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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
FEBRUARY 27, 1998
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. 12 |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 investment
objective and policies of the Registrant may, unless otherwise specifically
stated, be changed by the Trustees of the Registrant without a vote of the
shareholders. A change in the Registrant's objective may result in the
Registrant having an investment objective different from the objective which a
shareholder considered appropriate at the time of investment in the Registrant.
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
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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 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 convertible into 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
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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 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.
Brady Bonds. The Registrant may invest in Brady Bonds, which are
securities created through the exchange of existing commercial bank loans to
public and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Argentina,
Brazil, Bulgaria, Costa Rica, Croatia, the Dominican Republic, Ecuador, Jordan,
Mexico, Morocco, Nigeria, Panama, Peru, the Phillippines, Poland, Slovenia,
Uruguay and Venezuela. Brady Bonds have been issued only recently, and for that
reason do not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed-rate bonds or
floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components; the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
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
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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. Emerging market countries
include any country determined by the Investment Adviser to have an emerging
market economy, taking into account a number of factors, including whether the
country has a low- to middle-income economy according to the International Bank
for Reconstruction and Development, the country's foreign currency debt rating,
its political and economic stability and the development of its financial and
capital markets. The Investment 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 location of its 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.
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
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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 markets the Registrant bears 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).
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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 Services ("S&P") or Fitch IBCA, 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 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 Services" and "Fitch IBCA, 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.
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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").
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
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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. The Trustees have adopted
the requirement that Futures Contracts and Options on Futures Contracts only be
used as a hedge and not for speculation.
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.
The Registrant has established procedures which require the use of
segregated assets or "cover" in connection with the purchase and sale of such
contracts. In those instances in which
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the Registrant satisfies this requirement through segregation of assets, it will
segregate liquid assets, 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 (and subsidiaries thereof) of the New York Stock
Exchange, and would be required to be secured continuously by collateral in
cash, U.S. Treasury securities, an irrevocable letter of credit or other
collateral permissible under SEC policies and maintained on a current basis in
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. The Registrant would also
receive a fee from the borrower. The Registrant would also receive compensation
from the investment of the collateral, less a fee paid to the borrower, if the
collateral is in the form of cash. 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. While awaiting delivery of securities
purchased on such bases, the Registrant will segregate liquid assets sufficient
to cover its commitments. Although the Registrant does not intend to make such
purchases for speculative purposes, purchases of securities on such bases may
involve more risk than other types of purchases.
Repurchase Agreements. The Registrant may enter into repurchase
agreements in order to earn income on available cash or as a temporary defensive
measure. Under a repurchase
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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 U.S. Government Securities, the values
of which are equal to or greater than the repurchase price agreed to be paid by
the seller. The repurchase price may be higher than the purchase price, the
difference being income to the 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 amount 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 Registrant has the right to make margin calls at any time if the
value of the securities falls below the agreed upon collateral.
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-
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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 made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by prepayments of principal resulting
from the sale, refinancing or foreclosure of the underlying property, net of
fees or costs which may be incurred. 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 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.
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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 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 records these transactions as sale and
purchase transactions rather than as borrowing transactions. 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
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14
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 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.
Reverse Repurchase Agreements. The Registrant may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Registrant will
sell securities and receive cash proceeds, subject to its agreement to
repurchase the securities at a later date for a fixed price reflecting a market
rate of interest. There is a risk that the counter party to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as scheduled,
which may result in losses to the Registrant. The Registrant will invest the
proceeds received under a reverse repurchase agreement in accordance with its
investment objective and policies. In determining whether to engage in reverse
repurchase agreements, the Trustees will consider factors such as the estimated
spread between the imputed interest required to be paid by the Registrant under
the agreement and interest which can be earned by investing the proceeds
received under the agreement, as well as the level of distributions currently
being made by the Registrant to its shareholders. Reverse repurchase agreements
are considered borrowings for purposes of the Registrant's investment policies
and restrictions concerning borrowings, and therefore these borrowing
limitations apply to this investment practice. The Registrant must segregate
liquid assets, marked to market daily, in an amount at least equal to the
Registrant's obligations under the agreement, which is generally satisfied by
the Registrant providing the counter party with collateral in the form of the
securities subject to the repurchase agreement.
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
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15
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
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
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16
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.
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
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17
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 segregates liquid
assets 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. Because
these securities are traded over-the-counter, the SEC has taken the position
that yield curve options are illiquid, and therefore, cannot exceed the SEC
illiquidity ceiling.
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 notional 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 could be used to shift the Registrant'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 the Registrant'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,
or no investment of cash. 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
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18
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, 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 liquid assets 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 liquid assets with a daily value at
least equal to the excess, if any, of the Registrant'saccrued 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 Registrant'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.
Indexed Securities. The Registrant may purchase securities whose prices
are indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity (i.e., principal value) or coupon rate is determined by
reference to a specific instrument or statistic, the value of which may vary.
Gold-indexed securities, for example, typically provide for a maturity value
that depends on the price of gold, resulting in a security whose price tends to
rise and fall together with gold prices. Currency-
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indexed securities typically are short-term to intermediate-term debt securities
whose maturity values or interest rates are determined by reference to the
values of one or more specified foreign currencies, and may offer higher yields
than U.S. dollar-denominated securities of equivalent issuers. Currency-indexed
securities may be positively or negatively indexed; that is, their maturity
value or interest rates may increase when the specified currency value
increases, resulting in a security that performs similarly to a
foreign-denominated instrument, or their maturity value may decline when foreign
currencies increase, resulting in a security whose price characteristics are
similar to a put on the underlying currency and could involve the loss of all or
a portion of the principal amount of the instrument. Currency-indexed securities
may also have prices that depend on the values of a number of different foreign
currencies relative to each other.
Indexed securities may be more volatile than the underlying instrument
itself and could involve the loss of all or a portion of the principal amount or
interest on the instrument. The performance of indexed securities depends to a
great extent on the performance of the security, currency, or other instrument
to which they are indexed, and may also be influenced by interest rate changes
in the U.S. and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's credit worthiness deteriorates. Recent
issuers of indexed securities have included banks, corporations, and certain
U.S. government agencies.
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
buy-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
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
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20
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 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.
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.
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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 up to 50% of its net assets 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 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.
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22
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 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
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23
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.
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.
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24
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.
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.
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25
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 liquid assets) 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 liquid assets
representing the difference is segregated by the Registrant. A put option
written by the Registrant is "covered" if the Registrant segregates liquid
assets with a value equal to the exercise price in a segregated account, 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 liquid assets representing the difference is segregated by the
Registrant. 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.
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
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26
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
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
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27
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 "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
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28
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 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
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29
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 ensuring 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 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.
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30
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 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.
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31
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 liquid assets) 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 exercise price of the call written if liquid assets representing the
difference is segregated by the Registrant.
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
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32
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 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
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33
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,
Options on Futures Contracts and Options on Foreign Currencies traded on CFTC -
regulated exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums to establish such non-bona fide positions
do not exceed 5% of the liquidation value of the Registrant's assets, after
taking into account unrealized profits and unrealized losses on any such
contracts the Registrant has entered into, and excluding, in computing such 5%,
the in-the-money amount with respect to an option that is in-the-money at the
time of purchase.
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
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34
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.
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
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35
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 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 Investment
Restriction #1 and the Registrant's non-fundamental policy regarding illiquid
securities, 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;
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36
(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);
(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; 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.
As a matter of non-fundamental policy, the Registrant may not: (i)
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; and (ii) invest 25% or more of the market value of its total assets
in securities of issuers in any one industry, except as described under
Subsection "Corporate Fixed Income Securities" of the Section "Investment
Objective and Policies" above. These investment restrictions are not fundamental
and may be changed without shareholder approval.
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37
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.
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38
DESCRIPTION OF BOND RATINGS*
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various bonds. It should be emphasized, however, that ratings are not
absolute standards of quality. Consequently, bonds with the same maturity,
coupon and rating may have different yields while bonds of the same maturity and
coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term 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.
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
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39
are rated Ca represent obligations which are speculative in a high degree. Such
issues re often in default or have other marked short-comings.
C: Bond 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.
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.
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40
STANDARD & POOR'S RATINGS SERVICES, INC.*
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms of
the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. AS
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.
AAA: An obligation rated AAA has the highest rating assigned by
Standard & Poor's . The obligor'scapacity to meet its financial commitment on
the obligation is EXTREMELY STRONG.
AA: An obligation rated AAdiffers from the highest rated issues only
in small degree. The obligator's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated Asomewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated BB, B, CCC, C are regarded as having significant
speculative characteristics. BB; indicates the least degree of speculation and
'C' the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
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41
B: An obligation rated B is MORE VULNERABLE to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment,
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions will likely impair the
obligor's capacity or willingness to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to
nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payment on this
obligation are being continued.
D: An obligation 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.
r: This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk-such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA, INC.
International Long-Term Credit Rating
AAA:
Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
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42
AA:
Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is ot significantly vulnerable to foreseeable events.
A:
High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.
BBB:
Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
BB:
Speculative. BB rating indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category re not
investment grade.
B:
Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
sustained, favorable business and economic environment. CCC, CC, C:
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable business or
economic developments. A CC rating indicates that default of some kind appears
probably. C ratings signal imminent default. DDD, DD and D:
Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50%-90% of such outstandings, and D
the lowest recovery potential, i.e., below 50%.
8.5. Share Price Data: Inapplicable
8.6 Business Development Companies: Inapplicable
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.
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43
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. MFS is a subsidiary of Sun Life
of Canada (U.S.) Financial Holding Services, Inc. which in turn is an indirect
wholly owned subsidiary of Sun Life Assurance Company of Canada ("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 and seven variable accounts, each of which
is a registered investment company established by Sun Life Assurance Company of
Canada (U.S.), a subsidiary of SunLife, in connection with the sale of various
fixed/variable annuity contracts. MFS and its wholly owned subsidiary, MFS
Institutional Advisors, Inc., provide investment advice to substantial private
clients. MFS is America's oldest mutual fund organization. MFS and its
predecessor organizations have a history of money management dating from 1924
and the founding of the first mutual fund in the United States, Massachusetts
Investors Trust. Net assets under the management of the MFS organization were
approximately $72 billion on behalf of approximately 2.8 million investors as of
January 31, 1998. As of such date, the MFS organization managed approximately
$20.8 billion of assets in fixed income securities, and approximately $6.6
billion in U.S. Government securities and approximately $1.1 billion in fixed
income securities of foreign issuers and non-U.S. dollar denominated fixed
income securities of U.S. issuers. The Directors of MFS are Jeffrey L. Shames,
Arnold D. Scott, John W. Ballen, John D. McNeil and Donald A. Stewart. Mr.
Shames is the Chairman and President and Mr. Scott is the Secretary and a Senior
Executive Vice President of MFS. Mr. Ballen is an Executive Vice President and
Chief Equity Officer of MFS. Messrs. McNeil and Stewart are the Chairman and
President, respectively, of 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, establishing a headquarters office
here in 1973. The executive officers of MFS report to the Chairman of Sun Life.
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. Some simultaneous transactions are inevitable when several clients
receive investment advice from MFS, 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
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44
Investment Adviser, subject to review by the Board of Trustees. 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, 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 provides certain financial, legal, compliance,
shareholder communications and other administrative services pursuant to a
Master Administrative Services Agreement, dated March 1, 1997, as amended.
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.
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, 1998, 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 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.
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45
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 - Administrator: MFS provides the Registrant with
certain financial, legal, compliance, shareholder communications and other
administrative services pursuant to a Master Administrative Services Agreement
dated March 1, 1997, as amended. Under this Agreement, the Registrant pays MFS
an administrative fee up to 0.015% per annum of the Registrant's average daily
net assets. This fee reimburses MFS for a portion of the cost it incurs to
provide such services. For the period March 1, 1997 through the fiscal year
ended October 31, 1997, MFS received $73,518 under the Agreement.
9.1.e. Custodian: 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, a wholly owned subsidiary of MFS, is the
shareholder servicing agent.
9.1.f. General - Expenses: 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, but not
limited to, advisory and administrative services, 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 and servicing shareholder accounts, 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.
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
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46
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 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 any discount 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.
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47
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
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 exchange 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)
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48
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 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
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49
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.
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.
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50
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'
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 is party to a credit agreement
dated as of November 10, 1992, as it may have been amended from time to time,
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, 1998, the Registrant did not have any Loans outstanding under the
Credit Agreement.
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50
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 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 income or excise taxes, although the
Registrant's foreign-source income may be subject to foreign withholding taxes.
If the Registrant should fail to qualify as a "regulated investment company" in
any year, the Registrant would incur a regular corporate federal income tax upon
its taxable income and distributions received from the Registrant would
generally be taxable as ordinary dividend income to its shareholders.
Shareholders normally will have to pay federal income taxes and any
state or local taxes on the dividends and capital gain distributions they
receive from the Registrant. Dividends from ordinary income (including interest
on municipal obligations) and any distributions from net short-term capital
gains are taxable to shareholders as ordinary income for federal income tax
purposes. A portion of the ordinary income dividends paid by the Registrant is
normally eligible for the dividends received deduction for corporations if the
recipient otherwise qualifies for that deduction with respect to its holding of
shares of the Registrant. Availability of the deduction for particular corporate
shareholders is subject to certain limitations, and deducted amounts may be
subject to the alternative minimum tax or result in certain basis adjustments.
Distributions of net capital gains (i.e., the excess of net long-term capital
gain over net short-term capital losses), are taxable to shareholders as
long-term capital gains for federal income tax purposes without regard to the
length of time the shareholders have held their shares. Such capital gains will
generally be taxable to shareholders as if the shareholders had directly
realized gains from the same sources from which they were realized by the
Registrant. 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. Any dividend that is
declared by the Registrant in October, November and December of any calendar
year that is payable to shareholders of record in such a month and that is paid
the following January will be treated as if received by the shareholders on
December 31 of the year in which the dividend is declared. The Registrant will
notify shareholder regarding the federal tax status of its distributions after
the end of each calendar year.
Distributions will be taxable as described above, whether received in
cash or reinvested in additional 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
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54
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.
Any distribution by the Registrant will generally result in a reduction
in the fair market value of the Registrant's shares by the amount of the
distribution. 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; a long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than eighteen
months. However, any loss realized upon a taxable disposition of shares within
six months from the date of their purchase will be treated as a long-term
capital loss to the extent of any distributions treated by shareholders as
long-term capital gains during such six-month period. Any loss realized upon a
taxable disposition of Registrant shares may be disallowed under rules relating
to wash sales.
The Registrant's current dividend and accounting policies that is will
affect the amount, timing and character of distributions to shareholders and
may, under certain circumstances, make an economic return of capital taxable to
shareholders. Any investment in zero coupon bonds, deferred interest bonds,
payment in kind bonds, certain stripped securities, and certain securities
purchased at a market discount will cause the Registrant to recognize income
prior to the receipt of cash payments with respect to those securities. In order
to distribute this income and avoid income and excise taxes, the Registrant may
be required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss to
the Registrant. 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 Registrant has state or local
governments or other tax-exempt organizations as shareholders.
The Registrant's transactions in options, Futures Contracts, Options on
Futures Contracts Forward Contracts, short sales "against the box" and swaps and
related transactions will be subject to special tax rules that may affect the
amount, timing and character of the Registrant's income and distributions to
shareholders. For example, certain positions held by the Registrant on the last
business day of each taxable year will be marked to market (i.e., treated as if
closed out) on that day, and any gain or loss associated with the positions will
be treated as 60% long-
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53
term and 40% short-term capital gain or loss. Certain positions held by the
Registrant that substantially diminish the Registrant's risk of loss with
respect to other positions in its portfolio may constitute "straddles," and may
be subject to special tax rules that would cause deferral of Registrant losses,
adjustments in the holding periods of Registrant securities and conversion of
short-term into long-term capital losses. The Registrant may make certain tax
elections for its "straddles" which could alter the effects of these rules. The
Registrant will limit its activities in options, Futures Contracts, Forward
Contracts, short sales "against the box," and swaps and related transactions to
the extent necessary to meet the requirements of Subchapter M of the Code..
Special tax considerations apply with respect to foreign investments of
the Registrant. Foreign exchange gains and losses realized by the Registrant
generally will be treated as ordinary income and losses. Use of foreign
currencies for non-hedging purposes and investment by the Registrant in certain
"passive foreign investment companies" may be limited in order to avoid a tax on
the Registrant.
Investment income received by the Registrant from foreign securities
may be subject to foreign income taxes withheld at the source. The United States
has entered into tax treaties with many foreign countries that may entitle the
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.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Registrant
intends to withhold U.S. federal income tax payments at the rate of 30% (or any
lower rate permitted under an applicable treaty) on taxable dividends and other
payments made to Non-U.S. Persons that are subject to withholding. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. Distributions received from the Registrant by Non-U.S. Persons may also
be subject to tax under the laws of their own jurisdictions. The Registrant is
also required in certain circumstances to apply backup
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54
withholding at the rate of 31% on taxable dividends and redemption proceeds paid
to any shareholder (including a Non-U.S. Person) who does not furnish to the
Registrant certain information and certifications or who is otherwise subject to
backup withholding. Backup withholding will not, however, be applied to payments
that have been subject to 30% withholding.
As long as it qualifies as a regulated investment company under the
Code, the Registrant will not be required to pay Massachusetts income or excise
taxes.
Distributions of the Registrant which are derived from interest on
obligations of the U.S. Government and certain of its agencies and
instrumentalities (but generally not from capital gains realized from the
disposition of such obligations) may be exempt from state and local taxes. The
Registrant intends to advise shareholders of the proportion of its dividends
which consists of such interest. 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.
10.5. Outstanding Securities: The following information is furnished
as of January 31, 1998:
(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 124,846,052 31,965,700* 92,880,352 shares
Beneficial Interest,
without par value
*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: Inapplicable
<PAGE>
55
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 14. Cover Page: Inapplicable.
Item 15. Table of Contents: Inapplicable.
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 1997, the turnover rate of the Registrant's
portfolio was 172%. In fiscal year 1996, the turnover rate of the Registrant's
portfolio was 214%.
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, Schmidt and Ms. Smith will continue in office until
1999 and Messrs. Poorvu, Scott, Shames and Stone will continue in office until
2000.
<PAGE>
56
Name and Address Position(s) Held with Principal Occupation(s) During
Registrant Past 5 years
Richard B. Bailey* Trustee Private Investor;
(born 9/14/26) 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
(born 4/3/26)
211 Lindsay Pond Road
Concord, Massachusetts
J. Atwood Ives Trustee Eastern Enterprises
(born 5/1/36) (diversified services
9 Riverside Road company), Chairman and Chief
Weston, Massachusetts Executive Officer
Lawrence T. Perera Trustee Hemenway & Barnes, Partner
(born 6/23/35) (attorneys)
60 State Street
Boston, Massachusetts
William J. Poorvu Trustee Harvard University Graduate
(born 4/10/35) School of Business
Harvard Business School Administration, Adjunct
Soldiers Field Road Professor; CBL & Associates
Cambridge, Massachusetts Properties, Inc. (a real
estate investment trust),
Director; The Baupost Fund (a
registered investment
company), Vice Chairman
(since November 1993)
Charles W. Schmidt Trustee Private Investor, OHM
(born 3/18/28) Corporation, Director;
30 Colpitts Road Mohawk Paper Company,
Weston, Massachusetts Director
Arnold D. Scott* Trustee Massachusetts Financial
(born 12/16/42) Services Company,
Director, Senior Executive
Vice President and Secretary
Jeffrey L. Shames* Trustee Massachusetts Financial
(born 6/2/55) Services Company, Director,
Chairman, Chief Executive
Officer and President
Elaine R. Smith Trustee Independent Consultant;
(born 4/25/46) Brigham and Women's
Weston, Massachusetts Hospital
<PAGE>
57
Name and Address Position(s) Held with Principal Occupation(s) During
Registrant Past 5 years
David B. Stone Trustee North American Management
(born 9/2/27) Corp. (investment adviser),
Ten Post Office Square, Chairman and Director,
Suite 300 Eastern Enterprises, Trustee
Boston, Massachusetts
Leslie J. Nanberg* Vice President Massachusetts Financial
(born 11/14/45) Services Company, Senior Vice
President and Director
of Fixed Income Portfolio
Management
James T. Swanson Vice President Massachusetts Financial
(born 6/12/49) Services Company, Senior Vice
President
W. Thomas London* Treasurer Massachusetts Financial
(born 3/1/44) Services Company, Senior Vice
President
Ellen M. Moynihan* Assistant Treasurer Massachusetts Financial
(born 11/13/57) Services Company, Vice
President (since September
1996); Deloitte & Touche LLP,
Senior Manager (until
September 1996)
Mark E. Bradley* Assistant Treasurer Massachusetts Financial
(born 11/23/59) Services Company, Vice
President (since March 1997);
Putnam Investments, Vice
President (from September
1994 until March 1997);
Ernst & Young, Senior Tax
Manager (until September 1994)
James O. Yost* Assistant Treasurer Massachusetts Financial
(born 6/12/60) Services Company, Vice
President
Stephen E. Cavan* Secretary and Clerk Massachusetts Financial
(born 11/6/53) Services Company, Senior
Vice President, General
Counsel and Assistant
Secretary
James R. Bordewick, Jr.* Secretary Massachusetts Financial
(born 3/6/59) Services Company, Senior Vice
President and Associate
General Counsel
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.
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58
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.
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").
(1) (2) (3) (4) (5)
Name of Person, Aggregate Pension or Estimated Total
Position Compensation Retirement Annual Benefits Compensation
(Estimated Credit From Fund(1) Benefits Accrued Upon Retirement From Fund and
Years of Services As part of Fund (2) Fund Complex
(2)(5)) Expenses(1) Paid to
Directors(3)
Richard B. $1,400 $4,850 (4) $242,022
Bailey, Trustee
(8)
Peter G. $15,000 $3,633 (4) $121,105
Harwood,
Trustee (5)
J. Atwood Ives, $14,000 $5,250 (4) $108,720
Trustee (17)
Lawrence T. $16,000 $8,333 (4) $127,055
Perera, Trustee
(21)
William J. $15,000 $9,083 (4) $121,105
Poorvu, Trustee
(21)
<PAGE>
59
(1) (2) (3) (4) (5)
Name of Person, Aggregate Pension or Estimated Total
Position Compensation Retirement Annual Benefits Compensation
(Estimated Credit From Fund(1) Benefits Accrued Upon Retirement From Fund and
Years of Services As part of Fund (2) Fund Complex
(2)(5)) Expenses(1) Paid to
Charles W. $15,000 $8,583 (4) $121,105
Schmidt, Trustee
(14)
Arnold D. Scott, None None None None
Trustee
Jeffrey L. None None None None
Shames, Trustee
Elaine R. Smith, $16,500 $5,172 (4) $132,035
Trustee (27)
David B. Stone, $16,000 $7,400 (4) $127,055
Trustee (11)
(1) For fiscal year ended October 31, 1997.
(2) Based on normal retirement age of 73.
(3) For calendar year 1997. All Trustees receiving compensation served
as Trustees of 27funds within the MFS fund complex (having aggregate net assets
at December 31, 1997, of approximately $28,978,922 billion) except Mr. Bailey,
who served as Trustee of 69 funds within the MFS fund complex (having aggregate
net assets at December 31, 1997, of approximately $47,848,673 billion).
(4) See table set forth below under Item 18.4.b for estimated annual
benefits payable upon retirement by the Registrant to a Trustee based on his or
her credited years of service.
(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 $1,500 per meeting and $500 per
committee meeting attended. For attendance at meetings as Trustees, the Trustees
of the Registrant as a group received $121,500 from the Registrant for the
fiscal year ended October 31, 1997.
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
<PAGE>
60
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.
Estimated Annual Benefits Payable by Registrant upon Retirement(1)
Average Years of Service
Trustee Fees 3 5 7 10 or more
$ 12,600 $1,890 $3,150 $4,410 $6,300
13,710 2,057 3,428 4,799 6,855
14,820 2,223 3,705 5,187 7,410
15,930 2,390 3,983 5,576 7,965
17,040 2,556 4,260 5,964 8,520
18,150 2,723 4,538 6,353 9,075
(1) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustee.
Item 18.4(c): Inapplicable.
Item 19. Control Persons and Principal Holders of Securities:
Item 19.1 and 19.2: As of January 31, 1998, 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 80% of the outstanding shares of
the Registrant
Item 19.3: As of January 31, 1998, all Trustees and officers of the Registrant
as a group own of record 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, 1997, 1996 and 1995, MFS
received fees under the Registrant's Investment Advisory Agreement of
$5,820,180, $6,125,243 and $6,671,157, respectively.
20.6. See Item 9.1.e. Inapplicable.
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
<PAGE>
61
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).
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, 1997
and October 31, 1996, the Registrant paid brokerage commissions of $1,801 and
$172,
<PAGE>
66
respectively, on total transactions, excluding purchased option transactions and
short-term obligations, of $1,649,634, and $377,071, respectively. For the
fiscal year ended October 31, 1995, the Registrant did not pay any brokerage
commissions.
The Trustees of the Registrant (together with the Trustees of the other
MFS Funds) have directed the Investment Adviser to allocate a total of $54,160
of commission business from the MFS Funds to the Pershing Division of Donaldson,
Lufkin & Jenrette as consideration for the annual renewal of certain
publications provided by Lipper Analytical Securities Corporation (which
provides information useful to the Trustees in reviewing the relationship
between the 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, 1997, copies of which have been filed with the
SEC:
Portfolio of Investments at October 31, 1997
Statement of Assets and Liabilities at October 31, 1997
Statement of Operations for the year ended October 31, 1997
Statement of Changes in Net Assets for the years ended October 31,
1997 and 1996
Financial Highlights for the ten years ended October 31, 1988,
1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997.
Notes to Financial Statements
Report of Independent Auditors
<PAGE>
63
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, 1997
Statement of Assets and Liabilities at October 31,
1997
Statement of Operations for year ended October 31,
1997
Statement of Changes in Net Assets for the years
ended October 31, 1997 and 1996
Financial Highlights for the ten years ended October
31, 1988, 1989, 1990, 1991, 1992, 1993,
1994, 1995, 1996 and 1997
Notes to Financial Statements
Report of Independent Auditors
2. Exhibits:
(a)(1) -- Declaration of Trust, dated
January 9, 1987 (previously filed
as Exhibit 2(a)(1) to Amendment No.
11 to the Registration Statement
on Form N-2, filed with the SEC
on January 26, 1998 ("Amendment
No. 11")); incorporated herein by
reference.
(a)(2) -- Amendment to Declaration of Trust,
dated January 30, 1987 (previously
filed as Exhibit 2(a)(2) to
Amendment No. 11); incorporated
herein by reference.
(a)(3) -- Amendment to Declaration of Trust,
dated April 19, 1989 (previously
filed as Exhibit 2(a)(3) to
Amendment No. 11); incorporated
herein by reference.
(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.
<PAGE>
64
(d) -- Specimen certificate for Shares of
Beneficial Interest, without par
value (previously filed as
Exhibit 2(d) to Amendment No. 11);
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, 1997;
incorporated herein by reference.
(f) -- Inapplicable.
(g)(1) -- Investment Advisory Agreement,
dated February 25, 1987 (previously
filed as Exhibit 2(g)(1) to
Amendment No. 11); incorporated
herein by reference.
(g)(2) -- Administrative Services Agreement,
dated March 1, 1997, between
Massachusetts Financial Services
Company and the Registrant
(previously filed as Exhibit
2(g)(2) to Amendment No. 11);
incorporated herein by reference.
(h) -- Omitted pursuant to General
Instruction G.3. to Form N-2.
(i) -- Retirement Plan for Non-Interested
Person Trustees, dated January
1, 1991 (previously filed as
Exhibit 2(i) to Amendment No. 11);
incorporated herein by reference.
(j)(1) -- Custodian Agreement dated February
25, 1987 (previously filed as
Exhibit 2(j)(1) to Amendment No.
11); incorporated herein by
reference.
(j)(2) -- Amendment to Custodian Agreement
dated October 1, 1989 (previously
filed as Exhibit 2(j)(2) to
Amendment No. 11); incorporated
herein by reference.
(j)(3) -- Amendment to Custodian Agreement
dated February 29, 1988 (previously
filed as Exhibit 2(j)(3) to
Amendment No. 11); incorporated
herein by reference.
(j)(4) -- Amendment to Custodian Agreement
dated December 28, 1990 (previously
filed as Exhibit 2(j)(4) to
Amendment No. 11); incorporated
herein by reference.
(j)(5) -- Amendment to the Custodian
contract, dated September 17, 1991
(previously filed as Exhibit 2(j)
(5) to Amendment No. 11);
incorporated herein by reference.
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65
(k)(1) -- Registrar, Transfer Agency and
Service Agreement, dated August 15,
1994 (previously filed as Exhibit
(2)(k)(2) to Amendment No. 9
("Amendment No. 9")); incorporated
herein by reference by reference.
(k)(2) -- Credit Agreement dated as of
November 10, 1992 between
Registrant and Chase Manhattan
Bank, N.A. (previously filed as
Exhibit 2(k)(2) to Amendment No.
11); 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 2(p)
to Amendment No. 11); incorporated
herein by reference.
(q) -- Inapplicable.
(r) -- Financial Data Schedules; 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.
Item 28. Number of Holders of Securities:
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest 16,656
(without par value) 92,880,352 (as of January 31, 1998)
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
<PAGE>
66
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:
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds (except the Vertex Funds mentioned below):
Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Growth Opportunities Fund, MFS Government Securities Fund, MFS Government
Limited Maturity Fund, MFS Series Trust I (which has thirteen series: MFS
Managed Sectors Fund, MFS Cash Reserve Fund, MFS World Asset Allocation Fund,
MFS Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS Convertible
Securities Fund, MFS Blue Chip Fund, MFS New Discovery Fund, MFS Science and
Technology Fund and MFS Research International Fund), MFS Series Trust II (which
has three series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund and MFS
Intermediate Income 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 Mid Cap Growth Fund), MFS Series Trust V (which has
six series: MFS Total Return Fund, MFS Research Fund, MFS International
Opportunities Fund, MFS International Strategic Growth Fund, MFS International
Value Fund and MFS Asia Pacific 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 eight series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS
International Growth Fund, MFS International Growth and Income Fund, MFS Real
Estate Investment Fund, MFS Strategic Value Fund, MFS Small Cap Value Fund and
MFS Emerging Markets Debt Fund), MFS Series Trust XI (which has six series: MFS
Union Standard Equity Fund, Vertex All Cap Fund, Vertex Research All Cap Fund,
Vertex Growth Fund, Vertex Discovery Fund and Vertex Contrarian Fund (the Vertex
Funds are expected to be declared effective April 28, 1998)), and MFS Municipal
Series Trust (which has 16 series: MFS Alabama Municipal Bond Fund, MFS Arkansas
Municipal Bond Fund, MFS California
<PAGE>
67
Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia Municipal Bond
Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund,
MFS Mississippi Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North
Carolina Municipal Bond Fund, MFS Pennsylvania Municipal Bond Fund, MFS South
Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS Virginia
Municipal Bond Fund, MFS West Virginia Municipal Bond Fund and MFS Municipal
Income Fund) (the "MFS Funds"). The principal business address of each of the
MFS Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following open-end Funds:
MFS Institutional Trust ("MFSIT") (which has seven series) and MFS Variable
Insurance Trust ("MVI") (which has twelve series). The principal business
address of each of the aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL") (which has 26 series), Money Market Variable Account, High Yield
Variable Account, Capital Appreciation Variable Account, Government Securities
Variable Account, World Governments Variable Account, Total Return Variable
Account and Managed Sectors Variable Account (collectively, the "Accounts"). The
principal business address of MFS/SL is 500 Boylston Street, Boston,
Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
Vertex Investment Management, Inc., a Delaware corporation and a wholly
owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex Research All Cap Fund, Vertex Growth Fund, Vertex
Discovery Fund and Vertex Contrarian Fund, each a series of MFS Series Trust XI.
The principal business address of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
MFS International Ltd. ("MIL"), a limited liability company organized
under the laws of Bermuda and a subsidiary of MFS, whose principal business
address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves as
investment adviser to and distributor for MFS American Funds (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Funds-U.S. Research Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable
<PAGE>
68
securities (UCITS). The principal business address of the MIL Funds is 47,
Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Governments Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS
Meridian U.S. High Yield Fund and MFS Meridian Emerging Markets Debt 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 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Institutional Advisors (Australia) Ltd. ("MFSI-Australia"), a
private limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, N5W2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.
MFS Holdings Australia Pty Ltd. ("MFS Holdings Australia"), a private
limited company organized pursuant to the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, NSW2000 Australia, and whose function is to serve primarily as a
holding company.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of
MFS, serves as distributor for the MFS Funds, MVI and MFSIT.
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT and MVI.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary
of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
<PAGE>
69
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Donald A. Stewart and John D. McNeil. Mr. Shames is the Chairman,
Chief Executive Officer and President, Mr. Scott is a Senior Executive Vice
President and Secretary, William W. Scott, Jr., Patricia A. Zlotin, John W.
Ballen, Thomas J. Cashman, Jr., Joseph W. Dello Russo and Kevin R. Parke are
Executive Vice Presidents, Stephen E. Cavan is a Senior Vice President,
General Counsel and an Assistant Secretary, Robert T. Burns is a Senior Vice
President, Associate General Counsel and an Assistant Secretary of MFS, and
Thomas B. Hastings is a Vice President and Treasurer of MFS.
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS Growth Opportunities Fund
MFS Government Securities Fund
MFS Series Trust I
MFS Series Trust V
MFS Series Trust VI
MFS Series Trust X
MFS Government Limited Maturity Fund
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents of MFS,
are the Assistant Treasurers, James R. Bordewick, Jr., Senior Vice President
and Associate General Counsel of MFS, is the Assistant Secretary.
MFS Series Trust II
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS Government Markets Income Trust
MFS Intermediate Income Trust
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust III
James T. Swanson, Robert J. Manning and Joan S. Batchelder, Senior
Vice Presidents of MFS, and Bernard Scozzafava, Vice President of MFS, are
Vice Presidents, Sheila
<PAGE>
70
Burns-Magnan, Assistant Vice President of MFS, and Daniel E. McManus, Vice
President of MFS, are Assistant Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers, and James R. Bordewick, Jr. is
the Assistant Secretary.
MFS Series Trust IV
MFS Series Trust IX
Robert A. Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of
MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London
is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust VII
Leslie J. Nanberg and Stephen C. Bryant, Senior Vice Presidents of
MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London
is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust VIII
Jeffrey L. Shames, Leslie J. Nanberg and James T. Swanson and John D.
Laupheimer, Jr., a Senior Vice President of MFS, are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost,
Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James
R. Bordewick, Jr. is the Assistant Secretary.
MFS Municipal Series Trust
Robert A. Dennis is Vice President, David B. Smith and Geoffrey L.
Schechter, Vice Presidents of MFS, are Vice Presidents, Daniel E. McManus,
Vice President of MFS, is an Assistant Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr.
is the Assistant Secretary.
MFS Variable Insurance Trust
MFS Series Trust XI
MFS Institutional Trust
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant
Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
<PAGE>
71
MFS Municipal Income Trust
Robert J. Manning is Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr.
is the Assistant Secretary.
MFS Multimarket Income Trust
MFS Charter Income Trust
Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost,
Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James
R. Bordewick, Jr. is the Assistant Secretary.
MFS Special Value Trust
Robert J. Manning is Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr.
is the Assistant Secretary.
MFS/Sun Life Series Trust
John D. McNeil, Chairman and Director of Sun Life Assurance Company
of Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley
are the Assistant Treasurers and James R. Bordewick, Jr. is the Assistant
Secretary.
Money Market Variable Account
High Yield Variable Account
Capital Appreciation Variable Account
Government Securities Variable Account
Total Return Variable Account
World Governments Variable Account
Managed Sectors Variable Account
John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary,
and James R. Bordewick, Jr. is the Assistant Secretary.
Vertex
Jeffrey L. Shames and Arnold D. Scott are the Directors, Jeffrey L.
Shames is the President, Kevin R. Parke and John W. Ballen are Executive Vice
Presidents, John F. Brennan, Jr., and John D. Laupheimer are Senior Vice
Presidents, Brian E. Stack is a Vice President, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.
<PAGE>
72
MIL
Arnold D. Scott, Jeffrey L. Shames and Thomas J. Cashman, Jr. are
Directors, Stephen E. Cavan is a Director, Senior Vice President and the
Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo, Executive
Vice President and Chief Financial Officer of MFS, is the Treasurer and Thomas
B. Hastings is the Assistant Treasurer.
MIL-UK
Thomas J. Cashman, Jr. is President and a Director, Arnold D. Scott
and Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director and the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFSI - Australia
Thomas J. Cashman, Jr. is President and a Director, Graham E. Lenzer,
John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS Holdings - Australia
Jeffrey L. Shames is the President and a Director, Arnold D. Scott,
Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E. Cavan
is the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings
is the Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL Funds
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D.
Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Meridian Funds
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D.
Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr.
is the Assistant Secretary and James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers.
<PAGE>
73
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors, William W.
Scott, Jr., an Executive Vice President of MFS, is the President, Stephen E.
Cavan is the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W.
Dello Russo is the Treasurer, and Thomas B. Hastings is the Assistant
Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the President, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant
Secretary.
MFSI
Jeffrey L. Shames, and Arnold D. Scott are Directors, Thomas J.
Cashman, Jr., is the President and a Director, Leslie J. Nanberg is a Senior
Vice President, a Managing Director and a Director, Kevin R. Parke is the
Executive Vice President and a Managing Director, George F. Bennett, Jr., John
A. Gee, Brianne Grady, Joseph A. Kosciuszek and Joseph J. Trainor are Senior
Vice Presidents and Managing Directors, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer and Robert T. Burns
is the Secretary.
RSI
Arnold D. Scott is the Chairman and a Director, Martin E. Beaulieu is
the President, William W. Scott, Jr. is a Director, Joseph W. Dello Russo is
the Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan
is the Secretary and Robert T. Burns is the Assistant Secretary.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
Donald A. Stewart President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada (Mr.
Stewart is also an officer and/or
Director of various subsidiaries and
affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of Canada, Sun
Life Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. McNeil is also an
officer and/or Director of various
subsidiaries and affiliates of Sun Life)
<PAGE>
74
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>
75
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 24th day of February, 1998.
MFS MULTIMARKET INCOME TRUST
By: JAMES R. BORDEWICK, JR.
James R. Bordewick, Jr.
Assistant Secretary
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibits
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000809173
<NAME> MFS MULTIMARKET INCOME TRUST
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 697144610
<INVESTMENTS-AT-VALUE> 714305399
<RECEIVABLES> 35461555
<ASSETS-OTHER> 303683
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 750070637
<PAYABLE-FOR-SECURITIES> 24686490
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1734729
<TOTAL-LIABILITIES> 26421219
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 709999123
<SHARES-COMMON-STOCK> 92880352
<SHARES-COMMON-PRIOR> 95932452
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2531101)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (3821053)
<ACCUM-APPREC-OR-DEPREC> 20002449
<NET-ASSETS> 723649418
<DIVIDEND-INCOME> 531705
<INTEREST-INCOME> 63295037
<OTHER-INCOME> 0
<EXPENSES-NET> 8070863
<NET-INVESTMENT-INCOME> 55755879
<REALIZED-GAINS-CURRENT> 1779630
<APPREC-INCREASE-CURRENT> 5789268
<NET-CHANGE-FROM-OPS> 63324777
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (57910460)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> (3052100)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (16232634)
<ACCUMULATED-NII-PRIOR> 1035350
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (6984847)
<GROSS-ADVISORY-FEES> 5820180
<INTEREST-EXPENSE> 1277581
<GROSS-EXPENSE> 8178455
<AVERAGE-NET-ASSETS> 725230015
<PER-SHARE-NAV-BEGIN> 7.71
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 0.11
<PER-SHARE-DIVIDEND> (0.62)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.79
<EXPENSE-RATIO> 1.11
<AVG-DEBT-OUTSTANDING> 18854000
<AVG-DEBT-PER-SHARE> 0.200
</TABLE>
