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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
MARCH 30, 1998
1940 ACT FILE NO. 811-5078
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 GOVERNMENT MARKETS 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 Government Markets 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 GOVERNMENT MARKETS 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 March 27, 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. The investment objective and policies of the Registrant may,
unless otherwise specifically stated, be changed by the Trustees of the Trust
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 the shareholder considered appropriate at the time of investment
in the Registrant. The Registrant attempts to achieve this objective by
investing at least 65% of its assets in obligations issued or guaranteed by the
U.S. Government, its agencies, authorities or instrumentalities ("U.S.
Government Securities"). The Registrant does not intend to invest a significant
portion of its assets in any particular type of U.S. Government Securities. In
addition, the Registrant may engage in transactions involving related options.
The Registrant may also invest up to 35% of its total assets in obligations
issued or guaranteed by a foreign government or any of its political
subdivisions, authorities, agencies or instrumentalities ("Foreign Government
Securities") when the Registrant's investment adviser, Massachusetts Financial
Services Company ("MFS" or the "Investment Adviser"), believes that differences
in yield are sufficient to justify the risks of investing in such securities.
See "Special Considerations" below. In pursuing this objective, the Registrant
will consider the preservation of capital by balancing the yields of various
fixed income securities against their attendant risks. In addition, the
Registrant intends to sell futures contracts to hedge against the loss of
capital. However, the Registrant will not purchase securities with the goal of
seeking capital appreciation. There can be no assurance that the Registrant will
achieve its investment objective.
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U.S. Government Securities. The U.S. Government Securities in which the
Registrant intends to invest 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 or guaranteed by the U.S. Government or that are backed by the full
faith and credit of the U.S. Government (such government securities may not be
included in the assets that satisfy the test that 65% of the Registrant's assets
must be invested in government securities). 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.
Some U.S. 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 U.S. Government Securities are generally lower
than the yields available from other interest bearing securities. Like other
interest bearing securities, however, the values of U.S. Government Securities
change as interest rates fluctuate. Shorter-term U.S. and Foreign Government
Securities generally are more stable and less susceptible to principal loss than
longer-term securities.
Foreign Government Securities. The Registrant may invest up to 35% of
its total assets in Foreign Government Securities of issuers considered stable
by the Investment Adviser. The Investment Adviser does not believe that the
credit risk inherent in the obligations of such stable foreign governments is
significantly greater than that of U.S. Government Securities. For a description
of the risk considerations involved, see "Special Considerations" below. The
percentage of the Registrant's assets invested in Foreign Government Securities
will vary depending on the relative yields of such securities, the economies of
the countries in which the investments are made and such countries' financial
markets, the interest rate climate of such countries and the relationship of
such countries' currencies to the U.S. dollar. Investments in Foreign Government
Securities and currency are evaluated 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. To the extent that the Registrant invests in Foreign Government
Securities, the Registrant's portfolio, under normal conditions, will include
securities 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
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consistent with federal income tax diversification requirements for
qualification as a regulated investment company. The Registrant may also hold
foreign currency for hedging purposes.
As a result of its investments in Foreign Government 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. Alternatively, under certain circumstances, 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 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 Registrant may also hold foreign currency in anticipation of purchasing
Foreign Government Securities. 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.
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.
Emerging Market Securities. The Registrant may invest up to 20% of its
net assets in emerging market securities. Emerging market countries include any
country determined by the
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Adviser to have an emerging market economy, taking into account a number of
factors, including whether the country has a low- to middle-income economy
according to the International Bank for Reconstruction and Development, the
country's foreign currency debt rating, its political and economic stability and
the development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for 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.
Other Investments. When the Investment Adviser believes that investing
for 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, notes, U.S. Government Securities, Foreign Government
Securities and repurchase agreements.
The investment objective and policies described above may be changed
without shareholder approval, except that, as a fundamental policy, at least 65%
of the Registrant's assets under normal circumstances will be invested in U.S.
Government Securities. This fundamental policy may not be changed without the
approval of the holders of a majority of the Registrant's shares (as defined
below under "Investment Restrictions").
Lower Rated Fixed Income Securities: Up to 10% of the Registrant's net
assets may be invested in non-convertible fixed-income securities rated BB or
lower by Standard & Poor's Rating Services ("S&P"), Fitch IBCA, Inc. ("Fitch")
or Duff & Phelps Credit Rating Co.("Duff & Phelps") or Ba or lower by Moody's
Investors Services, Inc. ("Moody's") or, if unrated, determined to be of
equivalent quality by the Adviser (commonly referred to 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.
INVESTMENT PRACTICES
The following investment practices apply to the portfolio investments
of the Registrant. These practices may be changed without shareholder approval.
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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 intends to 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.
Futures Contracts and Options on Futures Contracts. The Registrant may
enter into contracts for the future delivery of fixed income securities or
foreign currencies, or contracts based on Eurodollar deposits, 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"). Futures Contracts and Options on Futures
Contracts to be written or purchased by the Registrant will be traded on U.S. or
foreign exchanges. These investment techniques may be used to hedge against
anticipated future changes in interest or exchange rates which otherwise might
either adversely affect the value of the Registrant's portfolio securities or
adversely affect the prices of securities which the Registrant intends to
purchase at a later date. Should interest or exchange 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. In
addition to this requirement, the Board of Trustees has also adopted the
restriction that the Registrant will not enter into any Futures Contracts and
Options on Futures Contracts if immediately thereafter the amount of initial
margin deposits on all the Futures Contracts of the Registrant and premiums paid
on Options on Futures Contracts would exceed 5% of the market value of the total
assets of the Registrant. This restriction will not be changed by the
Registrant's Board of Trustee without considering the policies and concerns of
the various federal and state regulatory agencies.
Options on Foreign Currencies. The Registrant may purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the dollar cost of foreign securities to be acquired. As in the
case of other kinds of options, however, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received, and the Registrant could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Registrant's position, it may forfeit the entire amount of the
premium plus related transaction costs. Options on foreign currencies to be
written or purchased by the Registrant will be traded on U.S. or 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.
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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. In addition, where the Registrant enters into Forward Contracts as a
"cross hedge", the Registrant incurs the risk of imperfect correlation between
changes in the values of the two currencies, which could result in losses.
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 Forward
Contracts. In those instances in which 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. While these contracts are not presently
regulated by the Commodity Futures Trading Commission (the "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.
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 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
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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 a fund's investment exposure
from one type of investment to another. For example, if the Registrant agreed to
exchange payments in dollars for payments in foreign currency, in each case
based on a fixed rate, the swap agreement would tend to decrease the fund'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
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 the Investment Adviser determines it is consistent with the
Registrant's investment objective and policies.
The Registrant will maintain liquid assets sufficient to cover its
current obligations under swap transactions. If the Registrant enters into a
swap agreement on a net basis (i.e., the two payment streams are netted out,
with the Registrant receiving or paying, as the case may be, only the net amount
of the two payments), the Registrant will maintain cash or liquid assets with a
daily value at least equal to the excess, if any, of the Registrant's accrued
obligations under the swap agreement over the accrued amount the Registrant is
entitled to receive under the agreement. If the Registrant enters into a swap
agreement on other than a net basis, it will maintain 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
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payments to be made under the arrangement. If the Investment Adviser 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 interest 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-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 or interest on 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 of 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 of the rate at which fixed-rate long-term
tax-exempt securities increase or decrease in
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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.
Restricted Securities. The Registrant may also purchase securities that
are not registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). A determination is made based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to the Registrant's limitation on investing not more
than 10% of its net assets in illiquid investments. The Board of Trustees has
adopted guidelines and delegated to MFS the daily function of determining and
monitoring the liquidity of Rule 144A securities. The Board, however, retains
oversight of the liquidity determinations, focusing on factors such as
valuation, liquidity and availability of information. Investing in Rule 144A
securities could have the effect of decreasing the level of liquidity in the
Registrant to the extent that qualified institutional buyers become for a time
uninterested in purchasing Rule 144A securities held in the Registrant's
portfolio. Subject to the Registrant's 10% limitation on investments in illiquid
investments, and subject to the diversification requirements of the Internal
Revenue Code of 1986, as amended, the Registrant may also invest in restricted
securities that may not be sold under Rule 144A, which presents certain risks.
As a result, the Registrant might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore, judgment may
at times play a greater role in valuing these securities than in the case of
unrestricted securities.
Lending of Portfolio Securities. The Registrant may seek to increase
its income by lending portfolio securities to the extent consistent with 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 firms
of a national securities exchange (the "Exchange") (or subsidiaries thereof) and
member banks of the Federal Reserve System, and would be required to be secured
continuously by collateral, in cash U.S. Government Securities or an irrevocable
letter of credit maintained on a current basis at 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 (which will usually not exceed five days). 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 receive a fee from the borrower or compensation from the
investment of the collateral, less a fee paid to the borrower, if the collateral
is in the form of cash . The 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 firms 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 justified the
attendant risk. If the Investment Adviser
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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 total
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 to the Registrant 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 total assets to such purchases.
The Registrant does not pay for the securities until received or start earning
interest on the securities until the contractual settlement date. While awaiting
delivery of securities purchased on such basis, 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 on such
bases may involve more risk than other types of purchases.
When the Registrant commits to purchase a security on a "when-issued"
or "forward delivery" basis, it will segregate liquid assets concerning such
purchases. However, although the Registrant does not intend to make such
purchases for speculative purposes and intends to adhere to the provisions of
the SEC policy, purchases of securities on such basis may involve more risk than
other types of purchases. For example, if the Registrant determines it is
necessary to sell the "when-issued" or "forward delivery" securities before
delivery, it may incur a gain or a loss because of market fluctuations since the
time the commitment to purchase such securities was made. Purchasing securities
on a when-issued basis involves a risk that the yields available in the market
when delivery takes place may be higher than yields on the securities purchased.
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 agreement, the Registrant acquires securities
subject to the seller's agreement to repurchase at a specific 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 a subsidiary thereof) of the Exchange, members of the
Federal Reserve System, or recognized primary U.S. 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 U.S. Government Securities.
<PAGE>
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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
and result in certain losses and costs to the Registrant. 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 that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Registrant has the right to make
margin calls at any time if the value of the securities falls below the agreed
upon collateral.
Securities Purchased at a Discount. When and if available, fixed income
securities may be purchased at a market 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.
"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.
Mortgage Pass-Through Securities. The Registrant may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. The average lives of mortgage pass-throughs are variable when
issued because their average lives depend on prepayment rates. The average life
of these securities is likely to be substantially
<PAGE>
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shorter than their stated final maturity as a result of unscheduled principal
prepayment. Prepayments on underlying mortgages result in a loss of anticipated
interest, and all or a part of a premium if any has been paid, and the actual
yield (or total return) to the Registrant may be different than the quoted yield
on the securities. Mortgage prepayments generally increase with falling interest
rates and decrease with rising interest rates. Like other fixed income
securities, when interest rates rise the value of the mortgage pass-through
security generally will decline; however, when interest rates are declining, the
value of mortgage pass-through securities with prepayment features may not
increase as much as that of other fixed income securities.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case of
securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities
of the U.S. Government (such as the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), which are
supported only by the discretionary authority of the U.S Government to purchase
the agency's obligations). Mortgage pass-through securities may also be issued
by non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers). Some of these mortgage pass-through securities may be
supported by various forms of insurance or guarantees.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by prepayments of principal resulting
from the sale, refinancing or foreclosure of the underlying property, net of
fees or costs which may be incurred. Some mortgage pass-through securities (such
as securities issued by the GNMA) are described as "modified pass-through."
These securities entitle the holder to receive all interests and principal
payments owed on the mortgages in the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether the mortgagor actually makes the
payment.
The principal government guarantor of mortgage pass-through securities
is the 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 FNMA and FHLMC. FNMA
is a government-
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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 by
FNMA of principal and interest.
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.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of mortgage loans. Such issuers may also be the
originators and/or servicers of the underlying mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of mortgage loans in
these pools may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance and letters of
credit. The insurance and guarantees are issued by government entities, private
insurers and the mortgage poolers. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements. The Registrant may also buy mortgage-related
securities without insurance or guarantees.
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 foregoes
principal and interest paid on the mortgage-backed securities. The Registrant is
compensated for the lost interest by the difference between the current sales
price and the lower price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. The Registrant may also be compensated by receipt of a commitment fee.
Zero Coupon Bonds. Securities in which the Registrant may invest also
include zero coupon bonds. Zero coupon bonds are debt obligations which are
issued at a significant discount
<PAGE>
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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. Zero coupon bonds do not require the periodic
payment of interest. Such investments benefit the issuer by mitigating its need
for cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value than debt
obligations which make regular payments of interest. The Registrant will accrue
income on such investments, which is distributable to shareholders for tax and
accounting purposes prior to the receipt of cash payments. The Registrant may
have to dispose of portfolio securities under disadvantageous circumstances, or
may have to leverage itself, to raise cash to satisfy such distribution
requirement.
Yield Curve Options. The Registrant may also enter into options on the
yield "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
for hedging purposes. For example, the Registrant may purchase a call option on
the spread between two securities if it owns one of the securities and
anticipates purchasing the other security and wants to hedge against an adverse
change in the yield spread between the two securities. The Registrant may also
purchase or write yield curve options for other than hedging purposes (i.e., in
an effort to increase its current income) if, in the judgment of the Investment
Adviser, the Registrant will be able to profit from movements in the spread
between the yields of the underlying U.S. or Foreign Government Securities. The
trading of yield curve options is subject to all of the risks associated with
the trading of other types of options. In addition, however, such options
present risk of loss even when the yield of one of the underlying securities
remains constant, if the yield 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 yield spread between the same two securities and
segregates liquid assets sufficient to cover the Registrant's net liability
under the two options. Therefore, the Registrant's maximum liability for such a
covered option is the difference between the amount of the Registrant's
liability under the option written by the Registrant less the value of the
option held by the Registrant. Yield curve options may also be covered in any
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 the Registrant
therefore includes them for
<PAGE>
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purposes of calculating the 10% limitation with respect to illiquid securities
contained in its investment restrictions.
Loan Participations and Other Direct Indebtedness. The Registrant may
invest a portion of its assets in "loan participations." 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 purchases at a time when the company is in default. Certain
of the loan participations acquired by the Registrant may involve revolving
credit facilities or other standby financing commitments which obligate the
Registrant to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct investments may not be in the form of securities
or may be subject to restrictions on transfer, and only limited opportunities
may exist to resell such instruments. As a result, the Registrant may be unable
to sell such investments at an opportune time or may have to resell them at less
than the fair market value.
Collateralized Mortgage Obligations and Multiclass Pass-Through
Certificates. 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. Typically,
CMOs are collateralized by certificates issued by the GNMA, FNMA or FHLMC but
also may be collateralized by whole loans or private mortgage pass-through
securities (such collateral collectively hereinafter referred to as "Mortgage
Assets"). Such obligations also include investments in trusts and other entities
representing interests in U.S. or Foreign Government Securities, or holding U.S.
or Foreign Government Securities in amounts sufficient to cover all payments due
from such entities. 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
reference herein to CMOs include multiclass pass-through securities. Payments of
principal of and interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. or a foreign 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 are usually issued in
multiple classes. Each class of CMOs, often referred to as a "tranche," is
issued at a specific fixed or floating coupon
<PAGE>
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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 description of the risks of investing in these stripped
securities and of investing in classes consisting primarily of interest payments
or principal payments.
The Registrant may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
Stripped Mortgage-Backed Securities. In addition, 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. or a foreign 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 the interest and principal distributions from a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest only or
"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 generally is unusually volatile in response to changes in
interest rates.
<PAGE>
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OPTIONS AND FUTURES
Options on U.S. and Foreign Government Securities. The Registrant
intends to 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.
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 security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional 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 are 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 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 are 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 the 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, the remaining term of the option, supply
and demand and interest rates. Put and call options may also be covered in any
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 rules
and regulations.
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
current market value of the underlying security. Even if an option is exercised,
the writer retains the amount of the premium.
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
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notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected. The writer, however, has
the right to repurchase an option it has written in certain situations.
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 price or expiration date or both, or
in the case of a written put option 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 Registrant 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 the 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 an 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.
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The Registrant may write options in connection with buy-and-write
transactions; that is, the Registrant may purchase a security and then write a
call option against that security. The exercise price of the call the Registrant
determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call option
plus the appreciation in the market price of the underlying security up to the
exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, the 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 option 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
future delivery of fixed income securities or foreign currencies or contracts
based on bond or other financial indices and commodities, including any index of
U.S. or Foreign Government Securities ("Futures Contracts"). A "sale" of a
Futures Contract means a contractual obligation to deliver the
<PAGE>
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securities or foreign currencies called for by the contract at a specified price
in a fixed delivery month 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 or
foreign currencies called for by the contract at a specified price in a fixed
delivery month or, in the case of a Futures Contract on an index, a contractual
obligation to make or receive a cash settlement. U.S. Futures Contracts have
been designed by exchanges which have been designated "contract markets" by the
CFTC, and must be executed through a futures commission merchant, or brokerage
firm, which is a member of the relevant contract market. Existing contract
markets include the Chicago Board of Trade and the 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, Government National Mortgage Association
modified pass-through mortgage-backed securities and three-month U.S. Treasury
Bills. The Registrant may also enter into Futures Contracts which are based on
Eurodollar deposits and non-U.S. Government bonds, and foreign currency Futures
Contracts which currently are traded on the British pound, Canadian dollar,
Japanese yen, Swiss franc and German mark.
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 a
contract's face value. Daily thereafter, the Futures Contract is valued on a
marked-to-market basis and the Registrant may be required to pay or receive
"variation margin," which reflects any decline or increase in the contract's
value.
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, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical Futures Contract calling for delivery in the same month.
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
clearinghouse associated with the exchange on which the contracts are traded,
the Registrant will incur brokerage fees when it purchases or sells Futures
Contracts.
One purpose of the acquisition or sale of a Futures Contract, in the
case of a portfolio, such as the portfolio of the Registrant, which hold or
intends to acquire long-term fixed income securities, is to attempt to protect
the Registrant from fluctuations in interest or foreign exchange rates without
actually buying or selling long-term fixed income securities or foreign
currency.
<PAGE>
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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
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 attempt 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 segregate liquid assets to cover its
obligations with respect to such Futures Contracts 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.
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. 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 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 had
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
<PAGE>
-23-
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.
Options on Futures Contracts. The Registrant intends to 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 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 security or foreign currency which
is 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 security or foreign currency which is
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 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 Registrant may cover the writing of call options on Futures
Contracts (a) through purchases of the underlying Futures Contract, (b) through
ownership of the instrument, or instruments included in the index, underlying
the Futures Contract, or (c) through the holding of a call on the same Futures
Contract and in the same principal amount as the call written where the exercise
price of the call held (i) is equal to or less than the exercise price of the
call written or (ii) is greater than the exercise price of the call written if
liquid assets representing the difference are segregated by the Registrant. The
Registrant may cover the writing of put options on Futures Contracts (a) through
sales of the underlying Futures Contract, (b) through segregation of liquid
assets in an amount equal to the value of the security or index underlying the
Futures Contracts, or (c) through the holding of a put on the same Futures
Contract and in the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written or where the exercise price of the put held is less than the exercise
price of the put written if liquid assets representing the difference are
segregated by the Registrant. Put and call options on Futures Contracts may also
be covered in
<PAGE>
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such other manner as may be in accordance with the rules of the exchange on
which they are traded and applicable laws and regulations.
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. For
example, the Registrant may 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. It is impossible to predict the amount of trading interest
that may exist in various types of options on 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.
Forward Contracts on Foreign Currency. 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. 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 believes 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.
The Registrant has established procedures which require the Registrant
to segregate assets sufficient to cover any commitments under Forward Contracts
to purchase or sell foreign currencies or to limit any potential risk. The
assets will be marked to market on a daily basis. While these contracts are not
presently regulated by the 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. Forward
Contracts may limit potential gain from a positive change in the relationship
between the U.S. dollar and foreign currencies.
<PAGE>
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Unanticipated changes in currency prices may result in poorer overall
performance for the Registrant than if it had not engaged in such transactions.
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 exchange 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 received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Registrant could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Registrant
to hedge such increased cost up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the 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
<PAGE>
-26-
currency without additional cash consideration (or for additional cash
consideration) segregated by the Registrant upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Registrant has purchased 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. A put option on
foreign currencies written by the Registrant is "covered" if the Registrant
segregated liquid assets in an amount equal to the exercise price or has
purchased a put on the same foreign currency and in the same principal amount as
the call 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. Call and put options on foreign currencies may
also be covered in any other manner as may be in accordance with the
requirements of the exchange on which, or the counterparty with which, they are
traded and applicable rules and regulations.
Call and put options and Options on Futures Contracts may be covered in
any other manner as may be in accordance with the requirements of the exchange
on which, or the counterparty with which, they are traded and applicable rules
and regulations.
Additional Risks of Options on U.S. and Foreign Government Securities,
Futures Contracts, Options on Futures Contracts, Forward Contracts and Options
on Foreign Currencies. Unlike transactions entered into by the Registrant in
Futures Contracts, options on foreign currencies and Forward Contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on securities may be
traded over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and trader of Forward Contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
In 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 exchanges only (i) for bona fide hedging purposes (as defined in
CFTC regulations), or (ii) for non-bonafide hedging purposes, provided that the
aggregate initial margin and premiums to establish such non-bona fide hedging
positions does not exceed 5% of the liquidation value of the Registrant's
assets, after taking into account unrealized profits and unrealized losses on
any such contract the Registrant has entered into, and
<PAGE>
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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.
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, together with other illiquid securities, such
options and assets cannot exceed 10% 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 U.S. Government Securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which the Registrant has in place
with primary dealers will provide that the Registrant has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Registrant for writing the option,
plus the amount, if any, of the option's intrinsic value (i.e., the amount that
the option is in-the-money). The formula may also include a factor to account
for the difference between the price of the security and the strike price of the
option if the option is written out-of-the-money. The Registrant will treat all
or a part of the formula price as illiquid for purposes of the SEC illiquidity
ceiling. 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 SEC illiquidity ceiling.
Options on foreign currencies traded on an Exchange 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 an 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 economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing
<PAGE>
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member, impose special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, or the fixing of dollar
settlement prices or prohibitions on exercise.
In addition, options on U.S. and Foreign Government 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) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Registrant's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the Untied States, and (v) lesser
trading volume.
Future Developments. The Registrant proposes to take advantage of
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 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) changing from one U.S. Government Security to an essentially
similar U.S. Government Security when their respective yields are distorted due
to market factors;
(2) changing from U.S. Government Securities to Foreign Government
Securities or from Foreign Government Securities to U.S. Government Securities
when disparities arise in their relative yields;
(3) selling one kind of U.S. Government Security (e.g., Treasury bonds)
and buying another (e.g., GNMA direct pass-through certificates) when
disparities arise in the relative values of each;
(4) shortening the average maturity of its portfolio in anticipation of
a rise in interest rates so as to minimize depreciation of principal; and
(5) lengthening the average maturity of its portfolio in anticipation
of a decline in interest rates so as to maximize appreciation of principal.
The Registrant may also use the techniques described above in
"Investment Practices" to manage its portfolio.
<PAGE>
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While these strategies are designed to increase the Registrant's
current income available for distribution to its shareholders, if the
Registrant's expectations of changes in interest rates or its evaluation of the
normal yield relationship between two securities or obligations proves to be
incorrect, the Registrant's income and net asset value may be reduced.
SPECIAL CONSIDERATIONS
The value of shares of the Registrant will vary as the aggregate value
of the Registrant's portfolio securities increases or decreases. The net asset
value of the Registrant may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of a portfolio invested at
higher yields can be expected to rise. Conversely, when interest rates rise, the
value of a portfolio invested at lower yields can be expected to decline. 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.
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.
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" above.
Investing in Foreign Government Securities involves considerations and
possible risks not typically associated with investing in U.S. Government
Securities. The value of Foreign Government Securities investments will be
affected by changes in currency rates or exchange control regulations,
application of foreign tax laws, including withholding taxes, 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. Foreign
brokerage commissions are generally higher than in the United States, and
foreign securities markets may 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.
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
<PAGE>
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settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Registrant is uninvested and no return is earned thereon. The inability of the
Registrant to make intended security purchases due to settlement problems could
cause the Registrant to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to settlement problems could result in
losses to the Registrant due to subsequent declines in value of the portfolio
security, a decrease in the level of liquidity in the Registrant's portfolio,
or, if the Registrant has entered into a contract to sell the security, in
possible liability to the purchaser. Certain markets may require payment for
securities before delivery, and in such markets the Registrants bear the risk
that the securities will not be delivered and that the Registrant's payments
will not be returned. Securities prices in emerging markets can be significantly
more volatile than in the more developed nations of the world, reflecting the
greater uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may have relatively unstable
governments, present the risk of nationalization of businesses, restrictions on
foreign ownership, or prohibitions of repatriation of assets, and may have less
protection of property rights than more developed countries. The economies of
countries of emerging markets may be predominantly based on only a few
industries, may be highly vulnerable to changes in local or global trade
conditions and may suffer from extreme and volatile debt burdens or inflation
rates. Local securities markets may trade a small number of securities and may
be unable to respond effectively to increases in trading volume potentially
making prompt liquidation of substantial holdings difficult or impossible at
times. Securities of issuers located in countries with emerging markets may have
limited marketability and may be subject to more abrupt or erratic price
movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sale of securities
of foreign investors. In addition, if a deterioration occurs in an emerging
market's balance of payments or for other reasons a country could impose
temporary restrictions on foreign capital remittances. The Registrant could be
adversely affected 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.
The lower-rated high yielding fixed income securities in which the
Registrant may invest generally tend to reflect economic changes, short-term
corporate and industry developments to a greater extent than higher rated
securities, which react primarily to fluctuations in the general level of
interest rates (although these lower-rated fixed income securities are also
affected by changes in interest rates, the market's perception of their credit
quality, and the outlook for economic growth). 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
<PAGE>
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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 despite the actual
loss of principal. The market for these lower-rated fixed income securities may
be less liquid than the market for investment grade fixed income securities, and
judgment may at time play a greater role in valuing these securities than in the
case of investment grade fixed income securities. Changes in the value of
securities subsequent to their acquisition will not affect cash income or yield
to the Registrant but will be reflected in the net asset value of shares of the
Registrant.
While the 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 Adviser's own independent and ongoing review of credit quality. The
Registrant's achievement of its investment objective may be more dependent on
the Adviser's own credit analysis than in the case of an investment company
primarily investing in higher quality fixed income securities. For a description
of these and other rating categories, see "Description of Bond Ratings" 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 one or more issuers, 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.
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.
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 borrowings and
investing in 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, except as a temporary measure for
extraordinary or emergency purposes or for a repurchase of its shares
and in no event in excess of 33 1/3% of its assets;
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(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) 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), if more
than 10% of the Registrant's assets (taken at market value) would be
invested in such securities;
(5) 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 currencies, currency
futures, Forward Contracts or contracts for the future acquisition or
delivery of fixed income securities and related options) 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);
(6) 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;
(7) issue any senior security (as that term is defined in the
1940 Act), if such issuance is specifically prohibited by the 1940 Act
or the rules and regulations promulgated thereunder (for the purpose of
this restriction, collateral arrangements with respect to options,
Futures Contracts and Options on Futures Contracts and collateral
arrangements with respect to initial and variation margin are not
deemed to be the issuance of a senior security);
(8) 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; or
(9) 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 for, without payment of any further consideration,
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
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net assets (taken at market value) is held as collateral for such sales
at any one time (it is the Registrant's present intention to make
such sales only for the purpose of deferring realization of gain or
loss for Federal income tax purposes; such sales would not be made of
securities subject to outstanding options).
Except for investment restriction number (1) and (4), the Registrant's
investment limitations, policies and rating standards are adhered to at the time
of purchase or utilization of assets; a subsequent change in circumstances will
not be considered to result in a violation of policy.
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES
Federal Farm Credit Banks Consolidated Systemwide Notes and Bonds -
are bonds issued and guaranteed 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 by the Department of
Transportation of the U.S. Government and are guaranteed by the United States.
FHA debentures- are bonds issued by the Federal Housing Administration
of the U.S. Government and are guaranteed by the United States.
GNMA Certificates - are mortgage-backed securities, with timely payment
guaranteed by the full faith and credit of the U.S. Government, which represent
partial ownership interests 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 also insured or guaranteed by the Federal
Housing Administration, the Veterans Administration or the Farmers Home
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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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.
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Caa: Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES, 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 S&P.
The obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated issues only
in small degree. The obligator's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
- -----------------------
*Rates all governmental bodies having $1,000,000 or more debt outstanding,
unless adequate information is not available.
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Obligations rated BB, B, CCC and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and C
the highest. While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to
nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: An obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless 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 or the taking of a similar action
payments are on obligations 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.
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FITCH IBCA, INC.
International Long-Term Credit Ratings
AAA:
Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA:
Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A:
High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.
BBB:
Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
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 are not
investment grade.
B:
Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
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.
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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%.
DUFF & PHELPS CREDIT RATING CO.
Long-Term Debt & Preferred Stock Rating Scale
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+,AA,AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+,A,A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+,BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+,BB,BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently with this category.
CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuers failed to meet scheduled
principal and/or interest payments.
DP: Preferred stock with dividend arrearages.
8.5. Share Price Data: Inapplicable.
8.6 Business Development Companies. Inapplicable.
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Item 9. Management:
9.1.a. General - Board of Trustees: Management of the Registrant's
business and affairs is the responsibility of the Board of Trustees of the
Registrant.
9.1.b. General - Investment Advisers: MFS is the Registrant's
Investment Adviser. MFS and its predecessor organizations have a history of
money management dating from 1924, thus making MFS America's oldest mutual fund
organization. MFS is a subsidiary of Sun Life off Canada (U.S.) Financial
Services Holding, Inc. ("Sun Life of Canada (U.S.)") which in turn is an
indirect wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun
Life"). Sun Life, a mutual life insurance company, is one of the largest
international life insurance companies and has been operating in the United
States since 1895. The executive officers of MFS report to the Chairman of Sun
Life. The principal business address of MFS is 500 Boylston Street, Boston,
Massachusetts 02116.
MFS also serves as investment adviser to each of the Trusts in the MFS
Family of Funds (the "MFS Funds"), MFS Municipal Income Trust, MFS Intermediate
Income Trust, MFS Multimarket Income Trust, MFS Charter Income Trust, MFS
Special Value Trust, MFS Institutional Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series 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 Sun Life 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. Net assets under the management of the MFS organization were
approximately $77.6 billion on behalf of approximately 2.9 million investors as
of February 28, 1998. As of such date, the MFS organization managed
approximately $20.4 billion of securities in fixed income portfolios, including
approximately $6.6 billion in U.S. Government Securities and approximately $40
billion in securities of foreign issuers and non-U.S. dollar denominated
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, Mr. Ballen is the Executive Vice President and Mr.
Scott is the Secretary and a Senior Executive Vice President 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.
INVESTMENT ADVISORY AGREEMENT
General. The Investment Advisory Agreement between MFS and the
Registrant (the "Advisory Agreement") provides that, subject to the direction of
the Board of Trustees of the Registrant, MFS is responsible for the actual
management of the Registrant's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Trustees.
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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 nor its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution and
management of the 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 pays MFS an annual fee computed and paid monthly in an
amount equal to the sum of .32% of the average daily net assets of the
Registrant and 5.33% 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 for the Registrant's then-current fiscal year). This advisory
fee is greater than that paid by most funds.
Payment of Expenses. MFS has voluntarily agreed to reduce its right to
the fee set forth in the Advisory Agreement to a maximum of 0.85% in the event
that such fees exceed 0.85% of the average daily net assets of the Registrant,
on an annual basis for the then-current fiscal year. This temporary advisory fee
reduction may be rescinded at any time.
The Registrant pays the compensation of the Trustees who are not
officers of MFS and all the Registrant's expenses, including governmental fees,
interest charges, taxes, membership dues in the Investment Company Institute
allocable to the Registrant, fees and expenses of independent auditors, of legal
counsel, and of any transfer agent, registrar or dividend disbursing agent of
the Registrant, expenses of repurchasing shares, expenses of preparing, printing
and mailing share certificates, shareholder reports, notices, proxy statements
and reports to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums, fees and expenses of the Registrant's
Custodian for all services to the Registrant, including safekeeping of funds and
securities and maintaining required books and accounts; expenses of calculating
the net asset value of the Registrant's shares, expenses of shareholder
meetings, expenses in connection with the Dividend Reinvestment and Cash
Purchase Plan and SEC registration fees.
Use of Name. The Advisory Agreement provides that if MFS ceases to
serve as the Investment Adviser to the Registrant, the Registrant will change
its name so as to delete the
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initials "MFS" and that MFS may render services to others and may permit fund
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: Steven E. Nothern and Steve
Bryant are portfolio managers of the Registrant. Mr. Nothern, a Senior Vice
President of MFS, joined MFS in 1986. He became a portfolio manager of the
Registrant in 1992. Mr. Bryant, a Senior Vice President of MFS, became a
portfolio manager at MFS in 1987. He a portfolio manager of the Registrant in
1992.
9.1.d. General - Administrators: 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 November 30, 1997, MFS received $59,654 under the Agreement.
9.1.e. Custodians: State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110 is the custodian and dividend disbursing
agent for the Registrant. MFS Service Center, Inc., 500 Boylston Street, Boston,
Massachusetts 02116, a wholly owned subsidiary of MFS, is the shareholder
servicing agent.
9.1.f. General: Payment of Expenses. The Registrant pays the
compensation of the Trustees who are not affiliated with MFS and all the
Registrant's expenses 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.
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9.1.g. General - Affiliated Brokerage: Inapplicable.
9.2. Non-resident Managers: While the Registrant is a Massachusetts
business trust, Sir J. David Gibbons, a trustee of the Registrant, is not a
resident of the United States, and substantially all of his assets may be
located outside the United States. As a result, it may be difficult for
investors to effect service of process upon him within the United States, to
enforce in United States courts, or to realize outside the United States,
judgments of courts in the United States predicated upon civil liabilities, if
any, of his under the Federal securities laws of the United States. The
Registrant has been advised that there is substantial doubt as to the
enforceability in Bermuda, where he resides, of such civil remedies as are
afforded by the Federal securities laws of the United States.
9.3. Control Persons: Inapplicable.
Item 10. Capital Stock, Long-Term Debt, and Other Securities:
10.1. Capital Stock:
a. and f. Description of Shares. The Registrant's Declaration of Trust
permits the Trustees to issue an unlimited number of full and fractional Shares
of Beneficial Interest, without par value. Shareholders are entitled to one vote
for each share held and to vote in the election of Trustees and on other matters
submitted to meetings of shareholders. No material amendment may be made to the
Registrant's Declaration of Trust without the affirmative vote of a majority of
its shares. Under certain circumstances, shareholders have the right to
communicate with other shareholders and to remove Trustees. Shares 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 Registrant's Dividend
Reinvestment and Cash Purchase 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 1940 Act 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
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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
repurchase its shares from time to time in the open market or otherwise as and
when it is deemed advisable by the Trustees. Such repurchases will be made only
when the Registrant's shares are trading at a discount of 10% or more from the
net asset value of the shares. Shares repurchased by the Registrant will be held
in treasury. The Registrant may incur debt to finance share repurchase
transactions. See the section "Investment Restrictions" in the response to Items
8.2, 8.3 and 8.4.
The shares of the Registrant will trade in the open market at a price
which will be a function of several factors, including their net asset value and
yield. The shares of closed-end investment companies generally sell at market
prices varying from their net asset values. When the Registrant repurchases its
shares for a price below their net asset value, the net asset value of those
shares that remain outstanding will be enhanced, but this does not necessarily
mean that the market price of those outstanding shares will be affected either
positively or negatively. Further, interest on borrowings to finance share
repurchase transactions will reduce the Registrant's net income.
Certain Provisions of the Declaration of Trust. The Registrant is an
entity of the type commonly known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Registrant and provides for
indemnification and reimbursement of expenses out of the Registrant 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.
<PAGE>
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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 2/3%
of the shares of the Registrant (a greater vote than that required by the 1940
Act and, in some cases, greater than the required vote applicable to business
corporations under state law) 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)
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of 5% 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.
<PAGE>
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e. Dividends and Distributions; Dividend Reinvestment and Cash Purchase
Plan. The Registrant intends to distribute monthly to shareholders substantially
all of its net investment income in accordance with the timing requirements
imposed by the Code, and thereby to be relieved of any federal income taxes
thereon. Premiums from options and short-term capital gains may be distributed
monthly. Shareholders will be informed of the tax consequences of such
distributions, including whether any portion represents a return of capital,
after the end of each calendar year. Long-term capital gains, if any, net of
capital losses, will 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"). Pursuant to the Registrant's 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.
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 Registrant shares at such time or if the
Registrant should declare a dividend or other distribution payable only in cash,
State Street will, as agents for the participants, buy Registrant shares in the
open market, on the New York Stock Exchange or elsewhere, for the participants'
accounts. If, before State Street has completed its purchases, the market price
exceeds the net asset value of the Registrant's shares, the average per share
purchase price paid by State Street may exceed the net asset value of the
Registrant's shares, resulting in the acquisition of fewer shares than if the
dividend or distribution had been paid in shares issued by the Registrant.
Participants in the Plan may withdraw from the Plan upon written notice
to State Street. When a participant withdraws from the Plan or upon termination
of the Plan as provided below, certificates for whole shares credited to his
account under the Plan will be issued and a cash payment will be made for any
fraction of a share credited to such account.
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 monies received from participants (as well as any dividend and
distributions received in cash) to purchase Registrant 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
<PAGE>
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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. A service fee of $0.75 is charged
for each cash purchase as well as a pro rata share of the brokerage commissions,
if any. 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. Brokerage charges for
purchasing small amounts of stock for individual accounts through the Plan are
expected to be less than the usual brokerage charges for such transactions, as
State Street will be purchasing shares for all participants in blocks and
pro-rating the lower commission thus attainable.
The automatic reinvestment of dividends and distributions will not
relieve participants of any income tax which may be payable on such dividends or
distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the trust 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: Inapplicable.
10.3. General: Inapplicable.
10.4. Taxes: The Registrant has elected and intends to qualify each
year as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), by meeting all applicable
requirements of Subchapter M, including requirements as
<PAGE>
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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 the 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 income to shareholders.
Shareholders of the Registrant 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 and any distributions from net short-term capital gains are taxable to
shareholders as ordinary income for federal income tax purposes. Because the
Registrant expects to earn primarily interest income, it is expected that no
Registrant dividends will qualify for the dividends deduction for corporations.
Distributions of net capital gains (i.e., the excess of net long-term capital
gains 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. Any dividend that is declared by the Registrant in October, November
or December of any calendar year, that is payable to shareholders of record in
such 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 shareholders 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 in shares under the Registrant's Dividend Reinvestment and Cash Purchase
Plan (the "Plan"). With respect to distributions received in cash or reinvested
in shares purchased on the open market, the amount of the distribution for tax
purposes is the amount of cash distributed or allocated to the shareholder.
However, with respect to distributions made in shares issued by the Registrant
pursuant to the Plan, the amount of the distribution for tax purposes is the
fair market value of the issued shares on the payment date and a portion of such
distribution 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.
Distributions by the Registrant generally result in a reduction in the
fair market value of the Registrant's shares. Should a distribution reduce the
fair market value below a shareholder's cost basis, such distribution
nevertheless would be taxable to the shareholder as described above, even
though, from an investment standpoint, it may constitute a partial return of
capital. In particular, since the price of shares purchased just prior to a
distribution includes the amount of
<PAGE>
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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 a long-term capital gain or loss if the shares have
been held for more than twelve months and otherwise as a short-term capital gain
or loss; 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 disposition of shares in the
Registrant held for six months or less will be treated as a long-term capital
loss to the extent of any distributions of net capital gain made with respect to
those shares. Any loss realized upon a disposition of shares may also be
disallowed under rules relating to wash sales.
The Registrant's current dividend and accounting policies will affect
the amount, timing, and character of distributions to shareholders, and may,
under certain circumstances, make an economic return of capital taxable to
shareholders. Any investment in zero coupon 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 a tax on the
Registrant, 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, 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 Registrant income and distributions to shareholders. For example,
certain positions held by the Registrant on the last business day of each
taxable year will bee marked to market (i.e., treated as if closed out) on that
day, and any gain or loss associated with the positions will be treated as 60%
long-term and 40% short-term capital gain or loss. Certain positions held by the
Registrant that substantially diminish its risk of loss with respect to other
positions in its portfolio may constitute "straddles," and may be subject to
special tax rules that would cause deferral of Registrant losses, adjustments in
the holding periods of Registrant securities, and conversion of short-term into
long-term capital losses. Certain tax elections exist for straddles which may
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
will generally be treated as ordinary income and loss. Use of foreign currencies
for non-hedging purposes may be limited in order to avoid a tax on the
Registrant.
<PAGE>
-49-
Investment income received by the Registrant from foreign securities
may be subject to foreign income taxes withheld at the source; the Registrant
does not expect to be able to pass through to shareholders foreign tax credits
with respect to such foreign taxes. The United States has entered into tax
treaties with many foreign countries that may entitle the Registrant to a
reduced rate of tax or an exemption from tax on such income; the Registrant
intends to qualify for treaty reduced rates where available. It is not possible,
however, to determine the Registrant's effective rate of foreign tax in advance
since the amount of the Registrant's assets to be invested in various countries
is not known.
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 the 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 to Non-U.S. Persons that are subject to such 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 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 that 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 upon the
disposition of such obligations) may be exempt from state and local taxes. The
Registrant intends to advise shareholders of the extent, if any, to which its
distributions consist of such interest. Shareholders are urged to 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.
<PAGE>
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10.5. Outstanding Securities: The following information is
furnished as of March 1, 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 Unlimited 27,743,400* 97,911,555 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.
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. For fiscal year 1997, the Registrant's portfolio turnover rate
was 248%. For fiscal year 1996, the Registrant's portfolio turnover rate was
249%.
A high turnover rate necessarily involves greater expenses to the
Registrant and could involve realization of capital gains that would be taxable
to the shareholders. 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.
<PAGE>
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Item 18. Management:
18.1. The Investment Advisers, 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. Cohan, Gibbons, Smith and Ms.
O'Neill will continue in office until 1998, Messrs. Cohn, Robb and Sherratt will
continue in office until 1999 and Messrs. Bailey, Scott and Shames will continue
in office until 2000.
Name and Address Position(s) Held with Principal Occupation(s)
Registrant During Past 5 years
Richard B. Bailey(born Trustee Private Investor;
9/14/26) Massachusetts Financial
Services Company, former
Chairman (prior to
September 30, 1991);
Cambridge Bancorp,
Director, Cambridge Trust
Company, Director
Marshall N. Cohan (born Trustee Private Investor
11/14/26)
2524 Bedford Mews Drive
Wellington, Florida
Lawrence H. Cohn, M.D. Trustee Brigham and Women's
(born 3/11/37) Hospital, Chief of
75 Francis Street Cardiac Surgery; Harvard
Boston, Massachusetts Medical School, Professor
of Surgery
The Hon. Sir J. David Trustee Edmund Gibbons Limited,
Gibbons, KBE (born Chief Executive Officer;
6/15/27) Colonial Insurance
21 Reid Street Company Ltd.; Chairman;
Hamilton, Bermuda HM The Bank of N.T.
Butterfield & Son
Limited, Chairman (prior
to November 1997)
Abby M. O'Neill (born Trustee Private Investor;
4/27/28) Rockefeller Financial
30 Rockefeller Plaza, Services, Inc.
Room 5600 (investment advisers),
New York, New York Director
<PAGE>
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Name and Address Position(s) Held with Principal Occupation(s)
Registrant During Past 5 years
Walter E. Robb, III Trustee Benchmark Advisors, Inc.
(born 8/18/26) (corporate financial
110 Broad Street consultants), President
Boston, Massachusetts and Treasurer; Benchmark
Consulting Group, Inc.
(offices services),
President; Landmark Funds
(mutual fund), Trustee
Arnold D. Scott* (born Trustee Massachusetts Financial
12/16/42) Services Company,
Director, Senior
Executive Vice President
and Secretary
Jeffrey L. Shames*(born Trustee Massachusetts Financial
6/2/55) Services Company,
Chairman
J. Dale Sherratt (born Trustee Insight Resources, Inc.
9/23/38) (acquisition planning
One Liberty Square specialists), President
Boston, Massachusetts
Ward Smith (born Trustee NACCO Industries (holding
9/13/20) company), Chairman (prior
36080 Shaker Blvd. to June 1994); Sundstrand
Hunting Valley, Ohio Corporation (diversified
mechanical manufacturer),
Director
Leslie J. Nanberg*(born Vice President Massachusetts Financial
11/14/45) Services Company, Senior
Vice President and
Director of Fixed Income
Portfolio Management
W. Thomas London* (born Treasurer Massachusetts Financial
3/1/44) Services Company, Senior
Vice President
Ellen M. Moynihan* (born Assistant Treasurer Massachusetts Financial
11/13/57) Services Company, Vice
President (since
September 1996); Deloitte
& Touche LLP, Senior
Manager (until September
1996)
James O. Yost* (born Treasurer Massachusetts Financial
6/12/60) Services Company, Vice
President
<PAGE>
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Name and Address Position(s) Held with Principal Occupation(s)
Registrant During Past 5 years
Mark E. Bradley* (born Assistant Treasurer Massachusetts Financial
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)
Stephen E. Cavan*(born Secretary and Clerk Massachusetts Financial
11/6/53) Services Company, Senior
Vice President, General
Counsel and Assistant
Secretary
James R. Bordewick, Jr.* Assistant 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 Government Limited Maturity
Fund, MFS Series Trust I, MFS Series Trust II, MFS Series Trust VI, MFS Series
Trust VIII, MFS Municipal Series Trust, MFS Intermediate Income Trust, MFS
Charter Income Trust and MFS Special Value Trust. Messrs. Bailey, Scott and
Shames are Trustees of each of the MFS Funds and MFS Multimarket Income Trust
and MFS Municipal Income Trust.
18.3. Sir J. David Gibbons has no authorized agent in the United States
to receive notice.
<PAGE>
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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 Aggregate Pension or Estimated Total
Person, Position Compensation Retirement Annual Benefits Compensation
(Estimated From Fund(1) Benefits Upon From Fund and
Credited Years Accrued As Part Retirement(2) Fund Complex
of of Fund Paid to
Service(2)(5)) Expenses(1) Trustees(3)
Richard B. $13,392 $4,083 (4) $283,647
Bailey, Trustee
Marshall N. $14,392 $7,639 (4) $148,067
Cohan, Trustee
(14)
Lawrence H. $12,892 $2,856 (4) $123,917
Cohn, M.D.,
Trustee (18)
The Hon. Sir J. $13,392 $6,350 (4) $129,842
David Gibbons,
KBE, Trustee
(13)
Abby M. $13,392 $3,403 (4) $129,842
O'Neill, Trustee
(10)
Walter E. Robb, $14,392 $7,639 (4) $148,067
III, Trustee (15)
Arnold D. None None None None
Scott, Trustee
Jeffrey L. None None None None
Shames, Trustee
J. Dale Sherratt, $16,892 $3,056 (4) $184,067
Trustee (20)
Ward Smith, $16,892 $3,819 (4) $184,067
Trustee (13)
(1) For Fiscal year ended November 30, 1997.
(2) Based on normal retirement age of 75.
(3) Information provided is provided for calendar year 1997. All
Trustees served as Trustees of 42 funds within the MFS Fund
complex (having aggregate net assets
<PAGE>
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at December 31, 1997, of approximately $18,869,750,275)
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 $47,848,672,538).
(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 not an officer of the Investment
Adviser a fee of $7,350 per year plus $500 per meeting and committee meeting
attended, together with such Trustee's actual out-of-pocket expenses relating to
attendance at meetings. For attendance at meetings and other services as
Trustees, the Trustees of the Registrant as a group received $115,636 from the
Registrant for the fiscal year ended November 30, 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 75 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 the age
of 75 and receive reduced payments if he has completed at least 5 years of
service. Under the plan, a Trustee (or his beneficiaries) will also receive
benefits for a period of time in the event the Trustee is disabled or dies.
These benefits will also be based on the Trustee's average annual compensation
and length of service. There is no retirement plan provided by the Registrant
for the interested Trustees. However, Mr. Bailey retired as Chairman of MFS as
of September 30, 1991 and 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
$11,602 $1,740 $2,901 $4,061 $5,801
$12,998 $1,950 $3,250 $4,549 $6,499
$14,394 $2,159 $3,598 $5,038 $7,197
$15,789 $2,368 $3,947 $5,526 $7,895
$17,185 $2,578 $4,296 $6,015 $8,593
$18,581 $2,787 $4,645 $6,503 $9,290
(1) Other funds in the MFS fund complex provide similar retirement
benefits to the Trustees.
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Item 19. Control Persons and Principal Holders of Securities:
As of March 1, 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), owns of
record approximately 59.37% of the outstanding shares of the Registrant.
As of March 1, 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.a. through 20.5. See Item 9.1.b. For the fiscal year ended
November 30, 1997, MFS received fees under the Registrant's Investment Advisory
Agreement of $3,802,065. For the fiscal year ended November 30, 1996, MFS
received fees under the Investment Advisory Agreement of $4,188,509. For the
fiscal year ended November 30, 1995, MFS received fees under the Registrant's
Investment Advisory Agreement of $4,459,164.
20.6. The Registrant's securities and cash are held under a Custodian
Agreement by State Street Bank and Trust Company, whose principal business
address is 225 Franklin Street, Boston, Massachusetts 02110. State Street Bank
and Trust Company also serves as dividend disbursing agent and as agent under
the Plan and as transfer agent and registrar for the Registrant's shares.
20.7. Deloitte & Touche LLP are the Registrant's independent public
accountants and certify financial statements of the Registrant as required to be
certified by any law or regulation and provide certain 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). The
principal business address of Deloitte & Touche LLP is 125 Summer Street,
Boston, Massachusetts 02110.
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 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
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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. Such employees may serve other clients of the Investment
Adviser and any subsidiary in a similar capacity. Changes in the Registrant's
investments are reviewed by the Board of Trustees.
The primary consideration in portfolio security transactions is
execution at the most favorable prices and in the most effective manner ("best
execution"). The Investment Adviser has complete freedom as to the markets in
and the broker-dealers through which it seeks this result. U.S. Government
Securities and, in the United States and in certain other countries, other 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 from
and sold to dealers include a dealer's mark-up or mark-down. The Investment
Adviser normally seeks to deal directly with the primary market maker, unless in
its opinion, better execution is available elsewhere. Securities firms may
receive brokerage commissions on transactions involving options, Futures
Contracts and Options on Futures Contracts 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 best execution 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 years ended November 30, 1997, 1996 and
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).
In certain instances, there may be securities which are suitable for
the Registrant's portfolio as well as for that of one or more of the advisory
clients of the Investment Adviser or any subsidiary. Investment decisions for
the Registrant and for the advisory clients of the
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Investment Adviser or any subsidiary are made with a view to achieving their
respective investment objectives. It may develop that a particular security is
bought or sold for only one client even though it might be held by, or bought or
sold for, other clients. Likewise, a particular security may be bought for one
or more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client. When
two or more clients are simultaneously engaged in the purchase or sale of the
same security, the securities are allocated among clients in a manner believed
by the Investment Adviser to be equitable to each on a case by case basis. It is
recognized that in some cases this system could have a detrimental effect on the
price or volume of the security as far as the Registrant is concerned. In other
cases, however, it is believed that the ability of the Registrant to participate
in volume transactions will produce better executions for the Registrant.
Item 22. Tax Status: None.
Item 23. Financial Statements: The following are incorporated herein by
reference to the Registrant's Annual Report to its shareholders, for its fiscal
year ended November 30, 1997, copies of which have been filed with the SEC:
Portfolio of Investments at November 30, 1997
Statement of Assets and Liabilities at November 30, 1997
Statement of Operations for the year ended November 30, 1997
Statement of Changes in Net Assets for the years ended November 30,
1997 and 1996
Financial Highlights for each of the years in the ten-year period
ended November 30, 1997.
Notes to Financial Statements
Independent Auditors' Report
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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 November 30, 1997
Statement of Assets and Liabilities at November 30, 1997
Statement of Operations for year ended November 30, 1997
Statement of Changes in Net Assets for the years ended
November 30, 1997 and 1996
Per Share and Other Data each of the years in the ten-
year period ended November 30, 1997.
Notes to Financial Statements
Independent Auditors' Report
2. Exhibits:
(a)(1) -- Declaration of Trust, dated March 27, 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.
(b)(1) -- Amended and Restated By-Laws dated December
14, 1994 (previously filed as Exhibit (b)(2)
to Amendment No. 10 to the Registrant's
Registration Statement on Form N-2 on March
30, 1995 ("Amendment No. 10")); incorporated
herein by reference.
(c) -- Inapplicable.
(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 4 of the Registrant's
Annual Report to its Shareholders, for its
fiscal year ended November 30, 1997;
incorporated herein by reference.
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(f) -- Inapplicable.
(g)(1) -- Investment Advisory Agreement, dated May 5,
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 between the Registrant
and State Street Bank and Trust Company,
dated May 20, 1987(previously filed as
Exhibit 2(j)(1) to Amendment No. 11);
incorporated herein by reference
(j)(2) -- Amendment to Custodian Agreement dated May
20, 1987; (previously filed as Exhibit 2(j)
(2) to Amendment No. 11); incorporated herein
by reference.
(j)(3) -- Amendment to Custodian Agreement dated
October 9, (previously filed as Exhibit 2(j)
(3) to Amendment No. 11); incorporated herein
by reference
(j)(4) -- Amendment to Custodian Agreement dated
February 29, 1988(previously filed as Exhibit
2(j)(4) to Amendment No. 11); incorporated
herein by reference.
(j)(5) -- Amendment to the Custodian contract, dated
October 1, 1989(previously filed as Exhibit
2(j)(5) to Amendment No. 11); incorporated
herein by reference.
(k)(1) -- Registrar, Transfer Agency and Service
Agreement between Registrant and MFS Service
Center, Inc., dated August 15, 1994
(previously filed as Exhibit (e)(2) to
Amendment No. 10); incorporated herein by
reference.
(k)(2) -- Loan Agreement by and among the Banks named
therein, the MFS Funds named therein, and The
First National Bank of Boston, dated as of
February 21, 1995, previously filed as
Exhibit (k)(3) to Amendment No. 10;
incorporated herein by reference.
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(l) -- Omitted pursuant to General Instruction G.3
to Form N-2.
(m) -- None.
(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; filed herewith.
(q) -- Inapplicable.
(r) -- Financial Data Schedule; filed herewith.
Item 25. Marketing Arrangements: Inapplicable.
Item 26. Other Expenses of Issuance and Distribution: Inapplicable.
Item 27. Persons Controlled by or Under Common Control with Registrant:
Inapplicable.
Item 28. Number of Holders of Securities:
---------------------------------------------------------------------
(1) (2)
Title of Class Number of Record Holders
---------------------------------------------------------------------
Shares of Beneficial Interest 10,905
(without par value) (as at March 1, 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 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
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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), and MFS
Municipal Series Trust (which has 16 series: MFS Alabama Municipal Bond Fund,
MFS Arkansas Municipal Bond Fund, MFS California Municipal Bond Fund, MFS
Florida Municipal Bond Fund, MFS Georgia Municipal Bond Fund, MFS Maryland
Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS Mississippi
Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North Carolina
Municipal Bond Fund, MFS Pennsylvania Municipal Bond Fund, MFS South Carolina
Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS Virginia Municipal
Bond Fund, MFS West Virginia Municipal Bond Fund and MFS Municipal Income
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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 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
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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.
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,
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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 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.
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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.
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.
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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.
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.
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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.
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.
<PAGE>
-69-
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>
-70
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 500 Boylston Street
Boston, Massachusetts 02116
Item 32. Management Services: Inapplicable.
Item 33. Undertakings: Inapplicable.
<PAGE>
-71-
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 26th day of March, 1998.
MFS GOVERNMENT MARKETS INCOME TRUST
By: /s/ JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
<PAGE>
-72-
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit Page
27 -- Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000811922
<NAME> MFS GOVERNMENT MARKETS INCOME TRUST
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 537207305
<INVESTMENTS-AT-VALUE> 536316473
<RECEIVABLES> 24286955
<ASSETS-OTHER> 4753
<OTHER-ITEMS-ASSETS> 78008
<TOTAL-ASSETS> 560686189
<PAYABLE-FOR-SECURITIES> 35870625
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1518013
<TOTAL-LIABILITIES> 37388638
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 560537212
<SHARES-COMMON-STOCK> 71077255
<SHARES-COMMON-PRIOR> 73384455
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 4872344
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 33645768
<ACCUM-APPREC-OR-DEPREC> 1278451
<NET-ASSETS> 523297551
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 19805148
<OTHER-INCOME> 0
<EXPENSES-NET> (2388267)
<NET-INVESTMENT-INCOME> 17416881
<REALIZED-GAINS-CURRENT> (4753399)
<APPREC-INCREASE-CURRENT> (9085386)
<NET-CHANGE-FROM-OPS> 3578096
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (19253308)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 2307200
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (31198467)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (3035917)
<OVERDIST-NET-GAINS-PRIOR> (28892369)
<GROSS-ADVISORY-FEES> 1907293
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2406925
<AVERAGE-NET-ASSETS> 531190706
<PER-SHARE-NAV-BEGIN> 7.56
<PER-SHARE-NII> 0.24
<PER-SHARE-GAIN-APPREC> (0.17)
<PER-SHARE-DIVIDEND> (0.27)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.36
<EXPENSE-RATIO> 0.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
