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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
MARCH 30, 1998
1940 ACT FILE NO. 811-5822
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 CHARTER 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 Charter Income Trust
c/o Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
(Name and Address of Agent for Service)
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MFS CHARTER 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 June 2, 1989.
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 maximize current income.
The investment objective and policies of the Registrant may, unless otherwise
specifically stated, be changed by the Trustees of the Trust without a vote of
the shareholders. A change in the Registrant's objective may result in the
Registrant having an investment objective different from the objective which the
shareholder considered appropriate at the time of investment in the Registrant.
The Registrant seeks to achieve its objective by investing approximately
one-third of its assets in each of the following sectors of the fixed income
securities markets: (i) securities issued or guaranteed as to principal and
interest by the U.S. Government, its agencies, authorities or instrumentalities
("U.S. Government Securities") and related options; (ii) debt securities issued
by foreign governments, their political subdivisions and other foreign issuers;
and (iii) high yielding corporate fixed income securities, some of which may
involve equity features. By following this investment strategy, the Registrant's
net asset value is likely to be more stable than that of a fund which invests in
only one of these three fixed income sectors. The Registrant's investment
adviser, Massachusetts Financial Services Company ("MFS" or the "Investment
Adviser"), believes that greater stability would occur because, in general, each
sector historically has produced results which are different from each other
sector, so that significant changes in one sector have tended to offset changes
in other sectors. During periods of unusual market or economic conditions (such
as a collapse of the high yield corporate fixed income market or a general
contraction in yields on foreign obligations), the Registrant may invest up to
50% of its assets in any one sector and may choose not to invest in a sector in
order to achieve its investment objective. The Registrant expects that, under
normal market conditions, the maturity
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of its portfolio securities will not exceed 30 years in the U.S. Government
sector and 25 years in the corporate fixed income sector. Securities selected
within a particular sector will be those which offer the highest income
available, except where differences in yield are not sufficient to justify
investments in higher risk securities. There can be no assurance that the
Registrant will achieve its investment objective. For the risk considerations
involved, see "Special Considerations."
U.S. Government Securities. The U.S. Government Securities in which the
Registrant intends to invest include (i) U.S. Treasury obligations, which differ
only in their interest rates, maturities and times of issuance: U.S. Treasury
bills (maturity of one year or less), U.S. Treasury notes (maturities of one to
10 years), and U.S. Treasury bonds (generally 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 the 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 or guaranteed by the U.S.
Government or that are backed by the full faith and credit of the U.S.
Government. 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, Authorities or Instrumentalities"
below.
U.S. Government Securities in which the Registrant intends to invest do
not involve the credit risks associated with other types of interest bearing
securities, although some are not backed by the full faith and credit of the
U.S. Treasury. 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.
Foreign Securities. The Registrant may invest up to 33 1/3% of its net
assets in securities of foreign issuers which are not traded on U.S. exchanges,
including securities issued by foreign governments considered stable by the
Investment Adviser and fixed income securities of foreign corporations. The
foreign government securities in which the Registrant intends to invest will
generally consist of obligations supported through their authority to levy taxes
by national, state or provincial governments or similar political subdivisions.
The Investment Adviser does not believe that the credit risk inherent in the
obligations of stable foreign governments is significantly greater than that of
U.S. Government Securities. For the risk considerations involved, see "Special
Considerations" below. While one-third of the Registrant's assets normally will
be invested in securities issued abroad and denominated in foreign currencies
("non-U.S. dollar securities"), that amount may vary depending on the relative
yield 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 non-U.S. dollar securities and currency
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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 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 speculate in foreign currency when, in the judgment
of the Investment Adviser, it would be beneficial to convert such currency into
U.S. dollars at a later date, based on anticipated changes in the relevant
exchange rate. The Registrant may invest more than 25% of the value of its total
assets in securities of issuers located in any one country. The Registrant may
also hold foreign currency in anticipation of purchasing foreign securities.
Brady Bonds. The Registrant may invest in Brady Bonds, which are
securities created through the exchange of existing commercial bank loans to
public and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Argentina,
Brazil, Bulgaria, Costa Rica, Croatia, the Dominican Republic, Ecuador, Jordan,
Mexico, Morocco, Nigeria, Panama, Peru, the Phillippines, Poland, Slovenia,
Uruguay and Venezuela. Brady Bonds have been issued only recently, and for that
reason do not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed-rate bonds or
floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components; the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
Emerging Market Securities. Consistent with the Registrant's objective
and policies, the Registrant may invest in securities of issuers whose principal
activities are located in emerging market countries. Emerging market countries
include any country determined by the Adviser to have an emerging market
economy, taking into account a number of factors, including whether the country
has a low- to middle-income economy according to the International Bank for
Reconstruction and Development, the country's foreign currency debt rating, its
political and economic stability and the development of its financial and
capital markets. The Adviser determines whether an issuer's principal activities
are located in an emerging market country by considering such factors as its
country of organization, the principal trading market for its securities and the
source of its revenues and location of its assets. The issuer's principal
activities generally are deemed to be located in a particular country if: (a)
the security is issued or guaranteed by the government of that country or any of
its agencies, authorities or
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instrumentalities; (b) the issuer is organized under the laws of, and maintains
a principal office in, that country; (c) the issuer has its principal securities
trading market in that country; (d) the issuer derives 50% or more of its total
revenues from goods sold or services performed in that country; or (e) the
issuer has 50% or more of its assets in that country.
The risks of investing in foreign securities may be intensified in
the case of investments in emerging markets. Securities of many issuers in
emerging markets may be less liquid and more volatile than securities of
comparable domestic issuers. Emerging markets also have different clearance and
settlement 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 repatriation of capital, as well as by the application
to the Registrant of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt obligations
and increase the expenses of the Registrant.
Corporate Fixed Income Securities. The Registrant may invest up to 33
1/3% of its net assets in high yield corporate fixed income securities of both
domestic and foreign issuers
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(denominated either in U.S. dollars or foreign currency) which include preferred
and preference stock convertible into fixed income securities and all types of
long-term or short-term debt obligations, such as bonds, debentures, notes,
equipment lease certificates, equipment trust certificates, conditional sales
contracts and commercial paper (including obligations, such as repurchase
agreements, secured by such instruments). Corporate fixed income securities may
also include zero coupon bonds, deferred interest bonds and bonds on which the
interest is payable in kind ("PIK bonds"). Zero coupon and deferred interest
bonds are debt obligations which are issued at a significant discount from face
value. The discount approximates the total amount of interest the bonds will
accrue and compound over the period until maturity or the first interest payment
date at a rate of interest reflecting the market rate of the security at the
time of issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide for a period of delay before the
regular payment of interest begins. PIK bonds are debt obligations which provide
that the issuer thereof may, at its option, pay interest on such bonds in cash
or in the form of additional debt obligations. Such investments benefit the
issuer by mitigating its need for cash to meet debt service, but also require a
higher rate of return to attract investors who are willing to defer receipt of
such cash. Such investments may experience greater volatility in market value
than debt obligations which make regular payments of interest. The Registrant
will accrue income on such investments for tax and accounting purposes, which is
distributable to shareholders, and, because of the higher rates of return, such
investments are regarded by the Registrant as consistent with its investment
objective. See "Special Considerations" below. Corporate fixed income securities
may involve equity features, such as conversion or exchange rights or warrants
for the acquisition of stock of the same or a different issuer; participations
based on revenues, sales or profits; or the purchase of common stock in a unit
transaction (where corporate debt securities and common stock are offered as a
unit).
High yield corporate fixed income securities are ordinarily unrated or
in the lower rating categories of recognized rating agencies (that is, ratings
of Ba or lower by Moody's Investors Service, Inc. ("Moody's") or BB or lower by
Standard & Poor's Ratings Services ("S&P") or Fitch IBCA, Inc. ("Fitch")), 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 than securities in the higher rating categories. See
"Special Considerations" below. With respect to unrated issues, which may be
foreign or domestic, the Investment Adviser performs its own investment
analysis. The Investment Adviser's analysis may include consideration of the
issuer's experience and managerial strength, changing financial conditions,
borrowing requirements or debt maturity schedules, and its responsiveness to
changes in business conditions and interest rates. The Investment Adviser also
considers relative values based on anticipated cash flow, interest or dividend
coverage, asset coverage and earnings prospects. Certain unrated or lower rated
fixed income securities are very speculative, involve high risk and may be
questionable as to principal and interest payments. Securities rated BBB or Baa
(or comparable unrated securities) have speculative characteristics and
securities rated BB or Ba or below (or comparable unrated securities) are
considered speculative and may be questionable as to principal and interest
payments. For a description of these and other rating categories, see
"Description of Bond Ratings" below. No minimum rating standard is required for
a purchase by the Registrant.
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The Registrant may invest up to 40% of the value of its total assets in
each of the electric utility and telephone industries, but will not invest more
than 25% in either of those industries unless yields available for four
consecutive weeks in the four highest rating categories on new issue bonds in
such industry (issue size of $50 million or more) have averaged in excess of
105% of yields of new issue long-term industrial bonds similarly rated (issue
size of $50 million or more).
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 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. Such obligations will all be at least investment grade.
The investment objective and policies described above may be changed
without shareholder approval, except that, as a fundamental policy, at least 80%
of the Registrant's assets under normal circumstances will be invested in fixed
income 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").
INVESTMENT PRACTICES
The following investment practices apply to the portfolio investments
of the Registrant. These practices may be changed without shareholder approval.
Options. In an effort to increase current income and to reduce
fluctuations in net asset value, the Registrant may write covered put and call
options and purchase put and call options on U.S. Government Securities and may
engage in such options transactions with respect to other fixed income
securities. All such options will be traded on either United States or foreign
securities exchanges or over the counter. This practice may result in the loss
of principal under certain market conditions. Other than the requirement that
options written on fixed income 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
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unexpected manner, the Registrant may not achieve the anticipated benefits of
Futures Contracts or Options on Futures Contracts or may realize a loss. For
further discussion of the use, risks and costs of Futures Contracts and Options
on Futures Contracts, see "Options and Futures" below.
The Trustees have adopted the requirement that Futures Contracts and
Options on Futures Contracts only be used as a hedge and not for speculation
Options on Foreign Currencies. The Registrant may purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the dollar cost of foreign securities to be acquired. As in the
case of other kinds of options, however, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received, and, if the option is exercised, 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.
and 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 date at a price set at the time of the contract (a
"Forward Contract"). The Registrant will enter into Forward Contracts for
hedging purposes as well as for non-hedging purposes. Transactions in Forward
Contracts entered into for hedging purposes will include forward purchases or
sales of foreign currencies for the purpose of protecting the dollar value of
securities denominated in a foreign currency or protecting the dollar equivalent
of interest or dividends to be paid on such securities. By entering into such
transactions, however, the Registrant may be required to forego the benefits of
advantageous changes in exchange rates. The Registrant may also enter into
transactions in Forward Contracts for other than hedging purposes. For example,
if the Investment Adviser believes that the value of a particular foreign
currency will increase or decrease relative to the value of the U.S. dollar, the
Registrant may purchase or sell such currency, respectively, through a Forward
Contract. If the expected changes in the value of the currency occur, the
Registrant will realize profits which will increase its gross income. Where
exchange rates do not move in the direction or to the extent anticipated,
however, the Registrant may sustain losses which will reduce its gross income.
The Registrant may also enter into a Forward Contract on one currency in order
to hedge against risk of loss arising from fluctuations in the value of a second
currency (referred to as a "cross hedge") if, in the judgment of the Investment
Adviser, a reasonable degree of correlation can be expected between movements in
the values of the two currencies. In addition, where the Registrant enters into
Forward Contracts as a "cross hedge," the Registrant incurs the risk of
imperfect correlation between changes in the values of the two currencies, which
could result in losses.
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The Registrant has established procedures which require the use of
segregated assets or "cover" in connection with the purchase and sale of Forward
Contracts. Since that policy currently recommends that an amount of the
Registrant's assets equal to the amount of the commitment to be held aside or
segregated to be used to pay for the commitment, the Registrant will segregate
liquid assets sufficient to cover any commitments under these Contracts to
purchase or sell foreign currencies or to limit any potential risk. The
segregated liquid assets will be marked to market on a daily basis. 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. Forward Contracts may
limit potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for the Registrant than if it had not
engaged in such transactions.
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 are typically, but not always, debt securities or deposits whose
value at maturity (i.e., principal value) or interest rate is determined by
reference to a specific instrument or statistic. 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 be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency. Indexed
securities may be more volatile than the underlying instrument itself and could
involve the loss of all or a portion of the principal amount 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
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increase or decrease in value in response to changes in short-term interest
rates at a rate which is a multiple of the rate at which fixed-rate long-term
tax-exempt securities increase or decrease in response to such changes. As a
result, such obligations have the effect of providing investment leverage and
may be more volatile than long-term fixed-rate tax-exempt obligations.
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 Registrant's investment
exposure from one type of investment to another. For example, if a Registrant
agreed to exchange payments in dollars for payments in foreign currency, in each
case based on a fixed rate, the swap agreement would tend to decrease the
Registrant's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Registrant's investments and
its share price and yield.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed,
or no investment of cash. As a result, swaps can be highly volatile and may have
a considerable impact on the Registrant's performance. Swap agreements are
subject to risks related to the counterparty's ability to perform, and may
decline in value if the counterparty's creditworthiness deteriorates. The
Registrant may also suffer losses if it is unable to terminate outstanding swap
agreements or reduce its exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. Swap agreements may be individually negotiated and
structured to include exposure to a variety of different types of investments or
market factors. Depending on their structure, swap agreements may increase or
decrease the Registrant's exposure to long or short-term interest rates (in the
U.S. or abroad), foreign currency values, mortgage securities, corporate
borrowing rates,
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or other factors such as securities prices or inflation rates. Swap agreements
can take many different forms and are known by a variety of names. The
Registrant is not limited to any particular form or variety of swap agreements
if the Investment Adviser determines it is consistent with the Registrant's
investment objective and policies.
The Registrant will maintain liquid assets 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 cash or liquid assets with a value equal to
the full amount of the Registrant's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors
and collars is the change in the specific interest rate, currency or other
factor that determines the amount of payments to be made under the arrangement.
If the Investment Adviser is incorrect in its forecasts of such factors, the
investment performance of the Registrant would be less than what it would have
been if these investment techniques had not been used. If a swap agreement calls
for payments by the Registrant, the Registrant must be prepared to make such
payments when due. In addition, if the counterparty's creditworthiness declines,
the value of the swap agreement would be likely to decline, potentially
resulting in losses. If the counterparty defaults, the Registrant's risk of loss
consists of the net amount of payments that the Registrant is contractually
entitled to receive. The Registrant anticipates that it will be able to
eliminate or reduce its exposure under these arrangements by assignment or other
disposition or by entering into an offsetting agreement with the same or another
counterparty.
Restricted Securities. The Registrant may also purchase securities that
are not registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). A determination is made based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to the Registrant's limitation on investing not more
than 20% of its net assets in illiquid investments. The Board of Trustees has
adopted guidelines and delegated to MFS the daily function of determining and
monitoring the liquidity of Rule 144A securities. The Board, however, will
retain oversight of the liquidity determinations focusing on factors as
valuation, liquidity and availability of information. Investing in 144A
securities could have the effect of increasing the level of illiquidity in the
Registrant to the extent that qualified institutional buyers become for a time
uninterested in purchasing Rule 144A securities held in the Registrant's
portfolio. Subject to the Registrant's 20% limitation on investments in illiquid
investments, and subject to the diversification requirements of the Internal
Revenue Code of 1986, as amended, the Registrant may also invest in restricted
securities that may not be sold under Rule 144A, which presents certain risks.
As a result, the Registrant might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair value. In
addition,
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market quotations are less readily available. Therefore, judgment may
at times play a greater role in valuing these securities than in the case of
unrestricted securities.
Yield Curve Options. The Registrant may also enter into options on the
"spread," or differential, between two fixed income securities transactions
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
fixed income securities, rather than the prices of the individual securities,
and is settled through cash payments. Accordingly, a yield curve option is
profitable to the holder if this differential widens (in the case of a call) or
narrows (in the case of a put), regardless of whether the yields of the
underlying securities increase or decrease.
Yield curve options may be used for the same purposes as other options
on securities. Specifically, the Registrant may purchase or write such options
for hedging purposes. For example, the Registrant may purchase a call option on
the spread between two securities if it owns one of the securities and
anticipates purchasing the other security and wants to hedge against an adverse
change in the yield between the two securities. The Registrant may also purchase
or write yield curve options for other than hedging purposes if, in the judgment
of the Investment Adviser, the Registrant will be able to profit from movements
in the spread between the yields of the underlying fixed income securities. The
trading of yield curve options is subject to all of the risks associated with
the trading of other types of options. In addition, however, such options
present risk of loss even when the yield of one of the underlying securities
remains constant, if the 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 written by the Registrant 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. Therefore, the Registrant's maximum liability
for such a covered option is the difference between the amount of the
Registrant's liability under the option written by the Registrant less the value
of the option held by the Registrant. Yield curve options may also be covered in
such other manners as may be in accordance with the requirements of the
counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because they
have been only recently introduced, established trading markets for these
securities have not yet developed. Because these securities are traded
over-the-counter, the SEC has taken the position that yield curve options are
illiquid, and the Registrant therefore includes them for purposes of calculating
the 20% limitation with respect to illiquid securities contained in its
investment restrictions.
"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
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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.
Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities. The Registrant may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by certificates issued by GNMA, FNMA or the Federal Home Loan
Mortgage Corporation but also may be collateralized by whole loans or private
mortgage pass-through securities (such collateral collectively hereinafter
referred to as "Mortgage Assets"). The Registrant may also invest a portion of
its assets in multiclass pass-through securities which are equity interests in a
trust composed of Mortgage Assets. Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities. Payments
of principal of and interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt services on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the United States Government 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. The issuer
of a series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit (a "REMIC").
In a CMO, a series of bonds or certificates may be issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates resulting in a loss of all or a part of the premium if any
has been paid. Interest is paid or accrued on all classes of the CMOs on a
monthly, quarterly or semiannual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a series of a CMO
in innumerable ways. In a common structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of the
series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payments 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
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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.
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. In addition, the Registrant may
invest a portion of its assets in stripped mortgage-backed securities, ("SMBS"),
which are derivative multiclass mortgage securities issued by agencies or
instrumentalities of the United States Government, or foreign governments, or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, mortgage banks, commercial banks and investment banks. SMBS
are usually structured with two classes that receive different proportions of
the interest and principal distributions from a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the mortgage assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest-only or "IO"
class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying Mortgage Assets, and a rapid rate of principal payments may
have a material adverse effect on such security's yield to maturity. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Registrant may fail to fully recoup its initial investment in
these securities. The market value of the class consisting primarily or entirely
of principal payments may be unusually volatile in response to changes in
interest rates. Because SMBS were only recently introduced, established trading
markets for these securities have not yet developed, although the securities are
traded among institutional investors and investment banking firms and some
liquidity is available.
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The Registrant may also invest in interests in trusts or other entities
representing interests in U.S. Government Securities or other fixed income
securities, or holding U.S. Government Securities or other fixed income
securities in amounts sufficient to cover all payments due from such entities.
Corporate Asset-Backed Securities. The Registrant may invest in
corporate asset-backed securities. These securities, issued by trusts and
special purpose corporations, are backed by a pool of assets, such as credit
card and automobile loan receivables, representing the obligations of a number
of different parties. Corporate asset-backed securities present certain risks.
For instance, in the case of credit card receivables, these securities may not
have the benefit of any security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables permit
the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is the risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
The underlying assets (e.g., loans) are also subject to prepayments which
shorten the securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support which fall into two
categories: (1) liquidity protection and (2) protection against losses resulting
from ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the receipt of payments on the
underlying pool occurs in a timely fashion. Protection against losses resulting
from ultimate default ensures payment through insurance policies or letters of
credit obtained by the issuer or sponsor from third parties. The Registrant will
not pay any additional or separate fees for credit support. The degree of credit
support provided for each issue is generally based on historical information
with respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that anticipated or failure of the credit
support could adversely affect the return on an investment in such a security.
Loan Participations and other Direct Indebtedness. The Registrant may
purchase loan participations and other direct claims against a borrower. In
purchasing a loan participation, the Registrant acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate
borrower. Many such loans are secured, although some may be unsecured. Such
loans may be in default at the time of purchase.
Loans that are fully secured offer the Registrant more protection than
an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance
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that the liquidation of collateral from a secured loan would satisfy the
corporate borrower's obligation, or that the collateral can be liquidated. These
loans are made generally to finance internal growth, mergers, acquisitions,
stock repurchases, leveraged buy-outs and other corporate activities. Such loans
are typically made by a syndicate of lending institutions, represented by an
agent lending institution which has negotiated and structured the loan and is
responsible for collecting interest, principal and other amounts due on its own
behalf and on behalf of the others in the syndicate, and for enforcing its and
their other rights against the borrower. Alternatively, such loans may be
structured as a novation, pursuant to which the Registrant would assume all of
the rights of the lending institution in a loan, or as an assignment, pursuant
to which the Registrant would purchase an assignment of a portion of a lender's
interest in a loan either directly from the lender or through an intermediary.
The Registrant may also purchase trade or other claims against companies, which
generally represent money owed by the company to a supplier of goods or
services. These claims may also be purchased at a time when the company is in
default.
Certain of the loan participations acquired by the Registrant may
involve revolving credit facilities or other standby financing commitments which
obligate the Registrant to pay additional cash on a certain date or on demand.
These commitments may have the effect of requiring the Registrant to increase
its investment in a company at a time when the Registrant might not otherwise
decide to do so (including at a time when the company's financial condition
makes it unlikely that such amounts will be repaid). To the extent that the
Registrant is committed to advance additional funds, it will at all times hold
and maintain in a segregated account cash or other high grade debt obligations
in an amount sufficient to meet such commitments.
The Registrant's ability to receive payments of principal, interest and
other amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loan participations
and other direct investments which the Registrant will purchase, the Investment
Adviser will rely upon its (and not that of the original lending institution's)
own credit analysis of the borrower. As the Registrant may be required to rely
upon another lending institution to collect and pass on to the Registrant
amounts payable with respect to the loan and to enforce the Registrant's rights
under the loan, an insolvency, bankruptcy or reorganization of the lending
institution may delay or prevent the Registrant from receiving such amounts. In
such cases, the Registrant will evaluate as well the creditworthiness of the
lending institution and will treat both the borrower and the lending institution
as an "issuer" of the loan participation for purposes of certain investment
restrictions pertaining to the diversification of the Registrant's portfolio
investments. The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions.
Investments in such loans may involve additional risks to the Registrant. For
example, if a loan is foreclosed, the Registrant could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, the Registrant could be held liable as a
co-lender. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, the Registrant relies on the
Investment Adviser's research in an attempt to avoid situations where fraud or
misrepresentation could adversely affect the Registrant.
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In addition, loan participations and other direct investments may not
be in the form of securities or may be subject to restrictions on transfer, and
only limited opportunities may exist to resell such instruments. As a result,
the Registrant may be unable to sell such investments at an opportune time or
may have to resell them at less than fair market value. To the extent that the
Investment Adviser determines that any such investments are illiquid, the
Registrant will include them in the investment limitations described below.
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 the
New York Stock Exchange and would be required to be secured continuously by
collateral, including cash, cash equivalents, U.S. Government Securities or an
irrevocable letter of credit maintained on a current basis at an amount at least
equal to the market value of the securities loaned. The Registrant would have
the right to call a loan and obtain the securities loaned at any time on
customary industry settlement notice. 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 receive compensation based on 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 justifies the
attendant risk. If the Investment Adviser determines to make securities loans,
it is intended that the value of the securities loaned would not exceed 30% of
the value of the Registrant's 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. While awaiting delivery of securities
purchased on such basis, the Registrant will segregate liquid assets sufficient
to cover its commitments. Although the Registrant does not intend to make such
purchases for speculative purposes, purchases of securities on such bases may
involve more risk than other types of purchases.
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When the Registrant commits to purchase a security on a "when-issued"
or "forward delivery" basis, it will set up a segregated account 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 amount.
If the seller becomes subject to a proceeding under the bankruptcy laws or its
assets are otherwise subject to a stay order, the Registrant's right to
liquidate the securities may be restricted (during which time the value of the
securities could decline).
The Registrant may enter into repurchase agreements with sellers who
are member firms (or subsidiaries thereof) of the New York Stock Exchange,
members of the Federal Reserve System, or recognized primary U.S. Government
securities dealers or institutions which the Investment Adviser has determined
to be of comparable creditworthiness. The securities that the Registrant
purchases and holds through its agent are U.S. Government Securities, the value
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
agreed amount on the agreed upon delivery date or upon demand, as the case may
be, the Registrant will have the right to liquidate the securities. If at the
time the Registrant is contractually entitled to exercise its right to liquidate
the securities, the seller is subject to a proceeding under the bankruptcy laws
or its assets are otherwise subject to a stay order, the Registrant's exercise
of its right to liquidate the securities may be delayed and result in certain
losses and costs to the Registrant. The Registrant has adopted and follows
procedures which are intended to minimize the risks of repurchase agreements.
For example, the Registrant only enters into repurchase agreements after the
Investment Adviser has determined that the seller is creditworthy, and the
Investment Adviser monitors 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.
Leveraging. The Registrant has the authority to borrow money for
investment from banks and through the issuance of bonds, debentures, notes or
other instruments evidencing
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indebtedness ("Senior Securities") and to invest the proceeds in accordance with
the Registrant's investment objective and policies. In determining whether to
employ leverage, the Trustees will consider such factors as the estimated spread
between interest required to be paid on money borrowed by the Registrant and
interest which can be earned by investing the proceeds of borrowings, as well as
the level of distributions currently being made by the Registrant to its
shareholders. Under the 1940 Act, the Registrant must maintain asset coverage
(which is the ratio which the value of the total assets of the Registrant minus
all liabilities and indebtedness not represented by Senior Securities bears to
the aggregate amount of Senior Securities representing any indebtedness of the
Registrant) of at least 300% with respect to Senior Securities representing
indebtedness. The Registrant would issue Senior Securities to raise money to
purchase securities for the Registrant's portfolio to preserve or enhance the
Registrant's payment of dividends. The Registrant has no intention during the
coming year of issuing Senior Securities and there can be no assurance that any
will be issued. See the subsection "Risks of Leverage" of "Special
Considerations" below.
Reverse Repurchase Agreements. The Registrant may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Registrant will
sell securities and receive cash proceeds, subject to its agreement to
repurchase the securities at a later date for a fixed price reflecting a market
rate of interest. There is a risk that the counterparty to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as scheduled,
which may result in losses to the Registrant. The Registrant will invest the
proceeds received under a reverse repurchase agreement in accordance with its
investment objective and policies. In determining whether to engage in reverse
repurchase agreements, the Trustees will consider factors such as the estimated
spread between the imputed interest required to be paid by the Registrant under
the agreement and interest which can be earned by investing the proceeds
received under the agreement, as well as the level of distributions currently
being made by the Registrant to its shareholders. Reverse repurchase agreements
are considered borrowings for purposes of the Registrant's investment policies
and restrictions concerning borrowings, and therefore these borrowing
limitations apply to this investment practice. The Registrant must segregate
liquid assets, marked to market daily, in an amount at least equal to the
Registrant's obligations under the agreement, which is generally satisfied by
the Registrant providing the counterparty with collateral in the form of the
securities subject to the repurchase agreement.
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 generally will 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. The value of the lower-rated fixed income securities that
the Registrant purchases may, under certain market conditions, fluctuate more
than the value of higher-rated fixed income securities. These lower-rated fixed
income securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher-rated securities, which react
primarily to
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fluctuations in the general level of interest rates. 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. To the extent that
the Registrant uses options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and options on foreign currencies, such techniques may result
in the loss of principal under certain market conditions. See "Options and
Futures" below.
Investments in fixed income securities that are unrated or in the lower
rating categories of recognized rating agencies, 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
than securities in the higher rating categories. These securities may include
those issued in debt restructurings, leveraged buyouts and corporate
acquisitions. Securities issued in such transactions may involve greater risks,
often related to creditworthiness, solvency, relative liquidity of the secondary
market, potential market losses, vulnerability to rising interest rates and
economic downturns and market price volatility based upon interest rate
sensitivity, all of which may adversely affect the Registrant's net asset value.
The Registrant will seek to reduce risk by investing its assets in a number of
markets and issuers, performing credit analysis of potential investments and
monitoring current developments and trends in both the economy and financial
markets. To the extent the Registrant holds zero coupon or deferred interest
bonds in its portfolio or bonds paying interest in the form of additional debt
obligations, the Registrant would recognize income currently even though the
Registrant received no cash payments of interest and would raise cash to satisfy
its obligation to distribute such income to shareholders from sales of portfolio
securities. (See Item 10.4 for a discussion of the tax treatment regarding these
investments.) To the extent the Registrant invests in fixed income securities
the disposition of which is subject to legal or contractual restrictions or the
markets for which are illiquid, the Registrant might not be able to sell these
securities when the Investment Adviser wishes to do so, or might have to sell
them at less than fair value. The Registrant does not currently intend to invest
in securities of bankrupt companies or in obligations which are in default.
Investing in foreign securities involves considerations and possible
risks not typically associated with investing in U.S. securities. The value of
foreign securities investments will be affected by changes in currency rates or
exchange control regulations. Because interest and principal payments of foreign
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 decrease in
the value of certain portfolio securities. The
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Registrant may enter into Forward Contracts and options on foreign currencies in
an effort to protect against this risk. The value of foreign 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 conversion 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. Moreover, there
may be less publicly available information about foreign issuers than about
domestic issuers, and foreign issuers may not be subject to accounting, auditing
and financial reporting standards and requirements comparable to those of
domestic issuers. Securities of some foreign issuers are less liquid and more
volatile than securities of comparable domestic issuers. 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 Registrant may be required to receive delivery of the foreign
currencies underlying options on foreign currencies or Forward Contracts it has
entered into. This could occur, for example, if an option written by the
Registrant is exercised or the Registrant is unable to close out a Forward
Contract it has entered into. The Registrant may also elect to take delivery of
the currencies underlying options or Forward Contracts if, in the judgment of
the Investment Adviser, it is in the best interest of the Registrant to do so.
In such instances as well, the Registrant may promptly convert the foreign
currencies to dollars at the then-current exchange rate, or may hold such
currencies for an indefinite period of time. While the holding of currencies may
permit the Registrant to take advantage of favorable movements in the applicable
exchange rate, it also exposes the Registrant to risk of loss if such 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.
Zero Coupon Bonds. Securities in which the Registrant may invest also
include zero coupon bonds. Zero coupon bonds are debt obligations which are
issued at a significant discount from face value. The discount approximates the
total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. Zero coupon
bonds do not require the periodic payment of interest. Such investments benefit
the issuer by mitigating its need for cash to meet debt service, but also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value than debt obligations which make regular payments of interest. The
Registrant will accrue income on such investments for tax and accounting
purposes, which is distributable to
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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.
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 issuer. U.S.
Government Securities are not subject to any such investment limitations. 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.
An investment in shares of the Registrant should not constitute a
complete investment program and may not be appropriate for all investors.
Risk Factors. The Registrant may invest in fixed income securities
rated Baa by Moody's or BBB by S&P or Fitch and comparable unrated securities.
These securities, while normally exhibiting adequate protection parameters, may
have speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income securities.
The Registrant may also invest in fixed income securities that are
rated Ba or lower by Moody's or BB or lower by S&P or Fitch and comparable
unrated securities (commonly known as "junk bonds"). These securities are
considered speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of principal
and income (including the possibility of default or bankruptcy of the issuers of
such securities) and may involve greater volatility of price, especially during
periods of economic uncertainty or change, than securities in the higher rating
categories, and because yields may vary over time, no specific level of income
can ever be assured. 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.
These lower rated high yielding fixed income securities generally tend
to reflect economic changes (and the outlook for economic growth) and short-term
corporate and industry developments and the market's perception of their quality
(especially during times of adverse publicity) to a greater extent than higher
rated securities which react primarily to fluctuations in the general level of
interest rates, although they are also affected by changes in interest rates. In
the past, economic downturns or an increase in interest rates have, under
certain circumstances, caused a higher incidence of default by the issuers of
these securities and may do so in the future, especially in the case of highly
leveraged issuers. The prices for these securities may be affected by
legislative and regulatory developments. For example, federal rules require that
savings and loan associations gradually reduce their holdings of high-yield
securities. An effect of such
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legislation may be to depress the prices of outstanding lower rated high
yielding fixed income securities.
The market for these lower rated fixed income securities may be less
liquid than the market for investment grade fixed income securities.
Furthermore, the liquidity of these lower rated securities may be affected by
the market's perception of their credit quality. Therefore, the Investment
Adviser's judgment may at times play a greater role in valuing these securities
than in the case of investment grade fixed income securities, and it also may be
more difficult during times of certain adverse market conditions to sell these
lower rated securities to respond to changes in the market. While the Investment
Adviser may refer to ratings issued by established credit rating agencies, it is
not the Registrant's policy to rely exclusively on ratings issued by these
rating agencies, but rather to supplement such ratings with the Investment
Adviser's own independent and ongoing review of credit quality. To the extent
the Registrant invests in these lower rated securities, the achievement of its
investment objectives may be more dependent on the Investment Adviser's own
credit analysis than in the case of a fund investing in higher quality fixed
income securities. These lower rated securities may also include zero coupon
bonds, deferred interest bonds and PIK bonds which are described above.
Risks of Leverage. To the extent that securities are purchased with
proceeds from the issuance of Senior Securities, the net asset value of the
Registrant's shares generally will increase or decrease at a greater rate than
would otherwise be the case. Any investment income or gains earned from the
securities purchased with these proceeds which is in excess of the expenses
associated therewith can be expected to cause the value of the Registrant's
shares and distributions on the Registrant's shares to rise more quickly than
would otherwise be the case. Conversely, if the investment income or gains
earned from the securities purchased with proceeds from the issuance of Senior
Securities fails to cover the expenses associated therewith, the value of the
Registrant's shares is likely to decrease more quickly than otherwise would be
the case and distributions thereon will be reduced or eliminated. Hence, the
issuance of Senior Securities (leverage) is speculative and increases the risk
of owning or investing in the shares of an investment company which employs that
technique. The issuance of Senior Securities also increases the Registrant's
expenses because of interest payments and administrative expenses associated
with the issuance of the Senior Securities. Unless the appreciation and income
on assets purchased with proceeds from the issuance of Senior Securities exceed
the costs associated with the Senior Securities, the use of leverage would
diminish the investment performance of the Registrant compared with what it
would have been without leverage.
If the Registrant were to issue Senior Securities, it would not be
permitted to declare dividends or other distributions with respect to the
Registrant's shares or repurchase the Registrant's shares unless at the time
thereof (and after giving effect thereto), asset coverage with respect to the
Registrant's Senior Securities would be at least 300% (or such other percentage
as may in the future be required by law). Under the Internal Revenue Code of
1986, as amended (the "Code"), the Registrant must, among other things (i)
distribute at least 90% of its investment company taxable income each fiscal
year in order to maintain its qualification for tax treatment as a regulated
investment company, (ii) distribute the remaining 10% of its investment company
taxable income each fiscal year in order to avoid federal income tax and (iii)
distribute
<PAGE>
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substantially all of its income on a calendar-year basis in accordance with the
timing requirements of the Code in order to avoid excise taxes. The foregoing
limitations on dividends and distributions may under certain circumstances
impair the Registrant's ability to maintain such qualification (which would
result in the Registrant being taxed as a corporation), or may result in the
Registrant being subject to income or excise taxes. (See Item 10.4.) To the
extent any Senior Securities are given a prior claim against the income of the
Registrant and against the net assets of the Registrant in a liquidation, they
may be a substantial lien and burden on the Registrant's shares.
OPTIONS AND FUTURES
Options. The Registrant may write covered put and call options and
purchase put and call options on U.S. Government Securities and may engage in
such options transactions with respect to other fixed income securities. All
such options will be traded on either United States or foreign securities
exchanges or 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 underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for liquid assets held)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if the Registrant holds a call on the same security and
in the same principal amount as the call written where the exercise price of the
call held is (a) equal to or less than the exercise price of the call written or
(b) greater than the exercise price of the call written if the difference in
liquid assets are segregated by the Registrant. A put option written 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
equal or greater than the exercise price of the put written or is less than the
exercise price of the put written if liquid assets representing the difference
are segregated by the Registrant. Put and call options 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 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.
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
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option is exercised, the writer must fulfill the obligation to purchase the
underlying security at the exercise price, which will usually exceed the then
market value of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an 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 will
permit the Registrant to write another option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit the Registrant to write another put option to
the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Registrant investments. If the Registrant desires to
sell a particular security from its portfolio on which it has written a call
option, it will effect a closing transaction prior to or concurrent with the
sale of the security.
The Registrant will realize a profit from a closing transaction if the
price of the transaction is less than the premium received from writing the
option or is more than the premium paid to purchase the option; the Registrant
will realize a loss from a closing transaction if the price of the transaction
is more than the premium received from writing the option or is less than the
premium paid to purchase the option. Because increases in the market price of a
call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the Registrant.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Registrant would have to exercise the options
in order to realize any profit. If the Registrant is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise. Reasons for the absence of a liquid secondary market
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by a national securities exchange
("Exchange") on opening transactions or closing transactions or both; (iii)
trading halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an Exchange; (v)
the facilities of an Exchange or the Options Clearing Corporation ("OCC") 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
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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 OCC as a result of trades on the 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.
The writing of covered put options is similar in terms of risk return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Registrant's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Registrant may elect to close the
position or take delivery of the security at the exercise price and the
Registrant's return will be the premium received from the put options minus the
amount by which the market price of the security is below the exercise price.
Out-of-the-money, at-the-money and in-the-money put options may be used by the
Registrant in the same market environments that call options are used in
equivalent buy-and-write transactions.
The Registrant may purchase put options to hedge against a decline in
the value of its portfolio. By using put options in this way, the Registrant
will reduce any profit it might otherwise have realized in the underlying
security by the amount of the premium paid for the put option and by transaction
costs.
The Registrant may purchase call options to hedge against an increase
in the price of fixed income 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.
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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 on financial indices and commodities
including any index of U.S. or foreign government securities ("Futures
Contracts"). A "sale" of a Futures Contract means a contractual obligation to
deliver the securities or foreign currencies called for by the contract at a
specified price on a specified date or, in the case of a Futures Contract on an
index, a contractual obligation to make or receive a cash settlement. A
"purchase" of a Futures Contract means a contractual obligation to acquire the
securities or foreign currencies called for by the contract at a specified price
on a specified date or, in the case of a Futures Contract on an index, a
contractual obligation to make or receive a cash settlement. U.S. Futures
Contracts have been designated by exchanges which have been designated
"contracts markets" by the CFTC, and must also be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. Existing contract markets include the Chicago Board of Trade
and International Monetary Market of the Chicago Mercantile Exchange. Futures
Contracts trade on these markets, and, through their clearing corporations, the
exchanges guarantee performance of the contracts as between the clearing members
of the exchange. The Registrant will enter into Futures Contracts which are
based on debt securities that are backed by the full faith and credit of the
U.S. Government, such as long-term U.S. Treasury Bonds, Treasury Notes, and
three-month U.S. Treasury Bills. The Registrant may also enter into Futures
Contracts which are based on financial indices, corporate securities, non-U.S.
Governmental bonds and Eurodollar deposits.
At the same time a Futures Contract is purchased or sold, the
Registrant must allocate cash or securities as a deposit payment ("initial
deposit"). The initial deposit varies, but may be as low as 5% or less of a
contract's face value. Daily thereafter the Futures Contract is valued and the
payment of "variation margin" may be required, since each day the Registrant
would provide or receive cash that 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 based on an index of securities provides for a
payment, in cash, equal to the amount, if any, by which the value of the index
at maturity is above or below the value of the index at the time the contract
was entered into, times a fixed index "multiplier." The index underlying such a
Futures Contract is generally a broad based index of securities designed to
reflect movements in the relevant market as a whole. The index assigns weighted
values to the securities included in the index, and its composition is changed
periodically. Futures Contracts on Eurodollar deposits also require the making
and acceptance of a cash payment, based on the change in value of the underlying
instrument.
Although Futures Contracts by their terms call for the actual delivery
or acquisition of securities, foreign currencies or, in the case of Futures
Contracts based on an index, the making or acceptance of a cash settlement at a
specified future time, in most cases the contractual obligation if fulfilled
before the date of the contract by buying (or selling, as the case may be) on
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a commodities exchange an identical Futures Contract calling for delivery in the
same month, subject to the availability of a liquid secondary market. Such a
transaction cancels the obligation incurred by the Futures Contract. The
Registrant will incur brokerage fees when it purchases and sells Futures
Contracts.
One purpose of the purchase or sale of a Futures Contract, in the case
of a portfolio such as that of the Registrant which holds or intends to acquire
long-term fixed income securities, is to attempt to protect the Registrant from
fluctuations in interest 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 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 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 stabilized. At that time, the Futures
Contracts could be liquidated and the Registrant could then buy long-term bonds
on the cash market. To the extent the Registrant enters into Futures Contracts
for this purpose the Registrant will segregate liquid assets with respect to
such Futures Contracts in an amount equal to the difference between the
fluctuating market value of such Futures Contract and the aggregate value of the
initial and variation margin payments made by the Registrant with respect to
such Futures Contracts.
The ordinary spreads between prices in the cash and futures markets,
due to differences in the natures of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to
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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 the 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 position. In addition, in such situations, if the
Registrant had 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
price of the underlying debt securities, it may or may not be less risky than
ownership of the Futures Contract or underlying debt securities. As with the
purchase of Futures Contracts, when the Registrant is not fully invested it may
purchase a call option on a Futures Contract to hedge a market advance due to
declining interest rates.
The writing of a call option on a Futures Contract constitutes a
partial hedge against declining prices of the security or foreign currency which
is deliverable upon exercise of the Futures Contract. If the futures price at
expiration of the option is below the exercise price, the Registrant will retain
the full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Registrant's portfolio holdings. The
writing of a put option on a Futures Contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable upon exercise of the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, the Registrant will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Registrant intends to
purchase. If a put or call option the Registrant has written is exercised, the
Registrant will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures position,
the Registrant's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
The Registrant may cover the writing of call options on Futures
Contracts (a) through purchases of the underlying Futures Contract, (b) through
ownership of the instrument, or instruments included in the index, underlying
the Futures Contract, or (c) through the holding of a call on the same Futures
Contract and in the same principal amount as the call written where
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the exercise price of the call held (i) is equal to or less than the exercise
price of the call written or (ii) is greater than the exercise price of the call
written if liquid assets representing the difference are segregated by the
Registrant. The Registrant may cover the writing of put options on Futures
Contracts (a) through sales of the underlying Futures Contract, (b) through
segregation of liquid assets in an amount equal to the value of the security or
index underlying the Futures Contracts, or (c) through the holding of a put on
the same Futures Contract and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written or where the exercise price of the put held is
less than the exercise price of the put written if liquid assets representing
the difference are segregated by the Registrant. Put and call options on Futures
Contracts may also be covered in such other manner as may be in accordance with
the rules of the exchange on which they are traded and applicable laws and
regulations.
The purchase of a put option on a Futures Contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, the Registrant may purchase a put option on a Futures Contract to hedge
the Registrant's portfolio against the risk of rising interest rates.
The amount of risk the Registrant assumes when it purchases an option
on a Futures Contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the
purchase of an option also entails the risk that changes in the value of the
underlying Futures Contract will not be fully reflected in the value of the
option purchased.
The Registrant's ability to engage in the options and futures
strategies described above will depend on the availability of liquid markets in
such instruments. Therefore no assurance can be given that the Registrant will
be able to utilize these instruments effectively for the purposes set forth
above.
Forward Contracts on Foreign Currency. The Registrant may enter into
forward foreign currency exchange contracts for the purchase or sale of a
specific currency at a future date at a price set at the time of the contract (a
"Forward Contract"). The Registrant will enter into Forward Contracts for
hedging purposes as well as for non-hedging purposes. Transactions in Forward
Contracts entered into for hedging purposes will include forward purchases or
sales of foreign currencies for the purpose of protecting the dollar value of
securities denominated in a foreign currency or protecting the dollar equivalent
of interest or dividends to be paid on such securities. By entering into such
transactions, however, the Registrant may be required to forego the benefits of
advantageous changes in exchange rates. The Registrant may also enter into
transactions in Forward Contracts for other than hedging purposes. For example,
if the Investment Adviser believes that the value of a particular foreign
currency will increase or decrease relative to the value of the U.S. dollar, the
Registrant may purchase or sell such currency, respectively, through a Forward
Contract. If the expected changes in the value of the currency occur, the
Registrant will realize profits which will increase its gross income. Where
exchange rates do not move in the direction or to the extent anticipated,
however, the Registrant may sustain losses which will reduce its gross income.
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The Registrant has established procedures consistent with the General
Statement of Policy of the SEC concurring such commitments. Since that policy
currently recommends that an amount of the Registrant's assets equal to the
amount of the commitment be held aside or segregated to be used to pay for the
commitment, the Registrant will always segregate liquid assets sufficient to
cover any commitments under these contracts to purchase or sell foreign
currencies or to limit any potential risk. The segregated liquid assets will be
marked to market on a daily basis. While these contracts are not presently
regulated by the CFTC, the CFTC may in the future assert authority to regulate
Forward Contracts. In such event the Registrant's ability to utilize Forward
Contracts in the manner set forth above may be restricted. Forward Contracts may
limit potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for the Registrant than if it had not
engaged in such transactions.
Options on Foreign Currencies. The Registrant may purchase and write
options on foreign currencies for hedging purposes in a manner similar to that
in which 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 such securities, the Registrant may purchase put options on the
foreign currency. If the value of the currency does decline, the Registrant will
have the right to sell such currency for a fixed amount in dollars and will
thereby offset, in whole or in part, the adverse effect on its portfolio which
otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Registrant may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Registrant deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Registrant could sustain losses on
transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
The Registrant may write options on foreign currencies for the same
types of hedging purposes. For example, where the Registrant anticipates a
decline in the dollar value of foreign-denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the option will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Registrant could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Registrant
to hedge such increased cost up to the amount of the premium. As in the case of
other
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types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Registrant would be required to purchase or sell the
underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Registrant
also may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable movements in exchange rates.
All call options written on foreign currencies will be covered. A call
option written on foreign 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 if such amount, or the
equivalent amount is segregated in liquid assets,) upon conversion or exchange
of other foreign currency held in its portfolio. A call option is also covered
if the trust has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held is (a)
equal to or less than the exercise price of the call written or (b) greater than
the exercise price of the call written if liquid assets representing the
difference are segregated by the Registrant. A put option written on foreign
currency by the Registrant is covered if the Registrant has a put on the same
foreign currency and in the same principal amount as the put written where the
exercise price of the put held is (a) equal to or greater than the exercise
price of the put written or (b) less than the exercise price of the put written
if liquid assets representing the difference are maintained by the Registrant.
Put and call 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,
or the counterparty with which, the option is traded and applicable rules and
regulations.
Additional Risks of Options on Securities, Futures Contracts, Options
on Futures Contracts, Forward Contracts and Options on Foreign Currencies.
Unlike transactions entered into by the Registrant in Futures Contracts, options
on foreign currencies and Forward Contracts are not traded on contract markets
regulated by the CFTC or, with the exception of certain foreign currency
options, by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchanges, subject to
SEC regulation. Similarly, options on securities and on stock indices 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 could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
In order to assure that the Registrant will not be deemed a "commodity
pool" for purposes of the Commodity Exchange Act, regulations of the CFTC
require that the Registrant enter into
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transactions in Futures Contracts Options on Futures Contracts and Options on
Foreign Currencies traded on CFTC-regulated exchange only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for non-bona fide
hedging purposes, provided that the aggregate initial margin and premiums to
establish such non-bona fide positions does not exceed 5% of the liquidation
value of the Registrant's assets, after taking into account unrealized losses on
any such contracts the Registrant has entered into, and excluding, in computing
such 5%, the in-the-money amount with respect to an option that is in-the-money
at the time of purchase. In addition, the Registrant must comply with the
requirements of various state securities laws in connection with such
transactions.
The staff of the SEC has taken the position that purchased
over-the-counter options and assets used to cover written over-the-counter
options are illiquid. Therefore, such options and assets, together with other
illiquid securities, cannot exceed 20% of the Registrant's assets under its
investment restrictions. Although the Investment Adviser disagrees with this
position, the Investment Adviser intends to limit the Registrant's writing of
over-the-counter options in accordance with the following procedure. Except as
provided below, the Registrant intends to write over-the-counter options only
with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which the Registrant has in place
with 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 portion of the formula price as illiquid for purposes of its investment
restrictions. The Registrant may also write over-the-counter options with
non-primary dealers, including foreign dealers, and will treat the assets used
to cover these options as illiquid for purposes of its investment restrictions.
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 OCC, thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded on a
national securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Registrant to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign
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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 securities, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on foreign
exchanges. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be adversely affected by (i) other complex
foreign political and economic factors, (ii) the availability of data on which
to make trading decisions, (iii) delays in the Registrant's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iv) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, and (v) less
trading volume.
Future Developments. The Registrant proposes to take advantage of
opportunities in the area of options, Futures Contracts, Options on Futures
Contracts and Forward 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 in the
options and futures activities described above.
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES,
AUTHORITIES OR INSTRUMENTALITIES
Federal Farm Credit Banks Consolidated Systemwide Notes and Bonds are
bonds issued and guaranteed by a cooperatively owned nationwide system of banks
and associations supervised by the Farm Credit Administration.
Maritime Administration Bonds - are bonds issued by the Department of
Transportation of the U.S. Government.
GNMA Certificates - are mortgage-backed securities, with timely payment
guaranteed by the full faith and credit of the U.S. Government, which represent
partial ownership interests in a pool of mortgage loans issued by lenders such
as mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is also insured or guaranteed by the Federal
Housing Administration, the Veterans Administration or the Farmers Home
Administration.
FHLMC Bonds - are bonds issued and guaranteed by the Federal Home
Loan Mortgage Corporation and are not guaranteed by the U.S. Government.
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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.
The list of securities set forth above does not purport to be an
exhaustive compilation of all debt obligations issued or guaranteed by U.S.
Government agencies, authorities or instrumentalities. The Registrant reserves
the right to invest in debt obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities in addition to those listed above.
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 or pledge, mortgage or hypothecate its assets, except
(i) as a temporary measure for extraordinary or emergency purposes, (ii) for a
tender offer or otherwise to repurchase its shares, (iii) for investment in
accordance with its investment objective and policies, or (iv) as contemplated
by clause (9) below, and in no event shall the Registrant borrow in excess of
1/3 of its assets (for the purpose of this restriction, collateral arrangements
with respect to options, futures Contracts, Options on Futures Contracts,
Forward Contracts and options on foreign currencies and collateral arrangements
with respect to initial and variation margin are not considered a pledge of
assets);
(2) purchase any security or evidence of interest therein on margin,
except that the Registrant may obtain such short-term credit as may be necessary
for the clearance of purchases and sales of securities and except that the
Registrant may make deposits on margin in connection with options, Futures
Contracts, Options on Futures Contracts, Forward Contracts and options on
foreign currencies;
(3) underwrite securities issued by other persons except insofar as the
Registrant may technically be deemed an underwriter under the Securities Act of
1933 in selling a portfolio security;
(4) invest in illiquid investments, including securities which are
subject to legal or contractual restrictions on resale or for which there is no
readily available market (e.g., trading in
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the security is suspended or, in the case of unlisted securities, where no
market makers exist), unless the Board of Trustees has determined that such
securities are liquid based upon trading markets for the specific security, if
more than 20% 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, Forward Contracts, Futures Contracts and
Options on 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, Options on
Futures Contracts, Forward Contracts and options on foreign currencies 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;
(9) make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable for, without payment
of any further consideration, securities of the same issue as, and equal in
amount to, the securities sold short ("short sales against the box"), and unless
not more than 10% of the Registrant's net assets (taken at market value) is held
as collateral for such sales at any one time (it is the Registrant's present
intention to make such sales only for the purpose of deferring realization of
gain or loss for Federal income tax purposes; such sales would not be made of
securities subject to outstanding options); or
(10) invest more than 25% of the value of its total assets in any
industry except as described above under the subsection "Corporate Fixed Income
Securities" of "Investment Objective and Policies."
As a matter of non-fundamental policy, the Registrant may not: (1) invest more
than 25% of the value of its total assets in any industry, except as described
under the subsection "Corporate Fixed Income Securities" of the section
"Investment Objective and Policies" above.
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DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various bonds. It should be emphasized, however, that ratings are not
absolute standards of quality. Consequently, bonds with the same maturity,
coupon and rating may have different yields while bonds of the same maturity and
coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
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Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest. Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked short-comings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES, INC.
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms of
the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.)
Accordingly, in the case of junior.
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
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obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions 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.
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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 to significantly vulnerable to foreseeable events.
A:
High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.
BBB:
Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB:
Speculative. BB 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.
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DDD, DD and D:
Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50%-90% of such outstandings, and D
the lowest recovery potential, i.e., below 50%.
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, a Delaware corporation, is
the Registrant's Investment Adviser. MFS and its predecessor organizations have
a history of money management dating from 1924, thus making MFS America's oldest
mutual fund organization. MFS is a subsidiary of Sun Life of Canada (U.S.)
Financial Holding Services, Inc., which in turn is an indirect wholly owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). Sun Life, a
mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the United States since 1895. The
executive officers of MFS report to the Chairman of Sun Life. The principal
business address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser to each of the funds in the MFS
Family of Funds (the "MFS Funds"), to MFS Municipal Income Trust, MFS Government
Markets Income Trust, MFS Multimarket Income Trust, MFS Intermediate Income
Trust, MFS Special Value Trust, MFS Institutional Trust, MFS Variable Insurance
Trust, MFS/Sun Life Series Trust and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.), a subsidiary of SunLife, in connection with the sale of various
fixed/variable annuity contracts. MFS and its wholly-owned subsidiary, MFS
Institutional Advisors, Inc., provide investment advice to substantial private
clients. MFS is America's oldest mutual fund organization. MFS and its
predecessor organizations have a history of money management dating from 1924
and the founding of the first mutual fund in the United States, Massachusetts
Investors Trust. Net assets under the management of the MFS organization were
approximately $77.6 billion on behalf of approximately 2.9 million investors as
of February 28, 1998. As of such date, the MFS organization managed
approximately $20.4 billion of securities in fixed income portfolios, including
approximately $6.6 billion in U.S. Government Securities and approximately $ 4.0
billion in securities of foreign issuers and non-U.S. dollar denominated
securities of U.S. issuers. The Directors of MFS are John W. Ballen, Jeffrey L.
Shames, Arnold D. Scott, John D. McNeil and Donald A. Stewart. Mr. Shames is the
Chairman and President of MFS, Mr.Ballen is on Executive Vice President of MFS,
and Mr. Scott is the Secretary and a Senior Executive Vice President of MFS.
Messrs. McNeil and
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Stewart are the Chairman and President, respectively, of Sun
Life. Sun Life, a mutual life insurance company, is on e 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 also
provides certain administrative services and general office facilities.
The Investment Adviser is not dependent on any other party in providing
the investment advisory services required in the management of the Registrant.
The Investment Adviser may, 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
Adviser also provides certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement, dated March 1, 1997, as amended.
The Advisory Agreement also provides that neither MFS nor its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution and
management of the Registrant, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their obligations and duties under the Advisory Agreement.
Advisory Fee. For the services provided by MFS under the Advisory
Agreement, the Registrant pays it a fee computed and paid monthly in an amount
equal to the sum of .32% of the adjusted average daily net assets of the
Registrant (adjusted average daily net assets being average daily net assets
without deducting any liability for money borrowed for investment in accordance
with the Registrant's investment objective and policies) and 4.57% of the daily
gross income (i.e., income other than gains from the sale of securities, gains
from options and futures transactions, premium income from options written and
gains from foreign exchange transactions) of the Registrant for the Registrant's
then-current fiscal year. However, that portion of the Investment Adviser's fee
which is based on income from leveraging, if any, shall be imposed only on net
income from leveraging (i.e., gross income from leveraging less expenses of
leveraging). This advisory fee is greater than that paid by most other 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
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initials "MFS" and that MFS may render services to others and may permit funds
clients in addition to the Registrant to use the initials "MFS" in their names.
The Advisory Agreement will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the Registrant's outstanding voting securities (as defined in the section
"Investment Restrictions" of Items 8.2, 8.3 and 8.4 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 (as defined in the
section "Investment Restrictions" of Items 8.2, 8.3 and 8.4 or by either party
on not more than 60 days' nor less than 30 days' written notice).
9.1.c. General - Portfolio Management: James T. Swanson, a Vice
President of the Registrant and a Senior Vice President of MFS, joined MFS in
1985. He became the portfolio manager of the Registrant in 1992.
9.1.d. General - Administrator: MFS provides the Registrant with
certain financial, legal, compliance, shareholder communications and other
administrative services pursuant to a Master Administrative Services Agreement
dated March 1, 1997, as amended. Under this Agreement, the Registrant pays MFS
an administrative fee up to 0.015% per annum of the Registrant's average daily
net assets. This fee reimburses MFS for a portion of the cost it incurs to
provide such services. For the period March 1, 1997 through the fiscal year
ended November 30, 1997, MFS received $82,143 under the Agreement.
9.1.e. Custodian: State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110 is the custodian and dividend disbursing
agent for the Registrant. MFS Services Center, Inc., 500 Boylston Street,
Boston, Massachusetts 02116, a wholly owned subsidiary of MFS, is the
shareholder servicing agent.
9.1.f. General: Payment of Expenses: The Registrant pays the
compensation of the Trustees who are not affiliated with MFS and all the
Registrant's expenses, including, but not limited to, advisory and
administrative services, governmental fees, interest charges, taxes, membership
dues in the Investment Company Institute allocable to the Registrant, fees and
expenses of independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Registrant, expenses of
repurchasing shares and servicing shareholder accounts, expenses of preparing,
printing and mailing share certificates, shareholder reports, notices, proxy
statements and reports to governmental officers and commissions, brokerage and
other expenses connected with the execution, recording and settlement of
portfolio security transactions, insurance premiums, fees and expenses of the
Registrant's Custodian, for all services to the Registrant, including
safekeeping of funds and securities and maintaining required books and accounts,
expenses of calculating the net asset value of the Registrant's shares, expenses
of shareholder meetings, expenses in connection with the Dividend Reinvestment
and Cash Purchases Plan and SEC fees.
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9.1.g. General - Affiliated Brokerage: Inapplicable.
9.2. Non-resident Managers: While the Registrant is a Massachusetts
business trust, Sir J. David Gibbons, a trustee of the Registrant, is not a
resident of the United States, and substantially all of his assets may be
located outside the United States. As a result, it may be difficult for
investors to effect service of process upon him within the United States, to
enforce in United States courts, or to realize outside the United States,
judgments of courts in the United States predicated upon civil liabilities, if
any, of his under the Federal securities laws of the United States. The
Registrant has been advised that there is substantial doubt as to the
enforceability in Bermuda, where he resides, of such civil remedies as are
afforded by the Federal securities laws of the United States.
9.3. Control Persons: Inapplicable.
Item 10. Capital Stock, Long-Term Debt, and Other Securities:
10.1. Capital Stock:
a. and f. Description of Shares. The 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
Declaration of Trust without the affirmative vote of a majority of its shares.
Under certain circumstances, shareholders have the right to communicate with
other shareholders and to remove Trustees. Shares have no pre-emptive or
conversion rights. Shares when issued are fully paid and non-assessable, except
as set forth below under "Certain Provisions of the Declaration of Trust."
The 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 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
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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.
Market or Private Repurchases. Since the Registrant is a closed-end
management investment company, 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 percent or more
from the net asset value of the shares. Shares repurchased by the Registrant
will be held in treasury. The Registrant may incur debt to finance share
repurchase transactions. See the section "Investment Restrictions" in response
to Items 8.2, 8.3 and 8.4.
The shares of the Registrant trade in the open market at a price which
is 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 assets values. When the Registrant repurchases its shares
for a price below their net asset value, the net asset value of those shares
that remain outstanding will be enhanced, but this does not necessarily mean
that the market price of those outstanding shares will be affected, either
positively or negatively. Further, interest on borrowings to finance share
repurchase transactions will reduce the Registrant's net income.
Certain Provisions of the Declaration of Trust. The Registrant is an
entity of the type commonly known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of such a Trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Registrant and provides for
indemnification and reimbursement of expenses out of the Registrant's property
for any shareholder held personally liable for the obligations of the
Registrant. The Declaration of Trust also provides that the Registrant shall
maintain appropriate insurance (for example, fidelity bonding and errors and
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 existed and the Registrant itself was 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 any
action or failure to act, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of 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
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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 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 assets sold in the
ordinary course of business); 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 five percent or more of the outstanding
shares of the Registrant. However, such vote or consent will not be required
with respect to the foregoing transactions where the Board of Trustees under
certain conditions approves the transaction. Reference is made to the
Declaration of Trust of the Registrant, on file with SEC, for the full text of
these provisions.
The foregoing provisions will make more difficult a change in the
Registrant's management, or consummation of the foregoing transactions without
the Trustees' approval, and could have the effect of depriving shareholders of
an opportunity to sell their shares at a premium over prevailing market prices
by discouraging a third party from seeking to obtain control of the Registrant
in a tender offer or similar transaction. However, the Board of Trustees has
considered these anti-takeover provisions and believes that they are in the
shareholders' best interests and benefit shareholders by providing the advantage
of potentially requiring persons seeking control of the Registrant to negotiate
with its management regarding the price to be paid and facilitating the
continuity of the Registrant's management.
b. Inapplicable.
c. Inapplicable.
d. Inapplicable.
e. Dividends and Distributions; Dividend Reinvestment and Cash Purchase
Plan. The Registrant will distribute monthly to shareholders substantially all
of its net investment income (non-capital gain income less expenses). Monthly
distributions will also include amounts attributable to net short-term capital
gains at the time of distribution, if any, from the
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sale of securities or other assets, and all or a portion of premiums received
from options (which are, at the time of distribution, a return of capital if the
option position remains open). Net short-term capital gains not previously
distributed and net long-term gains, if any, will be distributed at least
annually. The Registrant will attempt to maintain a level rate of monthly
distributions based upon what the Investment Adviser believes the Registrant's
annualized average net investment income and net realized short-term gains will
be. At times, a portion of these monthly distributions may constitute a return
of capital. For example, a return of capital would occur if the Registrant
realized net capital losses after a distribution of short-term gains, or if an
option position were closed at a loss after distribution of the premium received
when the option was written. Shareholders will be sent monthly and annual
notices reporting the tax status of such distributions. The notices will
indicate whether any portion of such distributions represents a return of
capital. See Item 10.4.
Shareholders holding shares in their own names may elect to have all
income dividend and/or other distributions automatically reinvested by State
Street Bank and Trust Company ("State Street"), as Plan agent, pursuant to the
Registrant's Dividend Reinvestment and Cash Purchase Plan (the "Plan"), the
provisions of which are set forth below. After this offering, shareholders of
record will be mailed supplemental information regarding the Plan, including a
form by which they may elect to participate in the Plan. 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.
Shareholders whose names are held in the name of a broker or nominee, if a
dividend reinvestment service is provided by the broker or nominee, may elect to
have dividends and/or distributions automatically reinvested by the broker under
the Plan. Shareholders whose shares are held by a broker or nominee which does
not provide a dividend reinvestment service will be required to have their
shares registered in their own names to participate in the Plan.
Under the Plan, if the Trustees of the Registrant declare an income
dividend or other distribution, the nonparticipants in the Plan will receive
such dividend or distribution in cash and participants in the Plan will receive
the equivalent of such dividend and/or distribution 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 on that date. This discount reflects savings in
underwriting and other costs which the Registrant would otherwise be required to
incur to raise additional capital. If net asset value exceeds the market price
of Trust shares at such time or if the Registrant should declare a dividend or
other distribution payable only in cash, State Street will, if possible, as
agent for the participants, buy Trust shares in the open market, on the New York
Stock Exchange or elsewhere, for the participants' accounts. If, before State
Street has completed its purchases, the market price exceeds the net asset value
of the Registrant's shares, the average per share purchase price paid by State
Street may exceed the net asset value of the Registrant's shares, resulting in
the acquisition of fewer shares than if the dividend or distribution had been
paid in shares issued by the Registrant.
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Participants in the Plan may withdraw from the Plan upon written notice
to State Street. When a participant withdraws from the Plan or upon termination
of the Plan as provided below, certificates for whole shares credited to his
account under the Plan will be issued and a cash payment will be made for any
fraction of a share credited to such account.
Participants in the Plan have the option of making additional cash
payments to State Street, semi-annually, for investment in the Registrant's
shares. Such payments may be made in any amount from $100 to $500. State Street
will use all funds received from participants to purchase Registrant shares in
the open market semi-annually. Interest will not be paid on any uninvested cash
payments.
State Street maintains all shareholders' 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 and/or
distributions, except for certain brokerage commissions, as described below.
State Street's fees will be paid by the Registrant for the handling of the
reinvestment of dividends and/or distributions. There will be no brokerage
charges with respect to shares issued directly by the Registrant as a result of
dividends and/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 and/or distributions as well as from voluntary cash
payments. A service fee of $.075 is charged for each cash purchase as well as a
pro rata share of the brokerage commissions, if any. 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
prorating the lower commission thus attainable.
The automatic reinvestment of dividends and/or 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 Registrant reserves the right to amend or terminate the Plan as
applied to any voluntary cash payments made and any dividend and/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
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dividend and/or distribution. The Plan also may be amended or terminated by
State Street on at least 90 days' written notice to participants in the Plan.
All correspondence concerning the Plan should be directed to State Street at 225
Franklin Street, Boston, Massachusetts 02110.
10.2. Long-term debt: Inapplicable.
10.3. General: Inapplicable.
10.4. Taxes: The Registrant has elected to be treated and intends to
qualify each year as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code") by meeting all applicable
requirements of Subchapter M, including requirements as 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 upon its taxable income and distributions received from
the Registrant would generally be taxable as ordinary dividend income to the
shareholders.
Shareholders of the Registrant normally will have to pay federal income
taxes and any state or local taxes on the dividends and capital gain
distributions they receive from the Registrant. Dividends from ordinary income
and any distributions from net short-term capital gains are taxable to
shareholders as ordinary income for federal income tax purposes. Because the
Registrant expects to earn primarily interest income, it is expected that no
dividends paid by the Registrant will qualify for the dividends-received
deduction for corporations. Distributions of net capital gains (i.e., the excess
of net long-term capital gains over net short-term capital losses) are taxable
to shareholders as long-term capital gains for federal income tax purposes
without regard to the length of time the shareholders have held their shares.
Such capital gains will generally be taxable to shareholders as if the
shareholders had directly realized gains from the same sources from which they
were realized by the Registrant. Any dividend that is declared by the Registrant
in October, November and December of any calendar year, that is payable to
shareholders of record in such a month and that is paid the following January
will be treated as if received by the shareholders on December 31 of the year in
which the dividend is declared. The Registrant will notify shareholders
regarding the federal tax status of its distributions after the end of each
calendar year.
Distributions will be taxable as described above, whether received in
cash or in shares under the Dividend Reinvestment and Cash Purchase Plan (the
"Plan"). With respect to distributions received in cash or reinvested in shares
purchased on the open market, the amount of the distribution for tax purposes is
the amount of cash distributed or allocated to the shareholder. However, with
respect to distributions made in shares issued by the Registrant pursuant to the
Plan, the amount of the distribution for tax purposes is the fair market value
of
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the issued shares on the payment date and a portion of such distribution may
be treated as a return of capital. In the case of shares purchased on the open
market, a participating shareholder's tax basis in each share received is its
cost. In the case of shares issued by the Registrant, the shareholder's tax
basis in each share received is its fair market value on the payment date.
Distributions by the Registrant generally result in a reduction in the
fair market value of the Registrant's shares. Should a distribution reduce the
fair market value below a shareholder's cost basis, such distribution
nevertheless would be taxable to the shareholder as described above, even
though, from an investment standpoint, it may constitute a partial return of
capital. In particular, since the price of shares purchased just prior to a
distribution includes the amount of the forthcoming distribution, investors
purchasing shares at that time should be aware that the distribution may be
taxable to them even though it represents a return of their investment.
In general, any gain or loss realized upon a taxable disposition of
shares of the Registrant by a shareholder that holds such shares as a capital
asset will be treated as long-term capital gain or loss if the shares have been
held for more than twelve months and otherwise as short-term capital gain or
loss; a long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than 18 months.
However, any loss realized upon a disposition of shares held for six months or
less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales.
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 it were closed out)
on that day, and any gain or loss associated with the positions will be treated
as 60% long-term and 40% short-term capital gain or loss. Certain positions held
by the Registrant that substantially diminish its risk of loss with respect to
other positions in its portfolio may constitute "straddles", and may be subject
to special tax rules that would cause deferral of Registrant losses, adjustments
in the holding
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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 and swaps and related transactions to the
extent necessary to meet the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of
the Registrant. Foreign exchange gains and losses realized by the Registrant
will generally be treated as ordinary income and losses. Use of foreign
currencies for non-hedging purposes and investment by the Registrant in certain
"passive foreign investment companies" may be limited in order to avoid a tax on
the Registrant. The Registrant may elect to mark to market any investments in
"passive foreign investment companies" on the last day of each year. This
election may cause the Registrant to recognize income prior to the receipt of
cash payments with respect to those investments; in order to distribute this
income and avoid a tax on the Registrant, the Registrant may be required to
liquidate portfolio securities that it might otherwise have continued to hold.
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
or deductions 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 ("Non-U.S. Persons") are generally subject to
U.S. tax withholding at the rate of 30%. The Registrant intends to withhold U.S.
federal income tax payments at the rate of 30% (or any lower rate permitted
under an applicable treaty) on taxable dividends and other payments to Non-U.S.
Persons that are subject to such withholding. Any amounts overwithheld may be
recovered by such persons by filing a claim for refund with the U.S. Internal
Revenue Service within the time period appropriate to such claims. Distributions
received from the Registrant by Non-U.S. Persons may also be subject to tax
under the laws of their own jurisdictions. The Registrant is also required in
certain circumstances to apply backup withholding at the rate of 31% on taxable
dividends and redemption proceeds paid to any shareholder (including a Non-U.S.
Person) who does not furnish to the Registrant certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding.
As long as it qualifies as a regulated investment company under the
Code, the Registrant will not be required to pay Massachusetts income or excise
taxes.
Distributions of the Registrant that are derived from interest on
obligations of the U.S. Government and certain of its agencies and
instrumentalities (but generally not from capital gains realized upon the
disposition of such obligations) may be exempt from state and local taxes. The
Registrant intends to advise shareholders of the extent to which, if any, its
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distributions which consists of such interest. Shareholders are urged to consult
their tax advisers regarding the possible exclusion of such portion of their
dividends for state and local income tax purposes as well as regarding the tax
consequences of an investment in the Registrant.
10.5. Outstanding Securities: The following information is furnished
as of March 1, 1998:
- -------------------------------------------------------------------------------
(1) (2) (3) (4)
Amount
Outstanding
Amount Held by Exclusive
Amount Registrant or for of Amount Shown
Title of Class Authorized its Account Under (3)
- -------------------------------------------------------------------------------
Shares of 90,358,639.398 63,037,689.00* 67,138,639.40 shares
Beneficial Interest
without par value
- -------------------------------------------------------------------------------
*Treasury Shares
10.6. Securities Ratings: Inapplicable.
Item 11. Defaults and Arrears on Senior Securities: None.
Item 12. Legal Proceedings: None.
Item 13. Table of Contents of Statement of Additional Information: See below.
PART B
INFORMATION REQUIRED IN A STATEMENT OF
ADDITIONAL INFORMATION
Item 14. Cover Page: Inapplicable.
Item 15. Table of Contents: See below.
Item 16. General Information and History: Inapplicable.
Item 17. Investment Objective and Policies:
17.1, 17.2 and 17.3: None that are not described in the Prospectus.
17.4. In fiscal year 1997, the turnover rate of the Registrant's
portfolio was 180%. In fiscal year 1996, the turnover rate of the Registrant's
portfolio was 146%.
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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. Trustees, Officers and Advisory Board Members: The Trustees and
officers of the Registrant and their principal occupations for at least the last
five years are set forth below. (Their titles may have varied during that
period.) Unless otherwise noted, the address of each Trustee and officer is 500
Boylston Street, Boston, Massachusetts 02116. Trustees and officers who are
"interested persons" of the Registrant, as defined in the Investment Company Act
of 1940, are denoted by an asterisk (*). The Board of Trustees is divided into
three classes, each class having a term of three years ending with the annual
meeting of shareholders (or any adjournment thereof) held in the year of
expiration, or until the election of a successor. Each year the term of office
of one class expires: Messrs. Gibbons and Robb will continue in office until
1998, Messrs. Bailey, Cohan and Sherratt will continue in office until 1999 and
Messrs. Cohn, Scott, Shames, Smith and Ms. O'Neill will continue in office until
2000.
Name and Address Position(s) Held with Principal Occupation(s)
Registrant During Past 5 years
Richard B. Bailey* Trustee Private Investor;
(born 9/14/26) Massachusetts Financial
Services Company, former
Chairman and Director
(prior to September 30,
1991) Cambridge Trust
Company, Director
Marshall N. Cohan (born Trustee Private Investor
11/14/26)
2524 Bedford Mews Drive
Wellington, Florida
Lawrence H. Cohn, M.D. (born Trustee Brigham and Women's
3/11/37) Hospital, Chief of
75 Francis Street Cardiac Surgery; Harvard
Boston, Massachusetts Medical School, Professor
of Surgery
The Hon. Sir J. David Trustee Edmund Gibbons Limited,
Gibbons, KBE (born 6/15/27) Chief Executive Officer;
21 Reid Street Colonial Insurance
Hamilton, Bermuda HM 12 Company Ltd.; Chairman;
The Bank of N.T.
Butterfield & Son
Limited, Chairman (prior
to November 1997)
<PAGE>
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Name and Address Position(s) Held with Principal Occupation(s)
Registrant During Past 5 years
Abby M. O'Neill (born Trustee Private Investor;
4/27/28) Rockefeller Financial
30 Rockefeller Plaza, Services, Inc.
Room 5600 (investment advisers),
New York, New York Director
Walter E. Robb, III Trustee Benchmark Advisors, Inc.
(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* (born Trustee Massachusetts Financial
12/16/42) Services Company,
Director, Senior
Executive Vice President
and Secretary
Jeffrey L. Shames* (born Trustee Massachusetts Financial
6/2/55) Services Company,
President
J. Dale Sherratt (born Trustee Insight Resources, Inc.
9/23/38) (acquisition planning
One Liberty Square specialists), President
Boston, Massachusetts
Ward Smith (born 9/13/20) Trustee NACCO Industries (holding
36080 Shaker Blvd., company), Chairman (prior
Hunting Valley, Ohio to June 1994); Sundstrand
Corporation (diversified
mechanical manufacturer),
Director
Leslie J. Nanberg*(born Vice President Massachusetts Financial
11/14/45) Services Company, Senior
Vice President and
Director of Fixed Income
Portfolio Management
James T. Swanson*(born Vice President Massachusetts Financial
6/12/49) Services Company, Senior
Vice President
W. Thomas London*(born Treasurer Massachusetts Financial
3/1/44) Services Company, Senior
Vice President
James O. Yost*(born 6/12/60) Assistant Treasurer Massachusetts Financial
Services Company, Vice
President
<PAGE>
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Name and Address Position(s) Held with Principal Occupation(s)
Registrant During Past 5 years
Ellen M. Moynihan*(born Assistant Treasurer Massachusetts Financial
(11/13/57) Services Company, Vice
President (since
September 1996); Deloitte
& Touche LLP, Senior
Manager (until September
1996)
Mark E. Bradley* (born Assistant Treasurer Massachusetts Financial
11/23/59) Services Company, Vice
President (since March
1997); Putnam
Investments, Vice
President (from September
1994 until March 1997);
Ernst & Young, Senior Tax
Manager (until September
1994)
Stephen E. Cavan* (born Secretary and Clerk Massachusetts Financial
11/6/53) Services Company, Senior
Vice President, General
Counsel and Assistant
Secretary
James R. Bordewick, Jr.* Assistant Secretary Massachusetts Financial
(born 3/6/59) Services Company, Senior
Vice President and
Associate General Counsel
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a subsidiary of MFS is
the investment adviser or distributor. Mr. Bailey is a Director of Sun Life
Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
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 Intermediate
Income Trust, MFS Government Markets Income Trust and MFS Special Value Trust.
Messrs. Bailey, Scott and Shames are Trustees of each of the MFS Funds and MFS
Multimarket Income Trust and MFS Municipal Income Trust.
18.3. Sir J. David Gibbons has not authorized an agent in the United
States to receive notice.
<PAGE>
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18.4.a. The following table lists all Trustees of the Registrant and
each of the three highest paid executive officers or any affiliated person of
the Registrant with aggregate compensation from the Registrant for the most
recently completed fiscal year in excess of $60,000 ("Compensated Persons").
(1) (2) (3) (4) (5)
Name of Aggregate Pension or Estimated Total
Person, Position Compensation Retirement Annual Benefits Compensation
(Estimated From Fund(1) Benefits Upon From Fund and
Credited Years Accrued As Part Retirement(2) Fund Complex
of of Fund Paid to
Service(2)(5)) Expenses(1) Trustees(3)
Richard B. $14,379 $2,911 (4) $283,647
Bailey, Trustee
(8)
Marshall N. $15,379 $3,278 (4) $148,067
Cohan, Trustee
(8)
Lawrence H. $13,879 $6,089 (4) $123,917
Cohn, M.D.,
Trustee (22)
The Hon. Sir J. $14,379 $3,011 (4) $129,842
David Gibbons,
KBE, Trustee
(8)
Abby M. $14,379 $2,878 (4) $129,842
O'Neill, Trustee
(9)
Walter E. Robb, $15,379 $3,278 (4) $148,067
III, Trustee (8)
(4)
Arnold D. None None None None
Scott, Trustee
Jeffrey L. None None None None
Shames, Trustee
<PAGE>
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(1) (2) (3) (4) (5)
Name of Aggregate Pension or Estimated Total
Person, Position Compensation Retirement Annual Benefits Compensation
(Estimated From Fund(1) Benefits Upon From Fund and
Credited Years Accrued As Part Retirement(2) Fund Complex
of of Fund Paid to
Service(2)(5)) Expenses(1) Trustees(3)
J. Dale Sherratt, $17,879 $6,556 (4) $184,067
Trustee (24)
Ward Smith, $17,879 $3,278 (4) $184,067
Trustee (12)
(1) For Fiscal year ended November 30, 1997
(2) Based on normal retirement age of 75
(3) Information provided is provided for calendar year 1997. All
Trustees served as Trustees of 42 funds within the MFS Fund
complex (having aggregate net assets 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. (5) Estimated
credited years of service include the total years of service
plus the expected years until retirement.
The Registrant pays each Trustee who is not an officer of the
Investment Adviser a fee of $8,275 per year plus $500 per meeting and committee
meeting attended, together with such Trustee's actual out-of-pocket expenses
relating to attendance at meetings. For attendance at meetings and other
services as Trustees, the Trustees of the Registrant as a group received
$123,532 from the Registrant for the fiscal year ended November 30, 1997.
18.4.b. The Registrant has adopted a retirement plan for non-interested
Trustees. Under this plan, a Trustee will retire upon reaching age 75 and if the
Trustee has completed at least 5 years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to the age of 75 and
receive reduced payments if he has completed at least 5 years of service. Under
the plan, a Trustee (or his beneficiaries) will also receive benefits for a
period of time in the event the Trustee is disabled or dies. These benefits will
also be based on the Trustee's average annual compensation and length of
service. There is no retirement plan provided by the Registrant for the
interested Trustees. However, Mr. Bailey, 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.
<PAGE>
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The following table sets forth the estimated annual benefits payable by
the Registrant to the non-interested Trustees and Mr. Bailey upon retirement.
Estimated Annual Benefits Payable by Registrant upon Retirement (1)
Average Years of Service
Trustee Fees 3 5 7 10 or more
$12,491 $1,874 $3,123 $4,372 $6,246
13,926 2,089 3,482 4,874 6,963
15,361 2,304 3,840 5,376 7,681
16,797 2,519 4,199 5,879 8,398
18,232 2,735 4,558 6,381 9,116
19,667 2,950 4,917 6,883 9,833
(1) Other funds in the MFS fund complex provide similar retirement
benefits to the Trustees.
18.4(c). Not Applicable.
Item 19. Control Persons and Principal Holders of Securities:
As of March 1, 1998, Cede & Co. Fast, P.O. Box 20, Bowling Green
Station, New York, New York 10004, owns of record approximately 69.7% of the
outstanding shares of the Registrant.
As of March 1, 1998, all Trustees and officers of the Registrant as a
group own of record less than 1% of the outstanding shares of the Registrant.
Item 20. Investment Advisory and Other Services:
Items 20.1.a. through 20.5. See Item 9.1.b. For the fiscal year ended
November 30, 1997, MFS received fees under the Registrant's Investment Advisory
Agreement of $5,055,572. For the fiscal year ended November 30, 1996, MFS
received fees under the Registrant's Investment Advisory Agreement of
$5,286,368. For the fiscal year ended November 30, 1995, MFS received fees under
the Investment Advisory Agreement of $5,699,041.
20.6. See Item 9.1.e. 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. Ernst & Young 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
<PAGE>
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<PAGE>
with the SEC). The principal business address of Ernst & Young LLP is 200
Clarendon Street, Boston, MA 02116.
20.8. Pursuant to the Registrar, Transfer Agency and Service Agreement
between the Registrant and MFS Service Center, Inc., MFS Service Center, Inc.
("MFSC") acts as the registrar and transfer agent for the Registrant's
authorized and issued shares of beneficial interest, as well as dividend
disbursing agent for the Registrant, and agent in connection with the Dividend
Reinvestment and Cash Purchase Plan of the Registrant. For account maintenance,
the Registrant currently pays MFSC a fee based on the total number of accounts
for all closed-end funds advised by MFS for which MFSC acts as registrar and
transfer agent. If the total number of accounts is less than 75,000, the annual
account fee is $9.00. If the total number of accounts is 75,000 or more, the
annual account fee is $8.00. For dividend services, MFSC charges $0.75 per
dividend reinvestment and $0.75 per cash infusion. If the total amount of fees
related to dividend services is less than $1,000 per month for all closed-end
funds advised by MFS for which MFSC acts as registrar and 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 the Registrant's portfolio manager who is an employee of MFS and who
is appointed and supervised by its senior officers. Changes in the Registrant's
investments are reviewed by the Board of Trustees. The portfolio manager may
serve other clients of the Registrant's Investment Adviser or any subsidiary of
the Investment Adviser in a similar capacity.
The primary consideration in portfolio security transactions is
execution at the most favorable prices and in the most effective manner ("best
execution"). The Investment Adviser has complete freedom as to the markets in
and the broker-dealers through which it seeks this result. U.S. Government
Securities and, in the United States and in certain other countries, other debt
securities are traded principally in the over-the-counter market on a net basis
through dealers acting for their own account and not as brokers. In other
countries, securities may be traded on exchanges at fixed commission rates. The
cost of securities purchased from underwriters includes an underwriter's
commission or concession, and the prices at which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down. The Investment
Adviser normally seeks to deal directly with the primary market maker, unless in
its opinion, better execution is available elsewhere. Securities firms may
receive brokerage commissions on transactions involving options, Futures
Contracts and Options on Futures Contracts and the purchase and sale of
underlying securities upon exercise of options. The
<PAGE>
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brokerage commissions associated with buying and selling options may be
proportionately higher than those associated with general securities
transactions. Subject to the requirement of seeking best execution securities
may, as authorized by the Advisory Agreement, be bought from or sold to dealers
who have furnished statistical, research and other information or services to
the Investment Adviser or who have sold shares of funds for which MFS or any
subsidiary serves as investment adviser. At present no arrangements to recapture
commission payments are in effect. For the fiscal year ended November 30, 1997,
the Registrant paid $5,601 in brokerage commissions on total transactions of
$2,214,798.37. For the fiscal years ended November 30, 1996, the Registrant paid
$0 in brokerage commissions. For the fiscal years ended November 1995, the
Registrant paid $0 in 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.
Item 23. Financial Statements: The following are incorporated herein by
reference to the Registrant's Annual Report to its shareholders, for its fiscal
year ended November 30, 1997, copies of which have been filed with the SEC:
Portfolio of Investments at November 30, 1997
Statement of Assets and Liabilities at November 30, 1997
Statement of Operations for the year ended November 30, 1997
Statement of Changes in Net Assets for the years ended November 30,
1997 and 1996
<PAGE>
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Per Share and Other Data for the period from the commencement of
investment operations, July 21, 1989, to November 30, 1989 and
for the years ended November 30, 1990, 1991, 1992, 1993, 1994,
1995, 1996 and 1997
Notes to Financial Statements
Independent Auditors' Report
<PAGE>
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PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
1. Financial Statements:
The following have been incorporated by reference in Item 23:
Portfolio of Investments at November 30, 1997
Statement of Assets and Liabilities at November 30, 1997
Statement of Operations for year ended November 30, 1997
Statement of Changes in Net Assets for the years ended
November 30, 1997 and 1996
Financial Highlights for the period from the commencement of
investment operations, July 21, 1989, to November 30,
1989 and for the years ended November 30, 1990, 1991, 1992,
1993, 1994, 1995, 1996 and 1997.
Notes to Financial Statements
Independent Auditors' Report
2. Exhibits:
(a) -- Amended and Restated Declaration of Trust, dated
November 3, 1986;(previously filed as Exhibit 1
(a) to Amendment No.9 to the Registration
Statement of Form N-2, filed with the SEC on
January 28, 1998 ("Amendment No. 9"); incorporated
herein by reference.
(a)(2) -- Amendment to Declaration of Trust, dated October
19, 1988; (previously filed as Exhibit 1(a)(2)
to Amendment No. 9); incorporated herein by
reference.
(b)(1) -- Amended and Restated By-Laws dated December 21,
1994 (previously filed as Exhibit (b)(2) to
Amendment No. 8 to the Registrant's Registration
Statement on Form N-2 filed with the Securities
and Exchange Commission on February 28, 1995
("Amendment No. 8")); incorporated herein by
reference.
(c) -- Inapplicable.
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(d) -- Specimen certificate for Shares of Beneficial
Interest(previously filed as Exhibit 1(d) to
Amendment No. 9); incorporated herein by reference
(e) -- The section "Dividend Reinvestment and Cash
Purchase Plan" on page 3 of the Registrant's
Annual Report to its Shareholders, for its
fiscal year ended October 31, 1997; (previously
filed as Exhibit 1(e) to Amendment No. 9);
incorporated herein by reference.
(f) -- Inapplicable.
(g)(1) -- Investment Advisory Agreement, dated November 6,
1986; (previously filed as Exhibit 1(g)(1) to
Amendment No. 9); incorporated herein by
reference.
(g)(2) -- Master Administrative Services Agreement dated
March 1, 1997, by and among Massachusetts
Financial Services Company and the Registrant
(previously filed as Exhibit 1(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; filed herewith.
(j)(1) -- Custodian Agreement dated February 19, 1988
between the Registrant and State Street Bank
and Trust Company (previously filed as Exhibit
1(j)(1) to Amendment No. 9); incorporated herein
by reference
(j)(2) -- Amendment to the Custodian Agreement dated
October 1, 1989; (previously filed as
Exhibit 1(j)(2) to Amendment No. 9); incorporated
herein by reference.
(j)(3) -- Amendment to Custodian Agreement dated September
17, 1991 (previously filed as Exhibit 1(j)(3) to
Amendment No. 9); incorporated herein by
reference.
(j)(4) -- Amendment to Custodian Agreement dated February
29, 1988 (previously filed as Exhibit 1(j)(4) to
Amendment No. 9); incorporated herein by
reference.
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(k)(1) -- Loan Agreement by and among the Banks named
therein, and The First National Bank of Boston,
and the MFS Funds named therein (previously
filed as Exhibit (k)(3) to Amendment No. 8);
incorporated herein by reference.
(k)(2) -- Registrar, Transfer Agency and Service Agreement
between Registrant and MFS Service Center, Inc.,
dated August 15, 1994 (previously filed as
Exhibit (k)(2) to Amendment No. 8); incorporated
herein by reference.
(l) -- Omitted pursuant to General Instruction G.3 to
Form N-2.
(m) -- Inapplicable.
(n) -- Omitted pursuant to General Instruction G.3 to
Form N-2.
(o) -- Omitted pursuant to General Instructions G.3 to
Form N-2.
(p) -- Form of Purchase Agreement (previously filed as
Exhibit 1(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 8,700
(without par value) (as at March 1, 1998)
- -------------------------------------------------------------------------------
<PAGE>
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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 reasonably 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
Investment Adviser are insured under an errors and omissions liability insurance
policy. The Registrant and its officers are also insured under the fidelity bond
required by Rule 17g-1 under the Investment Company Act of 1940.
Item 30. Business and Other Connections of Investment Adviser:
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds (except the Vertex Funds mentioned below):
Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Growth Opportunities Fund, MFS Government Securities Fund, MFS Government
Limited Maturity Fund, MFS Series Trust I (which has thirteen series: MFS
Managed Sectors Fund, MFS Cash Reserve Fund, MFS World Asset Allocation Fund,
MFS Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS Convertible
Securities Fund, MFS Blue Chip Fund, MFS New Discovery Fund, MFS Science and
Technology Fund and MFS Research International Fund), MFS Series Trust II (which
has three series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund and MFS
Intermediate Income Fund), MFS Series Trust III (which has two series: MFS High
Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has
four series: MFS Money Market Fund, MFS Government Money Market Fund, MFS
Municipal Bond Fund and MFS Mid Cap Growth Fund), MFS Series Trust V (which has
six series: MFS Total Return Fund, MFS Research Fund, MFS International
Opportunities Fund, MFS International Strategic Growth Fund, MFS International
Value Fund and MFS Asia Pacific Fund), MFS Series Trust VI (which has three
series: MFS World Total Return Fund, MFS Utilities Fund and MFS World Equity
Fund), MFS Series Trust VII (which has two series: MFS World Governments Fund
and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS Strategic
Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has three
series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS Series Trust X (which has eight series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS
International Growth Fund, MFS International Growth and Income Fund, MFS Real
Estate Investment Fund, MFS Strategic Value Fund, MFS Small Cap Value Fund and
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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.
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
<PAGE>
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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 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.
<PAGE>
-68-
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.
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.
<PAGE>
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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.
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.
<PAGE>
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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.
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.
<PAGE>
-71-
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.
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.
<PAGE>
-72-
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.
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
<PAGE>
-73-
of various subsidiaries and affiliates of Sun
Life)
John D. McNeil Chairman, Sun Life Assurance Company of Canada,
Sun Life Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. McNeil is also an
officer and/or Director of various
subsidiaries and affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The Boston
Company, Exchange Place, Boston, Massachusetts
(until August, 1994)
Item 31. Location of Accounts and Records:
The accounts and records of the Registrant are located, in whole or
in part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial 500 Boylston Street
Services Company Boston, Massachusetts 02116
State Street Bank and State Street South, 5-West
Trust Company North Quincy, Massachusetts 02171
MFS Service Center 500 Boylston Street
Boston, Massachusetts 02116
Item 32. Management Services: Inapplicable.
Item 33. Undertakings: Inapplicable.
<PAGE>
-74-
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Boston and Commonwealth of Massachusetts on the 26th day of March, 1998.
MFS CHARTER INCOME TRUST
By JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit Page
27 -- Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000851170
<NAME> MFS CHARTER INCOME TRUST
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 719421891
<INVESTMENTS-AT-VALUE> 725403418
<RECEIVABLES> 19447727
<ASSETS-OTHER> 6410
<OTHER-ITEMS-ASSETS> 43083
<TOTAL-ASSETS> 744900638
<PAYABLE-FOR-SECURITIES> 23541691
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3474745
<TOTAL-LIABILITIES> 27016436
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 727937921
<SHARES-COMMON-STOCK> 68904439
<SHARES-COMMON-PRIOR> 69654939
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (4119585)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (15552514)
<ACCUM-APPREC-OR-DEPREC> 9618380
<NET-ASSETS> 717884202
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 30182510
<OTHER-INCOME> 0
<EXPENSES-NET> (3070426)
<NET-INVESTMENT-INCOME> 27112084
<REALIZED-GAINS-CURRENT> 957498
<APPREC-INCREASE-CURRENT> (10991772)
<NET-CHANGE-FROM-OPS> 17077810
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (27112084)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (888266)
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> (750500)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (18087180)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (3231319)
<OVERDIST-NET-GAINS-PRIOR> (16510012)
<GROSS-ADVISORY-FEES> 2537279
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3100622
<AVERAGE-NET-ASSETS> 721256046
<PER-SHARE-NAV-BEGIN> 10.57
<PER-SHARE-NII> 0.39
<PER-SHARE-GAIN-APPREC> (0.14)
<PER-SHARE-DIVIDEND> (0.40)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.42
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
