<PAGE>
[Logo] M F S (R) STATEMENT OF ADDITIONAL
INVESTMENT MANAGEMENT INFORMATION
75 YEARS
WE INVENTED THE MUTUAL FUND(R) AUGUST 1, 1999
AS AMENDED SEPTEMBER 22, 1999
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
EACH A SERIES OF MFS(R) 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 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.
MST-13 7/99 600
<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 ............................................ 4
VII Investment Techniques, Practices, Risks and Restrictions ........... 4
Investment Techniques, Practices and Risks ......................... 4
Investment Restrictions ............................................ 4
VIII Tax Considerations ................................................. 5
IX Independent Auditors and Financial Statements ...................... 5
X Additional Information Concerning the States ....................... 5
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 Concerning the States ......... H-1
<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.
MFS had contractually agreed to bear expenses for the Arkansas Fund, the
Florida Fund and the Mississippi Fund, subject to reimbursement by these
series, such that each such series' "Other Expenses" shall not exceed more
than 0.40% of the average daily net assets of the series during a current
fiscal year. The payments made by MFS on behalf of each series under this
arrangement are currently subject to reimbursement by the series to MFS,
and are being accomplished by the payment of an expense reimbursement fee
by the series to MFS. This fee is computed and paid monthly at a
percentage of the series' average daily net assets for its current fiscal
year, with a limitation that immediately after such payment the series'
"Other Expenses" will not exceed the percentage set forth above for that
series. The obligation of MFS to bear a series' "Other Expenses" pursuant
to this arrangement, and the series' obligation to pay the reimbursement
fee to MFS, terminates on the earlier of the date on which payments made
by the series equal the prior payment of such reimbursable expenses by
MFS, or on December 31, 2001.
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
one-third 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.
X ADDITIONAL INFORMATION CONCERNING THE STATES
Additional information concerning the state that each Fund concentrates
its investments in is set forth in Appendix H to this Part I.
<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>
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PART I - APPENDIX B
- -----------------------
<TABLE>
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.
TRUSTEE COMPENSATION TABLES
<CAPTION>
..........................................................................................................................
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 $514 10 $259,430
Marshall N. Cohan 1,633 763 12 143,259
Lawrence H. Cohn 1,590 387 18 153,579
Sir J. David Gibbons 1,500 693 12 130,059
Abby M. O'Neill 1,500 448 10 130,059
Walter E. Robb, III 1,724 524 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 1,672 466 20 157,714
Ward Smith 1,606 546 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 $514 10 $259,430
Marshall N. Cohan 1,633 593 10 143,259
Lawrence H. Cohn 1,650 392 18 153,579
Sir J. David Gibbons 1,500 539 10 130,059
Abby M. O'Neill 1,500 448 10 130,059
Walter E. Robb, III 1,783 530 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 1,697 468 20 157,714
Ward Smith 1,631 548 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 $ 642 10 $259,430
Marshall N. Cohan 1,633 1,160 14 143,259
Lawrence H. Cohn 1,796 534 18 153,579
Sir J. David Gibbons 1,500 1,030 13 130,059
Abby M. O'Neill 1,500 573 10 130,059
Walter E. Robb, III 1,929 1,221 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 1,760 630 20 157,714
Ward Smith 1,694 742 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>
...................................................................................................................
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 $514 10 $259,430
Marshall N. Cohan 1,633 593 10 143,259
Lawrence H. Cohn 1,601 388 18 153,579
Sir J. David Gibbons 1,500 539 10 130,059
Abby M. O'Neill 1,500 448 10 130,059
Walter E. Robb, III 1,734 525 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 1,676 466 20 157,714
Ward Smith 1,610 546 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
1,461 219 365 512 731
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 $514 10 $259,430
Marshall N. Cohan 1,633 847 14 143,259
Lawrence H. Cohn 1,577 386 18 153,579
Sir J. David Gibbons 1,500 770 13 130,059
Abby M. O'Neill 1,500 448 10 130,059
Walter E. Robb, III 1,711 871 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 1,666 465 20 157,714
Ward Smith 1,600 545 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)
-------------------------------------------------------------------------------------------------------------------
Richard B. Bailey $1,500 $514 10 $259,430
Marshall N. Cohan 1,633 847 14 143,259
Lawrence H. Cohn 1,660 393 18 153,579
Sir J. David Gibbons 1,500 770 13 130,059
Abby M. O'Neill 1,500 448 10 130,059
Walter E. Robb, III 1,794 885 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 1,702 468 20 157,714
Ward Smith 1,636 549 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)
-------------------------------------------------------------------------------------------------------------------
Richard B. Bailey $1,500 $514 10 $259,430
Marshall N. Cohan 1,633 847 17 143,259
Lawrence H. Cohn 1,780 403 18 153,579
Sir J. David Gibbons 1,500 770 13 130,059
Abby M. O'Neill 1,500 448 10 130,059
Walter E. Robb, III 1,913 905 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 1,753 473 20 157,714
Ward Smith 1,687 554 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 $441 9 $259,430
Marshall N. Cohan 1,633 508 9 143,259
Lawrence H. Cohn 1,584 386 18 153,579
Sir J. David Gibbons 1,500 462 9 130,059
Abby M. O'Neill 1,500 448 10 130,059
Walter E. Robb, III 1,717 523 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 1,669 466 20 157,714
Ward Smith 1,603 545 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 $514 10 $259,430
Marshall N. Cohan 1,633 847 14 143,259
Lawrence H. Cohn 1,656 393 18 153,579
Sir J. David Gibbons 1,500 770 13 130,059
Abby M. O'Neill 1,500 448 10 130,059
Walter E. Robb, III 1,790 885 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 1,700 468 20 157,714
Ward Smith 1,634 548 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 $514 10 $259,430
Marshall N. Cohan 1,633 847 14 143,259
Lawrence H. Cohn 1,967 418 18 153,579
Sir J. David Gibbons 1,500 770 13 130,059
Abby M. O'Neill 1,500 448 10 130,059
Walter E. Robb, III 2,100 936 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 1,833 479 20 157,714
Ward Smith 1,767 562 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 $441 9 $259,430
Marshall N. Cohan 1,633 508 9 143,259
Lawrence H. Cohn 1,543 383 18 153,579
Sir J. David Gibbons 1,500 462 9 130,059
Abby M. O'Neill 1,500 448 10 130,059
Walter E. Robb, III 1,676 519 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 1,651 464 20 157,714
Ward Smith 1,585 544 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 $514 10 $259,430
Marshall N. Cohan 1,633 847 14 143,259
Lawrence H. Cohn 1,693 396 18 153,579
Sir J. David Gibbons 1,500 770 13 130,059
Abby M. O'Neill 1,500 448 10 130,059
Walter E. Robb, III 1,827 891 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 1,716 470 20 157,714
Ward Smith 1,650 550 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 $514 10 $259,430
Marshall N. Cohan 1,633 847 13 143,259
Lawrence H. Cohn 1,636 391 18 153,579
Sir J. David Gibbons 1,500 770 13 130,059
Abby M. O'Neill 1,500 448 10 130,059
Walter E. Robb, III 1,769 881 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 1,691 467 20 157,714
Ward Smith 1,625 548 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 $514 10 $259,430
Marshall N. Cohan 1,633 847 14 143,259
Lawrence H. Cohn 1,941 416 18 153,579
Sir J. David Gibbons 1,500 770 13 130,059
Abby M. O'Neill 1,500 448 10 130,059
Walter E. Robb, III 2,074 932 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 1,822 478 20 157,714
Ward Smith 1,756 561 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
----------------- --------------------------------------------------------------------------------------
$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 $514 10 $259,430
Marshall N. Cohan 1,633 847 14 143,259
Lawrence H. Cohn 1,657 393 18 153,579
Sir J. David Gibbons 1,500 770 13 130,059
Abby M. O'Neill 1,500 448 10 130,059
Walter E. Robb, III 1,790 885 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 1,700 468 20 157,714
Ward Smith 1,634 548 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>
AFFILIATED SERVICE PROVIDER COMPENSATION
.............................................................................................................................
Each Fund paid compensation to its affiliated service providers over the specified periods as follows:
<CAPTION>
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 ........ 177,731 50,581 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 END 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 15,725 N/A
New York Fund ........... 154,861 18,378 136,483 0 47,716 N/A
North Carolina Fund ..... 505,625 93,621 412,004 442 96,529 5,784
Pennsylvania Fund ....... 123,147 22,079 101,068 0 19,721 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 55,141 N/A
Virginia Fund ........... 573,270 100,381 472,889 3,937 87,226 177
West Virginia Fund ...... 288,957 52,864 236,093 3 48,299 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
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 .......................................... 94,950 71,738 23,212
Arkansas Fund Class A ......................................... 128,167 4,208 123,959
Arkansas Fund Class B ......................................... 66,444 66,089 355
California Fund Class A ....................................... 30,155 1,293 28,862
California Fund Class B ....................................... 414,404 381,519 32,885
California Fund Class C ....................................... 65,771 0 65,771
Florida Fund Class A .......................................... 0 0 0
Florida Fund Class B .......................................... 147,374 137,384 9,990
Georgia Fund Class A .......................................... 147,756 5,961 141,795
Georgia Fund Class B .......................................... 126,969 97,601 29,368
Maryland Fund Class A ......................................... 452,561 149,944 302,617
Maryland Fund Class B ......................................... 246,599 187,157 59,442
Massachusetts Fund Class A .................................... 836,875 297,116 539,759
Massachusetts Fund Class B .................................... 221,142 166,457 54,685
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 ......................................... 287,201 221,120 66,081
North Carolina Fund Class A ................................... 1,293,941 396,183 897,758
North Carolina Fund Class B ................................... 483,772 369,243 114,529
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 ................................... 511,304 154,497 356,807
South Carolina Fund Class B ................................... 320,229 242,722 77,507
Tennessee Fund Class A ........................................ 376,654 119,237 257,417
Tennessee Fund Class B ........................................ 199,023 151,373 47,650
Virginia Fund Class A ......................................... 1,284,437 395,020 889,417
Virginia Fund Class B ......................................... 341,856 259,531 82,325
Virginia Fund Class C ......................................... 44,052 0 44,052
West Virginia Fund Class A .................................... 457,498 138,598 318,900
West Virginia Fund Class B .................................... 165,063 127,030 38,033
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
---------------------------------------------------------------------------
None
<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%
.......................................................................................................................
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
.......................................................................................................................
</TABLE>
<PAGE>
- ----------------------
PART I - APPENDIX G
- ----------------------
PERFORMANCE INFORMATION
..........................................................................
All performance quotations are as of March 31, 1999.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS ACTUAL
---------------------------------- 30-DAY 30-DAY
10 YEAR YIELD YIELD
OR (INCLUDING (WITHOUT
LIFE OF ANY ANY
FUND 1 YEAR 5 YEAR FUND(1) WAIVERS) WAIVERS)
-------------------------------------------------- --------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Alabama Fund Class A with sales charge ........... 0.04% 5.80% 6.88% 4.49% 4.34%
Alabama Fund Class A without sales charge ........ 5.03 6.83 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
Arkansas Fund Class A with sales charge .......... (0.37) 5.28 5.72 4.71 4.56
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
California Fund Class A with sales charge ........ 1.52 6.01 7.30 4.25 4.10
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
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
Florida Fund Class A with sales charge ........... 0.25 5.49 5.96 4.45 4.30
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
Georgia Fund Class A with sales charge ........... (0.08) 5.45 6.83 4.41 4.26
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
Maryland Fund Class A with sales charge .......... (0.04) 5.33 6.29 4.02 3.88
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
Massachusetts Fund Class A with sales charge...... 0.12 5.41 6.71 4.56 4.41
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
Mississippi Fund Class A with sales charge ....... 0.60 6.13 5.47 4.63 4.49
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
New York Fund Class A with sales charge .......... 0.15 5.82 7.51 4.31 4.16
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
North Carolina Fund Class A with sales charge .... (0.22)% 5.48% 6.46% 4.36% 4.21%
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
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
Pennsylvania Fund Class A with sales charge ...... 0.82 6.37 5.49 4.54 4.01
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
South Carolina Fund Class A with sales charge .... (0.63) 5.45 6.64 4.21 4.07
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
Tennessee Fund Class A with sales charge ......... (0.18) 5.52 6.85 4.07 3.92
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
Virginia Fund Class A with sales charge .......... (0.26) 5.19 6.42 4.20 4.05
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
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
West Virginia Fund Class A with sales charge ..... (0.25) 5.36 6.68 4.30 4.16
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
<CAPTION>
ACTUAL
TAX EQUIVALENT TAX EQUIVALENT
30-DAY YIELD 30-DAY YIELD
(INCLUDING (WITHOUT
ANY WAIVERS) ANY WAIVERS) CURRENT
-------------------- -------------------- DISTRIBUTION
TAX BRACKETS: TAX BRACKETS: RATE
-------------------- -------------------- -----------
28% 31% 28% 31%
--------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Alabama Fund Class A with sales charge ........... 6.24% 6.51% 6.03% 6.29% 5.04%
Alabama Fund Class A without sales charge ........ -- -- -- -- --
Alabama Fund Class B with CDSC ................... -- -- -- -- --
Alabama Fund Class B without CDSC ................ 5.43 5.67 5.21 5.43 4.53
Arkansas Fund Class A with sales charge .......... 6.54 6.83 6.33 6.61 4.68
Arkansas Fund Class A without sales charge ....... -- -- -- -- --
Arkansas Fund Class B with CDSC .................. -- -- -- -- --
Arkansas Fund Class B without CDSC ............... 5.82 6.07 5.61 5.86 4.16
California Fund Class A with sales charge ........ 5.90 6.16 5.69 5.94 4.54
California Fund Class A without sales charge ..... -- -- -- -- --
California Fund Class B with CDSC ................ -- -- -- -- --
California Fund Class B without CDSC ............. 5.06 5.28 4.85 5.06 4.12
California Fund Class C with CDSC ................ -- -- -- -- --
California Fund Class C without CDSC ............. 4.93 5.14 4.72 4.93 3.85
Florida Fund Class A with sales charge ........... 6.18 6.45 5.97 6.23 4.63
Florida Fund Class A without sales charge ........ -- -- -- -- --
Florida Fund Class B with CDSC ................... -- -- -- -- --
Florida Fund Class B without CDSC ................ 5.32 5.55 5.10 5.32 4.15
Georgia Fund Class A with sales charge ........... 6.13 6.39 5.92 6.17 4.52
Georgia Fund Class A without sales charge ........ -- -- -- -- --
Georgia Fund Class B with CDSC ................... -- -- -- -- --
Georgia Fund Class B without CDSC ................ 5.36 5.59 5.15 5.38 3.98
Maryland Fund Class A with sales charge .......... 5.58 5.83 5.39 5.62 4.33
Maryland Fund Class A without sales charge ....... -- -- -- -- --
Maryland Fund Class B with CDSC .................. -- -- -- -- --
Maryland Fund Class B without CDSC ............... 4.96 5.17 4.74 4.94 3.89
Massachusetts Fund Class A with sales charge...... 6.33 6.61 6.13 6.39 4.58
Massachusetts Fund Class A without sales charge... -- -- -- -- --
Massachusetts Fund Class B with CDSC ............. -- -- -- -- --
Massachusetts Fund Class B without CDSC .......... 5.75 6.00 5.54 5.78 4.15
Mississippi Fund Class A with sales charge ....... 6.43 6.71 6.24 6.51 4.78
Mississippi Fund Class A without sales charge .... -- -- -- -- --
Mississippi Fund Class B with CDSC ............... -- -- -- -- --
Mississippi Fund Class B without CDSC ............ 5.65 5.90 5.44 5.68 4.21
New York Fund Class A with sales charge .......... 5.99 6.25 5.78 6.03 4.61
New York Fund Class A without sales charge ....... -- -- -- -- --
New York Fund Class B with CDSC .................. -- -- -- -- --
New York Fund Class B without CDSC ............... 5.25 5.48 5.06 5.28 4.08
North Carolina Fund Class A with sales charge .... 6.06% 6.32% 5.85% 6.10% 4.52%
North Carolina Fund Class A without sales charge.. -- -- -- -- --
North Carolina Fund Class B with CDSC ............ -- -- -- -- --
North Carolina Fund Class B without CDSC ......... 5.46 5.70 5.24 5.46 4.09
North Carolina Fund Class C with CDSC ............ -- -- -- -- --
North Carolina Fund Class C without CDSC ......... 5.46 5.70 5.25 5.48 4.09
Pennsylvania Fund Class A with sales charge ...... 6.31 6.58 5.57 5.81 4.62
Pennsylvania Fund Class A without sales charge.... -- -- -- -- --
Pennsylvania Fund Class B with CDSC .............. -- -- -- -- --
Pennsylvania Fund Class B without CDSC ........... 5.54 5.78 4.76 4.97 4.05
South Carolina Fund Class A with sales charge .... 5.85 6.10 5.65 5.90 4.30
South Carolina Fund Class A without sales charge . -- -- -- -- --
South Carolina Fund Class B with CDSC ............ -- -- -- -- --
South Carolina Fund Class B without CDSC ......... 5.24 5.46 5.01 5.23 3.86
Tennessee Fund Class A with sales charge ......... 5.65 5.90 5.44 5.68 4.42
Tennessee Fund Class A without sales charge ...... -- -- -- -- --
Tennessee Fund Class B with CDSC ................. -- -- -- -- --
Tennessee Fund Class B without CDSC .............. 5.07 5.29 4.86 5.07 3.98
Virginia Fund Class A with sales charge .......... 5.83 6.09 5.63 5.87 4.48
Virginia Fund Class A without sales charge ....... -- -- -- -- --
Virginia Fund Class B with CDSC .................. -- -- -- -- --
Virginia Fund Class B without CDSC ............... 5.22 5.45 5.01 5.23 4.05
Virginia Fund Class C with CDSC .................. -- -- -- -- --
Virginia Fund Class C without CDSC ............... 5.21 5.43 5.00 5.22 4.05
West Virginia Fund Class A with sales charge ..... 5.97 6.23 5.78 6.03 4.57
West Virginia Fund Class A without sales charge... -- -- -- -- --
West Virginia Fund Class B with CDSC ............. -- -- -- -- --
West Virginia Fund Class B without CDSC .......... 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:
<CAPTION>
FUND PERIOD
---- ------
<S> <C>
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.
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
In 1998, the Alabama economy remained healthy. Almost 40,000 net new jobs
were created, which represented an increase of 2.1 percent. Most of the
new jobs (45 percent) were created in the services sector. Retail trade,
one of the fastest growing sectors, accounted for another 35 percent of
all new jobs. Surprisingly, one of the strongest components within the
services sector in recent years, the health services industry, lost
approximately 500 jobs in 1998. The manufacturing sector lost
approximately 200 net jobs during 1998.
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 (the mean annual average of which varies between 52 and
68 inches) and a high pulpwood growth rate (averaging approximately one-
half cord per acre per year). In recent years Alabama has ranked as the
fifth largest producer of timber in the nation. Alabama has fresh water
availability of twenty 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, manufactured housing, motor vehicles,
machinery and service industries are also important to Alabama's economy.
Coal mining and the textile industry have both been in decline during
recent years.
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 health care 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 fastest job growth in the State during 1998 was in the Birmingham and
Mobile metropolitan areas, which added 11,200 and 6,700 jobs respectively.
These two areas accounted for almost 45 percent of the 1998 total job
growth in the State. Major factors contributing to the relatively faster
than expected rate of growth include very strong consumer spending; low
inflation and unemployment rates; low energy and commodity prices; low
interest rates; strong demand for residential housing; and strong
commercial construction.
The Alabama Development Office (ADO) reports as of December 31, 1998, that
for the thirteenth consecutive year more than $2 billion in capital
investment was announced for new and expanding industries. The State had
more than $2.0 billion in 1998, $2.7 billion in 1997, $2.6 billion in
1996, $3.8 billion in 1995, and $2.6 billion in 1994. These investments
include 18,554 announced jobs by 540 companies in 1998; 22,693 announced
jobs by 605 companies in 1997; 17,750 announced jobs by 622 companies in
1996 and 21,290 announced jobs by 913 companies in 1995. Preliminary
figures indicate that there will be approximately $2.8 billion in
announced investment and creation of approximately 21,000 jobs by
approximately 600 companies in 1998. Announcements early in 1999 that
Honda will build a $400 million automobile assembly plant in Lincoln,
creating 1,500 jobs, and Navistar will locate a $200 million diesel engine
plant, creating 600 new jobs, in Huntsville indicate 1999 will be a very
good year. Major investments in 1998 included IPSCO Steel ($395 million)
and McNeil Specialty Products, Inc. ($130 million). This would make the
past four years the best in the State's history in terms of total
announced capital investment by manufacturing firms. Other large
investments during 1990s 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).
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. On March 23, 1999, the U.S.
Supreme Court decided this case in favor of the taxpayers. 119 S.Ct. 1180
(1999). It declared the corporate franchise tax unconstitutional and
remanded the case to the Alabama courts to determine the appropriate
remedy.
There is an extensive history of this issue in the Alabama courts arising
from the different treatment of foreign and domestic corporations in the
franchise tax. Although the State had success on this issue until the U.S.
Supreme Court decision, see White v. Reynolds Metals Company, 558 So. 2d
373 (Ala. 1989), South Central Bell v. State, 711 So. 2d 105 (1998), the
State is now faced with the prospect of replacing the significant revenue
generated from this tax in the future. Additionally, there is a
possibility that the State will have to refund collections for past years.
Protective claims for refunds amounting to $253 million have been filed by
foreign corporations as of June 14, 1999. Potential refunds, including
both taxpayers that have filed claims and taxpayers that could, but have
not yet filed claims, amount to $636 million. Additionally, the State
could be held liable for interest charges which already amount to $194
million through June 14, 1999.
A special session of the Legislature later in 1999 is expected to deal
with replacing the revenue from the franchise tax for the future. The
amount of refunds, if any, that will be payable will depend on a number of
factors including without limitation: (a) whether the courts decide that
the South Central Bell decision should apply prospectively or
retroactively, (b) possible settlement negotiations with the plaintiffs
and other taxpayers, and (c) the measures the Legislature adopts to
replace the franchise tax revenue and perhaps deal with the refund issue.
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 pension received from the federal government at a higher rate than
they tax pensions received from the state without violating 4 U.S.C. (S)
111, the Intergovernmental Tax Immunity Act. Plaintiffs in Melof allege
that the equal protection clauses of the Federal and Alabama Constitutions
and a provision in the Alabama Constitution relating to the income tax
prohibit different treatment of pensions paid by governments and pensions
paid by private employers.
On May 28, 1999, the Alabama Supreme Court affirmed a decision of the
Court of Civil Appeals upholding the constitutionality of the State's
income tax treatment of pension income.
The potential refund if this class action were successful is probably in
excess of $300 million.
Valhalla Cemetery Company, Inc., et al., v. H.E. Monroe, Jr., 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 completed by
delivery in Alabama. Plaintiff and class members contend that they are
entitiled 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.
Act. No. 97-301, signed into law by Governor Fob James on May 7, 1997,
amended the use tax exemption, codified in section 40-23-62, Code of
Alabama 1975, 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. Section 3 of that Act made it effective for all years
open under the statute of limitations.
The circuit court entered an order declaring that section 3 of the Act was
unconstitutional. The State appealed to the Alabama Supreme Court, which
transferred the matter to the Court of Civil Appeals. On May 14, 1999, the
Court of Civil Appeals issued a decision reversing the Circuit Court and
upholding the constitutionality of the retroactive application of the Act
by virtue of section 3.
The potential revenue impact, if the plaintiff were to prevail, is the
approximately $350 million in use taxes that have been collected during
the past three years.
There are two other cases involving issues identical to those in this
case, Sessions Corp. v. Monroe and A.G. Industries v. Monroe, which have
been stayed pending resolution of Valhalla. See also, Bluegrass Bit
Company, Administrative Law Docket Nos. U. 96-249, S. 96-287.
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. It 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 responsibility 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, with significant job losses
(particularly in the aerospace, other manufacturing, services and
construction industries). The greatest effects of the recession were felt
in Southern California. Since 1994, California's economy has made a strong
recovery, but its growth has been somewhat unbalanced. In general, the
high-technology, biotechnology, construction and entertainment and other
service industries have expanded while aerospace and other manufacturing
industries have declined.
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 ratings have climbed from the lows experienced
during the recession, as of the date of this Statement of Additional
Information, rating agencies, underwriters and investors appear to have
lingering concerns about California's creditworthiness. Major rating
agencies often 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, throughout the
first half of the decade, California had a period of budget imbalance and
reported multibillion dollar year-end deficits. However, in recent years,
California has generally experienced positive or close to break-even
operating results due, in part, to more conservative budgeting and
improved economic conditions and, most recently, higher-than-expected tax
receipts paid on capital gains realizations.
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 was often cited as one of the
long-term structural elements responsible for California's earlier 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 (with limited obligation bonds being
generally less affected). 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 the possibility exists that another natural disaster 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 to 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 trial 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 have 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 relief
based upon theories of unjust enrichment and bailment. Cobb's claims
related to the State's administration 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 $16.851 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 1999.
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 May 1999, the Commonwealth's unadjusted
unemployment rate was 2.9%, as compared to a national average of 4.0%. 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 9.0% over the prior fiscal year to $19.300
billion. Expenditures increased by 5.9% over the prior fiscal year to
$19.002 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 May 19, 1999, by the Executive Office for
Administration and Finance to be approximately $19.852 billion, including
tax revenues of $14.16 billion. It is estimated that fiscal 1999 budgeted
expenditures and other uses will be $20.319 billion and that fiscal 1999
will end with fund balances of $1.724 billion.
In late April, 1999, both houses of the Massachusetts Legislature agreed
on a consensus revenue estimate for fiscal 2000 of $14.850 billion. On May
8, 1999 the House of Representatives approved its version of the fiscal
2000 budget. The House budget incorporates several tax cuts, one of which
had been included in the budget approved by the House Ways and Means
Committee. The Committee's budget provided for total expenditures of
approximately $20.770 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.
On March 3, 1999, the former Deputy State Treasurer for Cash Management
was arrested for embezzlement, between 1992 and 1995, of approximately
$2.4 million from the Unclaimed Check Fund, to which are credited amounts
held for the payment of aged outstanding checks drawn on the state
treasury. Earlier, in February, another former employee of the State
Treasurer's office had been charged with attempting to embezzle $6.5
million from the same Fund. The Attorney General is conducting a criminal
investigation of the matter and believes, based on the actual knowledge
acquired by the Office of the Attorney General in its review as of May
1999 of matters related to the operation of the Office of the State
Treasurer, that the likelihood of loss by the Commonwealth in excess of
$20 million is remote. The State Treasurer has since implemented measures
designed to minimize or eliminate the potential for errors, loss or theft
with respect to certain checking accounts.
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. Based on the actuarial valuation
completed by the Public Employee Retirement Administration Commission, the
amounts required for funding of current pension liabilities in fiscal
years 1999, 2000, 2001 and 2002, are estimated to be $898.5 million,
$910.0 million, $922.1 million and $934.6 million, 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 1998 was 5.4%, down from a rate of
5.7% in 1997. Unemployment in Mississippi is at its lowest rate since
1979. However, projections indicate a slight increase to 5.5% in 1999. 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 increased an estimated 5.5%; in
1999, personal income is projected to grow 5.0%.
The growing importance of telecommunications, the increase of
international trade and the tremendous increase in gaming and tourism have
significantly impacted the state's economic position. Total employment in
Mississippi increased by 1.1% in 1995 and is expected to increase by 2.2%
in 1998. In the U.S. as a whole, total employment grew at a rate of 2.6%
in 1998. Manufacturing accounts for 22% of employment in Mississippi,
although employment in the manufacturing sector declined approximately 4%
in 1996. This trend continued in 1997 and 1998. However, unlike the
remainder of the nation, manufacturing employment in Mississippi is
expected to increase between 1999 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, construction
and communications.
Although 1996 employment and income statistics show that the Mississippi
economy has slowed compared to the early 1990s, the communications,
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. In 1998, gross revenues in the gaming
industry rose 9.6% to $2.2 billion. Projections indicate a continued
increase in revenues and employment for 1999 in the gaming industry.
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 4.2% 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, 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, 1998, State General Fund receipts were
budgeted at approximately $3,049,371,000 and State General Fund
Disbursements were budgeted at approximately $2,948,035,000, and State
Special Fund Receipts and Disbursements were estimated to be approximately
$5,564,908,000 and $5,369,649,000, respectively. With the growth in
industry, employment, communications and the gaming industry, the State
General Fund receipts are increasing significantly. For the fiscal year
ending June 30, 1999, General Fund receipts are expected to increase to
approximately $3,249,200,000 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 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 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 which
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 the
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 1998 (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>
- ----------------------------
MFS(R) MUNICIPAL INCOME FUND
- ----------------------------
AUGUST 1, 1999 AS AMENDED SEPTEMBER 22, 1999
[logo] M F S (R) STATEMENT OF ADDITIONAL
INVESTMENT MANAGEMENT INFORMATION
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
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.
MMI-13 7/99 600
<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-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
<PAGE>
I DEFINITIONS
"Fund" - MFS(R) Municipal Income Fund, a series of MFS Municipal Series
Trust (the "Trust"), a Massachusetts business trust, organized in 1984.
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>
- -------------------
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
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>
- -------------------
PART I - APPENDIX B
- -------------------
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 $1,199 10 $259,430
Marshall N. Cohan 3,950 2,087 14 143,259
Dr. Lawrence Cohn 3,909 928 18 153,579
Sir David Gibbons 3,500 1,825 13 130,059
Abby M. O'Neill 3,500 1,050 10 130,059
Walter E. Robb, III 4,359 2,193 15 171,154
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 4,125 1,190 20 157,714
Ward Smith 3,900 1,382 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).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..........................................................................
AVERAGE YEARS OF SERVICE
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.
<PAGE>
- -------------------
PART I - APPENDIX C
- -------------------
AFFILIATED SERVICE PROVIDER COMPENSATION
..........................................................................
The 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 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>
- -------------------
PART I - APPENDIX D
- -------------------
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
..........................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
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
</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:
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
---------------------------------------------------------------------------
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.
<PAGE>
- -------------------
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>
- -------------------
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
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE 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>
- -------------------
PART I - APPENDIX G
- -------------------
<TABLE>
<CAPTION>
PERFORMANCE INFORMATION
...............................................................................................................................
All performance quotations are as of March 31, 1999.
ACTUAL
ACTUAL TAX EQUIVALENT TAX EQUIVALENT
AVERAGE ANNUAL 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 (4.75%) 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
(declining over 6 years
from 4% to 0%) 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 (1%
for first year) 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>
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.
