<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
FEBRUARY 27, 1998
1940 ACT FILE NO. 811-5440
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 10 |X|
MFS INTERMEDIATE 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 Intermediate Income Trust
c/o Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
(Name and Address of Agent for Service)
<PAGE>
-2-
MFS INTERMEDIATE 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 December 30, 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 preserve capital and
provide high current income. The investment objective and policies of the
Registrant may, unless otherwise specifically stated, be changed by the Trustees
of the Registrant without a vote of the shareholders. A change in a 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 will attempt to achieve this
objective by investing in obligations issued or guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities ("U.S. Government
Securities") and in obligations issued or guaranteed by a foreign government or
any of its political subdivisions, authorities, agencies or instrumentalities,
which are not traded on a U.S. exchange ("Foreign Government Securities"). The
Registrant will maintain an average weighted portfolio maturity of approximately
seven years or less and will invest substantially all of its assets in
securities with remaining maturities less than or equal to ten years. Equivalent
maturities are utilized with respect to certain securities, including Government
Agencies. Under normal market conditions, at least 65% of the Fund's total
assets will be invested in income producing securities. Under normal market
conditions, the Registrant's average weighted portfolio maturity will not be
less than three years. Contractual rights to dispose of a security will be
considered in calculating average maturity, because such rights limit the period
during which the Registrant bears a market risk with respect to the security.
The investment adviser, Massachusetts Financial Services Company, a Delaware
corporation ("MFS" or "Investment Adviser") believes that this strategy will
enable the Registrant to preserve capital while seeking high current income.
Shorter term U.S. and Foreign
<PAGE>
-3-
Government Securities generally are more stable and less susceptible to
principal loss than longer term securities. While shorter term securities in
most cases offer lower yields than securities with longer maturities, the
Registrant may seek to enhance income by writing options on U.S. and Foreign
Government Securities. Option writing can result in the loss of principal under
certain market conditions. Although the percentage of the Registrant's assets
invested in Foreign Government Securities will vary depending on the state of
the economies of the principal countries around the world, their financial
markets and the relationship of their currencies to the U.S. dollar, under
normal conditions the Registrant's portfolio is expected to be globally
diversified. See "Special Considerations" below. There can be no assurance that
the Registrant will achieve its investment objective.
For purposes of the foregoing investment policy, securities having a
certain maturity will be deemed to include securities with an equivalent
"duration" of such securities. "Duration" is a commonly used measure of the
longevity of a debt instrument that takes into account the full stream of
payments received on a debt instrument, including both interest and principal
payments, based on their present values. A debt instrument's duration is derived
by discounting principal and interest payments to their present value using the
instrument's current yield to maturity and taking the dollar-weighted average
time until those payments will be received. Contractual rights to dispose of a
security, call options and prepayment assumptions may be considered in
calculating duration and average maturity because such rights limit the period
during which the Registrant bears a market risk with respect to the security.
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 (maturities of one year or less), U.S. Treasury notes (maturities of one
to 10 years), and U.S. Treasury bonds (generally original 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, authorities 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 Federal National Mortgage
Association ("FNMA"); and (iii) interests in trusts or other entities
representing interests in obligations that are issued and guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities. For a description of
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, see "Description of Obligations Issued or Guaranteed by U.S.
Government Agencies or Instrumentalities" below.
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.
<PAGE>
-4-
Foreign Government Securities. The Registrant may invest up to 50% of
its net assets in Foreign Government Securities, including up to 20% of the
Registrant's net assets in securities of government, government-related, and
supranational issuers located, or primarily conducting their business, in
emerging markets (see "Emerging Markets Securities" below). 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 Ratings Services, Inc.
("S&P"), Fitch IBCA, Inc. ("Fitch") and Duff & Phelps Credit Rating Co ("Duff &
Phelps") or Ba or lower by Moody's Investors Service, Inc. ("Moody's") or, if
unrated, will be determined by the Adviser to be comparable quality (commonly
referred to as "junk bonds"). 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 will be
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. The Registrant's
portfolio, under normal conditions, will include securities of a number of
foreign countries. The Foreign Government Securities in which the Registrant
intends to invest will generally consist of obligations supported by national,
state or provincial governments or similar political subdivisions. As a
"non-diversified" investment company, the Registrant is limited as to the
percentage of its assets which may be invested in the securities of any one
issuer (including a given foreign government issuer) only by its own investment
restrictions and the diversification requirements imposed by the Internal
Revenue Code of 1986, as amended. The Registrant may hold foreign currency for
hedging purposes to protect against declines in the U.S. dollar value of foreign
securities held by the Registrant and against increases in the U.S. dollar value
of the foreign securities which the Registrant might purchase. The Registrant
may also hold foreign currency for non-hedging purposes.
Consistent with the Fund's investment objective and policies, the
Registrant may also invest in fixed income securities of corporate issuers.
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-
<PAGE>
-5-
rate bonds, are generally collateralized in full as to principal by U.S.
Treasury zero coupon bonds having the same maturity as the bonds. Brady Bonds
are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
American Depositary Receipts. The Registrant may invest in American
Depositary Receipts ("ADRs") which are certificates issued by a U.S. depository
(usually a bank) and represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. ADRs may be
sponsored or unsponsored. A sponsored ADR is issued by a depository which has an
exclusive relationship with the issuer of the underlying security. An
unsponsored ADR may be issued by any number of U.S. depositories. Under the
terms of most sponsored arrangements, depositories agree to distribute notices
of shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities. The depository of an unsponsored ADR, on the
other hand, is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through voting
rights to ADR holders in respect of the deposited securities. The Registrant may
invest in either type of ADR. Although the U.S. investor holds a substitute
receipt of ownership rather than direct stock certificates, the use of the
depositary receipts in the United States can reduce costs and delays as well as
potential currency exchange and other difficulties. The Registrant may purchase
securities in local markets and direct delivery of these ordinary shares to the
local depository of an ADR agent bank in the foreign country. Simultaneously,
the ADR agents create a certificate which settles at the Registrant's custodian
in five days. The Registrant may also execute trades on the U.S. markets using
existing ADRs. A foreign issuer of the security underlying an ADR is generally
not subject to the same reporting requirements in the United States as a
domestic issuer. Accordingly the information available to a U.S. investor will
be limited to the information the foreign issuer is required to disclose in its
own country and the market value of an ADR may not reflect undisclosed material
information concerning the issuer of the underlying security. ADRs may also be
subject to exchange rate risks if the underlying foreign securities are traded
in foreign currency.
Emerging Market Securities. Emerging markets in which the Registrant
may invest include countries or regions with relatively low gross national
product per capita compared to the world's major economies, and in countries or
regions with the potential for rapid economic growth. Emerging markets will
include any country: (i) having an "emerging stock market" as defined by the
International Finance Corporation; (ii) with low-to middle-income economies
according to the International Bank for Reconstruction and Development (the
"World Bank"); (iii) listed in World Bank publications as developing, or (iv)
determined by the Adviser to be an emerging market as defined above.
Other Investments. When the Investment Adviser believes that investing
for defensive purposes is appropriate, such as during periods of unusual market
conditions, part or all of the
<PAGE>
-6-
Registrant's assets may be temporarily 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
Registrant may also invest in similar instruments when relative yields are
attractive, provided that it adheres to the 65% policy stated below.
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.
and Foreign 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: The Registrant may invest in
lower-rated fixed income securities. 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. However, since yields
vary over time, no specific level of income can ever be assured). These
lower-rated high yielding fixed income securities generally tend to be 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 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.
<PAGE>
-7-
INVESTMENT PRACTICES
The following investment practices apply to the portfolio investments
of the Registrant. These practices may be changed without shareholder approval.
Options on U.S. and Foreign Government Securities. The Registrant may
write covered put and call options and purchase put and call options on U.S. 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. Other than the requirement that
options written on U.S. and Foreign Government Securities be covered, there are
no limitations on the use of such options. 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 purchase or sale for future delivery of fixed
income securities or foreign currencies, or contracts based on 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 are designed only 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.
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. Other than the requirement that options written
on foreign currencies only be used for hedging purposes, there are no
limitations on the use of such options. For further discussion of the use, risks
and costs of options on foreign currencies, see "Options and Futures" below.
Forward Foreign Currency Exchange Contracts. The Registrant may enter
into forward foreign currency exchange contracts for the purchase or sale of a
specific currency at a future
<PAGE>
-8-
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. 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 Adviser, a reasonable degree of correlation can be expected between
movements in the values of the two currencies. 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 consistent with the General
Statement of Policy of the Securities and Exchange Commission (the "SEC") and
its staff regarding the use of Forward Contracts by registered investment
companies which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Registrant satisfies this requirement through segregation of assets, it will
segregate liquid assets, which will be marked to market on a daily basis, in an
amount equal to the value of its commitments under Forward Contracts entered
into by the Registrant. While these contracts are not presently regulated by the
Commodity Futures Trading Commission ("CFTC"), the CFTC may in the future assert
authority to regulate Forward Contracts. In such event, the Registrant's ability
to utilize Forward Contracts in the manner set forth above may be restricted.
Zero Coupon Bonds. U.S. and Foreign Government 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 from face value and do
not require the periodic payment of interest. 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 benefit the issuer by mitigating its need for cash to meet debt service,
but also require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such investments may experience greater volatility
in market value than debt obligations which make regular payments of interest.
The Registrant will accrue income on such investments for tax and accounting
purposes, which is distributable to shareholders and which, because no cash is
received at the time of accrual, may require the liquidation of other portfolio
securities to satisfy the Registrant's distribution obligations.
Collateralized Mortgage Obligations. The Registrant may invest a
portion of its assets in collateralized mortgage obligations or "CMOs", which
are debt obligations collateralized by
<PAGE>
-9-
mortgage loans or mortgage pass-through securities which, in the case of U.S.
Government Securities, are issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities. Typically, CMOs are collateralized
by certificates issued by GNMA, FNMA or the Federal Home Loan Mortgage
Corporation (such collateral collectively hereinafter referred to as "Mortgage
Assets"). Payments of principal and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs.
CMOs may be issued by agencies or instrumentalities of the U.S. or foreign
governments 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.
In a CMO, a series of bonds or certificates may be issued in multiple
classes. Each class of CMOs, often referred to as a "tranche", is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrued on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a series of a CMO in
innumerable ways. In a common structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of the
series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security). See "Stripped Mortgage-Backed Securities" below for a
discussion of the risks of investing in these stripped securities and of
investing in classes consisting primarily of interest payments or principal
payments.
The Registrant may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
Indexed Securities. The Registrant may purchase securities whose prices
are indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity (i.e., principal value) or coupon rate is determined by
reference to a specific instrument or statistic. 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 references 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
<PAGE>
-10-
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.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government 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
securities increase or decrease in response to such changes. As a result, such
obligations have the effect of providing investment leverage and may be more
volatile than long-term fixed-rate obligations.
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.
Stripped Mortgage-Backed Securities. The Registrant may invest a
portion of its assets in stripped mortgage-backed securities ("SMBS"), which are
derivative multi-class mortgage securities issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks and investment banks.
<PAGE>
-11-
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 may be unusually volatile in response to changes in
interest rates.
Swaps and Related Transactions. As one way of managing its exposure to
different types of investments, the Registrant may enter into interest rate
swaps, currency swaps or structures with embedded swaps and other types of
available swap agreements, such as caps, collars and floors. Swaps involve the
exchange by the Registrant with another party of cash payments based upon
different interest rate indexes, currencies, and other prices or rates such as
the value of mortgage prepayment rates. For example, in the typical interest
rate swap, the Registrant might exchange a sequence of cash payments based on a
floating rate index for cash payments based on a fixed rate. Payments made by
both parties to a swap transaction are based on a notional principal amount
determined by the parties.
The Registrant may also purchase and sell caps, floors and collars. In
a typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the
counterparty. For example, the purchase of an interest rate cap entitles the
buyer, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the counterparty selling such interest rate cap. The sale of an interest
rate floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
Swap agreements could be used to shift a Fund's investment exposure
from one type of investment to another. For example, if a Fund 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 a 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 a Fund's investments and its share price and
yield.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed,
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
<PAGE>
-12-
Registrant may also suffer losses if it is unable to terminate outstanding swap
agreements or reduce its exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. Swap agreements may be individually negotiated and
structured to include exposure to a variety of different types of investments or
market factors. Depending on their structure, swap agreements may increase or
decrease the Registrant's exposure to long or short-term interest rates (in the
U.S. or abroad), foreign currency values, mortgage securities, corporate
borrowing rates, or other factors such as securities prices or inflation rates.
Swap agreements can take many different forms and are known by a variety of
names. The Registrant is not limited to any particular form or variety of swap
agreements if MFS determines it is consistent with the Registrant's investment
objective and policies.
The Registrant will maintain liquid assets to cover its current
obligations under swap transactions. If the Registrant enters into a swap
agreement on a net basis (i.e., the two payment streams are netted out, with the
Registrant receiving or paying, as the case may be, only the net amount of the
two payments), the Registrant will maintain liquid assets with a daily value at
least equal to the excess, if any, of the Registrant'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 payments to be made under the arrangement.
If MFS is incorrect in its forecasts of such factors, the investment performance
of the Registrant would be less than what it would have been if these investment
techniques had not been used. If a swap agreement calls for payments by the
Registrant, the Registrant must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness declines, the value of the swap
agreement would be likely to decline, potentially resulting in losses. If the
counterparty defaults, the Registrant's risk of loss consists of the net amount
of payments that the Registrant is contractually entitled to receive. The
Registrant anticipates that it will be able to eliminate or reduce its exposure
under these arrangements by assignment or other disposition or by entering into
an offsetting agreement with the same or another counterparty.
Yield Curve Options. The Registrant may also enter into options on the
"spread", or differential, between two U.S. or Foreign Government Securities, in
a transaction referred to as a "yield curve" option. In contrast to other types
of options, a yield curve option is based on the difference between the yields
of designated U.S. or Foreign Government Securities, rather than the prices of
the individual securities, and is usually settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Yield curve options may be used for the same purposes as other options
on securities. Specifically, the Registrant may purchase or write such options
in order to protect against the
<PAGE>
-13-
adverse effects of a potential widening or narrowing of the spreads between U.S.
or Foreign Government Securities, or other interest rate sensitive instruments,
held in the Registrant's portfolio. The Registrant may also purchase or write
yield curve options for other than hedging purposes if, in the judgment of the
Adviser, the Registrant will be able to profit from movements in the spread
between the yields of the underlying U.S. or Foreign Government Securities. The
trading of yield curve options is subject to all of the risks associated with
the trading of other types of options. In addition, however, such options
present risk of loss even if the yield of one of the underlying securities
remains constant, if the spread moves in a direction or to an extent which was
not anticipated. Yield curve options written by the Registrant will be covered.
A call (or put) option is covered if the Registrant holds another call (or put)
option on the spread between the same two securities and segregates liquid
assets sufficient to cover the Registrant's net liability under the two options.
Yield curve options may also be covered in such other manner as may be in
accordance with the requirements of the counterparty with which the option is
traded and applicable laws and regulations. Yield curve options are traded
over-the-counter and, because they have been only recently introduced,
established trading markets for these securities have not yet developed. Because
these securities are traded over-the-counter, the SEC has taken the position
that yield curve options are illiquid, and, therefore, cannot exceed the SEC
illiquidity ceiling.
"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.
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 banks
of the Federal Reserve System and member firms (and subsidiaries thereof) of a
national securities exchange ("Exchange"), and would be required to be secured
continuously by collateral, including cash, or U.S. Government Securities, an
irrevocable letter of credit or other collateral permissible under SEC policies
and maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Registrant
<PAGE>
-14-
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 also receive a fee from the borrower. The
Registrant would also receive compensation from the investment of the
collateral), less a fee paid to the borrower, if the collateral is in the form
of cash. . The Registrant would not, however, have the right to vote any
securities having voting rights during the existence of the loan, but the
Registrant would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to 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 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 be delivered at a future date beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a future
date may be deemed a separate security. Although the Registrant is not limited
to the amount of securities for which it may have commitments to purchase on
such basis, it is expected that under normal circumstances, the Registrant will
not commit more than 30% of its assets to such purchases. The Registrant does
not pay for the securities until received or start earning interest on them
until the contractual settlement date. While awaiting delivery of securities
purchased on such bases, the Registrant will segregate liquid assets sufficient
to cover its commitments. Although the Registrant does not intend to make such
purchases for speculative purposes, purchases 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 consistent with the
General Statement of Policy of the SEC described in "Forward Foreign Currency
Exchange Contracts" above, 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 specified time and price.
If the seller becomes subject to a proceeding under the bankruptcy laws
<PAGE>
-15-
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 an Exchange or members of the
Federal Reserve System, recognized primary U.S. Government Securities dealers or
institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the 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 U.S. Government Securities.
The repurchase agreement provides that in the event the seller fails to
pay the amount agreed upon on the agreed upon delivery date or upon demand, as
the case may be, the Registrant will have the right to liquidate the securities.
If at the time the Registrant is contractually entitled to exercise its right to
liquidate the securities, the seller is subject to a proceeding under the
bankruptcy laws or its assets are otherwise subject to a stay order, the
Registrant's exercise of its right to liquidate the securities may be delayed
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 Adviser has determined that the seller is creditworthy, and
the Adviser monitors the seller's creditworthiness on an ongoing basis.
Moreover, under such agreements, the value of the securities (which are marked
to market every business day) is required to be greater than the repurchase
price, and the Registrant has the right to make margin calls at any time if the
value of the securities falls below the agreed upon collateral. For additional
information concerning repurchase agreements, see "Investment Restrictions"
below.
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.
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 exchange 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
covered by the call or has an absolute and immediate right to acquire that
security without additional cash consideration ) upon conversion or exchange of
other securities held in its portfolio. A call
<PAGE>
-16-
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) liquid assets representing greater than the exercise price of the call
written if the difference is segregated by the Registrant. . A put option
written by the Registrant is "covered" if the Registrant segregates liquid
assets with a value equal to the exercise price , or else holds a put on the
same security and in the same principal amount as the put written where the
exercise price of the put held is (a) equal to or greater than the exercise
price of the put written or (b) less than the exercise price of the put written
if the difference is segregated by the Registrant . 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 such other manner as may be in accordance
with the requirements of the exchange on which, or the counterparty with which,
the option is traded and applicable 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-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 notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction". This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Registrant to write another call option on the underlying
security with either a different exercise 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.
<PAGE>
-17-
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.
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.
<PAGE>
-18-
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, from time to time, may purchase securities such as FNMA
bonds and Federal Housing Administration ("FHA") project loans which carry with
them the right to sell them back to the issuer prior to the stated maturity. The
Registrant will consider these rights in determining the maturity of such
securities.
The Registrant may purchase call options to hedge against an increase
in the price of U.S. or Foreign Government Securities that the Registrant
anticipates purchasing in the future. The premium paid for the call option plus
any transaction costs will reduce the benefit, if any, realized by the
Registrant upon exercise of the option, and unless the price of the underlying
security rises sufficiently, the option may expire worthless to the Registrant.
Futures Contracts. The Registrant may enter into contracts for the
purchase or sale for future delivery of fixed income securities or foreign
currencies, or contracts based on bonds or financial indices including any index
of U.S. or Foreign Government Securities ("Futures Contracts"). A "sale" of a
Futures Contract means the acquisition of a contractual obligation to deliver
the securities or foreign currencies called for by the contract at a specified
price on a specified date. A "purchase" of a Futures Contract means the
acquisition of a contractual obligation to acquire the securities or foreign
currencies called for by the contract at a specified price on a specified date.
U.S. Futures Contracts have been designed by exchanges which have been
designated "contracts markets" by the Commodity Futures Trading Commission
("CFTC"), and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. Existing
contract markets include the Chicago Board of Trade and International Money
Market of the Chicago Mercantile Exchange. Futures Contracts trade on these
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
The Registrant will enter into Futures Contracts which are based on debt
securities that are backed by the full faith and credit of the U.S. Government,
such as long-term U.S. Treasury Bonds, Treasury Notes and three-month U.S.
Treasury Bills. The Registrant may also enter into Futures Contracts which are
based on non-U.S. Government bonds.
<PAGE>
-19-
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 a
"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. A Futures
Contract on an index of securities provides for a cash settlement based on
changes in the value of the underlying index.
Although Futures Contracts by their terms call for the actual delivery
or acquisition of securities, or in the case of futures on an index of
securities, a cash settlement, 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.
The purpose of the acquisition or sale of a Futures Contract, in the
case of a portfolio, such as the portfolio of the Registrant, which 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. 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
<PAGE>
-20-
the extent the Registrant enters into Futures Contracts for this purpose, the
Registrant will segregate liquid assets in an amount equal to the difference
between the fluctuating market value of such Futures Contracts and the aggregate
value of the initial and variation margin payments made by the Registrant with
respect to such Futures Contracts, thereby assuring the position is unleveraged.
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 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
<PAGE>
-21-
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 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 risking 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, although it may be necessary to exercise the option which
will result in a position in the Futures Contract. 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 writing of an Option
on a Futures Contract involves all of the risks of purchases or sales of Futures
Contracts, including initial and variation margin requirements.
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. 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.
Options on Futures Contracts may be covered in any such manner as may
be in accordance with the requirements of the exchange on which they are traded
and applicable rules and regulations.
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.
<PAGE>
-22-
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 a foreign currency by the Registrant is "covered" if the
Registrant owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration 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. Call and put options on foreign currencies may also be covered
in such other manner as may be in accordance with the requirements of the
exchange on which they are traded and applicable rules and regulations.
Call and put options and Options on Futures Contracts may be covered in
any such manner as may be in accordance with the requirements of the exchange on
which they are traded and applicable rules and regulations.
<PAGE>
-23-
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 clearing
house performance guarantees. In addition, 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.
As a result of its investments in foreign securities, the Registrant
may receive interest payments, or the proceeds of the sale or redemption of such
securities, in foreign currencies. In that event, the Registrant may promptly
convert such currencies into dollars at the then-current exchange rate. Under
certain circumstances, alternatively, such as where the Investment Adviser
anticipates that the exchange rate will improve, the Registrant may hold such
currencies for an indefinite period of time. The Registrant may also hold
foreign currency in anticipation of purchasing foreign securities.
In addition, the Registrant may be required or elect to receive
delivery of the foreign currencies underlying options on foreign currencies or
Forward Contracts it has entered into. This could occur, for example, if an
option written by the Registrant is exercised or the Registrant is unable to
close out a Forward Contract it has entered into. The Registrant may also elect
to take delivery of the currencies underlying options or Forward Contracts if,
in the judgment of the Investment Adviser, it is in the best interest of the
Registrant to do so. The holding of currencies exposes the Registrant to risk of
loss if currency exchange rates move in a direction adverse to the Registrant's
position. Such losses could reduce any profits or increase any losses sustained
by the Registrant from the sale or redemption of securities, and could reduce
the dollar value of interest or dividend payments received. In addition, the
holding of currencies could adversely affect the Registrant's profit or loss on
currency options or Forward Contracts, as well as its hedging strategies.
Additional Risks of Options on U.S. and Foreign Government Securities,
Options on Futures Contracts, Forward Contracts and Options on Foreign
Currencies. Unlike transactions entered into by the Registrant in Futures
Contracts, options on foreign currencies and Forward Contracts are not traded on
contract markets regulated by the CFTC or (with the exception of certain foreign
currency options) by the SEC. To the contrary, such instruments are traded
through financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities exchanges, such
as the Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. Similarly, options on securities may be traded
over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the 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 addition, where the
Registrant enters into Forward Contracts as a "cross hedge" (i.e., the purchase
or sale of a Forward Contract on one currency to hedge against risk of loss
arising from changes in value of a second currency), the Registrant incurs the
risk of
<PAGE>
-24-
imperfect correlation between changes in the values of the two currencies, which
could result in losses.
In order to assure that the Registrant will not be deemed a "commodity
pool" for purposes of the Commodity Exchange Act, regulations of the CFTC
require that the Registrant enter into transactions in Futures Contracts,
Options on Futures Contracts and Options on Foreign Currencies traded on CFTC -
regulated exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums to establish such non-bona fide hedging
positions do not exceed 5% of the liquidation value of the Registrant's assets,
after taking into account unrealized profits and unrealized losses on any such
contracts the Registrant has entered into, and excluding, in computing such 5%,
the in-the-money amount with respect to an option that is in-the-money at the
time of purchase.
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 a certain percentage of the Registrant's assets
(the "SEC illiquidity ceiling"). 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 such primary dealers will provide that the Registrant has the absolute
right to repurchase an option it writes at any time at a price which represents
the fair market value, as determined in good faith through negotiation between
the parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Registrant for writing the option,
plus the amount, if any, of the option's intrinsic value (i.e., the amount that
the option is in-the-money). The formula may also include a factor to account
for the difference between the price of the security and the strike price of the
option if the option is written out-of-the-money. The Registrant will treat all
or a part of the formula price as illiquid for purposes of 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 national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Registrant to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
<PAGE>
-25-
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions, on exercise.
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., FNMA direct pass-through certificates) when
disparities arise in the relative values of each;
<PAGE>
-26-
(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 under
"Investment Practices" to manage its portfolio.
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 Registrant is designed primarily as a long-term investment and not
as a trading vehicle. 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. Because
interest and principal payments of Foreign Government Securities may be made in
foreign currencies, if the exchange rate declines after the Registrant receives
these payments the Registrant may not have sufficient cash to make distributions
to shareholders without selling portfolio securities. A decline in the exchange
rate would also result in a
<PAGE>
-27-
decrease in the value of certain portfolio securities. The Registrant may enter
into Forward Contracts and options on foreign currencies in an effort to protect
against this risk. The value of Foreign Government Securities can also be
affected by the 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. A delay in settlement could hinder the ability of
the Registrant to take advantage of changing market conditions with a possible
resulting adverse effect on net asset value.
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
procedure, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of the Registrant is uninvested
and no return is earned thereon. The inability of the Registrant to make
intended security purchases due to settlement problems could cause the
Registrant to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems could result either in losses to
the Registrant due to subsequent declines in value of the portfolio security 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. Securities prices in emerging markets can be significantly more
volatile than in the more developed nations of the world, reflecting the greater
uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may have relatively unstable
governments, present the risk of nationalization of businesses, restrictions on
foreign ownership, or prohibitions of repatriation of assets, and may have less
protection of property rights than more developed countries. The economies of
countries of emerging markets may be predominantly based on only a few
industries, may be highly vulnerable to changes in local or global trade
conditions and may suffer from extreme and volatile debt burdens or inflation
rates. Local securities markets may trade a small number of securities and may
be unable to respond effectively to increases in trading volume potentially
making prompt liquidation of substantial holdings difficult or impossible at
times. Securities of issuers located in countries with emerging markets may have
limited marketability and may be subject to more abrupt or erratic price
movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sale of securities
of foreign investors. In addition, if a deterioration occurs in an emerging
market's balance of payments or for other reasons a country could impose
temporary restrictions on foreign capital remittances. The Registrant could be
adversely effected by delays in, or a refusal to grant, any required
governmental approval for
<PAGE>
-28-
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 Registrant has registered as a "non-diversified" investment
company. As a result, the Registrant may, with respect to 50% of its assets,
invest up to 25% of its assets in the obligations of any one foreign issuer.
U.S. Government Securities are not subject to any investment limitation. 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 since it involves the 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
or except as contemplated by clause (9) below, and in no event shall
the Registrant borrow in excess of 1/3 of its assets. The Registrant
will not purchase securities while borrowings are outstanding, except
that it will honor prior commitments to purchase securities.
(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 options, Futures Contracts and Options on Futures
Contracts;
(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;
<PAGE>
<PAGE>
-29-
(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, where no market
makers exist), 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 options
or futures, Forward Contracts or Futures Contracts) 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, without payment of any further consideration, for
securities of the same issue as, and equal in amount to, the securities
sold short ("short sales against the box"), and unless not more than
10% of the Registrant's net assets (taken at market value) is held as
collateral for such sales at any one time.
The Registrant's investment limitations and policies are adhered to at
the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
<PAGE>
-30-
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES
Federal Farm Credit System Notes and Bonds-
are bonds issued by a cooperatively owned nationwide system of banks
and associations supervised by the Farm Credit Administration, an
independent agency of the U.S. Government. These bonds are not
guaranteed by the U.S. Government.
Maritime Administration Bonds-
are bonds issued and provided by the Department of Transportation of
the U.S. Government and are guaranteed by the United States.
FHA debentures-
are debentures issued by the Federal Housing Administration of the U.
S. Government and are guaranteed by the United States.
GNMA Certificates-
are mortgage-backed securities which represent a partial ownership
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 either insured by the
Federal Housing Administration or guaranteed by the Veterans
Administration.
FHLMC Bonds-
are bonds issued and guaranteed by the Federal Home Loan Mortgage
Corporation and are not guaranteed by the U.S. Government.
FNMA Bonds-
are bonds issued and guaranteed by the Federal National Mortgage
Association and are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds-
are notes and bonds issued by the Federal Home Loan Bank System, and
are not guaranteed by the U.S. Government.
Although this list includes a description of the primary types of U.S.
Government agency or instrumentality obligations in which the Registrant intends
to invest, the Registrant may invest in obligations of U.S. Government agencies
or instrumentalities other than those listed above.
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch and Duff & Phelps 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.
<PAGE>
-31-
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which 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.
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.
<PAGE>
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.
AAA: An obligation rated AAA has the highest rating assigned by
Standard & Poor's . The obligor's capacity to meet its financial commitment on
the obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated 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 somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated BB, B, CCC, C are regarded as having significant
speculative characteristics. BB; indicates the least degree of speculation and C
the highest. While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
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
<PAGE>
-33-
obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions will likely impair the
obligor's capacity or willingness to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to
nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payment on this
obligation are being continued.
D: An obligation rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk-such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA, INC.
International Long-Term Credit Rating
AAA:
Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA:
Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is ot significantly vulnerable to foreseeable events.
A:
<PAGE>
-34-
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 i economic conditions than is the cse for higher ratings.
BBB:
Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB:
Speculative. BB rating indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category re not
investment grade.
B:
Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
sustained, favorable business and economic environment.
CCC, CC, C:
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable business or
economic developments. A CC rating indicates that default of some kind appears
probably. C ratings signal imminent default.
DDD, DD and D:
Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50%-90% of such outstandings, and D
the lowest recovery potential, i.e., below 50%.
<PAGE>
-35-
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+,AA,A-: 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, BB-: Below investment grade but deemed likely to met
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+,B,B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty
exist 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 an/or interest payments.
DP: Preferred stock with dividend arrearanges.
8.5. Share Price Data: Inapplicable.
8.6 Business Development Companies: Inapplicable.
Item 9. Management:
9.1.a. General - Board of Trustees: Management of the Registrant's
business and affairs is the responsibility of the Board of Trustees of the
Registrant.
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 of Canada (U.S.) Financial
Services Holdings, Inc. ("Sun Life of Canada (U.S.)") which in turn is an
indirect 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
<PAGE>
-36-
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 Government
Markets 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.) in connection with the sale of various combination 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 $72
billion on behalf of approximately 2.3 million investors as of January 31, 1998.
As of such date, the MFS organization managed approximately $20.8 billion of
assets in fixed income funds and fixed income portfolios including approximately
$6.6 billion in U.S. Government securities and approximately $1.1 billion in
fixed income securities of foreign issuers and non-U.S. dollar denominated fixed
income securities of U.S. issuers. The Directors of MFS are Jeffrey L. Shames,
Arnold D. Scott, John W. Ballen, John D. McNeil and Donald A. Stewart. Mr.
Shames is the Chairman and President and Mr. Scott is the Secretary and a Senior
Executive Vice President of MFS. Mr. Ballen is an Executive Vice President and
Chief Equity Officer of MFS. Messrs. McNeil and Stewart are the Chairman and
President, respectively, of Sun Life. Sun Life, a mutual life insurance company,
is one of the largest international life insurance companies and has been
operating in the United States since 1895, establishing a headquarters office
here in 1973. The executive officers of MFS report to the Chairman of Sun Life.
INVESTMENT ADVISORY AGREEMENT
General. The Investment Advisory Agreement between MFS and the
Registrant (the "Advisory Agreement") provides that, subject to the direction of
the Board of Trustees of the Registrant, MFS is responsible for the actual
management of the Registrant's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Trustees
The Investment Adviser 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.
<PAGE>
-37-
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 will pay MFS an annual fee computed and paid monthly
in an amount equal to the lesser of the sum of .32% of the average daily net
assets of the Registrant and 5.65% of the daily gross income (i.e., income other
than gains from the sale of securities, gains from options and futures
transactions and premium income from options written) or 0.85% of the average
daily net assets of the Registrant for the Registrant's then-current fiscal
year. This advisory fee is greater than that paid by most funds.
Use of Name. The Advisory Agreement provides that if MFS ceases to
serve as the Investment Adviser to the Registrant, the Registrant will change
its name so as to delete the initials "MFS" and that MFS may render services to
others and may permit 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, a Senior Vice
President of MFS, joined MFS in 1986. He became the portfolio manager of the
Registrant in 1992. Christopher D. Piros, a Senior Vice President of MFS, joined
MFS in 1989. He became portfolio manager of the Registrant on January 31, 1996.
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 the 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 costs it incurs to provide
such services. For the period from March 1, 1997 through October 31, 1997, MFS
received fees under the Agreement of $109,860.
9.1.e. Custodians: State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110 is the custodian and dividend disbursing
agent for the Registrant. MFS Services Center, Inc., 500 Boylston Street,
Boston, Massachusetts 02116, a wholly owned subsidiary of MFS, is the
shareholder servicing agent.
<PAGE>
-38-
9.1.f. General - Expenses: Payment of Expenses. The Registrant pays the
compensation of the eight Trustees who are not affiliated with MFS and all the
Registrant's expenses (other than those assumed by MFS), including but not
limited to: advisory and administrative services, governmental fees, interest
charges, taxes, membership dues in the Investment Company Institute allocable to
the Registrant, fees and expenses of independent auditors, of legal counsel, and
of any transfer agent, registrar or dividend disbursing agent of the Registrant,
expenses of repurchasing shares and servicing shareholder accounts, expenses of
preparing, printing and mailing share certificates, shareholder reports,
notices, proxy statements and reports to governmental officers and commissions;
brokerage and other expenses connected with the execution, recording and
settlement of portfolio security transactions; insurance premiums, fees and
expenses of the Registrant's custodian for all services to the Registrant,
including safekeeping of funds and securities and maintaining required books and
accounts; listing fees; 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.
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."
<PAGE>
-39-
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 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 enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by the vote of the holders of
two-thirds of its outstanding shares, except that if the Trustees recommend such
transaction, the approval by the vote of the holders of a majority of its
outstanding shares will be sufficient. The Registrant may also be terminated
upon liquidation and distribution of its assets, if approved by the vote of the
holders of two-thirds of its outstanding shares. If not so terminated, the
Registrant will continue indefinitely. Upon liquidation of the Registrant, the
Registrant's shareholders are entitled to share pro rata in the Registrant's net
assets available for distribution to its shareholders.
Repurchase of Shares. The Registrant is a closed-end management
investment company and as such its shareholders do not, and will not, have the
right to redeem their shares of the Registrant. The Registrant, however, may
purchase its shares from time to time in the open market or otherwise as and
when it is deemed advisable by the Trustees. Such repurchases will be made only
when the Registrant's shares are trading at a discount of 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 state repurchase
transactions. Within six months preceding any such repurchase, the Registrant
will notify shareholders by letter or report. See the section "Investment
Restrictions" of 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
<PAGE>
-40-
liable for the obligations of the Registrant. The Declaration of Trust also
provides that the Registrant shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Registrant, its shareholders, Trustees, officers, employees and agents covering
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance exists and the Registrant itself is unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the
Registrant are not binding upon the Trustees individually but only upon the
property of the Registrant and that the Trustees will not be liable for errors
of judgment or mistakes of fact or law, but nothing in the Declaration of Trust
protects a Trustee against any liability to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Anti-Takeover Provisions. The Registrant presently has certain
anti-takeover provisions in its Declaration of Trust which could have the effect
of limiting the ability of other entities or persons to acquire control of the
Registrant, to cause it to engage in certain transactions or to modify its
structure. The Board of Trustees is divided into three classes, each having a
term of three years. Each year the term of one class expires. This provision
could delay for up to two years the replacement of a majority of the Board of
Trustees. In addition, the affirmative vote or consent of the holders of 66 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
<PAGE>
-43-
could have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Registrant in a tender offer or similar
transaction. However, the Board of Trustees has considered these anti-takeover
provisions and believes that they are in the shareholders' best interests and
benefit shareholders by providing the advantage of potentially requiring persons
seeking control of the Registrant to negotiate with its management regarding the
price to be paid and facilitating the continuity of the Registrant's management.
b. Inapplicable.
c. Inapplicable.
d. Inapplicable.
e. Dividends and Distributions. Dividend Reinvestment and Cash Purchase
Plan. The Registrant will distribute monthly to shareholders substantially all
of its net investment income in the manner required by Subchapter M of the
Internal Revenue Code of 1986, as amended ("the Code"). Short-term capital
gains, if any, may be distributed monthly and net long-term capital gains, if
any, will be distributed at least annually. Premiums from options, if any, may
be distributed at least annually. See Item 10.4.
Shareholders holding shares in their own names may elect to have all
distributions of dividends and capital gains automatically reinvested by State
Street Bank and Trust Company ("State Street"), as Plan agent. Pursuant to the
Dividend Reinvestment and Cash Purchase Plan (the "Plan"), the provisions of
which are set forth below, shareholders not making such election will receive
all such amounts in cash paid by check mailed directly to the shareholder by
State Street, as dividend paying agent.
Under the Plan, 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 on that date, 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, as agent for the participants, will buy
Trust shares in the open market, on the New York Stock Exchange or elsewhere,
for the participants' accounts. If, 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,
<PAGE>
-42-
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. Interest will not be paid on any uninvested cash payments.
State Street maintains all shareholder accounts in the Plan and
furnishes monthly written confirmations of all transactions in the account,
including information needed by shareholders for personal and tax records.
Shares in the account of each Plan participant will be held by State Street in
non-certificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan. While the
Registrant has no plans to issue additional shares other than pursuant to the
Plan, if participants in the Plan desire to exercise any rights which may be
issued or granted with respect to shares, they should request that certificates
for whole shares be issued to them. Each participant nevertheless has the right
to receive certificates for whole shares owned by him.
The Registrant will distribute proxy material to nominee and record
shareholders in accordance with SEC rules and regulations.
There is no charge to participants for reinvesting dividends or
distributions, except for certain brokerage commissions, as described below.
State Street's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Registrant. There will be no brokerage charges
with respect to shares issued directly by the Registrant as a result of
dividends or distributions payable either in stock or in cash. However, each
participant will pay a pro rata share of brokerage commissions incurred with
respect to State Street's open market purchases in connection with the
reinvestment of dividends or distributions as well as from voluntary cash
payments. With respect to purchases from voluntary cash payments, State Street
will charge a service fee of $0.75 for each cash purchase. Brokerage charges for
purchasing small amounts of stock for individual accounts through the Plan are
expected to be less than the usual brokerage charges for such transactions, as
State Street will be purchasing shares for all participants in blocks and
pro-rating the lower commission thus attainable.
The automatic reinvestment of dividends and distributions will not
relieve participants of any income tax which may be payable or required to be
withheld 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.
All correspondence concerning the Plan should be directed to State Street at 225
Franklin Street, Boston, Massachusetts 02110.
10.2. Long-term debt: Inapplicable.
<PAGE>
-43-
10.3. General: Inapplicable.
10.4. Taxes: The Registrant has elected to be treated and intends to
qualify each year as a regulated investment company under the Subchapter M of
the Code by meeting all applicable requirements, including requirements as to
the nature of the Registrant's gross income, the amount of Registrant
distributions, and the composition of the Registrant's portfolio assets. Because
the Registrant intends to distribute all of its net investment income and net
realized capital gains to shareholders in accordance with the timing
requirements imposed by the Code, it is not expected that the Registrant will be
required to pay any federal income or excise taxes, although the Registrant's
foreign-source income may be subject to foreign withholding taxes. If the
Registrant should fail to qualify as a "regulated investment company' in any
year, the Registrant would incur a regular corporate federal income tax upon its
taxable income and distributions received from the Registrant would generally be
taxable as ordinary dividend income to its shareholders.
Shareholders normally will have to pay federal income taxes and any
state or local taxes on the dividends and capital gain distributions they
receive from the Registrant. Dividends from ordinary income 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 be eligible for the dividends received deduction for corporate
shareholders. Distributions of net capital gains (i.e. the excess of the 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. Distributions that are treated for federal income tax
purposes as a return of capital will reduce each shareholder's basis in his
shares and, to the extent the return of capital exceeds such basis, will be
treated as gain to the shareholder from a sale of shares. Any dividend that is
declared by the Registrant in October, November or December of any calendar
year, that is payable to shareholders of record in such a month, and that is
paid the following January will be treated as if received by the shareholders on
December 31 of the year in which the dividend is declared. The Registrant will
notify 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 reinvested in additional shares under 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.
<PAGE>
-44-
Any distribution by the Registrant will result in a reduction in the
fair market value of the Registrant's shares by the amount of the distribution.
Should a distribution reduce the fair market value below a shareholder's cost
basis, such distribution nevertheless would be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares shortly before a distribution. The price of shares purchased at
that time includes the amount of any forthcoming distribution. Those investors
purchasing shares at such a time will receive a return of investment upon
distribution which will nevertheless be taxable to them.
In general, any gain or loss realized upon a taxable disposition of
shares of the Registrant by a shareholder that holds such shares as a capital
asset will be treated as long-term capital gain or loss if the shares have been
held for more than twelve months, and otherwise as short-term capital gain or
loss; a long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than eighteen
months. However, any loss realized upon a disposition of shares within six
months from the date of their purchase will be treated as long-term capital loss
to the extent of any distributions treated by shareholders as long-term capital
gains during such six-month period. Any loss realized upon a taxable disposition
of Registrant shares may 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 be marked to market (i.e., treated as if closed out) on that
day, and any gain or loss associated with the positions will be treated as 60%
long-term and 40% short-term capital gain or loss. Certain positions held by the
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 which 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 that
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.
<PAGE>
-45-
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 losses. Use of foreign
currencies for non-hedging purposes may be limited in order to avoid a tax on
the Registrant.
Investment income received by the Registrant from foreign securities
may be subject to foreign income taxes withheld at the source; the 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 within 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 a rate of 30%. The Registrant
intends to withhold U.S. federal income tax payments at the rate of 30% (or any
lower rate permitted under an applicable treaty) on taxable dividends and other
payments 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 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 proportion of its dividends which consists
of such interest. Shareholders should consult their tax advisers regarding the
possible exclusion of such portion of their dividends for state and local tax
purposes as well as regarding the tax consequences of an investment in the
Registrant.
<PAGE>
-46-
10.5. Outstanding Securities: The following information is
furnished as of January 31, 1998:
(1) (2) (3) (4)
Amount
Outstanding
Amount Held by Exclusive
Amount Registrant or for of Amount Shown
Title of Class Authorized its Account Under (3)
Shares of 202,648,016 61,901,100* 140,746,916
Beneficial Interest, shares
without par value
*Treasury Shares
10.6. Securities Ratings: Inapplicable.
Item 11. Defaults and Arrears on Senior Securities: None.
Item 12. Legal Proceedings: [None].
Item 13. Table of Contents of Statement of Additional Information: Inapplicable.
<PAGE>
-47-
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: See 8.2.
17.4. For fiscal year 1997, the Registrant's portfolio turnover rate
was 213%. For fiscal year 1996, the Registrant's portfolio turnover rate was
257%.
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.
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. Bailey, Cohn, Sherratt, Smith and
Ms. O'Neill will continue in office until 1998, Messrs. Cohan and Gibbons will
continue in office until 1999 and Mr. Robb, Scott and Shames will continue in
office until 2000.
<PAGE>
-48-
Name and Address Position(s) Held with Principal Occupations(s)
Registrant During Past 5 years
Richard B. Bailey* Trustee Private Investor;
(born 9/14/26) Massachusetts Financial
Services Company, former
Chairman (prior to
September 30, 1991);
Cambridge Bancorp,
Director, Cambridge Trust
Company, Director
Marshall N. Cohan Trustee Private Investor
(born 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;
Boston, Massachusetts Harvard Medical School,
Professor of Surgery
The Hon. Sir J. David Trustee Edmund Gibbons Limited,
Gibbons, Chief Executive Officer;
KBE (born 6/15/27) Colonial Insurance
21 Reid Street Company Ltd.; Chairman;
Hamilton, Bermuda HM 12 The Bank of N.T.
Butterfield & Son
Limited, Chairman (prior
to November 1997)
Abby M. O'Neill Trustee Private Investor;
(born 4/27/28) Rockefeller Financial
30 Rockefeller Plaza, Services, Inc.
Room 5600 (investment advisers),
New York, New York Director
Walter E. Robb, III Trustee Benchmark Advisors, Inc.
(born 8/18/26) (corporate financial
110 Broad Street consultants), President
Boston, Massachusetts and Trustee; Benchmark
Consulting Group, Inc.
(offices services),
President; Landmark Funds
(mutual fund), Trustee
Arnold D. Scott* Trustee Massachusetts Financial
(born 12/16/42) Services Company,
Director, Senior
Executive Vice
President and Secretary
<PAGE>
-49-
Name and Address Position(s) Held with Principal Occupations(s)
Registrant During Past 5 years
Jeffrey L. Shames* Trustee Massachusetts Financial
(born 6/2/55) Services Company,
Chairman, Chief Executive
Officer and President
J. Dale Sherratt Trustee Insight Resources, Inc.
(born 9/23/38) (acquisition planning
One Liberty Square specialists), President
Boston, Massachusetts
Ward Smith Trustee NACCO Industries (holding
(born 9/13/20) company), Chairman (prior
36080 Shaker Blvd., to June 1994); Sundstrand
Hunting Valley, Ohio Corporation (diversified
mechanical manufacturer),
Director
James O. Yost* Assistant Treasurer Massachusetts Financial
(born 6/12/60) Services Company, Vice
President
W. Thomas London* Treasurer Massachusetts Financial
(born 3/1/44) Services Company, Senior
Vice President
Ellen M. Moynihan* Assistant Treasurer Massachusetts Financial
(born 11/13/57) Services Company, Vice
President (since
September 1996);
Deloitte & Touche LLP,
Senior Manager (until
September 1996)
Mark E. Bradley* Assistant Treasurer Massachusetts Financial
(born 11/23/59) Services Company, Vice
President (since March
1997); Putnam
Investments, Vice
President (from September
1994 until March 1997);
Ernst & Young, Senior Tax
Manager (until September
1994)
Stephen E. Cavan* Secretary and Clerk Massachusetts Financial
(born 11/6/53) Services Company, Senior
Vice President, General
Counsel and Assistant
Secretary
<PAGE>
-50-
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 Series Trust XI, MFS Municipal Series Trust, MFS Government
Markets Income Trust, MFS Charter Income Trust and MFS Special Value Trust.
Messrs. Bailey, Scott and Shames are also Trustees of each of the MFS Funds and
MFS Multimarket Income Trust and MFS Municipal Income Trust.
18.3. Sir J. David Gibbons has not authorized an agent in the United
States to receive notice.
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 Annutal 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. $17,846 $5,467 (4) $242,022
Bailey, Trustee
(10)
Marshall N. $18,846 $9,944 (4) $148,067
Cohan, Trustee
(14)
<PAGE>
-51-
(1) (2) (3) (4) (5)
Name of Aggregate Pension or Estimated Total
Person, Position Compensation Retirement Annutal 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)
- ---------------- ------------- ---------------- ----------------- -------------
Lawrence H. $17,346 $3,778 (4) $123,917
Cohn, M.D.,
Trustee (18)
The Hon. Sir J. $17,846 $8,425 (4) $129,842
David Gibbons,
KBE, Trustee
(13)
Abby M. $17,846 $4,556 (4) $129,842
O'Neill, Trustee
(10)
Walter E. Robb, $18,846 $9,944 (4) $148,067
III, Trustee (14)
Arnold D. None None None None
Scott, Trustee
Jeffrey L. None None None None
Shames, Trustee
J. Dale Sherratt, $21,346 $3,978 (4) $184,067
Trustee (20)
Ward Smith, $21,346 $4,972 (4) $184,067
Trustee (13)
(1) For fiscal year ended October 31, 1997.
(2) Based on normal retirement age of 75.
(3) Information provided is provided for calendar year 1997. All
Trustees served as Trustees 42 of funds within the MFS fund
complex (having aggregate net assets 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, other than Messrs. Scott and Shames,
a fee of $11,575 per year plus $1,929 per meeting and committee meeting
attended. For attendance at meetings, the Trustees of the Registrant as a group
received $151,267 from the Registrant for the fiscal year ended October 31,
1997.
<PAGE>
-52-
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 age 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, who retired as Chairman of MFS as of
September 30, 1991, will eventually become eligible for retirement benefits. The
Registrant will accrue compensation expenses each year to cover current year's
service and amortize past service cost.
The following table sets forth the estimated annual benefits payable by
the Registrant to the non-interested Trustees and Mr. Bailey upon retirement.
Estimated Annual Benefits Payable by Registrant upon Retirement (1)
Average Years of Service
Trustee Fees 3 5 7 10 or more
$15,611 $2,342 $3,903 $5,464 $7,806
=============================================================================
17,185 2,578 4,296 6,015 8,593
============================================================================
18,759 2,814 4,690 6,566 9,380
============================================================================
20,335 3,050 5,083 7,117 10,166
=============================================================================
21,907 3,286 5,477 7,667 10,953
=============================================================================
23,481 3,522 5,870 8,218 11,740
=============================================================================
(1) Other funds in the MFS fund complex provide similar retirement
benefits to the Trustees.
Item 18.4(c). Applicable.
Item 19. Control Persons and Principal Holders of Securities:
Item 19.1 and 19.2: As of January 31, 1998, Cede & Co., c/o The Depository Trust
Company, P.O. Box 20, Bowling Green Station, New York, New York 10004 was the
record owner of approximately 86% of the outstanding shares of the Registrant.
Item 19.3: As of January 31, 1998, all Trustees and officers of the Registrant
as a group own of record less than 1% of the outstanding shares of the
Registrant.
<PAGE>
-53-
Item 20. Investment Advisory and Other Services:
Items 20.1.a. through 20.5. See Item 9.1.b. For the fiscal year ended
October 31, 1997, MFS received fees under the Registrant's Investment Advisory
Agreement of $8,514,050. For the fiscal year ended October 31, 1996, MFS
received fees under the Investment Advisory Agreement of $9,140,530. For the
fiscal year ended October 31, 1995, MFS received fees under the Registrant's
Investment Advisory Agreement of $10,087,739.
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.
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 Registrant's registrar and transfer agent for the
Registrant's authorized and issued shares of beneficial interest, as well as
dividend disbursing agent for the Registrant, and agent in connection with the
Dividend Reinvestment and Cash Purchase Plan of the Registrant. For account
maintenance, the Registrant currently pays MFSC a fee based on the total number
of accounts for all closed-end funds advised by MFS for which MFSC acts as
registrar and transfer agent. If the total number of accounts is less than
75,000, the annual account fee is $9.00. If the total number of accounts is
75,000 or more, the annual account fee is $8.00. For dividend services, MFSC
charges $0.75 per dividend reinvestment and $0.75 per cash infusion. If the
total amount of fees related to dividend services is less than $1,000 per month
for all closed-end funds advised by MFS for which MFSC acts as registrar and
transfer agent, the minimum fee for the Registrant for these services will be
$167 per month. The Registrant will reimburse MFSC for reasonable out-of-pocket
expenses and advances incurred by MFSC and for any other expenses incurred by
MFSC at the request, or with the consent, of the Registrant.
Item 21. Brokerage Allocation and Other Practices:
Specific decisions to purchase or sell securities for the Registrant
are made by employees of MFS who are appointed and supervised by its senior
officers. Changes in the Registrant's investments are reviewed by the Board of
Trustees. Such employees may serve other clients of the Investment Adviser or
any subsidiary in a similar capacity.
The primary consideration in portfolio security transactions is
execution at the most favorable prices. The Investment Adviser has complete
freedom as to the markets in and the
<PAGE>
-54-
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 marker or on major exchanges
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 execution at the most favorable price, securities may, as
authorized by the Advisory Agreement, be bought from or sold to dealers who have
furnished statistical, research and other information or services to the
Investment Adviser or who have sold shares of funds for which MFS or any
subsidiary serves as investment adviser. At present no arrangements to recapture
commission payments are in effect. For the fiscal year ended October 31, 1997,
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 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: Inapplicable.
<PAGE>
-55-
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 October 31, 1997, copies of which have been filed with the SEC:
Portfolio of Investments at October 31, 1997
Statement of Assets and Liabilities at October 31, 1997
Statement of Operations for the year ended October 31, 1997
Statement of Changes in Net Assets for the years ended October 31,
1996 and 1997
Financial Highlights for each of the years in the ten-year period ended
October 31, 1997.
Notes to Financial Statements
Independent Auditors' Report
<PAGE>
-56-
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
1. Financial Statements:
The following have been incorporated by reference in Item 23:
Portfolio of Investments at October 31, 1997
Statement of Assets and Liabilities at October 31, 1997
Statement of Operations for year ended October 31, 1997
Statement of Changes in Net Assets for the years ended
October 31, 1997 and 1996
Financial Highlights for each of the years in the ten year
period ended October 31, 1997
Notes to Financial Statements
Independent Auditors' Report
2. Exhibits:
(a)(1) -- Amended and Restated Declaration
of Trust, dated January 27, 1988
(previously filed as Exhibit 2(a)(1)
to Amendment No. 9 to the
Registration Statement on Form N-2,
filed with the SEC on January 30, 1998
("Amendment No. 9"); incorporated herein
by reference.
(a)(2) -- Certification of Amendment to
Declaration of Trust, dated February
29, 1988 (previously filed as Exhibit
2(a)(2) to Amendment No. 9);
incorporated herein by reference.
(b)(1) -- Amended and Restated By-Laws dated
December 14, 1994 (previously filed as
Exhibit (2)(b)(2) to Amendment No. 8 to
the Registration Statement on Form N-2
filed with the SEC on February 28, 1995
("Amendment No. 8")); 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. 9); incorporated herein by
reference.
(e) -- The section "Dividend Reinvestment
and Cash Purchase Plan" on page 4 of the
Registrant's Annual Report to its
<PAGE>
-57-
Shareholders, for its fiscal year ended
October 31, 1997; incorporated herein by
reference.
(f) -- Inapplicable.
(g)(1) -- Investment Advisory Agreement,
dated January 28, 1988 (previously
filed as Exhibit 2(g)(1) to Amendment
No. 9); 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. 9);
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)(2) to
Amendment No. 9); incorporated herein by
reference.
(j)(1) -- Custodian Agreement between the
Registrant and State Street Bank and
Trust Company, dated January 28, 1988
(previously filed as Exhibit 2(j)(1) to
Amendment No. 9); incorporated herein by
reference.
(j)(2) -- Amendment to Custodian Agreement,
dated October 1, 1989 (previously filed
as Exhibit 2(j)(2) to Amendment No.
9); incorporated herein by reference.
(j)(3) -- Amendment to Custodian Agreement,
dated October 9, 1991 (previously filed
as Exhibit 2(j)(3) to Amendment No.
9); 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
(k)(2) to Amendment No. 8); 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 with Amendment No.
8); incorporated herein by reference.
(l) -- Omitted pursuant to General
Instruction G.3 to Form N-2.
(m) -- None.
<PAGE>
-60-
(n) -- Omitted pursuant to General
Instruction G.3 to Form N-2.
(o) -- Omitted pursuant to General
Instructions G.3 to Form N-2.
(p) -- Form of Purchase Agreement
(previously filed as Exhibit 2(p) to
Amendment No. 9); incorporated herein by
reference.
(q) -- Inapplicable.
(r) -- Financial Data Schedule; filed
herewith.
Item 25. Marketing Arrangements: Inapplicable.
Item 26. Other Expenses of Issuance and Distribution: Inapplicable.
Item 27. Persons Controlled by or Under Common Control with Registrant:
Inapplicable.
Item 28. Number of Holders of Securities:
- -------------------------------------------------------------------------------
(1) (2)
Title of Class Number of Record Holders
- -------------------------------------------------------------------------------
Shares of Beneficial Interest 15,668
(without par value) 140,746,915.53 (as at January 31, 1998)
- -------------------------------------------------------------------------------
Item 29. Indemnification:
Article V of the Registrant's Declaration of Trust provides that the
Registrant will indemnify its Trustees and officers against liabilities and
expenses incurred in connection with litigation in which they may be involved
because of their offices with the Registrant, unless as to liabilities to the
Registrant or its shareholders, it is finally adjudicated that they engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in their offices, or with respect to any matter unless it is
adjudicated that they did not act in good faith in the reasonable belief that
their actions were in the best interest of the Registrant. In the case of a
settlement, such indemnification will not be provided unless it has been
determined in accordance with the Declaration of Trust that such officers or
Trustees have not engaged in misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser are insured under an errors and omissions
liability insurance policy. The Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment Company Act
of 1940.
<PAGE>
-59
Item 30. Business and Other Connections of Investment Adviser:
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds (except the Vertex Funds mentioned below):
Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Growth Opportunities Fund, MFS Government Securities Fund, MFS Government
Limited Maturity Fund, MFS Series Trust I (which has thirteen series: MFS
Managed Sectors Fund, MFS Cash Reserve Fund, MFS World Asset Allocation Fund,
MFS Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS Convertible
Securities Fund, MFS Blue Chip Fund, MFS New Discovery Fund, MFS Science and
Technology Fund and MFS Research International Fund), MFS Series Trust II (which
has three series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund and MFS
Intermediate Income Fund), MFS Series Trust III (which has two series: MFS High
Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has
four series: MFS Money Market Fund, MFS Government Money Market Fund, MFS
Municipal Bond Fund and MFS Mid Cap Growth Fund), MFS Series Trust V (which has
six series: MFS Total Return Fund, MFS Research Fund, MFS International
Opportunities Fund, MFS International Strategic Growth Fund, MFS International
Value Fund and MFS Asia Pacific Fund), MFS Series Trust VI (which has three
series: MFS World Total Return Fund, MFS Utilities Fund and MFS World Equity
Fund), MFS Series Trust VII (which has two series: MFS World Governments Fund
and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS Strategic
Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has three
series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS Series Trust X (which has eight series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS
International Growth Fund, MFS International Growth and Income Fund, MFS Real
Estate Investment Fund, MFS Strategic Value Fund, MFS Small Cap Value Fund and
MFS Emerging Markets Debt Fund), MFS Series Trust XI (which has six series: MFS
Union Standard Equity Fund, Vertex All Cap Fund, Vertex Research All Cap Fund,
Vertex Growth Fund, Vertex Discovery Fund and Vertex Contrarian Fund (the Vertex
Funds are expected to be declared effective April 28, 1998)), and MFS Municipal
Series Trust (which has 16 series: MFS Alabama Municipal Bond Fund, MFS Arkansas
Municipal Bond Fund, MFS California Municipal Bond Fund, MFS Florida Municipal
Bond Fund, MFS Georgia Municipal Bond Fund, MFS Maryland Municipal Bond Fund,
MFS Massachusetts Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS
New York Municipal Bond Fund, MFS North Carolina Municipal Bond Fund, MFS
Pennsylvania Municipal Bond Fund, MFS South Carolina Municipal Bond Fund, MFS
Tennessee Municipal Bond Fund, MFS Virginia Municipal Bond Fund, MFS West
Virginia Municipal Bond Fund and MFS Municipal Income Fund) (the "MFS Funds").
The principal business address of each of the MFS Funds is 500 Boylston Street,
Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following open-end Funds:
MFS Institutional Trust ("MFSIT") (which has seven series) and MFS Variable
Insurance Trust ("MVI") (which has twelve series). The principal business
address of each of the aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.
<PAGE>
-60-
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 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
<PAGE>
-61-
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,
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.
<PAGE>
-62-
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.
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.
<PAGE>
-63-
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.
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.
<PAGE>
-64-
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.
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.
<PAGE>
-65-
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.
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.
<PAGE>
-66-
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)
Joseph W. Dello Russo Director of Mutual Fund Operations,
The Boston Company, Exchange Place,
Boston, Massachusetts (until August,
1994)
<PAGE>
-67-
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>
-68-
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Boston and Commonwealth of Massachusetts on the 24th day of February, 1998.
MFS INTERMEDIATE INCOME TRUST
JAMES R. BORDEWICK, JR.
By: James R. Bordewick, Jr.
Assistant Secretary
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000826735
<NAME> MFS INTERMEDIATE INCOME TRUST
<SERIES>
<NUMBER> 010
<NAME> MFS INTERMEDIATE INCOME TRUST
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 1079739107
<INVESTMENTS-AT-VALUE> 1075674784
<RECEIVABLES> 25000152
<ASSETS-OTHER> 10053
<OTHER-ITEMS-ASSETS> 483296
<TOTAL-ASSETS> 1101168285
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2800629
<TOTAL-LIABILITIES> 2800629
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1128498635
<SHARES-COMMON-STOCK> 141553916
<SHARES-COMMON-PRIOR> 148282016
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (7200417)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (23630264)
<ACCUM-APPREC-OR-DEPREC> 699702
<NET-ASSETS> 1098367656
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 87371542
<OTHER-INCOME> 0
<EXPENSES-NET> 10037756
<NET-INVESTMENT-INCOME> 77333786
<REALIZED-GAINS-CURRENT> 1807453
<APPREC-INCREASE-CURRENT> (9214847)
<NET-CHANGE-FROM-OPS> 69926392
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (77333786)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (5944231)
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> (6728100)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (61311543)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (4003657)
<OVERDIST-NET-GAINS-PRIOR> (22690246)
<GROSS-ADVISORY-FEES> 8514050
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10158321
<AVERAGE-NET-ASSETS> 1117994160
<PER-SHARE-NAV-BEGIN> 7.82
<PER-SHARE-NII> 0.54
<PER-SHARE-GAIN-APPREC> (0.05)
<PER-SHARE-DIVIDEND> (0.54)
<PER-SHARE-DISTRIBUTIONS> (0.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.76
<EXPENSE-RATIO> .91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
