<PAGE>
As filed with the Securities and Exchange Commission on October 13, 2000
1933 Act File No. 33-37615
1940 Act File No. 811-6174
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 19
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 23
MFS(R) INSTITUTIONAL TRUST
(Exact Name of Registrant as Specified in Charter)
500 Boylston, Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (617) 954-5000
Stephen E. Cavan, Massachusetts Financial Services Company
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|_| on [date] pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|X| on December 27, 2000 pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
===============================================================================
<PAGE>
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MFS(R) INSTITUTIONAL TRUST
--------------------------
JANUARY 1, 2001
PROSPECTUS
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This Prospectus describes three funds of the MFS Institutional Trust (referred
to as the Trust):
1. MFS INSTITUTIONAL LARGE CAP VALUE FUND (referred to as the Large Cap Value
Fund) seeks capital appreciation and reasonable income.
2. MFS INSTITUTIONAL INTERNATIONAL RESEARCH EQUITY FUND (referred to as the
International Research Fund) seeks capital appreciation.
3. MFS INSTITUTIONAL REAL ESTATE INVESTMENT FUND (referred to as the REIT
Fund) seeks as a primary objective, capital appreciation; its secondary
objective is to provide current income and growth of income.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
FUNDS' SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
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TABLE OF CONTENTS
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Page
I Expense Summary ................................................ 1
II Risk Return Summary ............................................ 2
1. Large Cap Value Fund ....................................... 2
2. International Research Fund ................................ 4
3. REIT Fund .................................................. 6
III Certain Investment Strategies and Risks ........................ 9
IV Management of the Funds ........................................ 10
V Description of Shares .......................................... 11
VI How to Purchase, Exchange and Redeem Shares .................... 11
VII Other Information .............................................. 13
Appendix A -- Investment Techniques and Practices .............. A-1
<PAGE>
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I EXPENSE SUMMARY
-----------------
o EXPENSE TABLE
This table describes the expenses that you may pay when you hold shares of
the funds.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets):
..........................................................................
LARGE
CAP INTERNATIONAL
VALUE RESEARCH REIT
FUND FUND FUND
--- ------ ------
Management Fee .......................... 0.60 % 0.75 % 0.70%
Other Expenses(1) ....................... 0.20 % 0.26 % 0.28%
----- ----- -----
Total Annual Fund Operating Expenses .... 0.80 % 1.01 % 0.98%
Fee Waiver/Expense Reimbursement(2) . (0.25)% (0.16)% 0.00%
----- ----- -----
Net Expenses(3) ..................... 0.55 % 0.85 % 0.98%
------
(1) "Other Expenses" are based on estimated amounts for the current fiscal
year.
(2) MFS has contractually agreed to waive 0.05% of the Large Cap Value
Fund's management fee. With the exception of the REIT Fund, MFS has
contractually agreed to bear these funds' expenses, such that "Other
Expenses" do not exceed 0.00% for the Large Cap Value Fund and 0.10%
for the International Research Fund. These contractual fee
arrangements will continue until at least January 1, 2002, unless
changed with the consent of the board of trustees which oversees the
funds.
(3) Each fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent. Each fund may enter
into other similar arrangements and directed brokerage arrangements,
which would also have the effect of reducing the fund's expenses. Any
such fee reductions are not reflected in the table. Had these fee
reductions been taken into account, "Net Expenses" would be lower.
o EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in a
fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same, except that the fund's
total operating expenses are assumed to be the fund's "Net Expenses" for
the first year, and the fund's "Total Annual Fund Operating Expenses" for
subsequent years (see the table above).
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
PERIOD
------------------------
SERIES 1 YEAR 3 YEARS
---------------------------------------------------------------------------
Large Cap Value Fund $ 56 $ 230
International Research Fund 87 306
REIT Fund 100 312
<PAGE>
----------------------
II RISK RETURN SUMMARY
----------------------
INVESTMENT STRATEGIES WHICH ARE COMMON TO ALL FUNDS ARE DESCRIBED UNDER
THE CAPTION "CERTAIN INVESTMENT STRATEGIES AND RISKS."
1: LARGE CAP VALUE FUND
...........................................................................
o INVESTMENT OBJECTIVES
The fund's investment objective is capital appreciation and reasonable
income. The fund's objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 65% of its
total assets in equity securities of large capitalization companies that
the fund's investment adviser, Massachusetts Financial Services Company
(referred to as MFS or the adviser), believes have sustainable growth
prospects and attractive valuations based on current and expected earnings
or cash flow. While the fund generally seeks to outperform the Russell
1000 Value Index with less volatility, and to perform in the top quartile
of comparable funds over three to five year time periods, there is no
assurance that the fund will achieve this goal. The Russell 1000 Value
Index measures the performance of those Russell 1000 companies with lower
price-to-book ratios and lower forecasted growth rates relative to the
companies in the Russell 1000 Growth Index. Equity securities include
common stocks and related securities, such as preferred stocks,
convertible securities and depositary receipts for those securities. While
the fund may invest in companies of any size, the fund generally focuses
on companies with large market capitalizations. Large capitalization
companies are defined as those companies with market capitalizations of at
least $5 billion. Equity securities may be listed on a securities exchange
or traded in the over-the-counter markets.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the fund) it advises. This
means that securities are selected based upon fundamental analysis (such
as an analysis of earnings, cash flows, competitive position and
management's abilities) performed by the fund's portfolio manager and MFS'
large group of equity research analysts.
The fund may invest in foreign securities through which it may have
exposure to foreign currencies.
o PRINCIPAL RISKS
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. The share price of the fund generally changes
daily based on market conditions and other factors. Please note that there
are many circumstances which could cause the value of your investment in
the fund to decline, and which could prevent the fund from achieving its
objective, that are not described here.
The principal risks of investing in the fund are:
o Market Risk: This is the risk that the price of a securitiy held by the
fund will fall due to changing economic, political or market conditions or
disappointing earnings results.
o Large-Cap Value Company Risk: Prices of value company securities held by
the fund may decline due to changing economic, political or market
conditions, or due to the financial condition of the company which issued
the security. If anticipated events do not occur or are delayed, or if
investor perceptions about the securities do not improve, the market price
of value securities may not rise as expected or may fall. Large cap
companies tend to go in and out of favor based on market and economic
conditions. Large cap companies tend to be less volatile than companies
with smaller market capitalizations. In exchange for this potentially
lower risk, the fund's value may not rise as much as the value of funds
that emphasize smaller cap companies.
o Foreign Markets Risk: Investing in foreign securities involves risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the fund may directly hold foreign currencies and purchase
and sell foreign currencies through forward exchange cntracts. Changes
in currency exchange rates will affect the fund's net asset value, the
value of dividends and interest earned, and gains and losses realized
on the sale of securities. An increase in the strength of the U.S.
dollar relative to these other currencies may cause the value of the
fund to decline. Certain foreign currencies may be particularly
volatile, and foreign governments may intervene in the currency
markets, causing a decline in value or liquidity in the fund's foreign
currency holdings. By entering into forward foreign currency exchange
contracts, the fund may be required to forego the benefits of
advantageous changes in exchange rates and, in the case of forward
contracts entered into for the purpose of increasing return, the fund
may sustain losses which will reduce its gross income. Forward foreign
currency exchange contracts involve the risk that the party with which
the fund enters into the contract may fail to perform its obligations
to the fund.
o Active or Frequent Trading Risk: The fund may engage in active and
frequent trading to achieve its principal investment strategies. This may
result in the realization and distribution to shareholders of higher net
capital gains as compared to a fund with less active trading policies,
which would increase your tax liability. Frequent trading also increases
transaction costs, which could detract from the fund's performance.
o As with any mutual fund, you could lose money on your investment in the
fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table are not included because the fund has
not had a full calendar year of investment operations.
<PAGE>
2: INTERNATIONAL RESEARCH FUND
...........................................................................
o INVESTMENT OBJECTIVE
The fund's investment objective is capital appreciation. The fund's
objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 65% of its
total assets in equity securities of foreign companies. Equity securities
include common stocks and related securities, such as preferred stocks,
convertible securities and depositary receipts for those securities. The
fund focuses on foreign companies (including emerging market issuers) that
the fund's investment adviser believes have favorable growth prospects and
attractive valuations based on current and expected earnings or cash flow.
The fund does not emphasize any particular country and may from time to
time focus its investments in individual countries or regions. Equity
securities may be listed on a securities exchange or traded in the over-
the-counter markets.
A committee of investment research analysts selects portfolio securities
for the fund. This committee includes investment analysts employed by MFS
and its investment advisory affiliates. The committee allocates the fund's
assets among various geographic regions and industries. Individual
analysts then select what they view as the securities best suited to
achieve the fund's investment objective within their assigned industry
responsibility.
The fund may engage in active and frequent trading to achieve its
principal investment strategies.
o PRINCIPAL RISKS
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. The share price of the fund generally changes
daily based on market conditions and other factors. Please note that there
are many circumstances which could cause the value of your investment in
the fund to decline, and which could prevent the fund from achieving its
objective, that are not described here.
The principal risks of investing in the fund are:
o Market Risk: This is the risk that the price of a security held by the
fund will fall due to changing economic, political or market conditions or
disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The fund's equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Foreign Markets Risk: Investing in foreign securities involves risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the fund may directly hold foreign currencies and purchase
and sell foreign currencies through forward exchange contracts.
Changes in currency exchange rates will affect the fund's net asset
value, the value of dividends and interest earned, and gains and
losses realized on the sale of securities. An increase in the strength
of the U.S. dollar relative to these other currencies may cause the
value of the fund to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may intervene in the
currency markets, causing a decline in value or liquidity in the
fund's foreign currency holdings. By entering into forward foreign
currency exchange contracts, the fund may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the fund may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the fund enters into the contract may fail to perform
its obligations to the fund.
o Emerging Markets Risk: Emerging markets are generally defined as countries
in the initial stages of their industrialization cycles with low per
capita income. The markets of emerging markets countries are generally
more volatile than the markets of developed countries with more mature
economies. All of the risks of investing in foreign securities describe
above are heightened by investing in emerging markets countries.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those incurred by transactions in securities traded on
exchanges. OTC- listed companies may have limited product lines, markets
or financial resources. Many OTC stocks trade less frequently and in
smaller volume than exchange-listed stocks. The values of these stocks may
be more volatile than exchange-listed stocks, and the fund may experience
difficulty in purchasing or selling these securities at a fair price.
o Geographic Focus Risk: The fund may invest a substantial amount of its
assets in issuers located in a single country or a limited number of
countries. If the fund focuses its investments in this manner, it assumes
the risk that economic, political and social conditions in those countries
will have a significant impact on its investment performance. The fund's
investment performance may also be more volatile if it focuses its
investments in certain countries, especially emerging market countries.
o Active or Frequent Trading Risk: The fund may engage in active and
frequent trading to achieve its principal investment strategies. This may
result in the realization and distribution to shareholders of higher net
capital gains as compared to a fund with less active trading policies,
which would increase your tax liability. Frequent trading also increases
transaction costs, which could detract from the fund's performance.
o As with any mutual fund, you could lose money on your investment in the
fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table are not included because the fund has
not had a full calendar year of investment operations.
<PAGE>
3: REIT FUND
...........................................................................
o INVESTMENT OBJECTIVES
The fund's primary investment objective is capital appreciation. Its
secondary objective is to provide current income and growth of income. The
fund's objectives may be changed without shareholder approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 80% of its
total assets in securities of real estate investment trusts (REITs) and
other companies principally engaged in the real estate industry. REITs are
pooled investment vehicles that invest primarily in income producing real
estate or real estate related loans or interests. While the fund generally
focuses its investments in equity REITs, the fund may invest without
restriction in mortgage REITs. Equity REITs invest most of their assets
directly in U.S. or foreign real property, receive most of their income
from rents and may also realize gains by selling appreciated property.
Mortgage REITs invest most of their assets in real estate mortgages and
receive most of their income from interest payments. By investing in REITs
indirectly through the fund, a shareholder will bear not only a
proportionate share of the expenses of the fund, but also indirectly
similar expenses of the REITs, including compensation of management.
A company is considered to be principally engaged in the real estate
industry if, at the time of investment, the company earns at least 50% of
its gross revenues or net profits from real estate activities or from
products or services related to the real estate sector. Real estate
activities include owning, developing, managing or acting as a broker for
real estate. Examples of related products and services include building
supplies and mortgage servicing.
The fund's investments are allocated across various geographic areas,
REIT managers and property types, such as apartments, retail properties,
office buildings, hotels, industrial properties, health care facilities,
storage facilities, manufactured housing and special use facilities.
However, from time to time the fund may focus its investments in any one
or a few of these areas.
MFS has engaged Sun Capital Advisers, Inc. (referred to as Sun Capital
or the sub-adviser) to act as sub-adviser to the fund.
The sub-adviser selects securities for the fund's portfolio by analyzing
the fundamental and relative values of potential REIT investments based on
several factors, including:
o The ability of a REIT to grow its funds from operations internally through
increased occupancy and higher rents and externally through acquisitions
and development;
o The quality of a REIT's management, including its ability to buy
properties at reasonable prices and to add value by creative and
innovative property and business management;
o A REIT's cash flows, price/funds from operations ratio, dividend yield and
payment history, price/net asset value ratio and market price; and
o Current or anticipated economic and market conditions, interest rate
changes and regulatory developments.
Up to 20% of the fund's total assets may be invested in all types of
domestic and foreign equity and fixed income securities.
The fund is non-diversified. This means that the fund may invest a
relatively high percentage of its assets in a small number of issuers.
o PRINCIPAL RISKS
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. The share price of the fund generally changes
daily based on market conditions and other factors. Please note that there
are many circumstances which could cause the value of your investment in
the fund to decline, and which could prevent the fund from achieving its
objective, that are not described here.
The principal risks of investing in the fund are:
o Real Estate Risk: The risks of investing in real estate include risks
related to general, regional and local economic conditions and:
> fluctuations in interest rates;
> overbuilding and increased competition;
> increases in property taxes and operating expenses;
> changes in zoning laws;
> heavy cash flow dependency;
> possible lack of availability of mortgage funds;
> losses due to natural disasters;
> regulatory limitations on rents;
> variations in market rental rates;
> changes in neighborhood property values; and
> environmental problems
Furthermore, a REIT in the fund's portfolio may be, or may be
perceived by the market to be, poorly managed, or the sub-adviser's
judgments about the relative values of REIT securities selected for
the fund's portfolio may prove to be wrong.
Equity REITs may be affected by changes in the value of the underlying
property owned by the trusts. Mortgage REITs may be affected by
default or payment problems relating to underlying mortgages, the
quality of credit extended and self-liquidation provisions by which
mortgages held may be paid in full and distributions of capital
returns may be made at any time. Equity and mortgage REITs could be
adversely affected by failure to qualify for tax-free pass-through of
income under the Internal Revenue Code of 1986, as amended, or to
maintain their exemption from registration under the Investment
Company Act of 1940, as amended. Also, to the extent the fund invests
in mortgage REITs, it will be subject to credit risk and interest rate
risk, described below.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the fund's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the fund's
portfolio will generally rise.
o Concentration Risk: The fund's investment performance will be closely tied
to the performance of companies in the real estate group of industries.
Companies in a single industry often are faced with the same obstacles,
issues and regulatory burdens, and their securities may react similarly
and more in unison to these or other market conditions. These price
movements may have a larger impact on the fund than on a fund with a more
broadly diversified portfolio.
o Non-Diversified Status Risk: Because the fund may invest its assets in a
small number of issuers, the fund is more susceptible to any single
economic, political or regulatory event affecting those issuers than is a
diversified fund.
o Foreign Markets Risk: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
> Foreign markets may be less liquid and more volatile than U.S.
markets.
> Foreign securities often trade in currencies other than the U.S.
dollar, and the fund may directly hold foreign currencies and purchase
and sell foreign currencies through forward exchange contracts.
Changes in currency exchange rates will affect the fund's net asset
value, the value of dividends and interest earned, and gains and
losses realized on the sale of securities. An increase in the strength
of the U.S. dollar relative to these other currencies may cause the
value of the fund to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may intervene in the
currency markets, causing a decline in value or liquidity in the
fund's foreign currency holdings. By entering into forward foreign
currency exchange contracts, the fund may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purposes of increasing return,
the fund may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the fund enters into the contract may fail to perform
its obligations to the fund.
o Small Cap Companies Risk: Many REITs are small capitalization companies.
Investments in small cap companies tend to involve more risk and be more
volatile than investments in larger companies. Small cap companies may be
more susceptible to market declines because of their limited financial and
management resources, markets and distribution channels. Their shares may
be more difficult to sell at satisfactory prices during market declines.
o Active or Frequent Trading Risk: The fund may engage in active and
frequent trading to achieve its principal investment strategies. This may
result in the realization and distribution to shareholders of higher net
capital gains as compared to a fund with less active trading policies,
which would increase your tax liability. Frequent trading also increases
transaction costs, which could detract from the fund's performance.
o As with any mutual fund, you could lose money on your investment in the
fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table are not included because the fund has
not had a full calendar year of investment operations.
<PAGE>
-------------------------------------------
III CERTAIN INVESTMENT STRATEGIES AND RISKS
-------------------------------------------
o FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
Each fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this prospectus. The types of
securities and investment techniques and practices in which a fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this prospectus, and are
discussed, together with their risks, in the funds' Statement of
Additional Information (referred to as the SAI), which you may obtain by
contacting MFS Service Center, Inc. (please see back cover for address and
telephone number).
o TEMPORARY DEFENSIVE POLICIES
In addition, each fund may depart from its principal investment strategies
by temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While a fund invests defensively,
it may not be able to pursue its investment objective. The fund's
defensive investment position may not be effective in protecting its
value.
o ACTIVE OR FREQUENT TRADING
Each fund may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to a fund
with less active trading policies, which would increase your tax
liability. Frequent trading also increases transaction costs, which could
detract from the fund's performance.
<PAGE>
--------------------------
IV MANAGEMENT OF THE FUNDS
--------------------------
o INVESTMENT ADVISER
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the funds' investment adviser. MFS is America's oldest mutual
fund organization. MFS and its predecessor organizations have a history of
money management dating from 1924 and the founding of the first mutual
fund, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately [$ ] billion as of November
30, 2000. MFS is located at 500 Boylston Street, Boston, Massachusetts
02116.
MFS provides investment management and related administrative services
and facilities to each fund, including portfolio management and trade
execution. For these services, each fund pays MFS an annual management
fee. The effective rate of the management fee paid by each fund to MFS is
reflected in the "Expense Table."
o SUB-INVESTMENT ADVISER
The adviser has engaged a sub-adviser for the REIT Fund: Sun Capital
Advisers, Inc., referred to as Sun Capital or the sub-adviser. The sub-
adviser is an affiliate of the adviser. Sun Capital is an indirect wholly-
owned subsidiary of Sun Life Assurance Company of Canada, an insurance
company. The sub-adviser's investment personnel are also employed in the
U.S. Investment Division of Sun Life Assurance Company of Canada. The sub-
adviser has been providing investment management and supervisory services
to pension and profit-sharing accounts since 1997 and to mutual funds
since 1998. Sun Capital is located at One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02481. For its services, MFS pays the sub-
adviser a management fee in an amount equal to 0.35% annually of the
average daily net asset value of the REIT Fund's assets managed by the
sub-adviser. The REIT Fund is not responsible for paying a subadvisory fee
directly.
o PORTFOLIO MANAGERS
<TABLE>
<CAPTION>
FUND PORTFOLIO MANAGERS
---- ------------------
<S> <C>
Large Cap Value Fund Lisa B. Nurme, a Senior Vice President of MFS, has been employed in the
investment management area of the adviser since 1987 and has been the
portfolio manager of the fund since its inception.
International Research Fund The fund is managed by a committee of various equity research analysts
employed by the adviser under the general oversight of David A. Antonelli,
the Director of International Research and a Senior Vice President of the
adviser. Mr. Antonelli has been employed in the investment management area of
MFS since 1991.
REIT Fund The fund is managed by Sun Capital. John T. Donnelly is a Senior Vice
President of Sun Capital. Joseph H. Bozoyan is a Vice President of Sun
Capital. Thomas V. Pedulla is a Senior Vice President of Sun Capital. All
three portfolio managers have been employed in the investment management area
of Sun Capital's parent, Sun Life Assurance Company of Canada, since 1994.
All three have co-managed the fund since its inception.
</TABLE>
o ADMINISTRATOR
MFS provides the funds with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the funds for a portion of the costs it incurs in providing
these services.
o SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for the funds,
for which it is entitled to receive compensation from the funds.
<PAGE>
-----------------------
V DESCRIPTION OF SHARES
-----------------------
Each fund is designed for sale to institutional investor clients of MFS
and MFS Institutional Advisors, Inc. and other similar investors. Each
fund offers a single class of shares, which are not subject to a sales
charge or any Rule 12b-1 distribution and service fees.
----------------------------------------------
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
----------------------------------------------
You may purchase, exchange and redeem shares of a fund in the manner
described below.
o HOW TO PURCHASE SHARES
Shares may be purchased through MFD in cash or in-kind without a sales
charge at their net asset value next computed after acceptance of the
purchase order. The minimum initial investment is generally $3 million
(generally $1 million in the case of purchases by bank trust departments
for their clients). There is no minimum on additional investments.
OPENING AN ACCOUNT: Payments by check should be made to the order of
[insert name of fund] and sent to that particular fund as follows: MFS
Service Center, Inc., P.O. Box 1400, Boston, MA 02107-9906. Payments of
federal funds should be sent by wire to the custodian of the fund as
follows: State Street Bank and Trust Company, Attn: Mutual Funds Division,
for the account of: [Shareholder's name], Re: [insert name of fund]
(Account No. 99034795) and Wire Number: [Assigned by telephone].
Information on how to wire federal funds is available at any national
bank or any state bank which is a member of the Federal Reserve System.
Shareholders should also mail the completed Account Application to the
MFSC.
A shareholder must first telephone MFSC (see back cover for telephone
number) to advise of its intended action and, if funds are to be wired, to
obtain a wire order number.
IN-KIND PURCHASES: Shares of each fund may be purchased with securities
acceptable to that particular fund. A fund need not accept any security
offered for an in-kind purchase unless it is consistent with that fund's
investment objective, policies and restrictions and is otherwise
acceptable to the fund. Securities accepted in-kind for shares will be
valued in accordance with the fund's usual valuation procedures (see "Net
Asset Value" below). Investors interested in making an in-kind purchase of
fund shares must first telephone MFSC (see back cover for telephone
number) to advise of its intended action and obtain instructions for an
in-kind purchase.
o HOW TO EXCHANGE SHARES
You can exchange your shares for shares of any of the other funds
described in this prospectus at net asset value by contacting MFSC (see
back cover for telephone number). Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are
received for an established account by MFSC in proper form (see
"Redemptions" below). If you use an Exchange Request to open a new account
with one of the other funds described in this prospectus, the exchange
must involve shares having an aggregate value of at least $3 million
(generally $1 million in the case of purchases by bank trust departments
for their clients).
Exchanges may be subject to certain limitations and are subject to the
MFS funds' policies concerning excessive trading practices, which are
policies designed to protect the funds and their shareholders from the
harmful effect of frequent exchanges. These limitations and market timing
policies are described below under the captions "Right to Reject or
Restrict Purchase and Exchange Orders" and "Excessive Trading Practices."
You should read the description of the fund into which you are exchanging
and consider the differences in objectives, policies and rules before
making any exchange.
o HOW TO REDEEM SHARES
You may redeem your shares by contacting the MFSC. Redemptions may be in
cash or, at the fund's discretion, by distribution in-kind of securities
from a fund's portfolio. The securities distributed are selected by MFS in
light of the fund's objective and may not represent a pro rata
distribution of each security held in the fund's portfolio. In the event
that a fund makes an in-kind distribution, you could incur the brokerage
and transaction charges when converting the securities to cash. The fund
sends out your redemption proceeds within seven days after your request is
received in good order. "Good order" generally means that the stock power,
written request for redemption, letter of instruction or certificate must
be endorsed by the record owner(s) exactly as the shares are registered.
In addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature Guarantee/
Additional Documentation" below, or contact MFSC for details (see back
cover page for address and phone number).
Under unusual circumstances such as when the New York Stock Exchange is
closed, trading on the Exchange is restricted or if there is an emergency,
a fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, a fund may delay the payment of the
redemption proceeds until the check has cleared, which may take up to 15
days from the purchase date.
Each fund reserves the right to redeem shares in your account for their
then-current value (which you will be promptly paid) if at any time the
total investment in the account drops below $500,000 because of
redemptions and exchanges. You will be notified when the value of the
account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
REDEEMING DIRECTLY THROUGH MFSC.
o BY TELEPHONE. You can call MFSC to have shares redeemed from your account
and the proceeds wired or mailed (depending on the amount redeemed)
directly to a pre- designated bank account. MFSC will request personal or
other information from you and will generally record the calls. MFSC will
be responsible for losses that result from unauthorized telephone
transactions if it does not follow reasonable procedures designed to
verify your identity. You must elect this privilege on your account
application if you wish to use it.
o BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the
name of your fund, your account number, and the number of shares or dollar
amount to be sold.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. In order to protect against
fraud, each fund requires that your signature be guaranteed in order to
redeem your shares. Your signature may be guaranteed by an eligible bank,
broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency, or savings association. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
o OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. Purchases and
exchanges should be made for investment purposes only. Each fund reserves
the right to reject or restrict any specific purchase or exchange request.
Because an exchange request involves both a request to redeem shares of
one fund and to purchase shares of another fund, the funds consider the
underlying redemption and purchase requests conditioned upon the
acceptance of each of these underlying requests. Therefore, in the event
that the funds reject an exchange request, neither the redemption nor the
purchase side of the exchange will be processed. When a fund determines
that the level of exchanges on any day may be harmful to its remaining
shareholders, the fund may delay the payment of exchange proceeds for up
to seven days to permit cash to be raised through the orderly liquidation
of its portfolio securities to pay the redemption proceeds. In this case,
the purchase side of the exchange will be delayed until the exchange
proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm
fund performance. As noted above, each fund reserves the right to reject
or restrict any purchase order (including exchanges) from any investor. To
minimize harm to a fund and its shareholders, a fund will exercise these
rights if an investor has a history of excessive trading or if an
investor's trading, in the judgment of the fund, has been or may be
disruptive to a fund. In making this judgment, a fund may consider trading
done in multiple accounts under common ownership or control.
<PAGE>
---------------------
VII OTHER INFORMATION
---------------------
o PRICING OF FUND SHARES
The price of each fund's shares is based on its net asset value. The net
asset value of each fund's shares is determined at the close of regular
trading each day that the New York Stock Exchange ("NYSE") is open for
trading (generally, 4:00 p.m., Eastern time) (referred to as the valuation
time). The NYSE is closed for business on most national holidays and Good
Friday. To determine net asset value, each fund values its assets at
current market values, or, if current market values are unavailable, at
fair value as determined by the adviser under the direction of the Board
of Trustees that oversees the fund. Fair value pricing may be used by a
fund when current market values are unavailable or when an event occurs
after the close of the exchange on which the fund's portfolio securities
are principally traded that is likely to have changed the value of the
securities. The use of fair value pricing by a fund may cause the net
asset value of its shares to differ significantly from the net asset value
that would be calculated using current market values.
Certain of the funds invest in securities which are primarily listed on
foreign exchanges that trade on weekends and other days when the fund does
not price its shares. Therefore, the value of the fund's shares may change
on days when you will not be able to purchase or redeem the funds' shares.
o DISTRIBUTIONS
Each fund intends to declare and pay substantially all of its net
investment income (including any realized net capital gains) to its
shareholders as dividends at least annually.
o TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your
tax adviser regarding the effect that an investment in a fund may have on
your particular tax situation.
TAXABILITY OF DISTRIBUTIONS. As long as a fund qualifies for treatment as
a regulated investment company (which each fund intends to do), it pays no
federal income tax on the earnings and gains it distributes to its
shareholders.
You will normally have to pay federal income tax, and any state or local
income taxes, on the distributions you receive from a fund, whether you
take the distributions in cash or reinvest them in additional shares.
Distributions designated as capital gain dividends are taxable as long-
term capital gains. Other distributions are generally taxable as ordinary
income. Distributions derived from interest on U.S. Government securities
(but not distributions of gains from the sale of those securities) may be
exempt from state and local personal income taxes. Some dividends paid in
January may be taxable as if they had been paid the previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal income tax purposes.
All distributions by each fund will reduce its net asset value per
share. Therefore, if you buy shares shortly before the record date of a
distribution, you will pay the full price for the shares and then
effectively may receive a portion of the purchase price back as a taxable
distribution.
If you are neither a citizen nor a resident of the United States, a fund
will withhold U.S. federal income tax at the rate of 30% on income
dividends and other payments that are subject to such withholding. You may
be able to arrange for a lower withholding rate under an applicable tax
treaty if you supply the appropriate documentation required by the fund.
Each fund is also required in certain circumstances to apply backup
withholding at the rate of 31% on dividends and redemption proceeds paid
to any shareholder (including a shareholder who is nether a citizen nor a
resident of the United States) who does not furnish to the fund certain
information and certifications or, in the case of dividends, who is
otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors in a fund should read its Account Application for
additional information regarding backup withholding of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and
the redemption price of the shares you redeem, sell or exchange, you may
have a gain or a loss on the transaction. You are responsible for any tax
liabilities generated by your transaction.
o UNIQUE NATURE OF SERIES
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of the funds, and which may be managed by a fund's portfolio
manager(s). While a fund may have many similarities to these other funds,
its investment performance will differ from their investment performance.
This is due to a number of differences between a fund and these similar
products, including differences in sales charges, expense ratios and cash
flows.
<PAGE>
----------
APPENDIX A
----------
o INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, each fund may engage in the
following principal and non-principal investment techniques and practices.
Investment techniques and practices which are the principal focus of a
fund are described, together with their risks, in the Risk Return Summary
of the Prospectus. Both principal and non-principal investment techniques
and practices are described, together with their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
..........................................................................
SYMBOLS x permitted -- not permitted
--------------------------------------------------------------------------
INTERNATIONAL
LARGE CAP RESEARCH
VALUE FUND FUND REIT FUND
---------- -------- ---------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations
and Multiclass Pass-Through
Securities x -- x
Corporate Asset-Backed Securities x -- x
Mortgage Pass-Through Securities x x x
Stripped Mortgage-Backed Securities x -- x
Corporate Securities x x x
Loans and Other Direct Indebtedness x -- x
Lower Rated Bonds x -- x
Municipal Bonds x -- x
Speculative Bonds x -- x
U.S. Government Securities x x x
Variable and Floating Rate Obligations x -- x
Zero Coupon Bonds, Deferred Interest
Bonds and PIK Bonds x -- x
Equity Securities x x x
Foreign Securities Exposure
Brady Bonds x -- x
Depositary Receipts x x x
Dollar-Denominated Foreign Debt
Securities x x x
Emerging Markets x x x
Foreign Securities x x x
Forward Contracts x x x
Futures Contracts x x x
Indexed Securities/Structured Products x x x
Inverse Floating Rate Obligations -- -- --
Investment in Other Investment Companies
Open-End Funds x x x
Closed-End Funds x x x
Lending of Portfolio Securities x x x
Leveraging Transactions
Bank Borrowings -- -- --
Mortgage "Dollar-Roll" Transactions x -- x
Reverse Repurchase Agreements -- -- --
Options
Options on Foreign Currencies x x x
Options on Futures Contracts x x x
Options on Securities x x x
Options on Stock Indices x x x
Reset Options x x x
"Yield Curve" Options x x x
Repurchase Agreements x x x
Restricted Securities x x x
Short Sales -- -- x
Short Sales Against the Box -- -- x
Short Term Instruments x x x
Swaps and Related Derivative Instruments x -- x
Temporary Borrowings x x x
Temporary Defensive Positions x x x
Warrants x x x
"When-Issued" Securities x x x
<PAGE>
MFS(R) INSTITUTIONAL TRUST
If you want more information about the funds, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the funds'
actual investments. Annual reports discuss the effect of recent market
conditions and the funds' investment strategy on the funds' performance during
their last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated January 1, 2001,
provides more detailed information about the funds and is incorporated into
this prospectus by reference.
YOU CAN GET FREE COPIES OF THE ANNUAL/SEMIANNUAL REPORTS, THE SAI AND OTHER
INFORMATION ABOUT THE FUNDS, AND MAKE INQUIRIES ABOUT THE FUNDS, BY
CONTACTING:
MFS Service Center, Inc.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-637-2262
Internet: http://www.mfs.com
Information about the funds (including their prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-202-942-8090. Reports and other information about
the funds are available on the EDGAR Database on the Commission's Internet
website at http://www.sec.gov, and copies of this information may be obtained,
upon payment of a duplicating fee, by electronic request at the following e-
mail address: [email protected], or by writing the Public Reference Section
at the above address.
The Trust's Investment Company Act file number is 811-6174.
[UNION LABEL] MFSI-1 10/99 10M
<PAGE>
--------------------------
MFS(R) INSTITUTIONAL TRUST
--------------------------
JANUARY 1, 2001
[GRAPHIC OMITTED] STATEMENT OF ADDITIONAL
MFS(R) INSTITUTIONAL TRUST INFORMATION
500 BOYLSTON STREET, BOSTON, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Funds' Prospectus dated
January 1, 2001, as supplemented from time to time. This SAI should be read in
conjunction with the Prospectus, a copy of which may be obtained without charge
by contacting MFS Service Center, Inc. (see back cover for address and phone
number).
This SAI relates to the three Funds identified on page three hereof. Shares of
these Funds are designed for sale to institutional investor clients of MFS and
MFS Institutional Advisors, Inc., a wholly owned subsidiary of MFS, and other
similar investors.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
MFSI-13 10/99 500
<PAGE>
-----------------
TABLE OF CONTENTS
-----------------
Page
I Definitions ................................................... 3
II Investment Techniques, Practices and Risks .................... 3
III Investment Restrictions ....................................... 3
IV Management of the Funds ....................................... 4
Trustees .................................................. 4
Officers .................................................. 4
Trustees Compensation Table ............................... 5
Investment Adviser ........................................ 5
Investment Advisory Agreement ............................. 5
Administrator ............................................. 6
Custodian ................................................. 7
Shareholder Servicing Agent ............................... 7
Distributor ............................................... 7
V Portfolio Transactions and Brokerage Commissions .............. 7
VI Tax Considerations ............................................ 8
VII Net Income and Distributions .................................. k
VIII Determination of Net Asset Value .............................. k
IX Performance Information ....................................... k
X Descriptions of Shares, Voting Rights and Liabilities ......... m
XI Independent Auditors and Financial Statements ................. n
Appendix A -- Investment Techniques, Practices and Risks ...... A
Appendix B -- Description of Bond Ratings ..................... B
Appendix C -- Performance Quotation ........................... C
I DEFINITIONS
"Trust" - MFS Institutional Trust, a Massachusetts business trust
organized on September 13, 1990.
"Large Cap Value Fund" - MFS Institutional Large Cap Value Fund, a
diversified series of the Trust.*
"International Research Fund" - MFS Institutional International Research
Equity Fund, a diversified series of the Trust.*
"REIT Fund" - MFS Institutional Real Estate Investment Fund, a non-
diversified series of the Trust.
"Funds" - Large Cap Value Fund, International Research Fund and REIT Fund.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"Sub-Adviser" -- Sun Capital Advisers, Inc., a Delaware corporation.
"MFSC" MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Funds, dated January 1, 2001, as
amended or supplemented from time to time.
----------------
* Diversified series of the Trust. This means that, with respect to 75% of
its total assets, the series may not (1) purchase more than 10% of the
outstanding voting securities of any one issuer, or (2) purchase
securities of any issuer if, as a result, more than 5% of the series'
total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the U.S. Government or its
agencies or instrumentalities.
II INVESTMENT TECHNIQUES, PRACTICES AND RISKS
The investment objective and principal investment policies of each Fund
are described in the Prospectus. In pursuing its investment objective and
principal investment policies, a Fund may engage in a number of investment
techniques and practices, which involve certain risks. These investment
techniques and practices, which may be changed without shareholder
approval unless indicated otherwise, are identified in Appendix A to the
Prospectus, and are more fully described, together with their associated
risks, in Appendix A to this SAI. The following percentage limitations (as
a percentage of net assets) apply to these investment techniques and
practices:
PERCENTAGE LIMITATION
INVESTMENT POLICY (BASED ON NET ASSETS)
----------------- ---------------------
1. LARGE CAP VALUE FUND
Foreign Securities: .......... 25%
Lower Rated Bonds: ........... up to (but not including) 20%
Securities Lending: .......... 30%
Options*: .................... 5%
2. INTERNATIONAL RESEARCH FUND
Emerging Market Securities: .. 25%
Securities Lending: .......... 30%
Options*: .................... 5%
3. REIT FUND
Securities Lending: .......... 30%
Foreign Securities: .......... 20%
Options*: .................... 5%
* Investing in Options is not a principal focus of any of the Funds.
III INVESTMENT RESTRICTIONS
INVESTMENT RESTRICTIONS. The Trust on behalf of each Fund has adopted the
following fundamental and non-fundamental investment restrictions.
Fundamental restrictions cannot be changed without the approval of the
holders of a majority of that Fund's shares (which, as used in this SAI,
means the lesser of (i) more than 50% of its outstanding shares, or (ii)
67% or more of its outstanding shares present at a meeting at which
holders of more than 50% of its outstanding shares are represented in
person or by proxy).
Except for Investment Restriction (1) and each Fund's non-fundamental
investment policy regarding investing in illiquid securities, these
investment restrictions and policies are adhered to at the time of
purchase or utilization of assets; a subsequent change in circumstances
will not be considered to result in a violation of policy. In the event of
a violation of nonfundamental policy (1), the fund will reduce the
percentage of its assets invested in illiquid investments in due course,
taking into account the best interests of shareholders.
As fundamental policies, each Fund may not:
(1) Borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed.
(2) Underwrite securities issued by other persons except insofar as the
Fund may technically be deemed an underwriter under the Securities Act of
1933 in selling a portfolio security.
(3) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein and securities of companies, such as real estate investment
trusts, which deal in real estate or interests therein), interests in oil,
gas or mineral leases, commodities or commodity contracts (excluding
Options, Options on Futures Contracts, Options on Stock Indices, Options
on Foreign Currencies and any other type of option, and Futures Contracts)
in the ordinary course of its business; however, each Fund reserves the
freedom of action to hold and to sell real estate, mineral leases,
commodities or commodity contracts (including Options, Options on Futures
Contracts, Options on Stock Indices, Options on Foreign Currencies and any
other type of option, and Futures Contracts) acquired as a result of the
ownership of securities.
(4) Issue any senior securities except as permitted by the Investment
Company Act of 1940 ("1940 Act"). For purposes of this restriction,
collateral arrangements with respect to any type of option (including
Options, Options on Futures Contracts, Options on Stock Indices, Options
on Foreign Currencies), Forward Contracts, Futures Contracts and swap and
collateral arrangements with respect to initial and variation margin are
not deemed to be the issuance of a senior security.
(5) Make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an issue
of debt securities, the lending of portfolio securities, or the investment
of a Fund's assets in repurchase agreements, shall not be considered the
making of a loan.
(6) Purchase any securities of an issuer of a particular industry, if,
as a result, 25% or more of its gross assets would be invested in
securities of issuers whose principal business activities are in the same
industry (except obligations issued or guaranteed by the U.S. Government
or its agencies and instrumentalities and repurchase agreements
collateralized by such obligations), except that the REIT Fund will invest
at least 25% or more of its total assets in the real estate group of
industries.
In addition, the Funds have adopted the following non-fundamental policies
which may be changed without shareholder approval. Each such Fund will
not:
(1) Invest in illiquid investments, including securities 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 exists) if more than
15% of the Fund's net assets (taken at market value) would be invested in
such securities. Repurchase agreements maturing in more than seven days
will be deemed to be illiquid for purposes of a Fund's limitation on
investment in illiquid securities. Securities that are not registered
under the Securities Act of 1933, as amended, and sold in reliance on Rule
144A thereunder, but are determined to be liquid by the Trust's Board of
Trustees (or its delegee), will not be subject to this 15% limitation.
(2) Invest for the purpose of exercising control or management.
IV MANAGEMENT OF THE FUNDS
The Board of Trustees of the Trust provides broad supervision over the
affairs of each Fund. MFS is responsible for the investment management of
each Fund's assets and the officers of the Trust are responsible for its
operations. The Trustees and officers are listed below, together with
their principal occupations during the past five years (their titles may
have varied during that period).
The Funds and their Adviser and Distributor, and the Sub-Adviser, have
adopted codes of ethics as required under the 1940 Act. Subject to certain
conditions and restrictions, these codes permit personnel subject to the
codes to invest in securities for their own accounts, including securities
that may be purchased, held or sold by a Fund. Securities transactions by
some of these persons may be subject to prior approval of the Adviser's or
Sub-Adviser's compliance departments. Securities transactions of certain
personnel are subject to quarterly reporting and review requirements. The
codes are on public file with, and are available from, the SEC. See the
back cover of the Prospectus for information on obtaining a copy.
TRUSTEES
JEFFREY L. SHAMES,* Chairman and President (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive
Officer
NELSON J. DARLING, JR. (born 12/27/20)
Private Investor and Trustee
Address: Boston, Massachusetts
WILLIAM R. GUTOW (born 9/27/41)
Private Investor and Real Estate Consultant; Capitol Entertainment
Management Company (video franchise), Vice Chairman
Address: Dallas, Texas
OFFICERS
JAMES O. YOST,* Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Senior Vice
President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary and Assistant Clerk
(born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and
Associate General Counsel
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March
1997); Putnam Investments, Vice President (Prior to March 1997)
LAURA F. HEALY,* Assistant Treasurer (born 3/20/64)
Massachusetts Financial Services Company, Vice President (since December
1996); State Street Bank Fund Administration Group, Assistant Vice
President (prior to December 1996)
----------------
* "Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain
affiliates of MFS or with certain other Funds of which MFS or a subsidiary
is the Investment Adviser or distributor. Messrs. Shames and Scott,
Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates.
OWNERSHIP BY TRUSTEES AND OFFICERS
Not applicable
25% OR GREATER OWNERSHIP
The following table identifies those investors who own 25% or more of a
Fund's shares, and are therefore presumed to control that Fund:
APPROXIMATE
NUMBER APPROXIMATE %
NAME AND ADDRESS OF SHARES OF OUTSTANDING
FUND OF SHAREHOLDER OWNED SHARES OWNED
-------------------------------------------------------------------------
Not applicable
5% OR GREATER OWNERSHIP
The following table identifies those investors who own 5% or more (but
less than 25%) of a Fund's shares:
APPROXIMATE
NUMBER APPROXIMATE %
NAME AND ADDRESS OF SHARES OF OUTSTANDING
FUND OF SHAREHOLDER OWNED SHARES OWNED
------------------------------------------------------------------------
Not applicable
Each Fund pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, who currently receive a fee of $1,300
per year plus $150 per meeting and $150 per committee meeting attended,
together with such Trustee's out-of-pocket expenses.
TRUSTEE COMPENSATION TABLE
.........................................................................
TRUSTEE FEES TOTAL TRUSTEE
FROM EACH OF TRUST AND FEES FROM
TRUSTEE THE FUNDS(1) FUND COMPLEX(2)
-------------------------------------------------------------------------
Jeffrey L. Shames $ 0 $ [0]
Nelson J. Darling, Jr. 0 [ ]
William R. Gutow 0 [ ]
----------------
(1) These fees are estimated for each Fund's current fiscal year. The
Trustees are currently waiving their right to receive fees.
(2) Information provided is provided for calendar year 1999. Mr. Darling
served as Trustee of 27 Funds within the MFS Fund complex (having
aggregate net assets at December 31, 1999, of approximately $5.1
billion) and Mr. Gutow served as Trustee of 61 Funds within the MFS
complex (having aggregate net assets at December 31, 1999 of
approximately $20.5 billion).
The Declaration of Trust of the Trust provides that the Trust 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 Trust, unless, as to liabilities of the
Trust or its shareholders, it is determined 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 Trust. In the
case of settlement, such indemnification will not be provided unless it
has been determined pursuant to the Declaration of Trust, that they have
not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
The Trust has retained Massachusetts Financial Services Company ("MFS" or
the "Adviser") as each Fund's investment adviser. MFS and its predecessor
organizations have a history of money management dating from 1924. MFS is
a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings,
Inc., which in turn is an indirect wholly owned subsidiary of Sun Life
Assurance Company of Canada (an insurance company).
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages each Fund pursuant to
an Investment Advisory Agreement (the "Advisory Agreement"). Under the
Advisory Agreement, the Adviser provides each Fund with overall investment
advisory services. Subject to such policies as the Trustees may determine,
the Adviser makes investment decisions for each Fund. For these services
and facilities, the Adviser receives an annual management fee, computed
and paid monthly, as disclosed in the Prospectus under the heading
"Management of the Funds."
The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer of the Adviser. The 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 Fund's
investments and effecting its portfolio transactions.
The Advisory Agreement has an initial two year term and continues 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
Fund's shares (as defined in "Investment Restrictions" of this SAI) 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 Fund's shares (as defined in
"Investment Restrictions" of this SAI), or by either party on not more
than 60 days' nor less than 30 days' written notice. The Advisory
Agreement provides that if MFS ceases to serve as the Adviser to the Fund,
the Fund will change its name so as to delete the initials "MFS" and that
MFS may render services to others and may permit other fund clients to use
the initials "MFS" in their names. The Advisory Agreement also provides
that neither the Adviser 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 Fund, 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.
INVESTMENT SUB-ADVISER MFS has engaged Sun Capital Advisers, Inc.
(referred to as Sun Capital or the Sub-Adviser) for the Real Estate
Investment Fund. Sun Capital is located at One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02481. Sun Capital is an indirect wholly-
owned subsidiary of Sun Life Assurance Company of Canada (Sun Life of
Canada). Sun Life of Canada and its affiliates currently transact business
in Canada, the United States, the United Kingdom, Asia Pacific and South
America. Sun Life of Canada is a wholly-owned subsidiary of Sun Life
Financial Services of Canada Inc. ("Sun Life Financial"), a corporation
organized in Canada, Sun Life Financial is a reporting company under the
Securities Exchange Act of 1934 with common shares listed on the Toronto,
New York, London, and Manila stock exchanges.
The Sub-Adviser is a Delaware corporation and a registered investment
adviser. The Sub-Adviser provides investment management and supervisory
services to mutual funds and pension and profit-sharing accounts.
SUB-ADVISORY AGREEMENT Sun Capital serves as the REIT Fund's Sub-Adviser
pursuant to a Sub-Investment Advisory Agreement between the Adviser and
Sun Capital (the "Sub-Advisory Agreement"). The Sub-Advisory Agreement
provides that the Adviser may delegate to Sun Capital the authority to
make investment decisions for the REIT Fund. It is presently intended that
Sun Capital will provide portfolio management services for the REIT Fund.
For these services, the Adviser pays the Sub-Adviser an investment
advisory fee, computed and paid quarterly in arrears, at the annual rate
of 0.35% of the REIT Fund's average daily net assets. The Sub-Advisory
Agreement will continue in effect provided that such continuance is
specifically approved at least annually by the Board of Trustees or by the
vote of a majority of the REIT Fund's outstanding shares, and, in either
case, by a majority of the Trustees who are not parties to the Sub-
Advisory Agreement or interested persons of any such party. The Sub-
Advisory Agreement terminates automatically if it is assigned and may be
terminated without penalty by the Trustees, by vote of a majority of the
REIT Fund's outstanding shares, or by the Adviser or Sub-Adviser on not
less than 30 days' nor more than 60 days' written notice. The Sub-Advisory
Agreement specifically provides that neither the Sub-Adviser 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 REIT Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of reckless disregard of its obligations and duties
under the Sub-Advisory Agreement.
AFFILIATED SERVICE PROVIDER COMPENSATION
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
NET AMOUNT
PAID TO MFS AMOUNT
FOR ADVISORY WAIVED
FISCAL YEAR ENDED SERVICES BY MFS
---------------------------------------------------------------------
Not applicable
The Trust pays the compensation of the Trustees who are not officers of
MFS and all expenses of the Fund (other than those assumed by MFS)
including but not limited to: advisory and administrative services;
governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, periodic
reports, notices and proxy statements to shareholders and 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 State Street Bank and Trust
Company, the Fund's custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the
Fund; and expenses of shareholder meetings. Expenses relating to the
issuance, registration and qualification of shares of the Fund and the
preparation, printing and mailing of prospectuses are borne by the Fund
except that the Distribution Agreement with MFD requires MFD to pay for
prospectuses that are to be used for sales purposes. Expenses of the Trust
which are not attributable to a specific series are allocated between the
series in a manner believed by management of the Trust to be fair and
equitable.
ADMINISTRATOR
MFS provides each Fund with certain financial, legal, compliance,
shareholder communications and other administrative services pursuant to a
Master Administrative Services Agreement. Under this Agreement, the Fund
pays MFS an administrative fee of up to 0.0175% on the first $2.0 billion;
0.0130% on the next $2.5 billion; 0.0005% on the next $2.5 billion; and
0.0% on amounts in excess of $7.0 billion per annum of a Fund's average
daily net assets. This fee reimburses MFS for a portion of the costs it
incurs to provide such services.
NET AMOUNT
PAID TO MFS FOR
ADMINISTRATIVE
FISCAL YEAR ENDED SERVICES
-------------------------------------------------------------------------
Not applicable
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of
each Fund's assets. The Custodian's responsibilities include safekeeping
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest and
dividends on the Fund's investments, maintaining books of original entry
for portfolio and fund accounting and other required books and accounts,
and calculating the daily net asset value of the Fund. The Custodian does
not determine the investment policies of the Fund or decide which
securities the Fund will buy or sell. The Fund may, however, invest in
securities of the Custodian and may deal with the Custodian as principal
in securities transactions. The Custodian also acts as the dividend
disbursing agent of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is
each Fund's shareholder servicing agent, pursuant to an Amended and
Restated Shareholder Servicing Agreement (the "Agency Agreement"). The
Shareholder Servicing Agent's responsibilities under the Agency Agreement
include administering and performing transfer agent functions and the
keeping of records in connection with the issuance, transfer and
redemption of shares of the Funds. For these services, MFSC will receive a
fee calculated as a percentage of the average daily net assets of each
Fund at an effective annual rate of up to 0.0075%. In addition, MFSC will
be reimbursed by each Fund for certain expenses incurred by MFSC on behalf
of the Fund. The Custodian has contracted with MFSC to perform certain
dividend disbursing agent functions for each Fund.
NET AMOUNT
PAID TO MFSC
FOR TRANSFER
AGENCY
FISCAL YEAR ENDED SERVICES
----------------------------------------------------------------------
Not applicable
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues 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 Fund's shares (as defined in "Investment
Restrictions" of this SAI) and in either case, by a majority of the
Trustees who are not parties to the Distribution Agreement or interested
persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by
either party on not more than 60 days' nor less than 30 days' notice.
V PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Funds are made
by persons affiliated with the Adviser or the Sub-Adviser. Any such person
may serve other clients of the Adviser or the Sub-Adviser, or any
subsidiary of the Adviser or Sub-Adviser in a similar capacity. Changes in
a Fund's investments are reviewed by the Trust's Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser and the Sub-Adviser
have complete freedom as to the markets in and broker-dealers through
which they seek this result. In the U.S. and in some other countries debt
securities are traded principally in the over-the-counter market on a net
basis through dealers acting for their own account and not as brokers. In
other countries both debt and equity securities are traded on exchanges at
fixed commission rates. The cost of securities purchased from underwriters
includes an underwriter's commission or concession, and the prices at
which securities are purchased and sold from and to dealers include a
dealer's mark-up or mark-down. The Adviser and Sub-Adviser normally seek
to deal directly with the primary market makers or on major exchanges
unless, in their opinion, better prices are available elsewhere. Subject
to the requirement of seeking execution at the best available price,
securities may, as authorized by the Advisory Agreement and the Sub-
Advisory Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser or
the Sub-Adviser. At present no arrangements for the recapture of
commission payments are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules
of the National Association of Securities Dealers, Inc. ("NASD") and such
other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Funds and of the other investment company clients
of MFD as a factor in the selection of broker-dealers to execute the
Funds' portfolio transactions.
Under the Advisory Agreement and the Sub-Advisory Agreement and as
permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Adviser and the Sub-Adviser may cause a Fund to pay a broker-dealer which
provides brokerage and research services to the Adviser or the Sub-
Adviser, an amount of commission for effecting a securities transaction
for a Fund in excess of the amount other broker-dealers would have charged
for the transaction, if the Adviser or the Sub-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 their
respective overall responsibilities to the Fund or to their other clients.
Not all of such services are useful or of value in advising a Fund.
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.
Although commissions paid on every transaction will, in the judgment of
the Adviser or Sub-Adviser, be reasonable in relation to the value of the
brokerage services provided, commissions exceeding those which another
broker might charge may be paid to broker-dealers who were selected to
execute transactions on behalf of a Fund and the Adviser's or Sub-
Adviser's other clients in part for providing advice as to the
availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Adviser or Sub-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 a Fund. The Trustees (together with the Trustees of
certain other MFS Funds) have directed the Adviser to allocate a total of
$43,800 of commission business from certain MFS Funds (including the
Funds) to the Pershing Division of Donaldson Lufkin & Jenrette as
consideration for the annual renewal of certain publications provided by
Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the Funds and
the Adviser).
The Adviser's and Sub-Adviser's investment management personnel attempt
to evaluate the quality of Research provided by brokers. The Adviser and
Sub-Adviser sometimes use evaluations resulting from this effort as a
consideration in the selection of brokers to execute portfolio
transactions.
The management fee of the Adviser and Sub-Adviser will not be reduced as
a consequence of the Adviser's or Sub-Adviser's receipt of brokerage and
research service. To the extent a Fund's portfolio transactions are used
to obtain brokerage and research services, the brokerage commissions paid
by the Fund will exceed those that might otherwise be paid for such
portfolio transactions, or for such portfolio transactions and research,
by an amount which cannot be presently determined. Such services would be
useful and of value to the Adviser or Sub-Adviser in serving both the Fund
and other clients and, conversely, such services obtained by the placement
of brokerage business of other clients would be useful to the Adviser or
Sub-Adviser in carrying out its obligations to a Fund. While such services
are not expected to reduce the expenses of the Adviser or Sub-Adviser, the
Adviser or Sub-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 a
Fund's portfolio as well as for that of one or more of the other clients
of the Adviser or Sub-Adviser or any subsidiary of the Adviser or Sub-
Adviser. Investment decisions for a Fund and for such other clients are
made with a view to achieving their respective investment objectives. It
may develop that a particular security is bought or sold for only one
client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the
same security is suitable for the investment objectives of more than one
client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed by the adviser to be equitable to each. It is
recognized that in some cases this system could have a detrimental effect
on the price or volume of the security as far as a Fund is concerned. In
other cases, however, a Fund believes that its ability to participate in
volume transactions will produce better executions for a Fund.
Brokerage commissions paid by each Fund for certain specified periods,
and information concerning purchases by the Funds of securities issued by
their regular broker-dealers for the Funds' most recent fiscal year, is
set forth below.
BROKERAGE COMMISSIONS
.........................................................................
The Funds are newly organized and no brokerage commissions were paid by
the Funds as of the date of this SAI.
BROKERAGE
COMMISSIONS
FUND PAID BY FUND
--------------------------------------------------------------------
Not applicable
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
.........................................................................
The Funds are newly organized and have not purchased securities issued by
regular broker-dealers as of the date of this SAI.
FUND/BROKER-DEALER VALUE OF SECURITIES
--------------------------------------------------------------------
Not applicable
VI TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state and local) income tax consequences
affecting each Fund and its shareholders. The discussion is very general,
and therefore prospective investors are urged to consult their tax
advisors about the impact an investment in the Funds may have on their own
tax situations.
TAXATION OF THE FUNDS
FEDERAL TAXES -- Each Fund is treated as a separate corporation for
federal tax purposes under the Internal Revenue Code of 1986, as amended
(the "Code"). Each Fund intends to elect to be, and intends to qualify to
be treated each year as, a "regulated investment company" under Subchapter
M of the Code by meeting all applicable requirements of Subchapter M,
including requirements as to the nature of the Fund's gross income, the
amount of its distributions (as a percentage of its overall income), and
the composition of its portfolio assets. As a regulated investment
company, a Fund will not be subject to any federal income or excise taxes
on its net investment income and net realized capital gains that it
distributes to its shareholders in accordance with the timing requirements
imposed by the Code. A Fund's foreign-source income, if any, may be
subject to foreign withholding taxes. If any Fund failed to qualify for
treatment as a "regulated investment company" for any taxable year, it
would incur federal corporate income tax on all of its taxable income for
that year, whether or not distributed, and Fund distributions would
generally be taxable as ordinary dividend income to its shareholders.
MASSACHUSETTS TAXES -- As long as it qualifies as a regulated investment
company under the Code, a Fund will not be required to pay Massachusetts
income or excise taxes.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Shareholders of a Fund that are not tax-
exempt entities normally will have to pay federal income tax and any state
or local income taxes on the dividends and capital gain distributions they
receive from the Fund. Any dividends from ordinary income and net short-
term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes, whether paid in cash or reinvested in
additional shares. Distributions of net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss), whether paid
in cash or reinvested in additional shares, are taxable to shareholders as
long-term capital gains for federal income tax purposes without regard to
the length of time they have held their shares. Any Fund dividend or other
distribution that is declared in October, November, or December of any
calendar year, payable to shareholders of record in such a month, and paid
during the following January will be treated as if received by the
shareholders on December 31 of the year in which the distribution is
declared. Each Fund will notify its shareholders regarding the federal tax
status of its distributions after the end of each calendar year.
DIVIDENDS-RECEIVED DEDUCTION -- If a Fund receives dividend income from
U.S. corporations, a portion of its income dividends is normally eligible
for the dividends-received deduction for a corporate shareholder that
otherwise qualifies for that deduction with respect to its holding of Fund
shares. Availability of the deduction for particular corporate
shareholders is subject to certain limitations, and deducted amounts may
be subject to the federal alternative minimum tax or result in certain
basis adjustments.
DISPOSITION OF SHARES -- In general, any gain or loss a shareholder
realizes upon a disposition of Fund shares by a shareholder that holds
such shares as a capital asset will be treated as a long-term capital gain
or loss if the shares have been held for more than twelve months and
otherwise as a short-term capital gain or loss. However, any loss realized
upon a disposition of Fund shares held for six months or less will be
treated as a long-term capital loss to the extent of any distributions of
net capital gain made with respect to those shares. Any loss realized on a
disposition of shares may also be disallowed under rules relating to "wash
sales." Gain may be increased (or loss reduced) on a redemption of Class A
Fund shares held for 90 days or less followed by any purchase (including
purchases by exchange or by reinvestment) without payment of an additional
sales charge of Class A shares of the Fund or of any other shares of an
MFS Fund generally sold subject to a sales charge.
DISTRIBUTION/ACCOUNTING POLICIES -- A Fund's current distribution and
accounting policies will affect the amount, timing, and character of
distributions to shareholders and may, under certain circumstances, make
an economic return of capital taxable to shareholders.
FOREIGN INCOME TAXATION OF NON-U.S. PERSONS -- Distributions received from
a Fund by persons who are not citizens or residents of the United States
or U.S. entities may also be subject to tax under the laws of their own
jurisdictions.
STATE AND LOCAL INCOME TAXES: U.S. GOVERNMENT SECURITIES -- Dividends paid
by a Fund that are derived from interest on obligations of the U.S.
Government and certain of its agencies and instrumentalities (but
generally not distributions of capital gains realized upon the disposition
of those obligations) may be exempt from state and local personal income
taxes. Each Fund generally intends to advise shareholders of the extent,
if any, to which its dividends consist of such interest. Shareholders are
urged to consult their tax advisors regarding the possible exclusion of
such portion of their dividends for state and local income tax purposes.
CERTAIN SPECIFIC INVESTMENTS -- Any investment in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped
securities, and certain securities purchased at a market discount will
cause a Fund to recognize income prior to the receipt of cash payments
with respect to those securities. To distribute this income (as well as
non-cash income described in the next two paragraphs) and avoid a tax on a
Fund, it may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional
taxable gain or loss to the Fund. Any 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 for a
Fund that has state or local governments or other tax-exempt organizations
as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- Any Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by a Fund on the last business day of each taxable year
will be marked to market (i.e., treated as if closed out) on that day, and
any gain or loss associated with the positions will be treated as 60%
long-term and 40% short-term capital gain or loss. Certain positions held
by a Fund that substantially diminish its risk of loss with respect to
other positions in its portfolio may constitute "straddles" and may be
subject to special tax rules that would cause deferral of Fund losses,
adjustments in the holding periods of Fund securities, and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles that may alter the effects of these rules. Each Fund will limit
its activities in options, Futures Contracts, Forward Contracts, short
sales "against the box," and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
If a Fund enters into a "constructive sale" of "certain appreciated
financial positions," the Fund will generally recognize gain at that time,
even through the Fund has not actually sold the position. A constructive
sale generally consists of a short sale against the box, an offsetting
notional principal contract, or a Futures or Forward Contract entered into
by a Fund or a related person with respect to the same or substantially
identical property.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect to
foreign investments by a Fund. Foreign exchange gains and losses realized
by a Fund may be treated as ordinary income and loss. Use of foreign
currencies for non-hedging purposes and investment by a Fund in certain
"passive foreign investment companies" may be limited in order to avoid a
tax on the Fund. A Fund may elect to mark to market any investments in
"passive foreign investment companies" on the last day of each year. This
election may cause the Fund to recognize income prior to the receipt of
cash payments with respect to those investments; in order to distribute
this income and avoid a tax on the Fund, it may be required to liquidate
portfolio securities that it might otherwise have continued to hold,
potentially resulting in additional taxable gain or loss to the Fund.
FOREIGN INCOME TAXES -- Investment income received by a Fund and gains
with respect to foreign securities realized by a Fund may be subject to
foreign income taxes withheld at the source. The United States has entered
into tax treaties with many foreign countries that may entitle a Fund to a
reduced rate of tax or an exemption from tax on such income; each Fund
intends to qualify for treaty reduced rates where available. It is not
possible, however, to determine any Fund's effective rate of foreign tax
in advance, since the amount of each Fund's assets to be invested within
various countries is not known.
If a Fund holds more than 50% of its assets in stock and securities of
foreign corporations at the close of its taxable year, it may elect to
"pass through" to its shareholders foreign income taxes paid by it. If a
Fund so elects, its shareholders will be required to treat their pro rata
portions of the foreign income taxes paid by the Fund as part of the
amounts distributed to them by it and thus includable in their gross
income for federal income tax purposes. Shareholders who itemize
deductions would then be allowed to claim a deduction or credit (but not
both) on their federal income tax returns for those amounts, subject to
certain limitations. Shareholders who do not itemize deductions would
(subject to those limitations) be able to claim a credit but not a
deduction. No deduction will be permitted to individuals in computing
their alternative minimum tax liability. If a Fund is not eligible, or
does not elect, to "pass through" to its shareholders foreign income taxes
it has paid, shareholders will not be able to claim any deduction or
credit for any part of the foreign taxes paid by the Fund.
VII NET INCOME AND DISTRIBUTIONS
Each Fund intends to distribute to its shareholders dividends equal to all
of its net investment income with the frequency as is disclosed in the
Fund's prospectus. A Fund's net investment income consists of non-capital
gain income less expenses. In addition, the Funds intend to distribute net
realized short- and long-term capital gains, if any, at least annually.
Shareholders will be informed of the tax consequences of those
distributions, including whether any portion thereof represents a return
of capital, after the end of each calendar year.
VIII DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is determined each day during
which the New York Stock Exchange is open for trading. (As of the date of
this SAI, the Exchange is open for trading every weekday except for the
following holidays (or the days on which they are observed): New Year's
Day; Martin Luther King Day; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day and Christmas Day.) This
determination is made once each day as of the close of regular trading on
the Exchange by deducting the amount of the liabilities attributable to
the Fund from the value of the assets attributable to the Fund and
dividing the difference by the number of shares of the Fund outstanding.
Equity securities in a Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the Nasdaq
stock market system for unlisted national market issues, or at the last
quoted bid price for listed securities in which there were no sales during
the day or for unlisted securities not reported on the Nasdaq stock market
system. Bonds and other fixed income securities (other than short-term
obligations) of U.S. issuers in a Fund's portfolio are valued on the basis
of valuations furnished by a pricing service which utilizes both dealer-
supplied valuations and electronic data processing techniques which take
into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type
of issue, trading characteristics and other market data without exclusive
reliance upon quoted prices or exchange or over-the-counter prices, since
such valuations are believed to reflect more accurately the fair value of
such securities. Forward Contracts will be valued using a pricing model
taking into consideration market data from an external pricing source. Use
of the pricing services has been approved by the Board of Trustees.
All other securities, futures contracts and options in a Fund's
portfolio (other than short-term obligations) for which the principal
market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or at
the settlement price prior to the determination (or if there has been no
current sale, at the closing bid price) on the primary exchange on which
such securities, futures contracts or options are traded; but if a
securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the Nasdaq
stock market system, in which case they are valued at the last sale price
or, if no sales occurred during the day, at the last quoted bid price.
Short-term obligations in the Fund's portfolio are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Short-term obligations with a remaining maturity in excess of 60 days will
be valued upon dealer supplied valuations. Portfolio investments for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of regular trading on the
Exchange. Occasionally, events affecting the values of such securities may
occur between the times at which they are determined and the close of
regular trading on the Exchange which will not be reflected in the
computation of the Fund's net asset value unless the Trustees deem that
such event would materially affect the net asset value in which case an
adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. A share's net asset value is effective
for orders received by MFD prior to the close of that business day.
IX PERFORMANCE INFORMATION
FUNDS
Each Fund may quote the following performance results.
TOTAL RATE OF RETURN -- Each Fund will calculate its total rate of return
for shares for certain periods by determining the average annual
compounded rates of return over those periods that would cause an
investment of $1,000 (made with all distributions reinvested and
reflecting the maximum public offering price) to reach the value of that
investment at the end of the periods. Each Fund may also calculate total
rates of return which represent aggregate performance over a period or
year-by-year performance.
Any total rate of return quotation provided by a Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Total rate of return quotations for each Fund are
presented in Appendix C attached hereto.
YIELD -- Any yield quotation for a Fund is based on the annualized net
investment income per share of a Fund for the 30-day period. The yield for
a Fund is calculated by dividing the net investment income per share of a
Fund earned during the period by the maximum offering price per share of a
Fund on the last day of the period. The resulting figure is then
annualized. Net investment income per share is determined by dividing (i)
the dividends and interest earned by a Fund during the period, minus
accrued expenses for the period by (ii) the average number of Fund shares
entitled to receive dividends during the period multiplied by the maximum
offering price per share on the last day of the period. Yield quotations
for each Fund are presented in Appendix C attached hereto.
CURRENT DISTRIBUTION RATE -- Yield, which is calculated according to a
formula prescribed by the Securities and Exchange Commission, is not
indicative of the amounts which were or will be paid to the Fund's
shareholders. Amounts paid to shareholders of each Fund are reflected in
the quoted "current distribution rate" for that Fund. The current
distribution rate for a Fund is computed by (i) annualizing the
distributions (excluding short-term capital gains) of the Fund for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result
by the maximum offering price or net asset value per share on the last day
of the period. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income for
option writing, short-term capital gains and return of invested capital,
and may be calculated over a different period of time.
GENERAL
From time to time each Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited
to the following: Money, Fortune, U.S. News and World Report, Kiplinger's
Personal Finance, The Wall Street Journal, Barron's, Investors Business
Daily, Newsweek, Financial World, Financial Planning, Investment Advisor,
USA Today, Pensions and Investments, SmartMoney, Forbes, Global Finance,
Registered Representative, Institutional Investor, the Investment Company
Institute, Johnson's Charts, Morningstar, Lipper Inc., CDA Wiesenberger,
Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business Week, Lowry
Associates, Media General, Investment Company Data, The New York Times,
Your Money, Strangers Investment Advisor, Financial Planning on Wall
Street, Standard and Poor's, Individual Investor, The 100 Best Mutual
Funds You Can Buy, by Gordon K. Williamson, Consumer Price Index, and
Sanford C. Bernstein & Co. Fund performance may also be compared to the
performance of other mutual funds tracked by financial or business
publications or periodicals. The Fund may also quote evaluations mentioned
in independent radio or television broadcasts and use charts and graphs to
illustrate the past performance of various indices such as those mentioned
above and illustrations using hypothetical rates of return to illustrate
the effects of compounding and tax-deferral. The Fund may advertise
examples of the effects of periodic investment plans, including the
principle of dollar cost averaging. In such a program, an investor invests
a fixed dollar amount in a fund at periodic intervals, thereby purchasing
fewer shares when prices are high and more shares when prices are low.
While such a strategy does not assure a profit or guard against a loss in
a declining market, the investor's average cost per share can be lower
than if fixed numbers of shares are purchased at the same intervals.
From time to time, each Fund may discuss or quote its current portfolio
manager as well as other investment personnel, including such persons'
views on: the economy; securities markets; portfolio securities and their
issuers; investment philosophies, strategies, techniques and criteria used
in the selection of securities to be purchased or sold for the Fund; the
Fund's portfolio holdings; the investment research and analysis process;
the formulation and evaluation of investment recommendations; and the
assessment and evaluation of credit, interest rate, market and economic
risks, and similar or related matters.
Each Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund
categories established by Morningstar (or other nationally recognized
statistical ratings organizations) and to other MFS Funds.
From time to time each Fund may also discuss or quote the views of its
distributor, its investment adviser or sub-adviser and other financial
planning, legal, tax, accounting, insurance, estate planning and other
professionals, or from surveys, regarding individual and family financial
planning. Such views may include information regarding: retirement
planning; tax management strategies; estate planning; general investment
techniques (e.g., asset allocation and disciplined saving and investing);
business succession; ideas and information provided through the MFS
Heritage Planning(SM) program, an intergenerational financial planning
assistance program; issues with respect to insurance (e.g., disability and
life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; the
history of the mutual fund industry; investor behavior; and other similar
or related matters.
From time to time, each Fund may also advertise annual returns showing
the cumulative value of an initial investment in the Fund in various
amounts over specified periods, with capital gain and dividend
distributions invested in additional shares or taken in cash, and with no
adjustment for any income taxes (if applicable) payable by shareholders.
MFS FIRSTS
MFS has a long history of innovations.
1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act" or
"Full Disclosure Act").
1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
1981 -- MFS(R) Global Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-
yield municipal bond fund traded on the New York Stock Exchange.
1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
1993 -- MFS becomes money manager of MFS(R) Union Standard(R) Equity
Fund, the first fund to invest principally in companies deemed to be
union-friendly by an advisory board of senior labor officials, senior
managers of companies with significant labor contracts, academics and
other national labor leaders or experts. Performance information, as
quoted by the Funds in sales literature and marketing materials, is set
forth below.
X DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional Shares of Beneficial Interest (without par value)
of one or more separate series and to divide or combine the shares of any
series into a greater or lesser number of shares without thereby changing
the proportionate beneficial interests in that series. Upon liquidation of
the Fund, shareholders of each Fund are entitled to share pro rata in the
Fund's net assets available for distribution to shareholders. The Trust
reserves the right to create and issue a number of series and additional
shares, in which case the shares of a series would participate equally in
the earnings, dividends and assets allocable to that particular series.
Shareholders are entitled to one vote for each share held and may vote
in the election of Trustees and on other matters submitted to meetings of
shareholders. To the extent a shareholder of the Fund owns a controlling
percentage of the Fund's shares, such shareholder may affect the outcome
of such matters to a greater extent than other Fund shareholders. Although
Trustees are not elected annually by the shareholders, the Declaration of
Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the
Trust. A meeting of shareholders will be called upon the request of
shareholders of record holding in the aggregate not less than 10% of the
outstanding voting securities of the Trust. No material amendment may be
made to the Declaration of Trust without the affirmative vote of a
majority of the Trust's outstanding shares (as defined in "Investment
Restrictions" of this SAI). The Trust or any series of the Trust may be
terminated (i) upon the merger or consolidation of the Trust or any series
of the Trust with another organization or upon the sale of all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the
holders of two-thirds of the Trust's or the affected series' outstanding
shares voting as a single class, or of the affected series of the Trust,
except that if the Trustees recommend such merger, consolidation or sale,
the approval by vote of the holders of a majority of the Trust's or the
affected series' outstanding shares will be sufficient, or (ii) upon
liquidation and distribution of the assets of a Fund, if approved by the
vote of the holders of two-thirds of its outstanding shares of the Trust,
or (iii) by the Trustees by written notice to its shareholders. If not so
terminated, the Trust will continue indefinitely.
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 Trust
and provides for indemnification and reimbursement of expenses out of
Trust property for any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust also provides that the
Trust shall maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Trust and
its shareholders and the Trustees, officers, employees and agents of the
Trust covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which both inadequate insurance existed and
the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or
failure to act, but nothing in the Declaration of Trust protects a Trustee
against any liability to which he would otherwise be subject by reason of
his willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
XI INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Funds' independent auditors, providing audit
services, tax services, and assistance and consultation with respect to
the preparation of filings with the Securities and Exchange Commission.
<PAGE>
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APPENDIX A
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INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which a Fund may generally use in pursuing its investment objectives and
principal investment policies, and the risks associated with these
investment techniques and practices. Each Fund will engage only in certain
of these investment techniques and practices, as identified in Appendix A
of the Prospectus. Investment practices and techniques that are not
identified in Appendix A of the Prospectus do not apply to a Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent a Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can
be expected to rise. Conversely, when interest rates rise, the value of
debt securities can be expected to decline. A Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than a Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
ASSET-BACKED SECURITIES: A Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: A Fund 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 (such collateral
referred to collectively as "Mortgage Assets"). Unless the context
indicates otherwise, all references herein to CMOs include multiclass
pass-through securities.
Interest is paid or accrues 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 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 a CMO in the order of their respective stated maturities or
final distribution dates, so that no payment of principal will be made on
any class of CMOs until all other classes having an earlier stated
maturity or final distribution date have been paid in full. Certain CMOs
may be stripped (securities which provide only the principal or interest
factor of the underlying security). See "Stripped Mortgage-Backed
Securities" below for a discussion of the risks of investing in these
stripped securities and of investing in classes consisting of interest
payments or principal payments.
A Fund 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.
CORPORATE ASSET-BACKED SECURITIES: A Fund 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. These securities present certain risks. For instance,
in the case of credit card receivables, these securities may not have the
benefit of any security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another
party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the
holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore,
there is the possibility that recoveries on repossessed collateral may
not, in some cases, be available to support payments on these securities.
The underlying assets (e.g., loans) are also subject to prepayments which
shorten the securities' weighted average life and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on underlying assets to make payments,
the securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) 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. A Fund 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 respecting 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 PASS-THROUGH SECURITIES: A Fund 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 part of a premium if any has been
paid, and the actual yield (or total return) to a Fund may be different
than the quoted yield on the securities. Mortgage premiums generally
increase with falling interest rates and decrease with rising interest
rates. Like other fixed income securities, when interest rates rise the
value of a 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. In the event of an increase in interest
rates which results in a decline in mortgage prepayments, the anticipated
maturity of mortgage pass-through securities held by a Fund may increase,
effectively changing a security which was considered short or
intermediate-term at the time of purchase into a long-term security. Long-
term securities generally fluctuate more widely in response to changes in
interest rates than short or intermediate-term securities.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the
case of securities guaranteed by the Government National Mortgage
Association ("GNMA")); or guaranteed by agencies or instrumentalities of
the U.S. Government (such as the Federal National Mortgage Association
"FNMA") or the Federal Home Loan Mortgage Corporation, ("FHLMC") which are
supported only by the discretionary authority of the U.S. Government to
purchase the agency's obligations). Mortgage pass-through securities may
also be issued by non-governmental issuers (such as commercial banks,
savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers). Some of these
mortgage pass-through securities may be supported by various forms of
insurance or guarantees.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which
consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the
individual borrowers on their mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
prepayments of principal resulting from the sale, refinancing or
foreclosure of the underlying property, net of fees or costs which may be
incurred. Some mortgage pass-through securities (such as securities issued
by the GNMA) are described as "modified pass-through." These securities
entitle the holder to receive all interests and principal payments owed on
the mortgages in the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether the mortgagor actually makes the
payment.
The principal governmental 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 Federal
Housing Administration ("FHA") insured or Veterans Administration ("VA")
guaranteed mortgages. These guarantees, however, do not apply to the
market value or yield of mortgage pass-through securities. GNMA securities
are often purchased at a premium over the maturity value of the underlying
mortgages. This premium is not guaranteed and will be lost if prepayment
occurs.
Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S. Government) include FNMA and FHLMC.
FNMA is a government-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 seller/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 is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured
or guaranteed) for FHLMC's national portfolio. FHLMC guarantees timely
payment of interest and ultimate collection of principal regardless of the
status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also be
the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally offer
a higher rate of interest than government and government-related pools
because there are no direct or indirect government or agency guarantees of
payments in the former pools. However, timely payment of interest and
principal of mortgage loans in these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance and letters of credit. The insurance and guarantees
are issued by governmental entities, private insurers and the mortgage
poolers. There can be no assurance that the private insurers or guarantors
can meet their obligations under the insurance policies or guarantee
arrangements. A Fund may also buy mortgage-related securities without
insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: A Fund may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS") which are
derivative multiclass mortgage securities issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including savings and loan institutions,
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 "I0" class) while the other class will
receive all of the principal (the principal-only or "P0" class). The yield
to maturity on an I0 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, a Fund may
fail to fully recoup its initial investment in these securities. The
market value of the class consisting primarily or entirely of principal
payments generally is unusually volatile in response to changes in
interest rates. Because SMBS were only recently introduced, established
trading markets for these securities have not yet developed, although the
securities are traded among institutional investors and investment banking
firms.
CORPORATE SECURITIES: A Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: A Fund may purchase loans and other
direct indebtedness. In purchasing a loan, a Fund acquires some or all of
the interest of a bank or other lending institution in a loan to a
corporate, governmental or other borrower. Many such loans are secured,
although some may be unsecured. Such loans may be in default at the time
of purchase. Loans that are fully secured offer a Fund more protection
than an unsecured loan in the event of non-payment of scheduled interest
or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the corporate borrowers
obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on behalf
of the others in the syndicate, and for enforcing its and their other
rights against the borrower. Alternatively, such loans may be structured
as a novation, pursuant to which a Fund would assume all of the rights of
the lending institution in a loan or as an assignment, pursuant to which a
Fund would purchase an assignment of a portion of a lenders interest in a
loan either directly from the lender or through an intermediary. A Fund
may also purchase trade or other claims against companies, which generally
represent money owned by the company to a supplier of goods or services.
These claims may also be purchased at a time when the company is in
default.
Certain of the loans and the other direct indebtedness acquired by a
Fund may involve revolving credit facilities or other standby financing
commitments which obligate a Fund to pay additional cash on a certain date
or on demand. These commitments may have the effect of requiring a Fund to
increase its investment in a company at a time when a Fund might not
otherwise decide to do so (including at a time when the company's
financial condition makes it unlikely that such amounts will be repaid).
To the extent that a Fund 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.
A Fund's ability to receive payment 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 loans and other
direct indebtedness which a Fund will purchase, the Adviser or Sub-Adviser
will rely upon its own (and not the original lending institution's) credit
analysis of the borrower. As a Fund may be required to rely upon another
lending institution to collect and pass onto a Fund amounts payable with
respect to the loan and to enforce a Fund's rights under the loan and
other direct indebtedness, an insolvency, bankruptcy or reorganization of
the lending institution may delay or prevent a Fund from receiving such
amounts. In such cases, a Fund 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 for purposes of certain
investment restrictions pertaining to the diversification of a Fund's
portfolio investments. The highly leveraged nature of many such loans and
other direct indebtedness may make such loans and other direct
indebtedness especially vulnerable to adverse changes in economic or
market conditions. Investments in such loans and other direct indebtedness
may involve additional risk to a Fund.
LOWER RATED BONDS: A Fund may invest in fixed income securities rated Ba
or lower by Moody's or BB or lower by S&P, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See
Appendix D for a description of bond ratings. No minimum rating standard
is required by a Fund. These securities are considered speculative and,
while generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including
the possibility of default or bankruptcy of the issuers of such
securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher
rating categories and because yields vary over time, no specific level of
income can ever be assured. These lower rated high yielding fixed income
securities generally tend to reflect economic changes (and the outlook for
economic growth), short-term corporate and industry developments and the
market's perception of their credit quality (especially during times of
adverse publicity) to a greater extent than higher rated securities which
react primarily to fluctuations in the general level of interest rates
(although these lower rated fixed income securities 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 Adviser's or Sub-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
meet redemption requests or to respond to changes in the market.
While the Adviser or Sub-Adviser may refer to ratings issued by
established credit rating agencies, it is not a Fund's policy to rely
exclusively on ratings issued by these rating agencies, but rather to
supplement such ratings with the Adviser's or Sub-Adviser's own
independent and ongoing review of credit quality. To the extent a Fund
invests in these lower rated securities, the achievement of its investment
objectives may be more dependent on the Adviser's or Sub-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.
MUNICIPAL BONDS: A Fund may invest in debt securities issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds"). Municipal Bonds include debt securities which pay
interest income that is subject to the alternative minimum tax. A Fund may
invest in Municipal Bonds whose issuers pay interest on the Bonds from
revenues from projects such as multifamily housing, nursing homes,
electric utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and
the revenue bond is also secured by a lien on the real estate comprising
the project, foreclosure by the indenture trustee on the lien for the
benefit of the bondholders creates additional risks associated with owning
real estate, including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because
of the impossibility of precisely predicting demand for mortgages from the
proceeds of such an issue, there is a risk that the proceeds of the issue
will be in excess of demand, which would result in early retirement of the
bonds by the issuer. Moreover, such housing revenue bonds depend for their
repayment upon the cash flow from the underlying mortgages, which cannot
be precisely predicted when the bonds are issued. Any difference in the
actual cash flow from such mortgages from the assumed cash flow could have
an adverse impact upon the ability of the issuer to make scheduled
payments of principal and interest on the bonds, or could result in early
retirement of the bonds. Additionally, such bonds depend in part for
scheduled payments of principal and interest upon reserve funds
established from the proceeds of the bonds, assuming certain rates of
return on investment of such reserve funds. If the assumed rates of return
are not realized because of changes in interest rate levels or for other
reasons, the actual cash flow for scheduled payments of principal and
interest on the bonds may be inadequate. The financing of multi-family
housing projects is affected by a variety of factors, including
satisfactory completion of construction within cost constraints, the
achievement and maintenance of a sufficient level of occupancy, sound
management of the developments, timely and adequate increases in rents to
cover increases in operating expenses, including taxes, utility rates and
maintenance costs, changes in applicable laws and governmental regulations
and social and economic trends.
Electric utilities face problems in financing large construction
programs in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost
of competing fuel sources, difficulty in obtaining sufficient rate
increases and other regulatory problems, the effect of energy conservation
and difficulty of the capital market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing
for the elderly which offer residents the independence of condominium life
style and, if needed, the comprehensive care of nursing home services.
Bonds to finance these facilities have been issued by various state
industrial development authorities. Since the bonds are secured only by
the revenues of each facility and not by state or local government tax
payments, they are subject to a wide variety of risks. Primarily, the
projects must maintain adequate occupancy levels to be able to provide
revenues adequate to maintain debt service payments. Moreover, in the case
of life care facilities, since a portion of housing, medical care and
other services may be financed by an initial deposit, there may be risk if
the facility does not maintain adequate financial reserves to secure
estimated actuarial liabilities. The ability of management to accurately
forecast inflationary cost pressures weighs importantly in this process.
The facilities may also be affected by regulatory cost restrictions
applied to health care delivery in general, particularly state regulations
or changes in Medicare and Medicaid payments or qualifications, or
restrictions imposed by medical insurance companies. They may also face
competition from alternative health care or conventional housing
facilities in the private or public sector. Hospital bond ratings are
often based on feasibility studies which contain projections of expenses,
revenues and occupancy levels. A hospital's gross receipts and net income
available to service its debt are influenced by demand for hospital
services, the ability of the hospital to provide the services required,
management capabilities, economic developments in the service area,
efforts by insurers and government agencies to limit rates and expenses,
confidence in the hospital, service area economic developments,
competition, availability and expense of malpractice insurance, Medicaid
and Medicare funding, and possible federal legislation limiting the rates
of increase of hospital charges.
A Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from of a lease or
installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have special
risks not normally associated with general obligation or revenue bonds.
Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations are deemed to be inapplicable because of the inclusion in many
leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although
the obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or
foreclosure might, in some cases, prove difficult. There are, of course,
variations in the security of municipal lease securities, both within a
particular classification and between classifications, depending on
numerous factors.
A Fund may also invest in bonds for industrial and other projects, such
as sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to
meet specifications in a timely manner. Because some of the materials,
processes and wastes involved in these projects may include hazardous
components, there are risks associated with their production, handling and
disposal.
SPECULATIVE BONDS: A Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. 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 securities.
U.S. GOVERNMENT SECURITIES: A Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are
backed by the full faith and credit of the U.S. Government and (ii) U.S.
Government Securities, some of which are backed by the full faith and
credit of the U.S. Treasury, e.g., direct pass-through certificates of the
GNMA; some of which are backed only by the credit of the issuer itself,
e.g., obligations of the Student Loan Marketing Association; and some of
which are supported by the discretionary authority of the U.S. Government
to purchase the agency's obligations, e.g., obligations of the FNMA.
U.S. Government Securities also include interests in trust or other
entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: A Fund may invest in floating or
variable rate securities. Investments in floating or variable rate
securities normally will involve industrial development or revenue bonds
which provide that the rate of interest is set as a specific percentage of
a designated base rate, such as rates on Treasury Bonds or Bills or the
prime rate at a major commercial bank, and that a bondholder can demand
payment of the obligations on behalf of a Fund on short notice at par plus
accrued interest, which amount may be more or less than the amount the
bondholder paid for them. The maturity of floating or variable rate
obligations (including participation interests therein) is deemed to be
the longer of (i) the notice period required before a Fund is entitled to
receive payment of the obligation upon demand or (ii) the period remaining
until the obligation's next interest rate adjustment. If not redeemed by a
Fund through the demand feature, the obligations mature on a specified
date which may range up to thirty years from the date of issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: A Fund may
invest in zero coupon bonds, deferred interest bonds and bonds on which
the interest is payable in kind ("PIK bonds"). Zero coupon and deferred
interest bonds are debt obligations which are issued at a significant
discount from face value. The discount approximates the total amount of
interest the bonds will accrue and compound over the period until maturity
or the first interest payment date at a rate of interest reflecting the
market rate of the security at the time of issuance. While zero coupon
bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer 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. A Fund will accrue income on such investments for tax and
accounting purposes, which is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy a Fund's distribution
obligations.
EQUITY SECURITIES
A Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into
stocks; and depositary receipts for those securities. These securities may
be listed on securities exchanges, traded in various over-the-counter
markets or have no organized market.
FOREIGN SECURITIES EXPOSURE
A Fund may invest in various types of foreign securities, or securities
which provide a Fund with exposure to foreign securities or foreign
currencies, as discussed below:
BRADY BONDS: A Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public
and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady
(the "Brady Plan"). Brady Plan debt restructurings have been implemented
to date in Argentina, Brazil, Bulgaria, Costa Rica, Croatia, Dominican
Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the
Philippines, Poland, Slovenia, Uruguay and Venezuela. Brady Bonds have
been issued only recently, and for that reason do not have a long payment
history. Brady Bonds may be collateralized or uncollateralized, are issued
in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S.
Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments;
and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constituting the "residual risk"). In light of
the residual risk of Brady Bonds and the history of defaults of countries
issuing Brady Bonds with respect to commercial bank loans by public and
private entities, investments in Brady Bonds may be viewed as speculative.
DEPOSITARY RECEIPTS: A Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of
depositary receipts. ADRs are certificates by a U.S. depositary (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. GDRs and other
types of depositary receipts are typically issued by foreign banks or
trust companies and evidence ownership of underlying securities issued by
either a foreign or a U.S. company. Generally, ADRs are in registered form
and are designed for use in U.S. securities markets and GDRs are in bearer
form and are designed for use in foreign securities markets. For the
purposes of a Fund's policy to invest a certain percentage of its assets
in foreign securities, the investments of a Fund in ADRs, GDRs and other
types of depositary receipts are deemed to be investments in the
underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary 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. A
Fund 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. A
Fund may purchase securities in local markets and direct delivery of these
ordinary shares to the local depositary of an ADR agent bank in foreign
country. Simultaneously, the ADR agents create a certificate which settles
at a Fund's custodian in five days. A Fund 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,
information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its country and
the market value of an ADR may not reflect undisclosed material
information concerning the issuer of the underlying security. ADRs may
also be subject to exchange rate risks if the underlying foreign
securities are denominated in a foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: A Fund may invest in dollar-
denominated foreign debt securities. Investing in dollar-denominated
foreign debt represents a greater degree of risk than investing in
domestic securities, due to less publicly available information, less
securities regulation, war or expropriation. Special considerations may
include higher brokerage costs and thinner trading markets. Investments in
foreign countries could be affected by other factors including extended
settlement periods.
EMERGING MARKETS: A Fund may invest in securities of government,
government-related, supranational and corporate issuers located in
emerging markets. Emerging markets 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, the source of its revenues and location of its assets. Such
investments entail significant risks as described below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects
of the private sector through the ownership or control of many companies,
including some of the largest in any given country. As a result,
government actions in the future could have a significant effect on
economic conditions in emerging markets, which in turn, may adversely
affect companies in the private sector, general market conditions and
prices and yields of certain of the securities in a Fund's portfolio.
Expropriation, confiscatory taxation, nationalization, political, economic
or social instability or other similar developments have occurred
frequently over the history of certain emerging markets and could
adversely affect a Fund's assets should these conditions recur.
o Default; Legal Recourse -- A Fund may have limited legal recourse in the
event of a default with respect to certain debt obligations it may hold.
If the issuer of a fixed income security owned by a Fund defaults, a Fund
may incur additional expenses to seek recovery. Debt obligations issued by
emerging market governments differ from debt obligations of private
entities; remedies from defaults on debt obligations issued by emerging
market governments, unlike those on private debt, must be pursued in the
courts of the defaulting party itself. A Fund's ability to enforce its
rights against private issuers may be limited. The ability to attach
assets to enforce a judgment may be limited. Legal recourse is therefore
somewhat diminished. Bankruptcy, moratorium and other similar laws
applicable to private issuers of debt obligations may be substantially
different from those of other countries. The political context, expressed
as an emerging market governmental issuer's willingness to meet the terms
of the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial bank
debt may not contest payments to the holders of debt obligations in the
event of default under commercial bank loan agreements.
o Foreign Currencies -- The securities in which a Fund invests may be
denominated in foreign currencies and international currency units and a
Fund may invest a portion of its assets directly in foreign currencies.
Accordingly, the weakening of these currencies and units against the U.S.
dollar may result in a decline in a Fund's asset value.
Some emerging market countries also may have managed currencies, which are
not free floating against the U.S. dollar. In addition, there is risk that
certain emerging market countries may restrict the free conversion of
their currencies into other currencies. Further, certain emerging market
currencies may not be internationally traded. Certain of these currencies
have experienced a steep devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which a Fund's portfolio securities are
denominated may have a detrimental impact on a Fund's net asset value.
o Inflation -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had and may continue to
have adverse effects on the economies and securities markets of certain
emerging market countries. In an attempt to control inflation, wage and
price controls have been imposed in certain countries. Of these countries,
some, in recent years, have begun to control inflation through prudent
economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities markets
of emerging market countries are substantially smaller, less developed,
less liquid and more volatile than the major securities markets in the
U.S. Disclosure and regulatory standards are in many respects less
stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors
in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to
volume of trading in the securities of U.S. issuers could cause prices to
be erratic for reasons apart from factors that affect the soundness and
competitiveness of the securities issuers. For example, limited market
size may cause prices to be unduly influenced by traders who control large
positions. Adverse publicity and investors' perceptions, whether or not
based on in-depth fundamental analysis, may decrease the value and
liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or
may be substantially curtailed and prices for a Fund's securities in such
markets may not be readily available. A Fund may suspend redemption of its
shares for any period during which an emergency exists, as determined by
the Securities and Exchange Commission (the "SEC"). Accordingly, if a Fund
believes that appropriate circumstances exist, it will promptly apply to
the SEC for a determination that an emergency is present. During the
period commencing from a Fund's identification of such condition until the
date of the SEC action, a Fund's securities in the affected markets will
be valued at fair value determined in good faith by or under the direction
of the Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high degree
of risk. The governmental entity that controls the repayment of sovereign
debt may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. A governmental
entity's willingness or ability to repay principal and interest due in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative
size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund and
the political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce
principal and interest on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be
conditioned on a governmental entity's implementation of economic reforms
and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in
the cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently,
governmental entities may default on their sovereign debt. Holders of
sovereign debt (including a Fund) may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceedings by which sovereign debt on
which governmental entities have defaulted may be collected in whole or in
part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging market
governmental issuers have not been able to make payments of interest on or
principal of debt obligations as those payments have come due. Obligations
arising from past restructuring agreements may affect the economic
performance and political and social stability of those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access
to international credits and investments. An emerging market whose exports
are concentrated in a few commodities could be vulnerable to a decline in
the international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could
also adversely affect the country's exports and tarnish its trade account
surplus, if any. To the extent that emerging markets receive payment for
their exports in currencies other than dollars or non-emerging market
currencies, its ability to make debt payments denominated in dollars or
non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of
emerging markets to these forms of external funding may not be certain,
and a withdrawal of external funding could adversely affect the capacity
of emerging market country governmental issuers to make payments on their
obligations. In addition, the cost of servicing emerging market debt
obligations can be affected by a change in international interest rates
since the majority of these obligations carry interest rates that are
adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the
country. Fluctuations in the level of these reserves affect the amount of
foreign exchange readily available for external debt payments and thus
could have a bearing on the capacity of emerging market countries to make
payments on these debt obligations.
o Withholding -- Income from securities held by a Fund could be reduced by a
withholding tax on the source or other taxes imposed by the emerging
market countries in which a Fund makes its investments. A Fund's net asset
value may also be affected by changes in the rates or methods of taxation
applicable to a Fund or to entities in which a Fund has invested. The
Adviser or Sub-Adviser will consider the cost of any taxes in determining
whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
FOREIGN SECURITIES: A Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. 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.
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,
securities settlement practices, 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 investments in foreign securities,
a Fund may receive interest or dividend payments, or the proceeds of the
sale or redemption of such securities, in the foreign currencies in which
such securities are denominated. Under certain circumstances, such as
where the Adviser believes that the applicable exchange rate is
unfavorable at the time the currencies are received or the Adviser or Sub-
Adviser anticipates, for any other reason, that the exchange rate will
improve, a Fund may hold such currencies for an indefinite period of time.
While the holding of currencies will permit a Fund to take advantage of
favorable movements in the applicable exchange rate, such strategy also
exposes a Fund to risk of loss if exchange rates move in a direction
adverse to a Fund's position. Such losses could reduce any profits or
increase any losses sustained by a Fund from the sale or redemption of
securities and could reduce the dollar value of interest or dividend
payments received. The Fund's investments in foreign securities may also
include "privatizations". Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises.
In certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
FORWARD CONTRACTS
A Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is
entered into (a "Forward Contract"), for hedging purposes (e.g., to
protect its current or intended investments from fluctuations in currency
exchange rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where a Fund
seeks to protect against an anticipated increase in the exchange rate for
a specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, a Fund may enter into
a Forward Contract to purchase a given currency to protect against a
projected increase in the dollar value of securities denominated in such
currency which a Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline
in the dollar value of portfolio securities or the increase in the dollar
cost of securities to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such
Forward Contracts, a Fund may be required to forego all or a portion of
the benefits which otherwise could have been obtained from favorable
movements in exchange rates. A Fund does not presently intend to hold
Forward Contracts entered into until the value date, at which time it
would be required to deliver or accept delivery of the underlying
currency, but will seek in most instances to close out positions in such
Contracts by entering into offsetting transactions, which will serve to
fix a Fund's profit or loss based upon the value of the Contracts at the
time the offsetting transaction is executed.
A Fund will also enter into transactions in Forward Contracts for other
than hedging purposes, which presents greater profit potential but also
involves increased risk. For example, a Fund may purchase a given foreign
currency through a Forward Contract if, in the judgment of the Adviser,
the value of such currency is expected to rise relative to the U.S.
dollar. Conversely, a Fund may sell the currency through a Forward
Contract if the Adviser believes that its value will decline relative to
the dollar.
A Fund will profit if the anticipated movements in foreign currency
exchange rates occur, which will increase its gross income. Where exchange
rates do not move in the direction or to the extent anticipated, however,
a Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative and could involve
significant risk of loss.
The use by a Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards,
Swaps and Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
A Fund may purchase and sell futures contracts ("Futures Contracts") on
stock indices, foreign currencies, interest rates or interest-rate related
instruments, indices of foreign currencies or commodities. A Fund may also
purchase and sell Futures Contracts on foreign or domestic fixed income
securities or indices of such securities including municipal bond indices
and any other indices of foreign or domestic fixed income securities that
may become available for trading. Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to applicable
law.
A Futures Contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument, foreign
currency or commodity, or for the making and acceptance of a cash
settlement, at a stated time in the future for a fixed price. By its
terms, a Futures Contract provides for a specified settlement month in
which, in the case of the majority of commodities, interest rate and
foreign currency futures contracts, the underlying commodities, fixed
income securities or currency are delivered by the seller and paid for by
the purchaser, or on which, in the case of index futures contracts and
certain interest rate and foreign currency futures contracts, the
difference between the price at which the contract was entered into and
the contract's closing value is settled between the purchaser and seller
in cash. Futures Contracts differ from options in that they are bilateral
agreements, with both the purchaser and the seller equally obligated to
complete the transaction. Futures Contracts call for settlement only on
the expiration date and cannot be "exercised" at any other time during
their term.
The purchase or sale of a Futures Contract differs from the purchase or
sale of a security or the purchase of an option in that no purchase price
is paid or received. Instead, an amount of cash or cash equivalents, which
varies but may be as low as 5% or less of the value of the contract, must
be deposited with the broker as "initial margin." Subsequent payments to
and from the broker, referred to as "variation margin," are made on a
daily basis as the value of the index or instrument underlying the Futures
Contract fluctuates, making positions in the Futures Contract more or less
valuable -- a process known as "mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt
to protect a Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, a Fund may sell stock index
futures contracts in anticipation of or during a market decline to attempt
to offset the decrease in market value of a Fund's securities portfolio
that might otherwise result. If such decline occurs, the loss in value of
portfolio securities may be offset, in whole or part, by gains on the
futures position. When a Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock
index futures contracts in order to gain rapid market exposure that may,
in part or entirely, offset increases in the cost of securities that a
Fund intends to purchase. As such purchases are made, the corresponding
positions in stock index futures contracts will be closed out. In a
substantial majority of these transactions, a Fund will purchase such
securities upon termination of the futures position, but under unusual
market conditions, a long futures position may be terminated without a
related purchase of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on a Fund's current
or intended investments in fixed income securities. For example, if a Fund
owned long-term bonds and interest rates were expected to increase, a Fund
might enter into interest rate futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling some of
the long-term bonds in a Fund's portfolio. If interest rates did increase,
the value of the debt securities in the portfolio would decline, but the
value of a Fund's interest rate futures contracts would increase at
approximately the same rate, subject to the correlation risks described
below, thereby keeping the net asset value of a Fund from declining as
much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in
the value of the interest rate futures contracts should be similar to that
of long-term bonds, a Fund could protect itself against the effects of the
anticipated rise in the value of long-term bonds without actually buying
them until the necessary cash became available or the market had
stabilized. At that time, the interest rate futures contracts could be
liquidated and a Fund's cash reserves could then be used to buy long-term
bonds on the cash market. A Fund could accomplish similar results by
selling bonds with long maturities and investing in bonds with short
maturities when interest rates are expected to increase. However, since
the futures market may be more liquid than the cash market in certain
cases or at certain times, the use of interest rate futures contracts as a
hedging technique may allow a Fund to hedge its interest rate risk without
having to sell its portfolio securities.
A Fund may purchase and sell foreign currency futures contracts for
hedging purposes, to attempt to protect its current or intended
investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the dollar cost of foreign-
denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains
constant. A Fund may sell futures contracts on a foreign currency, for
example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the
dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in
part, by gains on the futures contracts.
Conversely, a Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in
part, the increased cost of such securities resulting from a rise in the
dollar value of the underlying currencies. Where a Fund purchases futures
contracts under such circumstances, however, and the prices of securities
to be acquired instead decline, a Fund will sustain losses on its futures
position which could reduce or eliminate the benefits of the reduced cost
of portfolio securities to be acquired.
The use by a Fund of Futures Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards,
Swaps and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
A Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are
debt securities or deposits whose value at maturity or coupon rate is
determined by reference to a specific instrument or statistic. A Fund may
also purchase indexed deposits with similar characteristics. Gold-indexed
securities, for example, typically provide for a maturity value that
depends on the price of gold, resulting in a security whose price tends to
rise and fall together with gold prices. Currency-indexed securities
typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the
values of one or more specified foreign currencies, and may offer higher
yields than U.S. dollar denominated securities of equivalent issuers.
Currency-indexed securities may be positively or negatively indexed; that
is, their maturity value may increase when the specified currency value
increases, resulting in a security that performs similarly to a foreign-
denominated instrument, or their maturity value may decline when foreign
currencies increase, resulting in a security whose price characteristics
are similar to a put on the underlying currency. Currency-indexed
securities may also have prices that depend on the values of a number of
different foreign currencies relative to each other. Certain indexed
securities may expose a Fund to the risk of loss of all or a portion of
the principal amount of its investment and/or the interest that might
otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values
may decline substantially if the issuer's creditworthiness deteriorates.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
A Fund may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an
obligation, a municipality issues a certain amount of debt and pays a
fixed interest rate. Half of the debt is issued as variable rate short
term obligations, the interest rate of which is reset at short intervals,
typically 35 days. The other half of the debt is issued as inverse
floating rate obligations, the interest rate of which is calculated based
on the difference between a multiple of (approximately two times) the
interest paid by the issuer and the interest paid on the short-term
obligation. Under usual circumstances, the holder of the inverse floating
rate obligation can generally purchase an equal principal amount of the
short term obligation and link the two obligations in order to create
long-term fixed rate bonds. Because the interest rate on the inverse
floating rate obligation is determined by subtracting the short-term rate
from a fixed amount, the interest rate will decrease as the short-term
rate increases and will increase as the short-term rate decreases. The
magnitude of increases and decreases in the market value of inverse
floating rate obligations may be approximately twice as large as the
comparable change in the market value of an equal principal amount of
long-term bonds which bear interest at the rate paid by the issuer and
have similar credit quality, redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
A Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such
other investment companies, including advisory fees.
OPEN-END FUNDS. A Fund may invest in open-end investment companies.
CLOSED-END FUNDS. A Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
LENDING OF PORTFOLIO SECURITIES
A Fund may seek to increase its income by lending portfolio securities.
Such loans will usually be made only to member firms of the New York Stock
Exchange (the "Exchange") (and subsidiaries thereof) and member banks of
the Federal Reserve System, and would be required to be secured
continuously by collateral in cash, an irrevocable letter of credit or
United States ("U.S.") Treasury securities maintained on a current basis
at an amount at least equal to the market value of the securities loaned.
A Fund would have the right to call a loan and obtain the securities
loaned at any time on customary industry settlement notice (which will not
usually exceed five business days). For the duration of a loan, a Fund
would continue to receive the equivalent of the interest or dividends paid
by the issuer on the securities loaned. A Fund would also receive a fee
from the borrower or compensation from the investment of the collateral,
less a fee paid to the borrower (if the collateral is in the form of
cash). A Fund would not, however, have the right to vote any securities
having voting rights during the existence of the loan, but a Fund 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 Adviser or
Sub-Adviser to be of good standing, and when, in the judgment of the
Adviser or Sub-Adviser, the consideration which can be earned currently
from securities loans of this type justifies the attendant risk.
LEVERAGING TRANSACTIONS
A Fund may engage in the types of transactions described below, which
involve "leverage" because in each case a Fund receives cash which it can
invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by a Fund will generally cause its
net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can
be expected to cause the value of a Fund's shares and distributions on a
Fund's shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from these transactions fail to cover
the expenses associated with these transactions, the value of a Fund's
shares is likely to decrease more quickly than otherwise would be the case
and distributions thereon will be reduced or eliminated. Hence, these
transactions are speculative, involve leverage and increase the risk of
owning or investing in the shares of a Fund. These transactions also
increase a Fund's expenses because of interest and similar payments and
administrative expenses associated with them. Unless the appreciation and
income on assets purchased with proceeds from these transactions exceed
the costs associated with them, the use of these transactions by a Fund
would diminish the investment performance of a Fund compared with what it
would have been without using these transactions.
BANK BORROWINGS: A Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment objectives
and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: A Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, a Fund foregoes principal and interest paid on the
mortgage-backed securities. A Fund 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, and gains from, the investment of the cash proceeds of
the initial sale. A Fund may also be compensated by receipt of a
commitment fee.
If the income and capital gains from a Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part
of the dollar roll, the use of this technique will diminish the investment
performance of a Fund compared with what the performance would have been
without the use of the dollar rolls. Dollar roll transactions involve the
risk that the market value of the securities a Fund is required to
purchase may decline below the agreed upon repurchase price of those
securities. If the broker/dealer to whom a Fund sells securities becomes
insolvent, a Fund's right to purchase or repurchase securities may be
restricted. Successful use of mortgage dollar rolls may depend upon the
Adviser's or Sub-Adviser's ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully
employed.
REVERSE REPURCHASE AGREEMENTS: A Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, a Fund will sell securities
and receive cash proceeds, subject to its agreement to repurchase the
securities at a later date for a fixed price reflecting a market rate of
interest. There is a risk that the counter party to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as
scheduled, which may result in losses to a Fund. A Fund will invest the
proceeds received under a reverse repurchase agreement in accordance with
its investment objective and policies.
OPTIONS
A Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options,
Futures, Forwards, Swaps and Other Derivative Transactions" in this
Appendix:
OPTIONS ON FOREIGN CURRENCIES: A Fund may purchase and write options on
foreign currencies for hedging and non-hedging purposes in a manner
similar to that in which Futures Contracts on foreign currencies, or
Forward Contracts, will be utilized. For example, a decline in the dollar
value of a foreign currency in which portfolio securities are denominated
will reduce the dollar value of such securities, even if their value in
the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, a Fund may purchase put
options on the foreign currency. If the value of the currency does
decline, a Fund will have the right to sell such currency for a fixed
amount in dollars and will thereby offset, in whole 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, a Fund may purchase call options thereon. The
purchase of such options could offset, at least partially, the effect of
the adverse movements in exchange rates. As in the case of other types of
options, however, the benefit to a Fund 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, a Fund 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. A Fund may write options on foreign currencies for the same types
of hedging purposes. For example, where a Fund 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 less related transaction costs. As in the case of
other types of options, therefore, the writing of Options on Foreign
Currencies will constitute only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, a
Fund could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow a Fund to
hedge such increased cost up to the amount of the premium. Foreign
currency options written by a Fund will generally be covered in a manner
similar to the covering of other types of options. 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 a Fund 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, a Fund
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. The use of foreign currency options for non-hedging purposes, like
the use of other types of derivatives for such purposes, presents greater
profit potential but also significant risk of loss and could be considered
speculative.
OPTIONS ON FUTURES CONTRACTS: A Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non-
hedging purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the
case of a call option, or a "short" position in the underlying Futures
Contract, in the case of a put option, at a fixed exercise price up to a
stated expiration date or, in the case of certain options, on such date.
Upon exercise of the option by the holder, the contract market
clearinghouse establishes a corresponding short position for the writer of
the option, in the case of a call option, or a corresponding long position
in the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of
Futures Contracts, such as payment of initial and variation margin
deposits. In addition, the writer of an Option on a Futures Contract,
unlike the holder, is subject to initial and variation margin requirements
on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary
market, which is the purchase or sale of an option of the same type (i.e.,
the same exercise price and expiration date) as the option previously
purchased or sold. The difference between the premiums paid and received
represents a Fund's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by a Fund on
U.S. exchanges are traded on the same contract market as the underlying
Futures Contract, and, like Futures Contracts, are subject to regulation
by the Commodity Futures Trading Commission (the "CFTC") and the
performance guarantee of the exchange clearinghouse. In addition, Options
on Futures Contracts may be traded on foreign exchanges. A Fund 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
a Fund owns liquid and unencumbered assets equal to the difference. A Fund
may cover the writing of put Options on Futures Contracts (a) through
sales of the underlying Futures Contract, (b) through the ownership of
liquid and unencumbered assets equal to the value of the security or index
underlying the Futures Contract, 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 (i) is equal to or
greater than the exercise price of the put written or where the exercise
price of the put held (ii) is less than the exercise price of the put
written if a Fund owns liquid and unencumbered assets equal to the
difference. 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 the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract
written by a Fund, a Fund will be required to sell the underlying Futures
Contract which, if a Fund has covered its obligation through the purchase
of such Contract, will serve to liquidate its futures position. Similarly,
where a put Option on a Futures Contract written by a Fund is exercised, a
Fund will be required to purchase the underlying Futures Contract which,
if a Fund has covered its obligation through the sale of such Contract,
will close out its futures position.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or
other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is below the
exercise price, a Fund will retain the full amount of the option premium,
less related transaction costs, which provides a partial hedge against any
decline that may have occurred in a Fund's portfolio holdings. The writing
of a put option on a Futures Contract constitutes a partial hedge against
increasing prices of the securities or other instruments required to be
delivered under the terms of the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, a Fund will
retain the full amount of the option premium which provides a partial
hedge against any increase in the price of securities which a Fund intends
to purchase. If a put or call option a Fund has written is exercised, a
Fund 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 the changes in the value of its
futures positions, a Fund's losses from existing Options on Futures
Contracts may to some extent be reduced or increased by changes in the
value of portfolio securities.
A Fund may purchase Options on Futures Contracts for hedging purposes
instead of purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is
anticipated as a result of a projected market-wide decline or changes in
interest or exchange rates, a Fund could, in lieu of selling Futures
Contracts, purchase put options thereon. In the event that such decrease
occurs, it may be offset, in whole or in part, by a profit on the option.
Conversely, where it is projected that the value of securities to be
acquired by a Fund will increase prior to acquisition, due to a market
advance or changes in interest or exchange rates, a Fund could purchase
call Options on Futures Contracts rather than purchasing the underlying
Futures Contracts.
OPTIONS ON SECURITIES: A Fund may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by a Fund may be covered in the manner set forth below.
A call option written by a Fund is "covered" if a Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration if a Fund owns liquid and unencumbered assets equal to the
amount of cash consideration) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if a Fund
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 (a) is equal to or
less than the exercise price of the call written or (b) is greater than
the exercise price of the call written if a Fund owns liquid and
unencumbered assets equal to the difference. A put option written by a
Fund is "covered" if a Fund owns liquid and unencumbered assets with a
value equal to the exercise price, or else holds a put on the same
security and in the same principal amount as the put written where the
exercise price of the put held is equal 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 a Fund owns liquid and
unencumbered assets equal to the difference. Put and call options written
by a Fund may also be covered in such other manner as may be in accordance
with the requirements of the exchange on which, or the counterparty with
which, the option is traded, and applicable laws and regulations. If the
writer's obligation is not so covered, it is subject to the risk of the
full change in value of the underlying security from the time the option
is written until exercise.
Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in
the case of a written put option will permit a Fund to write another put
option to the extent that a Fund owns liquid and unencumbered assets. Such
transactions permit a Fund to generate additional premium income, which
will partially offset declines in the value of portfolio securities or
increases in the cost of securities to be acquired. 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
investments of a Fund, provided that another option on such security is
not written. If a Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction in connection with the option prior to or concurrent with the
sale of the security.
A Fund will realize a profit from a closing transaction if the premium
paid in connection with the closing of an option written by a Fund is less
than the premium received from writing the option, or if the premium
received in connection with the closing of an option purchased by a Fund
is more than the premium paid for the original purchase. Conversely, a
Fund will suffer a loss if the premium paid or received in connection with
a closing transaction is more or less, respectively, than the premium
received or paid in establishing the option position. 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 previously written by a Fund is likely to be
offset in whole or in part by appreciation of the underlying security
owned by a Fund.
A Fund may write options in connection with buy-and-write transactions;
that is, a Fund may purchase a security and then write a call option
against that security. The exercise price of the call option a Fund
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
decline 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, a
Fund's maximum gain will be the premium received by it for writing the
option, adjusted upwards or downwards by the difference between a Fund's
purchase price of the security and the exercise price, less related
transaction costs. If the options are not exercised and the price of the
underlying security declines, the amount of such decline will be offset in
part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the
put option will expire worthless and a Fund's gain will be limited to the
premium received, less related transaction costs. If the market price of
the underlying security declines or otherwise is below the exercise price,
a Fund may elect to close the position or retain the option until it is
exercised, at which time a Fund will be required to take delivery of the
security at the exercise price; a Fund's return will be the premium
received from the put option minus the amount by which the market price of
the security is below the exercise price, which could result in a loss.
Out-of-the-money, at-the-money and in-the-money put options may be used by
a Fund in the same market environments that call options are used in
equivalent buy-and-write transactions.
A Fund may also write combinations of put and call options on the same
security, known as "straddles" with the same exercise price and expiration
date. By writing a straddle, a Fund undertakes a simultaneous obligation
to sell and purchase the same security in the event that one of the
options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium
and transaction costs, the call will likely be exercised and a Fund will
be required to sell the underlying security at a below market price. This
loss may be offset, however, in whole or part, by the premiums received on
the writing of the two options. Conversely, if the price of the security
declines by a sufficient amount, the put will likely be exercised. The
writing of straddles will likely be effective, therefore, only where the
price of the security remains stable and neither the call nor the put is
exercised. In those instances where one of the options is exercised, the
loss on the purchase or sale of the underlying security may exceed the
amount of the premiums received.
By writing a call option, a Fund limits its opportunity to profit from
any increase in the market value of the underlying security above the
exercise price of the option. By writing a put option, a Fund assumes the
risk that it may be required to purchase the underlying security for an
exercise price above its then-current market value, resulting in a capital
loss unless the security subsequently appreciates in value. The writing of
options on securities will not be undertaken by a Fund solely for hedging
purposes, and could involve certain risks which are not present in the
case of hedging transactions. Moreover, even where options are written for
hedging purposes, such transactions constitute only a partial hedge
against declines in the value of portfolio securities or against increases
in the value of securities to be acquired, up to the amount of the
premium.
A Fund may also purchase options for hedging purposes or to increase its
return. Put options may be purchased to hedge against a decline in the
value of portfolio securities. If such decline occurs, the put options
will permit a Fund to sell the securities at the exercise price, or to
close out the options at a profit. By using put options in this way, a
Fund 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.
A Fund may also purchase call options to hedge against an increase in
the price of securities that a Fund anticipates purchasing in the future.
If such increase occurs, the call option will permit a Fund to purchase
the securities at the exercise price, or to close out the options at a
profit. The premium paid for the call option plus any transaction costs
will reduce the benefit, if any, realized by a Fund upon exercise of the
option, and, unless the price of the underlying security rises
sufficiently, the option may expire worthless to a Fund.
OPTIONS ON STOCK INDICES: A Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast to
an option on a security, an option on a stock index provides the holder
with the right but not the obligation to make or receive a cash settlement
upon exercise of the option, rather than the right to purchase or sell a
security. The amount of this settlement is generally equal to (i) the
amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a call) or is below (in the case of a put) the closing
value of the underlying index on the date of exercise, multiplied by (ii)
a fixed "index multiplier." A Fund may cover written call options on stock
indices by owning securities whose price changes, in the opinion of the
Adviser or Sub-Adviser, are expected to be similar to those of the
underlying index, or by having an absolute and immediate right to acquire
such securities without additional cash consideration (or for additional
cash consideration if a Fund owns liquid and unencumbered assets equal to
the amount of cash consideration) upon conversion or exchange of other
securities in its portfolio. Where a Fund covers a call option on a stock
index through ownership of securities, such securities may not match the
composition of the index and, in that event, a Fund will not be fully
covered and could be subject to risk of loss in the event of adverse
changes in the value of the index. A Fund may also cover call options on
stock indices by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written
or (b) is greater than the exercise price of the call written if a Fund
owns liquid and unencumbered assets equal to the difference. A Fund may
cover put options on stock indices by owning liquid and unencumbered
assets with a value equal to the exercise price, or by holding a put on
the same stock index and in the same principal amount as the put written
where the exercise price of the put held (a) is equal to or greater than
the exercise price of the put written or (b) is less than the exercise
price of the put written if a Fund owns liquid and unencumbered assets
equal to the difference. Put and call options on stock indices may also be
covered in such other manner as may be in accordance with the rules of the
exchange on which, or the counterparty with which, the option is traded
and applicable laws and regulations.
A Fund will receive a premium from writing a put or call option, which
increases a Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on
which a Fund has written a call option falls or remains the same, a Fund
will realize a profit in the form of the premium received (less
transaction costs) that could offset all or a portion of any decline in
the value of the securities it owns. If the value of the index rises,
however, a Fund will realize a loss in its call option position, which
will reduce the benefit of any unrealized appreciation in a Fund's stock
investments. By writing a put option, a Fund assumes the risk of a decline
in the index. To the extent that the price changes of securities owned by
a Fund correlate with changes in the value of the index, writing covered
put options on indices will increase a Fund's losses in the event of a
market decline, although such losses will be offset in part by the premium
received for writing the option.
A Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, a Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
a Fund's investments does not decline as anticipated, or if the value of
the option does not increase, a Fund's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between
the changes in value of the index and the changes in value of a Fund's
security holdings.
The purchase of call options on stock indices may be used by a Fund to
attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when a Fund holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, a Fund will also bear the risk
of losing all or a portion of the premium paid if the value of the index
does not rise. The purchase of call options on stock indices when a Fund
is substantially fully invested is a form of leverage, up to the amount of
the premium and related transaction costs, and involves risks of loss and
of increased volatility similar to those involved in purchasing calls on
securities a Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns
relative values to the stocks included in the index and the index
fluctuates with changes in the market values of the stocks so included.
The composition of the index is changed periodically.
RESET OPTIONS:
In certain instances, a Fund may purchase or write options on U.S.
Treasury securities which provide for periodic adjustment of the strike
price and may also provide for the periodic adjustment of the premium
during the term of each such option. Like other types of options, these
transactions, which may be referred to as "reset" options or "adjustable
strike" options grant the purchaser the right to purchase (in the case of
a call) or sell (in the case of a put), a specified type of U.S. Treasury
security at any time up to a stated expiration date (or, in certain
instances, on such date). In contrast to other types of options, however,
the price at which the underlying security may be purchased or sold under
a "reset" option is determined at various intervals during the term of the
option, and such price fluctuates from interval to interval based on
changes in the market value of the underlying security. As a result, the
strike price of a "reset" option, at the time of exercise, may be less
advantageous than if the strike price had been fixed at the initiation of
the option. In addition, the premium paid for the purchase of the option
may be determined at the termination, rather than the initiation, of the
option. If the premium for a reset option written by a Fund is paid at
termination, a Fund assumes the risk that (i) the premium may be less than
the premium which would otherwise have been received at the initiation of
the option because of such factors as the volatility in yield of the
underlying Treasury security over the term of the option and adjustments
made to the strike price of the option, and (ii) the option purchaser may
default on its obligation to pay the premium at the termination of the
option. Conversely, where a Fund purchases a reset option, it could be
required to pay a higher premium than would have been the case at the
initiation of the option.
"YIELD CURVE" OPTIONS: A Fund may also enter into options on the "spread,"
or yield differential, between two fixed income securities, in
transactions referred to as "yield curve" options. In contrast to other
types of options, a yield curve option is based on the difference between
the yields of designated securities, rather than the prices of the
individual securities, and is settled through cash payments. Accordingly,
a yield curve option is profitable to the holder if this differential
widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Yield curve options may be used for the same purposes as other options
on securities. Specifically, a Fund may purchase or write such options for
hedging purposes. For example, a Fund may purchase a call option on the
yield spread between two securities, if it owns one of the securities and
anticipates purchasing the other security and wants to hedge against an
adverse change in the yield spread between the two securities. A Fund may
also purchase or write yield curve options for other than hedging purposes
(i.e., in an effort to increase its current income) if, in the judgment of
the Adviser or Sub-Adviser, a Fund 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 a Fund will be
"covered". A call (or put) option is covered if a Fund holds another call
(or put) option on the spread between the same two securities and owns
liquid and unencumbered assets sufficient to cover a Fund's net liability
under the two options. Therefore, a Fund's liability for such a covered
option is generally limited to the difference between the amount of a
Fund's liability under the option written by a Fund less the value of the
option held by a Fund. 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.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements with sellers who are member
firms (or a subsidiary thereof) of the New York Stock Exchange or members
of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be
of comparable creditworthiness. The securities that a Fund 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 a Fund, or the purchase and repurchase
prices may be the same, with interest at a standard rate due to a Fund
together with the repurchase price on repurchase. In either case, the
income to a Fund is unrelated to the interest rate on the Government
securities.
The repurchase agreement provides that in the event the seller fails to
pay the amount agreed upon on the agreed upon delivery date or upon
demand, as the case may be, a Fund will have the right to liquidate the
securities. If at the time a Fund 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, a Fund's exercise of its right to liquidate the
securities may be delayed and result in certain losses and costs to a
Fund. A Fund has adopted and follows procedures which are intended to
minimize the risks of repurchase agreements. For example, a Fund only
enters into repurchase agreements after the Adviser or Sub-Adviser has
determined that the seller is creditworthy, and the Adviser or Sub-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 a Fund has the right to make margin calls at any time if the
value of the securities falls below the agreed upon collateral.
RESTRICTED SECURITIES
A Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act ("Rule 144A securities") and
commercial paper issued under Section 4(2) of the 1933 Act ("4(2) Paper").
A determination is made, based upon a continuing review of the trading
markets for the Rule 144A security or 4(2) Paper, whether such security is
liquid and thus not subject to a Fund's limitation on investing in
illiquid investments. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the
liquidity of Rule 144A securities and 4(2) Paper. The Board, however,
retains oversight of the liquidity determinations focusing on factors such
as valuation, liquidity and availability of information. Investing in Rule
144A securities could have the effect of decreasing the level of liquidity
in a Fund to the extent that qualified institutional buyers become for a
time uninterested in purchasing these Rule 144A securities held in a
Fund's portfolio. Subject to a Fund's limitation on investments in
illiquid investments, a Fund may also invest in restricted securities that
may not be sold under Rule 144A, which presents certain risks. As a
result, a Fund might not be able to sell these securities when the Adviser
or Sub-Adviser wishes to do so, or might have to sell them at less than
fair value. In addition, market quotations are less readily available.
Therefore, judgment may at times play a greater role in valuing these
securities than in the case of unrestricted securities.
SHORT SALES
A Fund may seek to hedge investments or realize additional gains through
short sales. A Fund may make short sales, which are transactions in which
a Fund sells a security it does not own, in anticipation of a decline in
the market value of that security. To complete such a transaction, a Fund
must borrow the security to make delivery to the buyer. A Fund then is
obligated to replace the security borrowed by purchasing it at the 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 a Fund. Until the
security is replaced, a Fund is required to repay the lender any dividends
or interest which accrue during the period of the loan. To borrow the
security, a Fund 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. A Fund also will
incur transaction costs in effecting short sales.
A Fund 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 a Fund replaces the borrowed security. A Fund will realize a gain if
the price of the security declines 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 a Fund may be required to pay
in connection with a short sale.
Whenever a Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale,
equals the current market value of the security sold short.
SHORT SALES AGAINST THE BOX
A Fund may make short sales "against the box," i.e., when a security
identical to one owned by a Fund is borrowed and sold short. If a Fund
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. A
Fund will incur transaction costs, including interest, in connection with
opening, maintaining, and closing short sales against the box.
SHORT TERM INSTRUMENTS
A Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
A Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities
and indices, and related types of derivatives, such as caps, collars and
floors. A swap is an agreement between two parties pursuant to which each
party agrees to make one or more payments to the other on regularly
scheduled dates over a stated term, based on different interest rates,
currency exchange rates, security or commodity prices, the prices or rates
of other types of financial instruments or assets or the levels of
specified indices. Under a typical swap, one party may agree to pay a
fixed rate or a floating rate determined by reference to a specified
instrument, rate or index, multiplied in each case by a specified amount
(the "notional amount"), while the other party agrees to pay an amount
equal to a different floating rate multiplied by the same notional amount.
On each payment date, the obligations of parties are netted, with only the
net amount paid by one party to the other. All swap agreements entered
into by a Fund with the same counterparty are generally governed by a
single master agreement, which provides for the netting of all amounts
owed by the parties under the agreement upon the occurrence of an event of
default, thereby reducing the credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease a Fund's exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. A Fund is not limited
to any particular form or variety of swap agreement if the Adviser
determines it is consistent with a Fund's investment objective and
policies.
For example, a Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by a
Fund. In such an instance, a Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of a Fund's
portfolio, a Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. A Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as
a currency swap between the U.S. dollar and another currency which would
have the effect of increasing or decreasing a Fund's exposure to each such
currency. A Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the
underlying security or securities, as an alternative to purchasing such
securities. Such transactions could be more efficient or less costly in
certain instances than an actual purchase or sale of the securities.
A Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps
and floors are similar to swaps, except that one party pays a fee at the
time the transaction is entered into and has no further payment
obligations, while the other party is obligated to pay an amount equal to
the amount by which a specified fixed or floating rate exceeds or is below
another rate (multiplied by a notional amount). Caps and floors,
therefore, are also similar to options. A collar is in effect a
combination of a cap and a floor, with payments made only within or
outside a specified range of prices or rates. A swaption is an option to
enter into a swap agreement. Like other types of options, the buyer of a
swaption pays a non-refundable premium for the option and obtains the
right, but not the obligation, to enter into the underlying swap on the
agreed-upon terms.
A Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative transactions.
If a Fund enters into a swap agreement on a net basis (i.e., the two
payment streams are netted out, with a Fund receiving or paying, as the
case may be, only the net amount of the two payments), a Fund will
maintain liquid and unencumbered assets with a daily value at least equal
to the excess, if any, of a Fund's accrued obligations under the swap
agreement over the accrued amount a Fund is entitled to receive under the
agreement. If a Fund enters into a swap agreement on other than a net
basis, it will maintain liquid and unencumbered assets with a value equal
to the full amount of a Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors
and collars is the change in the underlying price, rate or index level
that determines the amount of payments to be made under the arrangement.
If the Adviser is incorrect in its forecasts of such factors, the
investment performance of a Fund would be less than what it would have
been if these investment techniques had not been used. If a swap agreement
calls for payments by a Fund, a Fund must be prepared to make such
payments when due. In addition, if the counterparty's creditworthiness
would decline, the value of the swap agreement would be likely to decline,
potentially resulting in losses.
If the counterparty defaults, a Fund's risk of loss consists of the net
amount of payments that a Fund is contractually entitled to receive. A
Fund anticipates that it will be able to eliminate or reduce its exposure
under these arrangements by assignment or other disposition or by entering
into an offsetting agreement with the same or another counterparty, but
there can be no assurance that it will be able to do so.
The uses by a Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
A Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
TEMPORARY DEFENSIVE POSITIONS
During periods of unusual market conditions when the Adviser or Sub-
Adviser believes that investing for temporary defensive purposes is
appropriate, or in order to meet anticipated redemption requests, a large
portion or all of the assets of a Fund may be invested in cash (including
foreign currency) or cash equivalents, including, but not limited to,
obligations of banks (including certificates of deposit, bankers'
acceptances, time deposits and repurchase agreements), commercial paper,
short-term notes, U.S. Government Securities and related repurchase
agreements.
WARRANTS
A Fund may invest in warrants. Warrants are securities that give a Fund
the right to purchase equity securities from the issuer at a specific
price (the "strike price") for a limited period of time. The strike price
of warrants typically is much lower than the current market price of the
underlying securities, yet they are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities and may offer greater potential for capital appreciation as
well as capital loss. Warrants do not entitle a holder to dividends or
voting rights with respect to the underlying securities and do not
represent any rights in the assets of the issuing company. Also, the value
of the warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not
exercised prior to the expiration date. These factors can make warrants
more speculative than other types of investments.
"WHEN-ISSUED" SECURITIES
A Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities will be delivered to a
Fund at a future date usually 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. In general, a Fund does not
pay for such securities until received, and does not start earning
interest on the securities until the contractual settlement date. While
awaiting delivery of securities purchased on such bases, a Fund will
identify liquid and unencumbered assets equal to its forward delivery
commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH A FUND'S
PORTFOLIO: A Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and
other types of derivatives depends on the degree to which price movements
in the underlying index or instrument correlate with price movements in
the relevant portion of a Fund's portfolio. In the case of derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on
fixed income securities, the portfolio securities which are being hedged
may not be the same type of obligation underlying such derivatives. The
use of derivatives for "cross hedging" purposes (such as a transaction in
a Forward Contract on one currency to hedge exposure to a different
currency) may involve greater correlation risks. Consequently, a Fund
bears the risk that the price of the portfolio securities being hedged
will not move in the same amount or direction as the underlying index or
obligation.
If a Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, a Fund would experience a
loss which is not completely offset by the put option. It is also possible
that there may be a negative correlation between the index or obligation
underlying an option or Futures Contract in which a Fund has a position
and the portfolio securities a Fund is attempting to hedge, which could
result in a loss on both the portfolio and the hedging instrument. It
should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry
group, may present greater risk than options or futures based on a broad
market index. This is due to the fact that a narrower index is more
susceptible to rapid and extreme fluctuations as a result of changes in
the value of a small number of securities. Nevertheless, where a Fund
enters into transactions in options or futures on narrowly-based indices
for hedging purposes, movements in the value of the index should, if the
hedge is successful, correlate closely with the portion of a Fund's
portfolio or the intended acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative and the price of the underlying index or obligation. The
anticipated spread between the prices may be distorted due to the
differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts will not be fully
reflected in the value of the option. The risk of imperfect correlation,
however, generally tends to diminish as the maturity date of the Futures
Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock
indices, options on currencies and Options on Futures Contracts, a Fund is
subject to the risk of market movements between the time that the option
is exercised and the time of performance thereunder. This could increase
the extent of any loss suffered by a Fund in connection with such
transactions.
In writing a covered call option on a security, index or futures
contract, a Fund also incurs the risk that changes in the value of the
instruments used to cover the position will not correlate closely with
changes in the value of the option or underlying index or instrument. For
example, where a Fund covers a call option written on a stock index
through segregation of securities, such securities may not match the
composition of the index, and a Fund may not be fully covered. As a
result, a Fund could be subject to risk of loss in the event of adverse
market movements.
The writing of options on securities, options on stock indices or
Options on Futures Contracts constitutes only a partial hedge against
fluctuations in the value of a Fund's portfolio. When a Fund writes an
option, it will receive premium income in return for the holder's purchase
of the right to acquire or dispose of the underlying obligation. In the
event that the price of such obligation does not rise sufficiently above
the exercise price of the option, in the case of a call, or fall below the
exercise price, in the case of a put, the option will not be exercised and
a Fund will retain the amount of the premium, less related transaction
costs, which will constitute a partial hedge against any decline that may
have occurred in a Fund's portfolio holdings or any increase in the cost
of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor
of the holder to warrant exercise of the option, however, and the option
is exercised, a Fund will incur a loss which may only be partially offset
by the amount of the premium it received. Moreover, by writing an option,
a Fund may be required to forego the benefits which might otherwise have
been obtained from an increase in the value of portfolio securities or
other assets or a decline in the value of securities or assets to be
acquired. In the event of the occurrence of any of the foregoing adverse
market events, a Fund's overall return may be lower than if it had not
engaged in the hedging transactions. Furthermore, the cost of using these
techniques may make it economically infeasible for a Fund to engage in
such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: A Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments involve greater risks and may
result in losses which may not be offset by increases in the value of
portfolio securities or declines in the cost of securities to be acquired.
A Fund will only write covered options, such that liquid and unencumbered
assets necessary to satisfy an option exercise will be identified, unless
the option is covered in such other manner as may be in accordance with
the rules of the exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations. Nevertheless, the
method of covering an option employed by a Fund may not fully protect it
against risk of loss and, in any event, a Fund could suffer losses on the
option position which might not be offset by corresponding portfolio
gains. A Fund may also enter into futures, Forward Contracts or swaps for
non-hedging purposes. For example, a Fund may enter into such a
transaction as an alternative to purchasing or selling the underlying
instrument or to obtain desired exposure to an index or market. In such
instances, a Fund will be exposed to the same economic risks incurred in
purchasing or selling the underlying instrument or instruments. However,
transactions in futures, Forward Contracts or swaps may be leveraged,
which could expose a Fund to greater risk of loss than such purchases or
sales. Entering into transactions in derivatives for other than hedging
purposes, therefore, could expose a Fund to significant risk of loss if
the prices, rates or values of the underlying instruments or indices do
not move in the direction or to the extent anticipated.
With respect to the writing of straddles on securities, a Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing a Fund with two simultaneous premiums on the same security, but
involve additional risk, since a Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise
or expiration, a futures or option position can only be terminated by
entering into a closing purchase or sale transaction. This requires a
secondary market for such instruments on the exchange on which the initial
transaction was entered into. While a Fund will enter into options or
futures positions only if there appears to be a liquid secondary market
therefor, there can be no assurance that such a market will exist for any
particular contract at any specific time. In that event, it may not be
possible to close out a position held by a Fund, and a Fund could be
required to purchase or sell the instrument underlying an option, make or
receive a cash settlement or meet ongoing variation margin requirements.
Under such circumstances, if a Fund has insufficient cash available to
meet margin requirements, it will be necessary to liquidate portfolio
securities or other assets at a time when it is disadvantageous to do so.
The inability to close out options and futures positions, therefore, could
have an adverse impact on a Fund's ability effectively to hedge its
portfolio, and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the
price of a contract during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures or
option positions and requiring traders to make additional margin deposits.
Prices have in the past moved to the daily limit on a number of
consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment
failures, government intervention, insolvency of a brokerage firm or
clearinghouse or other disruptions of normal trading activity, which could
at times make it difficult or impossible to liquidate existing positions
or to recover excess variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in
the price of the contract can result in substantial unrealized gains or
losses. Where a Fund enters into such transactions for hedging purposes,
any losses incurred in connection therewith should, if the hedging
strategy is successful, be offset, in whole or in part, by increases in
the value of securities or other assets held by a Fund or decreases in the
prices of securities or other assets a Fund intends to acquire. Where a
Fund enters into such transactions for other than hedging purposes, the
margin requirements associated with such transactions could expose a Fund
to greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When a Fund enters into
transactions in exchange-traded futures or options, it is exposed to the
risk of the potential bankruptcy of the relevant exchange clearinghouse or
the broker through which a Fund has effected the transaction. In that
event, a Fund might not be able to recover amounts deposited as margin, or
amounts owed to a Fund in connection with its transactions, for an
indefinite period of time, and could sustain losses of a portion or all of
such amounts. Moreover, the performance guarantee of an exchange
clearinghouse generally extends only to its members and a Fund could
sustain losses, notwithstanding such guarantee, in the event of the
bankruptcy of its broker.
TRADING AND POSITION LIMITS: The exchanges on which futures and options
are traded may impose limitations governing the maximum number of
positions on the same side of the market and involving the same underlying
instrument which may be held by a single investor, whether acting alone or
in concert with others (regardless of whether such contracts are held on
the same or different exchanges or held or written in one or more accounts
or through one or more brokers). Further, the CFTC and the various
contract markets have established limits referred to as "speculative
position limits" on the maximum net long or net short position which any
person may hold or control in a particular futures or option contract. An
exchange may order the liquidation of positions found to be in violation
of these limits and it may impose other sanctions or restrictions. The
Adviser and Sub-Adviser do not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the
portfolios of a Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS: The amount of risk a Fund assumes
when it purchases an Option on a Futures Contract is the premium paid for
the option, plus related transaction costs. In order to profit from an
option purchased, however, it may be necessary to exercise the option and
to liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. 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, as well as the additional risk that movements in the price of
the option may not correlate with movements in the price of the underlying
security, index, currency or Futures Contract.
RISKS OF TRANSACTIONS IN FOREIGN CURRENCIES AND OVER-THE-COUNTER
DERIVATIVES AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES:
Transactions in Forward Contracts on foreign currencies, as well as
futures and options on foreign currencies and transactions executed on
foreign exchanges, are subject to all of the correlation, liquidity and
other risks outlined above. In addition, however, such transactions are
subject to the risk of governmental actions affecting trading in or the
prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the value
of positions held by a Fund. Further, the value of such positions could be
adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete
as the comparable data on which a Fund makes investment and trading
decisions in connection with other transactions. Moreover, because the
foreign currency market is a global, 24-hour market, events could occur in
that market which will not be reflected in the forward, futures or options
market until the following day, thereby making it more difficult for a
Fund to respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or
foreign currency options generally must occur within the country issuing
the underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by a Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives are not traded on contract markets regulated by the CFTC or
(with the exception of certain foreign currency options) the SEC. To the
contrary, such instruments are traded through financial institutions
acting as market-makers, although foreign currency options are also traded
on certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC
regulation. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the purchaser of an option cannot lose more than the amount
of the premium plus related transaction costs, this entire amount could be
lost. Moreover, the option writer and a trader of Forward Contracts could
lose amounts substantially in excess of their initial investments, due to
the margin and collateral requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into with
a financial institution willing to take the opposite side, as principal,
of a Fund's position unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with a
Fund. Where no such counterparty is available, it will not be possible to
enter into a desired transaction. There also may be no liquid secondary
market in the trading of over-the-counter contracts, and a Fund could be
required to retain options purchased or written, or Forward Contracts or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit a Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee
of an exchange clearinghouse, and a Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution
serving as its counterparty. One or more of such institutions also may
decide to discontinue their role as market-makers in a particular currency
or security, thereby restricting a Fund's ability to enter into desired
hedging transactions. A Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be
traded on exchanges located in foreign countries. Such transactions may
not be conducted in the same manner as those entered into on U.S.
exchanges, and may be subject to different margin, exercise, settlement or
expiration procedures. As a result, many of the risks of over-the-counter
trading may be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders
on organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option positions entered
into on a national securities exchange are cleared and guaranteed by the
Options Clearing Corporation (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 a Fund to liquidate
open positions at a profit prior to exercise or expiration, or to limit
losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign
currency market, possible intervention by governmental authorities and the
effects of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not presented
by the over-the-counter market. For example, exercise and settlement of
such options must be made exclusively through the OCC, which has
established banking relationships in applicable foreign countries for this
purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions 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.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order
to assure that a Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require
that a Fund enter into transactions in Futures Contracts, Options on
Futures Contracts and Options on Foreign Currencies traded on a CFTC-
regulated exchange only (i) for bona fide hedging purposes (as defined in
CFTC regulations), or (ii) for non-bona fide hedging purposes, provided
that the aggregate initial margin and premiums required to establish such
non-bona fide hedging positions does not exceed 5% of the liquidation
value of a Fund's assets, after taking into account unrealized profits and
unrealized losses on any such contracts a Fund has entered into, and
excluding, in computing such 5%, the in-the-money amount with respect to
an option that is in-the-money at the time of purchase.
<PAGE>
----------
APPENDIX B
----------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however,
that ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with
different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risk appear
somewhat larger than the 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 some time 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.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment
on the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to
meet its financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality
and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is currently
highly vulnerable to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C
rating will also be assigned to a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk -- such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery
values are highly speculative and cannot be estimated with any precision,
the following serve as general guidelines. DDD obligations have the
highest potential for recovery around 90% -- 100% of outstanding amounts
and accrued interest. For U.S. corporates, for example, DD indicates
expected recoveries of 50% -- 90%, and D the lowest recovery potential,
i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within this
category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company
developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
----------
APPENDIX C
----------
<TABLE>
The funds are newly organized and do not have performance quotations as of the date of this SAI.
<CAPTION>
ACTUAL
30-DAY 30-DAY
AVERAGE ANNUAL TOTAL RETURNS YIELD YIELD CURRENT
---------------------------------------------------- (INCLUDING (WITHOUT DISTRIBUTION
1 YEAR 5 YEARS LIFE OF FUND ANY WAIVERS) ANY WAIVERS) RATE+
------------ ------------ -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Shares, at net asset value Not applicable
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
(800) 637-2262
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 637-2262
MAILING ADDRESS:
P.O. Box 1400, Boston, MA 02104-9985
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston MA 02110
MFS(R) INSTITUTIONAL TRUST
500 BOYLSTON STREET
BOSTON, MA 02116
[Logo] M F S(R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND
<PAGE>
MFS INSTITUTIONAL TRUST
MFS(R) INSTITUTIONAL LARGE CAP FUND
MFS(R) INSTITUTIONAL INTERNATIONAL RESEARCH FUND
MFS(R) INSTITUTIONAL REAL ESTATE INVESTMENT FUND
PART C
ITEM 23. EXHIBITS
1 (a) Declaration of Trust, dated September 13, 1990. (1)
(b) Certificate of Amendment to Declaration of Trust, dated
June 1, 1992. (1)
(c) Amendment No. 2 to the Declaration of Trust, dated
August 13, 1992. (1)
(d) Amendment to Declaration of Trust - Designation of
Series, dated May 16, 1995. (1)
(e) Amendment to Declaration of Trust - Designation of
Series, dated August 29, 1995. (2)
(f) Amendment to Declaration of Trust - Redesignation of
Series, dated October 31, 1995. (7)
(g) Amendment to Declaration of Trust - Redesignation of
Series, dated November 28, 1995. (7)
(h) Amendment to Declaration of Trust - Redesignation of
Series, dated April 24, 1996. (8)
(i) Amendment to the Declaration of Trust - Redesignation
of Shares. (11)
(j) Amendment to the Declaration of Trust - Establishment
and Designation of Series, dated July 31, 1998. (12)
(k) Amendment to Declaration of Trust - Redesignation of
Series, dated October 30, 1998. (12)
(l) Amendment to Amended and Restated Declaration of Trust
to terminate the MFS Institutional Core Fixed Income
Fund and the MFS Institutional Emerging Markets Debt
Fund, dated October 3, 2000; filed herewith.
(m) Form of Amendment to the Declaration of Trust
Establishment and Designation of Series; filed herewith.
2 (a) Amended and Restated By-Laws, dated June 1, 1992. (5)
(b) Amendment No. 1 to Amended and Restated By-Laws, dated
October 14, 1993. (5)
3 Form of Share Certificate. (4)
4 (a) Investment Advisory Agreement between MFS Emerging
Equities Fund and Massachusetts Financial Services
Company, as adviser, dated August 7, 1992. (5)
(b) Investment Advisory Agreement between MFS Worldwide
Fixed Income Fund and Massachusetts Financial Services
Company, as adviser, dated August 7, 1992. (5)
(c) Investment Advisory Agreement between the Registrant, on
behalf of MFS Institutional Emerging Markets Fixed
Income Fund, and Massachusetts Financial Services
Company, as adviser, dated June 26, 1995. (1)
(d) Investment Advisory Agreement between the Registrant, on
behalf of MFS Institutional Core Plus Fixed Income Fund,
and Massachusetts Financial Services Company, as
adviser, dated November 30, 1995. (7)
(e) Investment Advisory Agreement between the Registrant, on
behalf of MFS Institutional Research Fund, and
Massachusetts Financial Services Company, as adviser,
dated November 30, 1995. (7)
(f) Investment Advisory Agreement between the Registrant, on
behalf of MFS Institutional Mid-Cap Growth Equity Fund,
and Massachusetts Financial Services Company, as
adviser, dated November 30, 1995. (7)
(g) Investment Advisory Agreement between the Registrant, on
behalf of MFS Institutional International Equity Fund,
and Massachusetts Financial Services Company, as
adviser, dated November 30, 1995. (7)
(h) Investment Advisory Agreement between Registrant, on
behalf of MFS Institutional Core Equity Fund and
Massachusetts Financial Services Company, as adviser,
dated October 29, 1998. (12)
(i) Investment Advisory Agreement between Registrant, on
behalf of MFS Institutional High Yield Fund and
Massachusetts Financial Services Company, as adviser,
dated October 29, 1998. (12)
(j) Investment Advisory Agreement between Registrant, on
behalf of MFS Institutional Large Cap Growth Fund and
Massachusetts Financial Services Company, as adviser,
dated October 29, 1998. (12)
(k) Form of Investment Advisory Agreement between
Registrant, on behalf of MFS Institutional Large Cap
Value Fund and Massachusetts Financial Services Company,
as advise; filed herewith.
(l) Form of Investment Advisory Agreement between
Registrant, on behalf of MFS Institutional Research
Equity Fund and Massachusetts Financial Services
Company, as adviser; filed herewith.
(m) Form of Investment Advisory Agreement between
Registrant, on behalf of MFS Institutional Real Estate
Investment Fund and Massachusetts Financial Services
Company, as adviser; filed herewith.
(n) Form of Sub-Investment Advisory Agreement by and between
Massachusetts Financial Services Company and Sun Capital
Advisers, Inc.; filed herewith.
5 (a) Distribution Agreement by and between MFS Institutional
Trust and MFS Fund Distributors, Inc., dated June 15,
1994. (5)
(b) Dealer Agreement between MFS Fund Distributors, Inc.
and a dealer, and the Mutual Fund Agreement between MFS
and a bank, effective November 29, 1999. (13)
6 Not Applicable.
7 (a) Custodian Agreement between the Registrant and State
Street Bank and Trust Company, dated July 31, 1995. (2)
(b) Amendment to Custodian Contract dated November 30, 1995.
(7)
8 (a) Amended and Restated Shareholder Servicing Agent
Agreement between Registrant and MFS Service Center,
Inc. as Shareholder Servicing Agent dated November 30,
1995. (7)
(b) Exchange Privilege Agreement between the MFS
Institutional Trust, on behalf of each of its series,
and MFS Fund Distributors, Inc., dated July 26, 1995.
(7)
(c) Dividend Disbursing Agency Agreement between the
Registrant and State Street Bank and Trust Company,
dated October 31, 1990. (5)
(d) Master Administrative Services Agreement, dated March 1,
1997, as amended and restated April 1, 1999. (10)
9 (a) Opinion and Consent of Counsel, dated October 11,
2000; filed herewith.
10 Not Applicable.
11 Not Applicable.
12 Investment representation letter from initial
shareholder of MFS Institutional Emerging Markets Fixed
Income Fund. (1)
13 Not Applicable.
14 Not Applicable.
15 Not Applicable.
16 Code of Ethics pursuant to Rule 17j-1 under the
Investment Company Act of 1940. (3)
Power of Attorney dated July 26, 2000; filed herewith.
(1) Incorporated by reference to Post-Effective Amendment No. 7 to the
Registrant's Registration Statement on Form N-1A filed with the SEC via
EDGAR on May 18, 1995.
(2) Incorporated by reference to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A filed with the SEC via
EDGAR on September 15, 1995.
(3) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and
811-2464) Post-Effective Amendment No. 40 filed with the SEC via EDGAR on
August 28, 2000.
(4) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 28 filed with the SEC via EDGAR
on July 28, 1995.
(5) Incorporated by reference to Post-Effective Amendment No. 9 filed with the
SEC via EDGAR on October 27, 1995.
(6) Incorporated by reference to Post-Effective Amendment No. 16 to the
Registrant's Registration Statement on Form N-1A, filed with the SEC via
EDGAR on August 14, 1998.
(7) Incorporated by reference to Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form N-1A filed with the SEC via
EDGAR on February 8, 1996.
(8) Incorporated by reference to Post-Effective Amendment No. 11 to the
Registrant's Registration Statement on Form N-1A filed with the SEC via
EDGAR on April 26, 1996.
(9) Incorporated by reference to Post-Effective Amendment No. 17 to the
Registrant's Registration Statement on Form N-1A, filed with the SEC via
EDGAR on October 28, 1998.
(10) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
March 31, 1999.
(11) Incorporated by reference to Registrant's Post-Effective Amendment No. 15
filed with the SEC via EDGAR on October 28, 1997.
(12) Incorporated by reference to Registrant's Post-Effective Amendment No. 18
filed with the SEC via EDGAR on August 27, 1999.
(13) Incorporated by reference to MFS Series Trust V (File Nos. 2-38613 and
811-2031) Post-Effective Amendment No. 48 filed with the SEC via EDGAR on
November 29, 1999.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable
ITEM 25. 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 Trust, 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 willful 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, as amended.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds (except the Vertex Funds mentioned below):
Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Growth Opportunities Fund, MFS Government Securities Fund, MFS Government
Limited Maturity Fund, MFS Series Trust I (which has ten series: MFS Managed
Sectors Fund, MFS Cash Reserve Fund, MFS Global Asset Allocation Fund, MFS
Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS New Discovery Fund, MFS Science and Technology
Fund and MFS Research International Fund), MFS Series Trust II (which has four
series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund, MFS Intermediate
Income Fund and MFS Charter Income Fund), MFS Series Trust III (which has three
series: MFS High Income Fund, MFS Municipal High Income Fund and MFS High Yield
Opportunities Fund), MFS Series Trust IV (which has four series: MFS Money
Market Fund, MFS Government Money Market Fund, MFS Municipal Bond Fund and MFS
Mid Cap Growth Fund), MFS Series Trust V (which has five series: MFS Total
Return Fund, MFS Research Fund, MFS International Opportunities Fund, MFS
International Strategic Growth Fund and MFS International Value Fund), MFS
Series Trust VI (which has three series: MFS Global Total Return Fund, MFS
Utilities Fund and MFS Global Equity Fund), MFS Series Trust VII (which has two
series: MFS Global Governments Fund and MFS Capital Opportunities Fund), MFS
Series Trust VIII (which has two series: MFS Strategic Income Fund and MFS
Global Growth Fund), MFS Series Trust IX (which has eight series: MFS Bond Fund,
MFS Limited Maturity Fund, MFS Municipal Limited Maturity Fund, MFS Research
Bond Fund, MFS Intermediate Investment Grade Bond Fund, MFS Mid Cap Value Fund,
MFS Large Cap Value Fund and MFS High Quality Bond Fund), MFS Series Trust X
(which has ten series: MFS Government Mortgage Fund, MFS Emerging Markets Equity
Fund, MFS International Growth Fund, MFS International Growth and Income Fund,
MFS Strategic Value Fund, MFS Emerging Markets Debt Fund, MFS Income Fund, MFS
European Equity Fund, MFS High Yield Fund and MFS Concentrated Growth Fund), MFS
Series Trust XI (which has four series: MFS Union Standard Equity Fund, Vertex
All Cap Fund, Vertex Contrarian Fund and Vertex Income Fund), and MFS Municipal
Series Trust (which has 18 series: MFS Alabama Municipal Bond Fund, MFS Arkansas
Municipal Bond Fund, MFS California Municipal Bond Fund, MFS Florida Municipal
Bond Fund, MFS Georgia Municipal Bond Fund, MFS Maryland Municipal Bond Fund,
MFS Massachusetts Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS
New York Municipal Bond Fund, MFS North Carolina Municipal Bond Fund, MFS
Pennsylvania Municipal Bond Fund, MFS South Carolina Municipal Bond Fund, MFS
Tennessee Municipal Bond Fund, MFS Virginia Municipal Bond Fund, MFS West
Virginia Municipal Bond Fund, MFS Municipal Income Fund, MFS New York High
Income Tax Free Fund and MFS Massachusetts High Income Tax Free Fund) (the "MFS
Funds"). The principal business address of each of the MFS Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following open-end
Funds: MFS Institutional Trust ("MFSIT") (which has eight series) and MFS
Variable Insurance Trust ("MVI") (which has sixteen series). The principal
business address of each of the aforementioned funds is 500 Boylston Street,
Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series
Trust ("MFS/SL") (which has 26 series), Money Market Variable Account, High
Yield Variable Account, Capital Appreciation Variable Account, Government
Securities Variable Account, Global Governments Variable Account, Total Return
Variable Account and Managed Sectors Variable Account (collectively, the
"Accounts"). The principal business address of MFS/SL is 500 Boylston Street,
Boston, Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
VERTEX INVESTMENT MANAGEMENT, INC., a Delaware corporation and a
wholly owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex Contrarian Fund and Vertex Income Fund, each a
series of MFS Series Trust XI. The principal business address of the
aforementioned Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS INTERNATIONAL LTD. ("MIL"), a limited liability company
organized under the laws of Bermuda and a subsidiary of MFS, whose principal
business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves
as investment adviser to and distributor for MFS American Funds known as the MFS
Funds after January 1999 (which will have 11 portfolios as of January 1999):
U.S. Equity Fund, U.S. Emerging Growth Fund, U.S. High Yield Bond Fund, U.S.
Dollar Reserve Fund, Charter Income Fund, U.S. Research Fund, U.S. Strategic
Growth Fund, Global Equity Fund, European Equity Fund and European Corporate
Bond Fund) (the "MIL Funds"). The MIL Funds are organized in Luxembourg and
qualify as an undertaking for collective investments in transferable securities
(UCITS). The principal business address of the MIL Funds is 47, Boulevard Royal,
L-2449 Luxembourg. MIL also serves as investment adviser to and distributor for
MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Governments Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
Global Growth Fund, MFS Meridian Money Market Fund, MFS Meridian Global Balanced
Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS Meridian
U.S. High Yield Fund, MFS Meridian Emerging Markets Debt Fund, MFS Meridian
Strategic Growth Fund and MFS Meridian Global Asset Allocation Fund and the MFS
Meridian Research International 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 Eversheds, Senator House, 85 Queen Victoria Street, London, England
EC4V 4JL, is involved primarily in marketing and investment research activities
with respect to private clients and the MIL Funds and the MFS Meridian Funds.
MFS INSTITUTIONAL ADVISORS (AUSTRALIA) LTD. ("MFSI-AUSTRALIA"), a
private limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.
MFS HOLDINGS AUSTRALIA PTY LTD. ("MFS HOLDINGS AUSTRALIA"), a
private limited company organized pursuant to the Corporations Law of New South
Wales, Australia whose current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000 Australia, and whose function is to serve primarily as a
holding company.
MFS FUND DISTRIBUTORS, INC. ("MFD"), a wholly owned subsidiary of
MFS, serves as distributor for the MFS Funds, MVI and MFSIT.
MFS SERVICE CENTER, INC. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT and MVI.
MFS INSTITUTIONAL ADVISORS, INC. ("MFSI"), a wholly owned subsidiary
of MFS, provides investment advice to substantial private clients.
MFS RETIREMENT SERVICES, INC. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MFS INVESTMENT MANAGEMENT K.K. ("MIMCO"), a wholly owned subsidiary
of MFS, is a corporation incorporated in Japan. MIMCO, whose address is
Kamiyacho-Mori Building, 3-20, Tranomon 4-chome, Minato-ku, Tokyo, Japan, is
involved in investment management activities.
MFS HERITAGE TRUST COMPANY ("MFS TRUST"), a New Hampshire-chartered
limited-purpose trust company whose current address is 650 Elm Street, Suite
404, Manchester, NH 03101, provides directed trustee services to retirement
plans.
MFS ORIGINAL RESEARCH PARTNERS, LLC, a Delaware limited liability
company and a wholly owned subsidiary of MFS whose address is 500 Boylston
Street, Boston, Massachusetts 02116, is an adviser to domestic pooled private
investment vehicles.
MFS ORIGINAL RESEARCH ADVISORS, LLC, a Delaware limited liability
company and a wholly owned subsidiary of MFS whose address is 500 Boylston
Street, Boston, Massachusetts 02116, is an adviser to offshore pooled private
investment vehicles.
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Kevin R. Parke, Thomas J. Cashman, Jr., Joseph W. Dello Russo, William
W. Scott, Donald A. Stewart, James Prieur and William W. Stinson. Mr. Shames is
the Chairman and Chief Executive Officer, Mr. Ballen is President and Chief
Investment Officer, Mr. Arnold Scott is a Senior Executive Vice President, Mr.
William Scott, Mr. Cashman, Mr. Dello Russo and Mr. Parke are Executive Vice
Presidents (Mr. Dello Russo is also Chief Financial Officer and Chief
Administrative Officer and Mr. Parke is also Chief Equity Officer), Stephen E.
Cavan is a Senior Vice President, General Counsel and Secretary of MFS, Robert
T. Burns is a Senior Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Treasurer of
MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost, a Senior Vice President of MFS, is the
Treasurer, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents of MFS, are
the Assistant Treasurers, James R. Bordewick, Jr., Senior Vice President and
Associate General Counsel of MFS, is the Assistant Clerk and Assistant
Secretary.
MFS SERIES TRUST II
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers, and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers, and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS SERIES TRUST III
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers, and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS SERIES TRUST VII
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS SERIES TRUST VIII
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS SERIES TRUST XI
MFS INSTITUTIONAL TRUST
Jeffrey L. Shames is the President and Chairman, Stephen E. Cavan is
the Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and
Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS SPECIAL VALUE TRUST
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Clerk and Secretary, James O. Yost is the Treasurer, Ellen M. Moynihan and Mark
E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Clerk and Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
C. James Prieur, President and Director of Sun Life Assurance
Company of Canada, is the President, Stephen E. Cavan is the Secretary, James O.
Yost is the Treasurer, Ellen M. Moynihan and Mark E. Bradley are the Assistant
Treasurers and James R. Bordewick, Jr., is the Assistant Secretary.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
C. James Prieur is the President, Stephen E. Cavan is the Secretary,
and James R. Bordewick, Jr., is the Assistant Secretary.
MIL FUNDS
Jeffrey L. Shames is Chairman, Richard B. Bailey, John A. Brindle,
Richard W. S. Baker, Arnold D. Scott and William F. Waters are Directors,
Stephen E. Cavan is the Secretary, James O. Yost is the Treasurer, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS MERIDIAN FUNDS
Jeffrey L. Shames is Chairman, Richard B. Bailey, John A. Brindle,
Richard W. S. Baker, Arnold D. Scott and William F. Waters are Directors,
Stephen E. Cavan is the Secretary, James O. Yost is the Treasurer, James R.
Bordewick, Jr. is the Assistant Secretary and Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers.
VERTEX
Jeffrey L. Shames is the Chairman and President, Arnold D. Scott is
a Director, Kevin R. Parke and John W. Ballen are Executive Vice Presidents,
John D. Laupheimer is a Senior Vice President, Brian E. Stack is a Vice
President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, Stephen E. Cavan is the Secretary and Robert T. Burns is
the Assistant Secretary.
MIL
Peter D. Laird is President and a Director, Arnold D. Scott, Jeffrey
L. Shames and Thomas J. Cashman, Jr. are Directors, Stephen E. Cavan is a
Director, Senior Vice President and the Clerk, Robert T. Burns is an Assistant
Clerk, Joseph W. Dello Russo, Executive Vice President and Chief Financial
Officer of MFS, is the Treasurer and Thomas B. Hastings is the Assistant
Treasurer.
MIL-UK
Peter D. Laird is President and a Director, Thomas J. Cashman,
Arnold D. Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is a
Director and the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer and Robert T. Burns is the Assistant
Secretary.
MFSI - AUSTRALIA
Thomas J. Cashman, Jr. is President and a Director, Graham E.
Lenzer, John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS HOLDINGS - AUSTRALIA
Jeffrey L. Shames is the President and a Director, Arnold D. Scott,
Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E. Cavan is
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors, William W.
Scott, Jr., an Executive Vice President of MFS, is the President, Stephen E.
Cavan is the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W.
Dello Russo is the Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the President, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant
Secretary.
MFSI
Thomas J. Cashman, Jr. is Chairman and a Director, Jeffrey L.
Shames, and Arnold D. Scott are Directors, Joseph J. Trainor is the President
and a Director, Leslie J. Nanberg is a Senior Vice President, a Managing
Director and a Director, Kevin R. Parke is the Executive Vice President and a
Managing Director, George F. Bennett, Jr., John A. Gee, Brianne Grady, Joseph A.
Kosciuszek and Joseph J. Trainor are Senior Vice Presidents and Managing
Directors, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Secretary.
RSI
Arnold D. Scott is the Chairman and a Director, Martin E. Beaulieu
is the President, William W. Scott, Jr. is a Director, Joseph W. Dello Russo is
the Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan
is the Secretary and Robert T. Burns is the Assistant Secretary.
MIMCO
Jeffrey L. Shames, Arnold D. Scott and Mamoru Ogata are Directors,
Shaun Moran is the Representative Director, Joseph W. Dello Russo is the
Statutory Auditor, Robert DiBella is the President and Thomas B. Hastings is the
Assistant Statutory Auditor.
MFS TRUST
The Directors of MFS Trust are Martin E. Beaulieu, Stephen E. Cavan,
Janet A. Clifford, Joseph W. Dello Russo and Joseph A. Kosciuszek. Mr. Cavan is
President, Mr. Dello Russo is Treasurer, and Robert T. Burns is Clerk of MFS
Trust.
MFS ORIGINAL RESEARCH PARTNERS, LLC
Joseph J. Trainor is the President and a Manager, Jeffrey L. Shames,
John W. Ballen and Kevin R. Parke are Managers, Joseph W. Dello Russo is the
Treasurer, Stephen E. Cavan is the Secretary, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFS ORIGINAL RESEARCH ADVISORS, LLC
Joseph J. Trainor is the President and a Manager, Jeffrey L. Shames,
John W. Ballen and Kevin R. Parke are Managers, Joseph W. Dello Russo is the
Treasurer, Stephen E. Cavan is the Secretary, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
In addition, the following persons, Directors or officers of MFS,
have the affiliations indicated:
Donald A. Stewart Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada
(Mr. Stewart is also an officer and/or
Director of various subsidiaries and
affiliates of Sun Life)
C. James Prieur President and a Director, Sun Life
Assurance Company of Canada, Sun Life
Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. Prieur is also an
officer and/or Director of various
subsidiaries and affiliates of Sun
Life)
William W. Stinson Director, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada;
Director, United Dominion Industries
Limited, Charlotte, N.C.; Director,
PanCanadian Petroleum Limited, Calgary,
Alberta; Director, LWT Services, Inc.,
Calgary Alberta; Director, Western Star
Trucks, Inc., Kelowna, British
Columbia; Director, Westshore Terminals
Income Fund, Vancouver, British
Columbia; Director (until 4/99),
Canadian Pacific Ltd., Calgary, Alberta
ITEM 27. DISTRIBUTORS
(a) Reference is hereby made to Item 26 above.
(b) Reference is hereby made to Item 26 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
ITEM 28. 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 Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
State Street Bank and State Street South
Trust Company (custodian) 5 - West
North Quincy, MA 02171
MFS Service Center, Inc. 2 Avenue de LaFayette
(transfer agent) Boston, MA 02111-1738
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 11th day of October, 2000.
MFS INSTITUTIONAL TRUST
By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
Title: Assistant Clerk and
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on October 11, 2000.
SIGNATURE TITLE
JEFFREY L. SHAMES* Chairman, President (Principal Executive
-------------------------- Jeffrey L. Shames Officer) and Trustee
JAMES O. YOST* Treasurer (Principal Financial Officer
-------------------------- and Principal Accounting Officer)
James O. Yost
WILLIAM R. GUTOW* Trustee
--------------------------
William R. Gutow
NELSON J. DARLING, JR.* Trustee
--------------------------
Nelson J. Darling, Jr.
*By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on
behalf of those indicated pursuant to
a Power of Attorney dated July 26,
2000; filed herewith.
<PAGE>
POWER OF ATTORNEY
MFS INSTITUTIONAL TRUST
The undersigned, Trustees and officers of MFS Institutional Trust (the
"Registrant"), hereby severally constitute and appoint Jeffrey L. Shames, Arnold
D. Scott, Stephen E. Cavan, James O. Yost and James R. Bordewick, Jr., and each
of them singly, as true and lawful attorneys, with full power to them and each
of them to sign for each of the undersigned, in the names of, and in the
capacities indicated below, any Registration Statement and any and all
amendments thereto and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
for the purpose of registering the Registrant as a management investment company
under the Investment Company Act of 1940 and/or the shares issued by the
Registrant under the Securities Act of 1933 granting unto our said attorneys,
and each of them, acting alone, full power and authority to do and perform each
and every act and thing requisite or necessary or desirable to be done in the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys or any of them
may lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned have hereunto set their hand on this
26th day of July, 2000.
JEFFREY L. SHAMES Chairman of the Board; Trustee;
-------------------------- and Principal Executive Officer
Jeffrey L. Shames
JAMES O. YOST Principal Financial And Accounting Officer
--------------------------
James O. Yost
NELSON J. DARLING, JR. Trustee
--------------------------
Nelson J. Darling, Jr.
WILLIAM R. GUTOW Trustee
--------------------------
William R. Gutow
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
1 (l) Amendment to Amended and Restated
Declaration of Trust to terminate the
MFS Institutional Core Fixed Income
Fund and the MFS Institutional Emerging
Markets Debt Fund, dated October 3, 2000.
(m) Form of Amendment to the Declaration of
Trust - Establishment and Designation
of Series.
4 (k) Form of Investment Advisory Agreement
between Registrant, on behalf of MFS
Institutional Large Cap Value Fund and
Massachusetts Financial Services
Company, as adviser.
(l) Form of Investment Advisory Agreement
between Registrant, on behalf of MFS
Institutional Research Equity Fund and
Massachusetts Financial Services
Company, as adviser.
(m) Form of Investment Advisory Agreement
between Registrant, on behalf of MFS
Institutional Real Estate Investment
Fund and Massachusetts Financial
Services Company, as adviser.
(n) Form of Sub-Investment Advisory
Agreement by and between Massachusetts
Financial Services Company and Sun
Capital Advisers, Inc.
9 Opinion and Consent of Counsel, dated
October 11, 2000.