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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
FEBRUARY 28, 1996
1940 ACT FILE NO. 811-5912
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 8 |X|
MFS SPECIAL VALUE 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 Special Value 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 SPECIAL VALUE 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. 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 September 29, 1989.
8.2, 8.3, and 8.4. Investment Objectives and Policies, Risk Factors
and Other Policies:
INVESTMENT OBJECTIVE AND POLICIES
The Trust's investment objective is to maintain an annual distribution
rate of 11%, based on the original offering price of $15.00 per share, while
seeking opportunities for capital appreciation. In pursuing this objective, the
Registrant may invest in securities issued or guaranteed by the U.S. Government,
its agencies, authorities and instrumentalities ("U.S. Government Securities")
and, when appropriate, related options. As opportunities arise in the
marketplace, the Registrant may invest its assets in securities that the
Registrant believes represent uncommon value by having the potential for
significant capital appreciation over a period of twelve months or longer. The
issuers of such securities may include companies out-of-favor in the marketplace
or in out-of-favor industries, companies currently performing well but in
industries where the outlook is questionable and over-leveraged companies with
promising longer-term prospects. Some of these companies may be experiencing
financial or operating difficulties, and certain of those companies may be
involved, at the time of acquisition or soon thereafter, in reorganizations,
capital restructurings or bankruptcy proceedings; however, most of these
companies will not be experiencing such financial or operating difficulties as
will, in the Investment Adviser's opinion, lead to reorganizations, capital
restructurings or bankruptcy proceedings.
The Investment Adviser believes that the risks associated with
investing a portion of its assets in the debt and equity securities described
above can be managed through proper credit,
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financial and legal analysis, research and portfolio diversification. The
Investment Adviser will further attempt to manage risk through acquisition of
debt securities generally at significant discounts to face value and near the
Investment Advisor's estimate of their liquidation values. As a result, in the
event of the issuer's bankruptcy or liquidation, the Registrant would have a
greater possibility of recouping its initial investment than if it had not
purchased the securities at a discount. The availability of deeply discounted
debt securities usually results from the severely reduced credit quality of the
issuer. However, such securities offer the potential for significant capital
appreciation if the issuer is able to pay the security at maturity or to redeem
the issue at face value or if the credit quality of the security improves.
Similarly, the Investment Adviser believes that securities which are not current
in the payment of interest or dividends present the opportunity for significant
capital appreciation. There can be no assurance in these situations that such
capital appreciation will occur or that it will occur in the time frame
estimated by the Investment Advisor or that there will not be a loss of a
significant portion of the Registrant's investment in such issues.
The Trust may also invest in fixed income and equity securities of
non-U.S. issuers. To the extent available and permissible, the Registrant may
invest in options and Futures Contracts on securities, currencies and indices as
more fully described below.
The Investment Adviser will determine, based upon current yields and
the appreciation potential of various categories of securities, the relative
apportionment of the Registrant's assets among particular investments. The Trust
will evaluate its degree of success in achieving its investment objective by
measuring whether it can, over time, maintain an annual distribution rate of 11%
while paying expenses, without a substantial portion of such distributions being
a return of shareholders' capital; however, there can be no assurance that the
Registrant will achieve its investment objective. For the risk considerations
involved, see "Risk Factors" below.
U.S. Government Securities. The U.S. Government Securities in which the
Registrant may 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-though 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) interest in trusts or other entities
representing interests in obligations that are issued or guaranteed by U.S.
Government agencies, authorities or instrumentalities. For a description of
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, see "Description of Obligations Issued or Guaranteed by U.S.
Government Agencies or Instrumentalities" below.
U.S. Government Securities in which the Registrant may invest do not
involve the credit risks associated with other types of interest bearing
securities, although some are not backed by
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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. Longer- term Government Securities generally are less stable
and more susceptible to principal loss than shorter- term securities; however,
longer-term securities in most cases offer higher yields than securities with
shorter maturities.
Equity Securities. The Trust may invest in common stocks and warrants
of companies whose stock prices the Investment Adviser expects to increase
significantly because of special factors, such as rejuvenated management, new
products, changes in consumer demand, takeover bids or basic changes in the
economic environment. At the time the Registrant acquires such securities, these
companies may be out-of-favor in the marketplace, in out-of-favor industries,
currently performing well but in industries where the outlook is questionable or
over-leveraged with promising longer- term prospects for improved stock prices,
improved financial performance or reduced debt levels. Some of these companies
may be experiencing financial or operating difficulties or they may be involved
in reorganizations, capital restructurings or bankruptcy proceedings. See "Risk
Factors" below. The Investment Adviser's analysis of such companies will include
the industry outlook and competitive factors, including supplier and customer
relationships, strengths and weaknesses of products, viability of product lines
and other considerations in an effort to determine the company's business
prospects. The Investment Adviser will also consider the depth and capabilities
of the management team of an issuer to assess its ability to lead a company
through financial or operating difficulties. A company's need for additional
capital and the potential sources of such capital will also be considered by the
Investment Adviser. The Investment Adviser will perform credit and financial
analyses, emphasizing cash flow. Generally, the Registrant will not be invested
in a distressed situation if the Investment Adviser believes accurate financial
and business information is not available. In most cases capital appreciation
will be realized through the value inherent in the continued operation of the
company's business. When the Registrant does invest in a company in financial
difficulties, the Investment Adviser will have estimated the liquidation value
of the company to measure the risk of loss in case the company is unable to
continue operations; if the investment is purchased at or below liquidation
value, the ultimate risk of loss may be reduced. In certain cases, the sale of
the company's assets may provide more value than its continued operation. In the
event of a liquidation, the claims of creditors and bondholders to the assets of
the issuer are satisfied before any payments are made to equity owners.
Corporate Fixed Income Securities. Corporate fixed income securities of
issuers in which the Registrant may invest include preferred and preference
stock and all types of long-term or short-term debt obligations, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates,
conditional sales contracts and commercial paper (including obligations, such as
repurchase agreements, secured by such instruments). Corporate fixed income
securities may also include zero coupon bonds, deferred interest bonds, bonds on
which the interest is payable in kind ("PIK bonds") and zero coupon notes with
puts ("option notes"). Zero coupon and deferred interest bonds and option notes
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
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at a rate of interest reflecting the market rate of the security at the time of
issuance. While zero coupon bonds and option notes do not require the periodic
payment of interest, deferred interest bonds provide for a period of delay
before the regular payment of interest begins. Option notes are generally
convertible into the issuer's common stock, at the option of the holder, at any
time prior to or on maturity unless previously redeemed by the issuer or
surrendered to the issuer by the holder for payment in shares of the issuer's
common stock or in cash, at the issuer's option. 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 Trust is required to accrue income on such investments for tax and
accounting purposes, which is distributable to shareholders. Because such
investments do not generate cash, it may become necessary for the Registrant to
sell other securities in order to maintain its annual distribution rate even
though such sales may not otherwise be advantageous to the Registrant from an
investment or tax perspective. The Trust will purchase such securities for
capital appreciation which may result from favorable interest rate trends,
improved credit quality of the issuer, or both, consistent with the Registrant's
investment objective. See "Risk Factors" 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).
The Registrant may invest in securities rated Baa by Moody's Investors
Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group ("S&P") or
Fitch Investors Service, Inc. ("Fitch") and comparable unrated securities. These
securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income securities.
The Registrant may also invest in securities rated lower than BBB by
S&P or Fitch or Baa by Moody's and comparable unrated securities (commonly known
as "junk bonds"). These lower rated or unrated securities are considered
speculative and while generally providing greater income than investments in
higher rated securities, usually are high risk securities involving greater
volatility of price (especially during periods of economic uncertainty or
change) and risk to principal and income (including the possibility of default
by or bankruptcy of the issuers of such securities) than securities in the
higher rating categories. However, since yields vary over time, no specific
level of income can ever be assured. See "Risk Factors" below.
It is anticipated that many of the corporate fixed income securities in
which the Registrant may invest for the sole purpose of capital appreciation and
not for the purpose of producing income may not be current on payment of
interest at the time of acquisition or may be involved, at acquisition or
thereafter, in reorganization, restructuring or bankruptcy proceedings. Such
securities will be unrated or in the lowest rating categories of recognized
rating agencies (that is ratings of B or lower by Moody's or BB or lower by S&P
or Fitch. Securities rated B or BB or
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below (or comparable unrated securities) are considered speculative and may be
questionable as to principal and interest payments. In some cases, such
securities may be highly speculative, have poor prospects for reaching
investment standing and may be in default. For a description of the ratings
categories, see "Description of Bond Ratings" below. No minimum rating standard
is required for a purchase by the Registrant. The Investment Adviser may seek an
active role in reorganization, restructuring or bankruptcy proceedings of such
issuers at the time of its investments or may decide to assume such a role as a
result of subsequent events. Active participation may involve the identification
and organization of existing debt or equity holders and acting as agent to
negotiate on their behalf. The Trust will rely on the Investment Adviser's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. The Investment Adviser will consider the issuer's experience and
managerial strength, changing financial conditions, borrowing requirements,
responsiveness to changes in business conditions and interest rates, and
regulatory matters in analyzing the risk involved in investments in such
corporate fixed income securities. The Investment Adviser also will consider
relative values among possible investments based on anticipated cash flow,
interest coverage, asset coverage and earnings potential. See "Risk Factors"
below.
The Trust may have difficulty disposing of certain lower-rated
securities because there may be a thin trading market for such securities.
Because not all dealers maintain markets in all lower-rated, fixed income
securities, there is no established retail secondary market for many of these
securities, and the Registrant anticipates that such securities could only be
sold to a limited number of dealers or institutional investors. To the extent a
secondary market for lower- rated, fixed income securities does exist, it is
generally not as liquid as the secondary market for higher-rated securities. The
lack of a liquid secondary market may have an adverse impact on market price and
the Registrant's ability to dispose of particular issues when necessary to meet
the Registrant's liquidity needs or in response to a specific economic event
such as a deterioration in the creditworthiness of the issuer. The lack of a
liquid secondary market for certain securities may also make it more difficult
for the Registrant to obtain accurate market quotations for purposes of valuing
the Registrant's portfolio. Market quotations are generally available on many
lower-rated issues only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
The market value of lower-rated securities tends to reflect individual
corporate developments to a greater extent than higher-rated securities, which
react primarily to fluctuations in the general level of interest rates. Such
lower-rated securities also tend to be more sensitive to economic conditions
than are higher-rated securities. An economic downturn could severely disrupt
the market for lower-rated securities and adversely affect the value of
outstanding securities and the ability of issuers to repay principal and
interest. Factors having an adverse impact on the market value of lower-rated
securities will have an adverse impact on the Registrant's net asset value. In
addition, the Registrant may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings. Recent adverse publicity regarding lower-rated
securities may have depressed the prices for such securities to some extent.
Whether investor perceptions will continue to have a negative effect on the
price of such securities is uncertain.
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Other Investments. The Trust may invest up to 10% of its total assets
in securities of foreign issuers which are not traded on U.S. exchanges
(excluding American Depositary Receipts), including securities issued by foreign
governments considered stable by the Investment Adviser, fixed income securities
of foreign corporations, common stocks and equivalents (such as convertible debt
securities and warrants) and preferred stocks of foreign corporations and
foreign currency. The decision to invest in securities issued abroad ("foreign
securities") will depend 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 with the U.S. dollar. Investments in foreign
securities and currency will be evaluated on the basis of fundamental economic
criteria (e.g., relative inflation levels and trends, growth rate forecasts,
balance of payments status, and economic policies) as well as technical and
political data. In addition to the foregoing, interest rates are evaluated on
the basis of differentials or anomalies that may exist between issuers in
different countries with similar economies. The Investment Adviser will also
consider the factors described above under "Equity Securities" and "Corporate
Fixed Income Securities" in making decisions to invest in securities issued
abroad.
The Trust may hold foreign currency for hedging purposes to protect
against declines in the U.S. dollar value of foreign securities held by the
Registrant and against increases in the U.S. dollar value of the foreign
securities which the Registrant might purchase. The Registrant may also hold
foreign currency in anticipation of purchasing foreign securities. For the risk
considerations involved in investing in foreign securities, see "Risk Factors"
below.
American Depositary Receipts. The Registrant may invest in American
Depositary Receipts ("ADRs") which are certificates issued by a U.S. depository
(usually a bank) and represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. ADRs may be
sponsored or unsponsored. A sponsored ADR is issued by a depository which has an
exclusive relationship with the issuer of the underlying security. An
unsponsored ADR may be issued by any number of U.S. depositories. Under the
terms of most sponsored arrangements, depositories agree to distribute notices
of shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities. The depository of an unsponsored ADR, on the
other hand, is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through voting
rights to ADR holders in respect of the deposited securities. The Registrant may
invest in either type of ADR. Although the U.S. investor holds a substitute
receipt of ownership rather than direct stock certificates, the use of the
depositary receipts in the United States can reduce costs and delays as well as
potential currency exchange and other difficulties. The Registrant may purchase
securities in local markets and direct delivery of these ordinary shares to the
local depository of an ADR agent bank in the foreign country. Simultaneously,
the ADR agents create a certificate which settles at the Registrant's custodian
in five days. The Registrant may also execute trades on the U.S. markets using
existing ADRs. A foreign issuer of the security underlying an ADR is generally
not subject to the same reporting requirements in the United States as a
domestic issuer. Accordingly the information available to a U.S. investor will
be limited to the information the foreign issuer is required to disclose in its
own country and the
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market value of an ADR may not reflect undisclosed material information
concerning the issuer of the underlying security. ADRs may also be subject to
exchange rate risks if the underlying foreign securities are traded in foreign
currency.
Emerging Market Securities. Consistent with the Registrant's objective
and policies, the Registrant may invest in securities of issuers whose principal
activities are located in emerging market countries and Brady bonds. Emerging
market countries include any country determined by the Adviser to have an
emerging market economy, taking into account a number of factors, including
whether the country has a low- to middle-income economy according to the
International Bank for Reconstruction and Development, the country's foreign
currency debt rating, its political and economic stability and the development
of its financial and capital markets. The Adviser determines whether an issuer's
principal activities are located in an emerging market country by considering
such factors as its country of organization, the principal trading market for
its securities and the source of its revenues and assets. The issuer's principal
activities generally are deemed to be located in a particular country if: (a)
the security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c) the
issuer has its principal securities trading market in that country; (d) the
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country. Brady bonds are securities created through the exchange of
existing commercial bank loans to public and private entities in certain
emerging markets for new bonds in connection with debt restructurings under a
debt restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in
Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Ecuador, Jordan,
Mexico, Nigeria, Panama, the Philippines, Poland, Uruguay and Venezuela. Brady
bonds have been issued only recently, and for that reason do not have a long
payment history. Brady bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the- counter secondary markets. U.S. dollar-denominated,
collateralized Brady bonds, which may be fixed-rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S. Treasury
zero coupon bonds having the same maturity as the bonds. Brady bonds are often
viewed as having three or four valuation components: the collateralized
repayment of principal at final maturity; the collateralized interest payments;
the uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (the uncollateralized amounts constituting the "residual
risk"). In light of the residual risk of Brady bonds and the history of defaults
of countries issuing Brady bonds with respect to commercial bank loans by public
and private entities, investments in Brady bonds may be viewed as speculative.
The risks of investing in foreign securities may be intensified in the
case of investments in emerging markets. Securities of many issuers in emerging
markets may be less liquid and more volatile than securities of comparable
domestic issuers. Emerging markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
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difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of the Registrant is uninvested
and no return is earned thereon. The inability of the Registrant to make
intended security purchases due to settlement problems could cause the
Registrant to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems could result in losses to the
Registrant due to subsequent declines in value of the portfolio security, a
decrease in the level of liquidity in the Registrant's portfolio, or, if the
Registrant has entered into a contract to sell the security, in possible
liability to the purchaser. Certain markets may require payment for securities
before delivery, and in such markets the Registrants bear the risk that the
securities will not be delivered and that the Registrant's payments will not be
returned. Securities prices in emerging markets can be significantly more
volatile than in the more developed nations of the world, reflecting the greater
uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may have relatively unstable
governments, present the risk of nationalization of businesses, restrictions on
foreign ownership, or prohibitions of repatriation of assets, and may have less
protection of property rights than more developed countries. The economies of
countries of emerging markets may be predominantly based on only a few
industries, may be highly vulnerable to changes in local or global trade
conditions and may suffer from extreme and volatile debt burdens or inflation
rates. Local securities markets may trade a small number of securities and may
be unable to respond effectively to increases in trading volume potentially
making prompt liquidation of substantial holdings difficult or impossible at
times. Securities of issuers located in countries with emerging markets may have
limited marketability and may be subject to more abrupt or erratic price
movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sale of securities
of foreign investors. In addition, if a deterioration occurs in an emerging
market's balance of payments or for other reasons a country could impose
temporary restrictions on foreign capital remittances. The Registrant could be
adversely 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.
When the Investment Adviser believes that investing for temporary
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.
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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 securities including
domestic and foreign securities indices and with respect to foreign currencies.
See "Forward Contracts and Options on Foreign Currency" below. 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. 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 Trust 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 or securities
prices which otherwise might either adversely affect the value of the
Registrant's portfolio securities or adversely affect the prices of securities
which the Registrant intends to purchase at a later date. Should interest or
exchange rates move in an unexpected manner, the Registrant may not achieve the
anticipated benefits of Futures Contracts or Options on Futures Contracts or may
realize a loss. For further discussion of the use, risks and costs of Futures
Contracts and Options on Futures Contracts, see "Options and Futures" below.
The Trustees have adopted the requirement that Futures Contracts and
Options on Futures Contracts only be used as a hedge and not for speculation. In
addition to this requirement, the Board of Trustees has also adopted two other
restrictions on the use of Futures Contracts. The first restriction is that the
Registrant will not enter into any Futures Contracts and Options on Futures
Contracts if immediately thereafter the amount of initial margin deposits on all
the Futures Contracts of the Registrant and premiums paid on Options on Futures
Contracts would exceed 5% of the market value of the total assets of the
Registrant. The second restriction is that the value of the securities and other
obligations underlying all such Futures Contracts held by the Registrant not
exceed 50% of the value of the total assets of the Registrant. Neither of these
restrictions will be changed by the Registrant's Board of Trustees without
considering the policies and concerns of the various federal and state
regulatory agencies.
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
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Reserve System and the Securities and Exchange Commission (the "SEC"). Such
loans will usually be made only to member banks of the Federal Reserve System
and member firms (and subsidiaries thereof) of the New York Stock Exchange and
would be required to be secured continuously by collateral in cash, U.S.
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 and would also receive
either interest (through the investment of cash collateral) or a fee (if the
collateral is U.S. Government Securities). The Trust would not, however, have
the right to vote any securities having voting rights during the existence of
the loan, but the Registrant would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving or withholding
of their consent on a material matter affecting the investment. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, the loans would be made only to firms deemed by the Investment Adviser
to be of good standing, and when, in the judgment of the Investment Adviser, the
consideration which can be earned currently from securities loans of this type
justified the attendant risk. If the Investment Adviser determines to make
securities loans, it is intended that the value of the securities loaned would
not exceed 30% of the value of the Registrant's total assets.
"When-Issued Securities". Securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the obligations
will be delivered at a future date beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a future
date may be deemed a separate security. Although the Registrant is not limited
to the amount of securities for which it may have commitments to purchase on
such basis, it is expected that under normal circumstances, the Registrant will
not commit more than 30% of its assets to such purchases. The Trust does not pay
for the securities until received or start earning interest on them until the
contractual settlement date. In order to invest its assets immediately, while
awaiting delivery of securities purchased on such basis, the Registrant may
invest in short-term securities that offer same-day settlement and earnings, but
that may bear interest at a lower rate than longer term securities.
The Trust has established procedures consistent with the General
Statement of Policy of the SEC concerning such commitments. 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 additional income on available cash or as a
temporary defensive measure. Under a
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repurchase agreement, the Registrant acquires securities subject to the seller's
agreement to repurchase at a specified time and price.
The Registrant may enter into repurchase agreements with sellers who
are member firms (or a subsidiary 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 values
of which are equal to or greater than the repurchase price agreed to be paid by
the seller. The repurchase price may be higher than the purchase price, the
difference being income to the Registrant, or the purchase and repurchase price
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 price agreed upon on the agreed upon delivery date or upon demand, as
the case may be, the Registrant will have the right to liquidate the securities.
If at the time the Registrant is contractually entitled to exercise its right to
liquidate the securities, the seller is subject to a proceeding under the
bankruptcy laws or its assets are otherwise subject to a stay order, the
Registrant's exercise of its right to liquidate the securities may be delayed
and result in certain losses and costs to the Registrant. The Registrant has
adopted and follows procedures which are intended to minimize the risks of
repurchase agreements. For example, the Registrant only enters into repurchase
agreements after the Investment Adviser has determined that the seller is
creditworthy, and the Investment Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked-to-market every business day) is required to be
greater than the repurchase price, and the Registrant has the right to make
margin calls at any time if the value of the securities falls below the agreed
upon margin.
Mortgage Pass-Through Securities. The Registrant may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. The average lives of mortgage pass-throughs are variable when
issued because their average lives depend on prepayment rates. The average life
of these securities is likely to be substantially shorter than their stated
final maturity as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all or a part
of a premium if any has been paid, and the actual yield (or total return) to the
Registrant may be different than the quoted yield on the securities. Mortgage
prepayments generally increase with falling interest rates and decrease with
rising interest rates. Like other fixed income securities, when interest rates
rise the value of the mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of other
fixed income securities.
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Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a "pass
through" of the monthly payments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass- through securities (such as
securities issued by the GNMA) are described as "modified pass-through
securities." These securities entitle the holder to receive all interests and
principal payments owed on the mortgages in the mortgage pool, net of certain
fees, at the scheduled payment dates regardless of whether the mortgagor
actually makes the payment.
The principal government guarantor of mortgage pass-through securities
is GNMA. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the U.S. Government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage bankers)
and backed by pools of FHA-insured or VA-guaranteed mortgages. These guarantees,
however, do not apply to the market value or yield of mortgage pass-through
securities. GNMA securities are often purchased at a premium over the maturity
value of the underlying mortgages. This premium is not guaranteed and will be
lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S. Government) include FNMA and Federal Home
Loan Mortgage Corporation ("FHLMC"). FNMA is a government-sponsored corporation
owned entirely by private stockholders. It is subject to general regulation by
the Secretary of Housing and Urban Development. FNMA purchases conventional
residential mortgages (i.e., mortgages not insured or guaranteed by any
governmental agency) from a list of approved sellers/servicers which include
state and federally- chartered savings and loan associations, mutual savings
banks, commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment by FNMA of
principal and interest.
FHLMC was created by Congress in 1970 as a corporate instrumentality of
the U.S. Government for the purpose of increasing the availability of mortgage
credit for residential housing. FHLMC issues Participation Certificates ("PCs")
which represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) from FHLMC's national portfolio. FHLMC guarantees timely payment
of interest and ultimate collection of principal regardless of the status of the
underlying mortgage loans.
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
<PAGE>
collateral. Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. Most issuers of
automobile receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is the risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support which fall into two
categories: (1) liquidity protection and (2) protection against losses resulting
from ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the receipt of payments on the
underlying pool occurs in a timely fashion. Protection against losses resulting
from ultimate default ensures payment through insurance policies or letters of
credit obtained by the issuer or sponsor from third parties. The Registrant will
not pay any additional or separate fees for credit support. The degree of credit
support provided for each issue is generally based on historical information
with respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that anticipated or failure of the credit
support could adversely affect the return on an investment in such a security.
Mortgage "Dollar Roll" Transactions. The Registrant may enter into
mortgage "dollar roll" transactions with selected banks and broker-dealers
pursuant to which the Registrant sells mortgage-backed securities for delivery
in the future (generally within 30 days) and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. The Registrant will only enter into covered rolls. A
"covered roll" is a specific type of "dollar roll" for which there is an
offsetting cash position or a cash equivalent security position which matures on
or before the forward settlement date of the "dollar roll" transaction. During
the roll period, the Registrant forgoes principal and interest paid on the
mortgage- backed securities. The Registrant is compensated for the lost interest
by the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Registrant may also be
compensated by receipt of a commitment fee.
Forward Contracts And Options On Foreign Currency. The Trust may enter
into forward 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")
and options on foreign currencies for hedging purposes as well as for
non-hedging purposes. The Registrant may also enter into a Forward Contract on
one currency in order to hedge against risk of loss arising from fluctuations in
the value of a second currency (referred to as a "cross hedge") if, in the
judgment of the Investment Adviser, a
<PAGE>
reasonable degree of correlation can be expected between movements in the values
of the two currencies. By entering into Forward Contracts and options on foreign
currencies for hedging purposes, the Registrant may be required to forego all or
a portion of the benefits of advantageous changes in exchange rates. The Trust
may also enter into transactions in Forward Contracts and options on foreign
currencies for other than hedging purposes; however, where exchange rates do not
move in the direction or to the extent anticipated, the Registrant may sustain
losses which will reduce its gross income.
The Registrant has established procedures consistent with statements by
the SEC and its staff regarding the use of Forward Contracts by registered
investment companies, which require the use of segregated assets or "cover" in
connection with the purchase and sale of such contracts. In those instances in
which the Registrant satisfies this requirement through the segregation of
assets, it will maintain, in a segregated account, cash, cash equivalents or
high grade debt securities, which will be marked-to-market on a daily basis, in
an amount equal to the value of its commitments under Forward Contracts entered
into by the Registrant. While Forward 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 and options on foreign currencies 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. For further discussion of the use, risks and costs
of Forward Contracts and options on foreign currency, see "Options and Futures"
below.
Loans and Other Direct Indebtedness. The Registrant may invest a
portion of its assets in loans and other direct indebtedness. By purchasing a
loan, the Registrant acquires some or all of the interest of a bank or other
lending institution in a loan to a corporate borrower. Many such loans are
secured, and most impose restrictive covenants which must be met by the
borrower. These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged by-outs and other corporate
activities. Such loans may be in default at the time of purchase. The Registrant
may also purchase trade or other claims against companies, which generally
represent money owed by the company to a supplier of goods and services. These
claims may also be purchased at a time when the company is in default. Certain
of the loans acquired by the Registrant may involve revolving credit facilities
or other standby financing commitments which obligate the Registrant to pay
additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions. Loans
and other direct investments may not be in the form of securities or may be
subject to restrictions on transfer, and only limited opportunities may exist to
resell such instruments. As a result, the Registrant may be unable to sell such
investments at an opportune time or may have to resell them at less than fair
market value.
Certain of the loans acquired by the Registrant may involve revolving
credit facilities or other standby financing commitments which obligate the
Registrant to pay additional cash on a
<PAGE>
certain date or on demand. To the extent that the Registrant is committed to
advance additional funds, it will at all times hold and maintain in a segregated
account cash or other high grade debt obligations in an amount sufficient to
meet such commitments.
The Registrant's ability to receive payments of principal, interest and
other amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loan participations
and other direct investments which the Registrant will purchase, the Investment
Adviser will rely upon its (and not that of the original lending institution's)
own credit analysis of the borrower. As the Registrant may be required to rely
upon another lending institution to collect and pass on to the Registrant
amounts payable with respect to the loan and to enforce the Registrant's rights
under the loan, an insolvency, bankruptcy or reorganization of the lending
institution may delay or prevent the Registrant from receiving such amounts. In
such cases, the Registrant will evaluate as well the creditworthiness of the
lending institution and will treat both the borrower and the lending institution
as an "issuer" of the loan participation for purposes of certain investment
restrictions pertaining to the diversification of the Registrant's portfolio
investments. The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions.
Investments in such loans may involve additional risks to the Registrant. For
example, if a loan is foreclosed, the Registrant could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, the Registrant could be held liable as a
co-lender. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, the Registrant relies on the
Investment Adviser's research in an attempt to avoid situations where fraud or
misrepresentation could adversely affect the Registrant. In addition, loan
participations and other direct investments may not be in the form of securities
or may be subject to restrictions on transfer, and only limited opportunities
may exist to resell such instruments. As a result, the Registrant may be unable
to sell such investments at an opportune time or may have to resell them at less
than fair market value. To the extent that the Investment Adviser determines
that any such investments are illiquid, the Registrant will include them in the
investment limitations described below.
Short Sales. If the Registrant anticipates that the price of a security
will decline, it may sell the security short and borrow the same type of
security from a broker or other institution to complete the sale. The Registrant
may make a profit or loss depending upon whether the market price of the
security decreases or increases between the date of the short sale and the date
on which the Registrant must replace the borrowed security. Possible losses from
short sales differ from losses that could be incurred from a purchase of a
security, because losses from short sales may be unlimited, whereas losses from
purchases can equal only the total amount invested.
The Registrant may seek to hedge investments or realize additional
gains through short sales. The Registrant may make short sales, which are
transactions in which the Registrant sells a security it does not own, in
anticipation of a decline in the market value of that security. To complete such
a transaction, the Registrant must borrow the security to make delivery to the
buyer. The Registrant then is obligated to replace the security borrowed by
purchasing it at the
<PAGE>
market price at the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Registrant. Until the
security is replaced, the Registrant is required to repay the lender any
dividends or interest which accrue during the period of the loan. To borrow the
security, the Registrant also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale will
be retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out. The Registrant also will incur
transaction costs in effecting short sales.
The Registrant will incur a loss as a result of the short sale if the
price of the security increases between the date of the short sale and the date
on which the Registrant replaces the borrowed security. The Registrant will
realize a gain if the security declines in price between those dates. The amount
of any gain will be decreased, and the amount of any loss increased, by the
amount of the premium, dividends or interest the Registrant may be required to
pay in connection with a short sale.
Whenever the Registrant engages in short sales, its custodian
segregates cash or U.S. Government securities in an amount that, when combined
with the amount of collateral deposited with the broker in connection with the
short sale, equals the current market value of the security sold short. The
segregated assets are marked to market daily.
In addition, the Registrant also may make short sales "against the
box," i.e., when a security identical to one owned by the Registrant is borrowed
and sold short. If the Registrant enters into a short sale against the box, it
is required to segregate securities equivalent in kind and amount to the
securities sold short (or securities convertible or exchangeable into such
securities) and is required to hold such securities while the short sale is
outstanding. The Registrant will incur transaction costs, including interest, in
connection with opening, maintaining, and closing short sales against the box.
Collateralized Mortgage Obligations and Multi-Class Pass-Through
Securities. The Registrant may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities, which in the case of U.S.
Government Securities are issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities. Typically, CMOs are collateralized
by certificates issued by GNMA, FNMA or FHLMC but also may be collateralized by
whole loans or private mortgage pass-through securities (such collateral
collectively hereinafter referred to as "Mortgage Assets"). The Registrant may
also invest a portion of its assets in multi-class pass-through securities which
are equity interests in a Registrant composed of Mortgage Assets. Unless the
context indicates otherwise, all references herein to CMOs include multi-class
pass-through securities. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multi-class
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the United States or a foreign government or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing.
<PAGE>
The issuer of a series of CMOs may elect to be treated as a Real Estate Mortgage
Investment Conduit (a "REMIC").
In a CMO, a series of bonds or certificates may be issued in multiple
classes. Each class of CMOs, often referred to as a "tranche", is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrued on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a series of a CMO in
innumerable ways. In a common structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of the
series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security). See "Stripped Mortgage-Backed Securities" below for a
discussion of the rights of investing in these stripped securities and of
investing in classes consisting primarily of interest payments or principal
payments.
The Registrant may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
Stripped Mortgage-Backed Securities. In addition, the Registrant may
invest a portion of its assets in stripped mortgage-backed securities ("SMBS"),
which are derivative multi-class mortgage securities issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks and investment banks.
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
<PAGE>
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.
Yield Curve Options. The Registrant may also enter into options on the
"spread", or differential, between two securities, in a transaction referred to
as a "yield curve" option. In contrast to other types of options, a yield curve
option is based on the difference between the yields of designated securities,
rather than the prices of the individual securities, and is usually settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options
on securities. Specifically, the Registrant may purchase or write such options
in order to protect against the adverse effects of a potential widening or
narrowing of the spreads between securities, or other interest rate sensitive
instruments, held in the Registrant's portfolio. The Registrant may also
purchase or write yield curve options for other than hedging purposes if, in the
judgment of the Investment Adviser, the Registrant will be able to profit from
movements in the spread between the yields of the underlying securities. The
trading of yield curve options is subject to all of the risks associated with
the trading of other types of options. In addition, however, such options
present risk of loss even if the yield of one of the underlying securities
remains constant, if the spread moves in a direction or to an extent which was
not anticipated. Yield curve options written by the Registrant will be covered.
A call (or put) option is covered if the Registrant holds another call (or put)
option on the spread between the same two securities and maintains in a
segregated account with its custodian cash or cash equivalents sufficient to
cover the Registrant's net liability under the two options. Yield curve options
may also be covered in such other manner as may be in accordance with the
requirements of the counterparty with which the option is traded and applicable
laws and regulations. Yield curve options are traded over-the-counter and
because they have been only recently introduced, established trading markets for
these securities have not yet developed.
OPTIONS AND FUTURES
Options. The Trust may write covered put and call options and purchase
put and call options on securities that are 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 additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Registrant holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call held
is (a) equal to or less than the exercise
<PAGE>
price of the call written or (b) greater than the exercise price of the call
written if the difference is maintained by the Registrant in cash or cash
equivalents in a segregated account with its custodian. A put option written is
"covered" if the Registrant maintains cash or cash equivalents with a value
equal to the exercise price in a segregated account with its custodian, or else
holds a put on the same security and in the same principal amount as the put
written where the exercise price of the put held is equal or greater than the
exercise price of the put written or is less than the exercise price of the put
written if the difference is maintained by the Registrant in cash or cash
equivalents in a segregated account with its custodian. 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 of a decline in the market value of the underlying security
during the option period. If a call option is exercised, the writer experiences
a profit or loss from the sale of the underlying security. If a put option is
exercised, the writer must fulfill the obligation to purchase the underlying
security at the exercise price, which will usually exceed the then-market value
of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an 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 Trust investments. If the Registrant desires to sell
a particular security from its portfolio on which it has written a call option,
it will effect a closing transaction prior to or concurrent with the sale of the
security.
The Trust 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
<PAGE>
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 Exchange could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the OCC as a result of trades
on the Exchange would continue to be exercisable in accordance with their terms.
The Trust 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.
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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 Trust 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 Trust 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.
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 the
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 trust 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 Trust will treat all or a
portion of the formula price as illiquid for purposes of its investment
restrictions. The Trust may also write over-the-counter options with non-primary
dealers, including foreign dealers, and will treat the assets used to cover
these options as illiquid for purposes of such 20% test.
Futures Contracts. The Trust 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 including any index of U.S. or
foreign government securities ("Futures
<PAGE>
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 or 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 Trust 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 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
<PAGE>
incurred by the Futures Contract. The Trust will incur brokerage fees when if
purchases and sells Futures Contracts.
The 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 has 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 assets in the segregated asset account
maintained to cover the Registrant's obligations with respect to such Futures
Contracts will consist of cash, cash equivalents or high quality debt securities
from its portfolio 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 the possibility of distortion, a
correct forecast of general interest rate trends by the Investment Adviser may
still
<PAGE>
not result in a successful transaction. A Futures Contract entered into by the
Registrant may be closed out only where there exists a secondary market for such
contract.
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 Trust may have to sell securities at a time when it may be disadvantageous
to do so.
Options on Futures Contracts. The Trust 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 writer
of an option on a Futures Contract is subject to the risks of commodity futures
trading, including the requirement of initial and variation margin payments, and
both parties are subject to the additional risk that movements in price of the
option may not correlate with movements in the price of the underlying security,
currency, index or Futures Contracts.
<PAGE>
The Trust may cover the writing of call options on Futures Contracts
(a) through purchases of the underlying Futures Contract, (b) through ownership
of the instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of the
call held (i) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the difference is
maintained by the Registrant in cash or cash equivalents in a segregated account
with its custodian. The Trust may cover the writing of put options on Futures
contracts (a) through sales of the underlying Futures Contract, (b) through
segregation of cash or cash equivalents 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 the difference is
maintained by the Registrant in cash or cash equivalents in a segregated account
with its custodian. 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 Trust'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 Trust 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 Trust 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
<PAGE>
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 Trust 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 have cash or cash equivalents available
sufficient to cover any commitments under these contracts to purchase or sell
foreign currencies or to limit any potential risk. The segregated account 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 Trust 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 Trust 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.
<PAGE>
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Registrant could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Registrant
to hedge such increased cost up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Registrant would be required to purchase or sell the
underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Registrant
also may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable movements in exchange rates.
All call options written on foreign currencies will be covered. A call
option written on foreign 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 held in a segregated
account by its custodian) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the 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 the difference is maintained by the Registrant in cash or cash
equivalents in a segregated account with its custodian. 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 the difference is maintained by the Registrant in cash or cash equivalents in
a segregated account with its custodian. 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.
<PAGE>
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 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 the 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.
In order to assure that the Registrant will not be deemed a "commodity
pool" for purposes of the Commodity Exchange Act, regulations of the CFTC
require that the Registrant enter into transactions in Futures Contracts and
Options on Futures Contracts only (i) for bona fide hedging purposes (as defined
in CFTC regulations), or (ii) for non-hedging purposes, provided that the
aggregate initial margin and premiums on such non- hedging positions does not
exceed 5% of the liquidation value of the Registrant's assets. In addition, the
Registrant must comply with the requirements of various state securities laws in
connection with such transactions.
Future Developments. The Trust proposes to take advantage of
opportunities in the area of options, Futures Contracts, Options on Futures
Contracts and Forward Contracts which are
<PAGE>
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.
RISK FACTORS
The Trust is designed primarily as a long-term investment and not as a
trading vehicle. The value of shares of the Registrant will vary as the
aggregate value of the Registrant's portfolio securities increases or decreases.
The net asset value of the Registrant may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed income
portfolio securities invested at higher yields can be expected to rise.
Conversely, when interest rates rise, the value of fixed income portfolio
securities invested at lower yields can be expected to decline. Moreover the
value of the lower- rated fixed income securities that the Registrant purchases
will fluctuate more than the value of higher- rated fixed income securities.
These lower-rated fixed income securities generally tend to reflect short-term
corporate and market developments to a greater extent than higher-rated
securities, which react primarily to fluctuations in the general level of
interest rates. If the Investment Adviser'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.
The Registrant may invest in fixed income securities rated Baa by
Moody's or BBB by S&P or Fitch and comparable unrated securities. These
securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income securities.
The Registrant may also invest in corporate fixed income securities
rated Ba or lower by Moody's or BB or lower by S&P or Fitch and comparable
unrated securities (commonly known as "junk bonds"). No minimum rating standard
is required by the Registrant. These securities are considered speculative and,
while generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including the
possibility of default or bankruptcy of the issuers of such securities) and may
involve greater volatility of price (especially during periods of economic
uncertainty or change) than securities in the higher rating categories and
because yields vary over time, no specific level of income can ever be assured.
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.
<PAGE>
These lower rated high yielding fixed income securities generally tend
to reflect economic changes (and the outlook for economic growth), short-term
corporate and industry developments and the market's perception of their credit
quality (especially during times of adverse publicity) to a greater extent than
higher rated securities which react primarily to fluctuations in the general
level of interest rates although they are also affected by changes in interest
rates. In the past, economic downturns or an increase in interest rates have,
under certain circumstances, caused a higher incidence of default by the issuers
of these securities and may do so in the future, especially in the case of
highly leveraged issuers.
The prices for these securities may be affected by legislative and
regulatory developments. The market for these lower rated fixed income
securities may be less liquid than the market for investment grade fixed income
securities. Furthermore, the liquidity of these lower rated securities may be
affected by the market's perception of their credit quality. Therefore, the
Investment Adviser's judgment may at times play a greater role in valuing these
securities than in the case of investment grade fixed income securities, and it
also may be more difficult during times of certain adverse market conditions to
sell these lower rated securities to respond to changes in the market. While the
Investment Adviser may refer to ratings issued by established credit rating
agencies, it is not the Registrant's policy to rely exclusively on ratings
issued by these rating agencies, but rather to supplement such ratings with the
Investment Adviser's own independent and ongoing review of credit quality. To
the extent the Registrant invests in these lower rated securities, the
achievement of its investment objectives may be more dependent on the Investment
Adviser's own credit analysis than in the case of a fund investing in higher
quality fixed income securities. These lower rated securities may also include
zero coupon bonds, deferred interest bonds and PIK bonds which are described
above.
While Futures Contracts and Options on Futures Contracts will be used
solely for hedging purposes and Options and Forward Contracts will be used in
part for hedging purposes, the trading of such instruments involve certain
risks, including risk of loss arising from adverse price or rate movements,
margin requirements, market illiquidity and the potential default of a broker,
counterparty or clearinghouse.
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 accept 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,
<PAGE>
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. Where the Registrant enters into Forward Contacts as a "cross hedge"
(i.e., the purchase or sale of a Forward Contract on one currency to hedge
against the risk of loss arising from changes in value of a second currency),
the Registrant incurs the risk of imperfect correlation between changes in the
values of the two currencies, which could result in losses.
The portion of the Registrant's portfolio directed toward capital
appreciation will be aggressively managed with a higher risk of loss than that
of more conservatively managed portfolios. Many of the securities offering the
capital appreciation sought by the Registrant will involve a high degree of
risk. The Trust will seek to reduce risk by investing its assets in a number of
securities markets (e.g., U.S. Government, corporate fixed income, equity and
foreign) and issuers, performing credit analyses of potential investments and
monitoring current developments and trends in both the economy and financial
markets.
Some of the Registrant's assets may be invested in securities whose
issuers have operating losses, substantial capital needs, negative net worths,
are insolvent or are involved in bankruptcy or reorganization proceedings. It is
difficult to value financially distressed issuers and to estimate prospects for
their financial recovery. The issuers may be unable to meet debt service
requirements and the investments may take considerable time to appreciate in
value. Some of the securities acquired by the Registrant may not be current on
payment of interest or dividends. In the event that issuers of securities owned
by the Registrant become involved in bankruptcy or other insolvency proceedings,
additional risks will be present. Bankruptcy or other insolvency proceedings are
highly complex, can be very costly and may result in unpredictable outcomes. The
bankruptcy court has extensive powers and under certain circumstances may alter
contractual obligations of the bankrupt company.
Since there may be no public market or only inactive trading markets
for some of the securities in which the Registrant invests, the Registrant may
be required to retain such investments for indefinite periods or to sell them at
substantial losses. Such securities 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. This may be
particularly true of lower rated or unrated securities in which the Registrant
may invest. See the sub- section "Corporate Fixed Income Securities" of the
section "Investment Objective and Policies" above.
To the extent the Registrant holds zero coupon or deferred interest
bonds or option notes 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.
<PAGE>
Although change 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 portion of distributions paid by the
Registrant that are comprised of income 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" above.
The Registrant may invest in foreign securities. Investing in
securities of foreign issuers generally involves risks not ordinarily associated
with investing in securities of domestic issuers. These include changes in
currency rates, exchange control regulations, governmental administration or
economic or monetary policy (in the United States or abroad) or circumstances in
dealings between nations. Costs may be incurred in connection with conversions
between various currencies. Special considerations may also include more limited
information about foreign issuers, higher brokerage costs, different accounting
standards and thinner trading markets. Foreign securities markets may also be
less liquid, more volatile and less subject to government supervision than in
the United States. Investments in foreign countries could be affected by other
factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. As a result of its investment in foreign
securities, the Registrant may receive interest or dividend payments, or the
proceeds of the sale or redemption of such securities, in the foreign currencies
in which the securities are denominated. Under certain circumstances, such as
where the Investment Adviser believes that the applicable exchange rate is
unfavorable at the time the currencies are received or the Investment Adviser
anticipates, for any reason that the exchange rate will improve, the Registrant
may hold such currencies for an indefinite period of time. The Registrant may
also hold foreign currency in anticipation of purchasing foreign securities.
While the holding of currencies will permit the Registrant to take advantage of
favorable movements in the applicable exchange rate, such strategy also exposes
the Registrant to risk of loss if exchange rates move in a direction adverse to
the Registrant's position. Such losses could reduce any profits or increase any
losses sustained by the Registrant from the sale or redemption of securities and
could reduce the dollar value of interest or dividend payments received.
The Trust has registered as a "non-diversified" investment company. As
a result, the Registrant may invest up to 25% of its assets in the securities of
any one issuer, subject only to the requirements of the Internal Revenue Code of
1986, as amended. 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 securities of a limited number of issues, the
Registrant may be more susceptible to any single economic, political or
regulatory occurrence and to the financial conditions of the issuers in which it
invests.
The Trust is a closed-end investment company. Shares of a closed-end
investment company frequently trade at a discount to net asset value. Also,
since the Registrant is a closed-
<PAGE>
end investment company, the shareholders do not have the right to cause the
Registrant to repurchase their shares at net asset value.
An investment in shares of the Registrant should not constitute a
complete investment program and may not be appropriate for all investors.
INVESTMENT RESTRICTIONS
The Registrant has adopted the following restrictions which cannot be
changed without the approval of the holders of a majority of the 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, 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 Trust may not:
(1) borrow money, except (i) as a temporary measure for extraordinary
or emergency purposes, (ii) for a tender offer or otherwise to repurchase its
shares or (iii) in connection with making short sales or maintaining a short
position, and in no event shall the Registrant borrow in excess of 1/3 of its
assets;
(2) purchase any security or evidence of interest therein on margin,
except that the Registrant may obtain such short-term credit as may be necessary
for the clearance of purchases and sales of securities and except that the
Registrant may make deposits on margin in connection with 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 the security is suspended or, in the
case of unlisted securities, where no market makers exist or where market makers
will not accept offers), 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 other interests
therein), interests in oil, gas or mineral leases, commodities or commodity
contracts (except currencies, currency options, Forward Contracts,
<PAGE>
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 (such as through liquidation) as a result
of the ownership of securities);
(6) issue any senior security (as that term is defined in the 1940
Act), except as permitted under clause (1) above (for the purchase 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);
(7) make loans to other persons except through the lending of its
portfolio securities not in excess of 30% of its total assets (taken at market
value) and except through the use of repurchase agreements, the purchase of
commercial paper or the purchase of all or a portion of an issue of debt
securities in accordance with its investment objective, policies and
restrictions; or
(8) invest more than 25% of the value of its total assets in any
industry.
The Registrant may not, with respect to 50% of the Registrant's assets,
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. This investment restriction is not fundamental and may be changed
without shareholder approval.
<PAGE>
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES
Federal Farm Credit System Notes and Bonds
are bonds issued by a cooperatively owned nationwide system of banks
and associations supervised by the Farm Credit Administration, an
independent agency of the U.S. Government. These bonds are not guaranteed
by the U.S. Government.
Maritime Administration Bonds
are bonds issued by the Department of Transportation of the U.S.
Government and are guaranteed by the United States.
FHA Debentures
are debentures issued by the Federal Housing Administration of the U.S.
Government and are guaranteed by the United States.
GNMA Certificates
are mortgage backed securities which represent a partial ownership
interest in a pool of mortgage loans issued by lenders such as mortgage
bankers, commercial banks and savings and loan associations. Each mortgage
loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veteran's Administration.
FHLMC Bonds
are bonds issued and guaranteed by the Federal Home Loan Mortgage
Corporation and are not guaranteed by the U.S. Government.
FNMA Bonds
are bonds issued and guaranteed by the Federal National Mortgage
Association and are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds
are notes and bonds issued by the Federal Home Loan Bank System and
are not guaranteed by the U.S. Government.
Although this list includes a description of the primary types of U.S.
Government agency or instrumentality obligations in which the Registrant intends
to invest, the Registrant may invest in obligations of U.S. Government agencies
or instrumentalities other than those listed above.
<PAGE>
DESCRIPTION OF BOND RATINGS*
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
- ----------------------------
*The ratings indicated herein are believed to be the most recent ratings
available at the date of this Amendment for the securities listed. Ratings are
generally given to securities at the time of issuance. While the rating agencies
may from time to time revise such ratings, they undertake no obligation to do
so, and the ratings indicated do not necessarily represent ratings which will be
given to these securities on the date of the Registrant's fiscal year end.
<PAGE>
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue. Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or
companies that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the
rating is not published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonably up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
STANDARD AND POOR'S RATINGS GROUP*
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
- -------------------------------
*Rates all governmental bodies having $1,000,000 or more debt outstanding,
unless adequate information is not available.
<PAGE>
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB: Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC- rating. The C rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
<PAGE>
FITCH INVESTORS SERVICES, INC.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A: Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and, therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC: Bonds have certain identifiable characteristics which, if
not remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the AAA category.
<PAGE>
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for rating purposes.
Withdrawn: A rating will be withdrawn when an issue matures or is
called or refinanced, and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be raised or lowered. FitchAlert is relatively short- term, and should be
resolved within 12 months.
8.5. Share Price Data: Not applicable.
Item 9. Management:
9.1.a. General - Board of Trustees: Management of the Registrant's
business and affairs is the responsibility of the Board of Trustees of the
Registrant.
9.1.b. General - Investment Adviser: MFS is the Registrant's Investment
Adviser. MFS and its predecessor organizations have a history of money
management dating from 1924, thus making MFS America's oldest mutual fund
organization. MFS is a wholly owned subsidiary of Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") which in turn is a wholly owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). Sun Life, a
mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the United States since 1895. The
executive officers of MFS report to the Chairman of Sun Life. The principal
business address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser to each of the funds in the MFS
Family of Funds (the "MFS Funds"), which includes 24 funds, MFS Municipal Income
Trust, MFS Multimarket Income Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Institutional Trust,
MFS Variable Insurance Trust, MFS Union Standard Trust, MFS/Sun Life Series
Trust, Sun Growth Variable Annuity Fund, Inc. and seven variable accounts, each
of which is a registered investment company established by Sun Life of Canada
(U.S.) in connection with the sale of various fixed/variable annuity contracts.
MFS and its wholly owned subsidiary, MFS Asset Management Inc., provide
investment advice to substantial private clients. Net assets under the
management of the MFS organization were approximately $43.2 billion on behalf of
approximately 1.8 million investors as of January 31,
<PAGE>
1996. As of such date, the MFS organization managed approximately $20.6 billion
of assets in fixed income securities, $7.1 billion in U.S. Government securities
and approximately $3.8 billion in fixed income securities of foreign issuers and
non-U.S. dollar denominated fixed income securities of U.S. issuers.
MFS has established a strategic alliance with Foreign & Colonial
Management Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of
two of the world's oldest financial services institutions, the London-based
Foreign & Colonial Investment Trust PLC, which pioneered the idea of investment
management in 1868, and HYPO-BANK (Bayerische Hypotheken-und Weschel-Bank AG),
the oldest publicly listed bank in Germany, founded in 1835. As part of this
alliance, the portfolio managers and investment analysts of MFS and Foreign &
Colonial will share their views on a variety of investment related issues, such
as the economy, securities markets, portfolio securities and their issuers,
investment recommendations, strategies and techniques, risk analysis, trading
strategies and other portfolio management matters. MFS will have access to the
extensive international equity investment expertise of Foreign & Colonial and
Foreign & Colonial will have access to the extensive U.S. equity investment
expertise of MFS. One or more MFS investment analysts are expected to work for
an expected to work for an extended period with Foreign & Colonial's portfolio
managers and investment analysts at their offices in London. In return, one or
more Foreign & Colonial employees are expected to work in a similar manner at
MFS' Boston offices.
In certain instances there may be securities which are suitable for the
Registrant's portfolio as well as for portfolios of other clients of MFS or
clients of Foreign & Colonial. Some simultaneous transactions are inevitable
when several clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client. While
in some cases this arrangement could have a detrimental effect on the price or
availability of the security as far as the Registrant is concerned, in other
cases, it may produce increased investment opportunities for the Registrant.
INVESTMENT ADVISORY AGREEMENT
General. The Investment Advisory Agreement between MFS and the
Registrant (the "Advisory Agreement') provides that, subject to the direction of
the Board of Trustees of the Registrant MFS is responsible for the actual
management of the Registrant's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Trustees. The Investment Adviser also
provides certain administrative services and general office facilities.
The Investment Adviser pays the compensation of the Registrant's
officers and of the Trustees who are affiliated with the Investment Adviser. The
Investment Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities and all executive and supervisory personnel
necessary for managing the Registrant's investments, effecting the Registrant's
portfolio transactions and, in general, administering its affairs.
<PAGE>
The Advisory Agreement also provides that neither MFS nor its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution and
management of the Registrant, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their obligations and duties under the Advisory Agreement.
Advisory Fee. For the services provided by MFS under the Advisory
Agreement, the Registrant will pay MFS an annual fee computed and paid monthly
in an amount equal to the sum of 0.68% of the average daily net assets of the
Registrant and 3.40% 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.
This advisory fee is greater than that paid by most other funds.
Payment of Expenses. The Trust pays the compensation of the Trustees
who are not affiliated with MFS and all the Registrant's expenses (other than
those assumed by MFS), including governmental fees, interest charges, taxes,
membership dues in the Investment Company Institute allocable to the Registrant,
fees and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Registrant, expenses of
repurchasing shares, expenses of preparing, printing and mailing share
certificates, shareholder reports, notices, proxy statements and reports to
governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security transactions;
insurance premiums, fees and expenses of the trust's custodian for all services
to the Registrant, including safekeeping of funds and securities and maintaining
required books and accounts, listing fees; expenses of calculating the net asset
value of the Registrant's shares, expenses of shareholder meetings, expenses in
connection with the Dividend Reinvestment and Cash Purchase Plan and SEC
registration fees.
Use of Name. The Advisory Agreement provides that if MFS ceases to
serve as the Investment Adviser to the Registrant, the Registrant will change
its name so as to delete the initials "MFS" and that MFS may render services to
others and may permit fund clients in addition to the Registrant to use the
initials "MFS" in their names.
The Advisory Agreement will remain in effect until August 1, 1996, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the Registrant's outstanding voting securities and, in either case, by a
majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party. The Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by vote of
a majority of the Registrant's outstanding voting securities or by either party
on not more than 60 days' nor less than 30 days' written notice.
9.1.c. General - Portfolio Management: Robert J. Manning, a Vice
President of the Registrant and a Senior Vice President of MFS, became a
portfolio manager at MFS in 1984. He became a portfolio manager of the
Registrant in 1989. John F. Brennan, Jr., a Senior Vice
<PAGE>
President of MFS, became a portfolio manager at MFS in 1985. He became a
portfolio manager of the Registrant in 1989.
9.1.d. General - Administrators: Inapplicable.
9.1.e. Custodians: State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110 is the custodian and dividend
disbursing agent for the Registrant. MFS Service Center, Inc., 500 Boylston
Street, Boston, Massachusetts 02116 is the shareholder servicing agent.
9.1.f. General - Expenses: See Item 9.1.b.
9.1.g. General - Affiliated Brokerage: Inapplicable.
9.2. Non-resident Managers: 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 Trust
has no present intention of offering additional shares, except that additional
shares may be issued under the Plan. Other offerings of its shares, if made,
will require
<PAGE>
approval of the Registrant's Board of Trustees. Any additional offering will be
subject to the requirements of the 1940 Act that shares may not be sold at a
price below the then-current net asset value, exclusive of underwriting
discounts and commissions, except among other things, in connection with an
offering to existing shareholders or with the consent of the holders of a
majority of the Registrant's outstanding voting securities.
The Trust 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 Trust may also be terminated upon
liquidation and distribution of its assets, if approved by the vote of the
holders of two-thirds of its outstanding shares. If not so terminated, the
Registrant will continue indefinitely. Upon liquidation of the Registrant, the
Registrant's shareholders are entitled to share pro rata in the Registrant's net
assets available for distribution to its shareholders.
Certain Provisions of the Declaration of Trust. The Trust is an entity
of the type commonly known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Registrant and provides for
indemnification and reimbursement of expenses out of the Registrant's property
for any shareholder held personally liable for the obligations of the
Registrant. The Declaration of Trust also provides that the Registrant shall
maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Registrant, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which both inadequate
insurance exists and the Registrant itself is unable to meet its obligations.
The Declaration of Trust further provides that obligations of the
Registrant are not binding upon the Trustees individually but only upon the
property of the Registrant and that the Trustees will not be liable for actions
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 Trust presently has certain anti-takeover
provisions in its Declaration of Trust which could have the effect of limiting
the ability of other entities or persons to acquire control of the Registrant,
to cause it to engage in certain transactions or to modify its structure. The
Board of Trustees is divided into three classes, each having a term of three
years. Each year the term of one class expires. This provision could delay for
up to two years the replacement of a majority of the Board of Trustees. In
addition, the affirmative vote or consent of the holders of 66 2/3% of the
shares of the Registrant (a greater vote than that required by the 1940 Act and,
in some cases, greater than the required vote applicable to business
corporations under state law) is required to authorize the conversion of the
Registrant from a closed-end to an open-end investment company or generally to
authorize any of the following transactions:
<PAGE>
(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 through affiliates, the
beneficial owner of 5% or more of the outstanding shares of the Registrant.
However, such vote or consent will not be required with respect to the foregoing
transactions where the Board of Trustees under certain conditions approves the
transaction. Reference is made to the Declaration of Trust of the Registrant, on
file with the SEC, for the full text of these provisions.
The foregoing provisions will make more difficult a change in the
Registrant's management, or consummation of the foregoing transactions without
the Trustees' approval, and could have the effect of depriving shareholders of
an opportunity to sell their shares at a premium over prevailing market prices
by discouraging a third party from seeking to obtain control of the Registrant
in a tender offer or similar transaction. However, the Board of Trustees has
considered these anti-takeover provisions and believes that they are in the
shareholders' best interest 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.
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 Trust, 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 3% or more from the net asset
value of the shares. Shares repurchased by the Registrant will be held in
treasury. The Trust may incur debt to finance share repurchase transactions.
Within six months preceding any such repurchase, the Registrant will notify
shareholders by letter or report. See the section "Investment Restrictions" of
Item 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 asset values. When the Registrant repurchases its shares
for a price below their net asset value, the net asset value of those shares
that remain outstanding will be enhanced, but this does not necessarily mean
that the market price
<PAGE>
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.
b. Inapplicable.
c. Inapplicable.
d. Inapplicable.
e. Dividends and Distributions; Dividend Reinvestment and Cash
Purchase Plan. The Registrant intends to distribute monthly to shareholders
substantially all of its net investment income (non- capital gain income less
expense). Net short-term capital gains, if any, from the sale of securities or
other assets are expected to be distributed monthly. Undistributed net
short-term capital gains and net long- term capital gains, if any, will be
distributed at least annually. See Item 10.4. If, for any monthly distribution,
net investment income and net realized short-term capital gains are less than
the amount of the distribution, the difference will be distributed from other
Trust assets. The Trust's final distribution for each calendar year will include
any remaining net investment income and net realized short- term capital gains
deemed, for federal income tax purposes, undistributed during the year, as well
as any net long-realized capital gains, the excess, distributed from other Trust
assets, will generally be treated as a tax-free return of capital (up to the
amount of the shareholder's tax basis in his shares) which would be, in effect,
a return of the shareholder's investment. Such excess, however, will be treated
as ordinary dividend income up to the amount of the Registrant's current and
accumulated earnings and profits. The amount treated as a tax-free return of
capital will reduce a shareholder's adjusted basis in his shares, thereby
increasing his potential gain or reducing his potential loss on the sale of his
shares. Such distribution policy may, under certain circumstances, have certain
adverse consequences to the Registrant and its shareholders. Shareholders will
be sent annual notices reporting the tax status of such distributions. The
notices will indicate whether any portion of such distributions represent 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 shares 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.
<PAGE>
Under the Plan, if the Trustees of the Registrant declare a dividend
from net investment income or other distribution, the non participants 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. 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.
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 Trust 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 Trust 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 and by the participants for the
handling of voluntary cash payments. State Street will charge a service fee of
<PAGE>
$0.75 for each cash purchase. 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. 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 and/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 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 Bank and Trust Company at
P.O. Box 366, Boston, Massachusetts 02101.
10.2. Long-term debt: Inapplicable.
10.3. General: Inapplicable.
10.4. Taxes: The Trust 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
Code requirements, including requirements as to the nature of the Registrant's
gross income, the amount of Registrant distributions, and the composition and
holding period of the Registrant's portfolio assets. Because the Registrant
intends to distribute all of its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, it is not expected that the Registrant will be required to pay any federal
income or excise taxes.
Distributions of net investment income and the excess of net short-term
capital gain over net long-term capital loss will be treated as ordinary income
in the hands of shareholders. It is expected that a portion of such
distributions will be eligible for the dividends-received deduction for
corporate shareholders if the recipient otherwise qualifies for that deduction
with respect to its holding of Registrant shares. Deducted amounts may be
subject to the alternative minimum tax and may result in adjustments in the tax
basis of a shareholder's shares. Distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares of the
Registrant have been held by such shareholder. Such distributions are not
eligible for the dividends-received deduction. Monthly distributions by the
Registrant of net short-term capital gains may, to the extent capital
<PAGE>
losses are subsequently realized, be treated as a return of capital.
Distributions that are treated for federal income tax purposes as a return of
capital will reduce each shareholder's basis in his shares and, to the extent
the return of capital exceeds such basis, will be treated as gain to the
shareholder from a sale of shares. Distributions declared by the Registrant in
October, November and December to shareholders of record in such a month and
paid the following January will be reportable by shareholders as if received on
December 31.
Distributions will be taxable as described above, whether received in
cash or in shares under the Dividend Reinvestment and Cash Purchase Plan (the
"Plan"). With respect to distributions received in cash or reinvested in shares
purchased on the open market, the amount of the distribution for tax purposes is
the amount of cash distributed or allocated to the shareholder. However, with
respect to distributions made in shares issued by the Registrant pursuant to the
Plan, the amount of the distribution for tax purposes is the fair market value
of the issued shares on the payment date and a portion of such 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.
In general, any gain or loss realized upon a taxable disposition of
shares of the Registrant by a shareholder that holds such shares as a capital
asset will be treated as long-term capital gain or loss if the shares have been
held for more than twelve months and otherwise as short-term capital gain or
loss. However, any loss realized upon a taxable disposition of shares within (or
deemed to be within) six months from the date of their purchase will be treated
as a long-term capital loss to the extent of any amounts treated by shareholders
as long-term capital gains during such six-month period. All or a portion of any
loss realized upon a taxable disposition of Trust shares may be disallowed if
other Trust shares are purchased (whether under the Plan or otherwise) within 30
days before or after such disposition.
The Trust's investment in zero coupon bonds, deferred interest bonds,
option notes and PIK bonds are subject to special tax rules that will affect the
amount, timing and character of distributions to shareholders by causing the
Registrant to recognize income prior to the receipt of cash payments. For
example, with respect to zero coupon bonds, option notes and deferred interest
bonds, the Registrant will be required to accrue as income each year a portion
of the discount (or deemed discount) at which the securities were issued and to
distribute such income each year in order to maintain its qualification as a
regulated investment company and to avoid income and excise taxes. The Trust may
also elect to accrue market discount on a current basis and be required to
distribute any such accrued discount. In order to generate cash to satisfy these
distribution requirements, the Registrant may have to dispose of portfolio
securities which it would otherwise have continued to hold, potentially
resulting in additional taxable gain or loss to the Registrant.
The Trust's transactions in options, Futures Contracts, Options on
Futures Contracts and Forward Contracts will be subject to special tax rules
that could affect the amount, timing and character of distributions to
shareholders. For example, certain positions held by the Registrant on the last
business day of each taxable year will be marked to market (i.e., treated as if
closed
<PAGE>
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 will constitute "straddles,"
which are subject to special tax rules that may cause deferral of Registrant
losses, adjustments in the holding periods of Registrant securities and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles that could alter the effects of these rules. In order to
qualify as a regulated investment company, the Registrant must derive less than
30% of its annual gross income from the sale or other disposition of securities
or other investments held less than three months and will limit its activities
in options, Futures Contracts, Options on Futures Contracts and Forward
Contracts to the extent necessary to comply with this requirement.
Foreign exchange gains and losses realized by the Registrant generally
will be treated as ordinary income and losses rather than capital gains and
losses. In order to qualify as a regulated investment company, at least 90% of
the Registrant's annual gross income must consist of dividends, interest and
certain other types of qualifying income. Foreign exchange gains and certain
other gains are qualifying income, unless such gains are deemed not directly
related to the Registrant's principal business of investing in securities. In
addition, foreign exchange gains relating to investments held less than three
months are subject to the 30% limitation described above if such gains are
deemed not directly related to the Registrant's principal business of investing
in securities. Use of Forward Contracts for non-hedging purposes may generate
gains deemed to be not directly related to the Registrant's principal business
of investing in securities. The Trust will limit its activities involving
foreign exchange gains to the extent necessary to comply with these
requirements.
Distributions by the Registrant generally result in a reduction in the
fair market value of the Registrant's shares. Should a distribution reduce the
fair market value below a shareholder's cost basis, such distribution
nevertheless would be taxable to the shareholder as described above, even
though, from an investment standpoint, it may constitute a partial return of
capital. In particular, since the price of shares purchased shortly before a
distribution includes the amount of the forthcoming distribution, investors
purchasing shares at that time should be aware that the distribution may be
taxable to them even though it represents a return of their investment.
Monthly distributions by the Registrant of current year net short-term
capital gains will, to the extent of the Registrant's net capital loss
carryovers, be taxable to shareholders even though such distributions will
represent an economic return of their investment.
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.
Investment income received by the Registrant from foreign securities
may be subject to foreign income taxes; the Registrant does not expect to be
able to pass through to shareholders foreign tax credits with respect to such
foreign taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the Registrant to a reduced rate of tax or an
<PAGE>
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 30%
on any payments made to Non-U.S. Persons that are subject to withholding,
regardless of whether a lower treaty rate may be permitted. Any amounts
overwithheld may be recovered by filing a claim for refund with the U.S.
Internal Revenue Service within the time period applicable 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 jurisdiction. The Registrant is also
required in certain circumstances to withhold 31% of taxable dividends and
redemption proceeds paid to any shareholder (including a shareholder who is a
Non-U.S. Person) who does not furnish to the Registrant certain information and
certifications or who is otherwise subject to backup withholding. However,
backup withholding will not be applied to payments which have been subject to
30% withholding.
Under present law, the Registrant will not be subject to any excise or
income taxes in Massachusetts as long as it qualifies as a regulated investment
company under the Code.
Shareholders will normally have to pay state and/or local taxes on the
dividends and net capital gain distributions that they receive from the
Registrant. Distributions of the Registrant which are derived from interest on
obligations of the U.S. Government and certain of its agencies and
instrumentalities may be exempt from state and local taxes in certain states.
The Trust intends to advise shareholders of the proportion of its dividends
which consists of such interest. Residents of certain states may be subject to
an intangibles tax or a personal property tax on all or a portion of the value
of their shares. Shareholders should consult their tax advisers regarding the
possible exclusion of such portion of their dividends for state and local income
tax purposes as well as regarding the tax consequences of an investment in the
Registrant.
The Trust will send written notices to shareholders regarding the
federal income tax status of all distributions made during each calendar year.
<PAGE>
10.5. Outstanding Securities: The following information is furnished
as of January 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
(1) (2) (3) (4)
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Amount
Outstanding
Amount Held by Exclusive
Amount Registrant or for of Amount Shown
Title of Class Authorized its Account Under (3)
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Shares of Unlimited 256,600* 6,072,540.129
Beneficial Interest, shares
without par value
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
</TABLE>
*Treasury Shares
10.6. Securities Ratings: Inapplicable.
Item 11. Defaults and Arrears on Senior Securities: None.
Item 12. Legal Proceedings: None.
Item 13. Table of Contents of Statement of Additional Information: See below.
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 14. Cover Page: Inapplicable.
Item 15. Table of Contents: See below.
Item 16. General Information and History: Inapplicable.
Item 17. Investment Objective and Policies:
17.1, 17.2 and 17.3: None that are not described in the Prospectus.
17.4. For fiscal year 1995, the Registrant's portfolio turnover rate
was 92%. For fiscal year 1994, the Registrant's portfolio turnover rate was 75%.
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 Trust 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. Cohan, Gibbons and Robb will continue in office
until 1998, Messrs. Bailey and Sherratt will continue in office until 1996 and
Messrs. Brodkin, Cohn, Scott, Shames, Smith and Ms. O'Neill will continue in
office until 1997.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------ ----------------------------- -------------------------------------------------
Name and Address Position(s) Held with Principal Occupation(s) During
Registrant Past 5 years
- ------------------------------------------ ----------------------------- -------------------------------------------------
A. Keith Brodkin* Chairman, President and Massachusetts Financial Services Company,
Trustee Director, Chairman, Chief Executive Officer,
Chief Operating Officer and Chief Investment
Officer
- ------------------------------------------ ----------------------------- -------------------------------------------------
Richard B. Bailey* Trustee Private Investor;
Massachusetts Financial Services Company, former
Chairman (prior to September 30, 1991); Cambridge
Bancorp, Director; Cambridge Trust Company,
Director
- ------------------------------------------ ----------------------------- -------------------------------------------------
Marshall N. Cohan Trustee Private Investor
2524 Bedford Mews Drive
Wellington, Florida
- ------------------------------------------ ----------------------------- -------------------------------------------------
Lawrence H. Cohn, M.D. Trustee Brigham and Women's Hospital, Chief of Cardiac
75 Francis Street Surgery; Harvard Medical School, Professor of
Boston, Massachusetts Surgery
- ------------------------------------------ ----------------------------- -------------------------------------------------
The Hon. Sir J. David Gibbons, KBE Trustee Edmund Gibbons Limited, Chief Executive Officer;
21 Reid Street The Bank of N.T. Butterfield & Son Limited,
Hamilton, Bermuda HM 12 Chairman
- ------------------------------------------ ----------------------------- -------------------------------------------------
Abby M. O'Neill Trustee Private Investor; Rockefeller Financial Services,
30 Rockefeller Plaza, Room 5600 Inc. (investment advisers), Director
New York, New York
- ------------------------------------------ ----------------------------- -------------------------------------------------
Walter E. Robb, III Trustee Benchmark Advisors, Inc., (corporate financial
110 Broad Street consultants), President and Treasurer; Benchmark
Boston, Massachusetts Consulting Group, Inc. (office services),
President; Landmark Funds (mutual funds), Trustee
- ------------------------------------------ ----------------------------- -------------------------------------------------
Arnold D. Scott* Trustee Massachusetts Financial Services Company,
Director, Senior Executive Vice President and
Secretary
- ------------------------------------------ -----------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------ ----------------------------- -------------------------------------------------
Jeffrey L. Shames* Trustee and Vice President Massachusetts Financial Services Company,
President and Director
- ------------------------------------------ -----------------------------
- ------------------------------------------ ----------------------------- -------------------------------------------------
J. Dale Sherratt Trustee Insight Resources, Inc. (acquisition planning
One Liberty Square specialists), President
Boston, Massachusetts
- ------------------------------------------ ----------------------------- -------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------ ----------------------------- -------------------------------------------------
Ward Smith Trustee NACCO Industries (holding company), Chairman
5875 Landerbrook Drive, (prior to June 1994); Sundstrand Corporation
Mayfield Heights, Ohio (diversified mechanical manufacturer), Director;
Society Corporation (bank holding company),
Director (prior to April 1992); Society National
Bank (commercial bank), Director (prior to April
1992)
- ------------------------------------------ ----------------------------- -------------------------------------------------
- ------------------------------------------ ----------------------------- -------------------------------------------------
Patricia Zlotin* Vice President Massachusetts Financial Services Company,
Executive Vice President
- ------------------------------------------ -----------------------------
- ------------------------------------------ ----------------------------- -------------------------------------------------
Robert J. Manning* Vice President Massachusetts Financial Services Company, Senior
Vice President
- ------------------------------------------ -----------------------------
- ------------------------------------------ ----------------------------- -------------------------------------------------
W. Thomas London* Treasurer Massachusetts Financial Services Company, Senior
Vice President
- ------------------------------------------ -----------------------------
- ------------------------------------------ ----------------------------- -------------------------------------------------
Stephen E. Cavan* Secretary and Clerk Massachusetts Financial Services Company, Senior
Vice President, General Counsel and Assistant
Secretary
- ------------------------------------------ -----------------------------
- ------------------------------------------ ----------------------------- -------------------------------------------------
James R. Bordewick, Jr.* Assistant Secretary Massachusetts Financial Services Company, Vice
President and Associate General Counsel
- ------------------------------------------ -----------------------------
- ------------------------------------------ ----------------------------- -------------------------------------------------
James O. Yost* Assistant Treasurer Massachusetts Financial Services Company, Vice
President
- ------------------------------------------ ----------------------------- -------------------------------------------------
</TABLE>
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a subsidiary of MFS is
the investment adviser or distributor.
18.2. Each Trustee is also a Trustee of MFS Government Limited Maturity
Fund, MFS Series Trust I, MFS Series Trust II, MFS Series Trust VI, MFS Series
Trust VIII, MFS Municipal Series Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust and MFS Charter Income Trust. Mr. Brodkin is the
Chairman, President and a Trustee of each of the funds in the MFS Family of
Funds (the "MFS Funds"), MFS Multimarket Income Trust and MFS Municipal Income
Trust, and holds similar positions with certain affiliates of MFS. Mr. Brodkin
is also the Chairman, President and a Trustee of MFS Institutional Trust, MFS
Variable Insurance Trust and MFS Union Standard Trust. Messrs. Bailey, Scott and
Shames are Trustees of each of the MFS Funds and MFS Multimarket Income Trust
and MFS Municipal Income Trust.
18.3. Sir J. David Gibbons has not authorized an agent in the United States
to receive notice.
18.4.a. The following table lists all Trustees of the Registrant and
each of the three highest paid executive officers or any affiliated person of
the Registrant with aggregate compensation from the Registrant for the most
recently completed fiscal year in excess of $60,000 ("Compensated Persons").
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
(1) (2) (3) (4) (5)
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
Name of Person, Aggregate Pension or Estimated Total
Position Compensation Retirement Annual Benefits Compensation
(Estimated From Registrant Benefits Accrued Upon From Registrant
Credited Years (1) As Part of Retirement(2) and Fund
of Service(2)(5)) Registrant Complex Paid to
Expenses(1) Directors(3)
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
A. Keith Brodkin, Chairman, None None None None
President and Trustee
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
Richard B. Bailey, Trustee (8) $10,500 $1,050 (4) $263,815
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
Marshall N. Cohan, Trustee (8) $11,500 $1,250 (4) $148,624
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
Lawrence H. Cohn, M.D., Trustee $10,500 $3,700 (4) $135,874
(22)
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
The Hon. Sir J. David Gibbons, $10,500 $1,100 (4) $135,874
KBE, Trustee (8)
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
Abby M. O'Neill, Trustee (9) $10,000 $1,000 (4) $129,499
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
Walter E. Robb, III, Trustee (8) $11,500 $1,250 (4) $148,624
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
Arnold D. Scott, Trustee None None None None
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
Jeffrey L. Shames, Trustee and None None None None
Vice President
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
J. Dale Sherratt, Trustee (24) $11,500 $3,900 (4) $148,624
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
Ward Smith, Trustee (12) $11,500 $1,250 (4) $148,624
- ------------------------------------ -------------------- -------------------- ------------------- --------------------------
</TABLE>
(1) For fiscal year ended October 31, 1995
(2) Based on normal retirement age of 75
(3) For calendar year 1995. All Trustees receiving compensation served
as Trustees of 36 funds within the MFS fund complex (having aggregate net assets
at December 31, 1995, of approximately $12 billion) except Mr. Bailey, who
served as Trustee of 73 funds within the MFS fund complex (having aggregate net
assets at December 31, 1995, of approximately $32 billion).
(4) See table set forth below under Item 18.4.b.
(5) Estimated credited years of service include the total years of
service plus the expected years until retirement.
The Registrant pays each Trustee, other than Messrs. Brodkin, Scott and
Shames, a fee of $5,000 per year plus $500 per meeting and $500 per committee
meeting attended. For attendance
<PAGE>
at meetings, the Trustees of the Registrant as a group received $87,500 from the
Registrant for the fiscal year ended October 31, 1995.
18.4.(b). The Registrant has adopted a retirement plan for
non-interested Trustees. Under this plan, a Trustee will retire upon reaching
age 75 and if the Trustee has completed at least 5 years of service, he would be
entitled to annual payments during his lifetime of up to 50% of such Trustee's
average annual compensation (based on the three years prior to his retirement)
depending on his length of service. A Trustee may also retire prior to age 75
and receive reduced payments if he has completed at least 5 years of service.
Under the plan, a Trustee (or his beneficiaries) will also receive benefits for
a period of time in the event the Trustee is disabled or dies. These benefits
will also be based on the Trustee's average annual compensation and length of
service. There is no retirement plan provided by the Registrant for the
interested Trustees. However, Mr. Bailey, who retired as Chairman of MFS as of
September 30, 1991, will eventually become eligible for retirement benefits. The
Registrant will accrue compensation expenses each year to cover current year's
service and amortize past service cost.
The following table sets forth the estimated annual benefits payable by
the Registrant to the non- interested Trustees and Mr. Bailey upon retirement.
Estimated Annual Benefits Payable by Registrant upon Retirement (1)
Average Years of Service
Trustee Fees 3 5 7 10 or more
===============================================================================
$ 9,000 $1,350 $2,250 $3,150 $4,500
9,730 1,460 2,433 3,406 4,865
10,460 1,569 2,615 3,661 5,230
11,190 1,679 2,798 3,917 5,595
11,920 1,788 2,980 4,172 5,960
12,650 1,898 3,163 4,428 6,325
(1) Other funds in the MFS fund complex provide similar retirement benefits
to the Trustees.
Item 19. Control Persons and Principal Holders of Securities:
As of January 31, 1996, Cede & Co., c/o The Depository Trust Company,
P.O. Box 20, Bowling Green Station, New York, New York 10004, (as nominee for
The Depository Trust Company, 7 Hanover Square, New York, New York 10004), was
the record owner of approximately 79.84% of the outstanding shares of the
Registrant.
<PAGE>
As of January 31, 1996, all Trustees and officers of the Registrant as
a group owned less than 1% of the outstanding shares of the Registrant.
<PAGE>
Item 20. Investment Advisory and Other Services:
Items 20.1 through 20.5. See Item 9.1.b. For the fiscal year ended
October 31, 1995, MFS received fees under the Registrant's Investment Advisory
Agreement of $608,087 (of which $538,187 was based on average daily net assets
and $69,900 was based on gross income) . For the fiscal year ended October 31,
1994, MFS received fees under the Registrant's Investment Advisory Agreement of
$668,372. For the fiscal year ended October 31, 1993, MFS received fees under
the Registrant's Investment Advisory Agreement of $792,390.
20.6. See Item 9.1.e. The custodian has contracted with the Investment
Adviser for the Investment Adviser to perform certain accounting functions
related to options transactions for which the Investment Adviser receives
remuneration on a cost basis.
20.7. The principal business address of Ernst & Young LLP is 200
Clarendon Street, Boston, MA 02116. Ernst & Young LLP certifies financial
statements of the Registrant as required to be certified by any law or
regulation and provides other tax related services for the Registrant (such as
tax return preparation and assistant and consultation with respect to the
preparation of filings with the SEC).
20.8. Pursuant to the Registrar, Transfer Agency and Service Agreement
between the Registrant and MFS Service Center, Inc., MFS Service Center, Inc.
("MFSC") acts as the Registrant's registrar and transfer agent for the
Registrant's authorized and issued shares of beneficial interest, as well as
dividend disbursing agent for the Registrant, and agent in connection with the
Dividend Reinvestment and Cash Purchase Plan of the Registrant. For account
maintenance, the Registrant currently pays MFSC a fee based on the total number
of accounts for all closed-end funds advised by MFS for which MFSC acts as
registrar and transfer agent. If the total number of accounts is less than
75,000, the annual account fee is $9.00. If the total number of accounts is
75,000 or more, the annual account fee is $8.00. For dividend services, MFSC
charges $0.75 per dividend reinvestment and $0.75 per cash infusion. If the
total amount of fees related to dividend services is less than $1,000 per month
for all closed-end funds advised by MFS for which MFSC acts as registrar and
transfer agent, the minimum fee for the Registrant for these services will be
$167 per month. The Registrant will reimburse MFSC for reasonable out-of-pocket
expenses and advances incurred by MFSC and for any other expenses incurred by
MFSC at the request, or with the consent, of the Registrant.
Item 21. Brokerage Allocation and Other Practices: Specific decisions
to purchase or sell securities for the Registrant are made by employees of MFS
who are appointed and supervised by its senior officers. Changes in the
Registrant's investments are reviewed by the Board of Trustees. Such employees
may serve other clients of the investment Adviser or any subsidiary in a similar
capacity.
Presently, the primary consideration in portfolio security transactions
is execution at the most favorable prices and in the most effective manner
("best execution"). However, this may change as noted below. The Investment
Adviser attempts to achieve this result by selecting
<PAGE>
broker-dealers to execute portfolio transactions on behalf of the Registrant and
other clients of the Investment Adviser on the basis of their professional
capability, the value and quality of their brokerage services, and the general
level of their brokerage commissions. In the case of securities traded in the
over-the-counter market (where no stated commissions are paid but the prices
include a dealer's markup or markdown), the Investment Adviser normally seeks to
deal directly with the primary market makers, unless in its opinion, best
execution is available elsewhere. In the case of securities purchased from
underwriters, the cost of such securities generally includes a fixed
underwriting commission or concession. From time to time, soliciting dealer fees
are available to the Investment Adviser on the tender of the Registrant's
portfolio securities in so-called tender or exchange offers. Such soliciting
dealer fees are in effect recaptured for the Registrant by the investment
Adviser. At present no other recapture arrangements are in effect.
US. Government Securities and, in the United States and in certain
other countries, other 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. In transactions involving these securities the Investment
Adviser normally seeks to deal directly with the primary market maker or on
major exchanges, unless in its opinion, best execution is available elsewhere.
Securities firms may receive brokerage commissions on transactions involving
options, Futures Contracts and Options on Futures Contracts and the purchase and
sale of underlying securities upon exercise of options. The brokerage
commissions associated with buying and selling options may be proportionately
higher than those associated with general securities transactions.
Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. and such other
policies as the Trustees may determine, the Investment Adviser may consider
sales of shares of the trust as a factor in the selection of broker-dealers to
execute the trust's portfolio transactions.
In the future, as permitted by Section 28(e) of the Securities Exchange
Act of 1934, the Investment Adviser may cause the Registrant to pay a
broker-dealer which provides brokerage and research services to the Investment
Adviser an amount of commission for effecting a securities transaction for the
Registrant in excess of the amount other broker-dealers would have charged for
the transaction if the Investment Adviser determines in good faith that the
greater commission is reasonable in relation to the value of the brokerage and
research services provided by the executing broker-dealer viewed in terms of
either a particular transaction or the Investment Adviser's overall
responsibilities to the Registrant or to its other clients. Not all of such
services will be useful or of value in advising the Registrant.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or of purchasers or sellers of
securities; furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts; and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
<PAGE>
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Investment Adviser for
no consideration other than brokerage or underwriting commissions. Securities
may be bought or sold from time to time through such broker-dealers on behalf of
the Registrant. The Trustees of the Registrant (together with the Trustees of
the other MFS Funds) have directed the Investment Adviser to allocate a total of
$23,100 of commission business from the MFS Funds to the Pershing Division of
Donaldson, Lufkin & Jenrette as consideration for the annual renewal of the
Lipper Directors' Analytical Data Service (which provides information useful to
the Trustees in reviewing the relationship between the Registrant and the
Investment Adviser).
The Investment Adviser's investment management personnel attempt to
evaluate the quality of Research provided by brokers. The Investment Adviser
sometimes uses evaluations resulting from this effort as consideration in the
selection of brokers to execute portfolio transactions. However, the Investment
Adviser is unable to quantify the amount of commissions that might be paid as a
result of such Research because certain transactions might be effected through
brokers which provide Research but which would be selected principally because
of their execution capabilities.
The management fee that the Registrant pays to the Investment Adviser
will not be reduced as a consequence of the Investment Adviser's receipt of
brokerage and research services. To the extent the Registrant's portfolio
transactions are used to obtain such services, the brokerage commissions paid by
the Registrant will exceed those that might otherwise be paid, by an amount
which cannot be presently determined. Such services would be useful and of value
to the Investment Adviser in serving both the Registrant and other clients and,
conversely, such services obtained by the placement of brokerage business of
other clients would be useful to the Investment Adviser in carrying out its
obligations to the Registrant. While such services are not expected to reduce
the expenses of the Investment Adviser, the Investment Adviser would, through
use of the services, avoid the additional expenses which would be incurred if it
should attempt to develop comparable information through its own staff.
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 through 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 of 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 detrimental effect on the price or volume
of the security as far as the Registrant is concerned. In other cases, however,
it is
<PAGE>
believed that the ability of the Registrant to participate in volume
transactions will produce better executions for the Registrant.
For the fiscal year ended October 31, 1995, the Registrant paid
brokerage commissions of $154,996. For the fiscal year ended October 31, 1994,
the Registrant paid brokerage commissions of $118,113 on non-U.S. government
securities' transactions of a total dollar amount of $137,936,403. For the
fiscal year ended October 31, 1993, the Registrant paid brokerage commissions of
$70,486.
During the fiscal year ended October 31, 1995, the Registrant did not
purchase or sell securities of regular broker-dealers of the Registrant.
Item 22. Tax Status: None.
Item 23. Financial Statements: The following are incorporated herein by
reference to the Registrant's Annual Report to its shareholders, for its fiscal
year ended October 31, 1995, copies of which have been filed with the SEC:
Portfolio of Investments at October 31, 1995 Statement of Assets and
Liabilities at October 31, 1995 Statement of Operations for the year
ended October 31, 1995
Statement of Changes in Net Assets for the years ended October 31, 1995
and 1994.
Financial Highlights for the period from the commencement operations,
November 24, 1989, to October 31, 1990 and for the years ended
October 31, 1991, 1992, 1993, 1994 and 1995.
Notes to Financial Statements
Report of Independent Auditors
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits:
1. Financial Statements:
The following have been incorporated by reference in Item 23:
Portfolio of Investments at October 31, 1995
Statement of Assets and Liabilities at October 31, 1995
Statement of Operations for year ended October 31, 1995
Statement of Changes in Net Assets for the years ended
October 31, 1995 and 1994
Financial Highlights for the period from the commencement of
operations, November 24, 1989, to October 31, 1990 and for
the years ended October 31, 1991, 1992, 1993, 1994 and 1995
Notes to Financial Statements
Report of Independent Auditors
2. Exhibits:
(a) Declaration of Trust, dated September 29,
1989, (previously filed as Exhibit (1) to
the Registrant's Registration Statement on
Form N-2 (Investment Company Act File No.
811-5912), filed with the SEC on September
29, 1989 (the "Registration Statement"))
incorporated herein by reference.
(b)(1) Amended and Restated By-Laws dated December
14, 1994 (previously filed as Exhibit
(2)(b)(2) to Amendment No. 7 to the
Registration Statement on Form N-2, filed
with the SEC on February 28, 1995
("Amendment No. 7")) incorporated herein by
reference.
(c) Inapplicable.
(d) Specimen certificate for Shares of Beneficial
Interest, without par value (previously filed
as Exhibit (4) to Amendment No. 2 to the
Registration Statement, filed with the SEC on
November 15, 1989 ("Amendment No. 2"))
incorporated herein by reference.
(e) The section "Dividend Reinvestment and Cash
Purchase Plan" on page 2 of the Registrant's
Annual Report to its Shareholders, for its
<PAGE>
fiscal year ended October 31, 1995,
incorporated herein by reference.
(f) Inapplicable.
(g) Form of Investment Advisory Agreement, dated
November 10, 1989, (previously filed as
Exhibit (6) to Amendment No. 1 to the
Registration Statement, filed with the SEC on
November 7, 1989 ("Amendment No. 1"))
incorporated herein by reference.
(h) Omitted pursuant to General Instruction G.3
to Form N-2.
(i) Form of Retirement Plan for Non-Interested
Person Trustees, dated January 1, 1991
(previously filed as Exhibit (8) to Amendment
No. 6) incorporated herein by reference.
(j)(1) Amended and Restated Custodian Agreement,
dated December 29, 1989 (previously filed as
Exhibit (9) to Amendment No. 4 to the
Registration Statement, filed with the SEC
on February 24, 1990 ("Amendment No. 4"))
incorporated herein by reference.
(j)(2) Amendment to Custodian Contract, dated
September 11, 1991 (previously filed as
Exhibit (9)(b) to Amendment No. 6)
incorporated herein by reference.
(k)(1) Registrar, Transfer Agency and Service
Agreement between Registrant and MFS Service
Center, Inc., dated August 15, 1994
(previously filed as Exhibit (2)(k)(2) to
Amendment No. 7)) incorporated herein by
reference.
(k)(2) Loan Agreement by and among the Banks named
therein, the MFS Funds named therein, and
The First National Bank of Boston, dated as
of February 21, 1995 (previously filed as
Exhibit (2)(k)(3) to Amendment No. 7))
incorporated herein by reference.
(l) Omitted pursuant to General Instruction G.3
to Form N-2.
(m) None.
(n) Omitted pursuant to General Instruction G.3
to Form N-2.
(o) Inapplicable.
(p) Purchase Agreements (previously filed as
Exhibit (14) to Amendment No. 2) incorporated
herein by reference.
<PAGE>
(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 1,317
(without par value) (as of January 31, 1996)
- ---------------------------------- --------------------------------------------
Item 29. Indemnification: Article V of the Registrant's Declaration of Trust
provides that the Registrant will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the Registrant, unless as to
liabilities to the Registrant or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the
Registrant. In the case of a settlement, such indemnification will not be
provided unless it has been determined in accordance with the Declaration of
Trust that such officers or Trustees have not engaged in misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in their offices.
The Trustees and officers of the Registrant and the personnel of the
Registrant's Investment Adviser are insured under an errors and omissions
liability insurance policy. The Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment Company Act
of 1940.
Item 30. Business and Other Connections of Investment Adviser: Massachusetts
Financial Services Company ("MFS") serves as investment adviser to the following
open-end funds comprising the MFS Family of Funds: Massachusetts Investors
Trust, Massachusetts Investors Growth Stock Fund, MFS Growth Opportunities Fund,
MFS Government Securities Fund, MFS Government Limited Maturity Fund, MFS Series
Trust I (which has eight series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS World Asset Allocation Fund, MFS Special Opportunities Fund, MFS
Aggressive Growth Fund, MFS Research Growth and Income Fund, MFS Equity Income
Fund and MFS Core Growth Fund), MFS Series Trust II (which has four series: MFS
Emerging Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund
<PAGE>
and MFS Gold & Natural Resources Fund), MFS Series Trust III (which has two
series: MFS High Income Fund and MFS Municipal High Income Fund), MFS Series
Trust IV (which has four series: MFS Money Market Fund, MFS Government Money
Market Fund, MFS Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V
(which has two series: MFS Total Return Fund and MFS Research Fund), MFS Series
Trust VI (which has three series: MFS World Total Return Fund, MFS Utilities
Fund and MFS World Equity Fund), MFS Series Trust VII (which has two series: MFS
World Governments Fund and MFS Value Fund), MFS Series Trust VIII (which has two
series: MFS Strategic Income Fund and MFS World Growth Fund), MFS Series Trust
IX (which has three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS
Municipal Limited Maturity Fund), MFS Series Trust X (which has four series: MFS
Government Mortgage Fund, MFS/Foreign & Colonial Emerging Market Equity Fund,
MFS/Foreign & Colonial International Growth Fund and MFS/Foreign & Colonial
International Growth and Income Fund) and MFS Municipal Series Trust (which has
19 series: MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund,
MFS California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia
Municipal Bond Fund, MFS Louisiana Municipal Bond Fund, MFS Maryland Municipal
Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS Mississippi Municipal Bond
Fund, MFS New York Municipal Bond Fund, MFS North Carolina Municipal Bond Fund,
MFS Pennsylvania Municipal Bond Fund, MFS South Carolina Municipal Bond Fund,
MFS Tennessee Municipal Bond Fund, MFS Texas Municipal Bond Fund, MFS Virginia
Municipal Bond Fund, MFS Washington Municipal Bond Fund, MFS West Virginia
Municipal Bond Fund and MFS Municipal Income Fund) (collectively the "MFS
Funds"). The principal business address of each of the aforementioned funds is
500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following no-load,
open-end funds: MFS Institutional Trust ("MFSIT") (which has seven series), MFS
Variable Insurance Trust ("MVI") (which has twelve series) and MFS Union
Standard Trust ("UST") (which has two series). The principal business address of
each of the aforementioned funds is 500 Boylston Street, Boston, Massachusetts
02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Multimarket Income Trust, MFS Municipal Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the aforementioned funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL"), Sun Growth Variable Annuity Fund, Inc. ("SGVAF"), Money Market
Variable Account, High Yield Variable Account, Capital Appreciation Variable
Account, Government Securities Variable Account, World Governments Variable
Account, Total Return Variable Account and Managed Sectors Variable Account. The
principal business address of each is One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company organized
under the laws of the Republic of Ireland and a subsidiary of MFS, whose
principal business address is 41-45 St.
<PAGE>
Stephen's Green, Dublin 2, Ireland, serves as investment adviser to and
distributor for MFS International Funds (which has four portfolios: MFS
International Funds-U.S. Equity Fund, MFS International Funds-U.S. Emerging
Growth Fund, MFS International Funds-International Governments Fund and MFS
International Fund-Charter Income Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian U.S. Equity Fund
and MFS Meridian Research Fund (collectively the "MFS Meridian Funds"). Each of
the MFS Meridian Funds is organized as an exempt company under the laws of the
Cayman Islands. The principal business address of each of the MFS Meridian Funds
is P.O. Box 309, Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y ONH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary
of MFS, serves as distributor for certain life insurance and annuity contracts
issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFS Institutional Trust, MFS Variable Insurance Trust and MFS Union
Standard Trust.
MFS Asset Management, Inc. ("AMI"), a wholly owned subsidiary of MFS,
provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D.
Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the Chairman, Mr.
Shames is the President, Mr. Scott is a Senior Executive Vice President and
Secretary, Bruce C. Avery, William S. Harris, William W. Scott, Jr. and Patricia
A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a Senior Vice
President, General Counsel and an Assistant Secretary, Joseph W. Dello Russo is
a
<PAGE>
Senior Vice President, Chief Financial Officer and Treasurer, Robert T. Burns is
a Vice President and an Assistant Secretary, and Thomas B. Hastings is a Vice
President and Assistant Treasurer of MFS.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company of
Canada (U.S.), One Sun Life Executive Park,
Wellesley Hills, Massachusetts; Director, Sun
Life Insurance and Annuity Company of New
York, 67 Broad Street, New York, New York
John R. Gardner President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada (Mr.
Gardner is also an officer and/or Director
of various subsidiaries and affiliates of Sun
Life)
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr. McNeil is
also an officer and/or Director of various
subsidiaries and affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The Boston
Company, Exchange Place, Boston, Massachusetts
(until August, 1994)
Item 31. Location of Accounts and Records: The accounts and
records of the Registrant are located, in whole or in part, at the office of the
Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial 500 Boylston Street
Services Company Boston, Massachusetts 02111
State Street Bank and State Street South, 5-West
Trust Company North Quincy, Massachusetts 02171
MFS Service Center 500 Boylston Street
(transfer agent) Boston, MA 02116
Item 32. Management Services: Inapplicable.
Item 33. Undertakings: Inapplicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Boston and Commonwealth of Massachusetts on the 27th day of February, 1996.
MFS SPECIAL VALUE TRUST
By: A. KEITH BRODKIN
A. Keith Brodkin
Chairman and President
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
27 -- Financial Data Schedule
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS SPECIAL VALUE TRUST FOR THE "PERIOD ENDED OCTOBER
31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY" REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<NAME> MFS SPECIAL VALUE TRUST
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 72,592,069
<INVESTMENTS-AT-VALUE> 83,985,048
<RECEIVABLES> 571,822
<ASSETS-OTHER> 1,000
<OTHER-ITEMS-ASSETS> 352
<TOTAL-ASSETS> 84,558,222
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 315,621
<TOTAL-LIABILITIES> 315,621
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 74,423,001
<SHARES-COMMON-STOCK> 6,049,338
<SHARES-COMMON-PRIOR> 5,967,746
<ACCUMULATED-NII-CURRENT> (1,213,852)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (359,568)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,393,020
<NET-ASSETS> 84,242,601
<DIVIDEND-INCOME> 556,175
<INTEREST-INCOME> 1,631,238
<OTHER-INCOME> 0
<EXPENSES-NET> 985,852
<NET-INVESTMENT-INCOME> 1,201,561
<REALIZED-GAINS-CURRENT> 6,955,479
<APPREC-INCREASE-CURRENT> 6,130,381
<NET-CHANGE-FROM-OPS> 14,287,421
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,266,189)
<DISTRIBUTIONS-OF-GAINS> (6,885,011)
<DISTRIBUTIONS-OTHER> (3,030,266)
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 81,592
<NET-CHANGE-IN-ASSETS> 4,263,707
<ACCUMULATED-NII-PRIOR> (1,543,759)
<ACCUMULATED-GAINS-PRIOR> (35,501)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 608,087
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,000,007
<AVERAGE-NET-ASSETS> 79,149,074
<PER-SHARE-NAV-BEGIN> 13.40
<PER-SHARE-NII> 0.20
<PER-SHARE-GAIN-APPREC> 2.18
<PER-SHARE-DIVIDEND> (0.21)
<PER-SHARE-DISTRIBUTIONS> (1.14)
<RETURNS-OF-CAPITAL> (0.50)
<PER-SHARE-NAV-END> 13.93
<EXPENSE-RATIO> 1.26
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
