, such diminution in value. The Fund may
also enter into swaps to modify its exposure to particular markets or
instruments, such as a currency swap between the U.S. dollar and another
currency which would have the effect of increasing or decreasing the
Fund's exposure to each such currency. The Fund might also enter into a
swap on a particular security, or a basket or index of securities, in
order to gain exposure to the underlying security or securities, as an
alternative to purchasing such securities. Such transactions could be more
efficient or less costly in certain instances than an actual purchase or
sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps
and floors are similar to swaps, except that one party pays a fee at the
time the transaction is entered into and has no further payment
obligations, while the other party is obligated to pay an amount equal to
the amount by which a specified fixed or floating rate exceeds or is below
another rate (multiplied by a notional amount). Caps and floors,
therefore, are also similar to options. A collar is in effect a
combination of a cap and a floor, with payments made only within or
outside a specified range of prices or rates. A swaption is an option to
enter into a swap agreement. Like other types of options, the buyer of a
swaption pays a non-refundable premium for the option and obtains the
right, but not the obligation, to enter into the underlying swap on the
agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its
current obligations under swap and other over-the-counter derivative
transactions. If the Fund enters into a swap agreement on a net basis
(i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments), the
Fund will maintain liquid and unencumbered 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 maintain liquid and unencumbered 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 underlying price, rate or index level
that determines the amount of payments to be made under the arrangement.
If the Adviser 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
would decline, 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, but there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
TEMPORARY DEFENSIVE POSITIONS
During periods of unusual market conditions when the Adviser believes that
investing for temporary defensive purposes is appropriate, or in order to
meet anticipated redemption requests, a large portion or all of the assets
of the Fund may be invested in cash (including foreign currency) or cash
equivalents, including, but not limited to, obligations of banks
(including certificates of deposit, bankers' acceptances, time deposits
and repurchase agreements), commercial paper, short-term notes, U.S.
Government Securities and related repurchase agreements.
WARRANTS
The Fund may invest in warrants. Warrants are securities that give the
Fund the right to purchase equity securities from the issuer at a specific
price (the "strike price") for a limited period of time. The strike price
of warrants typically is much lower than the current market price of the
underlying securities, yet they are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities and may offer greater potential for capital appreciation as
well as capital loss. Warrants do not entitle a holder to dividends or
voting rights with respect to the underlying securities and do not
represent any rights in the assets of the issuing company. Also, the value
of the warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not
exercised prior to the expiration date. These factors can make warrants
more speculative than other types of investments.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities will be delivered to the
Fund at a future date usually beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. In general, the Fund does
not pay for such securities until received, and does not start earning
interest on the securities until the contractual settlement date. While
awaiting delivery of securities purchased on such bases, a Fund will
identify liquid and unencumbered assets equal to its forward delivery
commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO: The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and
other types of derivatives depends 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. In the case of derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on
fixed income securities, the portfolio securities which are being hedged
may not be the same type of obligation underlying such derivatives. The
use of derivatives for "cross hedging" purposes (such as a transaction in
a Forward Contract on one currency to hedge exposure to a different
currency) may involve greater correlation risks. 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 index or
obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience a
loss which is not completely offset by the put option. It is also possible
that there may be a negative correlation between the index or 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. It
should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry
group, may present greater risk than options or futures based on a broad
market index. This is due to the fact that a narrower index is more
susceptible to rapid and extreme fluctuations as a result of changes in
the value of a small number of securities. Nevertheless, where the Fund
enters into transactions in options or futures on narrowly-based indices
for hedging purposes, movements in the value of the index should, if the
hedge is successful, correlate closely with the portion of the Fund's
portfolio or the intended acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative and the price of the underlying index or 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 derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts 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, options on stock
indices, options on currencies 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, index 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 index or instrument. For
example, where the Fund covers a call option written on a stock index
through segregation of securities, such securities may not match the
composition of the index, 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, options on stock indices 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 forego 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. Furthermore, the
cost of using these techniques may make it economically infeasible for the
Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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 liquid and
unencumbered assets necessary to satisfy an option exercise will be
identified, unless the option is covered in such other manner as may be in
accordance with the rules of the exchange on which, or the counterparty
with 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. The Fund may also enter into futures,
Forward Contracts or swaps for non-hedging purposes. For example, the Fund
may enter into such a transaction as an alternative to purchasing or
selling the underlying instrument or to obtain desired exposure to an
index or market. In such instances, the Fund will be exposed to the same
economic risks incurred in purchasing or selling the underlying instrument
or instruments. However, transactions in futures, Forward Contracts or
swaps may be leveraged, which could expose the Fund to greater risk of
loss than such purchases or sales. Entering into transactions in
derivatives for other than hedging purposes, therefore, could expose the
Fund to significant risk of loss if the prices, rates or values of the
underlying instruments or indices do not move in the direction or to the
extent anticipated.
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 contract 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 to 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 establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) 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.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Fund enters
into transactions in exchange-traded futures or options, it is exposed to
the risk of the potential bankruptcy of the relevant exchange
clearinghouse or the broker through which the Fund has effected the
transaction. In that event, the Fund might not be able to recover amounts
deposited as margin, or amounts owed to the Fund in connection with its
transactions, for an indefinite period of time, and could sustain losses
of a portion or all of such amounts. Moreover, the performance guarantee
of an exchange clearinghouse generally extends only to its members and the
Fund could sustain losses, notwithstanding such guarantee, in the event of
the bankruptcy of its broker.
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 portfolios 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 IN FOREIGN CURRENCIES AND OVER-THE-COUNTER
DERIVATIVES AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES:
Transactions in Forward Contracts on foreign currencies, as well as
futures and options on foreign currencies and transactions executed on
foreign exchanges, are subject to all of the correlation, liquidity and
other risks outlined above. In addition, however, such transactions are
subject to the risk of governmental actions affecting trading in or the
prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the value
of positions held by the Fund. Further, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete
as the comparable data on which the Fund makes investment and trading
decisions in connection with other transactions. Moreover, because the
foreign currency market is a global, 24-hour market, events could occur in
that market which will not be reflected in the forward, futures or options
market until the following day, thereby making it more difficult for the
Fund to respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or
foreign currency options generally must occur within the country issuing
the underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives 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 and a trader of Forward Contracts 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, or Forward Contracts or
swaps entered into, 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.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be
traded on exchanges located in foreign countries. Such transactions may
not be conducted in the same manner as those entered into on U.S.
exchanges, and may be subject to different margin, exercise, settlement or
expiration procedures. As a result, many of the risks of over-the-counter
trading may be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders
on organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option positions entered
into on a national securities exchange are cleared and guaranteed by the
Options Clearing Corporation (the "OCC"), thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded
on a national securities exchange may be more readily available than in
the over-the-counter market, potentially permitting the Fund to liquidate
open positions at a profit prior to exercise or expiration, or to limit
losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign
currency market, possible intervention by governmental authorities and the
effects of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not presented
by the over-the-counter market. For example, exercise and settlement of
such options must be made exclusively through the OCC, which has
established banking relationships in applicable foreign countries for this
purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the
OCC or its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on
exercise.
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 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.
<PAGE>
PART II - APPENDIX D
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however,
that ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with
different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in
the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue. Should no rating be assigned, the reason may be one
of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment
on the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to
meet its financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality
and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on
this obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk -- such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. Securities are not meeting current obligations and
are extremely speculative. DDD designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, DD indicates expected recovery of 50% -- 90% of
such outstandings, and D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within this
category or into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company
developments.
DD: Defaulted debt-obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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
[Logo](R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street, Boston, MA 02116
GENERIC 1/22/99
<PAGE>
MFS MUNICIPAL SERIES TRUST
MFS(R) ALABAMA MUNICIPAL BOND FUND
MFS(R) ARKANSAS MUNICIPAL BOND FUND
MFS(R) CALIFORNIA MUNICIPAL BOND FUND
MFS(R) FLORIDA MUNICIPAL BOND FUND
MFS(R) GEORGIA MUNICIPAL BOND FUND
MFS(R) MARYLAND MUNICIPAL BOND FUND
MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND
MFS(R) MISSISSIPPI MUNICIPAL BOND FUND
MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) PENNSYLVANIA MUNICIPAL BOND FUND
MFS(R) SOUTH CAROLINA MUNICIPAL BOND FUND
MFS(R) TENNESSEE MUNICIPAL BOND FUND
MFS(R) VIRGINIA MUNICIPAL BOND FUND
MFS(R) WEST VIRGINIA MUNICIPAL BOND FUND
MFS(R) MUNICIPAL INCOME FUND
MFS(R) NEW YORK HIGH INCOME TAX FREE FUND
MFS(R) MASSACHUSETTS HIGH INCOME TAX FREE FUND
PART C
ITEM 23. FINANCIAL STATEMENTS AND EXHIBITS
(A) *FINANCIAL STATEMENTS INCLUDED IN PART A:
MFS MUNICIPAL SERIES TRUST (ALL OPERATIONAL SERIES)
For the five-year period ended March 31, 1999:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
MFS MUNICIPAL SERIES TRUST (ALL OPERATIONAL SERIES)
At March 31, 1999:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended March 31, 1999:
Statement of Changes in Net Assets*
For the year ended March 31, 1999:
Statement of Operations*
- ------------------
* Incorporated herein by reference to the Funds' Annual Reports to
Shareholders dated March 31, 1999 to be filed with the Securities and
Exchange Commission ("SEC") via EDGAR on or before June 9, 1999.
<PAGE>
(B) EXHIBITS
1 (a) Amended and Restated Declaration of Trust, dated
February 3, 1995. (1)
(b) Amendment to Declaration of Trust, dated April 29,
1999 to add two new series; filed herewith.
2 Amended and Restated By-Laws, dated December 14,
1994. (1)
3 Form of Share Certificate for Class A, B and C
Shares. (4)
4 (a) Investment Advisory Agreement, dated August 24,
1984 for all series other than Arkansas, California,
Florida, Louisiana*, Mississippi, Pennsylvania,
Texas*, Washington*, and MFS Municipal Income Fund.
(4)
(b) Investment Advisory Agreement, dated February 1,
1992, for the MFS Arkansas Municipal Bond Fund. (4)
(c) Investment Advisory Agreement, dated February 1,
1992, for the MFS Florida Municipal Bond Fund. (4)
(d) Investment Advisory Agreement, dated February 1,
1992, for the MFS Texas Municipal Bond Fund*. (4)
(e) Investment Advisory Agreement, dated August 1, 1992,
for the MFS Mississippi Municipal Bond Fund. (4)
(f) Investment Advisory Agreement, dated August 1, 1992,
for the MFS Washington Municipal Bond Fund*. (4)
(g) Investment Advisory Agreement, dated February 1,
1993, for MFS Louisiana Municipal Bond Fund*. (4)
(h) Investment Advisory Agreement, dated February 1,
1993, for MFS Pennsylvania Municipal Bond Fund. (4)
(i) Investment Advisory Agreement, dated September 1,
1993, for MFS California Municipal Bond Fund. (4)
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* No longer in existence
<PAGE>
(j) Investment Advisory Agreement, dated September 1,
1993, for the MFS Municipal Income Fund. (4)
(k) Form of Investment Advisory Agreement, dated July 29,
1999, for the MFS New York High Income Tax Free Fund;
filed herewith.
(l) Form of Investment Advisory Agreement, dated July 29,
1999, for the MFS Massachusetts High Income Tax Free
Fund; filed herewith.
5 (a) Amended and Restated Distribution Agreement for
the MFS Municipal Series Trust, dated January 1,
1995. (1)
(b) Dealer Agreement between MFS Fund Distributors, Inc.
("MFD") and a dealer and The Mutual Fund Agreement
between MFD and a bank or NASD affiliate, as amended
on April 11, 1997. (7)
6 Retirement Plan for Non-Interested Person Trustees,
dated January 1, 1991, as amended and restated
February 10, 1999. (11)
7 (a) Custodian Agreement, dated June 15, 1988. (4)
(b) Amendment to Custodian Agreement, dated June 15,
1988. (4)
(c) Amendment to Custodian Agreement, dated August 9,
1989. (4)
(d) Amendment to Custodian Agreement, dated October 1,
1989. (4)
(e) Amendment No. 3 to the Custodian Agreement, dated
October 9, 1991. (4)
8 (a) Shareholder Servicing Agent Agreement, dated
August 1, 1985. (4)
(b) Amendment to Shareholder Servicing Agent Agreement,
dated April 1, 1999; filed herewith.
(c) Exchange Privilege Agreement, dated July 30,
1997. (4)
(d) Loan Agreement by and among the banks named therein,
The MFS Funds Named Therein, and The First National
Bank of Boston as Agent, dated February 21, 1995. (3)
(e) Third Amendment dated February 14, 1997 to Loan
Agreement dated February 21, 1995 by and among the
Banks named therein and The First National Bank of
Boston. (8)
(f) Master Administrative Services Agreement dated March
1, 1997, as amended and restated April 1, 1999. (13)
(g) Dividend Disbursing Agency Agreement, dated February
1, 1986. (4)
9 (a) Opinion and Consent of Counsel, dated June 30,
1998. (14) (b) Consent of Counsel, dated May 10,
1999; filed herewith.
10 Consent of Deloitte & Touche LLP; filed herewith.
11 Not Applicable.
12 Not Applicable.
13 (a) Master Distribution Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 effective
January 1, 1997, as amended and restated April 14,
1999. (12) (b) Form of Exhibits as revised June 11,
1999 to Master Distribution Plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 to
replace those exhibits to the Master Distribution
Plan contained in Exhibit 13(a) above; filed
herewith.
14 Financial Data Schedules for all operational Series.
15 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940 effective September 6, 1996, as
amended and restated May 27, 1998. (6)
Power of Attorney, dated August 11, 1994. (2)
Power of Attorney, dated February 19, 1998. (14)
- -------------------------------
(1) Incorporated by reference to Post-Effective Amendment No. 26 to the
Registration Statement on Form N-1A filed with the SEC via EDGAR on
February 22, 1995.
(2) Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement on Form N-1A filed with the SEC via EDGAR on May 31,
1995.
(3) Incorporated by reference to Post-Effective Amendment No. 8 to the
Registration Statement on Form N-2 for MFS Municipal Income Trust (File No.
811-4841) filed with the SEC via EDGAR on February 28, 1995.
(4) Incorporated by reference to Post-Effective Amendment No. 28 to the
Registration Statement on Form N-1A filed with the SEC via EDGAR on July
28, 1995.
(5) Incorporated by reference to Post-Effective Amendment No. 31 filed with the
SEC via EDGAR on July 29, 1997.
(6) Incorporated by reference to MFS Series Trust II (File Nos. 33-7637 and
811-4775) Post-Effective Amendment No. 27 filed with the SEC via EDGAR on
May 29, 1998.
(7) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 24 filed with the SEC via EDGAR on
May 29, 1997.
(8) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
June 26, 1997.
(9) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 65 filed with
the SEC via EDGAR on March 30, 1998.
(10) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 64 filed with
the SEC via EDGAR on October 29, 1997.
(11) Incorporated by reference to MFS Government Limited Maturity Fund (File
Nos. 2-96738 and 811-4253) Post-Effective Amendment No. 20 filed with the
SEC via EDGAR on February 26, 1999.
(12) Incorporated by reference to MFS Series Trust VI (File Nos. 33-34502 and
811-6102) Post-Effective Amendment No. 14 filed with the SEC via EDGAR on
March 31, 1999.
(13) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
March 31, 1999.
(14) Incorporated by reference to Registrant's Post-Effective Amendment No. 32
filed with the SEC via EDGAR on July 20, 1998.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 25. INDEMNIFICATION
Reference is hereby made to (a) Article V of Registrant's
Declaration of Trust, filed as an Exhibit to Post-Effective Amendment No. 26 to
its Registration Statement; (b) Section 4 of the Distribution Agreement between
Registrant and MFS Fund Distributors, Inc., filed as an Exhibit to
Post-Effective Amendment No. 26; and (c) the undertaking of the Registrant
regarding indemnification set forth in its Registration Statement as initially
filed.
The Trustees and officers of the Registrant and the personnel of
the Registrant's investment adviser and distributor will be insured under an
errors and omissions liability insurance policy. The Registrant and its officers
are also insured under the fidelity bond required by Rule 17g-1 under the
Investment Company Act of 1940 as amended.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds (except the Vertex Funds mentioned below):
Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Growth Opportunities Fund, MFS Government Securities Fund, MFS Government
Limited Maturity Fund, MFS Series Trust I (which has twelve series: MFS Managed
Sectors Fund, MFS Cash Reserve Fund, MFS Global Asset Allocation Fund, MFS
Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS Convertible Securities Fund, MFS Blue Chip
Fund, MFS New Discovery Fund, MFS Science and Technology Fund and MFS Research
International Fund), MFS Series Trust II (which has four series: MFS Emerging
Growth Fund, MFS Large Cap Growth Fund, MFS Intermediate Income Fund and MFS
Charter Income Fund), MFS Series Trust III (which has three series: MFS High
Income Fund, MFS Municipal High Income Fund and MFS High Yield Opportunities
Fund), MFS Series Trust IV (which has four series: MFS Money Market Fund, MFS
Government Money Market Fund, MFS Municipal Bond Fund and MFS Mid Cap Growth
Fund), MFS Series Trust V (which has five series: MFS Total Return Fund, MFS
Research Fund, MFS International Opportunities Fund, MFS International Strategic
Growth Fund and MFS International Value Fund), MFS Series Trust VI (which has
three series: MFS Global Total Return Fund, MFS Utilities Fund and MFS Global
Equity Fund), MFS Series Trust VII (which has two series: MFS Global Governments
Fund and MFS Capital Opportunities Fund), MFS Series Trust VIII (which has two
series: MFS Strategic Income Fund and MFS Global Growth Fund), MFS Series Trust
IX (which has eight series: MFS Bond Fund, MFS Limited Maturity Fund, MFS
Municipal Limited Maturity Fund, MFS Research Bond Fund, MFS Intermediate
Investment Grade Bond Fund, MFS Mid Cap Value Fund, MFS Large Cap Value Fund and
MFS High Quality Bond Fund), MFS Series Trust X (which has seven series: MFS
Government Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund,
MFS International Growth Fund, MFS International Growth and Income Fund, MFS
Strategic Value Fund, MFS Small Cap Value Fund and MFS Emerging Markets Debt
Fund), MFS Series Trust XI (which has four series: MFS Union Standard Equity
Fund, Vertex All Cap Fund, Vertex U.S. All Cap Fund and Vertex Contrarian Fund),
and MFS Municipal Series Trust (which has 16 series: MFS Alabama Municipal Bond
Fund, MFS Arkansas Municipal Bond Fund, MFS California Municipal Bond Fund, MFS
Florida Municipal Bond Fund, MFS Georgia Municipal Bond Fund, MFS Maryland
Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS Mississippi
Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North Carolina
Municipal Bond Fund, MFS Pennsylvania Municipal Bond Fund, MFS South Carolina
Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS Virginia Municipal
Bond Fund, MFS West Virginia Municipal Bond Fund and MFS Municipal Income Fund)
(the "MFS Funds"). The principal business address of each of the MFS Funds is
500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following open-end
Funds: MFS Institutional Trust ("MFSIT") (which has ten series) and MFS Variable
Insurance Trust ("MVI") (which has fifteen series). The principal business
address of each of the aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series
Trust ("MFS/SL") (which has 26 series), Money Market Variable Account, High
Yield Variable Account, Capital Appreciation Variable Account, Government
Securities Variable Account, Global Governments Variable Account, Total Return
Variable Account and Managed Sectors Variable Account (collectively, the
"Accounts"). The principal business address of MFS/SL is 500 Boylston Street,
Boston, Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
VERTEX INVESTMENT MANAGEMENT, INC., a Delaware corporation and a
wholly owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex U.S. All Cap Fund and Vertex Contrarian Fund, each a
series of MFS Series Trust XI. The principal business address of the
aforementioned Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS INTERNATIONAL LTD. ("MIL"), a limited liability company
organized under the laws of Bermuda and a subsidiary of MFS, whose principal
business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves
as investment adviser to and distributor for MFS American Funds known as the MFS
Funds after January 1999 (which will have 11 portfolios as of January 1999):
U.S. Equity Fund, U.S. Emerging Growth Fund, U.S. High Yield Bond Fund, U.S.
Dollar Reserve Fund, Charter Income Fund, U.S. Research Fund, U.S. Strategic
Growth Fund, Global Equity Fund, European Equity Fund and European Corporate
Bond Fund) (the "MIL Funds"). The MIL Funds are organized in Luxembourg and
qualify as an undertaking for collective investments in transferable securities
(UCITS). The principal business address of the MIL Funds is 47, Boulevard Royal,
L-2449 Luxembourg. MIL also serves as investment adviser to and distributor for
MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Governments Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
Global Growth Fund, MFS Meridian Money Market Fund, MFS Meridian Global Balanced
Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS Meridian
U.S. High Yield Fund, MFS Meridian Emerging Markets Debt Fund, MFS Meridian
Strategic Growth Fund and MFS Meridian Global Asset Allocation Fund and the MFS
Meridian Research International Fund (collectively the "MFS Meridian Funds").
Each of the MFS Meridian Funds is organized as an exempt company under the laws
of the Cayman Islands. The principal business address of each of the MFS
Meridian Funds is P.O. Box 309, Grand Cayman, Cayman Islands, British West
Indies.
MFS INTERNATIONAL (U.K.) LTD. ("MIL-UK"), a private limited
company registered with the Registrar of Companies for England and Wales whose
current address is Eversheds, Senator House, 85 Queen Victoria Street, London,
England EC4V 4JL, is involved primarily in marketing and investment research
activities with respect to private clients and the MIL Funds and the MFS
Meridian Funds.
MFS INSTITUTIONAL ADVISORS (AUSTRALIA) LTD. ("MFSI-AUSTRALIA"), a
private limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.
MFS HOLDINGS AUSTRALIA PTY LTD. ("MFS HOLDINGS AUSTRALIA"), a
private limited company organized pursuant to the Corporations Law of New South
Wales, Australia whose current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000 Australia, and whose function is to serve primarily as a
holding company.
MFS FUND DISTRIBUTORS, INC. ("MFD"), a wholly owned subsidiary of
MFS, serves as distributor for the MFS Funds, MVI and MFSIT.
MFS SERVICE CENTER, INC. ("MFSC"), a wholly owned subsidiary of
MFS, serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT and MVI.
MFS INSTITUTIONAL ADVISORS, INC. ("MFSI"), a wholly owned
subsidiary of MFS, provides investment advice to substantial private clients.
MFS RETIREMENT SERVICES, INC. ("RSI"), a wholly owned subsidiary
of MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MASSACHUSETTS INVESTMENT MANAGEMENT CO., LTD. ("MIMCO"), a wholly
owned subsidiary of MFS, is a corporation incorporated in Japan. MIMCO, whose
address is Kamiyacho-Mori Building, 3-20, Tranomon 4-chome, Minato-ku, Tokyo,
Japan, is involved in investment management activities.
MFS HERITAGE TRUST COMPANY ("MFS TRUST"), a New
Hampshire-chartered limited-purpose trust company whose current address is 650
Elm Street, Suite 404, Manchester, NH 03101, provides directed trustee services
to retirement plans.
UNITED FUNDS MANAGEMENT LTD. ("UFM"), an Australian Company
organized under the Corporations Law of New South Wales, Australia whose current
address is Level 27, Australia Square 264-278, George St., Sydney, NSW2000, is
an investment manager and distributor of Australian superannuation unit trusts.
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John
W. Ballen, Kevin R. Parke, Thomas J. Cashman, Jr., Joseph W. Dello Russo,
William W. Scott, Donald A. Stewart and John D. McNeil. Mr. Shames is the
Chairman and Chief Executive Officer, Mr. Ballen is President and Chief
Investment Officer, Mr. Arnold Scott is a Senior Executive Vice President and
Secretary, Mr. William Scott, Mr. Cashman, Mr. Dello Russo and Mr. Parke are
Executive Vice Presidents (Mr. Joseph W. Dello Russo is also Chief Financial
Officer and Chief Administrative Officer), (Mr. Parke is also Chief Equity
Officer), Stephen E. Cavan is a Senior Vice President, General Counsel and an
Assistant Secretary, Robert T. Burns is a Senior Vice President, Associate
General Counsel and an Assistant Secretary of MFS, and Thomas B. Hastings is a
Vice President and Treasurer of MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents
of MFS, are the Assistant Treasurers, James R. Bordewick, Jr., Senior Vice
President and Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice
President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant
Treasurers, and James R. Bordewick, Jr. is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice
President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant
Treasurers, and James R. Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST III
James T. Swanson, Robert J. Manning and Joan S. Batchelder,
Senior Vice Presidents of MFS, and Bernard Scozzafava, Vice President of MFS,
are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers, and James R. Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
Robert A. Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents
of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London
is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST VII
Leslie J. Nanberg and Stephen C. Bryant, Senior Vice Presidents
of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London
is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST VIII
Jeffrey L. Shames, Leslie J. Nanberg and James T. Swanson and
John D. Laupheimer, Jr., a Senior Vice President of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
Robert A. Dennis is Vice President, Geoffrey L. Schechter, Vice
President of MFS, is Vice President, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS SERIES TRUST XI
MFS INSTITUTIONAL TRUST
Jeffrey L. Shames is the President and Chairman, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
Robert J. Manning is Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
Leslie J. Nanberg and James T. Swanson are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS SPECIAL VALUE TRUST
Robert J. Manning is Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
John D. McNeil, Chairman and Director of Sun Life Assurance
Company of Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley
are the Assistant Treasurers and James R. Bordewick, Jr. is the Assistant
Secretary.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
John D. McNeil is the Chairman, Stephen E. Cavan is the
Secretary, and James R. Bordewick, Jr. is the Assistant Secretary.
MIL FUNDS
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold
D. Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS MERIDIAN FUNDS
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold
D. Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James R. Bordewick,
Jr. is the Assistant Secretary and James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers.
VERTEX
Jeffrey L. Shames and Arnold D. Scott are the Directors, Jeffrey
L. Shames is the President, Kevin R. Parke and John W. Ballen are Executive Vice
Presidents, John D. Laupheimer is a Senior Vice President, Brian E. Stack is a
Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is
the Assistant Treasurer, Stephen E. Cavan is the Secretary and Robert T. Burns
is the Assistant Secretary.
MIL
Peter D. Laird is President and a Director, Arnold D. Scott,
Jeffrey L. Shames and Thomas J. Cashman, Jr. are Directors, Stephen E. Cavan is
a Director, Senior Vice President and the Clerk, Robert T. Burns is an Assistant
Clerk, Joseph W. Dello Russo, Executive Vice President and Chief Financial
Officer of MFS, is the Treasurer and Thomas B. Hastings is the Assistant
Treasurer.
MIL-UK
Peter D. Laird is President and a Director, Thomas J. Cashman,
Arnold D. Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is a
Director and the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer and Robert T. Burns is the Assistant
Secretary.
MFSI - AUSTRALIA
Thomas J. Cashman, Jr. is President and a Director, Graham E.
Lenzer, John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS HOLDINGS - AUSTRALIA
Jeffrey L. Shames is the President and a Director, Arnold D.
Scott, Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E.
Cavan is the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, and Robert T. Burns is the Assistant
Secretary.
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors, William W.
Scott, Jr., an Executive Vice President of MFS, is the President, Stephen E.
Cavan is the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W.
Dello Russo is the Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the President, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant
Secretary.
MFSI
Thomas J. Cashman, Jr., Jeffrey L. Shames, and Arnold D. Scott
are Directors, Joseph J. Trainor is the President and a Director, Leslie J.
Nanberg is a Senior Vice President, a Managing Director and a Director, Kevin R.
Parke is the Executive Vice President and a Managing Director, George F.
Bennett, Jr., John A. Gee, Brianne Grady, Joseph A. Kosciuszek and Joseph J.
Trainor are Senior Vice Presidents and Managing Directors, Joseph W. Dello Russo
is the Treasurer, Thomas B. Hastings is the Assistant Treasurer and Robert T.
Burns is the Secretary.
RSI
Arnold D. Scott is the Chairman and a Director, Martin E.
Beaulieu is the President, William W. Scott, Jr. is a Director, Joseph W. Dello
Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen
E. Cavan is the Secretary and Robert T. Burns is the Assistant Secretary.
MIMCO
Jeffrey L. Shames, Arnold D. Scott and Mamoru Ogata are
Directors, Shaun Moran is the Representative Director, Joseph W. Dello Russo is
the Statutory Auditor, Robert DiBella is the President and Thomas B. Hastings is
the Assistant Statutory Auditor.
MFS TRUST
The Directors of MFS Trust are Martin E. Beaulieu, Stephen E.
Cavan, Janet A. Clifford, Joseph W. Dello Russo and Joseph A. Kosciuszek. Mr.
Cavan is President, Mr. Dello Russo is Treasurer, and Robert T. Burns is Clerk
of MFS Trust.
UFM
The Directors of UFM are Thomas J. Cashman, Jr. and Susan
Gosling. Graham Lenzner is the Chairman and Thomas J. Murray is Chief Financial
Officer, Treasurer and Secretary.
In addition, the following persons, Directors or officers of MFS,
have the affiliations indicated:
Donald A. Stewart President and a Director, Sun Life
Assurance Company of Canada, Sun Life
Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. Stewart is also an
officer and/or Director of various
subsidiaries and affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr.
McNeil is also an officer and/or
Director of various subsidiaries and
affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The
Boston Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
ITEM 27. DISTRIBUTORS
(a) Reference is hereby made to Item 26 above.
(b) Reference is hereby made to Item 26 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in whole
or in part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
State Street Bank and State Street South
Trust Company (custodian) 5 - West
North Quincy, MA 02171
MFS Service Center, Inc. 2 Avenue de Lafayette
(transfer agent) Boston, MA 02111-1738
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 10th day of May, 1999.
MFS MUNICIPAL SERIES TRUST
By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on May 10, 1999.
SIGNATURE TITLE
--------- -----
Chairman, President (Principal Executive
JEFFREY L. SHAMES* Officer) and Trustee
- ---------------------------
Jeffrey L. Shames
Treasurer (Principal Financial Officer
W. THOMAS LONDON* and Principal Accounting Officer)
- ---------------------------
W. Thomas London
RICHARD B. BAILEY* Trustee
- ---------------------------
Richard B. Bailey
MARSHALL N. COHAN* Trustee
- ---------------------------
Marshall N. Cohan
LAWRENCE H. COHN, M.D.* Trustee
- ---------------------------
Lawrence H. Cohn, M.D.
SIR J. DAVID GIBBONS* Trustee
- ---------------------------
Sir J. David Gibbons
ABBY M. O'NEILL* Trustee
- ---------------------------
Abby M. O'Neill
WALTER E. ROBB, III* Trustee
- ---------------------------
Walter E. Robb, III
ARNOLD D. SCOTT* Trustee
- ---------------------------
Arnold D. Scott
J. DALE SHERRATT* Trustee
- ---------------------------
J. Dale Sherratt
WARD SMITH* Trustee
- ---------------------------
Ward Smith
*By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on
behalf of those indicated pursuant to
(i) a Power of Attorney dated August 11,
1994, incorporated by reference to the
Registrant's Post-Effective Amendment
No. 27 filed with the Securities and
Exchange Commission via EDGAR on May 31,
1995, and (ii) a Power of Attorney dated
February 19, 1998, incorporated by
reference to the Registrant's
Post-Effective Amendment No. 32 filed
with the Securities and Exchange
Commission via EDGAR on July 20, 1998.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
----------- ---------------------- --------
1 (b) Amendment to Declaration of Trust, dated April
29, 1999 to add two new series.
4 (k) Form of Investment Advisory Agreement, dated
July 29, 1999, for the MFS New York High Income Tax
Free Fund.
(l) Form of Investment Advisory Agreement, dated
July 29, 1999, for the MFS Massachusetts High Income
Tax Free Fund.
8 (b) Amendment to Shareholder Servicing Agent Agreement,
dated April 1, 1999.
9 (b) Consent of Counsel, dated May 10, 1999.
10 Consent of Deloitte & Touche LLP.
13 (b) Form of Exhibits as revised June 11, 1999 to Master
Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 to replace those
exhibits to the Master Distribution Plan contained
in Exhibit 13(a).
<PAGE>
EXHIBIT NO. 99.1(b)
MFS MUNICIPAL SERIES TRUST
CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
ESTABLISHMENT AND DESIGNATION
OF SERIES
AND
ESTABLISHMENT AND DESIGNATION
OF CLASSES
Pursuant to Section 6.9 of the Amended and Restated Declaration of
Trust dated February 3, 1995 as amended (the "Declaration"), of MFS Municipal
Series Trust, a business trust organized under the laws of The Commonwealth of
Massachusetts (the "Trust"), the undersigned Trustees of the Trust, being a
majority of the Trustees of the Trust, hereby establish and designate two new
series of Shares (as defined in the Declaration), such series to have the
following special and relative rights:
1. The new series shall be designated:
- MFS Massachusetts High Income Tax Free Fund
- MFS New York High Income Tax Free Fund
2. The series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the
Trust's then currently effective registration statement under the
Securities Act of 1933, as amended, and the Investment Company Act
of 1940, as amended, to the extent pertaining to the offering of
Shares of such series. Each Share of the series shall be redeemable,
shall be entitled to one vote or fraction thereof in respect of a
fractional share on matters on which Shares of the series shall be
entitled to vote, shall represent a pro rata beneficial interest in
the assets allocated or belonging to the series, and shall be
entitled to receive its pro rata share of the net assets of the
series upon liquidation of the series, all as provided in Section
6.9 of the Declaration.
3. Shareholders of the series shall vote separately as a class on any
matter to the extent required by, and any matter shall be deemed to
have been effectively acted upon with respect to the series as
provided in Rule 18f-2, as from time to time in effect, under the
Investment Company Act of 1940, as amended, or any successor rule,
and by the Declaration.
4. The assets and liabilities of the Trust shall be allocated among the
previously established and existing series of the Trust and such new
series as set forth in Section 6.9 of the Declaration.
5. Subject to the provisions of Section 6.9 and Article IX of the
Declaration, the Trustees (including any successor Trustees) shall
have the right at any time and from time to time to reallocate
assets and expenses or to change the designation of any series now
or hereafter created, or to otherwise change the special and
relative rights of any such establishment and designation of series
of Shares.
Pursuant to Section 6.9(h) of the Declaration, this instrument shall be
effective upon the execution by a majority of the Trustees of the Trust.
The undersigned, being a majority of the Trustees of the Trust, acting
pursuant to Section 6.10 of the Declaration, do hereby divide the Shares of each
of MFS Massachusetts High Income Tax Free Fund and MFS New York High Income Tax
Free Fund to create two classes of Shares, within the meaning of Section 6.10,
as follows:
1. The two classes of Shares are designated "Class A Shares" and "Class
B Shares";
2. Class A Shares and Class B Shares shall be entitled to all the
rights and preferences accorded to shares under the Declaration;
3. The purchase price of Class A Shares and Class B Shares, the method
of determination of the net asset value of Class A Shares and Class
B Shares, the price, terms and manner of redemption of Class A
Shares and Class B Shares, any conversion feature of Class B Shares,
and relative dividend rights of holders of Class A Shares and Class
B Shares shall be established by the Trustees of the Trust in
accordance with the Declaration and shall be set forth in the
current prospectus and statement of additional information of the
Trust or any series thereof, as amended from time to time, contained
in the Trust's registration statement under the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as
amended;
4. Class A Shares and Class B Shares shall vote together as a single
class except that shares of a class may vote separately on matters
affecting only that class and shares of a class not affected by a
matter will not vote on that matter; and
5. A class of shares of any series of the Trust may be terminated by
the Trustees by written notice to the Shareholders of the class.
<PAGE>
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have
executed this amendment, in one or more counterparts, all constituting a single
instrument, as an instrument under seal in The Commonwealth of Massachusetts, as
of this 29th day of April, 1999 and further certify, as provided by the
provisions of Section 9.3(d) of the Declaration, that this amendment was duly
adopted by the undersigned in accordance with the second sentence of Section
9.3(a) of the Declaration.
RICHARD B. BAILEY WALTER E. ROBB, III
- ------------------------ ------------------------
Richard B. Bailey Walter E. Robb, III
63 Atlantic Avenue 35 Farm Road
Boston, MA 02110 Sherborn, MA 01770
MARSHALL N. COHAN ARNOLD D. SCOTT
- ------------------------ ------------------------
Marshall N. Cohan Arnold D. Scott
2524 Bedford Mews Drive 20 Rowes Wharf
Wellington, FL 33414 Boston, MA 02110
LAWRENCE H. COHN JEFFREY L. SHAMES
- ------------------------ ------------------------
Lawrence H. Cohn Jeffrey L. Shames
45 Singletree Road 38 Lake Avenue
Chestnut Hill, MA 02167 Newton, MA 02159
SIR J. DAVID GIBBONS J. DALE SHERRATT
- ------------------------ ------------------------
Sir J. David Gibbons J. Dale Sherratt
"Leeward" 86 Farm Road
5 Leeside Drive Sherborn, MA 01770
"Point Shares"
Pembroke, Bermuda HM 05 WARD SMITH
------------------------
ABBY M. O'NEILL Ward Smith
- ------------------------ 36080 Shaker Blvd
Abby M. O'Neill Hunting Valley, OH 44022
200 Sunset Road
Oyster Bay, NY 11771
<PAGE>
EXHIBIT NO. 99.4(k)
FORM OF
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT, dated as of the 29th day of July, 1999, by and
between MFS MUNICIPAL SERIES TRUST, a Massachusetts business trust (the
"Trust"), on behalf of MFS NEW YORK HIGH INCOME TAX FREE FUND (the "Fund") a
series of the Trust, and Massachusetts Financial Services Company, a Delaware
corporation (the "Adviser").
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended; and
WHEREAS, the Adviser is willing to provide business management services to the
Fund on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of the
parties hereto as herein set forth, the parties covenant and agree as follows:
ARTICLE 1. DUTIES OF THE ADVISER. The Adviser shall provide the Fund with such
investment advice and supervision as the latter may from time to time consider
necessary for the proper supervision of its funds. The Adviser shall act as
Adviser to the Fund and as such shall furnish continuously an investment program
and shall determine from time to time what securities shall be purchased, sold
or exchanged and what portion of the assets of the Fund shall be held
uninvested, subject always to the restrictions of the Amended and Restated
Declaration of Trust of the Trust, dated February 3, 1995, and By-Laws, each as
amended from time to time (respectively, the "Declaration" and "By-Laws"), to
the provisions of the Investment Company Act of 1940, as amended, and the Rules,
Regulations and orders thereunder, and to the Fund's then-current Prospectus and
Statement of Additional Information. The Adviser shall also make recommendations
as to the manner in which voting rights, rights to consent to corporate action
and any other rights pertaining to the Fund's portfolio securities shall be
exercised. Should the Trustees at any time, however, make any definite
determination as to investment policy and notify the Adviser thereof in writing,
the Adviser shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination has
been revoked. The Adviser shall take, on behalf of the Fund, all actions which
it deems necessary to implement the investment policies determined as provided
above, and in particular to place all orders for the purchase or sale of
portfolio securities for the Fund's account with brokers or dealers selected by
it, and to that end, the Adviser is authorized as the agent of the Fund to give
instructions to the Custodian of the Fund as to deliveries of securities and
payments of cash for the account of the Fund. In connection with the selection
of such brokers or dealers and the placing of such orders, the Adviser is
directed to seek for the Fund execution at the most reasonable price by
responsible brokerage firms of reasonably competitive commission rates. In
fulfilling this requirement the Adviser shall not be deemed to have acted
unlawfully or to have breached any duty, created by this Agreement or otherwise,
solely by reason of its having caused the Fund to pay a broker or dealer an
amount of commission another broker or dealer would have charged for effecting
that transaction, if the Adviser determined in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with respect to
the Fund and to other clients of the Adviser as to which the Adviser exercises
investment discretion.
ARTICLE 2. ALLOCATION OF CHARGES AND EXPENSES. The Adviser shall furnish at its
own expense investment advisory and administrative services, office space,
equipment and clerical personnel necessary for servicing the investments of the
Fund and maintaining its organization, and investment advisory facilities and
executive and supervisory personnel for managing the investments and effecting
the portfolio transactions of the Fund. The Adviser shall arrange, if desired by
the Trust, for Directors, officers and employees of the Adviser to serve as
Trustees, officers or agents of the Trust if duly elected or appointed to such
positions and subject to their individual consent and to any limitations imposed
by law. It is understood that the Fund will pay all of its own expenses
including, without limitation, compensation of Trustees "not affiliated" with
the Adviser; 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 stock certificates, shareholder reports, notices, proxy statements and
reports 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 the 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; expenses of shareholders' meetings; expenses
relating to the issuance, registration and qualification of shares of the Fund
and the preparation, printing and mailing of prospectuses for such purposes
(except to the extent that any Distribution Agreement to which the Trust is a
party on behalf of the Fund provides that another party is to pay some or all of
such expenses).
ARTICLE 3. COMPENSATION OF THE ADVISER. For the services to be rendered and the
facilities provided, the Fund shall pay to the Adviser an investment advisory
fee computed and paid annually at a rate equal 0.40% of the FUND'S average daily
net assets. If the Adviser shall serve for less than the whole of any period
specified in this Article 3, the compensation to the Adviser will be prorated.
ARTICLE 4. COVENANTS OF THE ADVISER. The Adviser agrees that it will not deal
with itself, or with the Trustees of the Trust or the Trust's principal
underwriter, if any, as principals in making purchases or sales of securities or
other property for the account of the Fund, except as permitted by the
Investment Company Act of 1940, as amended, and the Rules, Regulations or orders
thereunder, will not take a long or short position in the shares of the Fund
except as permitted by the Declaration, and will comply with all other
provisions of the Declaration and the By-Laws and the then-current Prospectus
and Statement of Additional Information of the Fund relative to the Adviser and
its Directors and officers.
ARTICLE 5. LIMITATION OF LIABILITY OF THE ADVISER. The Adviser shall not 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 duties and obligations hereunder. As used in this Article 5,
the term "Adviser" shall include Directors, officers and employees of the
Adviser as well as that corporation itself.
ARTICLE 6. ACTIVITIES OF THE ADVISER. The services of the Adviser to the Fund
are not deemed to be exclusive, the Adviser being free to render investment
advisory and/or other services to others. The Adviser may permit other fund
clients to use the initials "MFS" in its name. The Fund agrees that if the
Adviser shall for any reason no longer serve as the Adviser for the Fund, the
Fund will change their names so as to delete the initials "MFS". It is
understood that the Trustees, officers, and shareholders of the Trust are or may
be or become interested in the Adviser, as Directors, officers, employees, or
otherwise and that Directors, officers and employees of the Adviser are or may
become similarly interested in the Fund, and that the Adviser may be or become
interested in the Fund as a shareholder or otherwise.
ARTICLE 7. DURATION, TERMINATION AND AMENDMENTS OF THIS AGREEMENT. This
Agreement shall become effective on the date first above written and shall
govern the relations between the parties hereto thereafter, and shall remain in
force until June 11, 2001 on which date it will terminate unless its continuance
after June 11, 2001 is "specifically approved at least annually" (i) by the vote
of a majority of the Trustees of the Trust who are not "interested persons" of
the Trust or of the Adviser at a meeting specifically called for the purpose of
voting on such approval, and (ii) by the Board of Trustees of the Trust, or by
"vote of a majority of the outstanding voting securities" of the Fund.
This Agreement may be terminated at any time without the payment of any penalty
by the Trustees or by "vote of a majority of the outstanding voting securities"
of the Fund, or by the Adviser, in each case on not more than sixty days' nor
less than thirty days' written notice to the other party. This Agreement shall
automatically terminate in the event of its "assignment."
This Agreement may be amended only if such agreement is approved by "vote of a
majority of the outstanding voting securities" of the Fund.
The terms "specifically approved at least annually," "vote of a majority of the
outstanding voting securities," "assignment," "affiliated person," and
"interested person," when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
Investment Company Act of 1940, as amended, and the Rules and Regulations
promulgated thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and delivered in their names and on their behalf by the undersigned, thereunto
duly authorized, and their respective seals to be hereto affixed, all as of the
day and year first written above. The undersigned Trustee of the Trust has
executed this Agreement not individually, but as Trustee under the Declaration
and the obligations of this Agreement are not binding upon any of the Trustees
or shareholders of the Trust, individually, but bind only the trust estate
applicable to the Fund.
MFS MUNICIPAL SERIES TRUST on
behalf of MFS NEW YORK HIGH INCOME
TAX FREE FUND
By:
-----------------------------
MASSACHUSETTS FINANCIAL
SERVICES COMPANY
By:
-----------------------------
<PAGE>
EXHIBIT NO. 99.4(l)
FORM OF
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT, dated as of the 29th day of July, 1999, by and
between MFS MUNICIPAL SERIES TRUST, a Massachusetts business trust (the
"Trust"), on behalf of MFS MASSACHUSETTS HIGH INCOME TAX FREE FUND (the "Fund")
a series of the Trust, and Massachusetts Financial Services Company, a Delaware
corporation (the "Adviser").
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended; and
WHEREAS, the Adviser is willing to provide business management services to the
Fund on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of the
parties hereto as herein set forth, the parties covenant and agree as follows:
ARTICLE 1. DUTIES OF THE ADVISER. The Adviser shall provide the Fund with such
investment advice and supervision as the latter may from time to time consider
necessary for the proper supervision of its funds. The Adviser shall act as
Adviser to the Fund and as such shall furnish continuously an investment program
and shall determine from time to time what securities shall be purchased, sold
or exchanged and what portion of the assets of the Fund shall be held
uninvested, subject always to the restrictions of the Amended and Restated
Declaration of Trust of the Trust, dated February 3, 1995, and By-Laws, each as
amended from time to time (respectively, the "Declaration" and "By-Laws"), to
the provisions of the Investment Company Act of 1940, as amended, and the Rules,
Regulations and orders thereunder, and to the Fund's then-current Prospectus and
Statement of Additional Information. The Adviser shall also make recommendations
as to the manner in which voting rights, rights to consent to corporate action
and any other rights pertaining to the Fund's portfolio securities shall be
exercised. Should the Trustees at any time, however, make any definite
determination as to investment policy and notify the Adviser thereof in writing,
the Adviser shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination has
been revoked. The Adviser shall take, on behalf of the Fund, all actions which
it deems necessary to implement the investment policies determined as provided
above, and in particular to place all orders for the purchase or sale of
portfolio securities for the Fund's account with brokers or dealers selected by
it, and to that end, the Adviser is authorized as the agent of the Fund to give
instructions to the Custodian of the Fund as to deliveries of securities and
payments of cash for the account of the Fund. In connection with the selection
of such brokers or dealers and the placing of such orders, the Adviser is
directed to seek for the Fund execution at the most reasonable price by
responsible brokerage firms of reasonably competitive commission rates. In
fulfilling this requirement the Adviser shall not be deemed to have acted
unlawfully or to have breached any duty, created by this Agreement or otherwise,
solely by reason of its having caused the Fund to pay a broker or dealer an
amount of commission another broker or dealer would have charged for effecting
that transaction, if the Adviser determined in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with respect to
the Fund and to other clients of the Adviser as to which the Adviser exercises
investment discretion.
ARTICLE 2. ALLOCATION OF CHARGES AND EXPENSES. The Adviser shall furnish at its
own expense investment advisory and administrative services, office space,
equipment and clerical personnel necessary for servicing the investments of the
Fund and maintaining its organization, and investment advisory facilities and
executive and supervisory personnel for managing the investments and effecting
the portfolio transactions of the Fund. The Adviser shall arrange, if desired by
the Trust, for Directors, officers and employees of the Adviser to serve as
Trustees, officers or agents of the Trust if duly elected or appointed to such
positions and subject to their individual consent and to any limitations imposed
by law. It is understood that the Fund will pay all of its own expenses
including, without limitation, compensation of Trustees "not affiliated" with
the Adviser; 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 stock certificates, shareholder reports, notices, proxy statements and
reports 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 the 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; expenses of shareholders' meetings; expenses
relating to the issuance, registration and qualification of shares of the Fund
and the preparation, printing and mailing of prospectuses for such purposes
(except to the extent that any Distribution Agreement to which the Trust is a
party on behalf of the Fund provides that another party is to pay some or all of
such expenses).
ARTICLE 3. COMPENSATION OF THE ADVISER. For the services to be rendered and the
facilities provided, the Fund shall pay to the Adviser an investment advisory
fee computed and paid annually at a rate equal 0.40% of the FUND'S average daily
net assets. If the Adviser shall serve for less than the whole of any period
specified in this Article 3, the compensation to the Adviser will be prorated.
ARTICLE 4. COVENANTS OF THE ADVISER. The Adviser agrees that it will not deal
with itself, or with the Trustees of the Trust or the Trust's principal
underwriter, if any, as principals in making purchases or sales of securities or
other property for the account of the Fund, except as permitted by the
Investment Company Act of 1940, as amended, and the Rules, Regulations or orders
thereunder, will not take a long or short position in the shares of the Fund
except as permitted by the Declaration, and will comply with all other
provisions of the Declaration and the By-Laws and the then-current Prospectus
and Statement of Additional Information of the Fund relative to the Adviser and
its Directors and officers.
ARTICLE 5. LIMITATION OF LIABILITY OF THE ADVISER. The Adviser shall not 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 duties and obligations hereunder. As used in this Article 5,
the term "Adviser" shall include Directors, officers and employees of the
Adviser as well as that corporation itself.
ARTICLE 6. ACTIVITIES OF THE ADVISER. The services of the Adviser to the Fund
are not deemed to be exclusive, the Adviser being free to render investment
advisory and/or other services to others. The Adviser may permit other fund
clients to use the initials "MFS" in its name. The Fund agrees that if the
Adviser shall for any reason no longer serve as the Adviser for the Fund, the
Fund will change their names so as to delete the initials "MFS". It is
understood that the Trustees, officers, and shareholders of the Trust are or may
be or become interested in the Adviser, as Directors, officers, employees, or
otherwise and that Directors, officers and employees of the Adviser are or may
become similarly interested in the Fund, and that the Adviser may be or become
interested in the Fund as a shareholder or otherwise.
ARTICLE 7. DURATION, TERMINATION AND AMENDMENTS OF THIS AGREEMENT. This
Agreement shall become effective on the date first above written and shall
govern the relations between the parties hereto thereafter, and shall remain in
force until June 11, 2001 on which date it will terminate unless its continuance
after June 11, 2001 is "specifically approved at least annually" (i) by the vote
of a majority of the Trustees of the Trust who are not "interested persons" of
the Trust or of the Adviser at a meeting specifically called for the purpose of
voting on such approval, and (ii) by the Board of Trustees of the Trust, or by
"vote of a majority of the outstanding voting securities" of the Fund.
This Agreement may be terminated at any time without the payment of any penalty
by the Trustees or by "vote of a majority of the outstanding voting securities"
of the Fund, or by the Adviser, in each case on not more than sixty days' nor
less than thirty days' written notice to the other party. This Agreement shall
automatically terminate in the event of its "assignment."
This Agreement may be amended only if such agreement is approved by "vote of a
majority of the outstanding voting securities" of the Fund.
The terms "specifically approved at least annually," "vote of a majority of the
outstanding voting securities," "assignment," "affiliated person," and
"interested person," when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
Investment Company Act of 1940, as amended, and the Rules and Regulations
promulgated thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and delivered in their names and on their behalf by the undersigned, thereunto
duly authorized, and their respective seals to be hereto affixed, all as of the
day and year first written above. The undersigned Trustee of the Trust has
executed this Agreement not individually, but as Trustee under the Declaration
and the obligations of this Agreement are not binding upon any of the Trustees
or shareholders of the Trust, individually, but bind only the trust estate
applicable to the Fund.
MFS MUNICIPAL SERIES TRUST on
behalf of MFS MASSACHUSETTS HIGH
INCOME TAX FREE FUND
By:
-----------------------------
MASSACHUSETTS FINANCIAL
SERVICES COMPANY
By:
-----------------------------
<PAGE>
EXHIBIT NO. 99.8(b)
MFS MUNICIPAL SERIES TRUST
500 Boylston Street o Boston o Massachusetts 02116
As of April 1, 1999
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder
Servicing Agent Agreement between us, dated August 1, 1985, as amended, is
hereby amended, effective immediately, to read in its entirety as set forth on
Attachment 1 hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS MUNICIPAL SERIES TRUST
By: W. THOMAS LONDON
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: JOSEPH W. DELLO RUSSO
Joseph W. Dello Russo
Treasurer
<PAGE>
ATTACHMENT 1
As of April 1, 1999
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS MUNICIPAL SERIES TRUST (THE "FUND")
The fees to be paid by the Fund on behalf of its series with respect to all
shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be 0.1000% of the average daily net assets of the Fund,
subject to applicable performance-related adjustments.
<PAGE>
EXHIBIT NO. 99.9(b)
LEGAL OPINION CONSENT
I consent to the incorporation by reference in this Post-Effective Amendment
No. 33 to the Registration Statement (File Nos. 2-92915 and 811-4096) (the
"Registration Statement") of MFS Municipal Series Trust (the "Trust"), of my
opinion dated June 30, 1998, appearing in Post-Effective Amendment No. 32 to the
Trust's Registration Statement, which was filed with the Securities and Exchange
Commission on July 20, 1998.
JAMES R. BORDEWICK, JR.
----------------------------
James R. Bordewick, Jr.
Assistant Secretary
Boston, Massachusetts
May 10, 1999
<PAGE>
EXHIBIT NO. 99.10
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 33 to Registration Statement No. 2-92915 of MFS Municipal Series
Trust, of our report dated May 7, 1999, appearing in the annual reports to
shareholders for the year ended March 31, 1999, and to the references to us
under the headings "Financial Highlights" in the Prospectuses and "Independent
Auditors and Financial Statements" in the Statements of Additional Information,
all of which are part of such Registration Statement.
DELOITTE & TOUCHE LLP
- -------------------------
Deloitte & Touche LLP
Boston, Massachusetts
May 10, 1999
<PAGE>
EXHIBIT NO. 99.13(b)
MFS FUNDS
AMENDED AND RESTATED MASTER DISTRIBUTION PLAN PURSUANT TO RULE 12B-1
UNDER THE
INVESTMENT COMPANY ACT OF 1940
Effective January 1, 1997,
Amended and Restated April 14, 1999
This Distribution Plan (the "Plan") has been adopted by each of the
registered investment companies identified from time to time on Exhibit A hereto
(the "Trust" or "Trusts"), severally and not jointly, pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended (the "1940 Act"), and sets
forth the material aspects of the financing of the distribution of the classes
of shares representing interests in the same portfolio issued by the Trusts.
WITNESSETH:
WHEREAS, each Trust is engaged in business as an open-end management investment
company and is registered under the 1940 Act, some consisting of multiple
investment portfolios or series, each of which has separate investment
objectives and policies and segregated assets (the "Fund" or "Funds"); and
WHEREAS, each Fund intends to distribute its Shares of Beneficial Interest
(without par value) ("Shares") in accordance with Rule 12b-1 under the 1940 Act,
and desires to adopt this Distribution Plan as a plan of distribution pursuant
to such Rule; and
WHEREAS, each Fund presently offers multiple classes of Shares, some Funds
presently offering only certain classes of Shares to investors;
WHEREAS, each Trust has entered into a distribution agreement (the "Distribution
Agreement") in a form approved by the Board of Trustees of each Trust (the
"Board of Trustees") in the manner specified in Rule 12b-1, with MFS Fund
Distributors, Inc., a Delaware corporation, as distributor (the "Distributor"),
whereby the Distributor provides facilities and personnel and renders services
to each Fund in connection with the offering and distribution of Shares; and
WHEREAS, each Trust recognizes and agrees that the Distributor may retain the
services of firms or individuals to act as dealers (the "Dealers") of the Shares
in connection with the offering of Shares; and
WHEREAS, the Distribution Agreement provides that: (a) a sales charge may be
paid by investors who purchase certain classes of Shares (i.e., Class A shares
and Class J shares) and that the Distributor and Dealers will receive such sales
charge as partial compensation for their services in connection with the sale of
these classes of Shares, and (b) the Distributor may (but is not required to)
impose certain deferred sales charges in connection with the repurchase of
Shares and the Distributor may retain or receive from a fund, as the case may
be, all such deferred sales charges; and
WHEREAS, the Board of Trustees of each Trust, in considering whether each Fund
should adopt and implement this Plan, has evaluated such information as it
deemed necessary to an informed determination as to whether this Plan should be
adopted and implemented and has considered such pertinent factors as it deemed
necessary to form the basis for a decision to use assets of a Fund for such
purposes, and has determined that there is a reasonable likelihood that the
adoption and implementation of this Plan will benefit the Fund and its
shareholders; and
NOW THEREFORE, the Board of Trustees of each Trust hereby adopts this Plan for
each Fund as a plan of distribution in accordance with Rule 12b-1, relating to
the classes of Shares each Fund from time to time offers, on the following terms
and conditions:
1. SERVICES PROVIDED AND EXPENSES BORNE BY DISTRIBUTOR.
1.1. As specified in the Distribution Agreement, the Distributor shall
provide facilities, personnel and a program with respect to the
offering and sale of Shares. Among other things, the Distributor shall
be responsible for any commissions payable to Dealers (including any
ongoing maintenance commissions), all expenses of printing (excluding
typesetting) and distributing prospectuses to prospective shareholders
and providing such other related services as are reasonably necessary
in connection therewith.
1.2. The Distributor shall bear all distribution-related expenses to the
extent specified in the Distribution Agreement in providing the
services described in Section 1.1, including, without limitation, the
compensation of personnel necessary to provide such services and all
costs of travel, office expenses (including rent and overhead),
equipment, printing, delivery and mailing costs.
2. DISTRIBUTION FEES AND SERVICE FEES.
2.1 Distribution and Service Fees Common to Each Class of Shares.
2.1.1. Service Fees. As partial consideration for the personal
services and/or account maintenance services performed by each Dealer
in the performance of its obligations under its dealer agreement with
the Distributor, each Fund shall pay each Dealer a service fee
periodically at a rate not to exceed 0.25% per annum of the portion of
the average daily net assets of the Fund that is represented by the
Class of Shares that are owned by investors for whom such Dealer is
the holder or dealer of record. That portion of the Fund's average
daily net assets on which the fees payable under this Section 2.1.1.
hereof are calculated may be subject to certain minimum amount
requirements as may be determined, and additional or different dealer
qualification standards that may be established, from time to time, by
the Distributor. The Distributor shall be entitled to be paid any fees
payable under this Section 2.1.1. hereof with respect to Shares for
which no Dealer of record exists or qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services provided by the Distributor to those Shares. The
service fee payable pursuant to this Section 2.1.1. may from time to
time be paid by a Fund to the Distributor and the Distributor will
then pay these fees to Dealers on behalf of the Fund or retain them in
accordance with this paragraph.
2.1.2. Distribution Fees. As partial consideration for the services
performed as specified in the Distribution Agreement and expenses
incurred in the performance of its obligations under the Distribution
Agreement, a Fund shall pay the Distributor a distribution fee
periodically at a rate based on the average daily net assets of a Fund
attributable to the designated Class of Shares. The amount of the
distribution fee paid by the Fund differs with respect to each Class
of Shares, as does the use by the Distributor of such distribution
fees.
<PAGE>
2.2. Distribution Fees Relating to Class A Shares
2.2.1. It is understood that the Distributor may impose certain
deferred sales charges in connection with the repurchase of Class A
Shares by a Fund and the Distributor may retain (or receive from the
Fund, as the case may be) all such deferred sales charges. Each Fund
listed on Exhibit B hereto shall pay the Distributor a distribution
fee periodically at a rate of 0.10% per annum of average daily net
assets of the Fund attributable to Class A Shares. Each Fund listed on
Exhibit C hereto shall pay the Distributor a distribution fee
periodically at a rate not to exceed 0.25% per annum of average daily
net assets of the Fund attributable to Class A Shares. Such payments
shall commence following shareholder approval of the Plan but only
upon notification by the Distributor to the Fund of the commencement
of the Plan (the "Commencement Date").
2.2.2. The aggregate amount of fees and expenses paid pursuant to
Sections 2.1. and 2.2. hereof shall not exceed 0.35% per annum and
0.50% per annum of the average daily net assets attributable to Class
A Shares of each Fund listed on Exhibit B hereto and Exhibit C,
hereto, respectively. No fees shall be paid pursuant to Section 2.2.1.
hereof or this Section 2.2.2. to any insurance company which has
entered into an agreement with the Trust on behalf of a Fund and the
Distributor that permits such insurance company to purchase Class A
Shares from a Fund at their net asset value in connection with annuity
agreements issued in connection with the insurance company's separate
accounts.
2.3. Distribution Fees Relating to Class B Shares
2.3.1. It is understood that the Distributor may impose certain
deferred sales charges in connection with the repurchase of Class B
Shares by a Fund and the Distributor may retain (or receive from the
Fund, as the case may be) all such deferred sales charges. As
additional consideration for all services performed and expenses
incurred in the performance of its obligations under the Distribution
Agreement relating to Class B Shares, a Fund shall pay the Distributor
a distribution fee periodically at a rate not to exceed 0.75% per
annum of the Fund's average daily net assets attributable to Class B
Shares.
2.3.2. Each Fund understands that agreements between the Distributor
and the Dealers may provide for payment of commissions to Dealers in
connection with the sale of Class B Shares and may provide for a
portion (which may be all or substantially all) of the fees payable by
a Fund to the Distributor under the Distribution Agreement to be paid
by the Distributor to the Dealers in consideration of the Dealer's
services as a dealer of the Class B Shares. Except as described in
Section 2.1., nothing in this Plan shall be construed as requiring a
Fund to make any payment to any Dealer or to have any obligations to
any Dealer in connection with services as a dealer of Class B Shares.
The Distributor shall agree and undertake that any agreement entered
into between the Distributor and any Dealer shall provide that, except
as provided in Section 2.1., such Dealer shall look solely to the
Distributor for compensation for its services thereunder and that in
no event shall such Dealer seek any payment from the Fund.
2.4. Distribution Fees Relating to Class C Shares
2.4.1. It is understood that the Distributor may (but is not required
to) impose certain deferred sales charges in connection with the
repurchase of Class C Shares by a Fund and the Distributor may retain
(or receive from the Fund, as the case may be) all such deferred sales
charges. As additional consideration for all services performed and
expenses incurred in the performance of its obligations under the
Distribution Agreement relating to Class C Shares, a Fund shall pay
the Distributor a distribution fee periodically at a rate not to
exceed 0.75% per annum of the Fund's average daily net assets
attributable to Class C Shares.
2.4.2. Each Fund understands that agreements between the Distributor
and the Dealers may provide for payment of commissions to Dealers in
connection with the sales of Class C Shares and may provide for a
portion (which may be all or substantially all) of the fees payable by
a Fund to the Distributor under the Distribution Agreement to be paid
to the Dealers in consideration of the Dealer's services as a dealer
of the Class C Shares. Except as described in Section 2.1., nothing in
this Plan shall be construed as requiring a Fund to make any payment
to any Dealer or to have any obligations to any Dealer in connection
with services as a dealer of Class C Shares. The Distributor shall
agree and undertake that any agreement entered into between the
Distributor and any Dealer shall provide that, except as provided in
Section 2.1., such Dealer shall look solely to the Distributor for
compensation for its services thereunder and that in no event shall
such Dealer seek any payment from the Fund.
2.5. Distribution Fees Relating to Class J Shares
2.5.1. It is understood that the Distributor may (but is not required
to) impose certain deferred sales charges in connection with the
repurchase of Class J Shares by a Fund and the Distributor may retain
(or receive from the Fund, as the case may be) all such deferred sales
charges. As additional consideration for all services performed and
expenses incurred in the performance of its obligations under the
Distribution Agreement relating to Class J Shares, a Fund shall pay
the Distributor a distribution fee periodically at a rate not to
exceed 0.50% (in the case of the MFS Emerging Growth Fund) or 0.70%
(in the case of the MFS Global Equity Fund) per annum of the Fund's
average daily net assets attributable to Class J Shares.
2.5.2. Each Fund understands that agreements between the Distributor
and the Dealers may provide for payment of commissions to Dealers in
connection with the sale of Class J Shares and may provide for a
portion (which may be all or substantially all) of the fees payable by
a Fund to the Distributor under the Distribution Agreement to be paid
by the Distributor to the Dealers in consideration of the Dealer's
services as a dealer of the Class J Shares. Except as described in
Section 2.1., nothing in this Plan shall be construed as requiring a
Fund to make any payment to any Dealer or to have any obligations to
any Dealer in connection with services as a dealer of Class J Shares.
The Distributor shall agree and undertake that any agreement entered
into between the Distributor and any Dealer shall provide that, except
as provided in Section 2.1., such Dealer shall look solely to the
Distributor for compensation for its services thereunder and that in
no event shall such Dealer seek any payment from the Fund.
3. EXPENSES BORNE BY FUND. Each Fund shall pay all fees and expenses of
any independent auditor, legal counsel, investment adviser,
administrator, transfer agent, custodian, shareholder servicing agent,
registrar or dividend disbursing agent of the Fund; expenses of
distributing and redeeming Shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, shareholder
reports, notices, proxy statements and reports to governmental
officers and commissions and to shareholders of a Fund, except that
the Distributor shall be responsible for the distribution-related
expenses as provided in Section 1 hereof.
4. ACTION TAKEN BY THE TRUST. Nothing herein contained shall be deemed to
require a Trust to take any action contrary to its Declaration of
Trust or By-laws or any applicable statutory or regulatory requirement
to which it is subject or by which it is bound, or to relieve or
deprive the Board of Trustees of the responsibility for and control of
the conduct of the affairs of a Fund.
5. EFFECTIVENESS OF PLAN. This Plan shall become effective upon (a)
approval by a vote of at least a "majority of the outstanding voting
securities" of each particular class of Shares (unless previously so
approved), and (b) approval by a vote of the Board of Trustees and a
vote of a majority of the Trustees who are not "interested persons" of
the Trust and who have no direct or indirect financial interest in the
operation of the Plan or in any agreement related to the Plan (the
"Qualified Trustees"), such votes to be cast in person at a meeting
called for the purpose of voting on this Plan.
6. DURATION OF PLAN. This Plan shall continue in effect indefinitely;
provided however, that such continuance is "specifically approved at
least annually" by vote of both a majority of the Trustees of the
Trust and a majority of the Qualified Trustees, such votes to be cast
in person at a meeting called for the purpose of voting on the
continuance of this Plan. If such annual approval is not obtained,
this Plan, with respect to the classes of Shares with respect to which
such approval was not obtained, shall expire 12 months after the
effective date of the last approval.
7. AMENDMENTS OF PLAN. This Plan may be amended at any time by the Board
of Trustees; provided that this Plan may not be amended to increase
materially the amount of permitted expenses hereunder without the
approval of holders of a "majority of the outstanding voting
securities" of the affected Class of Shares and may not be materially
amended in any case without a vote of a majority of both the Trustees
and the Qualified Trustees. This Plan may be terminated at any time by
a vote of a majority of the Qualified Trustees or by a vote of the
holders of a "majority of the outstanding voting securities" of
Shares.
8. REVIEW BY BOARD OF TRUSTEES. Each Fund and the Distributor shall
provide the Board of Trustees, and the Board of Trustees shall review,
at least quarterly, a written report of the amounts expended under
this Plan and the purposes for which such expenditures were made.
9. SELECTION AND NOMINATION OF QUALIFIED TRUSTEES. While this Plan is in
effect, the selection and nomination of Qualified Trustees shall be
committed to the discretion of the Trustees who are not "interested
persons" of the Trust.
10. DEFINITIONS; COMPUTATION OF FEES. For the purposes of this Plan, the
terms "interested persons", "majority of the outstanding voting
securities" and "specifically approved at least annually" are used as
defined in the 1940 Act or the rules and regulations adopted
thereunder. All references herein to "Fund" shall be deemed to refer
to a Trust where such Trust does not have multiple portfolios or
series. In addition, for purposes of determining the fees payable to
the Distributor hereunder, (i) the value of a Fund's net assets shall
be computed in the manner specified in each Fund's then-current
prospectus and statement of additional information for computation of
the net asset value of Shares of the Fund and (ii) the net asset value
per Share of a particular class shall reflect any plan adopted under
Rule 18f-3 under the 1940 Act.
11. RETENTION OF PLAN RECORDS. Each Trust shall preserve copies of this
Plan, and each agreement related hereto and each report referred to in
Section 8.1 hereof (collectively, the "Records") for a period of six
years from the end of the fiscal year in which such Record was made
and each such record shall be kept in an easily accessible place for
the first two years of said record-keeping.
12. APPLICABLE LAW. This Plan shall be construed in accordance with the
laws of The Commonwealth of Massachusetts and the applicable
provisions of the 1940 Act.
13. SEVERABILITY OF PLAN. If any provision of this Plan shall be held or
made invalid by a court decision, statute, rule or otherwise, the
remainder of the Plan shall not be affected thereby. The provisions of
this Plan are severable with respect to each Class of Shares offered
by a Fund and with respect to each Fund.
14. SCOPE OF TRUST'S OBLIGATION. A copy of the Declaration of Trust of
each Trust is on file with the Secretary of State of The Commonwealth
of Massachusetts. It is acknowledged that the obligations of or
arising out of this Plan are not binding upon any of the Trust's
trustees, officers, employees, agents or shareholders individually,
but are binding solely upon the assets and property of the Trust in
accordance with its proportionate interest hereunder. If this Plan is
adopted by the Trust on behalf of one or more series of the Trust, it
is further acknowledged that the assets and liabilities of each series
of the Trust are separate and distinct and that the obligations of or
arising out of this Plan are binding solely upon the assets or
property of the series on whose behalf the Trust has adopted this
Plan. If the Trust has adopted this Plan on behalf of more than one
series of the Trust, it is also acknowledged that the obligations of
each series hereunder shall be several and not joint, in accordance
with its proportionate interest hereunder, and no series shall be
responsible for the obligations of another series.
<PAGE>
EXHIBIT A
FUNDS AND SHARE CLASSES COVERED BY RULE 12B-1 PLAN
AS OF: JUNE 11, 1999
CLASSES OF
SHARES
COVERED BY
RULE 12B-1 DATE RULE 12B-1
FUND PLAN PLAN ADOPTED
---- ---------- ------------
MFS Managed Sectors Fund A,B January 1, 1997
MFS Cash Reserve Fund A,B,C January 1, 1997
MFS Global Asset Allocation Fund A,B,C January 1, 1997
MFS Strategic Growth Fund A,B,C January 1, 1997
MFS Research Growth and Income Fund A,B,C January 1, 1997
MFS Core Growth Fund A,B,C January 1, 1997
MFS Equity Income Fund A,B,C January 1, 1997
MFS Special Opportunities Fund A,B,C January 1, 1997
MFS Convertible Securities Fund A,B,C January 1, 1997
MFS Blue Chip Fund A,B,C January 1, 1997
MFS New Discovery Fund A,B,C January 1, 1997
MFS Science and Technology Fund A,B,C January 1, 1997
MFS Research International Fund A,B,C January 1, 1997
MFS Real Estate Investment Fund A,B,C February 11, 1998
MFS Emerging Growth Fund A,B,C, J January 1, 1997;
May 27, 1998
(J shares)
MFS Large Cap Growth Fund A,B January 1, 1997
MFS Intermediate Income Fund A,B January 1, 1997
MFS Charter Income Fund B,C,J* May 27, 1998
MFS Global Total Return Fund A,B,C January 1, 1997
MFS Utilities Fund A,B,C January 1, 1997
MFS Global Equity Fund A,B,C,J January 1, 1997;
April 14, 1999
(J shares)
MFS Strategic Income Fund A,B,C January 1, 1997
MFS Global Growth Fund A,B,C January 1, 1997
MFS Alabama Municipal Bond Fund A,B January 1, 1997
MFS Arkansas Municipal Bond Fund A,B January 1, 1997
MFS California Municipal Bond Fund A,B,C January 1, 1997
MFS Florida Municipal Bond Fund A,B January 1, 1997
MFS Georgia Municipal Bond Fund A,B January 1, 1997
MFS Maryland Municipal Bond Fund A,B January 1, 1997
MFS Massachusetts Municipal Bond Fund A,B January 1, 1997
MFS Mississippi Municipal Bond Fund A,B January 1, 1997
MFS New York Municipal Bond Fund A,B January 1, 1997
MFS North Carolina Municipal Bond Fund A,B,C January 1, 1997
MFS Pennsylvania Municipal Bond Fund A,B January 1, 1997
MFS South Carolina Municipal Bond Fund A,B January 1, 1997
MFS Tennessee Municipal Bond Fund A,B January 1, 1997
MFS Virginia Municipal Bond Fund A,B,C January 1, 1997
MFS West Virginia Municipal Bond Fund A,B January 1, 1997
MFS Municipal Income Fund A,B,C January 1, 1997
MFS Massachusetts High Income Tax Free Fund A, B June 11, 1999
MFS New York High Income Tax Free Fund A, B June 11, 1999
MFS Government Limited Maturity Fund A,B,C January 1, 1997
<PAGE>
EXHIBIT B
AS OF: JUNE 11, 1999
MFS Managed Sectors Fund
MFS Cash Reserve Fund
MFS Research Growth & Income Fund
MFS Emerging Growth Fund
MFS Large Cap Growth Fund
MFS Intermediate Income Fund
MFS Global Total Return Fund
MFS Utilities Fund
MFS Global Equity Fund
MFS Strategic Income Fund
MFS Global Growth Fund
MFS Alabama Municipal Bond Fund
MFS Arkansas Municipal Bond Fund
MFS California Municipal Bond Fund
MFS Florida Municipal Bond Fund
MFS Georgia Municipal Bond Fund
MFS Maryland Municipal Bond Fund
MFS Massachusetts Municipal Bond Fund
MFS Mississippi Municipal Bond Fund
MFS New York Municipal Bond Fund
MFS North Carolina Municipal Bond Fund
MFS Pennsylvania Municipal Bond Fund
MFS South Carolina Municipal Bond Fund
MFS Tennessee Municipal Bond Fund
MFS Virginia Municipal Bond Fund
MFS West Virginia Municipal Bond Fund
MFS Municipal Income Fund
MFS Government Limited Maturity Fund
MFS Strategic Growth Fund
MFS New Discovery Fund
MFS Equity Income Fund
MFS Research International Fund
MFS Real Estate Investment Fund
MFS Charter Income Fund
MFS Massachusetts High Income Tax Free Fund
MFS New York High Income Tax Free Fund
<PAGE>
EXHIBIT C
AS OF: APRIL 14, 1999
MFS Global Asset Allocation Fund
MFS Core Growth Fund
MFS Convertible Securities Fund
MFS Blue Chip Fund
MFS Science and Technology Fund
