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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
FEBRUARY 28, 1996
1940 ACT FILE NO. 811-4975
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 10 |X|
MFS MULTIMARKET INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
500 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 617-954-5000
Stephen E. Cavan
Secretary and Clerk
MFS Multimarket Income Trust
c/o Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
(Name and Address of Agent for Service)
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MFS MULTIMARKET INCOME TRUST
PART A.
INFORMATION REQUIRED IN A PROSPECTUS
Items 1 and 2: Omitted pursuant to General Instruction G.3 to Form N-2.
Item 3.1 Fee Table: Inapplicable - 1940 Act filing only.
Items 3.2, 4, 5, 6 and 7: Omitted pursuant to General Instruction G.3 to Form
N-2.
Item 8. General Description of Registrant:
8.1. General: The Registrant is a closed-end, non-diversified
management investment company which was organized as a business trust under the
laws of The Commonwealth of Massachusetts on January 9, 1987.
8.2, 8.3, and 8.4. Investment Objectives and Policies, Risk Factors
and Other Policies:
INVESTMENT OBJECTIVE AND POLICIES
The Registrant's investment objective is to provide a high level of
current income through investment in fixed income securities. The Registrant
will attempt to achieve this objective by allocating portfolio assets among
various categories of fixed income securities. The investment adviser,
Massachusetts Financial Services Company, a Delaware corporation ("MFS" or "the
Investment Adviser") will monitor the Registrant's portfolio performance on an
ongoing basis and reallocate assets in response to actual and anticipated market
and economic changes. In pursuing this objective, preservation of capital will
be a consideration, although capital appreciation, if any, will be incidental.
There can be no assurance that the Registrant will achieve its investment
objective.
The Registrant will rely on the Investment Adviser to determine, based
upon yields currently available for various categories of fixed income
securities, the relative portions of the Registrant's assets which should be
invested in particular markets. Markets selected will be those which offer the
highest income available, except where differences in yield are not sufficient
to justify investments in higher risk securities. For the risk considerations
involved, see "Special Considerations" below.
The market categories in which the Registrant may invest its assets
are: (i) high yielding corporate fixed income securities, some of which may
involve equity features; (ii) debt securities issued by foreign governments and
their political subdivisions; (iii) securities that are issued or
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guaranteed as to interest and principal by the U.S. Government, its agencies,
authorities or instrumentalities ("Government Securities"), with related
options; (iv) long-term or short-term municipal securities; (v) short-term
corporate obligations and higher quality long-term corporate obligations; (vi)
obligations of banks or savings and loan associations (including certificates of
deposit and bankers' acceptances); and (vii) to the extent available and
permissible, options and futures contracts on securities, currencies and indices
as more fully described below. At any given time, the Registrant's portfolio may
be entirely or only partially invested in a particular securities category.
Under normal economic or market conditions, at least 80% of the Registrant's
portfolio will be invested in fixed income securities. For this purpose the
Registrant will consider preferred stocks to be fixed income securities. Up to
20% of the Registrant's assets may be invested in equity securities.
Government Securities. The Registrant may invest in Government
Securities, which include (i) U.S. Treasury obligations, which differ only in
their interest rates, maturities and times of issuance: U.S. Treasury bills
(maturity of one year or less), U.S. Treasury notes (maturities of one to 10
years), and U.S. Treasury bonds (generally maturities of greater than 10 years),
all of which are backed by the full faith and credit of the United States; (ii)
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the Government National
Mortgage Association ("GNMA"); some of which are supported by the right of the
issuer to borrow from the U.S. Government, e.g., obligations of Federal Home
Loan Banks; and some of which are backed only by the credit of the issuer
itself, e.g., obligations of the Student Loan Marketing Association; and (iii)
interests in trusts or other entities representing interests in obligations that
are issued and guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities. For a description of obligations issued or guaranteed by U.S.
Government agencies or instrumentalities, see "Description of Obligations Issued
or Guaranteed by U.S. Government Agencies or Instrumentalities" below.
Government Securities do not generally involve the credit risks
associated with other types of interest bearing securities, although, as a
result, the yields available from Government Securities are generally lower than
the yields available from corporate interest bearing securities. Like other
interest bearing securities, however, the values of Government Securities change
as interest rates fluctuate.
Foreign Securities. The Registrant may invest up to 70% of its total
assets in foreign securities which are not traded on a U.S. exchange (excluding
American Depositary Receipts), which include fixed income securities that are
issued by foreign governments or any of their political subdivisions that are
considered stable by the Investment Adviser. The Trustees do not believe that
the credit risk inherent in the obligations of stable foreign governments is
significantly greater than that of U.S. Government obligations. For the risk
considerations involved, see "Special Considerations" below. Although the
percentage of the Registrant's assets invested in securities issued abroad and
denominated in foreign currencies ("non-U.S. dollar securities") will vary
depending on the relative yield of such securities, the state of the economies
of the countries in which the investments are made and such countries' financial
markets, and the relationship of such countries' currencies to the U.S. dollar,
under normal conditions the Registrant's portfolio of
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foreign securities will include those of a number of foreign countries. As a
"non-diversified" investment company, the Registrant will be able to invest more
than 5% of its assets in obligations of one or more foreign governments, to the
extent consistent with federal income tax diversification requirements for
qualification as a tax- exempt entity. The Registrant may also invest in fixed
income securities issued by foreign companies and may hold foreign currency for
hedging purposes. The Registrant may also hold foreign currency in anticipation
of purchasing foreign securities.
Investments in non-U.S. dollar securities are evaluated primarily on
the strength of a particular currency against the U.S. dollar and on the
interest rate climate of that country. Currency is judged on the basis of
fundamental economic criteria (e.g., relative inflation levels and trends,
growth rate forecasts, balance of payments status, and economic policies) as
well as technical and political data. In addition to the foregoing, interest
rates are evaluated on the basis of differentials or anomalies that may exist
between different countries.
American Depositary Receipts. The Registrant may invest in American
Depositary Receipts ("ADRs") which are certificates issued by a U.S. depository
(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. ADRs may be
sponsored or unsponsored. A sponsored ADR is issued by a depository 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 Registrant 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 Registrant may purchase
securities in local markets and direct delivery of these ordinary shares to the
local depository of an ADR agent bank in the foreign country. Simultaneously,
the ADR agents create a certificate which settles at the Registrant's custodian
in five days. The Registrant 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 the information available to a U.S. investor will
be limited to the information the foreign issuer is required to disclose in its
own 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 traded
in foreign currency.
Emerging Market Securities. Consistent with the Registrant's objective
and policies, the Registrant may invest in securities of issuers whose principal
activities are located in emerging market countries and Brady bonds. Emerging
market countries include any country determined by the Adviser to have an
emerging market economy, taking into account a number of factors,
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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
its securities and the source of its revenues and assets. 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. Brady bonds 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, Dominican Republic, Ecuador, Jordan,
Mexico, Nigeria, Panama, the Philippines, Poland, 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 (the 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.
The risks of investing in foreign securities may be intensified in the
case of investments in emerging markets. Securities of many issuers in emerging
markets may be less liquid and more volatile than securities of comparable
domestic issuers. Emerging markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of the Registrant is uninvested
and no return is earned thereon. The inability of the Registrant to make
intended security purchases due to settlement problems could cause the
Registrant to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems could result in losses to the
Registrant due to subsequent declines in value of the portfolio security, a
decrease in the level of liquidity in the Registrant's portfolio, or, if the
Registrant has entered into a contract to sell the security, in possible
liability to the purchaser. Certain markets may require payment for securities
before delivery, and in such
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markets the Registrants bear the risk that the securities will not be delivered
and that the Registrant's payments will not be returned. Securities prices in
emerging markets can be significantly more volatile than in the more developed
nations of the world, reflecting the greater uncertainties of investing in less
established markets and economies. In particular, countries with emerging
markets may have relatively unstable governments, present the risk of
nationalization of businesses, restrictions on foreign ownership, or
prohibitions of repatriation of assets, and may have less protection of property
rights than more developed countries. The economies of countries of emerging
markets may be predominantly based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions and may suffer from
extreme and volatile debt burdens or inflation rates. Local securities markets
may trade a small number of securities and may be unable to respond effectively
to increases in trading volume potentially making prompt liquidation of
substantial holdings difficult or impossible at times. Securities of issuers
located in countries with emerging markets may have limited marketability and
may be subject to more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sale of securities
of foreign investors. In addition, if a deterioration occurs in an emerging
market's balance of payments or for other reasons a country could impose
temporary restrictions on foreign capital remittances. The Registrant could be
adversely effected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Registrant of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt obligations
and increase the expenses of the Registrant.
Corporate Fixed Income Securities. Corporate fixed income securities of
both domestic and foreign issuers in which the Registrant may invest include
preferred and preference stock and all types of long-term or short-term debt
obligations, such as bonds, debentures, notes, equipment lease certificates,
equipment trust certificates, conditional sales contracts and commercial paper
(including obligations, such as repurchase agreements, secured by such
instruments). Corporate fixed income securities may involve equity features,
such as conversion or exchange rights or warrants for the acquisition of stock
of the same or a different issuer; participations based on revenues, sales or
profits; or the purchase of common stock in a unit transaction (where corporate
debt securities and common stock are offered as a unit).
High yield corporate fixed income securities in which the Registrant
may invest are ordinarily unrated or in the lower rating categories of
recognized rating agencies (that is, ratings of Baa or lower by Moody's
Investors Services, Inc. ("Moody's") or BBB or lower by Standard & Poor's
Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch")) and will
involve greater volatility of price and risk of principal and income (including
the possibility of default or bankruptcy of the issuers of such securities) than
securities in the higher rating categories. Certain unrated or lower rated fixed
income securities, e.g., "junk bonds", are very speculative, involve high risk
and may be questionable as to principal and interest payments. Securities rated
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Baa have speculative characteristics, securities rated Ba or BB or lower are
considered speculative and securities rated below BBB or Baa may be questionable
as to principal and interest payments. For a description of these and other
rating categories, see "Description of Bond Ratings; Moody's Investors Service,
Inc." and "Standard & Poor's Ratings Group" and "Fitch Investors Service, Inc."
below. No minimum rating standard is required for a purchase by the Registrant.
The Registrant may invest up to 40% of the value of its total assets in
each of the electric utility and telephone industries, but will not invest more
than 25% in either of those industries unless yields available for four
consecutive weeks in the four highest rating categories on new issue bonds in
such industry (issue size of $50 million or more) have averaged in excess of
105% of yields of new issue long-term industrial bonds similarly rated (issue
size of $50 million or more).
Bank Obligations. The Registrant may invest in obligations of domestic
and foreign banks which, at the date of investment, have capital, surplus and
undivided profits (as of the date of their most recently published financial
statements) in excess of $100 million. The Registrant may invest in obligations
of other banks or savings and loan associations if such obligations are insured
by the Federal Deposit Insurance Corporation.
Municipal Obligations. The Registrant may invest in municipal
obligations 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 when the Investment Adviser determines that they
offer the highest income available, except where differences in yield are not
sufficient to justify assuming the investment risk of such securities. Such
municipal obligations may be unrated or in the medium and lower rating
categories of recognized rating agencies, in which securities are speculative,
involve high risk and are questionable as to principal and interest payments.
For the risk considerations involved, see "Special Considerations" below.
Other Investments. When the Investment Adviser believes that investing
for temporary defensive purposes is appropriate, such as during periods of
unusual market conditions, or when relative yields are deemed attractive, part
or all of the Registrant's assets may be invested in cash (including foreign
currency) or cash equivalent short-term obligations including, but not limited
to, certificates of deposit, commercial paper, short-term notes, obligations
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities and repurchase agreements.
The investment objective and policies described above may be changed
without shareholder approval, except that the requirement that at least 80% of
the Registrant's assets under normal circumstances be invested in fixed income
securities is a fundamental policy and may not be changed without the approval
of the holders of a majority of its shares (as defined below under "Investment
Restrictions").
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INVESTMENT PRACTICES
The following investment practices apply to the portfolio investments
of the Registrant:
Options on U.S. and Foreign Government Securities. In an effort to
increase current income and to reduce fluctuations in net asset value, the
Registrant may write covered put and call options and purchase put and call
options on U.S. and foreign government securities that are traded on United
States and foreign securities exchanges and over-the-counter. This practice may
result in the loss of principal under certain market conditions. For a further
discussion of the use, risks and costs of options trading, see "Options and
Futures" below.
"Reset Options". In certain instances, the Registrant may enter into
options on Treasury securities which provide for periodic adjustment of the
premium during the term of each such option. Like other types of options, these
transactions, which may be referred to as "reset options" or "adjustable strike
options", grant the purchaser the right to purchase (in the case of a call) or
sell (in the case of a put), a specified type and series of U.S. Treasury
security at any time up to a stated expiration date (or, in certain instances,
on such date). In contrast to other types of options, however, the price at
which the underlying security may be purchased or sold under a "reset option" is
determined at various intervals during the term of the option, and such price
fluctuates from interval to interval based on changes in the market value of the
underlying security. As a result, the strike price of a "reset option", at the
time of exercise, may be less advantageous to the Registrant than if the strike
price had been fixed at the initiation of the option. In addition, the premium
paid for the purchase of the option may be determined at the termination, rather
than the initiation, of the option. If the premium is paid at termination, the
Registrant 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.
Futures Contracts and Options on Futures Contracts. The Registrant may
enter into contracts for the purchase or sale for future delivery of fixed
income securities or contracts based on municipal bond or other financial
indices including any index of U.S. or foreign government securities ("Futures
Contracts") and may purchase and write options to buy or sell Futures Contracts
("Options on Futures Contracts"). Options on Futures Contracts to be written or
purchased by the Registrant will be traded on U.S. and foreign exchanges. These
investment techniques are designed only to hedge against anticipated future
changes in interest rates which otherwise might either adversely affect the
value of the Registrant's portfolio securities or adversely affect the prices of
securities which the Registrant intends to purchase at a later date. Should
interest rates move in an unexpected manner, the Registrant may not achieve the
anticipated benefits of Futures Contracts or Options on Futures Contracts or may
realize a loss. For further discussion of the use, risks and costs of Futures
Contracts and Options on Futures Contracts, see "Options and Futures" below.
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The Trustees have adopted the requirement that Futures Contracts and
Options on Futures Contracts only be used as a hedge and not for speculation. In
addition to this requirement, the Board of Trustees has also adopted two
percentage restrictions on the use of Futures Contracts. The first restriction
is that the Registrant will not enter into any Futures Contracts and Options on
Futures Contracts if immediately thereafter the amount of initial margin
deposits on all the Futures Contracts of the Registrant and premiums paid on
Options on Futures Contracts would exceed 5% of the market value of the total
assets of the Registrant. The second restriction is that the value of the
securities and other obligations underlying all such Futures Contracts held by
the Registrant not exceed 50% of the value of the total assets of the
Registrant. Neither of these restrictions will be changed by the Registrant's
Board of Trustees without considering the policies and concerns of the various
federal and state regulatory agencies.
Options on Foreign Currencies. The Registrant may purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the dollar cost of foreign securities to be acquired. As in the
case of other kinds of options, however, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received, and the Registrant could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Registrant's position, it may forfeit the entire amount of the
premium plus related transactions costs. Options on foreign currencies to be
written or purchased by the Registrant will be traded on U.S. and foreign
exchanges or over-the-counter. For further discussion of the use, risks and
costs of options on foreign currencies, see "Options and Futures" below.
Forward Foreign Currency Exchange Contracts. The Registrant may enter
into forward foreign currency exchange contracts for the purchase or sale of a
specific currency at a future date at a price set at the time of the contract (a
"Forward Contract"). The Registrant will enter into Forward Contracts for
hedging purposes as well as for non-hedging purposes. The Registrant may also
enter into a Forward Contract on one currency in order to hedge against risk of
loss arising from fluctuations in the value of a second currency (referred to as
a "cross hedge") if, in the judgment of the Investment Adviser, a reasonable
degree of correlation can be expected between movements in the values of the two
currencies. Transactions in Forward Contracts entered into for hedging purposes
will include forward purchases or sales of foreign currencies for the purpose of
protecting the dollar value of securities denominated in a foreign currency or
protecting the dollar equivalent of interest or dividends to be paid on such
securities. By entering into such transactions, however, the Registrant may be
required to forego the benefits of advantageous changes in exchange rates. The
Registrant may also enter into transactions in Forward Contracts for other than
hedging purposes. For example, if the Investment Adviser expects that the value
of a particular foreign currency will increase or decrease relative to the value
of the U.S. dollar, the Registrant may purchase or sell such currency,
respectively, through a Forward Contract. If the expected changes in the value
of the currency occur, the Registrant will realize profits which will increase
its gross income. Where exchange rates do not move in the direction or to the
extent anticipated, however, the Registrant may sustain losses which will reduce
its gross income. Such transactions could involve significant risk of loss.
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The Registrant has established procedures consistent with the General
Statement of Policy of the Securities and Exchange Commission (the "SEC") and
its staff regarding the use of Forward Contracts by registered investment
companies which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Registrant satisfies this requirement through segregation of assets, it will
maintain, in a segregated account, cash, cash equivalents or high grade debt
securities, which will be marked to market on a daily basis, in an amount equal
to the value of its commitments under Forward Contracts entered into by the
Registrant. While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert authority
to regulate Forward Contracts. In such event, the Registrant's ability to
utilize Forward Contracts in the manner set forth above may be restricted.
Lending of Portfolio Securities. The Registrant may seek to increase
its income by lending portfolio securities under present regulatory policies,
including those of the Board of Governors of the Federal Reserve System and the
SEC. Such loans will usually be made only to member banks of the Federal Reserve
System and member firms of the New York Stock Exchange (and subsidiaries
thereof), and would be required to be secured continuously by collateral in
cash, U.S. Treasury securities or an irrevocable letter of credit maintained on
a current basis by an amount at least equal to the market value of the
securities loaned. The Registrant would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice. For
the duration of a loan, the Registrant would continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned and
would also receive compensation from the investment of the collateral. The
Registrant would not, however, have the right to vote any securities having
voting rights during the existence of the loan, but the Registrant 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
entities deemed by the Investment Adviser to be of good standing, and when, in
the judgment of the Investment Adviser, the consideration which can be earned
currently from securities loans of this type justifies the attendant risk. If
the Investment Adviser determines to make securities loans, it is intended that
the value of the securities loaned would not exceed 30% of the value of the
Registrant's assets.
"When-Issued Securities". Securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the obligations
will usually be delivered at a future date 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. Although the Registrant is not limited
to the amount of securities for which it may have commitments to purchase on
such basis, it is expected that under normal circumstances, the Registrant will
not commit more than 30% of its assets to such purchases. The Registrant does
not pay for the securities until received or start earning interest on them
until the contractual settlement date. In order to invest its assets
immediately, while awaiting delivery of securities purchased on such
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basis, the Registrant will normally invest in short-term securities that offer
same-day settlement and earnings, but that may bear interest at a lower rate
than longer term securities.
When the Registrant commits to purchase a security on a "when-issued"
or "forward delivery" basis, it will set up procedures consistent with the
General Statement of Policy of the SEC concerning such purchases. However,
although the Registrant does not intend to make such purchases for speculative
purposes and intends to adhere to the provisions of the SEC policy, purchases of
securities on such basis may involve more risk than other types of purchases.
For example, if the Registrant determines it is necessary to sell the
"when-issued" or "forward delivery" securities before delivery, it may incur a
gain or a loss because of market fluctuations since the time the commitment to
purchase such securities was made.
Repurchase Agreements. The Registrant may enter into repurchase
agreements in order to earn additional income on available cash or as a
temporary defensive measure. Under a repurchase agreement, the Registrant
acquires securities subject to the seller's agreement to repurchase at a
specified time and price. If the seller becomes subject to a proceeding under
the bankruptcy laws or its assets are otherwise subject to a stay order, the
Registrant's right to liquidate the securities may be restricted (during which
time the value of the securities could decline).
The Registrant may enter into repurchase agreements with sellers who
are member firms (or subsidiaries thereof) of the New York Stock Exchange,
members of the Federal Reserve System, or recognized primary Government
Securities dealers or institutions which the Investment Adviser has determined
to be of comparable creditworthiness. The securities that the Registrant
purchases and holds through its agent are 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 Registrant, or the purchase and repurchase prices
may be the same, with interest at a standard rate due to the Registrant together
with the repurchase price on repurchase. In either case, the income to the
Registrant is unrelated to the interest rate on the Government Securities.
The repurchase agreement provides that in the event the seller fails to
pay the price agreed upon on the agreed upon delivery date or upon demand, as
the case may be, the Registrant will have the right to liquidate the securities.
If at the time the Registrant 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
Registrant's exercise of its right to liquidate the securities may be delayed
(during which time the market value of the securities could decline, resulting
in a net loss to the Registrant) and the Registrant may incur certain costs in
attempting to exercise this right. The Registrant has adopted and follows
procedures which are intended to minimize the risks of repurchase agreements.
For example, the Registrant only enters into repurchase agreements after the
Investment Adviser has determined that the seller is creditworthy, and the
Investment Adviser monitors the 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
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Registrant has the right to make margin calls at any time if the value of the
securities falls below the agreed upon margin.
Mortgage Pass-Through Securities. The Registrant may invest in mortgage
pass-through securities that are Government 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 a part of a premium if any has been paid, and the actual yield (or
total return) to the Registrant may be different than the quoted yield on the
securities. Mortgage prepayments generally increase with falling interest rates
and decrease with rising interest rates. Like other fixed income securities,
when interest rates rise the value of the 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.
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 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 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 government 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 FHA-insured or 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 the Federal National
Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC"). FNMA is a government- sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the
<PAGE>
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 sellers/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 of principal and
interest by FNMA and not guaranteed by the U.S. Government.
FHLMC was created by Congress in 1970 as a corporate instrumentality of
the U.S. Government for the purpose of increasing the availability of mortgage
credit for residential housing. FHLMC issues Participation Certificates ("PCs")
which represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) from FHLMC's national portfolio. FHLMC guarantees timely payment
of interest and ultimate collection of principal regardless of the status of the
underlying mortgage loans. Bonds issued by FHLMC are not guaranteed by the U.S.
Government.
Corporate Asset-Backed Securities. The Registrant 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.
Corporate asset-backed 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 the 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.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support which fall into two
categories: (1) liquidity protection and (2) 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 Registrant 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
with respect to the level of credit risk associated with the
<PAGE>
underlying assets. Delinquency or loss in excess of that anticipated credit
support or failure of the credit support could adversely affect the return on an
investment in such a security.
Mortgage "Dollar Roll" Transactions. The Registrant may enter into
mortgage "dollar roll" transactions with selected banks and broker-dealers
pursuant to which the Registrant sells mortgage-backed securities for delivery
in the future (generally within 30 days) and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. The Registrant will only enter into "covered rolls". A
"covered roll" is a specific type of "dollar roll" for which there is an
offsetting cash position or a cash equivalent security position which matures on
or before the forward settlement date of the "dollar roll" transaction. During
the roll period, the Registrant forgoes principal and interest paid on the
mortgage- backed securities. The Registrant 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 the cash proceeds of the initial sale. The Registrant may also be
compensated by receipt of a commitment fee.
Leveraging. The Registrant may borrow money for investment from banks
and through the issuance of bonds, debentures, notes or other instruments
evidencing indebtedness ("Senior Securities") and to invest the proceeds in
accordance with the Registrant's investment objective and policies. In
determining whether to employ leverage, the Trustees will consider such factors
as the estimated spread between interest required to be paid on money borrowed
by the Registrant and interest which can be earned by investing the proceeds of
borrowings, as well as the level of distributions currently being made by the
Registrant to its shareholders. Under the 1940 Act, the Registrant must maintain
asset coverage (which is the ratio where the value of the total assets of the
Registrant plus all liabilities and indebtedness not represented by Senior
Securities bears to the aggregate amount of Senior Securities representing any
indebtedness of the Registrant) of at least 300% with respect to Senior
Securities representing indebtedness. The Registrant would issue Senior
Securities to raise money to purchase securities for the Registrant's portfolio
to preserve or enhance the Registrant's payment of dividends.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds. The
Registrant may invest in zero coupon bonds as well as in 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 thereof 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 Registrant 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
<PAGE>
of accrual may require the liquidation of other portfolio securities to satisfy
the Registrant's distribution obligations.
Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities. The Registrant 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 which in the case of
Government Securities are issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities. Typically, CMOs are collateralized
by certificates issued by the GNMA, the FNMA or the FHLMC but also may be
collateralized by whole loans or private mortgage pass-through securities (such
collateral collectively hereinafter referred to as "Mortgage Assets"). The
Registrant may also invest a portion of its assets in multiclass pass-through
securities which are equity interests in a trust composed of Mortgage Assets.
Unless the context indicates otherwise, all references herein to CMOs include
multiclass pass-through securities. Payments of principal and interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs. CMOs may be issued by agencies or instrumentalities of
the U.S. Government or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing. The
issuer of a series of CMOs may elect to be treated as a Real Estate Mortgage
Investment Conduit (a "REMIC").
In a CMO, a series of bonds or certificates may be issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrued on all classes of the CMOs on a monthly,
quarterly or semiannual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a series 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 the
series 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 primarily of interest payments or principal
payments.
The Registrant 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. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
<PAGE>
Stripped Mortgage-Backed Securities. The Registrant 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 associations, mortgage
banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of 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
"IO" class) while the other class will receive all of the principal (the
principal only or "PO" class). The yield to maturity on an IO 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 Registrant may fail to fully recoup its initial investment in
these securities. The market value of the class consisting primarily or entirely
of principal payments may be 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 and some
liquidity is available.
Yield Curve Options. The Registrant may also enter into options on the
"spread", or differential, between two U.S. or foreign government 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 U.S. or foreign government securities, rather than the prices of the
individual securities, and is usually 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 Registrant may purchase or write such options
in order to protect against the adverse effects of a potential widening or
narrowing of the spreads between U.S. or foreign government securities, or other
interest rate sensitive instruments, held in the Registrant's portfolio. The
Registrant may also purchase or write yield curve options for other than hedging
purposes if, in the judgment of the Investment Adviser, the Registrant will be
able to profit from movements in the spread between the yields of the underlying
U.S. or foreign government 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 Registrant will be covered. A call (or put) option is covered if
the Registrant holds another call (or put) option on the spread between the same
two securities and maintains in a segregated account with its
<PAGE>
custodian, cash or cash equivalents sufficient to cover the Registrant's net
liability under the two options. 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.
Swaps and Related Transactions. As one way of managing its exposure to
different types of investments, the Registrant may enter into interest rate
swaps, currency swaps or structures with embedded swaps and other types of
available swap agreements, such as caps, collars and floors. Swaps involve the
exchange by the Registrant with another party of cash payments based upon
different interest rate indexes, currencies, and other prices or rates such as
the value of mortgage prepayment rates. For example, in the typical interest
rate swap, the Registrant might exchange a sequence of cash payments based on a
floating rate index for cash payments based on a fixed rate. Payments made by
both parties to a swap transaction are based on a principal amount determined by
the parties.
The Registrant may also purchase and sell caps, floors and collars. In
a typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the
counterparty. For example, the purchase of an interest rate cap entitles the
buyer, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the counterparty selling such interest rate cap. The sale of an interest
rate floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
Swap agreements will tend to shift a Fund's investment exposure from
one type of investment to another. For example, if the Registrant agreed to
exchange payments in dollars for payments in foreign currency, in each case
based on a fixed rate, the swap agreement would tend to decrease the
Registrant's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed.
As a result, swaps can be highly volatile and may have a considerable impact on
the Registrant's performance. Swap agreements are subject to risks related to
the counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Registrant may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. Swap agreements may be individually negotiated and
structured to include exposure to a variety of different types of investments or
market factors. Depending on their structure, swap agreements may increase or
decrease the Registrant's exposure to long or short-term interest rates (in the
U.S. or abroad), foreign currency values, mortgage securities, corporate
borrowing rates,
<PAGE>
or other factors such as securities prices or inflation rates. Swap agreements
can take many different forms and are known by a variety of names. The
Registrant is not limited to any particular form or variety of swap agreements
if MFS determines it is consistent with the Registrant's investment objective
and policies.
The Registrant will maintain cash or appropriate liquid assets with its
custodian to cover its current obligations under swap transactions. If the
Registrant enters into a swap agreement on a net basis (i.e., the two payment
streams are netted out, with the Registrant receiving or paying, as the case may
be, only the net amount of the two payments), the Registrant will maintain cash
or liquid assets with its Custodian 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 Registrant is entitled to receive under the agreement. If
the Registrant enters into a swap agreement on other than a net basis, it will
maintain cash or liquid assets with a value equal to the full amount of the
Registrant's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors
and collars is the change in the specific interest rate, currency or other
factor that determines the amount of payments to be made under the arrangement.
If MFS is incorrect in its forecasts of such factors, the investment performance
of the Registrant 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
Registrant, the Registrant must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness declines, 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 Registrant is contractually entitled to receive. The
Registrant 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.
Inverse Floating Rate Obligations. The Registrant may invest in
so-called "inverse floating rate obligations" or "residual interest" bonds or
other obligations or certificates relating thereto structured to have similar
features. Such obligations generally have floating or variable interest rates
that move in the opposite direction of short-term interest rates and generally
increase or decrease in value in response to changes in short-term interest
rates at a rate which is a multiple (approximately two times) of the rate at
which fixed-rate long-term tax-exempt securities increase or decrease in
response to such changes. As a result, such obligations have the effect of
providing investment leverage and may be more volatile than long-term fixed-rate
tax-exempt obligations.
Loan Participations and Other Direct Indebtedness. The Registrant may
invest a portion of its assets in loan participations and other direct
indebtedness. By purchasing a loan participation, the Registrant acquires some
or all of the interest of a bank or other lending institution in a loan to a
corporate borrower. Many such loans are secured, and most impose restrictive
covenants which must be met by the borrower. These loans are made generally to
finance internal growth, mergers, acquisitions, stock repurchases, leveraged
by-outs and other corporate activities. Such loans may be in default at the time
of purchase. The Registrant may also purchase trade or other claims against
companies, which generally represent money owed by the company to a supplier of
<PAGE>
goods and services. These claims may also be purchased at a time when the
company is in default. Certain of the loan participations acquired by the
Registrant may involve revolving credit facilities or other standby financing
commitments which obligate the Registrant to pay additional cash on a certain
date or on demand.
The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct investments may not be in the form of securities
or may be subject to restrictions on transfer, and only limited opportunities
may exist to resell such instruments. As a result, the Registrant may be unable
to sell such investments at an opportune time or may have to resell them at less
than fair market value.
Certain of the loan participations acquired by the Registrant may
involve revolving credit facilities or other standby financing commitments which
obligate the Registrant to pay additional cash on a certain date or on demand.
To the extent that the Registrant 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 Registrant's ability to receive payments 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 loan participations
and other direct investments which the Registrant will purchase, the Investment
Adviser will rely upon its (and not that of the original lending institution's)
own credit analysis of the borrower. As the Registrant may be required to rely
upon another lending institution to collect and pass on to the Registrant
amounts payable with respect to the loan and to enforce the Registrant's rights
under the loan, an insolvency, bankruptcy or reorganization of the lending
institution may delay or prevent the Registrant from receiving such amounts. In
such cases, the Registrant 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 participation for purposes of certain investment
restrictions pertaining to the diversification of the Registrant's portfolio
investments. The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions.
Investments in such loans may involve additional risks to the Registrant. For
example, if a loan is foreclosed, the Registrant could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, the Registrant could be held liable as a
co-lender. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, the Registrant relies on the
Investment Adviser's research in an attempt to avoid situations where fraud or
misrepresentation could adversely affect the Registrant. In addition, loan
participations and other direct investments may not be in the form of securities
or may be subject to restrictions on transfer, and only limited opportunities
may exist to resell such instruments. As a result, the Registrant may be unable
to sell such investments at an opportune time or may have to resell them at less
than fair market value. To the extent that the Investment Adviser determines
that any such investments are illiquid, the Registrant will include them in the
investment limitations described below.
<PAGE>
When and if available, fixed income securities may be purchased at a
discount from face value. However, the Registrant does not intend to hold such
securities to maturity for the purpose of achieving potential capital gains,
unless current yields on these securities remain attractive.
The general investment practices described above may be changed without
shareholder approval.
SPECIAL CONSIDERATIONS
Investments in fixed income securities offering the high current income
sought by the Registrant, while generally providing greater income than
investments in higher rated securities, usually entail greater risk (including
the possibility of default or bankruptcy of the issuers of such securities) and,
accordingly, an investment in shares of the Registrant should not constitute a
complete investment program and may not be appropriate for all investors. The
Registrant will seek to reduce risk by investing its assets in a number of
markets and issuers, performing credit analyses of potential investments and
monitoring current developments and trends in both the economy and financial
markets. The Registrant's use of options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies may result in the
loss of principal under certain market conditions. See "Options and Futures"
below.
The Registrant may invest in fixed income securities rated Baa by
Moody's or BBB by S&P or Fitch (and comparable unrated securities). 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 fixed income securities.
The Registrant may also invest in corporate fixed income securities
rated Ba or lower by Moody's or BB or lower by S&P or Fitch (and comparable
unrated securities) (commonly known as "junk bonds"). No minimum rating standard
is required by the Registrant. 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 they are also affected by changes in interest
rates. In the past, economic downturns or an increase in interest rates have,
under certain circumstances, caused a higher incidence of default by the issuers
of these securities and may do so in the future, especially in the case of
highly leveraged issuers. During certain periods, the higher yields on the
Registrant's
<PAGE>
lower rated high yielding fixed income securities are paid primarily because of
the increased risk of loss of principal and income, arising from such factors as
the heightened possibility of default or bankruptcy of the issuers of such
securities. Due to the fixed income payments of these securities, the Registrant
may continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Registrant's yield (based on net asset value) despite the actual loss of
principal.
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
Investment 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 respond to changes in the market. While the
Investment Adviser may refer to ratings issued by established credit rating
agencies, it is not the Registrant's policy to rely exclusively on ratings
issued by these rating agencies, but rather to supplement such ratings with the
Investment Adviser's own independent and ongoing review of credit quality. To
the extent the Registrant invests in these lower rated securities, the
achievement of its investment objectives may be more dependent on the Investment
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 which are described
above.
The Registrant may also invest in municipal obligations rated BB or
lower by S&P or Fitch or Ba or lower by Moody's (and comparable rated and
unrated securities). While these high risk securities may have some quality and
protective characteristics, these can be expected to be outweighed by large
uncertainties or major risk exposures to adverse conditions. Such securities
will be affected by the market's perception of their credit quality, economic
changes and the outlook for economic growth to a greater extent than higher
rated securities which react primarily to fluctuations in the general level of
interest rates. Furthermore, an economic downturn may result in a higher
incidence of defaults by issuers of these securities. In addition, these lower
rated or unrated high risk tax-exempt securities are frequently traded only in
markets where the number of potential purchasers, if any, is very limited.
Therefore, judgment may at times play a greater role in valuing these securities
than in the case of higher grade tax- exempt securities. This consideration may
have the effect of limiting the ability of the Registrant to sell such
securities at their fair value either to meet redemption requests or to respond
to changes in the economy or the financial markets.
While the Investment Adviser may refer to ratings issued by established
credit rating agencies, it is not a policy of the Registrant to rely exclusively
on ratings issued by these agencies, but rather to supplement such ratings with
the Investment Adviser's own independent and ongoing review of credit quality.
Furthermore, no minimum rating standard is required by the Registrant. With
respect to those municipal obligations which are not rated by a major rating
agency, the Registrant will be more reliant on the Investment Adviser's
judgment, analysis and experience than would be the case if such municipal
obligations were rated. In evaluating the creditworthiness of
<PAGE>
an issuer, whether rated or unrated, the Investment Adviser may take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of and the
community support for the facility financed by the issuer, or the ability of the
issuer's management and regulatory matters.
The value of shares of the Registrant will vary as the aggregate value
of the Registrant's portfolio securities increases or decreases. The net asset
value of the Registrant may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of a portfolio invested at
higher yields can be expected to rise. Conversely, when interest rates rise, the
value of a portfolio invested at lower yields can be expected to decline.
Moreover the value of the lower-rated fixed income securities that the
Registrant purchases will fluctuate more than the value of higher- rated fixed
income securities. These lower-rated fixed income securities generally tend to
reflect short-term corporate and market developments to a greater extent than
higher-rated securities, which react primarily to fluctuations in the general
level of interest rates.
Although changes in the value of the Registrant's portfolio securities
subsequent to their acquisition are reflected in the net asset value of shares
of the Registrant, such changes will not affect the income received by the
Registrant from such securities. The dividends paid by the Registrant will
increase or decrease in relation to the income received by the Registrant from
its investments, which will in any case be reduced by the Registrant's expenses
before being distributed to the Registrant's shareholders.
If the Registrant's expectations of changes in interest rates or its
evaluation of the normal yield relationship between two securities proves to be
incorrect, the Registrant's income, net asset value and potential capital gain
may be decreased or its potential capital loss may be increased.
Investing in foreign securities involves considerations and possible
risks not typically associated with investing in U.S. securities. The value of
foreign securities investments will be affected by changes in currency rates or
exchange control regulations, changes in governmental administration or economic
or monetary policy (in this country or abroad) or changed circumstances in
dealings between nations. Costs may be incurred in connection with conversions
between various currencies. Moreover, there may be less publicly available
information about foreign issuers than about domestic issuers, and foreign
issuers may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of domestic issuers. Securities
of some foreign issuers are less liquid and more volatile than securities of
comparable domestic issuers and foreign brokerage commissions are generally
higher than in the United States. Foreign securities markets may also be less
liquid, more volatile and less subject to governmental supervision than in the
United States. Investments in foreign countries could be affected by other
factors not present in the United States, including expropriation, confiscatory
taxation and potential difficulties in enforcing contractual obligations and
could be subject to extended settlement periods.
For a discussion of the risks involved in trading options on securities
and currencies, Futures Contracts, Options on Futures Contracts and Forward
Contracts, see "Options and Futures" below.
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The Registrant has registered as a "non- diversified" investment
company so that it will be able to invest more than 5% of its assets in the
obligations of an issuer, subject to the diversification requirements of
Subchapter M of the Code (hereinafter defined) applicable to the Registrant.
Since the Registrant may invest a relatively high percentage of its assets in
the obligations of a limited number of issuers, the Registrant may be more
susceptible to any single economic, political or regulatory occurrence.
Risks of Leverage. To the extent that securities are purchased with
proceeds from the issuance of Senior Securities, the net asset value of the
Registrant's shares generally will increase or decrease at a greater rate than
would otherwise be the case. Any investment income or gains earned from the
securities purchased with these proceeds which is in excess of the expenses
associated therewith can be expected to cause the value of the Registrant's
shares and distributions on the Registrant's shares to rise more quickly than
would otherwise be the case. Conversely, if the investment income or gains
earned from the securities purchased with proceeds from the issuance of Senior
Securities fails to cover the expenses associated therewith, the value of the
Registrant's shares is likely to decrease more quickly than otherwise would be
the case and distributions thereon will be reduced or eliminated. Hence, the
issuance of Senior Securities (leverage) is speculative and increases the risk
of owning or investing in the shares of an investment company which employs that
technique. The issuance of Senior Securities also increases the Registrant's
expenses because of interest payments and administrative expenses associated
with the issuance of the Senior Securities. Unless the appreciation and income
on assets purchased with proceeds from the issuance of Senior Securities exceed
the costs associated with the Senior Securities, the use of leverage would
diminish the investment performance of the Registrant compared with what it
would have been without leverage.
The Registrant will not be permitted to declare dividends or other
distributions with respect to the Registrant's shares or repurchase the
Registrant's shares unless at the time thereof (and after giving effect
thereto), asset coverage with respect to the Registrant's Senior Securities
would be at least 300% (or such other percentage as may in the future be
required by law). Under the Internal Revenue Code of 1986, as amended (the
"Code"), the Registrant must, among other things (i) distribute at least 90% of
its investment company taxable income each fiscal year in order to maintain its
qualification for tax treatment as a regulated investment company, (ii)
distribute the remaining 10% of its investment company taxable income and all of
its net capital gains each fiscal year in order to avoid federal income tax and
(iii) distribute substantially all of its income on a calendar-year basis in
accordance with the timing requirements of the Code in order to avoid excise
taxes. The foregoing limitations on dividends and distributions may under
certain circumstances impair the Registrant's ability to maintain such
qualification (which would result in the Registrant being taxed as a
corporation), or may result in the Registrant being subject to income or excise
taxes. To the extent any Senior Securities are given a prior claim against the
income of the Registrant and against the net assets of the Registrant in a
liquidation, they may be a substantial lien and burden on the Registrant's
shares.
<PAGE>
For these reasons, an investment in shares of the Registrant should not
constitute a complete investment program and may not be appropriate for
investors who cannot assume the greater risk of capital depreciation inherent in
seeking higher income.
OPTIONS AND FUTURES
Options on U.S. and Foreign Government Securities. The Registrant may write
covered put and call options and purchase put and call options on U.S. or
foreign government securities that are traded on United States and foreign
securities exchanges and over-the-counter options.
Call options written by the Registrant give the holder the right to buy
the underlying securities from the Registrant at a stated exercise price; put
options written by the Registrant give the holder the right to sell the
underlying security to the Registrant at a stated exercise price. A call option
written by the Registrant is "covered" if the Registrant owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Registrant 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
is (a) equal to or less than the exercise price of the call written or (b)
greater than the exercise price of the call written if the difference is
maintained by the Registrant in cash, cash equivalents or Government Securities
in a segregated account with its custodian. A put option written by the
Registrant is "covered" if the Registrant maintains cash, cash equivalents or
Government Securities with a value equal to the exercise price in a segregated
account with its custodian, 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 (a) equal to or greater than the exercise price of the put written or
(b) less than the exercise price of the put written if the difference is
maintained by the Registrant in cash, cash equivalents or Government Securities
in a segregated account with its custodian. Put and call options written by the
Registrant may also be covered in such other manner as may be in accordance with
the requirements of the exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations. The premium paid by the
purchaser of an option will reflect, among other things, the relationship of the
exercise price to the market price and volatility of the underlying security,
and the remaining term of the option, supply and demand and interest rates.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option, since with regard to certain options, the writer may be
assigned an exercise notice at any time prior to the termination of the
obligation. Whether or not an option expires unexercised, the writer retains the
amount of the premium. This amount, of course, may, in the case of a covered
call option, be offset by a decline in the market value of the underlying
security during the option period. If a call option is exercised, the writer
experiences a profit or loss from the sale of the underlying security. If a put
option is exercised, the writer must fulfill the obligation to purchase the
underlying security at the exercise price, which will usually exceed the then
market value of the underlying security.
<PAGE>
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction". This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Registrant to write another call option on the underlying
security with either a different exercise date or both, or in the case of a
written put option effecting a transaction will permit the Registrant to write
another put option to the extent that the exercise price thereof is secured by
deposited cash or short-term securities. 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 Trust investments. If the Registrant
desires to sell a particular security from its portfolio on which it has written
a call option, it will effect a closing transaction prior to or concurrent with
the sale of security.
The Registrant will realize a profit from a closing transaction if the
price of the transaction is less than the premium received from writing the
option or is more than the premium paid to purchase the option; the Registrant
will realize a loss from a closing transaction if the price of the transaction
is more than the premium received from writing the option or is less than the
premium paid to purchase the option. Because increases in the market price of a
call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the Registrant.
An option position may be closed out only where there exists a
secondary market for an option of the same series, if a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Registrant would have to exercise the options
in order to realize any profit. If the Registrant is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise. Reasons for the absence of a liquid secondary market
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by a national securities exchange
("Exchange") on opening transactions or closing transactions or both; (iii)
trading halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an Exchange; (v)
the facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
<PAGE>
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Registrant may write options in connection with buy-and-write
transactions; that is, the Registrant may purchase a security and then write a
call option against that security. The exercise price of the call the Registrant
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 remain flat or
decline moderately during the option period. Buy-and- write transactions using
at-the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance 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 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 Registrant's maximum gain will be the
premium received by it for writing the option, adjusted upwards or downwards by
the difference between the Registrant's purchase price of the security and the
exercise price. If the options are not exercised and the price of the underlying
security declines, the amount of such decline will be offset in part, or
entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Registrant's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Registrant may elect to close the
position or take delivery of the security at the exercise price and the
Registrant's return will be the premium received from the put options minus the
amount by which the market price of the security is below the exercise price.
Out-of-the-money, at-the-money, and in-the- money put options may be used by the
Registrant in the same market environments that call options are used in
equivalent buy-and-write transactions.
The Registrant may purchase put options to hedge against a decline in
the value of its portfolio. By using put options in this way, the Registrant
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 Registrant may purchase call options to hedge against an increase
in the price of U.S. or foreign government securities that the Registrant
anticipates purchasing in the future. The premium paid for the call option plus
any transaction costs will reduce the benefit, if any, realized by the
Registrant upon exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire worthless to the Registrant.
Futures Contracts. The Registrant may enter into contracts for the
purchase or sale for future delivery of fixed income securities or contracts
based on municipal bond or other financial indices, including any index of U.S.
or foreign government securities ("Futures Contract"). A
<PAGE>
"sale" of a Futures Contract means a contractual obligation to deliver the
securities called for by the contract at a specified price on a specified date
or, in the case of a Futures Contract on an index, a contractual obligation to
make or receive a cash settlement. A "purchase" of a Futures Contract means a
contractual obligation to acquire the securities called for by the contract at a
specified price on a specified date or, in the case of a Futures Contract on an
index, a contractual obligation to make or receive a cash settlement. U.S.
Futures Contracts have been designed by exchanges which have been designated
"contract markets" by the CFTC, and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. Existing contract markets include the Chicago Board of Trade
and International Monetary Market of the Chicago Mercantile Exchange. Futures
Contracts trade on these markets and, through their clearing corporations, the
exchanges guarantee performance of the contracts as between the clearing members
of the exchange. The Registrant will enter into Futures Contracts which are
based on debt securities that are backed by the full faith and credit of the
U.S. Government, such as long-term U.S. Treasury Bonds, Treasury Notes and
three-month U.S. Treasury Bills. The Registrant may also enter into Futures
Contracts which are based on corporate securities, non- U.S. Government bonds
and Eurodollar deposits.
At the same time a Futures Contract is purchased or sold, the
Registrant must allocate cash or securities as a deposit payment ("initial
deposit"). The initial deposit varies but may be as low as 5% or less of the
value of the contract. Daily thereafter, the Futures Contract is valued on a
marked-to-market basis and a "variation margin" must be paid or received based
on the change in value of the contract from the preceding day.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a Futures
Contract may not have been issued when the contract was written.
Although Futures Contracts by their terms call for the actual delivery
or acquisition of securities, or, in the case of Futures Contracts based on an
index, the making or acceptance of a cash settlement at a specified future time,
in most cases the contractual obligation is fulfilled before the date of the
contract by buying (or selling, as the case may be) on a commodities exchange an
identical Futures Contract calling for delivery in the same month, subject to
the availability of a liquid secondary market. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a brokerage firm which is a member of the
exchange on which the contracts are traded, the Registrant will incur brokerage
fees when it purchases and sells Futures Contracts.
The purpose of the acquisition or sale of a Futures Contract, in the
case of a portfolio, such as the portfolio of the Registrant, which holds or
intends to acquire long-term fixed income securities, is to attempt to protect
the Registrant from fluctuations in interest rates without actually buying or
selling long- term fixed income securities. For example, if the Registrant owns
long-term bonds, and interest rates were expected to increase, the Registrant
might enter into Futures Contracts for the sale of debt securities. Such a sale
would have much the same effect as
<PAGE>
selling an equivalent value of the long-term bonds owned by the Registrant. If
interest rates did increase, the value of the debt securities in the portfolio
would decline, but the value of the Futures Contracts to the Registrant would
increase at approximately the same rate, thereby keeping the net asset value of
the Registrant from declining as much as it otherwise would have. The Registrant
could accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when interest rates are expected to
increase. However, since the futures market is more liquid than the cash market,
the use of Futures Contracts as an investment technique allows the Registrant to
maintain a defensive position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long- term bonds, the Registrant could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the Futures
Contracts could be liquidated and the Registrant could then buy long- term bonds
on the cash market. To the extent the Registrant enters into Futures Contracts
for this purpose, the Registrant will maintain cash or cash equivalents in a
segregated account in an amount equal to the difference between the fluctuating
market value of such Futures Contracts and the aggregate value of the initial
and variation margin payments made by the Registrant with respect to such
Futures Contracts, thereby insuring that the leveraging effect of such Futures
is minimized.
The ordinary spreads between prices in the cash and futures markets,
due to differences in the natures of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions, rather than making or taking
delivery, which could distort the normal relationship between the cash and
futures markets. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements in
the futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Investment Adviser may
still not result in a successful transaction.
In addition, Futures Contracts entail risks. Although the Registrant
believes that use of such contracts will benefit the Registrant, if the
Investment Adviser's investment judgment about the general direction of interest
rates is incorrect, the Registrant's overall performance would be poorer than if
it had not entered into any such contract. For example, if the Registrant has
hedged against the possibility of an increase in interest rates which would
adversely affect the price of bonds held in its portfolio and interest rates
decrease instead, the Registrant will lose part or all of the benefit of the
increased value of its bonds which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the
Registrant has insufficient
<PAGE>
cash, it may have to sell bonds from its portfolio to meet daily variation
margin requirements. Such sales of bonds may be, but will not necessarily be, at
increased prices which reflect the rising market. The Registrant may have to
sell securities at a time when it may be disadvantageous to do so.
Options on Futures Contracts. The Registrant may purchase and write
options on Futures Contracts for hedging purposes. The purchase of a call option
on a Futures Contract is similar in some respects to the purchase of a call
option on an individual security. Depending on the pricing of the option
compared to either the price of the Futures Contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the Futures Contract or underlying debt securities. As with
the purchase of Futures Contracts, when the Registrant is not fully invested it
may purchase a call option on a Futures Contract to hedge against a market
advance due to declining interest rates.
The writing of a call option on a Futures Contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the Futures Contract. If the futures price at expiration of the
option is below the exercise price, the Registrant will retain the full amount
of the option premium which provides a partial hedge against any decline that
may have occurred in the Registrant's portfolio holdings. The writing of a put
option on a Futures Contract constitutes a partial hedge against increasing
prices of the securities which are deliverable upon exercise of the Futures
Contract. If the futures price at expiration of the option is higher than the
exercise price, the Registrant will retain the full amount of the option premium
which provides a partial hedge against any increase in the price of Government
Securities which the Registrant intends to purchase. If a put or call option the
Registrant has written is exercised, the Registrant 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 changes
in the value of its futures positions, the Registrant's losses from existing
options on futures may to some extent be reduced or increased by changes in the
value of portfolio securities.
The purchase of a put option on a Futures Contract is similar in some
respects to the purchase of protective put options on portfolio securities. The
Registrant will purchase a put option on a Futures Contract to hedge the
Registrant's portfolio against the risk of rising interest rates.
The amount of risk the Registrant assumes when it purchases an option
on a Futures Contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the
purchase of an option also entails the risk that changes in the value of the
underlying Futures Contract will not be fully reflected in the value of the
option purchased.
The Registrant's ability to engage in the options and futures
strategies described above will depend on the availability of liquid markets in
such instruments. Markets in options and futures with respect to Government
Securities are relatively new and still developing. It is impossible to predict
the amount of trading interest that may exist in various types of options or
futures. Therefore no assurance can be given that the Registrant will be able to
utilize these instruments
<PAGE>
effectively for the purposes set forth above. Furthermore, the Registrant's
ability to engage in options and futures transactions may be limited by tax
considerations.
Options on Foreign Currencies. The Registrant may purchase and write
options on foreign currencies for 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 Registrant may purchase put options on the foreign currency. If the value of
the currency does decline, the Registrant will have the right to sell such
currency for a fixed amount in dollars and will thereby offset, in whole or 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 Registrant may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Registrant deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency rates do not move in the
direction or to the extent anticipated, the Registrant 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 Registrant may write options on foreign currencies for the same
types of hedging purposes. For example, where the Registrant 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, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Registrant 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 Registrant
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.
All call options written on foreign currencies will be covered. A call
option written on foreign currencies by the Registrant is "covered" if the
Registrant owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration if such amount, or the
equivalent amount in cash equivalent or Government Securities, is held in a
segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Registrant has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held is (a)
equal to or less than the exercise price of the call written or (b) greater than
the
<PAGE>
exercise price of the call written if the difference is maintained by the
Registrant in cash, cash equivalents or Government Securities in a segregated
account with its custodian.
Additional Risks of Options on Securities, Options on Futures
Contracts, Forward Contracts and Options on Foreign Currencies. Unlike
transactions entered into by the Registrant in Futures Contracts, options on
foreign currencies and Forward Contracts are not traded on contract markets
regulated by the CFTC or with the exception of certain foreign currency options
by 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.
Similarly, options on securities may be traded over-the- counter. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchase 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.
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 ("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
Registrant 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 on 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.
In addition, options on securities, Futures Contracts, Options on
Futures Contracts, Forward Contracts and Options on Foreign Currencies may be
traded on foreign exchanges. Such
<PAGE>
transactions are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) the availability of data on which to make
trading decisions, (iii) delays in the Registrant's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) less
trading volume.
In order to assure that the Registrant will not be deemed to be a
"commodity pool" for purposes of the Commodity Exchange Act, regulations of the
CFTC require that the Registrant enter into transactions in Futures Contracts
and Options on Futures Contracts only (i) for bona fide hedging purposes (as
defined in CFTC regulations), or (ii) for non-hedging purposes, provided that
the aggregate initial margin and premiums on such non-hedging positions does not
exceed 5% of the liquidation value of the Registrant's assets. In addition, the
Registrant must comply with the requirements of various state securities laws in
connection with such transactions.
Future Developments. The Registrant proposes to take advantage of
investment opportunities in the area of Options and Futures Contracts and
Options on Futures Contracts which are not presently contemplated for use by the
Registrant or which are not currently available but which may be developed, to
the extent such opportunities are both consistent with the Registrant's
investment objective and legally permissible investments for the Registrant.
Such opportunities, if they arise, may involve risks which exceed those involved
in the options and futures activities described above.
PORTFOLIO MANAGEMENT
The Registrant's portfolio management may include the following
strategies:
(1) selling all or a portion of the Registrant's securities in one
market and investing the proceeds in one or more different markets;
(2) buying and selling particular securities within one of the fixed
income securities markets in which the Registrant may invest;
(3) varying the maturity, mix and quality profile of its portfolio.
The Registrant will also use the techniques described above under
"Investment Practices" to manage its portfolio.
While these strategies are designed to result in increases in the
Registrant's current income available for distribution to its shareholders, if
the Registrant's expectations of changes in interest rates or its evaluation of
the normal yield relationship between two securities or obligations proves to be
incorrect, the Registrant's income and net asset value may be reduced.
<PAGE>
In addition to the methods of "cover" set forth in "Options and
Futures" above, the Registrant may also cover options on securities, Options on
Futures Contracts and Options on Foreign Currencies in such other manner as may
be in accordance with the requirements of the exchange on which, or the
counterparty with which, such instrument is traded and applicable laws and
regulations.
As a result of its investments in foreign securities, the Registrant
may receive interest payments, or the proceeds of the sale or redemption of such
securities, in foreign currencies. In that event, the Registrant may promptly
convert such currencies into dollars at the then-current exchange rate. Under
certain circumstances, alternatively, such as where the Investment Adviser
anticipates that the exchange rate will improve, the Registrant may hold such
currencies for an indefinite period of time.
In addition, the Registrant may be required or elect to receive
delivery of the foreign currencies underlying Options on Foreign Currencies or
Forward Contracts it has entered into. This could occur, for example, if an
option written by the Registrant is exercised or the Registrant is unable to
close out a Forward Contract it has entered into. The Registrant may also elect
to take delivery of the currencies underlying options or Forward Contracts if,
in the judgment of the Investment Adviser, it is in the best interest of the
Registrant to do so. The holding of currencies exposes the Registrant to risk of
loss if currency exchange rates move in a direction adverse to the Registrant's
position. Such losses could reduce any profits or increase any losses sustained
by the Registrant from the sale or redemption of securities, and could reduce
the dollar value of interest or dividend payments received. In addition, the
holding of currencies could adversely affect the Registrant's profit or loss on
currency options or Forward Contracts, as well as its hedging strategies.
The staff of the SEC has taken the position that purchased
over-the-counter options and assets used to cover written over-the-counter
options are illiquid. Therefore, such options and assets, together with other
illiquid securities, cannot exceed 15% of the Registrant's assets under its
investment restrictions. Although the Investment Adviser disagrees with this
position, the Investment Adviser intends to limit the Registrant's writing of
over-the-counter options in accordance with the following procedure. Except as
provided below, the Registrant intends to write over- the-counter options only
with primary Government Securities dealers recognized by the Federal Reserve
Bank of New York. Also, the contracts which the Registrant has in place with
such primary dealers will provide that the Registrant has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Registrant for writing the option,
plus the amount, if any, of the option's intrinsic value (i.e., the amount that
the option is in-the-money). The formula may also include a factor to account
for the difference between the price of the security and the strike price of the
option if the option is written out-of-the-money. The Registrant will treat all
or a part of the formula price as illiquid for purposes of its investment
restrictions. The Registrant may also
<PAGE>
write over-the- counter options with non-primary dealers, including foreign
dealers, and will treat the assets used to cover these options as illiquid for
purposes of such 15% test.
INVESTMENT RESTRICTIONS
The Registrant has adopted the following policies which cannot be
changed without the approval of the holders of a majority of its shares (which
means the lesser of (i) more than 50% of the outstanding shares of the
Registrant, or (ii) 67% or more of the outstanding shares of the Registrant
present at a meeting at which holders of more than 50% of its outstanding shares
are represented in person or by proxy). Except with respect to borrowers, all
percentage limitations set forth below apply immediately after a purchase or
initial investment and any subsequent change in any applicable percentage
resulting from market fluctuations does not require elimination of any security
from the portfolio. The Registrant may not:
(1) borrow money or pledge, mortgage or hypothecate its assets, except
(i) as a temporary measure for extraordinary or emergency purposes, (ii) for a
repurchase of its shares, or (iii) for investment in accordance with its
investment objective and policies, and in no event shall the Registrant borrow
in excess of 1/3 of its assets;
(2) purchase any security or evidence of interest therein on margin,
except that the Registrant may obtain such short-term credit as may be necessary
for the clearance of purchases and sales of securities and except that the
Registrant may make deposits on margin in connection with Futures Contracts and
options;
(3) underwrite securities issued by other persons except insofar as the
Registrant may technically be deemed an underwriter under the Securities Act of
1933 in selling a portfolio security;
(4) 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 contracts for the future acquisition or delivery of fixed income
securities) in the ordinary course of the business of the Registrant (the
Registrant reserves the freedom of action to hold and to sell real estate
acquired as a result of the ownership of securities);
(5) 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 the Registrant;
(6) 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 purposes 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 margin are not
deemed to be the issuance of a senior security);
<PAGE>
(7) make loans to other persons except through the lending of its
portfolio securities not in excess of 30% of its total assets (taken at market
value) and except through the use of repurchase agreements, the purchase of
commercial paper or the purchase of all or a portion of an issue of debt
securities in accordance with its investment objective, policies and
restrictions;
(8) make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue as, and equal in
amount to, the securities sold short ("short sales against the box"), and unless
not more than 10% of the Registrant's net assets (taken at market value) is held
as collateral for such sales at any one time (it is the Registrant's present
intention to make such sales only for the purpose of deferring realization of
gain or loss for Federal income tax purposes; such sales would not be make of
securities subject to outstanding options); and
(9) invest more than 25% of the value of its total assets in any
industry, except as described under the subsection "Corporate Fixed Income
Securities" of the section "Investment Objective and Policies" above.
The Registrant may not invest in illiquid investments, including
securities which are 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, market makers do not exist or
will not entertain bids or offers), unless the Board of Trustees has determined
that such securities are liquid based on trading markets for the specific
security, if more than 15% of the Registrant's assets (taken at market value)
would be invested in such securities. This investment restriction is not
fundamental and may be changed without shareholder approval.
<PAGE>
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED
BY U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES.
Federal Farm Credit System Notes and Bonds-
are bonds issued by a cooperatively owned nationwide system of banks and
associations supervised by the Farm Credit Administration, an independent
agency of the U.S. Government. These bonds are not guaranteed by the U.S.
Government.
Maritime Administration Bonds-
are bonds issued and provided by the Department of Transportation of the
U.S. Government and are guaranteed by the United States.
FHA Debentures-
are debentures issued by the Federal Housing Administration of the U.S.
Government and are guaranteed by the United States.
GNMA Certificates-
are mortgage-backed securities which represent a partial ownership
interest in a pool of mortgage loans issued by lenders such as mortgage
bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal
Housing Administration or guaranteed by the Veterans Administration.
FHLMC Bonds-
are bonds issued and guaranteed by the Federal Home Loan Mortgage
Corporation and are not guaranteed by the U.S. Government.
FNMA Bonds-
are bonds issued and guaranteed by the Federal National Mortgage
Association and are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds-
are notes and bonds issued by the Federal Home Loan Bank System and are not
guaranteed by the U.S. Government.
Although this list includes a description of the primary types of U.S.
Government agency or instrumentality obligations in which the Registrant intends
to invest, the Registrant may invest in obligations of U.S. Government agencies
or instrumentalities other than those listed above.
<PAGE>
DESCRIPTION OF BOND RATINGS*
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered 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.
- ---------------------------------
*The ratings indicated herein are believed to be the most recent ratings
available at the date of this Amendment for the securities listed. Ratings are
generally given to securities at the time of issuance. While the rating agencies
may from time to time revise such ratings, they undertake no obligation to do
so, and the ratings indicated do not necessarily represent ratings which will be
given to these securities on the date of the Registrant's fiscal year end.
<PAGE>
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.
Unrated: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believe possess the strongest investment attributes are designated by the
symbols Aa 1, A 1, Baa 1, Ba 1 and B 1.
STANDARD & POOR'S RATINGS GROUP*
AAA: Debt rated AAA has the highest rating assigned by Standard &
Poor's Ratings Group ("S&P"). Capacity to pay interest and repay principal is
extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
- ----------------------------------
*Rates all governmental bodies having $1,000,000 or more debt outstanding,
unless adequate information is not available.
<PAGE>
A: Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB: Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC- rating. The C rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest
is being paid.
D: Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments 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.
<PAGE>
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICES, INC.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A: Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and, therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC: Bonds have certain identifiable characteristics which, if
not remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
<PAGE>
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the AAA category.
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for rating purposes.
Withdrawn: A rating will be withdrawn when an issue matures or is
called or refinanced, and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be raised or lowered. FitchAlert is relatively short- term, and should be
resolved within 12 months.
8.5. Share Price Data: Not applicable.
Item 9. Management:
9.1.a. General - Board of Trustees: Management of the Registrant's
business and affairs is the responsibility of the Board of Trustees of the
Registrant.
9.1.b. General - Investment Adviser: MFS, a Delaware corporation, is
the Registrant's investment adviser. MFS and its predecessor organizations have
a history of money management dating from 1924, thus making MFS America's oldest
mutual fund organization. MFS is a wholly owned subsidiary of Sun Life Assurance
Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") which in turn is a wholly
owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). Sun Life,
a mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the United States since 1895. The
executive officers of MFS report to the Chairman of Sun Life. The principal
business address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser to each of the funds in the MFS
Family of Funds (the "MFS Funds"), to MFS/Sun Life Series Trust, MFS Municipal
Income Trust, MFS Government Markets Income Trust, MFS Intermediate Income
Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS Institutional
Trust, MFS Variable Insurance Trust, MFS Union Standard Trust, Sun Growth
Variable Annuity Fund, Inc. and seven variable accounts, each of which is a
registered investment company established by Sun Life of Canada (U.S.) in
<PAGE>
connection with the sale of various fixed/variable annuity contracts. MFS and
its wholly owned subsidiary, MFS Asset Management Inc., provide investment
advice to substantial private clients. Net assets under the management of the
MFS organization were approximately $43.2 billion on behalf of approximately 1.8
million investors as of January 31, 1996. As of such date, the MFS organization
managed approximately $20.6 billion of assets in fixed income securities, and
approximately $7.1 billion in U.S. Government securities and approximately $3.8
billion in fixed income securities of foreign issuers and non-U.S. dollar
denominated fixed income securities of U.S. issuers.
MFS has established a strategic alliance with Foreign &
Colonial Management Ltd. ("Foreign & Colonial"). Foreign & Colonial is a
subsidiary of two of the world's oldest financial services institutions, the
London-based Foreign & Colonial Investment Trust PLC, which pioneered the idea
of investment management in 1868, and HYPO-BANK (Bayerische Hypotheken-und
Weschel-Bank AG), the oldest publicly listed bank in Germany, founded in 1835.
As part of this alliance, the portfolio managers and investment analysts of MFS
and Foreign & Colonial will share their views on a variety of investment related
issues, such as the economy, securities markets, portfolio securities and their
issuers, investment recommendations, strategies and techniques, risk analysis,
trading strategies and other portfolio management matters. MFS will have access
to the extensive international equity investment expertise of Foreign & Colonial
and Foreign & Colonial will have access to the extensive U.S. equity investment
expertise of MFS. One or more MFS investment analysts are expected to work for
an expected to work for an extended period with Foreign & Colonial's portfolio
managers and investment analysts at their offices in London. In return, one or
more Foreign & Colonial employees are expected to work in a similar manner at
MFS' Boston offices.
In certain instances there may be securities which are suitable for the
Registrant's portfolio as well as for portfolios of other clients of MFS or
clients of Foreign & Colonial. Some simultaneous transactions are inevitable
when several clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client. While
in some cases this arrangement could have a detrimental effect on the price or
availability of the security as far as the Registrant is concerned, in other
cases, it may produce increased investment opportunities for the Registrant.
INVESTMENT ADVISORY AGREEMENT
General. The Investment Advisory Agreement between MFS and the
Registrant (the "Advisory Agreement") provides that, subject to the direction of
the Board of Trustees of the Registrant, MFS is responsible for the actual
management of the Registrant's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Trustees. The Investment Adviser also
provides certain administrative services and general office facilities.
The Investment Adviser is not dependent on any other party in providing
the investment advisory services required in the management of the Registrant.
The Investment Adviser may,
<PAGE>
however, consider analyses from various sources, including broker-dealers with
which the Registrant does business.
The Investment Adviser pays the compensation of the Registrant's
officers and of the Trustees who are affiliated with the Investment Adviser. The
Investment 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 Registrant's investments, effecting the Registrant's
portfolio transactions and, in general, administrating its affairs.
The Advisory Agreement also provides that neither MFS or 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 Registrant, 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.
Advisory Fee. For the services provided by MFS under the Advisory
Agreement, the Registrant will pay MFS a fee computed and paid monthly in an
amount equal to the sum of 0.34% of the average daily net assets of the
Registrant and 5.4% of the daily gross income (i.e., income other than gains
from the sale of securities or gains received from options and Futures
Contracts) of the Registrant, in each case on an annual basis, for the
Registrant's then-current fiscal year. This advisory fee is greater than that
paid by most funds.
Payment of Expenses. The Registrant pays the compensation of the
Trustees who are not affiliated with MFS and all the Registrant's expenses
(other than those assumed by MFS), including governmental fees, interest
charges, taxes, membership dues in the Investment Company Institute allocable to
the Registrant, fees and expenses of independent auditors, of legal counsel, and
of any transfer agent, registrar or dividend disbursing agent of the Registrant,
expenses of repurchasing shares, expenses of preparing, printing and mailing
share certificates, shareholder reports, notices, proxy statements and reports
to governmental officers and commissions, brokerage and other expenses connected
with the execution, recording and settlement of portfolio security transactions,
insurance premiums, fees and expenses of the Registrant's Custodian, for all
services to the Registrant, including safekeeping of funds and securities and
maintaining required books and accounts, expenses of calculating the net asset
value of the Registrant's shares, expenses of shareholder meetings, expenses in
connection with the Dividend Reinvestment and Cash Purchases Plan and SEC fees.
Use of Name. The Advisory Agreement provides that if MFS ceases to
serve as the Investment Adviser to the Registrant, the Registrant will change
its name so as to delete the initials "MFS" and that MFS may render services to
others and may permit funds clients in addition to the Registrant to use the
initials "MFS" in their names.
The Advisory Agreement will remain in effect until August 1, 1996, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the Registrant's outstanding voting securities and, in either
<PAGE>
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 Registrant's outstanding voting securities or by
either party on not more than 60 days' nor less than 30 days' written notice.
9.1.c. General - Portfolio Management: James T. Swanson, a Vice
President of the Registrant and a Senior Vice President of MFS, became a
portfolio manager at MFS in 1985. He became a portfolio manager of the
Registrant in 1992. Stephen C. Bryant, a Senior Vice President of MFS, became a
portfolio manager at MFS in 1987. He became a portfolio manager of the
Registrant in 1992. Robert J. Manning, a Senior Vice President of MFS, became a
portfolio manager at MFS in 1984. He became a portfolio manager of the
Registrant in 1994. Stephen E. Nothern, a Senior Vice President of MFS, became a
portfolio manager at MFS in 1993. He became a portfolio manager of the
Registrant in 1993.
9.1.d. General - Administrators: Inapplicable.
9.1.e. Custodians: State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110 is the custodian and dividend
disbursing agent for the Registrant. MFS Services Center, Inc., 500 Boylston
Street, Boston, Massachusetts 02116 is the shareholder servicing agent.
9.1.f. General - Expenses: See Item 9.1.b.
9.1.g. General - Affiliated Brokerage: Inapplicable.
9.2. Non-resident Managers: Inapplicable.
9.3. Control Persons: Inapplicable.
Item 10. Capital Stock, Long-Term Debt, and Other Securities:
10.1. Capital Stock:
a. and f. Description of Shares. The Registrant's Declaration of Trust
permits the Trustees to issue an unlimited number of full and fractional Shares
of Beneficial Interest, without par value. Shareholders are entitled to one vote
for each share held and to vote in the election of Trustees and on other matters
submitted to meetings of shareholders. No material amendment may be made to the
Registrant's Declaration of Trust without the affirmative vote of a majority of
its shares. Under certain circumstances, shareholders have the right to
communicate with other shareholders and to remove Trustees. Shareholders have no
pre-emptive or conversion rights. Shares when issued are fully paid and
non-assessable, except as set forth below under "Certain Provisions of the
Declaration of Trust."
The Registrant's Declaration of Trust permits the Trustees to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial
<PAGE>
interests in the Registrant. Each share represents an equal proportionate
interest in the Registrant with each other share. The Registrant has no present
intention of offering additional shares, except that additional shares may be
issued under the Plan. Other offerings of its shares, if made, will require
approval of the Registrant's Board of Trustees. Any additional offering will be
subject to the requirements of the Investment Company Act of 1940, as amended,
that shares may not be sold at a price below the then-current net asset value,
exclusive of underwriting discounts and commissions, except, among other things,
in connection with an offering to existing shareholders or with the consent of
the holders of a majority of the Registrant's outstanding voting securities.
The Registrant may be terminated (i) upon the sale of its assets to a
diversified open-end management investment company, if approved by the vote of
the holders of two-thirds of its outstanding shares, except that if the Trustees
recommend such sale of assets, the approval by the vote of the holders of a
majority of its outstanding shares will be sufficient, or (ii) upon liquidation
and distribution of its assets, if approved by the vote of the holders of
two-thirds of its outstanding shares, or (iii) by the Trustees by written notice
to the Registrant's shareholders. If not so terminated, the Registrant will
continue indefinitely. Upon liquidation of the Registrant the Registrant's
shareholders are entitled to share pro rata in the Registrant's net assets
available for distribution to its shareholders.
Repurchase of Shares. The Registrant is a closed- end management
investment company and as such its shareholders do not, and will not, have the
right to redeem their shares of the Registrant. The Registrant, however, may
purchase its shares from time to time in the open market or otherwise as and
when it is deemed advisable by the Trustees. Such repurchases will be made only
when the Registrant's shares are trading at a discount of 5% percent or more
from the net asset value of the shares. Shares repurchased by the Registrant
will be held in treasury. The Registrant may incur debt to finance share
repurchase transactions. See "Investment Restrictions" in Items 8.2, 8.3 and 8.4
above.
The shares of the Registrant will trade in the open market at a price
which will be a function of several factors, including their net asset value and
yield. The shares of closed-end investment companies generally sell at market
prices varying from their net asset values. When the Registrant repurchases its
shares for a price below their net asset value, the net asset value of those
shares that remain outstanding will be enhanced, but this does not necessarily
mean that the market price of those outstanding shares will be affected, either
positively or negatively. Further, interest on borrowings to finance share
repurchase transactions will reduce the Registrant's net income.
Certain Provisions of the Declaration of Trust. The Registrant 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 Registrant and provides for
indemnification and reimbursement of expenses out of the Registrant's property
for any shareholder held personally liable for the obligations of the
Registrant. The Declaration of Trust also provides that the Registrant shall
maintain appropriate insurance (for example, fidelity bonding and errors and
<PAGE>
omissions insurance) for the protection of the Registrant, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which both inadequate
insurance exists and the Registrant itself is unable to meet its obligations.
The Declaration of Trust further provides that obligations of the
Registrant are not binding upon the Trustees individually but only upon the
property of the Registrant and that the Trustees will not be liable for errors
of judgment or mistakes of fact or law, but nothing in the Declaration of Trust
protects a Trustee against any liability to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Anti-Takeover Provisions. The Registrant presently has certain
anti-takeover provisions in its Declaration of Trust which could have the effect
of limiting the ability of other entities or persons to acquire control of the
Registrant, to cause it to engage in certain transactions or to modify its
structure. The Board of Trustees is divided into three classes, each having a
term of three years. Each year the term of one class expires. This provision
could delay for up to two years the replacement of a majority of the Board of
Trustees. In addition, the affirmative vote or consent of the holders of 66%
percent of the shares of the Registrant (a greater vote than that required by
the 1940 Act) is required to authorize the conversion of the Registrant from a
closed-end to an open-end investment company, or generally to authorize any of
the following transactions:
(i) merger or consolidation of the Registrant with or into any
other corporation;
(ii) issuance of any securities of the Registrant to any person or
entity for cash;
(iii) sale, lease or exchange of all or any substantial part of the
assets of the Registrant to any entity or person (except assets having an
aggregate fair market value of less than $1,000,000); or
(iv) sale, lease or exchange to the Registrant, in echange for
securities of the Registrant, of any assets of any entity or person (except
assets having an aggregate fair market value of less than $1,000,000)
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of five percent or more of the outstanding
shares of the Registrant. However, such vote or consent will not be required
with respect to the foregoing transactions where the Board of Trustees under
certain conditions approves the transaction. Reference is made to the
Declaration of Trust of the Registrant, on file with the SEC, for the full text
of these provisions.
The foregoing provisions will make more difficult a change in the
Registrant's management, or consummation of the foregoing transactions without
the Trustees' approval, and could have the effect of depriving shareholders of
an opportunity to sell their shares at a premium over prevailing market prices
by discouraging a third party from seeking to obtain control of the
<PAGE>
Registrant in a tender offer or similar transaction. However, the Board of
Trustees has considered these anti-takeover provisions and believes that they
are in the shareholders' best interests and benefit shareholders by providing
the advantage of potentially requiring persons seeking control of the Registrant
to negotiate with its management regarding the price to be paid and facilitating
the continuity of the Registrant's management.
b. Inapplicable.
c. Inapplicable.
d. Inapplicable.
e. Dividends and Distributions; Dividend Reinvestment and Cash
Purchase Plan. The Registrant will distribute monthly to shareholders
substantially all of its net investment income in the manner required by the
Code. Short-term capital gains, if any, may be distributed monthly and net
long-term capital gains, if any, will be distributed at least annually. Premiums
from options, if any, may be distributed at least annually. See Item 10.4.
Shareholders may elect to have all distributions of dividends and
capital gains automatically reinvested by State Street Bank and Trust Company
("State Street"), as Plan agent. Pursuant to the Dividend Reinvestment and Cash
Purchase Plan (the "Plan"), the provisions of which are set forth below,
shareholders not making such election will receive all such amounts in cash paid
by check mailed directly to the shareholder by State Street, as the dividend
paying agent.
If the Trustees of the Registrant declare a dividend or determine to
make a capital gain distribution, the nonparticipants in the Plan will receive
such dividend or distribution in cash and participants in the Plan will receive
the equivalent in shares of the Registrant. Whenever the market price of the
shares on the payment date for the dividend or distribution is equal to or
exceeds their net asset value, participants will be issued shares of the
Registrant at the higher of net asset value or 95% of the market price. This
discount reflects savings in underwriting and other costs which the Registrant
would otherwise be required to incur to raise additional capital. If net asset
value exceeds the market price of Trust shares at such time or if the Registrant
should declare a dividend or other distribution payable only in cash, State
Street will, as agent for the participants, buy Trust shares in the open market,
on the New York Stock Exchange or elsewhere, for the participants' accounts. If,
before State Street has completed its purchases, the market price exceeds the
net asset value of the Registrant's shares, the average per share purchase price
paid by State Street may exceed the net asset value of the Registrant's shares,
resulting in the acquisition of fewer shares than if the dividend or
distribution had been paid in shares issued by the Registrant.
Participants in the Plan may withdraw from the Plan upon written notice
to State Street. When a participant withdraws from the Plan or upon termination
of the Plan as provided below, certificates for whole shares credited to his
account under the Plan will be issued and a cash payment will be made for any
fraction of a share credited to such account.
<PAGE>
Participants in the Plan have the option of making additional cash
payments to State Street, semi-annually, for investment in the Registrant's
shares. Such payments may be made in any amount from $100 to $500. State Street
will use all funds received from participants (as well as any dividend and
distributions received in cash) to purchase Trust shares in the open market
semi-annually. Interest will not be paid on any uninvested cash payments.
State Street maintains all shareholder accounts in the Plan and
furnishes monthly written confirmations of all transactions in the account,
including information needed by shareholders for personal and tax records.
Shares in the account of each Plan participant will be held by State Street in
non-certificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan. While the
Registrant has no plans to issue additional shares other than pursuant to the
Plan, if participants in the Plan desire to exercise any rights which may be
issued or granted with respect to shares, they should request that certificates
for whole shares be issued to them. Each participant nevertheless has the right
to receive certificates for whole shares owned by him.
The Registrant will distribute proxy material to nominee and record
shareholders in accordance with SEC rules and regulations.
There is no charge to participants for reinvesting dividends or
distributions, except for certain brokerage commissions, as described below.
State Street's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Registrant. There will be no brokerage charges
with respect to shares issued directly by the Registrant as a result of
dividends or distributions payable either in stock or in cash. However, each
participant will pay a pro rata share of brokerage commissions incurred with
respect to State Street's open market purchases in connection with the
reinvestment of dividends or distributions as well as from voluntary cash
payments.
With respect to purchases from voluntary cash payments, State Street
will charge a pro rata share of the brokerage commissions and a service fee of
$0.75 for each cash purchase. Brokerage charges for purchasing small amounts of
stock for individual accounts through the Plan are expected to be less than the
usual brokerage charges for such transactions, as State Street will be
purchasing shares for all participants in blocks and pro-rating the lower
commission thus attainable.
The automatic reinvestment of dividends and distributions will not
relieve participants of any income tax which may be payable on such dividends or
distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Registrant reserves the right to amend or terminate the Plan as
applied to any voluntary cash payments made and any dividend or distribution
paid subsequent to written notice of the change sent to the participants in the
Plan at least 90 days before the record date for such dividend or distribution.
The Plan also may be amended or terminated by State Street on at least 90 days'
<PAGE>
written notice to participants in the Plan. All correspondence concerning the
Plan should be directed to State Street at 225 Franklin Street, Boston,
Massachusetts 02110.
10.2. Long-term debt: The Registrant has entered into a credit
agreement dated as of November 10, 1992 between the Registrant and The Chase
Manhattan Bank, N.A. ("Chase Manhattan") (the "Credit Agreement"). Subject to
the terms and conditions of the Credit Agreement, Chase Manhattan has agreed to
make loans (the "Loans") to the Registrant from time to time up to a maximum of
$150,000,000 (the "Commitment"). The Loans may be outstanding as either variable
rate or fixed rate loans. The interest rate on variable rate loans is the higher
of (i) the Federal Funds Rate plus 3/8 of 1% and (ii) the prime commercial
lending rate of Chase Manhattan. The interest rate on fixed rate loans may be
the rate either (i) quoted by the principal London branch of Chase Manhattan for
the offering to leading banks in the London interbank market of United States
Dollar deposits in immediately available funds, for a period equal or comparable
to the period of such Loan and in an amount substantially equal to the principal
amount of such loan ("Eurodollar Loans"), or (ii) determined by Chase Manhattan
to be the average of the bid rates quoted to it at its principal office, 1 Chase
Manhattan Plaza, New York, New York 10081, for such Loan by New York certificate
of deposit dealers of recognized standing selected by Chase Manhattan for the
purchase at face value of certificates of deposit of Chase Manhattan having a
maturity equal or comparable to the period of such Loan and in an amount
substantially equal to the principal amount of such Loan ("CD Loans"); provided
that, if such quotations from such dealers are not available to Chase Manhattan,
it will determine a reasonably equivalent rate on the basis of another source or
sources selected by it in good faith. Except for borrowings which exhaust the
full remaining amount of the Commitment, and prepayments which result in the
prepayment of all Loans, each borrowing and prepayment of principal of Loans
must be in an amount at least equal to $10,000,000. The Credit Agreement
requires that the Registrant pay a commitment fee on the daily average unused
Commitment of 1/8 of 1%, calculated on the basis of a year of 365 (or, in a leap
year, 366) days for the actual number of days elapsed. The Registrant has the
right to reduce or terminate the amount of unused Commitment at any time or from
time to time, provided that: (i) the Registrant gives notice of each such
reduction pursuant to the Credit Agreement; and (ii) each partial reduction
shall be in an aggregate amount at least equal to $10,000,000. The term of a
Loan will be selected by the Registrant pursuant to the Credit Agreement but in
the case of variable rate loans and CD Loans will be less than 180 days, and in
the case of Eurodollar Loans will be less than six calendar months. As of
February 1, 1996, the Registrant did not have any Loans outstanding under the
Credit Agreement.
10.3. General: Inapplicable.
10.4. Taxes: The Registrant has elected to be treated and intends to
qualify each year as a regulated investment company under Subchapter M of the
Code by meeting all applicable requirements of Subchapter M, including
requirements as to the nature of the Registrant's gross income, the amount of
Registrant distributions, and the composition and holding period of the
Registrant's portfolio assets. Because the Registrant intends to distribute all
of its net investment income and net realized capital gains to shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Registrant will be required to pay any federal
<PAGE>
income or excise taxes, although the Registrant's foreign- source income may be
subject to foreign withholding taxes.
The Registrant's investment in zero coupon bonds, deferred interest
bonds, PIK bonds and stripped securities are subject to special tax rules that
will affect the amount, timing and character of distributions to shareholders by
causing the Registrant to recognize income prior to the receipt of cash
payments. For example, with respect to zero coupon bonds, deferred interest
bonds and stripped securities, the Registrant will be required to accrue as
income each year a portion of the discount (or deemed discount) at which the
securities were issued and to distribute such income each year in order to
maintain its qualification as a regulated investment company and to avoid income
and excise taxes. The Registrant may also elect to accrue market discount on a
current basis and be required to distribute any such accrued discount. In order
to generate cash to satisfy these distribution requirements, the Registrant may
have to dispose of portfolio securities which it would otherwise have continued
to hold, potentially resulting in additional gain or loss to the Registrant.
Distributions of net investment income (including interest on municipal
obligations) and the excess of net short-term capital gain over net long-term
capital loss will be treated as ordinary income in the hands of shareholders. It
is expected that a portion of such distributions will be eligible for the
dividends- received deduction for corporate shareholders subject to the
limitations applicable to the deduction. Amounts eligible for the corporate
dividends-received deduction may be subject to alternative minimum tax or result
in certain basis adjustments. Distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares of the
Registrant have been held by such shareholders. Such distributions are not
eligible for the dividends-received deduction. Monthly distributions by the
Registrant of net short-term capital gains may, to the extent capital losses are
subsequently realized, be treated as a return of capital. Distributions that are
treated for federal income tax purposes as a return of capital will reduce each
shareholder's basis in his shares and, to the extent the return of capital
exceeds such basis, will be treated as gain to the shareholder from a sale of
shares. Dividends declared by the Registrant in October, November and December
to shareholders of record in such a month and paid the following January will be
reportable by shareholders as if received on December 31 of the year in which
they are declared.
Distributions will be taxable as described above, whether received in
cash or in shares under the Dividend Reinvestment and Cash Purchase Plan (the
"Plan"). With respect to distributions received in cash or reinvested in shares
purchased on the open market, the amount of the distribution for tax purposes is
the amount of cash distributed or allocated to the shareholder. However, with
respect to distributions made in shares issued by the Registrant pursuant to the
Plan, the amount of the distribution for tax purposes is the fair market value
of the issued shares on the payment date and a portion of such distributions may
be treated as a return of capital. In the case of shares purchased on the open
market, a participating shareholder's tax basis in each share received is its
cost. In the case of shares issued by the Registrant, the shareholder's tax
basis in each share received is its fair market value on the payment date.
<PAGE>
Distributions by the Registrant generally result in a reduction in the
fair market value of the Registrant's shares. Should a distribution reduce the
fair market value below a shareholder's cost basis, such distribution
nevertheless would be taxable to the shareholder as described above, even
though, from an investment standpoint, it may constitute a partial return of
capital. In particular, since the price of shares purchased shortly before a
distribution includes the amount of the forthcoming distribution, investors
purchasing shares at that time should be aware that the distribution may be
taxable to them even though it represents a return of their investment.
In general, any gain or loss realized upon a taxable disposition of
shares of the Registrant by a shareholder that holds such shares as a capital
asset will be treated as long-term capital gain or loss if the shares have been
held for more than twelve months and otherwise as short-term capital gain or
loss. However, any loss realized upon a taxable disposition of shares within (or
deemed to be within) six months from the date of their purchase will be treated
as a long-term capital loss to the extent of any amounts treated by shareholders
as long-term capital gains during such six-month period. All or a portion of any
loss realized upon a taxable disposition of Registrant shares may be disallowed
if other Registrant shares are purchased (whether under the Plan or otherwise)
within 30 days before or after such disposition.
The Registrant's transactions in options, Futures Contracts, Options on
Futures Contracts and Forward Contracts will be subject to special tax rules
that could affect the amount, timing and character of distributions to
shareholders. For example, the tax treatment of Futures Contracts entered into
by the Registrant as well as listed non-equity options written or purchased by
the Registrant on U.S. exchanges (including options on debt securities and
Options on Futures Contracts) and certain Forward Contracts entered into by the
Registrant will be governed by Section 1256 of the Code. Absent a tax election
for "mixed straddles" (see below), each such position held by the Registrant on
the last business day of each taxable year of the Registrant will be marked to
market (i.e., treated as if it were closed out), and gain or loss associated
with such positions (other than Forward Contracts) will be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss, with
subsequent adjustments made to any gain or loss realized upon an actual
disposition of such positions. When the Registrant holds an option or contract
governed by Section 1256 which substantially diminishes the Registrant's risk of
loss with respect to another position of the Registrant not governed by Section
1256 (as might occur in some hedging transactions), this combination of
positions could be a "mixed straddle" that is subject to the additional straddle
rules of Section 1092 of the Code, which might result in deferral of losses,
adjustments in the holding periods of Registrant securities and conversion of
short-term capital losses into long-term capital losses. The Registrant may make
certain tax elections for its "mixed straddles" which could alter certain
effects of Section 1256 or Section 1092. In order to qualify as a regulated
investment company, the Registrant must derive less than 30% of its annual gross
income from the sale or other disposition of securities or other investments
held less than three months and will limit its activities in options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, and swaps and
related transactions to the extent necessary to comply with this requirement.
<PAGE>
An 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.
Foreign exchange gains and losses realized by the Registrant generally
will be treated as ordinary income and losses rather than capital gains and
losses. Use of foreign currencies, foreign currency options and Forward
Contracts for non-hedging purposes and investment by the Registrant in certain
"passive foreign investment companies" may be limited in order to avoid
imposition of tax on the Registrant.
Investment income received by the Registrant from foreign securities
may be subject to foreign income taxes. The United States has entered into tax
treaties with many foreign countries that may entitle the Registrant to a
reduced rate of tax or an exemption from tax on such income; the Registrant
intends to qualify for treaty reduced rates where available. It is not possible,
however, to determine the Registrant's effective rate of foreign tax in advance
since the amount of the Registrant's assets to be invested within various
countries is not known. If the Registrant holds more than 50% of its assets in
foreign stock and securities at the close of its taxable year, the Registrant
may elect to "pass through" to the Registrant's shareholders foreign income
taxes paid. If the Registrant so elects, shareholders will be required to treat
their pro rata portion of the foreign income taxes paid by the Registrant as
part of the amounts distributed to them by the Registrant 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 for
such amounts will be permitted to individuals in computing their alternative
minimum tax liability. If the Registrant does not qualify or elect to "pass
through" to the Registrant's shareholders foreign income taxes paid by it,
shareholders will not be able to claim any deduction or credit for any part of
the foreign taxes paid by the Registrant.
Amounts paid by the Registrant to individuals and certain other
shareholders who have not provided the Registrant with a correct taxpayer
identification number and certain required certifications or with respect to
whom the Registrant has received notification to withhold from the Internal
Revenue Service or a broker may be subject to "backup" withholding at a rate of
31%. An individual's taxpayer identification number is generally his social
security number.
Dividends and certain other payments to persons who are not citizens or
residents of the United States ("Non-U.S. Persons") are generally subject to
U.S. tax withholding at the rate of 30%. The Registrant intends to withhold 30%
on any payments made to Non-U.S. Persons that are subject to withholding,
irrespective of whether a lower rate may be permitted. 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 applicable to such claims.
Backup withholding at a rate of 31% may also apply to capital gain distributions
and the proceeds of redemptions and exchanges unless Non-U.S. Persons provide a
completed Form W-8 to the Registrant. Backup withholding will not, however, be
applied to payments that have been subject to 30% withholding.
<PAGE>
Under present law, the Registrant will not be subject to any excise or
income taxes in Massachusetts as long as it qualifies as a regulated investment
company under the Code.
Distributions of the Registrant which are derived from interest on
obligations of the U.S. Government and certain of its agencies and
instrumentalities may be exempt from state and local taxes in certain states.
The Registrant intends to advise shareholders of the proportion of its dividends
which consists of such interest. Residents of certain states may be subject to
an intangibles tax or a personal property tax on all or a portion of the value
of their shares. Shareholders should consult their tax advisers regarding the
possible exclusion of such portion of their dividends for state and local income
tax purposes as well as regarding the tax consequences of an investment in the
Registrant.
The Registrant will send written notices to shareholders regarding the
federal income tax status of all distributions made during each calendar year.
10.5. Outstanding Securities: The following information is furnished
as of January 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
(1) (2) (3) (4)
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Amount
Outstanding
Amount Held by Exclusive
Amount Registrant or for of Amount Shown
Title of Class Authorized its Account Under (3)
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Shares of Unlimited 21,689,100* 103,155,970.940
Beneficial Interest, shares
without par value
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
</TABLE>
*Treasury Shares
10.6. Securities Ratings: Inapplicable.
Item 11. Defaults and Arrears on Senior Securities: None.
Item 12. Legal Proceedings: None.
Item 13. Table of Contents of Statement of Additional Information: See below.
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 14. Cover Page: Inapplicable.
Item 15. Table of Contents: See below.
Item 16. General Information and History: Inapplicable.
Item 17. Investment Objective and Policies:
17.1, 17.2 and 17.3: None that are not described in the Prospectus.
17.4. In fiscal year 1995, the turnover rate of the Registrant's
portfolio was 189%. In fiscal year 1994, the turnover rate of the Registrant's
portfolio was 133%.
A high turnover rate necessarily involves greater expenses to the
Registrant. The Registrant will engage in portfolio trading if it believes that
a transaction net of costs (including custodian transaction charges) will help
in achieving its investment objective.
Item 18. Management:
18.1. Trustees, Officers and Advisory Board Members: The Trustees and
officers of the Registrant and their principal occupations for at least the last
five years are set forth below. (Their titles may have varied during that
period.) Unless otherwise noted, the address of each Trustee and officer is 500
Boylston Street, Boston, Massachusetts 02116. Trustees and officers who are
"interested persons" of the Registrant, as defined in the Investment Company Act
of 1940, are denoted by an asterisk (*). The Board of Trustees is divided into
three classes, each class having a term of three years ending with the annual
meeting of shareholders (or any adjournment thereof) held in the year of
expiration, or until the election of a successor. Each year the term of office
of one class expires: Messrs. Harwood, Ives and Perera will continue in office
until 1998, Messrs. Bailey, Brodkin, Schmidt and Ms. Smith will continue in
office until 1996 and Messrs. Poorvu, Scott, Shames and Stone will continue in
office until 1997.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------- -------------------------------- -------------------------------------------------
Name and Address Position(s) Held with Principal Occupation(s) During
Registrant Past 5 years
- --------------------------------------- -------------------------------- -------------------------------------------------
A. Keith Brodkin* Chairman, President and Trustee Massachusetts Financial Services Company,
Director, Chairman, Chief Executive Officer,
Chief Operating Officer and Chief Investment
Officer
- --------------------------------------- -------------------------------- -------------------------------------------------
Richard B. Bailey* Trustee Private Investor;
Massachusetts Financial Services Company, former
Chairman and Director (prior to September 30,
1991); Cambridge Bancorp, Director;
Cambridge Trust Company, Director
- --------------------------------------- -------------------------------- -------------------------------------------------
Peter G. Harwood Trustee Private Investor
211 Lindsay Pond Road
Concord, Massachusetts
- --------------------------------------- -------------------------------- -------------------------------------------------
J. Atwood Ives Trustee Eastern Enterprises (diversified holding
9 Riverside Road company), Chairman and Chief Executive Officer
Weston, Massachusetts (since December 1991); General Cinema
Corporation, Vice Chairman and Chief Financial
Officer (prior to December 1991); The Neiman
Marcus Group, Inc., Vice Chairman and Chief
Financial Officer (prior to February 1992)
- --------------------------------------- -------------------------------- -------------------------------------------------
Lawrence T. Perera Trustee Hemenway & Barnes, Partner (attorneys)
60 State Street
Boston, Massachusetts
- --------------------------------------- -------------------------------- -------------------------------------------------
William J. Poorvu Trustee Harvard University Graduate School of Business
Harvard Business School Administration, Adjunct Professor; CBL &
Soldiers Field Road Associates Properties, Inc. (a real estate
Cambridge, Massachusetts investment trust), Director; The Baupost Fund (a
registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee
(prior to November 1993)
- --------------------------------------- -------------------------------- -------------------------------------------------
Charles W. Schmidt Trustee Private Investor; Raytheon Company (diversified
30 Colpitts Road electronics manufacturer), Senior Vice President
Weston, Massachusetts (prior to December 1990); OHM Corporation,
Director; The Boston Company, Director; Boston
Safe Deposit and Trust Company, Director; Mohawk
Paper Company, Director
- --------------------------------------- -------------------------------- -------------------------------------------------
Arnold D. Scott* Trustee Massachusetts Financial Services Company,
Director, Senior Executive Vice President and
Secretary
- --------------------------------------- -------------------------------- -------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------- -------------------------------- -------------------------------------------------
Jeffrey L. Shames* Trustee Massachusetts Financial Services Company,
Director, President and Chief Equity Officer
- --------------------------------------- --------------------------------
- --------------------------------------- -------------------------------- -------------------------------------------------
Elaine R. Smith Trustee Independent Consultant; Brigham and Women's
Weston, Massachusetts Hospital, Executive Vice President and Chief
Operating Officer (from August 1990 until
September 1992)
- --------------------------------------- --------------------------------
- --------------------------------------- -------------------------------- -------------------------------------------------
David B. Stone Trustee North American Management Corp. (investment
Ten Post Office Square, adviser), Chairman and Director; Eastern
Suite 300 Enterprises, Director
Boston, Massachusetts
- --------------------------------------- --------------------------------
- --------------------------------------- -------------------------------- -------------------------------------------------
Patricia Zlotin* Vice President Massachusetts Financial Services Company,
Executive Vice President
- --------------------------------------- --------------------------------
- --------------------------------------- -------------------------------- -------------------------------------------------
Les Nanberg* Vice President Massachusetts Financial Services Company, Senior
Vice President and Director of Fixed Income
Portfolio Management
- --------------------------------------- --------------------------------
- --------------------------------------- -------------------------------- -------------------------------------------------
W. Thomas London* Treasurer Massachusetts Financial Services Company, Senior
Vice President
- --------------------------------------- --------------------------------
- --------------------------------------- -------------------------------- -------------------------------------------------
Stephen E. Cavan* Secretary and Clerk Massachusetts Financial Services Company, Senior
Vice President, General Counsel and Assistant
Secretary
- --------------------------------------- --------------------------------
- --------------------------------------- -------------------------------- -------------------------------------------------
James R. Bordewick, Jr.* Assistant Secretary Massachusetts Financial Services Company, Vice
President and Associate General Counsel
- --------------------------------------- --------------------------------
- --------------------------------------- -------------------------------- -------------------------------------------------
James O. Yost* Assistant Treasurer Massachusetts Financial Services Company, Vice
President
- --------------------------------------- -------------------------------- -------------------------------------------------
</TABLE>
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a subsidiary of MFS is
the investment adviser or distributor.
18.2. Each Trustee is also a Trustee of MFS Series Trust III, MFS
Series Trust IV, MFS Series Trust V, MFS Series Trust VII, MFS Series Trust IX,
MFS Series Trust X, Massachusetts Investors Trust, Massachusetts Investors
Growth Stock Fund, MFS Growth Opportunities Fund, MFS Government Securities Fund
and MFS Municipal Income Trust. Mr. Brodkin is the Chairman, President and a
Trustee of each of the funds in the MFS Family of Funds (the "MFS Funds"), MFS
Charter Income Trust, MFS Government Markets Income Trust, MFS Special Value
Trust and MFS Intermediate Income Trust, and holds similar positions with
certain affiliates of MFS. Mr. Brodkin is also the Chairman, President and a
Trustee of MFS Institutional Trust, MFS Variable Insurance Trust and MFS Union
Standard Trust. Messrs. Bailey, Scott and Shames are Trustees of each of the MFS
Funds and MFS Charter Income Trust, MFS Government Markets Income Trust, MFS
Special Value Trust and MFS Intermediate Income Trust.
<PAGE>
18.3. Inapplicable.
18.4.a. The following table lists all trustees of the Registrant and
each of the three highest paid executive officers or any affiliated person of
the Registrant with aggregate compensation from the Registrant for the most
recently completed fiscal year in excess of $60,000 ("Compensated Persons").
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
(1) (2) (3) (4) (5)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Name of Person, Aggregate Pension or Estimated Annual Total Compensation
Position (Estimated Compensation From Retirement Benefits Benefits Upon From Fund and Fund
Credit Years of Fund (1) Accrued As part of Retirement (2) Complex Paid to
Services (2)(5)) Fund Expenses (1) Directors (3)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
A. Keith Brodkin, None None None None
Chairman, President
and Trustee
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Richard B. Bailey, $17,000 $3,433 (4) $263,815
Trustee (8)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Peter G. Harwood, $20,000 $1,950 (4) $111,366
Trustee (5)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
J. Atwood Ives, $19,000 $3,667 (4) $101,356
Trustee (17)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Lawrence T. Perera, $18,000 $8,250 (4) $102,546
Trustee (21)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
William J. Poorvu, $20,000 $8,400 (4) $111,366
Trustee (21)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Charles W. Schmidt, $18,500 $7,725 (4) $105,411
Trustee (14)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Arnold D. Scott, None None None None
Trustee
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Jeffrey L. Shames, None None None None
Trustee
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Elaine R. Smith, $18,715 $3,433 (4) $105,411
Trustee (27)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
David B. Stone, $20,500 $5,450 (4) $115,521
Trustee (11)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
(1) For fiscal year ended October 31, 1995.
(2) Based on normal retirement age of 73.
(3) For calendar year 1995. All Trustees receiving compensation served
as Trustees of 23 funds within the MFS fund complex (having aggregate net assets
at December 31, 1995, of approximately $18 billion) except Mr. Bailey, who
served as Trustee of 73 funds within the MFS fund complex (having aggregate net
assets at December 31, 1995, of approximately $32 billion).
(4) See table set forth below under Item 18.4.b.
(5) Estimated credited years of service include the total years of
service plus the expected years until retirement.
The Registrant pays each Trustee who is not an officer of the
Investment Adviser a fee of $9,000 per year plus $500 per meeting and $500 per
committee meeting attended. For attendance at meetings as Trustees, the Trustees
of the Registrant as a group received $151,715 from the Registrant for the
fiscal year ended October 31, 1995.
18.4.b. The Registrant has adopted a retirement plan for non-interested
Trustees. Under this plan, a Trustee will retire upon reaching age 73 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 age 73 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.
There is no retirement plan provided by the Registrant for the interested
Trustees. However, Mr. Bailey, who retired as Chairman of MFS as of September
30, 1991, will eventually become eligible for retirement benefits. The
Registrant will accrue compensation expenses each year to cover current year's
service and amortize past service cost.
The following table sets forth the estimated annual benefits payable by
the Registrant to the non- interested Trustees and Mr. Bailey upon retirement.
<PAGE>
Estimated Annual Benefits Payable by Registrant upon Retirement(1)
Average Years of Service
Trustee Fees 3 5 7 10 or more
$15,300 $2,295 $3,825 $5,355 $ 7,650
16,750 2,513 4,188 5,863 8,375
18,200 2,730 4,550 6,370 9,100
19,650 2,948 4,913 6,878 9,825
21,100 3,165 5,275 7,385 10,550
22,550 3,383 5,638 7,893 11,275
(1) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustee.
Item 19. Control Persons and Principal Holders of Securities:
As of January 31, 1996, Cede & Co., c/o The Depository Trust Company,
P.O. Box 20, Bowling Green Station, New York, New York 10004, (as nominee for
the Depository Trust Company, 7 Hanover Square, New York, New York, 10004), was
the record owner of approximately 75.96% of the outstanding shares of the
Registrant.
As of January 31, 1996, all Trustees and officers of the Registrant as
a group owned less than 1% of the outstanding shares of the Registrant.
Item 20. Investment Advisory and Other Services:
Items 20.1 through 20.5. See Item 9.1.b. of this Registration
Statement. For the fiscal year ended October 31, 1995, MFS received fees under
the Registrant's Investment Advisory Agreement of $6,566,935 (of which
$2,675,371 was based on average daily net assets and $3,891,564 was based on
gross income), after a reduction in management fees of $104,222. For the fiscal
year ended October 31, 1994, MFS received fees under the Registrant's Investment
Advisory Agreement of $6,893,983. For the fiscal year ended October 31, 1993,
MFS received fees under the Registrant's Investment Advisory Agreement of
$7,962,775.
20.6. See Item 9.1.e. The custodian has contracted with the Investment
Adviser for the Investment Adviser to perform certain accounting functions
related to option transactions for which the Investment Adviser receives
remuneration on a cost basis.
20.7. The principal business address of the Registrant's independent
auditors, Ernst & Young LLP, is 200 Clarendon Street, Boston, MA 02116. Ernst &
Young LLP certifies financial statements of the Registrant as required by any
law or regulation to be certified and provides other tax related services for
the Registrant (such as tax return preparation and assistance and consultation
with respect to the preparation of filings with the SEC).
<PAGE>
20.8. Pursuant to the Registrar, Transfer Agency and Service Agreement
between the Registrant and MFS Service Center, Inc., MFS Service Center, Inc.
("MFSC") acts as the Registrant's registrar and transfer agent for the
Registrant's authorized and issued shares of beneficial interest, as well as
dividend disbursing agent for the Registrant, and agent in connection with the
Dividend Reinvestment and Cash Purchase Plan of the Registrant. For account
maintenance, the Registrant currently pays MFSC a fee based on the total number
of accounts for all closed-end funds advised by MFS for which MFSC acts as
registrar and transfer agent. If the total number of accounts is less than
75,000, the annual account fee is $9.00. If the total number of accounts is
75,000 or more, the annual account fee is $8.00. For dividend services, MFSC
charges $0.75 per dividend reinvestment and $0.75 per cash infusion. If the
total amount of fees related to dividend services is less than $1,000 per month
for all closed-end funds advised by MFS for which MFSC acts as registrar and
transfer agent, the minimum fee for the Registrant for these services will be
$167 per month. The Registrant will reimburse MFSC for reasonable out- of-pocket
expenses and advances incurred by MFSC and for any other expenses incurred by
MFSC at the request, or with the consent, of the Registrant.
Item 21. Brokerage Allocation and Other Practices: Specific decisions to
purchase or sell securities for the Registrant are made by employees of the
Investment Adviser who are appointed and supervised by its senior officers.
Changes in the Registrant's investments are reviewed by the Board of Trustees.
Such employees may serve other clients of the Investment Adviser or any
subsidiary in a similar capacity.
The primary consideration in portfolio security transactions is
execution at the most favorable prices. The Investment Adviser has complete
freedom as to the markets in and the broker-dealers through which it seeks this
result. Government Securities and, in the United States and in certain 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, securities may be 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 Investment Adviser normally seeks to deal directly with the primary market
maker or on major exchanges, unless in its opinion, better execution is
available elsewhere. Securities firms may receive brokerage commissions on
transactions involving options, futures and options on futures and the purchase
and sale of underlying securities upon exercise of options. The brokerage
commissions associated with buying and selling options may be proportionately
higher than those associated with general securities transactions. Subject to
the requirement of seeking execution at the most favorable 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 Investment Adviser or who have sold shares of funds for which MFS or any
subsidiary serves as investment adviser. At present no arrangements to recapture
commission payments are in effect. For the fiscal year ended October 31, 1995,
the Registrant did not pay any brokerage commissions. For the fiscal year ended
October 31, 1994, the Registrant did not pay any brokerage commissions. For the
fiscal year ended October 31, 1993, the Registrant paid brokerage commissions of
$2,353.19 on total transactions, excluding purchased option transactions and
short-term obligations, of $7,299,207,300.
<PAGE>
The Trustees of the Registrant (together with the Trustees of the other
MFS Funds) have directed the Investment Adviser to allocate a total of $23,100
of commission business from the MFS Funds to the Pershing Division of Donaldson,
Lufkin & Jenrette as consideration for the annual renewal of the Lipper
Directors' Analytical Data Service (which provides information useful to the
Trustees in reviewing the relationship between the Registrant and the Investment
Adviser).
Item 22. Tax Status: None.
Item 23. Financial Statements: The following are incorporated herein by
reference from the Registrant's Annual Report to its shareholders, for its
fiscal year ended October 31, 1995, copies of which have been filed with the
SEC:
Portfolio of Investments at October 31, 1995
Statement of Assets and Liabilities at October 31, 1995
Statement of Operations for the year ended October 31, 1995
Statement of Changes in Net Assets for the years ended October 31, 1995
and 1994
Financial Highlights for the period from the commencement of
operations, March 12, 1987 to October 31, 1987 and for the years
ended October 31, 1988, 1989, 1990, 1991, 1992, 1993, 1994 and
1995.
Notes to Financial Statements
Report of Independent Auditors
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
1. Financial Statements:
The following have been incorporated by reference in Item 23:
Portfolio of Investments at October 31, 1995
Statement of Assets and Liabilities at October 31, 1995
Statement of Operations for year ended October 31, 1995
Statement of Changes in Net Assets for the years ended October
31, 1995 and 1994
Financial Highlights for the period from the commencement of
operations, March 12, 1987 to October 31, 1987 and for the years
ended October 31, 1988, 1989, 1990, 1991, 1992, 1993, 1994 and 1995
Notes to Financial Statements
Report of Independent Auditors
2. Exhibits:
(a)(1) -- Declaration of Trust, dated January 9, 1987 (previously
filed as Exhibit (1) to the Registrant's Registration
Statement on Form N-2 (Investment Company Act File No.
811-4975), filed with the SEC on January 9, 1987 (the
"Registration Statement")) incorporated herein by reference.
(a)(2) -- Amendment of Declaration of Trust, dated January 30, 1987
(previously filed as Exhibit (1)(A)(1) to Amendment No. 1
to the Registrant's Registration Statement on Form N-2
(Investment Company Act File No. 811-4975), filed with the
SEC on February 2, 1987 ("Amendment No. 1")) incorporated
herein by reference.
(a)(3) -- Certification of Amendment to Declaration of Trust
(previously filed as Exhibit (1)(A)(2) to Amendment No. 1)
incorporated herein by reference.
(a)(4) -- Amendment of Declaration of Trust, dated April 24, 1989,
(previously filed as Exhibit (1)(A)(3) to Amendment No. 6
to the Registrant's Registration Statement on Form N-2,
filed with the SEC on February 28, 1990 ("Amendment No. 6"))
incorporated herein by reference.
<PAGE>
(b)(1) -- Amended and Restated By-Laws dated December 21, 1994
(previously filed as Exhibit (2)(b)(3) to Amendment No. 9
to the Registration Statement on Form N-2 filed with the
SEC on February 28, 1995 ("Amendment No. 9")) incorporated
herein by reference.
(c) -- Inapplicable.
(d) -- Specimen certificate for Shares of Beneficial Interest,
without par value (previously filed as Exhibit (4) to
Amendment No. 2) incorporated herein by reference.
(e) -- The section "Dividend Reinvestment and Cash Purchase Plan"
on page 3 of the Registrant's Annual Report to its
Shareholders, for its fiscal year ended October 31, 1995,
incorporated herein by reference.
(f) -- Inapplicable.
(g) -- Investment Advisory Agreement, dated February 25, 1987
(previously filed as Exhibit (6) to Amendment No. 3 to the
Registrant's Registration Statement on Form N-2 (Investment
Company Act File No. 811-4975) filed with the SEC on March
5, 1987 ("Amendment No. 3")) incorporated herein by
reference.
(h) -- Omitted pursuant to General Instruction G.3. to Form N-2.
(i) -- Form of Retirement Plan for Non-Interested Person Trustees,
dated January 1, 1991 (previously filed as Exhibit (8) to
Amendment No. 8) incorporated herein by reference.
(j)(1) -- Form of Custodian Agreement (previously filed as Exhibit (9)
to the Registration Statement) incorporated herein by
reference.
(j)(2) -- Amendment to Custodian Agreement (previously filed as
Exhibit (9)(A)(1) to Amendment No. 6) incorporated herein
by reference.
(j)(3) -- Form of Amendment to the Custodian contract, dated
September 11, 1991 (previously filed as Exhibit (9)(A)(2)
to Amendment No. 8) incorporated herein by reference.
<PAGE>
(k)(1) -- Credit Agreement dated as of November 8, 1989 between the
Registrant, the banks listed therein and Morgan Guaranty
Trust Company of New York, as Agent, (previously filed as
Exhibit (10) to Amendment No. 6) incorporated herein by
reference.
(k)(2) -- Registrar, Transfer Agency and Service Agreement between
Registrant and MFS Service Center, Inc., dated August 15,
1994 (previously filed as Exhibit (2)(k)(2) to Amendment No.
9) incorporated herein by reference.
(k)(3) -- Credit Agreement dated as of November 10, 1992 between
Registrant and Chase Manhattan Bank, N.A. (previously filed
as Exhibit (2)(k)(3) to Amendment No. 9) incorporated herein
by reference.
(l) -- Omitted pursuant to General Instruction G.3 to Form N-2.
(m) -- Inapplicable.
(n) -- Omitted pursuant to General Instruction G.3 to Form N-2.
(o) -- Omitted pursuant to General Instructions G.3 to Form N-2.
(p) -- Form of Purchase Agreement (previously filed as Exhibit (14)
to Amendment No. 3) incorporated herein by reference.
(q) -- Inapplicable.
(r) -- Financial Data Schedule; filed herewith.
Item 25. Marketing Arrangements: Inapplicable.
Item 26. Other Expenses of Issuance and Distribution: Inapplicable.
Item 27. Persons Controlled by or Under Common Control with Registrant:
Inapplicable.
<PAGE>
Item 28. Number of Holders of Securities:
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------------------------- ---------------------------------------------------------
(1) (2)
Title of Class Number of Record Holders
- ----------------------------------------------------------- ---------------------------------------------------------
Shares of Beneficial Interest 21,177
(without par value) (as of January 31, 1996)
- ----------------------------------------------------------- ---------------------------------------------------------
</TABLE>
Item 29. Indemnification: Article V of the Registrant's Declaration of Trust
provides that the Registrant 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 Registrant, unless as to
liabilities to the Registrant or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the
Registrant. In the case of a settlement, such indemnification will not be
provided unless it has been determined in accordance with the Declaration of
Trust that such officers or Trustees have not engaged in misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in their offices.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser are 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.
Item 30. Business and Other Connections of Investment Adviser: Massachusetts
Financial Services Company ("MFS") serves as investment adviser to the following
open-end funds comprising the MFS Family of Funds: 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 eight series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS World Asset Allocation Fund, MFS Special Opportunities Fund, MFS
Aggressive Growth Fund, MFS Research Growth and Income Fund, MFS Equity Income
Fund and MFS Core Growth Fund), MFS Series Trust II (which has four series: MFS
Emerging Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and
MFS Gold & Natural Resources Fund), MFS Series Trust III (which has two series:
MFS High Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV
(which has four series: MFS Money Market Fund, MFS Government Money Market Fund,
MFS Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two
series: MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI (which
has three series: MFS World Total Return Fund, MFS Utilities Fund and MFS World
Equity Fund), MFS Series Trust VII (which has two series: MFS World Governments
Fund and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has
three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS Series Trust X (which has four series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Market Equity Fund, MFS/Foreign &
<PAGE>
Colonial International Growth Fund and MFS/Foreign & Colonial International
Growth and Income Fund) and MFS Municipal Series Trust (which has 19 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 Louisiana 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 Texas Municipal Bond Fund, MFS Virginia
Municipal Bond Fund, MFS Washington Municipal Bond Fund, MFS West Virginia
Municipal Bond Fund and MFS Municipal Income Fund) (collectively the "MFS
Funds"). The principal business address of each of the aforementioned funds is
500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following no-load,
open-end funds: MFS Institutional Trust ("MFSIT") (which has seven series), MFS
Variable Insurance Trust ("MVI") (which has twelve series) and MFS Union
Standard Trust ("UST") (which has two 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 Multimarket Income Trust, MFS Municipal 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 aforementioned funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL"), Sun Growth Variable Annuity Fund, Inc. ("SGVAF"), Money Market
Variable Account, High Yield Variable Account, Capital Appreciation Variable
Account, Government Securities Variable Account, World Governments Variable
Account, Total Return Variable Account and Managed Sectors Variable Account. The
principal business address of each is One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company organized
under the laws of the Republic of Ireland and a subsidiary of MFS, whose
principal business address is 41-45 St. Stephen's Green, Dublin 2, Ireland,
serves as investment adviser to and distributor for MFS International Funds
(which has four portfolios: MFS International Funds-U.S. Equity Fund, MFS
International Funds-U.S. Emerging Growth Fund, MFS International
Funds-International Governments Fund and MFS International Fund-Charter Income
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 Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity
<PAGE>
Fund, MFS Meridian Limited Maturity Fund, MFS Meridian World Growth Fund, MFS
Meridian Money Market Fund, MFS Meridian U.S. Equity Fund and MFS Meridian
Research Fund (collectively the "MFS Meridian Funds"). Each of the MFS Meridian
Funds is organized as an exempt company under the laws of the Cayman Islands.
The principal business address of each of the MFS Meridian Funds is P.O. Box
309, Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y ONH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary of
MFS, serves as distributor for certain life insurance and annuity contracts
issued by Sun Life Assurance Company of Canada (U.S.).
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, MFS Institutional Trust, MFS Variable Insurance Trust and MFS Union
Standard Trust.
MFS Asset Management, Inc. ("AMI"), 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.
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D.
Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the Chairman, Mr.
Shames is the President, Mr. Scott is a Senior Executive Vice President and
Secretary, Bruce C. Avery, William S. Harris, William W. Scott, Jr. and Patricia
A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a Senior Vice
President, General Counsel and an Assistant Secretary, Joseph W. Dello Russo is
a Senior Vice President, Chief Financial Officer and Treasurer, Robert T. Burns
is a Vice President and an Assistant Secretary, and Thomas B. Hastings is a Vice
President and Assistant Treasurer of MFS.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company of Canada
(U.S.), One Sun Life Executive Park, Wellesley
Hills, Massachusetts; Director, Sun Life
Insurance and Annuity Company of New York, 67
Broad Street, New York, New York
<PAGE>
John R. Gardner President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada
(Mr. Gardner is also an officer and/or Director
of various subsidiaries and affiliates of Sun
Life)
John D. McNeil Chairman, Sun Life Assurance Company of Canada,
Sun Life Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. McNeil is also an officer
and/or Director of various subsidiaries and
affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The Boston
Company, Exchange Place, Boston, Massachusetts
(until August 1994)
Item 31. 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 500 Boylston Street
Services Company Boston, Massachusetts 02116
State Street Bank and State Street South, 5-West
Trust Company North Quincy, Massachusetts 02171
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
Item 32. Management Services: Inapplicable.
Item 33. Undertakings: Inapplicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Boston and Commonwealth of Massachusetts on the 27th day of February, 1996.
MFS MULTIMARKET INCOME TRUST
By: A. KEITH BRODKIN
A. Keith Brodkin
Chairman and President
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
27 -- Financial Data Schedule
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS MULTIMARKET INCOME TRUST FOR THE "PERIOD ENDED
OCTOBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY" REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<NAME> MFS MULTIMARKET INCOME TRUST
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 762,844,614
<INVESTMENTS-AT-VALUE> 782,325,459
<RECEIVABLES> 23,239,947
<ASSETS-OTHER> 10,917
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 805,576,323
<PAYABLE-FOR-SECURITIES> 18,805,111
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,856,012
<TOTAL-LIABILITIES> 24,661,123
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 781,766,075
<SHARES-COMMON-STOCK> 103,156,952
<SHARES-COMMON-PRIOR> 117,540,252
<ACCUMULATED-NII-CURRENT> (3,588,841)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (16,054,195)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18,792,161
<NET-ASSETS> 780,915,200
<DIVIDEND-INCOME> 7,795
<INTEREST-INCOME> 73,266,246
<OTHER-INCOME> 0
<EXPENSES-NET> 9,334,924
<NET-INVESTMENT-INCOME> 63,939,117
<REALIZED-GAINS-CURRENT> (9,707,694)
<APPREC-INCREASE-CURRENT> 53,683,280
<NET-CHANGE-FROM-OPS> 107,914,703
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (58,599,920)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (3,650,802)
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> (14,383,300)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (48,440,527)
<ACCUMULATED-NII-PRIOR> (1,856,119)
<ACCUMULATED-GAINS-PRIOR> (13,418,420)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,671,157
<INTEREST-EXPENSE> 741,841
<GROSS-EXPENSE> 9,468,563
<AVERAGE-NET-ASSETS> 786,926,100
<PER-SHARE-NAV-BEGIN> 7.06
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 0.49
<PER-SHARE-DIVIDEND> (0.53)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (0.04)
<PER-SHARE-NAV-END> 7.57
<EXPENSE-RATIO> 1.19
<AVG-DEBT-OUTSTANDING> 10,750,000
<AVG-DEBT-PER-SHARE> 0.10
</TABLE>
