<PAGE>
As filed with the Securities and Exchange Commission on July 28, 2000
1933 Act File No. 2-92915
1940 Act File No. 811-4096
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 34
AND REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 35
MFS(R) MUNICIPAL SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
500 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (617) 954-5000
Stephen E. Cavan, Massachusetts Financial Services Company,
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|X| on July 29, 2000 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date] pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
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<PAGE>
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MFS MUNICIPAL SERIES TRUST
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AUGUST 1, 2000
PROSPECTUS
MFS ALABAMA MUNICIPAL BOND FUND CLASS A
MFS ARKANSAS MUNICIPAL BOND FUND CLASS B
MFS CALIFORNIA MUNICIPAL BOND FUND CLASS C
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
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This Prospectus describes each of the funds listed above. The investment
objective of each fund is to provide current income exempt from federal income
tax and personal income tax, if any, of the state to which its name refers.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE FUNDS' SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU
OTHERWISE IS COMMITTING A CRIME.
<PAGE>
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TABLE OF CONTENTS
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Page
I Risk Return Summary .................................... 1
Bar Charts and Performance Tables
1. MFS Alabama Municipal Bond Fund ................. 7
2. MFS Arkansas Municipal Bond Fund ................ 9
3. MFS California Municipal Bond Fund .............. 11
4. MFS Florida Municipal Bond Fund ................. 13
5. MFS Georgia Municipal Bond Fund ................. 15
6. MFS Maryland Municipal Bond Fund ................ 17
7. MFS Massachusetts Municipal Bond Fund ........... 19
8. MFS Mississippi Municipal Bond Fund ............. 21
9. MFS New York Municipal Bond Fund ................ 23
10. MFS North Carolina Municipal Bond Fund .......... 25
11. MFS Pennsylvania Municipal Bond Fund ............ 27
12. MFS South Carolina Municipal Bond Fund .......... 29
13. MFS Tennessee Municipal Bond Fund ............... 31
14. MFS Virginia Municipal Bond Fund ................ 33
15. MFS West Virginia Municipal Bond Fund ........... 35
II Expense Summary ........................................ 37
III Certain Investment Strategies and Risks ................ 45
IV Management of the Funds ................................ 46
V Description of Share Classes ........................... 47
VI How to Purchase, Exchange and Redeem Shares ............ 52
VII Investor Services and Programs ......................... 56
VIII Other Information ...................................... 58
IX Financial Highlights ................................... 65
Appendix A -- Investment Techniques and Practices ...... A-1
Appendix B -- Tax Equivalent Yield Tables .............. B-1
<PAGE>
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I RISK RETURN SUMMARY
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o INVESTMENT OBJECTIVE
The investment objective of each fund is to provide current income exempt
from federal income tax and personal income tax, if any, of the state to
which its name refers. Each fund's objective may be changed without
shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
Each fund invests, under normal market conditions, at least 80% of its net
assets in municipal securities and participation interests in municipal
securities issued by banks, the interest on which is exempt from federal
income tax and personal income tax, if any, of the state to which its name
refers. Municipal securities are bonds or other debt obligations of a U.S.
state or political subdivision, such as a county, city, town, village, or
authority. Participation interests in municipal securities are interests
in holdings of municipal obligations backed by a letter of credit or
guarantee from the issuing bank. Although each fund seeks to invest in
municipal securities whose income is exempt from federal income tax and
state personal income tax in its namesake state (and the Florida
intangibles tax in the case of the Florida fund), the interest on certain
of these municipal securities may be subject to alternative minimum tax.
For a comparison of yields on municipal bonds and taxable securities, see
the Tax Equivalent Yield Tables attached as Appendix B to this Prospectus.
While each fund seeks to invest all its assets in the types of
securities described in the preceding paragraph, market conditions may
from time to time limit the availability of such obligations. During
periods when a fund is unable to invest as described above, the fund will
seek to invest its assets in municipal securities that are exempt from
federal income tax but are subject to personal income tax in the fund's
namesake state. Under normal market conditions, each fund will invest
substantially all of its assets in:
(i) municipal securities rated in one of the top three credit ratings
by credit rating agencies (or which are unrated and considered by
the fund's investment adviser, Massachusetts Financial Services
Company (referred to as MFS or the adviser), to be of comparable
quality);
(ii) securities of issuers who have securities that are rated in one of
the top three credit ratings by credit rating agencies or which
are guaranteed by the U.S. government; and
(iii) speculative and lower rated tax-exempt securities (commonly known
as junk bonds).
Speculative securities are securities rated in the lowest investment
grade category by credit rating agencies or which are unrated and
considered by MFS to be comparable to speculative securities. Lower rated
bonds, commonly known as junk bonds, are bonds assigned credit ratings
below the four highest credit ratings by credit rating agencies or which
are unrated and considered by MFS to be comparable to lower rated bonds.
In selecting fixed income investments for each fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager(s) of MFS' fixed income
oriented funds (including each of the funds) as a tool in making or
adjusting a fund's asset allocations to various segments of the fixed
income markets. In assessing the credit quality of fixed income
securities, MFS does not rely solely on the credit ratings assigned by
credit rating agencies, but rather performs its own independent credit
analysis.
Each fund is a non-diversified mutual fund. This means that each fund
may invest a relatively high percentage of its assets in a small number of
issuers.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in each fund and the circumstances
reasonably likely to cause the value of your investment in a fund to
decline are described below. The share price of a fund generally changes
daily based on market conditions and other factors. Please note that there
are many circumstances which could cause the value of your investment in a
fund to decline, and which could prevent the fund from achieving its
objective, that are not described here.
The principal risks of investing in each of the funds are:
o Municipal Securities Risk
> Interest Rate Risk: As with any fixed income security, the prices of
municipal securities in each fund's portfolio will generally fall when
interest rates rise. Conversely, when interest rates fall, the prices
of municipal securities in a fund's portfolio will generally rise.
> Maturity Risk: Interest rate risk will generally affect the price of a
municipal security more if the security has a longer maturity.
Municipal securities with longer maturities will therefore be more
volatile than other fixed income securities with shorter maturities.
Conversely, municipal securities with shorter maturities will be less
volatile but generally provide lower returns than municipal securities
with longer maturities. The average maturity of each fund's municipal
security investments will affect the volatility of the fund's share
price.
> Credit Risk: Credit risk is the risk that the issuer of a municipal
security will not be able to pay principal and interest when due.
Rating agencies assign credit ratings to certain municipal securities
to indicate their credit risk. The price of a municipal security will
generally fall if the issuer defaults on its obligation to pay
principal or interest, the rating agencies downgrade the issuer's
credit rating or other news affects the market's perception of the
issuer's credit risk. A participation interest is also subject to the
risk of default by the issuing bank.
> General Obligations and Revenue Obligations Risk: Each fund may invest
in municipal bonds that are general obligations backed by the full
faith and credit of the municipal issuer. Each fund may also invest in
municipal bonds called revenue obligations which are subject to a
higher degree of credit risk than general obligations. Revenue
obligations finance specific projects (such as building a hospital or
toll roads, water and sewer projects, etc.), and are not backed by the
full faith and credit of the municipal issuer. Each fund may invest in
excess of 25% of its assets in revenue bonds relating to any one
specific industry (i.e., housing, healthcare, water and sewer, etc.).
Because revenue obligations are repaid from the revenues from a
facility, they are subject to a risk of default in payments of
principal and interest if the facility does not generate enough
income.
> Municipal Lease Obligations Risk: Each fund's investments in municipal
securities may include municipal lease obligations. Municipal lease
obligations are undivided interests issued by a state or municipality
in a lease or installment purchase which generally relates to
equipment or facilities. When a fund invests in municipal lease
obligations, it may have limited recourse in the event of default or
termination. In some cases, payments under municipal leases do not
have to be made unless the appropriate legislative body specifically
approves money for that purpose.
o Concentration Risk: As more fully described below, because each fund
concentrates in securities of municipal issuers in its namesake state,
certain factors with respect to that state will disproportionately affect
the value of the fund's investments, including local economic factors or
policy changes, erosion of a state's tax base, or changes in the credit
ratings assigned to the state's municipal issuers. Thus, each fund's
performance will be closely tied to the economic and political conditions
in its namesake state and will be more volatile than the performance of a
more geographically diversified fund. The principal economic factors
affecting each state are as follows:
> Alabama: Alabama's economy relies in part on the textile, automobile
and forest products industries, which may be affected by cyclical
changes. While average per capita income of Alabama residents has
improved in recent years, certain areas of Alabama are among the
poorest in the nation.
> Arkansas: The Arkansas economy is reliant in part on the food
processing and lumber and wood products industries. Downturns in these
industries could adversely affect the state's economy. The limits to
growth in Arkansas are primarily related to labor supply shortages and
infrastructure constrictions rather than external factors. Arkansas
production and wealth prospects could be adversely affected if
consumer confidence declines.
> California: Issuers of California municipal obligations experienced
severe financial difficulties in the early 1990's. During that time,
California experienced recurring budget deficits. Although
California's economy has been recovering, 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. California's economy can be expected to be particularly
sensitive to trends in these industries and to economic downturns in
foreign markets. Many municipal issuers depend upon real property
taxes as a source of revenue. Voter-passed initiatives have limited
real property taxes. This limit and other voter-passed initiatives
also make it difficult for California to balance its budget. For
example, the state and local governments are subject to limits on
spending. In addition, California is required to guarantee a minimum
level of spending on public education.
> Florida: Florida does not impose an individual income tax on Florida
residents. This could affect Florida's ability to pay principal and
interest in a timely manner, if an economic downswing occurs.
Florida's economy is heavily dependent on the tourism and construction
industries. South Florida is susceptible to economic difficulties from
international trade and currency imbalances. North and Central Florida
are impacted by damage to agriculture, especially the citrus and sugar
industries.
> Georgia: Georgia's economy relies in part on a large military presence
within the state and a significant volume of defense contracting.
Should there be a severe decline in defense spending or a large number
of military base closings in Georgia, such changes could result in
increased unemployment levels within the state.
> Maryland: Average per capita personal income of Maryland residents
ranks as the fifth highest in the nation, and has been so ranked for
each of the previous nine years. However, with respect to such
personal income, Maryland is more reliant on the service and
government sectors than the nation as a whole, while the manufacturing
sector is much less significant in Maryland than nationwide.
Therefore, a significant downturn in either the government or service
sectors would have a heightened impact on Maryland personal income, as
a whole, possibly reducing certain muncipalities' revenues.
> Massachusetts: The Massachusetts economy tends to be particularly
susceptible to downturns in the U.S. economy, experiencing financial
difficulty and high unemployment levels during these downturns. The
Massachusetts economy is particularly susceptible to trends in the
high- technology, financial services, biotechnology and health care
industries.
> Mississippi: Because Mississippi's economy relies heavily on the
manufacturing and service industries, its economy is sensitive to
trends in those industries. Also, Mississippi's financial strength in
recent years is partially the result of substantial growth in the
gaming and tourism industries and is therefore subject to changes in
those industries. While Mississippi's financial condition has
improved, it still ranks last among the states in per capita income.
> New York: Because the fund invests primarily in the securities of New
York issuers, its performance may be disproportionately affected by
local, state and regional factors. These may include state or local
legislation or policy changes, economics, erosion of the city's or
state's tax base, natural disasters, and the possibility of credit
problems. New York City and certain localities outside New York City
have experienced financial problems. These problems may affect the
fiscal health of New York State.
> North Carolina: North Carolina has seen significant growth over the
past twenty-five years, including increases in population, labor
force, and per capita income. Nonetheless, it remains primarily a
rural state. North Carolina's economy consists of a combination of
industry, agriculture and tourism.
> Pennsylvania: Although Pennsylvania has been historically identified
as a heavy-industry state, over 82% of total state employment is
non-manufacturing employment. Thus, Pennsylvania's economy may be
disproportionately affected by economic downturns in non-
manufacturing industries. Although Pennsylvania's employment rate and
bond ratings are generally better than the national median, certain
areas within the Commonwealth, particularly those areas that are more
heavily reliant on a manufacturing economy, have worse employment
rates and bond ratings.
> South Carolina: South Carolina relies heavily on manufacturing, still
largely related to the textile industry. Accordingly, the State's
manufacturing economy remains vulnerable to cycles. The State also has
initiated an ambitious property tax relief program, though the funding
level is determined annually.
> Tennessee: Tennessee faced a recurring budget crisis for the current
year which could lead to financial difficulty for the state. Critics
of current fiscal policy believe the State's budget passed by the
Legislature for this year does not address long-term solution for
revenue shortfalls. Tennessee is reliant upon tourism and
manufacturing for revenue, each of which is sensitive to the strength
of the economy as a whole. Tennessee's economic growth has slowed over
the past couple of years and has fallen behind the rate of economic
growth for the nation.
> Virginia: The economy of Virginia is significantly dependent on the
government sector and could be affected adversely by reductions in
defense spending, particularly military base closings.
> West Virginia: West Virginia's economic indicators are typically below
national averages. Although the State's economy continues to
diversify, it is sensitive to trends in various industries such as
mineral production, manufacturing and tourism.
o Non-Diversified Status Risk: Because a fund may invest its assets in a
small number of issuers, the fund is more susceptible to any single
economic, political or regulatory event affecting those issuers than is a
diversified fund.
o Speculative Municipal Securities Risk: Speculative bonds are subject to a
higher risk that the issuer will default on payments of principal and
interest than higher rated investment grade bonds. Although the issuer's
ability to make interest and principal payments appears adequate, an
adverse change in economic conditions or other circumstances is more
likely to cause a default by the issuer of a speculative bond than the
issuer of a higher rated investment grade bond.
o Liquidity Risk: The fixed income securities purchased by each fund may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on a
fund's performance.
o Lower Rated Municipal Securities Risk
> Higher Credit Risk: Junk bonds are subject to a substantially higher
degree of credit risk than higher rated bonds. During recessions, a
high percentage of issuers of junk bonds may default on payments of
principal and interest. The price of a junk bond may therefore
fluctuate drastically due to bad news about the issuer or the economy
in general.
> Higher Liquidity Risk: During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will
be harder to value or sell at a fair price.
o As with any mutual fund, you could lose money on your investment in a
fund.
An investment in a fund is not a bank deposit and it not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
<PAGE>
1. MFS ALABAMA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1991 11.73%
1992 8.84%
1993 12.58%
1994 (4.74)%
1995 16.08%
1996 3.64%
1997 9.13%
1998 4.95%
1999 (3.09)%
During the period shown in the bar chart, the highest quarterly return was
6.50% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (4.75)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 4.96%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Alabama tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years Life*
MFS ALABAMA MUNICIPAL BOND FUND
Class A shares (7.69)% 4.93% 5.90%
Class B shares (7.45) 4.81 5.89
Lehman Brothers Municipal Bond Index+** (2.06) 6.91 7.00
Average Alabama municipal debt fund++ (3.79) 5.41 6.24
------
* For the period from the commencement of the fund's investment operations
on February 1, 1990, through December 31, 1999.
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
** The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on February 1, 1990 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of
the fund's class A shares for periods prior to the offering of class B
shares. This blended class B share performance has been adjusted to take
into account the CDSC applicable to class B shares, rather than the
initial sales charge (load) applicable to class A shares. This blended
performance has not been adjusted to take into account differences in
class specific operating expenses. Because operating expenses of class B
shares are higher than those of class A shares, this blended class B share
performance is higher than the performance of class B shares would have
been had class B shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
2. MFS ARKANSAS MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1993 12.41%
1994 (6.06)%
1995 14.96%
1996 3.17%
1997 8.98%
1998 4.70%
1999 (2.27)%
During the period shown in the bar chart, the highest quarterly return was
6.45% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.58)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 4.30%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
other state tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years Life*
MFS ARKANSAS MUNICIPAL BOND FUND
Class A shares (6.91)% 4.73% 4.74%
Class B shares (6.80) 4.57 4.67
Lehman Brothers Municipal Bond Index+** (2.06) 6.91 6.24
Average other state municipal debt fund++ (3.83) 5.73 5.17
------
* Fund performance figures are for the period from the commencement of the
fund's investment operations on February 3, 1992, through December 31,
1999. Index and Lipper average returns are from February 1, 1992.
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
** The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on February 3, 1992 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of
the fund's class A shares for periods prior to the offering of class B
shares. This blended class B share performance has been adjusted to take
into account the CDSC applicable to class B shares, rather than the
initial sales charge (load) applicable to class A shares. This blended
performance has not been adjusted to take into account differences in
class specific operating expenses. Because operating expenses of class B
shares are higher than those of class A shares, this blended class B share
performance is higher than the performance of class B shares would have
been had class B shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
3. MFS CALIFORNIA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1990 6.42%
1991 12.34%
1992 9.13%
1993 12.87%
1994 (8.06)%
1995 18.01%
1996 2.93%
1997 9.79%
1998 6.46%
1999 (3.32)%
During the period shown in the bar chart, the highest quarterly return was
7.00% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (6.18)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 4.20%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
California tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years 10 Years
MFS CALIFORNIA MUNICIPAL BOND FUND
Class A shares (7.92)% 5.51% 5.88%
Class B shares (7.93) 5.28 5.78
Class C shares (5.11) 5.49 5.77
Lehman Brothers Municipal Bond Index+* (2.06) 6.91 6.89
Average California municipal debt fund++ (5.16) 6.08 6.08
------
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%. Class C share
performance takes into account the deduction of the 1% CDSC.
The fund commenced investment operations on June 18, 1985 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993 and class C shares on January 3, 1994. Class B and class
C share performance includes the performance of the fund's class A shares
for periods prior to the offering of class B and class C shares. This
blended class B and class C share performance has been adjusted to take
into account the CDSC applicable to class B and class C shares, rather
than the initial sales charge (load) applicable to class A shares. This
blended performance has not been adjusted to take into account differences
in class specific operating expenses. Because operating expenses of class
B and C shares are higher than those of class A shares, this blended class
B and C share performance is higher than the performance of class B and C
shares would have been had class B and C shares been offered for the
entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
4. MFS FLORIDA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1993 14.88%
1994 (8.78)%
1995 18.72%
1996 2.12%
1997 8.43%
1998 5.47%
1999 (3.45)%
During the period shown in the bar chart, the highest quarterly return was
7.91% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (7.20)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 4.28%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Florida tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years Life*
MFS FLORIDA MUNICIPAL BOND FUND
Class A shares (8.04)% 4.98% 4.83%
Class B shares (7.99) 4.80 4.71
Lehman Brothers Municipal Bond Index+** (2.06) 6.91 6.24
Average Florida municipal debt fund++ (4.35) 5.90 5.51
------
* Fund performance figures are for the period from the commencement of the
fund's investment operations on February 3, 1992, through December 31,
1999. Index and Lipper average returns are from February 1, 1992.
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
** The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on February 3, 1992 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of
the fund's class A shares for periods prior to the offering of class B
shares. This blended class B share performance has been adjusted to take
into account the CDSC applicable to class B shares, rather than the
initial sales charge (load) applicable to class A shares. This blended
performance has not been adjusted to take into account differences in
class specific operating expenses. Because operating expenses of class B
shares are higher than those of class A shares, this blended class B share
performance is higher than the performance of class B shares would have
been had class B shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
5. MFS GEORGIA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1990 6.24%
1991 12.33%
1992 8.12%
1993 12.83%
1994 (6.88)%
1995 15.86%
1996 2.38%
1997 10.02%
1998 5.07%
1999 (3.57)%
During the period shown in the bar chart, the highest quarterly return was
6.41% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (6.20)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 4.32%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Georgia tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years 10 Years
MFS GEORGIA MUNICIPAL BOND FUND
Class A shares (8.15)% 4.72% 5.49%
Class B shares (7.88) 4.59 5.49
Lehman Brothers Municipal Bond Index+* (2.06) 6.91 6.89
Average Georgia municipal debt fund++ (4.51) 6.04 6.11
------
+ Source: Standard & Poor's Micropal, In.
++ Source: Lipper Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on June 6, 1988 with the offering
of class A shares, and subsequently offered class B shares on September 7,
1993. Class B share performance includes the performance of the fund's
class A shares for periods prior to the offering of class B shares. This
blended class B share performance has been adjusted to take into account
the CDSC applicable to class B shares, rather than the initial sales
charge (load) applicable to class A shares. This blended performance has
not been adjusted to take into account differences in class specific
operating expenses. Because operating expenses of class B shares are
higher than those of class A shares, this blended class B share
performance is higher than the performance of class B shares would have
been had class B shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
6. MFS MARYLAND MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1990 6.33%
1991 10.67%
1992 7.21%
1993 10.39%
1994 (6.12)%
1995 15.12%
1996 2.70%
1997 9.22%
1998 5.35%
1999 (3.85)%
During the period shown in the bar chart, the highest quarterly return was
6.73% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.92)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 4.17%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Maryland tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years 10 Years
MFS MARYLAND MUNICIPAL BOND FUND
Class A shares (8.42)% 4.49% 5.00%
Class B shares (8.15) 4.47 5.05
Lehman Brothers Municipal Bond Index+* (2.06) 6.91 6.89
Average Maryland municipal debt fund++ (3.78) 5.77 6.02
------
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on October 31, 1984 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of
the fund's class A shares for periods prior to the offering of class B
shares. This blended class B share performance has been adjusted to take
into account the CDSC applicable to class B shares, rather than the
initial sales charge (load) applicable to class A shares. This blended
performance has not been adjusted to take into account differences in
class specific operating expenses. Because operating expenses of class B
shares are higher than those of class A shares, this blended class B share
performance is higher than the performance of class B shares would have
been had class B shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
7. MFS MASSACHUSETTS MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1990 6.50%
1991 12.39%
1992 8.51%
1993 11.20%
1994 (5.65)%
1995 16.04%
1996 2.77%
1997 8.87%
1998 4.89%
1999 (3.57)%
During the period shown in the bar chart, the highest quarterly return was
6.41% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.18)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 4.05%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Massachusetts tax-exempt municipal bond fund and assumes the reinvestment
of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years 10 Years
MFS MASSACHUSETTS MUNICIPAL BOND FUND
Class A shares (8.15)% 4.58% 5.48%
Class B shares (7.94) 4.55 5.53
Lehman Brothers Municipal Bond Index+* (2.06) 6.91 6.89
Average Massachusetts municipal debt fund++ (4.57) 5.72 6.27
------
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on April 9, 1985 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of
the fund's class A shares for periods prior to the offering of class B
shares. This blended class B share performance has been adjusted to take
into account the CDSC applicable to class B shares, rather than the
initial sales charge (load) applicable to class A shares. This blended
performance has not been adjusted to take into account differences in
class specific operating expenses. Because operating expenses of class B
shares are higher than those of class A shares, this blended class B share
performance is higher than the performance of class B shares would have
been had class B shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
8. MFS MISSISSIPPI MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1993 13.13%
1994 (7.14)%
1995 17.96%
1996 3.55%
1997 9.52%
1998 6.13%
1999 (2.32)%
During the period shown in the bar chart, the highest quarterly return was
7.25% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (6.12)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 3.94%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
other state tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years Life*
MFS MISSISSIPPI MUNICIPAL BOND FUND
Class A shares (6.96)% 5.72% 4.48%
Class B shares (6.80) 5.57 4.42
Lehman Brothers Municipal Bond Index+** (2.06) 6.91 5.71
Average other state municipal debt fund++ (3.83) 5.73 4.73
------
* Fund performance figures are for the period from the commencement of the
fund's investment operations on August 6, 1992, through December 31,
1999. Index and Lipper average returns are from August 1, 1992.
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
** The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on August 6, 1992 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of
the fund's class A shares for periods prior to the offering of class B
shares. This blended class B share performance has been adjusted to take
into account the CDSC applicable to class B shares, rather than the
initial sales charge (load) applicable to class A shares. This blended
performance has not been adjusted to take into account differences in
class specific operating expenses. Because operating expenses of class B
shares are higher than those of class A shares, this blended class B share
performance is higher than the performance of class B shares would have
been had class B shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
9. MFS NEW YORK MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1990 6.04%
1991 13.66%
1992 9.84%
1993 13.23%
1994 (6.14)%
1995 16.79%
1996 2.67%
1997 9.99%
1998 5.53%
1999 (3.39)%
During the period shown in the bar chart, the highest quarterly return was
6.65% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.60)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 4.28%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average New
York tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years 10 Years
MFS NEW YORK MUNICIPAL BOND FUND
Class A shares (7.97)% 5.08% 6.07%
Class B shares (7.70) 4.96 6.06
Lehman Brothers Municipal Bond Index+* (2.06) 6.91 6.89
Average New York municipal debt fund++ (4.89) 5.68 6.09
------
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on June 6, 1988 with the offering
of class A shares, and subsequently offered class B shares on September 7,
1993. Class B share performance includes the performance of the fund's
class A shares for periods prior to the offering of class B shares. This
blended class B share performance has been adjusted to take into account
the CDSC applicable to class B shares, rather than the initial sales
charge (load) applicable to class A shares. This blended performance has
not been adjusted to take into account differences in class specific
operating expenses. Because operating expenses of class B shares are
higher than those of class A shares, this blended class B share
performance is higher than the performance of class B shares would have
been had class B shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
10. MFS NORTH CAROLINA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1990 6.34%
1991 10.97%
1992 7.03%
1993 10.78%
1994 (6.35)%
1995 16.26%
1996 3.48%
1997 9.01%
1998 4.94%
1999 (3.83)%
During the period shown in the bar chart, the highest quarterly return was
6.95% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.38)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 4.13%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
North Carolina tax-exempt municipal bond fund and assumes the reinvestment
of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years 10 Years
MFS NORTH CAROLINA MUNICIPAL BOND FUND
Class A shares (8.40)% 4.74% 5.15%
Class B shares (8.12) 4.73 5.19
Class C shares (5.37) 5.09 5.23
Lehman Brothers Municipal Bond Index+* (2.06) 6.91 6.89
Average North Carolina municipal debt fund++ (4.55) 5.77 5.71
------
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%. Class C share
performance takes into account the deduction of the 1% CDSC.
The fund commenced investment operations on October 31, 1984 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993 and class C shares on January 3, 1994. Class B and class
C share performance includes the performance of the fund's class A shares
for periods prior to the offering of class B and class C shares. This
blended class B and class C share performance has been adjusted to take
into account the CDSC applicable to class B and class C shares, rather
than the initial sales charge (load) applicable to class A shares. This
blended performance has not been adjusted to take into account differences
in class specific operating expenses. Because operating expenses of class
B and C shares are higher than those of class A shares, this blended class
B and C share performance is higher than the performance of class B and C
shares would have been had class B and C shares been offered for the
entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
11. MFS PENNSYLVANIA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1994 (7.05)%
1995 16.86%
1996 2.97%
1997 10.07%
1998 6.31%
1999 (2.66)%
During the period shown in the bar chart, the highest quarterly return was
7.39% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (7.70)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 4.38%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Pennsylvania tax-exempt municipal bond fund and assumes the reinvestment
of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years Life*
MFS PENNSYLVANIA MUNICIPAL BOND FUND
Class A shares (7.29)% 5.48% 4.34%
Class B shares (7.14) 5.37 4.30
Lehman Brothers Municipal Bond Index+** (2.06) 6.91 5.73
Average Pennsylvania municipal debt fund++ (4.73) 5.71 4.86
------
* For the period from the commencement of the fund's investment operations
on February 1, 1993, through December 31, 1999.
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
** The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on February 1, 1993 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of
the fund's class A shares for periods prior to the offering of class B
shares. This blended class B share performance has been adjusted to take
into account the CDSC applicable to class B shares, rather than the
initial sales charge (load) applicable to class A shares. This blended
performance has not been adjusted to take into account differences in
class specific operating expenses. Because operating expenses of class B
shares are higher than those of class A shares, this blended class B share
performance is higher than the performance of class B shares would have
been had class B shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
12. MFS SOUTH CAROLINA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1990 6.38%
1991 11.22%
1992 7.55%
1993 11.78%
1994 (5.67)%
1995 15.90%
1996 2.82%
1997 9.01%
1998 4.87%
1999 (4.46)%
During the period shown in the bar chart, the highest quarterly return was
6.93% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.67)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 4.19%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
South Carolina tax-exempt municipal bond fund and assumes the reinvestment
of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years 10 Years
MFS SOUTH CAROLINA MUNICIPAL BOND FUND
Class A shares (9.00)% 4.39% 5.22%
Class B shares (8.71) 4.35 5.27
Lehman Brothers Municipal Bond Index+* (2.06) 6.91 6.89
Average South Carolina municipal debt fund++ (4.41) 5.92 5.80
------
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on October 31, 1984 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of
the fund's class A shares for periods prior to the offering of class B
shares. This blended class B share performance has been adjusted to take
into account the CDSC applicable to class B shares, rather than the
initial sales charge (load) applicable to class A shares. This blended
performance has not been adjusted to take into account differences in
class specific operating expenses. Because operating expenses of class B
shares are higher than those of class A shares, this blended class B share
performance is higher than the performance of class B shares would have
been had class B shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
13. MFS TENNESSEE MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1990 6.35%
1991 10.52%
1992 8.25%
1993 10.78%
1994 (4.08)%
1995 14.80%
1996 2.87%
1997 9.82%
1998 5.13%
1999 (4.02)%
During the period shown in the bar chart, the highest quarterly return was
5.82% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (4.11)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 4.19%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Tennessee tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years 10 Years
MFS TENNESSEE MUNICIPAL BOND FUND
Class A shares (8.58)% 4.50% 5.36%
Class B shares (8.19) 4.49 5.41
Lehman Brothers Municipal Bond Index+* (2.06) 6.91 6.89
Average Tennessee municipal debt fund++ (3.84) 5.97 5.88
------
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on August 12, 1988 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of
the fund's class A shares for periods prior to the offering of class B
shares. This blended class B share performance has been adjusted to take
into account the CDSC applicable to class B shares, rather than the
initial sales charge (load) applicable to class A shares. This blended
performance has not been adjusted to take into account differences in
class specific operating expenses. Because operating expenses of class B
shares are higher than those of class A shares, this blended class B share
performance is higher than the performance of class B shares would have
been had class B shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
14. MFS VIRGINIA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1990 6.79%
1991 10.97%
1992 7.42%
1993 10.96%
1994 (6.68)%
1995 16.73%
1996 1.71%
1997 8.85%
1998 5.03%
1999 (3.54)%
During the period shown in the bar chart, the highest quarterly return was
6.69% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.77)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 4.38%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
Virginia tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years 10 Years
MFS VIRGINIA MUNICIPAL BOND FUND
Class A shares (8.12)% 4.52% 5.10%
Class B shares (7.83) 4.52 5.15
Class C shares (4.99) 4.90 5.19
Lehman Brothers Municipal Bond Index+* (2.06) 6.91 6.89
Average Virginia municipal debt fund++ (3.88) 6.20 5.87
------
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%. Class C share
performance takes into account the deduction of the 1% CDSC.
The fund commenced investment operations on October 31, 1984 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993 and class C shares on January 3, 1994. Class B and class
C share performance includes the performance of the fund's class A shares
for periods prior to the offering of class B and class C shares. This
blended class B and class C share performance has been adjusted to take
into account the CDSC applicable to class B and class C shares, rather
than the initial sales charge (load) applicable to class A shares. This
blended performance has not been adjusted to take into account differences
in class specific operating expenses. Because operating expenses of class
B and C shares are higher than those of class A shares, this blended class
B and C share performance is higher than the performance of class B and C
shares would have been had class B and C shares been offered for the
entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
15. MFS WEST VIRGINIA MUNICIPAL BOND FUND
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. The chart and table provide past performance information. The
fund's past performance does not necessarily indicate how the fund will
perform in the future. The performance information in the chart and table
is based upon calendar year periods, while the performance information
presented under the caption "Financial Highlights" and in the fund's
shareholder reports is based upon the fund's fiscal year. Therefore, these
performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class A returns shown
in the bar chart, depending upon the expenses of those classes.
1990 7.01%
1991 10.96%
1992 7.84%
1993 11.89%
1994 (5.30)%
1995 14.99%
1996 3.38%
1997 8.66%
1998 4.84%
1999 (3.86)%
During the period shown in the bar chart, the highest quarterly return was
6.12% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (5.26)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 4.03%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and the average
other state tax-exempt municipal bond fund and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years 10 Years
MFS WEST VIRGINIA MUNICIPAL BOND FUND
Class A shares (8.43)% 4.40% 5.34%
Class B shares (8.06) 4.40 5.40
Lehman Brothers Municipal Bond Index+* (2.06) 6.91 6.89
Average other state municipal debt fund++ (3.83) 5.73 5.65
------
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
index comprised of 8,000 actual bonds (with no floating or zero coupons)
which are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%.
The fund commenced investment operations on October 31, 1984 with the
offering of class A shares, and subsequently offered class B shares on
September 7, 1993. Class B share performance includes the performance of
the fund's class A shares for periods prior to the offering of class B
shares. This blended class B share performance has been adjusted to take
into account the CDSC applicable to class B shares, rather than the
initial sales charge (load) applicable to class A shares. This blended
performance has not been adjusted to take into account differences in
class specific operating expenses. Because operating expenses of class B
shares are higher than those of class A shares, this blended class B share
performance is higher than the performance of class B shares would have
been had class B shares been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
------------------
II EXPENSE SUMMARY
------------------
o EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of one of the funds. Each fund offers class A and
class B shares and the California, North Carolina and Virginia funds offer
class C shares.
SHAREHOLDER FEES APPLICABLE TO EACH FUND (fees paid directly from your
investment)
..........................................................................
CLASS A CLASS B CLASS C
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 4.75% 0.00% 0.00%
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase price
or redemption proceeds, whichever is less) See Below(1) 4.00% 1.00%
ANNUAL FUND OPERATING EXPENSES OF CLASS A FOR EACH FUND
(expenses that are deducted from fund assets)
..........................................................................
ALABAMA ARKANSAS CALIFORNIA FLORIDA GEORGIA
FUND FUND FUND FUND FUND
------- -------- ---------- ------- -------
Management Fees .... 0.55% 0.55% 0.55% 0.55% 0.55%
Distribution and
Service (12b-1)
Fees(2) .......... 0.25% 0.10% 0.10% 0.00% 0.25%
Other Expenses(3) .. 0.27% 0.25% 0.21% 0.29% 0.31%
----- ----- ----- ----- -----
Total Annual Fund
Operating Expenses 1.07% 0.90% 0.86% 0.84% 1.11%
Fee Waiver and/or
Expense
Reimbursement(4) (0.20)% (0.20)% (0.20)% (0.20)% (0.20)%
----- ----- ----- ----- -----
Net Expenses ... 0.87% 0.70% 0.66% 0.64% 0.91%
NORTH
MARYLAND MASSACHUSETTS MISSISSIPPI NEW YORK CAROLINA
FUND FUND FUND FUND FUND
------- -------- ---------- ------- -------
Management Fees ...... 0.55% 0.55% 0.55% 0.55% 0.55%
Distribution and
Service (12b-1)
Fees(2) ............ 0.35% 0.35% 0.00% 0.25% 0.35%
Other Expenses(3) .... 0.24% 0.20% 0.29% 0.23% 0.19%
----- ----- ----- ----- -----
Total Annual Fund
Operating Expenses . 1.14% 1.10% 0.84% 1.03% 1.09%
Fee Waiver and/or
Expense
Reimbursement(4) . (0.20)% (0.20)% (0.20)% (0.20)% (0.20)%
----- ----- ----- ----- -----
Net Expenses ..... 0.94% 0.90% 0.64% 0.83% 0.89%
SOUTH WEST
PENNSYLVANIA CAROLINA TENNESSEE VIRGINIA VIRGINIA
FUND FUND FUND FUND FUND
------- -------- ---------- ------- -------
Management Fees .... 0.55% 0.55% 0.55% 0.55% 0.55%
Distribution and
Service (12b-1)
Fees(2) .......... 0.00% 0.35% 0.35% 0.35% 0.35%
Other Expenses(3) .. 0.36% 0.22% 0.24% 0.19% 0.23%
----- ----- ----- ----- -----
Total Annual Fund
Operating
Expenses ......... 0.91% 1.12% 1.14% 1.09% 1.13%
Fee Waiver and/or
Expense
Reimbursement(4) (0.55)% (0.20)% (0.20)% (0.20)% (0.20)%
----- ----- ----- ----- -----
Net Expenses ... 0.36% 0.92% 0.94% 0.89% 0.93%
ANNUAL FUND OPERATING EXPENSES OF CLASS B FOR EACH FUND
(expenses that are deducted from fund assets)
..........................................................................
ALABAMA ARKANSAS CALIFORNIA FLORIDA GEORGIA
FUND FUND FUND FUND FUND
------- -------- ---------- ------- -------
Management Fees .... 0.55% 0.55% 0.55% 0.55% 0.55%
Distribution and
Service (12b-1)
Fees(2) .......... 1.00% 0.98% 0.91% 0.79% 1.00%
Other Expenses(3) .. 0.27% 0.25% 0.21% 0.29% 0.31%
----- ----- ----- ----- -----
Total Annual Fund
Operating Expenses . 1.82% 1.78% 1.67% 1.63% 1.86%
Fee Waiver and/or
Expense
Reimbursement(4) (0.20)% (0.20)% (0.20)% (0.20)% (0.20)%
----- ----- ----- ----- -----
Net Expenses ... 1.62% 1.58% 1.47% 1.43% 1.66%
NORTH
MARYLAND MASSACHUSETTS MISSISSIPPI NEW YORK CAROLINA
FUND FUND FUND FUND FUND
------- -------- ---------- ------- -------
Management Fees .... 0.55% 0.55% 0.55% 0.55% 0.55%
Distribution and
Service (12b-1)
Fees(2) .......... 1.00% 1.00% 0.80% 1.00% 1.00%
Other Expenses(3) .. 0.24% 0.20% 0.29% 0.23% 0.19%
----- ----- ----- ----- -----
Total Annual Fund
Operating Expenses . 1.79% 1.75% 1.64% 1.78% 1.74%
Fee Waiver and/or
Expense
Reimbursement(4) (0.20)% (0.20)% (0.20)% (0.20)% (0.20)%
----- ----- ----- ----- -----
Net Expenses ... 1.59% 1.55% 1.44% 1.58% 1.54%
SOUTH WEST
PENNSYLVANIA CAROLINA TENNESSEE VIRGINIA VIRGINIA
FUND FUND FUND FUND FUND
------- -------- ---------- ------- -------
Management Fees .... 0.55% 0.55% 0.55% 0.55% 0.55%
Distribution and
Service (12b-1)
Fees(2) .......... 0.81% 1.00% 1.00% 1.00% 1.00%
Other Expenses(3) .. 0.36% 0.22% 0.24% 0.19% 0.23%
----- ----- ----- ----- -----
Total Annual Fund
Operating Expenses . 1.72% 1.77% 1.79% 1.74% 1.78%
Fee Waiver and/or
Expense
Reimbursement(4) (0.55)% (0.20)% (0.20)% (0.20)% (0.20)%
----- ----- ----- ----- -----
Net Expenses ... 1.17% 1.57% 1.59% 1.54% 1.58%
ANNUAL FUND OPERATING EXPENSES OF CLASS C FOR FUNDS OFFERING CLASS C SHARES
(expenses that are deducted from fund assets)
..........................................................................
CALIFORNIA NORTH CAROLINA VIRGINIA
FUND FUND FUND
---------- -------------- --------
Management Fees ............. 0.55% 0.55% 0.55%
Distribution and Service
(12b-1) Fees(2) ........... 1.00% 1.00% 1.00%
Other Expenses(3) ........... 0.21% 0.19% 0.19%
----- ----- -----
Total Annual Fund
Operating Expenses ........ 1.76% 1.74% 1.74%
Fee Waiver and/or
Expense Reimbursement(4) (0.20)% (0.20)% (0.20)%
----- ----- -----
Net Expenses ............ 1.56% 1.54% 1.54%
------
(1) An initial sales charge will not be deducted from your purchase if you
buy $1 million or more of class A shares, or if you are investing
through a retirement plan and your class A purchase meets certain
requirements. However, in this case, a contingent deferred sales
charge (referred to as a CDSC) of 1% may be deducted from your
redemption proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it
to pay marketing and other fees to support the sale and distribution
of class A, B and C shares and the services provided to you by your
financial adviser (referred to as distribution and service fees).
(3) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent and may enter into
other similar arrangements and directed brokerage arrangements (which
would also have the effect of reducing the fund's expenses). Any such
fee reductions are not reflected in the table. Had these fee
reductions been taken into account, "Net Expenses" would be lower for
certain funds and would equal:
FUND CLASS A CLASS B CLASS C
---- ------- ------- -------
Alabama Fund ............. 0.86% 1.61%
Arkansas Fund ............ 0.68 1.56
California Fund .......... 0.65 1.46 1.55%
Florida Fund ............. 0.63 1.42
Georgia Fund ............. 0.89 1.64
Maryland Fund ............ 0.92 1.57
Massachusetts Fund ....... 0.89 1.54
Mississippi Fund ......... 0.62 1.42
New York Fund ............ 0.81 1.56
North Carolina Fund ...... 0.88 1.53 1.53
Pennsylvania Fund ........ 0.35 1.16
South Carolina Fund ...... 0.90 1.55
Tennessee Fund ........... 0.93 1.58
Virginia Fund ............ 0.87 1.52 1.52
West Virginia Fund ....... 0.92 1.57
(4) MFS has contractually agreed to waive its right to receive the
management fee to a maximum of 0.35% for each fund annually of such
fund's average daily net assets. MFS has contractually agreed, subject
to reimbursement, to bear all of the Pennsylvania Fund's "Other
Expenses". While MFS is entitled to be reimbursed by the Pennsylvania
Fund for bearing its expenses, is currently waiving its right to
reimbursement up to 0.40% annually. These contractual fee arrangements
will remain in effect until at least August 1, 2001, absent an earlier
modification approved by the Board of Trustees which oversees the
funds.
<PAGE>
o EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in a
fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS ALABAMA MUNICIPAL BOND FUND
Class A shares $560 $780 $1,019 $1,701
Class B shares(1)
Assuming redemption at end of
period 565 853 1,167 1,924
Assuming no redemption 165 553 967 1,924
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS ARKANSAS MUNICIPAL BOND FUND
Class A shares $543 $729 $ 931 $1,513
Class B shares(1)
Assuming redemption at end of
period 561 841 1,146 1,846
Assuming no redemption 161 541 946 1,846
--------
(1) Class B shares convert to class A shares approximately eight years
after purchase; therefore, years nine and ten reflect class A
expenses.
<PAGE>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS CALIFORNIA MUNICIPAL BOND FUND
Class A shares $539 $717 $ 910 $1,468
Class B shares(1)
Assuming redemption at end of
period 550 807 1,089 1,743
Assuming no redemption 150 507 889 1,743
Class C shares
Assuming redemption at end of
period 259 535 935 2,057
Assuming no redemption 159 535 935 2,057
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS FLORIDA MUNICIPAL BOND FUND
Class A shares $537 $711 $ 900 $1,445
Class B shares(1)
Assuming redemption at end of
period 546 795 1,068 1,704
Assuming no redemption 146 495 868 1,704
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS GEORGIA MUNICIPAL BOND FUND
Class A shares $563 $792 $1,039 $1,745
Class B shares(1)
Assuming redemption at end of
period 569 865 1,187 1,967
Assuming no redemption 169 565 987 1,967
--------
(1) Class B shares convert to class A shares approximately eight years
after purchase; therefore, years nine and ten reflect class A
expenses.
<PAGE>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS MARYLAND MUNICIPAL BOND FUND
Class A shares $566 $801 $1,054 $1,778
Class B shares(1)
Assuming redemption at end of
period 562 844 1,151 1,918
Assuming no redemption 162 544 951 1,918
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS MASSACHUSETTS MUNICIPAL BOND FUND
Class A shares $562 $789 $1,034 $1,734
Class B shares(1)
Assuming redemption at end of
period 558 832 1,130 1,874
Assuming no redemption 158 532 930 1,874
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS MISSISSIPPI MUNICIPAL BOND FUND
Class A shares $537 $711 $ 900 $1,445
Class B shares(1)
Assuming redemption at end of
period 547 798 1,073 1,713
Assuming no redemption 147 498 873 1,713
--------
(1) Class B shares convert to class A shares approximately eight years
after purchase; therefore, years nine and ten reflect class A
expenses.
<PAGE>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS NEW YORK MUNICIPAL BOND FUND
Class A shares $556 $768 $ 998 $1,657
Class B shares(1)
Assuming redemption at end of
period 561 841 1,146 1,880
Assuming no redemption 161 541 946 1,880
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS NORTH CAROLINA MUNICIPAL BOND FUND
Class A shares $562 $786 $1,029 $1,723
Class B shares(1)
Assuming redemption at end of
period 557 829 1,125 1,863
Assuming no redemption 157 529 925 1,863
Class C shares
Assuming redemption at end of
period 257 529 925 2,035
Assuming no redemption 157 529 925 2,035
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS PENNSYLVANIA MUNICIPAL BOND FUND
Class A shares $510 $699 $ 904 $1,493
Class B shares(1)
Assuming redemption at end of
period 519 788 1,082 1,769
Assuming no redemption 119 488 882 1,769
--------
(1) Class B shares convert to class A shares approximately eight years
after purchase; therefore, years nine and ten reflect class A
expenses.
<PAGE>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS SOUTH CAROLINA MUNICIPAL BOND FUND
Class A shares $564 $795 $1,044 $1,756
Class B shares(1)
Assuming redemption at end of
period 560 838 1,141 1,896
Assuming no redemption 160 538 941 1,896
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS TENNESSEE MUNICIPAL BOND FUND
Class A shares $566 $801 $1,054 $1,778
Class B shares(1)
Assuming redemption at end of
period 562 844 1,151 1,918
Assuming no redemption 162 544 951 1,918
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS VIRGINIA MUNICIPAL BOND FUND
Class A shares $562 $786 $1,029 $1,723
Class B shares(1)
Assuming redemption at end of
period 557 829 1,125 1,863
Assuming no redemption 157 529 925 1,863
Class C shares
Assuming redemption at end of
period 257 529 925 2,035
Assuming no redemption 157 529 925 2,035
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
MFS WEST VIRGINIA MUNICIPAL BOND FUND
Class A shares $565 $798 $1,049 $1,767
Class B shares(1)
Assuming redemption at end of
period 561 841 1,146 1,907
Assuming no redemption 161 541 946 1,907
--------
(1) Class B shares convert to class A shares approximately eight years
after purchase; therefore, years nine and ten reflect class A
expenses.
<PAGE>
-------------------------------------------
III CERTAIN INVESTMENT STRATEGIES AND RISKS
-------------------------------------------
o FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
Each fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which a fund may
engage, including the principal investment techniques and practices
discussed above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, in the funds' Statement of
Additional Information (referred to as the SAI), which you may obtain by
contacting MFS Service Center, Inc. (see back cover for address and phone
number).
o TEMPORARY DEFENSIVE POLICIES
In addition, each fund may depart from its principal investment strategies
by temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While a fund invests defensively,
it may not be able to pursue its investment objective. When such
conditions exist the fund may invest up to 50% of its total assets in the
following short-term investments:
o U.S. government securities; and
o commercial paper, obligations of banks (including certificates of deposit,
bankers' acceptances and repurchase agreements) with $1 billion of assets
and cash.
Interest income from these short-term investments will be taxable to
shareholders as ordinary income. A fund's defensive investment position may
not be effective in protecting its value.
o ACTIVE OR FREQUENT TRADING
Each fund may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to a fund
with less active trading policies, which would increase your tax
liability. Frequent trading also increases transaction costs, which could
detract from a fund's performance.
<PAGE>
--------------------------
IV MANAGEMENT OF THE FUNDS
--------------------------
o INVESTMENT ADVISER
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is each fund's investment adviser. MFS is America's oldest mutual
fund organization. MFS and its predecessor organizations have a history of
money management dating from 1924 and the founding of the first mutual
fund, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $151.2 billion on behalf of
approximately 5.1 million investor accounts as of June 30, 2000. MFS is
located at 500 Boylston Street, Boston, Massachusetts 02116.
MFS provides investment management and related administrative services
and facilities to each fund, including portfolio management and trade
execution. For these services each fund pays MFS an annual management fee
at the rate of 0.55% of such fund's average daily net assets on an
annualized basis for the fund's then-current fiscal year end. MFS has
agreed to waive its right to receive a portion of this fee as described
under "Expense Summary."
o PORTFOLIO MANAGER
Effective March 23, 2000, Michael L. Dawson and Geoffrey L. Schechter are
the portfolio managers of each fund. Mr. Dawson, a Vice President of the
Adviser, has been a portfolio manager of each fund since January 1, 1999,
and has been employed in the investment management area of the Adviser
since September, 1998. Prior to joining MFS, Mr. Dawson was employed as a
sales representative in the Institutional Sales Group at Fidelity Capital
Markets from March, 1997 to May, 1998, and was employed by Goldman Sachs &
Co. in the Institutional Sales - Fixed Income Division from January, 1993
to March, 1997. Mr. Schechter, a Vice President of the Adviser, became a
portfolio manager of the South Carolina, North Carolina, Georgia, Virginia
and West Virginia funds on May 1, 1999, and the remainder of the funds on
March 23, 2000. Mr. Schechter has been employed in the investment
management area of the Adviser since June, 1993.
o ADMINISTRATOR
MFS provides each fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by each fund for a portion of the costs it incurs in providing
these services.
o DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of each fund.
o SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for each fund,
for which it receives compensation from each fund.
<PAGE>
------------------------------
V DESCRIPTION OF SHARE CLASSES
------------------------------
Each fund offers class A and B shares through this prospectus. In
addition, the California fund, the North Carolina fund and the Virginia
fund offers Class C shares.
o SALES CHARGES
You may be subject to an initial sales charge when you purchase, or a CDSC
when you redeem, class A, B or C shares. These sales charges are described
below. In certain circumstances, these sales charges are waived. These
circumstances are described in the SAI. Special considerations concerning
the calculation of the CDSC that apply to each of these classes of shares
are described below under the heading "Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other concessions
which are paid from various sources, such as from the sales charges and
distribution and service fees, or from MFS or MFD. These commissions and
concessions are described in the SAI.
o CLASS A SHARES
You may purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), but in some cases you may
purchase class A shares without an initial sales charge but subject to a
1% CDSC upon redemption within one year. Class A shares have annual
distribution and service fees up to a maximum of 0.35% of net assets
annually.
PURCHASES SUBJECT TO AN INITIAL SALES CHARGE. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon
the amount you invest, as follows:
SALES CHARGE* AS PERCENTAGE OF:
-----------------------------
Offering Net Amount
Amount of Purchase Price Invested
Less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 2.95 3.04
$500,000 but less than $1,000,000 2.20 2.25
$1,000,000 or more None** None**
------
* Because of rounding in the calculation of offering price, actual
sales charges you pay may be more or less than those calculated
using these percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
PURCHASES SUBJECT TO A CDSC (BUT NOT AN INITIAL SALES CHARGE). You pay no
initial sales charge when you invest $1 million or more in class A shares.
However, a CDSC of 1% will be deducted from your redemption proceeds if
you redeem within 12 months of your purchase. In addition, purchases made
under the following four categories are not subject to an initial sales
charge. However, a CDSC of 1% will be deducted from redemption proceeds if
the redemption is made within 12 months of purchase:
o Investments in class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended (referred to
as ERISA), if, prior to July 1, 1996
> the plan had established an account with MFSC; and
> the sponsoring organization had demonstrated to the satisfaction of
MFD that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan of class A shares of
the MFS Family of Funds (the MFS funds) would be in the amount of
at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the retirement plan and/or sponsoring organization participates in the
MFS Corporate Plan Services 401(k) Plan or any similar recordkeeping
system made available by MFSC (referred to as the MFS participant
recordkeeping system);
> the plan establishes an account with MFSC on or after July 1, 1996;
and
> the total purchases by the retirement plan (or by multiple plans
maintained by the same plan sponsor) of class A shares of the MFS
Funds will be in the amount of at least $500,000 within a reasonable
period of time, as determined by MFD in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the plan establishes an account with MFSC on or after July 1, 1996;
and
> the plan has, at the time of purchase, either alone or in aggregate
with other plans maintained by the same plan sponsor, a market value
of $500,000 or more invested in shares of any class or classes of the
MFS Funds.
THE RETIREMENT PLANS WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE
PLANS OR THEIR SPONSORING ORGANIZATION INFORM MFSC PRIOR TO THE
PURCHASES THAT THE PLANS HAVE A MARKET VALUE OF $500,000 OR MORE
INVESTED IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS; MFSC HAS
NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH PLANS QUALIFY
UNDER THIS CATEGORY; AND
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the plan established an account with MFSC between July 1, 1997 and
December 31, 1999;
> the plan records are maintained on a pooled basis by MFSC; and
> the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
o CLASS B SHARES
You may purchase class B shares at net asset value without an initial
sales charge, but if you redeem your shares within the first six years you
may be subject to a CDSC (declining from 4.00% during the first year to 0%
after six years). Class B shares have annual distribution and service fees
up to a maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
---------------------------------------------------------------------------
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
If you hold class B shares of a fund for approximately eight years, they
will convert to class A shares of that fund. All class B shares you
purchased through the reinvestment of dividends and distributions will be
held in a separate sub-account. Each time any class B shares in your
account convert to class A shares, a proportionate number of the class B
shares in the sub-account will also convert to class A shares.
o CLASS C SHARES
You may purchase class C shares of the California fund, the North Carolina
fund or the Virginia fund at net asset value without an initial sales
charge, but if you redeem your shares within the first year you may be
subject to a CDSC of 1.00%. Class C shares have annual distribution and
service fees up to a maximum of 1.00% of net assets annually. Class C
shares do not convert to any other class of shares of the fund.
o CALCULATION OF CDSC
As discussed above, certain investments in class A, B and C shares will be
subject to a CDSC. Three different aging schedules apply to the
calculation of the CDSC:
o Purchases of class A shares made on any day during a calendar month will
age one month on the last day of the month, and each subsequent month.
o Purchases of class C shares, and purchases of class B shares on or after
January 1, 1993, made on any day during a calendar month will age one year
at the close of business on the last day of that month in the following
calendar year, and each subsequent year.
o Purchases of class B shares prior to January 1, 1993 made on any day
during a calendar year will age one year at the close of business on
December 31 of that year, and each subsequent year.
No CDSC is assessed on the value of your account represented by
appreciation or additional shares acquired through the automatic
reinvestment of dividends or capital gain distributions. Therefore, when
you redeem your shares, only the value of the shares in excess of these
amounts (i.e., your direct investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being
imposed at the lowest possible rate, which means that the CDSC will be
applied against the lesser of your direct investment or the total cost of
your shares. The applicability of a CDSC will not be affected by exchanges
or transfers of registration, except as described in the SAI.
o DISTRIBUTION AND SERVICE FEES
Each fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class A,
B and C shares and the services provided to you by your financial adviser.
These annual distribution and service fees may equal up to 0.35% for class
A shares (a 0.10% distribution fee and a 0.25% service fee) and up to
1.00% for each of class B and class C shares (a 0.75% distribution fee and
a 0.25% service fee), and are paid out of the assets of these classes.
Over time, these fees will increase the cost of your shares and may cost
you more than paying other types of sales charges.
Each fund's class A, class B and class C distribution and service fees
for its current fiscal year are as follows:
CLASS A CLASS B CLASS C
---- ---- ----
Alabama Fund ................... 0.25% 1.00%
Arkansas Fund .................. 0.10% 0.98%
California Fund ................ 0.10% 0.91% 1.00%
Florida Fund ................... 0.00% 0.79%
Georgia Fund ................... 0.25% 1.00%
Maryland Fund .................. 0.35% 1.00%
Massachusetts Fund ............. 0.35% 1.00%
Mississippi Fund ............... 0.00% 0.80%
New York Fund .................. 0.25% 1.00%
North Carolina Fund ............ 0.35% 1.00% 1.00%
Pennsylvania Fund .............. 0.00% 0.81%
South Carolina Fund ............ 0.35% 1.00%
Tennessee Fund ................. 0.35% 1.00%
Virginia Fund .................. 0.35% 1.00% 1.00%
West Virginia Fund ............. 0.35% 1.00%
For the Alabama, Georgia and New York funds:
o payment of the 0.10% per annum class A distribution fee will commence on
such date or dates as the Trustees of the funds may determine.
For the Arkansas fund:
o a portion of the class A service fee equal to 0.10% per annum is currently
being paid; payment of the remaining portion of the class A service fee
and payment of the 0.10% per annum class A distribution fee will commence
on such date or dates as the Trustees of the fund may determine.
o except in the case of the 0.25% per annum class B service fee paid by the
fund upon the sale of class B shares in the first year, payment of the
class B service fee has been set at 0.10% until such date as the Trustees
of the fund may determine.
For the California fund:
o a portion of Class A service fee equal to 0.10% per annum is currently
being paid; payment of the remaining portion of Class A service fee and
payment of the 0.10% per annum Class A distribution fee will commence on
such dates as the Trustees of the fund may determine.
o except in the case of the 0.25% per annum Class B service fee paid by the
fund for the sale of Class B shares in the first year, payment of Class B
service fee has been set at 0.10% for the fund.
For the Florida and Mississippi funds:
o the 0.25% per annum class A service fee and the 0.10% per annum class A
distribution fee will commence on such date or dates as the Trustees of
the funds may determine.
o except in the case of the 0.25% per annum class B service fee paid by the
funds upon the sale of class B shares in the first year, payment of the
class B service fee will not be imposed until such date or dates as the
Trustees of the funds may determine.
For the Pennsylvania fund:
o the 0.25% per annum class A service fee will commence when net assets
attributable to class A shares first equal or exceed $50 million and
payment of the 0.10% per annum class A distribution fee will commence on
such date as the Trustees of the fund may determine.
o except in the case of the 0.25% per annum Class B service fee paid by the
fund upon the sale of class B shares in the first year, payment of the
class B service fee will be suspended until such date as its class A
service fee first becomes payable.
<PAGE>
----------------------------------------------
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
----------------------------------------------
You may purchase, exchange and redeem class A, class B and class C (if
applicable) shares of a fund in the manner described below. In addition,
you may be eligible to participate in certain investor services and
programs to purchase, exchange and redeem these classes of shares, which
are described in the next section under the caption "Investor Services and
Programs."
o HOW TO PURCHASE SHARES
INITIAL PURCHASE. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is $1,000.
However, in the following circumstances the minimum initial investment is
only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
> tax-deferred retirement programs (other than IRAs) where investments
are made by means of group remittal statements; or
> employer sponsored investment programs.
The minimum initial investment for IRAs is $250 per account. The maximum
investment in class C shares is $1,000,000 per transaction. Class C shares
are not available for purchase by any retirement plan qualified under
Section 401(a) or 403(b) of the Internal Revenue Code if the plan or its
sponsor subscribes to certain recordkeeping services made available by
MFSC, such as the MFS Corporate Plan Services 401(k) Plan.
ADDING TO YOUR ACCOUNT. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first for
instructions); or
o authorize transfers by phone between your bank account and your MFS
account (the maximum purchase amount for this method is $100,000). You
must elect this privilege on your account application if you wish to use
it.
o HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of certain other
MFS funds at net asset value by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC will not be charged a
CDSC in an exchange. However, when you redeem the shares acquired through
the exchange, the shares you redeem may be subject to a CDSC, depending
upon when you originally purchased the shares you exchanged. For purposes
of computing the CDSC, the length of time you have owned your shares will
be measured from the date of original purchase and will not be affected by
any exchange.
Sales charges may apply to exchanges made from the MFS money market
funds. Certain qualified retirement plans may make exchanges between the
MFS funds and the MFS Fixed Fund, a bank collective investment fund, and
sales charges may also apply to these exchanges. Call MFSC for information
concerning these sales charges.
Exchanges may be subject to certain limitations and are subject to the
MFS funds' policies concerning excessive trading practices, which are
policies designed to protect the funds and their shareholders from the
harmful effect of frequent exchanges. These limitations and policies are
described below under the captions "Right to Reject or Restrict Purchase
and Exchange Orders" and "Excessive Trading Practices." You should read
the prospectus of the MFS fund into which you are exchanging and consider
the differences in objectives, policies and rules before making any
exchange.
o HOW TO REDEEM SHARES
You may redeem your shares either by having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature Guarantee/
Additional Documentation" below, or contact MFSC for details (see back
cover page for address and phone number).
Under unusual circumstances such as when the New York Stock Exchange is
closed, trading on the Exchange is restricted or if there is an emergency,
the fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, the fund may delay the payment of the
redemption proceeds until the check has cleared, which may take up to 15
days from the purchase date.
REDEEMING DIRECTLY THROUGH MFSC.
o BY TELEPHONE. You can call MFSC to have shares redeemed from your account
and the proceeds wired or mailed (depending on the amount redeemed)
directly to a pre-designated bank account. MFSC will request personal or
other information from you and will generally record the calls. MFSC will
be responsible for losses that result from unauthorized telephone
transactions if it does not follow reasonable procedures designed to
verify your identity. You must elect this privilege on your account
application if you wish to use it.
o BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the
name of your fund, your account number, and the number of shares or dollar
amount to be sold.
REDEEMING THROUGH YOUR FINANCIAL ADVISER. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser
will be responsible for furnishing all necessary documents to MFSC and may
charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. In order to protect against
fraud, each fund requires that your signature be guaranteed in order to
redeem your shares. Your signature may be guaranteed by an eligible bank,
broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency, or savings association. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
o OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. Purchases and
exchanges should be made for investment purposes only. The MFS funds each
reserve the right to reject or restrict any specific purchase or exchange
request. Because an exchange request involves both a request to redeem
shares of one fund and to purchase shares of another fund, the MFS funds
consider the underlying redemption and purchase requests conditioned upon
the acceptance of each of these underlying requests. Therefore, in the
event that the MFS funds reject an exchange request, neither the
redemption nor the purchase side of the exchange will be processed. When a
fund determines that the level of exchanges on any day may be harmful to
its remaining shareholders, the fund may delay the payment of exchange
proceeds for up to seven days to permit cash to be raised through the
orderly liquidation of its portfolio securities to pay the redemption
proceeds. In this case, the purchase side of the exchange will be delayed
until the exchange proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm
fund performance. As noted above, the MFS funds reserve the right to
reject or restrict any purchase order (including exchanges) from any
investor. To minimize harm to the MFS funds and their shareholders, the
MFS funds will exercise these rights if an investor has a history of
excessive trading or if an investor's trading, in the judgment of the MFS
funds, has been or may be disruptive to a fund. In making this judgment,
the MFS funds may consider trading done in multiple accounts under common
ownership or control.
REINSTATEMENT PRIVILEGE. After you have redeemed shares, you have a one-
time right to reinvest the proceeds within 90 days of the redemption at
the current net asset value (without an initial sales charge). If the
redemption involved a CDSC, your account will be credited with the
appropriate amount of the CDSC paid; however, your new shares will be
subject to a CDSC which will be determined from the date you originally
purchased the shares redeemed. This privilege applies to shares of the MFS
money market funds only under certain circumstances.
IN-KIND DISTRIBUTIONS. The MFS funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that a fund makes an in-kind
distribution, you could incur the brokerage and transaction charges when
converting the securities to cash. None of the funds expects to make in-
kind distributions, and if a fund does, it will pay, during any 90-day
period, your redemption proceeds in cash up to either $250,000 or 1% of
the fund's net assets, whichever is less.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Because it is costly to maintain
small accounts, the MFS funds have generally reserved the right to
automatically redeem shares and close your account when it contains less
than $500 due to your redemptions or exchanges. Before making this
automatic redemption, you will be notified and given 60 days to make
additional investments to avoid having your shares redeemed.
<PAGE>
----------------------------------
VII INVESTOR SERVICES AND PROGRAMS
----------------------------------
As a shareholder of a fund, you have available to you a number of services
and investment programs. Some of these services and programs may not be
available to you if your shares are held in the name of your financial
adviser or if your investment in a fund is made through a retirement plan.
o DISTRIBUTION OPTIONS
The following distribution options are generally available to all accounts
and you may change your distribution option as often as you desire by
notifying MFSC:
o Dividend and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
o Dividend distributions in cash; capital gain distributions reinvested in
additional shares; or
o Dividend and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value
as of the close of business on the record date. Distributions in amounts
less than $10 will automatically be reinvested in additional shares of
that fund. If you have elected to receive distributions in cash, and the
postal or other delivery service is unable to deliver checks to your
address of record, or you do not respond to mailings from MFSC with regard
to uncashed distribution checks, your distribution option will
automatically be converted to having all distributions reinvested in
additional shares. Your request to change a distribution option must be
received by MFSC by the record date for a distribution in order to be
effective for that distribution. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
o PURCHASE AND REDEMPTION PROGRAMS
For your convenience, the following purchase and redemption programs are
made available to you with respect to class A, B and C shares, without
extra charge:
AUTOMATIC INVESTMENT PLAN. You can make cash investments of $50 or more
through your checking account or savings account on any day of the month.
If you do not specify a date, the investment will automatically occur on
the first business day of the month.
AUTOMATIC EXCHANGE PLAN. If you have an account balance of at least $5,000
in any MFS fund, you may participate in the automatic exchange plan, a
dollar-cost averaging program. This plan permits you to make automatic
monthly or quarterly exchanges from your account in an MFS fund for shares
of the same class of shares of other MFS funds. You may make exchanges of
at least $50 to up to six different funds under this plan. Exchanges will
generally be made at net asset value without any sales charges. If you
exchange shares out of the MFS Money Market Fund or MFS Government Money
Market Fund, or if you exchange class A shares out of the MFS Cash Reserve
Fund, into class A shares of any other MFS fund, you will pay the initial
sales charge if you have not already paid this charge on these shares.
REINVEST WITHOUT A SALES CHARGE. You can reinvest dividend and capital
gain distributions into your account without a sales charge to add to your
investment easily and automatically.
DISTRIBUTION INVESTMENT PROGRAM. You may purchase shares of any MFS fund
without paying an initial sales charge or a CDSC upon redemption by
automatically reinvesting a minimum of $50 of dividend and capital gain
distributions from the same class of another MFS fund.
LETTER OF INTENT (LOI). If you intend to invest $100,000 or more in the
MFS funds (including the MFS Fixed Fund) within 13 months, you may buy
class A shares of the funds at the reduced sales charge as though the
total amount were invested in class A shares in one lump sum. If you
intend to invest $1 million or more under this program, the time period is
extended to 36 months. If the intended purchases are not completed within
the time period, shares will automatically be redeemed from a special
escrow account established with a portion of your investment at the time
of purchase to cover the higher sales charge you would have paid had you
not purchased your shares through this program.
RIGHT OF ACCUMULATION. You will qualify for a lower sales charge on your
purchases of class A shares when your new investment in class A shares,
together with the current (offering price) value of all your holdings in
the MFS funds (including the MFS Fixed Fund), reaches a reduced sales
charge level.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to automatically receive (or
designate someone else to receive) regular periodic payments of at least
$100. Each payment under this systematic withdrawal is funded through the
redemption of your fund shares. For class B and C shares, you can receive
up to 10% (15% for certain IRA distributions) of the value of your account
through these payments in any one year (measured at the time you establish
this plan). You will incur no CDSC on class B and C shares redeemed under
this plan. For class A shares, there is no similar percentage limitation;
however, you may incur the CDSC (if applicable) when class A shares are
redeemed under this plan.
FREE CHECKWRITING. You may redeem your class A or class C shares by
writing checks against your account. Checks must be for a least $500 and
investments made by check must have been in your account for at least 15
days before you can write checks against them. There is no charge for this
service. To authorize your account for checkwriting, contact MFSC (see
back cover page for address and phone number).
Shares in your account equal in value to the amount of the check plus
the applicable CDSC (if any) and any income tax required to be withheld
(if any) are redeemed to cover the amount of the check. If your account
value is not great enough to cover these amounts, your check will be
dishonored.
<PAGE>
----------------------
VIII OTHER INFORMATION
----------------------
o PRICING OF FUND SHARES
The price of each class of each fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange (the
"NYSE") is open for trading (generally, 4:00 p.m., Eastern time) (referred
to as the valuation time). The NYSE is closed on most national holidays and
Good Friday. To determine net asset value, each fund values its assets at
current market values, or at fair value as determined by the Adviser under
the direction of the Board of Trustees that oversees the fund if current
market values are unavailable. Fair value pricing may be used by a fund when
current market values are unavailable or when an event occurs after the
close of the exchange on which the fund's portfolio securities are
principally traded that is likely to have changed the value of the
securities. The use of fair value pricing by a fund may cause the net asset
value of its shares to differ significantly from the net asset value that
would be calculated using current market values.
You will receive the net asset value next calculated, after the
deduction of applicable sales charges and any required tax withholding, if
your order is complete (has all required information) and MFSC receives
your order by:
o the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) received your order
by the valuation time.
o DISTRIBUTIONS
Each fund intends to declare daily as dividends substantially all of its
net income (excluding any realized net capital gains) and to pay these
dividends to shareholders at least monthly. Any realized net capital
gains are distributed at least annually.
o FEDERAL TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your
tax adviser regarding the effect that an investment in a fund may have on
your particular tax situation.
TAXABILITY OF DISTRIBUTIONS. As long as a fund qualifies for treatment as
a regulated investment company (which each fund has in the past and
intends to do in the future), it pays no federal income tax on the
earnings it distributes to shareholders.
You may receive three different types of distributions from a fund:
exempt-interest dividends, ordinary dividends and capital gain dividends.
Most distributions will be exempt-interest dividends, which are exempt
from federal income tax. Ordinary dividends are normally subject to
federal income tax at ordinary income tax rates. Distributions designated
as capital gain dividends are taxable as long-term capital gains. Any
taxes that you pay on a distribution will be the same whether you take the
distribution in cash or have it reinvested in additional shares of the
fund. Some dividends paid in January may be taxable as if they had been
paid the previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes.
Each fund's distributions of net capital gains or net short-term capital
gains will reduce the fund's net asset value per share. Therefore, if you
buy shares shortly before the record date of such a distribution, you may
pay the full price for the shares and then effectively receive a portion
of the purchase price back as a taxable distribution.
If you are neither a citizen nor a resident of the U.S., each fund will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able
to arrange for a lower withholding rate under an applicable tax treaty if
you supply the appropriate documentation required by the fund. Each fund
is also required in certain circumstances to apply backup withholding at
the rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a
resident of the U.S.) who does not furnish to that fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments
that have been subject to 30% withholding. Prospective investors in a fund
should read the fund's Account Application for additional information
regarding backup withholding of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it
is generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, sell or exchange, you
may have a gain or a loss on the transaction. You are responsible for any
tax liabilities generated by your transaction.
OTHER TAX ISSUES. Exempt-interest dividends that you receive may affect
your alternative minimum tax calculation. Also, if you are receiving
social security or railroad retirement benefits, your exempt-interest
dividends may increase the tax on your benefits. If you borrow money to
purchase or carry shares of a fund, your deduction for interest paid on
those borrowings will be limited.
o STATE TAX CONSIDERATIONS
As long as a fund qualifies for treatment as a regulated investment
company, it will not need to pay Massachusetts income or corporate excise
tax.
Your distributions from a fund, including exempt-interest dividends, will
generally be subject to state income tax if you live in a state other than
the state to which the fund is targeted.
If you redeem, sell or exchange shares of a fund, you will normally need
to take your resulting gain or loss into account in computing your state
income tax.
The following discussion for each fund is very general and is directed at
shareholders who are residents of the namesake state. You are urged to
consult your tax adviser regarding the effect that an investment in a fund
may have on your particular tax situation.
ALABAMA FUND:
If the fund meets certain requirements of Alabama law, dividends that you
receive from the fund that meet those requirements will be exempt from
Alabama personal income tax. The fund will provide information to you
annually regarding the percentage of your dividends that meet the
requirements to be tax-exempt. Distributions resulting from capital gains
on qualifying fund investments and from all income and gains from fund
investments that do not qualify will be subject to Alabama personal income
tax.
If you sell shares of the fund, capital gains are taxable and capital
losses may be deductible. You cannot deduct interest paid on money you
borrow to buy or hold shares of the fund.
ARKANSAS FUND:
Distributions of interest that you receive from obligations of the State
of Arkansas or the United States or its possessions are exempt from
Arkansas income tax. This exemption was confirmed by the Department of
Finance and Administration in a letter ruling dated December 13, 1991
addressed to counsel to the fund.
In determining your Arkansas income tax liabilities, you must account for
capital gain distributions you receive from the fund and for capital gains
and losses that you realize from redemptions, sales or exchanges of shares
of the fund.
CALIFORNIA FUND:
If the fund meets certain conditions, you will be able to exclude from
income, for California personal income tax purposes, dividends received
from the fund which are derived from income from "California exempt-
interest securities." California exempt-interest securities are municipal
obligations held by the fund that, if held by an individual, would pay
interest which is exempt from California taxation. The conditions that the
fund must meet include a requirement that the fund continue to qualify as
a regulated investment company, a requirement that at the close of each
quarter of its taxable year, at least 50% of the fund's assets be invested
in California exempt-interest securities, and a requirement that the
dividends ("California exempt-interest dividends") be designated as such
by the fund by written notice to sharholders within 60 days after the
close of the fund's fiscal year. If you are a California resident, other
distributions you receive from the fund will be subject to California
personal income tax, whether or not such dividends are reinvested.
Interest on indebtedness incurred or continued in connection with the
purchase or carry of shares of the fund will not be deductible for
California personal income tax purposes.
FLORIDA FUND:
Florida does not impose an individual income tax on Florida residents.
Florida does impose a tax on intangible personal property owned, managed,
or controlled by Florida residents. Fund shares owned by Florida residents
will be exempt from the Florida intangible personal property tax only if:
o As of January 1 of each year at least 90% of the fund's portfolio consists
of assets that are exempt from the Florida intangible personal property
tax, such as State of Florida tax exempt securities and U.S. Government
securities.
In order to take advantage of the exemption from the intangible personal
property tax, the fund in normal circumstances intends to sell any non-
exempt assets held in its portfolio and reinvest the proceeds in exempt
assets prior to January 1. Therefore, your shares should normally be
exempt from the Florida intangible personal property tax. However, there
are likely to be transaction costs involved in restructuring the portfolio
in this manner. These transaction costs may reduce the fund's investment
return and exceed any increased investment return the fund achieved by
investing in non-exempt assets during the year.
GEORGIA FUND:
Under existing laws, you will not be subject to Georgia income tax on
distributions on shares of the fund if those distributions constitute
exempt-interest dividends for federal income tax purposes that are derived
from interest on debt obligations issued by or on behalf of the State of
Georgia or its political subdivisions. This treatment also will apply to
dividends on shares of the fund that are derived from interest on debt
obligations issued by territories or possessions of the United States
where federal law provides an exemption from state income taxation.
Generally you will, however, be subject to Georgia income tax on
distributions that are derived from gains on sales of debt obligations by
the fund.
MARYLAND FUND:
Under existing Maryland law, distributions that you receive from the fund
are generally not subject to Maryland State or local taxes provided that
tax distributions are exempt interest dividends for federal income tax
purposes and are attributable to i) interest on Maryland municipal
securities, ii) interest on obligations of the United States, iii)
interest on obligations of possessions or territories of the United
States, iv) gains from the disposition of Maryland municipal securities,
and v) gains from the disposition of obligations of the United States.
However, interest on certain Maryland municipal securities which are
qualified private activity bonds constitutes a tax preference, and 50% of
any distributions of the fund attributable to interest from such private
activity bonds may be subject to Maryland state and local income taxes.
All of your other income from the fund and gains from the redemption or
sale of your shares of the fund will generally be subject to Maryland
individual income tax.
MASSACHUSETTS FUND:
Most of your distributions from the fund will be exempt from Massachusetts
personal income tax. A portion of your exempt-interest dividends will be
subject to Massachusetts tax if the fund invests in municipal securities
of other states. Ordinary dividends that are attributable to interest on
U.S. government securities will be exempt from Massachusetts personal
income tax. A portion of capital gain dividends may also be exempt
depending on the municipal securities in which the fund invests. You will
receive a statement each January or February showing which distributions
are subject to Massachusetts income tax and which are exempt.
Companies that pay Massachusetts corporate excise tax will generally need
to include all distributions from the fund in calculating the income
measure of the tax. Companies generally will not include distributions in
calculating their sales factors.
If you borrow money to purchase or carry shares of the fund, any deduction
you would normally take for interest paid on those borrowings will be
limited. This is true even for companies that have to pay corporate excise
tax on distributions from the fund.
MISSISSIPPI FUND:
Under existing Mississippi law, you will not have to pay Mississippi
income taxes on distributions you receive from the fund to the extent that
the interest received by the fund on government obligations is itself
exempt from Mississippi income tax. Generally, interest on obligations of
the United States or the State of Mississippi, or political subdivisions
thereof, are exempt from Mississippi income tax. Any other distributions
you receive from the fund and gains from the redemption or sale of your
shares of the fund will be subject to Mississippi income taxes.
NEW YORK FUND:
Under existing New York laws, you will not be subject to New York State or
New York City personal income taxes on the fund's dividends to the extent
that such dividends qualify as exempt-interest dividends for federal
income tax purposes and represent interest income attributable to
obligations of the State of New York and its political subdivisions, or
certain other obligations the interest on which is exempt from New York
State and New York City personal income taxes, such as, for example,
certain obligations of The Commonwealth of Puerto Rico. To the extent you
receive distributions from the fund that are derived from other income,
including long-term or short-term capital gains, such distributions will
not be exempt from New York State or New York City personal income tax.
Fund dividends are not excluded from net income in determining New York
State or New York City franchise taxes on corporations or financial
institutions.
Any capital gains or losses you realize upon a redemption, sale or
exchange of your shares in the fund will be required to be taken into
account for New York State personal income tax purposes, if you are a New
York State resident, and for New York City personal income tax purposes,
if you are a resident of New York City.
You should also note that interest you incur to purchase or retain shares
of the fund will not be deductible for New York State or New York City
personal income tax purposes.
NORTH CAROLINA FUND:
Your income from the fund will not be subject to North Carolina individual
income tax to the extent that the income is attributable to (i) interest
earned on obligations that are tax-exempt for both federal and North
Carolina income tax purposes, (ii) interest earned on direct obligations
of the United States, or (iii) capital gains from the sale by the fund of
an obligation the profit from which is exempt from North Carolina
individual income tax. All of your other income from the fund and gains
from the redemption or sale of your shares of the fund generally will be
subject to North Carolina individual income tax.
PENNSYLVANIA FUND:
You will not be subject to personal income tax on the fund's distribution
of income and gains arising from most state and federal obligations.
However, you will be subject to tax on the fund's distributions from any
other sources including capital gain distributions. Residents of
Philadelphia will not be subject to the Philadelphia School District
Investment Net Income Tax on the fund's distributions from most state and
federal obligations. Corporate shareholders will not be subject to
corporate net income tax on the fund's interest distributions arising from
most state and federal obligations if such distributions are not included
in the corporation's Federal taxable income determined before net
operating loss carryovers and special deductions.
SOUTH CAROLINA FUND:
Under existing South Carolina law, you will not be subject to South
Carolina personal income tax on the fund's distribution of income and
gains arising from most state and federal obligations. However, any
capital gains distributed by the fund, or gains realized by a shareholder
from a redemption or sale of shares of the fund, will be subject to South
Carolina income taxation.
In addition, because your shares of the fund are considered intangible
personal property, the shares are exempt from any and all ad valorem
taxation in South Carolina.
You should also note that interest you incur to purchase or retain shares
of the fund generally will not be deductible for South Carolina income tax
purposes.
TENNESSEE FUND:
Your income from the fund will not be subject to Tennessee individual
income tax, also known as the Hall Income Tax, to the extent that the
income is attributable to interest earned on obligations of (i) Tennessee
or any county, municipality, or political subdivision of Tennessee or (ii)
the United States government or any agency or instrumentality of the
United States. The administrative position of the Tennessee Department of
Revenue is that your income from the fund also will not be subject to
Tennessee indivdual income tax to the extent that the income is
attributable to capital gains from the sale by the fund of any of those
obligations. All of your other income from the fund generally will be
subject to Tennessee individual income tax.
VIRGINIA FUND:
Your income from the fund will not be subject to Virginia individual
income tax to the extent that the income is attributable to (i) interest
earned on obligations that are tax-exempt for both federal and Virginia
income tax purposes, (ii) interest earned on direct obligations of the
United States, or (iii) capital gains from the sale by the fund of an
obligation the profit from which is exempt from Virginia individual income
tax. All of your other income from the fund and gains from the redemption
or sale of your shares of the fund generally will be subject to Virginia
individual income tax.
WEST VIRGINIA FUND:
The West Virginia Department of Tax and Revenue has created a list of
obligations of the United States and its possessions and of West Virginia
which, when invested in by an investor, do not create West Virginia
Personal Income Tax liability for interest or dividend income.
As long as the fund qualifies as a regulated investment company
distributions you receive from the fund are not subject to West Virginia
Personal Income Tax provided that the income is attributable to
obligations which appear on the Department's list.
o UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of a fund, and which may be managed by the fund's portfolio
manager(s). While each fund may have many similarities to these other
funds, its investment performance will differ from their investment
performance. This is due to a number of differences between the funds,
including differences in sales charges, expense ratios and cash flows.
o PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
Each fund produces financial reports every six months and updates its
prospectus annually. To avoid sending duplicate copies of materials to
households, only one copy of a fund's annual and semiannual report and
prospectus will be mailed to shareholders having the same residential
address on a fund's records. However, any shareholder may contact MFSC
(see back cover for address and phone number) to request that copies of
these reports and prospectuses be sent personally to that shareholder.
-----------------------
IX FINANCIAL HIGHLIGHTS
-----------------------
The financial highlights table is intended to help you understand a fund's
financial performance for the past 5 years, or, if a fund has not been in
operation that long, since the time it commenced investment operations.
Certain information reflects financial results for a single fund share.
The total returns in the table represent the rate by which an investor
would have earned (or lost) on an investment in a fund (assuming
reinvestment of all distributions). This information has been audited by
each fund's independent auditors, whose report, together with the fund's
financial statements, are included in the fund's annual report to
shareholders. The funds' annual report is available upon request by
contacting MFS Service Center, Inc. (see back cover for address and
telephone number). These financial statements are incorporated by
reference into the SAI. The fund's independent auditors are Deloitte &
Touche LLP.
<PAGE>
<TABLE>
ALABAMA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.76 $ 10.80 $ 10.48 $ 10.52 $ 10.34
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.54 $ 0.54 $ 0.55 $ 0.56 $ 0.55
Net realized and unrealized gain (loss) on
investments (0.64) (0.01) 0.45 0.04 0.18
--------- --------- --------- --------- ---------
Total from investment operations $ (0.10) $ 0.53 $ 1.00 $ 0.60 $ 0.73
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.54) $ (0.54) $ (0.55) $ (0.55) $ (0.55)
From net realized gain on investments (0.12) (0.03) (0.13) (0.09) --
In excess of net realized gain on investments (0.00)+ -- -- -- --
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.66) $ (0.57) $ (0.68) $ (0.64) $ (0.55)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.00 $ 10.76 $ 10.80 $ 10.48 $ 10.52
--------- --------- --------- --------- ---------
Total return(+) (0.82)% 5.03% 9.72% 5.82% 7.13%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 0.89% 0.95% 1.04% 1.10% 1.14%
Net investment income 5.28% 5.04% 5.12% 5.28% 5.18%
Portfolio turnover 44% 23% 21% 22% 37%
Net assets at end of period (000 omitted) $ 72,736 $ 73,851 $ 75,538 $ 76,928 $ 82,484
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.52 $ 0.53 $ 0.54 -- $ 0.54
Ratios (to average net assets):
Expenses## 1.07% 1.07% 1.11% -- 1.24%
Net investment income 5.10% 4.92% 5.05% -- 5.08%
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
</TABLE>
<PAGE>
<TABLE>
ALABAMA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.76 $ 10.80 $ 10.48 $ 10.52 $ 10.34
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.46 $ 0.46 $ 0.47 $ 0.47 $ 0.46
Net realized and unrealized gain (loss) on
investments (0.64) (0.01) 0.45 0.04 0.18
--------- --------- --------- --------- ---------
Total from investment operations $ (0.18) $ 0.45 $ 0.92 $ 0.51 $ 0.64
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.46) $ (0.46) $ (0.47) $ (0.47) $ (0.46)
From net realized gain on investments (0.12) (0.03) (0.13) (0.08) --
In excess of net realized gain on investments (0.00)+ -- -- -- --
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.58) $ (0.49) $ (0.60) $ (0.55) $ (0.46)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.00 $ 10.76 $ 10.80 $ 10.48 $ 10.52
--------- --------- --------- --------- ---------
Total return (1.56)% 4.25% 8.91% 4.98% 6.25%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.64% 1.69% 1.79% 1.90% 1.96%
Net investment income 4.53% 4.29% 4.36% 4.48% 4.34%
Portfolio turnover 44% 23% 21% 22% 37%
Net assets at end of period (000 omitted) $ 10,926 $ 11,452 $ 8,074 $ 7,281 $ 6,139
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.44 $ 0.45 $ 0.46 -- --
Ratios (to average net assets):
Expenses## 1.82% 1.81% 1.86% -- --
Net investment income 4.35% 4.17% 4.29% -- --
+ Per share amount was less than $0.01
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
<PAGE>
<TABLE>
ARKANSAS FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.14 $ 10.18 $ 9.72 $ 9.75 $ 9.66
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.50 $ 0.50 $ 0.50 $ 0.50 $ 0.50
Net realized and unrealized gain (loss)
on investments (0.53) (0.04) 0.46 (0.03) 0.09
--------- --------- --------- --------- ---------
Total from investment operations $ (0.03) $ 0.46 $ 0.96 $ 0.47 $ 0.59
--------- --------- --------- --------- ---------
Less distributions declared to
shareholders --
From net investment income $ (0.50) $ (0.50) $ (0.50) $ (0.50) $ (0.50)
In excess of net investment income -- -- (0.00)+ -- --
--------- --------- --------- --------- ---------
Total distributions declared to
shareholders $ (0.50) $ (0.50) $ (0.50) $ (0.50) $ (0.50)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 9.61 $ 10.14 $ 10.18 $ 9.72 $ 9.75
--------- --------- --------- --------- ---------
Total return(+) (0.24)% 4.60% 10.06% 4.87% 6.19%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 0.72% 0.77% 0.85% 0.92% 0.93%
Net investment income 5.14% 4.92% 4.97% 5.14% 5.10%
Portfolio turnover 28% 12% 15% 9% 6%
Net assets at end of period (000
omitted) $ 107,111 $ 124,644 $ 134,072 $ 144,263 $ 172,907
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.48 $ 0.49 $ 0.49 -- --
Ratios (to average net assets):
Expenses## 0.90% 0.89% 0.92% -- --
Net investment income 4.96% 4.80% 4.90% -- --
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
</TABLE>
<PAGE>
<TABLE>
ARKANSAS FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.14 $ 10.18 $ 9.72 $ 9.75 $ 9.65
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.42 $ 0.43 $ 0.42 $ 0.42 $ 0.42
Net realized and unrealized gain (loss) on
investments (0.53) (0.04) 0.46 (0.03) 0.10
--------- --------- --------- --------- ---------
Total from investment operations $ (0.11) $ 0.39 $ 0.88 $ 0.39 $ 0.52
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.41) $ (0.43) $ (0.42) $ (0.42) $ (0.42)
In excess of net investment income -- -- 0.00+ -- --
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.41) $ (0.43) $ (0.42) $ (0.42) $ (0.42)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 9.62 $ 10.14 $ 10.18 $ 9.72 $ 9.75
--------- --------- --------- --------- ---------
Total return (1.02)% 3.91% 9.18% 4.05% 5.43%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.62% 1.43% 1.65% 1.71% 1.76%
Net investment income 4.33% 4.26% 4.15% 4.34% 4.27%
Portfolio turnover 28% 12% 15% 9% 6%
Net assets at end of period (000 omitted) $ 9,227 $ 10,609 $ 7,370 $ 7,548 $ 7,950
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.40 $ 0.42 $ 0.41 -- --
Ratios (to average net assets):
Expenses## 1.80% 1.55% 1.72% -- --
Net investment income 4.15% 4.14% 4.08% -- --
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
<PAGE>
<TABLE>
CALIFORNIA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 5.89 $ 5.80 $ 5.47 $ 5.52 $ 5.41
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.29 $ 0.29 $ 0.29 $ 0.30 $ 0.30
Net realized and unrealized gain (loss)
on investments (0.38) 0.09 0.33 (0.05) 0.11
--------- --------- --------- --------- ---------
Total from investment operations $ (0.09) $ 0.38 $ 0.62 $ 0.25 $ 0.41
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.28) $ (0.29) $ (0.29) $ (0.30) $ (0.30)
In excess of net investment income -- (0.00)+ -- -- (0.00)+
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.28) $ (0.29) $ (0.29) $ (0.30) $ (0.30)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 5.52 $ 5.89 $ 5.80 $ 5.47 $ 5.52
--------- --------- --------- --------- ---------
Total return(+) (1.41)% 6.59% 11.51% 4.55% 7.86%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.51% 0.60% 0.64% 0.66% 0.66%
Net investment income 5.21% 4.82% 5.07% 5.36% 5.48%
Portfolio turnover 40% 26% 49% 78% 69%
Net assets at end of period (000 omitted) $ 196,828 $ 226,903 $ 222,421 $ 232,612 $ 259,817
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.27 $ 0.27 $ 0.28 $ 0.29 $ 0.29
Ratios (to average net assets):
Expenses## 0.86% 0.77% 0.79% 0.81% 0.81%
Net investment income 4.86% 4.65% 4.92% 5.21% 5.33%
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
</TABLE>
<PAGE>
<TABLE>
CALIFORNIA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 5.89 $ 5.80 $ 5.47 $ 5.52 $ 5.41
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.25 $ 0.24 $ 0.24 $ 0.25 $ 0.26
Net realized and unrealized gain (loss) on
investments (0.38) 0.09 0.33 (0.05) 0.11
--------- --------- --------- --------- ---------
Total from investment operations $ (0.13) $ 0.33 $ 0.57 $ 0.20 $ 0.37
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.24) $ (0.24) $ (0.24) $ (0.25) $ (0.26)
In excess of net investment income -- (0.00)+ -- -- (0.00)+
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.24) $ (0.24) $ (0.24) $ (0.25) $ (0.26)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 5.52 $ 5.89 $ 5.80 $ 5.47 $ 5.52
--------- --------- --------- --------- ---------
Total return (2.21)% 5.74% 10.62% 3.64% 6.93%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.31% 1.39% 1.44% 1.54% 1.54%
Net investment income 4.38% 4.02% 4.26% 4.48% 4.59%
Portfolio turnover 40% 26% 49% 78% 69%
Net assets at end of period (000 omitted) $ 60,367 $ 61,458 $ 43,790 $ 36,694 $ 34,675
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.23 $ 0.22 $ 0.23 $ 0.24 $ 0.24
Ratios (to average net assets):
Expenses## 1.66% 1.56% 1.59% 1.69% 1.91%
Net investment income 4.03% 3.85% 4.11% 4.33% 4.57%
+ Per share amount was less than $0.01
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
<PAGE>
<TABLE>
CALIFORNIA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS C
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 5.90 $ 5.81 $ 5.48 $ 5.53 $ 5.42
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.24 $ 0.23 $ 0.23 $ 0.24 $ 0.25
Net realized and unrealized gain (loss) on
investments (0.38) 0.09 0.33 (0.05) 0.11
--------- --------- --------- --------- ---------
Total from investment operations $ (0.14) $ 0.32 $ 0.56 $ 0.19 $ 0.36
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.23) $ (0.23) $ (0.23) $ (0.24) $ (0.25)
In excess of net investment income -- (0.00)+ -- -- (0.00)+
In excess of net realized gain on investments -- -- -- -- (0.01)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.23) $ (0.23) $ (0.23) $ (0.24) $ (0.25)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 5.53 $ 5.90 $ 5.81 $ 5.48 $ 5.53
--------- --------- --------- --------- ---------
Total return (2.29)% 5.54% 10.39% 3.51% 6.77%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.41% 1.56% 1.64% 1.66% 1.67%
Net investment income 4.32% 3.84% 4.08% 4.37% 4.47%
Portfolio turnover 40% 26% 49% 78% 69%
Net assets at end of period (000 omitted) $ 10,482 $ 10,178 $ 4,396 $ 3,856 $ 4,353
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.22 $ 0.21 $ 0.22 $ 0.23 $ 0.24
Ratios (to average net assets):
Expenses## 1.76% 1.74% 1.79% 1.81% 1.82%
Net investment income 3.97% 3.66% 3.93% 4.22% 4.32%
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
<PAGE>
<TABLE>
FLORIDA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.12 $ 10.10 $ 9.64 $ 9.82 $ 9.60
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.50 $ 0.50 $ 0.50 $ 0.51 $ 0.52
Net realized and unrealized gain (loss) on
investments (0.65) 0.02 0.46 (0.18) 0.22
--------- --------- --------- --------- ---------
Total from investment operations $ (0.15) $ 0.52 $ 0.96 $ 0.33 $ 0.74
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.50) $ (0.50) $ (0.50) $ (0.51) $ (0.52)
In excess of net investment income -- -- -- -- (0.00)+
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.50) $ (0.50) $ (0.50) $ (0.51) $ (0.52)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 9.47 $ 10.12 $ 10.10 $ 9.64 $ 9.82
--------- --------- --------- --------- ---------
Total return(+) (1.38)% 5.25% 10.16% 3.43% 7.81%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 0.66% 0.69% 0.78% 0.86% 0.86%
Net investment income 5.21% 4.96% 5.03% 5.26% 5.26%
Portfolio turnover 52% 23% 14% 24% 56%
Net assets at end of period (000 omitted) $ 64,107 $ 77,628 $ 77,711 $ 80,342 $ 87,553
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.48 $ 0.49 $ 0.49 -- $ 0.52
Ratios (to average net assets):
Expenses## 0.84% 0.81% 0.85% -- 0.90%
Net investment income 5.03% 4.84% 4.96% -- 5.22%
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
</TABLE>
<PAGE>
<TABLE>
FLORIDA FUND
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.11 $ 10.09 $ 9.64 $ 9.82 $ 9.60
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.43 $ 0.42 $ 0.42 $ 0.43 $ 0.43
Net realized and unrealized gain (loss) on
investments (0.64) 0.02 0.45 (0.18) 0.22
--------- --------- --------- --------- ---------
Total from investment operations $ (0.21) $ 0.44 $ 0.87 $ 0.25 $ 0.65
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.43) $ (0.42) $ (0.42) $ (0.43) $ (0.43)
In excess of net investment income -- -- -- -- (0.00)+
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.43) $ (0.42) $ (0.42) $ (0.43) $ (0.43)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 9.47 $ 10.11 $ 10.09 $ 9.64 $ 9.82
--------- --------- --------- --------- ---------
Total return (2.07)% 4.42% 9.18% 2.56% 6.88%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.45% 1.49% 1.58% 1.72% 1.74%
Net investment income 4.42% 4.16% 4.22% 4.40% 4.36%
Portfolio turnover 52% 23% 14% 24% 56%
Net assets at end of period (000 omitted) $ 19,999 $ 20,813 $ 16,719 $ 14,701 $ 14,448
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.41 $ 0.41 $ 0.41 -- $ 0.43
Ratios (to average net assets):
Expenses## 1.63% 1.61% 1.65% -- 1.78%
Net investment income 4.24% 4.04% 4.15% -- 4.33%
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
<PAGE>
<TABLE>
GEORGIA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.93 $ 10.95 $ 10.38 $ 10.47 $ 10.35
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.52 $ 0.55 $ 0.56 $ 0.56 $ 0.54
Net realized and unrealized gain (loss) on
investments (0.67) (0.02) 0.56 (0.10) 0.12
--------- --------- --------- --------- ---------
Total from investment operations $ (0.15) $ 0.53 $ 1.12 $ 0.46 $ 0.66
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.52) $ (0.55) $ (0.55) $ (0.55) $ (0.54)
In excess of net investment income -- (0.00)+ -- -- (0.00)+
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.52) $ (0.55) $ (0.55) $ (0.55) $ (0.54)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.26 $ 10.93 $ 10.95 $ 10.38 $ 10.47
--------- --------- --------- --------- ---------
Total return(+) (1.32)% 4.90% 11.02% 4.47% 6.48%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 0.93% 0.97% 1.03% 1.03% 1.17%
Net investment income 4.98% 4.97% 5.14% 5.34% 5.11%
Portfolio turnover 39% 35% 18% 27% 65%
Net assets at end of period (000 omitted) $ 48,054 $ 56,886 $ 59,546 $ 59,843 $ 68,183
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.50 $ 0.54 $ 0.55 $ 0.55 $ 0.53
Ratios (to average net assets):
Expenses## 1.11% 1.09% 1.13% 1.10% 1.27%
Net investment income 4.80% 4.85% 5.04% 5.27% 5.01%
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
</TABLE>
<PAGE>
<TABLE>
GEORGIA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.93 $ 10.95 $ 10.38 $ 10.47 $ 10.36
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.44 $ 0.47 $ 0.48 $ 0.47 $ 0.45
Net realized and unrealized gain (loss) on
investments (0.66) (0.02) 0.56 (0.09) 0.12
--------- --------- --------- --------- ---------
Total from investment operations $ (0.22) $ 0.45 $ 1.04 $ 0.38 $ 0.57
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.44) $ (0.47) $ (0.47) $ (0.47) $ (0.46)
In excess of net investment income -- (0.00)+ -- -- (0.00)+
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.44) $ (0.47) $ (0.47) $ (0.47) $ (0.46)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.27 $ 10.93 $ 10.95 $ 10.38 $ 10.47
--------- --------- --------- --------- ---------
Total return (2.06)% 4.22% 10.19% 3.63% 5.52%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.68% 1.72% 1.77% 1.83% 2.00%
Net investment income 4.24% 4.22% 4.39% 4.53% 4.27%
Portfolio turnover 39% 35% 18% 27% 65%
Net assets at end of period (000 omitted) $ 14,777 $ 14,591 $ 10,871 $ 9,995 $ 10,205
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.42 $ 0.45 $ 0.47 $ 0.47 --
Ratios (to average net assets):
Expenses## 1.86% 1.84% 1.87% 1.90% --
Net investment income 4.06% 4.10% 4.29% 4.46% --
+ Per share data amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
<PAGE>
<TABLE>
MARYLAND FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.49 $ 11.47 $ 10.89 $ 11.04 $ 10.94
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.53 $ 0.54 $ 0.54 $ 0.57 $ 0.57
Net realized and unrealized gain (loss)
on investments (0.68) 0.02 0.59 (0.16) 0.09
--------- --------- --------- --------- ---------
Total from investment operations $ (0.15) $ 0.56 $ 1.13 $ 0.41 $ 0.66
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.53) $ (0.54) $ (0.54) $ (0.56) $ (0.56)
In excess of net investment income -- -- (0.01) -- --
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.53) $ (0.54) $ (0.55) $ (0.56) $ (0.56)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.81 $ 11.49 $ 11.47 $ 10.89 $ 11.04
--------- --------- --------- --------- ---------
Total return(+) (1.27)% 4.94% 10.57% 3.75% 6.17%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.96% 1.03% 1.09% 1.12% 1.19%
Net investment income 4.85% 4.67% 4.79% 5.21% 5.10%
Portfolio turnover 24% 14% 21% 22% 15%
Net assets at end of period (000 omitted) $ 114,957 $ 131,261 $ 126,018 $ 126,405 $ 139,297
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.51 $ 0.53 $ 0.53 $ 0.57 --
Ratios (to average net assets):
Expenses## 1.14% 1.15% 1.19% 1.19% --
Net investment income 4.67% 4.55% 4.69% 5.14% --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
</TABLE>
<PAGE>
<TABLE>
MARYLAND FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.48 $ 11.47 $ 10.88 $ 11.03 $ 10.93
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.46 $ 0.45 $ 0.47 $ 0.50 $ 0.48
Net realized and unrealized gain (loss) on
investments (0.67) 0.02 0.60 (0.17) 0.10
--------- --------- --------- --------- ---------
Total from investment operations $ (0.21) $ 0.47 $ 1.07 $ 0.33 $ 0.58
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.46) $ (0.46) $ (0.47) $ (0.48) $ (0.48)
In excess of net investment income -- -- (0.01) -- --
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.46) $ (0.46) $ (0.48) $ (0.48) $ (0.48)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.81 $ 11.48 $ 11.47 $ 10.88 $ 11.03
--------- --------- --------- --------- ---------
Total return (1.82)% 4.18% 9.96% 3.03% 5.41%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.61% 1.68% 1.74% 1.82% 1.91%
Net investment income 4.21% 4.01% 4.12% 4.50% 4.36%
Portfolio turnover 24% 14% 21% 22% 15%
Net assets at end of period (000 omitted) $ 26,845 $ 28,902 $ 21,622 $ 17,379 $ 13,694
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.44 $ 0.45 $ 0.46 $ 0.49 --
Ratios (to average net assets):
Expenses## 1.79% 1.80% 1.84% 1.89% --
Net investment income 4.03% 3.89% 4.02% 4.43% --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
<PAGE>
<TABLE>
MASSACHUSETTS FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.35 $ 11.34 $ 10.86 $ 10.98 $ 10.84
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.57 $ 0.58 $ 0.58 $ 0.61 $ 0.60
Net realized and unrealized gain (loss)
on investments (0.76) (0.01) 0.48 (0.14) 0.14
--------- --------- --------- --------- ---------
Total from investment operations $ (0.19) $ 0.57 $ 1.06 $ 0.47 $ 0.74
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.56) $ (0.56) $ (0.58) $ (0.59) $ (0.60)
In excess of net investment income -- -- (0.00)+ -- (0.00)+
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.56) $ (0.56) $ (0.58) $ (0.59) $ (0.60)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.60 $ 11.35 $ 11.34 $ 10.86 $ 10.98
--------- --------- --------- --------- ---------
Total return(+) (1.57)% 5.11% 9.99% 4.39% 6.95%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.92% 1.00% 1.06% 1.12% 1.17%
Net investment income 5.29% 5.08% 5.18% 5.55% 5.44%
Portfolio turnover 35% 28% 24% 33% 31%
Net assets at end of period (000 omitted) $ 207,228 $ 239,980 $ 237,861 $ 234,874 $ 249,497
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.55 $ 0.57 $ 0.57 $ 0.60 --
Ratios (to average net assets):
Expenses## 1.10% 1.12% 1.16% 1.19% --
Net investment income 5.11% 4.96% 5.08% 5.48% --
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
</TABLE>
<PAGE>
<TABLE>
MASSACHUSETTS FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.35 $ 11.35 $ 10.87 $ 10.99 $ 10.84
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.50 $ 0.50 $ 0.51 $ 0.53 $ 0.52
Net realized and unrealized gain (loss) on
investments (0.76) (0.01) 0.48 (0.13) 0.15
--------- --------- --------- --------- ---------
Total from investment operations $ (0.26) $ 0.49 $ 0.99 $ 0.40 $ 0.67
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.49) $ (0.49) $ (0.51) $ (0.52) $ (0.52)
In excess of net investment income -- -- (0.00)+ -- (0.00)+
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.49) $ (0.49) $ (0.51) $ (0.52) $ (0.52)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.60 $ 11.35 $ 11.35 $ 10.87 $ 10.99
--------- --------- --------- --------- ---------
Total return (2.30)% 4.43% 9.25% 3.66% 6.27%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.57% 1.64% 1.71% 1.81% 1.90%
Net investment income 4.64% 4.43% 4.52% 4.81% 4.71%
Portfolio turnover 35% 28% 24% 33% 51%
Net assets at end of period (000 omitted) $ 25,743 $ 25,616 $ 18,750 $ 15,204 $ 11,316
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.48 $ 0.49 $ 0.50 $ 0.52 --
Ratios (to average net assets):
Expenses## 1.75% 1.76% 1.81% 1.88% --
Net investment income 4.46% 4.31% 4.42% 4.74% --
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
<PAGE>
<TABLE>
MISSISSIPPI FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 9.93 $ 9.88 $ 9.35 $ 9.35 $ 9.15
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.50 $ 0.49 $ 0.49 $ 0.48 $ 0.52
Net realized and unrealized gain (loss) on
investments (0.56) 0.06 0.52 0.00 0.20
--------- --------- --------- --------- ---------
Total from investment operations $ (0.06) $ 0.55 $ 1.01 $ 0.48 $ 0.72
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.50) $ (0.50) $ (0.48) $ (0.48) $ (0.52)
In excess of net realized gain on investments -- -- -- -- (0.00)(++)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.50) $ (0.50) $ (0.48) $ (0.48) $ (0.52)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 9.37 $ 9.93 $ 9.88 $ 9.35 $ 9.35
--------- --------- --------- --------- ---------
Total return(+) (0.58)% 5.62% 11.02% 5.22% 7.99%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.66% 0.73% 0.78% 0.87% 0.45%
Net investment income 5.22% 4.94% 5.04% 5.14% 5.51%
Portfolio turnover 18% 6% 18% 17% 31%
Net assets at end of period (000 omitted) $ 66,173 $ 66,869 $ 66,061 $ 66,630 $ 74,435
----------
(S) Subject to reimbursement by the Fund, the investment adviser has voluntarily agreed under a temporary expense agreement to
pay all of the Fund's operating expenses, exclusive of management, distribution, and service fees, in excess of 0.40% for
certain of the periods indicated. In addition, the investment adviser voluntarily waived a portion of its fee for certain of
the periods indicated. To the extent actual expenses were over this limitation and the waivers had not been in place, the
net investment income per share and the ratios would have been:
Net investment income $ 0.48 $ 0.48 $ 0.48 -- $ 0.48
Ratios (to average net assets):
Expenses## 0.84% 0.85% 0.85% -- 0.88%
Net investment income 5.04% 4.82% 4.97% -- 5.08%
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
MISSISSIPPI FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 9.94 $ 9.89 $ 9.36 $ 9.36 $ 9.16
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.42 $ 0.41 $ 0.41 $ 0.40 $ 0.44
Net realized and unrealized gain (loss) on
investments (0.56) 0.06 0.53 0.00 0.20
--------- --------- --------- --------- ---------
Total from investment operations $ (0.14) $ 0.47 $ 0.94 $ 0.40 $ 0.64
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.42) $ (0.42) $ (0.41) $ (0.40) $ (0.44)
In excess of net investment income -- -- -- -- (0.00)(+)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.42) $ (0.42) $ (0.41) $ (0.40) $ (0.44)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 9.38 $ 9.94 $ 9.89 $ 9.36 $ 9.36
--------- --------- --------- --------- ---------
Total return (1.37)% 4.80% 10.15% 4.33% 7.11%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.46% 1.51% 1.56% 1.72% 1.28%
Net investment income 4.41% 4.16% 4.26% 4.29% 4.67%
Portfolio turnover 18% 6% 18% 17% 31%
Net assets at end of period (000 omitted) $ 10,786 $ 11,465 $ 10,717 $ 11,014 $ 11,475
----------
(S) Subject to reimbursement by the Fund, the investment adviser has voluntarily agreed under a temporary expense agreement to
pay all of the Fund's operating expenses, exclusive of management, distribution, and service fees, in excess of 0.40% for
certain of the periods indicated. In addition, the investment adviser voluntarily waived a portion of its fee for certain of
the periods indicated. To the extent actual expenses were over this limitation and the waivers had not been in place, the
net investment income per share and the ratios would have been:
Net investment income $ 0.40 $ 0.40 $ 0.40 -- $ 0.40
Ratios (to average net assets):
Expenses## 1.64% 1.63% 1.63% -- 1.71%
Net investment income 4.23% 4.04% 4.19% -- 4.24%
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
NEW YORK FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.27 $ 11.26 $ 10.60 $ 10.66 $ 10.49
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.55 $ 0.56 $ 0.57 $ 0.55 $ 0.55
Net realized and unrealized gain (loss)
on investments (0.69) 0.01 0.64 (0.06) 0.17
--------- --------- --------- --------- ---------
Total from investment operations $ (0.14) $ 0.57 $ 1.21 $ 0.49 $ 0.72
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.55) $ (0.56) $ (0.55) $ (0.55) $ (0.55)
In excess of net investment income -- (0.00)(++) -- -- (0.00)(++)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.55) $ (0.56) $ (0.55) $ (0.55) $ (0.55)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.58 $ 11.27 $ 11.26 $ 10.60 $ 10.66
--------- --------- --------- --------- ---------
Total return(+) (1.06)% 5.14% 11.59% 4.68% 6.98%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.85% 0.93% 1.03% 1.11% 1.10%
Net investment income 5.14% 4.93% 5.14% 5.18% 5.09%
Portfolio turnover 38% 26% 41% 64% 102%
Net assets at end of period (000 omitted) $ 101,403 $ 116,767 $ 119,376 $ 121,588 $ 134,449
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.53 $ 0.55 $ 0.56 -- $ 0.54
Ratios (to average net assets):
Expenses## 1.03% 1.05% 1.10% -- 1.20%
Net investment income 4.96% 4.81% 5.07% -- 4.99%
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
NEW YORK FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.27 $ 11.26 $ 10.59 $ 10.66 $ 10.49
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.47 $ 0.47 $ 0.49 $ 0.47 $ 0.47
Net realized and unrealized gain (loss) on
investments (0.69) 0.01 0.64 (0.07) 0.17
--------- --------- --------- --------- ---------
Total from investment operations $ (0.22) $ 0.48 $ 1.13 $ 0.40 $ 0.64
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.47) $ (0.47) $ (0.46) $ (0.47) $ (0.47)
In excess of net investment income -- (0.00)(+) -- -- (0.00)(+)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.47) $ (0.47) $ (0.46) $ (0.47) $ (0.47)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.58 $ 11.27 $ 11.26 $ 10.59 $ 10.66
--------- --------- --------- --------- ---------
Total return (1.89)% 4.46% 10.78% 3.77% 6.10%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.60% 1.68% 1.78% 1.92% 1.92%
Net investment income 4.38% 4.18% 4.39% 4.37% 4.27%
Portfolio turnover 38% 26% 41% 64% 102%
Net assets at end of period (000 omitted) $ 20,224 $ 30,408 $ 26,618 $ 26,724 $ 28,068
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.45 $ 0.46 $ 0.48 -- --
Ratios (to average net assets):
Expenses## 1.78% 1.80% 1.85% -- --
Net investment income 4.20% 4.06% 4.32% -- --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
NORTH CAROLINA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 12.14 $ 12.15 $ 11.56 $ 11.57 $ 11.42
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.59 $ 0.59 $ 0.59 $ 0.59 $ 0.59
Net realized and unrealized gain (loss)
on investments (0.80) (0.02) 0.59 (0.01) 0.15
--------- --------- --------- --------- ---------
Total from investment operations $ (0.21) $ 0.57 $ 1.18 $ 0.58 $ 0.74
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.58) $ (0.58) $ (0.59) $ (0.59) $ (0.59)
In excess of net realized gain on
investments -- -- -- (0.00)(++) (0.00)(++)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.58) $ (0.58) $ (0.59) $ (0.59) $ (0.59)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 11.35 $ 12.14 $ 12.15 $ 11.56 $ 11.57
--------- --------- --------- --------- ---------
Total return(+) (1.67)% 4.76% 10.36% 5.09% 6.56%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.91% 0.98% 1.03% 1.08% 1.17%
Net investment income 5.07% 4.76% 4.92% 5.05% 5.04%
Portfolio turnover 9% 30% 24% 33% 30%
Net assets at end of period (000 omitted) $ 310,624 $ 364,576 $ 380,595 $ 377,112 $ 409,347
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.57 $ 0.57 $ 0.58 $ 0.58 --
Ratios (to average net assets):
Expenses## 1.09% 1.10% 1.13% 1.15% --
Net investment income 4.89% 4.64% 4.82% 4.98% --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
NORTH CAROLINA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 12.13 $ 12.15 $ 11.55 $ 11.56 $ 11.42
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.51 $ 0.50 $ 0.51 $ 0.50 $ 0.50
Net realized and unrealized gain (loss) on
investments (0.78) (0.02) 0.60 0.00 0.14
--------- --------- --------- --------- ---------
Total from investment operations $ (0.27) $ 0.48 $ 1.11 $ 0.50 $ 0.64
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.51) $ (0.50) $ (0.51) $ (0.51) $ (0.50)
In excess of net realized gain on investments -- -- -- (0.00)(+) (0.00)(+)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.51) $ (0.50) $ (0.51) $ (0.51) $ (0.50)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 11.35 $ 12.13 $ 12.15 $ 11.55 $ 11.56
--------- --------- --------- --------- ---------
Total return (2.22)% 4.00% 9.75% 4.36% 5.70%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.56% 1.63% 1.68% 1.78% 1.90%
Net investment income 4.42% 4.11% 4.27% 4.36% 4.30%
Portfolio turnover 9% 30% 24% 33% 30%
Net assets at end of period (000 omitted) $ 48,794 $ 52,033 $ 44,238 $ 39,035 $ 33,847
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.49 $ 0.49 $ 0.50 $ 0.49 --
Ratios (to average net assets):
Expenses## 1.74% 1.75% 1.78% 1.85% --
Net investment income 4.24% 3.99% 4.17% 4.29% --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
NORTH CAROLINA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS C
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 12.13 $ 12.15 $ 11.55 $ 11.56 $ 11.41
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.51 $ 0.50 $ 0.51 $ 0.52 $ 0.51
Net realized and unrealized gain (loss) on
investments (0.78) (0.02) 0.60 (0.02) 0.15
--------- --------- --------- --------- ---------
Total from investment operations $ (0.27) $ 0.48 $ 1.11 $ 0.50 $ 0.66
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.51) $ (0.50) $ (0.51) $ (0.51) $ (0.51)
In excess of net realized gain on investments -- -- -- (0.00)(+) (0.00)(+)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.51) $ (0.50) $ (0.51) $ (0.51) $ (0.51)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 11.35 $ 12.13 $ 12.15 $ 11.55 $ 11.56
--------- --------- --------- --------- ---------
Total return (2.22)% 4.00% 9.75% 4.41% 5.87%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.56% 1.63% 1.68% 1.73% 1.83%
Net investment income 4.42% 4.11% 4.27% 4.40% 4.38%
Portfolio turnover 9% 30% 24% 33% 30%
Net assets at end of period (000 omitted) $ 14,206 $ 14,084 $ 8,143 $ 7,789 $ 9,352
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.49 $ 0.49 $ 0.50 $ 0.51 --
Ratios (to average net assets):
Expenses## 1.74% 1.75% 1.78% 1.80% --
Net investment income 4.24% 3.99% 4.17% 4.33% --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
PENNSYLVANIA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 9.90 $ 9.82 $ 9.26 $ 9.37 $ 9.29
----------- ----------- ----------- ---------- ----------
Income from investment operations# --
Net investment income(S) $ 0.50 $ 0.48 $ 0.50 $ 0.53 $ 0.54
Net realized and unrealized gain (loss) on
investments (0.55) 0.08 0.56 (0.10) 0.09
----------- ----------- ----------- ---------- ----------
Total from investment operations $ (0.05) $ 0.56 $ 1.06 $ 0.43 $ 0.63
----------- ----------- ----------- ---------- ----------
Less distributions declared to shareholders --
From net investment income $ (0.49) $ (0.48) $ (0.50) $ (0.54) $ (0.55)
In excess of net investment income -- -- -- (0.00)(++) --
----------- ----------- ----------- ---------- ----------
Total distributions declared to shareholders $ (0.49) $ (0.48) $ (0.50) $ (0.54) $ (0.55)
----------- ----------- ----------- ---------- ----------
Net asset value -- end of period $ 9.36 $ 9.90 $ 9.82 $ 9.26 $ 9.37
----------- ----------- ----------- ---------- ----------
Total return(+) (0.45)% 5.85% 11.65% 4.67% 6.85%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.38% 0.45% 0.40% 0.10% 0.10%
Net investment income 5.19% 4.85% 5.15% 5.66% 5.76%
Portfolio turnover 48% 8% 31% 42% 40%
Net assets at end of period (000 omitted) $25,494 $21,695 $ 18,918 $ 16,933 $ 18,030
----------
(S) Subject to reimbursement by the Fund, the investment adviser voluntarily agreed under a temporary expense reimbursement
agreement to pay all of the Fund's operating expenses, exclusive of management, distribution, and service fees. In
consideration, the Fund pays a fee not greater than 0.00% of average daily net assets for certain of the periods indicated.
In addition, the investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. To the
extent actual expenses were over this limitation and the waiver had not been in place, the net investment income per share
and the ratios would have been:
Net investment income $ 0.44 $ 0.43 $ 0.44 $ 0.45 $ 0.45
Ratios (to average net assets):
Expenses## 0.91% 0.93% 0.99% 0.95% 1.00%
Net investment income 4.66% 4.37% 4.56% 4.81% 4.86%
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
PENNSYLVANIA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 9.92 $ 9.84 $ 9.28 $ 9.39 $ 9.29
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.42 $ 0.41 $ 0.42 $ 0.46 $ 0.50
Net realized and unrealized gain (loss) on
investments (0.55) 0.08 0.56 (0.11) 0.07
--------- --------- --------- --------- ---------
Total from investment operations $ (0.13) $ 0.49 $ 0.98 $ 0.35 $ 0.57
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.41) $ (0.41) $ (0.42) $ (0.46) $ (0.47)
In excess of net investment income -- -- -- (0.00)(+) --
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.41) $ (0.41) $ (0.42) $ (0.46) $ (0.47)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 9.38 $ 9.92 $ 9.84 $ 9.28 $ 9.39
--------- --------- --------- --------- ---------
Total return (1.25)% 5.02% 10.76% 3.83% 6.23%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.19% 1.23% 1.19% 0.90% 0.88%
Net investment income 4.38% 4.07% 4.36% 4.86% 4.98%
Portfolio turnover 48% 8% 31% 42% 40%
Net assets at end of period (000 omitted) $ 17,496 $ 23,983 $ 20,551 $ 24,898 $ 24,170
----------
(S) Subject to reimbursement by the Fund, the investment adviser voluntarily agreed under a temporary expense reimbursement
agreement to pay all of the fund's operating expenses, exclusive of management, distribution, and service fees. In
consideration, the Fund pays a fee not greater than 0.00% of average daily net assets for certain of the periods indicated.
In addition, the investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. To the
extent actual expenses were over this limitation and the waiver had not been in place, the net investment income per share
and the ratios would have been:
Net investment income $ 0.37 $ 0.33 $ 0.36 $ 0.38 $ 0.41
Ratios (to average net assets):
Expenses## 1.72% 1.71% 1.78% 1.75% 1.85%
Net investment income 3.85% 3.59% 3.77% 4.01% 4.01%
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
SOUTH CAROLINA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 12.48 $ 12.52 $ 11.88 $ 11.97 $ 11.86
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.58 $ 0.57 $ 0.60 $ 0.62 $ 0.62
Net realized and unrealized gain (loss)
on investments (0.86) (0.04) 0.64 (0.10) 0.11
--------- --------- --------- --------- ---------
Total from investment operations $ (0.28) $ 0.53 $ 1.24 $ 0.52 $ 0.73
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.58) $ (0.57) $ (0.60) $ (0.61) $ (0.62)
From net realized gain on investments (0.03) -- -- -- --
In excess of net investment income -- (0.00)(++) (0.00)(++) -- (0.00)(++)
In excess of net realized gain on
investments (0.01) -- -- -- --
--------- --------- --------- --------- ---------
Total distributions declared to
shareholders $ (0.62) $ (0.57) $ (0.60) $ (0.61) $ (0.62)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 11.58 $ 12.48 $ 12.52 $ 11.88 $ 11.97
--------- --------- --------- --------- ---------
Total return(+) (2.27)% 4.33% 10.62% 4.46% 6.20%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.94% 1.02% 1.06% 1.10% 1.20%
Net investment income 4.91% 4.55% 4.86% 5.17% 5.10%
Portfolio turnover 18% 25% 29% 13% 18%
Net assets at end of period (000 omitted) $ 121,064 $ 145,787 $ 148,820 $ 148,908 $ 166,801
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.56 $ 0.56 $ 0.59 $ 0.16 --
Ratios (to average net assets):
Expenses## 1.12% 1.14% 1.16% 1.16% --
Net investment income 4.73% 4.43% 4.76% 5.11% --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
SOUTH CAROLINA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 12.47 $ 12.52 $ 11.88 $ 11.97 $ 11.86
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.51 $ 0.48 $ 0.52 $ 0.54 $ 0.52
Net realized and unrealized gain (loss) on
investments (0.86) (0.04) 0.64 (0.10) 0.12
--------- --------- --------- --------- ---------
Total from investment operations $ (0.35) $ 0.44 $ 1.16 $ 0.44 $ 0.64
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.50) $ (0.49) $ (0.52) $ (0.53) $ (0.53)
From net realized gain on investments (0.03) -- -- -- --
In excess of net investment income -- (0.00)(+) (0.00)(+) -- (0.00)(+)
In excess of net realized gain on
investments (0.01) -- -- -- --
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.54) $ (0.49) $ (0.52) $ (0.53) $ (0.53)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 11.58 $ 12.47 $ 12.52 $ 11.88 $ 11.97
--------- --------- --------- --------- ---------
Total return (2.82)% 3.57% 9.91% 3.73% 5.43%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.59% 1.67% 1.71% 1.79% 1.92%
Net investment income 4.26% 3.90% 4.21% 4.48% 4.35%
Portfolio turnover 18% 25% 29% 13% 18%
Net assets at end of period (000 omitted) $ 31,532 $ 36,226 $ 28,086 $ 21,871 $ 18,420
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.48 $ 0.47 $ 0.51 $ 0.53 --
Ratios (to average net assets):
Expenses## 1.77% 1.79% 1.81% 1.85% --
Net investment income 4.08% 3.78% 4.11% 4.42% --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
TENNESSEE FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.87 $ 10.91 $ 10.32 $ 10.40 $ 10.27
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.50 $ 0.53 $ 0.53 $ 0.55 $ 0.54
Net realized and unrealized gain (loss)
on investments (0.69) (0.02) 0.60 (0.09) 0.13
--------- --------- --------- --------- ---------
Total from investment operations $ (0.19) $ 0.51 $ 1.13 $ 0.46 $ 0.67
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.50) $ (0.52) $ (0.53) $ (0.54) $ (0.54)
From net realized gain on investment (0.07) (0.03) -- -- --
In excess of net investment income -- -- (0.01) -- (0.00)(++)
In excess of net realized gain on
investments (0.00)(++) -- -- -- --
--------- --------- --------- --------- ---------
Total distributions declared to
shareholders $ (0.57) $ (0.55) $ (0.54) $ (0.54) $ (0.54)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.11 $ 10.87 $ 10.91 $ 10.32 $ 10.40
--------- --------- --------- --------- ---------
Total return(+) (1.75)% 4.80% 11.11% 4.48% 6.66%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.96% 1.02% 1.07% 1.10% 1.21%
Net investment income 4.80% 4.79% 4.97% 5.26% 5.18%
Portfolio turnover 20% 16% 26% 20% 20%
Net assets at end of period (000 omitted) $ 100,251 $ 117,296 $ 108,871 $ 108,000 $ 109,811
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.48 $ 0.51 $ 0.52 $ 0.54 --
Ratios (to average net assets):
Expenses## 1.14% 1.14% 1.17% 1.16% --
Net investment income 4.62% 4.67% 4.87% 5.20% --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
TENNESSEE FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.86 $ 10.91 $ 10.31 $ 10.39 $ 10.26
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.43 $ 0.45 $ 0.46 $ 0.47 $ 0.46
Net realized and unrealized gain (loss) on
investments (0.69) (0.02) 0.61 (0.09) 0.14
--------- --------- --------- --------- ---------
Total from investment operations $ (0.26) $ 0.43 $ 1.07 $ 0.38 $ 0.60
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.43) $ (0.45) $ (0.46) $ (0.46) $ (0.47)
From net realized gain on investment (0.07) (0.03) -- -- --
In excess of net investment income -- -- (0.01) -- (0.00)(+)
In excess of net realized gain on investments (0.00)(+) -- -- -- --
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.50) $ (0.48) $ (0.47) $ (0.46) $ (0.47)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.10 $ 10.86 $ 10.91 $ 10.31 $ 10.39
--------- --------- --------- --------- ---------
Total return (2.39)% 4.04% 10.51% 3.76% 5.89%
Ratios (to average net assets)/Supplemental
data(S):
Expenses## 1.61% 1.67% 1.72% 1.79% 1.93%
Net investment income 4.15% 4.14% 4.32% 4.57% 4.43%
Portfolio turnover 20% 16% 26% 20% 20%
Net assets at end of period (000 omitted) $ 21,321 $ 22,765 $ 18,198 $ 14,436 $ 12,935
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.41 $ 0.44 $ 0.45 $ 0.46 --
Ratios (to average net assets):
Expenses## 1.79% 1.79% 1.82% 1.85% --
Net investment income 3.97% 4.02% 4.22% 4.51% --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
VIRGINIA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.60 $ 11.61 $ 11.06 $ 11.21 $ 11.09
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.57 $ 0.55 $ 0.57 $ 0.59 $ 0.59
Net realized and unrealized gain (loss)
on investments (0.70) (0.01) 0.55 (0.15) 0.13
--------- --------- --------- --------- ---------
Total from investment operations $ (0.13) $ 0.54 $ 1.12 $ 0.44 $ 0.72
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.56) $ (0.55) $ (0.57) $ (0.59) $ (0.60)
In excess of net investment income -- -- (0.00)(++) -- (0.00)(++)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.56) $ (0.55) $ (0.57) $ (0.59) $ (0.60)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.91 $ 11.60 $ 11.61 $ 11.06 $ 11.21
--------- --------- --------- --------- ---------
Total return(+) (1.09)% 4.71% 10.32% 3.97% 6.52%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.91% 0.99% 1.03% 1.08% 1.18%
Net investment income 5.07% 4.73% 4.97% 5.27% 5.20%
Portfolio turnover 13% 24% 39% 42% 42%
Net assets at end of period (000 omitted) $ 311,934 $ 365,880 $ 373,024 $ 379,185 $ 418,408
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.54 $ 0.54 $ 0.56 $ 0.58 --
Ratios (to average net assets):
Expenses## 1.09% 1.11% 1.13% 1.14% --
Net investment income 4.89% 4.61% 4.87% 5.21% --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
VIRGINIA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.60 $ 11.61 $ 11.06 $ 11.21 $ 11.08
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.49 $ 0.47 $ 0.49 $ 0.51 $ 0.51
Net realized and unrealized gain (loss) on
investments (0.70) (0.01) 0.56 (0.15) 0.13
--------- --------- --------- --------- ---------
Total from investment operations $ (0.21) $ 0.46 $ 1.05 $ 0.36 $ 0.64
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.48) $ (0.47) $ (0.49) $ (0.51) $ (0.51)
In excess of net investment income -- -- (0.01) -- (0.00)(+)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.48) $ (0.47) $ (0.50) $ (0.51) $ (0.51)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.91 $ 11.60 $ 11.61 $ 11.06 $ 11.21
--------- --------- --------- --------- ---------
Total return (1.73)% 4.04% 9.61% 3.24% 5.85%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.56% 1.64% 1.68% 1.78% 1.90%
Net investment income 4.42% 4.08% 4.32% 4.57% 4.46%
Portfolio turnover 13% 24% 39% 42% 42%
Net assets at end of period (000 omitted) $ 29,316 $ 35,644 $ 32,902 $ 30,567 $ 28,420
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.47 $ 0.46 $ 0.48 $ 0.50 --
Ratios (to average net assets):
Expenses## 1.74% 1.76% 1.78% 1.84% --
Net investment income 4.24% 3.96% 4.22% 4.51% --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
VIRGINIA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.60 $ 11.61 $ 11.06 $ 11.21 $ 11.07
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.49 $ 0.47 $ 0.49 $ 0.52 $ 0.51
Net realized and unrealized gain (loss) on
investments (0.70) (0.01) 0.56 (0.16) 0.15
--------- --------- --------- --------- ---------
Total from investment operations $ (0.21) $ 0.46 $ 1.05 $ 0.36 $ 0.66
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.48) $ (0.47) $ (0.49) $ (0.51) $ (0.52)
In excess of net investment income -- -- (0.01) -- (0.00)(+)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.48) $ (0.47) $ (0.50) $ (0.51) $ (0.52)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.91 $ 11.60 $ 11.61 $ 11.06 $ 11.21
--------- --------- --------- --------- ---------
Total return (1.73)% 4.04% 9.61% 3.30% 6.02%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.56% 1.64% 1.68% 1.72% 1.83%
Net investment income 4.42% 4.08% 4.32% 4.63% 4.53%
Portfolio turnover 13% 24% 39% 42% 42%
Net assets at end of period (000 omitted) $ 5,171 $ 6,523 $ 3,082 $ 3,182 $ 3,366
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the
periods indicated. If this fee had been incurred by the Fund, the net investment income
per share and the ratios would have been:
Net investment income $ 0.47 $ 0.46 $ 0.48 $ 0.51 --
Ratios (to average net assets):
Expenses## 1.74% 1.76% 1.78% 1.78% --
Net investment income 4.24% 3.96% 4.22% 4.57% --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
WEST VIRGINIA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.75 $ 11.77 $ 11.31 $ 11.33 $ 11.21
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.57 $ 0.56 $ 0.58 $ 0.60 $ 0.61
Net realized and unrealized gain (loss)
on investments (0.80) (0.01) 0.47 (0.02) 0.12
--------- --------- --------- --------- ---------
Total from investment operations $ (0.23) $ 0.55 $ 1.05 $ 0.58 $ 0.73
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.57) $ (0.57) $ (0.58) $ (0.60) $ (0.61)
In excess of net investment income -- (0.00)(++) (0.01) -- (0.00)(++)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.57 $ (0.57) $ (0.59) $ (0.60) $ (0.61)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.95 $ 11.75 $ 11.77 $ 11.31 $ 11.33
--------- --------- --------- --------- ---------
Total return(+) (1.89)% 4.73% 9.42% 5.20% 6.58%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.95% 1.02% 1.10% 1.17% 1.22%
Net investment income 5.13% 4.78% 4.98% 5.28% 5.30%
Portfolio turnover 30% 13% 17% 21% 11%
Net assets at end of period (000 omitted) $ 117,174 $ 133,456 $ 130,002 $ 126,107 $ 134,514
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.55 $ 0.55 $ 0.57 -- --
Ratios (to average net assets):
Expenses## 1.13% 1.14% 1.17% -- --
Net investment income 4.95% 4.66% 4.91% -- --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(++) Per share amount was less than $0.01.
</TABLE>
<PAGE>
<TABLE>
WEST VIRGINIA FUND
<CAPTION>
..............................................................................................................................
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 11.74 $ 11.77 $ 11.31 $ 11.33 $ 11.21
--------- --------- --------- --------- ---------
Income from investment operations# --
Net investment income(S) $ 0.50 $ 0.49 $ 0.51 $ 0.52 $ 0.52
Net realized and unrealized gain (loss) on
investments (0.80) (0.03) 0.46 (0.02) 0.12
--------- --------- --------- --------- ---------
Total from investment operations $ (0.30) $ 0.46 $ 0.97 $ 0.50 $ 0.64
--------- --------- --------- --------- ---------
Less distributions declared to shareholders --
From net investment income $ (0.50) $ (0.49) $ (0.51) $ (0.52) $ (0.52)
In excess of net investment income -- (0.00)(+) (0.00)(+) -- (0.00)(+)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders $ (0.50) $ (0.49) $ (0.51) $ (0.52) $ (0.52)
--------- --------- --------- --------- ---------
Net asset value -- end of period $ 10.94 $ 11.74 $ 11.77 $ 11.31 $ 11.33
--------- --------- --------- --------- ---------
Total return (2.53)% 3.97% 8.72% 4.47% 5.81%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.60% 1.67% 1.75% 1.87% 1.94%
Net investment income 4.48% 4.13% 4.33% 4.57% 4.56%
Portfolio turnover 30% 13% 17% 21% 11%
Net assets at end of period (000 omitted) $ 14,727 $ 17,166 $ 15,472 $ 13,587 $ 12,647
----------
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.48 $ 0.48 $ 0.50 -- --
Ratios (to average net assets):
Expenses## 1.78% 1.79% 1.82% -- --
Net investment income 4.30% 4.01% 4.26% -- --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Per share amount was less than $0.01.
</TABLE>
<PAGE>
----------
APPENDIX A
----------
o INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, each fund may engage in the
following principal and non-principal investment techniques and practices.
Investment techniques and practices which are the principal focus of the
fund are described, together with their risks, in the Risk Return Summary
of the Prospectus. Both principal and non-principal investment techniques
and practices are described, together with their risks, in the SAI.
..........................................................................
INVESTMENT TECHNIQUES/PRACTICES
..........................................................................
SYMBOLS x permitted -- not permitted
--------------------------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities x
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities x
Loans and Other Direct Indebtedness x
Lower Rated Bonds x
Municipal Bonds x
Speculative Bonds x
U.S. Government Securities x
Variable and Floating Rate Obligations x
Zero Coupon Bonds x
Equity Securities x
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities --
Emerging Markets --
Foreign Securities --
Forward Contracts --
Futures Contracts x
Indexed Securities/Structured Products x
Inverse Floating Rate Obligations x
Investment in Other Investment Companies
Open-End Funds x
Closed-End Funds x
Lending of Portfolio Securities --*
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions x**
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies --
Options on Futures Contracts x
Options on Securities x
Options on Stock Indices --
Reset Options --
"Yield Curve" Options --
Repurchase Agreements x
Restricted Securities x
Short Sales --
Short Sales Against the Box --
Short Term Instruments x
Swaps and Related Derivative Instruments x
Temporary Borrowings x
Temporary Defensive Positions x
Warrants x
"When-Issued" Securities x
------------
* May only be changed with shareholder approval.
** Each fund may only enter into "covered" mortgage dollar-roll
transactions, meaning that a fund segregates liquid securities
equal in value to the securities it will repurchase and does
not use these transactions as a form of leverage.
<PAGE>
----------
APPENDIX B
----------
TAX EQUIVALENT YIELD TABLES
(RATES FOR 2000 UNDER FEDERAL AND STATE INCOME TAX LAWS)
The tables below show the approximate taxable bond yields which are equivalent
to tax-exempt bond yields, for the ranges indicated, under federal and,
respectively, Alabama, Arkansas, California, Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina, Pennsylvania, South Carolina,
Tennessee, Virginia and West Virginia personal income tax laws that apply to
2000. The State of Florida does not currently impose an income tax on
individuals. Such yields will differ under the laws applicable to subsequent
years. Separate calculations, showing the applicable taxable income brackets,
are provided for investors who file joint returns and for those investors who
file individual returns. In each table, the effective marginal income tax rate
will be increased if personal exemptions are phased out (for the phase out
period only) and if a portion of itemized deductions are disallowed. This
increase in the marginal rates, if applicable, will cause a corresponding
increase in the equivalent taxable yields.
<TABLE>
ALABAMA -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ----------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 19.12% 3.71% 4.95% 6.18% 7.42% 8.65% 9.89% 0.15 0.048475 0.1912
$ 0- 43,850 19.09 3.71 4.94 6.18 7.42 8.65 9.89 0.15 0.048175 0.1909
$ 26,250- 63,550 $ 43,850-105,950 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000 0.3160
$ 63,550-132,600 $105,950-161,450 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000 0.3445
$132,600-288,350 $161,450-288,350 39.20 4.93 6.58 8.22 9.87 11.51 13.16 0.36 0.050000 0.3920
$288,350 & Over $288,350 & Over 42.62 5.23 6.97 8.71 10.46 12.20 13.94 0.396 0.050000 0.4262
* Net amount subject to Federal and Alabama personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Alabama rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
ARKANSAS -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ----------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 18.78% 3.69% 4.92% 6.16% 7.39% 8.62% 9.85% 0.15 0.044478 0.1878
$ 0- 43,850 19.65 3.73 4.98 6.22 7.47 8.71 9.96 0.15 0.054722 0.1965
$ 26,250- 63,550 $ 43,850-105,950 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000 0.3304
$ 63,550-132,600 $105,950-161,450 35.83 4.68 6.23 7.79 9.35 10.91 12.47 0.31 0.070000 0.3583
$132,600-288,350 $161,450-288,350 40.48 5.04 6.72 8.40 10.08 11.76 13.44 0.36 0.070000 0.4048
$288,350 & Over $288,350 & Over 43.83 5.34 7.12 8.90 10.68 12.46 14.24 0.396 0.070000 0.4383
* Net amount subject to Federal and Arkansas personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Arkansas rate assumes itemization of state tax deduction.
CALIFORNIA -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ----------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 17.85% 3.65% 4.87% 6.09% 7.30% 8.52% 9.74% 0.15 0.033485 0.1785
$ 0- 43,850 17.40 3.63 4.84 6.05 7.26 8.47 9.69 0.15 0.028254 0.1740
$ 26,250- 63,550 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.28 0.089525 0.3445
$ 43,850-105,950 34.06 4.55 6.07 7.58 9.10 10.62 12.13 0.28 0.084229 0.3406
$ 63,550-132,600 $105,950-161,450 37.42 4.79 6.39 7.99 9.59 11.19 12.78 0.31 0.093000 0.3742
$132,600-288,350 $161,450-288,350 41.95 5.17 6.89 8.61 10.34 12.06 13.78 0.36 0.093000 0.4195
$288,350 & Over $288,350 & Over 45.22 5.48 7.30 9.13 10.95 12.78 14.60 0.396 0.093000 0.4522
* Net amount subject to Federal and California personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and California rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
GEORGIA -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ----------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 19.48% 3.73% 4.97% 6.21% 7.45% 8.69% 9.94% 0.15 0.052762 0.1948
$ 0- 43,850 19.60 3.73 4.98 6.22 7.46 8.71 9.95 0.15 0.054070 0.1960
$ 26,250- 63,550 $ 43,850-105,950 32.32 4.43 5.91 7.39 8.87 10.34 11.82 0.28 0.060000 0.3232
$ 63,550-132,600 $105,950-161,450 35.14 4.63 6.17 7.71 9.25 10.79 12.33 0.31 0.060000 0.3514
$132,600-288,350 $161,450-288,350 39.84 4.99 6.65 8.31 9.97 11.64 13.30 0.36 0.060000 0.3984
$288,350 & Over $288,350 & Over 43.22 5.28 7.04 8.81 10.57 12.33 14.09 0.396 0.060000 0.4322
* Net amount subject to Federal and Georgia personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Georgia rate assumes itemization of state tax deduction.
MARYLAND -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ----------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 18.94% 3.70% 4.93% 6.17% 7.40% 8.64% 9.87% 0.15 0.046385 0.1894
$ 0- 43,850 19.01 3.70 4.94 6.17 7.41 8.64 9.88 0.15 0.047234 0.1901
$ 26,250- 63,550 $ 43,850-105,950 31.49 4.38 5.84 7.30 8.76 10.22 11.68 0.28 0.048500 0.3149
$ 63,550-132,600 $105,950-161,450 34.35 4.57 6.09 7.62 9.14 10.66 12.19 0.31 0.048500 0.3435
$132,600-288,350 $161,450-288,350 39.10 4.93 6.57 8.21 9.85 11.49 13.14 0.36 0.048500 0.3910
$288,350 & Over $288,350 & Over 42.53 5.22 6.96 8.70 10.44 12.18 13.92 0.396 0.048500 0.4253
* Net amount subject to Federal and Maryland personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Though the state rate maxs out at 4.85% for the year 2000, Maryland's counties and the City of Baltimore impose (in
accordance with state statute) piggyback taxes which currently reach a maximum of 3.01% of Maryland taxable income.
Therefore, the maximum combined state and local tax rate in Maryland is 7.86%.
**** Combined Federal and Maryland rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
THE MASSACHUSETTS RATE OF 5.85% IS BASED ON 2000 TAX RATES
MASSACHUSETTS -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
----------------------------------------- INCOME MASSACHUSETTS TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ----------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 $ 0- 43,850 19.97% 3.75% 5.00% 6.25% 7.50% 8.75% 10.00% 0.15 0.058500 0.1997
$ 26,250- 63,550 $ 43,850-105,950 32.21 4.43 5.90 7.38 8.85 10.33 11.80 0.28 0.058500 0.3221
$ 63,550-132,600 $105,950-161,450 35.04 4.62 6.16 7.70 9.24 10.78 12.32 0.31 0.058500 0.3504
$132,600-288,350 $161,450-288,350 39.74 4.98 6.64 8.30 9.96 11.62 13.28 0.36 0.058500 0.3974
$288,350 & Over $288,350 & Over 43.13 5.28 7.03 8.79 10.55 12.31 14.07 0.396 0.058500 0.4313
* Net amount subject to Federal and Massachusetts personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Massachusetts rate assumes itemization of state tax deduction.
MISSISSIPPI -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ----------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 18.76% 3.69% 4.92% 6.15% 7.39% 8.62% 9.85% 0.15 0.044285 0.1876
$ 0- 43,850 18.96 3.70 4.94 6.17 7.40 8.64 9.87 0.15 0.046579 0.1896
$ 26,250- 63,550 $ 43,850-105,950 31.60 4.39 5.85 7.31 8.77 10.23 11.70 0.28 0.050000 0.3160
$ 63,550-132,600 $105,950-161,450 34.45 4.58 6.10 7.63 9.15 10.68 12.20 0.31 0.050000 0.3445
$132,600-288,350 $161,450-288,350 39.20 4.93 6.58 8.22 9.87 11.51 13.16 0.36 0.050000 0.3920
$288,350 & Over $288,350 & Over 42.62 5.23 6.97 8.71 10.46 12.20 13.94 0.396 0.050000 0.4262
* Net amount subject to Federal and Mississippi personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Mississippi rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
NEW YORK STATE RESIDENTS (EXCEPT NEW YORK CITY RESIDENTS) -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ----------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 19.54% 3.73% 4.97% 6.21% 7.45% 8.70% 9.94% 0.15 0.053375 0.1954
$ 0- 43,850 19.28 3.72 4.95 6.19 7.43 8.67 9.91 0.15 0.050392 0.1928
$ 26,250- 63,550 $ 43,850-105,950 32.93 4.47 5.96 7.45 8.95 10.44 11.93 0.28 0.068500 0.3293
$ 63,550-132,600 $105,950-161,450 35.73 4.67 6.22 7.78 9.34 10.89 12.45 0.31 0.068500 0.3573
$132,600-288,350 $161,450-288,350 40.38 5.03 6.71 8.39 10.06 11.74 13.42 0.36 0.068500 0.4038
$288,350 & Over $288,350 & Over 43.74 5.33 7.11 8.89 10.66 12.44 14.22 0.396 0.068500 0.4374
* Net amount subject to Federal and New York personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and New York rate assumes itemization of state tax deduction.
NEW YORK -- NEW YORK CITY RESIDENTS ONLY -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------
TAXABLE INCOME*
------------------------------------ INCOME TAX-EXEMPT YIELD
SINGLE JOINT TAX ------------------------------------------- FEDERAL
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE
----------------- ----------------- -------- ------------------------------------------- ------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 22.40% 3.87% 5.15% 6.44% 7.73% 9.02% 10.31% 0.15
$ 0- 43,850 22.15 3.85 5.14 6.42 7.71 8.99 10.28 0.15
$ 26,250- 63,550 35.63 4.66 6.21 7.77 9.32 10.87 12.43 0.28
$ 43,850-105,950 35.65 4.66 6.22 7.77 9.32 10.88 12.43 0.28
$ 63,550-132,600 38.37 4.87 6.49 8.11 9.74 11.36 12.98 0.31
$105,950-161,450 38.37 4.87 6.49 8.11 9.74 11.36 12.98 0.31
$132,600-288,350 $161,450-288,350 42.83 5.25 7.00 8.75 10.50 12.24 13.99 0.36
$288,350 & Over $288,350 & Over 46.05 5.56 7.41 9.27 11.12 12.97 14.83 0.396
<CAPTION>
----------------------------------------------------------------------------------------
TAXABLE INCOME*
------------------------------------ AVERAGE AVERAGE AVERAGE AVERAGE COMBINED
SINGLE JOINT STATE CITY NYC ADD'L FED. & ST.
2000 2000 RATE RATE SURCHARGE SURCHARGE RATE***
----------------- ----------------- -------- -------- --------- --------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 0.053375 0.029590 0.000000 0.004143 0.2240
$ 0- 43,850 0.050392 0.029620 0.000000 0.004147 0.2215
$ 26,250- 63,550 0.068500 0.032832 0.000000 0.004596 0.3563
$ 43,850-105,950 0.068500 0.033141 0.000000 0.004640 0.3565
$ 63,550-132,600 0.068500 0.033575 0.000000 0.004701 0.3837
$105,950-161,450 0.068500 0.033575 0.000000 0.004701 0.3837
$132,600-288,350 $161,450-288,350 0.068500 0.033575 0.000000 0.004701 0.4283
$288,350 & Over $288,350 & Over 0.068500 0.033575 0.000000 0.004701 0.4605
* Net amount subject to Federal and New York personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and New York rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
NORTH CAROLINA -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ----------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 20.54% 3.78% 5.03% 6.29% 7.55% 8.81% 10.07% 0.15 0.065141 0.2054
$ 0- 43,850 20.54 3.78 5.03 6.29 7.55 8.81 10.07 0.15 0.065153 0.2054
$ 26,250- 63,550 33.09 4.48 5.98 7.47 8.97 10.46 11.96 0.28 0.070714 0.3309
$ 43,850-105,950 33.09 4.48 5.98 7.47 8.97 10.46 11.96 0.28 0.070719 0.3309
$ 63,550-132,600 $105,950-161,450 36.35 4.71 6.28 7.86 9.43 11.00 12.57 0.31 0.775000 0.3635
$132,600-288,350 $161,450-288,350 40.96 5.08 6.78 8.47 10.16 11.86 13.55 0.36 0.775000 0.4096
$288,350 & Over $288,350 & Over 44.28 5.38 7.18 8.97 10.77 12.56 14.36 0.396 0.775000 0.4428
* Net amount subject to Federal and North Carolina personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and North Carolina rate assumes itemization of state tax deduction.
PENNSYLVANIA -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ----------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 $ 0- 43,850 17.38% 3.63% 4.84% 6.05% 7.26% 8.47% 9.68% 0.15 0.028000 0.1738
$ 26,250- 63,550 $ 43,850-105,950 30.02 4.29 5.72 7.14 8.57 10.00 11.43 0.28 0.028000 0.3002
$ 63,550-132,600 $105,950-161,450 32.93 4.47 5.96 7.45 8.95 10.44 11.93 0.31 0.028000 0.3293
$132,600-288,350 $161,450-288,350 37.79 4.82 6.43 8.04 9.64 11.25 12.86 0.36 0.028000 0.3779
$288,350 & Over $288,350 & Over 41.29 5.11 6.81 8.52 10.22 11.92 13.63 0.396 0.028000 0.4129
* Net amount subject to Federal and Pennsylvania personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average rate for the Federal tax bracket.
*** Combined Federal and Pennsylvania rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
SOUTH CAROLINA -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ----------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 19.87% 3.74% 4.99% 6.24% 7.49% 8.74% 9.98% 0.15 0.057239 0.1987
$ 0- 43,850 20.30 3.76 5.02 6.27 7.53 8.78 10.04 0.15 0.062361 0.2030
$ 26,250- 63,550 $ 43,850-105,950 33.04 4.48 5.97 7.47 8.96 10.45 11.95 0.28 0.070000 0.3304
$ 63,550-132,600 $105,950-161,450 35.83 4.68 6.23 7.79 9.35 10.91 12.47 0.31 0.070000 0.3583
$132,600-288,350 $161,450-288,350 40.48 5.04 6.72 8.40 10.08 11.76 13.44 0.36 0.070000 0.4048
$288,350 & Over $288,350 & Over 43.83 5.34 7.12 8.90 10.68 12.46 14.24 0.396 0.070000 0.4383
* Net amount subject to Federal and South Carolina personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and South Carolina rate assumes itemization of state tax deduction.
TENNESSEE -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ----------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 $ 0- 43,850 20.10% 3.75% 5.01% 6.26% 7.51% 8.76% 10.01% 0.15 0.060000 0.2010
$ 26,250- 63,550 $ 43,850-105,950 32.32 4.43 5.91 7.39 8.87 10.34 11.82 0.28 0.060000 0.3232
$ 63,550-132,600 $105,950-161,450 35.14 4.63 6.17 7.71 9.25 10.79 12.33 0.31 0.060000 0.3514
$132,600-288,350 $161,450-288,350 39.84 4.99 6.65 8.31 9.97 11.64 13.30 0.36 0.060000 0.3984
$288,350 & Over $288,350 & Over 43.22 5.28 7.04 8.81 10.57 12.33 14.09 0.396 0.060000 0.4322
* Net amount subject to Federal and Tennessee personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Tennessee rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
VIRGINIA -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ----------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 19.05% 3.71% 4.94% 6.18% 7.41% 8.65% 9.88% 0.15 0.047690 0.1905
$ 0- 43,850 19.39 3.72 4.96 6.20 7.44 8.68 9.92 0.15 0.051627 0.1939
$ 26,250- 63,550 $ 43,850-105,950 32.14 4.42 5.89 7.37 8.84 10.32 11.79 0.28 0.057500 0.3214
$ 63,550-132,600 $105,950-161,450 34.97 4.61 6.15 7.69 9.23 10.76 12.30 0.31 0.057500 0.3497
$132,600-288,350 $161,450-288,350 39.68 4.97 6.63 8.29 9.95 11.60 13.26 0.36 0.057500 0.3968
$288,350 & Over $288,350 & Over 43.07 5.27 7.03 8.78 10.54 12.30 14.05 0.396 0.057500 0.4307
* Net amount subject to Federal and Virginia personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Virginia rate assumes itemization of state tax deduction.
WEST VIRGINIA -- 2000 TAX YEAR
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME*
----------------------------------------- INCOME TAX-EXEMPT YIELD AVERAGE COMBINED
SINGLE JOINT TAX ----------------------------------------------- FEDERAL STATE FED & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ----------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 18.10% 3.66% 4.88% 6.11% 7.33% 8.55% 9.77% 0.15 0.036427 0.1810
$ 0- 43,850 18.50 3.68 4.91 6.13 7.36 8.59 9.82 0.15 0.041185 0.1850
$ 26,250- 63,550 31.96 4.41 5.88 7.35 8.82 10.29 11.76 0.28 0.054946 0.3196
$ 43,850-105,950 32.59 4.45 5.93 7.42 8.90 10.38 11.87 0.28 0.063700 0.3259
$ 63,550-132,600 $105,950-161,450 35.49 4.65 6.20 7.75 9.30 10.85 12.40 0.31 0.065000 0.3549
$132,600-288,350 $161,450-288,350 40.16 5.01 6.68 8.36 10.03 11.70 13.37 0.36 0.065000 0.4016
$288,350 & Over $288,350 & Over 43.53 5.31 7.08 8.85 10.63 12.40 14.17 0.396 0.065000 0.4353
* Net amount subject to Federal and West Virginia personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and West Virginia rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
MFS(R) MUNICIPAL SERIES TRUST
If you want more information about the funds, the following documents are
available free
upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the funds'
actual investments. Annual reports discuss the effect of recent market
conditions and the funds' investment strategy on the funds' performance during
its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated August 1, 2000,
provides more detailed information about the funds and is incorporated into
this prospectus by reference.
YOU CAN GET FREE COPIES OF THE ANNUAL/SEMIANNUAL REPORTS, THE SAI AND OTHER
INFORMATION ABOUT THE FUNDS, AND MAKE INQUIRIES ABOUT THE FUNDS, BY
CONTACTING:
MFS Service Center, Inc.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the funds (including their prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, DC 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 202-942-8090. Reports and other information about
the funds are available on the EDGAR Databases on the Commission's Internet
website at http://www.sec.gov, and copies of this information may be obtained,
upon payment of a duplicating fee, by electronic request at the following e-
mail address: [email protected], or by writing the Public Reference Section
at the above address.
The funds' Investment Company Act file number is 811-4096.
MST-1 7/00 105M
<PAGE>
[logo] M F S(R) STATEMENT OF ADDITIONAL
INVESTMENT MANAGEMENT INFORMATION
We invented the mutual fund(R)
AUGUST 1, 2000
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, 2000. 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 7/00 600
<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 ...................................................... 4
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" or the "Distributor" - MFS Fund Distributors, Inc., a Delaware
corporation.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Funds, dated August 1, 2000, 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.
Each Fund and its Adviser and Distributor have adopted a code of ethics
as required under the Investment Company Act of 1940 (the "1940 Act").
Subject to certain conditions and restrictions, this code permits personnel
subject to the code to invest in securities for their own accounts,
including securities that may be purchased, held or sold by the Fund.
Securities transactions by some of these persons may be subject to prior
approval of the Adviser's Compliance Department. Securities transactions of
certain personnel are subject to quarterly reporting and review
requirements. The code is on public file with, and is available from, the
Securities and Exchange Commission (the "SEC"). See the back cover of the
prospectus for information on obtaining a copy.
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 $43,800
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. In the event of a violation
of the non-fundamental investment policy on illiquid securities, a Fund
will reduce the percentage of its assets invested in the illiquid
investments in due course, taking into account the best interests of
shareholders.
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, 2000, the Statement of Operations for the year
ended March 31, 2000, the Statement of Changes in Net Assets for the two
years ended March 31, 2000, 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
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 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: 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: Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc.
(investment advisers), Director
Address: 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: Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists),
President; Wellfleet Investments (investor in health care
companies), Managing General Partner (since 1993)
Address: Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994);
Sundstrand Corporation (diversified mechanical
manufacturer), Director
Address: Hunting Valley, Ohio
OFFICERS
JAMES O. YOST,* 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 Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary and Assistant Clerk
(born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and
Associate General Counsel
----------------
*"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.
<PAGE>
-------------------
PART I - APPENDIX B
-------------------
TRUSTEE COMPENSATION
Each Fund pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, who currently receive from each Fund a
fee of $833 per year plus $67 per meeting and $67 per committee meeting
attended, together with such Trustee's out-of-pocket expenses. In addition,
the Trust has a retirement plan for these Trustees as described under the
caption "Management of the Funds -- Trustee Retirement Plan" in Part II.
The Retirement Age under the plan is 75.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLES
...................................................................................................................
ALABAMA FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marshall N. Cohan $1,633 $839 12 $149,167
Lawrence H. Cohn 1,524 461 18 142,207
Sir J. David Gibbons 1,500 761 12 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,657 608 9 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 1,709 561 20 155,992
Ward Smith 1,642 631 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the MFS
fund complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
...............................................................................
YEARS OF SERVICE
AVERAGE --------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- --------------------------------------------------------
$1,290 $193 $322 $451 $645
1,408 211 352 493 704
1,526 229 381 534 763
1,644 247 411 575 822
1,762 264 440 617 881
1,880 282 470 658 940
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
<TABLE>
<CAPTION>
<PAGE>
....................................................................................................................
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>
Marshall N. Cohan $1,633 $671 10 $149,167
Lawrence H. Cohn 1,535 468 18 142,207
Sir J. David Gibbons 1,500 609 10 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,668 617 9 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 1,713 563 20 155,992
Ward Smith 1,646 634 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the
MFS fund complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..............................................................................
YEARS OF SERVICE
AVERAGE ---------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- ---------------------------------------------------------
$1,290 $193 $322 $451 $645
1,409 211 352 493 704
1,528 229 382 535 764
1,646 247 412 576 823
1,765 265 441 618 883
1,884 283 471 660 942
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
<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>
Marshall N. Cohan $1,633 $ 839 14 $149,167
Lawrence H. Cohn 1,579 487 18 142,207
Sir J. David Gibbons 1,500 761 13 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,712 912 17 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 1,729 569 20 155,992
Ward Smith 1,662 641 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..............................................................................
YEARS OF SERVICE
AVERAGE --------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- --------------------------------------------------------
$1,290 $193 $322 $451 $645
1,412 212 353 494 706
1,535 230 384 537 767
1,657 249 414 580 829
1,779 267 445 623 890
1,902 285 475 666 951
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
<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>
Marshall N. Cohan $1,633 $671 10 $149,167
Lawrence H. Cohn 1,526 463 18 142,207
Sir J. David Gibbons 1,500 609 10 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,659 610 9 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 1,710 561 20 155,992
Ward Smith 1,643 631 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..............................................................................
YEARS OF SERVICE
AVERAGE ---------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- ---------------------------------------------------------
$1,290 $193 $322 $451 $645
1,408 211 352 493 704
1,526 229 382 534 763
1,644 247 411 576 822
1,763 264 441 617 881
1,881 282 470 658 941
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
<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>
Marshall N. Cohan $1,633 $839 14 $149,167
Lawrence H. Cohn 1,519 460 18 142,207
Sir J. David Gibbons 1,500 761 13 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,652 866 14 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 1,707 560 20 155,992
Ward Smith 1,640 630 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..............................................................................
YEARS OF SERVICE
AVERAGE --------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- --------------------------------------------------------
$1,290 $193 $322 $451 $645
1,407 211 352 493 704
1,525 229 381 534 762
1,643 246 411 575 821
1,760 264 440 616 880
1,878 282 469 657 939
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
<PAGE>
<TABLE>
<CAPTION>
.......................................................................................................................
MARYLAND FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marshall N. Cohan $1,633 $839 14 $149,167
Lawrence H. Cohn 1,542 470 18 142,207
Sir J. David Gibbons 1,500 761 13 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,675 884 17 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 1,715 564 20 155,992
Ward Smith 1,648 634 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..............................................................................
YEARS OF SERVICE
AVERAGE ---------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- ---------------------------------------------------------
$1,290 $193 $322 $451 $645
1,409 211 352 493 705
1,528 229 382 535 764
1,648 247 412 577 824
1,767 265 442 618 884
1,887 283 472 660 943
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
<PAGE>
<TABLE>
<CAPTION>
.......................................................................................................................
MASSACHUSETTS FUND RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marshall N. Cohan $1,633 $839 17 $149,167
Lawrence H. Cohn 1,569 485 18 142,207
Sir J. David Gibbons 1,500 761 13 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,703 908 17 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 1,726 569 20 155,992
Ward Smith 1,659 640 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..............................................................................
YEARS OF SERVICE
AVERAGE --------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- --------------------------------------------------------
$1,290 $193 $322 $451 $ 645
1,411 212 353 494 706
1,533 230 383 537 767
1,655 248 414 579 828
1,777 267 444 622 888
1,899 285 475 665 949
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
<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>
Marshall N. Cohan $1,633 $587 9 $149,167
Lawrence H. Cohn 1,521 460 18 142,207
Sir J. David Gibbons 1,500 533 9 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,654 607 9 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 1,709 560 20 155,992
Ward Smith 1,642 630 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..............................................................................
YEARS OF SERVICE
AVERAGE --------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- --------------------------------------------------------
$1,290 $193 $322 $451 $645
1,408 211 352 493 704
1,526 229 381 534 763
1,644 247 411 575 822
1,762 264 440 617 881
1,880 282 470 658 940
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
<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>
Marshall N. Cohan $1,633 $839 14 $149,167
Lawrence H. Cohn 1,538 469 18 142,207
Sir J. David Gibbons 1,500 761 13 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,671 882 14 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 1,714 563 20 155,992
Ward Smith 1,647 634 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..............................................................................
YEARS OF SERVICE
AVERAGE ---------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- ---------------------------------------------------------
$1,290 $193 $322 $451 $645
1,409 211 352 493 704
1,528 229 382 535 764
1,647 247 412 576 824
1,766 265 442 618 883
1,885 283 471 660 943
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
<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>
Marshall N. Cohan $1,633 $839 14 $149,167
Lawrence H. Cohn 1,612 508 18 142,207
Sir J. David Gibbons 1,500 761 13 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,746 947 17 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 1,741 577 20 155,992
Ward Smith 1,674 649 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..............................................................................
YEARS OF SERVICE
AVERAGE --------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- --------------------------------------------------------
$1,290 $193 $322 $451 $645
1,416 212 354 496 708
1,542 231 386 540 771
1,668 250 417 584 834
1,794 269 449 628 897
1,921 288 480 672 960
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
<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>
Marshall N. Cohan $1,633 $587 9 $149,167
Lawrence H. Cohn 1,506 456 18 142,207
Sir J. David Gibbons 1,500 533 9 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,639 601 9 156,082
Arnold D. Scott 0 N/A N/A 0
Jeffrey L. Shames 0 N/A N/A 0
J. Dale Sherratt 1,705 558 20 155,992
Ward Smith 1,638 628 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..............................................................................
YEARS OF SERVICE
AVERAGE --------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- --------------------------------------------------------
$1,290 $194 $323 $452 $645
1,407 211 352 492 704
1,524 229 381 533 762
1,641 246 410 574 821
1,758 264 440 615 879
1,876 281 469 656 938
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
<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>
Marshall N. Cohan $1,633 $839 14 $149,167
Lawrence H. Cohn 1,547 474 18 142,207
Sir J. David Gibbons 1,500 761 13 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,680 890 17 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 1,717 565 20 155,992
Ward Smith 1,650 636 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..............................................................................
YEARS OF SERVICE
AVERAGE --------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- --------------------------------------------------------
$1,290 $194 $323 $452 $645
1,410 211 352 493 705
1,530 229 382 535 765
1,649 247 412 577 825
1,769 265 442 619 885
1,889 283 472 661 944
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
<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>
Marshall N. Cohan $1,433 $839 13 $149,167
Lawrence H. Cohn 1,538 467 18 142,207
Sir J. David Gibbons 1,500 761 13 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,671 879 13 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 1,713 562 20 155,992
Ward Smith 1,646 633 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..............................................................................
YEARS OF SERVICE
AVERAGE ---------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- ---------------------------------------------------------
$1,290 $193 $322 $451 $645
1,409 211 352 493 704
1,528 229 382 535 764
1,646 247 412 576 823
1,765 265 441 618 883
1,884 283 471 660 942
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
<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>
Marshall N. Cohan $1,633 $839 14 $149,167
Lawrence H. Cohn 1,606 505 18 142,207
Sir J. David Gibbons 1,500 761 13 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,739 941 17 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 1,738 576 20 155,992
Ward Smith 1,671 648 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..........................................................................
YEARS OF SERVICE
AVERAGE --------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- --------------------------------------------------------
$1,290 $193 $322 $451 $645
1,414 212 354 495 707
1,539 231 385 539 769
1,664 250 416 582 832
1,788 268 447 626 894
1,913 287 478 670 956
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
<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>
Marshall N. Cohan $1,633 $839 14 $149,167
Lawrence H. Cohn 1,539 470 18 142,207
Sir J. David Gibbons 1,500 761 13 135,292
Abby M. O'Neill 1,433 533 10 135,292
Walter E. Robb, III 1,673 883 17 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 1,714 563 20 155,992
Ward Smith 1,647 634 13 149,167
----------------
(1) For the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the MFS fund
complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..............................................................................
YEARS OF SERVICE
AVERAGE --------------------------------------------------------
TRUSTEES FEES 3 5 7 10 OR MORE
----------------- --------------------------------------------------------
$1,290 $193 $332 $451 $645
1,409 211 352 493 704
1,528 229 382 535 764
1,647 247 412 576 824
1,776 265 442 618 883
1,885 283 472 660 943
----------------
(4) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
<PAGE>
PART I - APPENDIX C
AFFILIATED SERVICE PROVIDER COMPENSATION
...............................................................................
Each Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC 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, 2000 Alabama Fund ......... $ 310,471 $154,290 $10,962 $ 84,661 $ 406,094
Arkansas Fund ........ 460,834 228,603 16,251 125,367 602,452
California Fund ...... 564,832 988,734 36,633 282,416 883,881
Florida Fund ......... 335,536 166,138 11,835 91,223 438,594
Georgia Fund ......... 245,098 121,633 8,630 66,688 320,416
Maryland Fund ........ 551,009 273,437 19,445 149,921 720,375
Massachusetts Fund ... 913,613 453,353 32,196 248,573 1,194,382
Mississippi Fund ..... 285,271 142,465 10,032 77,789 373,092
New York Fund ........ 492,970 244,146 17,369 134,032 644,371
North Carolina Fund .. 1,466,927 727,042 51,781 398,955 1,917,663
Pennsylvania Fund .... 165,829 82,459 5,857 45,174 216,860
South Carolina Fund .. 609,767 301,632 21,540 165,726 797,033
Tennessee Fund ....... 481,718 238,450 17,041 130,957 629,716
Virginia Fund ........ 1,376,483 681,496 48,622 374,221 1,799,326
West Virginia Fund ... 515,889 255,839 18,204 140,333 674,426
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 1,463,144
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
</TABLE>
<PAGE>
PART I - APPENDIX D
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
<TABLE>
<CAPTION>
SALES CHARGES
.......................................................................................................................
The following sales charges were paid during the specified periods:
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END FUND TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 2000 Alabama Fund ........ $ 88,469 $ 17,063 $ 71,406 $ 0 $ 53,709 N/A
Arkansas Fund ....... 124,270 22,313 101,957 0 36,185 N/A
California Fund ..... 437,121 53,828 383,293 11,599 149,300 $ 7,727
Florida Fund ........ 127,006 22,597 104,409 9,433 80,799 N/A
Georgia Fund ........ 47,920 8,538 39,382 0 28,795 N/A
Maryland Fund ....... 191,662 34,078 157,584 855 81,284 N/A
Massachusetts Fund .. 254,689 46,975 207,714 9,382 100,946 N/A
Mississippi Fund .... 155,804 24,499 131,305 0 10,638 N/A
New York Fund ....... 162,948 19,734 143,214 0 73,574 N/A
North Carolina Fund . 402,815 75,154 327,661 231 110,362 6,051
Pennsylvania Fund ... 115,708 18,639 97,069 0 55,487 N/A
South Carolina Fund . 133,572 24,007 109,565 3,023 99,310 N/A
Tennessee Fund ...... 123,248 23,888 99,360 9,417 86,595 N/A
Virginia Fund ....... 355,331 64,808 290,523 0 90,561 14,021
West Virginia Fund .. 201,554 35,581 165,973 0 65,282 N/A
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
</TABLE>
<PAGE>
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, 2000, 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
------------------------------------------------------------------------------
Alabama Fund Class A ...... $ 182,249 $ 7,400 $ 174,849
Alabama Fund Class B ...... 116,222 87,967 28,255
Arkansas Fund Class A ..... 115,546 4,945 110,601
Arkansas Fund Class B ..... 98,071 74,304 23,767
California Fund Class A ... 209,900 9,467 200,433
California Fund Class B ... 567,787 467,068 100,719
California Fund Class C ... 104,198 0 104,198
Florida Fund Class A ...... 0 0 0
Florida Fund Class B ...... 168,417 158,889 9,528
Georgia Fund Class A ...... 129,460 4,838 124,622
Georgia Fund Class B ...... 149,039 113,716 35,323
Maryland Fund Class A ..... 425,884 140,853 285,031
Maryland Fund Class B ..... 282,403 213,554 68,849
Massachusetts Fund Class A 779,222 293,685 485,537
Massachusetts Fund Class B 259,385 195,740 63,645
Mississippi Fund Class A .. 0 0 0
Mississippi Fund Class B .. 89,854 84,160 5,694
New York Fund Class A ..... 268,576 13,484 255,092
New York Fund Class B ..... 266,025 204,177 61,848
North Carolina Fund Class A 1,166,278 359,353 806,925
North Carolina Fund Class B 512,180 389,074 123,106
North Carolina Fund Class C 145,144 94 145,050
Pennsylvania Fund Class A . 0 0 0
Pennsylvania Fund Class B . 176,371 163,293 13,078
South Carolina Fund Class A 460,527 140,364 320,163
South Carolina Fund Class B 341,465 259,895 81,570
Tennessee Fund Class A .... 379,153 117,489 261,664
Tennessee Fund Class B .... 226,275 171,469 54,806
Virginia Fund Class A ..... 1,175,288 359,866 815,422
Virginia Fund Class B ..... 328,446 249,120 79,326
Virginia Fund Class C ..... 55,789 1 55,788
West Virginia Fund Class A 435,334 134,582 300,752
West Virginia Fund Class B 159,524 121,458 38,066
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 each Fund during the
specified time periods:
BROKERAGE COMMISSIONS
FISCAL YEAR END FUND PAID BY FUND
---------------------------------------------------------------------
March 31, 2000 None
March 31, 1999 None
March 31, 1998 None
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
..........................................................................
During the fiscal year ended March 31, 2000, the Funds purchased securities
issued by the following regular broker-dealer of the Funds, which had the
following value as of March 31, 2000:
VALUE OF SECURITIES
BROKER-DEALER AS OF MARCH 31, 2000
----------------------------------------------------------------------
None
<PAGE>
-------------------
PART I - APPENDIX F
-------------------
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of June 30, 2000, 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 June 30,
2000, and are therefore presumed to control the Fund:
JURISDICTION OF
ORGANIZATION PERCENTAGE
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) OWNERSHIP
-------------------------------------------------------------------------------
None
5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any class
of the Funds' shares as of June 30, 2000:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTOR OWNERSHIP FUND PERCENTAGE
.......................................................................................................................
<S> <C> <C>
Merrill Lynch, Pierce Fenner & Smith, Inc. Alabama Fund -- Class A 18.17%
(For the Sole Benefit of its Customers) Alabama Fund -- Class B 29.10%
4800 Deer Lake Drive East Arkansas Fund -- Class A 11.63%
Jacksonville, FL 32246 Arkansas Fund -- Class B 22.52%
California Fund -- Class A 8.14%
California Fund -- Class B 16.44%
California Fund -- Class C 31.94%
Florida Fund -- Class A 13.03%
Florida Fund -- Class B 20.09%
Georgia Fund -- Class A 7.68%
Georgia Fund -- Class B 25.95%
Maryland Fund -- Class A 8.02%
Maryland Fund -- Class B 8.14%
Massachusetts Fund -- Class A 13.45%
Massachusetts Fund -- Class B 11.31%
Mississippi Fund -- Class A 12.84%
Mississippi Fund -- Class B 24.44%
New York Fund -- Class A 9.40%
New York Fund -- Class B 14.31%
North Carolina Fund -- Class B 5.40%
North Carolina Fund -- Class C 8.37%
Pennsylvania Fund -- Class B 18.98%
South Carolina Fund -- Class A 6.10%
South Carolina Fund -- Class B 12.56%
Tennessee Fund -- Class A 9.26%
Tennessee Fund -- Class B 16.76%
Virginia Fund -- Class A 7.63%
Virginia Fund -- Class B 24.10%
Virginia Fund -- Class C 12.80%
West Virginia Fund -- Class B 5.22%
.......................................................................................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTOR OWNERSHIP FUND PERCENTAGE
.......................................................................................................................
<S> <C> <C>
W. G. McCord Alabama Fund -- Class A 5.37%
Warrior, AL
.......................................................................................................................
Cora B. Ledgerwood Arkansas Fund -- Class B 5.47%
Cherokee Village, AR
.......................................................................................................................
Bob D. Ledgerwood Arkansas Fund -- Class B 5.47%
Cherokee Village, AR
.......................................................................................................................
Lehman Brothers, Inc. California Fund -- Class C 7.26%
P.O. Box 29198
Brooklyn, NY 11202
.......................................................................................................................
Brian Jordan & Pamela Jordan Georgia Fund -- Class B 5.95%
Alpharetta, GA
.......................................................................................................................
Wachovia Securities, Inc. Georgia Fund -- Class B 5.13%
P.O. Box 1220
Charlotte, NC 28201
.......................................................................................................................
Salomon Smith Barney Inc. Tennessee Fund -- Class A 7.15%
333 West 34th Street
New York, NY 10001
.......................................................................................................................
Martha S. Scott Virginia Fund -- Class C 8.02%
Springfield, VA 22150
.......................................................................................................................
J.C. Bradford & Co., Custodian Virginia Fund -- Class C 6.02%
Gerald Stahr
330 Commerce Street
Nashville, TN 37201
.......................................................................................................................
Dean Witter for the Benefit of Virginia Fund -- Class C 5.65%
L. J. Marhoefer
P.O. Box 250
New York, NY 10008
.......................................................................................................................
</TABLE>
<PAGE>
-------------------
PART I - APPENDIX G
-------------------
PERFORMANCE INFORMATION
..............................................................................
All performance quotations are as of March 31, 2000.
<TABLE>
<CAPTION>
AVERAGE ANNUAL ACTUAL
TOTAL RETURNS ACTUAL TAX EQUIVALENT TAX EQUIVALENT
------------------------- 30-DAY 30-DAY 30-DAY YIELD 30-DAY YIELD
10 YEAR YIELD YIELD (INCLUDING (WITHOUT
OR (INCLUDING (WITHOUT ANY WAIVERS) ANY WAIVERS) CURRENT
LIFE OF ANY ANY ---------------------------------------- DISTRIBUTION
FUND 1 YEAR 5 YEAR FUND(1) WAIVERS) WAIVERS) TAX BRACKETS: TAX BRACKETS: RATE
------------------- ------ ------ ------- ---------- --------- -------------- ------------------ -------------
28% 31% 28% 31%
----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama Fund Class
A, with initial
sales charge
(4.75%) ........... (5.53)% 4.30% 6.19% 4.97% 4.78% 6.90% 7.20% 6.64% 6.93% 5.14%
Alabama Fund
Class A, at
net asset
value ............. (0.82) 5.32 6.71 N/A N/A N/A N/A N/A N/A N/A
Alabama Fund Class
B, with CDSC
(declining over 6
years from 4% to
0%) ............... (5.28) 4.18 6.16 N/A N/A N/A N/A N/A N/A N/A
Alabama Fund Class
B, at net asset
value ............. (1.56) 4.51 6.16 4.49 4.29 6.24 6.51 5.96 6.22 4.65
Arkansas Fund Class
A, with initial
sales charge
(4.75%) ........... (4.97) 4.03 4.97 5.24 5.05 7.28 7.59 7.01 7.32 4.94
Arkansas Fund Class
A, at net asset
value ............. (0.24) 5.04 5.60 N/A N/A N/A N/A N/A N/A N/A
Arkansas Fund Class
B, with CDSC
(declining over 6
years from 4% to
0%) ............... (4,82) 3.92 4.88 N/A N/A N/A N/A N/A N/A N/A
Arkansas Fund Class
B, at net asset
value ............. (1.02) 4.26 4.88 4.62 4.42 6.42 6.70 6.14 6.41 4.29
California Fund
Class A, with
initial sales
charge (4.75%) .... (6.09) 4.71 6.16 5.01 4.67 6.96 7.26 6.49 6.77 4.99
California Fund
Class A, at net
asset value ....... (1.41) 5.73 6.68 N/A N/A N/A N/A N/A N/A N/A
California Fund
Class B, with
CDSC (declining
over 6 years from
4% to 0%) ......... (5.96) 4.52 6.06 N/A N/A N/A N/A N/A N/A N/A
California Fund
Class B, at net
asset value ....... (2.21) 4.86 6.06 4.44 4.09 6.17 6.43 5.68 5.93 4.41
California Fund
Class C, with CDSC
(1% for first year) (3.23) 4.70 6.03 N/A N/A N/A N/A N/A N/A N/A
California Fund
Class C, at net
asset value ....... (2.29) 4.70 6.03 4.38 4.02 6.08 6.35 5.58 5.83 4.32
Florida Fund Class
A, with initial
sales charge
(4.75%) ........... (6.06) 3.96 5.03 5.22 5.03 7.25 7.57 6.99 7.29 5.11
Florida Fund Class
A, at net asset
value ............. (1.38) 4.98 5.66 N/A N/A N/A N/A N/A N/A N/A
Florida Fund Class
B, with CDSC
(declining over 6
years from 4% to
0%) ............... (5.82) 3.78 4.91 N/A N/A N/A N/A N/A N/A N/A
Florida Fund Class
B, at net asset
value ............. (2.07) 4.12 4.91 4.69 4.49 6.51 6.80 6.24 6.51 4.56
Georgia Fund Class
A, with initial
sales charge (4.75%) (6.01) 4.02 5.76 5.20 5.01 7.22 7.54 6.96 7.26 4.83
Georgia Fund Class
A, at net asset
value ............. (1.32) 5.03 6.27 N/A N/A N/A N/A N/A N/A N/A
Georgia Fund Class
B, with CDSC
(declining over 6
years from 4% to
0%) ............... (5.81) 3.89 5.74 N/A N/A N/A N/A N/A N/A N/A
Georgia Fund Class
B, at net asset
value ............. (2.06) 4.23 5.74 4.70 4.50 6.53 6.81 6.25 6.52 4.31
Maryland Fund Class
A, with initial
sales charge (4.75%) (5.96) 3.75 5.29 4.85 4.66 6.74 7.03 6.47 6.75 4.71
Maryland Fund Class
A, at net asset
value ............. (1.27) 4.76 5.81 N/A N/A N/A N/A N/A N/A N/A
Maryland Fund Class
B, with CDSC
(declining over 6
years from 4% to
0%) ............... (5.59) 3.74 5.34 N/A N/A N/A N/A N/A N/A N/A
Maryland Fund Class
B, at net asset
value .............. (1.82) 4.08 5.34 4.46 4.25 6.19 6.46 5.90 6.16 4.29
Massachusetts Fund
Class A, with
initial sales charge
(4.75%) ........... (6.25) 3.88 5.74 5.24 5.05 7.28 7.59 7.01 7.32 5.15
Massachusetts Fund
Class A, at net
asset value ....... (1.57) 4.90 6.26 N/A N/A N/A N/A N/A N/A N/A
Massachusetts Fund
Class B, with CDSC
(declining over
6 years from 4% to
0%) ............... (6.03) 3.86 5.78 N/A N/A N/A N/A N/A N/A N/A
Massachusetts Fund
Class B, at net
asset value ....... (2.30) 4.19 5.78 4.86 4.66 6.75 7.04 6.47 6.75 4.76
Mississippi Fund
Class A, with
initial sales charge
(4.75%) ........... (5.31) 4.76 4.66 5.36 5.17 7.44 7.77 7.18 7.49 5.06
Mississippi Fund
Class A, at net
asset value ....... (0.58) 5.78 5.33 N/A N/A N/A N/A N/A N/A N/A
Mississippi Fund
Class B, with CDSC
(declining over 6
years from 4% to
0%) ............... (5,15) 4.60 4.58 N/A N/A N/A N/A N/A N/A N/A
Mississippi Fund
Class B, at net
asset value ....... (1.37) 4.93 4.58 4.83 4.63 6.71 7.00 6.43 6.71 4.51
New York Fund Class
A, with initial
sales charge (4.75%) (5.76) 4.37 6.46 5.11 4.91 7.10 7.41 6.82 7.12 5.02
New York Fund Class
A, at net asset
value ............. (1.06) 5.39 6.98 N/A N/A N/A N/A N/A N/A N/A
New York Fund Class
B, with CDSC
(declining over 6
years from 4% to
0%) ............... (5.65) 4.23 6.42 N/A N/A N/A N/A N/A N/A N/A
New York Fund Class
B, at net asset
value ............. (1.89) 4.56 6.42 4.62 4.42 6.42 6.70 6.14 6.41 4.52
North Carolina Fund
Class A, with
initial sales
charge (4.75%) .... (6.34)% 3.93% 5.41% 4.94% 4.75% 6.86% 7.16% 6.60% 6.88% 4.95%
North Carolina Fund
Class A, at net
asset value ....... (1.67) 4.95 5.92 N/A N/A N/A N/A N/A N/A N/A
North Carolina Fund
Class B, with CDSC
(declining over
6 years from 4% to
0%) ............... (5.97) 3.91 5.45 N/A N/A N/A N/A N/A N/A N/A
North Carolina Fund
Class B, at net
asset value ....... (2.22) 4.24 5.45 4.54 4.33 6.31 6.58 6.01 6.28 4.55
North Carolina Fund
Class C, with CDSC
(1% for first year) (3.16) 4.29 5.48 N/A N/A N/A N/A N/A N/A N/A
North Carolina Fund
Class C, at net
asset value ....... (2.22) 4.29 5.48 4.54 4.34 6.31 6.58 6.03 6.29 4.55
Pennsylvania Fund
Class A, with
initial sales
charge (4.75%) .... (5.18) 4.62 4.64 5.29 4.72 7.35 7.67 6.56 6.84 4.99
Pennsylvania Fund
Class A, at net
asset value ....... (0.45) 5.64 5.35 N/A N/A N/A N/A N/A N/A N/A
Pennsylvania Fund
Class B, with CDSC
(declining over
6 years from 4% to
0%) ............... (5.03) 4.51 4.57 N/A N/A N/A N/A N/A N/A N/A
Pennsylvania Fund
Class B, at net
asset value ....... (1.25) 4.84 4.57 4.76 4.16 6.61 6.90 5.78 6.03 4.43
South Carolina Fund
Class A, with
initial sales
charge (4.75%) .... (6.91) 3.57 5.48 4.97 4.77 6.90 7.20 6.63 6.91 4.79
South Carolina Fund
Class A, at net
asset value ....... (2.27) 4.58 5.99 N/A N/A N/A N/A N/A N/A N/A
South Carolina Fund
Class B, with CDSC
(declining over
6 years from 4% to
0%) ............... (6.53) 3.55 5.52 N/A N/A N/A N/A N/A N/A N/A
South Carolina Fund
Class B, at net
asset value ....... (2.82) 3.88 5.52 4.57 4.36 6.35 6.62 6.06 6.32 4.37
Tennessee Fund Class
A, with initial
sales charge (4.75%) (6.42) 3.96 5.59 4.78 4.59 6.64 6.93 6.38 6.65 4.76
Tennessee Fund Class
A, at net asset
value ............. (1.75) 4.98 6.11 N/A N/A N/A N/A N/A N/A N/A
Tennessee Fund Class
B, with CDSC
(declining over 6
years from 4% to
0%) ............... (6.11) 3.94 5.62 N/A N/A N/A N/A N/A N/A N/A
Tennessee Fund Class
B, at net asset
value ............. (2.39) 4.28 5.62 4.38 4.18 6.08 6.35 5.81 6.06 4.35
Virginia Fund Class
A, with initial
sales charge (4.75%) (5.79) 3.81 5.39 4.89 4.69 6.79 7.09 6.51 6.80 4.92
Virginia Fund Class
A, at net asset
value ............. (1.09) 4.82 5.90 N/A N/A N/A N/A N/A N/A N/A
Virginia Fund Class
B, with CDSC
(declining over 6
years from 4% to
0%) ............... (5.49) 3.80 5.43 N/A N/A N/A N/A N/A N/A N/A
Virginia Fund Class
B, at net asset value (1.73) 4.14 5.43 4.53 4.33 6.29 6.57 6.01 6.28 4.52
Virginia Fund Class
C, with CDSC (1% for
first year) ....... (2.67) 4.18 5.46 N/A N/A N/A N/A N/A N/A N/A
Virginia Fund Class
C, at net asset
value ............. (1.73) 4.18 5.46 4.52 4.32 6.28 6.55 6.00 6.26 4.52
West Virginia Fund
Class A, with
initial sales
charge (4.75%) .... (6.55) 3.73 5.59 5.03 4.84 6.99 7.29 6.72 7.01 5.04
West Virginia Fund
Class A, at net
asset value ....... (1.89) 4.74 6.11 N/A N/A N/A N/A N/A N/A N/A
West Virginia Fund
Class B, with CDSC
(declining over
6 years from 4% to
0%) ............... (6.25) 3.69 5.62 N/A N/A N/A N/A N/A N/A N/A
West Virginia Fund
Class B, at net
asset value ....... (2.53) 4.02 5.62 4.63 4.43 6.43 6.71 6.15 6.42 4.64
----------------
(1) For the period from the inception of Class A shares to March 31, 2000, or for the 10 years ended March 31, 2000, whichever is
shorter, as noted below:
</TABLE>
<PAGE>
FUND PERIOD
Alabama ................................ 10 years
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
Performance results include any applicable expense subsidies and waivers, which
may cause the results to be more favorable.
<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 SAI, and do not purport to be complete
descriptions. The Adviser and its counsel have not independently verified
any of the information contained in official statements or other publicly
available documents and have not expressed any opinion regarding the
completeness or materiality of such information. 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
Among the leading manufacturing industries in Alabama 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 Alabama Development Office (ADO) reports as of December 31, 1999, that
for the fourteenth consecutive year more than $2 billion in capital
investment was announced for new and expanding industries. The State had
more than $3.2 billion in 1999, $2.0 billion in 1998, $2.7 billion in 1997,
$2.6 billion in 1996, and $3.8 billion in 1995. These investments include
20,252 announced jobs by 593 companies in 1999; 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. Major investments in 1999 included Honda ($400 million)
and Navistar ($200 million). Other large investments during the 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); IPSCO Steel ($395 million); Amoco Chemicals
($350 million); EXXON Company, USA ($300 million); Mead Containerboard ($224
million); McNeil Specialty Products, Inc. ($180 million); Courtaulds Fibers,
Inc. ($170 million); USS Fairfield Works ($150 million); and Worthington
Industries ($150 million).
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.
The Alabama legislature passed Act No. 665, Ala. Acts 1999, which purports
to solve prospectively the Commerce Clause problem with Alabama's franchise
tax. On January 7, 2000, the Alabama Supreme Court remanded the case to the
Circuit Court to augment the evidentiary record regarding the amount of
refunds, if any. The opinion states that in order to fashion a remedy that
complies with the Constitution and the holdings of the United States Supreme
Court, more evidence is required. Upon the completion of the evidentiary
record the Court will establish a briefing schedule so that the parties can
address new issues presented by that record.
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 1999 averaged 4.5%,
compared to a national rate of 4.2%.
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, the Budget Stabilization
Trust Fund, which receives one-half of interest earnings from the investment
of the State's daily Treasury balance, 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 some
lingering concerns about California's creditworthiness. Major rating
agencies often cite, among other things, concerns about California's 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 updated actual revenue and forecasts on June 23, 2000, in
order to support the state's budgeting and planning process. For fiscal year
1999-2000, the estimated General Revenue Fund and Working Capital Fund is
reported to be $19.8 billion. The projected year end balance of the combined
General Revenue Fund and the Working Capital Fund is $948.3 million.
Including the projected $847.0 million balance in the Budget Stabilization
Fund, total reserves are projected to stand at $1.795 billion, or 9.5% of
current year appropriations. For fiscal year 2000-2001, the estimated
General Revenue Fund and Working Capital fund is $20.51 billion, a 3.5%
increase over fiscal year 1999-2000. The fiscal year 2000-01 budget includes
a 5.3% increase in Net General Revenue over fiscal year 1999-2000. For
fiscal year 1999-2000, the estimated Florida and United States unemployment
rates are 3.8% and 4.1%, respectively. For fiscal year 2000-01, the
estimated Florida and United States unemployment rates are 4.1% and 4.2%,
respectively.
In 1993, the State constitution was amended to limit the annual growth in
the assessed valuation of residential property. This amendment may, over
time, constrain the growth in property taxes, a major revenue source for
local governments. While no immediate ratings implications are expected, the
amendment could have a negative impact on the financial performance of local
governments over time and lead to ratings revisions which may have a
negative impact on the prices of affected bonds.
General obligations of Florida have been rated AA2, AA+ and AA by Moody's,
S&P and Fitch, respectively. S&P presently regards the outlook for the State
as stable.
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, the number of tourists
visiting Florida was 48.8 million, a 0.2% increase over fiscal year 1997-98.
For fiscal year 1999-2000, expected tourist arrivals are projected at 51.2
million, a 4.9% increase over fiscal year 1998-99. For fiscal year 2000-01,
expected tourist arrivals are projected at 52.6 million, a 2.7% increase
over fiscal year 1999-2000.
There has been a decline in Florida's dependency on highly cyclical
construction and construction-related manufacturing sectors. For example,
for fiscal year 1985-86, construction employment, as a share of total
non-farm employment, was 7.5%. From fiscal year 1990-91 through fiscal year
1995-96, the share edged downward to an average of 5.1%. While the share for
fiscal year 1999-2000 is expected to slightly increase to 5.2%, the trend is
expected to resume a downward slope and drop below the 5% level by fiscal
year 2001-02, 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 June 2000, 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 $5,140,585,000 and the highest aggregate annual
payment for such debt equalled 5.06% of fiscal year 1999 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 1999 showed an increase of 8.5% over
collections for the similar period in the previous fiscal year.
Based on data of the Georgia Department of Revenue for fiscal year 1999,
income tax receipts and sales tax receipts of the State for fiscal year 1999
comprised approximately 48.1% and 31.7%, respectively, of the total State
tax revenues.
The unemployment rate of the civilian labor force in the State as of March
2000 was 3.4% 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 June 2000 of certain of such lawsuits which could have a
significant impact on the State's financial position are summarized below.
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.
Age International, Inc. v. State (two cases), Fulton Superior Court Civil
Action No. E-3793 and Fulton Superior Court Civil Action No.
E-25073. These two cases are suits for refund seeking about $153,000,000,
including claimed interest, plus additional interest, for liquor taxes
allegedly paid by out-of-state distillers. Plaintiffs are challenging the
constitutionality of Georgia's import tax on liquor, see Ga. Laws 1985, p.
665 (O.C.G.A. (S) 3-4-60), on Commerce Clause and related grounds.
Georgia's pre-1985 liquor tax statute was held by the U.S. Supreme Court
to violate the Commerce Clause. See James B. Beam Distilling Co. v.
Georgia, 501 U.S. 529 (1991). The trial court granted the State's motions
for summary judgment, and 12 of the 23 claimants have appealed. The total
amount (excluding interest) of the refund claims by the 12 plaintiffs who
did appeal now appears to be about $42,000,000; while the total amount
(excluding interest) of the refund claims by the 11 plaintiffs who did not
appeal, which seem to be conclusively resolved in favor of the State by
virtue of the trial court's judgment, now appears to be about $54,000,000.
The appeal is pending in the Georgia Supreme Court.
DeKalb County, et al. v. State, et al., Fulton Superior Court Civil Action
No. E-67520 (filed March 13, 1998). This suit, against the State of Georgia,
the Department of Revenue, the Governor (in his official capacity), and the
Commissioner of the Department of Revenue (in his personal and official
capacities), alleges improper collection and distribution by the State and
its agencies of the Homestead Option Sales and Use Tax, a local option sales
tax in effect in DeKalb County since July, 1997. DeKalb County's complaint,
as amended, seeks damages of $27.7 million. Subsequently, DeKalb County has
re-estimated its alleged damages variously as $19, $15, and $12 million.
DeKalb County's action was dismissed by the trial court, and this dismissal
was affirmed in part and reversed in part by the Georgia Supreme Court in an
order dated February 22, 1999. The Supreme Court's decision remands to the
trial court the accounting claim on the question of whether the Department
of Revenue made reasonable efforts to identify county tax proceeds that have
been determined by the Department to be unidentifiable to any county.
General Motors Acceptance Corp. v. Jackson, Fulton Super. Ct., C.A. No.
1999CV06252 ("GMAC"); Bank of America, N.A., as successor by merger to
NationsBank, N.A. v. Jackson, Fulton Super. Ct., C.A. No. 1999CV10366;
Chrysler Financial Co. LLC v. Jackson, Fulton Super. Ct., C.A. No.
1999CV10369; SunTrust Bank, Atlanta, et al. v. Jackson, Fulton Super. Ct.,
C.A. No. 1999CV10385; First Union Nat'l Bank v. Jackson, Fulton Super.
Ct., C.A. No. 1999CV12508. These suits by financial institutions seek
refunds of sales taxes, based upon alleged bad debts on installment sales
contracts purchased from Georgia motor vehicle dealers, in the approximate
respective amounts of $300,000, $2,500,000, $2,000,000, $1,400,000, and
$459,000. The total amount (excluding interest) of these and all similar,
pending administrative claims for refund (for the years 1991-1999) is
approximately $37,000,000. The four cases filed after the GMAC case have
been temporarily stayed pending the outcome of the GMAC case. After the
filing of cross-motions for summary judgment in the GMAC case, the
Superior Court ruled in favor of the Defendant State Revenue Commissioner.
GMAC's appeal from the decision of the Superior Court is pending in the
Georgia Court of Appeals.
James Andrew Coleman v. United States of America, et al., Federal District
Court for the District of Columbia Case No. 1:98cv02559. This civil action
was filed against the United States, the "Executive Branch federal
defendant," William Jefferson Clinton, the State of Georgia, the State of
Mississippi, and the State of South of Carolina. As of June 2, 2000, the
State of Georgia has not been legally served. The suit alleges that the
United States government's failure to enforce the purported terms of
surrender ending the Civil War have resulted in the inclusion in the Georgia
state flag of a Confederate battle flag, allegedly in violation of those
terms of surrender. The suit claims that said failure of enforcement
violates various federal constitutional and statutory provisions. The suit
prays for relief in the form of $40 billion in compensatory damages and $40
billion in punitive damages against each named defendant. If the State of
Georgia ever becomes a proper party to the suit through legal service of
process, the State intends to defend vigorously. The State believes it has
good and valid defenses, including but not limited to Eleventh Amendment
immunity.
Niccie McClendon, et. al, v. Georgia Department of Community Health, et al.,
United States District Court for the Northern District of Georgia Case
Number 4:00CV-26:HLM. The complaint in the above-referenced case was filed
on January 26, 2000. Plaintiffs in this case are alleged Medicaid recipients
who have allegedly suffered from smoking related illnesses. They seek to
recover for themselves and others similarly situated a portion of the
tobacco settlement proceeds that they claim is owed to them under Medicaid's
third party liability program. In short, they claim that the proceeds from
the tobacco settlement exceed what is necessary for the State to recoup its
Medicaid expenses and that, under Federal law, the excess must be
distributed to the Medicaid recipients. The suit seeks unspecified monetary
relief representing an amount they claim is due them from the Medicaid
recovery as well as a portion of future tobacco settlement proceeds
representing the same. At this point, the State believes its chances of
prevailing in this case are strong. The State has filed a motion to dismiss
which has been thoroughly briefed by both parties. Similar motions have been
successful in other states.
PTI, Inc. et al., v. Philip Morris, Inc., et al., United States District
Court for the Central District of California Case No. 99-08235NM(EX). The
complaint in this case, filed on August 13, 1999, requests declaratory,
equitable, injunctive and other forms of relief as well as monetary damages.
Among the named defendants are the State of Georgia, Zell Miller
(individually and officially), former Governor of Georgia, and Thurbert
Baker (individually and officially), current Attorney General of Georgia and
T. Jerry Jackson (officially), current State Revenue Commissioner. The
claims against the State and the official claims against Messrs. Miller,
Baker, and Jackson are not insured. The suit challenges the master
settlement agreement among most of the tobacco manufacturers and 46 states
(plus other jurisdictions) and the validity of subsequent legislation
related thereto. Couched largely as an antitrust suit, the plaintiffs seek,
among other things, disgorgement of funds paid pursuant to the agreement.
Under the agreement, Georgia is to receive over $4.8 billion between the
years 2000 and 2025. The defendant states have collectively filed a motion
to dismiss. The State believes it has good and valid defenses on
jurisdictional and other grounds. The district court granted the states'
motion to dismiss the case in its entirety. The time for appeal has not yet
expired.
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 from its General Fund (recorded in accordance
with generally accepted accounting principles ("GAAP")) for the fiscal years
ending June 30, 1996, 1997 and 1998 were $9.580 billion, $10.031 billion and
$10.286 billion, respectively. The State's General Fund is the fund from
which all general costs of State government are paid and to which taxes and
other revenues not specifically directed by law to be deposited in separate
funds are deposited or credited. The State's General Fund represents
approximately 55%-60% of the State's total budget. The State's General Fund
had unreserved GAAP surpluses of $139.1 million, $298.1 million and $536.1
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 $169.1 million increase in funding over 1998). The 1999 budget
did 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.
Based on the 1999 budget, it was estimated that the general fund surplus on
a budgetary basis at June 30, 1999, would be approximately $27.9 million. As
of July 14, 1999, it was estimated that the general fund surplus on a
budgetary basis at June 30, 1999, would be $274.5 million.
In April 1999, the General Assembly approved the 2000 fiscal year budget.
The fiscal year 2000 budget included $3.0 billion in aid to local
governments and $68 million in net general fund deficiency appropriations
for fiscal year 1999. As of July 14, 1999, it was estimated that the general
fund surplus on a budgetary basis at June 30, 2000, would be $11.2 million
and that the balance in the Revenue Stabilization Account of the State
Reserve Fund at June 30, 2000, would be $578.1 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.
According to recent available ratings, general obligation bonds of the State
of Maryland are rated Aaa by Moody's, AAA by S&P and AAA by Fitch.
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 July 14, 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 2000, the Commonwealth's unadjusted unemployment rate
was 2.3%, as compared to a national average of 3.9%. 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 1995 were $726.0 million. Fiscal 1996 and 1997
ended with positive fund balances of $1.172 billion and $1.394 billion,
respectively.
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
$19.800 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. In fiscal 1999, the
total revenues of the budgeted operating funds of the Commonwealth increased
by approximately 1.8% over the prior fiscal year to $20.165 billion.
Expenditures increased by 6.5% over the prior fiscal year to $20.245
billion. As a result, the Commonwealth ended fiscal year 1999 with a
positive closing fund balance of $2.112 billion.
Budgeted revenues and other sources in fiscal 2000, which ended on June 30,
2000, were estimated as of June 16, 2000, by the Executive Office for
Administration and Finance to be approximately $21.641 billion, including
tax revenues of $15.46 billion. It is estimated that fiscal 2000 budgeted
expenditures and other uses will be $21.259 billion and that fiscal 2000
will end with fund balances of $2.319 billion.
On April 14, 2000, the House of Representatives approved its version of the
fiscal 2001 budget. The House budget provides for total appropriations of
approximately $21.8 billion and is based on a tax revenue estimate of
$15.283 billion, excluding $645 million of sales tax receipts dedicated to
the Massachusetts Bay Transportation Authority as a result of forward
funding legislation. On May 25, 2000, the Senate approved its version of
fiscal 2001 budget, which provides for total spending of approximately
$21.549 billion and is based on a tax revenue estimate of approximately
$15.204 billion, which is essentially equivalent to the House estimate after
adjusting for proposed tax cuts in the Senate budget. Based on tax revenue
through April, the Secretary of Administration and Finance did not agree
with the Legislature's proposed tax revenue estimate and consensus was not
reached by May 15, 2000, as required by state finance law. On June 12, 2000,
the Secretary of Administration and Finance informed the chairmen of the
House and Senate Committees on Ways and Means that the administration
accepted the legislative consensus tax revenue estimate for fiscal 2001
($15.283 billion before any tax cuts), based on higher-than-expected tax
collection in May, 2000. The differences between the House and Senate
versions will be reconciled by a legislative conference committee.
On February 9, 2000, the Governor announced a debt reduction proposal to be
funded with approximately $150 million in accumulated surplus revenues from
fiscal 1997, 1998, and 1999 (now on deposit in the Capital Projects Fund)
and surplus revenues expected on account of fiscal 2000, estimated as of
March 3, 2000, at $200 million. Under the Governor's proposal, such moneys
would be applied to the retirement of outstanding Commonwealth debt bearing
the highest interest rates.
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 $3.558 billion
in fiscal 1997. Fiscal 1998 expenditures for direct local aid were $3.950
billion, which is an increase of approximately 11.0% above the fiscal 1997
level. Fiscal 1999 expenditures for direct local aid were $4.310 billion, an
increase of 9.2% above the fiscal 1998 level. It is estimated that fiscal
2000 expenditures for direct local aid will be $4.645 billion, an increase
of approximately 7.8% above the fiscal 1999 level.
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 1995 through fiscal
1999 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 2000 will not reach such limit.
Certain of the Commonwealth's cities, counties and towns have at times
experienced serious financial difficulties which have adversely affected
their credit standing. The recurrence of such financial difficulties, or
financial difficulties of the Commonwealth, could adversely affect the
market values and marketability of outstanding obligations issued by the
Commonwealth or its public authorities or municipalities.
The largest single component of the Commonwealth's capital program is the
Central Artery/Ted Williams Tunnel project, a major construction project
that is part of the completion of the federal interstate highway system. On
April 11, 2000, the U.S. Secretary of Transportation released a report dated
March 31, 2000, that had been prepared by a task force of federal officials.
The task force report stated that senior management of the Central
Artery/Ted Williams Tunnel project had deliberately withheld information
about cost overruns from the Federal Highway Administration and recommended
a change in project leadership, as well as an evaluation of whether the
Massachusetts Turnpike Authority should continue to be reponsible for the
management of the project. The report stated that there were risks that
could lead to cost exposures in addition to those identified in the March
15, 2000, finance plan update submitted by the Massachusets Turnpike
Authority in the range of $300 million to $480 million. The task force
estimated that a realistic total cost estimate for the project was $13.4
billion to $13.6 billion. The report stated that the Commonwealth appeared
to have adequate resources to finance the additional costs but had not yet
identified precisely how it would do so, noting that several of the elements
in the Governor's proposed funding plan did not appear to have state
legislative support. Upon receiving the report, the Governor requested and
received the resignation of the chairman of the Massachusetts Turnpike
Authority and appointed a new chairman.
The Executive Office for Administration and Finance has engaged the services
of an independent consulting and accounting firm to review costs associated
with the Central Artery/Ted Williams Tunnel project and expects to receive
the results of the firm's review by the end of July, 2000. On May 17, 2000,
the Governor approved legislation to provide financing for the additional
costs of the Central Artery/Ted Williams Tunnel project and for the
statewide road and bridge program. The legislation authorizes approximately
$1.520 billion of Commonwealth bonds, which may be issued as general
obligations or as special obligations payable from the gasoline tax and, in
the case of $1.35 billion, from Highway Fund revenues generally. The
legislation reinstates certain fees collected by the Registry of Motor
Vehicles. On June 16, 2000, the Massachusetts Turnpike Authority filed with
the Federal Highway Administration a finance plan update identifying total
project costs, expressed as cash needs through completion in 2004, of
$13.513 billion.
The aggregate unfunded actuarial liabilities of the pension systems of the
Commonwealth and the unfunded liability of the Commonwealth related to local
retirement systems are significant. As of January 1, 1998, the Public
Employee Retirement Administration Commission (PERAC) estimated these
liabilities to be $5.803 billion on the basis of certain actuarial
assumptions regarding, among other things, future investment earnings,
annual inflation rates, wage increases and cost of living increases. No
assurance can be given that these assumptions will be realized. Further, on
April 8, 1999, independent actuarial consultants to the Pension Reserves
Investment Management (PRIM) Board released significantly higher figures
based on the same data used by PERAC, but using a more advanced software
system. PERAC currently is conducting an experience study of the pension
system which it expects to complete by the end of the summer of 2000. The
legislature adopted a comprehensive pension bill addressing the issue in
January 1988, which requires the Commonwealth, beginning in fiscal year
1989, to fund future pension liabilities currently and amortize the
Commonwealth's unfunded liabilities over 40 years in accordance with funding
schedules prepared by the Secretary for Administration and Finance and
approved by the legislature. On March 1, 2000, the Secretary of
Administration and Finance filed a revised pension funding schedule (which
has been deemed approved by the Legislature) which provides that the amounts
required for funding of current pension liabilities in fiscal years 2001,
2002, 2003, and 2004 are estimated to be $1.029 billion, $1.050 billion,
$1.073 billion, and $1.096 billion, respectively. Pension funding
legislation was revised in July, 1997 as part of the fiscal 1998 budget, to
include an accelerated pension funding schedule that would eliminate the
Commonwealth's unfunded liability by 2018 rather than 2028.
MISSISSIPPI FUND
Mississippi's unemployment rate for 1999 was 5.1%, down from a rate of 5.4%
in 1998. Unemployment in Mississippi is at its lowest rate since 1979.
However, projections indicate a slight increase to 5.5% in 2000. The growth
rate of the gross State product in 1999 was 2.7%, down from a rate of 2.9%
in 1998. A growth rate of 2% is expeced in 2000. In 1998, Mississippi's per
capita income surpassed the growth rate for the country. Per capita incomes
increased an estimated 5.8% in 1998. In 1999, personal income increased to
5.8%; in 2000, 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 2.1% in 1999. 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, however,
the state forecast is for a slower growth rate of employment in 2000.
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 have participated in nationwide
banking through the establishment of branches out-of-state, and one
out-of-state bank has established 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. In 1999, 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
1999, gross revenues in the gaming industry rose to over $2.5 billion.
Projections indicate a continued increase in revenues and employment for
2000 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 62% (approximately 18.6 million acres) is
classified as commercial forest and generates $11.4 billion in business
annually.
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 2,770,000. The population
increased an estimated 2.1% from 1980-1990. Population projections suggest a
more dramatic growth in the 1990's, with a projected increase of 9.8% from
1990 to 2000, 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 22% 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 and services industries sectors are the leading
employers 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 1998, $2.5
billion in goods were exported. Exports to China also increased
significantly, substantial levels of exports to Canada, Mexico and Honduras,
historically Mississippi's leading export markets, continued.
Total personal income in Mississippi increased 4.2% in 1999. Projections for
2000 show the State personal income growth to be slightly higher than the
growth experienced in Mississippi in 1999. Manufacturing, services and
government employment comprise the largest components of earned personal
income in Mississippi. Mississippi continues to rank 50th among the 50
states in per capita total personal income. However, 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, 1999, State General Fund receipts were
budgeted at approximately $3,429,200 and State General Fund Disbursements
were budgeted at approximately $3,149,868, and State Special Fund Receipts
and Disbursements were estimated to be approximately $5,506,861 and
$5,536,188, 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 $3,421,900 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 agency, authority or locality 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.
New York is one of the most populous state in the nation and has a
relatively high level of average 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. Like the rest of the nation, a
declining proportion of the State's workforce is engaged in manufacturing,
and an increasing proportion is engaged in service industries. The State is
likely to be less affected than the nation as a whole by 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.
Both the State and New York City (the "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 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. Certain
localities outside the City have experienced financial problems and have
requested and received additional State assistance during the last several
years.
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.
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.
Although the State has added over 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.
New York City. The fiscal health of the State may be affected by the fiscal
health of the City which continues to receive significant financial
assistance from the State. The City depends on State aid both to enable the
City to balance its budget and to meet its cash requirements. The State may
also be affected by the ability of the City and certain entities issuing
debt for the benefit of the City to market their securities successfully in
the public credit markets. The City has achieved balanced operating results
for each of its fiscal years since 1981 as measured by the GAAP standards in
force at that time.
The 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.
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability including establishing the
Municipal Assistance Corporation for the City of New York to provide
financing assistance to the City; the New York State Financial Control Board
(the Control Board) to oversee the City's financial affairs; and the Office
of the State Deputy Comptroller for the City of New York to assist the
Control Board in exercising its powers and responsibilities. A "control
period" existed from 1975 to 1986 during which the City was subject to
certain statutorily prescribed fiscal controls. The Control Board terminated
the control period in 1986 when certain statutory conditions were met. State
law requires the Control Board to reimpose a control period upon the
occurrence of "substantial likelihood and imminence" of the occurrence of
certain events, including (but not limited to) a City operating budget
deficit of more than $100 million or impaired access to the public credit
markets.
Other Localities. Certain localities outside the City have experienced
financial problems and have requested and received additional State
assistance during the last several State fiscal years. The potential impact
on the State of any future requests by localities for additional oversight
or financial assistance is not included in the projections of the State's
receipts and disbursements for the State's 2000-2001 fiscal year.
The State has provided extraordinary financial assistance to select
municipalities, primarily cities, since the 1996-97 fiscal year. Funding has
essentially been continued or increased in each subsequent fiscal year. Such
funding in 1999-2000 totaled $113.9 million. In 1997-98, the State increased
General Purpose State Aid for local governments by $27 million to $550
million, and has continued funding at this new level since that date.
The 1998-99 budget included an additional $29.4 million in unrestricted aid
targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more than $25.6 million. Twelve
upstate cities were to receive $24.2 million in one-time assistance from a
cash flow acceleration of State aid.
While the distribution of General Purpose State Aid for local governments
was originally based on a statutory formula, in recent years both the total
amount appropriated and the shares appropriated to specific localities have
been determined by the Legislature. A State commission established to study
the distribution and amounts of general purpose local government aid failed
to agree on any recommendations for a new formula.
Counties, cities, towns, villages and school districts have engaged in
substantial short-term and long-term borrowings. In 1997, the total
indebtedness of all localities in the State other than New York City was
approximately $21.0 billion. A small portion (approximately $80.2 million)
of that indebtedness represented borrowing to finance budgetary deficits and
was issued pursuant to State enabling legislation.
Authorities. The fiscal stability of the State is related in part to the
fiscal stability of its public authorities. Public authorities are not
subject to the constitutional restrictions on the incurrence of debt that
apply to the State itself and may issue bonds and notes within the amounts
and restrictions set forth in legislative authorization. The State's access
to the public credit markets could be impaired and the market price of its
outstanding debt materially and adversely affected if any of its public
authorities default on their respective obligations, particularly those
using the financing techniques referred to as State-supported or
State-related debt. As of December 31, 1998, there were 17 public
authorities that had outstanding debt of $100 million or more, and the
aggregate outstanding debt, including refunding bonds, of all State Public
Authorities was $94 billion, only a portion of which constitutes State-
supported or State-related debt.
Since 1998, the Long Island Power Authority (LIPA) has issued over $5
billion in bonds secured solely by ratepayer charges as part of an estimated
$7 billion financing plan. LIPA's debt is not considered either
State-supported or State-related debt.
The Metropolitan Transit Authority (MTA) oversees the operation of subway
and bus lines in New York City by its affiliates, the New York City Transit
Authority and Manhattan and Bronx Surface Transit Operating Authority
(collectively, TA) and operates commuter rail, rapid transit and bus
services in the New York Metropolitan area through subsidiaries. Through its
affiliated agency, the Triborough Bridge and Tunnel Authority (TBTA), the
MTA operates certain intrastate toll bridges and tunnels. The MTA has
depended on, and will continue to depend on, operating support from the
State, local governments and TBTA, including loans, grants and subsidies.
The TA or commuter railroads may be required to seek additional State
assistance, raise fares or take other actions. State legislation and
regulatory review authorized the MTA, TBTA and TA to issue an aggregate of
$6.5 billion in bonds to finance a portion of a new $12.55 billion MTA
capital plan for the 1995 through 1999 calendar years.
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 exclusively 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.
From 1994 until 1998, the State 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. However, the State faces a budget shortfall for
the fiscal year ended June 30, 2000. 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
authorized unreserved General Fund balance at June 30, 1999, the end of the
1998-99 fiscal year, was approximately $323.6 million and the reserved
balance of the General Fund was approximately $40.9 million.
Growth in the individual income tax is expected to be solid, although
unspectacular in 2000-01. Strong labor market conditions along with
acceleration in average wages will continue to propel state total
withholding payments in 2000-01. Rising interest rates and the beginnings of
the post-Floyd recovery of the state's farm sector will provide a boost to
non-withholding tax receipts. Overall, growth in the individual income tax
is currently forecast at 8.1% in 2000-01.
In the 2000-01 Budget prepared by the Office of State Budget and Management,
it was projected that General Fund net revenues, including non-tax revenues,
would increase 5.8% over 1999-2000.
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. Bailey v. State and Patton v. State -- State Income Tax Refunds
for Retired State and Federal Workers. Bailey is a class action involving
the claim that the General Assembly acted unconstitutionally in 1989 when it
repealed the full exemption from State income tax for the pensions of
retired state and local government employees. This action was taken in
response to the United States Supreme Court decision in Davis v. Michigan
Department of Treasury that the intergovernmental tax immunity doctrine
prohibits states from taxing pensions of state and federal retirees
differently. Patton is a class action involving the claim that the General
Assembly's 1989 legislation did not cure the defects in the State's taxation
of the pensions of state and federal retirees.
The State defended Bailey on the grounds that the people of the State in
enacting Article V, Sec. 1 of the State Constitution ("The power of taxation
shall . . . never be surrendered, suspended or contracted away") vested in
the General Assembly the full discretion to change tax exemptions as
conditions warranted. On May 8, 1997, the North Carolina Supreme Court chose
not to apply Article V, Sec. 1 of the State Constitution and held that the
General Assembly acted unconstitutionally when it repealed the full tax
exemption for state and local government retirees who had "vested" interests
in their pensions. Overturning a long line of prior decisions, the Court
further held that the State was liable for full refunds of all state income
taxes paid by these retirees since 1989 regardless of whether they had
followed required procedures.
One potential result of the Bailey decision was to recreate a difference in
the treatment of the pensions of federal and state retirees for the period
since 1989, and thus make the State liable to federal retirees in Patton.
Given the Supreme Court's decision in Bailey and its potential impact in
Patton, the General Assembly agreed to settle all claims for refunds by all
state and federal retirees for $799 million. The North Carolina General
Assembly reserved $400 million to pay the first installment of the
settlement, which was paid during fiscal year 1999-2000. This amount has
been reported in the State's financial statements as a liability of the
General Fund. The remaining $399 million has been reported as a liability in
the General Long-term Obligation Account Group.
Faulkenbury v. Teachers' and State Employees' Retirement System; Peele v.
Teachers' and State Employees' Retirement System; Woodard v. Local
Governmental Employees' Retirement System -- Payment of Retirement Benefits
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. Their claims were heard in the
Superior Court of Wake County in May, 1995. The trial court ruled in favor
of the plaintiffs, and the State appealed to the North Carolina Supreme
Court. The Supereme Court affirmed the judgment of the trial court in favor
of the plaintiffs on April 11, 1997. The court concluded that at the time
plaintiffs' rights to pensions became vested, the law provided that they
would have disability retirement benefits calculated in a certain way; and
that these were contractual rights that plaintiffs earned and that could not
be taken away by the Legislature. The trial court is now supervising the
payment of back benefits to class members. The estimated amount of back
benefits due to class members is $126 million, plus interest. This amount
has been reported in the financial statements of the State as a liability of
the Teachers' and State Employees' Retirement System.
As of June 30, 2000, there remain about 387 eligible estates which have not
made claims, as well as several hundred eligible individuals class members
who have not exercised their right to make an election. Additionally, the
court has ordered additional interest to be paid to class members, the
amount of which totals less than 2% of the original payout amount. A hearing
is scheduled August 11, 2000 for these matters. The last payment date was
October, 1999.
Leandro et al. v. State of North Carolina and State Board of Education --
Adequacy of Public Education System. On May 25, 1994, students and boards of
education in five counties in the State filed suit in Superior Court
requesting a declaration that the State's public education system does not
meet standards established by the State Constitution. In January, 1995, the
trial court refused to dismiss the suit and the State appealed.
Subsequently, the North Carolina Court of Appeals reversed the trial court
and dismissed the suit. On July 24, 1997, the North Carolina Supreme Court
reversed the Court of Appeals. The Court concluded that the North Carolina
Consititution guarantees "every child of this state an opportunity to
receive a sound basic education," and remanded that issue to the trial court
for further proceedings.
The Attorney General's Office believes that there are sound legal arguments
to support the State's position on remand that plaintiffs are receiving an
opportunity to obtain a sound basic education.
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, plus
administrative costs and legal fees, will be approximately $440,000,000.
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.
Southeast Compact Commission -- Disposal of Low-level Radioactive Waste.
North Carolina and seven other southeastern states created the Southeast
Interstate Low-level Radioactive Waste Management Compact to plan and
develop a site for the disposal of low-level radioactive waste generated in
the member states. North Carolina was assigned responsibility for
development of the first disposal site, with costs to be distributed
equitably among the Compact members. In 1997 the Compact Commission
discontinued funding of the development of the North Carolina site, alleging
that the State was not actively pursuing the permitting and development of
the proposed site. North Carolina withdrew from the Compact in 1999. The
Compact recently voted to pursue sanctions against North Carolina, including
the repayment, with interest, by the State to the Compact Commission of $80
million of Compact member payments expended on the permitting of the site.
The North Carolina Attorney General's office believes that sound legal
arguments support the State's position on this matter.
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 State is located on the Atlantic seacoast and is bordered by
the states of South Carolina, Georgia, Tennessee and Virginia. The State has
a land area, exclusive of waterways and lakes, of 48,718 square miles.
During the period from 1980 to 1990 the State experienced a 12.9% increase
in population, growing to 6,655,455 persons and maintaining its position as
the tenth most populous state. According to the North Carolina Office of
State Planning, the State's estimated population as of July 1999 was
7,658,145, and it estimates this population will reach 7,756,517 by July
2000. The State has six municipalitlies with populations in excess of
100,000.
Economic Characteristics. The economic profile of the State consists of a
combination of industry, agriculture and tourism. Nonagricultural wage and
salary employment accounted for approximately 3,866,100 jobs in 1999. The
largest segment of jobs was approximately 802,700 in manufacturing. Based on
July 1997 data from the United States Bureau of Labor Statistics, the State
ranked tenth among the states in non-agricultural employment and eighth
among the states in manufacturing employment. During the period from 1990 to
1998, per capita income in the State grew from $16,674 to $24,036, an
increase of 44.2%. The Employment Security Commission estimated the
seasonally adjusted unemployment rate in March 2000 to be 3.4% of the labor
force, as compared with an unemployment rate of 4.0% nationwide. According
to the Employment Security Commission, the labor force has grown from
2,855,200 in 1980 to 3,953,500 in 2000, an increase of 38.5%.
North Carolina's economy continues to benefit from a vibrant manufacturing
sector. Manufacturing firms employ approximately 21% of the total
non-agricultural workforce. North Carolina has the fourth highest percentage
of manufacturing workers in the nation. The State's annual value of
manufacturing shipments totaled $156 billion in 1997, ranking the State
eighth in the nation. The State leads the nation in the production of
textiles, tobacco products, and furniture and is among the largest producers
of electronics and other electrical equipment and industrial and commercial
machinery and computer equipment.
In 1998, the State ranked fourth in the nation after Michigan, California,
Ohio, and New York in new corporate locations and expansions, with 1,044
announced new facilities and expansions. The State also ranked first in both
new jobs and new location projects per one million residents for 1996-1998.
In 1998 there was an unprecedented $8 billion in new corporate investment in
the State, led by Nucor Corporation and Federal Express, with investments of
approximately $300 million each. Total manufacturing investments increased
18.8 percent to $4.7 billion over 1997, and non-manufacturing investments
more than doubled at $3.1 billion over 1997.
More than 734 international firms have established a presence in the State.
Charlotte is the scond largest financial center in the country, based on
assets of banks headquartered there. Bank of America, N.A., the nation's
largest bank, is based in Charlotte. The strength of the State's
manufacturing sector also supports the growth in exports. Foreign-owned
firms invested more than $1 billion in the State in 1998, and created 7,173
new jobs. The 1997 annual statistics showed $18.0 billion in exports, tenth
among the States in export trade.
Agriculture is a basic element in the economy of the State. Gross
agricultural income reached over $7 billion in 1998, placing the State
eighth in the nation in gross agricultural income. The poultry industry is
the leading source of agricultural income in the State, accounting for
approximately 31% of gross agricultural income. The pork industry provides
approximately 18% of the gross agricultural income. The tobacco industry
remains important to the State providing approximately 14% of gross
agricultural income. In 1997, the State also ranked third in the nation in
net farm income.
The diversity of agriculture in North Carolina and a continuing emphasis on
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 has the third most diversified agricultural
economy in the nation.
According to the State Commissioner of Agriculture, the State ranks first in
the nation in the production of all tobacco, flue-cured tobacco, turkeys and
sweet potatoes and second in hog production, trout, the production of
Christmas trees, and cucumbers for pickles. The State ranks third in poultry
and egg products. In 1998 there were approximately 58,000 farms in the
State. A strong agribusiness sector also 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 agricultural
industry, including food, fiber and forest, contributes over $46 billion
annually to the State's economy, accounts for nearly 25% of the State's
income and employs approximately 22% of the State's work force.
As stated in the August 27, 1999 Official Statement of the Department of
State Treasurer relating to the State of North Carolina General Obligation
Bonds, on November 23, 1998, 46 states' Attorneys General and the major
tobacco companies signed a proposed settlement that reimburses states for
smoking-related medical expenses paid through Medicaid and other health care
programs. North Carolina could receive approximately $4.6 billion over the
next 25 years. The settlement was approved in North Carolina by a Consent
Decree in December 1998. On March 16, 1999, the General Assembly enacted a
law approving the establishment of a foundation, in compliance with the
Consent Decree, to help communities in North Carolina hurt by the decline of
tobacco farming. The court must review the law for compliance with the
intent outlined in the Consent Decree. The foundation would receive fifty
percent of the settlement. A trust fund for tobacco farmers and quota
holders and a second trust fund for health programs, both to be created by
the General Assembly, would each get twenty-five percent of the settlement.
North Carolina is also one of the 14 states that has entered into a major
settlement agreement with several cigarette manufacturers. Approximately
$1.9 billion of settlement payments (under the National Tobacco Growers
Settlement Trust phase of the settlement agreement) will be paid to North
Carolina tobacco growers and allotment holders. Payments of this amount are
scheduled to begin in December 1999 and are expected to average $155 million
per year over a 12-year period.
The North Carolina Department of Commerce, Division of Tourism, Film and
Sports Development, indicates that travel and tourism is increasingly
important to the State's economy. Forty-four million visitors in 1999
contributed to the $11.9 billion travel and tourism economic impact for the
state, a 5.8% increase over 1998. The North Carolina travel and tourism
industry directly supports 198,200 jobs. Without these jobs generated by
travel, North Carolina's unemployment rate would have been 5.2 percent
higher.
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 1995 JUNE 1996 JUNE 1997 JUNE 1998 JUNE 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Civilian Labor Force 3,578,000 3,704,000 3,797,000 3,776,000 3,846,000
Nonagricultural Employment 3,419,100 3,506,000 3,620,300 3,758,800 3,837,900
Goods Producing Occupations
(mining, construction and
manufacturing) 1,036,700 1,023,800 1,041,000 1,045,400 1,025,800
Service Occupations 2,382,400 2,482,400 2,579,300 2,713,400 2,812,100
Wholesale/Retail
Occupations 776,900 809,100 813,500 848,300 875,000
Government Employees 555,300 570,800 579,600 594,800 617,600
Miscellaneous Services 742,200 786,100 852,500 923,100 960,200
Agricultural Employment 53,000 53,000 not available not available not available
Bond Ratings. Currently, Moody's rates North Carolina general obligation bonds as Aaa and S&P rates such bonds as AAA.
</TABLE>
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 $4.2 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 generally increased
steadily since 1980 to its May 2000 level of 82% of total Commonwealth
employment. Manufacturing, which contributed 16.5% of May 2000
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 May 2000, the services sector accounted for 32.4% of all
non-agricultural employment in the Commonwealth while the trade sector
accounted for 22.2%.
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 1999, the annual
average unemployment rate in the Commonwealth was 4.4%, compared to 4.2% for
the United States. For May 2000, the unadjusted unemployment rate was 4.5%
in the Commonwealth and 4.3% in the United States, while the seasonally
adjusted unemployment rate for the Commonwealth was 4.0% and for the United
States was 4.1%.
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.
The budget for fiscal 2000 was enacted in May 1999 at which time the
official revenue estimate for the 2000 fiscal year was established at
$18,718.5 million. That estimate is based on an economic forecast for real
gross domestic product to grow at a 1.4% from the second quarter of 1999 to
the second quarter of 2000. The 1.4% is based on expectations that the
growth of real gross domestic product is expected to be restrained by a
slowing of the rate of consumer spending to a level consistent with the
personal income gains and by smaller gains in business investment in
response to falling capacity utilization and profits. Slowing economic
growth is expected to cause the state's unemployment rate to rise and
closely parallel the national rate. Other trends for the Pennsylvania
economy are expected to maintain their close association with national
economic trends.
The fiscal 2000 budget includes estimated spending of $19,103.8 million and
estimated revenue (net of estimated tax refunds and enacted tax changes) of
$18,718.5. Funds to cover the $342.1 million difference between estimated
revenue and projected spending will be obtained from a draw down of the
projected fiscal 1999 year-end balance.
Appropriations enacted for fiscal 2000 are 3.8% ($743.5 million) above
appropriations enacted for fiscal 1999 (including supplemental
appropriations). Major increases in expenditures budgeted for fiscal 2000
include: (i) corrections, (ii) special education and (iii) medical
assistance.
Fiscal 2001 Budget. On May 24, 2000, the Governor signed the Commonwealth's
fiscal year 2000-01 budget that was approved by the General Assembly. The
General Fund budget is $20.2 billion, representing an increase of $806
million or 4.1% over fiscal year 1999-2000. Tax reductions and rebates
totaling an estimated $774 million are proposed to stimulate the job market,
and monies are proposed to be dedicated to the business community to attract
high technology jobs to the Commonwealth. Basic education will receive $3.8
billion, representing an increase, an additional $28.0 million will be paid
to the State System of Higher Education and a $41.7 million increase is
dedicated to the five state-related universities. The budget increases
funding for law enforcement, health insurance, welfare programs and public
libraries. The Commonwealth will spend $1.25 billion for state highways and
bridge maintenance.
Debt Limits and Outstanding Debt. The Pennsylvania Constitution permits the
issuance of the following types of debt: (i) debt to suppress insurrection
or rehabilitate areas affected by disaster; (ii) electorate approved debt;
(iii) debt for capital projects subject to an aggregate outstanding debt
limit of 1.75 times the annual average tax revenues of the preceding five
fiscal years; and (iv) tax anticipation notes payable in the fiscal year of
issuance.
Under the Pennsylvania Fiscal Code, the Auditor General is required to
certify to the Governor and the General Assembly certain information
regarding the Commonwealth's indebtedness. According to the February 29,
2000, Auditor General certificate, the average annual tax revenues deposited
in all funds in the five fiscal years ended February 29, 2000, was
approximately $21.2 billion, and, therefore, the net debt limitation for the
2000 fiscal year is $32.7 billion. Outstanding net debt totaled $3.9 billion
at June 30, 1999, approximately equal to the net debt at June 30, 1998. On
February 29, 2000, the amount of debt authorized by law to be issued, but
not yet incurred, was $29.2 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 $1,054.3 million
in Special Tax Revenue Bonds outstanding as of April 15, 1999.
The audited General Fund balance of the City as of June 30, 1995, 1996, 1997
and 1998 showed a surplus of approximately $80.5 million, $118.5 million,
$128.8 million and $169.2 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 State 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, Section 17G.36, provides that if, because
of an inaccurate estimate of revenues, a deficit appears likely, the State
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 State 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.
For the fiscal year ended June 30, 1998, the State had a budgetary surplus
of $254 million. The General Assembly designated the application of all of
this surplus, including a transfer to the Capital Reserve Fund in the amount
of $86.9 million.
For the fiscal year ended June 30, 1999, the State had a budgetary surplus
of $410 million. The General Assembly designated the application of $322
million of this surplus, including a transfer to the Capital Reserve Fund in
the amount of $92 million.
South Carolina is primarily a manufacturing state. In 1998, one-fifth of all
jobs in the state were in the manufacturing industry, compared to 15%
nationally. While the textile industry is still the major industrial
employer in the state, since 1950 the State's economy has undergone a
gradual transition to other activities. The economic base of the State has
diversified into other areas such as trade, health care, services and
durable goods manufacturing.
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. These developments were 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.
South Carolina's economy tends to depend on the national economy. Real Gross
Domestic Product (GDP) nationwide increased 3.9% during 1998. The nation's
output expanded at 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 3.00% in 1996.
During all of 1998 personal income grew at a revised average annual rate of
5.6% in South Carolina. During the same period the nation's income grew 5.7%
and the Southeast grew 5.8%. Over the last 5 years (1993-1998) personal
income in South Carolina rose at a compounded annual rate of 5.7%, outpacing
the 5.5% annual income growth in the United States for the same period, but
below the 5.8% annual income growth rate in the Southeastern region.
In 1998, employment increased 3.9% while the rate of employment growth in
the United States was 2.6%. Monthly unemployment rates in the State have
declined below comparable national rates throughout 1998. The unemployment
rate for South Carolina in 1998 was 3.8%, nearly 1% lower than the 4.5%
nationwide.
General Fund Revenue increased at a rate of 8.7% during Fiscal year 1998-99
over the previous fiscal year. The State finished Fiscal Year 1998-99 with a
revenue excess of $263 million above the Fiscal Year 1998-99 Appropriation
Act. Revenues through August 1999 have increased at a rate of 4.1% during
Fiscal Year 1999-00.
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.
The State of Tennessee faced a recurring budget crisis for this fiscal year.
Tennessee does not presently impose an income tax upon personal income and
relies primarily on the sales tax for revenue. The Tennessee General
Assembly recently passed a budget which includes no new taxes, relies on
one-time revenue to pay recurring expenses and hinges on heightened revenue
projections. The governor has announced plans to call a special session of
the Tennessee legislature later this year to address the issue of whether to
adopt an income tax upon personal income if revenue projections fall short.
The recurring budget crisis could lead to financial difficulty for the
state.
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 and 1999, with only
modest economic gains. Slower growth for the State's economy is projected
for the fiscal year ending June 30, 2000. Tennessee's economic growth has
fallen behind the rate of economic growth for the nation.
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 $66.02 billion in 1997,
approximately $66.25 billion in 1998 and approximately $72.34 billion in
1999, an increase of approximately 9.20% over 1998. Taxable sales are
projected to increase by 5.3% in 2000, although there is no guarantee such
projections will be met.
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, 1998 and 1999. In
1999, per capita income in Tennessee registered $24,466, an increase of
approximately 3.07% over 1998. Tennessee per capita personal income is
projected to rise 1.96% in 2000, up slightly from the 4.3 percent pace
expected for 1998. Real Tennessee per capita personal income is projected to
increase by 27% by 2008.
Tennessee's overall average unemployment rate for 1999 was approximately 4%
and is projected to be 3.6% for 2000. The number of new jobs in Tennessee
grew by 1.5 percent in 1999, down from 2.1 percent and 1.9 percent in 1997.
The first quarter of 2000 had job growth of 2.3 percent. 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. Tennessee job growth is projected to advance 1.4 percent in 2000
versus 1.2 percent for the national economy.
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 decreased by about 1.5 percent in 1999,
representing the loss of 7,800 manufacturing jobs. The job losses remain
most pronounced in textiles, apparel and leather.
Agriculture also plays a vital role in the Tennessee economy. According to a
recent study conducted by University of Tennessee agricultural economists,
agriculture accounts for 14% of the state's economy, and agriculture and
related industries contribute $36 billion annually to Tennessee's economy.
The inherent uncertainty in agricultural production and the uncertain future
of federal legislation affecting agriculture make future agricultural
production difficult to predict.
Tennessee's population increased approximately 12.4% from 1990 to 1999.
Tennessee's population increased .9% from 1998 to 1999. As of July 1, 1999,
the State's population was estimated at approximately 5.48 million, making
it the sixteenth most populous state in the U.S.
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. 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 have recently been downgraded from AAA
to AA+ by Standard & Poor's. As of this date, Moody's Investor Service has
not announced a change of its rating of Tennessee's general obligation bonds
from Aaa but is reviewing whether to downgrade such rating. 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 County 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 for general obligation bonds by Standard &
Poors.
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 2000 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 1999 (annual average)
was 6.6%. This represents the State's lowest annual rate during the last 20
years; however, West Virginia's unemployment rate remains above the national
average. The State Treasurer's Office reports that, while personal income of
the State's residents has increased in recent years, West Virginia ranks
37th in total personal income and 50th in per capita income when compared to
other states. The state's population has declined in recent years, although
slight growth in population is anticipated in upcoming years. West Virginia
is reported to have the nation's oldest population.
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 up to $550 million in general obligation road
bonds over five years. A total of $330 million of road bonds were issued in
1998 and 1999 and it is anticipated that $110 million of such bonds will be
issued in each of fiscal years 2001 and 2002. 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. The State
is currently considering the issuance of $4.0 billion of bonds for the
purpose of retiring the unfunded liability in the State's pension funds
which would be the largest such refunding ever undertaken by a state or
local government. Before these pension obligation bonds can be sold, further
authorization and action by the State Legislature, the West Virginia Supreme
Court of Appeals and possibly the State's voters will be necessary.
According to the West Virginia Debt Capacity Reports issued by the State
Treasurer in 1999 and 2000, the State's general obligation bonds were
recently rated Aa3 by Moody's Investors Service, AA- by S&P and AA- by
Fitch.
In 2000 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 proposed reforms require amendment to
the State's Constitution as well as significant legislation. A random sample
of taxpayers are expected to file informational tax returns during 2001 so
that the proposed reforms can be further analyzed.
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.
A popular surface coal mining method commonly referred to as "mountaintop
removal" has recently come under heavy scrutiny in this State. Mountaintop
removal typically involves the removal of spoil to expose coal seams and the
subsequent disposal of the spoil into valley spills. Rulings of the U.S.
District Court for the Southern District of West Virginia in Patricia Bragg,
et al, v. Colonel Dana Robertson, et al., Civil Action No. 2:98-0636, have
placed significant restrictions on mountaintop removal mining due to the
impact on streams and other water resources. The State Legislature, Congress
and state and federal agencies continue to evaluate this issue. Given the
popularity of this mining method, restrictions such as those resulting from
the litigation are anticipated to have a significant adverse effect on
coal-related jobs in West Virginia and tax revenues generated by coal
mining.
Numerous businesses which self-insure for worker's compensation purposes
are, via administrative and judicial action, seeking exemption from paying
any portion of the $1.7 billion long-term debt of the State's Workers'
Compensation Fund. If the self-insured businesses prevail, the burden of the
Fund's long-term debt would be borne by regular subscribers to the Fund
which pay premiums to the Fund to cover benefits for injured workers. These
self-insured businesses are also seeking refunds of overpayments made to
claimants who were subsequently determined ineligible for benefits.
<PAGE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in this
Part II to a "Trust" means the Massachusetts business trust of which the Fund is
a series, or, if the Fund is not a series of a Massachusetts business trust,
references to a "Trust" shall mean the Fund.
-----------------
TABLE OF CONTENTS
-----------------
PAGE
I Management of the Fund .......................................... 1
Trustees/Officers ............................................... 1
Investment Adviser .............................................. 1
Administrator ................................................... 2
Custodian ....................................................... 2
Shareholder Servicing Agent ..................................... 2
Distributor ..................................................... 2
II Principal Share Characteristics ................................. 2
Class A Shares .................................................. 2
Class B Shares, Class C Shares and Class I Shares ............... 2
Waiver of Sales Charges ......................................... 3
Dealer Commissions and Concessions .............................. 3
General ......................................................... 3
III Distribution Plan ............................................... 3
Features Common to Each Class of Shares ......................... 3
Features Unique to Each Class of Shares ......................... 4
IV Investment Techniques, Practices and Risks ...................... 5
V Net Income and Distributions .................................... 5
Money Market Funds .............................................. 5
Other Funds ..................................................... 5
VI Tax Considerations .............................................. 5
Taxation of the Fund ............................................ 5
Taxation of Shareholders ........................................ 6
Special Rules for Municipal Fund Distributions .................. 7
VII Portfolio Transactions and Brokerage Commissions ................ 8
VIII Determination of Net Asset Value ................................ 9
Money Market Funds .............................................. 9
Other Funds ..................................................... 10
IX Performance Information ......................................... 10
Money Market Funds .............................................. 10
Other Funds ..................................................... 11
General ......................................................... 12
MFS Firsts ...................................................... 12
X Shareholder Services ............................................ 13
Investment and Withdrawal Programs .............................. 13
Exchange Privilege .............................................. 15
Tax-Deferred Retirement Plans ................................... 16
XI Description of Shares, Voting Rights and Liabilities ............ 17
Appendix A -- Waivers of Sales Charges .......................... A-1
Appendix B -- Dealer Commissions and Concessions ................ B-1
Appendix C -- Investment Techniques, Practices and Risks ........ C-1
Appendix D -- Description of Bond Ratings ....................... D-1
<PAGE>
I MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS
BOARD OVERSIGHT -- The Board of Trustees which oversees the Fund provides
broad supervision over the affairs of the Fund. The Adviser is responsible
for the investment management of the Fund's assets, and the officers of
the Trust are responsible for its operations.
TRUSTEE RETIREMENT PLAN -- The Trust has a retirement plan for Trustees
who are non-interested Trustees and Trustees who are not officers of the
Trust. Under this plan, a Trustee will retire upon reaching a specified
age (see Part I -- "Appendix B ") ("Retirement Age") and if the Trustee
has completed at least 5 years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to his
Retirement Age and receive reduced payments if he has completed at least 5
years of service. Under the plan, a Trustee (or his beneficiaries) will
also receive benefits for a period of time in the event the Trustee is
disabled or dies. These benefits will also be based on the Trustee's
average annual compensation and length of service. The Fund will accrue
its allocable portion of compensation expenses under the retirement plan
each year to cover the current year's service and amortize past service
cost.
INDEMNIFICATION OF TRUSTEES AND OFFICERS -- The Declaration of Trust of
the Trust provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with litigation in
which they may be involved because of their offices with the Trust,
unless, as to liabilities of the Trust or its shareholders, it is
determined that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices,
or with respect to any matter, unless it is adjudicated that they did not
act in good faith in the reasonable belief that their actions were in the
best interest of the Trust. In the case of settlement, such
indemnification will not be provided unless it has been determined
pursuant to the Declaration of Trust, that they have not engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
INVESTMENT ADVISER
The Trust has retained Massachusetts Financial Services Company ("MFS" or
the "Adviser") as the Fund's investment adviser. MFS and its predecessor
organizations have a history of money management dating from 1924. MFS is
a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings,
Inc., which in turn is an indirect wholly owned subsidiary of Sun Life of
Canada (an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment
advisers to assist MFS in the management of the Fund's assets. A
description of these sub-advisers, the services they provide and their
compensation is provided under the caption "Management of the Fund -- Sub-
Adviser" in Part I of this SAI for Funds which use sub-advisers.
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to
an Investment Advisory Agreement (the "Advisory Agreement"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Subject to such policies as the Trustees may determine,
the Adviser makes investment decisions for the Fund. For these services
and facilities, the Adviser receives an annual management fee, computed
and paid monthly, as disclosed in the Prospectus under the heading
"Management of the Fund[s]."
The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer of the Adviser. The Adviser also furnishes at
its own expense all necessary administrative services, including office
space, equipment, clerical personnel, investment advisory facilities, and
all executive and supervisory personnel necessary for managing the Fund's
investments and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are not officers of
MFS and all expenses of the Fund (other than those assumed by MFS)
including but not limited to: advisory and administrative services;
governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, periodic
reports, notices and proxy statements to shareholders and to governmental
officers and commissions; brokerage and other expenses connected with the
execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust
Company, the Fund's custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the
Fund; and expenses of shareholder meetings. Expenses relating to the
issuance, registration and qualification of shares of the Fund and the
preparation, printing and mailing of prospectuses are borne by the Fund
except that the Distribution Agreement with MFD requires MFD to pay for
prospectuses that are to be used for sales purposes. Expenses of the Trust
which are not attributable to a specific series are allocated between the
series in a manner believed by management of the Trust to be fair and
equitable.
The Advisory Agreement has an initial two year term and continues in
effect thereafter only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) and, in either case, by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party.
The Advisory Agreement terminates automatically if it is assigned and may
be terminated without penalty by vote of a majority of the Fund's shares
(as defined in "Investment Restrictions" in Part I of this SAI), or by
either party on not more than 60 days" nor less than 30 days" written
notice. The Advisory Agreement provides that if MFS ceases to serve as the
Adviser to the Fund, the Fund will change its name so as to delete the
initials "MFS" and that MFS may render services to others and may permit
other fund clients to use the initials "MFS" in their names. The Advisory
Agreement also provides that neither the Adviser nor its personnel shall
be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution
and management of the Fund, except for willful misfeasance, bad faith or
gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the
Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance,
shareholder communications and other administrative services pursuant to a
Master Administrative Services Agreement. Under this Agreement, the Fund
pays MFS an administrative fee up to 0.015% per annum of the Fund's
average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of
the Fund's assets. The Custodian's responsibilities include safekeeping
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest and
dividends on the Fund's investments, maintaining books of original entry
for portfolio and fund accounting and other required books and accounts,
and calculating the daily net asset value of each class of shares of the
Fund. The Custodian does not determine the investment policies of the Fund
or decide which securities the Fund will buy or sell. The Fund may,
however, invest in securities of the Custodian and may deal with the
Custodian as principal in securities transactions. The Custodian also acts
as the dividend disbursing agent of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is
the Fund's shareholder servicing agent, pursuant to an Amended and
Restated Shareholder Servicing Agreement (the "Agency Agreement"). The
Shareholder Servicing Agent's responsibilities under the Agency Agreement
include administering and performing transfer agent functions and the
keeping of records in connection with the issuance, transfer and
redemption of each class of shares of the Fund. For these services, MFSC
will receive a fee calculated as a percentage of the average daily net
assets of the Fund at an effective annual rate of up to 0.1125%. In
addition, MFSC will be reimbursed by the Fund for certain expenses
incurred by MFSC on behalf of the Fund. The Custodian has contracted with
MFSC to perform certain dividend disbursing agent functions for the Fund.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Trustees or by
vote of a majority of the Fund's shares (as defined in "Investment
Restrictions" in Part I of this SAI) and in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days'
notice.
II PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered by
the MFS Family of Funds. Some MFS Funds may not offer each class of shares
-- see the Prospectus of the Fund to determine which classes of shares the
Fund offers.
CLASS A SHARES
MFD acts as agent in selling Class A shares of the Fund to dealers. The
public offering price of Class A shares of the Fund is their net asset
value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share
of the Fund is calculated by dividing the net asset value of a Class A
share by the difference (expressed as a decimal) between 100% and the
sales charge percentage of offering price applicable to the purchase (see
"How to Purchase, Exchange and Redeem Shares" in the Prospectus). The
sales charge scale set forth in the Prospectus applies to purchases of
Class A shares of the Fund alone or in combination with shares of all
classes of certain other funds in the MFS Family of Funds and other funds
(as noted under Right of Accumulation) by any person, including members of
a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of
Accumulation or a Letter of Intent (see "Investment and Withdrawal
Programs" below). A group might qualify to obtain quantity sales charge
discounts (see "Investment and Withdrawal Programs" below). Certain
purchases of Class A shares may be subject to a 1% CDSC instead of an
initial sales charge, as described in the Fund's Prospectus.
CLASS B SHARES, CLASS C SHARES AND CLASS I SHARES
MFD acts as agent in selling Class B, Class C and Class I shares of the
Fund. The public offering price of Class B, Class C and Class I shares is
their net asset value next computed after the sale. Class B and C shares
are generally subject to a CDSC, as described in the Fund's Prospectus.
WAIVER OF SALES CHARGES
In certain circumstances, the initial sales charge imposed upon purchases
of Class A shares and the CDSC imposed upon redemptions of Class A, B and
C shares are waived. These circumstances are described in Appendix A of
this Part II. Such sales are made without a sales charge to promote good
will with employees and others with whom MFS, MFD and/or the Fund have
business relationships, because the sales effort, if any, involved in
making such sales is negligible, or in the case of certain CDSC waivers,
because the circumstances surrounding the redemption of Fund shares were
not foreseeable or voluntary.
DEALER COMMISSIONS AND CONCESSIONS
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concessions are described in Appendix
B of this Part II.
GENERAL
Neither MFD nor dealers are permitted to delay placing orders to benefit
themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD
may benefit from its temporary holding of funds paid to it by investment
dealers for the purchase of Fund shares.
III DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and
Class C shares (the "Distribution Plan") pursuant to Section 12(b) of the
1940 Act and Rule 12b-1 thereunder (the "Rule") after having concluded
that there is a reasonable likelihood that the Distribution Plan would
benefit the Fund and each respective class of shareholders. The provisions
of the Distribution Plan are severable with respect to each Class of
shares offered by the Fund. The Distribution Plan is designed to promote
sales, thereby increasing the net assets of the Fund. Such an increase may
reduce the expense ratio to the extent the Fund's fixed costs are spread
over a larger net asset base. Also, an increase in net assets may lessen
the adverse effect that could result were the Fund required to liquidate
portfolio securities to meet redemptions. There is, however, no assurance
that the net assets of the Fund will increase or that the other benefits
referred to above will be realized.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current
distribution and service fees for each Fund are reflected under the
caption "Expense Summary" in the Prospectus.
FEATURES COMMON TO EACH CLASS OF SHARES
There are features of the Distribution Plan that are common to each Class
of shares, as described below.
SERVICE FEES -- The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to
the class of shares to which the Distribution Plan relates (i.e., Class A,
Class B or Class C shares, as appropriate) (the "Designated Class")
annually in order that MFD may pay expenses on behalf of the Fund relating
to the servicing of shares of the Designated Class. The service fee is
used by MFD to compensate dealers which enter into a sales agreement with
MFD in consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to shares of the Designated
Class owned by investors for whom such dealer is the dealer or holder of
record. MFD may from time to time reduce the amount of the service fees
paid for shares sold prior to a certain date. Service fees may be reduced
for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates
are entitled to retain all service fees payable under the Distribution
Plan for which there is no dealer of record or for which qualification
standards have not been met as partial consideration for personal services
and/or account maintenance services performed by MFD or its affiliates to
shareholder accounts.
DISTRIBUTION FEES -- The Distribution Plan provides that the Fund may pay
MFD a distribution fee in addition to the service fee described above
based on the average daily net assets attributable to the Designated Class
as partial consideration for distribution services performed and expenses
incurred in the performance of MFD's obligations under its distribution
agreement with the Fund. MFD pays commissions to dealers as well as
expenses of printing prospectuses and reports used for sales purposes,
expenses with respect to the preparation and printing of sales literature
and other distribution related expenses, including, without limitation,
the cost necessary to provide distribution-related services, or personnel,
travel, office expense and equipment. The amount of the distribution fee
paid by the Fund with respect to each class differs under the Distribution
Plan, as does the use by MFD of such distribution fees. Such amounts and
uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any
year may be more or less than the expenses incurred by MFD under its
distribution agreement with the Fund, the Fund is not liable to MFD for
any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES -- Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the
Designated Class. The provisions of the Distribution Plan relating to
operating policies as well as initial approval, renewal, amendment and
termination are substantially identical as they relate to each Class of
shares covered by the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its
continuance is specifically approved at least annually by vote of both the
Trustees and a majority of the Trustees who are not "interested persons"
or financially interested parties of such Plan ("Distribution Plan
Qualified Trustees"). The Distribution Plan also requires that the Fund
and MFD each shall provide the Trustees, and the Trustees shall review, at
least quarterly, a written report of the amounts expended (and purposes
therefor) under such Plan. The Distribution Plan may be terminated at any
time by vote of a majority of the Distribution Plan Qualified Trustees or
by vote of the holders of a majority of the respective class of the Fund's
shares (as defined in "Investment Restrictions" in Part I of this SAI).
All agreements relating to the Distribution Plan entered into between the
Fund or MFD and other organizations must be approved by the Board of
Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under the Distribution Plan must be in writing, will
be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution
Plan Qualified Trustees or by vote of the holders of a majority of the
respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution
expenses without the approval of a majority of the respective class of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) or may not be materially amended in any case without a vote of the
Trustees and a majority of the Distribution Plan Qualified Trustees. The
selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office.
No Trustee who is not an "interested person" has any financial interest in
the Distribution Plan or in any related agreement.
FEATURES UNIQUE TO EACH CLASS OF SHARES
There are certain features of the Distribution Plan that are unique to
each class of shares, as described below.
CLASS A SHARES -- Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid to
MFD). In addition to the initial sales charge, the dealer also generally
receives the ongoing 0.25% per annum service fee, as discussed above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or record for investors who own Class A shares having an aggregate
net asset value less than $750,000, or such other amount as may be
determined from time to time by MFD (MFD, however, may waive this minimum
amount requirement from time to time); or (ii) to any insurance company
which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their
net asset value in connection with annuity agreements issued in connection
with the insurance company's separate accounts.
The distribution fee paid to MFD under the Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover distribution-
related expenses incurred by it under its distribution agreement with the
Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement plans
of Class A shares which are sold at net asset value but which are subject
to a 1% CDSC for one year after purchase). In addition, to the extent that
the aggregate service and distribution fees paid under the Distribution
Plan do not exceed 0.35% per annum of the average daily net assets of the
Fund attributable to Class A shares (0.50% per annum for certain Funds),
the Fund is permitted to pay such distribution-related expenses or other
distribution-related expenses.
CLASS B SHARES -- Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. MFD will advance to dealers
the first year service fee described above at a rate equal to 0.25% of the
purchase price of such shares and, as compensation therefor, MFD may
retain the service fee paid by the Fund with respect to such shares for
the first year after purchase. Dealers will become eligible to receive the
ongoing 0.25% per annum service fee with respect to such shares commencing
in the thirteenth month following purchase.
Except in the case of the first year service fee, no service fees will
be paid to any securities dealer who is the holder or dealer of record for
investors who own Class B shares having an aggregate net asset value of
less than $750,000 or such other amount as may be determined by MFD from
time to time. MFD, however, may waive this minimum amount requirement from
time to time.
Under the Distribution Plan, the Fund pays MFD a distribution fee
equal, on an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class B shares. As noted above, this distribution fee may
be used by MFD to cover its distribution-related expenses under its
distribution agreement with the Fund (including the 3.75% commission it
pays to dealers upon purchase of Class B shares).
CLASS C SHARES -- Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC of 1.00% upon redemption during
the first year. MFD will pay a commission to dealers of 1.00% of the
purchase price of Class C shares purchased through dealers at the time of
purchase. In compensation for this 1.00% commission paid by MFD to
dealers, MFD will retain the 1.00% per annum Class C distribution and
service fees paid by the Fund with respect to such shares for the first
year after purchase, and dealers will become eligible to receive from MFD
the ongoing 1.00% per annum distribution and service fees paid by the Fund
to MFD with respect to such shares commencing in the thirteenth month
following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee
paid to MFD under the Distribution Plan (which MFD in turn pays to
dealers), as discussed above, and a distribution fee paid to MFD (which
MFD also in turn pays to dealers) under the Distribution Plan, equal, on
an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class C shares.
IV INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in pursuing
their investment objectives and principal investment policies, and the
risks associated with these investment techniques and practices. The Fund
will engage only in certain of these investment techniques and practices,
as identified in Part I. Investment practices and techniques that are not
identified in Part I do not apply to the Fund.
V NET INCOME AND DISTRIBUTIONS
MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund
is determined each day during which the New York Stock Exchange is open
for trading (see "Determination of Net Asset Value" below for a list of
days the Exchange is closed).
For this purpose, the net income attributable to shares of a money
market fund (from the time of the immediately preceding determination
thereof) shall consist of (i) all interest income accrued on the portfolio
assets of the money market fund, (ii) less all actual and accrued expenses
of the money market fund determined in accordance with generally accepted
accounting principles, and (iii) plus or minus net realized gains and
losses and net unrealized appreciation or depreciation on the assets of
the money market fund, if any. Interest income shall include discount
earned (including both original issue and market discount) on discount
paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income
is determined, the net asset value per share (i.e., the value of the net
assets of the money market fund divided by the number of shares
outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares in the
shareholder's account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for any
reason the net income determined at any time is a negative amount, which
could occur, for instance, upon default by an issuer of a portfolio
security, the money market fund would first offset the negative amount
with respect to each shareholder account from the dividends declared
during the month with respect to each such account. If and to the extent
that such negative amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the money market fund could reduce the number of its
outstanding shares by treating each shareholder of the money market fund
as having contributed to its capital that number of full and fractional
shares of the money market fund in the account of such shareholder which
represents its proportion of such excess. Each shareholder of the money
market fund will be deemed to have agreed to such contribution in these
circumstances by its investment in the money market fund. This procedure
would permit the net asset value per share of the money market fund to be
maintained at a constant $1.00 per share.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute
to its shareholders dividends equal to all of its net investment income
with such frequency as is disclosed in the Fund's prospectus. These Funds'
net investment income consists of non-capital gain income less expenses.
In addition, these Funds intend to distribute net realized short- and
long-term capital gains, if any, at least annually. Shareholders will be
informed of the tax consequences of such distributions, including whether
any portion represents a return of capital, after the end of each calendar
year.
VI TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
TAXATION OF THE FUND
FEDERAL TAXES -- The Fund (even if it is a fund in a Trust with multiple
series) is treated as a separate entity for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund
has elected (or in the case of a new Fund, intends to elect) to be, and
intends to qualify to be treated each year as, a "regulated investment
company" under Subchapter M of the Code by meeting all applicable
requirements of Subchapter M, including requirements as to the nature of
the Fund's gross income, the amount of its distributions (as a percentage
of both its overall income and any tax-exempt income), and the composition
of its portfolio assets. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. The Fund's
foreign-source income, if any, may be subject to foreign withholding
taxes. If the Fund failed to qualify as a "regulated investment company"
in any year, it would incur a regular federal corporate income tax on all
of its taxable income, whether or not distributed, and Fund distributions
would generally be taxable as ordinary dividend income to the
shareholders.
MASSACHUSETTS TAXES -- As long as it qualifies as a regulated investment
company under the Code, the Fund will not be required to pay Massachusetts
income or excise taxes.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Subject to the special rules discussed
below for Municipal Funds, shareholders of the Fund normally will have to
pay federal income tax and any state or local income taxes on the
dividends and capital gain distributions they receive from the Fund. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether paid in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), whether paid in cash or
reinvested in additional shares, are taxable to shareholders as long-term
capital gains for federal income tax purposes without regard to the length
of time the shareholders have held their shares. Any Fund dividend that is
declared in October, November, or December of any calendar year, payable
to shareholders of record in such a month, and paid during the following
January will be treated as if received by the shareholders on December 31
of the year in which the dividend is declared. The Fund will notify
shareholders regarding the federal tax status of its distributions after
the end of each calendar year.
Any Fund distribution, other than dividends that are declared by the
Fund on a daily basis, will have the effect of reducing the per share net
asset value of Fund shares by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any such distribution
(other than an exempt-interest dividend) may thus pay the full price for
the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION -- If the Fund receives dividend income from
U.S. corporations, a portion of the Fund's ordinary income dividends is
normally eligible for the dividends-received deduction for corporations if
the recipient otherwise qualifies for that deduction with respect to its
holding of Fund shares. Availability of the deduction for particular
corporate shareholders is subject to certain limitations, and deducted
amounts may be subject to the alternative minimum tax or result in certain
basis adjustments.
DISPOSITION OF SHARES -- In general, any gain or loss realized upon a
disposition of Fund shares by a shareholder that holds such shares as a
capital asset will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a
disposition of Fund shares held for six months or less will be treated as
a long-term capital loss to the extent of any distributions of net capital
gain made with respect to those shares. Any loss realized upon a
disposition of shares may also be disallowed under rules relating to "wash
sales." Gain may be increased (or loss reduced) upon a redemption of Class
A Fund shares held for 90 days or less followed by any purchase (including
purchases by exchange or by reinvestment) without payment of an additional
sales charge of Class A shares of the Fund or of any other shares of an
MFS Fund generally sold subject to a sales charge.
DISTRIBUTION/ACCOUNTING POLICIES -- The Fund's current distribution and
accounting policies will affect the amount, timing, and character of
distributions to shareholders and may, under certain circumstances, make
an economic return of capital taxable to shareholders.
U.S. TAXATION OF NON-U.S. PERSONS -- Dividends and certain other payments
(but not including distributions of net capital gains) to persons who are
not citizens or residents of the United States or U.S. entities ("Non-U.S.
Persons") are generally subject to U.S. tax withholding at the rate of
30%. The Fund intends to withhold at that rate on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. Any
amounts overwithheld may be recovered by such persons by filing a claim
for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims.
BACKUP WITHHOLDING -- The Fund is also required in certain circumstances
to apply backup withholding at the rate of 31% on taxable dividends and
capital gain distributions (and redemption proceeds, if applicable) paid
to any non-corporate shareholder (including a Non-U.S. Person) who does
not furnish to the Fund certain information and certifications or who is
otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
FOREIGN INCOME TAXATION OF NON-U.S. PERSONS -- Distributions received from
the Fund by Non-U.S. Persons may also be subject to tax under the laws of
their own jurisdictions.
STATE AND LOCAL INCOME TAXES: U.S. GOVERNMENT SECURITIES -- Dividends paid
by the Fund that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but
generally not distributions of capital gains realized upon the disposition
of such obligations) may be exempt from state and local income taxes. The
Fund generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
CERTAIN SPECIFIC INVESTMENTS -- Any investment in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped
securities, and certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments
with respect to those securities. To distribute this income (as well as
non-cash income described in the next two paragraphs) and avoid a tax on
the Fund, the Fund may be required to liquidate portfolio securities that
it might otherwise have continued to hold, potentially resulting in
additional taxable gain or loss to the Fund. Any investment in residual
interests of a CMO that has elected to be treated as a real estate
mortgage investment conduit, or "REMIC," can create complex tax problems,
especially if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by the Fund on the last business day of each taxable year
will be marked to market (i.e., treated as if closed out) on that day, and
any gain or loss associated with the positions will be treated as 60%
long-term and 40% short-term capital gain or loss. Certain positions held
by the Fund that substantially diminish its risk of loss with respect to
other positions in its portfolio may constitute "straddles," and may be
subject to special tax rules that would cause deferral of Fund losses,
adjustments in the holding periods of Fund securities, and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles that may alter the effects of these rules. The Fund will limit
its activities in options, Futures Contracts, Forward Contracts, short
sales "against the box" and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect to
foreign investments by the Fund. Foreign exchange gains and losses
realized by the Fund may be treated as ordinary income and loss. Use of
foreign currencies for non-hedging purposes and investment by the Fund in
certain "passive foreign investment companies" may be limited in order to
avoid a tax on the Fund. The Fund may elect to mark to market any
investments in "passive foreign investment companies" on the last day of
each year. This election may cause the Fund to recognize income prior to
the receipt of cash payments with respect to those investments; in order
to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or
loss to the Fund.
FOREIGN INCOME TAXES -- Investment income received by the Fund and gains
with respect to foreign securities may be subject to foreign income taxes
withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of
tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance, since the
amount of the Fund's assets to be invested within various countries is not
known.
If the Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, it may elect to "pass
through" to its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by it and thus includable in their gross income for
federal income tax purposes. Shareholders who itemize deductions would
then be allowed to claim a deduction or credit (but not both) on their
federal income tax returns for such amounts, subject to certain
limitations. Shareholders who do not itemize deductions would (subject to
such limitations) be able to claim a credit but not a deduction. No
deduction will be permitted to individuals in computing their alternative
minimum tax liability. If the Fund is not eligible, or does not elect, to
"pass through" to its shareholders foreign income taxes it has paid,
shareholders will not be able to claim any deduction or credit for any
part of the foreign taxes paid by the Fund.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS The following special rules
apply to shareholders of funds whose objective is to invest primarily in
obligations that pay interest that is exempt from federal income tax
("Municipal Funds").
TAX EXEMPT DISTRIBUTIONS -- The portion of a Municipal Fund's
distributions of net investment income that is attributable to interest
from tax-exempt securities will be designated by the Fund as an "exempt-
interest dividend" under the Code and will generally be exempt from
federal income tax in the hands of shareholders so long as at least 50% of
the total value of the Fund's assets consists of tax-exempt securities at
the close of each quarter of the Fund's taxable year. Distributions of
tax-exempt interest earned from certain securities may, however, be
treated as an item of tax preference for shareholders under the federal
alternative minimum tax, and all exempt-interest dividends may increase a
corporate shareholder's alternative minimum tax. Except when the Fund
provides actual monthly percentage breakdowns, the percentage of income
designated as tax-exempt will be applied uniformly to all distributions by
the Fund of net investment income made during each fiscal year of the Fund
and may differ from the percentage of distributions consisting of
tax-exempt interest in any particular month. Shareholders are required to
report exempt-interest dividends received from the Fund on their federal
income tax returns.
TAXABLE DISTRIBUTIONS -- A Municipal Fund may also earn some income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may recognize capital gains and losses as a
result of the disposition of securities and from certain options and
futures transactions. Shareholders normally will have to pay federal
income tax on the non-exempt-interest dividends and capital gain
distributions they receive from the Fund, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. Because the Fund expects to earn primarily tax-exempt
interest income, it is expected that no Fund dividends will qualify for
the dividends-received deduction for corporations.
CONSEQUENCES OF DISTRIBUTIONS BY A MUNICIPAL FUND: EFFECT OF ACCRUED TAX-
EXEMPT INCOME -- Shareholders redeeming shares after tax-exempt income has
been accrued but not yet declared as a dividend should be aware that a
portion of the proceeds realized upon redemption of the shares will
reflect the existence of such accrued tax-exempt income and that this
portion will be subject to tax as a capital gain even though it would have
been tax-exempt had it been declared as a dividend prior to the
redemption. For this reason, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after the Fund declares dividends
representing substantially all the ordinary income (including tax-exempt
income) accrued for that month.
CERTAIN ADDITIONAL INFORMATION FOR MUNICIPAL FUND SHAREHOLDERS -- Interest
on indebtedness incurred by shareholders to purchase or carry Fund shares
will not be deductible for federal income tax purposes. Exempt-interest
dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by private activity
bonds should consult their tax advisors before purchasing Fund shares.
CONSEQUENCES OF REDEMPTION OF SHARES -- Any loss realized on a redemption
of Municipal Fund shares held for six months or less will be disallowed to
the extent of any exempt-interest dividends received with respect to those
shares. If not disallowed, any such loss will be treated as a long-term
capital loss to the extent of any distributions of net capital gain made
with respect to those shares.
STATE AND LOCAL INCOME TAXES: MUNICIPAL OBLIGATIONS -- The exemption of
exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of an
exempt-interest dividend that represents interest received by a regulated
investment company on its holdings of securities issued by that state and
its political subdivisions and instrumentalities. Therefore, the Fund will
report annually to its shareholders the percentage of interest income
earned by it during the preceding year on Municipal Bonds and will
indicate, on a state-by-state basis only, the source of such income.
VII PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other
clients of the Adviser, or any subsidiary of the Adviser in a similar
capacity. Changes in the Fund's investments are reviewed by the Trust's
Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom
as to the markets in and broker-dealers through which it seeks this
result. In the U.S. and in some other countries debt securities are traded
principally in the over-the-counter market on a net basis through dealers
acting for their own account and not as brokers. In other countries both
debt and equity securities are traded on exchanges at fixed commission
rates. The cost of securities purchased from underwriters includes an
underwriter's commission or concession, and the prices at which securities
are purchased and sold from and to dealers include a dealer's mark-up or
mark-down. The Adviser normally seeks to deal directly with the primary
market makers or on major exchanges unless, in its opinion, better prices
are available elsewhere. Subject to the requirement of seeking execution
at the best available price, securities may, as authorized by the Advisory
Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser. At
present no arrangements for the recapture of commission payments are in
effect.
Consistent with the foregoing primary consideration, the Conduct Rules
of the National Association of Securities Dealers, Inc. ("NASD") and such
other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund and of the other investment company clients of
MFD as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the
Adviser, an amount of commission for effecting a securities transaction
for the Fund in excess of the amount other broker-dealers would have
charged for the transaction, if the Adviser determines in good faith that
the greater commission is reasonable in relation to the value of the
brokerage and research services provided by the executing broker-dealer
viewed in terms of either a particular transaction or their respective
overall responsibilities to the Fund or to their other clients. Not all of
such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or of purchasers or
sellers of securities; furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts; and effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
the Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might
charge may be paid to broker-dealers who were selected to execute
transactions on behalf of the Fund and the Adviser's other clients in part
for providing advice as to the availability of securities or of purchasers
or sellers of securities and services in effecting securities transactions
and performing functions incidental thereto, such as clearance and
settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions. Securities
may be bought or sold from time to time through such broker-dealers, on
behalf of the Fund.
The Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The Adviser sometimes uses
evaluations resulting from this effort as a consideration in the selection
of brokers to execute portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence
of the Adviser's receipt of brokerage and research service. To the extent
the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed
those that might otherwise be paid for such portfolio transactions, or for
such portfolio transactions and research, by an amount which cannot be
presently determined. Such services would be useful and of value to the
Adviser in serving both the Fund and other clients and, conversely, such
services obtained by the placement of brokerage business of other clients
would be useful to the Adviser in carrying out its obligations to the
Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the
additional expenses which would be incurred if it should attempt to
develop comparable information through its own staff.
In certain instances there may be securities which are suitable for the
Fund's portfolio as well as for that of one or more of the other clients
of the Adviser or any subsidiary of the Adviser. Investment decisions for
the Fund and for such other clients are made with a view to achieving
their respective investment objectives. It may develop that a particular
security is bought or sold for only one client even though it might be
held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other
clients are selling that same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more
clients are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner believed
by the adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume
of the security as far as the Fund is concerned. In other cases, however,
the Fund believes that its ability to participate in volume transactions
will produce better executions for the Fund.
VIII DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each
day during which the New York Stock Exchange is open for trading. (As of
the date of this SAI, the Exchange is open for trading every weekday
except for the following holidays (or the days on which they are
observed): New Year's Day; Martin Luther King Day; Presidents' Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day and
Christmas Day.) This determination is made once each day as of the close
of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of
shares of the class outstanding.
MONEY MARKET FUNDS
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has determined in good faith constitutes fair value for
the purposes of complying with the 1940 Act. This valuation method will
continue to be used until such time as the Board of Trustees determines
that it does not constitute fair value for such purposes. Each money
market fund will limit its portfolio to those investments in U.S.
dollar-denominated instruments which its Board of Trustees determines
present minimal credit risks, and which are of high quality as determined
by any major rating service or, in the case of any instrument that is not
so rated, of comparable quality as determined by the Board of Trustees.
Each money market fund has also agreed to maintain a dollar-weighted
average maturity of 90 days or less and to invest only in securities
maturing in 13 months or less. The Board of Trustees which oversees each
money market fund has established procedures designed to stabilize its net
asset value per share, as computed for the purposes of sales and
redemptions, at $1.00 per share. If the Board determines that a deviation
from the $1.00 per share price may exist which may result in a material
dilution or other unfair result to investors or existing shareholders, it
will take corrective action it regards as necessary and appropriate, which
action could include the sale of instruments prior to maturity (to realize
capital gains or losses); shortening average portfolio maturity;
withholding dividends; or using market quotations for valuation purposes.
OTHER FUNDS
The following valuation techniques apply to each MFS Fund that is not a
money market fund.
Equity securities in the Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the Nasdaq
stock market system for unlisted national market issues, or at the last
quoted bid price for listed securities in which there were no sales during
the day or for unlisted securities not reported on the Nasdaq stock market
system. Bonds and other fixed income securities (other than short-term
obligations) of U.S. issuers in the Fund's portfolio are valued on the
basis of valuations furnished by a pricing service which utilizes both
dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other market data without
exclusive reliance upon quoted prices or exchange or over-the-counter
prices, since such valuations are believed to reflect more accurately the
fair value of such securities. Forward Contracts will be valued using a
pricing model taking into consideration market data from an external
pricing source. Use of the pricing services has been approved by the Board
of Trustees.
All other securities, futures contracts and options in the Fund's
portfolio (other than short-term obligations) for which the principal
market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or at
the settlement price prior to the determination (or if there has been no
current sale, at the closing bid price) on the primary exchange on which
such securities, futures contracts or options are traded; but if a
securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the Nasdaq
stock market system, in which case they are valued at the last sale price
or, if no sales occurred during the day, at the last quoted bid price.
Short-term obligations in the Fund's portfolio are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Short-term obligations with a remaining maturity in excess of 60 days will
be valued upon dealer supplied valuations. Portfolio investments for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the close of regular trading on the
Exchange. Occasionally, events affecting the values of such securities may
occur between the times at which they are determined and the close of
regular trading on the Exchange which will not be reflected in the
computation of the Fund's net asset value unless the Trustees deem that
such event would materially affect the net asset value in which case an
adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. A share's net asset value is effective
for orders received by the dealer prior to its calculation and received by
MFD prior to the close of that business day.
IX PERFORMANCE INFORMATION
MONEY MARKET FUNDS
Each MFS Fund that is a money market fund will provide current annualized
and effective annualized yield quotations based on the daily dividends of
shares of the money market fund. These quotations may from time to time be
used in advertisements, shareholder reports or other communications to
shareholders.
Any current yield quotation of a money market fund which is used in
such a manner as to be subject to the provisions of Rule 482(d) under the
1933 Act shall consist of an annualized historical yield, carried at least
to the nearest hundredth of one percent based on a specific seven calendar
day period and shall be calculated by dividing the net change in the value
of an account having a balance of one share of that class at the beginning
of the period by the value of the account at the beginning of the period
and multiplying the quotient by 365/7. For this purpose the net change in
account value would reflect the value of additional shares purchased with
dividends declared on the original share and dividends declared on both
the original share and any such additional shares, but would not reflect
any realized gains or losses from the sale of securities or any unrealized
appreciation or depreciation on portfolio securities. In addition, any
effective yield quotation of a money market fund so used shall be
calculated by compounding the current yield quotation for such period by
multiplying such quotation by 7/365, adding 1 to the product, raising the
sum to a power equal to 365/7, and subtracting 1 from the result. These
yield quotations should not be considered as representative of the yield
of a money market fund in the future since the yield will vary based on
the type, quality and maturities of the securities held in its portfolio,
fluctuations in short-term interest rates and changes in the money market
fund's expenses.
OTHER FUNDS
Each MFS Fund that is not a money market fund may quote the following
performance results.
TOTAL RATE OF RETURN -- The Fund will calculate its total rate of return
for each class of shares for certain periods by determining the average
annual compounded rates of return over those periods that would cause an
investment of $1,000 (made with all distributions reinvested and
reflecting the CDSC or the maximum public offering price) to reach the
value of that investment at the end of the periods. The Fund may also
calculate (i) a total rate of return, which is not reduced by any
applicable CDSC and therefore may result in a higher rate of return, (ii)
a total rate of return assuming an initial account value of $1,000, which
will result in a higher rate of return since the value of the initial
account will not be reduced by any applicable sales charge and/or (iii)
total rates of return which represent aggregate performance over a period
or year- by-year performance, and which may or may not reflect the effect
of the maximum or other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially offered
for sale to, and purchased by, the public on different dates (the class
"inception date"). The calculation of total rate of return for a class of
shares which has a later class inception date than another class of shares
of the Fund is based both on (i) the performance of the Fund's newer class
from its inception date and (ii) the performance of the Fund's oldest
class from its inception date up to the class inception date of the newer
class.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares
differ. In calculating total rate of return for a newer class of shares in
accordance with certain formulas required by the SEC, the performance will
be adjusted to take into account the fact that the newer class is subject
to a different sales charge than the oldest class (e.g., if the newer
class is Class A shares, the total rate of return quoted will reflect the
deduction of the initial sales charge applicable to Class A shares; if the
newer class is Class B shares, the total rate of return quoted will
reflect the deduction of the CDSC applicable to Class B shares). However,
the performance will not be adjusted to take into account the fact that
the newer class of shares bears different class specific expenses than the
oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the total rate
of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for
the entire period over which the calculation is based (i.e., the total
rate of return quoted for the newer class will be higher than the return
that would have been quoted had the newer class of shares been outstanding
for the entire period over which the calculation is based if the class
specific expenses for the newer class are higher than the class specific
expenses of the oldest class, and the total rate of return quoted for the
newer class will be lower than the return that would be quoted had the
newer class of shares been outstanding for this entire period if the class
specific expenses for the newer class are lower than the class specific
expenses of the oldest class).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
YIELD -- Any yield quotation for a class of shares of the Fund is based on
the annualized net investment income per share of that class for the 30-
day period. The yield for each class of the Fund is calculated by dividing
the net investment income allocated to that class earned during the period
by the maximum offering price per share of that class of the Fund on the
last day of the period. The resulting figure is then annualized. Net
investment income per share of a class is determined by dividing (i) the
dividends and interest allocated to that class during the period, minus
accrued expense of that class for the period by (ii) the average number of
shares of the class entitled to receive dividends during the period
multiplied by the maximum offering price per share on the last day of the
period. The Fund's yield calculations assume a maximum sales charge of
5.75% in the case of Class A shares and no payment of any CDSC in the case
of Class B and Class C shares.
TAX-EQUIVALENT YIELD -- The tax-equivalent yield for a class of shares of
a Fund is calculated by determining the rate of return that would have to
be achieved on a fully taxable investment in such shares to produce the
after-tax equivalent of the yield of that class. In calculating tax-
equivalent yield, a Fund assumes certain federal tax brackets for
shareholders and does not take into account state taxes.
CURRENT DISTRIBUTION RATE -- Yield, which is calculated according to a
formula prescribed by the Securities and Exchange Commission, is not
indicative of the amounts which were or will be paid to the Fund's
shareholders. Amounts paid to shareholders of each class are reflected in
the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result
by the maximum offering price or net asset value per share on the last day
of the period. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income for
option writing, short-term capital gains and return of invested capital,
and may be calculated over a different period of time. The Fund's current
distribution rate calculation for Class B shares and Class C shares
assumes no CDSC is paid.
GENERAL
From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited
to the following: Money, Fortune, U.S. News and World Report, Kiplinger's
Personal Finance, The Wall Street Journal, Barron's, Investors Business
Daily, Newsweek, Financial World, Financial Planning, Investment Advisor,
USA Today, Pensions and Investments, SmartMoney, Forbes, Global Finance,
Registered Representative, Institutional Investor, the Investment Company
Institute, Johnson's Charts, Morningstar, Lipper Analytical Securities
Corporation, CDA Wiesenberger, Shearson Lehman and Salomon Bros. Indices,
Ibbotson, Business Week, Lowry Associates, Media General, Investment
Company Data, The New York Times, Your Money, Strangers Investment
Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may
also quote evaluations mentioned in independent radio or television
broadcasts and use charts and graphs to illustrate the past performance of
various indices such as those mentioned above and illustrations using
hypothetical rates of return to illustrate the effects of compounding and
tax-deferral. The Fund may advertise examples of the effects of periodic
investment plans, including the principle of dollar cost averaging. In
such a program, an investor invests a fixed dollar amount in a fund at
periodic intervals, thereby purchasing fewer shares when prices are high
and more shares when prices are low. While such a strategy does not assure
a profit or guard against a loss in a declining market, the investor's
average cost per share can be lower than if fixed numbers of shares are
purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio
manager as well as other investment personnel, including such persons'
views on: the economy; securities markets; portfolio securities and their
issuers; investment philosophies, strategies, techniques and criteria used
in the selection of securities to be purchased or sold for the Fund; the
Fund's portfolio holdings; the investment research and analysis process;
the formulation and evaluation of investment recommendations; and the
assessment and evaluation of credit, interest rate, market and economic
risks, and similar or related matters.
The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund
categories established by Morningstar (or other nationally recognized
statistical ratings organizations) and to other MFS Funds.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal,
tax, accounting, insurance, estate planning and other professionals, or
from surveys, regarding individual and family financial planning. Such
views may include information regarding: retirement planning, including
issues concerning social security; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and
disciplined saving and investing); business succession; ideas and
information provided through the MFS Heritage Planning(SM) program, an
intergenerational financial planning assistance program; issues with
respect to insurance (e.g., disability and life insurance and Medicare
supplemental insurance); issues regarding financial and health care
management for elderly family members; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
From time to time, the Fund may also advertise annual returns showing
the cumulative value of an initial investment in the Fund in various
amounts over specified periods, with capital gain and dividend
distributions invested in additional shares or taken in cash, and with no
adjustment for any income taxes (if applicable) payable by shareholders.
MFS FIRSTS
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in-house analytical capability for an investment management
firm.
o 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act" or
"Full Disclosure Act").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal
securities.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard(R) Equity
Fund, the first fund to invest principally in companies deemed to be
union-friendly by an advisory board of senior labor officials, senior
managers of companies with significant labor contracts, academics and
other national labor leaders or experts.
X SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS
The Fund makes available the following programs designed to enable
shareholders to add to their investment or withdraw from it with a minimum
of paper work. These programs are described below and, in certain cases,
in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases)
and may be changed or discontinued at any time by a shareholder or the
Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of MFS Funds
or MFS Fixed Fund (a bank collective investment fund) within a 13-month
period (or 36-month period, in the case of purchases of $1 million or
more), the shareholder may obtain Class A shares of the Fund at the same
reduced sales charge as though the total quantity were invested in one
lump sum by completing the Letter of Intent section of the Account
Application or filing a separate Letter of Intent application (available
from MFSC) within 90 days of the commencement of purchases. Subject to
acceptance by MFD and the conditions mentioned below, each purchase will
be made at a public offering price applicable to a single transaction of
the dollar amount specified in the Letter of Intent application. The
shareholder or his dealer must inform MFD that the Letter of Intent is in
effect each time shares are purchased. The shareholder makes no commitment
to purchase additional shares, but if his purchases within 13 months (or
36 months in the case of purchases of $1 million or more) plus the value
of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a
person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the
shares were paid for by the person signing such Letter. Neither income
dividends nor capital gain distributions taken in additional shares will
apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the
Fund pursuant to the Distribution Investment Program will also not apply
toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by MFSC in the form of shares
registered in the shareholder's name. All income dividends and capital
gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed
(either prior to or by the end of the 13-month period or 36-month period,
as applicable), the shareholder will be notified and the escrowed shares
will be released.
If the intended investment is not completed, MFSC will redeem an
appropriate number of the escrowed shares in order to realize such
difference. Shares remaining after any such redemption will be released by
MFSC. By completing and signing the Account Application or separate Letter
of Intent application, the shareholder irrevocably appoints MFSC his
attorney to surrender for redemption any or all escrowed shares with full
power of substitution in the premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment,
together with the current offering price value of all holdings of Class A,
Class B and Class C shares of that shareholder in the MFS Funds or MFS
Fixed Fund reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. A shareholder must provide MFSC
(or his investment dealer must provide MFD) with information to verify
that the quantity sales charge discount is applicable at the time the
investment is made.
SUBSEQUENT INVESTMENT BY TELEPHONE -- Each shareholder may purchase
additional shares of any MFS Fund by telephoning MFSC toll-free at (800)
225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application
and designate thereon a bank and account number from which purchases will
be made. If a telephone purchase request is received by MFSC on any
business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the
closing net asset value of the shares purchased on that day. MFSC may be
liable for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the
identity of the caller. MFSC will request personal or other information
from the caller, and will normally also record calls. Shareholders should
verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and capital
gains made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of that fund are available for sale. Such investments
will be subject to additional purchase minimums. Distributions will be
invested at net asset value (exclusive of any sales charge) and will not
be subject to any CDSC. Distributions will be invested at the close of
business on the payable date for the distribution. A shareholder
considering the Distribution Investment Program should obtain and read the
prospectus of the other fund and consider the differences in objectives
and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN -- A shareholder may direct MFSC to send him
(or anyone he designates) regular periodic payments based upon the value
of his account. Each payment under a Systematic Withdrawal Plan ("SWP")
must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant
to a SWP generally are limited to 10% of the value of the account at the
time of establishment of the SWP. SWP payments are drawn from the proceeds
of share redemptions (which would be a return of principal and, if
reflecting a gain, would be taxable). Redemptions of Class B and Class C
shares will be made in the following order: (i) shares representing
reinvested distributions; (ii) shares representing undistributed capital
gains and income; and (iii) to the extent necessary, shares representing
direct investments subject to the lowest CDSC. The CDSC will be waived in
the case of redemptions of Class B and Class C shares pursuant to a SWP,
but will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC. To the extent that redemptions for such
periodic withdrawals exceed dividend income reinvested in the account,
such redemptions will reduce and may eventually exhaust the number of
shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be received in full and
fractional shares of the Fund at the net asset value in effect at the
close of business on the record date for such distributions. To initiate
this service, shares having an aggregate value of at least $5,000 either
must be held on deposit by, or certificates for such shares must be
deposited with, MFSC. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be
disadvantageous because of the sales charges included in share purchases
and the imposition of a CDSC on certain redemptions. The shareholder may
deposit into the account additional shares of the Fund, change the payee
or change the dollar amount of each payment. MFSC may charge the account
for services rendered and expenses incurred beyond those normally assumed
by the Fund with respect to the liquidation of shares. No charge is
currently assessed against the account, but one could be instituted by
MFSC on 60 days' notice in writing to the shareholder in the event that
the Fund ceases to assume the cost of these services. The Fund may
terminate any SWP for an account if the value of the account falls below
$5,000 as a result of share redemptions (other than as a result of a SWP)
or an exchange of shares of the Fund for shares of another MFS Fund. Any
SWP may be terminated at any time by either the shareholder or the Fund.
INVEST BY MAIL -- Additional investments of $50 or more may be made at any
time by mailing a check payable to the Fund directly to MFSC. The
shareholder's account number and the name of his investment dealer must be
included with each investment.
GROUP PURCHASES -- A bona fide group and all its members may be treated at
MFD's discretion as a single purchaser and, under the Right of
Accumulation (but not the Letter of Intent) obtain quantity sales charge
discounts on the purchase of Class A shares if the group (1) gives its
endorsement or authorization to the investment program so it may be used
by the investment dealer to facilitate solicitation of the membership,
thus effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals whose
sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder (if
available for sale). Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by MFSC of an application in good
order. Exchanges will continue to be made from a shareholder's account in
any MFS Fund, as long as the balance of the account is sufficient to
complete the exchanges. Additional payments made to a shareholder's
account will extend the period that exchanges will continue to be made
under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before
an exchange is scheduled, such funds may not be available for exchanges
until the following month; therefore, care should be used to avoid
inadvertently terminating the Automatic Exchange Plan through exhaustion
of the account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market
Fund, MFS Government Money Market Fund and Class A shares of MFS Cash
Reserve Fund will be subject to any applicable sales charge. Changes in
amounts to be exchanged to the Fund, the funds to which exchanges are to
be made and the timing of exchanges (monthly or quarterly), or termination
of a shareholder's participation in the Automatic Exchange Plan will be
made after instructions in writing or by telephone (an "Exchange Change
Request") are received by MFSC in proper form (i.e., if in writing --
signed by the record owner(s) exactly as shares are registered; if by
telephone -- proper account identification is given by the dealer or
shareholder of record). Each Exchange Change Request (other than
termination of participation in the program) must involve at least $50.
Generally, if an Exchange Change Request is received by telephone or in
writing before the close of business on the last business day of a month,
the Exchange Change Request will be effective for the following month's
exchange.
A shareholder's right to make additional investments in any of the MFS
Funds, to make exchanges of shares from one MFS Fund to another and to
withdraw from an MFS Fund, as well as a shareholder's other rights and
privileges are not affected by a shareholder's participation in the
Automatic Exchange Plan. The Automatic Exchange Plan is part of the
Exchange Privilege. For additional information regarding the Automatic
Exchange Plan, including the treatment of any CDSC, see "Exchange
Privilege" below.
REINSTATEMENT PRIVILEGE -- Shareholders of the Fund and shareholders of
the other MFS Funds (except MFS Money Market Fund, MFS Government Money
Market Fund and holders of Class A shares of MFS Cash Reserve Fund in the
case where shares of such funds are acquired through direct purchase or
reinvested dividends) who have redeemed their shares have a one-time right
to reinvest the redemption proceeds in the same class of shares of any of
the MFS Funds (if shares of the fund are available for sale) at net asset
value (without a sales charge) and, if applicable, with credit for any
CDSC paid. In the case of proceeds reinvested in MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve
Fund, the shareholder has the right to exchange the acquired shares for
shares of another MFS Fund at net asset value pursuant to the exchange
privilege described below. Such a reinvestment must be made within 90 days
of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited for any CDSC paid are then redeemed within six
years of the initial purchase in the case of Class B shares or 12 months
of the initial purchase in the case of Class C shares and certain Class A
shares, a CDSC will be imposed upon redemption. Although redemptions and
repurchases of shares are taxable events, a reinvestment within a certain
period of time in the same fund may be considered a "wash sale" and may
result in the inability to recognize currently all or a portion of a loss
realized on the original redemption for federal income tax purposes.
Please see your tax adviser for further information.
EXCHANGE PRIVILEGE
Subject to the requirements set forth below, some or all of the shares of
the same class in an account with the Fund for which payment has been
received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the Class of shares) at
net asset value. Exchanges will be made only after instructions in writing
or by telephone (an "Exchange Request") are received for an established
account by MFSC.
EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market
funds) -- No initial sales charge or CDSC will be imposed in connection
with an exchange from shares of an MFS Fund to shares of any other MFS
Fund, except with respect to exchanges from an MFS money market fund to
another MFS Fund which is not an MFS money market fund (discussed below).
With respect to an exchange involving shares subject to a CDSC, the CDSC
will be unaffected by the exchange and the holding period for purposes of
calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND -- Special rules apply with
respect to the imposition of an initial sales charge or a CDSC for
exchanges from an MFS money market fund to another MFS Fund which is not
an MFS money market fund. These rules are described under the caption "How
to Purchase, Exchange and Redeem Shares" in the Prospectuses of those MFS
money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND -- Class A shares of any MFS Fund
held by certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund)
(the "Units"), and Units may be exchanged for Class A shares of any MFS
Fund. With respect to exchanges between Class A shares subject to a CDSC
and Units, the CDSC will carry over to the acquired shares or Units and
will be deducted from the redemption proceeds when such shares or Units
are subsequently redeemed, assuming the CDSC is then payable (the period
during which the Class A shares and the Units were held will be aggregated
for purposes of calculating the applicable CDSC). In the event that a
shareholder initially purchases Units and then exchanges into Class A
shares subject to an initial sales charge of an MFS Fund, the initial
sales charge shall be due upon such exchange, but will not be imposed with
respect to any subsequent exchanges between such Class A shares and Units
with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC
period will commence upon such exchange, and the applicability of the CDSC
with respect to subsequent exchanges shall be governed by the rules set
forth above in this paragraph.
GENERAL -- Each Exchange Request must be in proper form (i.e., if in
writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by
the dealer or shareholder of record), and each exchange must involve
either shares having an aggregate value of at least $1,000 ($50 in the
case of retirement plan participants whose sponsoring organizations
subscribe to MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by MFSC) or all the shares in the
account. Each exchange involves the redemption of the shares of the Fund
to be exchanged and the purchase of shares of the same class of the other
MFS Fund. Any gain or loss on the redemption of the shares exchanged is
reportable on the shareholder's federal income tax return, unless both the
shares received and the shares surrendered in the exchange are held in a
tax-deferred retirement plan or other tax-exempt account. No more than
five exchanges may be made in any one Exchange Request by telephone. If
the Exchange Request is received by MFSC prior to the close of regular
trading on the Exchange the exchange usually will occur on that day if all
the requirements set forth above have been complied with at that time.
However, payment of the redemption proceeds by the Fund, and thus the
purchase of shares of the other MFS Fund, may be delayed for up to seven
days if the Fund determines that such a delay would be in the best
interest of all its shareholders. Investment dealers which have satisfied
criteria established by MFD may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the requirements set forth above.
Additional information with respect to any of the MFS Funds, including
a copy of its current prospectus, may be obtained from investment dealers
or MFSC. A shareholder considering an exchange should obtain and read the
prospectus of the other fund and consider the differences in objectives
and policies before making any exchange.
Any state income tax advantages for investment in shares of each state-
specific series of MFS Municipal Series Trust may only benefit residents
of such states. Investors should consult with their own tax advisers to be
sure this is an appropriate investment, based on their residency and each
state's income tax laws. The exchange privilege (or any aspect of it) may
be changed or discontinued and is subject to certain limitations imposed
from time to time at the discretion of the Funds in order to protect the
Funds.
TAX-DEFERRED RETIREMENT PLANS
Shares of the Fund may be purchased by all types of tax-deferred
retirement plans. MFD makes available, through investment dealers, plans
and/or custody agreements, the following:
o Traditional Individual Retirement Accounts (IRAs) (for individuals who
desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who
desire to make limited contributions to a tax-favored retirement
program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public school systems and certain non-profit organizations); and
o Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or
group establishing the plan) and contain specific information about the
plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by the trustee, custodian or MFD, tax consequences
and redemption information, see the specific documents for that plan. Plan
documents other than those provided by MFD may be used to establish any of
the plans described above. Third party administrative services, available
for some corporate plans, may limit or delay the processing of
transactions.
An investor should consult with his tax adviser before establishing
any of the tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any
retirement plan qualified under Internal Revenue Code Section 401(a) or
403(b) if the retirement plan and/or the sponsoring organization subscribe
to the MFS FUNDamental 401(k) Plan or another similar Section 401(a) or
403(b) recordkeeping program made available by MFSC.
XI DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional Shares of Beneficial Interest (without par value)
of one or more separate series and to divide or combine the shares of any
series into a greater or lesser number of shares without thereby changing
the proportionate beneficial interests in that series. The Declaration of
Trust further authorizes the Trustees to classify or reclassify any series
of shares into one or more classes. Each share of a class of the Fund
represents an equal proportionate interest in the assets of the Fund
allocable to that class. Upon liquidation of the Fund, shareholders of
each class of the Fund are entitled to share pro rata in the Fund's net
assets allocable to such class available for distribution to shareholders.
The Trust reserves the right to create and issue a number of series and
additional classes of shares, in which case the shares of each class of a
series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote
in the election of Trustees and on other matters submitted to meetings of
shareholders. To the extent a shareholder of the Fund owns a controlling
percentage of the Fund's shares, such shareholder may affect the outcome
of such matters to a greater extent than other Fund shareholders. Although
Trustees are not elected annually by the shareholders, the Declaration of
Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the
Trust. A meeting of shareholders will be called upon the request of
shareholders of record holding in the aggregate not less than 10% of the
outstanding voting securities of the Trust. No material amendment may be
made to the Declaration of Trust without the affirmative vote of a
majority of the Trust's outstanding shares (as defined in "Investment
Restrictions" in Part I of this SAI). The Trust or any series of the Trust
may be terminated (i) upon the merger or consolidation of the Trust or any
series of the Trust with another organization or upon the sale of all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the
holders of two-thirds of the Trust's or the affected series' outstanding
shares voting as a single class, or of the affected series of the Trust,
except that if the Trustees recommend such merger, consolidation or sale,
the approval by vote of the holders of a majority of the Trust's or the
affected series' outstanding shares will be sufficient, or (ii) upon
liquidation and distribution of the assets of a Fund, if approved by the
vote of the holders of two-thirds of its outstanding shares of the Trust,
or (iii) by the Trustees by written notice to its shareholders. If not so
terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust
may, under certain circumstances, be held personally liable as partners
for its obligations. However, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust
and provides for indemnification and reimbursement of expenses out of
Trust property for any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust also provides that the
Trust shall maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Trust and
its shareholders and the Trustees, officers, employees and agents of the
Trust covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which both inadequate insurance existed and
the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or
failure to act, but nothing in the Declaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by reason of
his willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
<PAGE>
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PART II - APPENDIX A
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WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the CDSC
for Class A shares are waived (Section II), and the CDSC for Class B and
Class C shares is waived (Section III). Some of the following information
will not apply to certain funds in the MFS Family of Funds, depending on
which classes of shares are offered by such fund. As used in this Appendix,
the term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD.
I WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any fund in the MFS Funds pursuant to the
Distribution Investment Program.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
AFFILIATES OF AN MFS FUND/CERTAIN DEALERS.
Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses or
domestic partners identified above and certain trusts, pension,
profit-sharing or other retirement plans for the sole benefit of such
persons, provided the shares are not resold except to the MFS Fund
which issued the shares; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> Distributions from a 401(a) or ESP Plan that has invested its
assets in one or more of the MFS Funds for more than 10 years from
the later to occur of: (i) January 1, 1993 or (ii) the date such
401(a) or ESP Plan first invests its assets in one or more of the
MFS Funds. The sales charges will be waived in the case of a
redemption of all of the 401(a) or ESP Plan's shares in all MFS
Funds (i.e., all the assets of the 401(a) or ESP Plan invested in
the MFS Funds are withdrawn), unless immediately prior to the
redemption, the aggregate amount invested by the 401(a) or ESP Plan
in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of
the total value of the 401(a) or ESP Plan's assets in the MFS
Funds, in which case the sales charges will not be waived; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or one
of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping services
are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination
of employment.
CERTAIN TRANSFERS OF REGISTRATION
(CDSC WAIVER ONLY).
Shares transferred:
o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple accounts
maintained by MFSC on behalf of individual participants of such Plan,
provided that the Plan sponsor subscribes to the MFS FUNDamental 401(k)
Plan or another similar recordkeeping system made available by MFSC.
LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).
II WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
WRAP ACCOUNT AND FUND "SUPERMARKET"
INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account or
a similar program under which such clients pay a fee to such dealer.
INVESTMENT BY INSURANCE COMPANY SEPARATE
ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is
equal to or exceeds $500,000, either alone or in aggregate with the
current market value of the plan's existing Class A shares.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age
of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where the retirement plan and/or sponsoring organization
demonstrates to the satisfaction of, and certifies to, MFSC that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a
market value of $500,000 or more invested in shares of any class or
classes of the MFS Family of Funds and aggregate assets of at least
$10 million;
provided, however, that the CDSC will not be waived (i.e., it will be
imposed) (a) with respect to plans which establish an account with MFSC on
or after November 1, 1997, in the event that the plan makes a complete
redemption of all of its shares in the MFS Family of Funds, or (b) with
respect to plans which establish an account with MFSC prior to November 1,
1997, in the event that there is a change in law or regulations which result
in a material adverse change to the tax advantaged nature of the plan, or in
the event that the plan and/or sponsoring organization: (i) becomes
insolvent or bankrupt; (ii) is terminated under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated with any
other entity.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the proceeds
of a redemption of Class I shares of any of the MFS Funds.
III WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs where
the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account value at the time of
establishment.
DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to MFSC).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
provided, however, that the CDSC will not be waived (i.e., it will
be imposed) in the event that there is a change in law or
regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is
terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with any other entity.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its account
with MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s)
with any MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver category.
<PAGE>
--------------------
PART II - APPENDIX B
--------------------
DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions made to
dealers by MFD in connection with the sale of Fund shares. As used in this
Appendix, the term "dealer" includes any broker, dealer, bank (including
bank trust departments), registered investment adviser, financial planner
and any other financial institutions having a selling agreement or other
similar agreement with MFD.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as shown
in Appendix D to Part I of this SAI. The difference between the total amount
invested and the sum of (a) the net proceeds to the Fund and (b) the dealer
reallowance, is the amount of the initial sales charge retained by MFD (as
shown in Appendix D to Part I of this SAI). Because of rounding in the
computation of offering price, the portion of the sales charge retained by
MFD may vary and the total sales charge may be more or less than the sales
charge calculated using the sales charge expressed as a percentage of the
offering price or as a percentage of the net amount invested as listed in
the Prospectus.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments made through such dealers as follows:
COMMISSION
PAID BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
------------------------------------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
Except for those employer sponsored retirement plans described below, for
purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares purchases for
each shareholder account (and certain other accounts for which the
shareholder is a record or beneficial holder) will be aggregated over a
12-month period (commencing from the date of the first such purchase).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
CLASS B SHARES
For purchases of Class B shares, MFD will pay commissions to dealers of
3.75% of the purchase price of Class B shares purchased through dealers. MFD
will also advance to dealers the first year service fee payable under the
Fund's Distribution Plan at a rate equal to 0.25% of the purchase price of
such shares. Therefore, the total amount paid to a dealer upon the sale of
Class B shares is 4% of the purchase price of the shares (commission rate of
3.75% plus a service fee equal to 0.25% of the purchase price).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and December
31, 1998, MFD pays an amount to dealers equal to 3.00% of the amount
purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement of
the first year service fee equal to 0.25% of the purchase price payable
under the Fund's Distribution Plan.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided that
the plan establishment paperwork is received by MFSC in good order on or
after November 15, 1998), MFD pays no up front commissions to dealers, but
instead pays an amount to dealers equal to 1% per annum of the average daily
net assets of the Fund attributable to plan assets, payable at the rate of
0.25% at the end of each calendar quarter, in arrears. This commission
structure is not available with respect to a plan with a pre-existing
account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper
Plus product.
CLASS C SHARES
For purchases of Class C shares, MFD will pay dealers 1.00% of the purchase
price of Class C shares purchased through dealers and, as compensation
therefor, MFD will retain the 1.00% per annum distribution and service fee
paid under the Fund's Distribution Plan to MFD for the first year after
purchase.
ADDITIONAL DEALER COMMISSIONS/CONCESSIONS
Dealers may receive different compensation with respect to sales of Class A,
Class B and Class C shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified Funds sold by such dealer during a specified sales period.
In addition, MFD or its affiliates may, from time to time, pay dealers an
additional commission equal to 0.50% of the net asset value of all of the
Class B and/or Class C shares of certain specified Funds sold by such dealer
during a specified sales period. In addition, from time to time, MFD, at its
expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell or arrange for the sale of
shares of the Fund. Such concessions provided by MFD may include financial
assistance to dealers in connection with preapproved conferences or
seminars, sales or training programs for invited registered representatives
and other employees, payment for travel expenses, including lodging,
incurred by registered representatives and other employees for such seminars
or training programs, seminars for the public, advertising and sales
campaigns regarding one or more Funds, and/ or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives and other employees in
group meetings or to help pay the expenses of sales contests. Other
concessions may be offered to the extent not prohibited by state laws or any
self-regulatory agency, such as the NASD.
<PAGE>
--------------------
PART II - APPENDIX C
--------------------
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
ASSET-BACKED SECURITIES: The Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Fund may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities (such collateral referred
to collectively as "Mortgage Assets"). Unless the context indicates
otherwise, all references herein to CMOs include multiclass pass-through
securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in
innumerable ways. In a common structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the classes
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any
class of CMOs until all other classes having an earlier stated maturity or
final distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security). See "Stripped Mortgage-Backed Securities" below for a
discussion of the risks of investing in these stripped securities and of
investing in classes consisting of interest payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special
purpose corporations, are backed by a pool of assets, such as credit card
and automobile loan receivables, representing the obligations of a number of
different parties. These securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the
benefit of any security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another
party, there is a risk that the purchaser would acquire an interest superior
to that of the holders of the related automobile receivables. In addition,
because of the large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. The underlying assets
(e.g., loans) are also subject to prepayments which shorten the securities'
weighted average life and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default ensures payment through
insurance policies or letters of credit obtained by the issuer or sponsor
from third parties. The Fund will not pay any additional or separate fees
for credit support. The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit
risk associated with the underlying assets. Delinquency or loss in excess of
that anticipated or failure of the credit support could adversely affect the
return on an investment in such a security.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage
pools are paid off. The average lives of mortgage pass-throughs are variable
when issued because their average lives depend on prepayment rates. The
average life of these securities is likely to be substantially shorter than
their stated final maturity as a result of unscheduled principal prepayment.
Prepayments on underlying mortgages result in a loss of anticipated
interest, and all or part of a premium if any has been paid, and the actual
yield (or total return) to the Fund may be different than the quoted yield
on the securities. Mortgage premiums generally increase with falling
interest rates and decrease with rising interest rates. Like other fixed
income securities, when interest rates rise the value of a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
In the event of an increase in interest rates which results in a decline in
mortgage prepayments, the anticipated maturity of mortgage pass-through
securities held by the Fund may increase, effectively changing a security
which was considered short or intermediate-term at the time of purchase into
a long-term security. Long- term securities generally fluctuate more widely
in response to changes in interest rates than short or intermediate-term
securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by
the full faith and credit of the U.S. Government (in the case of securities
guaranteed by the Government National Mortgage Association ("GNMA")); or
guaranteed by agencies or instrumentalities of the U.S. Government (such as
the Federal National Mortgage Association "FNMA") or the Federal Home Loan
Mortgage Corporation, ("FHLMC") which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and
other secondary market issuers). Some of these mortgage pass-through
securities may be supported by various forms of insurance or guarantees.
Interests in pools of mortgage-related securities differ from other forms
of debt securities, which normally provide for periodic payment of interest
in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by prepayments of principal
resulting from the sale, refinancing or foreclosure of the underlying
property, net of fees or costs which may be incurred. Some mortgage
pass-through securities (such as securities issued by the GNMA) are
described as "modified pass-through." These securities entitle the holder to
receive all interests and principal payments owed on the mortgages in the
mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities
is GNMA. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the timely
payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks
and mortgage bankers) and backed by pools of Federal Housing Administration
("FHA") insured or Veterans Administration ("VA") guaranteed mortgages.
These guarantees, however, do not apply to the market value or yield of
mortgage pass-through securities. GNMA securities are often purchased at a
premium over the maturity value of the underlying mortgages. This premium is
not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S. Government) include FNMA and FHLMC.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional residential
mortgages (i.e., mortgages not insured or guaranteed by any governmental
agency) from a list of approved seller/servicers which include state and
federally chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment by FNMA of
principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) for FHLMC's national portfolio. FHLMC guarantees timely
payment of interest and ultimate collection of principal regardless of the
status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also be
the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments
in the former pools. However, timely payment of interest and principal of
mortgage loans in these pools may be supported by various forms of insurance
or guarantees, including individual loan, title, pool and hazard insurance
and letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers and the mortgage poolers. There can
be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. The Fund
may also buy mortgage-related securities without insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS") which are derivative
multiclass mortgage securities issued by agencies or instrumentalities of
the U.S. Government, or by private originators of, or investors in, mortgage
loans, including savings and loan institutions, mortgage banks, commercial
banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving some of
the interest and most of the principal from the Mortgage Assets, while the
other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "I0" class) while the other class will
receive all of the principal (the principal-only or "P0" class). The yield
to maturity on an I0 is extremely sensitive to the rate of principal
payments, including prepayments on the related underlying Mortgage Assets,
and a rapid rate of principal payments may have a material adverse effect on
such security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Fund may
fail to fully recoup its initial investment in these securities. The market
value of the class consisting primarily or entirely of principal payments
generally is unusually volatile in response to changes in interest rates.
Because SMBS were only recently introduced, established trading markets for
these securities have not yet developed, although the securities are traded
among institutional investors and investment banking firms.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct indebtedness. In purchasing a loan, the Fund acquires some or all of
the interest of a bank or other lending institution in a loan to a
corporate, governmental or other borrower. Many such loans are secured,
although some may be unsecured. Such loans may be in default at the time of
purchase. Loans that are fully secured offer the Fund more protection than
an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the corporate borrowers obligation, or
that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on behalf of
the others in the syndicate, and for enforcing its and their other rights
against the borrower. Alternatively, such loans may be structured as a
novation, pursuant to which the Fund would assume all of the rights of the
lending institution in a loan or as an assignment, pursuant to which the
Fund would purchase an assignment of a portion of a lenders interest in a
loan either directly from the lender or through an intermediary. The Fund
may also purchase trade or other claims against companies, which generally
represent money owned by the company to a supplier of goods or services.
These claims may also be purchased at a time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain date
or on demand. These commitments may have the effect of requiring the Fund to
increase its investment in a company at a time when the Fund might not
otherwise decide to do so (including at a time when the company's financial
condition makes it unlikely that such amounts will be repaid). To the extent
that the Fund is committed to advance additional funds, it will at all times
hold and maintain in a segregated account cash or other high grade debt
obligations in an amount sufficient to meet such commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loans and other
direct indebtedness which the Fund will purchase, the Adviser will rely upon
its own (and not the original lending institution's) credit analysis of the
borrower. As the Fund may be required to rely upon another lending
institution to collect and pass onto the Fund amounts payable with respect
to the loan and to enforce the Fund's rights under the loan and other direct
indebtedness, an insolvency, bankruptcy or reorganization of the lending
institution may delay or prevent the Fund from receiving such amounts. In
such cases, the Fund will evaluate as well the creditworthiness of the
lending institution and will treat both the borrower and the lending
institution as an "issuer" of the loan for purposes of certain investment
restrictions pertaining to the diversification of the Fund's portfolio
investments. The highly leveraged nature of many such loans and other direct
indebtedness may make such loans and other direct indebtedness especially
vulnerable to adverse changes in economic or market conditions. Investments
in such loans and other direct indebtedness may involve additional risk to
the Fund.
LOWER RATED BONDS: The Fund may invest in fixed income securities rated Ba
or lower by Moody's or BB or lower by S&P, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. No minimum rating standard is required
by the Fund. These securities are considered speculative and, while
generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including the
possibility of default or bankruptcy of the issuers of such securities) and
may involve greater volatility of price (especially during periods of
economic uncertainty or change) than securities in the higher rating
categories and because yields vary over time, no specific level of income
can ever be assured. These lower rated high yielding fixed income securities
generally tend to reflect economic changes (and the outlook for economic
growth), short-term corporate and industry developments and the market's
perception of their credit quality (especially during times of adverse
publicity) to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although
these lower rated fixed income securities are also affected by changes in
interest rates). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of
default by the issuers of these securities and may do so in the future,
especially in the case of highly leveraged issuers. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than
the market for investment grade fixed income securities. Furthermore, the
liquidity of these lower rated securities may be affected by the market's
perception of their credit quality. Therefore, the Adviser's judgment may at
times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the
market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued
by these rating agencies, but rather to supplement such ratings with the
Adviser's own independent and ongoing review of credit quality. To the
extent a Fund invests in these lower rated securities, the achievement of
its investment objectives may be a more dependent on the Adviser's own
credit analysis than in the case of a fund investing in higher quality fixed
income securities. These lower rated securities may also include zero coupon
bonds, deferred interest bonds and PIK bonds.
MUNICIPAL BONDS: The Fund may invest in debt securities issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds"). Municipal Bonds include debt securities which pay
interest income that is subject to the alternative minimum tax. The Fund may
invest in Municipal Bonds whose issuers pay interest on the Bonds from
revenues from projects such as multifamily housing, nursing homes, electric
utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of
the bondholders creates additional risks associated with owning real estate,
including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because of
the impossibility of precisely predicting demand for mortgages from the
proceeds of such an issue, there is a risk that the proceeds of the issue
will be in excess of demand, which would result in early retirement of the
bonds by the issuer. Moreover, such housing revenue bonds depend for their
repayment upon the cash flow from the underlying mortgages, which cannot be
precisely predicted when the bonds are issued. Any difference in the actual
cash flow from such mortgages from the assumed cash flow could have an
adverse impact upon the ability of the issuer to make scheduled payments of
principal and interest on the bonds, or could result in early retirement of
the bonds. Additionally, such bonds depend in part for scheduled payments of
principal and interest upon reserve funds established from the proceeds of
the bonds, assuming certain rates of return on investment of such reserve
funds. If the assumed rates of return are not realized because of changes in
interest rate levels or for other reasons, the actual cash flow for
scheduled payments of principal and interest on the bonds may be inadequate.
The financing of multi-family housing projects is affected by a variety of
factors, including satisfactory completion of construction within cost
constraints, the achievement and maintenance of a sufficient level of
occupancy, sound management of the developments, timely and adequate
increases in rents to cover increases in operating expenses, including
taxes, utility rates and maintenance costs, changes in applicable laws and
governmental regulations and social and economic trends.
Electric utilities face problems in financing large construction programs
in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost of
competing fuel sources, difficulty in obtaining sufficient rate increases
and other regulatory problems, the effect of energy conservation and
difficulty of the capital market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing
for the elderly which offer residents the independence of condominium life
style and, if needed, the comprehensive care of nursing home services. Bonds
to finance these facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to
maintain debt service payments. Moreover, in the case of life care
facilities, since a portion of housing, medical care and other services may
be financed by an initial deposit, there may be risk if the facility does
not maintain adequate financial reserves to secure estimated actuarial
liabilities. The ability of management to accurately forecast inflationary
cost pressures weighs importantly in this process. The facilities may also
be affected by regulatory cost restrictions applied to health care delivery
in general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative health
care or conventional housing facilities in the private or public sector.
Hospital bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. A hospital's gross
receipts and net income available to service its debt are influenced by
demand for hospital services, the ability of the hospital to provide the
services required, management capabilities, economic developments in the
service area, efforts by insurers and government agencies to limit rates and
expenses, confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding, and possible federal legislation limiting the rates of
increase of hospital charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from of a lease or
installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have special
risks not normally associated with general obligation or revenue bonds.
Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations are deemed to be inapplicable because of the inclusion in many
leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although
the obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. There are, of course, variations in
the security of municipal lease securities, both within a particular
classification and between classifications, depending on numerous factors.
The Fund may also invest in bonds for industrial and other projects, such
as sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes
and wastes involved in these projects may include hazardous components,
there are risks associated with their production, handling and disposal.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade securities.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are backed
by the full faith and credit of the U.S. Government and (ii) U.S. Government
Securities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the GNMA; some of
which are backed only by the credit of the issuer itself, e.g., obligations
of the Student Loan Marketing Association; and some of which are supported
by the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the FNMA.
U.S. Government Securities also include interests in trust or other
entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Fund may invest in floating or
variable rate securities. Investments in floating or variable rate
securities normally will involve industrial development or revenue bonds
which provide that the rate of interest is set as a specific percentage of a
designated base rate, such as rates on Treasury Bonds or Bills or the prime
rate at a major commercial bank, and that a bondholder can demand payment of
the obligations on behalf of the Fund on short notice at par plus accrued
interest, which amount may be more or less than the amount the bondholder
paid for them. The maturity of floating or variable rate obligations
(including participation interests therein) is deemed to be the longer of
(i) the notice period required before the Fund is entitled to receive
payment of the obligation upon demand or (ii) the period remaining until the
obligation's next interest rate adjustment. If not redeemed by the Fund
through the demand feature, the obligations mature on a specified date which
may range up to thirty years from the date of issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may
invest in zero coupon bonds, deferred interest bonds and bonds on which the
interest is payable in kind ("PIK bonds"). Zero coupon and deferred interest
bonds are debt obligations which are issued at a significant discount from
face value. The discount approximates the total amount of interest the bonds
will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of
the security at the time of issuance. While zero coupon bonds do not require
the periodic payment of interest, deferred interest bonds provide for a
period of delay before the regular payment of interest begins. PIK bonds are
debt obligations which provide that the issuer may, at its option, pay
interest on such bonds in cash or in the form of additional debt
obligations. Such investments benefit the issuer by mitigating its need for
cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value than debt
obligations which make regular payments of interest. The Fund will accrue
income on such investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities
to satisfy the Fund's distribution obligations.
EQUITY SECURITIES
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks; securities
such as bonds, warrants or rights that are convertible into stocks; and
depositary receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized market.
FOREIGN SECURITIES EXPOSURE
The Fund may invest in various types of foreign securities, or securities
which provide the Fund with exposure to foreign securities or foreign
currencies, as discussed below:
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public and
private entities in certain emerging markets for new bonds in connection
with debt restructurings under a debt restructuring plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Argentina,
Brazil, Bulgaria, Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan,
Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Slovenia,
Uruguay and Venezuela. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter
secondary markets. U.S. dollar-denominated, collateralized Brady Bonds,
which may be fixed rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds
having the same maturity as the bonds. Brady Bonds are often viewed as
having three or four valuation components: the collateralized repayment of
principal at final maturity; the collateralized interest payments; the
uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the
"residual risk"). In light of the residual risk of Brady Bonds and the
history of defaults of countries issuing Brady Bonds with respect to
commercial bank loans by public and private entities, investments in Brady
Bonds may be viewed as speculative.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of depositary
receipts. ADRs are certificates by a U.S. depositary (usually a bank) and
represent a specified quantity of shares of an underlying non- U.S. stock on
deposit with a custodian bank as collateral. GDRs and other types of
depositary receipts are typically issued by foreign banks or trust companies
and evidence ownership of underlying securities issued by either a foreign
or a U.S. company. Generally, ADRs are in registered form and are designed
for use in U.S. securities markets and GDRs are in bearer form and are
designed for use in foreign securities markets. For the purposes of the
Fund's policy to invest a certain percentage of its assets in foreign
securities, the investments of the Fund in ADRs, GDRs and other types of
depositary receipts are deemed to be investments in the underlying
securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of U.S.
depositories. Under the terms of most sponsored arrangements, depositories
agree to distribute notices of shareholder meetings and voting instructions,
and to provide shareholder communications and other information to the ADR
holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation
to distribute shareholder communications received from the issuer of the
deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of
ADR. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depositary receipts in
the United States can reduce costs and delays as well as potential currency
exchange and other difficulties. The Fund may purchase securities in local
markets and direct delivery of these ordinary shares to the local depositary
of an ADR agent bank in foreign country. Simultaneously, the ADR agents
create a certificate which settles at the Fund's custodian in five days. The
Fund may also execute trades on the U.S. markets using existing ADRs. A
foreign issuer of the security underlying an ADR is generally not subject to
the same reporting requirements in the United States as a domestic issuer.
Accordingly, information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its country and
the market value of an ADR may not reflect undisclosed material information
concerning the issuer of the underlying security. ADRs may also be subject
to exchange rate risks if the underlying foreign securities are denominated
in a foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in
dollar-denominated foreign debt securities. Investing in dollar-denominated
foreign debt represents a greater degree of risk than investing in domestic
securities, due to less publicly available information, less securities
regulation, war or expropriation. Special considerations may include higher
brokerage costs and thinner trading markets. Investments in foreign
countries could be affected by other factors including extended settlement
periods.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many
aspects of the private sector through the ownership or control of many
companies, including some of the largest in any given country. As a
result, government actions in the future could have a significant effect
on economic conditions in emerging markets, which in turn, may adversely
affect companies in the private sector, general market conditions and
prices and yields of certain of the securities in the Fund's portfolio.
Expropriation, confiscatory taxation, nationalization, political,
economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and
could adversely affect the Fund's assets should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse in
the event of a default with respect to certain debt obligations it may
hold. If the issuer of a fixed income security owned by the Fund
defaults, the Fund may incur additional expenses to seek recovery. Debt
obligations issued by emerging market governments differ from debt
obligations of private entities; remedies from defaults on debt
obligations issued by emerging market governments, unlike those on
private debt, must be pursued in the courts of the defaulting party
itself. The Fund's ability to enforce its rights against private issuers
may be limited. The ability to attach assets to enforce a judgment may be
limited. Legal recourse is therefore somewhat diminished. Bankruptcy,
moratorium and other similar laws applicable to private issuers of debt
obligations may be substantially different from those of other countries.
The political context, expressed as an emerging market governmental
issuer's willingness to meet the terms of the debt obligation, for
example, is of considerable importance. In addition, no assurance can be
given that the holders of commercial bank debt may not contest payments
to the holders of debt obligations in the event of default under
commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may be
denominated in foreign currencies and international currency units and
the Fund may invest a portion of its assets directly in foreign
currencies. Accordingly, the weakening of these currencies and units
against the U.S. dollar may result in a decline in the Fund's asset
value.
Some emerging market countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, there is risk
that certain emerging market countries may restrict the free conversion
of their currencies into other currencies. Further, certain emerging
market currencies may not be internationally traded. Certain of these
currencies have experienced a steep devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a Fund's portfolio
securities are denominated may have a detrimental impact on the Fund's
net asset value.
o Inflation -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had and may continue to
have adverse effects on the economies and securities markets of certain
emerging market countries. In an attempt to control inflation, wage and
price controls have been imposed in certain countries. Of these
countries, some, in recent years, have begun to control inflation through
prudent economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities markets
of emerging market countries are substantially smaller, less developed,
less liquid and more volatile than the major securities markets in the
U.S. Disclosure and regulatory standards are in many respects less
stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors
in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to
volume of trading in the securities of U.S. issuers could cause prices to
be erratic for reasons apart from factors that affect the soundness and
competitiveness of the securities issuers. For example, limited market
size may cause prices to be unduly influenced by traders who control
large positions. Adverse publicity and investors' perceptions, whether or
not based on in-depth fundamental analysis, may decrease the value and
liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Fund's securities in
such markets may not be readily available. The Fund may suspend
redemption of its shares for any period during which an emergency exists,
as determined by the Securities and Exchange Commission (the "SEC").
Accordingly, if the Fund believes that appropriate circumstances exist,
it will promptly apply to the SEC for a determination that an emergency
is present. During the period commencing from the Fund's identification
of such condition until the date of the SEC action, the Fund's securities
in the affected markets will be valued at fair value determined in good
faith by or under the direction of the Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high degree
of risk. The governmental entity that controls the repayment of sovereign
debt may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. A governmental
entity's willingness or ability to repay principal and interest due in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative
size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund and
the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements
from foreign governments, multilateral agencies and others abroad to
reduce principal and interest on their debt. The commitment on the part
of these governments, agencies and others to make such disbursements may
be conditioned on a governmental entity's implementation of economic
reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when due
may result in the cancellation of such third parties' commitments to lend
funds to the governmental entity, which may further impair such debtor's
ability or willingness to service its debts in a timely manner.
Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Fund) may be requested to
participate in the rescheduling of such debt and to extend further loans
to governmental entities. There is no bankruptcy proceedings by which
sovereign debt on which governmental entities have defaulted may be
collected in whole or in part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging market
governmental issuers have not been able to make payments of interest on
or principal of debt obligations as those payments have come due.
Obligations arising from past restructuring agreements may affect the
economic performance and political and social stability of those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its
access to international credits and investments. An emerging market whose
exports are concentrated in a few commodities could be vulnerable to a
decline in the international prices of one or more of those commodities.
Increased protectionism on the part of an emerging market's trading
partners could also adversely affect the country's exports and tarnish
its trade account surplus, if any. To the extent that emerging markets
receive payment for their exports in currencies other than dollars or
non-emerging market currencies, its ability to make debt payments
denominated in dollars or non-emerging market currencies could be
affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of
emerging markets to these forms of external funding may not be certain,
and a withdrawal of external funding could adversely affect the capacity
of emerging market country governmental issuers to make payments on their
obligations. In addition, the cost of servicing emerging market debt
obligations can be affected by a change in international interest rates
since the majority of these obligations carry interest rates that are
adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the
country. Fluctuations in the level of these reserves affect the amount of
foreign exchange readily available for external debt payments and thus
could have a bearing on the capacity of emerging market countries to make
payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be reduced
by a withholding tax on the source or other taxes imposed by the emerging
market countries in which the Fund makes its investments. The Fund's net
asset value may also be affected by changes in the rates or methods of
taxation applicable to the Fund or to entities in which the Fund has
invested. The Adviser will consider the cost of any taxes in determining
whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
FOREIGN SECURITIES: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c)
the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or
services performed in that country; or (e) the issuer has 50% or more of its
assets in that country.
Investing in securities of foreign issuers generally involves risks not
ordinarily associated with investing in securities of domestic issuers.
These include changes in currency rates, exchange control regulations,
securities settlement practices, governmental administration or economic or
monetary policy (in the United States or abroad) or circumstances in
dealings between nations. Costs may be incurred in connection with
conversions between various currencies. Special considerations may also
include more limited information about foreign issuers, higher brokerage
costs, different accounting standards and thinner trading markets. Foreign
securities markets may also be less liquid, more volatile and less subject
to government supervision than in the United States. Investments in foreign
countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. As a result
of its investments in foreign securities, the Fund may receive interest or
dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are
denominated. Under certain circumstances, such as where the Adviser believes
that the applicable exchange rate is unfavorable at the time the currencies
are received or the Adviser anticipates, for any other reason, that the
exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. While the holding of currencies will permit the
Fund to take advantage of favorable movements in the applicable exchange
rate, such strategy also exposes the Fund to risk of loss if exchange rates
move in a direction adverse to the Fund's position. Such losses could reduce
any profits or increase any losses sustained by the Fund from the sale or
redemption of securities and could reduce the dollar value of interest or
dividend payments received. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
FORWARD CONTRACTS
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is entered
into (a "Forward Contract"), for hedging purposes (e.g., to protect its
current or intended investments from fluctuations in currency exchange
rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the Fund
seeks to protect against an anticipated increase in the exchange rate for a
specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, the Fund may enter into
a Forward Contract to purchase a given currency to protect against a
projected increase in the dollar value of securities denominated in such
currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline
in the dollar value of portfolio securities or the increase in the dollar
cost of securities to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, the Fund may be required to forego all or a portion of the
benefits which otherwise could have been obtained from favorable movements
in exchange rates. The Fund does not presently intend to hold Forward
Contracts entered into until the value date, at which time it would be
required to deliver or accept delivery of the underlying currency, but will
seek in most instances to close out positions in such Contracts by entering
into offsetting transactions, which will serve to fix the Fund's profit or
loss based upon the value of the Contracts at the time the offsetting
transaction is executed.
The Fund will also enter into transactions in Forward Contracts for other
than hedging purposes, which presents greater profit potential but also
involves increased risk. For example, the Fund may purchase a given foreign
currency through a Forward Contract if, in the judgment of the Adviser, the
value of such currency is expected to rise relative to the U.S. dollar.
Conversely, the Fund may sell the currency through a Forward Contract if the
Adviser believes that its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, which will increase its gross income. Where exchange
rates do not move in the direction or to the extent anticipated, however,
the Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative and could involve
significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts ("Futures Contracts") on
stock indices, foreign currencies, interest rates or interest-rate related
instruments, indices of foreign currencies or commodities. The Fund may also
purchase and sell Futures Contracts on foreign or domestic fixed income
securities or indices of such securities including municipal bond indices
and any other indices of foreign or domestic fixed income securities that
may become available for trading. Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to applicable
law.
A Futures Contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument, foreign
currency or commodity, or for the making and acceptance of a cash
settlement, at a stated time in the future for a fixed price. By its terms,
a Futures Contract provides for a specified settlement month in which, in
the case of the majority of commodities, interest rate and foreign currency
futures contracts, the underlying commodities, fixed income securities or
currency are delivered by the seller and paid for by the purchaser, or on
which, in the case of index futures contracts and certain interest rate and
foreign currency futures contracts, the difference between the price at
which the contract was entered into and the contract's closing value is
settled between the purchaser and seller in cash. Futures Contracts differ
from options in that they are bilateral agreements, with both the purchaser
and the seller equally obligated to complete the transaction. Futures
Contracts call for settlement only on the expiration date and cannot be
"exercised" at any other time during their term.
The purchase or sale of a Futures Contract differs from the purchase or
sale of a security or the purchase of an option in that no purchase price is
paid or received. Instead, an amount of cash or cash equivalents, which
varies but may be as low as 5% or less of the value of the contract, must be
deposited with the broker as "initial margin." Subsequent payments to and
from the broker, referred to as "variation margin," are made on a daily
basis as the value of the index or instrument underlying the Futures
Contract fluctuates, making positions in the Futures Contract more or less
valuable -- a process known as "mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt to
protect the Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, the Fund may sell stock index
futures contracts in anticipation of or during a market decline to attempt
to offset the decrease in market value of the Fund's securities portfolio
that might otherwise result. If such decline occurs, the loss in value of
portfolio securities may be offset, in whole or part, by gains on the
futures position. When the Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock
index futures contracts in order to gain rapid market exposure that may, in
part or entirely, offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, the corresponding positions
in stock index futures contracts will be closed out. In a substantial
majority of these transactions, the Fund will purchase such securities upon
termination of the futures position, but under unusual market conditions, a
long futures position may be terminated without a related purchase of
securities.
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Fund's current
or intended investments in fixed income securities. For example, if the Fund
owned long-term bonds and interest rates were expected to increase, the Fund
might enter into interest rate futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling some of
the long-term bonds in the Fund's portfolio. If interest rates did increase,
the value of the debt securities in the portfolio would decline, but the
value of the Fund's interest rate futures contracts would increase at
approximately the same rate, subject to the correlation risks described
below, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in the
value of the interest rate futures contracts should be similar to that of
long-term bonds, the Fund could protect itself against the effects of the
anticipated rise in the value of long-term bonds without actually buying
them until the necessary cash became available or the market had stabilized.
At that time, the interest rate futures contracts could be liquidated and
the Fund's cash reserves could then be used to buy long-term bonds on the
cash market. The Fund could accomplish similar results by selling bonds with
long maturities and investing in bonds with short maturities when interest
rates are expected to increase. However, since the futures market may be
more liquid than the cash market in certain cases or at certain times, the
use of interest rate futures contracts as a hedging technique may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
The Fund may purchase and sell foreign currency futures contracts for
hedging purposes, to attempt to protect its current or intended investments
from fluctuations in currency exchange rates. Such fluctuations could reduce
the dollar value of portfolio securities denominated in foreign currencies,
or increase the dollar cost of foreign- denominated securities to be
acquired, even if the value of such securities in the currencies in which
they are denominated remains constant. The Fund may sell futures contracts
on a foreign currency, for example, where it holds securities denominated in
such currency and it anticipates a decline in the value of such currency
relative to the dollar. In the event such decline occurs, the resulting
adverse effect on the value of foreign-denominated securities may be offset,
in whole or in part, by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in part,
the increased cost of such securities resulting from a rise in the dollar
value of the underlying currencies. Where the Fund purchases futures
contracts under such circumstances, however, and the prices of securities to
be acquired instead decline, the Fund will sustain losses on its futures
position which could reduce or eliminate the benefits of the reduced cost of
portfolio securities to be acquired.
The use by the Fund of Futures Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. The Fund may also
purchase indexed deposits with similar characteristics. Gold- indexed
securities, for example, typically provide for a maturity value that depends
on the price of gold, resulting in a security whose price tends to rise and
fall together with gold prices. Currency-indexed securities typically are
short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S. dollar
denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a
security that performs similarly to a foreign- denominated instrument, or
their maturity value may decline when foreign currencies increase, resulting
in a security whose price characteristics are similar to a put on the
underlying currency. Currency-indexed securities may also have prices that
depend on the values of a number of different foreign currencies relative to
each other. Certain indexed securities may expose the Fund to the risk of
loss of all or a portion of the principal amount of its investment and/or
the interest that might otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers
of indexed securities have included banks, corporations, and certain U.S.
Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Fund may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an obligation,
a municipality issues a certain amount of debt and pays a fixed interest
rate. Half of the debt is issued as variable rate short term obligations,
the interest rate of which is reset at short intervals, typically 35 days.
The other half of the debt is issued as inverse floating rate obligations,
the interest rate of which is calculated based on the difference between a
multiple of (approximately two times) the interest paid by the issuer and
the interest paid on the short-term obligation. Under usual circumstances,
the holder of the inverse floating rate obligation can generally purchase an
equal principal amount of the short term obligation and link the two
obligations in order to create long-term fixed rate bonds. Because the
interest rate on the inverse floating rate obligation is determined by
subtracting the short-term rate from a fixed amount, the interest rate will
decrease as the short-term rate increases and will increase as the
short-term rate decreases. The magnitude of increases and decreases in the
market value of inverse floating rate obligations may be approximately twice
as large as the comparable change in the market value of an equal principal
amount of long-term bonds which bear interest at the rate paid by the issuer
and have similar credit quality, redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio securities.
Such loans will usually be made only to member firms of the New York Stock
Exchange (the "Exchange") (and subsidiaries thereof) and member banks of the
Federal Reserve System, and would be required to be secured continuously by
collateral in cash, an irrevocable letter of credit or United States
("U.S.") Treasury securities maintained on a current basis at an amount at
least equal to the market value of the securities loaned. The Fund would
have the right to call a loan and obtain the securities loaned at any time
on customary industry settlement notice (which will not usually exceed five
business days). For the duration of a loan, the Fund would continue to
receive the equivalent of the interest or dividends paid by the issuer on
the securities loaned. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (if the collateral is in the form of cash). The Fund would not,
however, have the right to vote any securities having voting rights during
the existence of the loan, but the Fund would call the loan in anticipation
of an important vote to be taken among holders of the securities or of the
giving or withholding of their consent on a material matter affecting the
investment. As with other extensions of credit there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to firms
deemed by the Adviser to be of good standing, and when, in the judgment of
the Adviser, the consideration which can be earned currently from securities
loans of this type justifies the attendant risk.
LEVERAGING TRANSACTIONS
The Fund may engage in the types of transactions described below, which
involve "leverage" because in each case the Fund receives cash which it can
invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Fund will generally cause its
net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can be
expected to cause the value of the Fund's shares and distributions on the
Fund's shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from these transactions fail to cover the
expenses associated with these transactions, the value of the Fund's shares
is likely to decrease more quickly than otherwise would be the case and
distributions thereon will be reduced or eliminated. Hence, these
transactions are speculative, involve leverage and increase the risk of
owning or investing in the shares of the Fund. These transactions also
increase the Fund's expenses because of interest and similar payments and
administrative expenses associated with them. Unless the appreciation and
income on assets purchased with proceeds from these transactions exceed the
costs associated with them, the use of these transactions by a Fund would
diminish the investment performance of the Fund compared with what it would
have been without using these transactions.
BANK BORROWINGS: The Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment objectives
and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on the
mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on, and gains from, the investment of the cash proceeds of the
initial sale. The Fund may also be compensated by receipt of a commitment
fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part of
the dollar roll, the use of this technique will diminish the investment
performance of the Fund compared with what the performance would have been
without the use of the dollar rolls. Dollar roll transactions involve the
risk that the market value of the securities the Fund is required to
purchase may decline below the agreed upon repurchase price of those
securities. If the broker/dealer to whom the Fund sells securities becomes
insolvent, the Fund's right to purchase or repurchase securities may be
restricted. Successful use of mortgage dollar rolls may depend upon the
Adviser's ability to correctly predict interest rates and prepayments. There
is no assurance that dollar rolls can be successfully employed.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund will sell securities
and receive cash proceeds, subject to its agreement to repurchase the
securities at a later date for a fixed price reflecting a market rate of
interest. There is a risk that the counter party to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as
scheduled, which may result in losses to the Fund. The Fund will invest the
proceeds received under a reverse repurchase agreement in accordance with
its investment objective and policies.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-hedging purposes in a manner similar
to that in which Futures Contracts on foreign currencies, or Forward
Contracts, will be utilized. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such diminutions in
the value of portfolio securities, the Fund may purchase put options on the
foreign currency. If the value of the currency does decline, the Fund will
have the right to sell such currency for a fixed amount in dollars and will
thereby offset, in whole in part, the adverse effect on its portfolio which
otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Fund may purchase call options thereon. The
purchase of such options could offset, at least partially, the effect of the
adverse movements in exchange rates. As in the case of other types of
options, however, the benefit to the Fund deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in
the direction or to the extent anticipated, the Fund could sustain losses on
transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates. The
Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar
value of foreign-denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the option
will most likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received less related
transaction costs. As in the case of other types of options, therefore, the
writing of Options on Foreign Currencies will constitute only a partial
hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Fund to hedge
such increased cost up to the amount of the premium. Foreign currency
options written by the Fund will generally be covered in a manner similar to
the covering of other types of options. As in the case of other types of
options, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium, and only if rates move
in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium.
Through the writing of options on foreign currencies, the Fund also may be
required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in exchange rates. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non- hedging
purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the case
of a call option, or a "short" position in the underlying Futures Contract,
in the case of a put option, at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (i.e., the same
exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
Fund's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund on
U.S. exchanges are traded on the same contract market as the underlying
Futures Contract, and, like Futures Contracts, are subject to regulation by
the Commodity Futures Trading Commission (the "CFTC") and the performance
guarantee of the exchange clearinghouse. In addition, Options on Futures
Contracts may be traded on foreign exchanges. The Fund may cover the writing
of call Options on Futures Contracts (a) through purchases of the underlying
Futures Contract, (b) through ownership of the instrument, or instruments
included in the index, underlying the Futures Contract, or (c) through the
holding of a call on the same Futures Contract and in the same principal
amount as the call written where the exercise price of the call held (i) is
equal to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written if the Fund owns liquid
and unencumbered assets equal to the difference. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through the ownership of liquid and
unencumbered assets equal to the value of the security or index underlying
the Futures Contract, or (c) through the holding of a put on the same
Futures Contract and in the same principal amount as the put written where
the exercise price of the put held (i) is equal to or greater than the
exercise price of the put written or where the exercise price of the put
held (ii) is less than the exercise price of the put written if the Fund
owns liquid and unencumbered assets equal to the difference. Put and call
Options on Futures Contracts may also be covered in such other manner as may
be in accordance with the rules of the exchange on which the option is
traded and applicable laws and regulations. Upon the exercise of a call
Option on a Futures Contract written by the Fund, the Fund will be required
to sell the underlying Futures Contract which, if the Fund has covered its
obligation through the purchase of such Contract, will serve to liquidate
its futures position. Similarly, where a put Option on a Futures Contract
written by the Fund is exercised, the Fund will be required to purchase the
underlying Futures Contract which, if the Fund has covered its obligation
through the sale of such Contract, will close out its futures position.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or
other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is below the
exercise price, the Fund will retain the full amount of the option premium,
less related transaction costs, which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. The writing
of a put option on a Futures Contract constitutes a partial hedge against
increasing prices of the securities or other instruments required to be
delivered under the terms of the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is exercised, the
Fund will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the
value of its portfolio securities and the changes in the value of its
futures positions, the Fund's losses from existing Options on Futures
Contracts may to some extent be reduced or increased by changes in the value
of portfolio securities.
The Fund may purchase Options on Futures Contracts for hedging purposes
instead of purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is
anticipated as a result of a projected market-wide decline or changes in
interest or exchange rates, the Fund could, in lieu of selling Futures
Contracts, purchase put options thereon. In the event that such decrease
occurs, it may be offset, in whole or in part, by a profit on the option.
Conversely, where it is projected that the value of securities to be
acquired by the Fund will increase prior to acquisition, due to a market
advance or changes in interest or exchange rates, the Fund could purchase
call Options on Futures Contracts rather than purchasing the underlying
Futures Contracts.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by the Fund may be covered in the manner set forth below.
A call option written by the Fund is "covered" if the Fund owns the
security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for
additional cash consideration if the Fund owns liquid and unencumbered
assets equal to the amount of cash consideration) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the Fund owns
liquid and unencumbered assets equal to the difference. A put option written
by the Fund is "covered" if the Fund owns liquid and unencumbered assets
with a value equal to the exercise price, or else holds a put on the same
security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise
price of the put written or where the exercise price of the put held is less
than the exercise price of the put written if the Fund owns liquid and
unencumbered assets equal to the difference. Put and call options written by
the Fund may also be covered in such other manner as may be in accordance
with the requirements of the exchange on which, or the counterparty with
which, the option is traded, and applicable laws and regulations. If the
writer's obligation is not so covered, it is subject to the risk of the full
change in value of the underlying security from the time the option is
written until exercise.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case
of a written put option will permit the Fund to write another put option to
the extent that the Fund owns liquid and unencumbered assets. Such
transactions permit the Fund to generate additional premium income, which
will partially offset declines in the value of portfolio securities or
increases in the cost of securities to be acquired. Also, effecting a
closing transaction will permit the cash or proceeds from the concurrent
sale of any securities subject to the option to be used for other
investments of the Fund, provided that another option on such security is
not written. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction in connection with the option prior to or concurrent with the
sale of the security.
The Fund will realize a profit from a closing transaction if the premium
paid in connection with the closing of an option written by the Fund is less
than the premium received from writing the option, or if the premium
received in connection with the closing of an option purchased by the Fund
is more than the premium paid for the original purchase. Conversely, the
Fund will suffer a loss if the premium paid or received in connection with a
closing transaction is more or less, respectively, than the premium received
or paid in establishing the option position. Because increases in the market
price of a call option will generally reflect increases in the market price
of the underlying security, any loss resulting from the repurchase of a call
option previously written by the Fund is likely to be offset in whole or in
part by appreciation of the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and then write a call option
against that security. The exercise price of the call option the Fund
determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the- money")
the current value of the underlying security at the time the option is
written. Buy-and-write transactions using in-the-money call options may be
used when it is expected that the price of the underlying security will
decline moderately during the option period. Buy-and-write transactions
using out-of-the-money call options may be used when it is expected that the
premiums received from writing the call option plus the appreciation in the
market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone.
If the call options are exercised in such transactions, the Fund's maximum
gain will be the premium received by it for writing the option, adjusted
upwards or downwards by the difference between the Fund's purchase price of
the security and the exercise price, less related transaction costs. If the
options are not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the
premium received, less related transaction costs. If the market price of the
underlying security declines or otherwise is below the exercise price, the
Fund may elect to close the position or retain the option until it is
exercised, at which time the Fund will be required to take delivery of the
security at the exercise price; the Fund's return will be the premium
received from the put option minus the amount by which the market price of
the security is below the exercise price, which could result in a loss.
Out-of-the-money, at-the-money and in-the-money put options may be used by
the Fund in the same market environments that call options are used in
equivalent buy-and-write transactions.
The Fund may also write combinations of put and call options on the same
security, known as "straddles" with the same exercise price and expiration
date. By writing a straddle, the Fund undertakes a simultaneous obligation
to sell and purchase the same security in the event that one of the options
is exercised. If the price of the security subsequently rises sufficiently
above the exercise price to cover the amount of the premium and transaction
costs, the call will likely be exercised and the Fund will be required to
sell the underlying security at a below market price. This loss may be
offset, however, in whole or part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of
straddles will likely be effective, therefore, only where the price of the
security remains stable and neither the call nor the put is exercised. In
those instances where one of the options is exercised, the loss on the
purchase or sale of the underlying security may exceed the amount of the
premiums received.
By writing a call option, the Fund limits its opportunity to profit from
any increase in the market value of the underlying security above the
exercise price of the option. By writing a put option, the Fund assumes the
risk that it may be required to purchase the underlying security for an
exercise price above its then-current market value, resulting in a capital
loss unless the security subsequently appreciates in value. The writing of
options on securities will not be undertaken by the Fund solely for hedging
purposes, and could involve certain risks which are not present in the case
of hedging transactions. Moreover, even where options are written for
hedging purposes, such transactions constitute only a partial hedge against
declines in the value of portfolio securities or against increases in the
value of securities to be acquired, up to the amount of the premium.
The Fund may also purchase options for hedging purposes or to increase its
return. Put options may be purchased to hedge against a decline in the value
of portfolio securities. If such decline occurs, the put options will permit
the Fund to sell the securities at the exercise price, or to close out the
options at a profit. By using put options in this way, the Fund will reduce
any profit it might otherwise have realized in the underlying security by
the amount of the premium paid for the put option and by transaction costs.
The Fund may also purchase call options to hedge against an increase in
the price of securities that the Fund anticipates purchasing in the future.
If such increase occurs, the call option will permit the Fund to purchase
the securities at the exercise price, or to close out the options at a
profit. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise of the
option, and, unless the price of the underlying security rises sufficiently,
the option may expire worthless to the Fund.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast to
an option on a security, an option on a stock index provides the holder with
the right but not the obligation to make or receive a cash settlement upon
exercise of the option, rather than the right to purchase or sell a
security. The amount of this settlement is generally equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds (in
the case of a call) or is below (in the case of a put) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed
"index multiplier." The Fund may cover written call options on stock indices
by owning securities whose price changes, in the opinion of the Adviser, are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional
cash consideration (or for additional cash consideration if the Fund owns
liquid and unencumbered assets equal to the amount of cash consideration)
upon conversion or exchange of other securities in its portfolio. Where the
Fund covers a call option on a stock index through ownership of securities,
such securities may not match the composition of the index and, in that
event, the Fund will not be fully covered and could be subject to risk of
loss in the event of adverse changes in the value of the index. The Fund may
also cover call options on stock indices by holding a call on the same index
and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of
the call written or (b) is greater than the exercise price of the call
written if the Fund owns liquid and unencumbered assets equal to the
difference. The Fund may cover put options on stock indices by owning liquid
and unencumbered assets with a value equal to the exercise price, or by
holding a put on the same stock index and in the same principal amount as
the put written where the exercise price of the put held (a) is equal to or
greater than the exercise price of the put written or (b) is less than the
exercise price of the put written if the Fund owns liquid and unencumbered
assets equal to the difference. Put and call options on stock indices may
also be covered in such other manner as may be in accordance with the rules
of the exchange on which, or the counterparty with which, the option is
traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on which
the Fund has written a call option falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of
any unrealized appreciation in the Fund's stock investments. By writing a
put option, the Fund assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Fund correlate with
changes in the value of the index, writing covered put options on indices
will increase the Fund's losses in the event of a market decline, although
such losses will be offset in part by the premium received for writing the
option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of the Fund's
security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or
a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write options on U.S.
Treasury securities which provide for periodic adjustment of the strike
price and may also provide for the periodic adjustment of the premium during
the term of each such option. Like other types of options, these
transactions, which may be referred to as "reset" options or "adjustable
strike" options grant the purchaser the right to purchase (in the case of a
call) or sell (in the case of a put), a specified type of U.S. Treasury
security at any time up to a stated expiration date (or, in certain
instances, on such date). In contrast to other types of options, however,
the price at which the underlying security may be purchased or sold under a
"reset" option is determined at various intervals during the term of the
option, and such price fluctuates from interval to interval based on changes
in the market value of the underlying security. As a result, the strike
price of a "reset" option, at the time of exercise, may be less advantageous
than if the strike price had been fixed at the initiation of the option. In
addition, the premium paid for the purchase of the option may be determined
at the termination, rather than the initiation, of the option. If the
premium for a reset option written by the Fund is paid at termination, the
Fund assumes the risk that (i) the premium may be less than the premium
which would otherwise have been received at the initiation of the option
because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the
strike price of the option, and (ii) the option purchaser may default on its
obligation to pay the premium at the termination of the option. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation of the
option.
"YIELD CURVE" OPTIONS: The Fund may also enter into options on the "spread,"
or yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. In contrast to other types of options,
a yield curve option is based on the difference between the yields of
designated securities, rather than the prices of the individual securities,
and is settled through cash payments. Accordingly, a yield curve option is
profitable to the holder if this differential widens (in the case of a call)
or narrows (in the case of a put), regardless of whether the yields of the
underlying securities increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Fund may purchase or write such options for
hedging purposes. For example, the Fund may purchase a call option on the
yield spread between two securities, if it owns one of the securities and
anticipates purchasing the other security and wants to hedge against an
adverse change in the yield spread between the two securities. The Fund may
also purchase or write yield curve options for other than hedging purposes
(i.e., in an effort to increase its current income) if, in the judgment of
the Adviser, the Fund will be able to profit from movements in the spread
between the yields of the underlying securities. The trading of yield curve
options is subject to all of the risks associated with the trading of other
types of options. In addition, however, such options present risk of loss
even if the yield of one of the underlying securities remains constant, if
the spread moves in a direction or to an extent which was not anticipated.
Yield curve options written by the Fund will be "covered". A call (or put)
option is covered if the Fund holds another call (or put) option on the
spread between the same two securities and owns liquid and unencumbered
assets sufficient to cover the Fund's net liability under the two options.
Therefore, the Fund's liability for such a covered option is generally
limited to the difference between the amount of the Fund's liability under
the option written by the Fund less the value of the option held by the
Fund. Yield curve options may also be covered in such other manner as may be
in accordance with the requirements of the counterparty with which the
option is traded and applicable laws and regulations. Yield curve options
are traded over-the-counter and because they have been only recently
introduced, established trading markets for these securities have not yet
developed.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are member
firms (or a subsidiary thereof) of the New York Stock Exchange or members of
the Federal Reserve System, recognized primary U.S. Government securities
dealers or institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Fund purchases and holds through
its agent are U.S. Government securities, the values of which are equal to
or greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same,
with interest at a standard rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the Government securities.
The repurchase agreement provides that in the event the seller fails to
pay the amount agreed upon on the agreed upon delivery date or upon demand,
as the case may be, the Fund will have the right to liquidate the
securities. If at the time the Fund is contractually entitled to exercise
its right to liquidate the securities, the seller is subject to a proceeding
under the bankruptcy laws or its assets are otherwise subject to a stay
order, the Fund's exercise of its right to liquidate the securities may be
delayed and result in certain losses and costs to the Fund. The Fund has
adopted and follows procedures which are intended to minimize the risks of
repurchase agreements. For example, the Fund only enters into repurchase
agreements after the Adviser has determined that the seller is creditworthy,
and the Adviser monitors that seller's creditworthiness on an ongoing basis.
Moreover, under such agreements, the value of the securities (which are
marked to market every business day) is required to be greater than the
repurchase price, and the Fund has the right to make margin calls at any
time if the value of the securities falls below the agreed upon collateral.
RESTRICTED SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act ("Rule 144A securities") and
commercial paper issued under Section 4(2) of the 1933 Act ("4(2) Paper"). A
determination is made, based upon a continuing review of the trading markets
for the Rule 144A security or 4(2) Paper, whether such security is liquid
and thus not subject to the Fund's limitation on investing in illiquid
investments. The Board of Trustees has adopted guidelines and delegated to
MFS the daily function of determining and monitoring the liquidity of Rule
144A securities and 4(2) Paper. The Board, however, retains oversight of the
liquidity determinations focusing on factors such as valuation, liquidity
and availability of information. Investing in Rule 144A securities could
have the effect of decreasing the level of liquidity in the Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these Rule 144A securities held in the Fund's portfolio. Subject
to the Fund's limitation on investments in illiquid investments, the Fund
may also invest in restricted securities that may not be sold under Rule
144A, which presents certain risks. As a result, the Fund might not be able
to sell these securities when the Adviser wishes to do so, or might have to
sell them at less than fair value. In addition, market quotations are less
readily available. Therefore, judgment may at times play a greater role in
valuing these securities than in the case of unrestricted securities.
SHORT SALES
The Fund may seek to hedge investments or realize additional gains through
short sales. The Fund may make short sales, which are transactions in which
the Fund sells a security it does not own, in anticipation of a decline in
the market value of that security. To complete such a transaction, the Fund
must borrow the security to make delivery to the buyer. The Fund then is
obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. The price at such time may be more or less
than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to repay the lender any dividends
or interest which accrue during the period of the loan. To borrow the
security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale
will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out. The Fund also will
incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain
if the price of the security declines between those dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount
of the premium, dividends or interest the Fund may be required to pay in
connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale, equals
the current market value of the security sold short.
SHORT SALES AGAINST THE BOX
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the Fund
enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is required
to hold such securities while the short sale is outstanding. The Fund will
incur transaction costs, including interest, in connection with opening,
maintaining, and closing short sales against the box.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. The Fund is not limited
to any particular form or variety of swap agreement if the Adviser
determines it is consistent with the Fund's investment objective and
policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative transactions.
If the Fund enters into a swap agreement on a net basis (i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments), the Fund will
maintain liquid and unencumbered assets with a daily value at least equal to
the excess, if any, of the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than a net
basis, it will maintain liquid and unencumbered assets with a value equal to
the full amount of the Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the underlying price, rate or index level that
determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of the Fund would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when
due. In addition, if the counterparty's creditworthiness would decline, the
value of the swap agreement would be likely to decline, potentially
resulting in losses.
If the counterparty defaults, the Fund's risk of loss consists of the net
amount of payments that the Fund is contractually entitled to receive. The
Fund anticipates that it will be able to eliminate or reduce its exposure
under these arrangements by assignment or other disposition or by entering
into an offsetting agreement with the same or another counterparty, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
TEMPORARY DEFENSIVE POSITIONS
During periods of unusual market conditions when the Adviser believes that
investing for temporary defensive purposes is appropriate, or in order to
meet anticipated redemption requests, a large portion or all of the assets
of the Fund may be invested in cash (including foreign currency) or cash
equivalents, including, but not limited to, obligations of banks (including
certificates of deposit, bankers' acceptances, time deposits and repurchase
agreements), commercial paper, short-term notes, U.S. Government Securities
and related repurchase agreements.
WARRANTS
The Fund may invest in warrants. Warrants are securities that give the Fund
the right to purchase equity securities from the issuer at a specific price
(the "strike price") for a limited period of time. The strike price of
warrants typically is much lower than the current market price of the
underlying securities, yet they are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities and may offer greater potential for capital appreciation as well
as capital loss. Warrants do not entitle a holder to dividends or voting
rights with respect to the underlying securities and do not represent any
rights in the assets of the issuing company. Also, the value of the warrant
does not necessarily change with the value of the underlying securities and
a warrant ceases to have value if it is not exercised prior to the
expiration date. These factors can make warrants more speculative than other
types of investments.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities will be delivered to the
Fund at a future date usually beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a future
date may be deemed a separate security. In general, the Fund does not pay
for such securities until received, and does not start earning interest on
the securities until the contractual settlement date. While awaiting
delivery of securities purchased on such bases, a Fund will identify liquid
and unencumbered assets equal to its forward delivery commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO: The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives depends on the degree to which price movements in the
underlying index or instrument correlate with price movements in the
relevant portion of the Fund's portfolio. In the case of derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. Consequently, the Fund bears the risk
that the price of the portfolio securities being hedged will not move in the
same amount or direction as the underlying index or obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience a
loss which is not completely offset by the put option. It is also possible
that there may be a negative correlation between the index or obligation
underlying an option or Futures Contract in which the Fund has a position
and the portfolio securities the Fund is attempting to hedge, which could
result in a loss on both the portfolio and the hedging instrument. It should
be noted that stock index futures contracts or options based upon a narrower
index of securities, such as those of a particular industry group, may
present greater risk than options or futures based on a broad market index.
This is due to the fact that a narrower index is more susceptible to rapid
and extreme fluctuations as a result of changes in the value of a small
number of securities. Nevertheless, where the Fund enters into transactions
in options or futures on narrowly-based indices for hedging purposes,
movements in the value of the index should, if the hedge is successful,
correlate closely with the portion of the Fund's portfolio or the intended
acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative and the price of the underlying index or obligation. The
anticipated spread between the prices may be distorted due to the
differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts will not be fully
reflected in the value of the option. The risk of imperfect correlation,
however, generally tends to diminish as the maturity date of the Futures
Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock indices,
options on currencies and Options on Futures Contracts, the Fund is subject
to the risk of market movements between the time that the option is
exercised and the time of performance thereunder. This could increase the
extent of any loss suffered by the Fund in connection with such
transactions.
In writing a covered call option on a security, index or futures contract,
the Fund also incurs the risk that changes in the value of the instruments
used to cover the position will not correlate closely with changes in the
value of the option or underlying index or instrument. For example, where
the Fund covers a call option written on a stock index through segregation
of securities, such securities may not match the composition of the index,
and the Fund may not be fully covered. As a result, the Fund could be
subject to risk of loss in the event of adverse market movements.
The writing of options on securities, options on stock indices or Options
on Futures Contracts constitutes only a partial hedge against fluctuations
in the value of the Fund's portfolio. When the Fund writes an option, it
will receive premium income in return for the holder's purchase of the right
to acquire or dispose of the underlying obligation. In the event that the
price of such obligation does not rise sufficiently above the exercise price
of the option, in the case of a call, or fall below the exercise price, in
the case of a put, the option will not be exercised and the Fund will retain
the amount of the premium, less related transaction costs, which will
constitute a partial hedge against any decline that may have occurred in the
Fund's portfolio holdings or any increase in the cost of the instruments to
be acquired.
Where the price of the underlying obligation moves sufficiently in favor
of the holder to warrant exercise of the option, however, and the option is
exercised, the Fund will incur a loss which may only be partially offset by
the amount of the premium it received. Moreover, by writing an option, the
Fund may be required to forego the benefits which might otherwise have been
obtained from an increase in the value of portfolio securities or other
assets or a decline in the value of securities or assets to be acquired. In
the event of the occurrence of any of the foregoing adverse market events,
the Fund's overall return may be lower than if it had not engaged in the
hedging transactions. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments involve greater risks and may
result in losses which may not be offset by increases in the value of
portfolio securities or declines in the cost of securities to be acquired.
The Fund will only write covered options, such that liquid and unencumbered
assets necessary to satisfy an option exercise will be identified, unless
the option is covered in such other manner as may be in accordance with the
rules of the exchange on which, or the counterparty with which, the option
is traded and applicable laws and regulations. Nevertheless, the method of
covering an option employed by the Fund may not fully protect it against
risk of loss and, in any event, the Fund could suffer losses on the option
position which might not be offset by corresponding portfolio gains. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary
market for such instruments on the exchange on which the initial transaction
was entered into. While the Fund will enter into options or futures
positions only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
contract at any specific time. In that event, it may not be possible to
close out a position held by the Fund, and the Fund could be required to
purchase or sell the instrument underlying an option, make or receive a cash
settlement or meet ongoing variation margin requirements. Under such
circumstances, if the Fund has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse
impact on the Fund's ability effectively to hedge its portfolio, and could
result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the Fund enters into such transactions for hedging purposes, any
losses incurred in connection therewith should, if the hedging strategy is
successful, be offset, in whole or in part, by increases in the value of
securities or other assets held by the Fund or decreases in the prices of
securities or other assets the Fund intends to acquire. Where the Fund
enters into such transactions for other than hedging purposes, the margin
requirements associated with such transactions could expose the Fund to
greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Fund enters into
transactions in exchange-traded futures or options, it is exposed to the
risk of the potential bankruptcy of the relevant exchange clearinghouse or
the broker through which the Fund has effected the transaction. In that
event, the Fund might not be able to recover amounts deposited as margin, or
amounts owed to the Fund in connection with its transactions, for an
indefinite period of time, and could sustain losses of a portion or all of
such amounts. Moreover, the performance guarantee of an exchange
clearinghouse generally extends only to its members and the Fund could
sustain losses, notwithstanding such guarantee, in the event of the
bankruptcy of its broker.
TRADING AND POSITION LIMITS: The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument
which may be held by a single investor, whether acting alone or in concert
with others (regardless of whether such contracts are held on the same or
different exchanges or held or written in one or more accounts or through
one or more brokers). Further, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control
in a particular futures or option contract. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Adviser does not believe that
these trading and position limits will have any adverse impact on the
strategies for hedging the portfolios of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS: The amount of risk the Fund assumes
when it purchases an Option on a Futures Contract is the premium paid for
the option, plus related transaction costs. In order to profit from an
option purchased, however, it may be necessary to exercise the option and to
liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an
Option on a Futures Contract is subject to the risks of commodity futures
trading, including the requirement of initial and variation margin payments,
as well as the additional risk that movements in the price of the option may
not correlate with movements in the price of the underlying security, index,
currency or Futures Contract.
RISKS OF TRANSACTIONS IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are
subject to all of the correlation, liquidity and other risks outlined above.
In addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and
could have a substantial adverse effect on the value of positions held by
the Fund. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives are not traded on contract markets regulated by the CFTC or
(with the exception of certain foreign currency options) the SEC. To the
contrary, such instruments are traded through financial institutions acting
as market-makers, although foreign currency options are also traded on
certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation.
In an over-the-counter trading environment, many of the protections afforded
to exchange participants will not be available. For example, there are no
daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the premium plus
related transaction costs, this entire amount could be lost. Moreover, the
option writer and a trader of Forward Contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of
the Fund's position unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with the
Fund. Where no such counterparty is available, it will not be possible to
enter into a desired transaction. There also may be no liquid secondary
market in the trading of over-the-counter contracts, and the Fund could be
required to retain options purchased or written, or Forward Contracts or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit the Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order to
assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC- regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/00
<PAGE>
----------------------------
MFS(R) MUNICIPAL INCOME FUND
----------------------------
AUGUST 1, 2000
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
--------------------------------------------------------------------------------
This Prospectus describes the MFS Municipal Income Fund. The investment
objective of the fund is to provide as high a level of current income exempt
from federal income tax as is considered consistent with prudent investing
while seeking protection of shareholders' capital.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE FUND'S SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS
YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
TABLE OF CONTENTS
Page
I Risk Return Summary ............................ 1
II Expense Summary ................................ 6
III Certain Investment Strategies and Risks ........ 8
IV Management of the Fund ......................... 9
V Description of Share Classes ................... 10
VI How to Purchase, Exchange and Redeem Shares .... 14
VII Investor Services and Programs ................. 18
VIII Other Information .............................. 20
IX Financial Highlights ........................... 23
Appendix A -- Investment Techniques and
Practices .................................... A-1
Appendix B -- Taxable Equivalent Yield Table ... B-1
<PAGE>
----------------------
I RISK RETURN SUMMARY
----------------------
o INVESTMENT OBJECTIVE
The fund's investment objective is to provide as high a level of current
income exempt from federal income tax as is considered consistent with
prudent investing while seeking protection of shareholders' capital. The
fund's objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 80% of its net
assets in municipal securities and participation interests in municipal
securities issued by banks, the interest on which is exempt from federal
income tax. Municipal securities are bonds or other debt obligations of a
U.S. state or political subdivision, such as a county, city, town,
village, or authority. Participation interests in municipal securities are
interests in holdings of municipal obligations backed by a letter of
credit or guarantee from the issuing bank. The fund seeks to invest in
municipal securities whose income is exempt from federal income tax.
However, the interest income on certain of these municipal securities may
be subject to alternative minimum tax. For a comparison of yields on
municipal bonds and taxable securities see the Tax Equivalent Yield Table
attached as Appendix B to this Prospectus.
While the fund focuses on municipal securities rated, or issued by
issuers who have securities that are rated, in one of the top four credit
ratings by credit rating agencies, the fund may also invest in lower rated
bonds. Lower rated bonds, commonly known as junk bonds, are bonds assigned
credit ratings below the four highest credit ratings by credit rating
agencies or which are unrated and considered by the fund's investment
adviser, Massachusetts Financial Services Company (referred to as MFS or
the adviser), to be comparable to lower rated bonds.
In selecting fixed income investments for the fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager(s) of MFS' fixed income
oriented funds (including the fund) as a tool in making or adjusting a
fund's asset allocations to various segments of the fixed income markets.
In assessing the credit quality of fixed income securities, MFS does not
rely solely on the credit ratings assigned by credit rating agencies, but
rather performs its own independent credit analysis.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. The share price of the fund generally changes
daily based on market conditions and other factors. Please note that there
are many circumstances which could cause the value of your investment in
the fund to decline, and which could prevent the fund from achieving its
objective, that are not described here.
The principal risks of investing in the fund are:
o Municipal Securities Risk:
> Interest Rate Risk: As with any fixed income security, the prices of
municipal securities in the fund's portfolio will generally fall when
interest rates rise. Conversely, when interest rates fall, the prices
of municipal securities in the fund's portfolio will generally rise.
> Maturity Risk: Interest rate risk will generally affect the price of a
municipal security more if the security has a longer maturity.
Municipal securities with longer maturities will therefore be more
volatile than other fixed income securities with shorter maturities.
Conversely, municipal securities with shorter maturities will be less
volatile but generally provide lower returns than municipal securities
with longer maturities. The average maturity of the fund's municipal
security investments will affect the volatility of the fund's share
price.
> Credit Risk: Credit risk is the risk that the issuer of a municipal
security will not be able to pay principal and interest when due.
Rating agencies assign credit ratings to certain municipal securities
to indicate their credit risk. The price of a municipal security will
generally fall if the issuer defaults on its obligation to pay
principal or interest, the rating agencies downgrade the issuer's
credit rating or other news affects the market's perception of the
issuer's credit risk. A participation interest is also subject to the
risk of default by the issuing bank.
> General Obligations and Revenue Obligations Risk: The fund may invest
in municipal bonds that are general obligations backed by the full
faith and credit of the municipal issuer. The fund may also invest in
municipal bonds called revenue obligations which are subject to a
higher degree of credit risk than general obligations. Revenue
obligations finance specific projects (such as building a hospital or
toll roads, water and sewer projects, etc.), and are not backed by the
full faith and credit of the municipal issuer. Because revenue
obligations are repaid from the revenues from a facility, they are
subject to a risk of default in payments of principal and interest if
the facility does not generate enough income.
> Municipal Lease Obligations Risk: The fund's investments in municipal
securities may include municipal lease obligations. Municipal lease
obligations are undivided interests issued by a state or municipality
in a lease or installment purchase which generally relates to
equipment or facilities. When the fund invests in municipal lease
obligations, it may have limited recourse in the event of default or
termination. In some cases, payments under municipal leases do not
have to be made unless the appropriate legislative body specifically
approves money for that purpose.
o Speculative Bonds Risk: Bonds rated in the lowest investment grade
category (i.e. the fourth highest credit rating) by credit rating agencies
are called speculative bonds. Speculative bonds are subject to a higher
risk that the issuer will default on payments of principal and interest
than higher rated investment grade bonds. Although the issuer's ability to
make interest and principal payments appears adequate, an adverse change
in economic conditions or other circumstances is more likely to cause a
default by the issuer of a speculative bond than the issuer of a higher
rated investment grade bond.
o Liquidity Risk: The fixed income securities purchased by the fund may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on
the fund's performance.
o Lower Rated Bonds Risk:
> Higher Credit Risk: Junk bonds are subject to a substantially higher
degree of credit risk than higher rated bonds. During recessions, a
high percentage of issuers of junk bonds may default on payments of
principal and interest. The price of a junk bond may therefore
fluctuate drastically due to bad news about the issuer or the economy
in general.
> Higher Liquidity Risk: During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will
be harder to value or sell at a fair price.
o As with any mutual fund, you could lose money on your investment in the
fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
<PAGE>
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. The chart and table provide past performance
information. The fund's past performance does not necessarily indicate how
the fund will perform in the future. The performance information in the
chart and table is based upon calendar year periods, while the performance
information presented under the caption "Financial Highlights" and in the
fund's shareholder reports is based upon the fund's fiscal year.
Therefore, these performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class B shares. The chart and related notes do not take into account any
sales charges (loads) that you may be required to pay upon purchase or
redemption of the fund's shares, but do include the reinvestment of
distributions. Any sales charge will reduce your return. The return of the
fund's other classes of shares will differ from the class B returns shown
in the bar chart, depending upon the expenses of those classes.
1990 3.55%
1991 11.41%
1992 7.88%
1993 10.91%
1994 (5.30)%
1995 13.82%
1996 2.87%
1997 8.81%
1998 4.26%
1999 (3.62)%
During the period shown in the bar chart, the highest quarterly return was
5.86% (for the calendar quarter ended March 31, 1995) and the lowest
quarterly return was (4.82)% (for the calendar quarter ended March 31,
1994).
The return for the six-months ended June 30, 2000 was 3.50%.
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compare to a broad measure of market performance and to the average
general municipal debt fund and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
..........................................................................
1 Year 5 Years 10 Years
Class A shares (7.51)% 4.86% 5.33%
Class B shares (7.27)% 4.73% 5.28%
Class C shares (4.53)% 5.09% 5.31%
Lehman Brothers Municipal Bond Index+* (2.06)% 6.91% 6.89%
Average general municipal debt fund++ (4.63)% 5.76% 6.18%
------
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Inc.
* The Lehman Brothers Municipal Bond Index is a broad based, unmanaged
index of 8,000 actual bonds (with no floating or zero coupons) which
are investment-grade, fixed-rate bonds with long-term maturities
(greater than two years).
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share performance takes into account the
deduction of the applicable contingent deferred sales charge (referred to
as a CDSC), which declines over six years from 4% to 0%. Class C share
performance takes into account the deduction of the 1% CDSC.
The fund commenced investment operations on December 29, 1986 with the
offering of class B shares, and subsequently offered class A shares on
September 7, 1993 and class C shares on January 3, 1994. Class A and class
C share performance includes the performance of the fund's class B shares
for periods prior to the offering of class A and class C shares. This
blended class A and class C share performance has been adjusted to take
into account the initial sales charge (load) applicable to class A shares
and the lower CDSC applicable to class C shares, rather than the CDSC
applicable to class B shares. This blended performance has not been
adjusted to take into account differences in class specific operating
expenses. Class A share performance generally would have been higher than
class B share performance had class A shares been offered for the entire
period, because certain operating expenses (e.g., distribution and service
fees) attributable to class B shares are higher than those of class A
shares. Class C share performance generally would have been approximately
the same as class B share performance had class C shares been offered for
the entire period, because class C and B operating expenses (e.g.,
distribution and service fees) attributable to class C and B shares are
approximately the same.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
-------------------
II EXPENSE SUMMARY
-------------------
o EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment):
............................................................................
CLASS A CLASS B CLASS C
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering
price) ............................... 4.75% 0.00% 0.00%
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase
price or redemption proceeds,
whichever is less) ................... See Below(1) 4.00% 1.00%
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from
fund assets):
............................................................................
Management Fees ...................... 0.72% 0.72% 0.72%
Distribution and Service (12b-1)
Fees(2) .............................. 0.25% 1.00% 1.00%
Other Expenses(3) .................... 0.23% 0.23% 0.23%
----- ----- -----
Total Annual Fund Operating Expenses . 1.20% 1.95% 1.95%
Fee Waiver(4) .................... (0.32)% (0.32)% (0.32)%
Net Expenses ..................... 0.88% 1.63% 1.63%
------
(1) An initial sales charge will not be deducted from your purchase if you
buy $1 million or more of class A shares, or if you are investing
through a retirement plan and your class A purchase meets certain
requirements. However, in this case, a contingent deferred sales
charge (referred to as a CDSC) of 1% may be deducted from your
redemption proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it
to pay marketing and other fees to support the sale and distribution
of class A, B and C shares and the services provided to you by your
financial adviser (referred to as distribution and service fees).
(3) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent and may enter into
other similar arrangements (which would also have the effect of
reducing the fund's expenses). Any such fee reductions are not
reflected in the table. Had these expense reductions been taken into
account, "Net Expenses" would be 0.85%, 1.60% and 1.60% for class A,
class B and class C, respectively.
(4) MFS has contractually agreed to reduce its management fee to 0.40%
annually of the average daily net assets of the fund. This contractual
fee arrangement will remain in effect until at least August 1, 2001
absent an earlier modification approved by the Board of Trustees which
oversees the fund.
o EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
Class A shares $561 $808 $1,074 $1,833
Class B shares(1)
Assuming redemption at end of
period $566 $879 $1,218 $2,047
Assuming no redemption $166 $579 $1,018 $2,047
Class C shares
Assuming redemption at end of
period $266 $581 $1,023 $2,249
Assuming no redemption $166 $581 $1,023 $2,249
------
(1) Class B shares convert to Class A shares approximately eight years
after purchase; therefore, years nine and ten reflect Class A
expenses.
<PAGE>
--------------------------------------------
III CERTAIN INVESTMENT STRATEGIES AND RISKS
--------------------------------------------
o FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, in the fund's Statement of
Additional Information (referred to as the SAI), which you may obtain by
contacting MFS Service Center, Inc. (see back cover for address and phone
number).
o TEMPORARY DEFENSIVE POLICIES
In addition, the fund may depart from its principal investment strategies
by temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While the fund invests
defensively, it may not be able to pursue its investment objective. When
such conditions exist the fund may invest up to 50% of its total assets in
the following short-term investments:
o U.S. government securities; and
o commercial paper, obligations of banks (including certificates of deposit,
bankers' acceptances and repurchase agreements) with $1 billion of assets
and cash.
Interest income from these short-term investments will be taxable to
shareholders as ordinary income. The fund's defensive investment position
may not be effective in protecting its value.
o ACTIVE OR FREQUENT TRADING
The fund may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to a fund
with less active trading policies, which would increase your tax
liability. Frequent trading also increases transaction costs, which could
detract from the fund's performance.
<PAGE>
--------------------------
IV MANAGEMENT OF THE FUND
--------------------------
o INVESTMENT ADVISER
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the fund's investment adviser. MFS is America's oldest mutual
fund organization. MFS and its predecessor organizations have a history of
money management dating from 1924 and the founding of the first mutual
fund, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $151.2 billion on behalf of
approximately 5.1 million investor accounts as of June 30, 2000. MFS is
located at 500 Boylston Street, Boston, Massachusetts 02116.
MFS provides investment management and related administrative services
and facilities to the fund, including portfolio management and trade
execution. For these services, the fund has contracted to pay MFS an
annual management fee equal to 0.30% of the fund's average daily net
assets plus 6.43% of its gross income for its then-current fiscal year.
For fiscal year ended March 31, 2000, this fee was equivalent to 0.72% of
the fund's average daily net assets. MFS has contracted to waive its right
to receive a portion of this fee as described under "Expense Summary."
o PORTFOLIO MANAGER
The fund's portfolio managers are Geoffrey L. Schechter and Michael L.
Dawson, Vice Presidents of MFS. Messrs. Schechter and Dawson became
portfolio managers of the fund on March 23, 2000 and have been employed in
the investment management area of MFS since June 1993 and September 1998,
respectively. Prior to joining MFS, Mr. Dawson was employed as a sales
representative in the Institutional Sales Group at Fidelity Capital
Markets from March 1997 to May 1998, and in the Institutional Sales -
Fixed Income Division of Goldman Sachs & Co. from January 1993 to March
1997.
o ADMINISTRATOR
MFS provides the fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the fund for a portion of the costs it incurs in providing
these services.
o DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of the fund.
o SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for the fund,
for which it receives compensation from the fund.
<PAGE>
-------------------------------
V DESCRIPTION OF SHARE CLASSES
-------------------------------
The fund offers class A, B and C shares through this prospectus.
o SALES CHARGES
You may be subject to an initial sales charge when you purchase, or a CDSC
when you redeem, class A, B or C shares. These sales charges are described
below. In certain circumstances, these sales charges are waived. These
circumstances are described in the SAI. Special considerations concerning
the calculation of the CDSC that apply to each of these classes of shares
are described below under the heading "Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other concessions
which are paid from various sources, such as from the sales charges and
distribution and service fees, or from MFS or MFD. These commissions and
concessions are described in the SAI.
o CLASS A SHARES
You may purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), but in some cases you may
purchase class A shares without an initial sales charge but subject to a
1% CDSC upon redemption within one year. Class A shares have annual
distribution and service fees up to a maximum of 0.35% of net assets.
PURCHASES SUBJECT TO AN INITIAL SALES CHARGE. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon
the amount you invest, as follows:
SALES CHARGE* AS PERCENTAGE OF:
-------------------------------
Offering Net Amount
Amount of Purchase Price Invested
Less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 2.95 3.04
$500,000 but less than $1,000,000 2.20 2.25
$1,000,000 or more None** None**
------
* Because of rounding in the calculation of offering price, actual sales
charges you pay may be more or less than those calculated using these
percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
PURCHASES SUBJECT TO A CDSC (BUT NOT AN INITIAL SALES CHARGE). You pay no
initial sales charge when you invest $1 million or more in class A shares.
However, a CDSC of 1% will be deducted from your redemption proceeds if
you redeem within 12 months of your purchase.
In addition, purchases made under the following four categories are not
subject to an initial sales charge; however, a CDSC of 1% will be deducted
from redemption proceeds if the redemption is made within 12 months of
purchase:
o Investments in class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended (referred to
as ERISA), if, prior to July 1, 1996
> the plan had established an account with MFSC; and
> the sponsoring organization had demonstrated to the satisfaction of
MFD that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan of class A shares of
the MFS Family of Funds (the MFS funds) would be in the amount of
at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the retirement plan and/or sponsoring organization participates in the
MFS Corporate Plan Services 401(k) Plan or any similar recordkeeping
system made available by MFSC (referred to as the MFS participant
recordkeeping system);
> the plan establishes an account with MFSC on or after July 1, 1996;
> the total purchases by the retirement plan (or by multiple plans
maintained by the same plan sponsor) of class A shares of the MFS
Funds will be in the amount of at least $500,000 within a reasonable
period of time, as determined by MFD in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the plan establishes an account with MFSC on or after July 1, 1996;
and
> the plan has, at the time of purchase, either alone or in aggregate
with other plans maintained by the same plan sponsor, a market value
of $500,000 or more invested in shares of any class or classes of the
MFS Funds.
THE RETIREMENT PLANS WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE
PLANS OR THEIR SPONSORING ORGANIZATION INFORM MFSC PRIOR TO THE
PURCHASES THAT THE PLANS HAVE A MARKET VALUE OF $500,000 OR MORE
INVESTED IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS; MFSC HAS
NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH PLANS QUALIFY
UNDER THIS CATEGORY; AND
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the plan established an account with MFSC between July 1, 1997 and
December 31, 1999;
> the plan records are maintained on a pooled basis by MFSC; and
> the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
o CLASS B SHARES
You may purchase class B shares at net asset value without an initial
sales charge, but if you redeem your shares within the first six years you
may be subject to a CDSC (declining from 4.00% during the first year to 0%
after six years). Class B shares have annual distribution and service fees
up to a maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
----------------------------------------------------------------------------
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
If you hold class B shares for approximately eight years, they will
convert to class A shares of the fund. All class B shares you purchased
through the reinvestment of dividends and distributions will be held in a
separate sub-account. Each time any class B shares in your account convert
to class A shares, a proportionate number of the class B shares in the
sub-account will also convert to class A shares.
o CLASS C SHARES
You may purchase class C shares at net asset value without an initial
sales charge, but if you redeem your shares within the first year you may
be subject to a CDSC of 1.00%. Class C shares have annual distribution and
service fees up to a maximum of 1.00% of net assets annually. Class C
shares do not convert to any other class of shares of the fund.
o CALCULATION OF CDSC
As discussed above, certain investments in class A, B and C shares will be
subject to a CDSC. Three different aging schedules apply to the
calculation of the CDSC:
o Purchases of class A shares made on any day during a calendar month will
age one month on the last day of the month, and each subsequent month.
o Purchases of class C shares, and purchases of class B shares on or after
January 1, 1993, made on any day during a calendar month will age one year
at the close of business on the last day of that month in the following
calendar year, and each subsequent year.
o Purchases of class B shares prior to January 1, 1993 made on any day
during a calendar year will age one year at the close of business on
December 31 of that year, and each subsequent year.
No CDSC is assessed on the value of your account represented by
appreciation or additional shares acquired through the automatic
reinvestment of dividends or capital gain distributions. Therefore, when
you redeem your shares, only the value of the shares in excess of these
amounts (i.e., your direct investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being
imposed at the lowest possible rate, which means that the CDSC will be
applied against the lesser of your direct investment or the total cost of
your shares. The applicability of a CDSC will not be affected by exchanges
or transfers of registration, except as described in the SAI.
o DISTRIBUTION AND SERVICE FEES
The fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class A,
B and C shares and the services provided to you by your financial adviser.
These annual distribution and service fees may equal up to 0.35% for class
A shares (a 0.10% distribution fee and a 0.25% service fee) and 1.00% for
each of class B and class C shares (a 0.75% distribution fee and a 0.25%
service fee), and are paid out of the assets of these classes. Over time,
these fees will increase the cost of your shares and may cost you more
than paying other types of sales charges. The 0.10% per annum class A
distribution fee is currently not being imposed. The fund will begin
paying this fee on such date as the Trustees of the fund may determine.
<PAGE>
-----------------------------------------------
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
-----------------------------------------------
You may purchase, exchange and redeem class A, B and C shares of the fund
in the manner described below. In addition, you may be eligible to
participate in certain investor services and programs to purchase,
exchange and redeem these classes of shares, which are described in the
next section under the caption "Investor Services and Programs."
o HOW TO PURCHASE SHARES
INITIAL PURCHASE. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is $1,000.
However, in the following circumstances the minimum initial investment is
only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
> tax-deferred retirement programs (other than IRAs) where investments
are made by means of group remittal statements; or
> employer sponsored investment programs.
The minimum initial investment for IRAs is $250 per account. The maximum
investment in class C shares is $1,000,000 per transaction. Class C shares
are not available for purchase by any retirement plan qualified under
Section 401(a) or 403(b) of the Internal Revenue Code if the plan or its
sponsor subscribes to certain recordkeeping services made available by
MFSC, such as the MFS Corporate Plan Services 401(k) Plan.
ADDING TO YOUR ACCOUNT. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first for
instructions); or
o authorize transfers by phone between your bank account and your MFS
account (the maximum purchase amount for this method is $100,000). You
must elect this privilege on your account application if you wish to use
it.
o HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of certain other
MFS funds at net asset value by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC will not be charged a
CDSC in an exchange. However, when you redeem the shares acquired through
the exchange, the shares you redeem may be subject to a CDSC, depending
upon when you originally purchased the shares you exchanged. For purposes
of computing the CDSC, the length of time you have owned your shares will
be measured from the date of original purchase and will not be affected by
any exchange.
Sales charges may apply to exchanges made from the MFS money market
funds. Certain qualified retirement plans may make exchanges between the
MFS Funds and the MFS Fixed Fund, a bank collective investment fund, and
sales charges may also apply to these exchanges. Call MFSC for information
concerning these sales charges.
Exchanges may be subject to certain limitations and are subject to the
MFS Funds' policies concerning excessive trading practices, which are
policies designed to protect the funds and their shareholders from the
harmful effect of frequent exchanges. These limitations and policies are
described below under the captions "Right to Reject or Restrict Purchase
and Exchange Orders" and "Excessive Trading Practices." You should read
the prospectus of the MFS fund into which you are exchanging and consider
the differences in objectives, policies and rules before making any
exchange.
o HOW TO REDEEM SHARES
You may redeem your shares either by having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature Guarantee/
Additional Documentation" below, or contact MFSC for details (see back
cover page for address and phone number).
Under unusual circumstances such as when the New York Stock Exchange is
closed, trading on the Exchange is restricted or if there is an emergency,
the fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, the fund may delay the payment of the
redemption proceeds until the check has cleared, which may take up to 15
days from the purchase date.
REDEEMING DIRECTLY THROUGH MFSC.
o BY TELEPHONE. You can call MFSC to have shares redeemed from your account
and the proceeds wired or mailed (depending on the amount redeemed)
directly to a pre- designated bank account. MFSC will request personal or
other information from you and will generally record the calls. MFSC will
be responsible for losses that result from unauthorized telephone
transactions if it does not follow reasonable procedures designed to
verify your identity. You must elect this privilege on your account
application if you wish to use it.
o BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the
name of your fund, your account number, and the number of shares or dollar
amount to be sold.
REDEEMING THROUGH YOUR FINANCIAL ADVISER. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser
will be responsible for furnishing all necessary documents to MFSC and may
charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. In order to protect against
fraud, the fund requires that your signature be guaranteed in order to
redeem your shares. Your signature may be guaranteed by an eligible bank,
broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency, or savings association. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
o OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. Purchases and
exchanges should be made for investment purposes only. The MFS Funds each
reserve the right to reject or restrict any specific purchase or exchange
request. Because an exchange request involves both a request to redeem
shares of one fund and to purchase shares of another fund, the MFS Funds
consider the underlying redemption and purchase requests conditioned upon
the acceptance of each of these underlying requests. Therefore, in the
event that the MFS Funds reject an exchange request, neither the
redemption nor the purchase side of the exchange will be processed. When a
fund determines that the level of exchanges on any day may be harmful to
its remaining shareholders, the fund may delay the payment of exchange
proceeds for up to seven days to permit cash to be raised through the
orderly liquidation of its portfolio securities to pay the redemption
proceeds. In this case, the purchase side of the exchange will be delayed
until the exchange proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm
fund performance. As noted above, the MFS funds reserve the right to
reject or restrict any purchase order (including exchanges) from any
investor. To minimize harm to the MFS funds and their shareholders, the
MFS funds will exercise these rights if an investor has a history of
excessive trading or if an investor's trading, in the judgment of the MFS
funds, has been or may be disruptive to a fund. In making this judgment,
the MFS funds may consider trading done in multiple accounts under common
ownership or control.
REINSTATEMENT PRIVILEGE. After you have redeemed shares, you have a one-
time right to reinvest the proceeds within 90 days of the redemption at
the current net asset value (without an initial sales charge). If the
redemption involved a CDSC, your account will be credited with the
appropriate amount of the CDSC paid; however, your new shares will be
subject to a CDSC which will be determined from the date you originally
purchased the shares redeemed. This privilege applies to shares of the MFS
money market funds only under certain circumstances.
IN-KIND DISTRIBUTIONS. The MFS Funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that the fund makes an in-kind
distribution, you could incur the brokerage and transaction charges when
converting the securities to cash. The fund does not expect to make in-
kind distributions, and if it does, the fund will pay, during any 90-day
period, your redemption proceeds in cash up to either $250,000 or 1% of
the fund's net assets, whichever is less.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Because it is costly to maintain
small accounts, the MFS Funds have generally reserved the right to
automatically redeem shares and close your account when it contains less
than $500 due to your redemptions or exchanges. Before making this
automatic redemption, you will be notified and given 60 days to make
additional investments to avoid having your shares redeemed.
<PAGE>
-----------------------------------
VII INVESTOR SERVICES AND PROGRAMS
-----------------------------------
As a shareholder of the fund, you have available to you a number of
services and investment programs. Some of these services and programs may
not be available to you if your shares are held in the name of your
financial adviser or if your investment in the fund is made through a
retirement plan.
o DISTRIBUTION OPTIONS
The following distribution options are generally available to all accounts
and you may change your distribution option as often as you desire by
notifying MFSC:
o Dividend and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
o Dividend distributions in cash; capital gain distributions reinvested in
additional shares; or
o Dividend and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value
as of the close of business on the record date. Distributions in amounts
less than $10 will automatically be reinvested in additional shares of the
fund. If you have elected to receive distributions in cash, and the postal
or other delivery service is unable to deliver checks to your address of
record, or you do not respond to mailings from MFSC with regard to
uncashed distribution checks, your distribution option will automatically
be converted to having all distributions reinvested in additional shares.
Your request to change a distribution option must be received by MFSC by
the record date for a distribution in order to be effective for that
distribution. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
o PURCHASE AND REDEMPTION PROGRAMS
For your convenience, the following purchase and redemption programs are
made available to you with respect to class A, B and C shares, without
extra charge:
AUTOMATIC INVESTMENT PLAN. You can make cash investments of $50 or more
through your checking account or savings account on any day of the month.
If you do not specify a date, the investment will automatically occur on
the first business day of the month.
AUTOMATIC EXCHANGE PLAN. If you have an account balance of at least $5,000
in any MFS fund, you may participate in the automatic exchange plan, a
dollar-cost averaging program. This plan permits you to make automatic
monthly or quarterly exchanges from your account in an MFS fund for shares
of the same class of shares of other MFS funds. You may make exchanges of
at least $50 to up to six different funds under this plan. Exchanges will
generally be made at net asset value without any sales charges. If you
exchange shares out of the MFS Money Market Fund or MFS Government Money
Market Fund, or if you exchange class A shares out of the MFS Cash Reserve
Fund, into class A shares of any other MFS fund, you will pay the initial
sales charge if you have not already paid this charge on these shares.
REINVEST WITHOUT A SALES CHARGE. You can reinvest dividend and capital
gain distributions into your account without a sales charge to add to your
investment easily and automatically.
DISTRIBUTION INVESTMENT PROGRAM. You may purchase shares of any MFS fund
without paying an initial sales charge or a CDSC upon redemption by
automatically reinvesting a minimum of $50 of dividend and capital gain
distributions from the same class of another MFS fund.
LETTER OF INTENT (LOI). If you intend to invest $100,000 or more in the
MFS funds (including the MFS Fixed Fund) within 13 months, you may buy
class A shares of the funds at the reduced sales charge as though the
total amount were invested in class A shares in one lump sum. If you
intend to invest $1 million or more under this program, the time period is
extended to 36 months. If the intended purchases are not completed within
the time period, shares will automatically be redeemed from a special
escrow account established with a portion of your investment at the time
of purchase to cover the higher sales charge you would have paid had you
not purchased your shares through this program.
RIGHT OF ACCUMULATION. You will qualify for a lower sales charge on your
purchases of class A shares when your new investment in class A shares,
together with the current (offering price) value of all your holdings in
the MFS funds (including the MFS Fixed Fund), reaches a reduced sales
charge level.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to automatically receive (or
designate someone else to receive) regular periodic payments of at least
$100. Each payment under this systematic withdrawal is funded through the
redemption of your fund shares. For class B and C shares, you can receive
up to 10% (15% for certain IRA distributions) of the value of your account
through these payments in any one year (measured at the time you establish
this plan). You will incur no CDSC on class B and C shares redeemed under
this plan. For class A shares, there is no similar percentage limitation;
however, you may incur the CDSC (if applicable) when class A shares are
redeemed under this plan.
FREE CHECKWRITING. You may redeem your class A or class C shares by
writing checks against your account. Checks must be for at least $500 and
investments made by check must have been in your account for at least 15
days before you can write checks against them. There is no charge for this
service. To authorize your account for checkwriting, contact MFSC (see
back cover page for address and phone number).
Shares in your account equal in value to the amount of the check plus
the applicable CDSC (if any) and any income tax required to be withheld
(if any) are redeemed to cover the amount of the check. If your account
value is not great enough to cover these amounts, your check will be
dishonored.
<PAGE>
-----------------------
VIII OTHER INFORMATION
-----------------------
o PRICING OF FUND SHARES
The price of each class of the fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange (the
"NYSE") is open for trading (generally, 4:00 p.m., Eastern time) (referred
to as the valuation time). The NYSE is closed on most national holidays and
Good Friday. To determine net asset value, the fund values its assets at
current market values, or at fair value as determined by the Adviser under
the direction of the Board of Trustees that oversees the fund if current
market values are unavailable. Fair value pricing may be used by the fund
when current market values are unavailable or when an event occurs after the
close of the exchange on which the fund's portfolio securities are
principally traded that is likely to have changed the value of the
securities. The use of fair value pricing by the fund may cause the net
asset value of its shares to differ significantly from the net asset value
that would be calculated using current market values.
You will receive the net asset value next calculated, after the
deduction of applicable sales charges and any required tax withholding, if
your order is complete (has all required information) and MFSC receives
your order by:
o the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) received your order
by the valuation time.
The fund invests in certain securities which are primarily listed on
foreign exchanges that trade on weekends and other days when the fund does
not price its shares. Therefore, the value of the fund's shares may change
on days when you will not be able to purchase or redeem the fund's shares.
o DISTRIBUTIONS
The fund intends to declare daily as dividends substantially all of its
net income (excluding any realized net capital gains) and to pay these
dividends to shareholders at least monthly. Any realized net capital gains
are distributed at least annually.
o TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your
tax adviser regarding the effect that an investment in the fund may have
on your particular tax situation.
TAXABILITY OF DISTRIBUTIONS. As long as the fund qualifies for treatment
as a regulated investment company (which it has in the past and intends to
do in the future), it pays no federal income tax on the earnings it
distributes to shareholders.
You may receive three different types of distributions from the fund:
exempt-interest dividends, ordinary dividends and capital gain dividends.
Most distributions will be exempt-interest dividends, which are exempt
from federal income tax, but may be subject to state or local income
taxes. Ordinary dividends are normally subject to both federal income tax
and any state and local income taxes. Distributions designated as capital
gain dividends are taxable as long-term capital gains. Any taxes that you
pay on a distribution will be the same whether you take the distribution
in cash or have it reinvested in additional shares of the fund. Some
dividends paid in January may be taxable as if they had been paid the
previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes.
Fund distributions of net capital gains or net short-term capital gains
will reduce the fund's net asset value per share. Therefore, if you buy
shares shortly before the record date of such a distribution, you may pay
the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
If you are neither a citizen nor a resident of the U.S., the fund will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able
to arrange for a lower withholding rate under an applicable tax treaty if
you supply the appropriate documentation required by the fund. The fund is
also required in certain circumstances to apply backup withholding at the
rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a
resident of the U.S.) who does not furnish to the fund certain information
and certifications or who is otherwise subject to backup withholding.
Backup withholding will not, however, be applied to payments that have
been subject to 30% withholding. Prospective investors should read the
fund's Account Application for additional information regarding backup
withholding of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it
is generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, sell or exchange, you
may have a gain or a loss on the transaction. You are responsible for any
tax liabilities generated by your transaction.
OTHER TAX ISSUES. Exempt-interest dividends that you receive may affect
your alternative minimum tax calculation. Also, if you are receiving
social security or railroad retirement benefits, your exempt-interest
dividends may increase the tax on your benefits. If you borrow money to
purchase or carry shares of the fund, your deduction for interest paid on
those borrowings will be limited.
o UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of the fund, and which may be managed by the fund's portfolio
manager(s). While the fund may have many similarities to these other
funds, its investment performance will differ from their investment
performance. This is due to a number of differences between the funds,
including differences in sales charges, expense ratios and cash flows.
o PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
The fund produces financial reports every six months and updates its
prospectus annually. To avoid sending duplicate copies of materials to
households, only one copy of the fund's annual and semiannual report and
prospectus will be mailed to shareholders having the same residential
address on the fund's records. However, any shareholder may contact MFSC
(see back cover for address and phone number) to request that copies of
these reports and prospectuses be sent personally to that shareholder.
<PAGE>
------------------------
IX FINANCIAL HIGHLIGHTS
------------------------
The financial highlights table is intended to help you understand the
fund's financial performance for the past 5 years. Certain information
reflects financial results for a single fund share. The total returns in
the table represent the rate by which an investor would have earned (or
lost) on an investment in the fund (assuming reinvestment of all
distributions). This information has been audited by the fund's
independent auditors, whose report, together with the fund's financial
statements, are included in the fund's Annual Report to shareholders. The
fund's Annual Report is available upon request by contacting MFS Service
Center, Inc. (see back cover for address and telephone number). These
financial statements are incorporated by reference into the SAI. The
fund's independent auditors are Deloitte & Touche LLP.
<PAGE>
<TABLE>
CLASS A SHARES
...............................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 8.97 $ 8.99 $ 8.50 $ 8.62 $ 8.56
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) $ 0.48 $ 0.47 $ 0.48 $ 0.49 $ 0.51
Net realized and unrealized gain
(loss) on investments (0.59) (0.02) 0.49 (0.12) 0.05
-------- -------- -------- -------- --------
Total from investment operations $ (0.11) $ 0.45 $ 0.97 $ 0.37 $ 0.56
-------- -------- -------- -------- --------
Less distributions declared to
shareholders -
From net investment income $ (0.47) $ (0.47) $ (0.48) $ (0.49) $ (0.50)
From net realized gain on investments (0.06) -- -- -- --
In excess of net investment income -- -- -- -- (0.00)+
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (0.53) $ (0.47) $ (0.48) $ (0.49) $ (0.50)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 8.33 $ 8.97 $ 8.99 $ 8.50 $ 8.62
-------- -------- -------- -------- --------
Total return(+) (1.15)% 5.16% 11.61% 4.28% 6.81%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 0.88% 1.08% 1.23% 1.31% 1.28%
Net investment income 5.66% 5.35% 5.44% 5.75% 5.75%
Portfolio turnover 57% 31% 23% 30% 23%
Net assets at end of period (000 omitted) $217,880 $215,858 $189,056 $152,039 $121,903
--------
(S) The investment adviser voluntarily waived a portion of its management fee for certain periods indicated. If
this fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.45 $ 0.47 $ -- $ -- $ --
Ratios (to average net assets):
Expenses## 1.20% 1.21% -- -- --
Net investment income 5.34% 5.22% -- -- --
+ Per share amount was less than $0.01.
# Per share data is based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
</TABLE>
<PAGE>
<TABLE>
CLASS B SHARES
...............................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding
throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of period $ 8.98 $ 9.00 $ 8.51 $ 8.63 $ 8.57
------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) $ 0.42 $ 0.41 $ 0.42 $ 0.43 $ 0.43
Net realized and unrealized gain (loss)
on investments (0.59) (0.02) 0.48 (0.13) 0.06
------- -------- -------- -------- --------
Total from investment operations $ (0.17) $ 0.39 $ 0.90 $ 0.30 $ 0.49
------- -------- -------- -------- --------
Less distributions declared to
shareholders -
From net investment income $ (0.41) $ (0.41) $ (0.41) $ (0.42) $ (0.43)
From net realized gain on investments (0.06) -- -- -- --
In excess of net investment income -- -- -- -- (0.00)+
------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (0.47) $ (0.41) $ (0.41) $ (0.42) $ (0.43)
------- -------- -------- -------- --------
Net asset value -- end of period $ 8.34 $ 8.98 $ 9.00 $ 8.51 $ 8.63
------- -------- -------- -------- --------
Total return (1.89)% 4.38% 10.77% 3.44% 5.87%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.63% 1.83% 1.98% 2.11% 2.13%
Net investment income 4.89% 4.59% 4.69% 4.95% 4.90%
Portfolio turnover 57% 31% 23% 30% 23%
Net assets at end of period (000 omitted) $93,656 $140,871 $172,339 $226,138 $306,889
--------
(S) The investment adviser voluntarily waived a portion of its management fee for certain periods indicated. If
this fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.39 $ 0.40 $ -- $ -- $ --
Ratios (to average net assets):
Expenses## 1.95% 1.96% -- -- --
Net investment income 4.57% 4.46% -- -- --
+ Per share amount was less than $0.01.
# Per share data is based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
<PAGE>
<TABLE>
CLASS C SHARES
.....................................................................................................................
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 8.99 $ 9.01 $ 8.52 $ 8.64 $ 8.57
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) $ 0.42 $ 0.41 $ 0.41 $ 0.43 $ 0.43
Net realized and unrealized gain (loss) on
investments (0.59) (0.02) 0.49 (0.12) 0.07
------ ------ ------ ------ ------
Total from investment operations $(0.17) $ 0.39 $ 0.90 $ 0.31 $ 0.50
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.41) $(0.41) $(0.41) $(0.43) $(0.43)
From net realized gain on investments (0.06)
In excess of net investment income -- -- -- -- (0.00)+
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.47) $(0.41) $(0.41) $(0.43) $(0.43)
------ ------ ------ ------ ------
Net asset value -- end of period $ 8.35 $ 8.99 $ 9.01 $ 8.52 $ 8.64
------ ------ ------ ------ ------
Total return (1.89)% 4.37% 10.75% 3.62% 5.94%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.63% 1.81% 1.98% 2.06% 2.05%
Net investment income 4.89% 4.59% 4.69% 5.00% 4.95%
Portfolio turnover 57% 31% 23% 30% 23%
Net assets at end of period (000 omitted) $26,037 $32,164 $21,802 $19,159 $16,504
--------
(S) The investment adviser voluntarily waived a portion of its management fee for certain periods indicated. If
this fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.39 $ 0.40 $ -- $ -- $ --
Ratios (to average net assets):
Expenses## 1.95% 1.94% -- -- --
Net investment income 4.57% 4.46% -- -- --
+ Per share amount was less than $0.01.
# Per share data is based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
<PAGE>
----------
APPENDIX A
----------
o INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices.
Investment techniques and practices which are the principal focus of the
fund are described, together with their risks, in the Risk Return Summary
of the Prospectus. Both principal and non-principal investment techniques
and practices are described, together with their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES (CONTINUED)
..........................................................................
INVESTMENT TECHNIQUES/PRACTICES
..........................................................................
SYMBOLS x permitted -- not permitted
--------------------------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities x
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities x
Loans and Other Direct Indebtedness x
Lower Rated Bonds x
Municipal Bonds x
Speculative Bonds x
U.S. Government Securities x
Variable and Floating Rate Obligations x
Zero Coupon Bonds x
Equity Securities x
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities --
Emerging Markets --
Foreign Securities --
Forward Contracts --
Futures Contracts x
Indexed Securities/Structured Products x
Inverse Floating Rate Obligations x
Investment in Other Investment Companies
Open-End Funds --*
Closed-End Funds x
Lending of Portfolio Securities x
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions x**
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies --
Options on Futures Contracts x
Options on Securities x
Options on Stock Indices --
Reset Options x
"Yield Curve" Options x
Repurchase Agreements x
Restricted Securities x
Short Sales --*
Short Sales Against the Box x
Short Term Instruments x
Swaps and Related Derivative Instruments --
Temporary Borrowings x
Temporary Defensive Positions x
Warrants x
"When-Issued" Securities x
--------
* May only be changed with shareholder approval.
** The fund will only enter into "covered" mortgage dollar-roll
transactions, meaning that the fund segregates liquid securities equal in
value to the securities it will repurchase and does not use these
transactions as a form of leverage.
<PAGE>
----------
APPENDIX B
----------
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 2000)
The table below shows the approximate taxable bond yields which are equivalent
to tax-exempt bond yields from 3% to 8% under federal income tax laws that
apply to 2000. Such yields may differ under the laws applicable to subsequent
years. Separate calculations, showing the applicable taxable income brackets,
are provided for investors who file joint returns and for those investors who
file individual returns. In each table, the effective marginal income tax rate
will be increased if personal exemptions are phased out (for the phase out
period only) and if a portion of itemized deductions are disallowed. This
increase in the marginal rates, if applicable, will cause a corresponding
increase in the equivalent taxable yields.
While it is expected that a substantial portion of the interest income
distributed to the fund's shareholders will be exempt from federal income
taxes, portions of such distributions from time to time may be subject to
federal income taxes or a federal alternative minimum tax.
<TABLE>
TAXABLE INCOME* INCOME TAX-EXEMPT YIELD
--------------------------------------------- TAX --------------------------------------------------------------------
SINGLE JOINT BRACKET** 3% 4% 5% 6% 7% 8%
--------------------------------------------- ------------ --------------------------------------------------------------------
2000 2000
OVER NOT OVER OVER NOT OVER EQUIVALENT TAXABLE YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 26,250 $ 0-$ 43,850 0.15% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 26,250-$ 63,550 $ 43,850-$105,950 0.28 4.17 5.56 6.94 8.33 9.72 11.11
$ 63,550-$132,600 $105,950-$161,450 0.31 4.35 5.80 7.25 8.70 10.14 11.59
$132,600-$288,350 $161,450-$288,350 0.36 4.69 6.25 7.81 9.38 10.94 12.50
$288,350 & Over $288,350 & Over 0.396 4.97 6.62 8.28 9.93 11.59 13.25
* Net amount subject to Federal personal income tax after deductions and exemptions.
** Effective Federal Tax Bracket.
</TABLE>
<PAGE>
MFS(R) MUNICIPAL INCOME FUND
If you want more information about the fund, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the fund's
actual investments. Annual reports discuss the effect of recent market
conditions and the fund's investment strategy on the fund's performance during
its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated August 1, 2000,
provides more detailed information about the fund and is incorporated into
this prospectus by reference.
YOU CAN GET FREE COPIES OF THE ANNUAL/SEMIANNUAL REPORTS, THE SAI AND OTHER
INFORMATION ABOUT THE FUND, AND MAKE INQUIRIES ABOUT THE FUND, BY CONTACTING:
MFS Service Center, Inc.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-202-942-8090. Reports and other information about
the fund are available on the EDGAR Databases on the Commission's Internet
website at http://www.sec.gov, and copies of this information may be obtained,
upon payment of a duplicating fee, by electronic request at the following
e-mail address: [email protected], or by writing the Public Reference Section
at the above address.
The fund's Investment Company Act file number is 811-4096.
<PAGE>
----------------------------
MFS(R) MUNICIPAL INCOME FUND
----------------------------
AUGUST 1, 2000
[Logo] MFS(R) STATEMENT OF ADDITIONAL
INVESTMENT MANAGEMENT INFORMATION
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, 2000. 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 7/00 02/202/302 600
<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 .......................................... 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
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
"Trust" - MFS(R) Municipal Series 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.
"Fund" - MFS Municipal Income Fund, a series of the Trust. The 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" or the "Distributor" - MFS Fund Distributors, Inc., a Delaware
corporation.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated August 1, 2000, as
amended or supplemented from time to time.
II MANAGEMENT OF THE FUND
THE FUND
The Fund is a diversified series of the Trust. This means that, with
respect to 75% of its total assets, the fund may not (1) purchase more
than 10% of the outstanding voting securities of any one issuer, or (2)
purchase securities of any issuer if as a result more than 5% of the
Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the U.S. Government or its
agencies or instrumentalities. The Trust is an open-end management
investment company.
The Fund and its Adviser and Distributor have adopted a code of ethics
as required under the Investment Company Act of 1940 (the "1940 Act").
Subject to certain conditions and restrictions, this code permits
personnel subject to the code to invest in securities for their own
accounts, including securities that may be purchased, held or sold by the
Fund. Securities transactions by some of these persons may be subject to
prior approval of the Adviser's Compliance Department. Securities
transactions of certain personnel are subject to quarterly reporting and
review requirements. The code is on public file with, and is available
from, the Securities and Exchange Commission (the "SEC"). See the back
cover of the Prospectus for information on obtaining a copy.
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 $43,800
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 (i), 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.
In the event of a violation of non-fundamental policy (i), the Fund will
reduce the percentage of its assets invested in illiquid investments in
due course, taking into account the best interests of shareholders.
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.
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, 2000, the Statement of Operations for the year ended March
31, 2000, the Statement of Changes in Net Assets for the two years ended
March 31, 2000, 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
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 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: 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: Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc.
(investment advisers), Director
Address: 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: Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists),
President; Wellfleet Investments (investor in health care
companies), Managing General Partner (since 1993)
Address: Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994);
Sundstrand Corporation (diversified mechanical
manufacturer), Director
Address: Hunting Valley, Ohio
OFFICERS
JAMES O. YOST,* 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 Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary and Assistant Clerk
(born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and
Associate General Counsel
----------------
*"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.
<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>
TRUSTEE COMPENSATION TABLE
..............................................................................................................................
<CAPTION>
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>
Marshall N. Cohan $3,950 $2,050 14 $149,167
Dr. Lawrence Cohn 3,601 1,101 18 142,207
Sir David Gibbons 3,500 1,787 13 135,292
Abby M. O'Neill 3,275 1,251 10 135,292
Walter E. Robb, III 4,051 2,173 15 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 4,212 1,427 20 155,992
Ward Smith 3,987 1,587 13 149,167
----------------
(1)For the fiscal year ended March 31, 2000.
(2)Based upon normal retirement age (75).
(3)Information provided is provided for calendar year 1999. All Trustees
served as Trustees of 42 funds within the MFS fund complex (having
aggregate net assets at December 31, 1999, of approximately $35.2
billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..........................................................................
YEARS OF SERVICE
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
--------------------------------------------------------------------------
$2,948 $442 $ 737 $1,032 $1,474
3,285 493 821 1,150 1,642
3,622 543 905 1,268 1,811
3,959 594 990 1,386 1,979
4,296 644 1,074 1,504 2,148
4,633 695 1,158 1,622 2,317
----------------
(4) Other funds in the MFS Fund complex provide similar retirement benefits
to the Trustees.
<PAGE>
-------------------
PART I - APPENDIX C
-------------------
<TABLE>
AFFILIATED SERVICE PROVIDER COMPENSATION
...............................................................................................................................
The 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 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>
March 31, 2000 $1,451,781 $1,149,917 $46,838 $361,344 N/A $1,859,963
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
</TABLE>
<PAGE>
------------------------
PART I - APPENDIX D
------------------------
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
<TABLE>
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 TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 2000 $274,392 $48,045 $226,347 $237 $151,711 $25,082
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
</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, 2000, the Fund made the following
Distribution Plan payments:
<TABLE>
<CAPTION>
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares $ 534,744 $ 46,209 $488,535
Class B Shares $1,192,005 $921,742 $270,263
Class C Shares $ 282,458 $ 1,711 $280,747
</TABLE>
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, 2000 $0
March 31, 1999 $0
March 31, 1998 $0
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
..........................................................................
During the fiscal year ended March 31, 2000, the Fund purchased securities
issued by the following regular broker-dealer of the Fund, which had the
following value as of March 31, 2000:
VALUE OF SECURITIES
BROKER-DEALER AS OF MARCH 31, 2000
---------------------------------------------------------------------------
None N/A
<PAGE>
-----------------------
PART I - APPENDIX F
-----------------------
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of June 30, 2000, 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 June 30, 2000, and
are therefore presumed to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
---------------------------------------------------------------------------------------
<S> <C> <C>
None
</TABLE>
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 June 30, 2000:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTOR OWNERSHIP PERCENTAGE
......................................................................................................................
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith, Inc. for the Sole Benefit of its Customers 9.20% of Class A shares
Attn: Fund Administration 10.20% of Class B shares
4800 Deer Lake Dr E FL 3 13.17% of Class C shares
Jacksonville, FL 32246-6484
..........................................................................
</TABLE>
<PAGE>
-----------------------
PART I - APPENDIX G
-----------------------
PERFORMANCE INFORMATION
..........................................................................
All performance quotations are as of March 31, 2000.
<TABLE>
<CAPTION>
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%) (5.85)% 4.24% 5.63% 5.63% 5.33% 7.82% 8.16% 7.40% 7.72% 5.39%
Class A Shares, at net
asset value (1.15)% 5.26% 6.14% 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%) (5.60)% 4.11% 5.56% N/A N/A N/A N/A N/A N/A N/A
Class B Shares, at net
asset value (1.89)% 4.44% 5.56% 5.16% 4.85% 7.17% 7.48% 6.74% 7.03% 4.89%
Class C Shares, with CDSC
(1% for first year) (2.81)% 4.48% 5.58% N/A N/A N/A N/A N/A N/A N/A
Class C Shares, at net
asset value (1.89)% 4.48% 5.58% 5.16% 4.84% 7.17% 7.48% 6.72% 7.01% 4.89%
----------------------
+ 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.
<PAGE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in this
Part II to a "Trust" means the Massachusetts business trust of which the Fund is
a series, or, if the Fund is not a series of a Massachusetts business trust,
references to a "Trust" shall mean the Fund.
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TABLE OF CONTENTS
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PAGE
I Management of the Fund .......................................... 1
Trustees/Officers ............................................... 1
Investment Adviser .............................................. 1
Administrator ................................................... 2
Custodian ....................................................... 2
Shareholder Servicing Agent ..................................... 2
Distributor ..................................................... 2
II Principal Share Characteristics ................................. 2
Class A Shares .................................................. 2
Class B Shares, Class C Shares and Class I Shares ............... 2
Waiver of Sales Charges ......................................... 3
Dealer Commissions and Concessions .............................. 3
General ......................................................... 3
III Distribution Plan ............................................... 3
Features Common to Each Class of Shares ......................... 3
Features Unique to Each Class of Shares ......................... 4
IV Investment Techniques, Practices and Risks ...................... 5
V Net Income and Distributions .................................... 5
Money Market Funds .............................................. 5
Other Funds ..................................................... 5
VI Tax Considerations .............................................. 5
Taxation of the Fund ............................................ 5
Taxation of Shareholders ........................................ 6
Special Rules for Municipal Fund Distributions .................. 7
VII Portfolio Transactions and Brokerage Commissions ................ 8
VIII Determination of Net Asset Value ................................ 9
Money Market Funds .............................................. 9
Other Funds ..................................................... 10
IX Performance Information ......................................... 10
Money Market Funds .............................................. 10
Other Funds ..................................................... 11
General ......................................................... 12
MFS Firsts ...................................................... 12
X Shareholder Services ............................................ 13
Investment and Withdrawal Programs .............................. 13
Exchange Privilege .............................................. 15
Tax-Deferred Retirement Plans ................................... 16
XI Description of Shares, Voting Rights and Liabilities ............ 17
Appendix A -- Waivers of Sales Charges .......................... A-1
Appendix B -- Dealer Commissions and Concessions ................ B-1
Appendix C -- Investment Techniques, Practices and Risks ........ C-1
Appendix D -- Description of Bond Ratings ....................... D-1
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I MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS
BOARD OVERSIGHT -- The Board of Trustees which oversees the Fund provides
broad supervision over the affairs of the Fund. The Adviser is responsible
for the investment management of the Fund's assets, and the officers of
the Trust are responsible for its operations.
TRUSTEE RETIREMENT PLAN -- The Trust has a retirement plan for Trustees
who are non-interested Trustees and Trustees who are not officers of the
Trust. Under this plan, a Trustee will retire upon reaching a specified
age (see Part I -- "Appendix B ") ("Retirement Age") and if the Trustee
has completed at least 5 years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to his
Retirement Age and receive reduced payments if he has completed at least 5
years of service. Under the plan, a Trustee (or his beneficiaries) will
also receive benefits for a period of time in the event the Trustee is
disabled or dies. These benefits will also be based on the Trustee's
average annual compensation and length of service. The Fund will accrue
its allocable portion of compensation expenses under the retirement plan
each year to cover the current year's service and amortize past service
cost.
INDEMNIFICATION OF TRUSTEES AND OFFICERS -- The Declaration of Trust of
the Trust provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with litigation in
which they may be involved because of their offices with the Trust,
unless, as to liabilities of the Trust or its shareholders, it is
determined that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices,
or with respect to any matter, unless it is adjudicated that they did not
act in good faith in the reasonable belief that their actions were in the
best interest of the Trust. In the case of settlement, such
indemnification will not be provided unless it has been determined
pursuant to the Declaration of Trust, that they have not engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
INVESTMENT ADVISER
The Trust has retained Massachusetts Financial Services Company ("MFS" or
the "Adviser") as the Fund's investment adviser. MFS and its predecessor
organizations have a history of money management dating from 1924. MFS is
a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings,
Inc., which in turn is an indirect wholly owned subsidiary of Sun Life of
Canada (an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment
advisers to assist MFS in the management of the Fund's assets. A
description of these sub-advisers, the services they provide and their
compensation is provided under the caption "Management of the Fund -- Sub-
Adviser" in Part I of this SAI for Funds which use sub-advisers.
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to
an Investment Advisory Agreement (the "Advisory Agreement"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Subject to such policies as the Trustees may determine,
the Adviser makes investment decisions for the Fund. For these services
and facilities, the Adviser receives an annual management fee, computed
and paid monthly, as disclosed in the Prospectus under the heading
"Management of the Fund[s]."
The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer of the Adviser. The Adviser also furnishes at
its own expense all necessary administrative services, including office
space, equipment, clerical personnel, investment advisory facilities, and
all executive and supervisory personnel necessary for managing the Fund's
investments and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are not officers of
MFS and all expenses of the Fund (other than those assumed by MFS)
including but not limited to: advisory and administrative services;
governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, periodic
reports, notices and proxy statements to shareholders and to governmental
officers and commissions; brokerage and other expenses connected with the
execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust
Company, the Fund's custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the
Fund; and expenses of shareholder meetings. Expenses relating to the
issuance, registration and qualification of shares of the Fund and the
preparation, printing and mailing of prospectuses are borne by the Fund
except that the Distribution Agreement with MFD requires MFD to pay for
prospectuses that are to be used for sales purposes. Expenses of the Trust
which are not attributable to a specific series are allocated between the
series in a manner believed by management of the Trust to be fair and
equitable.
The Advisory Agreement has an initial two year term and continues in
effect thereafter only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) and, in either case, by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party.
The Advisory Agreement terminates automatically if it is assigned and may
be terminated without penalty by vote of a majority of the Fund's shares
(as defined in "Investment Restrictions" in Part I of this SAI), or by
either party on not more than 60 days" nor less than 30 days" written
notice. The Advisory Agreement provides that if MFS ceases to serve as the
Adviser to the Fund, the Fund will change its name so as to delete the
initials "MFS" and that MFS may render services to others and may permit
other fund clients to use the initials "MFS" in their names. The Advisory
Agreement also provides that neither the Adviser nor its personnel shall
be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution
and management of the Fund, except for willful misfeasance, bad faith or
gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the
Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance,
shareholder communications and other administrative services pursuant to a
Master Administrative Services Agreement. Under this Agreement, the Fund
pays MFS an administrative fee up to 0.015% per annum of the Fund's
average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of
the Fund's assets. The Custodian's responsibilities include safekeeping
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest and
dividends on the Fund's investments, maintaining books of original entry
for portfolio and fund accounting and other required books and accounts,
and calculating the daily net asset value of each class of shares of the
Fund. The Custodian does not determine the investment policies of the Fund
or decide which securities the Fund will buy or sell. The Fund may,
however, invest in securities of the Custodian and may deal with the
Custodian as principal in securities transactions. The Custodian also acts
as the dividend disbursing agent of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is
the Fund's shareholder servicing agent, pursuant to an Amended and
Restated Shareholder Servicing Agreement (the "Agency Agreement"). The
Shareholder Servicing Agent's responsibilities under the Agency Agreement
include administering and performing transfer agent functions and the
keeping of records in connection with the issuance, transfer and
redemption of each class of shares of the Fund. For these services, MFSC
will receive a fee calculated as a percentage of the average daily net
assets of the Fund at an effective annual rate of up to 0.1125%. In
addition, MFSC will be reimbursed by the Fund for certain expenses
incurred by MFSC on behalf of the Fund. The Custodian has contracted with
MFSC to perform certain dividend disbursing agent functions for the Fund.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Trustees or by
vote of a majority of the Fund's shares (as defined in "Investment
Restrictions" in Part I of this SAI) and in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days'
notice.
II PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered by
the MFS Family of Funds. Some MFS Funds may not offer each class of shares
-- see the Prospectus of the Fund to determine which classes of shares the
Fund offers.
CLASS A SHARES
MFD acts as agent in selling Class A shares of the Fund to dealers. The
public offering price of Class A shares of the Fund is their net asset
value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share
of the Fund is calculated by dividing the net asset value of a Class A
share by the difference (expressed as a decimal) between 100% and the
sales charge percentage of offering price applicable to the purchase (see
"How to Purchase, Exchange and Redeem Shares" in the Prospectus). The
sales charge scale set forth in the Prospectus applies to purchases of
Class A shares of the Fund alone or in combination with shares of all
classes of certain other funds in the MFS Family of Funds and other funds
(as noted under Right of Accumulation) by any person, including members of
a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of
Accumulation or a Letter of Intent (see "Investment and Withdrawal
Programs" below). A group might qualify to obtain quantity sales charge
discounts (see "Investment and Withdrawal Programs" below). Certain
purchases of Class A shares may be subject to a 1% CDSC instead of an
initial sales charge, as described in the Fund's Prospectus.
CLASS B SHARES, CLASS C SHARES AND CLASS I SHARES
MFD acts as agent in selling Class B, Class C and Class I shares of the
Fund. The public offering price of Class B, Class C and Class I shares is
their net asset value next computed after the sale. Class B and C shares
are generally subject to a CDSC, as described in the Fund's Prospectus.
WAIVER OF SALES CHARGES
In certain circumstances, the initial sales charge imposed upon purchases
of Class A shares and the CDSC imposed upon redemptions of Class A, B and
C shares are waived. These circumstances are described in Appendix A of
this Part II. Such sales are made without a sales charge to promote good
will with employees and others with whom MFS, MFD and/or the Fund have
business relationships, because the sales effort, if any, involved in
making such sales is negligible, or in the case of certain CDSC waivers,
because the circumstances surrounding the redemption of Fund shares were
not foreseeable or voluntary.
DEALER COMMISSIONS AND CONCESSIONS
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concessions are described in Appendix
B of this Part II.
GENERAL
Neither MFD nor dealers are permitted to delay placing orders to benefit
themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD
may benefit from its temporary holding of funds paid to it by investment
dealers for the purchase of Fund shares.
III DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and
Class C shares (the "Distribution Plan") pursuant to Section 12(b) of the
1940 Act and Rule 12b-1 thereunder (the "Rule") after having concluded
that there is a reasonable likelihood that the Distribution Plan would
benefit the Fund and each respective class of shareholders. The provisions
of the Distribution Plan are severable with respect to each Class of
shares offered by the Fund. The Distribution Plan is designed to promote
sales, thereby increasing the net assets of the Fund. Such an increase may
reduce the expense ratio to the extent the Fund's fixed costs are spread
over a larger net asset base. Also, an increase in net assets may lessen
the adverse effect that could result were the Fund required to liquidate
portfolio securities to meet redemptions. There is, however, no assurance
that the net assets of the Fund will increase or that the other benefits
referred to above will be realized.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current
distribution and service fees for each Fund are reflected under the
caption "Expense Summary" in the Prospectus.
FEATURES COMMON TO EACH CLASS OF SHARES
There are features of the Distribution Plan that are common to each Class
of shares, as described below.
SERVICE FEES -- The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to
the class of shares to which the Distribution Plan relates (i.e., Class A,
Class B or Class C shares, as appropriate) (the "Designated Class")
annually in order that MFD may pay expenses on behalf of the Fund relating
to the servicing of shares of the Designated Class. The service fee is
used by MFD to compensate dealers which enter into a sales agreement with
MFD in consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to shares of the Designated
Class owned by investors for whom such dealer is the dealer or holder of
record. MFD may from time to time reduce the amount of the service fees
paid for shares sold prior to a certain date. Service fees may be reduced
for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates
are entitled to retain all service fees payable under the Distribution
Plan for which there is no dealer of record or for which qualification
standards have not been met as partial consideration for personal services
and/or account maintenance services performed by MFD or its affiliates to
shareholder accounts.
DISTRIBUTION FEES -- The Distribution Plan provides that the Fund may pay
MFD a distribution fee in addition to the service fee described above
based on the average daily net assets attributable to the Designated Class
as partial consideration for distribution services performed and expenses
incurred in the performance of MFD's obligations under its distribution
agreement with the Fund. MFD pays commissions to dealers as well as
expenses of printing prospectuses and reports used for sales purposes,
expenses with respect to the preparation and printing of sales literature
and other distribution related expenses, including, without limitation,
the cost necessary to provide distribution-related services, or personnel,
travel, office expense and equipment. The amount of the distribution fee
paid by the Fund with respect to each class differs under the Distribution
Plan, as does the use by MFD of such distribution fees. Such amounts and
uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any
year may be more or less than the expenses incurred by MFD under its
distribution agreement with the Fund, the Fund is not liable to MFD for
any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES -- Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the
Designated Class. The provisions of the Distribution Plan relating to
operating policies as well as initial approval, renewal, amendment and
termination are substantially identical as they relate to each Class of
shares covered by the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its
continuance is specifically approved at least annually by vote of both the
Trustees and a majority of the Trustees who are not "interested persons"
or financially interested parties of such Plan ("Distribution Plan
Qualified Trustees"). The Distribution Plan also requires that the Fund
and MFD each shall provide the Trustees, and the Trustees shall review, at
least quarterly, a written report of the amounts expended (and purposes
therefor) under such Plan. The Distribution Plan may be terminated at any
time by vote of a majority of the Distribution Plan Qualified Trustees or
by vote of the holders of a majority of the respective class of the Fund's
shares (as defined in "Investment Restrictions" in Part I of this SAI).
All agreements relating to the Distribution Plan entered into between the
Fund or MFD and other organizations must be approved by the Board of
Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under the Distribution Plan must be in writing, will
be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution
Plan Qualified Trustees or by vote of the holders of a majority of the
respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution
expenses without the approval of a majority of the respective class of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) or may not be materially amended in any case without a vote of the
Trustees and a majority of the Distribution Plan Qualified Trustees. The
selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office.
No Trustee who is not an "interested person" has any financial interest in
the Distribution Plan or in any related agreement.
FEATURES UNIQUE TO EACH CLASS OF SHARES
There are certain features of the Distribution Plan that are unique to
each class of shares, as described below.
CLASS A SHARES -- Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid to
MFD). In addition to the initial sales charge, the dealer also generally
receives the ongoing 0.25% per annum service fee, as discussed above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or record for investors who own Class A shares having an aggregate
net asset value less than $750,000, or such other amount as may be
determined from time to time by MFD (MFD, however, may waive this minimum
amount requirement from time to time); or (ii) to any insurance company
which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their
net asset value in connection with annuity agreements issued in connection
with the insurance company's separate accounts.
The distribution fee paid to MFD under the Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover distribution-
related expenses incurred by it under its distribution agreement with the
Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement plans
of Class A shares which are sold at net asset value but which are subject
to a 1% CDSC for one year after purchase). In addition, to the extent that
the aggregate service and distribution fees paid under the Distribution
Plan do not exceed 0.35% per annum of the average daily net assets of the
Fund attributable to Class A shares (0.50% per annum for certain Funds),
the Fund is permitted to pay such distribution-related expenses or other
distribution-related expenses.
CLASS B SHARES -- Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. MFD will advance to dealers
the first year service fee described above at a rate equal to 0.25% of the
purchase price of such shares and, as compensation therefor, MFD may
retain the service fee paid by the Fund with respect to such shares for
the first year after purchase. Dealers will become eligible to receive the
ongoing 0.25% per annum service fee with respect to such shares commencing
in the thirteenth month following purchase.
Except in the case of the first year service fee, no service fees will
be paid to any securities dealer who is the holder or dealer of record for
investors who own Class B shares having an aggregate net asset value of
less than $750,000 or such other amount as may be determined by MFD from
time to time. MFD, however, may waive this minimum amount requirement from
time to time.
Under the Distribution Plan, the Fund pays MFD a distribution fee
equal, on an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class B shares. As noted above, this distribution fee may
be used by MFD to cover its distribution-related expenses under its
distribution agreement with the Fund (including the 3.75% commission it
pays to dealers upon purchase of Class B shares).
CLASS C SHARES -- Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC of 1.00% upon redemption during
the first year. MFD will pay a commission to dealers of 1.00% of the
purchase price of Class C shares purchased through dealers at the time of
purchase. In compensation for this 1.00% commission paid by MFD to
dealers, MFD will retain the 1.00% per annum Class C distribution and
service fees paid by the Fund with respect to such shares for the first
year after purchase, and dealers will become eligible to receive from MFD
the ongoing 1.00% per annum distribution and service fees paid by the Fund
to MFD with respect to such shares commencing in the thirteenth month
following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee
paid to MFD under the Distribution Plan (which MFD in turn pays to
dealers), as discussed above, and a distribution fee paid to MFD (which
MFD also in turn pays to dealers) under the Distribution Plan, equal, on
an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class C shares.
IV INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in pursuing
their investment objectives and principal investment policies, and the
risks associated with these investment techniques and practices. The Fund
will engage only in certain of these investment techniques and practices,
as identified in Part I. Investment practices and techniques that are not
identified in Part I do not apply to the Fund.
V NET INCOME AND DISTRIBUTIONS
MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund
is determined each day during which the New York Stock Exchange is open
for trading (see "Determination of Net Asset Value" below for a list of
days the Exchange is closed).
For this purpose, the net income attributable to shares of a money
market fund (from the time of the immediately preceding determination
thereof) shall consist of (i) all interest income accrued on the portfolio
assets of the money market fund, (ii) less all actual and accrued expenses
of the money market fund determined in accordance with generally accepted
accounting principles, and (iii) plus or minus net realized gains and
losses and net unrealized appreciation or depreciation on the assets of
the money market fund, if any. Interest income shall include discount
earned (including both original issue and market discount) on discount
paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income
is determined, the net asset value per share (i.e., the value of the net
assets of the money market fund divided by the number of shares
outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares in the
shareholder's account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for any
reason the net income determined at any time is a negative amount, which
could occur, for instance, upon default by an issuer of a portfolio
security, the money market fund would first offset the negative amount
with respect to each shareholder account from the dividends declared
during the month with respect to each such account. If and to the extent
that such negative amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the money market fund could reduce the number of its
outstanding shares by treating each shareholder of the money market fund
as having contributed to its capital that number of full and fractional
shares of the money market fund in the account of such shareholder which
represents its proportion of such excess. Each shareholder of the money
market fund will be deemed to have agreed to such contribution in these
circumstances by its investment in the money market fund. This procedure
would permit the net asset value per share of the money market fund to be
maintained at a constant $1.00 per share.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute
to its shareholders dividends equal to all of its net investment income
with such frequency as is disclosed in the Fund's prospectus. These Funds'
net investment income consists of non-capital gain income less expenses.
In addition, these Funds intend to distribute net realized short- and
long-term capital gains, if any, at least annually. Shareholders will be
informed of the tax consequences of such distributions, including whether
any portion represents a return of capital, after the end of each calendar
year.
VI TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
TAXATION OF THE FUND
FEDERAL TAXES -- The Fund (even if it is a fund in a Trust with multiple
series) is treated as a separate entity for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund
has elected (or in the case of a new Fund, intends to elect) to be, and
intends to qualify to be treated each year as, a "regulated investment
company" under Subchapter M of the Code by meeting all applicable
requirements of Subchapter M, including requirements as to the nature of
the Fund's gross income, the amount of its distributions (as a percentage
of both its overall income and any tax-exempt income), and the composition
of its portfolio assets. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. The Fund's
foreign-source income, if any, may be subject to foreign withholding
taxes. If the Fund failed to qualify as a "regulated investment company"
in any year, it would incur a regular federal corporate income tax on all
of its taxable income, whether or not distributed, and Fund distributions
would generally be taxable as ordinary dividend income to the
shareholders.
MASSACHUSETTS TAXES -- As long as it qualifies as a regulated investment
company under the Code, the Fund will not be required to pay Massachusetts
income or excise taxes.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Subject to the special rules discussed
below for Municipal Funds, shareholders of the Fund normally will have to
pay federal income tax and any state or local income taxes on the
dividends and capital gain distributions they receive from the Fund. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether paid in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), whether paid in cash or
reinvested in additional shares, are taxable to shareholders as long-term
capital gains for federal income tax purposes without regard to the length
of time the shareholders have held their shares. Any Fund dividend that is
declared in October, November, or December of any calendar year, payable
to shareholders of record in such a month, and paid during the following
January will be treated as if received by the shareholders on December 31
of the year in which the dividend is declared. The Fund will notify
shareholders regarding the federal tax status of its distributions after
the end of each calendar year.
Any Fund distribution, other than dividends that are declared by the
Fund on a daily basis, will have the effect of reducing the per share net
asset value of Fund shares by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any such distribution
(other than an exempt-interest dividend) may thus pay the full price for
the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION -- If the Fund receives dividend income from
U.S. corporations, a portion of the Fund's ordinary income dividends is
normally eligible for the dividends-received deduction for corporations if
the recipient otherwise qualifies for that deduction with respect to its
holding of Fund shares. Availability of the deduction for particular
corporate shareholders is subject to certain limitations, and deducted
amounts may be subject to the alternative minimum tax or result in certain
basis adjustments.
DISPOSITION OF SHARES -- In general, any gain or loss realized upon a
disposition of Fund shares by a shareholder that holds such shares as a
capital asset will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a
disposition of Fund shares held for six months or less will be treated as
a long-term capital loss to the extent of any distributions of net capital
gain made with respect to those shares. Any loss realized upon a
disposition of shares may also be disallowed under rules relating to "wash
sales." Gain may be increased (or loss reduced) upon a redemption of Class
A Fund shares held for 90 days or less followed by any purchase (including
purchases by exchange or by reinvestment) without payment of an additional
sales charge of Class A shares of the Fund or of any other shares of an
MFS Fund generally sold subject to a sales charge.
DISTRIBUTION/ACCOUNTING POLICIES -- The Fund's current distribution and
accounting policies will affect the amount, timing, and character of
distributions to shareholders and may, under certain circumstances, make
an economic return of capital taxable to shareholders.
U.S. TAXATION OF NON-U.S. PERSONS -- Dividends and certain other payments
(but not including distributions of net capital gains) to persons who are
not citizens or residents of the United States or U.S. entities ("Non-U.S.
Persons") are generally subject to U.S. tax withholding at the rate of
30%. The Fund intends to withhold at that rate on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. Any
amounts overwithheld may be recovered by such persons by filing a claim
for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims.
BACKUP WITHHOLDING -- The Fund is also required in certain circumstances
to apply backup withholding at the rate of 31% on taxable dividends and
capital gain distributions (and redemption proceeds, if applicable) paid
to any non-corporate shareholder (including a Non-U.S. Person) who does
not furnish to the Fund certain information and certifications or who is
otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
FOREIGN INCOME TAXATION OF NON-U.S. PERSONS -- Distributions received from
the Fund by Non-U.S. Persons may also be subject to tax under the laws of
their own jurisdictions.
STATE AND LOCAL INCOME TAXES: U.S. GOVERNMENT SECURITIES -- Dividends paid
by the Fund that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but
generally not distributions of capital gains realized upon the disposition
of such obligations) may be exempt from state and local income taxes. The
Fund generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
CERTAIN SPECIFIC INVESTMENTS -- Any investment in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped
securities, and certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments
with respect to those securities. To distribute this income (as well as
non-cash income described in the next two paragraphs) and avoid a tax on
the Fund, the Fund may be required to liquidate portfolio securities that
it might otherwise have continued to hold, potentially resulting in
additional taxable gain or loss to the Fund. Any investment in residual
interests of a CMO that has elected to be treated as a real estate
mortgage investment conduit, or "REMIC," can create complex tax problems,
especially if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by the Fund on the last business day of each taxable year
will be marked to market (i.e., treated as if closed out) on that day, and
any gain or loss associated with the positions will be treated as 60%
long-term and 40% short-term capital gain or loss. Certain positions held
by the Fund that substantially diminish its risk of loss with respect to
other positions in its portfolio may constitute "straddles," and may be
subject to special tax rules that would cause deferral of Fund losses,
adjustments in the holding periods of Fund securities, and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles that may alter the effects of these rules. The Fund will limit
its activities in options, Futures Contracts, Forward Contracts, short
sales "against the box" and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect to
foreign investments by the Fund. Foreign exchange gains and losses
realized by the Fund may be treated as ordinary income and loss. Use of
foreign currencies for non-hedging purposes and investment by the Fund in
certain "passive foreign investment companies" may be limited in order to
avoid a tax on the Fund. The Fund may elect to mark to market any
investments in "passive foreign investment companies" on the last day of
each year. This election may cause the Fund to recognize income prior to
the receipt of cash payments with respect to those investments; in order
to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or
loss to the Fund.
FOREIGN INCOME TAXES -- Investment income received by the Fund and gains
with respect to foreign securities may be subject to foreign income taxes
withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of
tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance, since the
amount of the Fund's assets to be invested within various countries is not
known.
If the Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, it may elect to "pass
through" to its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by it and thus includable in their gross income for
federal income tax purposes. Shareholders who itemize deductions would
then be allowed to claim a deduction or credit (but not both) on their
federal income tax returns for such amounts, subject to certain
limitations. Shareholders who do not itemize deductions would (subject to
such limitations) be able to claim a credit but not a deduction. No
deduction will be permitted to individuals in computing their alternative
minimum tax liability. If the Fund is not eligible, or does not elect, to
"pass through" to its shareholders foreign income taxes it has paid,
shareholders will not be able to claim any deduction or credit for any
part of the foreign taxes paid by the Fund.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS The following special rules
apply to shareholders of funds whose objective is to invest primarily in
obligations that pay interest that is exempt from federal income tax
("Municipal Funds").
TAX EXEMPT DISTRIBUTIONS -- The portion of a Municipal Fund's
distributions of net investment income that is attributable to interest
from tax-exempt securities will be designated by the Fund as an "exempt-
interest dividend" under the Code and will generally be exempt from
federal income tax in the hands of shareholders so long as at least 50% of
the total value of the Fund's assets consists of tax-exempt securities at
the close of each quarter of the Fund's taxable year. Distributions of
tax-exempt interest earned from certain securities may, however, be
treated as an item of tax preference for shareholders under the federal
alternative minimum tax, and all exempt-interest dividends may increase a
corporate shareholder's alternative minimum tax. Except when the Fund
provides actual monthly percentage breakdowns, the percentage of income
designated as tax-exempt will be applied uniformly to all distributions by
the Fund of net investment income made during each fiscal year of the Fund
and may differ from the percentage of distributions consisting of
tax-exempt interest in any particular month. Shareholders are required to
report exempt-interest dividends received from the Fund on their federal
income tax returns.
TAXABLE DISTRIBUTIONS -- A Municipal Fund may also earn some income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may recognize capital gains and losses as a
result of the disposition of securities and from certain options and
futures transactions. Shareholders normally will have to pay federal
income tax on the non-exempt-interest dividends and capital gain
distributions they receive from the Fund, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. Because the Fund expects to earn primarily tax-exempt
interest income, it is expected that no Fund dividends will qualify for
the dividends-received deduction for corporations.
CONSEQUENCES OF DISTRIBUTIONS BY A MUNICIPAL FUND: EFFECT OF ACCRUED TAX-
EXEMPT INCOME -- Shareholders redeeming shares after tax-exempt income has
been accrued but not yet declared as a dividend should be aware that a
portion of the proceeds realized upon redemption of the shares will
reflect the existence of such accrued tax-exempt income and that this
portion will be subject to tax as a capital gain even though it would have
been tax-exempt had it been declared as a dividend prior to the
redemption. For this reason, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after the Fund declares dividends
representing substantially all the ordinary income (including tax-exempt
income) accrued for that month.
CERTAIN ADDITIONAL INFORMATION FOR MUNICIPAL FUND SHAREHOLDERS -- Interest
on indebtedness incurred by shareholders to purchase or carry Fund shares
will not be deductible for federal income tax purposes. Exempt-interest
dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by private activity
bonds should consult their tax advisors before purchasing Fund shares.
CONSEQUENCES OF REDEMPTION OF SHARES -- Any loss realized on a redemption
of Municipal Fund shares held for six months or less will be disallowed to
the extent of any exempt-interest dividends received with respect to those
shares. If not disallowed, any such loss will be treated as a long-term
capital loss to the extent of any distributions of net capital gain made
with respect to those shares.
STATE AND LOCAL INCOME TAXES: MUNICIPAL OBLIGATIONS -- The exemption of
exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of an
exempt-interest dividend that represents interest received by a regulated
investment company on its holdings of securities issued by that state and
its political subdivisions and instrumentalities. Therefore, the Fund will
report annually to its shareholders the percentage of interest income
earned by it during the preceding year on Municipal Bonds and will
indicate, on a state-by-state basis only, the source of such income.
VII PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other
clients of the Adviser, or any subsidiary of the Adviser in a similar
capacity. Changes in the Fund's investments are reviewed by the Trust's
Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom
as to the markets in and broker-dealers through which it seeks this
result. In the U.S. and in some other countries debt securities are traded
principally in the over-the-counter market on a net basis through dealers
acting for their own account and not as brokers. In other countries both
debt and equity securities are traded on exchanges at fixed commission
rates. The cost of securities purchased from underwriters includes an
underwriter's commission or concession, and the prices at which securities
are purchased and sold from and to dealers include a dealer's mark-up or
mark-down. The Adviser normally seeks to deal directly with the primary
market makers or on major exchanges unless, in its opinion, better prices
are available elsewhere. Subject to the requirement of seeking execution
at the best available price, securities may, as authorized by the Advisory
Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser. At
present no arrangements for the recapture of commission payments are in
effect.
Consistent with the foregoing primary consideration, the Conduct Rules
of the National Association of Securities Dealers, Inc. ("NASD") and such
other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund and of the other investment company clients of
MFD as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the
Adviser, an amount of commission for effecting a securities transaction
for the Fund in excess of the amount other broker-dealers would have
charged for the transaction, if the Adviser determines in good faith that
the greater commission is reasonable in relation to the value of the
brokerage and research services provided by the executing broker-dealer
viewed in terms of either a particular transaction or their respective
overall responsibilities to the Fund or to their other clients. Not all of
such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or of purchasers or
sellers of securities; furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts; and effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
the Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might
charge may be paid to broker-dealers who were selected to execute
transactions on behalf of the Fund and the Adviser's other clients in part
for providing advice as to the availability of securities or of purchasers
or sellers of securities and services in effecting securities transactions
and performing functions incidental thereto, such as clearance and
settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions. Securities
may be bought or sold from time to time through such broker-dealers, on
behalf of the Fund.
The Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The Adviser sometimes uses
evaluations resulting from this effort as a consideration in the selection
of brokers to execute portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence
of the Adviser's receipt of brokerage and research service. To the extent
the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed
those that might otherwise be paid for such portfolio transactions, or for
such portfolio transactions and research, by an amount which cannot be
presently determined. Such services would be useful and of value to the
Adviser in serving both the Fund and other clients and, conversely, such
services obtained by the placement of brokerage business of other clients
would be useful to the Adviser in carrying out its obligations to the
Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the
additional expenses which would be incurred if it should attempt to
develop comparable information through its own staff.
In certain instances there may be securities which are suitable for the
Fund's portfolio as well as for that of one or more of the other clients
of the Adviser or any subsidiary of the Adviser. Investment decisions for
the Fund and for such other clients are made with a view to achieving
their respective investment objectives. It may develop that a particular
security is bought or sold for only one client even though it might be
held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other
clients are selling that same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more
clients are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner believed
by the adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume
of the security as far as the Fund is concerned. In other cases, however,
the Fund believes that its ability to participate in volume transactions
will produce better executions for the Fund.
VIII DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each
day during which the New York Stock Exchange is open for trading. (As of
the date of this SAI, the Exchange is open for trading every weekday
except for the following holidays (or the days on which they are
observed): New Year's Day; Martin Luther King Day; Presidents' Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day and
Christmas Day.) This determination is made once each day as of the close
of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of
shares of the class outstanding.
MONEY MARKET FUNDS
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has determined in good faith constitutes fair value for
the purposes of complying with the 1940 Act. This valuation method will
continue to be used until such time as the Board of Trustees determines
that it does not constitute fair value for such purposes. Each money
market fund will limit its portfolio to those investments in U.S.
dollar-denominated instruments which its Board of Trustees determines
present minimal credit risks, and which are of high quality as determined
by any major rating service or, in the case of any instrument that is not
so rated, of comparable quality as determined by the Board of Trustees.
Each money market fund has also agreed to maintain a dollar-weighted
average maturity of 90 days or less and to invest only in securities
maturing in 13 months or less. The Board of Trustees which oversees each
money market fund has established procedures designed to stabilize its net
asset value per share, as computed for the purposes of sales and
redemptions, at $1.00 per share. If the Board determines that a deviation
from the $1.00 per share price may exist which may result in a material
dilution or other unfair result to investors or existing shareholders, it
will take corrective action it regards as necessary and appropriate, which
action could include the sale of instruments prior to maturity (to realize
capital gains or losses); shortening average portfolio maturity;
withholding dividends; or using market quotations for valuation purposes.
OTHER FUNDS
The following valuation techniques apply to each MFS Fund that is not a
money market fund.
Equity securities in the Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the Nasdaq
stock market system for unlisted national market issues, or at the last
quoted bid price for listed securities in which there were no sales during
the day or for unlisted securities not reported on the Nasdaq stock market
system. Bonds and other fixed income securities (other than short-term
obligations) of U.S. issuers in the Fund's portfolio are valued on the
basis of valuations furnished by a pricing service which utilizes both
dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other market data without
exclusive reliance upon quoted prices or exchange or over-the-counter
prices, since such valuations are believed to reflect more accurately the
fair value of such securities. Forward Contracts will be valued using a
pricing model taking into consideration market data from an external
pricing source. Use of the pricing services has been approved by the Board
of Trustees.
All other securities, futures contracts and options in the Fund's
portfolio (other than short-term obligations) for which the principal
market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or at
the settlement price prior to the determination (or if there has been no
current sale, at the closing bid price) on the primary exchange on which
such securities, futures contracts or options are traded; but if a
securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the Nasdaq
stock market system, in which case they are valued at the last sale price
or, if no sales occurred during the day, at the last quoted bid price.
Short-term obligations in the Fund's portfolio are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Short-term obligations with a remaining maturity in excess of 60 days will
be valued upon dealer supplied valuations. Portfolio investments for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the close of regular trading on the
Exchange. Occasionally, events affecting the values of such securities may
occur between the times at which they are determined and the close of
regular trading on the Exchange which will not be reflected in the
computation of the Fund's net asset value unless the Trustees deem that
such event would materially affect the net asset value in which case an
adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. A share's net asset value is effective
for orders received by the dealer prior to its calculation and received by
MFD prior to the close of that business day.
IX PERFORMANCE INFORMATION
MONEY MARKET FUNDS
Each MFS Fund that is a money market fund will provide current annualized
and effective annualized yield quotations based on the daily dividends of
shares of the money market fund. These quotations may from time to time be
used in advertisements, shareholder reports or other communications to
shareholders.
Any current yield quotation of a money market fund which is used in
such a manner as to be subject to the provisions of Rule 482(d) under the
1933 Act shall consist of an annualized historical yield, carried at least
to the nearest hundredth of one percent based on a specific seven calendar
day period and shall be calculated by dividing the net change in the value
of an account having a balance of one share of that class at the beginning
of the period by the value of the account at the beginning of the period
and multiplying the quotient by 365/7. For this purpose the net change in
account value would reflect the value of additional shares purchased with
dividends declared on the original share and dividends declared on both
the original share and any such additional shares, but would not reflect
any realized gains or losses from the sale of securities or any unrealized
appreciation or depreciation on portfolio securities. In addition, any
effective yield quotation of a money market fund so used shall be
calculated by compounding the current yield quotation for such period by
multiplying such quotation by 7/365, adding 1 to the product, raising the
sum to a power equal to 365/7, and subtracting 1 from the result. These
yield quotations should not be considered as representative of the yield
of a money market fund in the future since the yield will vary based on
the type, quality and maturities of the securities held in its portfolio,
fluctuations in short-term interest rates and changes in the money market
fund's expenses.
OTHER FUNDS
Each MFS Fund that is not a money market fund may quote the following
performance results.
TOTAL RATE OF RETURN -- The Fund will calculate its total rate of return
for each class of shares for certain periods by determining the average
annual compounded rates of return over those periods that would cause an
investment of $1,000 (made with all distributions reinvested and
reflecting the CDSC or the maximum public offering price) to reach the
value of that investment at the end of the periods. The Fund may also
calculate (i) a total rate of return, which is not reduced by any
applicable CDSC and therefore may result in a higher rate of return, (ii)
a total rate of return assuming an initial account value of $1,000, which
will result in a higher rate of return since the value of the initial
account will not be reduced by any applicable sales charge and/or (iii)
total rates of return which represent aggregate performance over a period
or year- by-year performance, and which may or may not reflect the effect
of the maximum or other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially offered
for sale to, and purchased by, the public on different dates (the class
"inception date"). The calculation of total rate of return for a class of
shares which has a later class inception date than another class of shares
of the Fund is based both on (i) the performance of the Fund's newer class
from its inception date and (ii) the performance of the Fund's oldest
class from its inception date up to the class inception date of the newer
class.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares
differ. In calculating total rate of return for a newer class of shares in
accordance with certain formulas required by the SEC, the performance will
be adjusted to take into account the fact that the newer class is subject
to a different sales charge than the oldest class (e.g., if the newer
class is Class A shares, the total rate of return quoted will reflect the
deduction of the initial sales charge applicable to Class A shares; if the
newer class is Class B shares, the total rate of return quoted will
reflect the deduction of the CDSC applicable to Class B shares). However,
the performance will not be adjusted to take into account the fact that
the newer class of shares bears different class specific expenses than the
oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the total rate
of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for
the entire period over which the calculation is based (i.e., the total
rate of return quoted for the newer class will be higher than the return
that would have been quoted had the newer class of shares been outstanding
for the entire period over which the calculation is based if the class
specific expenses for the newer class are higher than the class specific
expenses of the oldest class, and the total rate of return quoted for the
newer class will be lower than the return that would be quoted had the
newer class of shares been outstanding for this entire period if the class
specific expenses for the newer class are lower than the class specific
expenses of the oldest class).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
YIELD -- Any yield quotation for a class of shares of the Fund is based on
the annualized net investment income per share of that class for the 30-
day period. The yield for each class of the Fund is calculated by dividing
the net investment income allocated to that class earned during the period
by the maximum offering price per share of that class of the Fund on the
last day of the period. The resulting figure is then annualized. Net
investment income per share of a class is determined by dividing (i) the
dividends and interest allocated to that class during the period, minus
accrued expense of that class for the period by (ii) the average number of
shares of the class entitled to receive dividends during the period
multiplied by the maximum offering price per share on the last day of the
period. The Fund's yield calculations assume a maximum sales charge of
5.75% in the case of Class A shares and no payment of any CDSC in the case
of Class B and Class C shares.
TAX-EQUIVALENT YIELD -- The tax-equivalent yield for a class of shares of
a Fund is calculated by determining the rate of return that would have to
be achieved on a fully taxable investment in such shares to produce the
after-tax equivalent of the yield of that class. In calculating tax-
equivalent yield, a Fund assumes certain federal tax brackets for
shareholders and does not take into account state taxes.
CURRENT DISTRIBUTION RATE -- Yield, which is calculated according to a
formula prescribed by the Securities and Exchange Commission, is not
indicative of the amounts which were or will be paid to the Fund's
shareholders. Amounts paid to shareholders of each class are reflected in
the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result
by the maximum offering price or net asset value per share on the last day
of the period. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income for
option writing, short-term capital gains and return of invested capital,
and may be calculated over a different period of time. The Fund's current
distribution rate calculation for Class B shares and Class C shares
assumes no CDSC is paid.
GENERAL
From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited
to the following: Money, Fortune, U.S. News and World Report, Kiplinger's
Personal Finance, The Wall Street Journal, Barron's, Investors Business
Daily, Newsweek, Financial World, Financial Planning, Investment Advisor,
USA Today, Pensions and Investments, SmartMoney, Forbes, Global Finance,
Registered Representative, Institutional Investor, the Investment Company
Institute, Johnson's Charts, Morningstar, Lipper Analytical Securities
Corporation, CDA Wiesenberger, Shearson Lehman and Salomon Bros. Indices,
Ibbotson, Business Week, Lowry Associates, Media General, Investment
Company Data, The New York Times, Your Money, Strangers Investment
Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may
also quote evaluations mentioned in independent radio or television
broadcasts and use charts and graphs to illustrate the past performance of
various indices such as those mentioned above and illustrations using
hypothetical rates of return to illustrate the effects of compounding and
tax-deferral. The Fund may advertise examples of the effects of periodic
investment plans, including the principle of dollar cost averaging. In
such a program, an investor invests a fixed dollar amount in a fund at
periodic intervals, thereby purchasing fewer shares when prices are high
and more shares when prices are low. While such a strategy does not assure
a profit or guard against a loss in a declining market, the investor's
average cost per share can be lower than if fixed numbers of shares are
purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio
manager as well as other investment personnel, including such persons'
views on: the economy; securities markets; portfolio securities and their
issuers; investment philosophies, strategies, techniques and criteria used
in the selection of securities to be purchased or sold for the Fund; the
Fund's portfolio holdings; the investment research and analysis process;
the formulation and evaluation of investment recommendations; and the
assessment and evaluation of credit, interest rate, market and economic
risks, and similar or related matters.
The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund
categories established by Morningstar (or other nationally recognized
statistical ratings organizations) and to other MFS Funds.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal,
tax, accounting, insurance, estate planning and other professionals, or
from surveys, regarding individual and family financial planning. Such
views may include information regarding: retirement planning, including
issues concerning social security; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and
disciplined saving and investing); business succession; ideas and
information provided through the MFS Heritage Planning(SM) program, an
intergenerational financial planning assistance program; issues with
respect to insurance (e.g., disability and life insurance and Medicare
supplemental insurance); issues regarding financial and health care
management for elderly family members; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
From time to time, the Fund may also advertise annual returns showing
the cumulative value of an initial investment in the Fund in various
amounts over specified periods, with capital gain and dividend
distributions invested in additional shares or taken in cash, and with no
adjustment for any income taxes (if applicable) payable by shareholders.
MFS FIRSTS
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in-house analytical capability for an investment management
firm.
o 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act" or
"Full Disclosure Act").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal
securities.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard(R) Equity
Fund, the first fund to invest principally in companies deemed to be
union-friendly by an advisory board of senior labor officials, senior
managers of companies with significant labor contracts, academics and
other national labor leaders or experts.
X SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS
The Fund makes available the following programs designed to enable
shareholders to add to their investment or withdraw from it with a minimum
of paper work. These programs are described below and, in certain cases,
in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases)
and may be changed or discontinued at any time by a shareholder or the
Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of MFS Funds
or MFS Fixed Fund (a bank collective investment fund) within a 13-month
period (or 36-month period, in the case of purchases of $1 million or
more), the shareholder may obtain Class A shares of the Fund at the same
reduced sales charge as though the total quantity were invested in one
lump sum by completing the Letter of Intent section of the Account
Application or filing a separate Letter of Intent application (available
from MFSC) within 90 days of the commencement of purchases. Subject to
acceptance by MFD and the conditions mentioned below, each purchase will
be made at a public offering price applicable to a single transaction of
the dollar amount specified in the Letter of Intent application. The
shareholder or his dealer must inform MFD that the Letter of Intent is in
effect each time shares are purchased. The shareholder makes no commitment
to purchase additional shares, but if his purchases within 13 months (or
36 months in the case of purchases of $1 million or more) plus the value
of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a
person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the
shares were paid for by the person signing such Letter. Neither income
dividends nor capital gain distributions taken in additional shares will
apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the
Fund pursuant to the Distribution Investment Program will also not apply
toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by MFSC in the form of shares
registered in the shareholder's name. All income dividends and capital
gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed
(either prior to or by the end of the 13-month period or 36-month period,
as applicable), the shareholder will be notified and the escrowed shares
will be released.
If the intended investment is not completed, MFSC will redeem an
appropriate number of the escrowed shares in order to realize such
difference. Shares remaining after any such redemption will be released by
MFSC. By completing and signing the Account Application or separate Letter
of Intent application, the shareholder irrevocably appoints MFSC his
attorney to surrender for redemption any or all escrowed shares with full
power of substitution in the premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment,
together with the current offering price value of all holdings of Class A,
Class B and Class C shares of that shareholder in the MFS Funds or MFS
Fixed Fund reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. A shareholder must provide MFSC
(or his investment dealer must provide MFD) with information to verify
that the quantity sales charge discount is applicable at the time the
investment is made.
SUBSEQUENT INVESTMENT BY TELEPHONE -- Each shareholder may purchase
additional shares of any MFS Fund by telephoning MFSC toll-free at (800)
225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application
and designate thereon a bank and account number from which purchases will
be made. If a telephone purchase request is received by MFSC on any
business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the
closing net asset value of the shares purchased on that day. MFSC may be
liable for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the
identity of the caller. MFSC will request personal or other information
from the caller, and will normally also record calls. Shareholders should
verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and capital
gains made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of that fund are available for sale. Such investments
will be subject to additional purchase minimums. Distributions will be
invested at net asset value (exclusive of any sales charge) and will not
be subject to any CDSC. Distributions will be invested at the close of
business on the payable date for the distribution. A shareholder
considering the Distribution Investment Program should obtain and read the
prospectus of the other fund and consider the differences in objectives
and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN -- A shareholder may direct MFSC to send him
(or anyone he designates) regular periodic payments based upon the value
of his account. Each payment under a Systematic Withdrawal Plan ("SWP")
must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant
to a SWP generally are limited to 10% of the value of the account at the
time of establishment of the SWP. SWP payments are drawn from the proceeds
of share redemptions (which would be a return of principal and, if
reflecting a gain, would be taxable). Redemptions of Class B and Class C
shares will be made in the following order: (i) shares representing
reinvested distributions; (ii) shares representing undistributed capital
gains and income; and (iii) to the extent necessary, shares representing
direct investments subject to the lowest CDSC. The CDSC will be waived in
the case of redemptions of Class B and Class C shares pursuant to a SWP,
but will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC. To the extent that redemptions for such
periodic withdrawals exceed dividend income reinvested in the account,
such redemptions will reduce and may eventually exhaust the number of
shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be received in full and
fractional shares of the Fund at the net asset value in effect at the
close of business on the record date for such distributions. To initiate
this service, shares having an aggregate value of at least $5,000 either
must be held on deposit by, or certificates for such shares must be
deposited with, MFSC. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be
disadvantageous because of the sales charges included in share purchases
and the imposition of a CDSC on certain redemptions. The shareholder may
deposit into the account additional shares of the Fund, change the payee
or change the dollar amount of each payment. MFSC may charge the account
for services rendered and expenses incurred beyond those normally assumed
by the Fund with respect to the liquidation of shares. No charge is
currently assessed against the account, but one could be instituted by
MFSC on 60 days' notice in writing to the shareholder in the event that
the Fund ceases to assume the cost of these services. The Fund may
terminate any SWP for an account if the value of the account falls below
$5,000 as a result of share redemptions (other than as a result of a SWP)
or an exchange of shares of the Fund for shares of another MFS Fund. Any
SWP may be terminated at any time by either the shareholder or the Fund.
INVEST BY MAIL -- Additional investments of $50 or more may be made at any
time by mailing a check payable to the Fund directly to MFSC. The
shareholder's account number and the name of his investment dealer must be
included with each investment.
GROUP PURCHASES -- A bona fide group and all its members may be treated at
MFD's discretion as a single purchaser and, under the Right of
Accumulation (but not the Letter of Intent) obtain quantity sales charge
discounts on the purchase of Class A shares if the group (1) gives its
endorsement or authorization to the investment program so it may be used
by the investment dealer to facilitate solicitation of the membership,
thus effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals whose
sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder (if
available for sale). Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by MFSC of an application in good
order. Exchanges will continue to be made from a shareholder's account in
any MFS Fund, as long as the balance of the account is sufficient to
complete the exchanges. Additional payments made to a shareholder's
account will extend the period that exchanges will continue to be made
under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before
an exchange is scheduled, such funds may not be available for exchanges
until the following month; therefore, care should be used to avoid
inadvertently terminating the Automatic Exchange Plan through exhaustion
of the account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market
Fund, MFS Government Money Market Fund and Class A shares of MFS Cash
Reserve Fund will be subject to any applicable sales charge. Changes in
amounts to be exchanged to the Fund, the funds to which exchanges are to
be made and the timing of exchanges (monthly or quarterly), or termination
of a shareholder's participation in the Automatic Exchange Plan will be
made after instructions in writing or by telephone (an "Exchange Change
Request") are received by MFSC in proper form (i.e., if in writing --
signed by the record owner(s) exactly as shares are registered; if by
telephone -- proper account identification is given by the dealer or
shareholder of record). Each Exchange Change Request (other than
termination of participation in the program) must involve at least $50.
Generally, if an Exchange Change Request is received by telephone or in
writing before the close of business on the last business day of a month,
the Exchange Change Request will be effective for the following month's
exchange.
A shareholder's right to make additional investments in any of the MFS
Funds, to make exchanges of shares from one MFS Fund to another and to
withdraw from an MFS Fund, as well as a shareholder's other rights and
privileges are not affected by a shareholder's participation in the
Automatic Exchange Plan. The Automatic Exchange Plan is part of the
Exchange Privilege. For additional information regarding the Automatic
Exchange Plan, including the treatment of any CDSC, see "Exchange
Privilege" below.
REINSTATEMENT PRIVILEGE -- Shareholders of the Fund and shareholders of
the other MFS Funds (except MFS Money Market Fund, MFS Government Money
Market Fund and holders of Class A shares of MFS Cash Reserve Fund in the
case where shares of such funds are acquired through direct purchase or
reinvested dividends) who have redeemed their shares have a one-time right
to reinvest the redemption proceeds in the same class of shares of any of
the MFS Funds (if shares of the fund are available for sale) at net asset
value (without a sales charge) and, if applicable, with credit for any
CDSC paid. In the case of proceeds reinvested in MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve
Fund, the shareholder has the right to exchange the acquired shares for
shares of another MFS Fund at net asset value pursuant to the exchange
privilege described below. Such a reinvestment must be made within 90 days
of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited for any CDSC paid are then redeemed within six
years of the initial purchase in the case of Class B shares or 12 months
of the initial purchase in the case of Class C shares and certain Class A
shares, a CDSC will be imposed upon redemption. Although redemptions and
repurchases of shares are taxable events, a reinvestment within a certain
period of time in the same fund may be considered a "wash sale" and may
result in the inability to recognize currently all or a portion of a loss
realized on the original redemption for federal income tax purposes.
Please see your tax adviser for further information.
EXCHANGE PRIVILEGE
Subject to the requirements set forth below, some or all of the shares of
the same class in an account with the Fund for which payment has been
received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the Class of shares) at
net asset value. Exchanges will be made only after instructions in writing
or by telephone (an "Exchange Request") are received for an established
account by MFSC.
EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market
funds) -- No initial sales charge or CDSC will be imposed in connection
with an exchange from shares of an MFS Fund to shares of any other MFS
Fund, except with respect to exchanges from an MFS money market fund to
another MFS Fund which is not an MFS money market fund (discussed below).
With respect to an exchange involving shares subject to a CDSC, the CDSC
will be unaffected by the exchange and the holding period for purposes of
calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND -- Special rules apply with
respect to the imposition of an initial sales charge or a CDSC for
exchanges from an MFS money market fund to another MFS Fund which is not
an MFS money market fund. These rules are described under the caption "How
to Purchase, Exchange and Redeem Shares" in the Prospectuses of those MFS
money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND -- Class A shares of any MFS Fund
held by certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund)
(the "Units"), and Units may be exchanged for Class A shares of any MFS
Fund. With respect to exchanges between Class A shares subject to a CDSC
and Units, the CDSC will carry over to the acquired shares or Units and
will be deducted from the redemption proceeds when such shares or Units
are subsequently redeemed, assuming the CDSC is then payable (the period
during which the Class A shares and the Units were held will be aggregated
for purposes of calculating the applicable CDSC). In the event that a
shareholder initially purchases Units and then exchanges into Class A
shares subject to an initial sales charge of an MFS Fund, the initial
sales charge shall be due upon such exchange, but will not be imposed with
respect to any subsequent exchanges between such Class A shares and Units
with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC
period will commence upon such exchange, and the applicability of the CDSC
with respect to subsequent exchanges shall be governed by the rules set
forth above in this paragraph.
GENERAL -- Each Exchange Request must be in proper form (i.e., if in
writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by
the dealer or shareholder of record), and each exchange must involve
either shares having an aggregate value of at least $1,000 ($50 in the
case of retirement plan participants whose sponsoring organizations
subscribe to MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by MFSC) or all the shares in the
account. Each exchange involves the redemption of the shares of the Fund
to be exchanged and the purchase of shares of the same class of the other
MFS Fund. Any gain or loss on the redemption of the shares exchanged is
reportable on the shareholder's federal income tax return, unless both the
shares received and the shares surrendered in the exchange are held in a
tax-deferred retirement plan or other tax-exempt account. No more than
five exchanges may be made in any one Exchange Request by telephone. If
the Exchange Request is received by MFSC prior to the close of regular
trading on the Exchange the exchange usually will occur on that day if all
the requirements set forth above have been complied with at that time.
However, payment of the redemption proceeds by the Fund, and thus the
purchase of shares of the other MFS Fund, may be delayed for up to seven
days if the Fund determines that such a delay would be in the best
interest of all its shareholders. Investment dealers which have satisfied
criteria established by MFD may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the requirements set forth above.
Additional information with respect to any of the MFS Funds, including
a copy of its current prospectus, may be obtained from investment dealers
or MFSC. A shareholder considering an exchange should obtain and read the
prospectus of the other fund and consider the differences in objectives
and policies before making any exchange.
Any state income tax advantages for investment in shares of each state-
specific series of MFS Municipal Series Trust may only benefit residents
of such states. Investors should consult with their own tax advisers to be
sure this is an appropriate investment, based on their residency and each
state's income tax laws. The exchange privilege (or any aspect of it) may
be changed or discontinued and is subject to certain limitations imposed
from time to time at the discretion of the Funds in order to protect the
Funds.
TAX-DEFERRED RETIREMENT PLANS
Shares of the Fund may be purchased by all types of tax-deferred
retirement plans. MFD makes available, through investment dealers, plans
and/or custody agreements, the following:
o Traditional Individual Retirement Accounts (IRAs) (for individuals who
desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who
desire to make limited contributions to a tax-favored retirement
program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public school systems and certain non-profit organizations); and
o Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or
group establishing the plan) and contain specific information about the
plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by the trustee, custodian or MFD, tax consequences
and redemption information, see the specific documents for that plan. Plan
documents other than those provided by MFD may be used to establish any of
the plans described above. Third party administrative services, available
for some corporate plans, may limit or delay the processing of
transactions.
An investor should consult with his tax adviser before establishing
any of the tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any
retirement plan qualified under Internal Revenue Code Section 401(a) or
403(b) if the retirement plan and/or the sponsoring organization subscribe
to the MFS FUNDamental 401(k) Plan or another similar Section 401(a) or
403(b) recordkeeping program made available by MFSC.
XI DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional Shares of Beneficial Interest (without par value)
of one or more separate series and to divide or combine the shares of any
series into a greater or lesser number of shares without thereby changing
the proportionate beneficial interests in that series. The Declaration of
Trust further authorizes the Trustees to classify or reclassify any series
of shares into one or more classes. Each share of a class of the Fund
represents an equal proportionate interest in the assets of the Fund
allocable to that class. Upon liquidation of the Fund, shareholders of
each class of the Fund are entitled to share pro rata in the Fund's net
assets allocable to such class available for distribution to shareholders.
The Trust reserves the right to create and issue a number of series and
additional classes of shares, in which case the shares of each class of a
series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote
in the election of Trustees and on other matters submitted to meetings of
shareholders. To the extent a shareholder of the Fund owns a controlling
percentage of the Fund's shares, such shareholder may affect the outcome
of such matters to a greater extent than other Fund shareholders. Although
Trustees are not elected annually by the shareholders, the Declaration of
Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the
Trust. A meeting of shareholders will be called upon the request of
shareholders of record holding in the aggregate not less than 10% of the
outstanding voting securities of the Trust. No material amendment may be
made to the Declaration of Trust without the affirmative vote of a
majority of the Trust's outstanding shares (as defined in "Investment
Restrictions" in Part I of this SAI). The Trust or any series of the Trust
may be terminated (i) upon the merger or consolidation of the Trust or any
series of the Trust with another organization or upon the sale of all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the
holders of two-thirds of the Trust's or the affected series' outstanding
shares voting as a single class, or of the affected series of the Trust,
except that if the Trustees recommend such merger, consolidation or sale,
the approval by vote of the holders of a majority of the Trust's or the
affected series' outstanding shares will be sufficient, or (ii) upon
liquidation and distribution of the assets of a Fund, if approved by the
vote of the holders of two-thirds of its outstanding shares of the Trust,
or (iii) by the Trustees by written notice to its shareholders. If not so
terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust
may, under certain circumstances, be held personally liable as partners
for its obligations. However, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust
and provides for indemnification and reimbursement of expenses out of
Trust property for any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust also provides that the
Trust shall maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Trust and
its shareholders and the Trustees, officers, employees and agents of the
Trust covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which both inadequate insurance existed and
the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or
failure to act, but nothing in the Declaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by reason of
his willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
<PAGE>
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PART II - APPENDIX A
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WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the CDSC
for Class A shares are waived (Section II), and the CDSC for Class B and
Class C shares is waived (Section III). Some of the following information
will not apply to certain funds in the MFS Family of Funds, depending on
which classes of shares are offered by such fund. As used in this Appendix,
the term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD.
I WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any fund in the MFS Funds pursuant to the
Distribution Investment Program.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
AFFILIATES OF AN MFS FUND/CERTAIN DEALERS.
Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses or
domestic partners identified above and certain trusts, pension,
profit-sharing or other retirement plans for the sole benefit of such
persons, provided the shares are not resold except to the MFS Fund
which issued the shares; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> Distributions from a 401(a) or ESP Plan that has invested its
assets in one or more of the MFS Funds for more than 10 years from
the later to occur of: (i) January 1, 1993 or (ii) the date such
401(a) or ESP Plan first invests its assets in one or more of the
MFS Funds. The sales charges will be waived in the case of a
redemption of all of the 401(a) or ESP Plan's shares in all MFS
Funds (i.e., all the assets of the 401(a) or ESP Plan invested in
the MFS Funds are withdrawn), unless immediately prior to the
redemption, the aggregate amount invested by the 401(a) or ESP Plan
in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of
the total value of the 401(a) or ESP Plan's assets in the MFS
Funds, in which case the sales charges will not be waived; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or one
of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping services
are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination
of employment.
CERTAIN TRANSFERS OF REGISTRATION
(CDSC WAIVER ONLY).
Shares transferred:
o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple accounts
maintained by MFSC on behalf of individual participants of such Plan,
provided that the Plan sponsor subscribes to the MFS FUNDamental 401(k)
Plan or another similar recordkeeping system made available by MFSC.
LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).
II WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
WRAP ACCOUNT AND FUND "SUPERMARKET"
INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account or
a similar program under which such clients pay a fee to such dealer.
INVESTMENT BY INSURANCE COMPANY SEPARATE
ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is
equal to or exceeds $500,000, either alone or in aggregate with the
current market value of the plan's existing Class A shares.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age
of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where the retirement plan and/or sponsoring organization
demonstrates to the satisfaction of, and certifies to, MFSC that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a
market value of $500,000 or more invested in shares of any class or
classes of the MFS Family of Funds and aggregate assets of at least
$10 million;
provided, however, that the CDSC will not be waived (i.e., it will be
imposed) (a) with respect to plans which establish an account with MFSC on
or after November 1, 1997, in the event that the plan makes a complete
redemption of all of its shares in the MFS Family of Funds, or (b) with
respect to plans which establish an account with MFSC prior to November 1,
1997, in the event that there is a change in law or regulations which result
in a material adverse change to the tax advantaged nature of the plan, or in
the event that the plan and/or sponsoring organization: (i) becomes
insolvent or bankrupt; (ii) is terminated under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated with any
other entity.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the proceeds
of a redemption of Class I shares of any of the MFS Funds.
III WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs where
the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account value at the time of
establishment.
DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to MFSC).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
provided, however, that the CDSC will not be waived (i.e., it will
be imposed) in the event that there is a change in law or
regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is
terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with any other entity.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its account
with MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s)
with any MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver category.
<PAGE>
--------------------
PART II - APPENDIX B
--------------------
DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions made to
dealers by MFD in connection with the sale of Fund shares. As used in this
Appendix, the term "dealer" includes any broker, dealer, bank (including
bank trust departments), registered investment adviser, financial planner
and any other financial institutions having a selling agreement or other
similar agreement with MFD.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as shown
in Appendix D to Part I of this SAI. The difference between the total amount
invested and the sum of (a) the net proceeds to the Fund and (b) the dealer
reallowance, is the amount of the initial sales charge retained by MFD (as
shown in Appendix D to Part I of this SAI). Because of rounding in the
computation of offering price, the portion of the sales charge retained by
MFD may vary and the total sales charge may be more or less than the sales
charge calculated using the sales charge expressed as a percentage of the
offering price or as a percentage of the net amount invested as listed in
the Prospectus.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments made through such dealers as follows:
COMMISSION
PAID BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
------------------------------------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
Except for those employer sponsored retirement plans described below, for
purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares purchases for
each shareholder account (and certain other accounts for which the
shareholder is a record or beneficial holder) will be aggregated over a
12-month period (commencing from the date of the first such purchase).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
CLASS B SHARES
For purchases of Class B shares, MFD will pay commissions to dealers of
3.75% of the purchase price of Class B shares purchased through dealers. MFD
will also advance to dealers the first year service fee payable under the
Fund's Distribution Plan at a rate equal to 0.25% of the purchase price of
such shares. Therefore, the total amount paid to a dealer upon the sale of
Class B shares is 4% of the purchase price of the shares (commission rate of
3.75% plus a service fee equal to 0.25% of the purchase price).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and December
31, 1998, MFD pays an amount to dealers equal to 3.00% of the amount
purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement of
the first year service fee equal to 0.25% of the purchase price payable
under the Fund's Distribution Plan.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided that
the plan establishment paperwork is received by MFSC in good order on or
after November 15, 1998), MFD pays no up front commissions to dealers, but
instead pays an amount to dealers equal to 1% per annum of the average daily
net assets of the Fund attributable to plan assets, payable at the rate of
0.25% at the end of each calendar quarter, in arrears. This commission
structure is not available with respect to a plan with a pre-existing
account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper
Plus product.
CLASS C SHARES
For purchases of Class C shares, MFD will pay dealers 1.00% of the purchase
price of Class C shares purchased through dealers and, as compensation
therefor, MFD will retain the 1.00% per annum distribution and service fee
paid under the Fund's Distribution Plan to MFD for the first year after
purchase.
ADDITIONAL DEALER COMMISSIONS/CONCESSIONS
Dealers may receive different compensation with respect to sales of Class A,
Class B and Class C shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified Funds sold by such dealer during a specified sales period.
In addition, MFD or its affiliates may, from time to time, pay dealers an
additional commission equal to 0.50% of the net asset value of all of the
Class B and/or Class C shares of certain specified Funds sold by such dealer
during a specified sales period. In addition, from time to time, MFD, at its
expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell or arrange for the sale of
shares of the Fund. Such concessions provided by MFD may include financial
assistance to dealers in connection with preapproved conferences or
seminars, sales or training programs for invited registered representatives
and other employees, payment for travel expenses, including lodging,
incurred by registered representatives and other employees for such seminars
or training programs, seminars for the public, advertising and sales
campaigns regarding one or more Funds, and/ or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives and other employees in
group meetings or to help pay the expenses of sales contests. Other
concessions may be offered to the extent not prohibited by state laws or any
self-regulatory agency, such as the NASD.
<PAGE>
--------------------
PART II - APPENDIX C
--------------------
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
ASSET-BACKED SECURITIES: The Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Fund may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities (such collateral referred
to collectively as "Mortgage Assets"). Unless the context indicates
otherwise, all references herein to CMOs include multiclass pass-through
securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in
innumerable ways. In a common structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the classes
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any
class of CMOs until all other classes having an earlier stated maturity or
final distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security). See "Stripped Mortgage-Backed Securities" below for a
discussion of the risks of investing in these stripped securities and of
investing in classes consisting of interest payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special
purpose corporations, are backed by a pool of assets, such as credit card
and automobile loan receivables, representing the obligations of a number of
different parties. These securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the
benefit of any security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another
party, there is a risk that the purchaser would acquire an interest superior
to that of the holders of the related automobile receivables. In addition,
because of the large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. The underlying assets
(e.g., loans) are also subject to prepayments which shorten the securities'
weighted average life and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default ensures payment through
insurance policies or letters of credit obtained by the issuer or sponsor
from third parties. The Fund will not pay any additional or separate fees
for credit support. The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit
risk associated with the underlying assets. Delinquency or loss in excess of
that anticipated or failure of the credit support could adversely affect the
return on an investment in such a security.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage
pools are paid off. The average lives of mortgage pass-throughs are variable
when issued because their average lives depend on prepayment rates. The
average life of these securities is likely to be substantially shorter than
their stated final maturity as a result of unscheduled principal prepayment.
Prepayments on underlying mortgages result in a loss of anticipated
interest, and all or part of a premium if any has been paid, and the actual
yield (or total return) to the Fund may be different than the quoted yield
on the securities. Mortgage premiums generally increase with falling
interest rates and decrease with rising interest rates. Like other fixed
income securities, when interest rates rise the value of a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
In the event of an increase in interest rates which results in a decline in
mortgage prepayments, the anticipated maturity of mortgage pass-through
securities held by the Fund may increase, effectively changing a security
which was considered short or intermediate-term at the time of purchase into
a long-term security. Long- term securities generally fluctuate more widely
in response to changes in interest rates than short or intermediate-term
securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by
the full faith and credit of the U.S. Government (in the case of securities
guaranteed by the Government National Mortgage Association ("GNMA")); or
guaranteed by agencies or instrumentalities of the U.S. Government (such as
the Federal National Mortgage Association "FNMA") or the Federal Home Loan
Mortgage Corporation, ("FHLMC") which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and
other secondary market issuers). Some of these mortgage pass-through
securities may be supported by various forms of insurance or guarantees.
Interests in pools of mortgage-related securities differ from other forms
of debt securities, which normally provide for periodic payment of interest
in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by prepayments of principal
resulting from the sale, refinancing or foreclosure of the underlying
property, net of fees or costs which may be incurred. Some mortgage
pass-through securities (such as securities issued by the GNMA) are
described as "modified pass-through." These securities entitle the holder to
receive all interests and principal payments owed on the mortgages in the
mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities
is GNMA. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the timely
payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks
and mortgage bankers) and backed by pools of Federal Housing Administration
("FHA") insured or Veterans Administration ("VA") guaranteed mortgages.
These guarantees, however, do not apply to the market value or yield of
mortgage pass-through securities. GNMA securities are often purchased at a
premium over the maturity value of the underlying mortgages. This premium is
not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S. Government) include FNMA and FHLMC.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional residential
mortgages (i.e., mortgages not insured or guaranteed by any governmental
agency) from a list of approved seller/servicers which include state and
federally chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment by FNMA of
principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) for FHLMC's national portfolio. FHLMC guarantees timely
payment of interest and ultimate collection of principal regardless of the
status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also be
the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments
in the former pools. However, timely payment of interest and principal of
mortgage loans in these pools may be supported by various forms of insurance
or guarantees, including individual loan, title, pool and hazard insurance
and letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers and the mortgage poolers. There can
be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. The Fund
may also buy mortgage-related securities without insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS") which are derivative
multiclass mortgage securities issued by agencies or instrumentalities of
the U.S. Government, or by private originators of, or investors in, mortgage
loans, including savings and loan institutions, mortgage banks, commercial
banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving some of
the interest and most of the principal from the Mortgage Assets, while the
other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "I0" class) while the other class will
receive all of the principal (the principal-only or "P0" class). The yield
to maturity on an I0 is extremely sensitive to the rate of principal
payments, including prepayments on the related underlying Mortgage Assets,
and a rapid rate of principal payments may have a material adverse effect on
such security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Fund may
fail to fully recoup its initial investment in these securities. The market
value of the class consisting primarily or entirely of principal payments
generally is unusually volatile in response to changes in interest rates.
Because SMBS were only recently introduced, established trading markets for
these securities have not yet developed, although the securities are traded
among institutional investors and investment banking firms.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct indebtedness. In purchasing a loan, the Fund acquires some or all of
the interest of a bank or other lending institution in a loan to a
corporate, governmental or other borrower. Many such loans are secured,
although some may be unsecured. Such loans may be in default at the time of
purchase. Loans that are fully secured offer the Fund more protection than
an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the corporate borrowers obligation, or
that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on behalf of
the others in the syndicate, and for enforcing its and their other rights
against the borrower. Alternatively, such loans may be structured as a
novation, pursuant to which the Fund would assume all of the rights of the
lending institution in a loan or as an assignment, pursuant to which the
Fund would purchase an assignment of a portion of a lenders interest in a
loan either directly from the lender or through an intermediary. The Fund
may also purchase trade or other claims against companies, which generally
represent money owned by the company to a supplier of goods or services.
These claims may also be purchased at a time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain date
or on demand. These commitments may have the effect of requiring the Fund to
increase its investment in a company at a time when the Fund might not
otherwise decide to do so (including at a time when the company's financial
condition makes it unlikely that such amounts will be repaid). To the extent
that the Fund is committed to advance additional funds, it will at all times
hold and maintain in a segregated account cash or other high grade debt
obligations in an amount sufficient to meet such commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loans and other
direct indebtedness which the Fund will purchase, the Adviser will rely upon
its own (and not the original lending institution's) credit analysis of the
borrower. As the Fund may be required to rely upon another lending
institution to collect and pass onto the Fund amounts payable with respect
to the loan and to enforce the Fund's rights under the loan and other direct
indebtedness, an insolvency, bankruptcy or reorganization of the lending
institution may delay or prevent the Fund from receiving such amounts. In
such cases, the Fund will evaluate as well the creditworthiness of the
lending institution and will treat both the borrower and the lending
institution as an "issuer" of the loan for purposes of certain investment
restrictions pertaining to the diversification of the Fund's portfolio
investments. The highly leveraged nature of many such loans and other direct
indebtedness may make such loans and other direct indebtedness especially
vulnerable to adverse changes in economic or market conditions. Investments
in such loans and other direct indebtedness may involve additional risk to
the Fund.
LOWER RATED BONDS: The Fund may invest in fixed income securities rated Ba
or lower by Moody's or BB or lower by S&P, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. No minimum rating standard is required
by the Fund. These securities are considered speculative and, while
generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including the
possibility of default or bankruptcy of the issuers of such securities) and
may involve greater volatility of price (especially during periods of
economic uncertainty or change) than securities in the higher rating
categories and because yields vary over time, no specific level of income
can ever be assured. These lower rated high yielding fixed income securities
generally tend to reflect economic changes (and the outlook for economic
growth), short-term corporate and industry developments and the market's
perception of their credit quality (especially during times of adverse
publicity) to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although
these lower rated fixed income securities are also affected by changes in
interest rates). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of
default by the issuers of these securities and may do so in the future,
especially in the case of highly leveraged issuers. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than
the market for investment grade fixed income securities. Furthermore, the
liquidity of these lower rated securities may be affected by the market's
perception of their credit quality. Therefore, the Adviser's judgment may at
times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the
market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued
by these rating agencies, but rather to supplement such ratings with the
Adviser's own independent and ongoing review of credit quality. To the
extent a Fund invests in these lower rated securities, the achievement of
its investment objectives may be a more dependent on the Adviser's own
credit analysis than in the case of a fund investing in higher quality fixed
income securities. These lower rated securities may also include zero coupon
bonds, deferred interest bonds and PIK bonds.
MUNICIPAL BONDS: The Fund may invest in debt securities issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds"). Municipal Bonds include debt securities which pay
interest income that is subject to the alternative minimum tax. The Fund may
invest in Municipal Bonds whose issuers pay interest on the Bonds from
revenues from projects such as multifamily housing, nursing homes, electric
utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of
the bondholders creates additional risks associated with owning real estate,
including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because of
the impossibility of precisely predicting demand for mortgages from the
proceeds of such an issue, there is a risk that the proceeds of the issue
will be in excess of demand, which would result in early retirement of the
bonds by the issuer. Moreover, such housing revenue bonds depend for their
repayment upon the cash flow from the underlying mortgages, which cannot be
precisely predicted when the bonds are issued. Any difference in the actual
cash flow from such mortgages from the assumed cash flow could have an
adverse impact upon the ability of the issuer to make scheduled payments of
principal and interest on the bonds, or could result in early retirement of
the bonds. Additionally, such bonds depend in part for scheduled payments of
principal and interest upon reserve funds established from the proceeds of
the bonds, assuming certain rates of return on investment of such reserve
funds. If the assumed rates of return are not realized because of changes in
interest rate levels or for other reasons, the actual cash flow for
scheduled payments of principal and interest on the bonds may be inadequate.
The financing of multi-family housing projects is affected by a variety of
factors, including satisfactory completion of construction within cost
constraints, the achievement and maintenance of a sufficient level of
occupancy, sound management of the developments, timely and adequate
increases in rents to cover increases in operating expenses, including
taxes, utility rates and maintenance costs, changes in applicable laws and
governmental regulations and social and economic trends.
Electric utilities face problems in financing large construction programs
in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost of
competing fuel sources, difficulty in obtaining sufficient rate increases
and other regulatory problems, the effect of energy conservation and
difficulty of the capital market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing
for the elderly which offer residents the independence of condominium life
style and, if needed, the comprehensive care of nursing home services. Bonds
to finance these facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to
maintain debt service payments. Moreover, in the case of life care
facilities, since a portion of housing, medical care and other services may
be financed by an initial deposit, there may be risk if the facility does
not maintain adequate financial reserves to secure estimated actuarial
liabilities. The ability of management to accurately forecast inflationary
cost pressures weighs importantly in this process. The facilities may also
be affected by regulatory cost restrictions applied to health care delivery
in general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative health
care or conventional housing facilities in the private or public sector.
Hospital bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. A hospital's gross
receipts and net income available to service its debt are influenced by
demand for hospital services, the ability of the hospital to provide the
services required, management capabilities, economic developments in the
service area, efforts by insurers and government agencies to limit rates and
expenses, confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding, and possible federal legislation limiting the rates of
increase of hospital charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from of a lease or
installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have special
risks not normally associated with general obligation or revenue bonds.
Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations are deemed to be inapplicable because of the inclusion in many
leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although
the obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. There are, of course, variations in
the security of municipal lease securities, both within a particular
classification and between classifications, depending on numerous factors.
The Fund may also invest in bonds for industrial and other projects, such
as sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes
and wastes involved in these projects may include hazardous components,
there are risks associated with their production, handling and disposal.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade securities.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are backed
by the full faith and credit of the U.S. Government and (ii) U.S. Government
Securities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the GNMA; some of
which are backed only by the credit of the issuer itself, e.g., obligations
of the Student Loan Marketing Association; and some of which are supported
by the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the FNMA.
U.S. Government Securities also include interests in trust or other
entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Fund may invest in floating or
variable rate securities. Investments in floating or variable rate
securities normally will involve industrial development or revenue bonds
which provide that the rate of interest is set as a specific percentage of a
designated base rate, such as rates on Treasury Bonds or Bills or the prime
rate at a major commercial bank, and that a bondholder can demand payment of
the obligations on behalf of the Fund on short notice at par plus accrued
interest, which amount may be more or less than the amount the bondholder
paid for them. The maturity of floating or variable rate obligations
(including participation interests therein) is deemed to be the longer of
(i) the notice period required before the Fund is entitled to receive
payment of the obligation upon demand or (ii) the period remaining until the
obligation's next interest rate adjustment. If not redeemed by the Fund
through the demand feature, the obligations mature on a specified date which
may range up to thirty years from the date of issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may
invest in zero coupon bonds, deferred interest bonds and bonds on which the
interest is payable in kind ("PIK bonds"). Zero coupon and deferred interest
bonds are debt obligations which are issued at a significant discount from
face value. The discount approximates the total amount of interest the bonds
will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of
the security at the time of issuance. While zero coupon bonds do not require
the periodic payment of interest, deferred interest bonds provide for a
period of delay before the regular payment of interest begins. PIK bonds are
debt obligations which provide that the issuer may, at its option, pay
interest on such bonds in cash or in the form of additional debt
obligations. Such investments benefit the issuer by mitigating its need for
cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value than debt
obligations which make regular payments of interest. The Fund will accrue
income on such investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities
to satisfy the Fund's distribution obligations.
EQUITY SECURITIES
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks; securities
such as bonds, warrants or rights that are convertible into stocks; and
depositary receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized market.
FOREIGN SECURITIES EXPOSURE
The Fund may invest in various types of foreign securities, or securities
which provide the Fund with exposure to foreign securities or foreign
currencies, as discussed below:
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public and
private entities in certain emerging markets for new bonds in connection
with debt restructurings under a debt restructuring plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Argentina,
Brazil, Bulgaria, Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan,
Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Slovenia,
Uruguay and Venezuela. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter
secondary markets. U.S. dollar-denominated, collateralized Brady Bonds,
which may be fixed rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds
having the same maturity as the bonds. Brady Bonds are often viewed as
having three or four valuation components: the collateralized repayment of
principal at final maturity; the collateralized interest payments; the
uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the
"residual risk"). In light of the residual risk of Brady Bonds and the
history of defaults of countries issuing Brady Bonds with respect to
commercial bank loans by public and private entities, investments in Brady
Bonds may be viewed as speculative.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of depositary
receipts. ADRs are certificates by a U.S. depositary (usually a bank) and
represent a specified quantity of shares of an underlying non- U.S. stock on
deposit with a custodian bank as collateral. GDRs and other types of
depositary receipts are typically issued by foreign banks or trust companies
and evidence ownership of underlying securities issued by either a foreign
or a U.S. company. Generally, ADRs are in registered form and are designed
for use in U.S. securities markets and GDRs are in bearer form and are
designed for use in foreign securities markets. For the purposes of the
Fund's policy to invest a certain percentage of its assets in foreign
securities, the investments of the Fund in ADRs, GDRs and other types of
depositary receipts are deemed to be investments in the underlying
securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of U.S.
depositories. Under the terms of most sponsored arrangements, depositories
agree to distribute notices of shareholder meetings and voting instructions,
and to provide shareholder communications and other information to the ADR
holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation
to distribute shareholder communications received from the issuer of the
deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of
ADR. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depositary receipts in
the United States can reduce costs and delays as well as potential currency
exchange and other difficulties. The Fund may purchase securities in local
markets and direct delivery of these ordinary shares to the local depositary
of an ADR agent bank in foreign country. Simultaneously, the ADR agents
create a certificate which settles at the Fund's custodian in five days. The
Fund may also execute trades on the U.S. markets using existing ADRs. A
foreign issuer of the security underlying an ADR is generally not subject to
the same reporting requirements in the United States as a domestic issuer.
Accordingly, information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its country and
the market value of an ADR may not reflect undisclosed material information
concerning the issuer of the underlying security. ADRs may also be subject
to exchange rate risks if the underlying foreign securities are denominated
in a foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in
dollar-denominated foreign debt securities. Investing in dollar-denominated
foreign debt represents a greater degree of risk than investing in domestic
securities, due to less publicly available information, less securities
regulation, war or expropriation. Special considerations may include higher
brokerage costs and thinner trading markets. Investments in foreign
countries could be affected by other factors including extended settlement
periods.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many
aspects of the private sector through the ownership or control of many
companies, including some of the largest in any given country. As a
result, government actions in the future could have a significant effect
on economic conditions in emerging markets, which in turn, may adversely
affect companies in the private sector, general market conditions and
prices and yields of certain of the securities in the Fund's portfolio.
Expropriation, confiscatory taxation, nationalization, political,
economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and
could adversely affect the Fund's assets should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse in
the event of a default with respect to certain debt obligations it may
hold. If the issuer of a fixed income security owned by the Fund
defaults, the Fund may incur additional expenses to seek recovery. Debt
obligations issued by emerging market governments differ from debt
obligations of private entities; remedies from defaults on debt
obligations issued by emerging market governments, unlike those on
private debt, must be pursued in the courts of the defaulting party
itself. The Fund's ability to enforce its rights against private issuers
may be limited. The ability to attach assets to enforce a judgment may be
limited. Legal recourse is therefore somewhat diminished. Bankruptcy,
moratorium and other similar laws applicable to private issuers of debt
obligations may be substantially different from those of other countries.
The political context, expressed as an emerging market governmental
issuer's willingness to meet the terms of the debt obligation, for
example, is of considerable importance. In addition, no assurance can be
given that the holders of commercial bank debt may not contest payments
to the holders of debt obligations in the event of default under
commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may be
denominated in foreign currencies and international currency units and
the Fund may invest a portion of its assets directly in foreign
currencies. Accordingly, the weakening of these currencies and units
against the U.S. dollar may result in a decline in the Fund's asset
value.
Some emerging market countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, there is risk
that certain emerging market countries may restrict the free conversion
of their currencies into other currencies. Further, certain emerging
market currencies may not be internationally traded. Certain of these
currencies have experienced a steep devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a Fund's portfolio
securities are denominated may have a detrimental impact on the Fund's
net asset value.
o Inflation -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had and may continue to
have adverse effects on the economies and securities markets of certain
emerging market countries. In an attempt to control inflation, wage and
price controls have been imposed in certain countries. Of these
countries, some, in recent years, have begun to control inflation through
prudent economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities markets
of emerging market countries are substantially smaller, less developed,
less liquid and more volatile than the major securities markets in the
U.S. Disclosure and regulatory standards are in many respects less
stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors
in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to
volume of trading in the securities of U.S. issuers could cause prices to
be erratic for reasons apart from factors that affect the soundness and
competitiveness of the securities issuers. For example, limited market
size may cause prices to be unduly influenced by traders who control
large positions. Adverse publicity and investors' perceptions, whether or
not based on in-depth fundamental analysis, may decrease the value and
liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Fund's securities in
such markets may not be readily available. The Fund may suspend
redemption of its shares for any period during which an emergency exists,
as determined by the Securities and Exchange Commission (the "SEC").
Accordingly, if the Fund believes that appropriate circumstances exist,
it will promptly apply to the SEC for a determination that an emergency
is present. During the period commencing from the Fund's identification
of such condition until the date of the SEC action, the Fund's securities
in the affected markets will be valued at fair value determined in good
faith by or under the direction of the Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high degree
of risk. The governmental entity that controls the repayment of sovereign
debt may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. A governmental
entity's willingness or ability to repay principal and interest due in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative
size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund and
the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements
from foreign governments, multilateral agencies and others abroad to
reduce principal and interest on their debt. The commitment on the part
of these governments, agencies and others to make such disbursements may
be conditioned on a governmental entity's implementation of economic
reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when due
may result in the cancellation of such third parties' commitments to lend
funds to the governmental entity, which may further impair such debtor's
ability or willingness to service its debts in a timely manner.
Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Fund) may be requested to
participate in the rescheduling of such debt and to extend further loans
to governmental entities. There is no bankruptcy proceedings by which
sovereign debt on which governmental entities have defaulted may be
collected in whole or in part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging market
governmental issuers have not been able to make payments of interest on
or principal of debt obligations as those payments have come due.
Obligations arising from past restructuring agreements may affect the
economic performance and political and social stability of those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its
access to international credits and investments. An emerging market whose
exports are concentrated in a few commodities could be vulnerable to a
decline in the international prices of one or more of those commodities.
Increased protectionism on the part of an emerging market's trading
partners could also adversely affect the country's exports and tarnish
its trade account surplus, if any. To the extent that emerging markets
receive payment for their exports in currencies other than dollars or
non-emerging market currencies, its ability to make debt payments
denominated in dollars or non-emerging market currencies could be
affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of
emerging markets to these forms of external funding may not be certain,
and a withdrawal of external funding could adversely affect the capacity
of emerging market country governmental issuers to make payments on their
obligations. In addition, the cost of servicing emerging market debt
obligations can be affected by a change in international interest rates
since the majority of these obligations carry interest rates that are
adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the
country. Fluctuations in the level of these reserves affect the amount of
foreign exchange readily available for external debt payments and thus
could have a bearing on the capacity of emerging market countries to make
payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be reduced
by a withholding tax on the source or other taxes imposed by the emerging
market countries in which the Fund makes its investments. The Fund's net
asset value may also be affected by changes in the rates or methods of
taxation applicable to the Fund or to entities in which the Fund has
invested. The Adviser will consider the cost of any taxes in determining
whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
FOREIGN SECURITIES: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c)
the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or
services performed in that country; or (e) the issuer has 50% or more of its
assets in that country.
Investing in securities of foreign issuers generally involves risks not
ordinarily associated with investing in securities of domestic issuers.
These include changes in currency rates, exchange control regulations,
securities settlement practices, governmental administration or economic or
monetary policy (in the United States or abroad) or circumstances in
dealings between nations. Costs may be incurred in connection with
conversions between various currencies. Special considerations may also
include more limited information about foreign issuers, higher brokerage
costs, different accounting standards and thinner trading markets. Foreign
securities markets may also be less liquid, more volatile and less subject
to government supervision than in the United States. Investments in foreign
countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. As a result
of its investments in foreign securities, the Fund may receive interest or
dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are
denominated. Under certain circumstances, such as where the Adviser believes
that the applicable exchange rate is unfavorable at the time the currencies
are received or the Adviser anticipates, for any other reason, that the
exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. While the holding of currencies will permit the
Fund to take advantage of favorable movements in the applicable exchange
rate, such strategy also exposes the Fund to risk of loss if exchange rates
move in a direction adverse to the Fund's position. Such losses could reduce
any profits or increase any losses sustained by the Fund from the sale or
redemption of securities and could reduce the dollar value of interest or
dividend payments received. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
FORWARD CONTRACTS
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is entered
into (a "Forward Contract"), for hedging purposes (e.g., to protect its
current or intended investments from fluctuations in currency exchange
rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the Fund
seeks to protect against an anticipated increase in the exchange rate for a
specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, the Fund may enter into
a Forward Contract to purchase a given currency to protect against a
projected increase in the dollar value of securities denominated in such
currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline
in the dollar value of portfolio securities or the increase in the dollar
cost of securities to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, the Fund may be required to forego all or a portion of the
benefits which otherwise could have been obtained from favorable movements
in exchange rates. The Fund does not presently intend to hold Forward
Contracts entered into until the value date, at which time it would be
required to deliver or accept delivery of the underlying currency, but will
seek in most instances to close out positions in such Contracts by entering
into offsetting transactions, which will serve to fix the Fund's profit or
loss based upon the value of the Contracts at the time the offsetting
transaction is executed.
The Fund will also enter into transactions in Forward Contracts for other
than hedging purposes, which presents greater profit potential but also
involves increased risk. For example, the Fund may purchase a given foreign
currency through a Forward Contract if, in the judgment of the Adviser, the
value of such currency is expected to rise relative to the U.S. dollar.
Conversely, the Fund may sell the currency through a Forward Contract if the
Adviser believes that its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, which will increase its gross income. Where exchange
rates do not move in the direction or to the extent anticipated, however,
the Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative and could involve
significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts ("Futures Contracts") on
stock indices, foreign currencies, interest rates or interest-rate related
instruments, indices of foreign currencies or commodities. The Fund may also
purchase and sell Futures Contracts on foreign or domestic fixed income
securities or indices of such securities including municipal bond indices
and any other indices of foreign or domestic fixed income securities that
may become available for trading. Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to applicable
law.
A Futures Contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument, foreign
currency or commodity, or for the making and acceptance of a cash
settlement, at a stated time in the future for a fixed price. By its terms,
a Futures Contract provides for a specified settlement month in which, in
the case of the majority of commodities, interest rate and foreign currency
futures contracts, the underlying commodities, fixed income securities or
currency are delivered by the seller and paid for by the purchaser, or on
which, in the case of index futures contracts and certain interest rate and
foreign currency futures contracts, the difference between the price at
which the contract was entered into and the contract's closing value is
settled between the purchaser and seller in cash. Futures Contracts differ
from options in that they are bilateral agreements, with both the purchaser
and the seller equally obligated to complete the transaction. Futures
Contracts call for settlement only on the expiration date and cannot be
"exercised" at any other time during their term.
The purchase or sale of a Futures Contract differs from the purchase or
sale of a security or the purchase of an option in that no purchase price is
paid or received. Instead, an amount of cash or cash equivalents, which
varies but may be as low as 5% or less of the value of the contract, must be
deposited with the broker as "initial margin." Subsequent payments to and
from the broker, referred to as "variation margin," are made on a daily
basis as the value of the index or instrument underlying the Futures
Contract fluctuates, making positions in the Futures Contract more or less
valuable -- a process known as "mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt to
protect the Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, the Fund may sell stock index
futures contracts in anticipation of or during a market decline to attempt
to offset the decrease in market value of the Fund's securities portfolio
that might otherwise result. If such decline occurs, the loss in value of
portfolio securities may be offset, in whole or part, by gains on the
futures position. When the Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock
index futures contracts in order to gain rapid market exposure that may, in
part or entirely, offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, the corresponding positions
in stock index futures contracts will be closed out. In a substantial
majority of these transactions, the Fund will purchase such securities upon
termination of the futures position, but under unusual market conditions, a
long futures position may be terminated without a related purchase of
securities.
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Fund's current
or intended investments in fixed income securities. For example, if the Fund
owned long-term bonds and interest rates were expected to increase, the Fund
might enter into interest rate futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling some of
the long-term bonds in the Fund's portfolio. If interest rates did increase,
the value of the debt securities in the portfolio would decline, but the
value of the Fund's interest rate futures contracts would increase at
approximately the same rate, subject to the correlation risks described
below, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in the
value of the interest rate futures contracts should be similar to that of
long-term bonds, the Fund could protect itself against the effects of the
anticipated rise in the value of long-term bonds without actually buying
them until the necessary cash became available or the market had stabilized.
At that time, the interest rate futures contracts could be liquidated and
the Fund's cash reserves could then be used to buy long-term bonds on the
cash market. The Fund could accomplish similar results by selling bonds with
long maturities and investing in bonds with short maturities when interest
rates are expected to increase. However, since the futures market may be
more liquid than the cash market in certain cases or at certain times, the
use of interest rate futures contracts as a hedging technique may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
The Fund may purchase and sell foreign currency futures contracts for
hedging purposes, to attempt to protect its current or intended investments
from fluctuations in currency exchange rates. Such fluctuations could reduce
the dollar value of portfolio securities denominated in foreign currencies,
or increase the dollar cost of foreign- denominated securities to be
acquired, even if the value of such securities in the currencies in which
they are denominated remains constant. The Fund may sell futures contracts
on a foreign currency, for example, where it holds securities denominated in
such currency and it anticipates a decline in the value of such currency
relative to the dollar. In the event such decline occurs, the resulting
adverse effect on the value of foreign-denominated securities may be offset,
in whole or in part, by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in part,
the increased cost of such securities resulting from a rise in the dollar
value of the underlying currencies. Where the Fund purchases futures
contracts under such circumstances, however, and the prices of securities to
be acquired instead decline, the Fund will sustain losses on its futures
position which could reduce or eliminate the benefits of the reduced cost of
portfolio securities to be acquired.
The use by the Fund of Futures Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. The Fund may also
purchase indexed deposits with similar characteristics. Gold- indexed
securities, for example, typically provide for a maturity value that depends
on the price of gold, resulting in a security whose price tends to rise and
fall together with gold prices. Currency-indexed securities typically are
short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S. dollar
denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a
security that performs similarly to a foreign- denominated instrument, or
their maturity value may decline when foreign currencies increase, resulting
in a security whose price characteristics are similar to a put on the
underlying currency. Currency-indexed securities may also have prices that
depend on the values of a number of different foreign currencies relative to
each other. Certain indexed securities may expose the Fund to the risk of
loss of all or a portion of the principal amount of its investment and/or
the interest that might otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers
of indexed securities have included banks, corporations, and certain U.S.
Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Fund may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an obligation,
a municipality issues a certain amount of debt and pays a fixed interest
rate. Half of the debt is issued as variable rate short term obligations,
the interest rate of which is reset at short intervals, typically 35 days.
The other half of the debt is issued as inverse floating rate obligations,
the interest rate of which is calculated based on the difference between a
multiple of (approximately two times) the interest paid by the issuer and
the interest paid on the short-term obligation. Under usual circumstances,
the holder of the inverse floating rate obligation can generally purchase an
equal principal amount of the short term obligation and link the two
obligations in order to create long-term fixed rate bonds. Because the
interest rate on the inverse floating rate obligation is determined by
subtracting the short-term rate from a fixed amount, the interest rate will
decrease as the short-term rate increases and will increase as the
short-term rate decreases. The magnitude of increases and decreases in the
market value of inverse floating rate obligations may be approximately twice
as large as the comparable change in the market value of an equal principal
amount of long-term bonds which bear interest at the rate paid by the issuer
and have similar credit quality, redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio securities.
Such loans will usually be made only to member firms of the New York Stock
Exchange (the "Exchange") (and subsidiaries thereof) and member banks of the
Federal Reserve System, and would be required to be secured continuously by
collateral in cash, an irrevocable letter of credit or United States
("U.S.") Treasury securities maintained on a current basis at an amount at
least equal to the market value of the securities loaned. The Fund would
have the right to call a loan and obtain the securities loaned at any time
on customary industry settlement notice (which will not usually exceed five
business days). For the duration of a loan, the Fund would continue to
receive the equivalent of the interest or dividends paid by the issuer on
the securities loaned. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (if the collateral is in the form of cash). The Fund would not,
however, have the right to vote any securities having voting rights during
the existence of the loan, but the Fund would call the loan in anticipation
of an important vote to be taken among holders of the securities or of the
giving or withholding of their consent on a material matter affecting the
investment. As with other extensions of credit there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to firms
deemed by the Adviser to be of good standing, and when, in the judgment of
the Adviser, the consideration which can be earned currently from securities
loans of this type justifies the attendant risk.
LEVERAGING TRANSACTIONS
The Fund may engage in the types of transactions described below, which
involve "leverage" because in each case the Fund receives cash which it can
invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Fund will generally cause its
net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can be
expected to cause the value of the Fund's shares and distributions on the
Fund's shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from these transactions fail to cover the
expenses associated with these transactions, the value of the Fund's shares
is likely to decrease more quickly than otherwise would be the case and
distributions thereon will be reduced or eliminated. Hence, these
transactions are speculative, involve leverage and increase the risk of
owning or investing in the shares of the Fund. These transactions also
increase the Fund's expenses because of interest and similar payments and
administrative expenses associated with them. Unless the appreciation and
income on assets purchased with proceeds from these transactions exceed the
costs associated with them, the use of these transactions by a Fund would
diminish the investment performance of the Fund compared with what it would
have been without using these transactions.
BANK BORROWINGS: The Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment objectives
and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on the
mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on, and gains from, the investment of the cash proceeds of the
initial sale. The Fund may also be compensated by receipt of a commitment
fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part of
the dollar roll, the use of this technique will diminish the investment
performance of the Fund compared with what the performance would have been
without the use of the dollar rolls. Dollar roll transactions involve the
risk that the market value of the securities the Fund is required to
purchase may decline below the agreed upon repurchase price of those
securities. If the broker/dealer to whom the Fund sells securities becomes
insolvent, the Fund's right to purchase or repurchase securities may be
restricted. Successful use of mortgage dollar rolls may depend upon the
Adviser's ability to correctly predict interest rates and prepayments. There
is no assurance that dollar rolls can be successfully employed.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund will sell securities
and receive cash proceeds, subject to its agreement to repurchase the
securities at a later date for a fixed price reflecting a market rate of
interest. There is a risk that the counter party to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as
scheduled, which may result in losses to the Fund. The Fund will invest the
proceeds received under a reverse repurchase agreement in accordance with
its investment objective and policies.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-hedging purposes in a manner similar
to that in which Futures Contracts on foreign currencies, or Forward
Contracts, will be utilized. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such diminutions in
the value of portfolio securities, the Fund may purchase put options on the
foreign currency. If the value of the currency does decline, the Fund will
have the right to sell such currency for a fixed amount in dollars and will
thereby offset, in whole in part, the adverse effect on its portfolio which
otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Fund may purchase call options thereon. The
purchase of such options could offset, at least partially, the effect of the
adverse movements in exchange rates. As in the case of other types of
options, however, the benefit to the Fund deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in
the direction or to the extent anticipated, the Fund could sustain losses on
transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates. The
Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar
value of foreign-denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the option
will most likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received less related
transaction costs. As in the case of other types of options, therefore, the
writing of Options on Foreign Currencies will constitute only a partial
hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Fund to hedge
such increased cost up to the amount of the premium. Foreign currency
options written by the Fund will generally be covered in a manner similar to
the covering of other types of options. As in the case of other types of
options, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium, and only if rates move
in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium.
Through the writing of options on foreign currencies, the Fund also may be
required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in exchange rates. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non- hedging
purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the case
of a call option, or a "short" position in the underlying Futures Contract,
in the case of a put option, at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (i.e., the same
exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
Fund's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund on
U.S. exchanges are traded on the same contract market as the underlying
Futures Contract, and, like Futures Contracts, are subject to regulation by
the Commodity Futures Trading Commission (the "CFTC") and the performance
guarantee of the exchange clearinghouse. In addition, Options on Futures
Contracts may be traded on foreign exchanges. The Fund may cover the writing
of call Options on Futures Contracts (a) through purchases of the underlying
Futures Contract, (b) through ownership of the instrument, or instruments
included in the index, underlying the Futures Contract, or (c) through the
holding of a call on the same Futures Contract and in the same principal
amount as the call written where the exercise price of the call held (i) is
equal to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written if the Fund owns liquid
and unencumbered assets equal to the difference. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through the ownership of liquid and
unencumbered assets equal to the value of the security or index underlying
the Futures Contract, or (c) through the holding of a put on the same
Futures Contract and in the same principal amount as the put written where
the exercise price of the put held (i) is equal to or greater than the
exercise price of the put written or where the exercise price of the put
held (ii) is less than the exercise price of the put written if the Fund
owns liquid and unencumbered assets equal to the difference. Put and call
Options on Futures Contracts may also be covered in such other manner as may
be in accordance with the rules of the exchange on which the option is
traded and applicable laws and regulations. Upon the exercise of a call
Option on a Futures Contract written by the Fund, the Fund will be required
to sell the underlying Futures Contract which, if the Fund has covered its
obligation through the purchase of such Contract, will serve to liquidate
its futures position. Similarly, where a put Option on a Futures Contract
written by the Fund is exercised, the Fund will be required to purchase the
underlying Futures Contract which, if the Fund has covered its obligation
through the sale of such Contract, will close out its futures position.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or
other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is below the
exercise price, the Fund will retain the full amount of the option premium,
less related transaction costs, which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. The writing
of a put option on a Futures Contract constitutes a partial hedge against
increasing prices of the securities or other instruments required to be
delivered under the terms of the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is exercised, the
Fund will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the
value of its portfolio securities and the changes in the value of its
futures positions, the Fund's losses from existing Options on Futures
Contracts may to some extent be reduced or increased by changes in the value
of portfolio securities.
The Fund may purchase Options on Futures Contracts for hedging purposes
instead of purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is
anticipated as a result of a projected market-wide decline or changes in
interest or exchange rates, the Fund could, in lieu of selling Futures
Contracts, purchase put options thereon. In the event that such decrease
occurs, it may be offset, in whole or in part, by a profit on the option.
Conversely, where it is projected that the value of securities to be
acquired by the Fund will increase prior to acquisition, due to a market
advance or changes in interest or exchange rates, the Fund could purchase
call Options on Futures Contracts rather than purchasing the underlying
Futures Contracts.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by the Fund may be covered in the manner set forth below.
A call option written by the Fund is "covered" if the Fund owns the
security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for
additional cash consideration if the Fund owns liquid and unencumbered
assets equal to the amount of cash consideration) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the Fund owns
liquid and unencumbered assets equal to the difference. A put option written
by the Fund is "covered" if the Fund owns liquid and unencumbered assets
with a value equal to the exercise price, or else holds a put on the same
security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise
price of the put written or where the exercise price of the put held is less
than the exercise price of the put written if the Fund owns liquid and
unencumbered assets equal to the difference. Put and call options written by
the Fund may also be covered in such other manner as may be in accordance
with the requirements of the exchange on which, or the counterparty with
which, the option is traded, and applicable laws and regulations. If the
writer's obligation is not so covered, it is subject to the risk of the full
change in value of the underlying security from the time the option is
written until exercise.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case
of a written put option will permit the Fund to write another put option to
the extent that the Fund owns liquid and unencumbered assets. Such
transactions permit the Fund to generate additional premium income, which
will partially offset declines in the value of portfolio securities or
increases in the cost of securities to be acquired. Also, effecting a
closing transaction will permit the cash or proceeds from the concurrent
sale of any securities subject to the option to be used for other
investments of the Fund, provided that another option on such security is
not written. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction in connection with the option prior to or concurrent with the
sale of the security.
The Fund will realize a profit from a closing transaction if the premium
paid in connection with the closing of an option written by the Fund is less
than the premium received from writing the option, or if the premium
received in connection with the closing of an option purchased by the Fund
is more than the premium paid for the original purchase. Conversely, the
Fund will suffer a loss if the premium paid or received in connection with a
closing transaction is more or less, respectively, than the premium received
or paid in establishing the option position. Because increases in the market
price of a call option will generally reflect increases in the market price
of the underlying security, any loss resulting from the repurchase of a call
option previously written by the Fund is likely to be offset in whole or in
part by appreciation of the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and then write a call option
against that security. The exercise price of the call option the Fund
determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the- money")
the current value of the underlying security at the time the option is
written. Buy-and-write transactions using in-the-money call options may be
used when it is expected that the price of the underlying security will
decline moderately during the option period. Buy-and-write transactions
using out-of-the-money call options may be used when it is expected that the
premiums received from writing the call option plus the appreciation in the
market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone.
If the call options are exercised in such transactions, the Fund's maximum
gain will be the premium received by it for writing the option, adjusted
upwards or downwards by the difference between the Fund's purchase price of
the security and the exercise price, less related transaction costs. If the
options are not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the
premium received, less related transaction costs. If the market price of the
underlying security declines or otherwise is below the exercise price, the
Fund may elect to close the position or retain the option until it is
exercised, at which time the Fund will be required to take delivery of the
security at the exercise price; the Fund's return will be the premium
received from the put option minus the amount by which the market price of
the security is below the exercise price, which could result in a loss.
Out-of-the-money, at-the-money and in-the-money put options may be used by
the Fund in the same market environments that call options are used in
equivalent buy-and-write transactions.
The Fund may also write combinations of put and call options on the same
security, known as "straddles" with the same exercise price and expiration
date. By writing a straddle, the Fund undertakes a simultaneous obligation
to sell and purchase the same security in the event that one of the options
is exercised. If the price of the security subsequently rises sufficiently
above the exercise price to cover the amount of the premium and transaction
costs, the call will likely be exercised and the Fund will be required to
sell the underlying security at a below market price. This loss may be
offset, however, in whole or part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of
straddles will likely be effective, therefore, only where the price of the
security remains stable and neither the call nor the put is exercised. In
those instances where one of the options is exercised, the loss on the
purchase or sale of the underlying security may exceed the amount of the
premiums received.
By writing a call option, the Fund limits its opportunity to profit from
any increase in the market value of the underlying security above the
exercise price of the option. By writing a put option, the Fund assumes the
risk that it may be required to purchase the underlying security for an
exercise price above its then-current market value, resulting in a capital
loss unless the security subsequently appreciates in value. The writing of
options on securities will not be undertaken by the Fund solely for hedging
purposes, and could involve certain risks which are not present in the case
of hedging transactions. Moreover, even where options are written for
hedging purposes, such transactions constitute only a partial hedge against
declines in the value of portfolio securities or against increases in the
value of securities to be acquired, up to the amount of the premium.
The Fund may also purchase options for hedging purposes or to increase its
return. Put options may be purchased to hedge against a decline in the value
of portfolio securities. If such decline occurs, the put options will permit
the Fund to sell the securities at the exercise price, or to close out the
options at a profit. By using put options in this way, the Fund will reduce
any profit it might otherwise have realized in the underlying security by
the amount of the premium paid for the put option and by transaction costs.
The Fund may also purchase call options to hedge against an increase in
the price of securities that the Fund anticipates purchasing in the future.
If such increase occurs, the call option will permit the Fund to purchase
the securities at the exercise price, or to close out the options at a
profit. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise of the
option, and, unless the price of the underlying security rises sufficiently,
the option may expire worthless to the Fund.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast to
an option on a security, an option on a stock index provides the holder with
the right but not the obligation to make or receive a cash settlement upon
exercise of the option, rather than the right to purchase or sell a
security. The amount of this settlement is generally equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds (in
the case of a call) or is below (in the case of a put) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed
"index multiplier." The Fund may cover written call options on stock indices
by owning securities whose price changes, in the opinion of the Adviser, are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional
cash consideration (or for additional cash consideration if the Fund owns
liquid and unencumbered assets equal to the amount of cash consideration)
upon conversion or exchange of other securities in its portfolio. Where the
Fund covers a call option on a stock index through ownership of securities,
such securities may not match the composition of the index and, in that
event, the Fund will not be fully covered and could be subject to risk of
loss in the event of adverse changes in the value of the index. The Fund may
also cover call options on stock indices by holding a call on the same index
and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of
the call written or (b) is greater than the exercise price of the call
written if the Fund owns liquid and unencumbered assets equal to the
difference. The Fund may cover put options on stock indices by owning liquid
and unencumbered assets with a value equal to the exercise price, or by
holding a put on the same stock index and in the same principal amount as
the put written where the exercise price of the put held (a) is equal to or
greater than the exercise price of the put written or (b) is less than the
exercise price of the put written if the Fund owns liquid and unencumbered
assets equal to the difference. Put and call options on stock indices may
also be covered in such other manner as may be in accordance with the rules
of the exchange on which, or the counterparty with which, the option is
traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on which
the Fund has written a call option falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of
any unrealized appreciation in the Fund's stock investments. By writing a
put option, the Fund assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Fund correlate with
changes in the value of the index, writing covered put options on indices
will increase the Fund's losses in the event of a market decline, although
such losses will be offset in part by the premium received for writing the
option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of the Fund's
security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or
a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write options on U.S.
Treasury securities which provide for periodic adjustment of the strike
price and may also provide for the periodic adjustment of the premium during
the term of each such option. Like other types of options, these
transactions, which may be referred to as "reset" options or "adjustable
strike" options grant the purchaser the right to purchase (in the case of a
call) or sell (in the case of a put), a specified type of U.S. Treasury
security at any time up to a stated expiration date (or, in certain
instances, on such date). In contrast to other types of options, however,
the price at which the underlying security may be purchased or sold under a
"reset" option is determined at various intervals during the term of the
option, and such price fluctuates from interval to interval based on changes
in the market value of the underlying security. As a result, the strike
price of a "reset" option, at the time of exercise, may be less advantageous
than if the strike price had been fixed at the initiation of the option. In
addition, the premium paid for the purchase of the option may be determined
at the termination, rather than the initiation, of the option. If the
premium for a reset option written by the Fund is paid at termination, the
Fund assumes the risk that (i) the premium may be less than the premium
which would otherwise have been received at the initiation of the option
because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the
strike price of the option, and (ii) the option purchaser may default on its
obligation to pay the premium at the termination of the option. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation of the
option.
"YIELD CURVE" OPTIONS: The Fund may also enter into options on the "spread,"
or yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. In contrast to other types of options,
a yield curve option is based on the difference between the yields of
designated securities, rather than the prices of the individual securities,
and is settled through cash payments. Accordingly, a yield curve option is
profitable to the holder if this differential widens (in the case of a call)
or narrows (in the case of a put), regardless of whether the yields of the
underlying securities increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Fund may purchase or write such options for
hedging purposes. For example, the Fund may purchase a call option on the
yield spread between two securities, if it owns one of the securities and
anticipates purchasing the other security and wants to hedge against an
adverse change in the yield spread between the two securities. The Fund may
also purchase or write yield curve options for other than hedging purposes
(i.e., in an effort to increase its current income) if, in the judgment of
the Adviser, the Fund will be able to profit from movements in the spread
between the yields of the underlying securities. The trading of yield curve
options is subject to all of the risks associated with the trading of other
types of options. In addition, however, such options present risk of loss
even if the yield of one of the underlying securities remains constant, if
the spread moves in a direction or to an extent which was not anticipated.
Yield curve options written by the Fund will be "covered". A call (or put)
option is covered if the Fund holds another call (or put) option on the
spread between the same two securities and owns liquid and unencumbered
assets sufficient to cover the Fund's net liability under the two options.
Therefore, the Fund's liability for such a covered option is generally
limited to the difference between the amount of the Fund's liability under
the option written by the Fund less the value of the option held by the
Fund. Yield curve options may also be covered in such other manner as may be
in accordance with the requirements of the counterparty with which the
option is traded and applicable laws and regulations. Yield curve options
are traded over-the-counter and because they have been only recently
introduced, established trading markets for these securities have not yet
developed.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are member
firms (or a subsidiary thereof) of the New York Stock Exchange or members of
the Federal Reserve System, recognized primary U.S. Government securities
dealers or institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Fund purchases and holds through
its agent are U.S. Government securities, the values of which are equal to
or greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same,
with interest at a standard rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the Government securities.
The repurchase agreement provides that in the event the seller fails to
pay the amount agreed upon on the agreed upon delivery date or upon demand,
as the case may be, the Fund will have the right to liquidate the
securities. If at the time the Fund is contractually entitled to exercise
its right to liquidate the securities, the seller is subject to a proceeding
under the bankruptcy laws or its assets are otherwise subject to a stay
order, the Fund's exercise of its right to liquidate the securities may be
delayed and result in certain losses and costs to the Fund. The Fund has
adopted and follows procedures which are intended to minimize the risks of
repurchase agreements. For example, the Fund only enters into repurchase
agreements after the Adviser has determined that the seller is creditworthy,
and the Adviser monitors that seller's creditworthiness on an ongoing basis.
Moreover, under such agreements, the value of the securities (which are
marked to market every business day) is required to be greater than the
repurchase price, and the Fund has the right to make margin calls at any
time if the value of the securities falls below the agreed upon collateral.
RESTRICTED SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act ("Rule 144A securities") and
commercial paper issued under Section 4(2) of the 1933 Act ("4(2) Paper"). A
determination is made, based upon a continuing review of the trading markets
for the Rule 144A security or 4(2) Paper, whether such security is liquid
and thus not subject to the Fund's limitation on investing in illiquid
investments. The Board of Trustees has adopted guidelines and delegated to
MFS the daily function of determining and monitoring the liquidity of Rule
144A securities and 4(2) Paper. The Board, however, retains oversight of the
liquidity determinations focusing on factors such as valuation, liquidity
and availability of information. Investing in Rule 144A securities could
have the effect of decreasing the level of liquidity in the Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these Rule 144A securities held in the Fund's portfolio. Subject
to the Fund's limitation on investments in illiquid investments, the Fund
may also invest in restricted securities that may not be sold under Rule
144A, which presents certain risks. As a result, the Fund might not be able
to sell these securities when the Adviser wishes to do so, or might have to
sell them at less than fair value. In addition, market quotations are less
readily available. Therefore, judgment may at times play a greater role in
valuing these securities than in the case of unrestricted securities.
SHORT SALES
The Fund may seek to hedge investments or realize additional gains through
short sales. The Fund may make short sales, which are transactions in which
the Fund sells a security it does not own, in anticipation of a decline in
the market value of that security. To complete such a transaction, the Fund
must borrow the security to make delivery to the buyer. The Fund then is
obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. The price at such time may be more or less
than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to repay the lender any dividends
or interest which accrue during the period of the loan. To borrow the
security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale
will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out. The Fund also will
incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain
if the price of the security declines between those dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount
of the premium, dividends or interest the Fund may be required to pay in
connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale, equals
the current market value of the security sold short.
SHORT SALES AGAINST THE BOX
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the Fund
enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is required
to hold such securities while the short sale is outstanding. The Fund will
incur transaction costs, including interest, in connection with opening,
maintaining, and closing short sales against the box.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. The Fund is not limited
to any particular form or variety of swap agreement if the Adviser
determines it is consistent with the Fund's investment objective and
policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative transactions.
If the Fund enters into a swap agreement on a net basis (i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments), the Fund will
maintain liquid and unencumbered assets with a daily value at least equal to
the excess, if any, of the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than a net
basis, it will maintain liquid and unencumbered assets with a value equal to
the full amount of the Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the underlying price, rate or index level that
determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of the Fund would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when
due. In addition, if the counterparty's creditworthiness would decline, the
value of the swap agreement would be likely to decline, potentially
resulting in losses.
If the counterparty defaults, the Fund's risk of loss consists of the net
amount of payments that the Fund is contractually entitled to receive. The
Fund anticipates that it will be able to eliminate or reduce its exposure
under these arrangements by assignment or other disposition or by entering
into an offsetting agreement with the same or another counterparty, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
TEMPORARY DEFENSIVE POSITIONS
During periods of unusual market conditions when the Adviser believes that
investing for temporary defensive purposes is appropriate, or in order to
meet anticipated redemption requests, a large portion or all of the assets
of the Fund may be invested in cash (including foreign currency) or cash
equivalents, including, but not limited to, obligations of banks (including
certificates of deposit, bankers' acceptances, time deposits and repurchase
agreements), commercial paper, short-term notes, U.S. Government Securities
and related repurchase agreements.
WARRANTS
The Fund may invest in warrants. Warrants are securities that give the Fund
the right to purchase equity securities from the issuer at a specific price
(the "strike price") for a limited period of time. The strike price of
warrants typically is much lower than the current market price of the
underlying securities, yet they are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities and may offer greater potential for capital appreciation as well
as capital loss. Warrants do not entitle a holder to dividends or voting
rights with respect to the underlying securities and do not represent any
rights in the assets of the issuing company. Also, the value of the warrant
does not necessarily change with the value of the underlying securities and
a warrant ceases to have value if it is not exercised prior to the
expiration date. These factors can make warrants more speculative than other
types of investments.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities will be delivered to the
Fund at a future date usually beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a future
date may be deemed a separate security. In general, the Fund does not pay
for such securities until received, and does not start earning interest on
the securities until the contractual settlement date. While awaiting
delivery of securities purchased on such bases, a Fund will identify liquid
and unencumbered assets equal to its forward delivery commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO: The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives depends on the degree to which price movements in the
underlying index or instrument correlate with price movements in the
relevant portion of the Fund's portfolio. In the case of derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. Consequently, the Fund bears the risk
that the price of the portfolio securities being hedged will not move in the
same amount or direction as the underlying index or obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience a
loss which is not completely offset by the put option. It is also possible
that there may be a negative correlation between the index or obligation
underlying an option or Futures Contract in which the Fund has a position
and the portfolio securities the Fund is attempting to hedge, which could
result in a loss on both the portfolio and the hedging instrument. It should
be noted that stock index futures contracts or options based upon a narrower
index of securities, such as those of a particular industry group, may
present greater risk than options or futures based on a broad market index.
This is due to the fact that a narrower index is more susceptible to rapid
and extreme fluctuations as a result of changes in the value of a small
number of securities. Nevertheless, where the Fund enters into transactions
in options or futures on narrowly-based indices for hedging purposes,
movements in the value of the index should, if the hedge is successful,
correlate closely with the portion of the Fund's portfolio or the intended
acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative and the price of the underlying index or obligation. The
anticipated spread between the prices may be distorted due to the
differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts will not be fully
reflected in the value of the option. The risk of imperfect correlation,
however, generally tends to diminish as the maturity date of the Futures
Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock indices,
options on currencies and Options on Futures Contracts, the Fund is subject
to the risk of market movements between the time that the option is
exercised and the time of performance thereunder. This could increase the
extent of any loss suffered by the Fund in connection with such
transactions.
In writing a covered call option on a security, index or futures contract,
the Fund also incurs the risk that changes in the value of the instruments
used to cover the position will not correlate closely with changes in the
value of the option or underlying index or instrument. For example, where
the Fund covers a call option written on a stock index through segregation
of securities, such securities may not match the composition of the index,
and the Fund may not be fully covered. As a result, the Fund could be
subject to risk of loss in the event of adverse market movements.
The writing of options on securities, options on stock indices or Options
on Futures Contracts constitutes only a partial hedge against fluctuations
in the value of the Fund's portfolio. When the Fund writes an option, it
will receive premium income in return for the holder's purchase of the right
to acquire or dispose of the underlying obligation. In the event that the
price of such obligation does not rise sufficiently above the exercise price
of the option, in the case of a call, or fall below the exercise price, in
the case of a put, the option will not be exercised and the Fund will retain
the amount of the premium, less related transaction costs, which will
constitute a partial hedge against any decline that may have occurred in the
Fund's portfolio holdings or any increase in the cost of the instruments to
be acquired.
Where the price of the underlying obligation moves sufficiently in favor
of the holder to warrant exercise of the option, however, and the option is
exercised, the Fund will incur a loss which may only be partially offset by
the amount of the premium it received. Moreover, by writing an option, the
Fund may be required to forego the benefits which might otherwise have been
obtained from an increase in the value of portfolio securities or other
assets or a decline in the value of securities or assets to be acquired. In
the event of the occurrence of any of the foregoing adverse market events,
the Fund's overall return may be lower than if it had not engaged in the
hedging transactions. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments involve greater risks and may
result in losses which may not be offset by increases in the value of
portfolio securities or declines in the cost of securities to be acquired.
The Fund will only write covered options, such that liquid and unencumbered
assets necessary to satisfy an option exercise will be identified, unless
the option is covered in such other manner as may be in accordance with the
rules of the exchange on which, or the counterparty with which, the option
is traded and applicable laws and regulations. Nevertheless, the method of
covering an option employed by the Fund may not fully protect it against
risk of loss and, in any event, the Fund could suffer losses on the option
position which might not be offset by corresponding portfolio gains. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary
market for such instruments on the exchange on which the initial transaction
was entered into. While the Fund will enter into options or futures
positions only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
contract at any specific time. In that event, it may not be possible to
close out a position held by the Fund, and the Fund could be required to
purchase or sell the instrument underlying an option, make or receive a cash
settlement or meet ongoing variation margin requirements. Under such
circumstances, if the Fund has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse
impact on the Fund's ability effectively to hedge its portfolio, and could
result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the Fund enters into such transactions for hedging purposes, any
losses incurred in connection therewith should, if the hedging strategy is
successful, be offset, in whole or in part, by increases in the value of
securities or other assets held by the Fund or decreases in the prices of
securities or other assets the Fund intends to acquire. Where the Fund
enters into such transactions for other than hedging purposes, the margin
requirements associated with such transactions could expose the Fund to
greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Fund enters into
transactions in exchange-traded futures or options, it is exposed to the
risk of the potential bankruptcy of the relevant exchange clearinghouse or
the broker through which the Fund has effected the transaction. In that
event, the Fund might not be able to recover amounts deposited as margin, or
amounts owed to the Fund in connection with its transactions, for an
indefinite period of time, and could sustain losses of a portion or all of
such amounts. Moreover, the performance guarantee of an exchange
clearinghouse generally extends only to its members and the Fund could
sustain losses, notwithstanding such guarantee, in the event of the
bankruptcy of its broker.
TRADING AND POSITION LIMITS: The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument
which may be held by a single investor, whether acting alone or in concert
with others (regardless of whether such contracts are held on the same or
different exchanges or held or written in one or more accounts or through
one or more brokers). Further, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control
in a particular futures or option contract. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Adviser does not believe that
these trading and position limits will have any adverse impact on the
strategies for hedging the portfolios of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS: The amount of risk the Fund assumes
when it purchases an Option on a Futures Contract is the premium paid for
the option, plus related transaction costs. In order to profit from an
option purchased, however, it may be necessary to exercise the option and to
liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an
Option on a Futures Contract is subject to the risks of commodity futures
trading, including the requirement of initial and variation margin payments,
as well as the additional risk that movements in the price of the option may
not correlate with movements in the price of the underlying security, index,
currency or Futures Contract.
RISKS OF TRANSACTIONS IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are
subject to all of the correlation, liquidity and other risks outlined above.
In addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and
could have a substantial adverse effect on the value of positions held by
the Fund. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives are not traded on contract markets regulated by the CFTC or
(with the exception of certain foreign currency options) the SEC. To the
contrary, such instruments are traded through financial institutions acting
as market-makers, although foreign currency options are also traded on
certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation.
In an over-the-counter trading environment, many of the protections afforded
to exchange participants will not be available. For example, there are no
daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the premium plus
related transaction costs, this entire amount could be lost. Moreover, the
option writer and a trader of Forward Contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of
the Fund's position unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with the
Fund. Where no such counterparty is available, it will not be possible to
enter into a desired transaction. There also may be no liquid secondary
market in the trading of over-the-counter contracts, and the Fund could be
required to retain options purchased or written, or Forward Contracts or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit the Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order to
assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC- regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/00
<PAGE>
PROSPECTUS
AUGUST 1, 2000
MFS(R) MASSACHUSETTS HIGH INCOME TAX FREE FUND
MFS(R) NEW YORK HIGH INCOME TAX FREE FUND
CLASS A SHARES
CLASS B SHARES
--------------------------------------------------------------------------------
This Prospectus describes two funds:
o MFS Massachusetts High Income Tax Free Fund, which seeks high current income
exempt from federal income tax and Massachusetts personal income tax.
o MFS New York High Income Tax Free Fund, which seeks high current income
exempt from federal and New York State and City income taxes.
THIS PROSPECTUS DESCRIBES TWO CLASSES OF SHARES FOR EACH FUND. CURRENTLY, ONLY
CLASS A SHARES ARE AVAILABLE FOR PURCHASE. THESE CLASS A SHARES ARE ONLY
AVAILABLE FOR PURCHASE AT NET ASSET VALUE AND MAY ONLY BE SOLD TO RESIDENTS OF
MASSACHUSETTS OR NEW YORK (AS APPLICABLE) WHO ARE:
o EMPLOYEES (OR CERTAIN RELATIVES OF EMPLOYEES) OF MASSACHUSETTS FINANCIAL
SERVICES COMPANY (REFERRED TO AS MFS OR THE ADVISER) AND ITS AFFILIATES; OR
o MEMBERS OF THE GOVERNING BOARDS OF THE VARIOUS FUNDS SPONSORED BY MFS.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE FUNDS' SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS
YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
TABLE OF CONTENTS
Page
I Risk Return Summary ............................ 1
II Expense Summary ................................ 5
III Certain Investment Strategies and Risks ........ 9
IV Management of the Funds ........................ 10
V Description of Share Classes ................... 11
VI How to Purchase, Exchange and Redeem Shares .... 15
VII Investor Services and Programs ................. 18
VIII Other Information .............................. 20
Appendix A -- Investment Techniques and
Practices ...................................... A-1
Appendix B -- Tax Equivalent Yield Tables ...... B-1
<PAGE>
----------------------
I RISK RETURN SUMMARY
----------------------
o INVESTMENT OBJECTIVES
o MFS MASSACHUSETTS HIGH INCOME TAX FREE FUND - The investment objective of
the MFS Massachusetts High Income Tax Free Fund (referred to as the
Massachusetts fund) is to provide high current income exempt from federal
income tax and Massachusetts personal income tax.
o MFS NEW YORK HIGH INCOME TAX FREE FUND - The investment objective of the
MFS New York High Income Tax Free Fund (referred to as the New York fund)
is to provide high current income exempt from federal income tax and New
York State and City income taxes.
Each fund's objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT STRATEGIES
o MASSACHUSETTS FUND - The Massachusetts fund invests, under normal market
conditions, at least 80% of its net assets in municipal securities and
participation interests in municipal securities issued by banks, the
interest on which is exempt from federal income tax and Massachusetts
personal income tax.
o NEW YORK FUND - The New York fund invests, under normal market
conditions, at least 80% of its net assets in municipal securities and
participation interests in municipal securities issued by banks, the
interest on which is exempt from federal income tax and New York State
and City income taxes.
o PRINCIPAL INVESTMENT STRATEGIES COMMON TO BOTH FUNDS
As described above, each of the funds invest in municipal securities and
participation interests in municipal securities issued by banks. Municipal
securities are bonds or other debt obligations of a U.S. state or
political subdivision, such as a county, city, town, village, or
authority. Participation interests in municipal securities are interests
in holdings of municipal obligations backed by a letter of credit or
guarantee from the issuing bank.
While each of the funds may invest in securities with any credit rating,
municipal securities offering the high current income sought by each of
the funds generally are speculative and lower rated bonds. Speculative
securities are securities rated in the lowest investment grade category by
credit rating agencies or which are unrated and considered by the fund's
investment adviser, Massachusetts Financial Services Company (referred to
as MFS or the adviser), to be comparable to speculative securities. Lower
rated bonds (i.e. bonds rated below investment grade), commonly known as
junk bonds, are bonds assigned lower credit ratings by credit rating
agencies or are unrated and considered by MFS to be comparable to lower
rated bonds.
Although each fund seeks to invest in municipal securities that provide
income exempt from federal income tax and state (and, in the case of the
New York fund, New York City) personal income tax, the interest income on
certain of these municipal securities may be subject to an alternative
minimum tax. For a comparison of yields on municipal bonds and taxable
securities, see the Tax Equivalent Yield Tables attached as Appendix B to
this Prospectus.
While each fund seeks to invest all its assets in the types of
securities described above, market conditions may from time to time limit
the availability of such obligations. During periods when a fund is unable
to invest as described above, the fund will seek to invest its assets in
municipal securities that are exempt from federal income taxes but are
subject to its state (and city, if applicable) personal income taxes.
In selecting fixed income investments for each fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager(s) of MFS' fixed income
oriented funds (including each of the funds) as a tool in making or
adjusting a fund's asset allocations to various segments of the fixed
income markets. In assessing the credit quality of fixed income
securities, MFS does not rely solely on the credit ratings assigned by
credit rating agencies, but rather performs its own independent credit
analysis.
Each fund is a non-diversified mutual fund. This means that each fund
may invest a relatively high percentage of its assets in a small number of
issuers.
o PRINCIPAL RISKS OF AN INVESTMENT
The principal risks of investing in each fund and the circumstances
reasonably likely to cause the value of your investment in a fund to
decline are described below. The share price of a fund generally changes
daily based on market conditions and other factors. Please note that there
are many circumstances which could cause the value of your investment in a
fund to decline, and which could prevent the fund from achieving its
objective, that are not described here.
The principal risks of investing in each of the funds are:
o Municipal Securities Risk
> Interest Rate Risk: As with any fixed income security, the prices of
municipal securities in each fund's portfolio will generally fall when
interest rates rise. Conversely, when interest rates fall, the prices
of municipal securities in a fund's portfolio will generally rise.
> Maturity Risk: Interest rate risk will generally affect the price of a
municipal security more if the security has a longer maturity.
Municipal securities with longer maturities will therefore be more
volatile than other fixed income securities with shorter maturities.
Conversely, municipal securities with shorter maturities will be less
volatile but generally provide lower returns than municipal securities
with longer maturities. The average maturity of each fund's municipal
security investments will affect the volatility of the fund's share
price.
> Credit Risk: Credit risk is the risk that the issuer of a municipal
security will not be able to pay principal and interest when due.
Rating agencies assign credit ratings to certain municipal securities
to indicate their credit risk. The price of a municipal security will
generally fall if the issuer defaults on its obligation to pay
principal or interest, the rating agencies downgrade the issuer's
credit rating or other news affects the market's perception of the
issuer's credit risk. A participation interest is also subject to the
risk of default by the issuing bank.
> General Obligations and Revenue Obligations Risk: Each fund may invest
in municipal bonds that are general obligations backed by the full
faith and credit of the municipal issuer. Each fund may also invest in
municipal bonds called revenue obligations which are subject to a
higher degree of credit risk than general obligations. Revenue
obligations finance specific projects (such as building a hospital or
toll roads, water and sewer projects, etc.), and are not backed by the
full faith and credit of the municipal issuer. Each fund may invest in
excess of 25% of its assets in revenue bonds relating to any one
specific industry (i.e., housing, healthcare, water and sewer, etc.).
Because revenue obligations are repaid from the revenues from a
facility, they are subject to a risk of default in payments of
principal and interest if the facility does not generate enough
income.
> Municipal Lease Obligations Risk: Each fund's investments in municipal
securities may include municipal lease obligations. Municipal lease
obligations are undivided interests issued by a state or municipality
in a lease or installment purchase which generally relates to
equipment or facilities. When a fund invests in municipal lease
obligations, it may have limited recourse in the event of default or
termination. In some cases, payments under municipal leases do not
have to be made unless the appropriate legislative body specifically
approves money for that purpose.
o Concentration Risk
> Massachusetts Concentration Risk: Because the Massachusetts fund
concentrates in securities of municipal issuers in Massachusetts,
certain factors with respect to this state will disproportionately
affect the value of the fund's investments, including local economic
factors or policy changes, erosion of the state's tax base, or changes
in the credit ratings assigned to the state's municipal issuers. Thus,
the fund's performance will be closely tied to the economic and
political conditions in Massachusetts and will be more volatile than
the performance of a more geographically diversified fund. The
Massachusetts economy tends to be particularly susceptible to
downturns in the U.S. economy, experiencing financial difficulty and
high unemployment levels during these downturns. The Massachusetts
economy is particularly susceptible to trends in the high-technology,
financial services, biotechnology and health care industries.
> New York Concentration Risk: Because the New York fund invests
primarily in the securities of New York issuers, its performance may
be disproportionately affected by local, state and regional factors.
These may include state or local legislation or policy changes,
economics, erosion of the city's or state's tax base, natural
disasters, and the possibility of credit problems. New York City and
certain localities outside New York City have experienced financial
problems. These problems may affect the fiscal health of New York
State. Thus, the fund's performance will be closely tied to the
economic and political conditions in the City and State of New York
and will be more volatile than the performance of a more
geographically diversified fund.
o Speculative Municipal Securities Risk: Speculative bonds are subject to a
higher risk that the issuer will default on payments of principal and
interest than higher rated investment grade bonds. Although the issuer's
ability to make interest and principal payments appears adequate, an
adverse change in economic conditions or other circumstances is more
likely to cause a default by the issuer of a speculative bond than the
issuer of a higher rated investment grade bond.
o Liquidity Risk: The fixed income securities purchased by each fund may be
traded in the over-the-counter market rather than on an organized
exchange and are subject to liquidity risk. This means that they may be
harder to purchase or sell at a fair price. The inability to purchase or
sell these fixed income securities at a fair price could have a negative
impact on a fund's performance.
o Lower Rated Municipal Securities Risk
> Higher Credit Risk: Junk bonds are subject to a substantially higher
degree of credit risk than higher rated bonds. During recessions, a
high percentage of issuers of junk bonds may default on payments of
principal and interest. The price of a junk bond may therefore
fluctuate drastically due to bad news about the issuer or the economy
in general.
> Higher Liquidity Risk: During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will
be harder to value or sell at a fair price.
o Non-Diversified Status Risk: Because a fund may invest its assets in a
small number of issuers, the fund is more susceptible to any single
economic, political or regulatory event affecting those issuers than is a
diversified fund.
o As with any mutual fund, you could lose money on your investment in a
fund.
An investment in a fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table are not included because the funds
have not had a full calendar year of investment operations.
<PAGE>
------------------
II EXPENSE SUMMARY
------------------
o EXPENSE TABLES
These tables describe the fees and expenses that you may pay when you buy,
redeem and hold shares of one of the funds.
o MFS MASSACHUSETTS HIGH INCOME TAX FREE FUND
SHAREHOLDER FEES (fees paid directly from your investment):
..........................................................................
CLASS A CLASS B
Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price) ......................... 4.75% 0.00%
Maximum Deferred Sales Charge (Load) (as a percentage
of original purchase price or redemption proceeds,
whichever is less) ....................................See Below(1) 4.00%
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets):
..........................................................................
Management Fees ....................................... 0.40% 0.40%
Distribution and Service (12b-1) Fees(2) .............. 0.00% 1.00%
Other Expenses(3) ..................................... 2.20% 2.20%
----- -----
Total Annual Fund Operating Expenses .................. 2.60% 3.60%
Fee Waiver and Expense Reimbursement(4) ............... (2.57)% (2.57)%
Net Expenses .......................................... 0.03% 1.03%
------
(1) An initial sales charge will not be deducted from your purchase if you
buy $1 million or more of class A shares, or if you are investing
through a retirement plan and your class A purchase meets certain
requirements. However, in this case, a contingent deferred sales
charge (referred to as a CDSC) of 1% may be deducted from your
redemption proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it
to pay marketing and other fees to support the sale and distribution
of class A and B shares and the services provided to you by your
financial adviser (referred to as distribution and service fees).
(3) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent and may enter into
other similar arrangements and directed brokerage arrangements (which
would also have the effect of reducing the fund's expenses). Any such
fee reductions are not reflected in the table. Had these fee
reductions been taken into account, "Net Expenses" would be 0.00% and
1.00% for class A and class B, respectively.
(4) MFS has contractually agreed to waive its management fee and to bear
the fund's expenses such that "Other Expenses" do not exceed 0.00%
annually. These contractual arrangements will continue until at least
August 1, 2001, unless modified with the consent of the board of
trustees which oversees the fund.
o EXAMPLE OF EXPENSES
This example is intended to help you compare the cost of investing in the
Massachusetts fund with the cost of investing in other mutual funds.
The example assumes that:
o You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 6
---------------------------------------------------------------------------
MFS MASSACHUSETTS HIGH INCOME TAX FREE FUND
Class A shares $478 $1,010 $1,569 $3,086
Class B shares(1)
Assuming redemption at end of
period $505 $1,164 $1,845 $3,467
Assuming no redemption $105 $ 864 $1,645 $3,467
------
(1) Class B shares convert to Class A shares approximately eight years
after purchase; therefore, years nine and ten reflect Class A
expenses.
<PAGE>
o MFS NEW YORK HIGH INCOME TAX FREE FUND
SHAREHOLDER FEES (fees paid directly from your investment):
..........................................................................
CLASS A CLASS B
Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price) ......................... 4.75% 0.00%
Maximum Deferred Sales Charge (Load) (as a percentage
of original purchase price or redemption proceeds,
whichever is less) ....................................See Below(1) 4.00%
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets):
. ..........................................................................
Management Fees ....................................... 0.40% 0.40%
Distribution and Service (12b-1) Fees(2) .............. 0.00% 1.00%
Other Expenses(3) ..................................... 6.15% 6.15%
----- -----
Total Annual Fund Operating Expenses .................. 6.55% 7.55%
Fee Waiver and Expense Reimbursement(4) ............... (6.51)% (6.51)%
Net Expenses .......................................... 0.04% 1.04%
------
(1) An initial sales charge will not be deducted from your purchase if you
buy $1 million or more of class A shares, or if you are investing
through a retirement plan and your class A purchase meets certain
requirements. However, in this case, a contingent deferred sales
charge (referred to as a CDSC) of 1% may be deducted from your
redemption proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it
to pay marketing and other fees to support the sale and distribution
of class A and B shares and the services provided to you by your
financial adviser (referred to as distribution and service fees).
(3) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent and may enter into
other similar arrangements and directed brokerage arrangements (which
would also have the effect of reducing the fund's expenses). Any such
fee reductions are not reflected in the table. Had these fee
reductions been taken into account, "Net Expenses" would be 0.00% and
1.00% for Class A and Class B, respectively.
(4) MFS has contractually agreed to waive its management fee and to bear
the fund's expenses such that "Other Expenses" do not exceed 0.00%
annually. These contractual arrangements will continue until at least
August 1, 2001, unless modified with the consent of the board of
trustees which oversees the fund.
o EXAMPLE OF EXPENSES
This example is intended to help you compare the cost of investing in the
New York fund with the cost of investing in other mutual funds.
The example assumes that:
o You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
--------------------------------------------------------------------------
MFS NEW YORK HIGH INCOME TAX FREE FUND
Class A shares $479 $1,768 $3,018 $5,977
Class B shares(1)
Assuming redemption at end of
period $506 $1,936 $3,289 $6,252
Assuming no redemption $106 $1,636 $3,089 $6,252
------
(1) Class B shares convert to Class A shares approximately eight years
after purchase; therefore, years nine and ten reflect Class A
expenses.
<PAGE>
-------------------------------------------
III CERTAIN INVESTMENT STRATEGIES AND RISKS
-------------------------------------------
o FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISK
Each fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which a fund may
engage, including the principal investment techniques and practices
discussed above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, in the funds' Statement of
Additional Information (referred to as the SAI), which you may obtain by
contacting MFS Service Center, Inc. (see back cover for address and phone
number).
o TEMPORARY DEFENSIVE POLICIES
In addition, each fund may depart from its principal investment strategies
by temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While a fund invests defensively,
it may not be able to pursue its investment objective. When such
conditions exist each fund may invest up to 50% of its total assets in the
following short-term investments:
o U.S. government securities; and
o commercial paper, obligations of banks (including certificates of
deposit, bankers' acceptances and repurchase agreements) with $1 billion
of assets and cash.
Interest income from these short-term investments will be taxable to
shareholders as ordinary income. A fund's defensive investment position may
not be effective in protecting its value.
o ACTIVE OR FREQUENT TRADING
Each fund may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to a fund
with less active trading policies, which would increase your tax
liability. Frequent trading also increases transaction costs, which could
detract from a fund's performance.
<PAGE>
-------------------------
IV MANAGEMENT OF THE FUND
-------------------------
o INVESTMENT ADVISER
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is each fund's investment adviser. MFS is America's oldest mutual
fund organization. MFS and its predecessor organizations have a history of
money management dating from 1924 and the founding of the first mutual
fund, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $151.2 billion on behalf of
approximately 5.1 million investor accounts as of June 30, 2000. MFS is
located at 500 Boylston Street, Boston, Massachusetts 02116.
MFS provides investment management and related administrative services
and facilities to each fund, including portfolio management and trade
execution. For these services, each fund pays MFS an annual management fee
at the rate of 0.40% of such fund's average daily net assets on an
annualized basis for the fund's then-current fiscal year end. MFS has
agreed to waive its right to receive this fee as described under "Expense
Summary."
o PORTFOLIO MANAGER
The portfolio manager for each fund, since its inception, is Michael
Roberge, a Senior Vice President of the Adviser. Mr. Roberge has been
employed in the investment management area of MFS since 1996. Prior to
1996, Mr. Roberge worked as a municipal credit analyst and portfolio
manager with Colonial Investment Management.
o ADMINISTRATOR
MFS provides each fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by each fund for a portion of the costs it incurs in providing
these services.
o DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of each fund.
o SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for each fund,
for which it receives compensation from each fund.
<PAGE>
------------------------------
V DESCRIPTION OF SHARE CLASSES
------------------------------
Each fund offers class A and class B shares through this prospectus.
Currently, only Class A shares of each fund are available for sale.
o SALES CHARGES
You may be subject to an initial sales charge when you purchase, or a CDSC
when you redeem, class A or B shares. These sales charges are described
below. In certain circumstances, these sales charges are waived. These
circumstances are described in the SAI. Special considerations concerning
the calculation of the CDSC that apply to each of these classes of shares
are described below under the heading "Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other concessions
which are paid from various sources, such as from the sales charges and
distribution and service fees, or from MFS or MFD. These commissions and
concessions are described in the SAI.
o CLASS A SHARES
You may purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), but in some cases you may
purchase class A shares without an initial sales charge but subject to a
1% CDSC upon redemption within one year. Class A shares have annual
distribution and service fees up to a maximum of 0.35% of net assets
annually.
PURCHASES SUBJECT TO AN INITIAL SALES CHARGE. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon
the amount you invest, as follows:
SALES CHARGE* AS PERCENTAGE OF:
-------------------------------
Offering Net Amount
Amount of Purchase Price Invested
Less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 2.95 3.04
$500,000 but less than $1,000,000 2.20 2.25
$1,000,000 or more None** None**
------
* Because of rounding in the calculation of offering price, actual sales
charges you pay may be more or less than those calculated using these
percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
PURCHASES SUBJECT TO A CDSC (BUT NOT AN INITIAL SALES CHARGE). You pay no
initial sales charge when you invest $1 million or more in class A shares.
However, a CDSC of 1% will be deducted from your redemption proceeds if
you redeem within 12 months of your purchase. In addition, purchases made
under the following four categories are not subject to an initial sales
charge. However, a CDSC of 1% will be deducted from redemption proceeds if
the redemption is made within 12 months of purchase:
o Investments in class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended (referred to
as ERISA), if, prior to July 1, 1996
> the plan had established an account with MFSC; and
> the sponsoring organization had demonstrated to the satisfaction of
MFD that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan of class A shares of
the MFS Family of Funds (the MFS funds) would be in the amount
of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the retirement plan and/or sponsoring organization participates in the
MFS Corporate Plan Services 401(k) Plan or any similar recordkeeping
system made available by MFSC (referred to as the MFS participant
recordkeeping system);
> the plan establishes an account with MFSC on or after July 1, 1996;
> the total purchases by the retirement plan (or by multiple plans
maintained by the same plan sponsor) of class A shares of the MFS
Funds will be in the amount of at least $500,000 within a reasonable
period of time, as determined by MFD in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the plan establishes an account with MFSC on or after July 1, 1996;
and
> the plan has, at the time of purchase, either alone or in aggregate
with other plans maintained by the same plan sponsor, a market value
of $500,000 or more invested in shares of any class or classes of the
MFS Funds.
THE RETIREMENT PLANS WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE
PLANS OR THEIR SPONSORING ORGANIZATION INFORM MFSC PRIOR TO THE
PURCHASES THAT THE PLANS HAVE A MARKET VALUE OF $500,000 OR MORE
INVESTED IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS; MFSC HAS
NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH PLANS QUALIFY
UNDER THIS CATEGORY; AND
o Investments in class A shares by certain retirement plans subject to
ERISA, if
> the plan established an account with MFSC between July 1, 1997 and
December 31, 1999;
> the plan records are maintained on a pooled basis by MFSC; and
> the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
o CLASS B SHARES
You may purchase class B shares at net asset value without an initial
sales charge, but if you redeem your shares within the first six years you
may be subject to a CDSC (declining from 4.00% during the first year to 0%
after six years). Class B shares have annual distribution and service fees
up to a maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
-------------------------------------------------------------------------------
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
If you hold class B shares for approximately eight years, they will
convert to class A shares of that fund. All class B shares you purchased
through the reinvestment of dividends and distributions will be held in a
separate sub-account. Each time any class B shares in your account convert
to class A shares, a proportionate number of the class B shares in the
sub-account will also convert to class A shares.
o CALCULATION OF CDSC
As discussed above, certain investments in class A and B shares will be
subject to a CDSC. Three different aging schedules apply to the
calculation of the CDSC:
o Purchases of class A shares made on any day during a calendar month will
age one month on the last day of the month, and each subsequent month.
o Purchases of class B shares on or after January 1, 1993, made on any day
during a calendar month, will age one year at the close of business on
the last day of that month in the following calendar year, and each
subsequent year.
o Purchases of class B shares prior to January 1, 1993, made on any day
during a calendar year, will age one year at the close of business on
December 31 of that year, and each subsequent year.
No CDSC is assessed on the value of your account represented by
appreciation or additional shares acquired through the automatic
reinvestment of dividends or capital gain distributions. Therefore, when
you redeem your shares, only the value of the shares in excess of these
amounts (i.e., your direct investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being
imposed at the lowest possible rate, which means that the CDSC will be
applied against the lesser of your direct investment or the total cost of
your shares. The applicability of a CDSC will not be affected by exchanges
or transfers of registration, except as described in the SAI.
o DISTRIBUTION AND SERVICE FEES
Each fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class A
and B shares and the services provided to you by your financial adviser.
These annual distribution and service fees may equal up to 0.35% for class
A shares (a 0.10% distribution fee and a 0.25% service fee) and 1.00% for
class B shares (a 0.75% distribution fee and a 0.25% service fee), and are
paid out of the assets of these classes. Over time, these fees will
increase the cost of your shares and may cost you more than paying other
types of sales charges. The 0.35% class A distribution and service fees
have not been implemented for either fund and may be implemented on such
date as the board of trustees which oversees the funds may determine.
<PAGE>
----------------------------------------------
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
----------------------------------------------
You may purchase, exchange and redeem class A and B shares of a fund in
the manner described below. In addition, you may be eligible to
participate in certain investor services and programs to purchase,
exchange and redeem these classes of shares, which are described in the
next section under the caption "Investor Services and Programs."
o HOW TO PURCHASE SHARES
INITIAL PURCHASE. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is $1,000.
However, in the following circumstances the minimum initial investment is
only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
> tax-deferred retirement programs (other than IRAs) where investments
are made by means of group remittal statements; or
> employer sponsored investment programs.
The minimum initial investment for IRAs is $250 per account.
ADDING TO YOUR ACCOUNT. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first for
instructions); or
o authorize transfers by phone between your bank account and your MFS
account (the maximum purchase amount for this method is $100,000). You
must elect this privilege on your account application if you wish to use
it.
o HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of certain other
MFS funds at net asset value by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC will not be charged a
CDSC in an exchange. However, when you redeem the shares acquired through
the exchange, the shares you redeem may be subject to a CDSC, depending
upon when you originally purchased the shares you exchanged. For purposes
of computing the CDSC, the length of time you have owned your shares will
be measured from the date of original purchase and will not be affected by
any exchange.
Sales charges may apply to exchanges made from the MFS money market
funds. Certain qualified retirement plans may make exchanges between the
MFS funds and the MFS Fixed Fund, a bank collective investment fund, and
sales charges may also apply to these exchanges. Call MFSC for information
concerning these sales charges.
Exchanges may be subject to certain limitations and are subject to the
MFS funds' policies concerning excessive trading practices, which are
policies designed to protect the funds and their shareholders from the
harmful effect of frequent exchanges. These limitations and market timing
policies are described below under the captions "Right to Reject or
Restrict Purchase and Exchange Orders" and "Excessive Trading Practices."
You should read the prospectus of the MFS fund into which you are
exchanging and consider the differences in objectives, policies and rules
before making any exchange.
o HOW TO REDEEM SHARES
You may redeem your shares either by having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature Guarantee/
Additional Documentation" below, or contact MFSC for details (see back
cover page for address and phone number).
Under unusual circumstances such as when the New York Stock Exchange is
closed, trading on the Exchange is restricted or if there is an emergency,
the fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, the fund may delay the payment of the
redemption proceeds until the check has cleared, which may take up to 15
days from the purchase date.
REDEEMING DIRECTLY THROUGH MFSC.
o BY TELEPHONE. You can call MFSC to have shares redeemed from your account
and the proceeds wired or mailed (depending on the amount redeemed)
directly to a pre- designated bank account. MFSC will request personal or
other information from you and will generally record the calls. MFSC will
be responsible for losses that result from unauthorized telephone
transactions if it does not follow reasonable procedures designed to
verify your identity. You must elect this privilege on your account
application if you wish to use it.
o BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the
name of your fund, your account number, and the number of shares or
dollar amount to be sold.
REDEEMING THROUGH YOUR FINANCIAL ADVISER. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser
will be responsible for furnishing all necessary documents to MFSC and may
charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. In order to protect against
fraud, each fund requires that your signature be guaranteed in order to
redeem your shares. Your signature may be guaranteed by an eligible bank,
broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency, or savings association. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
o OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. Purchases and
exchanges should be made for investment purposes only. The MFS funds each
reserve the right to reject or restrict any specific purchase or exchange
request. Because an exchange request involves both a request to redeem
shares of one fund and to purchase shares of another fund, the MFS funds
consider the underlying redemption and purchase requests conditioned upon
the acceptance of each of these underlying requests. Therefore, in the
event that the MFS funds reject an exchange request, neither the
redemption nor the purchase side of the exchange will be processed. When a
fund determines that the level of exchanges on any day may be harmful to
its remaining shareholders, the fund may delay the payment of exchange
proceeds for up to seven days to permit cash to be raised through the
orderly liquidation of its portfolio securities to pay the redemption
proceeds. In this case, the purchase side of the exchange will be delayed
until the exchange proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm
fund performance. As noted above, the MFS funds reserve the right to
reject or restrict any purchase order (including exchanges) from any
investor. To minimize harm to the MFS funds and their shareholders, the
MFS funds will exercise these rights if an investor has a history of
excessive trading or if an investor's trading, in the judgment of the MFS
funds, has been or may be disruptive to a fund. In making this judgment,
the MFS funds may consider trading done in multiple accounts under common
ownership or control.
REINSTATEMENT PRIVILEGE. After you have redeemed shares, you have a one-
time right to reinvest the proceeds within 90 days of the redemption at
the current net asset value (without an initial sales charge). If the
redemption involved a CDSC, your account will be credited with the
appropriate amount of the CDSC paid; however, your new shares will be
subject to a CDSC which will be determined from the date you originally
purchased the shares redeemed. This privilege applies to shares of the MFS
money market funds only under certain circumstances.
IN-KIND DISTRIBUTIONS. The MFS funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that a fund makes an in-kind
distribution, you could incur the brokerage and transaction charges when
converting the securities to cash. None of the funds expects to make in-
kind distributions, and if a fund does, it will pay, during any 90-day
period, your redemption proceeds in cash up to either $250,000 or 1% of
the fund's net assets, whichever is less.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Because it is costly to maintain
small accounts, the MFS funds have generally reserved the right to
automatically redeem shares and close your account when it contains less
than $500 due to your redemptions or exchanges. Before making this
automatic redemption, you will be notified and given 60 days to make
additional investments to avoid having your shares redeemed.
<PAGE>
----------------------------------
VII INVESTOR SERVICES AND PROGRAMS
----------------------------------
As a shareholder of a fund, you have available to you a number of services
and investment programs. Some of these services and programs may not be
available to you if your shares are held in the name of your financial
adviser or if your investment in a fund is made through a retirement plan.
o DISTRIBUTION OPTIONS
The following distribution options are generally available to all accounts
and you may change your distribution option as often as you desire by
notifying MFSC:
o Dividend and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
o Dividend distributions in cash; capital gain distributions reinvested in
additional shares; or
o Dividend and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value
as of the close of business on the record date. Distributions in amounts
less than $10 will automatically be reinvested in additional shares of
that fund. If you have elected to receive distributions in cash, and the
postal or other delivery service is unable to deliver checks to your
address of record, or you do not respond to mailings from MFSC with regard
to uncashed distribution checks, your distribution option will
automatically be converted to having all distributions reinvested in
additional shares. Your request to change a distribution option must be
received by MFSC by the record date for a distribution in order to be
effective for that distribution. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
o PURCHASE AND REDEMPTION PROGRAMS
For your convenience, the following purchase and redemption programs are
made available to you with respect to class A and B shares, without extra
charge:
AUTOMATIC INVESTMENT PLAN. You can make cash investments of $50 or more
through your checking account or savings account on any day of the month.
If you do not specify a date, the investment will automatically occur on
the first business day of the month.
AUTOMATIC EXCHANGE PLAN. If you have an account balance of at least $5,000
in any MFS fund, you may participate in the automatic exchange plan, a
dollar-cost averaging program. This plan permits you to make automatic
monthly or quarterly exchanges from your account in an MFS fund for shares
of the same class of shares of other MFS funds. You may make exchanges of
at least $50 to up to six different funds under this plan. Exchanges will
generally be made at net asset value without any sales charges. If you
exchange shares out of the MFS Money Market Fund or MFS Government Money
Market Fund, or if you exchange class A shares out of the MFS Cash Reserve
Fund, into class A shares of any other MFS fund, you will pay the initial
sales charge if you have not already paid this charge on these shares.
REINVEST WITHOUT A SALES CHARGE. You can reinvest dividend and capital
gain distributions into your account without a sales charge to add to your
investment easily and automatically.
DISTRIBUTION INVESTMENT PROGRAM. You may purchase shares of any MFS fund
without paying an initial sales charge or a CDSC upon redemption by
automatically reinvesting a minimum of $50 of dividend and capital gain
distributions from the same class of another MFS fund.
LETTER OF INTENT (LOI). If you intend to invest $100,000 or more in the
MFS funds (including the MFS Fixed Fund) within 13 months, you may buy
class A shares of the funds at the reduced sales charge as though the
total amount were invested in class A shares in one lump sum. If you
intend to invest $1 million or more under this program, the time period is
extended to 36 months. If the intended purchases are not completed within
the time period, shares will automatically be redeemed from a special
escrow account established with a portion of your investment at the time
of purchase to cover the higher sales charge you would have paid had you
not purchased your shares through this program.
RIGHT OF ACCUMULATION. You will qualify for a lower sales charge on your
purchases of class A shares when your new investment in class A shares,
together with the current (offering price) value of all your holdings in
the MFS funds (including the MFS Fixed Fund), reaches a reduced sales
charge level.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to automatically receive (or
designate someone else to receive) regular periodic payments of at least
$100. Each payment under this systematic withdrawal is funded through the
redemption of your fund shares. For class B shares, you can receive up to
10% (15% for certain IRA distributions) of the value of your account
through these payments in any one year (measured at the time you establish
this plan). You will incur no CDSC on class B shares redeemed under this
plan. For class A shares, there is no similar percentage limitation;
however, you may incur the CDSC (if applicable) when class A shares are
redeemed under this plan.
FREE CHECKWRITING. You may redeem your class A shares by writing checks
against your account. Checks must be for a least $500 and investments made
by check must have been in your account for at least 15 days before you
can write checks against them. There is no charge for this service. To
authorize your account for checkwriting, contact MFSC (see back cover page
for address and phone number).
Shares in your account equal in value to the amount of the check plus
the applicable CDSC (if any) and any income tax required to be withheld
(if any) are redeemed to cover the amount of the check. If your account
value is not great enough to cover these amounts, your check will be
dishonored.
<PAGE>
----------------------
VIII OTHER INFORMATION
----------------------
o PRICING OF FUND SHARES
The price of each class of each fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange (the
"NYSE") is open for trading (generally,
4:00 p.m., Eastern time) (referred to as the valuation time). The NYSE is
closed on most national holidays and Good Friday. To determine net asset
value, each fund values its assets at current market values, or at fair
value as determined by the Adviser under the direction of the Board of
Trustees that oversees a fund if current market values are unavailable.
Fair value pricing may be used by the fund when current market values are
unavailable or when an event occurs after the close of the exchange on
which the fund's portfolio securities are principally traded that is
likely to have changed the value of the securities. The use of fair value
pricing by a fund may cause the net asset value of its shares to differ
significantly from the net asset value that would be calculated using
current market values.
You will receive the net asset value next calculated, after the
deduction of applicable sales charges and any required tax withholding, if
your order is complete (has all required information) and MFSC receives
your order by:
o the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) received your order
by the valuation time.
o DISTRIBUTIONS
Each fund intends to declare daily as dividends substantially all of its
net income (excluding any realized net capital gains) and to pay these
dividends to shareholders at least monthly. Any realized net capital gains
are distributed at least annually.
o FEDERAL TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your
tax adviser regarding the effect that an investment in a fund may have on
your particular tax situation.
TAXABILITY OF DISTRIBUTIONS. As long as a fund qualifies for treatment as
a regulated investment company (which each fund has in the past and
intends to do in the future), it pays no federal income tax on the
earnings it distributes to shareholders.
You may receive three different types of distributions from a fund:
exempt-interest dividends, ordinary dividends and capital gain dividends.
Most distributions will be exempt-interest dividends, which are exempt
from federal income tax. Ordinary dividends are normally subject to
federal income tax at ordinary income tax rates. Distributions designated
as capital gain dividends are taxable as long-term capital gains. Any
taxes that you pay on a distribution will be the same whether you take the
distribution in cash or have it reinvested in additional shares of the
fund. Some dividends paid in January may be taxable as if they had been
paid the previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes.
Each Fund's distributions of net capital gains or net short-term capital
gains will reduce the fund's net asset value per share. Therefore, if you
buy shares shortly before the record date of such a distribution, you may
pay the full price for the shares and then effectively receive a portion
of the purchase price back as a taxable distribution.
If you are neither a citizen nor a resident of the U.S., each fund will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able
to arrange for a lower withholding rate under an applicable tax treaty if
you supply the appropriate documentation required by the fund. Each fund
is also required in certain circumstances to apply backup withholding at
the rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a
resident of the U.S.) who does not furnish to that fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments
that have been subject to 30% withholding. Prospective investors in a Fund
should read that fund's Account Application for additional information
regarding backup withholding of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it
is generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, sell or exchange, you
may have a gain or a loss on the transaction. You are responsible for any
tax liabilities generated by your transaction.
OTHER TAX ISSUES. Exempt-interest dividends that you receive may affect
your alternative minimum tax calculation. Also, if you are receiving
social security or railroad retirement benefits, your exempt-interest
dividends may increase the tax on your benefits. If you borrow money to
purchase or carry shares of a fund, your deduction for interest paid on
those borrowings will be limited.
o STATE TAX CONSIDERATIONS
As long as a fund qualifies for treatment as a regulated investment
company, it will not need to pay Massachusetts income or corporate excise
tax.
Your distributions from a fund, including exempt-interest dividends, will
generally be subject to state income tax if you live in a state other than
the state to which the fund is targeted.
If you redeem, sell or exchange shares of a fund, you will normally need
to take your resulting gain or loss into account in computing your state
income tax.
The following discussion for each fund is very general. You are urged to
consult your tax adviser regarding the effect that an investment in a fund
may have on your particular tax situation.
MASSACHUSETTS FUND: Most of your distributions from the Massachusetts fund
will be exempt from Massachusetts personal income tax. A portion of your
exempt-interest dividends will be subject to Massachusetts tax if the fund
invests in municipal securities of other states. Ordinary dividends that
are attributable to interest on U.S. government securities will be exempt
from Massachusetts personal income tax. A portion of capital gain
dividends may also be exempt depending on the municipal securities in
which the fund invests. You will receive a statement each January or
February showing which distributions are subject to Massachusetts income
tax and which are exempt.
Companies that pay Massachusetts corporate excise tax will generally need
to include all distributions from the fund in calculating the income
measure of the tax. Companies generally will not include distributions in
calculating their sales factors.
If you borrow money to purchase or carry shares of the fund, any deduction
you would normally take for interest paid on those borrowings will be
limited. This is true even for companies that have to pay corporate excise
tax on distributions from the fund.
NEW YORK FUND: Under existing New York laws, you will not be subject to
New York State or New York City personal income taxes on the fund's
dividends to the extent that such dividends qualify as exempt-interest
dividends for federal income tax purposes and represent interest income
attributable to obligations of the State of New York and its political
subdivisions, or certain other obligations the interest on which is exempt
from New York State and New York City personal income taxes, such as, for
example, certain obligations of The Commonwealth of Puerto Rico. To the
extent you receive distributions from the fund that are derived from other
income, including long-term or short-term capital gains, such
distributions will not be exempt from New York State or New York City
personal income tax.
Fund dividends are not excluded from net income in determining New York
State or New York City franchise taxes on corporations or financial
institutions.
Any capital gains or losses you realize upon a redemption, sale or
exchange of your shares in the fund will be required to be taken into
account for New York State personal income tax purposes, if you are a New
York State resident, and for New York City personal income tax purposes,
if you are a resident of New York City.
You should also note that interest you incur to purchase or retain shares
of the fund will not be deductible for New York State or New York City
personal income tax purposes.
o UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of a fund, and which may be managed by the fund's portfolio
manager(s). While each fund may have many similarities to these other
funds, its investment performance will differ from their investment
performance. This is due to a number of differences between the funds,
including differences in sales charges, expense ratios and cash flows.
o PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
Each fund produces financial reports every six months and updates its
prospectus annually. To avoid sending duplicate copies of materials to
households, only one copy of a fund's annual and semiannual report and
prospectus will be mailed to shareholders having the same residential
address on the fund's records. However, any shareholder may contact MFSC
(see back cover for address and phone number) to request that copies of
these reports and prospectuses be sent personally to that shareholder.
<PAGE>
-----------------------
IX FINANCIAL HIGHLIGHTS
-----------------------
The financial highlights table is intended to help you understand a fund's
financial performance since inception. Certain information reflects
financial results for a single fund share. The total returns in the table
represent the rate by which an investor would have earned (or lost) on an
investment in a fund (assuming reinvestment of all distributions). This
information has been audited by each fund's independent auditors, whose
report, together with the fund's financial statements, are included in the
funds' Annual Report to shareholders. The funds' Annual Report is
available upon request by contacting MFS Service Center, Inc. (see back
cover for address and telephone number). These financial statements are
incorporated by reference into the SAI. The funds' independent auditors
are Deloitte & Touche LLP.
<PAGE>
<TABLE>
<CAPTION>
MASSACHUSETTS NEW YORK
HIGH INCOME HIGH INCOME
PERIOD ENDED MARCH 31, 2000* TAX FREE FUND TAX FREE FUND
----------------------------------------------------------------------------------------------------------
CLASS A CLASS A
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $10.00 $10.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.33 $ 0.33
Net realized and unrealized loss on investments (0.20) (0.10)
------ ------
Total from investment operations $ 0.13 $ 0.23
------ ------
Less distributions declared to shareholders -
From net investment income $(0.32) $(0.33)
In excess of net investment income -- $(0.00)+++
------ ------
Net asset value - end of period $ 9.81 $ 9.90
------ ------
Total return(+) 1.42%++ 2.35%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.03%+ 0.04%+
Net investment income 5.27%+ 5.01%+
Portfolio turnover 65% 19%
Net assets at end of period (000 omitted) $6,672 $ 512
(S)The investment adviser voluntarily agreed to maintain the expenses of each Fund at 0.00% of its average
daily net assets. In addition, the investment adviser voluntarily waived its fee for the periods indicated.
To the extent actual expenses were over this limitation and the waiver had not been in place, the net
investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ 0.16 $(0.10)
Ratios (to average net assets):
Expenses## 2.60%+ 6.55%+
Net investment income (loss) 2.70%+ (1.50)%+
* For the period from the commencement of each Fund's investment operations, August 2, 1999, through March 31, 2000.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the
results would have been lower.
</TABLE>
<PAGE>
----------
APPENDIX A
----------
o INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, each fund may engage in the
following principal and non-principal investment techniques and practices.
Investment techniques and practices which are the principal focus of the
funds are described, together with their risks, in the Risk Return Summary
of the prospectus. Both principal and non-principal investment techniques
and practices are described, together with their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
..........................................................................
SYMBOLS x permitted -- not permitted
--------------------------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities x
Corporate Asset-Backed Securities x
Mortgage Pass-Through Securities x
Stripped Mortgage-Backed Securities x
Corporate Securities x
Loans and Other Direct Indebtedness x
Lower Rated Bonds x
Municipal Bonds x
Speculative Bonds x
U.S. Government Securities x
Variable and Floating Rate Obligations x
Zero Coupon Bonds x
Equity Securities x
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities --
Emerging Markets --
Foreign Securities --
Forward Contracts --
Futures Contracts x
Indexed Securities/Structured Products x
Inverse Floating Rate Obligations x
Investment in Other Investment Companies
Open-End Funds x
Closed-End Funds x
Lending of Portfolio Securities x
Leveraging Transactions
Bank Borrowings --
Mortgage "Dollar-Roll" Transactions --
Reverse Repurchase Agreements --
Options
Options on Foreign Currencies --
Options on Futures Contracts x
Options on Securities x
Options on Stock Indices --
Reset Options --
"Yield Curve" Options --
Repurchase Agreements x
Restricted Securities x
Short Sales --
Short Sales Against the Box --
Short Term Instruments x
Swaps and Related Derivative Instruments x
Temporary Borrowings x
Temporary Defensive Positions x
Warrants x
"When-Issued" Securities x
<PAGE>
----------
APPENDIX B
----------
TAX EQUIVALENT YIELD TABLES
(RATES FOR 2000 UNDER FEDERAL AND STATE INCOME TAX LAWS)
The tables below show the approximate taxable bond yields which are equivalent
to tax-exempt bond yields, for the ranges indicated, under federal and,
respectively, Massachusetts and New York personal income tax laws that apply
to 2000. Such yields will differ under the laws applicable to subsequent
years. Separate calculations, showing the applicable taxable income brackets,
are provided for investors who file joint returns and for those investors who
file individual returns. In each table, the effective marginal income tax rate
will be increased if personal exemptions are phased out (for the phase out
period only) and if a portion of itemized deductions are disallowed. This
increase in the marginal rates, if applicable, will cause a corresponding
increase in the equivalent taxable yields.
<TABLE>
<CAPTION>
MASSACHUSETTS -- 2000 TAX YEAR
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* MASSACHUSETTS TAX-EXEMPT YIELD COMBINED
----------------------------------------- INCOME ----------------------------------------------- AVERAGE FED. &
SINGLE JOINT TAX FEDERAL STATE ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 $ 0- 43,850 19.97% 3.75% 5.00% 6.25% 7.50% 8.75% 10.00% 0.15 0.058500 0.1997
$ 26,250- 63,550 $ 43,850-105,950 32.21 4.43 5.90 7.38 8.85 10.33 11.80 0.28 0.058500 0.3221
$ 63,550-132,600 $105,950-161,450 35.04 4.62 6.16 7.70 9.24 10.78 12.32 0.31 0.058500 0.3504
$132,600-288,350 $161,450-288,350 39.74 4.98 6.64 8.30 9.96 11.62 13.28 0.36 0.058500 0.3974
$288,350 & Over $288,350 & Over 43.13 5.28 7.03 8.79 10.55 12.31 14.07 0.396 0.058500 0.4313
* Net amount subject to Federal and Massachusetts personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and Massachusetts rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NEW YORK STATE RESIDENTS (EXCEPT NEW YORK CITY RESIDENTS) -- 2000 TAX YEAR
-----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* TAX-EXEMPT YIELD
--------------------------------------- INCOME ------------------------------------------------- AVERAGE COMBINED
SINGLE JOINT TAX FEDERAL STATE FED. & ST.
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% RATE RATE RATE***
------------------- ------------------ -------- ------------------------------------------------- ------- ---------- --------
NOT NOT
OVER OVER OVER OVER
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 19.54% 3.73% 4.97% 6.21% 7.45% 8.70% 9.94% 0.15 0.053375 0.1954
$ 0- 43,850 19.28 3.72 4.95 6.19 7.43 8.67 9.91 0.15 0.050392 0.1928
$ 26,250- 63,550 $ 43,850-105,950 32.93 4.47 5.96 7.45 8.95 10.44 11.93 0.28 0.068500 0.3293
$ 63,550-132,600 $105,950-161,450 35.73 4.67 6.22 7.78 9.34 10.89 12.45 0.31 0.068500 0.3573
$132,600-288,350 $161,450-288,350 40.38 5.03 6.71 8.39 10.06 11.74 13.42 0.36 0.068500 0.4038
$288,350 & Over $288,350 & Over 43.74 5.33 7.11 8.89 10.66 12.44 14.22 0.396 0.068500 0.4374
* Net amount subject to Federal and New York personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and New York rate assumes itemization of state tax deduction.
</TABLE>
<TABLE>
<CAPTION>
NEW YORK -- NEW YORK CITY RESIDENTS ONLY -- 2000 TAX YEAR
--------------------------------------------------------------------------------------------------
TAXABLE INCOME*
------------------------------------ INCOME TAX-EXEMPT YIELD
SINGLE JOINT TAX -------------------------------------------------
2000 2000 BRACKET** 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%
----------------- ----------------- -------- -------------------------------------------------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 22.40% 3.87% 5.15% 6.44% 7.73% 9.02% 10.31%
$ 0- 43,850 22.15 3.85 5.14 6.42 7.71 8.99 10.28
$ 26,250- 63,550 35.63 4.66 6.21 7.77 9.32 10.87 12.43
$ 43,850-105,950 35.65 4.66 6.22 7.77 9.32 10.88 12.43
$ 63,550-132,600 38.37 4.87 6.49 8.11 9.74 11.36 12.98
$105,950-161,450 38.37 4.87 6.49 8.11 9.74 11.36 12.98
$132,600-288,350 $161,450-288,350 42.83 5.25 7.00 8.75 10.50 12.24 13.99
$288,350 & Over $288,350 & Over 46.05 5.56 7.41 9.27 11.12 12.97 14.83
<CAPTION>
NEW YORK -- NEW YORK CITY RESIDENTS ONLY -- 2000 TAX YEAR
----------------------------------------------------------------------------------------------------
TAXABLE INCOME*
------------------------------------ AVERAGE AVERAGE AVERAGE AVERAGE COMBINED
SINGLE JOINT FEDERAL STATE CITY NYC ADD'L FED. & ST.
2000 2000 RATE RATE RATE SURCHARGE SURCHARGE RATE***
----------------- ----------------- ------- -------- -------- --------- --------- ----------
NOT NOT
OVER OVER OVER OVER
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 0.15 0.053375 0.029590 0.000000 0.004143 0.2241
$ 0- 43,850 0.15 0.050392 0.029620 0.000000 0.004147 0.2215
$ 26,250- 63,550 0.28 0.068500 0.032832 0.000000 0.004596 0.3563
$ 43,850-105,950 0.28 0.068500 0.033141 0.000000 0.004640 0.3565
$ 63,550-132,600 0.31 0.068500 0.033575 0.000000 0.004701 0.3837
$105,950-161,450 0.31 0.068500 0.033575 0.000000 0.004701 0.3837
$132,600-288,350 $161,450-288,350 0.36 0.068500 0.033575 0.000000 0.004701 0.4283
$288,350 & Over $288,350 & Over 0.396 0.068500 0.033575 0.000000 0.004701 0.4605
* Net amount subject to Federal and New York personal income tax after deductions and exemptions.
** Effective combined Federal and state tax bracket. State rate based on the average state rate for the Federal tax bracket.
*** Combined Federal and New York rate assumes itemization of state tax deduction.
</TABLE>
<PAGE>
MFS(R) MASSACHUSETTS HIGH INCOME TAX FREE FUND
MFS(R) NEW YORK HIGH INCOME TAX FREE FUND
If you want more information about the funds, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the funds'
actual investments. Annual reports discuss the effect of recent market
conditions and the funds' investment strategy on the funds' performance during
their last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated August 1, 2000,
provides more detailed information about the funds and is incorporated into
this prospectus by reference.
YOU CAN GET FREE COPIES OF THE ANNUAL/SEMIANNUAL REPORTS, THE SAI AND OTHER
INFORMATION ABOUT THE FUNDS, AND MAKE INQUIRIES ABOUT THE FUNDS, BY
CONTACTING:
MFS Service Center, Inc.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the funds (including their prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 202-942-8090. Reports and other information about
the funds are available on the Edgar Databases on the Commission's Internet
website at http://www.sec.gov, and copies of this information may be obtained,
upon payment of a duplicating fee, by electronic request at the following e-
mail address: [email protected], or by writing the Public Reference Section
at the above address.
The funds' Investment Company Act file number is 811-4096.
INC-1-MST 7/00 900
<PAGE>
[logo] M F S (R) STATEMENT OF ADDITIONAL
INVESTMENT MANAGEMENT INFORMATION
We invented the mutual fund(R)
AUGUST 1, 2000
MFS MASSACHUSETTS HIGH INCOME TAX FREE FUND
MFS NEW YORK HIGH INCOME TAX FREE 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, 2000. This SAI should be read in conjunction with the Prospectus. You
may obtain a copy of the Funds' Prospectus and Annual Report, when available,
without charge by contacting MFS Service Center, Inc. (see back cover of Part II
of this SAI for address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Fund, while Part II contains information
that generally applies to each of the Funds in the MFS Family of Funds (the "MFS
Funds"). Each Part of the SAI has a variety of appendices which can be found at
the end of Part I and Part II, respectively.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
INC-13-MST 7/00 300
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Funds.
TABLE OF CONTENTS
Page
I Definitions ......................................................... 3
II Management of the Funds ............................................. 3
The Funds ........................................................... 3
Trustees and Officers -- Identification and Background .............. 3
Trustees Compensation ............................................... 3
Affiliated Service Provider Compensation ............................ 3
III Sales Charges and Distribution Plan Payments ........................ 3
Sales Charges ....................................................... 3
Distribution Plan Payments ......................................... 3
IV Portfolio Transactions and Brokerage Commissions .................... 3
V Share Ownership ..................................................... 3
VI Performance Information ............................................. 3
VII Investment Techniques, Practices, Risks and Restrictions ............ 4
Investment Techniques, Practices and Risks .......................... 4
Investment Restrictions ............................................. 4
VIII Tax Considerations .................................................. 4
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(R) New York High Income Tax Free Fund and MFS(R)
Massachusetts High Income Tax Free Fund, each a series of the Trust.
"Trust" - MFS Municipal Series Trust, a Massachusetts business trust,
organized in 1984. On August 27, 1993, the Trust changed its name from
"MFS Multi-State Municipal Bond Trust." On August 3, 1992 the Trust
changed its name from "MFS Managed Multi-State Municipal Bond Trust." The
Trust was known as "MFS Managed Multi-State Tax-Exempt Trust" until its
name was changed effective August 12, 1988.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" or the "Distributor" - MFS Fund Distributors, Inc., a Delaware
corporation.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Funds, dated August 1, 2000, 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.
Each Fund and its Adviser and Distributor have adopted a code of ethics
as required under the Investment Company Act of 1940 (the "1940 Act").
Subject to certain conditions and restrictions, this code permits
personnel subject to the code to invest in securities for their own
accounts, including securities that may be purchased, held or sold by the
Fund. Securities transactions by some of these persons may be subject to
prior approval of the Adviser's Compliance Department. Securities
transactions of certain personnel are subject to quarterly reporting and
review requirements. The code is on public file with, and is available
from, the Securities and Exchange Commission (the "SEC"). See the back
cover of the prospectus for information on obtaining a copy.
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND The identification
and background of the Trustees and officers of the Trust are set forth in
Appendix A of this Part I.
TRUSTEE COMPENSATION
Compensation paid to the non-interested Trustees and to Trustees who are
not officers of the Trust, for certain specified periods, is set forth in
Appendix B of this Part I.
AFFILIATED SERVICE PROVIDER COMPENSATION
Compensation paid by each Fund to its affiliated service providers -- to
MFS, for investment advisory and administrative services, and to MFSC, for
transfer agency services -- for certain specified periods is set forth in
Appendix C to this Part I.
III SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
Sales charges paid in connection with the purchase and sale of Fund shares
for certain specified periods are set forth in Appendix D to this Part I,
together with the Funds' schedule of dealer reallowances.
DISTRIBUTION PLAN PAYMENTS
Payments made by each Fund under the Distribution Plan for its most recent
fiscal year end are set forth in Appendix D to this Part I.
IV PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by each Fund for certain specified periods, and
information concerning purchases by the Funds of securities issued by
their regular broker-dealers for the Funds' most recent fiscal year, are
set forth in Appendix E to this Part I.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions. Securities
may be bought or sold from time to time through such broker-dealers, on
behalf of the Funds. The Trustees (together with the Trustees of certain
other MFS funds) have directed the Adviser to allocate a total of $43,800
of commission business from certain MFS funds (including the Funds) to the
Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical
Securities Corporation (which provides information useful to the Trustees
in reviewing the relationship between the Funds and the Adviser).
V SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and
officers of the Trust as a group, by investors who control the Fund, if
any, and by investors who own 5% or more of any class of Fund shares, if
any, is set forth in Appendix F to this Part I.
VI PERFORMANCE INFORMATION
Performance information, as quoted by the Funds in sales literature and
marketing materials, is set forth in Appendix G to this Part I.
VII INVESTMENT TECHNIQUES, PRACTICES, RISKS AND RESTRICTIONS
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
The investment objective and principal investment policies of each Fund
are described in the Prospectus. In pursuing its investment objective and
principal investment policies, a Fund may engage in a number of investment
techniques and practices, which involve certain risks. These investment
techniques and practices, which may be changed without shareholder
approval unless indicated otherwise, are identified in Appendix A to the
Prospectus, and are more fully described, together with their associated
risks, in Part II of this SAI. The following percentage limitations apply
to these investment techniques and practices for each Fund:
o Speculative Securities and Lower Rated Securities may not exceed 75% of
a Fund's net assets; and
o Revenue Bonds may not exceed 100% of a Fund's net assets.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of the Fund's shares
(which, as used in this SAI, means the lesser of (i) more than 50% of the
outstanding shares of the Trust or a series or class, as applicable, or
(ii) 67% or more of the outstanding shares of the Trust or a series or
class, as applicable, present at a meeting at which holders of more than
50% of the outstanding shares of the Trust or a series or class, as
applicable, are represented in person or by proxy).
Terms used below (such as Options and Futures Contracts) are defined in
Part II of this SAI.
The Funds may not:
(1) Borrow amounts from banks in excess of 33 1/3% of its total assets
including amounts borrowed.
(2) Underwrite securities issued by other persons except insofar as the
Trust may technically be deemed an underwriter under the Securities Act of
1933, as amended (the "1933 Act"), in selling a portfolio security.
(3) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein and securities of companies, such as real estate investment
trusts, which deal in real estate or interests therein), interests in oil,
gas or mineral leases, commodities or commodity contracts (excluding
currencies and any type of option, Futures Contracts and Forward
Contracts) in the ordinary course of business. Each Fund reserves the
freedom of action to hold and to sell real estate mineral leases,
commodities or commodity contracts (including currencies and any type of
option, Futures Contracts and Forwards Contracts) acquired as a result of
the ownership of securities).
(4) Issue any senior securities except as permitted by the Investment
Company Act of 1940, as amended (the "1940 Act"). For purposes of this
restriction, collateral arrangements with respect to any type of swap,
option, Forward Contracts and Futures Contracts and collateral
arrangements with respect to initial and variation margin are not deemed
to be the issuance of a senior security.
(5) Make loans to other persons. For these purposes, the purchase of
commercial paper, the purchase of a portion or all of an issue of debt
securities, the lending of portfolio securities, or the investment of the
Fund's assets in repurchase agreements, shall not be considered the making
of a loan.
For purposes of the investment restrictions described above and the non-
fundamental restriction described below, the issuer of a tax-exempt
security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the
security.
In addition, each Fund has adopted the following non-fundamental policy
which may be changed without shareholder approval:
o Each Fund will not knowingly invest in illiquid securities, including
securities subject to legal or contractual restrictions on resale or
for which there is no readily available market (e.g., trading in the
security is suspended, or, in the case of unlisted securities, where no
market exists), if more than 15% of the Fund's assets (taken at market
value) would be invested in such securities. Repurchase agreements
maturing in more than seven days will be deemed to be illiquid for
purposes of each Fund's limitation on investment in illiquid
securities. Securities that are not registered under the 1933 Act and
sold in reliance on Rule 144A thereunder, but are determined to be
liquid by the Trust's Board of Trustees (or its delegate), will not be
subject to this 15% limitation.
PERCENTAGE AND RATING RESTRICTIONS: Except for Investment Restriction (1)
and the non-fundamental investment policy regarding illiquid securities,
these investment restrictions are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy. In the event of a violation
of the non-fundamental investment policy on illiquid securities, a Fund
will reduce the percentage of its assets invested in illiquid investments
in due course, taking into account the best interests of shareholders.
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.
The Portfolio of Investments and the Statement of Assets and Liabilities
at March 31, 2000, the Statement of Operations and the Statement of
Changes in Net Assets for the period ended March 31, 2000, the Notes to
Financial Statements and the Report of the Independent Auditors, each of
which is included in each Fund's Annual Report to Shareholders, 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 Fund's 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
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 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: 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: Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc.
(investment advisers), Director
Address: 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: Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists),
President; Wellfleet Investments (investor in health care
companies), Managing General Partner (since 1993)
Address: Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994);
Sundstrand Corporation (diversified mechanical
manufacturer), Director
Address: Hunting Valley, Ohio
OFFICERS
JAMES O. YOST,* 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 Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary and
Assistant Clerk (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and
Associate General Counsel
----------------
*"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.
<PAGE>
-------------------
PART I - APPENDIX B
-------------------
TRUSTEE COMPENSATION
The Funds pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, who currently receive a fee of $833 per
year plus $67 per meeting and $67 per committee meeting attended, together
with such Trustee's out-of-pocket expenses. The Trustees are currently
waiving receipt of these fees. In addition, the Trust has a retirement plan
for these Trustees as described under the caption "Management of the Funds
-- Trustee Retirement Plan" in Part II. The Retirement Age under the plan is
75.
TRUSTEE COMPENSATION TABLES
..........................................................................
<TABLE>
<CAPTION>
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>
Marshall N. Cohan $ 0 $ 0 3 $149,167
Dr. Lawrence Cohn 0 0 13 142,207
Sir David Gibbons 0 0 3 135,292
Abby M. O'Neill 0 0 4 135,292
Walter E. Robb, III 0 0 3 156,082
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 0 0 15 155,992
Ward Smith 0 0 4 149,167
----------------
(1) Estimated for the fiscal year ending March 31, 2000.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1999. All Trustees served as Trustees of 42 funds within the
MFS fund complex (having aggregate net assets at December 31, 1999, of approximately $35.2 billion).
</TABLE>
<PAGE>
-------------------
PART I - APPENDIX C
-------------------
AFFILIATED SERVICE PROVIDER COMPENSATION
..........................................................................
Each Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
PAID TO
MFS FOR AMOUNT PAID TO MFS FOR AMOUNT PAID TO MFSC AMOUNT AGGREGATE
ADVISORY WAIVED ADMINISTRATIVE WAIVED FOR TRANSFER WAIVED AMOUNT PAID TO
FISCAL YEAR ENDED FUND SERVICES BY MFS SERVICES BY MFS AGENCY SERVICES BY MFSC MFS AND MFSC
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 2000 MFS Massachusetts
High Income
Tax Free Fund $0 $8,406 $0 $260 $0 $2,102 $0
MFS New York High
Income
Tax Free Fund $0 $1,308 $0 $ 39 $0 $ 327 $0
</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 CDSC PAID
SALES CHARGES: TO MFD ON:
RETAINED REALLOWED CLASS A CLASS B
FISCAL YEAR END FUND TOTAL BY MFD TO DEALERS SHARES SHARES
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 2000 MFS Massachusetts High
Income Tax Free Fund $0 $0 $0 $0 $0
MFS New York High
Income Tax Free Fund $0 $0 $0 $0 $0
</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, 2000, 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
--------------------------------------------------------------------------
MFS Massachusetts High
Income Tax Free Fund
Class A $0 $0 $0
Class B $0 $0 $0
MFS New York High Income
Tax Free Fund
Class A $0 $0 $0
Class B $0 $0 $0
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 each Fund during the
specified time period:
BROKERAGE COMMISSION
FISCAL YEAR END FUND PAID BY FUND
---------------------------------------------------------------------------
March 31, 2000 N/A None
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
..........................................................................
During the fiscal year ended March 31, 2000, the Funds purchased securities
issued by the following regular broker-dealers of the Funds, which had the
following values as of March 31, 2000:
VALUE AS OF
BROKER-DEALER FUND MARCH 31, 2000
-----------------------------------------------------------------------
None N/A N/A
<PAGE>
-------------------
PART I - APPENDIX F
-------------------
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of June 30, 2000, the Trustees and officers of the Trust as a group owned
less than 1% of any class of each Fund's shares.
25% OR GREATER OWNERSHIP
The following table identifies those investors who own 25% or more of a
Fund's shares (all share classes taken together) and are therefore presumed
to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS Fund Distributors, Inc. Delaware Corporation 99.96% of Class A Shares of New
c/o Thomas Hastings York Fund
500 Boylston Street
Boston, MA 02116
</TABLE>
5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any
class of a Fund's shares:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTOR OWNERSHIP FUND PERCENTAGE
.............................................................................................
<S> <C> <C>
John Ballen* Massachusetts Fund -- Class A 17.21%
Robert & Donna Manning* Massachusetts Fund -- Class A 15.69%
Joan Batchelder* Massachusetts Fund -- Class A 15.38%
Toni Y. Shimura* Massachusetts Fund -- Class A 14.83%
Donald P. and Shirley H. Pitcher* Massachusetts Fund -- Class A 12.13%
Ronnie P. Scott Massachusetts Fund -- Class A 7.71%
Hingham, MA
Elizabeth S. Batchelder Trust Massachusetts Fund -- Class A 7.46%
Needham, MA 02492
MFS Fund Distributors, Inc. New York Fund -- Class A 99.96%
Attn: Thomas Hastings
500 Boylston Street
Boston, MA 02116
------------
*Massachusetts Financial Services Company, 500 Boylston Street, Boston, MA 02116
</TABLE>
<PAGE>
-------------------
PART I - APPENDIX G
-------------------
PERFORMANCE INFORMATION
..........................................................................
All performance quotations are as of March 31, 2000.
<TABLE>
<CAPTION>
ACTUAL
TAX EQUIVALENT TAX EQUIVALENT
ACTUAL 30-DAY YIELD 30-DAY YIELD
AVERAGE ANNUAL TOTAL RETURNS 30-DAY 30-DAY (INCLUDING (WITHOUT
YIELD YIELD ANY WAIVERS) ANY WAIVERS)
------------------------------ (INCLUDING (WITHOUT CURRENT
LIFE OF ANY ANY ---------------- ---------------- DISTRIBUTION
1 YEAR 5 YEARS FUND* WAIVERS) WAIVERS) TAX BRACKETS: TAX BRACKETS: RATE+
-------- ------- -------- ----------- --------- ---------------- ---------------- -------------
28% 31% 28% 31%
------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MFS Massachusetts High Income
Tax Free Fund:
Class A shares, with
initial sales charge
(4.75%) N/A N/A (3.39)% 5.34% 1.98% 7.42% 7.74% 2.75% 2.87% 5.01%
Class A shares, at net
asset value N/A N/A 1.42 % N/A N/A N/A N/A N/A N/A N/A
MFS New York High Income
Tax Free Fund:
Class A shares, with
initial sales charge
(4.75%) N/A N/A (2.51)% 5.15% 1.78% 7.15% 7.46% 2.47% 2.58% 4.96%
Class A shares, at net
asset value N/A N/A 2.35 % N/A N/A N/A N/A N/A N/A N/A
----------------------
* From the commencement of each fund's investment operations on August 2, 1999.
+ Annualized, based upon the last distribution.
</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.
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 2000, the Commonwealth's unadjusted unemployment rate
was 2.3%, as compared to a national average of 3.9%. 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 1995 were $726.0 million. Fiscal 1996 and 1997
ended with positive fund balances of $1.172 billion and $1.394 billion,
respectively.
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
$19.800 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. In fiscal 1999, the
total revenues of the budgeted operating funds of the Commonwealth increased
by approximately 1.8% over the prior fiscal year to $20.165 billion.
Expenditures increased by 6.5% over the prior fiscal year to $20.245
billion. As a result, the Commonwealth ended fiscal year 1999 with a
positive closing fund balance of $2.112 billion.
Budgeted revenues and other sources in fiscal 2000, which ended on June 30,
2000, were estimated as of June 16, 2000, by the Executive Office for
Administration and Finance to be approximately $21.641 billion, including
tax revenues of $15.46 billion. It is estimated that fiscal 2000 budgeted
expenditures and other uses will be $21.259 billion and that fiscal 2000
will end with fund balances of $2.319 billion.
On April 14, 2000, the House of Representatives approved its version of the
fiscal 2001 budget. The House budget provides for total appropriations of
approximately $21.8 billion and is based on a tax revenue estimate of
$15.283 billion, excluding $645 million of sales tax receipts dedicated to
the Massachusetts Bay Transportation Authority as a result of forward
funding legislation. On May 25, 2000, the Senate approved its version of
fiscal 2001 budget, which provides for total spending of approximately
$21.549 billion and is based on a tax revenue estimate of approximately
$15.204 billion, which is essentially equivalent to the House estimate after
adjusting for proposed tax cuts in the Senate budget. Based on tax revenue
through April, the Secretary of Administration and Finance did not agree
with the Legislature's proposed tax revenue estimate and consensus was not
reached by May 15, 2000, as required by state finance law. On June 12, 2000,
the Secretary of Administration and Finance informed the chairmen of the
House and Senate Committees on Ways and Means that the administration
accepted the legislative consensus tax revenue estimate for fiscal 2001
($15.283 billion before any tax cuts), based on higher-than- expected tax
collection in May, 2000. The differences between the House and Senate
versions will be reconciled by a legislative conference committee.
On February 9, 2000, the Governor announced a debt reduction proposal to be
funded with approximately $150 million in accumulated surplus revenues from
fiscal 1997, 1998, and 1999 (now on deposit in the Capital Projects Fund)
and surplus revenues expected on account of fiscal 2000, estimated as of
March 3, 2000, at $200 million. Under the Governor's proposal, such moneys
would be applied to the retirement of outstanding Commonwealth debt bearing
the highest interest rates.
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 $3.558 billion
in fiscal 1997. Fiscal 1998 expenditures for direct local aid were $3.950
billion, which is an increase of approximately 11.0% above the fiscal 1997
level. Fiscal 1999 expenditures for direct local aid were $4.310 billion, an
increase of 9.2% above the fiscal 1998 level. It is estimated that fiscal
2000 expenditures for direct local aid will be $4.645 billion, an increase
of approximately 7.8% above the fiscal 1999 level.
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 1995 through fiscal
1999 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 2000 will not reach such limit.
Certain of the Commonwealth's cities, counties and towns have at times
experienced serious financial difficulties which have adversely affected
their credit standing. The recurrence of such financial difficulties, or
financial difficulties of the Commonwealth, could adversely affect the
market values and marketability of outstanding obligations issued by the
Commonwealth or its public authorities or municipalities.
The largest single component of the Commonwealth's capital program is the
Central Artery/Ted Williams Tunnel project, a major construction project
that is part of the completion of the federal interestate highway system. On
April 11, 2000, the U.S. Secretary of Transportation released a report dated
March 31, 2000, that had been prepared by a task force of federal officials.
The task force report stated that senior management of the Central
Artery/Ted Williams Tunnel project had deliberately withheld information
about cost overruns from the Federal Highway Administration and recommended
a change in project leadership, as well as an evaluation of whether the
Massachusetts Turnpike Authority should continue to be reponsible for the
management of the project. The report stated that there were risks that
could lead to cost exposures in addition to those identified in the March
15, 2000, finance plan update submitted by the Massachusets Turnpike
Authority in the range of $300 million to $480 million. The task force
estimated that a realistic total cost estimate for the project was $13.4
billion to $13.6 billion. The report stated that the Commonwealth appeared
to have adequate resources to finance the additional costs but had not yet
identified precisely how it would do so, noting that several of the elements
in the Governor's proposed funding plan did not appear to have state
legislative support. Upon receiving the report, the Governor requested and
received the resignation of the chairman of the Massachusetts Turnpike
Authority and appointed a new chairman.
The Executive Office for Administration and Finance has engaged the services
of an independent consulting and accounting firm to review costs associated
with the Central Artery/Ted Williams Tunnel project and expects to receive
the results of the firm's review by the end of July, 2000. On May 17, 2000,
the Governor approved legislation to provide financing for the additional
costs of the Central Artery/Ted Williams Tunnel project and for the
statewide road and bridge program. The legislation authorizes approximately
$1.520 billion of Commonwealth bonds, which may be issued as general
obligations or as special obligations payable from the gasoline tax and, in
the case of $1.35 billion, from Highway Fund revenues generally. The
legislation reinstates certain fees collected by the Registry of Motor
Vehicles. On June 16, 2000, the Massachusetts Turnpike Authority filed with
the Federal Highway Administration a finance plan update identifying total
project costs, expressed as cash needs through completion in 2004, of
$13.513 billion.
The aggregate unfunded actuarial liabilities of the pension systems of the
Commonwealth and the unfunded liability of the Commonwealth related to local
retirement systems are significant. As of January 1, 1998, the Public
Employee Retirement Administration Commission (PERAC) estimated these
liabilities to be $5.803 billion on the basis of certain actuarial
assumptions regarding, among other things, future investment earnings,
annual inflation rates, wage increases and cost of living increases. No
assurance can be given that these assumptions will be realized. Further, on
April 8, 1999, independent actuarial consultants to the Pension Reserves
Investment Management (PRIM) Board released significantly higher figures
based on the same data used by PERAC, but using a more advanced software
system. PERAC currently is conducting an experience study of the pension
system which it expects to complete by the end of the summer of 2000. The
legislature adopted a comprehensive pension bill addressing the issue in
January 1988, which requires the Commonwealth, beginning in fiscal year
1989, to fund future pension liabilities currently and amortize the
Commonwealth's unfunded liabilities over 40 years in accordance with funding
schedules prepared by the Secretary for Administration and Finance and
approved by the legislature. On March 1, 2000, the Secretary of
Administration and Finance filed a revised pension funding schedule (which
has been deemed approved by the Legislature) which provides that the amounts
required for funding of current pension liabilities in fiscal years 2001,
2002, 2003, and 2004 are estimated to be $1.029 billion, $1.050 billion,
$1.073 billion, and $1.096 billion, respectively. Pension funding
legislation was revised in July, 1997 as part of the fiscal 1998 budget, to
include an accelerated pension funding schedule that would eliminate the
Commonwealth's unfunded liability by 2018 rather than 2028.
NEW YORK FUND
The fiscal stability of New York State is related, in part, to the fiscal
stability of its public localities and authorities. Various State agencies,
authorities and localities have issued large amounts of bonds and notes
either guaranteed or supported by the State through lease-purchase
arrangements, other contractual arrangements or moral obligation provisions.
While debt service is normally paid out of revenues generated by projects of
such State agencies, authorities and localities, the State has had to
provide special assistance in recent years, in some cases of a recurring
nature, to enable such agencies, authorities and localities to meet their
financial obligations and, in some cases, to prevent or cure defaults. If
any State agency, authority or locality 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.
New York is one of the most populous state in the nation and has a
relatively high level of average 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. Like the rest of the nation, a
declining proportion of the State's workforce is engaged in manufacturing,
and an increasing proportion is engaged in service industries. The State is
likely to be less affected than the nation as a whole by 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.
Both the State and New York City (the "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 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. Certain
localities outside the City have experienced financial problems and have
requested and received additional State assistance during the last several
years.
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.
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.
Although the State has added over 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.
New York City. The fiscal health of the State may be affected by the fiscal
health of the City which continues to receive significant financial
assistance from the State. The City depends on State aid both to enable the
City to balance its budget and to meet its cash requirements. The State may
also be affected by the ability of the City and certain entities issuing
debt for the benefit of the City to market their securities successfully in
the public credit markets. The City has achieved balanced operating results
for each of its fiscal years since 1981 as measured by the GAAP standards in
force at that time.
The 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.
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability including establishing the
Municipal Assistance Corporation for the City of New York to provide
financing assistance to the City; the New York State Financial Control Board
(the Control Board) to oversee the City's financial affairs; and the Office
of the State Deputy Comptroller for the City of New York to assist the
Control Board in exercising its powers and responsibilities. A "control
period" existed from 1975 to 1986 during which the City was subject to
certain statutorily prescribed fiscal controls. The Control Board terminated
the control period in 1986 when certain statutory conditions were met. State
law requires the Control Board to reimpose a control period upon the
occurrence of "substantial likelihood and imminence" of the occurrence of
certain events, including (but not limited to) a City operating budget
deficit of more than $100 million or impaired access to the public credit
markets.
Other Localities. Certain localities outside the City have experienced
financial problems and have requested and received additional State
assistance during the last several State fiscal years. The potential impact
on the State of any future requests by localities for additional oversight
or financial assistance is not included in the projections of the State's
receipts and disbursements for the State's 2000-2001 fiscal year.
The State has provided extraordinary financial assistance to select
municipalities, primarily cities, since the 1996-97 fiscal year. Funding has
essentially been continued or increased in each subsequent fiscal year. Such
funding in 1999-2000 totaled $113.9 million. In 1997-98, the State increased
General Purpose State Aid for local governments by $27 million to $550
million, and has continued funding at this new level since that date.
The 1998-99 budget included an additional $29.4 million in unrestricted aid
targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more than $25.6 million. Twelve
upstate cities were to receive $24.2 million in one-time assistance from a
cash flow acceleration of State aid.
While the distribution of General Purpose State Aid for local governments
was originally based on a statutory formula, in recent years both the total
amount appropriated and the shares appropriated to specific localities have
been determined by the Legislature. A State commission established to study
the distribution and amounts of general purpose local government aid failed
to agree on any recommendations for a new formula.
Counties, cities, towns, villages and school districts have engaged in
substantial short-term and long-term borrowings. In 1997, the total
indebtedness of all localities in the State other than New York City was
approximately $21.0 billion. A small portion (approximately $80.2 million)
of that indebtedness represented borrowing to finance budgetary deficits and
was issued pursuant to State enabling legislation.
Authorities. The fiscal stability of the State is related in part to the
fiscal stability of its public authorities. Public authorities are not
subject to the constitutional restrictions on the incurrence of debt that
apply to the State itself and may issue bonds and notes within the amounts
and restrictions set forth in legislative authorization. The State's access
to the public credit markets could be impaired and the market price of its
outstanding debt materially and adversely affected if any of its public
authorities default on their respective obligations, particularly those
using the financing techniques referred to as State-supported or
State-related debt. As of December 31, 1998, there were 17 public
authorities that had outstanding debt of $100 million or more, and the
aggregate outstanding debt, including refunding bonds, of all State Public
Authorities was $94 billion, only a portion of which constitutes State-
supported or State-related debt.
Since 1998, the Long Island Power Authority (LIPA) has issued over $5
billion in bonds secured solely by ratepayer charges as part of an estimated
$7 billion financing plan. LIPA's debt is not considered either
State-supported or State-related debt.
The Metropolitan Transit Authority (MTA) oversees the operation of subway
and bus lines in New York City by its affiliates, the New York City Transit
Authority and Manhattan and Bronx Surface Transit Operating Authority
(collectively, TA) and operates commuter rail, rapid transit and bus
services in the New York Metropolitan area through subsidiaries. Through its
affiliated agency, the Triborough Bridge and Tunnel Authority (TBTA), the
MTA operates certain intrastate toll bridges and tunnels. The MTA has
depended on, and will continue to depend on, operating support from the
State, local governments and TBTA, including loans, grants and subsidies.
The TA or commuter railroads may be required to seek additional State
assistance, raise fares or take other actions. State legislation and
regulatory review authorized the MTA, TBTA and TA to issue an aggregate of
$6.5 billion in bonds to finance a portion of a new $12.55 billion MTA
capital plan for the 1995 through 1999 calendar years.
<PAGE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in this
Part II to a "Trust" means the Massachusetts business trust of which the Fund is
a series, or, if the Fund is not a series of a Massachusetts business trust,
references to a "Trust" shall mean the Fund.
-----------------
TABLE OF CONTENTS
-----------------
PAGE
I Management of the Fund .......................................... 1
Trustees/Officers ............................................... 1
Investment Adviser .............................................. 1
Administrator ................................................... 2
Custodian ....................................................... 2
Shareholder Servicing Agent ..................................... 2
Distributor ..................................................... 2
II Principal Share Characteristics ................................. 2
Class A Shares .................................................. 2
Class B Shares, Class C Shares and Class I Shares ............... 2
Waiver of Sales Charges ......................................... 3
Dealer Commissions and Concessions .............................. 3
General ......................................................... 3
III Distribution Plan ............................................... 3
Features Common to Each Class of Shares ......................... 3
Features Unique to Each Class of Shares ......................... 4
IV Investment Techniques, Practices and Risks ...................... 5
V Net Income and Distributions .................................... 5
Money Market Funds .............................................. 5
Other Funds ..................................................... 5
VI Tax Considerations .............................................. 5
Taxation of the Fund ............................................ 5
Taxation of Shareholders ........................................ 6
Special Rules for Municipal Fund Distributions .................. 7
VII Portfolio Transactions and Brokerage Commissions ................ 8
VIII Determination of Net Asset Value ................................ 9
Money Market Funds .............................................. 9
Other Funds ..................................................... 10
IX Performance Information ......................................... 10
Money Market Funds .............................................. 10
Other Funds ..................................................... 11
General ......................................................... 12
MFS Firsts ...................................................... 12
X Shareholder Services ............................................ 13
Investment and Withdrawal Programs .............................. 13
Exchange Privilege .............................................. 15
Tax-Deferred Retirement Plans ................................... 16
XI Description of Shares, Voting Rights and Liabilities ............ 17
Appendix A -- Waivers of Sales Charges .......................... A-1
Appendix B -- Dealer Commissions and Concessions ................ B-1
Appendix C -- Investment Techniques, Practices and Risks ........ C-1
Appendix D -- Description of Bond Ratings ....................... D-1
<PAGE>
I MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS
BOARD OVERSIGHT -- The Board of Trustees which oversees the Fund provides
broad supervision over the affairs of the Fund. The Adviser is responsible
for the investment management of the Fund's assets, and the officers of
the Trust are responsible for its operations.
TRUSTEE RETIREMENT PLAN -- The Trust has a retirement plan for Trustees
who are non-interested Trustees and Trustees who are not officers of the
Trust. Under this plan, a Trustee will retire upon reaching a specified
age (see Part I -- "Appendix B ") ("Retirement Age") and if the Trustee
has completed at least 5 years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to his
Retirement Age and receive reduced payments if he has completed at least 5
years of service. Under the plan, a Trustee (or his beneficiaries) will
also receive benefits for a period of time in the event the Trustee is
disabled or dies. These benefits will also be based on the Trustee's
average annual compensation and length of service. The Fund will accrue
its allocable portion of compensation expenses under the retirement plan
each year to cover the current year's service and amortize past service
cost.
INDEMNIFICATION OF TRUSTEES AND OFFICERS -- The Declaration of Trust of
the Trust provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with litigation in
which they may be involved because of their offices with the Trust,
unless, as to liabilities of the Trust or its shareholders, it is
determined that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices,
or with respect to any matter, unless it is adjudicated that they did not
act in good faith in the reasonable belief that their actions were in the
best interest of the Trust. In the case of settlement, such
indemnification will not be provided unless it has been determined
pursuant to the Declaration of Trust, that they have not engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
INVESTMENT ADVISER
The Trust has retained Massachusetts Financial Services Company ("MFS" or
the "Adviser") as the Fund's investment adviser. MFS and its predecessor
organizations have a history of money management dating from 1924. MFS is
a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings,
Inc., which in turn is an indirect wholly owned subsidiary of Sun Life of
Canada (an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment
advisers to assist MFS in the management of the Fund's assets. A
description of these sub-advisers, the services they provide and their
compensation is provided under the caption "Management of the Fund -- Sub-
Adviser" in Part I of this SAI for Funds which use sub-advisers.
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to
an Investment Advisory Agreement (the "Advisory Agreement"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Subject to such policies as the Trustees may determine,
the Adviser makes investment decisions for the Fund. For these services
and facilities, the Adviser receives an annual management fee, computed
and paid monthly, as disclosed in the Prospectus under the heading
"Management of the Fund[s]."
The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer of the Adviser. The Adviser also furnishes at
its own expense all necessary administrative services, including office
space, equipment, clerical personnel, investment advisory facilities, and
all executive and supervisory personnel necessary for managing the Fund's
investments and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are not officers of
MFS and all expenses of the Fund (other than those assumed by MFS)
including but not limited to: advisory and administrative services;
governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, periodic
reports, notices and proxy statements to shareholders and to governmental
officers and commissions; brokerage and other expenses connected with the
execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust
Company, the Fund's custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the
Fund; and expenses of shareholder meetings. Expenses relating to the
issuance, registration and qualification of shares of the Fund and the
preparation, printing and mailing of prospectuses are borne by the Fund
except that the Distribution Agreement with MFD requires MFD to pay for
prospectuses that are to be used for sales purposes. Expenses of the Trust
which are not attributable to a specific series are allocated between the
series in a manner believed by management of the Trust to be fair and
equitable.
The Advisory Agreement has an initial two year term and continues in
effect thereafter only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) and, in either case, by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party.
The Advisory Agreement terminates automatically if it is assigned and may
be terminated without penalty by vote of a majority of the Fund's shares
(as defined in "Investment Restrictions" in Part I of this SAI), or by
either party on not more than 60 days" nor less than 30 days" written
notice. The Advisory Agreement provides that if MFS ceases to serve as the
Adviser to the Fund, the Fund will change its name so as to delete the
initials "MFS" and that MFS may render services to others and may permit
other fund clients to use the initials "MFS" in their names. The Advisory
Agreement also provides that neither the Adviser nor its personnel shall
be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution
and management of the Fund, except for willful misfeasance, bad faith or
gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the
Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance,
shareholder communications and other administrative services pursuant to a
Master Administrative Services Agreement. Under this Agreement, the Fund
pays MFS an administrative fee up to 0.015% per annum of the Fund's
average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of
the Fund's assets. The Custodian's responsibilities include safekeeping
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest and
dividends on the Fund's investments, maintaining books of original entry
for portfolio and fund accounting and other required books and accounts,
and calculating the daily net asset value of each class of shares of the
Fund. The Custodian does not determine the investment policies of the Fund
or decide which securities the Fund will buy or sell. The Fund may,
however, invest in securities of the Custodian and may deal with the
Custodian as principal in securities transactions. The Custodian also acts
as the dividend disbursing agent of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is
the Fund's shareholder servicing agent, pursuant to an Amended and
Restated Shareholder Servicing Agreement (the "Agency Agreement"). The
Shareholder Servicing Agent's responsibilities under the Agency Agreement
include administering and performing transfer agent functions and the
keeping of records in connection with the issuance, transfer and
redemption of each class of shares of the Fund. For these services, MFSC
will receive a fee calculated as a percentage of the average daily net
assets of the Fund at an effective annual rate of up to 0.1125%. In
addition, MFSC will be reimbursed by the Fund for certain expenses
incurred by MFSC on behalf of the Fund. The Custodian has contracted with
MFSC to perform certain dividend disbursing agent functions for the Fund.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Trustees or by
vote of a majority of the Fund's shares (as defined in "Investment
Restrictions" in Part I of this SAI) and in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days'
notice.
II PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered by
the MFS Family of Funds. Some MFS Funds may not offer each class of shares
-- see the Prospectus of the Fund to determine which classes of shares the
Fund offers.
CLASS A SHARES
MFD acts as agent in selling Class A shares of the Fund to dealers. The
public offering price of Class A shares of the Fund is their net asset
value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share
of the Fund is calculated by dividing the net asset value of a Class A
share by the difference (expressed as a decimal) between 100% and the
sales charge percentage of offering price applicable to the purchase (see
"How to Purchase, Exchange and Redeem Shares" in the Prospectus). The
sales charge scale set forth in the Prospectus applies to purchases of
Class A shares of the Fund alone or in combination with shares of all
classes of certain other funds in the MFS Family of Funds and other funds
(as noted under Right of Accumulation) by any person, including members of
a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of
Accumulation or a Letter of Intent (see "Investment and Withdrawal
Programs" below). A group might qualify to obtain quantity sales charge
discounts (see "Investment and Withdrawal Programs" below). Certain
purchases of Class A shares may be subject to a 1% CDSC instead of an
initial sales charge, as described in the Fund's Prospectus.
CLASS B SHARES, CLASS C SHARES AND CLASS I SHARES
MFD acts as agent in selling Class B, Class C and Class I shares of the
Fund. The public offering price of Class B, Class C and Class I shares is
their net asset value next computed after the sale. Class B and C shares
are generally subject to a CDSC, as described in the Fund's Prospectus.
WAIVER OF SALES CHARGES
In certain circumstances, the initial sales charge imposed upon purchases
of Class A shares and the CDSC imposed upon redemptions of Class A, B and
C shares are waived. These circumstances are described in Appendix A of
this Part II. Such sales are made without a sales charge to promote good
will with employees and others with whom MFS, MFD and/or the Fund have
business relationships, because the sales effort, if any, involved in
making such sales is negligible, or in the case of certain CDSC waivers,
because the circumstances surrounding the redemption of Fund shares were
not foreseeable or voluntary.
DEALER COMMISSIONS AND CONCESSIONS
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concessions are described in Appendix
B of this Part II.
GENERAL
Neither MFD nor dealers are permitted to delay placing orders to benefit
themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD
may benefit from its temporary holding of funds paid to it by investment
dealers for the purchase of Fund shares.
III DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and
Class C shares (the "Distribution Plan") pursuant to Section 12(b) of the
1940 Act and Rule 12b-1 thereunder (the "Rule") after having concluded
that there is a reasonable likelihood that the Distribution Plan would
benefit the Fund and each respective class of shareholders. The provisions
of the Distribution Plan are severable with respect to each Class of
shares offered by the Fund. The Distribution Plan is designed to promote
sales, thereby increasing the net assets of the Fund. Such an increase may
reduce the expense ratio to the extent the Fund's fixed costs are spread
over a larger net asset base. Also, an increase in net assets may lessen
the adverse effect that could result were the Fund required to liquidate
portfolio securities to meet redemptions. There is, however, no assurance
that the net assets of the Fund will increase or that the other benefits
referred to above will be realized.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current
distribution and service fees for each Fund are reflected under the
caption "Expense Summary" in the Prospectus.
FEATURES COMMON TO EACH CLASS OF SHARES
There are features of the Distribution Plan that are common to each Class
of shares, as described below.
SERVICE FEES -- The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to
the class of shares to which the Distribution Plan relates (i.e., Class A,
Class B or Class C shares, as appropriate) (the "Designated Class")
annually in order that MFD may pay expenses on behalf of the Fund relating
to the servicing of shares of the Designated Class. The service fee is
used by MFD to compensate dealers which enter into a sales agreement with
MFD in consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to shares of the Designated
Class owned by investors for whom such dealer is the dealer or holder of
record. MFD may from time to time reduce the amount of the service fees
paid for shares sold prior to a certain date. Service fees may be reduced
for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates
are entitled to retain all service fees payable under the Distribution
Plan for which there is no dealer of record or for which qualification
standards have not been met as partial consideration for personal services
and/or account maintenance services performed by MFD or its affiliates to
shareholder accounts.
DISTRIBUTION FEES -- The Distribution Plan provides that the Fund may pay
MFD a distribution fee in addition to the service fee described above
based on the average daily net assets attributable to the Designated Class
as partial consideration for distribution services performed and expenses
incurred in the performance of MFD's obligations under its distribution
agreement with the Fund. MFD pays commissions to dealers as well as
expenses of printing prospectuses and reports used for sales purposes,
expenses with respect to the preparation and printing of sales literature
and other distribution related expenses, including, without limitation,
the cost necessary to provide distribution-related services, or personnel,
travel, office expense and equipment. The amount of the distribution fee
paid by the Fund with respect to each class differs under the Distribution
Plan, as does the use by MFD of such distribution fees. Such amounts and
uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any
year may be more or less than the expenses incurred by MFD under its
distribution agreement with the Fund, the Fund is not liable to MFD for
any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES -- Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the
Designated Class. The provisions of the Distribution Plan relating to
operating policies as well as initial approval, renewal, amendment and
termination are substantially identical as they relate to each Class of
shares covered by the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its
continuance is specifically approved at least annually by vote of both the
Trustees and a majority of the Trustees who are not "interested persons"
or financially interested parties of such Plan ("Distribution Plan
Qualified Trustees"). The Distribution Plan also requires that the Fund
and MFD each shall provide the Trustees, and the Trustees shall review, at
least quarterly, a written report of the amounts expended (and purposes
therefor) under such Plan. The Distribution Plan may be terminated at any
time by vote of a majority of the Distribution Plan Qualified Trustees or
by vote of the holders of a majority of the respective class of the Fund's
shares (as defined in "Investment Restrictions" in Part I of this SAI).
All agreements relating to the Distribution Plan entered into between the
Fund or MFD and other organizations must be approved by the Board of
Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under the Distribution Plan must be in writing, will
be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution
Plan Qualified Trustees or by vote of the holders of a majority of the
respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution
expenses without the approval of a majority of the respective class of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) or may not be materially amended in any case without a vote of the
Trustees and a majority of the Distribution Plan Qualified Trustees. The
selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office.
No Trustee who is not an "interested person" has any financial interest in
the Distribution Plan or in any related agreement.
FEATURES UNIQUE TO EACH CLASS OF SHARES
There are certain features of the Distribution Plan that are unique to
each class of shares, as described below.
CLASS A SHARES -- Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid to
MFD). In addition to the initial sales charge, the dealer also generally
receives the ongoing 0.25% per annum service fee, as discussed above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or record for investors who own Class A shares having an aggregate
net asset value less than $750,000, or such other amount as may be
determined from time to time by MFD (MFD, however, may waive this minimum
amount requirement from time to time); or (ii) to any insurance company
which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their
net asset value in connection with annuity agreements issued in connection
with the insurance company's separate accounts.
The distribution fee paid to MFD under the Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover distribution-
related expenses incurred by it under its distribution agreement with the
Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement plans
of Class A shares which are sold at net asset value but which are subject
to a 1% CDSC for one year after purchase). In addition, to the extent that
the aggregate service and distribution fees paid under the Distribution
Plan do not exceed 0.35% per annum of the average daily net assets of the
Fund attributable to Class A shares (0.50% per annum for certain Funds),
the Fund is permitted to pay such distribution-related expenses or other
distribution-related expenses.
CLASS B SHARES -- Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. MFD will advance to dealers
the first year service fee described above at a rate equal to 0.25% of the
purchase price of such shares and, as compensation therefor, MFD may
retain the service fee paid by the Fund with respect to such shares for
the first year after purchase. Dealers will become eligible to receive the
ongoing 0.25% per annum service fee with respect to such shares commencing
in the thirteenth month following purchase.
Except in the case of the first year service fee, no service fees will
be paid to any securities dealer who is the holder or dealer of record for
investors who own Class B shares having an aggregate net asset value of
less than $750,000 or such other amount as may be determined by MFD from
time to time. MFD, however, may waive this minimum amount requirement from
time to time.
Under the Distribution Plan, the Fund pays MFD a distribution fee
equal, on an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class B shares. As noted above, this distribution fee may
be used by MFD to cover its distribution-related expenses under its
distribution agreement with the Fund (including the 3.75% commission it
pays to dealers upon purchase of Class B shares).
CLASS C SHARES -- Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC of 1.00% upon redemption during
the first year. MFD will pay a commission to dealers of 1.00% of the
purchase price of Class C shares purchased through dealers at the time of
purchase. In compensation for this 1.00% commission paid by MFD to
dealers, MFD will retain the 1.00% per annum Class C distribution and
service fees paid by the Fund with respect to such shares for the first
year after purchase, and dealers will become eligible to receive from MFD
the ongoing 1.00% per annum distribution and service fees paid by the Fund
to MFD with respect to such shares commencing in the thirteenth month
following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee
paid to MFD under the Distribution Plan (which MFD in turn pays to
dealers), as discussed above, and a distribution fee paid to MFD (which
MFD also in turn pays to dealers) under the Distribution Plan, equal, on
an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class C shares.
IV INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in pursuing
their investment objectives and principal investment policies, and the
risks associated with these investment techniques and practices. The Fund
will engage only in certain of these investment techniques and practices,
as identified in Part I. Investment practices and techniques that are not
identified in Part I do not apply to the Fund.
V NET INCOME AND DISTRIBUTIONS
MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market fund
is determined each day during which the New York Stock Exchange is open
for trading (see "Determination of Net Asset Value" below for a list of
days the Exchange is closed).
For this purpose, the net income attributable to shares of a money
market fund (from the time of the immediately preceding determination
thereof) shall consist of (i) all interest income accrued on the portfolio
assets of the money market fund, (ii) less all actual and accrued expenses
of the money market fund determined in accordance with generally accepted
accounting principles, and (iii) plus or minus net realized gains and
losses and net unrealized appreciation or depreciation on the assets of
the money market fund, if any. Interest income shall include discount
earned (including both original issue and market discount) on discount
paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income
is determined, the net asset value per share (i.e., the value of the net
assets of the money market fund divided by the number of shares
outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares in the
shareholder's account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for any
reason the net income determined at any time is a negative amount, which
could occur, for instance, upon default by an issuer of a portfolio
security, the money market fund would first offset the negative amount
with respect to each shareholder account from the dividends declared
during the month with respect to each such account. If and to the extent
that such negative amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the money market fund could reduce the number of its
outstanding shares by treating each shareholder of the money market fund
as having contributed to its capital that number of full and fractional
shares of the money market fund in the account of such shareholder which
represents its proportion of such excess. Each shareholder of the money
market fund will be deemed to have agreed to such contribution in these
circumstances by its investment in the money market fund. This procedure
would permit the net asset value per share of the money market fund to be
maintained at a constant $1.00 per share.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to distribute
to its shareholders dividends equal to all of its net investment income
with such frequency as is disclosed in the Fund's prospectus. These Funds'
net investment income consists of non-capital gain income less expenses.
In addition, these Funds intend to distribute net realized short- and
long-term capital gains, if any, at least annually. Shareholders will be
informed of the tax consequences of such distributions, including whether
any portion represents a return of capital, after the end of each calendar
year.
VI TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
TAXATION OF THE FUND
FEDERAL TAXES -- The Fund (even if it is a fund in a Trust with multiple
series) is treated as a separate entity for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund
has elected (or in the case of a new Fund, intends to elect) to be, and
intends to qualify to be treated each year as, a "regulated investment
company" under Subchapter M of the Code by meeting all applicable
requirements of Subchapter M, including requirements as to the nature of
the Fund's gross income, the amount of its distributions (as a percentage
of both its overall income and any tax-exempt income), and the composition
of its portfolio assets. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. The Fund's
foreign-source income, if any, may be subject to foreign withholding
taxes. If the Fund failed to qualify as a "regulated investment company"
in any year, it would incur a regular federal corporate income tax on all
of its taxable income, whether or not distributed, and Fund distributions
would generally be taxable as ordinary dividend income to the
shareholders.
MASSACHUSETTS TAXES -- As long as it qualifies as a regulated investment
company under the Code, the Fund will not be required to pay Massachusetts
income or excise taxes.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Subject to the special rules discussed
below for Municipal Funds, shareholders of the Fund normally will have to
pay federal income tax and any state or local income taxes on the
dividends and capital gain distributions they receive from the Fund. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether paid in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), whether paid in cash or
reinvested in additional shares, are taxable to shareholders as long-term
capital gains for federal income tax purposes without regard to the length
of time the shareholders have held their shares. Any Fund dividend that is
declared in October, November, or December of any calendar year, payable
to shareholders of record in such a month, and paid during the following
January will be treated as if received by the shareholders on December 31
of the year in which the dividend is declared. The Fund will notify
shareholders regarding the federal tax status of its distributions after
the end of each calendar year.
Any Fund distribution, other than dividends that are declared by the
Fund on a daily basis, will have the effect of reducing the per share net
asset value of Fund shares by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any such distribution
(other than an exempt-interest dividend) may thus pay the full price for
the shares and then effectively receive a portion of the purchase price
back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION -- If the Fund receives dividend income from
U.S. corporations, a portion of the Fund's ordinary income dividends is
normally eligible for the dividends-received deduction for corporations if
the recipient otherwise qualifies for that deduction with respect to its
holding of Fund shares. Availability of the deduction for particular
corporate shareholders is subject to certain limitations, and deducted
amounts may be subject to the alternative minimum tax or result in certain
basis adjustments.
DISPOSITION OF SHARES -- In general, any gain or loss realized upon a
disposition of Fund shares by a shareholder that holds such shares as a
capital asset will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a
disposition of Fund shares held for six months or less will be treated as
a long-term capital loss to the extent of any distributions of net capital
gain made with respect to those shares. Any loss realized upon a
disposition of shares may also be disallowed under rules relating to "wash
sales." Gain may be increased (or loss reduced) upon a redemption of Class
A Fund shares held for 90 days or less followed by any purchase (including
purchases by exchange or by reinvestment) without payment of an additional
sales charge of Class A shares of the Fund or of any other shares of an
MFS Fund generally sold subject to a sales charge.
DISTRIBUTION/ACCOUNTING POLICIES -- The Fund's current distribution and
accounting policies will affect the amount, timing, and character of
distributions to shareholders and may, under certain circumstances, make
an economic return of capital taxable to shareholders.
U.S. TAXATION OF NON-U.S. PERSONS -- Dividends and certain other payments
(but not including distributions of net capital gains) to persons who are
not citizens or residents of the United States or U.S. entities ("Non-U.S.
Persons") are generally subject to U.S. tax withholding at the rate of
30%. The Fund intends to withhold at that rate on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. Any
amounts overwithheld may be recovered by such persons by filing a claim
for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims.
BACKUP WITHHOLDING -- The Fund is also required in certain circumstances
to apply backup withholding at the rate of 31% on taxable dividends and
capital gain distributions (and redemption proceeds, if applicable) paid
to any non-corporate shareholder (including a Non-U.S. Person) who does
not furnish to the Fund certain information and certifications or who is
otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
FOREIGN INCOME TAXATION OF NON-U.S. PERSONS -- Distributions received from
the Fund by Non-U.S. Persons may also be subject to tax under the laws of
their own jurisdictions.
STATE AND LOCAL INCOME TAXES: U.S. GOVERNMENT SECURITIES -- Dividends paid
by the Fund that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but
generally not distributions of capital gains realized upon the disposition
of such obligations) may be exempt from state and local income taxes. The
Fund generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
CERTAIN SPECIFIC INVESTMENTS -- Any investment in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped
securities, and certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments
with respect to those securities. To distribute this income (as well as
non-cash income described in the next two paragraphs) and avoid a tax on
the Fund, the Fund may be required to liquidate portfolio securities that
it might otherwise have continued to hold, potentially resulting in
additional taxable gain or loss to the Fund. Any investment in residual
interests of a CMO that has elected to be treated as a real estate
mortgage investment conduit, or "REMIC," can create complex tax problems,
especially if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by the Fund on the last business day of each taxable year
will be marked to market (i.e., treated as if closed out) on that day, and
any gain or loss associated with the positions will be treated as 60%
long-term and 40% short-term capital gain or loss. Certain positions held
by the Fund that substantially diminish its risk of loss with respect to
other positions in its portfolio may constitute "straddles," and may be
subject to special tax rules that would cause deferral of Fund losses,
adjustments in the holding periods of Fund securities, and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles that may alter the effects of these rules. The Fund will limit
its activities in options, Futures Contracts, Forward Contracts, short
sales "against the box" and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect to
foreign investments by the Fund. Foreign exchange gains and losses
realized by the Fund may be treated as ordinary income and loss. Use of
foreign currencies for non-hedging purposes and investment by the Fund in
certain "passive foreign investment companies" may be limited in order to
avoid a tax on the Fund. The Fund may elect to mark to market any
investments in "passive foreign investment companies" on the last day of
each year. This election may cause the Fund to recognize income prior to
the receipt of cash payments with respect to those investments; in order
to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or
loss to the Fund.
FOREIGN INCOME TAXES -- Investment income received by the Fund and gains
with respect to foreign securities may be subject to foreign income taxes
withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of
tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance, since the
amount of the Fund's assets to be invested within various countries is not
known.
If the Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, it may elect to "pass
through" to its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by it and thus includable in their gross income for
federal income tax purposes. Shareholders who itemize deductions would
then be allowed to claim a deduction or credit (but not both) on their
federal income tax returns for such amounts, subject to certain
limitations. Shareholders who do not itemize deductions would (subject to
such limitations) be able to claim a credit but not a deduction. No
deduction will be permitted to individuals in computing their alternative
minimum tax liability. If the Fund is not eligible, or does not elect, to
"pass through" to its shareholders foreign income taxes it has paid,
shareholders will not be able to claim any deduction or credit for any
part of the foreign taxes paid by the Fund.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS The following special rules
apply to shareholders of funds whose objective is to invest primarily in
obligations that pay interest that is exempt from federal income tax
("Municipal Funds").
TAX EXEMPT DISTRIBUTIONS -- The portion of a Municipal Fund's
distributions of net investment income that is attributable to interest
from tax-exempt securities will be designated by the Fund as an "exempt-
interest dividend" under the Code and will generally be exempt from
federal income tax in the hands of shareholders so long as at least 50% of
the total value of the Fund's assets consists of tax-exempt securities at
the close of each quarter of the Fund's taxable year. Distributions of
tax-exempt interest earned from certain securities may, however, be
treated as an item of tax preference for shareholders under the federal
alternative minimum tax, and all exempt-interest dividends may increase a
corporate shareholder's alternative minimum tax. Except when the Fund
provides actual monthly percentage breakdowns, the percentage of income
designated as tax-exempt will be applied uniformly to all distributions by
the Fund of net investment income made during each fiscal year of the Fund
and may differ from the percentage of distributions consisting of
tax-exempt interest in any particular month. Shareholders are required to
report exempt-interest dividends received from the Fund on their federal
income tax returns.
TAXABLE DISTRIBUTIONS -- A Municipal Fund may also earn some income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may recognize capital gains and losses as a
result of the disposition of securities and from certain options and
futures transactions. Shareholders normally will have to pay federal
income tax on the non-exempt-interest dividends and capital gain
distributions they receive from the Fund, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. Because the Fund expects to earn primarily tax-exempt
interest income, it is expected that no Fund dividends will qualify for
the dividends-received deduction for corporations.
CONSEQUENCES OF DISTRIBUTIONS BY A MUNICIPAL FUND: EFFECT OF ACCRUED TAX-
EXEMPT INCOME -- Shareholders redeeming shares after tax-exempt income has
been accrued but not yet declared as a dividend should be aware that a
portion of the proceeds realized upon redemption of the shares will
reflect the existence of such accrued tax-exempt income and that this
portion will be subject to tax as a capital gain even though it would have
been tax-exempt had it been declared as a dividend prior to the
redemption. For this reason, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after the Fund declares dividends
representing substantially all the ordinary income (including tax-exempt
income) accrued for that month.
CERTAIN ADDITIONAL INFORMATION FOR MUNICIPAL FUND SHAREHOLDERS -- Interest
on indebtedness incurred by shareholders to purchase or carry Fund shares
will not be deductible for federal income tax purposes. Exempt-interest
dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by private activity
bonds should consult their tax advisors before purchasing Fund shares.
CONSEQUENCES OF REDEMPTION OF SHARES -- Any loss realized on a redemption
of Municipal Fund shares held for six months or less will be disallowed to
the extent of any exempt-interest dividends received with respect to those
shares. If not disallowed, any such loss will be treated as a long-term
capital loss to the extent of any distributions of net capital gain made
with respect to those shares.
STATE AND LOCAL INCOME TAXES: MUNICIPAL OBLIGATIONS -- The exemption of
exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of an
exempt-interest dividend that represents interest received by a regulated
investment company on its holdings of securities issued by that state and
its political subdivisions and instrumentalities. Therefore, the Fund will
report annually to its shareholders the percentage of interest income
earned by it during the preceding year on Municipal Bonds and will
indicate, on a state-by-state basis only, the source of such income.
VII PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other
clients of the Adviser, or any subsidiary of the Adviser in a similar
capacity. Changes in the Fund's investments are reviewed by the Trust's
Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom
as to the markets in and broker-dealers through which it seeks this
result. In the U.S. and in some other countries debt securities are traded
principally in the over-the-counter market on a net basis through dealers
acting for their own account and not as brokers. In other countries both
debt and equity securities are traded on exchanges at fixed commission
rates. The cost of securities purchased from underwriters includes an
underwriter's commission or concession, and the prices at which securities
are purchased and sold from and to dealers include a dealer's mark-up or
mark-down. The Adviser normally seeks to deal directly with the primary
market makers or on major exchanges unless, in its opinion, better prices
are available elsewhere. Subject to the requirement of seeking execution
at the best available price, securities may, as authorized by the Advisory
Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser. At
present no arrangements for the recapture of commission payments are in
effect.
Consistent with the foregoing primary consideration, the Conduct Rules
of the National Association of Securities Dealers, Inc. ("NASD") and such
other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund and of the other investment company clients of
MFD as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the
Adviser, an amount of commission for effecting a securities transaction
for the Fund in excess of the amount other broker-dealers would have
charged for the transaction, if the Adviser determines in good faith that
the greater commission is reasonable in relation to the value of the
brokerage and research services provided by the executing broker-dealer
viewed in terms of either a particular transaction or their respective
overall responsibilities to the Fund or to their other clients. Not all of
such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or of purchasers or
sellers of securities; furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts; and effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
the Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might
charge may be paid to broker-dealers who were selected to execute
transactions on behalf of the Fund and the Adviser's other clients in part
for providing advice as to the availability of securities or of purchasers
or sellers of securities and services in effecting securities transactions
and performing functions incidental thereto, such as clearance and
settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions. Securities
may be bought or sold from time to time through such broker-dealers, on
behalf of the Fund.
The Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The Adviser sometimes uses
evaluations resulting from this effort as a consideration in the selection
of brokers to execute portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence
of the Adviser's receipt of brokerage and research service. To the extent
the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed
those that might otherwise be paid for such portfolio transactions, or for
such portfolio transactions and research, by an amount which cannot be
presently determined. Such services would be useful and of value to the
Adviser in serving both the Fund and other clients and, conversely, such
services obtained by the placement of brokerage business of other clients
would be useful to the Adviser in carrying out its obligations to the
Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the
additional expenses which would be incurred if it should attempt to
develop comparable information through its own staff.
In certain instances there may be securities which are suitable for the
Fund's portfolio as well as for that of one or more of the other clients
of the Adviser or any subsidiary of the Adviser. Investment decisions for
the Fund and for such other clients are made with a view to achieving
their respective investment objectives. It may develop that a particular
security is bought or sold for only one client even though it might be
held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other
clients are selling that same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more
clients are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner believed
by the adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume
of the security as far as the Fund is concerned. In other cases, however,
the Fund believes that its ability to participate in volume transactions
will produce better executions for the Fund.
VIII DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each
day during which the New York Stock Exchange is open for trading. (As of
the date of this SAI, the Exchange is open for trading every weekday
except for the following holidays (or the days on which they are
observed): New Year's Day; Martin Luther King Day; Presidents' Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day and
Christmas Day.) This determination is made once each day as of the close
of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of
shares of the class outstanding.
MONEY MARKET FUNDS
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has determined in good faith constitutes fair value for
the purposes of complying with the 1940 Act. This valuation method will
continue to be used until such time as the Board of Trustees determines
that it does not constitute fair value for such purposes. Each money
market fund will limit its portfolio to those investments in U.S.
dollar-denominated instruments which its Board of Trustees determines
present minimal credit risks, and which are of high quality as determined
by any major rating service or, in the case of any instrument that is not
so rated, of comparable quality as determined by the Board of Trustees.
Each money market fund has also agreed to maintain a dollar-weighted
average maturity of 90 days or less and to invest only in securities
maturing in 13 months or less. The Board of Trustees which oversees each
money market fund has established procedures designed to stabilize its net
asset value per share, as computed for the purposes of sales and
redemptions, at $1.00 per share. If the Board determines that a deviation
from the $1.00 per share price may exist which may result in a material
dilution or other unfair result to investors or existing shareholders, it
will take corrective action it regards as necessary and appropriate, which
action could include the sale of instruments prior to maturity (to realize
capital gains or losses); shortening average portfolio maturity;
withholding dividends; or using market quotations for valuation purposes.
OTHER FUNDS
The following valuation techniques apply to each MFS Fund that is not a
money market fund.
Equity securities in the Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the Nasdaq
stock market system for unlisted national market issues, or at the last
quoted bid price for listed securities in which there were no sales during
the day or for unlisted securities not reported on the Nasdaq stock market
system. Bonds and other fixed income securities (other than short-term
obligations) of U.S. issuers in the Fund's portfolio are valued on the
basis of valuations furnished by a pricing service which utilizes both
dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other market data without
exclusive reliance upon quoted prices or exchange or over-the-counter
prices, since such valuations are believed to reflect more accurately the
fair value of such securities. Forward Contracts will be valued using a
pricing model taking into consideration market data from an external
pricing source. Use of the pricing services has been approved by the Board
of Trustees.
All other securities, futures contracts and options in the Fund's
portfolio (other than short-term obligations) for which the principal
market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or at
the settlement price prior to the determination (or if there has been no
current sale, at the closing bid price) on the primary exchange on which
such securities, futures contracts or options are traded; but if a
securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the Nasdaq
stock market system, in which case they are valued at the last sale price
or, if no sales occurred during the day, at the last quoted bid price.
Short-term obligations in the Fund's portfolio are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Short-term obligations with a remaining maturity in excess of 60 days will
be valued upon dealer supplied valuations. Portfolio investments for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the close of regular trading on the
Exchange. Occasionally, events affecting the values of such securities may
occur between the times at which they are determined and the close of
regular trading on the Exchange which will not be reflected in the
computation of the Fund's net asset value unless the Trustees deem that
such event would materially affect the net asset value in which case an
adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. A share's net asset value is effective
for orders received by the dealer prior to its calculation and received by
MFD prior to the close of that business day.
IX PERFORMANCE INFORMATION
MONEY MARKET FUNDS
Each MFS Fund that is a money market fund will provide current annualized
and effective annualized yield quotations based on the daily dividends of
shares of the money market fund. These quotations may from time to time be
used in advertisements, shareholder reports or other communications to
shareholders.
Any current yield quotation of a money market fund which is used in
such a manner as to be subject to the provisions of Rule 482(d) under the
1933 Act shall consist of an annualized historical yield, carried at least
to the nearest hundredth of one percent based on a specific seven calendar
day period and shall be calculated by dividing the net change in the value
of an account having a balance of one share of that class at the beginning
of the period by the value of the account at the beginning of the period
and multiplying the quotient by 365/7. For this purpose the net change in
account value would reflect the value of additional shares purchased with
dividends declared on the original share and dividends declared on both
the original share and any such additional shares, but would not reflect
any realized gains or losses from the sale of securities or any unrealized
appreciation or depreciation on portfolio securities. In addition, any
effective yield quotation of a money market fund so used shall be
calculated by compounding the current yield quotation for such period by
multiplying such quotation by 7/365, adding 1 to the product, raising the
sum to a power equal to 365/7, and subtracting 1 from the result. These
yield quotations should not be considered as representative of the yield
of a money market fund in the future since the yield will vary based on
the type, quality and maturities of the securities held in its portfolio,
fluctuations in short-term interest rates and changes in the money market
fund's expenses.
OTHER FUNDS
Each MFS Fund that is not a money market fund may quote the following
performance results.
TOTAL RATE OF RETURN -- The Fund will calculate its total rate of return
for each class of shares for certain periods by determining the average
annual compounded rates of return over those periods that would cause an
investment of $1,000 (made with all distributions reinvested and
reflecting the CDSC or the maximum public offering price) to reach the
value of that investment at the end of the periods. The Fund may also
calculate (i) a total rate of return, which is not reduced by any
applicable CDSC and therefore may result in a higher rate of return, (ii)
a total rate of return assuming an initial account value of $1,000, which
will result in a higher rate of return since the value of the initial
account will not be reduced by any applicable sales charge and/or (iii)
total rates of return which represent aggregate performance over a period
or year- by-year performance, and which may or may not reflect the effect
of the maximum or other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially offered
for sale to, and purchased by, the public on different dates (the class
"inception date"). The calculation of total rate of return for a class of
shares which has a later class inception date than another class of shares
of the Fund is based both on (i) the performance of the Fund's newer class
from its inception date and (ii) the performance of the Fund's oldest
class from its inception date up to the class inception date of the newer
class.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares
differ. In calculating total rate of return for a newer class of shares in
accordance with certain formulas required by the SEC, the performance will
be adjusted to take into account the fact that the newer class is subject
to a different sales charge than the oldest class (e.g., if the newer
class is Class A shares, the total rate of return quoted will reflect the
deduction of the initial sales charge applicable to Class A shares; if the
newer class is Class B shares, the total rate of return quoted will
reflect the deduction of the CDSC applicable to Class B shares). However,
the performance will not be adjusted to take into account the fact that
the newer class of shares bears different class specific expenses than the
oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the total rate
of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for
the entire period over which the calculation is based (i.e., the total
rate of return quoted for the newer class will be higher than the return
that would have been quoted had the newer class of shares been outstanding
for the entire period over which the calculation is based if the class
specific expenses for the newer class are higher than the class specific
expenses of the oldest class, and the total rate of return quoted for the
newer class will be lower than the return that would be quoted had the
newer class of shares been outstanding for this entire period if the class
specific expenses for the newer class are lower than the class specific
expenses of the oldest class).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
YIELD -- Any yield quotation for a class of shares of the Fund is based on
the annualized net investment income per share of that class for the 30-
day period. The yield for each class of the Fund is calculated by dividing
the net investment income allocated to that class earned during the period
by the maximum offering price per share of that class of the Fund on the
last day of the period. The resulting figure is then annualized. Net
investment income per share of a class is determined by dividing (i) the
dividends and interest allocated to that class during the period, minus
accrued expense of that class for the period by (ii) the average number of
shares of the class entitled to receive dividends during the period
multiplied by the maximum offering price per share on the last day of the
period. The Fund's yield calculations assume a maximum sales charge of
5.75% in the case of Class A shares and no payment of any CDSC in the case
of Class B and Class C shares.
TAX-EQUIVALENT YIELD -- The tax-equivalent yield for a class of shares of
a Fund is calculated by determining the rate of return that would have to
be achieved on a fully taxable investment in such shares to produce the
after-tax equivalent of the yield of that class. In calculating tax-
equivalent yield, a Fund assumes certain federal tax brackets for
shareholders and does not take into account state taxes.
CURRENT DISTRIBUTION RATE -- Yield, which is calculated according to a
formula prescribed by the Securities and Exchange Commission, is not
indicative of the amounts which were or will be paid to the Fund's
shareholders. Amounts paid to shareholders of each class are reflected in
the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result
by the maximum offering price or net asset value per share on the last day
of the period. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income for
option writing, short-term capital gains and return of invested capital,
and may be calculated over a different period of time. The Fund's current
distribution rate calculation for Class B shares and Class C shares
assumes no CDSC is paid.
GENERAL
From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited
to the following: Money, Fortune, U.S. News and World Report, Kiplinger's
Personal Finance, The Wall Street Journal, Barron's, Investors Business
Daily, Newsweek, Financial World, Financial Planning, Investment Advisor,
USA Today, Pensions and Investments, SmartMoney, Forbes, Global Finance,
Registered Representative, Institutional Investor, the Investment Company
Institute, Johnson's Charts, Morningstar, Lipper Analytical Securities
Corporation, CDA Wiesenberger, Shearson Lehman and Salomon Bros. Indices,
Ibbotson, Business Week, Lowry Associates, Media General, Investment
Company Data, The New York Times, Your Money, Strangers Investment
Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may
also quote evaluations mentioned in independent radio or television
broadcasts and use charts and graphs to illustrate the past performance of
various indices such as those mentioned above and illustrations using
hypothetical rates of return to illustrate the effects of compounding and
tax-deferral. The Fund may advertise examples of the effects of periodic
investment plans, including the principle of dollar cost averaging. In
such a program, an investor invests a fixed dollar amount in a fund at
periodic intervals, thereby purchasing fewer shares when prices are high
and more shares when prices are low. While such a strategy does not assure
a profit or guard against a loss in a declining market, the investor's
average cost per share can be lower than if fixed numbers of shares are
purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio
manager as well as other investment personnel, including such persons'
views on: the economy; securities markets; portfolio securities and their
issuers; investment philosophies, strategies, techniques and criteria used
in the selection of securities to be purchased or sold for the Fund; the
Fund's portfolio holdings; the investment research and analysis process;
the formulation and evaluation of investment recommendations; and the
assessment and evaluation of credit, interest rate, market and economic
risks, and similar or related matters.
The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund
categories established by Morningstar (or other nationally recognized
statistical ratings organizations) and to other MFS Funds.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal,
tax, accounting, insurance, estate planning and other professionals, or
from surveys, regarding individual and family financial planning. Such
views may include information regarding: retirement planning, including
issues concerning social security; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and
disciplined saving and investing); business succession; ideas and
information provided through the MFS Heritage Planning(SM) program, an
intergenerational financial planning assistance program; issues with
respect to insurance (e.g., disability and life insurance and Medicare
supplemental insurance); issues regarding financial and health care
management for elderly family members; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
From time to time, the Fund may also advertise annual returns showing
the cumulative value of an initial investment in the Fund in various
amounts over specified periods, with capital gain and dividend
distributions invested in additional shares or taken in cash, and with no
adjustment for any income taxes (if applicable) payable by shareholders.
MFS FIRSTS
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in-house analytical capability for an investment management
firm.
o 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act" or
"Full Disclosure Act").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal
securities.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard(R) Equity
Fund, the first fund to invest principally in companies deemed to be
union-friendly by an advisory board of senior labor officials, senior
managers of companies with significant labor contracts, academics and
other national labor leaders or experts.
X SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS
The Fund makes available the following programs designed to enable
shareholders to add to their investment or withdraw from it with a minimum
of paper work. These programs are described below and, in certain cases,
in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases)
and may be changed or discontinued at any time by a shareholder or the
Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of MFS Funds
or MFS Fixed Fund (a bank collective investment fund) within a 13-month
period (or 36-month period, in the case of purchases of $1 million or
more), the shareholder may obtain Class A shares of the Fund at the same
reduced sales charge as though the total quantity were invested in one
lump sum by completing the Letter of Intent section of the Account
Application or filing a separate Letter of Intent application (available
from MFSC) within 90 days of the commencement of purchases. Subject to
acceptance by MFD and the conditions mentioned below, each purchase will
be made at a public offering price applicable to a single transaction of
the dollar amount specified in the Letter of Intent application. The
shareholder or his dealer must inform MFD that the Letter of Intent is in
effect each time shares are purchased. The shareholder makes no commitment
to purchase additional shares, but if his purchases within 13 months (or
36 months in the case of purchases of $1 million or more) plus the value
of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a
person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the
shares were paid for by the person signing such Letter. Neither income
dividends nor capital gain distributions taken in additional shares will
apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the
Fund pursuant to the Distribution Investment Program will also not apply
toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by MFSC in the form of shares
registered in the shareholder's name. All income dividends and capital
gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed
(either prior to or by the end of the 13-month period or 36-month period,
as applicable), the shareholder will be notified and the escrowed shares
will be released.
If the intended investment is not completed, MFSC will redeem an
appropriate number of the escrowed shares in order to realize such
difference. Shares remaining after any such redemption will be released by
MFSC. By completing and signing the Account Application or separate Letter
of Intent application, the shareholder irrevocably appoints MFSC his
attorney to surrender for redemption any or all escrowed shares with full
power of substitution in the premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment,
together with the current offering price value of all holdings of Class A,
Class B and Class C shares of that shareholder in the MFS Funds or MFS
Fixed Fund reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. A shareholder must provide MFSC
(or his investment dealer must provide MFD) with information to verify
that the quantity sales charge discount is applicable at the time the
investment is made.
SUBSEQUENT INVESTMENT BY TELEPHONE -- Each shareholder may purchase
additional shares of any MFS Fund by telephoning MFSC toll-free at (800)
225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application
and designate thereon a bank and account number from which purchases will
be made. If a telephone purchase request is received by MFSC on any
business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the
closing net asset value of the shares purchased on that day. MFSC may be
liable for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the
identity of the caller. MFSC will request personal or other information
from the caller, and will normally also record calls. Shareholders should
verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and capital
gains made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of that fund are available for sale. Such investments
will be subject to additional purchase minimums. Distributions will be
invested at net asset value (exclusive of any sales charge) and will not
be subject to any CDSC. Distributions will be invested at the close of
business on the payable date for the distribution. A shareholder
considering the Distribution Investment Program should obtain and read the
prospectus of the other fund and consider the differences in objectives
and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN -- A shareholder may direct MFSC to send him
(or anyone he designates) regular periodic payments based upon the value
of his account. Each payment under a Systematic Withdrawal Plan ("SWP")
must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant
to a SWP generally are limited to 10% of the value of the account at the
time of establishment of the SWP. SWP payments are drawn from the proceeds
of share redemptions (which would be a return of principal and, if
reflecting a gain, would be taxable). Redemptions of Class B and Class C
shares will be made in the following order: (i) shares representing
reinvested distributions; (ii) shares representing undistributed capital
gains and income; and (iii) to the extent necessary, shares representing
direct investments subject to the lowest CDSC. The CDSC will be waived in
the case of redemptions of Class B and Class C shares pursuant to a SWP,
but will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC. To the extent that redemptions for such
periodic withdrawals exceed dividend income reinvested in the account,
such redemptions will reduce and may eventually exhaust the number of
shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be received in full and
fractional shares of the Fund at the net asset value in effect at the
close of business on the record date for such distributions. To initiate
this service, shares having an aggregate value of at least $5,000 either
must be held on deposit by, or certificates for such shares must be
deposited with, MFSC. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be
disadvantageous because of the sales charges included in share purchases
and the imposition of a CDSC on certain redemptions. The shareholder may
deposit into the account additional shares of the Fund, change the payee
or change the dollar amount of each payment. MFSC may charge the account
for services rendered and expenses incurred beyond those normally assumed
by the Fund with respect to the liquidation of shares. No charge is
currently assessed against the account, but one could be instituted by
MFSC on 60 days' notice in writing to the shareholder in the event that
the Fund ceases to assume the cost of these services. The Fund may
terminate any SWP for an account if the value of the account falls below
$5,000 as a result of share redemptions (other than as a result of a SWP)
or an exchange of shares of the Fund for shares of another MFS Fund. Any
SWP may be terminated at any time by either the shareholder or the Fund.
INVEST BY MAIL -- Additional investments of $50 or more may be made at any
time by mailing a check payable to the Fund directly to MFSC. The
shareholder's account number and the name of his investment dealer must be
included with each investment.
GROUP PURCHASES -- A bona fide group and all its members may be treated at
MFD's discretion as a single purchaser and, under the Right of
Accumulation (but not the Letter of Intent) obtain quantity sales charge
discounts on the purchase of Class A shares if the group (1) gives its
endorsement or authorization to the investment program so it may be used
by the investment dealer to facilitate solicitation of the membership,
thus effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals whose
sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder (if
available for sale). Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by MFSC of an application in good
order. Exchanges will continue to be made from a shareholder's account in
any MFS Fund, as long as the balance of the account is sufficient to
complete the exchanges. Additional payments made to a shareholder's
account will extend the period that exchanges will continue to be made
under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before
an exchange is scheduled, such funds may not be available for exchanges
until the following month; therefore, care should be used to avoid
inadvertently terminating the Automatic Exchange Plan through exhaustion
of the account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market
Fund, MFS Government Money Market Fund and Class A shares of MFS Cash
Reserve Fund will be subject to any applicable sales charge. Changes in
amounts to be exchanged to the Fund, the funds to which exchanges are to
be made and the timing of exchanges (monthly or quarterly), or termination
of a shareholder's participation in the Automatic Exchange Plan will be
made after instructions in writing or by telephone (an "Exchange Change
Request") are received by MFSC in proper form (i.e., if in writing --
signed by the record owner(s) exactly as shares are registered; if by
telephone -- proper account identification is given by the dealer or
shareholder of record). Each Exchange Change Request (other than
termination of participation in the program) must involve at least $50.
Generally, if an Exchange Change Request is received by telephone or in
writing before the close of business on the last business day of a month,
the Exchange Change Request will be effective for the following month's
exchange.
A shareholder's right to make additional investments in any of the MFS
Funds, to make exchanges of shares from one MFS Fund to another and to
withdraw from an MFS Fund, as well as a shareholder's other rights and
privileges are not affected by a shareholder's participation in the
Automatic Exchange Plan. The Automatic Exchange Plan is part of the
Exchange Privilege. For additional information regarding the Automatic
Exchange Plan, including the treatment of any CDSC, see "Exchange
Privilege" below.
REINSTATEMENT PRIVILEGE -- Shareholders of the Fund and shareholders of
the other MFS Funds (except MFS Money Market Fund, MFS Government Money
Market Fund and holders of Class A shares of MFS Cash Reserve Fund in the
case where shares of such funds are acquired through direct purchase or
reinvested dividends) who have redeemed their shares have a one-time right
to reinvest the redemption proceeds in the same class of shares of any of
the MFS Funds (if shares of the fund are available for sale) at net asset
value (without a sales charge) and, if applicable, with credit for any
CDSC paid. In the case of proceeds reinvested in MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve
Fund, the shareholder has the right to exchange the acquired shares for
shares of another MFS Fund at net asset value pursuant to the exchange
privilege described below. Such a reinvestment must be made within 90 days
of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited for any CDSC paid are then redeemed within six
years of the initial purchase in the case of Class B shares or 12 months
of the initial purchase in the case of Class C shares and certain Class A
shares, a CDSC will be imposed upon redemption. Although redemptions and
repurchases of shares are taxable events, a reinvestment within a certain
period of time in the same fund may be considered a "wash sale" and may
result in the inability to recognize currently all or a portion of a loss
realized on the original redemption for federal income tax purposes.
Please see your tax adviser for further information.
EXCHANGE PRIVILEGE
Subject to the requirements set forth below, some or all of the shares of
the same class in an account with the Fund for which payment has been
received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the Class of shares) at
net asset value. Exchanges will be made only after instructions in writing
or by telephone (an "Exchange Request") are received for an established
account by MFSC.
EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market
funds) -- No initial sales charge or CDSC will be imposed in connection
with an exchange from shares of an MFS Fund to shares of any other MFS
Fund, except with respect to exchanges from an MFS money market fund to
another MFS Fund which is not an MFS money market fund (discussed below).
With respect to an exchange involving shares subject to a CDSC, the CDSC
will be unaffected by the exchange and the holding period for purposes of
calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND -- Special rules apply with
respect to the imposition of an initial sales charge or a CDSC for
exchanges from an MFS money market fund to another MFS Fund which is not
an MFS money market fund. These rules are described under the caption "How
to Purchase, Exchange and Redeem Shares" in the Prospectuses of those MFS
money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND -- Class A shares of any MFS Fund
held by certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund)
(the "Units"), and Units may be exchanged for Class A shares of any MFS
Fund. With respect to exchanges between Class A shares subject to a CDSC
and Units, the CDSC will carry over to the acquired shares or Units and
will be deducted from the redemption proceeds when such shares or Units
are subsequently redeemed, assuming the CDSC is then payable (the period
during which the Class A shares and the Units were held will be aggregated
for purposes of calculating the applicable CDSC). In the event that a
shareholder initially purchases Units and then exchanges into Class A
shares subject to an initial sales charge of an MFS Fund, the initial
sales charge shall be due upon such exchange, but will not be imposed with
respect to any subsequent exchanges between such Class A shares and Units
with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC
period will commence upon such exchange, and the applicability of the CDSC
with respect to subsequent exchanges shall be governed by the rules set
forth above in this paragraph.
GENERAL -- Each Exchange Request must be in proper form (i.e., if in
writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by
the dealer or shareholder of record), and each exchange must involve
either shares having an aggregate value of at least $1,000 ($50 in the
case of retirement plan participants whose sponsoring organizations
subscribe to MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by MFSC) or all the shares in the
account. Each exchange involves the redemption of the shares of the Fund
to be exchanged and the purchase of shares of the same class of the other
MFS Fund. Any gain or loss on the redemption of the shares exchanged is
reportable on the shareholder's federal income tax return, unless both the
shares received and the shares surrendered in the exchange are held in a
tax-deferred retirement plan or other tax-exempt account. No more than
five exchanges may be made in any one Exchange Request by telephone. If
the Exchange Request is received by MFSC prior to the close of regular
trading on the Exchange the exchange usually will occur on that day if all
the requirements set forth above have been complied with at that time.
However, payment of the redemption proceeds by the Fund, and thus the
purchase of shares of the other MFS Fund, may be delayed for up to seven
days if the Fund determines that such a delay would be in the best
interest of all its shareholders. Investment dealers which have satisfied
criteria established by MFD may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the requirements set forth above.
Additional information with respect to any of the MFS Funds, including
a copy of its current prospectus, may be obtained from investment dealers
or MFSC. A shareholder considering an exchange should obtain and read the
prospectus of the other fund and consider the differences in objectives
and policies before making any exchange.
Any state income tax advantages for investment in shares of each state-
specific series of MFS Municipal Series Trust may only benefit residents
of such states. Investors should consult with their own tax advisers to be
sure this is an appropriate investment, based on their residency and each
state's income tax laws. The exchange privilege (or any aspect of it) may
be changed or discontinued and is subject to certain limitations imposed
from time to time at the discretion of the Funds in order to protect the
Funds.
TAX-DEFERRED RETIREMENT PLANS
Shares of the Fund may be purchased by all types of tax-deferred
retirement plans. MFD makes available, through investment dealers, plans
and/or custody agreements, the following:
o Traditional Individual Retirement Accounts (IRAs) (for individuals who
desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who
desire to make limited contributions to a tax-favored retirement
program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public school systems and certain non-profit organizations); and
o Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or
group establishing the plan) and contain specific information about the
plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by the trustee, custodian or MFD, tax consequences
and redemption information, see the specific documents for that plan. Plan
documents other than those provided by MFD may be used to establish any of
the plans described above. Third party administrative services, available
for some corporate plans, may limit or delay the processing of
transactions.
An investor should consult with his tax adviser before establishing
any of the tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any
retirement plan qualified under Internal Revenue Code Section 401(a) or
403(b) if the retirement plan and/or the sponsoring organization subscribe
to the MFS FUNDamental 401(k) Plan or another similar Section 401(a) or
403(b) recordkeeping program made available by MFSC.
XI DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional Shares of Beneficial Interest (without par value)
of one or more separate series and to divide or combine the shares of any
series into a greater or lesser number of shares without thereby changing
the proportionate beneficial interests in that series. The Declaration of
Trust further authorizes the Trustees to classify or reclassify any series
of shares into one or more classes. Each share of a class of the Fund
represents an equal proportionate interest in the assets of the Fund
allocable to that class. Upon liquidation of the Fund, shareholders of
each class of the Fund are entitled to share pro rata in the Fund's net
assets allocable to such class available for distribution to shareholders.
The Trust reserves the right to create and issue a number of series and
additional classes of shares, in which case the shares of each class of a
series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote
in the election of Trustees and on other matters submitted to meetings of
shareholders. To the extent a shareholder of the Fund owns a controlling
percentage of the Fund's shares, such shareholder may affect the outcome
of such matters to a greater extent than other Fund shareholders. Although
Trustees are not elected annually by the shareholders, the Declaration of
Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the
Trust. A meeting of shareholders will be called upon the request of
shareholders of record holding in the aggregate not less than 10% of the
outstanding voting securities of the Trust. No material amendment may be
made to the Declaration of Trust without the affirmative vote of a
majority of the Trust's outstanding shares (as defined in "Investment
Restrictions" in Part I of this SAI). The Trust or any series of the Trust
may be terminated (i) upon the merger or consolidation of the Trust or any
series of the Trust with another organization or upon the sale of all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the
holders of two-thirds of the Trust's or the affected series' outstanding
shares voting as a single class, or of the affected series of the Trust,
except that if the Trustees recommend such merger, consolidation or sale,
the approval by vote of the holders of a majority of the Trust's or the
affected series' outstanding shares will be sufficient, or (ii) upon
liquidation and distribution of the assets of a Fund, if approved by the
vote of the holders of two-thirds of its outstanding shares of the Trust,
or (iii) by the Trustees by written notice to its shareholders. If not so
terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust
may, under certain circumstances, be held personally liable as partners
for its obligations. However, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust
and provides for indemnification and reimbursement of expenses out of
Trust property for any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust also provides that the
Trust shall maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Trust and
its shareholders and the Trustees, officers, employees and agents of the
Trust covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which both inadequate insurance existed and
the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or
failure to act, but nothing in the Declaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by reason of
his willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
<PAGE>
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PART II - APPENDIX A
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WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the CDSC
for Class A shares are waived (Section II), and the CDSC for Class B and
Class C shares is waived (Section III). Some of the following information
will not apply to certain funds in the MFS Family of Funds, depending on
which classes of shares are offered by such fund. As used in this Appendix,
the term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD.
I WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any fund in the MFS Funds pursuant to the
Distribution Investment Program.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
AFFILIATES OF AN MFS FUND/CERTAIN DEALERS.
Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses or
domestic partners identified above and certain trusts, pension,
profit-sharing or other retirement plans for the sole benefit of such
persons, provided the shares are not resold except to the MFS Fund
which issued the shares; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> Distributions from a 401(a) or ESP Plan that has invested its
assets in one or more of the MFS Funds for more than 10 years from
the later to occur of: (i) January 1, 1993 or (ii) the date such
401(a) or ESP Plan first invests its assets in one or more of the
MFS Funds. The sales charges will be waived in the case of a
redemption of all of the 401(a) or ESP Plan's shares in all MFS
Funds (i.e., all the assets of the 401(a) or ESP Plan invested in
the MFS Funds are withdrawn), unless immediately prior to the
redemption, the aggregate amount invested by the 401(a) or ESP Plan
in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of
the total value of the 401(a) or ESP Plan's assets in the MFS
Funds, in which case the sales charges will not be waived; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or one
of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping services
are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination
of employment.
CERTAIN TRANSFERS OF REGISTRATION
(CDSC WAIVER ONLY).
Shares transferred:
o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple accounts
maintained by MFSC on behalf of individual participants of such Plan,
provided that the Plan sponsor subscribes to the MFS FUNDamental 401(k)
Plan or another similar recordkeeping system made available by MFSC.
LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).
II WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
WRAP ACCOUNT AND FUND "SUPERMARKET"
INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account or
a similar program under which such clients pay a fee to such dealer.
INVESTMENT BY INSURANCE COMPANY SEPARATE
ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is
equal to or exceeds $500,000, either alone or in aggregate with the
current market value of the plan's existing Class A shares.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age
of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where the retirement plan and/or sponsoring organization
demonstrates to the satisfaction of, and certifies to, MFSC that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a
market value of $500,000 or more invested in shares of any class or
classes of the MFS Family of Funds and aggregate assets of at least
$10 million;
provided, however, that the CDSC will not be waived (i.e., it will be
imposed) (a) with respect to plans which establish an account with MFSC on
or after November 1, 1997, in the event that the plan makes a complete
redemption of all of its shares in the MFS Family of Funds, or (b) with
respect to plans which establish an account with MFSC prior to November 1,
1997, in the event that there is a change in law or regulations which result
in a material adverse change to the tax advantaged nature of the plan, or in
the event that the plan and/or sponsoring organization: (i) becomes
insolvent or bankrupt; (ii) is terminated under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated with any
other entity.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the proceeds
of a redemption of Class I shares of any of the MFS Funds.
III WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs where
the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account value at the time of
establishment.
DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to MFSC).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
provided, however, that the CDSC will not be waived (i.e., it will
be imposed) in the event that there is a change in law or
regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is
terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with any other entity.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its account
with MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s)
with any MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver category.
<PAGE>
--------------------
PART II - APPENDIX B
--------------------
DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions made to
dealers by MFD in connection with the sale of Fund shares. As used in this
Appendix, the term "dealer" includes any broker, dealer, bank (including
bank trust departments), registered investment adviser, financial planner
and any other financial institutions having a selling agreement or other
similar agreement with MFD.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as shown
in Appendix D to Part I of this SAI. The difference between the total amount
invested and the sum of (a) the net proceeds to the Fund and (b) the dealer
reallowance, is the amount of the initial sales charge retained by MFD (as
shown in Appendix D to Part I of this SAI). Because of rounding in the
computation of offering price, the portion of the sales charge retained by
MFD may vary and the total sales charge may be more or less than the sales
charge calculated using the sales charge expressed as a percentage of the
offering price or as a percentage of the net amount invested as listed in
the Prospectus.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments made through such dealers as follows:
COMMISSION
PAID BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
------------------------------------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
Except for those employer sponsored retirement plans described below, for
purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares purchases for
each shareholder account (and certain other accounts for which the
shareholder is a record or beneficial holder) will be aggregated over a
12-month period (commencing from the date of the first such purchase).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
CLASS B SHARES
For purchases of Class B shares, MFD will pay commissions to dealers of
3.75% of the purchase price of Class B shares purchased through dealers. MFD
will also advance to dealers the first year service fee payable under the
Fund's Distribution Plan at a rate equal to 0.25% of the purchase price of
such shares. Therefore, the total amount paid to a dealer upon the sale of
Class B shares is 4% of the purchase price of the shares (commission rate of
3.75% plus a service fee equal to 0.25% of the purchase price).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and December
31, 1998, MFD pays an amount to dealers equal to 3.00% of the amount
purchased through such dealers (rather than the 4.00% payment described
above), which is comprised of a commission of 2.75% plus the advancement of
the first year service fee equal to 0.25% of the purchase price payable
under the Fund's Distribution Plan.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided that
the plan establishment paperwork is received by MFSC in good order on or
after November 15, 1998), MFD pays no up front commissions to dealers, but
instead pays an amount to dealers equal to 1% per annum of the average daily
net assets of the Fund attributable to plan assets, payable at the rate of
0.25% at the end of each calendar quarter, in arrears. This commission
structure is not available with respect to a plan with a pre-existing
account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper
Plus product.
CLASS C SHARES
For purchases of Class C shares, MFD will pay dealers 1.00% of the purchase
price of Class C shares purchased through dealers and, as compensation
therefor, MFD will retain the 1.00% per annum distribution and service fee
paid under the Fund's Distribution Plan to MFD for the first year after
purchase.
ADDITIONAL DEALER COMMISSIONS/CONCESSIONS
Dealers may receive different compensation with respect to sales of Class A,
Class B and Class C shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified Funds sold by such dealer during a specified sales period.
In addition, MFD or its affiliates may, from time to time, pay dealers an
additional commission equal to 0.50% of the net asset value of all of the
Class B and/or Class C shares of certain specified Funds sold by such dealer
during a specified sales period. In addition, from time to time, MFD, at its
expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell or arrange for the sale of
shares of the Fund. Such concessions provided by MFD may include financial
assistance to dealers in connection with preapproved conferences or
seminars, sales or training programs for invited registered representatives
and other employees, payment for travel expenses, including lodging,
incurred by registered representatives and other employees for such seminars
or training programs, seminars for the public, advertising and sales
campaigns regarding one or more Funds, and/ or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives and other employees in
group meetings or to help pay the expenses of sales contests. Other
concessions may be offered to the extent not prohibited by state laws or any
self-regulatory agency, such as the NASD.
<PAGE>
--------------------
PART II - APPENDIX C
--------------------
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
ASSET-BACKED SECURITIES: The Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Fund may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities (such collateral referred
to collectively as "Mortgage Assets"). Unless the context indicates
otherwise, all references herein to CMOs include multiclass pass-through
securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in
innumerable ways. In a common structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the classes
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any
class of CMOs until all other classes having an earlier stated maturity or
final distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security). See "Stripped Mortgage-Backed Securities" below for a
discussion of the risks of investing in these stripped securities and of
investing in classes consisting of interest payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special
purpose corporations, are backed by a pool of assets, such as credit card
and automobile loan receivables, representing the obligations of a number of
different parties. These securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the
benefit of any security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another
party, there is a risk that the purchaser would acquire an interest superior
to that of the holders of the related automobile receivables. In addition,
because of the large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. The underlying assets
(e.g., loans) are also subject to prepayments which shorten the securities'
weighted average life and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default ensures payment through
insurance policies or letters of credit obtained by the issuer or sponsor
from third parties. The Fund will not pay any additional or separate fees
for credit support. The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit
risk associated with the underlying assets. Delinquency or loss in excess of
that anticipated or failure of the credit support could adversely affect the
return on an investment in such a security.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage
pools are paid off. The average lives of mortgage pass-throughs are variable
when issued because their average lives depend on prepayment rates. The
average life of these securities is likely to be substantially shorter than
their stated final maturity as a result of unscheduled principal prepayment.
Prepayments on underlying mortgages result in a loss of anticipated
interest, and all or part of a premium if any has been paid, and the actual
yield (or total return) to the Fund may be different than the quoted yield
on the securities. Mortgage premiums generally increase with falling
interest rates and decrease with rising interest rates. Like other fixed
income securities, when interest rates rise the value of a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
In the event of an increase in interest rates which results in a decline in
mortgage prepayments, the anticipated maturity of mortgage pass-through
securities held by the Fund may increase, effectively changing a security
which was considered short or intermediate-term at the time of purchase into
a long-term security. Long- term securities generally fluctuate more widely
in response to changes in interest rates than short or intermediate-term
securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by
the full faith and credit of the U.S. Government (in the case of securities
guaranteed by the Government National Mortgage Association ("GNMA")); or
guaranteed by agencies or instrumentalities of the U.S. Government (such as
the Federal National Mortgage Association "FNMA") or the Federal Home Loan
Mortgage Corporation, ("FHLMC") which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and
other secondary market issuers). Some of these mortgage pass-through
securities may be supported by various forms of insurance or guarantees.
Interests in pools of mortgage-related securities differ from other forms
of debt securities, which normally provide for periodic payment of interest
in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by prepayments of principal
resulting from the sale, refinancing or foreclosure of the underlying
property, net of fees or costs which may be incurred. Some mortgage
pass-through securities (such as securities issued by the GNMA) are
described as "modified pass-through." These securities entitle the holder to
receive all interests and principal payments owed on the mortgages in the
mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities
is GNMA. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the timely
payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks
and mortgage bankers) and backed by pools of Federal Housing Administration
("FHA") insured or Veterans Administration ("VA") guaranteed mortgages.
These guarantees, however, do not apply to the market value or yield of
mortgage pass-through securities. GNMA securities are often purchased at a
premium over the maturity value of the underlying mortgages. This premium is
not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S. Government) include FNMA and FHLMC.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional residential
mortgages (i.e., mortgages not insured or guaranteed by any governmental
agency) from a list of approved seller/servicers which include state and
federally chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment by FNMA of
principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) for FHLMC's national portfolio. FHLMC guarantees timely
payment of interest and ultimate collection of principal regardless of the
status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also be
the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments
in the former pools. However, timely payment of interest and principal of
mortgage loans in these pools may be supported by various forms of insurance
or guarantees, including individual loan, title, pool and hazard insurance
and letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers and the mortgage poolers. There can
be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. The Fund
may also buy mortgage-related securities without insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS") which are derivative
multiclass mortgage securities issued by agencies or instrumentalities of
the U.S. Government, or by private originators of, or investors in, mortgage
loans, including savings and loan institutions, mortgage banks, commercial
banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving some of
the interest and most of the principal from the Mortgage Assets, while the
other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "I0" class) while the other class will
receive all of the principal (the principal-only or "P0" class). The yield
to maturity on an I0 is extremely sensitive to the rate of principal
payments, including prepayments on the related underlying Mortgage Assets,
and a rapid rate of principal payments may have a material adverse effect on
such security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Fund may
fail to fully recoup its initial investment in these securities. The market
value of the class consisting primarily or entirely of principal payments
generally is unusually volatile in response to changes in interest rates.
Because SMBS were only recently introduced, established trading markets for
these securities have not yet developed, although the securities are traded
among institutional investors and investment banking firms.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct indebtedness. In purchasing a loan, the Fund acquires some or all of
the interest of a bank or other lending institution in a loan to a
corporate, governmental or other borrower. Many such loans are secured,
although some may be unsecured. Such loans may be in default at the time of
purchase. Loans that are fully secured offer the Fund more protection than
an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the corporate borrowers obligation, or
that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on behalf of
the others in the syndicate, and for enforcing its and their other rights
against the borrower. Alternatively, such loans may be structured as a
novation, pursuant to which the Fund would assume all of the rights of the
lending institution in a loan or as an assignment, pursuant to which the
Fund would purchase an assignment of a portion of a lenders interest in a
loan either directly from the lender or through an intermediary. The Fund
may also purchase trade or other claims against companies, which generally
represent money owned by the company to a supplier of goods or services.
These claims may also be purchased at a time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain date
or on demand. These commitments may have the effect of requiring the Fund to
increase its investment in a company at a time when the Fund might not
otherwise decide to do so (including at a time when the company's financial
condition makes it unlikely that such amounts will be repaid). To the extent
that the Fund is committed to advance additional funds, it will at all times
hold and maintain in a segregated account cash or other high grade debt
obligations in an amount sufficient to meet such commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loans and other
direct indebtedness which the Fund will purchase, the Adviser will rely upon
its own (and not the original lending institution's) credit analysis of the
borrower. As the Fund may be required to rely upon another lending
institution to collect and pass onto the Fund amounts payable with respect
to the loan and to enforce the Fund's rights under the loan and other direct
indebtedness, an insolvency, bankruptcy or reorganization of the lending
institution may delay or prevent the Fund from receiving such amounts. In
such cases, the Fund will evaluate as well the creditworthiness of the
lending institution and will treat both the borrower and the lending
institution as an "issuer" of the loan for purposes of certain investment
restrictions pertaining to the diversification of the Fund's portfolio
investments. The highly leveraged nature of many such loans and other direct
indebtedness may make such loans and other direct indebtedness especially
vulnerable to adverse changes in economic or market conditions. Investments
in such loans and other direct indebtedness may involve additional risk to
the Fund.
LOWER RATED BONDS: The Fund may invest in fixed income securities rated Ba
or lower by Moody's or BB or lower by S&P, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. No minimum rating standard is required
by the Fund. These securities are considered speculative and, while
generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including the
possibility of default or bankruptcy of the issuers of such securities) and
may involve greater volatility of price (especially during periods of
economic uncertainty or change) than securities in the higher rating
categories and because yields vary over time, no specific level of income
can ever be assured. These lower rated high yielding fixed income securities
generally tend to reflect economic changes (and the outlook for economic
growth), short-term corporate and industry developments and the market's
perception of their credit quality (especially during times of adverse
publicity) to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although
these lower rated fixed income securities are also affected by changes in
interest rates). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of
default by the issuers of these securities and may do so in the future,
especially in the case of highly leveraged issuers. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than
the market for investment grade fixed income securities. Furthermore, the
liquidity of these lower rated securities may be affected by the market's
perception of their credit quality. Therefore, the Adviser's judgment may at
times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the
market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued
by these rating agencies, but rather to supplement such ratings with the
Adviser's own independent and ongoing review of credit quality. To the
extent a Fund invests in these lower rated securities, the achievement of
its investment objectives may be a more dependent on the Adviser's own
credit analysis than in the case of a fund investing in higher quality fixed
income securities. These lower rated securities may also include zero coupon
bonds, deferred interest bonds and PIK bonds.
MUNICIPAL BONDS: The Fund may invest in debt securities issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds"). Municipal Bonds include debt securities which pay
interest income that is subject to the alternative minimum tax. The Fund may
invest in Municipal Bonds whose issuers pay interest on the Bonds from
revenues from projects such as multifamily housing, nursing homes, electric
utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of
the bondholders creates additional risks associated with owning real estate,
including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because of
the impossibility of precisely predicting demand for mortgages from the
proceeds of such an issue, there is a risk that the proceeds of the issue
will be in excess of demand, which would result in early retirement of the
bonds by the issuer. Moreover, such housing revenue bonds depend for their
repayment upon the cash flow from the underlying mortgages, which cannot be
precisely predicted when the bonds are issued. Any difference in the actual
cash flow from such mortgages from the assumed cash flow could have an
adverse impact upon the ability of the issuer to make scheduled payments of
principal and interest on the bonds, or could result in early retirement of
the bonds. Additionally, such bonds depend in part for scheduled payments of
principal and interest upon reserve funds established from the proceeds of
the bonds, assuming certain rates of return on investment of such reserve
funds. If the assumed rates of return are not realized because of changes in
interest rate levels or for other reasons, the actual cash flow for
scheduled payments of principal and interest on the bonds may be inadequate.
The financing of multi-family housing projects is affected by a variety of
factors, including satisfactory completion of construction within cost
constraints, the achievement and maintenance of a sufficient level of
occupancy, sound management of the developments, timely and adequate
increases in rents to cover increases in operating expenses, including
taxes, utility rates and maintenance costs, changes in applicable laws and
governmental regulations and social and economic trends.
Electric utilities face problems in financing large construction programs
in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost of
competing fuel sources, difficulty in obtaining sufficient rate increases
and other regulatory problems, the effect of energy conservation and
difficulty of the capital market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing
for the elderly which offer residents the independence of condominium life
style and, if needed, the comprehensive care of nursing home services. Bonds
to finance these facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to
maintain debt service payments. Moreover, in the case of life care
facilities, since a portion of housing, medical care and other services may
be financed by an initial deposit, there may be risk if the facility does
not maintain adequate financial reserves to secure estimated actuarial
liabilities. The ability of management to accurately forecast inflationary
cost pressures weighs importantly in this process. The facilities may also
be affected by regulatory cost restrictions applied to health care delivery
in general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative health
care or conventional housing facilities in the private or public sector.
Hospital bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. A hospital's gross
receipts and net income available to service its debt are influenced by
demand for hospital services, the ability of the hospital to provide the
services required, management capabilities, economic developments in the
service area, efforts by insurers and government agencies to limit rates and
expenses, confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding, and possible federal legislation limiting the rates of
increase of hospital charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from of a lease or
installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have special
risks not normally associated with general obligation or revenue bonds.
Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations are deemed to be inapplicable because of the inclusion in many
leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although
the obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. There are, of course, variations in
the security of municipal lease securities, both within a particular
classification and between classifications, depending on numerous factors.
The Fund may also invest in bonds for industrial and other projects, such
as sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes
and wastes involved in these projects may include hazardous components,
there are risks associated with their production, handling and disposal.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade securities.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are backed
by the full faith and credit of the U.S. Government and (ii) U.S. Government
Securities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the GNMA; some of
which are backed only by the credit of the issuer itself, e.g., obligations
of the Student Loan Marketing Association; and some of which are supported
by the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the FNMA.
U.S. Government Securities also include interests in trust or other
entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Fund may invest in floating or
variable rate securities. Investments in floating or variable rate
securities normally will involve industrial development or revenue bonds
which provide that the rate of interest is set as a specific percentage of a
designated base rate, such as rates on Treasury Bonds or Bills or the prime
rate at a major commercial bank, and that a bondholder can demand payment of
the obligations on behalf of the Fund on short notice at par plus accrued
interest, which amount may be more or less than the amount the bondholder
paid for them. The maturity of floating or variable rate obligations
(including participation interests therein) is deemed to be the longer of
(i) the notice period required before the Fund is entitled to receive
payment of the obligation upon demand or (ii) the period remaining until the
obligation's next interest rate adjustment. If not redeemed by the Fund
through the demand feature, the obligations mature on a specified date which
may range up to thirty years from the date of issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may
invest in zero coupon bonds, deferred interest bonds and bonds on which the
interest is payable in kind ("PIK bonds"). Zero coupon and deferred interest
bonds are debt obligations which are issued at a significant discount from
face value. The discount approximates the total amount of interest the bonds
will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of
the security at the time of issuance. While zero coupon bonds do not require
the periodic payment of interest, deferred interest bonds provide for a
period of delay before the regular payment of interest begins. PIK bonds are
debt obligations which provide that the issuer may, at its option, pay
interest on such bonds in cash or in the form of additional debt
obligations. Such investments benefit the issuer by mitigating its need for
cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value than debt
obligations which make regular payments of interest. The Fund will accrue
income on such investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities
to satisfy the Fund's distribution obligations.
EQUITY SECURITIES
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks; securities
such as bonds, warrants or rights that are convertible into stocks; and
depositary receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized market.
FOREIGN SECURITIES EXPOSURE
The Fund may invest in various types of foreign securities, or securities
which provide the Fund with exposure to foreign securities or foreign
currencies, as discussed below:
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public and
private entities in certain emerging markets for new bonds in connection
with debt restructurings under a debt restructuring plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Argentina,
Brazil, Bulgaria, Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan,
Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Slovenia,
Uruguay and Venezuela. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter
secondary markets. U.S. dollar-denominated, collateralized Brady Bonds,
which may be fixed rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds
having the same maturity as the bonds. Brady Bonds are often viewed as
having three or four valuation components: the collateralized repayment of
principal at final maturity; the collateralized interest payments; the
uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the
"residual risk"). In light of the residual risk of Brady Bonds and the
history of defaults of countries issuing Brady Bonds with respect to
commercial bank loans by public and private entities, investments in Brady
Bonds may be viewed as speculative.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of depositary
receipts. ADRs are certificates by a U.S. depositary (usually a bank) and
represent a specified quantity of shares of an underlying non- U.S. stock on
deposit with a custodian bank as collateral. GDRs and other types of
depositary receipts are typically issued by foreign banks or trust companies
and evidence ownership of underlying securities issued by either a foreign
or a U.S. company. Generally, ADRs are in registered form and are designed
for use in U.S. securities markets and GDRs are in bearer form and are
designed for use in foreign securities markets. For the purposes of the
Fund's policy to invest a certain percentage of its assets in foreign
securities, the investments of the Fund in ADRs, GDRs and other types of
depositary receipts are deemed to be investments in the underlying
securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of U.S.
depositories. Under the terms of most sponsored arrangements, depositories
agree to distribute notices of shareholder meetings and voting instructions,
and to provide shareholder communications and other information to the ADR
holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation
to distribute shareholder communications received from the issuer of the
deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of
ADR. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depositary receipts in
the United States can reduce costs and delays as well as potential currency
exchange and other difficulties. The Fund may purchase securities in local
markets and direct delivery of these ordinary shares to the local depositary
of an ADR agent bank in foreign country. Simultaneously, the ADR agents
create a certificate which settles at the Fund's custodian in five days. The
Fund may also execute trades on the U.S. markets using existing ADRs. A
foreign issuer of the security underlying an ADR is generally not subject to
the same reporting requirements in the United States as a domestic issuer.
Accordingly, information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its country and
the market value of an ADR may not reflect undisclosed material information
concerning the issuer of the underlying security. ADRs may also be subject
to exchange rate risks if the underlying foreign securities are denominated
in a foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in
dollar-denominated foreign debt securities. Investing in dollar-denominated
foreign debt represents a greater degree of risk than investing in domestic
securities, due to less publicly available information, less securities
regulation, war or expropriation. Special considerations may include higher
brokerage costs and thinner trading markets. Investments in foreign
countries could be affected by other factors including extended settlement
periods.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many
aspects of the private sector through the ownership or control of many
companies, including some of the largest in any given country. As a
result, government actions in the future could have a significant effect
on economic conditions in emerging markets, which in turn, may adversely
affect companies in the private sector, general market conditions and
prices and yields of certain of the securities in the Fund's portfolio.
Expropriation, confiscatory taxation, nationalization, political,
economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and
could adversely affect the Fund's assets should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse in
the event of a default with respect to certain debt obligations it may
hold. If the issuer of a fixed income security owned by the Fund
defaults, the Fund may incur additional expenses to seek recovery. Debt
obligations issued by emerging market governments differ from debt
obligations of private entities; remedies from defaults on debt
obligations issued by emerging market governments, unlike those on
private debt, must be pursued in the courts of the defaulting party
itself. The Fund's ability to enforce its rights against private issuers
may be limited. The ability to attach assets to enforce a judgment may be
limited. Legal recourse is therefore somewhat diminished. Bankruptcy,
moratorium and other similar laws applicable to private issuers of debt
obligations may be substantially different from those of other countries.
The political context, expressed as an emerging market governmental
issuer's willingness to meet the terms of the debt obligation, for
example, is of considerable importance. In addition, no assurance can be
given that the holders of commercial bank debt may not contest payments
to the holders of debt obligations in the event of default under
commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may be
denominated in foreign currencies and international currency units and
the Fund may invest a portion of its assets directly in foreign
currencies. Accordingly, the weakening of these currencies and units
against the U.S. dollar may result in a decline in the Fund's asset
value.
Some emerging market countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, there is risk
that certain emerging market countries may restrict the free conversion
of their currencies into other currencies. Further, certain emerging
market currencies may not be internationally traded. Certain of these
currencies have experienced a steep devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a Fund's portfolio
securities are denominated may have a detrimental impact on the Fund's
net asset value.
o Inflation -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had and may continue to
have adverse effects on the economies and securities markets of certain
emerging market countries. In an attempt to control inflation, wage and
price controls have been imposed in certain countries. Of these
countries, some, in recent years, have begun to control inflation through
prudent economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities markets
of emerging market countries are substantially smaller, less developed,
less liquid and more volatile than the major securities markets in the
U.S. Disclosure and regulatory standards are in many respects less
stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors
in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to
volume of trading in the securities of U.S. issuers could cause prices to
be erratic for reasons apart from factors that affect the soundness and
competitiveness of the securities issuers. For example, limited market
size may cause prices to be unduly influenced by traders who control
large positions. Adverse publicity and investors' perceptions, whether or
not based on in-depth fundamental analysis, may decrease the value and
liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Fund's securities in
such markets may not be readily available. The Fund may suspend
redemption of its shares for any period during which an emergency exists,
as determined by the Securities and Exchange Commission (the "SEC").
Accordingly, if the Fund believes that appropriate circumstances exist,
it will promptly apply to the SEC for a determination that an emergency
is present. During the period commencing from the Fund's identification
of such condition until the date of the SEC action, the Fund's securities
in the affected markets will be valued at fair value determined in good
faith by or under the direction of the Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high degree
of risk. The governmental entity that controls the repayment of sovereign
debt may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. A governmental
entity's willingness or ability to repay principal and interest due in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative
size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund and
the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements
from foreign governments, multilateral agencies and others abroad to
reduce principal and interest on their debt. The commitment on the part
of these governments, agencies and others to make such disbursements may
be conditioned on a governmental entity's implementation of economic
reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when due
may result in the cancellation of such third parties' commitments to lend
funds to the governmental entity, which may further impair such debtor's
ability or willingness to service its debts in a timely manner.
Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Fund) may be requested to
participate in the rescheduling of such debt and to extend further loans
to governmental entities. There is no bankruptcy proceedings by which
sovereign debt on which governmental entities have defaulted may be
collected in whole or in part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging market
governmental issuers have not been able to make payments of interest on
or principal of debt obligations as those payments have come due.
Obligations arising from past restructuring agreements may affect the
economic performance and political and social stability of those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its
access to international credits and investments. An emerging market whose
exports are concentrated in a few commodities could be vulnerable to a
decline in the international prices of one or more of those commodities.
Increased protectionism on the part of an emerging market's trading
partners could also adversely affect the country's exports and tarnish
its trade account surplus, if any. To the extent that emerging markets
receive payment for their exports in currencies other than dollars or
non-emerging market currencies, its ability to make debt payments
denominated in dollars or non-emerging market currencies could be
affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of
emerging markets to these forms of external funding may not be certain,
and a withdrawal of external funding could adversely affect the capacity
of emerging market country governmental issuers to make payments on their
obligations. In addition, the cost of servicing emerging market debt
obligations can be affected by a change in international interest rates
since the majority of these obligations carry interest rates that are
adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the
country. Fluctuations in the level of these reserves affect the amount of
foreign exchange readily available for external debt payments and thus
could have a bearing on the capacity of emerging market countries to make
payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be reduced
by a withholding tax on the source or other taxes imposed by the emerging
market countries in which the Fund makes its investments. The Fund's net
asset value may also be affected by changes in the rates or methods of
taxation applicable to the Fund or to entities in which the Fund has
invested. The Adviser will consider the cost of any taxes in determining
whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
FOREIGN SECURITIES: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c)
the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or
services performed in that country; or (e) the issuer has 50% or more of its
assets in that country.
Investing in securities of foreign issuers generally involves risks not
ordinarily associated with investing in securities of domestic issuers.
These include changes in currency rates, exchange control regulations,
securities settlement practices, governmental administration or economic or
monetary policy (in the United States or abroad) or circumstances in
dealings between nations. Costs may be incurred in connection with
conversions between various currencies. Special considerations may also
include more limited information about foreign issuers, higher brokerage
costs, different accounting standards and thinner trading markets. Foreign
securities markets may also be less liquid, more volatile and less subject
to government supervision than in the United States. Investments in foreign
countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. As a result
of its investments in foreign securities, the Fund may receive interest or
dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are
denominated. Under certain circumstances, such as where the Adviser believes
that the applicable exchange rate is unfavorable at the time the currencies
are received or the Adviser anticipates, for any other reason, that the
exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. While the holding of currencies will permit the
Fund to take advantage of favorable movements in the applicable exchange
rate, such strategy also exposes the Fund to risk of loss if exchange rates
move in a direction adverse to the Fund's position. Such losses could reduce
any profits or increase any losses sustained by the Fund from the sale or
redemption of securities and could reduce the dollar value of interest or
dividend payments received. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
FORWARD CONTRACTS
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is entered
into (a "Forward Contract"), for hedging purposes (e.g., to protect its
current or intended investments from fluctuations in currency exchange
rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the Fund
seeks to protect against an anticipated increase in the exchange rate for a
specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, the Fund may enter into
a Forward Contract to purchase a given currency to protect against a
projected increase in the dollar value of securities denominated in such
currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline
in the dollar value of portfolio securities or the increase in the dollar
cost of securities to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, the Fund may be required to forego all or a portion of the
benefits which otherwise could have been obtained from favorable movements
in exchange rates. The Fund does not presently intend to hold Forward
Contracts entered into until the value date, at which time it would be
required to deliver or accept delivery of the underlying currency, but will
seek in most instances to close out positions in such Contracts by entering
into offsetting transactions, which will serve to fix the Fund's profit or
loss based upon the value of the Contracts at the time the offsetting
transaction is executed.
The Fund will also enter into transactions in Forward Contracts for other
than hedging purposes, which presents greater profit potential but also
involves increased risk. For example, the Fund may purchase a given foreign
currency through a Forward Contract if, in the judgment of the Adviser, the
value of such currency is expected to rise relative to the U.S. dollar.
Conversely, the Fund may sell the currency through a Forward Contract if the
Adviser believes that its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, which will increase its gross income. Where exchange
rates do not move in the direction or to the extent anticipated, however,
the Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative and could involve
significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts ("Futures Contracts") on
stock indices, foreign currencies, interest rates or interest-rate related
instruments, indices of foreign currencies or commodities. The Fund may also
purchase and sell Futures Contracts on foreign or domestic fixed income
securities or indices of such securities including municipal bond indices
and any other indices of foreign or domestic fixed income securities that
may become available for trading. Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to applicable
law.
A Futures Contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument, foreign
currency or commodity, or for the making and acceptance of a cash
settlement, at a stated time in the future for a fixed price. By its terms,
a Futures Contract provides for a specified settlement month in which, in
the case of the majority of commodities, interest rate and foreign currency
futures contracts, the underlying commodities, fixed income securities or
currency are delivered by the seller and paid for by the purchaser, or on
which, in the case of index futures contracts and certain interest rate and
foreign currency futures contracts, the difference between the price at
which the contract was entered into and the contract's closing value is
settled between the purchaser and seller in cash. Futures Contracts differ
from options in that they are bilateral agreements, with both the purchaser
and the seller equally obligated to complete the transaction. Futures
Contracts call for settlement only on the expiration date and cannot be
"exercised" at any other time during their term.
The purchase or sale of a Futures Contract differs from the purchase or
sale of a security or the purchase of an option in that no purchase price is
paid or received. Instead, an amount of cash or cash equivalents, which
varies but may be as low as 5% or less of the value of the contract, must be
deposited with the broker as "initial margin." Subsequent payments to and
from the broker, referred to as "variation margin," are made on a daily
basis as the value of the index or instrument underlying the Futures
Contract fluctuates, making positions in the Futures Contract more or less
valuable -- a process known as "mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt to
protect the Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, the Fund may sell stock index
futures contracts in anticipation of or during a market decline to attempt
to offset the decrease in market value of the Fund's securities portfolio
that might otherwise result. If such decline occurs, the loss in value of
portfolio securities may be offset, in whole or part, by gains on the
futures position. When the Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock
index futures contracts in order to gain rapid market exposure that may, in
part or entirely, offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, the corresponding positions
in stock index futures contracts will be closed out. In a substantial
majority of these transactions, the Fund will purchase such securities upon
termination of the futures position, but under unusual market conditions, a
long futures position may be terminated without a related purchase of
securities.
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Fund's current
or intended investments in fixed income securities. For example, if the Fund
owned long-term bonds and interest rates were expected to increase, the Fund
might enter into interest rate futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling some of
the long-term bonds in the Fund's portfolio. If interest rates did increase,
the value of the debt securities in the portfolio would decline, but the
value of the Fund's interest rate futures contracts would increase at
approximately the same rate, subject to the correlation risks described
below, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in the
value of the interest rate futures contracts should be similar to that of
long-term bonds, the Fund could protect itself against the effects of the
anticipated rise in the value of long-term bonds without actually buying
them until the necessary cash became available or the market had stabilized.
At that time, the interest rate futures contracts could be liquidated and
the Fund's cash reserves could then be used to buy long-term bonds on the
cash market. The Fund could accomplish similar results by selling bonds with
long maturities and investing in bonds with short maturities when interest
rates are expected to increase. However, since the futures market may be
more liquid than the cash market in certain cases or at certain times, the
use of interest rate futures contracts as a hedging technique may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
The Fund may purchase and sell foreign currency futures contracts for
hedging purposes, to attempt to protect its current or intended investments
from fluctuations in currency exchange rates. Such fluctuations could reduce
the dollar value of portfolio securities denominated in foreign currencies,
or increase the dollar cost of foreign- denominated securities to be
acquired, even if the value of such securities in the currencies in which
they are denominated remains constant. The Fund may sell futures contracts
on a foreign currency, for example, where it holds securities denominated in
such currency and it anticipates a decline in the value of such currency
relative to the dollar. In the event such decline occurs, the resulting
adverse effect on the value of foreign-denominated securities may be offset,
in whole or in part, by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in part,
the increased cost of such securities resulting from a rise in the dollar
value of the underlying currencies. Where the Fund purchases futures
contracts under such circumstances, however, and the prices of securities to
be acquired instead decline, the Fund will sustain losses on its futures
position which could reduce or eliminate the benefits of the reduced cost of
portfolio securities to be acquired.
The use by the Fund of Futures Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. The Fund may also
purchase indexed deposits with similar characteristics. Gold- indexed
securities, for example, typically provide for a maturity value that depends
on the price of gold, resulting in a security whose price tends to rise and
fall together with gold prices. Currency-indexed securities typically are
short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S. dollar
denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a
security that performs similarly to a foreign- denominated instrument, or
their maturity value may decline when foreign currencies increase, resulting
in a security whose price characteristics are similar to a put on the
underlying currency. Currency-indexed securities may also have prices that
depend on the values of a number of different foreign currencies relative to
each other. Certain indexed securities may expose the Fund to the risk of
loss of all or a portion of the principal amount of its investment and/or
the interest that might otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers
of indexed securities have included banks, corporations, and certain U.S.
Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Fund may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an obligation,
a municipality issues a certain amount of debt and pays a fixed interest
rate. Half of the debt is issued as variable rate short term obligations,
the interest rate of which is reset at short intervals, typically 35 days.
The other half of the debt is issued as inverse floating rate obligations,
the interest rate of which is calculated based on the difference between a
multiple of (approximately two times) the interest paid by the issuer and
the interest paid on the short-term obligation. Under usual circumstances,
the holder of the inverse floating rate obligation can generally purchase an
equal principal amount of the short term obligation and link the two
obligations in order to create long-term fixed rate bonds. Because the
interest rate on the inverse floating rate obligation is determined by
subtracting the short-term rate from a fixed amount, the interest rate will
decrease as the short-term rate increases and will increase as the
short-term rate decreases. The magnitude of increases and decreases in the
market value of inverse floating rate obligations may be approximately twice
as large as the comparable change in the market value of an equal principal
amount of long-term bonds which bear interest at the rate paid by the issuer
and have similar credit quality, redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio securities.
Such loans will usually be made only to member firms of the New York Stock
Exchange (the "Exchange") (and subsidiaries thereof) and member banks of the
Federal Reserve System, and would be required to be secured continuously by
collateral in cash, an irrevocable letter of credit or United States
("U.S.") Treasury securities maintained on a current basis at an amount at
least equal to the market value of the securities loaned. The Fund would
have the right to call a loan and obtain the securities loaned at any time
on customary industry settlement notice (which will not usually exceed five
business days). For the duration of a loan, the Fund would continue to
receive the equivalent of the interest or dividends paid by the issuer on
the securities loaned. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (if the collateral is in the form of cash). The Fund would not,
however, have the right to vote any securities having voting rights during
the existence of the loan, but the Fund would call the loan in anticipation
of an important vote to be taken among holders of the securities or of the
giving or withholding of their consent on a material matter affecting the
investment. As with other extensions of credit there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to firms
deemed by the Adviser to be of good standing, and when, in the judgment of
the Adviser, the consideration which can be earned currently from securities
loans of this type justifies the attendant risk.
LEVERAGING TRANSACTIONS
The Fund may engage in the types of transactions described below, which
involve "leverage" because in each case the Fund receives cash which it can
invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Fund will generally cause its
net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can be
expected to cause the value of the Fund's shares and distributions on the
Fund's shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from these transactions fail to cover the
expenses associated with these transactions, the value of the Fund's shares
is likely to decrease more quickly than otherwise would be the case and
distributions thereon will be reduced or eliminated. Hence, these
transactions are speculative, involve leverage and increase the risk of
owning or investing in the shares of the Fund. These transactions also
increase the Fund's expenses because of interest and similar payments and
administrative expenses associated with them. Unless the appreciation and
income on assets purchased with proceeds from these transactions exceed the
costs associated with them, the use of these transactions by a Fund would
diminish the investment performance of the Fund compared with what it would
have been without using these transactions.
BANK BORROWINGS: The Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment objectives
and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on the
mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on, and gains from, the investment of the cash proceeds of the
initial sale. The Fund may also be compensated by receipt of a commitment
fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part of
the dollar roll, the use of this technique will diminish the investment
performance of the Fund compared with what the performance would have been
without the use of the dollar rolls. Dollar roll transactions involve the
risk that the market value of the securities the Fund is required to
purchase may decline below the agreed upon repurchase price of those
securities. If the broker/dealer to whom the Fund sells securities becomes
insolvent, the Fund's right to purchase or repurchase securities may be
restricted. Successful use of mortgage dollar rolls may depend upon the
Adviser's ability to correctly predict interest rates and prepayments. There
is no assurance that dollar rolls can be successfully employed.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund will sell securities
and receive cash proceeds, subject to its agreement to repurchase the
securities at a later date for a fixed price reflecting a market rate of
interest. There is a risk that the counter party to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as
scheduled, which may result in losses to the Fund. The Fund will invest the
proceeds received under a reverse repurchase agreement in accordance with
its investment objective and policies.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-hedging purposes in a manner similar
to that in which Futures Contracts on foreign currencies, or Forward
Contracts, will be utilized. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such diminutions in
the value of portfolio securities, the Fund may purchase put options on the
foreign currency. If the value of the currency does decline, the Fund will
have the right to sell such currency for a fixed amount in dollars and will
thereby offset, in whole in part, the adverse effect on its portfolio which
otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Fund may purchase call options thereon. The
purchase of such options could offset, at least partially, the effect of the
adverse movements in exchange rates. As in the case of other types of
options, however, the benefit to the Fund deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in
the direction or to the extent anticipated, the Fund could sustain losses on
transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates. The
Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar
value of foreign-denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the option
will most likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received less related
transaction costs. As in the case of other types of options, therefore, the
writing of Options on Foreign Currencies will constitute only a partial
hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Fund to hedge
such increased cost up to the amount of the premium. Foreign currency
options written by the Fund will generally be covered in a manner similar to
the covering of other types of options. As in the case of other types of
options, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium, and only if rates move
in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium.
Through the writing of options on foreign currencies, the Fund also may be
required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in exchange rates. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non- hedging
purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the case
of a call option, or a "short" position in the underlying Futures Contract,
in the case of a put option, at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (i.e., the same
exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
Fund's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund on
U.S. exchanges are traded on the same contract market as the underlying
Futures Contract, and, like Futures Contracts, are subject to regulation by
the Commodity Futures Trading Commission (the "CFTC") and the performance
guarantee of the exchange clearinghouse. In addition, Options on Futures
Contracts may be traded on foreign exchanges. The Fund may cover the writing
of call Options on Futures Contracts (a) through purchases of the underlying
Futures Contract, (b) through ownership of the instrument, or instruments
included in the index, underlying the Futures Contract, or (c) through the
holding of a call on the same Futures Contract and in the same principal
amount as the call written where the exercise price of the call held (i) is
equal to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written if the Fund owns liquid
and unencumbered assets equal to the difference. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through the ownership of liquid and
unencumbered assets equal to the value of the security or index underlying
the Futures Contract, or (c) through the holding of a put on the same
Futures Contract and in the same principal amount as the put written where
the exercise price of the put held (i) is equal to or greater than the
exercise price of the put written or where the exercise price of the put
held (ii) is less than the exercise price of the put written if the Fund
owns liquid and unencumbered assets equal to the difference. Put and call
Options on Futures Contracts may also be covered in such other manner as may
be in accordance with the rules of the exchange on which the option is
traded and applicable laws and regulations. Upon the exercise of a call
Option on a Futures Contract written by the Fund, the Fund will be required
to sell the underlying Futures Contract which, if the Fund has covered its
obligation through the purchase of such Contract, will serve to liquidate
its futures position. Similarly, where a put Option on a Futures Contract
written by the Fund is exercised, the Fund will be required to purchase the
underlying Futures Contract which, if the Fund has covered its obligation
through the sale of such Contract, will close out its futures position.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or
other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is below the
exercise price, the Fund will retain the full amount of the option premium,
less related transaction costs, which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. The writing
of a put option on a Futures Contract constitutes a partial hedge against
increasing prices of the securities or other instruments required to be
delivered under the terms of the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is exercised, the
Fund will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the
value of its portfolio securities and the changes in the value of its
futures positions, the Fund's losses from existing Options on Futures
Contracts may to some extent be reduced or increased by changes in the value
of portfolio securities.
The Fund may purchase Options on Futures Contracts for hedging purposes
instead of purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is
anticipated as a result of a projected market-wide decline or changes in
interest or exchange rates, the Fund could, in lieu of selling Futures
Contracts, purchase put options thereon. In the event that such decrease
occurs, it may be offset, in whole or in part, by a profit on the option.
Conversely, where it is projected that the value of securities to be
acquired by the Fund will increase prior to acquisition, due to a market
advance or changes in interest or exchange rates, the Fund could purchase
call Options on Futures Contracts rather than purchasing the underlying
Futures Contracts.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by the Fund may be covered in the manner set forth below.
A call option written by the Fund is "covered" if the Fund owns the
security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for
additional cash consideration if the Fund owns liquid and unencumbered
assets equal to the amount of cash consideration) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the Fund owns
liquid and unencumbered assets equal to the difference. A put option written
by the Fund is "covered" if the Fund owns liquid and unencumbered assets
with a value equal to the exercise price, or else holds a put on the same
security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise
price of the put written or where the exercise price of the put held is less
than the exercise price of the put written if the Fund owns liquid and
unencumbered assets equal to the difference. Put and call options written by
the Fund may also be covered in such other manner as may be in accordance
with the requirements of the exchange on which, or the counterparty with
which, the option is traded, and applicable laws and regulations. If the
writer's obligation is not so covered, it is subject to the risk of the full
change in value of the underlying security from the time the option is
written until exercise.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case
of a written put option will permit the Fund to write another put option to
the extent that the Fund owns liquid and unencumbered assets. Such
transactions permit the Fund to generate additional premium income, which
will partially offset declines in the value of portfolio securities or
increases in the cost of securities to be acquired. Also, effecting a
closing transaction will permit the cash or proceeds from the concurrent
sale of any securities subject to the option to be used for other
investments of the Fund, provided that another option on such security is
not written. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction in connection with the option prior to or concurrent with the
sale of the security.
The Fund will realize a profit from a closing transaction if the premium
paid in connection with the closing of an option written by the Fund is less
than the premium received from writing the option, or if the premium
received in connection with the closing of an option purchased by the Fund
is more than the premium paid for the original purchase. Conversely, the
Fund will suffer a loss if the premium paid or received in connection with a
closing transaction is more or less, respectively, than the premium received
or paid in establishing the option position. Because increases in the market
price of a call option will generally reflect increases in the market price
of the underlying security, any loss resulting from the repurchase of a call
option previously written by the Fund is likely to be offset in whole or in
part by appreciation of the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and then write a call option
against that security. The exercise price of the call option the Fund
determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the- money")
the current value of the underlying security at the time the option is
written. Buy-and-write transactions using in-the-money call options may be
used when it is expected that the price of the underlying security will
decline moderately during the option period. Buy-and-write transactions
using out-of-the-money call options may be used when it is expected that the
premiums received from writing the call option plus the appreciation in the
market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone.
If the call options are exercised in such transactions, the Fund's maximum
gain will be the premium received by it for writing the option, adjusted
upwards or downwards by the difference between the Fund's purchase price of
the security and the exercise price, less related transaction costs. If the
options are not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the
premium received, less related transaction costs. If the market price of the
underlying security declines or otherwise is below the exercise price, the
Fund may elect to close the position or retain the option until it is
exercised, at which time the Fund will be required to take delivery of the
security at the exercise price; the Fund's return will be the premium
received from the put option minus the amount by which the market price of
the security is below the exercise price, which could result in a loss.
Out-of-the-money, at-the-money and in-the-money put options may be used by
the Fund in the same market environments that call options are used in
equivalent buy-and-write transactions.
The Fund may also write combinations of put and call options on the same
security, known as "straddles" with the same exercise price and expiration
date. By writing a straddle, the Fund undertakes a simultaneous obligation
to sell and purchase the same security in the event that one of the options
is exercised. If the price of the security subsequently rises sufficiently
above the exercise price to cover the amount of the premium and transaction
costs, the call will likely be exercised and the Fund will be required to
sell the underlying security at a below market price. This loss may be
offset, however, in whole or part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of
straddles will likely be effective, therefore, only where the price of the
security remains stable and neither the call nor the put is exercised. In
those instances where one of the options is exercised, the loss on the
purchase or sale of the underlying security may exceed the amount of the
premiums received.
By writing a call option, the Fund limits its opportunity to profit from
any increase in the market value of the underlying security above the
exercise price of the option. By writing a put option, the Fund assumes the
risk that it may be required to purchase the underlying security for an
exercise price above its then-current market value, resulting in a capital
loss unless the security subsequently appreciates in value. The writing of
options on securities will not be undertaken by the Fund solely for hedging
purposes, and could involve certain risks which are not present in the case
of hedging transactions. Moreover, even where options are written for
hedging purposes, such transactions constitute only a partial hedge against
declines in the value of portfolio securities or against increases in the
value of securities to be acquired, up to the amount of the premium.
The Fund may also purchase options for hedging purposes or to increase its
return. Put options may be purchased to hedge against a decline in the value
of portfolio securities. If such decline occurs, the put options will permit
the Fund to sell the securities at the exercise price, or to close out the
options at a profit. By using put options in this way, the Fund will reduce
any profit it might otherwise have realized in the underlying security by
the amount of the premium paid for the put option and by transaction costs.
The Fund may also purchase call options to hedge against an increase in
the price of securities that the Fund anticipates purchasing in the future.
If such increase occurs, the call option will permit the Fund to purchase
the securities at the exercise price, or to close out the options at a
profit. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise of the
option, and, unless the price of the underlying security rises sufficiently,
the option may expire worthless to the Fund.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast to
an option on a security, an option on a stock index provides the holder with
the right but not the obligation to make or receive a cash settlement upon
exercise of the option, rather than the right to purchase or sell a
security. The amount of this settlement is generally equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds (in
the case of a call) or is below (in the case of a put) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed
"index multiplier." The Fund may cover written call options on stock indices
by owning securities whose price changes, in the opinion of the Adviser, are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional
cash consideration (or for additional cash consideration if the Fund owns
liquid and unencumbered assets equal to the amount of cash consideration)
upon conversion or exchange of other securities in its portfolio. Where the
Fund covers a call option on a stock index through ownership of securities,
such securities may not match the composition of the index and, in that
event, the Fund will not be fully covered and could be subject to risk of
loss in the event of adverse changes in the value of the index. The Fund may
also cover call options on stock indices by holding a call on the same index
and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of
the call written or (b) is greater than the exercise price of the call
written if the Fund owns liquid and unencumbered assets equal to the
difference. The Fund may cover put options on stock indices by owning liquid
and unencumbered assets with a value equal to the exercise price, or by
holding a put on the same stock index and in the same principal amount as
the put written where the exercise price of the put held (a) is equal to or
greater than the exercise price of the put written or (b) is less than the
exercise price of the put written if the Fund owns liquid and unencumbered
assets equal to the difference. Put and call options on stock indices may
also be covered in such other manner as may be in accordance with the rules
of the exchange on which, or the counterparty with which, the option is
traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on which
the Fund has written a call option falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of
any unrealized appreciation in the Fund's stock investments. By writing a
put option, the Fund assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Fund correlate with
changes in the value of the index, writing covered put options on indices
will increase the Fund's losses in the event of a market decline, although
such losses will be offset in part by the premium received for writing the
option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of the Fund's
security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or
a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write options on U.S.
Treasury securities which provide for periodic adjustment of the strike
price and may also provide for the periodic adjustment of the premium during
the term of each such option. Like other types of options, these
transactions, which may be referred to as "reset" options or "adjustable
strike" options grant the purchaser the right to purchase (in the case of a
call) or sell (in the case of a put), a specified type of U.S. Treasury
security at any time up to a stated expiration date (or, in certain
instances, on such date). In contrast to other types of options, however,
the price at which the underlying security may be purchased or sold under a
"reset" option is determined at various intervals during the term of the
option, and such price fluctuates from interval to interval based on changes
in the market value of the underlying security. As a result, the strike
price of a "reset" option, at the time of exercise, may be less advantageous
than if the strike price had been fixed at the initiation of the option. In
addition, the premium paid for the purchase of the option may be determined
at the termination, rather than the initiation, of the option. If the
premium for a reset option written by the Fund is paid at termination, the
Fund assumes the risk that (i) the premium may be less than the premium
which would otherwise have been received at the initiation of the option
because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the
strike price of the option, and (ii) the option purchaser may default on its
obligation to pay the premium at the termination of the option. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation of the
option.
"YIELD CURVE" OPTIONS: The Fund may also enter into options on the "spread,"
or yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. In contrast to other types of options,
a yield curve option is based on the difference between the yields of
designated securities, rather than the prices of the individual securities,
and is settled through cash payments. Accordingly, a yield curve option is
profitable to the holder if this differential widens (in the case of a call)
or narrows (in the case of a put), regardless of whether the yields of the
underlying securities increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Fund may purchase or write such options for
hedging purposes. For example, the Fund may purchase a call option on the
yield spread between two securities, if it owns one of the securities and
anticipates purchasing the other security and wants to hedge against an
adverse change in the yield spread between the two securities. The Fund may
also purchase or write yield curve options for other than hedging purposes
(i.e., in an effort to increase its current income) if, in the judgment of
the Adviser, the Fund will be able to profit from movements in the spread
between the yields of the underlying securities. The trading of yield curve
options is subject to all of the risks associated with the trading of other
types of options. In addition, however, such options present risk of loss
even if the yield of one of the underlying securities remains constant, if
the spread moves in a direction or to an extent which was not anticipated.
Yield curve options written by the Fund will be "covered". A call (or put)
option is covered if the Fund holds another call (or put) option on the
spread between the same two securities and owns liquid and unencumbered
assets sufficient to cover the Fund's net liability under the two options.
Therefore, the Fund's liability for such a covered option is generally
limited to the difference between the amount of the Fund's liability under
the option written by the Fund less the value of the option held by the
Fund. Yield curve options may also be covered in such other manner as may be
in accordance with the requirements of the counterparty with which the
option is traded and applicable laws and regulations. Yield curve options
are traded over-the-counter and because they have been only recently
introduced, established trading markets for these securities have not yet
developed.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are member
firms (or a subsidiary thereof) of the New York Stock Exchange or members of
the Federal Reserve System, recognized primary U.S. Government securities
dealers or institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Fund purchases and holds through
its agent are U.S. Government securities, the values of which are equal to
or greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same,
with interest at a standard rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the Government securities.
The repurchase agreement provides that in the event the seller fails to
pay the amount agreed upon on the agreed upon delivery date or upon demand,
as the case may be, the Fund will have the right to liquidate the
securities. If at the time the Fund is contractually entitled to exercise
its right to liquidate the securities, the seller is subject to a proceeding
under the bankruptcy laws or its assets are otherwise subject to a stay
order, the Fund's exercise of its right to liquidate the securities may be
delayed and result in certain losses and costs to the Fund. The Fund has
adopted and follows procedures which are intended to minimize the risks of
repurchase agreements. For example, the Fund only enters into repurchase
agreements after the Adviser has determined that the seller is creditworthy,
and the Adviser monitors that seller's creditworthiness on an ongoing basis.
Moreover, under such agreements, the value of the securities (which are
marked to market every business day) is required to be greater than the
repurchase price, and the Fund has the right to make margin calls at any
time if the value of the securities falls below the agreed upon collateral.
RESTRICTED SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act ("Rule 144A securities") and
commercial paper issued under Section 4(2) of the 1933 Act ("4(2) Paper"). A
determination is made, based upon a continuing review of the trading markets
for the Rule 144A security or 4(2) Paper, whether such security is liquid
and thus not subject to the Fund's limitation on investing in illiquid
investments. The Board of Trustees has adopted guidelines and delegated to
MFS the daily function of determining and monitoring the liquidity of Rule
144A securities and 4(2) Paper. The Board, however, retains oversight of the
liquidity determinations focusing on factors such as valuation, liquidity
and availability of information. Investing in Rule 144A securities could
have the effect of decreasing the level of liquidity in the Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these Rule 144A securities held in the Fund's portfolio. Subject
to the Fund's limitation on investments in illiquid investments, the Fund
may also invest in restricted securities that may not be sold under Rule
144A, which presents certain risks. As a result, the Fund might not be able
to sell these securities when the Adviser wishes to do so, or might have to
sell them at less than fair value. In addition, market quotations are less
readily available. Therefore, judgment may at times play a greater role in
valuing these securities than in the case of unrestricted securities.
SHORT SALES
The Fund may seek to hedge investments or realize additional gains through
short sales. The Fund may make short sales, which are transactions in which
the Fund sells a security it does not own, in anticipation of a decline in
the market value of that security. To complete such a transaction, the Fund
must borrow the security to make delivery to the buyer. The Fund then is
obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. The price at such time may be more or less
than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to repay the lender any dividends
or interest which accrue during the period of the loan. To borrow the
security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale
will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out. The Fund also will
incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain
if the price of the security declines between those dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount
of the premium, dividends or interest the Fund may be required to pay in
connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale, equals
the current market value of the security sold short.
SHORT SALES AGAINST THE BOX
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the Fund
enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is required
to hold such securities while the short sale is outstanding. The Fund will
incur transaction costs, including interest, in connection with opening,
maintaining, and closing short sales against the box.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. The Fund is not limited
to any particular form or variety of swap agreement if the Adviser
determines it is consistent with the Fund's investment objective and
policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative transactions.
If the Fund enters into a swap agreement on a net basis (i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments), the Fund will
maintain liquid and unencumbered assets with a daily value at least equal to
the excess, if any, of the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than a net
basis, it will maintain liquid and unencumbered assets with a value equal to
the full amount of the Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the underlying price, rate or index level that
determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of the Fund would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when
due. In addition, if the counterparty's creditworthiness would decline, the
value of the swap agreement would be likely to decline, potentially
resulting in losses.
If the counterparty defaults, the Fund's risk of loss consists of the net
amount of payments that the Fund is contractually entitled to receive. The
Fund anticipates that it will be able to eliminate or reduce its exposure
under these arrangements by assignment or other disposition or by entering
into an offsetting agreement with the same or another counterparty, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
TEMPORARY DEFENSIVE POSITIONS
During periods of unusual market conditions when the Adviser believes that
investing for temporary defensive purposes is appropriate, or in order to
meet anticipated redemption requests, a large portion or all of the assets
of the Fund may be invested in cash (including foreign currency) or cash
equivalents, including, but not limited to, obligations of banks (including
certificates of deposit, bankers' acceptances, time deposits and repurchase
agreements), commercial paper, short-term notes, U.S. Government Securities
and related repurchase agreements.
WARRANTS
The Fund may invest in warrants. Warrants are securities that give the Fund
the right to purchase equity securities from the issuer at a specific price
(the "strike price") for a limited period of time. The strike price of
warrants typically is much lower than the current market price of the
underlying securities, yet they are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities and may offer greater potential for capital appreciation as well
as capital loss. Warrants do not entitle a holder to dividends or voting
rights with respect to the underlying securities and do not represent any
rights in the assets of the issuing company. Also, the value of the warrant
does not necessarily change with the value of the underlying securities and
a warrant ceases to have value if it is not exercised prior to the
expiration date. These factors can make warrants more speculative than other
types of investments.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities will be delivered to the
Fund at a future date usually beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a future
date may be deemed a separate security. In general, the Fund does not pay
for such securities until received, and does not start earning interest on
the securities until the contractual settlement date. While awaiting
delivery of securities purchased on such bases, a Fund will identify liquid
and unencumbered assets equal to its forward delivery commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO: The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives depends on the degree to which price movements in the
underlying index or instrument correlate with price movements in the
relevant portion of the Fund's portfolio. In the case of derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. Consequently, the Fund bears the risk
that the price of the portfolio securities being hedged will not move in the
same amount or direction as the underlying index or obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience a
loss which is not completely offset by the put option. It is also possible
that there may be a negative correlation between the index or obligation
underlying an option or Futures Contract in which the Fund has a position
and the portfolio securities the Fund is attempting to hedge, which could
result in a loss on both the portfolio and the hedging instrument. It should
be noted that stock index futures contracts or options based upon a narrower
index of securities, such as those of a particular industry group, may
present greater risk than options or futures based on a broad market index.
This is due to the fact that a narrower index is more susceptible to rapid
and extreme fluctuations as a result of changes in the value of a small
number of securities. Nevertheless, where the Fund enters into transactions
in options or futures on narrowly-based indices for hedging purposes,
movements in the value of the index should, if the hedge is successful,
correlate closely with the portion of the Fund's portfolio or the intended
acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative and the price of the underlying index or obligation. The
anticipated spread between the prices may be distorted due to the
differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts will not be fully
reflected in the value of the option. The risk of imperfect correlation,
however, generally tends to diminish as the maturity date of the Futures
Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock indices,
options on currencies and Options on Futures Contracts, the Fund is subject
to the risk of market movements between the time that the option is
exercised and the time of performance thereunder. This could increase the
extent of any loss suffered by the Fund in connection with such
transactions.
In writing a covered call option on a security, index or futures contract,
the Fund also incurs the risk that changes in the value of the instruments
used to cover the position will not correlate closely with changes in the
value of the option or underlying index or instrument. For example, where
the Fund covers a call option written on a stock index through segregation
of securities, such securities may not match the composition of the index,
and the Fund may not be fully covered. As a result, the Fund could be
subject to risk of loss in the event of adverse market movements.
The writing of options on securities, options on stock indices or Options
on Futures Contracts constitutes only a partial hedge against fluctuations
in the value of the Fund's portfolio. When the Fund writes an option, it
will receive premium income in return for the holder's purchase of the right
to acquire or dispose of the underlying obligation. In the event that the
price of such obligation does not rise sufficiently above the exercise price
of the option, in the case of a call, or fall below the exercise price, in
the case of a put, the option will not be exercised and the Fund will retain
the amount of the premium, less related transaction costs, which will
constitute a partial hedge against any decline that may have occurred in the
Fund's portfolio holdings or any increase in the cost of the instruments to
be acquired.
Where the price of the underlying obligation moves sufficiently in favor
of the holder to warrant exercise of the option, however, and the option is
exercised, the Fund will incur a loss which may only be partially offset by
the amount of the premium it received. Moreover, by writing an option, the
Fund may be required to forego the benefits which might otherwise have been
obtained from an increase in the value of portfolio securities or other
assets or a decline in the value of securities or assets to be acquired. In
the event of the occurrence of any of the foregoing adverse market events,
the Fund's overall return may be lower than if it had not engaged in the
hedging transactions. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments involve greater risks and may
result in losses which may not be offset by increases in the value of
portfolio securities or declines in the cost of securities to be acquired.
The Fund will only write covered options, such that liquid and unencumbered
assets necessary to satisfy an option exercise will be identified, unless
the option is covered in such other manner as may be in accordance with the
rules of the exchange on which, or the counterparty with which, the option
is traded and applicable laws and regulations. Nevertheless, the method of
covering an option employed by the Fund may not fully protect it against
risk of loss and, in any event, the Fund could suffer losses on the option
position which might not be offset by corresponding portfolio gains. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary
market for such instruments on the exchange on which the initial transaction
was entered into. While the Fund will enter into options or futures
positions only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
contract at any specific time. In that event, it may not be possible to
close out a position held by the Fund, and the Fund could be required to
purchase or sell the instrument underlying an option, make or receive a cash
settlement or meet ongoing variation margin requirements. Under such
circumstances, if the Fund has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse
impact on the Fund's ability effectively to hedge its portfolio, and could
result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the Fund enters into such transactions for hedging purposes, any
losses incurred in connection therewith should, if the hedging strategy is
successful, be offset, in whole or in part, by increases in the value of
securities or other assets held by the Fund or decreases in the prices of
securities or other assets the Fund intends to acquire. Where the Fund
enters into such transactions for other than hedging purposes, the margin
requirements associated with such transactions could expose the Fund to
greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Fund enters into
transactions in exchange-traded futures or options, it is exposed to the
risk of the potential bankruptcy of the relevant exchange clearinghouse or
the broker through which the Fund has effected the transaction. In that
event, the Fund might not be able to recover amounts deposited as margin, or
amounts owed to the Fund in connection with its transactions, for an
indefinite period of time, and could sustain losses of a portion or all of
such amounts. Moreover, the performance guarantee of an exchange
clearinghouse generally extends only to its members and the Fund could
sustain losses, notwithstanding such guarantee, in the event of the
bankruptcy of its broker.
TRADING AND POSITION LIMITS: The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument
which may be held by a single investor, whether acting alone or in concert
with others (regardless of whether such contracts are held on the same or
different exchanges or held or written in one or more accounts or through
one or more brokers). Further, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control
in a particular futures or option contract. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Adviser does not believe that
these trading and position limits will have any adverse impact on the
strategies for hedging the portfolios of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS: The amount of risk the Fund assumes
when it purchases an Option on a Futures Contract is the premium paid for
the option, plus related transaction costs. In order to profit from an
option purchased, however, it may be necessary to exercise the option and to
liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an
Option on a Futures Contract is subject to the risks of commodity futures
trading, including the requirement of initial and variation margin payments,
as well as the additional risk that movements in the price of the option may
not correlate with movements in the price of the underlying security, index,
currency or Futures Contract.
RISKS OF TRANSACTIONS IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are
subject to all of the correlation, liquidity and other risks outlined above.
In addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and
could have a substantial adverse effect on the value of positions held by
the Fund. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives are not traded on contract markets regulated by the CFTC or
(with the exception of certain foreign currency options) the SEC. To the
contrary, such instruments are traded through financial institutions acting
as market-makers, although foreign currency options are also traded on
certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation.
In an over-the-counter trading environment, many of the protections afforded
to exchange participants will not be available. For example, there are no
daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the premium plus
related transaction costs, this entire amount could be lost. Moreover, the
option writer and a trader of Forward Contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of
the Fund's position unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with the
Fund. Where no such counterparty is available, it will not be possible to
enter into a desired transaction. There also may be no liquid secondary
market in the trading of over-the-counter contracts, and the Fund could be
required to retain options purchased or written, or Forward Contracts or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit the Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order to
assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC- regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/00
<PAGE>
MFS MUNICIPAL SERIES TRUST
MFS(R) ALABAMA MUNICIPAL BOND FUND
MFS(R) ARKANSAS MUNICIPAL BOND FUND
MFS(R) CALIFORNIA MUNICIPAL BOND FUND
MFS(R) FLORIDA MUNICIPAL BOND FUND
MFS(R) GEORGIA MUNICIPAL BOND FUND
MFS(R) MARYLAND MUNICIPAL BOND FUND
MFS(R) MASSACHUSETTS MUNICIPAL BOND FUND
MFS(R) MISSISSIPPI MUNICIPAL BOND FUND
MFS(R) NEW YORK MUNICIPAL BOND FUND
MFS(R) NORTH CAROLINA MUNICIPAL BOND FUND
MFS(R) PENNSYLVANIA MUNICIPAL BOND FUND
MFS(R) SOUTH CAROLINA MUNICIPAL BOND FUND
MFS(R) TENNESSEE MUNICIPAL BOND FUND
MFS(R) VIRGINIA MUNICIPAL BOND FUND
MFS(R) WEST VIRGINIA MUNICIPAL BOND FUND
MFS(R) MUNICIPAL INCOME FUND
MFS(R) NEW YORK HIGH INCOME TAX FREE FUND
MFS(R) MASSACHUSETTS HIGH INCOME TAX FREE FUND
PART C
ITEM 23. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
MFS MUNICIPAL SERIES TRUST (ALL SERIES)
---------------------------------------
For the five-year (or life of fund, if applicable) period ended
March 31, 2000:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
MFS MUNICIPAL SERIES TRUST (ALL SERIES)
---------------------------------------
At March 31, 2000:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years (or life of fund, if applicable) ended
March 31, 2000:
Statement of Changes in Net Assets*
For the year ended March 31, 2000:
Statement of Operations*
----------------------------
* Incorporated herein by reference to the Funds' Annual Reports to Shareholders
dated March 31, 2000 filed with the Securities and Exchange Commission ("SEC")
via EDGAR on May 23, 2000.
<PAGE>
(B) EXHIBITS
1 (a) Amended and Restated Declaration of Trust, dated
February 3, 1995. (1)
(b) Amendment to Declaration of Trust, dated April 29, 1999
to add two new series. (11)
2 Amended and Restated By-Laws, dated December 14, 1994.
(1)
3 Form of Share Certificate for Class A, B and C Shares.
(3)
4 (a) Investment Advisory Agreement, dated August 24, 1984
for all series other than Arkansas, California, Florida,
Louisiana*, Mississippi, Pennsylvania, Texas*,
Washington*, and MFS Municipal Income Fund. (3)
(b) Investment Advisory Agreement, dated February 1, 1992,
for the MFS Arkansas Municipal Bond Fund. (3)
(c) Investment Advisory Agreement, dated February 1, 1992,
for the MFS Florida Municipal Bond Fund. (3)
(d) Investment Advisory Agreement, dated February 1, 1992,
for the MFS Texas Municipal Bond Fund*. (3)
(e) Investment Advisory Agreement, dated August 1, 1992, for
the MFS Mississippi Municipal Bond Fund. (3)
(f) Investment Advisory Agreement, dated August 1, 1992, for
the MFS Washington Municipal Bond Fund*. (3)
(g) Investment Advisory Agreement, dated February 1, 1993,
for MFS Louisiana Municipal Bond Fund*. (3)
(h) Investment Advisory Agreement, dated February 1, 1993,
for MFS Pennsylvania Municipal Bond Fund. (3)
---------------------------
*No longer in existence
<PAGE>
(i) Investment Advisory Agreement, dated September 1, 1993,
for MFS California Municipal Bond Fund. (3)
(j) Investment Advisory Agreement, dated September 1, 1993,
for the MFS Municipal Income Fund. (3)
(k) Investment Advisory Agreement, dated July 30, 1999, for
the MFS New York High Income Tax Free Fund; filed
herewith.
(l) Investment Advisory Agreement, dated July 30, 1999, for
the MFS Massachusetts High Income Tax Free Fund; filed
herewith.
5 (a) Amended and Restated Distribution Agreement for the
MFS Municipal Series Trust, dated January 1, 1995. (1)
(b) Dealer Agreement between MFS Fund Distributors, Inc.
("MFD") and a dealer and the Mutual Fund Agreement
between MFS and a bank effective November 29, 1999. (6)
6 Retirement Plan for Non-Interested Person Trustees, as
amended and restated February 10, 1999. (7)
7 (a) Custodian Agreement, dated June 15, 1988. (3)
(b) Amendment to Custodian Agreement, dated June 15, 1988.
(3)
(c) Amendment to Custodian Agreement, dated August 9, 1989.
(3)
(d) Amendment to Custodian Agreement, dated October 1, 1989.
(3)
(e) Amendment No. 3 to the Custodian Agreement, dated
October 9, 1991. (3)
8 (a) Shareholder Servicing Agent Agreement, dated August 1,
1985. (3)
(b) Amendment to Shareholder Servicing Agent Agreement,
dated April 1, 1999. (11)
(c) Exchange Privilege Agreement, dated July 30, 1997. (3)
(d) Master Administrative Services Agreement dated March 1,
1997, as amended and restated April 1, 1999. (9)
(e) Dividend Disbursing Agency Agreement, dated February 1,
1986. (3)
9 (a) Opinion and Consent of Counsel, dated June 30, 1998.
(10)
(b) Legal Opinion Consent, dated July 25, 2000; filed
herewith.
10 Consent of Deloitte & Touche LLP; filed herewith.
11 Not Applicable.
12 Not Applicable.
13 (a) Amended and Restated Master Distribution Plan pursuant
to Rule 12b-1 under the Investment Company Act of 1940
effective December 8, 1999. (8)
(b) Exhibits as revised February 9, 2000, to Master
Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. (8)
14 Not Applicable.
15 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940 amended and restated July 30, 1998
(Exhibit A dated April 12, 2000). (5)
16 (a) Code of Ethics for the fund pursuant to Rule 17j-1
under the Investment Company Act of 1940. (4)
(b) Code of Ethics for the fund's adviser and distributor
pursuant to Rule 17j-1 under the Investment Company Act
of 1940. (4)
Power of Attorney, dated August 11, 1994. (2)
Power of Attorney, dated February 10, 1999; filed herewith.
Power of Attorney, dated July 1, 2000; filed herewith.
-------------------------------
(1) Incorporated by reference to Post-Effective Amendment No. 26 to the
Registration Statement on Form N-1A filed with the SEC via EDGAR on February
22, 1995.
(2) Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement on Form N-1A filed with the SEC via EDGAR on May 31,
1995.
(3) Incorporated by reference to Post-Effective Amendment No. 28 to the
Registration Statement on Form N-1A filed with the SEC via EDGAR on July 28,
1995.
(4) Incorporated by reference to Massachusetts Investors Growth Stock Fund (File
Nos. 2-14677 and 811-859) Post-Effective Amendment No. 67 filed with the SEC
via EDGAR on March 29, 2000.
(5) Incorporated by reference to MFS Government Limited Maturity Fund (File Nos.
2-96738 and 811-4253) Post-Effective Amendment No. 21 filed with the SEC via
EDGAR on April 28, 2000.
(6) Incorporated by reference to MFS Series Trust V (File Nos. 2-38613 and
81-2031) Post-Effective Amendment No. 48 filed with the SEC via EDGAR on
November 29, 1999.
(7) Incorporated by reference to MFS Government Limited Maturity Fund (File Nos.
2-96738 and 811-4253) Post-Effective Amendment No. 20 filed with the SEC via
EDGAR on February 26, 1999.
(8) Incorporated by reference to MFS Series Trust VI (File Nos. 33-34502 and
811-6102) Post-Effective Amendment No. 15 filed with the SEC via EDGAR on
February 28, 2000
(9) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
March 31, 1999.
(10) Incorporated by reference to Registrant's Post-Effective Amendment No. 32
filed with the SEC via EDGAR on July 20, 1998.
(11) Incorporated by reference to Registrant's Post-Effective Amendment No. 33
filed with the SEC via EDGAR on May 14, 1999.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
-------------------------------------------------------------
Not applicable.
ITEM 25. INDEMNIFICATION
---------------
Reference is hereby made to (a) Article V of Registrant's Declaration
of Trust, filed as an Exhibit to Post-Effective Amendment No. 26 to its
Registration Statement; (b) Section 4 of the Distribution Agreement between
Registrant and MFS Fund Distributors, Inc., filed as an Exhibit to
Post-Effective Amendment No. 26; and (c) the undertaking of the Registrant
regarding indemnification set forth in its Registration Statement as initially
filed.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser and distributor will be insured under an errors
and omissions liability insurance policy. The Registrant and its officers are
also insured under the fidelity bond required by Rule 17g-1 under the Investment
Company Act of 1940 as amended.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end
Funds comprising the MFS Family of Funds (except the Vertex Funds mentioned
below): Massachusetts Investors Trust, Massachusetts Investors Growth Stock
Fund, MFS Growth Opportunities Fund, MFS Government Securities Fund, MFS
Government Limited Maturity Fund, MFS Series Trust I (which has ten series: MFS
Managed Sectors Fund, MFS Cash Reserve Fund, MFS Global Asset Allocation Fund,
MFS Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS New Discovery Fund, MFS Science and Technology
Fund and MFS Research International Fund), MFS Series Trust II (which has four
series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund, MFS Intermediate
Income Fund and MFS Charter Income Fund), MFS Series Trust III (which has three
series: MFS High Income Fund, MFS Municipal High Income Fund and MFS High Yield
Opportunities Fund), MFS Series Trust IV (which has four series: MFS Money
Market Fund, MFS Government Money Market Fund, MFS Municipal Bond Fund and MFS
Mid Cap Growth Fund), MFS Series Trust V (which has five series: MFS Total
Return Fund, MFS Research Fund, MFS International Opportunities Fund, MFS
International Strategic Growth Fund and MFS International Value Fund), MFS
Series Trust VI (which has three series: MFS Global Total Return Fund, MFS
Utilities Fund and MFS Global Equity Fund), MFS Series Trust VII (which has two
series: MFS Global Governments Fund and MFS Capital Opportunities Fund), MFS
Series Trust VIII (which has two series: MFS Strategic Income Fund and MFS
Global Growth Fund), MFS Series Trust IX (which has eight series: MFS Bond Fund,
MFS Limited Maturity Fund, MFS Municipal Limited Maturity Fund, MFS Research
Bond Fund, MFS Intermediate Investment Grade Bond Fund, MFS Mid Cap Value Fund,
MFS Large Cap Value Fund and MFS High Quality Bond Fund), MFS Series Trust X
(which has ten series: MFS Government Mortgage Fund, MFS Emerging Markets Equity
Fund, MFS International Growth Fund, MFS International Growth and Income Fund,
MFS Strategic Value Fund, MFS Emerging Markets Debt Fund, MFS Income Fund, MFS
European Equity Fund, MFS High Yield Fund and MFS Concentrated Growth Fund), MFS
Series Trust XI (which has four series: MFS Union Standard Equity Fund, Vertex
All Cap Fund, Vertex Contrarian Fund and Vertex Income Fund), and MFS Municipal
Series Trust (which has 18 series: MFS Alabama Municipal Bond Fund, MFS Arkansas
Municipal Bond Fund, MFS California Municipal Bond Fund, MFS Florida Municipal
Bond Fund, MFS Georgia Municipal Bond Fund, MFS Maryland Municipal Bond Fund,
MFS Massachusetts Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS
New York Municipal Bond Fund, MFS North Carolina Municipal Bond Fund, MFS
Pennsylvania Municipal Bond Fund, MFS South Carolina Municipal Bond Fund, MFS
Tennessee Municipal Bond Fund, MFS Virginia Municipal Bond Fund, MFS West
Virginia Municipal Bond Fund, MFS Municipal Income Fund, MFS New York High
Income Tax Free Fund and MFS Massachusetts High Income Tax Free Fund) (the "MFS
Funds"). The principal business address of each of the MFS Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following open-end Funds:
MFS Institutional Trust ("MFSIT") (which has nine series) and MFS Variable
Insurance Trust ("MVI") (which has sixteen series). The principal business
address of each of the aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL") (which has 26 series), Money Market Variable Account, High Yield
Variable Account, Capital Appreciation Variable Account, Government Securities
Variable Account, Global Governments Variable Account, Total Return Variable
Account and Managed Sectors Variable Account (collectively, the "Accounts"). The
principal business address of MFS/SL is 500 Boylston Street, Boston,
Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
VERTEX INVESTMENT MANAGEMENT, INC., a Delaware corporation and a
wholly owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex Contrarian Fund and Vertex Income Fund, each a
series of MFS Series Trust XI. The principal business address of the
aforementioned Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS INTERNATIONAL LTD. ("MIL"), a limited liability company organized
under the laws of Bermuda and a subsidiary of MFS, whose principal business
address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves as
investment adviser to and distributor for MFS American Funds known as the MFS
Funds after January 1999 (which will have 11 portfolios as of January 1999):
U.S. Equity Fund, U.S. Emerging Growth Fund, U.S. High Yield Bond Fund, U.S.
Dollar Reserve Fund, Charter Income Fund, U.S. Research Fund, U.S. Strategic
Growth Fund, Global Equity Fund, European Equity Fund and European Corporate
Bond Fund) (the "MIL Funds"). The MIL Funds are organized in Luxembourg and
qualify as an undertaking for collective investments in transferable securities
(UCITS). The principal business address of the MIL Funds is 47, Boulevard Royal,
L-2449 Luxembourg. MIL also serves as investment adviser to and distributor for
MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Governments Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
Global Growth Fund, MFS Meridian Money Market Fund, MFS Meridian Global Balanced
Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS Meridian
U.S. High Yield Fund, MFS Meridian Emerging Markets Debt Fund, MFS Meridian
Strategic Growth Fund and MFS Meridian Global Asset Allocation Fund and the MFS
Meridian Research International Fund (collectively the "MFS Meridian Funds").
Each of the MFS Meridian Funds is organized as an exempt company under the laws
of the Cayman Islands. The principal business address of each of the MFS
Meridian Funds is P.O. Box 309, Grand Cayman, Cayman Islands, British West
Indies.
MFS INTERNATIONAL (U.K.) LTD. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is Eversheds, Senator House, 85 Queen Victoria Street, London, England
EC4V 4JL, is involved primarily in marketing and investment research activities
with respect to private clients and the MIL Funds and the MFS Meridian Funds.
MFS INSTITUTIONAL ADVISORS (AUSTRALIA) LTD. ("MFSI-AUSTRALIA"), a
private limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.
MFS HOLDINGS AUSTRALIA PTY LTD. ("MFS HOLDINGS AUSTRALIA"), a private
limited company organized pursuant to the Corporations Law of New South Wales,
Australia whose current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000 Australia, and whose function is to serve primarily as a
holding company.
MFS FUND DISTRIBUTORS, INC. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI and MFSIT.
MFS SERVICE CENTER, INC. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT and MVI.
MFS INSTITUTIONAL ADVISORS, INC. ("MFSI"), a wholly owned subsidiary
of MFS, provides investment advice to substantial private clients.
MFS RETIREMENT SERVICES, INC. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MASSACHUSETTS INVESTMENT MANAGEMENT CO., LTD. ("MIMCO"), a wholly
owned subsidiary of MFS, is a corporation incorporated in Japan. MIMCO, whose
address is Kamiyacho-Mori Building, 3-20, Tranomon 4-chome, Minato-ku, Tokyo,
Japan, is involved in investment management activities.
MFS HERITAGE TRUST COMPANY ("MFS TRUST"), a New Hampshire-chartered
limited-purpose trust company whose current address is 650 Elm Street, Suite
404, Manchester, NH 03101, provides directed trustee services to retirement
plans.
MFS
---
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Kevin R. Parke, Thomas J. Cashman, Jr., Joseph W. Dello Russo, William
W. Scott, Donald A. Stewart, James Prieur and William W. Stinson. Mr. Shames is
the Chairman and Chief Executive Officer, Mr. Ballen is President and Chief
Investment Officer, Mr. Arnold Scott is a Senior Executive Vice President, Mr.
William Scott, Mr. Cashman, Mr. Dello Russo and Mr. Parke are Executive Vice
Presidents (Mr. Dello Russo is also Chief Financial Officer and Chief
Administrative Officer and Mr. Parke is also Chief Equity Officer), Stephen E.
Cavan is a Senior Vice President, General Counsel and Secretary of MFS, Robert
T. Burns is a Senior Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Treasurer of
MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost, a Senior Vice President of MFS, is the
Treasurer, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents of MFS, are
the Assistant Treasurers, James R. Bordewick, Jr., Senior Vice President and
Associate General Counsel of MFS, is the Assistant Clerk and Assistant
Secretary.
MFS SERIES TRUST II
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers, and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers, and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS SERIES TRUST III
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers, and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS SERIES TRUST VII
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS SERIES TRUST VIII
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS SERIES TRUST XI
MFS INSTITUTIONAL TRUST
Jeffrey L. Shames is the President and Chairman, Stephen E. Cavan is
the Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and
Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS SPECIAL VALUE TRUST
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
C. James Prieur, President and Director of Sun Life Assurance Company
of Canada, is the President, Stephen E. Cavan is the Secretary, James O. Yost is
the Treasurer, Ellen M. Moynihan and Mark E. Bradley are the Assistant
Treasurers and James R. Bordewick, Jr., is the Assistant Secretary.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
C. James Prieur is the President, Stephen E. Cavan is the Secretary,
and James R. Bordewick, Jr., is the Assistant Secretary.
MIL FUNDS
Jeffrey L. Shames is Chairman, Richard B. Bailey, John A. Brindle,
Richard W. S. Baker, Arnold D. Scott and William F. Waters are Directors,
Stephen E. Cavan is the Secretary, James O. Yost is the Treasurer, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS MERIDIAN FUNDS
Jeffrey L. Shames is Chairman, Richard B. Bailey, John A. Brindle,
Richard W. S. Baker, Arnold D. Scott and William F. Waters are Directors,
Stephen E. Cavan is the Secretary, James O. Yost is the Treasurer, James R.
Bordewick, Jr. is the Assistant Secretary and Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers.
VERTEX
Jeffrey L. Shames is the Chairman and President, Arnold D. Scott is a
Director, Kevin R. Parke and John W. Ballen are Executive Vice Presidents, John
D. Laupheimer is a Senior Vice President, Brian E. Stack is a Vice President,
Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant
Treasurer, Stephen E. Cavan is the Secretary and Robert T. Burns is the
Assistant Secretary.
MIL
Peter D. Laird is President and a Director, Arnold D. Scott, Jeffrey
L. Shames and Thomas J. Cashman, Jr. are Directors, Stephen E. Cavan is a
Director, Senior Vice President and the Clerk, Robert T. Burns is an Assistant
Clerk, Joseph W. Dello Russo, Executive Vice President and Chief Financial
Officer of MFS, is the Treasurer and Thomas B. Hastings is the Assistant
Treasurer.
MIL-UK
Peter D. Laird is President and a Director, Thomas J. Cashman, Arnold
D. Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director and
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFSI - AUSTRALIA
Thomas J. Cashman, Jr. is President and a Director, Graham E. Lenzer,
John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS HOLDINGS - AUSTRALIA
Jeffrey L. Shames is the President and a Director, Arnold D. Scott,
Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E. Cavan is
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors, William W. Scott,
Jr., an Executive Vice President of MFS, is the President, Stephen E. Cavan is
the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo
is the Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the President, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant
Secretary.
MFSI
Thomas J. Cashman, Jr. is Chairman and a Director, Jeffrey L. Shames,
and Arnold D. Scott are Directors, Joseph J. Trainor is the President and a
Director, Leslie J. Nanberg is a Senior Vice President, a Managing Director and
a Director, Kevin R. Parke is the Executive Vice President and a Managing
Director, George F. Bennett, Jr., John A. Gee, Brianne Grady, Joseph A.
Kosciuszek and Joseph J. Trainor are Senior Vice Presidents and Managing
Directors, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Secretary.
RSI
Arnold D. Scott is the Chairman and a Director, Martin E. Beaulieu is
the President, William W. Scott, Jr. is a Director, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.
MIMCO
Jeffrey L. Shames, Arnold D. Scott and Mamoru Ogata are Directors,
Shaun Moran is the Representative Director, Joseph W. Dello Russo is the
Statutory Auditor, Robert DiBella is the President and Thomas B. Hastings is the
Assistant Statutory Auditor.
MFS TRUST
The Directors of MFS Trust are Martin E. Beaulieu, Stephen E. Cavan,
Janet A. Clifford, Joseph W. Dello Russo and Joseph A. Kosciuszek. Mr. Cavan is
President, Mr. Dello Russo is Treasurer, and Robert T. Burns is Clerk of MFS
Trust.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
Donald A. Stewart Chairman, Sun Life Assurance Company of Canada,
Sun Life Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. Stewart is also an officer
and/or Director of various subsidiaries and
affiliates of Sun Life)
C. James Prieur President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada (Mr. Prieur
is also an officer and/or Director of various
subsidiaries and affiliates of Sun Life)
William W. Stinson Director, Sun Life Assurance Company of Canada,
Sun Life Centre, 150 King Street West, Toronto,
Ontario, Canada; Director, United Dominion
Industries Limited, Charlotte, N.C.; Director,
PanCanadian Petroleum Limited, Calgary, Alberta;
Director, LWT Services, Inc., Calgary Alberta;
Director, Western Star Trucks, Inc., Kelowna,
British Columbia; Director, Westshore Terminals
Income Fund, Vancouver, British Columbia; Director
(until 4/99), Canadian Pacific Ltd., Calgary,
Alberta
ITEM 27. DISTRIBUTORS
(a) Reference is hereby made to Item 26 above.
(b) Reference is hereby made to Item 26 above; the principal business
address of each of these persons is 500 Boylston Street, Boston, Massachusetts
02116.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
State Street Bank and State Street South
Trust Company (custodian) 5 - West
North Quincy, MA 02171
MFS Service Center, Inc. 2 Avenue de Lafayette
(transfer agent) Boston, MA 02111-1738
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 25TH day of July, 2000.
MFS MUNICIPAL SERIES TRUST
By: JAMES R. BORDEWICK, JR.
--------------------------------------
Name: James R. Bordewick, Jr.
Title: Assistant Secretary and Assistant Clerk
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on July 25, 2000.
SIGNATURE TITLE
JEFFREY L. SHAMES* Chairman, President (Principal
------------------------ Executive Officer) and Trustee
Jeffrey L. Shames
JAMES O. YOST* Treasurer (Principal Financial Officer
------------------------ and Principal Accounting Officer)
James O. Yost
MARSHALL N. COHAN* Trustee
------------------------
Marshall N. Cohan
LAWRENCE H. COHN* Trustee
------------------------
Lawrence H. Cohn
SIR J. DAVID GIBBONS* Trustee
------------------------
Sir J. David Gibbons
ABBY M. O'NEILL* Trustee
------------------------
Abby M. O'Neill
WALTER E. ROBB, III* Trustee
------------------------
Walter E. Robb, III
ARNOLD D. SCOTT* Trustee
------------------------
Arnold D. Scott
J. DALE SHERRATT* Trustee
------------------------
J. Dale Sherratt
WARD SMITH* Trustee
------------------------
Ward Smith
*By: JAMES R. BORDEWICK, JR.
------------------------
Name: James R. Bordewick, Jr.,
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on behalf
of those indicated pursuant to (i) a Power of
Attorney dated August 11, 1994, incorporated
by reference to the Registrant's
Post-Effective Amendment No. 27 filed
electronically with the Securities and
Exchange Commission on May 31, 1995; (ii) a
Power of Attorney dated February 10, 1999,
filed herewith; and (iii) a Power of Attorney
dated July 1, 2000, filed herewith.
<PAGE>
POWER OF ATTORNEY
MFS MUNICIPAL SERIES TRUST
The undersigned officer of MFS Municipal Series Trust (the
"Registrant") hereby severally constitutes and appoints Arnold D. Scott, Stephen
E. Cavan and James R. Bordewick, Jr., and each of them singly, as true and
lawful attorneys, with full power to them and each of them to sign for the
undersigned, in the name of, and in the capacity indicated below, any
Registration Statement and any and all amendments thereto and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission for the purpose of registering the Registrant
as a management investment company under the Investment Company Act of 1940
and/or the shares issued by the Registrant under the Securities Act of 1933
granting unto my said attorneys, and each of them, acting alone, full power and
authority to do and perform each and every act and thing requisite or necessary
or desirable to be done in the premises, as fully to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorneys or any of them may lawfully do or cause to be done by virtue thereof.
In WITNESS WHEREOF, the undersigned has hereunto set his hand as of 1st
day of July, 2000.
Signature Title
--------- -----
JAMES O. YOST Treasurer (Principal Financial Officer
------------- and Principal Accounting Officer)
James O. Yost
<PAGE>
POWER OF ATTORNEY
MFS Municipal Series Trust
The undersigned officer of MFS Municipal Series Trust (the
"Registrant") hereby severally constitutes and appoints Arnold D. Scott, Stephen
E. Cavan, W. Thomas London, and James R. Bordewick, Jr., and each of them
singly, as true and lawful attorneys, with full power to them and each of them
to sign for the undersigned, in the name of, and in the capacity indicated
below, any Registration Statement and any and all amendments thereto and to file
the same with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission for the purpose of registering the
Registrant as a management investment company under the Investment Company Act
of 1940 and/or the shares issued by the Registrant under the Securities Act of
1933 granting unto my said attorneys, and each of them, acting alone, full power
and authority to do and perform each and every act and thing requisite or
necessary or desirable to be done in the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys or any of them may lawfully do or cause to be
done by virtue thereof.
In WITNESS WHEREOF, the undersigned has hereunto set his hand as of
this 10th day of February, 1999.
Signature Title
--------- -----
JEFFREY L. SHAMES Principal Executive Officer
-----------------
Jeffrey L. Shames
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
4 (k) Investment Advisory Agreement, dated July 30, 1999,
for the MFS New York High Income Tax Free Fund.
(l) Investment Advisory Agreement, dated July 30, 1999,
for the MFS Massachusetts High Income Tax Free Fund.
9 (b) Legal Opinion Consent, dated July 25, 2000.
10 Consent of Deloitte & Touche LLP.
