AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
FEBRUARY 28, 2006
1940 ACT FILE NO. 811-5912
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 11 |X|
MFS(R) SPECIAL VALUE TRUST
(Exact Name of Registrant as Specified in Charter)
500 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 617-954-5000
Susan S. Newton
Assistant Secretary and Assistant Clerk
MFS Special Value Trust
c/o Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
(Name and Address of Agent for Service)
MFS SPECIAL VALUE TRUST
PART A.
INFORMATION REQUIRED IN A PROSPECTUS
Items 1 and 2: Omitted pursuant to General Instruction G.3 to Form N-2.
Item 3. Fee Table: Inapplicable - 1940 Act filing only.
Items 3.2, 4, 5, 6 and 7: Omitted pursuant to General Instruction G.3 to Form
N-2.
Item 8. General Description of Registrant:
8.1. General: The MFS Special Value Trust ("Trust") is a closed-end, diversified
management investment company which was organized as a business trust under the
laws of The Commonwealth of Massachusetts on September 29, 1989.
8.2, 8.3, and 8.4. Investment Objectives and Policies, Risk Factors and Other
Policies:
INVESTMENT OBJECTIVE AND POLICIES
The Trust's investment objective is to maintain an annual distribution rate of
10%, based on the Trust's average daily net asset value, while seeking
opportunities for capital appreciation.
In pursuing this objective, the Trust may invest in securities issued or
guaranteed by the U.S. Government, its agencies, authorities and
instrumentalities ("U.S. Government Securities") and, when appropriate, related
options. As opportunities arise in the marketplace, the Trust may invest its
assets in securities that the Trust believes represent uncommon value by having
the potential for significant capital appreciation over a period of twelve
months or longer. The issuers of such securities may include companies
out-of-favor in the marketplace or in out-of-favor industries, companies
currently performing well but in industries where the outlook is questionable
and over-leveraged companies with promising longer-term prospects. Some of these
companies may be experiencing financial or operating difficulties, and certain
of those companies may be involved, at the time of acquisition or soon
thereafter, in reorganizations, capital restructurings or bankruptcy
proceedings; however, most of these companies will not be experiencing such
financial or operating difficulties as well, in MFS Investment Management's
("the Investment Adviser or Adviser") opinion, lead to reorganizations, capital
restructurings or bankruptcy proceedings.
The Investment Adviser believes that the risks associated with investing a
portion of its assets in the debt and equity securities described above can be
managed through proper credit, financial and legal analysis, research and
portfolio diversification. The Investment Adviser will further attempt to manage
risk through acquisition of debt securities generally at significant discounts
to face value and near the Investment Advisor's estimate of their liquidation
values. As a result, in the event of the issuer's bankruptcy or liquidation, the
Trust would have a greater possibility of recouping its initial investment than
if it had not purchased the securities at a discount. The availability of deeply
discounted debt securities usually results from the severely reduced credit
quality of the issuer.
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However, such securities offer the potential for
significant capital appreciation if the issuer is able to pay the security at
maturity or to redeem the issue at face value or if the credit quality of the
security improves. Similarly, the Investment Adviser believes that securities
which are not current in the payment of interest or dividends present the
opportunity for significant capital appreciation. There can be no assurance in
these situations that such capital appreciation will occur or that it will occur
in the time frame estimated by the Investment Adviser or that there will not be
a loss of a significant portion of the Trust's investment in such issues.
The Trust may also invest in fixed income and equity securities of non-U.S.
issuers. To the extent available and permissible, the Trust may invest in
options and Futures Contracts on securities, currencies and indices as more
fully described below.
The Investment Adviser will determine, based upon current yields and the
appreciation potential of various categories of securities, the relative
apportionment of the Trust's assets among particular investments. The Trust will
evaluate its degree of success in achieving its investment objective by
measuring whether it can, over time, maintain an annual distribution rate of 10%
while paying expenses, without a substantial portion of such distributions being
a return of shareholders' capital; however, there can be no assurance that the
Trust will achieve its investment objective. For the risk considerations
involved, see "Risk Factors" below.
U.S. Government Securities. The U.S. Government Securities in which the Trust
may invest include (i) U.S. Treasury obligations, which differ only in their
interest rates, maturities and times of issuance: U.S. Treasury bills (maturity
of one year or less); U.S. Treasury notes (maturities of one to 10 years); and
U.S. Treasury bonds (generally original maturities of greater than 10 years),
all of which are backed by the full faith and credit of the United States, (ii)
obligations issued or guaranteed by U.S. Government agencies, authorities or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-though certificates of the Government National
Mortgage Association ("GNMA"); some of which are supported by the right of the
issuer to borrow from the U.S. Government, e.g., obligations of the Federal Home
Loan Banks; and some of which are backed only by the credit of the issuer
itself, e.g., obligations of the Federal National Mortgage Association ("FNMA"),
and (iii) interest in trusts or other entities representing interests in
obligations that are issued or guaranteed by U.S. Government agencies,
authorities or instrumentalities. For a description of obligations issued or
guaranteed by U.S. Government agencies or instrumentalities, see "Description of
Obligations Issued or Guaranteed by U.S. Government Agencies or
Instrumentalities" below.
U.S. Government Securities in which the Trust may invest do not involve the
credit risks associated with other types of interest bearing securities,
although some are not backed by the full faith and credit of the U.S. Treasury.
As a result, the yields available from U.S. Government Securities are generally
lower than the yields available from other interest bearing securities. Like
other interest bearing securities, however, the values of U.S. Government
Securities change as interest rates fluctuate. Longer-term U.S. Government
Securities generally are less stable and more susceptible to principal loss than
shorter-term securities; however, longer-term securities in most cases offer
higher yields than securities with shorter maturities.
Equity Securities. The Trust may invest in common stocks and warrants of
companies whose stock prices the Investment Adviser expects to increase
significantly because of special factors, such as rejuvenated management, new
products, changes in consumer demand, takeover bids or basic
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changes in the economic environment. At the time the Trust acquires such
securities, these companies may be out-of-favor in the marketplace, in
out-of-favor industries, currently performing well but in industries where the
outlook is questionable or over-leveraged with promising longer- term prospects
for improved stock prices, improved financial performance or reduced debt
levels. Some of these companies may be experiencing financial or operating
difficulties or they may be involved in reorganizations, capital restructurings
or bankruptcy proceedings. See "Risk Factors" below. The Investment Adviser's
analysis of such companies will include the industry outlook and competitive
factors, including supplier and customer relationships, strengths and weaknesses
of products, viability of product lines and other considerations in an effort to
determine the company's business prospects. The Investment Adviser will also
consider the depth and capabilities of the management team of an issuer to
assess its ability to lead a company through financial or operating
difficulties. A company's need for additional capital and the potential sources
of such capital will also be considered by the Investment Adviser. The
Investment Adviser will perform credit and financial analyses, emphasizing cash
flow. Generally, the Trust will not be invested in a distressed situation if the
Investment Adviser believes accurate financial and business information is not
available. In most cases capital appreciation is expected to be realized through
the value inherent in the continued operation of the company's business. When
the Trust does invest in a company in financial difficulties, the Investment
Adviser will have estimated the liquidation value of the company to measure the
risk of loss in case the company is unable to continue operations; if the
investment is purchased at or below liquidation value, the ultimate risk of loss
may be reduced. In certain cases, the sale of the company's assets may provide
more value than its continued operation. In the event of a liquidation, the
claims of creditors and bondholders to the assets of the issuer are satisfied
before any payments are made to equity owners.
Corporate Fixed Income Securities. Corporate fixed income securities of issuers
in which the Trust may invest include preferred and preference stock and all
types of long-term or short-term debt obligations, such as bonds, debentures,
notes, equipment lease certificates, equipment trust certificates, conditional
sales contracts and commercial paper (including obligations, such as repurchase
agreements, secured by such instruments). Corporate fixed income securities may
also include zero coupon bonds, deferred interest bonds, bonds on which the
interest is payable in kind ("PIK bonds") and zero coupon notes with puts
("option notes"). Zero coupon and deferred interest bonds and option notes are
debt obligations which are issued at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest payment date at a
rate of interest reflecting the market rate of the security at the time of
issuance. While zero coupon bonds and option notes do not require the periodic
payment of interest, deferred interest bonds provide for a period of delay
before the regular payment of interest begins. Option notes are generally
convertible into the issuer's common stock, at the option of the holder, at any
time prior to or on maturity unless previously redeemed by the issuer or
surrendered to the issuer by the holder for payment in shares of the issuer's
common stock or in cash, at the issuer's option. PIK bonds are debt obligations
which provide that the issuer thereof may, at its option, pay interest on such
bonds in cash or in the form of additional debt obligations. Such investments
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such investments may experience greater volatility
in market value than debt obligations which make regular payments of interest.
The Trust is required to accrue income on such investments for tax and
accounting purposes, which is distributable to shareholders. Because such
investments do not generate cash, it may become necessary for the Trust to sell
other securities in order to maintain its annual distribution rate even though
such sales may not otherwise be
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advantageous to the Trust from an investment or tax perspective. The Trust will
purchase such securities for capital appreciation which may result from
favorable interest rate trends, improved credit quality of the issuer, or both,
consistent with the Trust's investment objective. See "Risk Factors" below.
Corporate fixed income securities may involve equity features, such as
conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer; participations based on revenues, sales or profits;
or the purchase of common stock in a unit transaction (where corporate debt
securities and common stock are offered as a unit).
The Trust may invest in securities rated Baa by Moody's Investors Service, Inc.
("Moody's") or BBB by Standard & Poor's Ratings Group ("S&P") or Fitch Investors
Service, Inc. ("Fitch") and comparable unrated securities. These securities,
while normally exhibiting adequate protection parameters, have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities.
The Trust may also invest in securities rated lower than BBB by S&P or Fitch or
Baa by Moody's and comparable unrated securities (commonly known as "junk
bonds"). These lower rated or unrated securities are considered speculative and
while generally providing greater income than investments in higher rated
securities, usually are high risk securities involving greater volatility of
price (especially during periods of economic uncertainty or change) and risk to
principal and income (including the possibility of default by or bankruptcy of
the issuers of such securities) than securities in the higher rating categories.
However, since yields vary over time, no specific level of income can ever be
assured. See "Risk Factors" below.
It is anticipated that many of the corporate fixed income securities in which
the Trust may invest for the sole purpose of capital appreciation and not for
the purpose of producing income may not be current on payment of interest at the
time of acquisition or may be involved, at acquisition or thereafter, in
reorganization, restructuring or bankruptcy proceedings. Such securities will be
unrated or in the lowest rating categories of recognized rating agencies (that
is ratings of B or lower by Moody's or BB or lower by S&P or Fitch. Securities
rated B or BB or below (or comparable unrated securities) are considered
speculative and may be questionable as to principal and interest payments. In
some cases, such securities may be highly speculative, have poor prospects for
reaching investment grade standing and may be in default. For a description of
the ratings categories, see "Description of Bond Ratings" below. No minimum
rating standard is required for a purchase by the Trust. The Investment Adviser
may seek an active role in reorganization, restructuring or bankruptcy
proceedings of such issuers at the time of its investments or may decide to
assume such a role as a result of subsequent events. Active participation may
involve the identification and organization of existing debt or equity holders
and acting as agent to negotiate on their behalf. The Trust will rely on the
Investment Adviser's judgment, analysis and experience in evaluating the
creditworthiness of an issuer. The Investment Adviser will consider the issuer's
experience and managerial strength, changing financial conditions, borrowing
requirements, responsiveness to changes in business conditions and interest
rates, and regulatory matters in analyzing the risk involved in investments in
such corporate fixed income securities. The Investment Adviser also will
consider relative values among possible investments based on anticipated cash
flow, interest coverage, asset coverage and earnings potential. See "Risk
Factors" below.
The Trust may have difficulty disposing of certain lower-rated securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all lower-rated, fixed
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income securities, there is no established retail secondary market for many of
these securities, and the Trust anticipates that such securities could only be
sold to a limited number of dealers or institutional investors. To the extent a
secondary market for lower- rated, fixed income securities does exist, it is
generally not as liquid as the secondary market for higher-rated securities. The
lack of a liquid secondary market may have an adverse impact on market price and
the Trust's ability to dispose of particular issues when necessary to meet the
Trust's liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities may also make it more difficult for the
Trust to obtain accurate market quotations for purposes of valuing the Trust's
portfolio. Market quotations are generally available on many lower-rated issues
only from a limited number of dealers and may not necessarily represent firm
bids of such dealers or prices for actual sales.
The market value of lower-rated securities tends to reflect individual corporate
developments to a greater extent than higher-rated securities, which react
primarily to fluctuations in the general level of interest rates. Such
lower-rated securities also tend to be more sensitive to economic conditions
than are higher-rated securities. An economic downturn could severely disrupt
the market for lower-rated securities and adversely affect the value of
outstanding securities and the ability of issuers to repay principal and
interest. Factors having an adverse impact on the market value of lower-rated
securities will have an adverse impact on the Trust's net asset value. In
addition, the Trust may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings. Recent adverse publicity regarding lower-rated securities
may have depressed the prices for such securities to some extent. Whether
investor perceptions will continue to have a negative effect on the price of
such securities is uncertain.
Foreign Equity Securities. The Trust may invest up to 10% of its total assets in
securities of foreign issuers which are not traded on U.S. exchanges (excluding
American Depositary Receipts), including securities issued by foreign
governments considered stable by the Investment Adviser, fixed income securities
of foreign corporations, common stocks and equivalents (such as convertible debt
securities and warrants) and preferred stocks of foreign corporations and
foreign currency. The decision to invest in securities issued abroad ("foreign
securities") will depend on the relative yield of such securities, the economies
of the countries in which the investments are made and such countries' financial
markets, the interest rate climate of such countries and the relationship of
such countries' currencies with the U.S. dollar. Investments in foreign
securities and currency will be evaluated on the basis of fundamental economic
criteria (e.g., relative inflation levels and trends, growth rate forecasts,
balance of payments status, and economic policies) as well as technical and
political data. In addition to the foregoing, interest rates are evaluated on
the basis of differentials or anomalies that may exist between issuers in
different countries with similar economies. The Investment Adviser will also
consider the factors described above under "Equity Securities" and "Corporate
Fixed Income Securities" in making decisions to invest in securities issued
abroad.
The Trust may hold foreign currency for hedging purposes to protect against
declines in the U.S. dollar value of foreign securities held by the Trust and
against increases in the U.S. dollar value of the foreign securities which the
Trust might purchase. The Trust may also hold foreign currency in anticipation
of purchasing foreign securities. For the risk considerations involved in
investing in foreign securities, see "Risk Factors" below.
American Depositary Receipts. The Trust may invest in American Depositary
Receipts ("ADRs")
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which are certificates issued by a U.S. depository (usually a bank) and
represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under no
obligation to distribute shareholder communications received from the issuer of
the deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Trust may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depositary receipts in the United
States can reduce costs and delays as well as potential currency exchange and
other difficulties. The Trust may purchase securities in local markets and
direct delivery of these ordinary shares to the local depository of an ADR agent
bank in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Trust's custodian in five days. The Trust may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly the information available to
a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are traded in foreign currency.
Emerging Market Securities. Consistent with the Trust's objective and policies,
the Trust may invest in securities of issuers whose principal activities are
located in emerging market countries and Brady bonds. Emerging market countries
include any country determined by the Investment 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 Investment Adviser determines whether an issuer's principal
activities are located in an emerging market country by considering such factors
as its country of organization, the principal trading market for its securities
and the source of its revenues and assets. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the security
is issued or guaranteed by the government of that country or any of its
agencies, authorities or instrumentalities; (b) the issuer is organized under
the laws of, and maintains a principal office in, that country; (c) the issuer
has its principal securities trading market in that country; (d) the issuer
derives 50% or more of its total revenues from goods sold or services performed
in that country; or (e) the issuer has 50% or more of its assets in that
country. Brady bonds are securities created through the exchange of existing
commercial bank loans to public and private entities in certain emerging markets
for new bonds in connection with debt restructurings under a debt restructuring
plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan").
Brady Plan debt restructurings have been implemented in a number of countries
including 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
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U.S. dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady bonds, which may be fixed-rate bonds or
floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady
bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (the uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady bonds and the history of defaults of countries issuing Brady bonds with
respect to commercial bank loans by public and private entities, investments in
Brady bonds may be viewed as speculative.
The risks of investing in foreign securities may be intensified in the case of
investments in emerging markets. Securities of many issuers in emerging markets
may be less liquid and more volatile than securities of comparable domestic
issuers. Emerging markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of the Trust is uninvested and no
return is earned thereon. The inability of the Trust to make intended security
purchases due to settlement problems could cause the Trust to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result in losses to the Trust due to subsequent
declines in value of the portfolio security, a decrease in the level of
liquidity in the Trust's portfolio, or, if the Trust has entered into a contract
to sell the security, in possible liability to the purchaser. Certain markets
may require payment for securities before delivery, and in such markets the
Trust bears the risk that the securities will not be delivered and that the
Trust's payments will not be returned. Securities prices in emerging markets can
be significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries of emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of securities
and may be unable to respond effectively to increases in trading volume
potentially making prompt liquidation of substantial holdings difficult or
impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sale of securities of foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons a country could impose temporary
restrictions on foreign capital remittances. The Trust could be adversely
effected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Trust of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Trust.
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When the Investment Adviser believes that investing for temporary defensive
purposes is appropriate, such as during periods of unusual market conditions,
part or all of the Trust's assets may be temporarily invested in cash (including
foreign currency) or cash equivalent short-term obligations including, but not
limited to, certificates of deposit, commercial paper, notes, U.S. Government
Securities, foreign government securities and repurchase agreements. Such
obligations will all be at least investment grade.
The investment objective and policies described above may be changed without
shareholder approval.
INVESTMENT PRACTICES
The following investment practices apply to the portfolio investments of the
Trust. These practices may be changed without shareholder approval.
Options. In an effort to increase current income and to reduce fluctuations in
net asset value, the Trust may write covered put and call options and purchase
put and call options on U.S. Government Securities and may engage in such
options transactions with respect to other securities including domestic and
foreign securities indices and with respect to foreign currencies. See "Forward
Contracts and Options on Foreign Currency" below. All such options will be
traded on either United States or foreign securities exchanges or
over-the-counter. This practice may result in the loss of principal under
certain market conditions. For a further discussion of the use, risks and costs
of options trading, see "Options and Futures" below.
Futures Contracts and Options on Futures Contracts. The Trust may enter into
contracts for the purchase or sale for future delivery of fixed income
securities or foreign currencies, or contracts based on financial indices
including any index of U.S. or foreign government securities ("Futures
Contracts") and may purchase and write options to buy or sell Futures Contracts
("Options on Futures Contracts"). Futures Contracts and Options on Futures
Contracts to be written or purchased by the Trust will be traded on U.S. or
foreign exchanges. These investment techniques are designed only to hedge
against anticipated future changes in interest or exchange rates or securities
prices which otherwise might either adversely affect the value of the Trust's
portfolio securities or adversely affect the prices of securities which the
Trust intends to purchase at a later date. Should interest or exchange rates
move in an unexpected manner, the Trust may not achieve the anticipated benefits
of Futures Contracts or Options on Futures Contracts or may realize a loss. For
further discussion of the use, risks and costs of Futures Contracts and Options
on Futures Contracts, see "Options and Futures" below.
The Trustees have adopted the requirement that Futures Contracts and Options on
Futures Contracts only be used as a hedge and not for speculation. In addition
to this requirement, the Board of Trustees has also adopted two other
restrictions on the use of Futures Contracts. The first restriction is that the
Trust will not enter into any Futures Contracts and Options on Futures Contracts
if immediately thereafter the amount of initial margin deposits on all the
Futures Contracts of the Trust and premiums paid on Options on Futures Contracts
would exceed 5% of the market value of the total assets of the Trust. The second
restriction is that the value of the securities and other obligations underlying
all such Futures Contracts held by the Trust not exceed 50% of the value of the
total assets
9
of the Trust. Neither of these restrictions will be changed by the Trust's Board
of Trustees without considering the policies and concerns of the various federal
and state regulatory agencies.
Lending of Portfolio Securities. The Trust may seek to increase its income by
lending portfolio securities to the extent consistent with present regulatory
policies, including those of the Board of Governors of the Federal Reserve
System and the Securities and Exchange Commission (the "SEC"). Such loans will
usually be made only to member banks of the Federal Reserve System and member
firms (and subsidiaries thereof) of the New York Stock Exchange and would be
required to be secured continuously by collateral in cash, U.S. Government
Securities or an irrevocable letter of credit maintained on a current basis at
an amount at least equal to the market value of the securities loaned. The Trust
would have the right to call a loan and obtain the securities loaned at any time
on customary industry settlement notice. For the duration of a loan, the Trust
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive either interest
(through the investment of cash collateral) or a fee (if the collateral is U.S.
Government Securities). The Trust would not, however, have the right to vote any
securities having voting rights during the existence of the loan, but the Trust
would call the loan in anticipation of an important vote to be taken among
holders of the securities or of the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in the collateral
should the borrower of the securities fail financially. However, the loans would
be made only to firms deemed by the Investment Adviser to be of good standing,
and when, in the judgment of the Investment Adviser, the consideration which can
be earned currently from securities loans of this type justified the attendant
risk. If the Investment Adviser determines to make securities loans, it is
intended that the value of the securities loaned would not exceed 30% of the
value of the Trust's total assets.
"When-Issued Securities". Securities may be purchased on a "when-issued" or on a
"forward delivery" basis, which means that the obligations will be delivered at
a future date beyond customary settlement time. The commitment to purchase a
security for which payment will be made on a future date may be deemed a
separate security. Although the Trust is not limited to the amount of securities
for which it may have commitments to purchase on such basis, it is expected that
under normal circumstances, the Trust will not commit more than 30% of its
assets to such purchases. The Trust does not pay for the securities until
received or start earning interest on them until the contractual settlement
date. In order to invest its assets immediately, while awaiting delivery of
securities purchased on such basis, the Trust may invest in short-term
securities that offer same-day settlement and earnings, but that may bear
interest at a lower rate than longer term securities.
The Trust has established procedures consistent with the General Statement of
Policy of the SEC concerning such commitments. However, although the Trust does
not intend to make such purchases for speculative purposes and intends to adhere
to the provisions of the SEC policy, purchases of securities on such basis may
involve more risk than other types of purchases. For example, if the Trust
determines it is necessary to sell the "when-issued" or "forward delivery"
securities before delivery, it may incur a gain or a loss because of market
fluctuations since the time the commitment to purchase such securities was made.
Purchasing securities on a when-issued basis involves a risk that the yields
available in the market when delivery takes place may be higher than yields on
the securities purchased.
Repurchase Agreements. The Trust may enter into repurchase agreements in order
to earn additional income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the
10
Trust acquires securities subject to the seller's agreement to repurchase at a
specified time and price.
The Trust may enter into repurchase agreements with sellers who are member firms
(or a subsidiary thereof) of the New York Stock Exchange, members of the Federal
Reserve System, or recognized primary U.S. Government Securities dealers or
institutions which the Investment Adviser has determined to be of comparable
creditworthiness. The securities that the Trust purchases and holds through its
agent are U.S. Government Securities, the values of which are equal to or
greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Trust, or the purchase and repurchase price may be the same, with
interest at a standard rate due to the Trust together with the repurchase price
on repurchase. In either case, the income to the Trust is unrelated to the
interest rate on U.S. Government Securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Trust will have the right to liquidate the securities. If at the
time the Trust is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Trust's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Trust. The Trust has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Trust
only enters into repurchase agreements after the Investment Adviser has
determined that the seller is creditworthy, and the Investment Adviser monitors
that seller's creditworthiness on an ongoing basis. Moreover, under such
agreements, the value of the securities (which are marked-to-market every
business day) is required to be greater than the repurchase price, and the Trust
has the right to make margin calls at any time if the value of the securities
falls below the agreed upon margin.
Mortgage Pass-Through Securities. The Trust may invest in mortgage pass-through
securities. Mortgage pass-through securities are securities representing
interests in "pools" of mortgage loans. Monthly payments of interest and
principal by the individual borrowers on mortgages are passed through to the
holders of the securities (net of fees paid to the issuer or guarantor of the
securities) as the mortgages in the underlying mortgage pools are paid off. The
average lives of mortgage pass-throughs are variable when issued because their
average lives depend on prepayment rates. The average life of these securities
is likely to be substantially shorter than their stated final maturity as a
result of unscheduled principal prepayment. Prepayments on underlying mortgages
result in a loss of anticipated interest, and all or a part of a premium if any
has been paid, and the actual yield (or total return) to the Trust may be
different than the quoted yield on the securities. Mortgage prepayments
generally increase with falling interest rates and decrease with rising interest
rates. Like other fixed income securities, when interest rates rise the value of
the mortgage pass-through security generally will decline; however, when
interest rates are declining, the value of mortgage pass-through securities with
prepayment features may not increase as much as that of other fixed income
securities. Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a "pass
through" of the monthly payments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through
11
securities (such as securities issued by the GNMA) are described as "modified
pass-through securities." These securities entitle the holder to receive all
interests and principal payments owed on the mortgages in the mortgage pool, net
of certain fees, at the scheduled payment dates regardless of whether the
mortgagor actually makes the payment.
The principal government guarantor of mortgage pass-through securities is GNMA.
GNMA is a wholly owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage pass-through securities. GNMA
securities are often purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the full
faith and credit of the U.S. Government) include FNMA and Federal Home Loan
Mortgage Corporation ("FHLMC"). FNMA is a government-sponsored corporation owned
entirely by private stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. FNMA purchases conventional
residential mortgages (i.e., mortgages not insured or guaranteed by any
governmental agency) from a list of approved sellers/servicers which include
state and federally-chartered savings and loan associations, mutual savings
banks, commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment by FNMA of
principal and interest.
FHLMC was created by Congress in 1970 as a corporate instrumentality of the U.S.
Government for the purpose of increasing the availability of mortgage credit for
residential housing. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured or
guaranteed) from FHLMC's national portfolio. FHLMC guarantees timely payment of
interest and ultimate collection of principal regardless of the status of the
underlying mortgage loans.
Corporate Asset-Backed Securities. The Trust may invest in corporate
asset-backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is the risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore,
12
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support which fall into two
categories: (1) liquidity protection and (2) protection against losses resulting
from ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the receipt of payments on the
underlying pool occurs in a timely fashion. Protection against losses resulting
from ultimate default ensures payment through insurance policies or letters of
credit obtained by the issuer or sponsor from third parties. The Trust will not
pay any additional or separate fees for credit support. The degree of credit
support provided for each issue is generally based on historical information
with respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that anticipated or failure of the credit
support could adversely affect the return on an investment in such a security.
Mortgage "Dollar Roll" Transactions. The Trust may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Trust sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. The
Trust will only enter into covered rolls. A "covered roll" is a specific type of
"dollar roll" for which there is an offsetting cash position or a cash
equivalent security position which matures on or before the forward settlement
date of the "dollar roll" transaction. During the roll period, the Trust forgoes
principal and interest paid on the mortgage-backed securities. The Trust is
compensated for the lost interest by the difference between the current sales
price and the lower price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. The Trust may also be compensated by receipt of a commitment fee.
Forward Contracts and Options on Foreign Currency. The Trust may enter into
forward contracts for the purchase or sale of a specific currency at a future
date at a price set at the time of the contract (a "Forward Contract") and
options on foreign currencies for hedging purposes as well as for non-hedging
purposes. The Trust may also enter into a Forward Contract on one currency in
order to hedge against risk of loss arising from fluctuations in the value of a
second currency (referred to as a "cross hedge") if, in the judgment of the
Investment Adviser, a reasonable degree of correlation can be expected between
movements in the values of the two currencies. By entering into Forward
Contracts and options on foreign currencies for hedging purposes, the Trust may
be required to forego all or a portion of the benefits of advantageous changes
in exchange rates. The Trust may also enter into transactions in Forward
Contracts and options on foreign currencies for other than hedging purposes;
however, where exchange rates do not move in the direction or to the extent
anticipated, the Trust may sustain losses which will reduce its gross income.
The Trust has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Trust satisfies this requirement through the segregation of assets, it will
maintain, in a segregated account, cash, cash equivalents or high grade debt
securities, which will be marked-to-market on a daily basis, in an amount equal
to the value of its commitments under
13
Forward Contracts entered into by the Trust. While Forward Contracts are not
presently regulated by the Commodity Futures Trading Commission ("CFTC"), the
CFTC may in the future assert authority to regulate Forward Contracts. In such
event the Trust's ability to utilize Forward Contracts in the manner set forth
above may be restricted. Forward Contracts and options on foreign currencies may
limit potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for the Trust than if it had not engaged in
such transactions. For further discussion of the use, risks and costs of Forward
Contracts and options on foreign currency, see "Options and Futures" below.
Loans and Other Direct Indebtedness. The Trust may invest a portion of its
assets in loans and other direct indebtedness. By purchasing a loan, the Trust
acquires some or all of the interest of a bank or other lending institution in a
loan to a corporate borrower. Many such loans are secured, and most impose
restrictive covenants which must be met by the borrower. These loans are made
generally to finance internal growth, mergers, acquisitions, stock repurchases,
leveraged by-outs and other corporate activities. Such loans may be in default
at the time of purchase. The Trust may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods and services. These claims may also be purchased at a time
when the company is in default. Certain of the loans acquired by the Trust may
involve revolving credit facilities or other standby financing commitments which
obligate the Trust to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loans and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Trust may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
Certain of the loans acquired by the Trust may involve revolving credit
facilities or other standby financing commitments which obligate the Trust to
pay additional cash on a certain date or on demand. To the extent that the Trust
is committed to advance additional funds, it will at all times hold and maintain
in a segregated account cash or other high grade debt obligations in an amount
sufficient to meet such commitments.
The Trust's ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loan participations and other direct
investments which the Trust will purchase, the Investment Adviser will rely upon
its (and not that of the original lending institution's) own credit analysis of
the borrower. As the Trust may be required to rely upon another lending
institution to collect and pass on to the Trust amounts payable with respect to
the loan and to enforce the Trust's rights under the loan, an insolvency,
bankruptcy or reorganization of the lending institution may delay or prevent the
Trust from receiving such amounts. In such cases, the Trust will evaluate as
well the creditworthiness of the lending institution and will treat both the
borrower and the lending institution as an "issuer" of the loan participation
for purposes of certain investment restrictions pertaining to the
diversification of the Trust's portfolio investments. The highly leveraged
nature of many such loans may make such loans especially vulnerable to adverse
changes in economic or market conditions. Investments in such loans may involve
additional risks to the Trust. For example, if a loan is foreclosed, the Trust
could become part owner of any collateral, and would bear the costs and
liabilities associated with owning and disposing of the collateral. In addition,
it is conceivable that under emerging legal theories of
14
lender liability, the Trust could be held liable as a co-lender. It is unclear
whether loans and other forms of direct indebtedness offer securities law
protections against fraud and misrepresentation. In the absence of definitive
regulatory guidance, the Trust relies on the Investment Adviser's research in an
attempt to avoid situations where fraud or misrepresentation could adversely
affect the Trust. In addition, loan participations and other direct investments
may not be in the form of securities or may be subject to restrictions on
transfer, and only limited opportunities may exist to resell such instruments.
As a result, the Trust may be unable to sell such investments at an opportune
time or may have to resell them at less than fair market value. To the extent
that the Investment Adviser determines that any such investments are illiquid,
the Trust will include them in the investment limitations described below.
Short Sales. If the Trust anticipates that the price of a security will decline,
it may sell the security short and borrow the same type of security from a
broker or other institution to complete the sale. The Trust may make a profit or
loss depending upon whether the market price of the security decreases or
increases between the date of the short sale and the date on which the Trust
must replace the borrowed security. Possible losses from short sales differ from
losses that could be incurred from a purchase of a security, because losses from
short sales may be unlimited, whereas losses from purchases can equal only the
total amount invested.
The Trust may seek to hedge investments or realize additional gains through
short sales. The Trust may make short sales, which are transactions in which the
Trust sells a security it does not own, in anticipation of a decline in the
market value of that security. To complete such a transaction, the Trust must
borrow the security to make delivery to the buyer. The Trust 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 the Trust. Until the security is replaced, the
Trust is required to repay the lender any dividends or interest which accrue
during the period of the loan. To borrow the security, the Trust also may be
required to pay a premium, which would increase the cost of the security sold.
The net proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed out.
The Trust also will incur transaction costs in effecting short sales.
The Trust will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Trust replaces the borrowed security. The Trust will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the premium,
dividends or interest the Trust may be required to pay in connection with a
short sale. Whenever the Trust engages in short sales, its custodian segregates
cash or U.S. Government securities in an amount that, when combined with the
amount of collateral deposited with the broker in connection with the short
sale, equals the current market value of the security sold short. The segregated
assets are marked to market daily.
Collateralized Mortgage Obligations and Multi-Class Pass-Through Securities. The
Trust may invest a portion of its assets in collateralized mortgage obligations
or "CMOs," which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities, which in the case of U.S. Government
Securities are issued or guaranteed by the U.S. Government, its agencies,
authorities or instrumentalities. Typically, CMOs are collateralized by
certificates issued by GNMA, FNMA or FHLMC but also may be collateralized by
whole loans or private mortgage pass-through securities (such collateral
collectively hereinafter referred to as "Mortgage Assets"). The Trust may also
invest a
15
portion of its assets in multi-class pass-through securities which are equity
interests in a Pool composed of Mortgage Assets. Unless the context indicates
otherwise, all references herein to CMOs include multi-class pass-through
securities. Payments of principal of and interest on the Mortgage Assets, and
any reinvestment income thereon, provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multi-class pass-through securities.
CMOs may be issued by agencies or instrumentalities of the United States or a
foreign government or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
The issuer of a series of CMOs may elect to be treated as a Real Estate Mortgage
Investment Conduit (a "REMIC").
In a CMO, a series of bonds or certificates may be issued in multiple classes.
Each class of CMOs, often referred to as a "tranche", is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates resulting in a loss of all or part of the premium if any has been paid.
Interest is paid or accrued on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In a common structure, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of the series of
a CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of CMOs until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. Certain CMOs may be stripped (securities which provide
only the principal or interest factor of the underlying security). See "Stripped
Mortgage-Backed Securities" below for a discussion of the rights of investing in
these stripped securities and of investing in classes consisting primarily of
interest payments or principal payments.
The Trust may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
Stripped Mortgage-Backed Securities. In addition, the Trust may invest a portion
of its assets in stripped mortgage-backed securities ("SMBS"), which are
derivative multi-class mortgage securities issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest only or "IO"
class) while the other class will
16
receive all of the principal (the principal only or "PO" class). The yield to
maturity on an IO is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying Mortgage Assets, and a rapid
rate of principal payments may have a material adverse effect on such security's
yield to maturity. If the underlying Mortgage Assets experience greater than
anticipated prepayments of principal, the Trust may fail to fully recoup its
initial investment in these securities. The market value of the class consisting
primarily or entirely of principal payments may be unusually volatile in
response to changes in interest rates.
Yield Curve Options. The Trust may also enter into options on the "spread", or
differential, between two securities, in a transaction referred to as a "yield
curve" option. In contrast to other types of options, a yield curve option is
based on the difference between the yields of designated securities, rather than
the prices of the individual securities, and is usually settled through cash
payments. Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Trust may purchase or write such options in order
to protect against the adverse effects of a potential widening or narrowing of
the spreads between securities, or other interest rate sensitive instruments,
held in the Trust's portfolio. The Trust may also purchase or write yield curve
options for other than hedging purposes if, in the judgment of the Investment
Adviser, the Trust will be able to profit from movements in the spread between
the yields of the underlying securities. The trading of yield curve options is
subject to all of the risks associated with the trading of other types of
options. In addition, however, such options present risk of loss even if the
yield of one of the underlying securities remains constant, if the spread moves
in a direction or to an extent which was not anticipated. Yield curve options
written by the Trust will be covered. A call (or put) option is covered if the
Trust holds another call (or put) option on the spread between the same two
securities and maintains in a segregated account with its custodian cash or cash
equivalents sufficient to cover the Trust's net liability under the two options.
Yield curve options may also be covered in such other manner as may be in
accordance with the requirements of the counterparty with which the option is
traded and applicable laws and regulations. Yield curve options are traded
over-the-counter and because they have been only recently introduced,
established trading markets for these securities have not yet developed.
OPTIONS, FUTURES AND SWAPS
Options. The Trust may write covered put and call options and purchase put and
call options on securities that are traded on either United States or foreign
securities exchanges or over-the-counter.
Call options written by the Trust give the holder the right to buy the
underlying securities from the Trust at a stated exercise price; put options
written by the Trust give the holder the right to sell the underlying security
to the Trust at a stated exercise price. A call option written by the Trust is
"covered" if the Trust owns the underlying security covered by the call or has
an absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if the Trust 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
17
is (a) equal to or less than the exercise price of the call written or (b)
greater than the exercise price of the call written if the difference is
maintained by the Trust in cash or cash equivalents in a segregated account with
its custodian. A put option written is "covered" if the Trust maintains cash or
cash equivalents with a value equal to the exercise price in a segregated
account with its custodian, or else holds a put on the same security and in the
same principal amount as the put written where the exercise price of the put
held is equal or greater than the exercise price of the put written or is less
than the exercise price of the put written if the difference is maintained by
the Trust in cash or cash equivalents in a segregated account with its
custodian. Put and call options may also be covered in such other manner as may
be in accordance with the requirements of the exchange on which, or the
counterparty with which, the option is traded and applicable rules and
regulations. The premium paid by the purchaser of an option will reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option, since with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation. Whether
or not an option expires unexercised, the writer retains the amount of the
premium. This amount, of course, may, in the case of a covered call option, be
offset of a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option is exercised, the
writer must fulfill the obligation to purchase the underlying security at the
exercise price, which will usually exceed the then-market value of the
underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. However, a
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.
Effecting a closing transaction in the case of a written call will permit the
Trust to write another option on the underlying security with either a different
exercise price or expiration date or both, or in the case of a written put
option will permit the Trust to write another put option to the extent that the
exercise price thereof is secured by deposited cash or short-term securities.
Also, effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Trust investments. If the Trust desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
18
The Trust will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the Trust will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Trust.
An option position may be closed out only where there exists a secondary market
for an option of the same series. If a secondary market does not exist, it might
not be possible to effect closing transactions in particular options with the
result that the Trust would have to exercise the options in order to realize any
profit. If the Trust is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise. Reasons for
the absence of a liquid secondary market include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by a national securities exchange ("Exchange") on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing Corporation ("OCC") may not at all times be adequate to
handle current trading volume; or (vi) one or more Exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the OCC as a result of trades on the Exchange would continue to
be exercisable in accordance with their terms.
The Trust may write options in connection with buy-and-write transactions: that
is, the Trust may purchase a security and then write a call option against that
security. The exercise price of the call the Trust determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the-money call options may be used when it
is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Trust's maximum gain will be the premium
received by it for writing the option, adjusted upwards or downwards by the
difference between the Trust's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Trust's gain will be limited to the premium
19
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Trust may elect to close the position or take
delivery of the security at the exercise price and the Trust's return will be
the premium received from the put options minus the amount by which the market
price of the security is below the exercise price. Out-of-the-money,
at-the-money and in-the-money put options may be used by the Trust in the same
market environments that call options are used in equivalent buy-and-write
transactions.
The Trust may purchase put options to hedge against a decline in the value of
its portfolio. By using put options in this way, the Trust will reduce any
profit it might otherwise have realized in the underlying security by the amount
of the premium paid for the put option and by transaction costs.
The Trust may purchase call options to hedge against an increase in the price of
fixed income securities that the Trust anticipates purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Trust upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Trust.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid.
Therefore, such options and assets, together with other illiquid securities,
cannot exceed 20% of the Trust's assets under its investment restrictions.
Although the Investment Adviser disagrees with the position, the Investment
Adviser intends to limit the Trust's writing of over-the-counter options in
accordance with the following procedure. Except as provided below, the Trust
intends to write over-the-counter options only with primary U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York. Also, the
contracts which the Trust has in place with such primary dealers will provide
that the Trust has the absolute right to repurchase an option it writes at any
time at a price which represents the fair market value, as determined in good
faith through negotiation between the parties, but which in no event will exceed
a price determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
will generally be based on a multiple of the premium received by the Trust for
writing the option, plus the amount, if any, of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also include
a factor to account for the difference between the price of the security and the
strike price of the option if the option is written out-of-the-money. The Trust
will treat all or a portion of the formula price as illiquid for purposes of its
investment restrictions. The Trust may also write over-the-counter options with
non-primary dealers, including foreign dealers, and will treat the assets used
to cover these options as illiquid for purposes of such 20% test.
Futures Contracts. The Trust may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on bonds or on financial indices including any index of U.S. or
foreign government securities ("Futures Contracts"). A "sale" of a Futures
Contract means a contractual obligation to deliver the securities or foreign
currencies called for by the contract at a specified price on a specified date
or, in the case of a Futures Contract on an index, a contractual obligation to
make or receive a cash settlement. A "purchase" of a Futures Contract means a
contractual obligation to acquire the securities or foreign currencies called
for by the contract at a specified price on a specified date or, in the case of
a Futures Contract on an index, a contractual obligation to make or receive a
cash settlement. U.S. Futures Contracts have been designated by exchanges which
have been designated "contracts markets" by the CFTC, and must also be executed
through a futures commission merchant, or brokerage firm, which is a member or
the
20
relevant contract market. Existing contract markets include the Chicago Board of
Trade and International Monetary Market of the Chicago Mercantile Exchange.
Futures Contracts trade on these markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange. The Trust will enter into Futures
Contracts which are based on debt securities that are backed by the full faith
and credit of the U.S. Government, such as long-term U.S. Treasury Bonds,
Treasury Notes, and three-month U.S. Treasury Bills. The Trust may also enter
into Futures Contracts which are based on financial indices, corporate
securities, non-U.S. Governmental bonds and Eurodollar deposits.
At the same time a Futures Contract is purchased or sold, the Trust must
allocate cash or securities as a deposit payment ("initial deposit"). The
initial deposit varies, but may be as low as 5% or less of a contract's face
value. Daily thereafter the Futures Contract is valued and the payment of
"variation margin" may be required, since each day the Trust would provide or
receive cash that reflects any decline or increase in the contract's value.
At the time of delivery of securities pursuant to such a contract, adjustments
are made to recognize differences in value arising from the delivery of
securities with a different interest rate from that specified in the contract.
In some (but not many) cases, securities called for by a Futures Contract may
not have been issued when the contract was written.
A Futures Contract based on an index of securities provides for a payment, in
cash, equal to the amount, if any, by which the value of the index at maturity
is above or below the value of the index at the time the contract was entered
into, times a fixed index "multiplier." The index underlying such a Futures
Contract is generally a broad based index of securities designed to reflect
movements in the relevant market as a whole. The index assigns weighted values
to the securities included in the index, and its composition is changed
periodically. Futures Contracts on Eurodollar deposits also require the making
and acceptance of a cash payment, based on the change in value of the underlying
instrument.
Although Futures Contracts by their terms call for the actual delivery or
acquisition of securities, foreign currencies or, in the case of Futures
Contracts based on an index, the making or acceptance of a cash settlement at a
specified future time, in most cases the contractual obligation if fulfilled
before the date of the contract by buying (or selling, as the case may be) on a
commodities exchange an identical Futures Contract calling for delivery in the
same month, subject to the availability of a liquid secondary market. Such a
transaction cancels the obligation incurred by the Futures Contract. The Trust
will incur brokerage fees when if purchases and sells Futures Contracts.
The purpose of the purchase or sale of a Futures Contract, in the case of a
portfolio such as that of the Trust, which holds or intends to acquire long-term
fixed income securities, is to attempt to protect the Trust from fluctuations in
interest or foreign exchange rates without actually buying or selling long-term
fixed income securities or foreign currency. For example, if the Trust owns
long-term bonds, and interest rates were expected to increase, the Trust might
enter into Futures Contracts for the sale of debt securities. Such a sale would
have much the same effect as selling an equivalent value of the long-term bonds
owned by the Trust. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Futures
Contracts to the Trust would increase at approximately the same rate, thereby
keeping the net asset value of the Trust from declining as much as it otherwise
would have. The Trust could accomplish similar results by selling bonds with
long maturities and investing bonds with short maturities when interest rates
are
21
expected to increase. However, since the futures market is more liquid than the
cash market, the use of futures as an investment technique allows the Trust to
maintain a defensive position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to that of long-term bonds, the Trust could take
advantage of the anticipated rise in the value of long-term bonds, without
actually buying them until the market has stabilized. At that time, the Futures
Contracts could be liquidated and the Trust could then buy long-term bonds on
the cash market. To the extent the Trust enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Trust's obligations with respect to such Futures Contracts will consist of cash,
cash equivalents or high quality debt securities from its portfolio in an amount
equal to the difference between the fluctuating market value of such Futures
Contract and the aggregate value of the initial and variation margin payments
made by the Trust with respect to such Futures Contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Investment Adviser may
still not result in a successful transaction. A Futures Contract entered into by
the Trust may be closed out only where there exists a secondary market for such
contract.
In addition, Futures Contracts entail risks. Although the Trust believes that
the use of such contracts will benefit the Trust, if the Investment Adviser's
investment judgment about the direction of interest rates is incorrect, the
Trust's overall performance would be poorer than if it had not entered into any
such contract. For example, if the Trust had hedged against the possibility of
an increase in interest rates which would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the Trust will lose
part or all of the benefit of the increased value of its bonds which it has
hedged because it will have offsetting losses in its futures position. In
addition, in such situations, if the Trust had insufficient cash, it may have to
sell bonds from its portfolio to meet daily variation margin requirements. Such
sales of bonds may be, but will not necessarily be, at increased prices which
reflect the rising market. The Trust may have to sell securities at a time when
it may be disadvantageous to do so.
Options on Futures Contracts. The Trust intends to purchase and write Options on
Futures Contracts for hedging purposes. The purchase of a call option on a
Futures Contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the price of the Futures Contract upon which it is based or price of the
underlying debt securities, it may or may not be less risky than ownership of
the Futures Contract or underlying
22
debt securities. As with the purchase of Futures Contracts, when the Trust is
not fully invested it may purchase a call option on a Futures Contract to hedge
a market advance due to declining interest rates.
The writing of a call option on a Futures Contract constitutes a partial hedge
against declining prices of the security or foreign currency which is
deliverable upon exercise of the Futures Contract. If the futures price at
expiration of the option is below the exercise price, the Trust will retain the
full amount of the option premium which provides, a partial hedge against any
decline that may have occurred in the Trust's portfolio holdings. The writing of
a put option on a Futures Contract constitutes a partial hedge against
increasing prices of the security or foreign currency which is deliverable upon
exercise of the Futures Contract. If the futures price at expiration of the
option is higher than the exercise price, the Trust will retain the full amount
of the option premium which provides a partial hedge against any increase in the
price of securities which the Trust intends to purchase. If a put or call option
the Trust has written is exercised, the Trust will incur a loss which will be
reduced by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes
in the value of its futures position, the Trust's losses from existing options
on futures may to some extent be reduced or increased by changes in the value of
portfolio securities. The writer of an option on a Futures Contract is subject
to the risks of commodity futures trading, including the requirement of initial
and variation margin payments, and both parties are subject to the additional
risk that movements in price of the option may not correlate with movements in
the price of the underlying security, currency, index or Futures Contracts.
The Trust may cover the writing of call options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of the
call held (i) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the difference is
maintained by the Trust in cash or cash equivalents in a segregated account with
its custodian. The Trust may cover the writing of put options on Futures
Contracts (a) through sales of the underlying Futures Contract, (b) through
segregation of cash or cash equivalents in an amount equal to the value of the
security or index underlying the Futures Contracts, or (c) through the holding
of a put on the same Futures Contract and in the same principal amount as the
put written where the exercise price of the put held is equal to or greater than
the exercise price of the put written or where the exercise price of the put
held is less than the exercise price of the put written if the difference is
maintained by the Trust in cash or cash equivalents in a segregated account with
its custodian. Put and call options on Futures Contracts may also be covered in
such other manner as may be in accordance with the rules of the exchange on
which they are traded and applicable laws and regulations.
The purchase of a put option on a Futures Contract is similar in some respects
to the purchase of protective put options on portfolio securities. For example,
the Trust may purchase a put option on a Futures Contract to hedge the Trust's
portfolio against the risk of rising interest rates.
The amount of risk the Trust assumes when it purchases an option on a Futures
Contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying Futures
Contract will not be fully reflected in the value of the option purchased.
23
The Trust's ability to engage in the options and futures strategies described
above will depend on the availability of liquid markets in such instruments.
Therefore no assurance can be given that the Trust will be able to utilize these
instruments effectively for the purposes set forth above.
Forward Contracts on Foreign Currency. The Trust may enter into forward foreign
currency exchange contracts for the purchase or sale of a specific currency at a
future date at a price set at the time of the contract (a "Forward Contract").
The Trust will enter into Forward Contracts for hedging purposes as well as for
non-hedging purposes. Transactions in Forward Contracts entered into for hedging
purposes will include forward purchases or sales of foreign currencies for the
purpose of protecting the dollar value of securities denominated in a foreign
currency or protecting the dollar equivalent of interest or dividends to be paid
on such securities. By entering into such transactions, however, the Trust may
be required to forego the benefits of advantageous changes in exchange rates.
The Trust may also enter into transactions in Forward Contracts for other than
hedging purposes. For example, if the Investment Adviser believes that the value
of a particular foreign currency will increase or decrease relative to the value
of the U.S. dollar, the Trust may purchase or sell such currency, respectively,
through a Forward Contract. If the expected changes in the value of the currency
occur, the Trust will realize profits which will increase its gross income.
Where exchange rates do not move in the direction or to the extent anticipated,
however, the Trust may sustain losses which will reduce its gross income.
The Trust has established procedures consistent with the General Statement of
Policy of the SEC concurring such commitments. Since that policy currently
recommends that an amount of the Trust's assets equal to the amount of the
commitment be held aside or segregated to be used to pay for the commitment, the
Trust will always have cash or cash equivalents available sufficient to cover
any commitments under these contracts to purchase or sell foreign currencies or
to limit any potential risk. The segregated account will be marked to market on
a daily basis. While these contracts are not presently regulated by the CFTC,
the CFTC may in the future assert authority to regulate Forward Contracts. In
such event the Trust's ability to utilize Forward Contracts in the manner set
forth above may be restricted. Forward Contracts may limit potential gain from a
positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for the Trust than if it had not engaged in such
transactions.
Options on Foreign Currencies. The Trust may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
Forward Contracts will be utilized. For example, a decline in the dollar value
of a foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
such securities, the Trust may purchase put options on the foreign currency. If
the value of the currency does decline, the Trust will have the right to sell
such currency for a fixed amount in dollars and will thereby offset, in whole or
in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Trust may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Trust deriving from purchases of foreign currency options will be
reduced by the amount of the
24
premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction or to the extent anticipated, the Trust could
sustain losses on transactions in foreign currency options which would require
it to forego a portion or all of the benefits of advantageous changes in such
rates.
The Trust may write options on foreign currencies for the same types of hedging
purposes. For example, where the Trust anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates
it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Trust could write
a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Trust to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Trust
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on foreign currencies, the Trust also may be required to forego all or a portion
of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
All call options written on foreign currencies will be covered. A call option
written on foreign currency by the Trust is "covered" if the Trust owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other foreign currency held in its portfolio. A
call option is also covered if the Trust has a call on the same foreign currency
and in the same principal amount as the call written where the exercise price of
the call held is (a) equal to or less than the exercise price of the call
written or (b) greater than the exercise price of the call written if the
difference is maintained by the Trust in cash or cash equivalents in a
segregated account with its custodian. A put option written on foreign currency
by the Trust is covered if the Trust has a put on the same foreign currency and
in the same principal amount as the put written where the exercise price of the
put held is (a) equal to or greater than the exercise price of the put written
or (b) less than the exercise price of the put written if the difference is
maintained by the Trust in cash or cash equivalents in a segregated account with
its custodian. Put and call options on foreign currencies may also be covered in
such other manner as may be in accordance with the requirements of the exchange
on which, or the counterparty with which, the option is traded and applicable
rules and regulations.
Additional Risks of Options on Securities, Futures Contracts, Options on Futures
Contracts, Forward Contracts and Options on Foreign Currencies. Unlike
transactions entered into by the Trust in Futures Contracts, options on foreign
currencies and Forward Contracts are not traded on contract markets regulated by
the CFTC or, with the exception of certain foreign currency options, by the SEC.
To the contrary, such instruments are traded through financial institutions
acting as market-makers, although foreign currency options are also traded on
certain national securities exchanges, such as the Philadelphia Stock Exchange
and the Chicago Board Options Exchanges, subject to SEC regulation. Similarly,
options on securities and on stock indices may be traded over-the-counter. In an
25
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer could lose
amounts substantially in excess of their initial investments, due to the margin
and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the OCC, thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the over-the-counter
market, potentially permitting the Trust to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for the purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC,
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions, on exercise.
In addition, options on securities, Futures Contracts, Options on Futures
Contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) the availability of data on which to make
trading decisions, (iii) delays in the Trust's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) less
trading volume.
In order to assure that the Trust will not be deemed a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that the
Trust enter into transactions in Futures Contracts and Options on Futures
Contracts only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-hedging purposes, provided that the aggregate
initial margin and premiums on such non- hedging positions does not exceed 5% of
the liquidation value of the Trust's assets. In addition, the Trust must comply
with the requirements of various state securities laws in connection with such
transactions.
26
Future Developments. The Trust proposes to take advantage of opportunities in
the area of options, Futures Contracts, Options on Futures Contracts and Forward
Contracts which are not presently contemplated for use by the Trust or which are
not currently available but which may be developed, to the extent such
opportunities are both consistent with the Trust's investment objective and
legally permissible for the Trust. Such opportunities, if they arise, may
involve risks which exceed those in the options and futures activities described
above.
Swaps and Related Transactions. As one way of managing its exposure to different
types of investments, the Trust may enter into interest rate swaps, currency
swaps or structures with embedded swaps and other types of available swap
agreements, such as caps, collars and floors. Swaps involve the exchange by the
Trust with another party of cash payments based upon different interest rate
indexes, currencies, and other prices or rates such as the value of mortgage
prepayment rates. For example, in the typical interest rate swap, the Trust
might exchange a sequence of cash payments based on a floating rate index for
cash payments based on a fixed rate. Payments made by both parties to a swap
transaction are based on a notional principal amount determined by the parties.
The Trust may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements could be used to shift the Trust's investment exposure from one
type of investment to another. For example, if the Trust agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Trust's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of the Trust's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed, or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on the Trust's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in value
if the counterparty's creditworthiness deteriorates. The Trust may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. Swap agreements may be individually negotiated and structured to
include exposure to a variety of different types of investments or market
factors. Depending on their structure, swap agreements may increase or decrease
the Trust's exposure to long or short-term interest rates (in the U.S. or
abroad), foreign currency values, mortgage securities, corporate borrowing
rates, or other factors such as securities prices or inflation rates. Swap
agreements can take many different forms and are known by a variety of names.
The Trust is not limited to any particular form or variety of swap
27
agreements if the Investment Adviser determines it is consistent with the
Trust's investment objective and policies.
The Trust will maintain liquid assets to cover its current obligations under
swap transactions. If the Trust enters into a swap agreement on a net basis
(i.e., the two payment streams are netted out, with the Trust receiving or
paying, as the case may be, only the net amount of the two payments), the Trust
will maintain liquid assets with a daily value at least equal to the excess, if
any, of the Trust's accrued obligations under the swap agreement over the
accrued amount the Trust is entitled to receive under the agreement. If the
Trust enters into a swap agreement on other than a net basis, it will maintain
liquid assets with a value equal to the full amount of the Trust's accrued
obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If the
Investment Adviser is incorrect in its forecasts of such factors, the investment
performance of the Trust would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for payments
by the Trust, the Trust must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness declines, the value of the swap
agreement would be likely to decline, potentially resulting in losses. If the
counterparty defaults, the Trust's risk of loss consists of the net amount of
payments that the Trust is contractually entitled to receive. The Trust
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.
RISK FACTORS
The Trust is designed primarily as a long-term investment and not as a trading
vehicle. The value of shares of the Trust will vary as the aggregate value of
the Trust's portfolio securities increases or decreases. The net asset value of
the Trust may change as the general levels of interest rates fluctuate. When
interest rates decline, the value of fixed income portfolio securities invested
at higher yields can be expected to rise. Conversely, when interest rates rise,
the value of fixed income portfolio securities invested at lower yields can be
expected to decline. Moreover the value of the lower-rated fixed income
securities that the Trust purchases will fluctuate more than the value of
higher-rated fixed income securities. These lower-rated fixed income securities
generally tend to reflect short-term corporate and market developments to a
greater extent than higher-rated securities, which react primarily to
fluctuations in the general level of interest rates. If the Investment Adviser's
expectations of changes in interest rates or its evaluation of the normal yield
relationship between two securities proves to be incorrect, the Trust's income,
net asset value and potential capital gain may be decreased or its potential
capital loss may be increased.
The Trust's target annual distribution rate is calculated based on the Trust's
net asset value, not a fixed share price, and the Trust's dividend amount will
fluctuate with changes in the Trust's net asset value.
The Trust may invest in fixed income securities rated Baa by Moody's or BBB by
S&P or Fitch and comparable unrated securities. These securities, while normally
exhibiting adequate protection parameters, have speculative characteristics and
changes in economic conditions or other
28
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income securities.
The Trust may also invest in corporate fixed income securities rated Ba or lower
by Moody's or BB or lower by S&P or Fitch and comparable unrated securities
(commonly known as "junk bonds"). No minimum rating standard is required by the
Trust. These securities are considered speculative and, while generally
providing greater income than investments in higher rated securities, will
involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories and because yields vary
over time, no specific level of income can ever be assured.
During certain periods, the higher yields on the Trust's lower-rated, high
yielding fixed income securities are paid primarily because of the increased
risk of loss of principal and income, arising from such factors as the
heightened possibility of default or bankruptcy of the issuers of such
securities. Due to the fixed income payments of these securities, the Trust may
continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Trust's yield despite the actual loss of principal.
These lower-rated high yielding fixed income securities generally tend to
reflect economic changes (and the outlook for economic growth), short-term
corporate and industry developments and the market's perception of their credit
quality (especially during times of adverse publicity) to a greater extent than
higher-rated securities which react primarily to fluctuations in the general
level of interest rates although they are also affected by changes in interest
rates. In the past, economic downturns or an increase in interest rates have,
under certain circumstances, caused a higher incidence of default by the issuers
of these securities and may do so in the future, especially in the case of
highly leveraged issuers.
The prices for these securities may be affected by legislative and regulatory
developments. The market for these lower-rated fixed income securities may be
less liquid than the market for investment grade fixed income securities.
Furthermore, the liquidity of these lower-rated securities may be affected by
the market's perception of their credit quality. Therefore, the Investment
Adviser's judgment may at times play a greater role in valuing these securities
than in the case of investment grade fixed income securities, and it also may be
more difficult during times of certain adverse market conditions to sell these
lower-rated securities to respond to changes in the market. While the Investment
Adviser may refer to ratings issued by established credit rating agencies, it is
not the Trust's policy to rely exclusively on ratings issued by these rating
agencies, but rather to supplement such ratings with the Investment Adviser's
own independent and ongoing review of credit quality. To the extent the Trust
invests in these lower-rated securities, the achievement of its investment
objective may be more dependent on the Investment Adviser's own credit analysis
than in the case of a fund investing in higher quality fixed income securities.
These lower-rated securities may also include zero coupon bonds, deferred
interest bonds and PIK bonds which are described above.
29
While Futures Contracts and Options on Futures Contracts will be used solely for
hedging purposes and Options and Forward Contracts will be used in part for
hedging purposes, the trading of such instruments involve certain risks,
including risk of loss arising from adverse price or rate movements, margin
requirements, market illiquidity and the potential default of a broker,
counterparty or clearinghouse.
The Trust may be required to receive delivery of the foreign currencies
underlying options on foreign currencies or Forward Contracts it has entered
into. This could occur, for example, if an option written by the Trust is
exercised or the Trust is unable to close out a Forward Contract it has entered
into. The Trust may also elect to accept delivery of the currencies underlying
options or Forward Contracts if, in the judgment of the Investment Adviser, it
is in the best interest of the Trust to do so. In such instances as well, the
Trust may promptly convert the foreign currencies to U.S. dollars at the then
current exchange rate, or may hold such currencies for an indefinite period of
time.
While the holding of currencies may permit the Trust to take advantage of
favorable movements in the applicable exchange rate, it also exposes the Trust
to risk of loss if such rates move in a direction adverse to the Trust's
position. Such losses could reduce any profits or increase any losses sustained
by the Trust from the sale or redemption of securities, and could reduce the
dollar value of interest or dividend payments received. In addition, the holding
of currencies could adversely affect the Trust's profit or loss on currency
options or Forward Contracts, as well as its hedging strategies. Where the Trust
enters into Forward Contacts as a "cross hedge" (i.e., the purchase or sale of a
Forward Contract on one currency to hedge against the risk of loss arising from
changes in value of a second currency), the Trust incurs the risk of imperfect
correlation between changes in the values of the two currencies, which could
result in losses.
The portion of the Trust's portfolio directed toward capital appreciation will
be aggressively managed with a higher risk of loss than that of more
conservatively managed portfolios. Many of the securities offering the capital
appreciation sought by the Trust will involve a high degree of risk. The Trust
will seek to reduce risk by investing its assets in a number of securities
markets (e.g., U.S. Government, corporate fixed income, equity and foreign) and
issuers, performing credit analyses of potential investments and monitoring
current developments and trends in both the economy and financial markets.
Some of the Trust's assets may be invested in securities whose issuers have
operating losses, substantial capital needs, negative net worths, are insolvent
or are involved in bankruptcy or reorganization proceedings. It is difficult to
value financially distressed issuers and to estimate prospects for their
financial recovery. The issuers may be unable to meet debt service requirements
and the investments may take considerable time to appreciate in value. Some of
the securities acquired by the Trust may not be current on payment of interest
or dividends. In the event that issuers of securities owned by the Trust become
involved in bankruptcy or other insolvency proceedings, additional risks will be
present. Bankruptcy or other insolvency proceedings are highly complex, can be
very costly and may result in unpredictable outcomes. The bankruptcy court has
extensive powers and under certain circumstances may alter contractual
obligations of the bankrupt company.
Since there may be no public market or only inactive trading markets for some of
the securities in which the Trust invests, the Trust may be required to retain
such investments for indefinite periods or to sell them at substantial losses.
Such securities may involve greater risks, often related to
30
creditworthiness, solvency, relative liquidity of the secondary market,
potential market losses, vulnerability to rising interest rates and economic
downturns and market price volatility based upon interest rate sensitivity, all
of which may adversely affect the Trust's net asset value. This may be
particularly true of lower-rated or unrated securities in which the Trust may
invest. See the sub-section "Corporate Fixed Income Securities" of the section
"Investment Objective and Policies" above.
To the extent the Trust holds zero coupon or deferred interest bonds or option
notes in its portfolio or bonds paying interest in the form of additional debt
obligations, the Trust would recognize income currently even though the Trust
received no cash payments of interest and would raise cash to satisfy its
obligation to distribute such income to shareholders from sales of portfolio
securities. See Item 10.4 for a discussion of the tax treatment regarding these
investments.
Although change in the value of the Trust's portfolio securities subsequent to
their acquisition are reflected in the net asset value of shares of the Trust,
such changes will not affect the income received by the Trust from such
securities. The portion of distributions paid by the Trust that are comprised of
income will increase or decrease in relation to the income received by the Trust
from its investments, which will in any case be reduced by the Trust's expenses
before being distributed to the Trust's shareholders. To the extent that the
Trust uses options, Futures Contracts, Options on Futures Contracts, Forward
Contracts and options on foreign currencies, such techniques may result in the
loss of principal under certain market conditions. See "Options and Futures"
above.
The Trust may invest in foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing in
securities of domestic issuers. These include changes in currency rates,
exchange control regulations, governmental administration or economic or
monetary policy (in the United States or abroad) or circumstances in dealings
between nations. Costs may be incurred in connection with conversions between
various currencies. Special considerations may also include more limited
information about foreign issuers, higher brokerage costs, different accounting
standards and thinner trading markets. Foreign securities markets may also be
less liquid, more volatile and less subject to government supervision than in
the United States. Investments in foreign countries could be affected by other
factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. As a result of its investment in foreign
securities, the Trust may receive interest or dividend payments, or the proceeds
of the sale or redemption of such securities, in the foreign currencies in which
the securities are denominated. Under certain circumstances, such as where the
Investment Adviser believes that the applicable exchange rate is unfavorable at
the time the currencies are received or the Investment Adviser anticipates, for
any reason that the exchange rate will improve, the Trust may hold such
currencies for an indefinite period of time. The Trust may also hold foreign
currency in anticipation of purchasing foreign securities. While the holding of
currencies will permit the Trust to take advantage of favorable movements in the
applicable exchange rate, such strategy also exposes the Trust to risk of loss
if exchange rates move in a direction adverse to the Trust's position. Such
losses could reduce any profits or increase any losses sustained by the Trust
from the sale or redemption of securities and could reduce the dollar value of
interest or dividend payments received.
31
The Trust is a closed-end investment company. Shares of a closed-end investment
company frequently trade at a discount to net asset value. Because the Trust is
a closed-end investment company, the shareholders do not have the right to cause
the Trust to repurchase their shares at net asset value.
The Trust's shares also may trade at a premium to their net asset value. When
Trust shares trade at a premium, buyers pay more than the net asset value
underlying Trust shares, and shares purchased at a premium may receive less than
the amount paid for them in the event of the Trust's liquidation. The Trust's
monthly distributions may include a return of capital to shareholders.
Distributions that are treated for federal income tax purposes as a return of
capital will reduce each shareholder's basis in his or her shares and, to the
extent the return of capital exceeds such basis, will be treated as gain to the
shareholder from a sale of shares. Returns of shareholder capital have the
effect of reducing the Trust's assets and increasing the Trust's expense ratio.
If a portion of the Trust's distributions represents returns of capital over
extended periods, this could lead to a reduction in the Trust's assets over time
to levels where the Trust is no longer viable and might be liquidated.
The risks of swaps and related transactions are discussed along with a
description of the investment techniques beginning on page 27.
An investment in shares of the Trust should not constitute a complete investment
program and may not be appropriate for all investors.
INVESTMENT RESTRICTIONS
The Trust has adopted the following restrictions which cannot be changed without
the approval of the holders of a majority of the shares (which means the lesser
of (i) more than 50% of the outstanding shares of the Trust or (ii) 67% or more
of the outstanding shares of the Trust present at a meeting at which holders of
more than 50% of its outstanding shares are represented in person or by proxy).
(1) borrow money except to the extent such borrowing is not prohibited by
the Investment Company Act of 1940, as amended (the "1940 Act") and
exemptive orders granted under such Act;
(2) underwrite securities issued by other persons, except that all or any
portion of the assets of the Trust may be invested in one or more
investment companies, to the extent not prohibited by the 1940 Act and
exemptive orders granted under such Act, and except insofar as the
Trust may technically be deemed an underwriter under the Securities
Act of 1933, as amended, in selling a portfolio security;
(3) issue any senior securities except to the extent not prohibited by the
1940 Act and exemptive orders granted under such Act. For purposes of
this restriction, collateral arrangements with respect to any type of
swap, option, Forward Contracts and Futures Contracts and collateral
arrangements with respect to initial and variation margin are not
deemed to be the issuance of a senior security;
(4) make loans except to the extent not prohibited by the 1940 Act and
exemptive orders granted under such Act; and
32
(5) purchase or sell real estate (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 currencies and any type of option,
Futures Contracts and Forward Contracts) in the ordinary course of its
business. The Trust reserves the freedom of action to hold and to sell
real estate, mineral leases, commodities or commodity contracts
(including currencies and any type of option, Futures Contracts and
Forward Contracts) acquired as a result of the ownership of
securities.
(6) purchase any securities of an issuer in a particular industry if as a
result 25% or more of its total assets (taken at market value at the
time of purchase) would be invested in securities of issuers whose
principal business activities are in the same industry.
In addition, the Trust has adopted the following non-fundamental policies, which
may be changed without shareholder approval. The Trust 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 Trust'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 the
Trust's limitation on investment in illiquid securities. Securities
that are not registered under the Securities Act of 1933, but are
determined to be liquid by the Trust's Board of Trustees (or its
delegee), will not be subject to the 15% limitation.
Except for investment restriction no. 1 and the Trust's non-fundamental policy
on investing in illiquid securities, these investment restrictions 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 the investments exceed the percentage specified in the Trust's
non-fundamental policy on illiquid investments, the Trust will reduce the
percentage of its assets invested in illiquid investments in due course, taking
into account the best interests of shareholders.
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES
Federal Farm Credit System Notes and Bonds-
are bonds issued by a cooperatively owned nationwide system of banks and
associations supervised by the Farm Credit Administration, an independent
agency of the U.S. Government. These bonds are not guaranteed by the U.S.
Government.
Maritime Administration Bonds-
are bonds issued and provided by the Department of Transportation of the
U.S. Government and are guaranteed by the United States.
33
FHA debentures-
are debentures issued by the Federal Housing Administration of the U. S.
Government and are guaranteed by the United States.
GNMA Certificates-
are mortgage-backed securities which represent a partial ownership
interests in a pool of mortgage loans issued by lenders such as mortgage
bankers, commercial banks and savings and loan associations. Each mortgage
loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.
FHLMC Bonds-
are bonds issued and guaranteed by the Federal Home Loan Mortgage
Corporation and are not guaranteed by the U.S. Government.
FNMA Bonds-
are bonds issued and guaranteed by the Federal National Mortgage
Association and are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds-
are notes and bonds issued by the Federal Home Loan Bank System, and are
not guaranteed by the U.S. Government.
Although this list includes a description of the primary types of U.S.
Government agency or instrumentality obligations in which the Trust intends to
invest, the Trust may invest in obligations of U.S. Government agencies or
instrumentalities other than those listed above.
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch 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: Obligations rated Aaa are judged to be of the highest quality with minimal
credit risk.
Aa: Obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.
A: Obligations rated A are considered upper-medium-grade and are subject to low
credit risk.
Baa: Obligations rated Baa are subject to moderate credit risk. They are
considered medium-grade and as such may possess certain speculative
characteristics.
34
Ba: Obligations rated Ba are judged to have speculative elements and are subject
to substantial credit risk.
B: Obligations rated B are considered speculative and are subject to high credit
risk.
Caa: Obligations rated Caa are judged to be of poor standing and are subject to
very high credit risk.
Ca: Obligations rated Ca are highly speculative and are likely in, or very near
default, with some prospect of recovery of principal and interest.
C: Obligations rated C are the lowest rated class of bonds and are typically in
default, with little prospect for recovery of principal or interest.
Note: Moody's applies numerical modifiers "1", "2" and "3" in each generic
rating classification from "Aa" through "Caa." The modifier "1" indicates that
the obligation ranks in the higher end of its generic rating category; the
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates a
ranking in the lower end of that generic rating category.
STANDARD AND POOR'S RATINGS GROUP
Issue credit ratings are based in varying degrees, on the following
considerations: (1) likelihood of payment capacity and willingness of the
obligor to meet its financial commitment on an obligation in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA: An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitments 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 obligations is
extremely strong.
A: An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher-rated
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is still strong.
BBB: An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligator to meet its financial obligations is very
strong.
BB, B, CCC, CC, and C: Obligations rated "BB", "B", "CCC", "CC", and "C" are
regarded as having significant speculative characteristics. `B' indicates the
least degree of speculation and `C' the highest. While such obligations will
likely have some quality and protective characteristics, these
35
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 non-payment than obligations
rated `BB', but the obligor currently has the capacity to meet its financial
commitment on the obligations. 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 vulnerability to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligator to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions is not likely to have the
capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is currently vulnerable to nonpayment.
C: The "C" rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
C: The "C" rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
D: An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if debt
service payments are jeopardized.
Plus (+) or Minus (-): The "AA" and "CCC" ratings may be modified by the
addition of a plus or minus sign to show relative standing within the applicable
rating category.
The `c' subscript is used to provide additional information to investors that
the bank may terminate its obligation to purchase tendered bonds if the
long-term credit rating of the issuer is below an investment-grade level and/or
the issuer's bonds are deemed taxable.
The letter `p' indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project financed by the debt being
rated and indicates that payment of debt service requirements is largely or
entirely dependent upon the successful, timely completion of the project. This
rating, however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the risk of default upon
failure of such completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
36
Asterisk (*): Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
The `r' highlights derivative, hybrid, and certain other obligations that
Standard & Poor's believes may experience high volatility or high variability in
expected returns as a result of noncredit risks. Examples of such obligations
are securities with principal or interest return indexed to equities,
commodities, or currencies; certain swaps and options; and interest-only and
principal-only mortgage securities. The absence of an `r' symbol should not be
taken as an indication that an obligation will exhibit no volatility or
variability in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories (`AAA', `AA', `A', `BBB', commonly known as investment-grade ratings)
generally are regarded as eligible for bank investment. Also, the laws of
various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries in general.
FITCH
Investment Grade
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.
37
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. Entities rated in this category have defaulted on some or
all of the obligations. 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. "DD" indicates
expected recoveries in the range of 50% - 90% and "D" the lowest recovery
potential, i.e. below 50%.
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' long-term rating
category, or to categorize below `CCC'.
NR indicates that Fitch Ratings does not rate the issuer or issue in question.
Withdrawn: A rating is withdrawn when Fitch Ratings deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that there
is a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.
A Rating Outlook indicates the direction a rating is likely to move over a one-
to two-year period. Outlooks may be positive, stable, or negative. A positive or
negative Rating Outlook does not imply a rating change is inevitable. Similarly,
ratings for which outlooks are "stable" could be upgraded or downgraded before
an outlook moves to positive or negative if circumstances warrant such an
action. Occasionally, Fitch may be unable to identify the fundamental trend and
in these cases, the Rating Outlook may be described as "evolving".
8.5. Share Price Data: Inapplicable.
8.6. Business Development Companies: Inapplicable.
38
Item 9. Management:
9.1.a. General - Board of Trustees: Management of the Trust's business and
affairs is the responsibility of the Board of Trustees of the Trust.
9.1.b. General - Investment Adviser: MFS Investment Management ("MFS") is the
Trust's Investment Adviser. MFS and its predecessor organizations have a history
of money management dating from 1924, thus making MFS America's oldest mutual
fund organization. MFS is a majority owned subsidiary of Sun Life of Canada
(U.S.) Financial Services Holdings, Inc., 500 Boylston Street, Boston,
Massachusetts 02116, which is in turn an indirect majority owned subsidiary of
Sun Life Financial, Inc. (a diversified financial services organization) at the
same address. The executive officers of MFS report to the Chairman of Sun Life.
The principal business address of MFS is 500 Boylston Street, Boston,
Massachusetts 02116.
MFS serves as investment adviser to the following open-end Funds comprising the
MFS Family of Funds: Massachusetts Investors Growth Stock Fund; Massachusetts
Investors Trust; MFS Government Limited Maturity Fund; MFS Government Securities
Fund; MFS Growth Opportunities Fund; MFS Series Trust I (which has 8 series: MFS
Cash Reserve Fund, MFS Core Equity Fund, MFS Core Growth Fund, MFS New Discovery
Fund, MFS Research International Fund, MFS Strategic Growth Fund, MFS Technology
Fund and MFS Value Fund); MFS Series Trust II (which has one series: MFS
Emerging Growth Fund); MFS Series Trust III (which has three series: MFS High
Income Fund, MFS High Yield Opportunities Fund and MFS Municipal High Income
Fund); MFS Series Trust IV (which has four series: MFS Government Money Market
Fund, MFS Mid Cap Growth Fund, MFS Money Market Fund and MFS Municipal Bond
Fund); MFS Series Trust V (which has three series: MFS International New
Discovery Fund, MFS Research Fund and MFS Total Return Fund); MFS Series Trust
VI (which has three series: MFS Global Equity Fund, MFS Global Total Return Fund
and MFS Utilities Fund); MFS Series Trust VII (which has one series: MFS Capital
Opportunities Fund); MFS Series Trust VIII (which has two series: MFS Global
Growth Fund and MFS Strategic Income Fund); MFS Series Trust IX (which has seven
series: MFS Bond Fund, MFS Inflation-Adjusted Bond Fund, MFS Intermediate
Investment Grade Bond Fund, MFS Limited Maturity Fund, MFS Municipal Limited
Maturity Fund, MFS Research Bond Fund and MFS Research Bond Fund J); MFS Series
Trust X (which has 12 series: MFS Aggressive Growth Allocation Fund, MFS
Conservative Allocation Fund, MFS Emerging Markets Debt Fund, MFS Emerging
Markets Equity Fund, MFS Floating Rate High Income Fund, MFS Growth Allocation
Fund, MFS International Diversification Fund, MFS International Growth Fund, MFS
International Value Fund, MFS Moderate Allocation Fund, MFS New Endeavor Fund
and MFS Strategic Value Fund); MFS Series Trust XI (which has two series: MFS
Mid Cap Value Fund and MFS Union Standard Equity Fund); MFS Series Trust XII
(which has 5 series: MFS Lifetime Retirement Income Fund, MFS Lifetime 2010
Fund, MFS Lifetime 2020 Fund, MFS Lifetime 2030 Fund and MFS Lifetime 2040 Fund;
and MFS Municipal Series Trust (which has 16 series: MFS Alabama Municipal Bond
Fund, MFS Arkansas Municipal Bond Fund, MFS California Municipal Bond Fund, MFS
Florida Municipal Bond Fund, MFS Georgia Municipal Bond Fund, MFS Maryland
Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS Mississippi
Municipal Bond Fund, MFS Municipal Income 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 and MFS West Virginia Municipal Bond Fund (the
"MFS Funds"). The principal business address of each of the MFS Funds is 500
Boylston Street, Boston, Massachusetts, 02116.
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MFS also serves as investment adviser of the following open-end Funds: MFS
Institutional Trust ("MFSIT") (which has four series) and MFS Variable Insurance
Trust ("MVI") (which has 16 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 Charter Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Multimarket Income Trust, MFS Municipal 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 28 series), Capital Appreciation Variable Account, Global Governments
Variable Account, Government Securities Variable Account, High Yield Variable
Account, Money Market Variable Account and Total Return 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.
MFS and its subsidiaries, provide investment advice to retailed institutional
clients. Net assets under the management of the MFS organization were
approximately $163 billion as of December 31, 2005.
INVESTMENT ADVISORY AGREEMENT
General. The Investment Adviser manages the Trust pursuant to an Investment
Advisory Agreement (the "Advisory Agreement"). Under the Advisory Agreement, the
Investment Adviser provides the Trust with overall investment advisory services.
Subject to such policies as the Trustees may determine, the Investment Adviser
makes investment decisions for the Trust. For these services and facilities, the
Investment Adviser receives an annual investment advisory fee, computed and paid
monthly.
The Investment Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer of the Adviser. The Investment Adviser also furnishes
at its own expense investment advisory and administrative services, including
office space, equipment, clerical personnel, investment advisory facilities, and
all executive and supervisory personnel necessary for managing the Trust's
investments and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are "not affiliated" with
the Investment Adviser and all expenses of the Trust (other than those assumed
by the Investment Adviser) including but not limited to: governmental fees;
interest charges; taxes; membership dues in the Investment Company Institute
allocable to the Trust; fees and expenses of independent auditors, of legal
counsel, and of any transfer agent, registrar or dividend disbursing agent of
the Trust; expenses of repurchasing and redeeming shares and servicing
shareholder accounts; expenses of preparing, printing and mailing stock
certificates, shareholder reports, notices, proxy statements and reports to
governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of the Trust's custodian for all services
to the Trust, including safekeeping of funds and securities and maintaining
required books and accounts; expenses of calculating the net asset value of
shares of the
40
Trust; organizational and start up costs; and such non-recurring or
extraordinary expenses as may arise, including those relating to actions, suits
or proceedings to which the Trust is a party or otherwise may have an exposure,
and the legal obligation which the Trust may have to indemnify the Trust's
Trustees and officers with respect thereto. Expenses relating to the issuance,
registration and qualification of shares of the Trust and the preparation,
printing and mailing of prospectuses for such purposes are borne by the Trust.
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 the affirmative vote of a majority of the
outstanding voting securities of the Trust. The Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by the
affirmative vote of the outstanding voting securities of the Trust, or by either
party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement grants the Trust a non-exclusive and non-transferable
right and sub-license to use the names "Massachusetts Financial Services," "MFS"
or any derivatives or logos associated with those names. If MFS for any reason
no longer serves as investment adviser to the Trust, the Trust will promptly
cease to use these MFS marks. MFS may permit other clients to use these MFS
marks in their names or other material.
The Advisory Agreement also provides that neither the Investment 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 Trust, except for willful misfeasance, bad faith, gross
negligence, or reckless disregard of its or their duties and obligations under
the Advisory Agreement.
The Investment Adviser is free to render investment and/or other services to
others, but the Investment Adviser will at all times endeavor to treat all of
its clients in a fair and equitable manner. Whenever the Trust and one or more
other Trusts or accounts advised by the Investment Adviser have money available
for investment, investments or opportunities to sell investments will be
allocated in a manner believed by the Adviser to be fair and equitable to each
client. The Investment Adviser may cause the Trust to pay a broker or dealer a
higher commission than another broker or dealer might have charged for effecting
that transaction, if the Investment Adviser determines, in good faith, that the
higher commission was reasonable in relation to the value of brokerage and
research services provided by the broker or dealer.
Advisory Fee. For the services provided by MFS under the Advisory Agreement, the
Trust will pay MFS an annual fee computed and paid monthly in an amount equal to
the sum of 0.68% of the average daily net assets of the Trust and 3.40% of the
daily gross income (i.e., income other than gains from the sale of securities,
gains from options and futures transactions, premium income from options written
and gains from foreign exchange transactions) of the Trust for the Trust's
then-current fiscal year.
A discussion regarding the basis for the Board of Trustees' approval of the
Investment Advisory Agreement between the Trust and MFS is available in the
Trust's Annual Report to shareholders for the fiscal year ended October 31,
2005.
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9.1.c. General - Portfolio Management: John Addeo, Scott B. Richards and Kenneth
J. Enright are the portfolio managers of the Trust. Mr. Addeo, a Vice President
of the Adviser, has been employed in the investment management area of the
Adviser since 1998. Mr. Richards, a Vice President of the Adviser, has been
employed in the investment management area of the Adviser since 2004. Mr.
Richards was head of the High Yield Group at Columbia Management Group from 1999
to 2003. Kenneth J. Enright is a Senior Vice President of the Adviser and has
been employed in the investment management area of the Adviser since 1986.
Further information regarding the portfolio managers, including other accounts
managed, compensation, ownership of Trust shares and possible conflicts of
interest, is available in the Trust's Statement of Additional Information. The
portfolio managers are jointly responsible for the day-to-day management of the
Trust.
9.1.d. General - Administrators: Inapplicable.
9.1.e. Custodians: State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 is the custodian and dividend disbursing agent for
the Trust. The Chase Manhattan Bank, 270 Park Avenue, New York, NY 20017 has
been employed as the global custodian as of July 2, 2001. MFS Service Center,
Inc., 500 Boylston Street, Boston, Massachusetts 02116 is the shareholder
servicing agent.
9.1.f. General - Expenses: See Item 9.1.b.
9.1.g. General - Affiliated Brokerage: Inapplicable.
9.2. Non-resident Managers: Inapplicable.
9.3. Control Persons: Inapplicable.
Item 10. Capital Stock, Long-Term Debt, and Other Securities:
10.1. Capital Stock:
a. and f. Description of Shares. The Trust's Declaration of Trust permits the
Trust's Board of Trustees to issue an unlimited number of full and fractional
Shares of Beneficial Interest (without par value). Each Share represents an
equal proportionate interest in the Trust with each other Share. Shares of the
Trust participate equally in the earnings, dividends and distribution of net
assets upon liquidation or dissolution. The Trust has no present intention of
offering additional Shares, except that additional Shares may be issued under
the Plan. Other offerings of its Shares, if made, will require approval of the
Trust's Board of Trustees. Any additional offering will be subject to the
requirements of the 1940 Act that Shares may not be sold at a price below the
then-current net asset value, exclusive of underwriting discounts and
commissions, except among other things, in connection with an offering to
existing shareholders or with the consent of the holders of a majority of the
Trust's outstanding voting securities.
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Each shareholder of the Trust is entitled to one vote for each Share held on
each matter on which the shareholder is entitled to vote. Except when a larger
vote is required by applicable law, a majority of the voting power of the Shares
voted in person or by proxy on a matter will decide that matter and a plurality
of the voting power of the Shares voted in person or by proxy will elect a
Trustee. The Declaration of Trust provides that a Trustee may be removed from
office at a meeting of shareholders by a vote of Shares representing two-thirds
of the voting power of the outstanding Shares of the Trust.
Except in limited circumstances, the Trustees may, without any shareholder vote,
amend or otherwise supplement the Trust's Declaration of Trust.
The Trust may reincorporate or reorganize (but not with another operating
entity) without any shareholder vote. The Trust may be terminated at any time by
a vote of not less than two-thirds of the Shares outstanding and entitled to
vote at any meeting of shareholders, or by the Trustees by written notice to the
shareholders. If not so terminated, the Trust will continue indefinitely.
Under the Declaration of Trust, the Trust may, in the future, convert to a
master/feeder structure or a fund of funds structure without shareholder
approval. In a master/feeder structure, Trust invests all of its investable
assets in another investment company with similar investment objectives and
policies. In a fund of funds structure, a Trust invests all or a portion of its
assets in multiple investment companies.
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 Trust also maintains
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 or she would otherwise be subject by reason of his or her willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office.
The Trust's Declaration of Trust provides that shareholders may not bring suit
on behalf of the Trust without first requesting that the Trustees bring such
suit unless there would be irreparable injury to the Trust or if a majority of
the Trustees have a personal financial interest in the action. Trustees are not
considered to have a personal financial interest by virtue of being compensated
for their services as Trustees or as trustees of Trusts with the same or an
affiliated investment adviser or distributor.
The Trust's Declaration of Trust provides that by becoming a shareholder of the
Trust, each shareholder shall be expressly held to have assented to and agreed
to be bound by the provisions of the Declaration.
43
Anti-Takeover Provisions. The Trust presently has certain anti-takeover
provisions in its Declaration of Trust which could have the effect of limiting
the ability of other entities or persons to acquire control of the Trust, to
cause it to merge with or sell its assets to another operating entity, to
terminate the Trust, or to modify its structure. The Board of Trustees is
divided into three classes, each having a term of three years. Each year the
term of one class expires. This provision could delay for up to two years the
replacement of a majority of the Board of Trustees. In addition, the affirmative
vote or consent of the holders of 66 2/3% of the shares of the Trust (a greater
vote than that required by the 1940 Act and, in some cases, greater than the
required vote applicable to business corporations under state law) is required
to authorize the conversion of the Trust from a closed-end to an open-end
investment company or generally to authorize any of the following transactions:
(i) merger or consolidation of the Trust with or into any other
corporation;
(ii) issuance of any securities of the Trust to any person or entity
for cash;
(iii) sale, lease or exchange of all or any substantial part of the
assets of the Trust to any entity or person (except assets having an
aggregate fair market value of less than $1,000,000 or assets sold in
the ordinary course of business); or
(iv) sale, lease or exchange to the Trust, in exchange for securities
of the Trust, of any assets of any entity or person (except assets
having an aggregate fair market value of less than $1,000,000).
if such corporation, person or entity is directly through affiliates, the
beneficial owner of 5% or more of the outstanding shares of the Trust. However,
such vote or consent will not be required with respect to the foregoing
transactions where the Board of Trustees under certain conditions approves the
transaction. Reference is made to the Declaration of Trust of the Trust, on file
with the SEC, for the full text of these provisions.
The foregoing provisions will make more difficult a change in the Trust's
management, or consummation of the foregoing transactions without the Trustees'
approval, and could have the effect of depriving shareholders of an opportunity
to sell their Shares at a premium over prevailing market prices by discouraging
a third party from seeking to obtain control of the Trust in a tender offer or
similar transaction. However, the Board of Trustees has considered these
anti-takeover provisions and believes that they are in the shareholders' best
interest and benefit shareholders by providing the advantage of potentially
requiring persons seeking control of the Trust to negotiate with its management
regarding the price to be paid and facilitating the continuity of the Trust's
management.
Market or Private Repurchases. Since the Trust is a closed-end management
investment company, its shareholders do not, and will not, have the right to
redeem their shares of the Trust. The Trust, however, may purchase its shares
from time to time in the open market or otherwise as and when it is deemed
advisable by the Trustees. Such repurchases will be made only when the Trust's
shares are trading at a discount of 3% or more from the net asset value of the
shares. Shares repurchased by the Trust will be held in treasury. The Trust may
incur debt to finance share repurchase transactions. Within six months preceding
any such repurchase, the Trust will notify shareholders by letter or report. See
the section "Investment Restrictions" of Item 8.2, 8.3 and 8.4.
44
The shares of the Trust trade in the open market at a price which is a function
of several factors, including their net asset value and yield. The shares of
closed-end investment companies generally sell at market prices varying from
their net asset values. When the Trust repurchases its shares for a price below
their net asset value, the net asset value of those shares that remain
outstanding will be enhanced, but this does not necessarily mean that the market
price of those outstanding shares will be affected, either positively or
negatively. Further, interest on borrowings to finance share repurchase
transactions will reduce the Trust's net income.
b. Inapplicable.
c. The Declaration of Trust permits the Trustees to make certain changes without
a shareholder vote; however no such changes will modify shareholder rights. See
10.1 a and f above.
d. Inapplicable.
e. Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan.
The Trust intends to distribute monthly to shareholders substantially all of its
net investment income (non-capital gain income less expense) and capital gains,
if any, will be distributed at least annually. See Item 10.4. If any monthly
distribution exceeds the net investment income available for distribution, the
excess will be distributed from other Trust assets. The Trust's final
distribution for each calendar year will include any remaining net investment
income and net short-term capital gains deemed, for federal income tax purposes,
undistributed during the year, as well as any net long-term capital gains; the
excess, if any, distributed from other Trust assets, will generally be treated
as a tax-free return of capital (up to the amount of the shareholder's tax basis
in his shares) which would be, in effect, a return of the shareholder's
investment. Such excess, however, will be treated as ordinary dividend income up
to the amount of the Trust's current and accumulated earnings and profits. The
amount treated as a tax-free return of capital will reduce a shareholder's
adjusted basis in his shares, thereby increasing his potential gain or reducing
his potential loss on the sale of his shares. Such distribution policy may,
under certain circumstances, have certain adverse consequences to the Trust and
its shareholders. Shareholders will be sent annual notices reporting the tax
status of such distributions. The notices will indicate whether any portion of
such distributions represent a return of capital. See Item 10.4.
Shareholders holding shares in their own names may elect to have all income
dividend and/or other distributions automatically reinvested by State Street
Bank and Trust Company ("State Street"), as Plan agent, pursuant to the Trust's
Dividend Reinvestment and Cash Purchase Plan (the "Plan"), the provisions of
which are set forth below. Shareholders not making such election will receive
all such amounts in cash paid by check mailed directly to the shareholder by
State Street, as dividend paying agent. Shareholders whose shares are held in
the name of a broker or nominee, if a dividend reinvestment service is provided
by the broker or nominee, may elect to have dividends and/or distributions
automatically reinvested by the broker under the Plan. Shareholders whose shares
are held by a broker or nominee which does not provide a dividend reinvestment
service will be required to have their shares registered in their own names to
participate in the Plan.
45
Under the Plan, if the Trustees of the Trust declare a dividend from net
investment income or other distribution, the non participants in the Plan will
receive such dividend or distribution in cash and participants in the Plan will
receive the equivalent of such dividend and/or distribution in shares of the
Trust. Whenever the market price of the shares on the payment date for the
dividend or distribution is equal to or exceeds their net asset value on that
date, participants will be issued shares of the Trust at the higher of net asset
value or 95% of the market price. This discount reflects savings in underwriting
and other costs which the Trust would otherwise be required to incur to raise
additional capital. If net asset value exceeds the market price of Trust shares
at such time or if the Trust should declare a dividend or other distribution
payable only in cash, State Street will, if possible, as agent for the
participants, buy Trust shares in the open market, on the New York Stock
Exchange or elsewhere, for the participants' accounts. If, before State Street
has completed its purchases, the market price exceeds the net asset value of the
Trust's shares, the average per share purchase price paid by State Street may
exceed the net asset value of the Trust's shares, resulting in the acquisition
of fewer shares than if the dividend or distribution had been paid in shares
issued by the Trust.
Participants in the Plan may withdraw from the Plan upon written notice to State
Street. When a participant withdraws from the Plan or upon termination of the
Plan as provided below, certificates for whole shares credited to his account
under the Plan will be issued and a cash payment will be made for any fraction
of a share credited to such account.
Participants in the Plan have the option of making additional cash payments to
State Street, semi-annually, for investment in the Trust's shares. Such payments
may be made in any amount from $100 to $500. State Street will use all funds
received from participants to purchase Trust shares in the open market
semi-annually. Interest will not be paid on any uninvested cash payments.
State Street maintains all shareholders' accounts in the Plan and furnishes
monthly written confirmations of all transactions in the account, including
information needed by shareholders for personal and tax records. Shares in the
account of each Plan participant will be held by State Street in
non-certificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan. While the Trust
has no plans to issue additional shares other than pursuant to the Plan, if
participants in the Plan desire to exercise any rights which may be issued or
granted with respect to shares, they should request that certificates for whole
shares be issued to them. Each participant nevertheless has the right to receive
certificates for whole shares owned by him.
The Trust will distribute proxy material to nominee and record shareholders in
accordance with SEC rules and regulations.
There is no charge to participants for reinvesting dividends and/or
distributions, except for certain brokerage commissions, as described below.
State Street's fees will be paid by the Trust for the handling of the
reinvestment of dividends and/or distributions and by the participants for the
handling of voluntary cash payments. State Street will charge a service fee of
$0.75 for each cash purchase. There will be no brokerage charges with respect to
shares issued directly by the Trust as a result of dividends and/or
distributions payable either in stock or in cash. However, each participant will
pay a pro rata share of brokerage commissions incurred with respect to State
Street's open market purchases in connection with the reinvestment of dividends
and/or distributions as well as
46
from voluntary cash payments. Brokerage charges for purchasing small amounts of
stock for individual accounts through the Plan are expected to be less than the
usual brokerage charges for such transactions, as State Street will be
purchasing shares for all participants in blocks and prorating the lower
commission thus attainable.
The automatic reinvestment of dividends and/or distributions will not relieve
participants of any income tax which may be payable or required to be withheld
on such dividends and/or distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Trust reserves the right to amend or terminate the Plan as applied to any
voluntary cash payments made and any dividend and/or distribution paid
subsequent to written notice of the change sent to the participants in the Plan
at least 90 days before the record date for such dividend and/or distribution.
The Plan also may be amended or terminated by State Street on at least 90 days'
written notice to participants in the Plan. All correspondence concerning the
Plan should be directed to State Street Bank and Trust Company at P.O. Box 366,
Boston, Massachusetts 02101.
10.2. Long-term debt: Inapplicable.
10.3. General: Inapplicable.
10.4. Taxes: The Trust has elected to be treated and intends to qualify each
year as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code") by meeting all applicable
requirements, including requirements of Subchapter M as to the nature of the
Trust's gross income, the amount of Trust distributions, and the composition of
the Trust's portfolio assets. Because the Trust intends to distribute all of its
net investment income and net realized capital gains to shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Trust will be required to pay any federal income or excise taxes,
although the Trust's foreign-source income may be subject to foreign withholding
taxes. If the Trust should fail to qualify as a regulated investment company in
any year, the Trust would incur a regular corporate federal income tax upon its
taxable income, and distributions received from the Trust (including
distributions of net capital gains) would generally be taxable in the same
manner as regular corporate dividends to shareholders.
Shareholders normally will have to pay federal income taxes and any state or
local taxes on the dividends and capital gain distributions they receive from
the Trust. Dividends from ordinary income and any distributions from net
short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes. A portion of such distributions may be eligible for
the dividends-received deduction for corporate shareholders if the recipient
otherwise qualifies for that deduction with respect to its holding of Trust
shares. Deducted amounts may be subject to the alternative minimum tax and may
result in adjustments in the tax basis of a shareholder's shares. Properly
designated distributions of net capital gains (i.e., the excess of net long-term
capital gains over net short-term capital losses) are taxable to shareholders as
long-term capital gains, for federal income tax purposes, regardless of the
length of time the shareholders have held their shares. For taxable years
beginning before January 1, 2009, "qualified dividend income" received by an
individual will be taxed at the rates applicable to long-term capital gain. In
order for some portion of the dividends received by a Trust shareholder to be
qualified dividend income, the Trust must meet holding period and other
requirements with respect to some portion of the dividend-paying stocks in its
portfolio and the shareholder must meet holding period and other requirements
with respect to
47
the Trust's shares. A dividend will not be treated as qualified dividend income
(at either the Trust or shareholder level) (i) if the dividend is received with
respect to any share of stock held for fewer than 61 days during the 121-day
period beginning on the date which is 60 days before the date on which such
share becomes ex-dividend with respect to such dividend (or, in the case of
certain preferred stock, 91 days during the 181-day period beginning 90 days
before such date), (ii) to the extent that the recipient is under an obligation
(whether pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property, (iii) if the
recipient elects to have the dividend income treated as investment interest, or
(iv) if the dividend is received from a foreign corporation that is (a) not
eligible for the benefits of a comprehensive income tax treaty with the United
States (with the exception of dividends paid on stock of such a foreign
corporation readily tradable on an established securities market in the United
States) or (b) treated as a passive foreign investment company. Distributions
that are treated for federal income tax purposes as a return of capital will
reduce each shareholder's basis in his shares and, to the extent the return of
capital exceeds such basis, will be treated as gain to the shareholder from a
sale of shares. Any dividend that is declared by the Trust in October, November
or December of any calendar year, that is payable to shareholders of record in
such a month, and that is paid the following January, will be treated as if
received by the shareholders on December 31 of the year in which the dividend is
declared. The Trust will notify shareholders regarding the federal tax status of
its distributions after the end of each calendar year.
Distributions will be taxable as described above, whether received in cash or
reinvested in additional shares under the Plan. With respect to distributions
received in cash or reinvested in shares purchased on the open market, the
amount of the distribution for tax purposes is the amount of cash distributed or
allocated to the shareholder. However, with respect to distributions made in
shares issued by the Trust pursuant to the Plan, the amount of the distribution
for tax purposes is the fair market value of the issued shares on the payment
date and a portion of such distribution may be treated as a return of capital.
In the case of shares purchased on the open market, a participating
shareholder's tax basis in each share received is its cost. In the case of
shares issued by the Trust, the shareholder's tax basis in each share received
is its fair market value on the payment date.
Any distribution by the Trust will result in a reduction in the fair market
value of the Trust's shares by the amount of the distribution. Should a
distribution reduce the fair market value below a shareholder's cost basis, the
distribution is nevertheless taxable to the shareholder as ordinary income or
capital gain, as described above, even though, from an investment standpoint, it
may constitute a partial return of capital. Shareholders who purchase shares of
the Trust shortly before a distribution may therefore pay the full price for the
shares and then effectively receive a portion of the purchase price back as a
taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Trust by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as short-term capital gain or loss. However,
any loss realized upon a taxable disposition of shares within six months from
the date of their purchase will be treated as a long-term capital loss to the
extent of any net capital gain distributions paid by the Trust during such
six-month period. Any loss realized upon a taxable disposition of Trust shares
may be disallowed under rules relating to wash sales.
The Trust's current dividend and accounting policies will affect the amount,
timing and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of
48
capital taxable to shareholders. Any investments in zero coupon bonds, deferred
interest bonds, option notes, PIK bonds, SMBS, inflation-indexed securities and
certain securities purchased at a market discount will cause the Trust to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax on the Trust, the
Trust 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 Trust. A direct or indirect investment in residual interests of a CMO
that has elected to be treated as a REMIC can create complex tax problems,
especially if the Trust has state or local governments or other tax-exempt
organizations as shareholders.
The Trust's transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and swaps and related transactions will be subject
to special tax rules that could affect the amount, timing and character of
distributions to shareholders. For example, certain positions held by the Trust
on the last business day of each taxable year will be marked to market (i.e.,
treated as if closed out) on that day, and any gain or loss associated with the
positions will be treated as 60% long-term and 40% short-term capital gain or
loss. Certain positions held by the Trust that substantially diminish its risk
of loss with respect to other positions in its portfolio may constitute
"straddles," which are subject to special tax rules that may cause deferral of
Trust losses, adjustments in the holding periods of Trust securities and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles that could alter the effects of these rules. The Trust will
limit its activities in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Trust. Foreign exchange gains and losses realized by the Trust will generally be
treated as ordinary income and losses. Use of foreign currencies for non-hedging
purposes may be limited in order to avoid a tax on the Trust. The Trust may
elect to market any investments in "passive foreign investment companies" on the
last day of each year. This election may cause the Trust 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 Trust, the Trust 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 Trust.
Investment income received by the Trust from foreign securities may be subject
to foreign income taxes withheld at the source; the Trust does not expect to be
able to pass through to shareholders foreign tax credits with respect to such
foreign taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the Trust to a reduced rate of tax or an exemption
from tax on such income; the Trust intends to qualify for treaty reduced rates
where available. It is not possible, however, to determine the Trust's effective
rate of foreign tax in advance since the amount of the Trust's assets to be
invested within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States ("Non-U.S. Persons") are generally subject to
U.S. tax withholding at the rate of 30%. The Trust intends to withhold U.S.
federal income tax at the rate of 30% on any payments made to Non-U.S. Persons
that are subject to withholding. The Trust may withhold at a lower rate
permitted by an applicable treaty if the shareholder provides the documentation
required by the Trust. Any amounts overwithheld may be recovered by filing a
claim for refund with the U.S. Internal Revenue Service within the time period
applicable to such claims. Distributions received from the Trust by Non-U.S.
49
Persons may also be subject to tax under the laws of their own jurisdiction.
Capital gain dividends are generally not subject to withholding of U.S. federal
income tax. Special tax considerations may apply to distributions derived from
the sale or exchange of certain United States real property interests. Non-U.S.
shareholders are urged to consult their tax advisors to determine the
consequences of investing in the Trust in light of their own particular
circumstances.
Under the American Jobs Creation Act of 2004 (the "2004 Act"), effective for
taxable years of the Trust beginning before January 1, 2008, the Trust will not
be required to withhold any amounts (i) with respect to distributions (other
than distributions to a foreign shareholder that has not provided a satisfactory
statement that the beneficial owner is not a U.S. person, to the extent that the
dividend is attributable to certain interest on an obligation if the foreign
shareholder is the issuer or is a 10% shareholder of the issuer, that is within
certain foreign countries that have inadequate information exchange with the
United States, or to the extent the dividend is attributable to interest paid by
a person that is a related person of the foreign shareholder and the foreign
shareholder is a controlled foreign corporation) from U.S.-source interest
income that would not be subject to U.S. federal income tax if earned directly
by an individual foreign shareholder, to the extent such distributions are
properly designated by the Fund (the "interest-related dividends"), and (ii)
with respect to distributions (other than distributions to an individual foreign
shareholder who is present in the United States for a period or periods
aggregating 183 days or more during the year of the distribution) of net
short-term capital gains in excess of net long-term capital losses, to the
extent such distributions are properly designated by the Trust (the "short-term
capital gain dividends"). The Trust may opt not to designate dividends as
interest-related dividends or short-term capital gain dividends to the full
extent permitted by the Code.
The Trust is also required in certain circumstances to apply backup withholding
at the rate of 28% (the backup withholding tax rate will be 31% for amounts paid
after December 31, 2010) on taxable dividends, redemption proceeds and certain
other payments that are paid to any shareholder (including a shareholder who is
a Non-U.S. Person) who does not furnish to the Trust certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not be applied to payments that have been subject to the 30%
withholding tax on payments to Non-U.S. Persons.
Under present law, the Trust will not be subject to any excise or income taxes
in Massachusetts as long as it qualifies as a regulated investment company under
the Code.
Distributions of the Trust that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Trust intends to advise shareholders of
the proportion of its dividends which consists of such interest. Shareholders
should consult their tax advisers regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes as well as
regarding the tax consequences of an investment in the Trust.
The Trust will send written notices to shareholders regarding the federal income
tax status of all distributions made during each calendar year.
50
10.5. Outstanding Securities: The following information is furnished as of
January 31, 2006:
(1) (2) (3) (4)
Amount
Outstanding
Amount Held by Exclusive
Amount Trust or for Of Amount Shown
Title of Class Authorized its Account Under (3)
-------------- ---------- ----------- ---------
Shares of 7,041,971.930 256,600* 6,785,371.930
Beneficial Interest, shares
without par value
*Treasury Shares
10.6. Securities Ratings: Inapplicable.
Item 11. Defaults and Arrears on Senior Securities: None.
Item 12. Legal Proceedings: On March 31, 2004, MFS settled an administrative
proceeding with the Securities and Exchange Commission ("SEC") regarding
disclosure of brokerage allocation practices in connection with MFS fund sales
(the term "MFS funds" means the open-end registered management investment
companies sponsored by MFS). The brokerage allocation practices which were the
subject of this proceeding were discontinued by MFS in November 2003. In
addition, in February 2004, MFS reached agreement with the SEC, the New York
Attorney General ("NYAG") and the Bureau of Securities Regulation of the State
of New Hampshire to settle administrative proceedings alleging false and
misleading information in certain MFS open-end retail fund prospectuses
regarding market timing and related matters.
Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center, Inc.,
MFS Corporation Retirement Committee, Sun Life Financial Inc., various MFS
funds, certain current and/or former Trustees of these MFS funds, and certain
officers of MFS have been named as defendants in multiple lawsuits filed in
federal and state courts. The lawsuits variously have been commenced as class
actions or individual actions on behalf of investors who purchased, held or
redeemed shares of the MFS funds during specified periods, as ERISA actions by
participants in certain retirement plan accounts on behalf of those accounts, or
as derivative actions on behalf of the MFS funds. The lawsuits relating to
market timing and related matters have been transferred to, and consolidated
before, the United States District Court for the District of Maryland, as part
of a multi-district litigation of market timing and related claims involving
several other fund complexes (In re Mutual Funds Investment Litigation (Alger,
Columbia, Janus, MFS, One Group, Putnam, Allianz Dresdner), No. 1:04-md-15863
(transfer began March 19, 2004)). The market timing cases related to the MFS
complex are Riggs v. MFS et al., Case No. 04-CV-01162-JFM (direct), Hammerslough
v. MFS et al., Case No. 04-MD-01620 (derivative), Anita Walker v. MFS et al.,
Case No. 1:04-CV-01758 (ERISA), and Reaves v. MFS Series Trust I, et al., Case
No. 1:05-CV-02220-JFM (Class B Shares). The plaintiffs in these consolidated
lawsuits generally seek injunctive relief including removal of the named
Trustees, adviser and distributor, rescission of contracts and 12b-1 Plans,
disgorgement of fees and profits, monetary damages, punitive damages, attorney's
fees and costs and other equitable and declaratory relief. Two lawsuits alleging
improper brokerage allocation practices and excessive compensation
51
are pending in the United States District Court for the District of
Massachusetts (Forsythe v. Sun Life Financial Inc., et al., No. 04cv10584 (GAO)
(a consolidated action) and Marcus Dumond, et al. v. Massachusetts Financial
Servs. Co., et al., No. 04cv11458 (GAO)). The plaintiffs in these lawsuits
generally seek compensatory damages, punitive damages, recovery of fees,
rescission of contracts, an accounting, restitution, declaratory relief,
equitable and/or injunctive relief and attorney's fees and costs. The various
lawsuits generally allege that some or all of the defendants (i) permitted or
acquiesced in market timing and/or late trading in some of the MFS funds,
inadequately disclosed MFS' internal policies concerning market timing and such
matters, (ii) received excessive compensation as fiduciaries to the MFS funds,
or (iii) permitted or acquiesced in the improper use of fund assets by MFS to
support the distribution of MFS fund shares and inadequately disclosed MFS' use
of fund assets in this manner. The actions assert that some or all of the
defendants violated the federal securities laws, including the Securities Act of
1933 and the Securities Exchange Act of 1934, the Investment Company Act of 1940
and the Investment Advisers Act of 1940, the Employee Retirement Income Security
Act of 1974, as well as fiduciary duties and other violations of common law.
Insofar as any of the actions is appropriately brought derivatively on behalf of
any of the MFS funds, any recovery will inure to the benefit of the MFS funds.
The defendants filed separate motions to dismiss all claims of the various
lawsuits (except Reaves, which has not been separately briefed). On November 3,
2005, the district judge considering the motions to dismiss the Riggs and
Hammerslough actions issued memoranda indicating that he intends to grant in
part and deny in part defendants' motions in these actions. A formal order
consistent with the court's memoranda is forthcoming. On January 19, 2006, the
district judge considering the Forsythe and Dumond actions denied defendants'
motion to dismiss the Dumond action and granted in part (including dismissing
all claims against the Trustees and Sun Life Financial, Inc.) and denied in part
defendants' motion to dismiss the Forsythe action. Additional lawsuits based on
similar allegations may be filed in the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. It is not clear whether any amounts paid in connection with the
above regulatory settlements will be sufficient to compensate shareholders for
all of the damage they allegedly sustained, whether certain shareholders or
putative class members may have additional claims to compensation, or whether
the damages that may be awarded in any of the actions will exceed these amounts.
In the event the MFS funds incur any losses, costs or expenses in connection
with such lawsuits, the Boards of Trustees of the affected MFS funds may pursue
claims on behalf of such funds against any party that may have liability to the
funds in respect thereof. There can be no assurance that these regulatory
actions and lawsuits, or the adverse publicity associated with these
developments, will not result in increased fund redemptions, reduced sales of
fund shares, or other adverse consequences to the MFS funds.
Item 13. Table of Contents of Statement of Additional Information: Inapplicable.
52
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 14. Cover Page: Inapplicable.
Item 15. Table of Contents: Inapplicable.
Item 16. General Information and History: Inapplicable.
Item 17. Investment Objective and Policies:
17.1, 17.2 and 17.3: None that are not described in the Prospectus.
17.4. For fiscal year 2005, the Trust's portfolio turnover rate was 47%. For
fiscal year 2004, the Trust's portfolio turnover rate was 72%.
A high turnover rate necessarily involves greater expenses to the Trust and
could involve realization of capital gains that would be taxable to the
shareholders. The Trust will engage in portfolio trading if it believes that a
transaction, net of costs (including custodian transaction charges), will help
in achieving its investment objective.
Item 18. Management:
18.1 and 18.2: Trustees, Officers and Advisory Board Members: The Trustees and
officers of the Trust, as of February 1, 2006, are listed below, together with
their principal occupations during the last five years. (Their titles may have
varied during that period.) The address of each Trustee and officer is 500
Boylston Street, Boston, Massachusetts 02116.
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
--------------------------------------- ---------------------------------------------------------------------------------------
Principal Occupations During the
Position(s) Held Trustee/Officer Past Five Years & Other
Name, Date of Birth with Fund Since(1) Directorships(2)
--------------------------------------- ---------------------------------------------------------------------------------------
--------------------------------------- ---------------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------- ---------------------------------------------------------------------------------------
--------------------------------------- ---------------------------------------------------------------------------------------
Robert J. Manning(3) Trustee February 2004 Massachusetts Financial Services
(born 10/20/63) Company, Chief Executive Officer,
President, Chief Investment Officer
and Director
--------------------------------------- ---------------------------------------------------------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
53
--------------------------------------- --------------------- --------------------- --------------------------------------
Name, Date of Birth Position(s) Held Trustee/Officer Principal Occupations During the
Past Five Years & Other
with Fund Since(1) Directorships(2)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
INTERESTED TRUSTEES
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial Services
(born 08/08/46) Company, Chairman (since February 2004);
Secretary of Economic Affairs, TheCommonwealth
of Massachusetts (January 2002 to December
2002); Fidelity Investments, Vice Chairman
(June 2000 to December 2001); Fidelity
Management & Research Company (investment
adviser), President (March 1997 to
July 2001); Bell Canada Enterprises
(telecommunications), Director; Medtronic,
Inc.(medical technology), Director; Telesat
(satellite communications), Director
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
J. Atwood Ives Trustee and Chair February 1992 Private investor; Eastern
(born 05/01/36) of Trustees Enterprises (diversified services
company), Chairman, Trustee and
Chief Executive Officer (until
November 2000)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Robert E. Butler(4) Trustee January 2006 Consultant - regulatory and
(born 11/29/41) compliance matters(4) (since July
2002); PricewaterhouseCoopers LLP
(professional services firm),
Partner (November 2000 until June
2002)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- ---------------------------------------------------------------------------------------
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital, Senior
(born 03/11/37) Cardiac Surgeon, Chief of Cardiac
Surgery (until 2005); Harvard
Medical School, Professor of
Surgery; Brigham and Women's
Hospital Physician's Organization
Chair (2000 to 2004)
--------------------------------------- ---------------------------------------------------------------------------------------
--------------------------------------- ---------------------------------------------------------------------------------------
--------------------------------------- ---------------------------------------------------------------------------------------
--------------------------------------- ---------------------------------------------------------------------------------------
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service provider), Vice
Chairman/Director (since April 2001);
Encinitos Ventures (private investment
company), Principal (1997 to April 2001);
Lincoln Electric Holdings, Inc.(welding
equipment manufacturer), Director
--------------------------------------- ---------------------------------------------------------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- ---------------------------------------------------------------------------------------
William R. Gutow Trustee December 1993 Private investor and real estate
(born 09/27/41) consultant; Capitol Entertainment
Management Company (video
franchise), Vice Chairman
--------------------------------------- ---------------------------------------------------------------------------------------
--------------------------------------- ---------------------------------------------------------------------------------------
--------------------------------------- ---------------------------------------------------------------------------------------
--------------------------------------- ---------------------------------------------------------------------------------------
Michael Hegarty Trustee December 2004 Retired; AXA Financial (financial
(born 12/21/44) services and insurance), Vice
Chairman and Chief Operating Officer
(until May 2001); The Equitable Life
Assurance Society (insurance),
President and Chief Operating
Officer (until May 2001)
--------------------------------------- ---------------------------------------------------------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
54
--------------------------------------- --------------------- --------------------- --------------------------------------
Name, Date of Birth Position(s) Held Trustee/Officer Principal Occupations During the
Past Five Years & Other
with Fund Since(1) Directorships(2)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes (attorneys),
(born 06/23/35) Partner
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc. (acquisition
(born 09/23/38) planning specialists), President;
Wellfleet Investments (investor in
health care companies), Managing General
Partner (since 1993); Cambridge Nutraceuticals
(professional nutritional products), Chief
Executive Officer(until May 2001)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- ---------------------------------------------------------------------------------------
Laurie J. Thomsen Trustee March 2005 Private investor; Prism Venture
(born 08/05/57) Partners (venture capital),
Co-founder and General Partner
(until June 2004); St. Paul
Travelers Companies (commercial
property liability insurance),
Director
--------------------------------------- ---------------------------------------------------------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Robert W. Uek Trustee January 2006 Retired (since 1999);
(born 05/18/41) PricewaterhouseCoopers LLP
(professional services firm), Partner (until
1999); Consultant to investment company
industry (since 2000); TT International
Funds (mutual fund complex), Trustee (since
2000); Hillview Investment Trust II
Funds (mutual fund complex), Trustee
(since 2000)
--------------------------------------- ---------------------------------------------------------------------------------------
OFFICERS
--------------------------------------- ---------------------------------------------------------------------------------------
Maria F. Dwyer(3) President November 2005 Massachusetts Financial Services
(born 12/1/58) Company, Executive Vice President
and Chief Regulatory Officer (since
March 2004); Fidelity Management &
Research Company, Vice President
(prior to March 2004); Fidelity
Group of Funds, President and
Treasurer (prior to March 2004)
--------------------------------------- ---------------------------------------------------------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- ---------------------------------------------------------------------------------------
Tracy Atkinson(3) Treasurer September 2005 Massachusetts Financial Services
(born 12/30/64) Company, Senior Vice President
(since September 2004);
PricewaterhouseCoopers LLP, Partner
(prior to September 2004)
--------------------------------------- ---------------------------------------------------------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Christopher R. Bohane(3) Assistant Secretary July 2005 Massachusetts Financial Services
(born 1/18/74) and Assistant Clerk Company, Vice President and Senior
Counsel (since April 2003); Kirkpatrick
& Lockhart LLP (law firm), Associate
(prior to April 2003); Nvest Services
Company, Assistant Vice President and
Associate Counsel (prior to January 2001)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Ethan D. Corey(3) Assistant Secretary July 2005 Massachusetts Financial Services
(born 11/21/63) and Assistant Clerk Company, Special Counsel (since
December 2004); Dechert LLP (law
firm), Counsel (prior to December
2004)
--------------------------------------- --------------------- --------------------- --------------------------------------
55
--------------------------------------- --------------------- --------------------- --------------------------------------
Name, Date of Birth Position(s) Held Trustee/Officer Principal Occupations During the
Past Five Years & Other
with Fund Since(1) Directorships(2)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
David L. DiLorenzo(3) Assistant Treasurer July 2005 Massachusetts Financial Services
(born 8/10/68) Company, Vice President (since June
2005); JP Morgan Investor Services,
Vice President (January 2001 to June
2005); State Street Bank, Vice
President and Corporate Audit
Manager (prior to January 2001)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Timothy M. Fagan(3) Assistant Secretary September 2005 Massachusetts Financial Services
(born 7/10/68) and Assistant Clerk Company, Vice President and Senior
Counsel (since September 2005); John Hancock
Advisers, LLC, Vice President and
Chief Compliance Officer (September 2004 to
August 2005), Senior Attorney (prior
to September 2004); John Hancock Group of Funds,
Vice President and Chief
Compliance Officer (September 2004 to December
2004)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Mark D. Fischer(3) Assistant Treasurer July 2005 Massachusetts Financial Services
(born 10/27/70) Company, Vice President (since May
2005); JP Morgan Investment
Management Company, Vice President
(prior to May 2005)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Brian T. Hourihan(3) Assistant Secretary September 2004 Massachusetts Financial Services
(born 11/11/64) and Assistant Clerk Company, Vice President, Senior
Counsel and Assistant Secretary
(since June 2004); Affiliated
Managers Group, Inc., Chief Legal
Officer/Centralized Compliance
Program (January to April 2004);
Fidelity Research & Management
Company, Assistant General Counsel
(prior to January 2004)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial Services
(born 11/13/57) Company, Vice President
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Susan S. Newton(3) Assistant Secretary May 2005 Massachusetts Financial Services
(born 3/7/50) and Assistant Clerk Company, Senior Vice President and
Associate General Counsel (since April 2005);
John Hancock Advisers, LLC, Senior
Vice President, Secretary and Chief Legal
Officer (prior to April 2005); John
Hancock Group of Funds, Senior Vice President,
Secretary and Chief Legal Officer
(prior to April 2005)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Susan A. Pereira(3) Assistant Secretary July 2005 Massachusetts Financial Services
(born 11/5/70) and Assistant Clerk Company, Vice President and Senior
Counsel (since June 2004); Bingham McCutchen LLP
(law firm), Associate (January
2001 to June 2004); Preti, Flaherty, Beliveau,
Pachios & Haley, LLC, Associate
(prior to January 2001)
--------------------------------------- --------------------- --------------------- --------------------------------------
56
--------------------------------------- --------------------- --------------------- --------------------------------------
Name, Date of Birth Position(s) Held Trustee/Officer Principal Occupations During the
Past Five Years & Other
with Fund Since(1) Directorships(2)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Mark N. Polebaum(3) Secretary and Clerk January 2006 Massachusetts Financial Services
(born 05/01/52) Company, Executive Vice President,
General Counsel and Secretary (since
January 2006); Wilmer Cutler Pickering Hale
and Dorr LLP (law firm), Partner
(prior to January 2006)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance Officer compliance services), Principal
(since June 2004); CRA Business
Strategies Group (consulting
services), Executive Vice President
(April 2003 to June 2004); David L.
Babson & Co. (investment adviser),
Managing Director, Chief
Administrative Officer and Director
(February 1997 to March 2003)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial Services
(born 06/12/60) Company, Senior Vice President
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each
Trustee has served continuously since appointment unless indicated
otherwise.
(2) Directorships or trusteeships of companies required to report to the
Securities and Exchange Commission (i.e., "public companies").
(3) "Interested person" of the trust within the meaning of the Investment
Company Act of 1940 (referred to as the 1940 Act), which is the principal
federal law governing investment companies like the fund, as a result of
position with MFS. The address of MFS is 500 Boylston Street, Boston,
Massachusetts 02116.
(4) In 2004 and 2005, Mr. Butler provided consulting services to the
independent compliance consultant retained by MFS pursuant to its
settlement with the SEC concerning market timing and related matters. The
terms of that settlement required that compensation and expenses related to
the independent compliance consultant be borne exclusively by MFS and,
therefore, MFS paid Mr. Butler for the services he rendered to the
independent compliance consultant. In 2004 and 2005, MFS paid Mr. Butler a
total of $351,119.29.
The Board of Trustees is divided into three classes, each class having a term of
three years ending with the annual meeting of shareholders (or any adjournment
thereof) held in the year of expiration, or until the election of a successor.
Each year the term of office of one class expires: Messrs. Gunning, Pozen and
Sherratt will continue in office until the 2006 annual meeting, Messrs. Cohn,
Manning and Perera, and Ms. Thomsen will continue in office until the 2007
annual meeting and Messrs. Gutow, Hegarty and Ives will continue in office until
the 2008 annual meeting.
Each of the Trust's Trustees and officers holds comparable positions
with certain other funds of which MFS or a subsidiary is the investment adviser
or distributor, and, in the case of the officers, with certain affiliates of
MFS. Each Trustee serves as a board member of 98 funds within the MFS Family of
Funds.
18.3. Inapplicable.
18.4. Inapplicable.
57
18.5. Committees.
Name of Committee Number of Meetings Functions Members(1)
in Last Fiscal Year
AUDIT COMMITTEE 16 Oversees the accounting and auditing procedures of Butler*, Ives*, Sherratt*,
the Trust and, among other things, considers the Thomsen* and Uek*
selection of the independent accountants for the
Trust and the scope of the audit, and considers the
effect on the independence of those accountants of
any non-audit services such accountants provide to
the Trust and any audit or non-audit services such
accountants provide to other MFS Funds, MFS and/or
certain affiliates. The Committee is also
responsible for establishing procedures for the
receipt, retention and treatment of complaints
received by the Trust regarding accounting, internal
accounting controls, or auditing matters and the
confidential, anonymous submission of concerns
regarding questionable Trust accounting matters by
officers of the Trust and employees of the Trust's
investment adviser, administrator, principal
underwriter or any other provider of accounting
related services to the Trust.
COMPLIANCE AND GOVERNANCE 8 Oversees the development and implementation of the Butler*, Cohn*, Gunning*,
COMMITTEE Trust's regulatory and fiduciary compliance Gutow*, Hegarty*, Ives*
policies, procedures and practices under the 1940 (ex-officio member) and
Act and other applicable laws as well as oversight Sherratt*
of compliance policies of the Trust's investment
adviser and certain other service providers as they
relate to Trust activities. The Trust's Independent
Chief Compliance Officer reports directly to the
Committee and assists the Committee in carrying out
its responsibilities. In addition, the Committee
advises and makes recommendations to the Board on
matters concerning Trustee practices and
recommendations concerning the functions and duties
of the committees of the Board.
58
CONTRACTS REVIEW COMMITTEE 5 Requests, reviews and considers the information All non-interested
deemed reasonably necessary to evaluate the terms of Trustees of the Board
the investment advisory and principal underwriting (Butler, Cohn, Gunning,
agreements and the Plan of Distribution under Rule Gutow, Hegarty, Ives,
12b-1 that the Trust proposes to renew or continue, Perera, Sherratt, Thomsen
and to make its recommendations to the full Board of and Uek)
Trustees on these matters.
SERVICES CONTRACTS COMMITTEE 2^ Reviews and evaluates the contractual arrangements Gunning*, Ives*
of the Trust relating to transfer agency, (ex-officio member),
administrative services, custody, pricing and Sherratt* and Thomsen*
bookkeeping services and lending of portfolio
securities and makes recommendations to the full
Board of Trustees on these matters.
59
NOMINATION AND COMPENSATION COMMITTEE 1 Recommends qualified candidates to the Board in the All non-interested
event that a position is vacated or created. The Trustees of the Board
Committee will consider recommendations by (Butler,Cohn, Gunning,
shareholders when a vacancy exists. Shareholders Gutow, Hegarty, Ives,
wishing to recommend candidates for Trustee for Perera, Sherratt, Thomsen
consideration by the Committee may do so by writing and Uek)
to the Trust's Secretary at the principal executive
office of the Trust. Such recommendations must be
accompanied by biographical and occupational data on
the candidate (including whether the candidate would
be an "interested person" of the Trust), a written
consent of the candidate to be named as a nominee
and to serve as Trustee if elected, record and
ownership information for the recommending
shareholder with respect to the Trust, and a
description of any arrangements or understandings
regarding recommendation of the candidate for
consideration. The Committee is also responsible for
making recommendations to the Board regarding any
necessary standards or qualifications for service on
the Board. The Committee also reviews and makes
recommendations to the Board regarding compensation
for the non-interested Trustees.
PORTFOLIO TRADING AND MARKETING REVIEW 7 Oversees the policies, procedures, and practices of Cohn*, Gunning*, Gutow*,
COMMITTEE the Trusts with respect to brokerage transactions Hegarty*, Ives*
involving portfolio securities as those policies, (ex-officio member) and
procedures, and practices are carried out by Perera*
MFS and its affiliates. The Committee also oversees
the administration of the Trusts' proxy voting
policies and procedures by MFS. In addition, the
Committee receives reports from MFS regarding the
policies, procedures, and practices of MFS and its
affiliates in connection with their marketing and
distribution of shares of the Trust.
60
PRICING COMMITTEE 7 Oversees the determination of the value of the Ives* (ex-officio member),
portfolio securities and other assets held by the Perera*, Thomsen* and
Trust and determines or causes to be determined the Uek*
fair value of securities and assets for which market
quotations are not "readily available" in accordance
with the 1940 Act. The Committee delegates primary
responsibility for carrying out these functions to
MFS and MFS' internal valuation committee pursuant
to pricing policies and procedures approved by the
Committee and adopted by the full Board, which
include methodologies to be followed by MFS to
determine the fair values of portfolio securities
and other assets held by the Trust for which market
quotations are not readily available. The Committee
meets periodically with the members of MFS' internal
valuation committee to review and assess the quality
of fair valuation and other pricing determinations
made pursuant to the Trust's pricing policies and
procedures, and to review and assess the policies
and procedures themselves. The Committee also
exercises the responsibilities of the Board under
the Amortized Cost Valuation Procedures approved by
the Board on behalf of each Trust which holds itself
out as a "money market fund" in accordance with Rule
2a-7 under the 1940 Act.
(1) The Trustees' Identification and Background are set forth in Item 18.1 and
18.2. * Non-interested or independent Trustees.
^ The Board of Trustees established the Services Contracts Committee on
September 27, 2005. For periods prior to September 27, 2005, the functions
of the Services Contracts Committee were performed by the Fund's Audit
Committee.
61
18.6. See Item 18.1.
18.7. The following table shows the dollar range of equity securities
beneficially owned by each Trustee in the Trust and, on an aggregate basis, in
all funds overseen by the Trustee in the MFS Family of Funds, as of December 31,
2005. The following dollar ranges apply:
N. None
A. $1 - $10,000
B. $10,001 - $50,000
C. $50,001 - $100,000
D. Over $100,000
Aggregate Dollar Range of Equity Securities in All
Funds Overseen
Dollar Range of Equity by Trustee in MFS
Name of Trustee Securities in Trust Family of Funds
Interested Trustees
Robert J. Manning N D
Robert C. Pozen N D
Non-Interested Trustees
Robert E. Butler(1) N N
Lawrence H. Cohn, M.D. D D
David H. Gunning N D
William R. Gutow N D
Michael Hegarty N D
J. Atwood Ives N D
Lawrence T. Perera N D
J. Dale Sherratt D D
Laurie J. Thomsen(1) N D
Robert W. Uek(1) N N
------------------
(1) Ms. Thomsen became a Trustee of the Trust on March 23, 2005. Messrs. Butler
and Uek became Trustees of the Trust on January 1, 2006.
18.8. Inapplicable.
18.9. Inapplicable.
18.10. Inapplicable.
18.11. Inapplicable.
18.12. Inapplicable.
62
18.13.A discussion regarding the basis for the Board of Trustees' approval of
the Investment Advisory Agreement between the Trust and MFS is available
in the Trust's Annual Report to shareholders for the fiscal year ended
October 31, 2005.
18.14.The following table lists all Trustees of the Trust and each of the three
highest paid executive officers or any affiliated person of the Trust
with aggregate compensation from the Trust for the most recently
completed fiscal year in excess of $60,000 ("Compensated Persons").
Trustee Fees Retirement Benefits Trustee Fees
From Accrued as Part of From Trust and
Trustee Trust(1) Trust Expense Fund Complex(2)
Interested Trustees
Robert J. Manning* N/A N/A N/A
Robert C. Pozen* N/A N/A N/A
Non-Interested Trustees
Robert E. Butler(3) N/A N/A N/A
Lawrence H. Cohn, M.D.(7) $1,002 $(1,205) $192,518
David H. Gunning(4) $1,008 N/A $204,768
William R. Gutow $1,002 N/A $192,518
Michael Hegarty(4) $ 890 N/A $188,304
J. Atwood Ives $1,066 $275,518
Amy B. Lane(4), (5) $1,018 N/A $215,518
Lawrence T. Perera $ 991 $203,304
William J. Poorvu(5) $ 226 N/A N/A
J. Dale Sherratt $1,019 $(1,094) $221,143
Elaine R. Smith(5) $ 448 $ 47,334
Laurie J. Thomsen((6)) $ 830 N/A $187,787
Robert W. Uek(3) N/A N/A N/A
-------------
* Messrs. Manning and Pozen became Trustees of the Trust on March 23, 2005.
Prior to March 23, 2005, Messrs. Manning and Pozen served as Trustees from
February 2004 to December 2004 and Advisory Trustees December 2004 to March
23, 2005 and did not receive any compensation from the Fund in either
capacity.
(1) For the fiscal year ended October 31, 2005.
(2) Information provided is provided for calendar year 2005. Each Trustee
receiving compensation from the Trust served as Trustees of 98 Funds within
the MFS Fund complex (having aggregate net assets at December 31, 2005 of
approximately $94 billion).
(3) Messrs. Butler and Uek became Trustees of the Trust on January 1, 2006.
(4) Mr. Gunning and Ms. Lane became Trustees of the Trust on January 27, 2004,
and Mr. Hegarty became a Trustee of the Fund on December 16, 2004.
(5) Mr. Poorvu retired as a Trustee of the Trust on December 31, 2004, and Ms.
Smith retired as a Trustee of the Trust on March 23, 2005. Ms. Lane retired
as a Trustee of the Trust on February 22, 2006.
(6) Ms. Thomsen became a Trustee of the Trust on March 23, 2005. From December
16, 2004 to March 22, 2005, Ms. Thomsen was an Advisory Trustee of the
Trust and as such received compensation from the Trust for that period.
This compensation is included in the amount stated in the table for the
period covered by the table, if applicable.
(7) The total amount of deferred compensation accrued by the Trust for Mr. Cohn
is $1,815.
Retirement Benefit Deferral Plan. Under a Retirement Benefit Deferral Plan,
certain Trustees have deferred benefits from a prior retirement plan. The value
of the benefits is periodically readjusted as though an equivalent amount had
been invested in Class A shares of the applicable Fund. The value of the
deferred benefits will be paid to the Trustees upon retirement or thereafter.
The plan does not obligate a Fund to retain the services of any Trustee or pay
any particular level of compensation to any Trustee. The plan is not funded and
a Fund's obligation to pay the Trustee's deferred compensation is a general
unsecured obligation.
63
18.15. Code of Ethics: The Trust and its Adviser have adopted a code of ethics
as required under the 1940 Act. Subject to certain conditions and restrictions,
this code permits personnel subject to the code to invest in securities for
their own accounts, including securities that may be purchased, held or sold by
the Trust. Securities transactions by some of these persons may be subject to
prior approval of the Adviser's Compliance Department. Securities transactions
of certain personnel are subject to quarterly reporting and review requirements.
The code is on public file with, and is available from the SEC. Information
about the Trust (including its prospectus and shareholder reports) can be
reviewed and copied at: Public Reference Room, Securities and Exchange
Commission, Washington, DC 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 Trust 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: publicinfo@sec.gov,
or by writing the Public Reference Section at the above address.
18.16. Proxy Voting Policies:
MASSACHUSETTS FINANCIAL SERVICES COMPANY
PROXY VOTING POLICIES AND PROCEDURES
September 17, 2003, as revised on September 20, 2004,
March 15, 2005 and February 22, 2006
Massachusetts Financial Services Company, MFS Institutional Advisors, Inc. and
MFS' other investment adviser subsidiaries (collectively, "MFS") have adopted
proxy voting policies and procedures, as set forth below ("MFS Proxy Voting
Policies and Procedures"), with respect to securities owned by the clients for
which MFS serves as investment adviser and has the power to vote proxies,
including the registered investment companies sponsored by MFS, other than the
MFS Union Standard Equity Fund (the "MFS Funds"). References to "clients" in
these policies and procedures include the MFS Funds and other clients of MFS,
such as funds organized offshore, sub-advised funds and separate account
clients, to the extent these clients have delegated to MFS the responsibility to
vote proxies on their behalf under the MFS Proxy Voting Policies and Procedures.
The MFS Proxy Voting Policies and Procedures include:
A. Voting Guidelines;
B. Administrative Procedures;
C. Monitoring System;
D. Records Retention; and
E. Reports.
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A. VOTING GUIDELINES
1. General Policy; Potential Conflicts of Interest
MFS' policy is that proxy voting decisions are made in what MFS believes to be
the best long-term economic interests of MFS' clients, and not in the interests
of any other party or in MFS' corporate interests, including interests such as
the distribution of MFS Fund shares, administration of 401(k) plans, and
institutional relationships.
MFS has carefully reviewed matters that in recent years have been presented for
shareholder vote by either management or shareholders of public companies. Based
on the overall principle that all votes cast by MFS on behalf of its clients
must be in what MFS believes to be the best long-term economic interests of such
clients, MFS has adopted proxy voting guidelines, set forth below, that govern
how MFS generally will vote on specific matters presented for shareholder vote.
In all cases, MFS will exercise its discretion in voting on these matters in
accordance with this overall principle. In other words, the underlying
guidelines are simply that - guidelines. Proxy items of significance are often
considered on a case-by-case basis, in light of all relevant facts and
circumstances, and in certain cases MFS may vote proxies in a manner different
from these guidelines.
As a general matter, MFS maintains a consistent voting position on similar proxy
proposals with respect to various issuers. In addition, MFS generally votes
consistently on the same matter when securities of an issuer are held by
multiple client accounts. However, MFS recognizes that there are gradations in
certain types of proposals that might result in different voting positions being
taken with respect to different proxy statements. There also may be situations
involving matters presented for shareholder vote that are not clearly governed
by the guidelines, such as proposed mergers and acquisitions. Some items that
otherwise would be acceptable will be voted against the proponent when it is
seeking extremely broad flexibility without offering a valid explanation. MFS
reserves the right to override the guidelines with respect to a particular
shareholder vote when such an override is, in MFS' best judgment, consistent
with the overall principle of voting proxies in the best long-term economic
interests of MFS' clients.
From time to time, MFS receives comments on these guidelines as well as
regarding particular voting issues from its clients and corporate issuers. These
comments are carefully considered by MFS, when it reviews these guidelines each
year and revises them as appropriate.
These policies and procedures are intended to address any potential material
conflicts of interest on the part of MFS or its affiliates that are likely to
arise in connection with the voting of proxies on behalf of MFS' clients. If
such potential material conflicts of interest do arise, MFS will analyze,
document and report on such potential material conflicts of interest (see
Sections B.2 and E below), and shall ultimately vote the relevant proxies in
what MFS believes to be the best long-term economic interests of its clients.
The MFS Proxy Review Group is responsible for monitoring and reporting with
respect to such potential material conflicts of interest.
65
2. MFS' Policy on Specific Issues
Election of Directors
MFS believes that good governance should be based on a board with a majority of
directors who are "independent" of management, and whose key committees (e.g.,
compensation, nominating, and audit committees) are comprised entirely of
"independent" directors. While MFS generally supports the board's nominees in
uncontested elections, we will withhold our vote for a nominee for a board of a
U.S. issuer if, as a result of such nominee being elected to the board, the
board would be comprised of a majority of members who are not "independent" or,
alternatively, the compensation, nominating or audit committees would include
members who are not "independent." MFS will also withhold its vote for a nominee
to the board if we can determine that he or she failed to attend at least 75% of
the board and/or relevant committee meetings in the previous year without a
valid reason. In addition, MFS will withhold its vote for all nominees standing
for election to a board of a U.S. issuer if we can determine: (1) if, since the
last annual meeting of shareholders and without shareholder approval, the board
or its compensation committee has repriced underwater options; or (2) if, within
the last year, shareholders approved by majority vote a resolution recommending
that the board rescind a "poison pill" and the board has failed to take
responsive action to that resolution. Responsive action would include the
rescission of the "poison pill"(without a broad reservation to reinstate the
"poison pill" in the event of a hostile tender offer), or public assurances that
the terms of the "poison pill" would be put to a binding shareholder vote within
the next five to seven years.
MFS evaluates a contested election of directors on a case-by-case basis
considering the long-term financial performance of the company relative to its
industry, management's track record, the qualifications of the nominees for both
slates and an evaluation of what each side is offering shareholders.
MFS generally votes for reasonably crafted proposals calling for directors to be
elected with an affirmative majority of votes cast and/or the elimination of the
plurality standard for electing directors (including binding resolutions
requesting that the board amend the company's bylaws), provided the proposal
includes a carve-out for a plurality voting standard when there are more
director nominees than board seats (e.g., contested elections) ("Majority Vote
Proposals").
MFS considers voting against Majority Vote Proposals if the company has adopted,
or has proposed to adopt in the proxy statement, formal corporate governance
principles that present a meaningful alternative to the majority voting standard
and provide an adequate response to both new nominees as well as incumbent
nominees who fail to receive a majority of votes cast.
MFS believes that a company's election policy should address the specific
circumstances at that company. MFS considers whether a company's election policy
articulates the following elements to address each director nominee who fails to
receive an affirmative majority of votes cast in an election:
o Establish guidelines for the process by which the company determines
the status of nominees who fail to receive an affirmative majority of
votes cast and disclose the guidelines in the annual proxy statement;
o Guidelines should include a reasonable timetable for resolution
66
of the nominee's status and a requirement that the resolution be
disclosed together with the reasons for the resolution;
o Vest management of the process in the company's independent directors,
other than the nominee in question; and
o Outline the range of remedies that the independent directors may
consider concerning the nominee.
Classified Boards
MFS opposes proposals to classify a board (e.g., a board in which only one-third
of board members are elected each year). MFS supports proposals to declassify a
board.
Non-Salary Compensation Programs
Restricted stock plans should reward results rather than tenure. In some cases,
restricted stock is granted to the recipient at deep discounts to fair market
value, sometimes at par value. The holder cannot sell for a period of years, but
in the meantime the holder is able to vote and receive dividends. Eventually the
restrictions lapse and the stock can be sold by the holder.
MFS votes against stock option programs for officers, employees or non-employee
directors that do not require an investment by the optionee, that give "free
rides" on the stock price, or that permit grants of stock options with an
exercise price below fair market value on the date the options are granted.
MFS opposes stock option programs that allow the board or the compensation
committee, without shareholder approval, to reprice underwater options or to
automatically replenish shares (i.e., evergreen plans). MFS will consider on a
case-by-case basis proposals to exchange existing options for newly issued
options (taking into account such factors as whether there is a reasonable
value-for-value exchange).
MFS opposes stock option and restricted stock plans that provide unduly generous
compensation for officers, directors or employees, or could result in excessive
dilution to other shareholders. As a general guideline, MFS votes against stock
option and restricted stock plans if all such plans for a particular company
involve potential dilution, in the aggregate, of more than 15%. However, MFS may
accept a higher percentage (up to 20%) in the case of startup or small companies
which cannot afford to pay large salaries to executives, or in the case where
MFS, based upon the issuer's public disclosures, believes that the issuer has
been responsible with respect to its recent compensation practices, including
the mix of the issuance of restricted stock and options.
MFS votes in favor of stock option or restricted stock plans for non-employee
directors as long as they satisfy the requirements set forth above with respect
to stock option and restricted stock plans for company executives.
Expensing of Stock Options
While we acknowledge that there is no agreement on a uniform methodology for
expensing stock options, MFS supports shareholder proposals to expense stock
options because we believe that the expensing of options presents a more
accurate picture of the company's financial results to investors. We also
believe that companies are likely to be more disciplined when granting options
if the value of stock options were treated as an expense item on the company's
income statements.
67
Executive Compensation
MFS believes that competitive compensation packages are necessary to attract,
motivate and retain executives. Therefore, MFS opposes shareholder proposals
that seek to set limits on executive compensation. Shareholder proposals seeking
to set limits on executive compensation tend to specify arbitrary compensation
criteria. MFS also opposes shareholder requests for disclosure on executive
compensation beyond regulatory requirements because we believe that current
regulatory requirements for disclosure of executive compensation are appropriate
and that additional disclosure is often unwarranted and costly. Although we
support linking executive stock option grants to a company's stock performance,
MFS opposes shareholder proposals that mandate a link of performance-based
options to a specific industry or peer group index. MFS believes that
compensation committees should retain the flexibility to propose the appropriate
index or other criteria by which performance-based options should be measured.
MFS evaluates other executive compensation restrictions (e.g., terminating the
company's stock option or restricted stock programs, freezing executive pay
during periods of large layoffs, and establishing a maximum ratio between the
highest paid executive and lowest paid employee) based on whether such proposals
are in the best long-term economic interests of our clients.
Employee Stock Purchase Plans
MFS supports the use of a broad-based employee stock purchase plans to increase
company stock ownership by employees, provided that shares purchased under the
plan are acquired for no less than 85% of their market value and do not result
in excessive dilution.
"Golden Parachutes"
From time to time, shareholders of companies have submitted proxy proposals that
would require shareholder approval of severance packages for executive officers
that exceed certain predetermined thresholds. MFS votes in favor of such
shareholder proposals when they would require shareholder approval of any
severance package for an executive officer that exceeds a certain multiple of
such officer's annual compensation that is not determined in MFS' judgment to be
excessive.
Anti-Takeover Measures
In general, MFS votes against any measure that inhibits capital appreciation in
a stock, including proposals that protect management from action by
shareholders. These types of proposals take many forms, ranging from "poison
pills" and "shark repellents" to super-majority requirements.
MFS will vote for proposals to rescind existing "poison pills" and proposals
that would require shareholder approval to adopt prospective "poison pills."
Nevertheless, MFS will consider supporting the adoption of a prospective "poison
pill" or the continuation of an existing "poison pill" if the following two
conditions are met: (1) the "poison pill" allows MFS clients to hold an
aggregate position of up to 15% of a company's total voting securities (and of
any class of voting securities); and (2) either (a) the "poison pill" has a term
of not longer than five years, provided that MFS will consider voting in favor
of the "poison pill" if the term does not exceed seven years and the "poison
pill" is linked to a business strategy or purpose that MFS believes is likely to
result in greater value for
68
shareholders; or (b) the terms of the "poison pill" allow MFS clients the
opportunity to accept a fairly structured and attractively priced tender offer
(e.g., a "chewable poison pill" that automatically dissolves in the event of an
all cash, all shares tender offer at a premium price).
MFS will consider on a case-by-case basis proposals designed to prevent tenders
which are disadvantageous to shareholders such as tenders at below market prices
and tenders for substantially less than all shares of an issuer.
Reincorporation and Reorganization Proposals
When presented with a proposal to reincorporate a company under the laws of a
different state, or to effect some other type of corporate reorganization, MFS
considers the underlying purpose and ultimate effect of such a proposal in
determining whether or not to support such a measure. While MFS generally votes
in favor of management proposals that it believes are in the best long-term
economic interests of its clients, MFS may oppose such a measure if, for
example, the intent or effect would be to create additional inappropriate
impediments to possible acquisitions or takeovers.
Issuance of Stock
There are many legitimate reasons for issuance of stock. Nevertheless, as noted
above under "Non-Salary Compensation Programs", when a stock option plan (either
individually or when aggregated with other plans of the same company) would
substantially dilute the existing equity (e.g., by approximately 15% or more),
MFS generally votes against the plan. In addition, MFS votes against proposals
where management is asking for authorization to issue common or preferred stock
with no reason stated (a "blank check") because the unexplained authorization
could work as a potential anti-takeover device.
Repurchase Programs
MFS supports proposals to institute share repurchase plans in which all
shareholders have the opportunity to participate on an equal basis. Such plans
may include a company acquiring its own shares on the open market, or a company
making a tender offer to its own shareholders.
Confidential Voting
MFS votes in favor of proposals to ensure that shareholder voting results are
kept confidential. For example, MFS supports proposals that would prevent
management from having access to shareholder voting information that is compiled
by an independent proxy tabulation firm.
Cumulative Voting
MFS opposes proposals that seek to introduce cumulative voting and for proposals
that seek to eliminate cumulative voting. In either case, MFS will consider
whether cumulative voting is likely to enhance the interests of MFS' clients as
minority shareholders. In our view, shareholders should provide names of
qualified candidates to a company's nominating committee, which now for the
first time (for U.S. listed companies) must be comprised solely of "independent"
directors.
69
Written Consent and Special Meetings
Because the shareholder right to act by written consent (without calling a
formal meeting of shareholders) can be a powerful tool for shareholders, MFS
generally opposes proposals that would prevent shareholders from taking action
without a formal meeting or would take away a shareholder's right to call a
special meeting of company shareholders.
Independent Auditors
MFS believes that the appointment of auditors is best left to the board of
directors of the company and therefore supports the ratification of the board's
selection of an auditor for the company. Recently, some shareholder groups have
submitted proposals to limit the non-audit activities of a company's audit firm.
Some proposals would prohibit the provision of any non-audit services by a
company's auditors to that company. MFS opposes proposals recommending the
prohibition or limitation of the performance of non-audit services by an
auditor, and proposals recommending the removal of a company's auditor due to
the performance of non-audit work for the company by its auditor. MFS believes
that the board, or its audit committee, should have the discretion to hire the
company's auditor for specific pieces of non-audit work in the limited
situations permitted under current law.
Best Practices Standards
Best practices standards are rapidly developing in the corporate governance
areas as a result of recent corporate scandals, the Sarbanes-Oxley Act of 2002
and revised listing standards on major stock exchanges. MFS generally support
these developments. However, many issuers are not publicly registered, are not
subject to these enhanced listing standards, or are not operating in an
environment that is comparable to that in the United States. In reviewing proxy
proposals under these circumstances, MFS votes for proposals that enhance
standards of corporate governance so long as we believe that - given the
circumstances or the environment within which the issuers operate - the proposal
is consistent with the best long-term economic interests of our clients.
Social Issues
There are many groups advocating social change, and many have chosen the
publicly-held corporation as a vehicle for advancing their agenda. Common among
these are resolutions requiring the corporation to refrain from investing or
conducting business in certain countries, to adhere to some list of goals or
principles (e.g., environmental standards) or to promulgate special reports on
various activities. MFS votes against such proposals unless their
shareholder-oriented benefits will outweigh any costs or disruptions to the
business, including those that use corporate resources to further a particular
social objective outside the business of the company or when no discernible
shareholder economic advantage is evident.
The laws of various states may regulate how the interests of certain clients
subject to those laws (e.g., state pension plans) are voted with respect to
social issues. Thus, it may be necessary to cast ballots differently for certain
clients than MFS might normally do for other clients.
70
Foreign Issuers
MFS will evaluate items on proxies for foreign companies in the context of the
guidelines described above, as well as local market standards and best
practices. Proxies for foreign companies often contain significantly more voting
items than those of U.S. companies. Many of these items on foreign proxies
involve repetitive, non-controversial matters that are mandated by local law.
Accordingly, the items that are generally deemed routine and which do not
require the exercise of judgment under these guidelines (and therefore generally
voted in favor) for foreign issuers include the following: (i) receiving
financial statements or other reports from the board; (ii) approval of
declarations of dividends; (iii) appointment of shareholders to sign board
meeting minutes; (iv) discharge of management and supervisory boards; (v)
approval of share repurchase programs; (vi) election of directors in uncontested
elections and (vii) appointment of auditors.
In accordance with local law or business practices, many foreign companies
prevent the sales of shares that have been voted for a certain period beginning
prior to the shareholder meeting and ending on the day following the meeting
("share blocking"). Depending on the country in which a company is domiciled,
the blocking period may begin a stated number of days prior to the meeting
(e.g., one, three or five days) or on a date established by the company. While
practices vary, in many countries the block period can be continued for a longer
period if the shareholder meeting is adjourned and postponed to a later date.
Similarly, practices vary widely as to the ability of a shareholder to have the
"block" restriction lifted early (e.g., in some countries shares generally can
be "unblocked" up to two days prior to the meeting whereas in other countries
the removal of the block appears to be discretionary with the issuer's transfer
agent). Due to these restrictions, MFS must balance the benefits to its clients
of voting proxies against the potentially serious portfolio management
consequences of a reduced flexibility to sell the underlying shares at the most
advantageous time. For companies in countries with share blocking periods, the
disadvantage of being unable to sell the stock regardless of changing conditions
generally outweighs the advantages of voting at the shareholder meeting for
routine items. Accordingly, MFS generally will not vote those proxies in the
absence of an unusual, significant vote.
B. ADMINISTRATIVE PROCEDURES
1. MFS Proxy Review Group
The administration of these MFS Proxy Voting Policies and Procedures is overseen
by the MFS Proxy Voting Committee, which includes senior personnel from the MFS
Legal and Global Investment Support Departments. The MFS Proxy Voting Committee:
a. Reviews these MFS Proxy Voting Policies and Procedures at least annually and
recommends any amendments considered to be necessary or advisable;
b. Determines whether any potential material conflicts of interest exist with
respect to instances in which (i) MFS seeks to override these MFS Proxy Voting
Policies and Procedures and (ii) votes on ballot items not clearly governed by
these MFS Proxy Voting Policies and Procedures; and
c. Considers special proxy issues as they may arise from time to time.
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2. Potential Conflicts of Interest
The MFS Proxy Voting Committee is responsible for monitoring potential material
conflicts of interest on the part of MFS or its affiliates that could arise in
connection with the voting of proxies on behalf of MFS' clients. Any significant
attempt to influence MFS' voting on a particular proxy matter should be reported
to the MFS Proxy Voting Committee.
In cases where proxies are voted in accordance with these MFS Proxy Voting
Policies and Procedures, no material conflict of interest will be deemed to
exist. In cases where (i) MFS is considering overriding these MFS Proxy Voting
Policies and Procedures, or (ii) matters presented for vote are not clearly
governed by these MFS Proxy Voting Policies and Procedures, the MFS Proxy Voting
Committee, or delegees, will follow these procedures:
a. Compare the name of the issuer of such proxy against a list of significant
current and potential (i) distributors of MFS Fund shares, (ii) retirement plans
administered by MFS, and (iii) MFS institutional clients (the "MFS Significant
Client List");
b. If the name of the issuer does not appear on the MFS Significant Client List,
then no material conflict of interest will be deemed to exist, and the proxy
will be voted as otherwise determined by the MFS Proxy Voting Committee;
c. If the name of the issuer appears on the MFS Significant Client List, then at
least one member of the MFS Proxy Voting Committee will carefully evaluate the
proposed vote in order to ensure that the proxy ultimately is voted in what MFS
believes to be the best long-term economic interests of MFS' clients, and not in
MFS' corporate interests; and
d. For all potential material conflicts of interest identified under clause (c)
above, the MFS Proxy Voting Committee will document: the name of the issuer, the
issuer's relationship to MFS, the analysis of the matters submitted for proxy
vote, and the basis for the determination that the votes ultimately were cast in
what MFS believes to be the best long-term economic interests of MFS' clients,
and not in MFS' corporate interests. A copy of the foregoing documentation will
be provided to the MFS' Conflicts Officer.
The members of the MFS Proxy Voting Committee are responsible for creating and
maintaining the MFS Significant Client List, in consultation with MFS'
distribution, retirement plan administration and institutional business units.
The MFS Significant Client List will be reviewed and updated periodically, as
appropriate.
3. Gathering Proxies
Most proxies received by MFS and its clients originate at Automatic Data
Processing Corp. ("ADP") although a few proxies are transmitted to investors by
corporate issuers through their custodians or depositories. ADP and issuers send
proxies and related material directly to the record holders of the shares
beneficially owned by MFS' clients, usually to the client's custodian or, less
commonly, to the client itself. This material will include proxy cards,
reflecting the proper shareholdings of Funds and of clients on the record dates
for such shareholder meetings, as well as proxy statements with the issuer's
explanation of the items to be voted upon.
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MFS, on behalf of itself and the Funds, has entered into an agreement with an
independent proxy administration firm, Institutional Shareholder Services, Inc.
(the "Proxy Administrator"), pursuant to which the Proxy Administrator performs
various proxy vote related services, such as vote processing and recordkeeping
functions for MFS' Funds and institutional client accounts. The Proxy
Administrator receives proxy statements and proxy cards directly or indirectly
from various custodians, logs these materials into its database and matches
upcoming meetings with MFS Fund and client portfolio holdings, which are input
into the Proxy Administrator's system by an MFS holdings datafeed. Through the
use of the Proxy Administrator system, ballots and proxy material summaries for
the upcoming shareholders' meetings of over 10,000 corporations are available
on-line to certain MFS employees and the MFS Proxy Voting Committee.
4. Analyzing Proxies
Proxies are voted in accordance with these MFS Proxy Voting Policies and
Procedures. The Proxy Administrator at the prior direction of MFS automatically
votes all proxy matters that do not require the particular exercise of
discretion or judgment with respect to these MFS Proxy Voting Policies and
Procedures as determined by the MFS Proxy Voting Committee. With respect to
proxy matters that require the particular exercise of discretion or judgment,
MFS considers and votes on those proxy matters. Representatives of the MFS Proxy
Voting Committee review, as appropriate, votes cast to ensure conformity with
these MFS Proxy Voting Policies and Procedures.
As a general matter, portfolio managers and investment analysts have little or
no involvement in specific votes taken by MFS. This is designed to promote
consistency in the application of MFS' voting guidelines, to promote consistency
in voting on the same or similar issues (for the same or for multiple issuers)
across all client accounts, and to minimize the potential that proxy solicitors,
issuers, or third parties might attempt to exert inappropriate influence on the
vote. In limited types of votes (e.g., corporate actions, such as mergers and
acquisitions), a representative of MFS Proxy Voting Committee may consult with
or seek recommendations from portfolio managers or analysts.(1) However, the MFS
Proxy Voting Committee would ultimately determine the manner in which all
proxies are voted.
As noted above, MFS reserves the right to override the guidelines when such an
override is, in MFS' best judgment, consistent with the overall principle of
voting proxies in the best long-term economic interests of MFS' clients. Any
such override of the guidelines shall be analyzed, documented and reported in
accordance with the procedures set forth in these policies.
5. Voting Proxies
In accordance with its contract with MFS, the Proxy Administrator also generates
a variety of reports for the MFS Proxy Voting Committee, and makes available
on-line various other types of information so that the MFS Proxy Voting
Committee may review and monitor the votes cast by the Proxy Administrator on
behalf of MFS' clients.
------------------------
(1) From time to time, due to travel schedules and other commitments, an
appropriate portfolio manager or research analyst is not available to
provide a recommendation on a merger or acquisition proposal. If such a
recommendation cannot be obtained within a few business days prior to the
shareholder meeting, the MFS Proxy Review Group may determine to vote the
proxy in what it believes to be the best long-term economic interests of
MFS' clients.
73
C. MONITORING SYSTEM
It is the responsibility of the Proxy Administrator and MFS' Proxy Voting
Committee to monitor the proxy voting process. When proxy materials for clients
are received, they are forwarded to the Proxy Administrator and are input into
the Proxy Administrator's system. Through an interface with the portfolio
holdings database of MFS, the Proxy Administrator matches a list of all MFS
Funds and clients who hold shares of a company's stock and the number of shares
held on the record date with the Proxy Administrator's listing of any upcoming
shareholder's meeting of that company.
When the Proxy Administrator's system "tickler" shows that the voting cut-off
date of a shareholders' meeting is approaching, a Proxy Administrator
representative checks that the vote for MFS Funds and clients holding that
security has been recorded in the computer system. If a proxy card has not been
received from the client's custodian, the Proxy Administrator calls the
custodian requesting that the materials be forwarded immediately. If it is not
possible to receive the proxy card from the custodian in time to be voted at the
meeting, MFS may instruct the custodian to cast the vote in the manner specified
and to mail the proxy directly to the issuer.
D. RECORDS RETENTION
MFS will retain copies of these MFS Proxy Voting Policies and Procedures in
effect from time to time and will retain all proxy voting reports submitted to
the Board of Trustees, Board of Directors and Board of Managers of the MFS Funds
for the period required by applicable law. Proxy solicitation materials,
including electronic versions of the proxy cards completed by representatives of
the MFS Proxy Voting Committee, together with their respective notes and
comments, are maintained in an electronic format by the Proxy Administrator and
are accessible on-line by the MFS Proxy Voting Committee. All proxy voting
materials and supporting documentation, including records generated by the Proxy
Administrator's system as to proxies processed, including the dates when proxy
ballots were received and submitted, and the votes on each company's proxy
issues, are retained as required by applicable law.
E. REPORTS
MFS Funds
MFS will report the results of its voting to the Board of Trustees, Board of
Directors and Board of Managers of the MFS Funds. These reports will include:
(i) a summary of how votes were cast; (ii) a review of situations where MFS did
not vote in accordance with the guidelines and the rationale therefor; (iii) a
review of the procedures used by MFS to identify material conflicts of interest;
and (iv) a review of these policies and the guidelines and, as necessary or
appropriate, any proposed modifications thereto to reflect new developments in
corporate governance and other issues. Based on these reviews, the Trustees,
Directors and Managers of the MFS Funds will consider possible modifications to
these policies to the extent necessary or advisable.
All MFS Advisory Clients
At any time, a report can be printed by MFS for each client who has requested
that MFS furnish a record of votes cast. The report specifies the proxy issues
which have been voted for the client during the year and the position taken with
respect to each issue.
74
Generally, MFS will not divulge actual voting practices to any party other than
the client or its representatives (unless required by applicable law) because we
consider that information to be confidential and proprietary to the client.
Item 19. Control Persons and Principal Holders of Securities:
As of January 31, 2006, Cede & Co., c/o The Depository Trust Company, P.O. Box
20, Bowling Green Station, New York, New York 10004, (as nominee for The
Depository Trust Company, 7 Hanover Square, New York, New York 10004), was the
record owner of approximately 85% of the outstanding shares of the Trust.
As of January 31, 2006, all Trustees and officers of the Trust as a group owned
less than 1% of the outstanding shares of the Trust.
Item 20. Investment Advisory and Other Services:
Items 20.1 through 20.5. See Item 9.1.b. For the fiscal year ended October 31,
2005, MFS received fees under the Trust's Investment Advisory Agreement of
$636,991, for the fiscal year ended October 31, 2004, MFS received fees under
the Trust's Investment Advisory Agreement of $629,950 and for the fiscal year
ended October 31, 2003, MFS received fees under the Trust's Investment Advisory
Agreement of $534,668.
20.6. See Item 9.1.e.
20.7. The principal business address of Ernst & Young LLP is 200 Clarendon
Street, Boston, MA 02116. Ernst & Young LLP certifies financial statements of
the Trust as required to be certified by any law or regulation and provides
other tax related services for the Trust (such as tax return preparation and
assistant and consultation with respect to the preparation of filings with the
SEC).
20.8. Pursuant to the Registrar, Transfer Agency and Service Agreement between
the Trust and MFS Service Center, Inc., MFS Service Center, Inc. ("MFSC") acts
as the Trust's registrar and transfer agent for the Trust's authorized and
issued shares of beneficial interest, as well as dividend disbursing agent for
the Trust, and agent in connection with the Dividend Reinvestment and Cash
Purchase Plan of the Trust. For account maintenance, the Trust currently pays
MFSC a fee based on the total number of accounts for all closed-end funds
advised by MFS for which MFSC acts as registrar and transfer agent. If the total
number of accounts is less than 75,000, the annual account fee is $9.00. If the
total number of accounts is 75,000 or more, the annual account fee is $8.00. For
dividend services, MFSC charges $0.75 per dividend reinvestment and $0.75 per
cash infusion. If the total amount of fees related to dividend services is less
than $1,000 per month for all closed-end funds advised by MFS for which MFSC
acts as registrar and transfer agent, the minimum fee for the Trust for these
services will be $167 per month. The Trust will reimburse MFSC for reasonable
out-of-pocket expenses and advances incurred by MFSC and for any other expenses
incurred by MFSC at the request, or with the consent, of the Trust.
75
Item 21. PORTFOLIO MANAGERS
21.1 Other Accounts. In addition to the Fund, the Fund's portfolio managers are
responsible (either individually or jointly) for the day-to-day management of
certain other accounts, the number and total assets of which as of October 31,
2005 were as follows:
Other Pooled Investment
Registered Investment Companies Vehicles Other Accounts
------------------------ --------------------------------- -------------------------------- ----------------------------------
------------------------ --------------- ----------------- ------------- ------------------ ------------- --------------------
Name Number of Total Assets* Number of Total Assets Number of Total Assets
Accounts* Accounts Accounts
------------------------ --------------- ----------------- ------------- ------------------ ------------- --------------------
------------------------ --------------- ----------------- ------------- ------------------ ------------- --------------------
John Addeo 10 $4.4 billion 1 $213 million 2 $519 million
------------------------ --------------- ----------------- ------------- ------------------ ------------- --------------------
------------------------ --------------- ----------------- ------------- ------------------ ------------- --------------------
Scott Richards 13 $4.8 billion 2 $549 million 2 $519 million
------------------------ --------------- ----------------- ------------- ------------------ ------------- --------------------
------------------------ --------------- ----------------- ------------- ------------------ ------------- --------------------
Kenneth J. Enright 13 $23.6 billion 0 N/A 2 $1.1 billion
------------------------ --------------- ----------------- ------------- ------------------ ------------- --------------------
----------------
* Includes the Fund.
Advisory fees are not based upon performance of any of the accounts identified
in the table above.
Potential Conflicts of Interest. MFS seeks to identify potential conflicts of
interest resulting from a portfolio manager's management of both the Fund and
other accounts and has adopted policies and procedures designed to address such
potential conflicts.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for accounts with similar investment objectives of the
Adviser or subsidiary of the Adviser. Securities transactions for the Fund and
other accounts with similar investment objectives are generally executed on the
same day, or the next day. Nevertheless, 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.
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 MFS to be fair and 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 the Fund is concerned. In most cases, however, MFS believes
that the Fund's ability to participate in volume transactions will produce
better executions for the Fund.
MFS does not receive a performance fee for its management of the Fund. MFS
and/or a portfolio manager may have an incentive to allocate favorable or
limited opportunity investments or structure the timing of investments to favor
accounts other than the Fund--for instance, those that pay a higher advisory fee
and/or have a performance fee.
76
Item 21.2 Compensation
Portfolio manager total cash compensation is a combination of base salary and
performance bonus:
o Base Salary - Base salary represents a relatively smaller percentage
of portfolio manager total cash compensation (generally below 33%)
than incentive compensation.
o Performance Bonus - Generally, incentive compensation represents a
majority of portfolio manager total cash compensation. The performance
bonus is based on a combination of quantitative and qualitative
factors, with more weight given to the former (generally over 60%) and
less weight given to the latter.
The quantitative portion is based on pre-tax performance of all
of the accounts managed by the portfolio manager (which includes
the Fund and any other accounts managed by the portfolio manager)
over a one-, three- and five-year period relative to the
appropriate Lipper peer group universe and/or one or more
benchmark indices with respect to each account. The primary
weight is given to portfolio performance over a three-year time
period with lesser consideration given to portfolio performance
over one- and five-year periods (adjusted as appropriate if the
portfolio manager has served for shorter periods).
The qualitative portion is based on the results of an annual
internal peer review process (conducted by other portfolio
managers, analysts and traders) and management's assessment of
overall portfolio manager contributions to investor relations and
the investment process (distinct from Fund and other account
performance).
Portfolio managers also typically benefit from the opportunity to participate in
the MFS Equity Plan. Equity interests in MFS or its parent company are awarded
by management, on a discretionary basis, taking into account tenure at MFS,
contribution to the investment process and other factors.
Finally, portfolio managers are provided with a benefits package including a
defined contribution plan, health coverage and other insurance, which are
available to other employees of MFS on substantially similar terms. The
percentage of compensation provided by these benefits depends upon the length of
the individual's tenure at MFS and salary level as well as other factors.
77
21.3 Ownership of Fund Shares. The following table shows the dollar range of
equity securities of the Trust beneficially owned by the Trust's portfolio
managers as of October 31, 2005. The following dollar ranges apply:
N. None A. $1 - $10,000 B. $10,001 - $50,000 C. $50,001 - $100,000 D.
$100,001 - $500,000
E. $500,001 - $1,000,000 F. Over $1,000,000
Name of Portfolio Manager Dollar Range of Equity Securities in Fund
------------------------- -----------------------------------------
John Addeo N
Kenneth J. Enright N
Scott Richards N
Item 22. Brokerage Allocation and Other Practices: Specific decisions to
purchase or sell securities for the Trust are made by persons affiliated with
the Adviser. Any such person may serve other clients of the Adviser, or any
subsidiary of the Adviser in a similar capacity.
In connection with the selection of broker dealers and the placing of Trust
portfolio transactions, the Adviser seeks for the Trust the best overall price
and execution available from responsible brokerage firms, taking account of all
factors it deems relevant, including by way of illustration: price; the size of
the transaction; the nature of the market for the security; the amount of the
commission; the timing and impact of the transaction taking into account market
prices and trends; the reputation, experience and financial stability of the
broker or dealer involved; and the quality of services rendered by the broker or
dealer in other transactions.
In the case of securities traded in the over-the-counter market, portfolio
transactions may be effected either on an agency basis, which involves the
payment of negotiated brokerage commissions to the broker-dealer, including
electronic communication, networks, or on a principal basis at net prices
without commissions, but which include compensation to the broker-dealer in the
form of a mark-up or mark-down, depending on where the Adviser believes best
execution is available. In the case of securities purchased from underwriters,
the cost of such securities generally includes a fixed underwriting commission
or concession. From time to time, soliciting dealer fees are available to the
Adviser on tender or exchange offers. Such soliciting or dealer fees are, in
effect, recaptured by the Funds.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Trust to pay a broker-dealer
which provides brokerage and research services to the Adviser, an amount of
commission for effecting a securities transaction for the Trust in excess of the
amount other broker-dealers would have charged for the transaction, if the
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
its overall responsibilities to the Trust or to its other clients.
"Commissions," as interpreted by the SEC, include fees paid to brokers for
trades conducted on an agency basis, and certain mark-ups, mark-downs,
commission equivalents and other fees received by dealers in riskless
78
principal transactions placed in the over-the-counter market.
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, 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
the Trust and the 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") for example, investment research reports;
access to analysts; execution systems and trading analytics; reports or
databases containing corporate, fundamental, and technical analyses; portfolio
modeling strategies; and economic research services, such as publications, chart
services and advice from economists concerning macroeconomics information, and
analytical investment information about particular corporations to the Adviser
for no consideration other than brokerage or underwriting commissions.
Securities may be bought or sold from time to time through such
brokerage-dealers, on behalf of the Trust. The Adviser may use brokerage
commissions from the Fund's portfolio transactions to acquire Research, subject
to the procedures and limitations described in this discussion.
The advisory fee paid by the Trust to the Adviser is not reduced as a
consequence of the Adviser's receipt of Research. To the extent the Trust's
portfolio transactions are used to obtain Research, the brokerage commissions
paid by the Trust might exceed those that might otherwise be paid. The Research
received may be useful and of value to the Adviser in serving both the Fund and
other clients of the Adviser; accordingly, not all of the Research provided by
brokers through which the Fund effects securities transactions may be used by
the Adviser in connection with the Fund. While the Research is not expected to
reduce the expenses of the Adviser, the Adviser would, through the use of the
Research, avoid the additional expenses which would be incurred if it should
attempt to develop comparable information through its own staff.
From time to time, the Adviser prepares a list of broker-dealer firms that have
been deemed by the Adviser to provide valuable Research as determined
periodically by the investment staff ("Research Firms"), together with a
suggested non-binding amount of brokerage commissions ("non-binding target") to
be allocated to each of these research firms, subject to certain requirements.
All trades with Research Firms will be executed in accordance with the Adviser's
obligation to seek best execution for its client accounts. Neither the Adviser
nor the Fund has an obligation to any Research Firm if the amount of brokerage
commissions paid to the research firm is less than the applicable non-binding
target. The Adviser reserves the right to pay cash to the Research Firm from its
own resources in an amount the Adviser determines in its discretion.
79
If the Adviser determines that any service or product has a mixed use, (i.e., it
also serves functions that do not assist the investment decision-making or
trading process), the Adviser will allocate the costs of such service or product
accordingly in its reasonable discretion. The Adviser will allocate brokerage
commissions to Research Firms only for the portion of the service or product
that the Adviser determines assists it in the investment decision-making or
trading process and will pay for the remaining value of the product or service
in cash.
Certain Funds entered into an arrangement under which, with respect to certain
brokerage transactions directed to certain broker-dealers, the Funds received a
credit for part of the brokerage commission paid, which was applied against
expenses of the Funds. In addition, the Funds have an expense offset arrangement
that reduces the Funds' custodian fees based upon the amount of cash maintained
by the Funds with their custodian and dividend disbursing agent, State Street
Bank and Trust Company.
In effecting portfolio transactions on behalf of the Fund and the Adviser's
other clients, the Adviser from time to time may instruct the broker-dealer that
executes a transaction to allocate, or "step out," a portion of such transaction
to another broker-dealer. The broker-dealer to which the Adviser has "stepped
out" would then settle and complete the designated portion of the transaction,
and the executing broker-dealer would settle and complete the remaining portion
of the transaction that has not been "stepped out." Each broker-dealer may
receive a commission or brokerage fee with respect to that portion of the
transaction that it settles and completes.
In certain instances there may be securities which are suitable for the Trust's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Trust 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. The Adviser has adopted
policies that are reasonably designed to ensure that 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
fair and equitable to each. Among other things, these policies prohibit
allocations of equity initial public offerings, equity limited offerings or
fixed income new issues to, among others: (1) private funds or accounts
principally owned by the Adviser's officers and/or employees or the Trust's
employees or Trustees; and (2) any accounts owned beneficially solely by the
Adviser or any direct or indirect subsidiary of the Adviser. However, these
policies do not prohibit allocations to funds or accounts owned beneficially by
Sun Life of Canada (U.S.) Financial Services Holdings, Inc. or Sun Life
Financial, Inc. or their affiliates other than the Adviser and its direct and
indirect subsidiaries.
It is recognized that in some cases this system could have a detrimental effect
on the price or volume of the security as far as the Trust is concerned. In
other cases, however, the Trust believes that its ability to participate in
volume transactions will produce better executions for the Trust.
For the fiscal year ended October 31, 2005, the Trust paid brokerage commissions
of $8,255. For the fiscal year ended October 31, 2004, the Trust paid brokerage
commissions of $85,791 and for the fiscal year ended October 31, 2003, the Trust
paid brokerage commissions of $33,639.
80
During the fiscal year ended October 31, 2005, the Trust purchased securities
issued by the following regular broker-dealers of the Trust, which had the
following values as of October 31, 2005:
--------------------------------------------------------------------- -------------------------------------------------------------
Broker Dealer Value of Securities as of October 31, 2005
------------- ------------------------------------------
--------------------------------------------------------------------- -------------------------------------------------------------
--------------------------------------------------------------------- -------------------------------------------------------------
Morgan Stanley $48,553
--------------------------------------------------------------------- -------------------------------------------------------------
--------------------------------------------------------------------- -------------------------------------------------------------
Merrill Lynch & Co., Inc. $2,274,000
--------------------------------------------------------------------- -------------------------------------------------------------
Item 23. Tax Status: None.
Item 24. Financial Statements: The following are incorporated herein by
reference to the Trust's Annual Report to its shareholders, for its fiscal year
ended October 31, 2005, copies of which have been filed with the SEC:
Portfolio of Investments at October 31, 2005 Statement of Assets and Liabilities
at October 31, 2005 Statement of Operations for the year ended October 31, 2005
Statement of Changes in Net Assets for the years ended October 31, 2005 and
2004. Financial Highlights for the years ended October 31, 2005, 2004, 2003,
2002 and 2001. Notes to Financial Statements and Report of Independent
Registered Public Accounting Firm
81
PART C
OTHER INFORMATION
Item 25. Financial Statements and Exhibits:
1. Financial Statements:
The following have been incorporated by reference in Item 24:
Portfolio of Investments at October 31, 2005
Statement of Assets and Liabilities at October 31, 2005
Statement of Operations for year ended October 31, 2005
Statement of Changes in Net Assets for the years ended
October 31, 2005 and 2004 Financial Highlights for the
years ended October 31, 2005, 2004, 2003, 2002 and 2001
Notes to Financial Statements
Report of Independent Auditors
2. Exhibits:
(a) Amended and Restated Declaration of Trust, dated
December 16, 2004; filed herein.
(b)(1) Master Amended and Restated By-Laws dated January 1, 2002,
as revised June 23, 2004; filed herein.
(b)(2) Appendix A, as revised February 21, 2006, to the Master
Amended and Restated By-Laws, dated January 1, 2002, as
revised June 23, 2004; filed herein.
(c) Inapplicable.
(d) Specimen certificate for Shares of Beneficial Interest,
without par value (previously filed as Exhibit (4) to
Amendment No. 2 to the Trust's Registration Statement, filed
with the SEC on November 15, 1989 ("Amendment No. 2"))
incorporated herein by reference.
(e) The section "Important Note for Shareholders" describing the
Registrant's dividend reinvestment plan on page 6 of the
Trust's Annual Report to its Shareholders, for its fiscal
year ended October 31, 2001, incorporated herein by
reference.
(f) Inapplicable.
(g) Investment Advisory Agreement, dated January 1, 2002
(previously filed as Exhibit 2(g) to Amendment No. 10 to the
Trust's Registration Statement on February 28, 2002),
incorporated herein by reference.
82
(h) Omitted pursuant to General Instruction G.3 to Form N-2.
(i)(1) Retirement Plan for Non-Interested Person Trustees, dated
February 17, 1999 (previously filed as Exhibit (8) to
Amendment No. 39 to the Registration Statement for MFS
Growth Opportunities Fund on Form N-1A, File Nos. 2-36431
and 811-2032, filed with the SEC on February 26, 1999 ("MFS
Growth Opportunities Fund Amendment No. 29")) incorporated
herein by reference.
(i)(2) Amendment, dated December 11, 2001, to the Retirement Plan
for Non-Interested Person Trustees (previously filed as
Exhibit 6(b) to MFS Series Trust V Amendment No. 51)
incorporated herein by reference.
(j)(1) Custodian Agreement between Registrant and State Street
Bank and Trust Company, dated July 2, 2001 (previously filed
as Exhibit (7)(a) to Amendment No. 34 to the Registration
Statement for MFS Series Trust X, on Form N-1A, File Nos.
33-1657 and 811-4492 filed with the Securities and Exchange
Commission on July 30, 2001 ("MFS Series Trust X Amendment
No. 34")) incorporated herein by reference.
(j)(2) Global Custody Contract between Registrant and Chase
Manhattan Bank, dated July 2, 2001 (previously filed as
Exhibit 7(b) to MFS Series Trust X Amendment No. 34)
incorporated herein by reference.
(j)(3) Exhibit A, as revised April 26, 2005, to the Master
Custodian Agreement between Registrant and State Street Bank
and Trust Company, and the Master Global Custody Contract
between Registrant and Chase Manhattan Bank, each dated July
2, 2001; filed herein.
(j)(4) Form of Amended Amendment No. 3, dated September 30, 2004,
to the Master Custodian Agreement with State Street Bank and
Trust Company (previously filed in Amendment No. 37 to the
Registration Statement for MFS Series Trust III, on Form
N-1A, File Nos. 2-60491 and 811-2794 filed with the SEC on
March 31, 2005) incorporated herein by reference.
(j)(5) Amendment No. 2, dated May 2, 2003, to the Master
Custodian Agreement with State Street Bank and Trust Company
(previously filed in Amendment No. 42 to the Registration
Statement for MFS Series Trust I, on Form N-1A, File Nos.
33-7638 and 811-4777 filed with the SEC on October 30, 2003)
incorporated herein by reference.
(j)(6) Amendment, dated December 28, 2004, to the Master
Custodian Agreement with State Street Bank and Trust Company
(previously filed in Amendment No. 22 to the Registration
Statement for MFS Series Trust XI, on Form N-1A, File Nos.
33-68310 and 811-7992 filed with the SEC on January 28,
2005) incorporated herein by reference.
83
(j)(7) Amendment, dated December 31, 2004, to the JP Morgan Chase
Global Custody Contract (previously filed in Amendment No.
59 to the Registration Statement for MFS Series Trust IX, on
Form N-1A, File Nos. 2-50409 and 811-2464 filed with the SEC
on June 29, 2005) incorporated herein by reference.
(k)(1) Registrar, Transfer Agency and Service Agreement between
Trust and MFS Service Center, Inc., dated August 15, 1994
(previously filed as Exhibit (2)(k)(2) to Amendment No.7 to
the Trust's Registration Statement) incorporated herein by
reference.
(k)(2) Loan Agreement by and among the Banks named therein, the
MFS Funds named therein, and The First National Bank of
Boston, dated as of February 21, 1995 (previously filed as
Exhibit (2)(k)(3) to Amendment No. 7 to the Trust's
Registration Statement) incorporated herein by reference.
(k)(3) Master Administrative Services Agreement, as amended,
dated March 1, 1997, as amended and restated April 1, 1999
(previously filed as Exhibit 8 (e) to Amendment No. 28 to
the Registration Statement for MFS Series Trust III on Form
N-1A, File Nos. 2-60491 and 811-2794, filed with the SEC on
March 31, 1999 ("MFS Series Trust III Amendment No. 28"))
incorporated herein by reference.
(k)(4) Exhibit A as revised July 26, 2005 to the Master
Administrative Services Agreement; filed herein.
(l) Omitted pursuant to General Instruction G.3 to Form N-2.
(m) None.
(n) Omitted pursuant to General Instruction G.3 to Form N-2.
(o) Inapplicable.
(p) Purchase Agreements (previously filed as Exhibit (14) to
Amendment No. 2 to the Trust's Registration Statement)
incorporated herein by reference.
(q) Inapplicable.
(r)(1) Code of Ethics as amended and restated effective January 1,
2005, pursuant to Rule 17j-1 under the Investment Company
Act of 1940 (previously filed as Exhibit 16(a) to Amendment
No. 45 of the Registration Statement on Form N-1A for MFS
Series Trust I, File Nos. 33-7638 and 811-4777, filed with
the SEC on December 29, 2004 ("MFS Series Trust I Amendment
No. 45").
84
(r)(2) Code of Ethics for Personal Trading and Conduct for
Non-Management Directors of MFS, effective October 6, 2004
(previously filed as Exhibit 16(b) to Amendment No. 44 of
the Registration Statement on Form N-1A for MFS Series Trust
I, File Nos. 33-7638 and 811-4777, filed with the SEC on
December 29, 2004 ("MFS Series Trust I Amendment No. 44").
(r)(3) Code of Ethics for Non-MFS Management Trustees effective
January 1, 2005 (previously filed as Exhibit 16(c) to
Amendment No. 45 of the Registration Statement on Form N-1A
for MFS Series Trust I, File Nos. 33-7638 and 811-4777,
filed with the SEC on December 29, 2004 ("MFS Series Trust I
Amendment No. 45").
Item 26. Marketing Arrangements:
Inapplicable.
Item 27. Other Expenses of Issuance and Distribution:
Inapplicable.
Item 28. Persons Controlled by or Under Common Control with Trust:
Inapplicable.
Item 29. Number of Holders of Securities:
(1) (2)
Title of Class Number of Record Holders
Shares of Beneficial Interest
(without par value)
562
(as of January 31, 2006)
Item 30. Indemnification: Article V of the Trust's Declaration of 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 to the Trust
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 Trust. In the case of a
settlement, such indemnification will not be provided unless it has been
determined in accordance with the Declaration of Trust that such officers or
Trustees have not engaged in misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices.
The Trustees and officers of the Trust and the personnel of the Trust's
Investment Adviser are insured under an errors and omissions liability insurance
policy. The Trust and its officers are also
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insured under the fidelity bond required by Rule 17g-1 under the Investment
Company Act of 1940.
Item 31. MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds: Massachusetts Investors Growth Stock Fund;
Massachusetts Investors Trust; MFS Government Limited Maturity Fund; MFS
Government Securities Fund; MFS Growth Opportunities Fund; MFS Series Trust I
(which has 8 series: MFS Cash Reserve Fund, MFS Core Equity Fund, MFS Core
Growth Fund, MFS New Discovery Fund, MFS Research International Fund, MFS
Strategic Growth Fund, MFS Technology Fund and MFS Value Fund); MFS Series Trust
II (which has one series: MFS Emerging Growth Fund); MFS Series Trust III (which
has three series: MFS High Income Fund, MFS High Yield Opportunities Fund and
MFS Municipal High Income Fund); MFS Series Trust IV (which has four series: MFS
Government Money Market Fund, MFS Mid Cap Growth Fund, MFS Money Market Fund and
MFS Municipal Bond Fund); MFS Series Trust V (which has three series: MFS
International New Discovery Fund, MFS Research Fund and MFS Total Return Fund);
MFS Series Trust VI (which has three series: MFS Global Equity Fund, MFS Global
Total Return Fund and MFS Utilities Fund); MFS Series Trust VII (which has one
series: MFS Capital Opportunities Fund); MFS Series Trust VIII (which has two
series: MFS Global Growth Fund and MFS Strategic Income Fund); MFS Series Trust
IX (which has seven series: MFS Bond Fund, MFS Inflation-Adjusted Bond Fund, MFS
Intermediate Investment Grade Bond Fund, MFS Limited Maturity Fund, MFS
Municipal Limited Maturity Fund, MFS Research Bond Fund and MFS Research Bond
Fund J); MFS Series Trust X (which has 13 series: MFS Aggressive Growth
Allocation Fund, MFS Conservative Allocation Fund, MFS Emerging Markets Debt
Fund, MFS Emerging Markets Equity Fund, MFS Floating Rate High Income Fund, MFS
Growth Allocation Fund, MFS International Diversification Fund, MFS
International Growth Fund, MFS International Value Fund, MFS Moderate Allocation
Fund, MFS New Endeavor Fund and MFS Strategic Value Fund); MFS Series Trust XI
(which has two series: MFS Mid Cap Value Fund and MFS Union Standard Equity
Fund); MFS Series Trust XII (which has 5 series: MFS Lifetime Retirement Income
Fund, MFS Lifetime 2010 Fund, MFS Lifetime 2020 Fund, MFS Lifetime 2030 Fund and
MFS Lifetime 2040 Fund; and MFS Municipal Series Trust (which has 16 series: MFS
Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS California
Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia Municipal Bond
Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund,
MFS Mississippi Municipal Bond Fund, MFS Municipal Income 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 and MFS West Virginia
Municipal Bond 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 four series) and MFS Variable Insurance
Trust ("MVI") (which has 16 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 Charter Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Multimarket Income Trust, MFS Municipal 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 28 series), Capital Appreciation Variable Account, Global Governments
Variable Account, Government Securities
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Variable Account, High Yield Variable Account, Money Market Variable Account and
Total Return 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.
The Directors of MFS are Robert J. Manning, Martin E. Beaulieu, Robin A.
Stelmach, Donald A. Stewart, C. James Prieur, William W. Stinson, James C.
Baillie, Ronald W. Osborne and William K. O'Brien. Robert C. Pozen is the
Chairman, Mr. Manning is Chief Executive Officer, Chief Investment Officer and
President, Mr. Beaulieu is Executive Vice President and the Director of Global
Distribution, Robin A. Stelmach is Executive Vice President and Chief Operating
Officer; Maria D. Dwyer is Executive Vice President and Chief Regulatory
Officer, [TBA] is an Executive Vice President, General Counsel and Secretary,
Mitchell C. Freestone and Brian T. Hourihan are Assistant Secretaries, Michael
W. Roberge is an Executive Vice President, Chief Fixed Income Officer and
Director of Fixed Income Research, David A. Antonelli is an Executive Vice
President and Chief Equity Officer, Deborah H. Miller is an Executive Vice
President and Director of Equity Quantitative Research, Paul T. Kirwan is an
Executive Vice President and Chief Financial Officer, Thomas B. Hastings is a
Senior Vice President and Treasurer, Michael H. Whitaker is a Senior Vice
President and Chief Compliance Officer and Joseph E. Lynch is the Assistant
Treasurer.
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
MFS Series Trust II
MFS Series Trust III
MFS Series Trust IV
MFS Series Trust V
MFS Series Trust VI
MFS Series Trust VII
MFS Series Trust VIII
MFS Series Trust IX
MFS Series Trust X
MFS Series Trust XI
MFS Series Trust XII
MFS Municipal Series Trust
MFS Variable Insurance Trust
MFS Institutional Trust
MFS Municipal Income Trust
MFS Multimarket Income Trust
MFS Government Markets Income Trust
MFS Intermediate Income Trust
MFS Charter Income Trust
MFS Special Value Trust
J. Atwood Ives is the Chair, Maria F. Dwyer is President, Tracy A. Atkinson,
a Senior Vice President of MFS, is Treasurer, James O. Yost, Ellen M. Moynihan,
David L. DiLorenzo and Mark Fischer, Vice
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Presidents of MFS, are the Assistant Treasurers, Mark N. Polebaum, Senior Vice
President, General Counsel and Secretary of MFS, is the Secretary, Brian T.
Hourihan, Vice President and Senior Counsel, Christopher R. Bohane, Susan A.
Pereira and Timothy M. Fagan, Vice Presidents and Senior Counsels of MFS and
Ethan D. Corey, Special Counsel of MFS are Assistant Secretaries and Assistant
Clerks.
MFS/Sun Life Series Trust
J. Kermit Birchfield is Chairman, Maria F. Dwyer is President, Tracy A. Atkinson
is the Treasurer, James O. Yost, Ellen M. Moynihan, David L. DiLorenzo and Mark
Fischer are the Assistant Treasurers, Mark N. Polebaum is the Secretary, Brian
T. Hourihan is the Assistant Secretary and Assistant Clerk.
Money Market Variable Account
High Yield Variable Account
Capital Appreciation Variable Account
Government Securities Variable Account
Total Return Variable Account
Global Governments Variable Account
J. Kermit Birchfield is Chairman, Maria F. Dwyer is President and a Director,
Tracy A. Atkinson is Treasurer, Jim Yost, Ellen M. Moynihan, David L. DiLorenzo
and Mark Fischer are the Assistant Treasurers, Mark N. Polebaum is the Secretary
and Brian T. Hourihan, Christopher R. Bohane, Ethan D. Corey, Susan A. Pereira
and Timothy M. Fagan are the Assistant Secretaries.
MFS Floating Rate Income Fund - (Cayman Islands Registered Fund)
MFS Meridian Funds, SICAV
Martin E. Beaulieu, Maria F. Dwyer and Robin A. Stelmach are Directors, Tracy A.
Atkinson is Treasurer, James O. Yost and Ellen M. Moynihan are the Assistant
Treasurers, and Christopher R. Bohane is the Assistant Secretary.
MFS International Ltd. ("MIL Bermuda"), a limited liability company organized
under the laws of Bermuda and a subsidiary of MFS, whose principal business
address is Canon's Court, 22 Victoria Street, Hamilton HM 12 Bermuda, serves as
investment adviser to and distributor for MFS Floating Rate Income Fund and the
MFS Meridian Funds, SICAV ("SICAV Funds"). The SICAV Funds are organized in
Luxembourg and qualify as an undertaking for collective investments in
transferable securities (UCITS). The principal business address of the Funds is
47, Boulevard Royal, L-2449 Luxembourg. The SICAV Funds include Asia Pacific
Ex-Japan Fund, Continental European Equity Fund, Emerging Markets Debt Fund,
Emerging Markets Equity Fund, Euro Reserve Fund, European Bond Fund, European
Equity Fund, European Growth Fund, European High Yield Bond Fund, European
Smaller Companies Fund, European Value Fund, Global Balanced Fund, Global Equity
Fund, Global Growth Fund, Global Value Fund, Inflation-Adjusted Bond Fund, Japan
Equity Fund, Limited Maturity Fund, Research Bond Fund, Research International
Fund, Strategic Income Fund, Technology Fund, UK Equity Fund, US Dollar Money
Market Fund, US Emerging Growth Fund, US Equity Fund, US Government Bond Fund,
US High Yield Bond Fund, US Research Fund, US Strategic Growth Fund and US Value
Fund. The MFS Floating Rate Income Fund is organized as an exempt company under
the laws of the Cayman Islands. The principal business address for the MFS
Floating Rate Income Fund is P.O. Box 309, Grand Cayman, Cayman Islands, British
West Indies.
88
Mark C. Rogers is Director and President, Paul T. Kirwan is the Treasurer, Mark
N. Polebaum is the Secretary, Mitchell C. Freestone, Ethan D. Corey, Jeremy
Kream, Mark D. Kaplan, Suzanne Michaud, Susan Newton and Brian T. Hourihan are
Assistant Secretaries and Thomas B. Hastings is the Assistant Treasurer. Timothy
F. Tierney is the Tax Officer.
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 Cayman Islands Registered Fund and the MFS Meridian
Funds, SICAV.
Olivier Lebleu is Managing Director, Mitchell C. Freestone is Director and
Assistant Secretary and Barnaby Wiener is a Director. Paul T. Kirwan is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Mark N. Polebaum is
the Secretary, Ethan D. Corey, Jeremy Kream, Mark D. Kaplan, Suzanne Michaud,
Susan Newton and Brian T. Hourihan are Assistant Secretaries. Timothy F. Tierney
is the SICAV Tax Officer.
MFS International S.C. LTDA ("MIL Brazil"), a private commercial limited
liability quota company organized under the laws of Brazil whose current address
is Al Campinas, 1070, 7 andar, Sala 15, Sao Paulo, Sao Paulo, Brazil, is
primarily involved in providing market development services to increment the use
of MFS products and services in Brazil as well as being a distributor of the MFS
Floating Rate Income Fund and MFS Meridian Funds, SICAV.
Robert J. Manning is the President and Advisory Board Member, Paul T. Kirwan is
Treasurer and Thomas B. Hastings is Assistant Treasurer, Mitchell C. Freestone,
Ethan D. Corey, Jeremy Kream, Suzanne Michaud, Susan Newton and Brian T.
Hourihan are Assistant Secretaries. Timothy F. Tierney is the Tax Officer.
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.
Graham E. Lenzner is the Director and Chairman of the Board, Loretta Lenzner,
Robert J. Manning and Sheldon Rivers are Directors, Paul T. Kirwan is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Mark N. Polebaum is
the Secretary and Mitchell C. Freestone, Ethan D. Corey, Jeremy Kream, Suzanne
Michaud, Susan Newton and Brian T. Hourihan are Assistant Secretaries. Timothy
F. Tierney is the Tax Officer.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS, serves as
distributor for the MFS Funds, MVI and MFSIT.
Robert J. Manning is the Director, Martin E. Beaulieu is a Director and Chairman
of the Board, James A. Jessee is President, Randolph J. Verzillo is the
Treasurer, Mark N. Polebaum is the Secretary, Mitchell C. Freestone and Brian T.
Hourihan are Assistant Secretaries, Thomas B. Hastings is the Assistant
Treasurer, Sharon A. Brovelli is Senior Vice President and Director of
Administration/Operations, Paul F. Fichera is Senior Vice President and Director
of Product
89
Development, William H. Finnegan is Senior Vice President and Director of Market
Development, Michael D. Fitzgerald is Senior Vice President - Bank Marketing
Group, Joseph A. Kosciuszek is Senior Vice President - Support Services
MFSI/International, Larry I. Milder is Senior Vice President - FIAD Sales,
Thomas A. Jessee is Senior Vice President - Broker/Dealer Sales, Bill C. Taylor
is Senior Vice President and Director of PPS, Susan G. Fowler is Senior Vice
President - Fulfillment/PPS and Brendan K. Nolan is Senior Vice President.
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.
Robert J. Manning is Director and Chairman of the Board. Maureen Leary-Jago is a
Director. Ms. Leary-Jago is also the President, Mark N. Polebaum is the
Secretary, Mitchell C. Freestone and Brian T. Hourihan are Assistant
Secretaries, Paul T. Kirwan is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert W. Green is Senior Vice President - Dealer
Services, Gloria E. Schmid is Senior Vice President - Operations David G.
Rainville is Senior Vice President.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary of MFS,
provides investment advice to substantial private clients.
Robert J. Manning is Chairman and Chief Investment Officer, Martin E. Beaulieu
is a Director, Carol Geremiah is the President, [TBA] is the Secretary, Mitchell
C. Freestone and Brian T. Hourihan are Assistant Secretaries, Paul T. Kirwan is
the Treasurer, Thomas B. Hastings is the Assistant Treasurer.
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.
Robert J. Manning is the Director and Chairman of the Board, Martin E. Beaulieu
is the Director, Carol W. Geremia is the President, Paul T. Kirwan is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Mark N. Polebaum is
the Secretary, Mitchell C. Freestone and Brian T. Hourihan are Assistant
Secretaries Matthew D. Gannon is Senior Vice President - Retail Marketing,
Director of RSI Marketing, William F. Shaw is Senior Vice President - Marketing
and George C. Sutherland is Senior Vice President - Sales.
MFS Investment Management K.K. ("MIMKK"), a wholly owned subsidiary of MFS, is a
corporation incorporated in Japan. MIMKK, whose address is 16F Daido Seimei
Kasumigaseki Bldg., 1-4-2- Kasumigaseki, Chiyoda-ku, Tokyo Japan 100 0013, is
involved in investment management activities.
Joseph A. Kosciuszek and Carol W. Geremia are Directors, Takafumi Ishii is a
Director and Representative Director, Yasuyuki Hirata is Director -Corporate
Planning and Paul T. Kirwan is Statutory Auditor. Ethan D. Corey, Jeremy Kream,
Suzanne Michaud, Susan Newton and Brian T. Hourihan are Assistant Secretaries.
Timothy F. Tierney is the Tax Officer.
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.
90
Eric G. Burns is Director and President, Paul F. Fichera, Carol W. Geremia and
Joseph A. Kosciuszek are Directors. Paul T. Kirwan is the Treasurer, Thomas B.
Hastings is Assistant Treasurer, Brian T. Hourihan is Assistant Clerk and Mark
D. Kaplan is Clerk and Trust Officer.
MFS Japan Holdings, LLC, a private limited liability company organized under the
laws of Delaware whose address is 500 Boylston Street, Boston, MA 02116, is
primarily a holding company and is 50% owned by Massachusetts Financial Services
Company and 50% owned by Sun Life Financial (Japan), Inc.
Robert J. Manning and Donald A. Stewart are Managers, Mark N. Polebaum is the
Secretary, Paul T. Kirwan is Treasurer and Thomas B. Hastings is Assistant
Treasurer, Mitchell C. Freestone, Ethan D. Corey, Jeremy Kream, Suzanne Michaud,
Susan Newton and Brian T. Hourihan are Assistant Secretaries. Timothy F. Tierney
is the Tax Officer.
Sun Life of Canada (U.S.) Financial Services Holdings, Inc., a company
incorporated under the laws of Delaware whose address is 500 Boylston Street,
Boston, Massachusetts 02116, is the direct parent company of Massachusetts
Financial Services Company.
Robert J. Manning is the Director and Chairman of the Board, Eric G. Burns,
Donald A. Stewart and C. James Prieur are Directors, Mark N. Polebaum is the
Secretary, Mitchell C. Freestone and Brian T. Hourihan are Assistant
Secretaries, Paul T. Kirwan is the Treasurer and Joseph Lynch is the Assistant
Treasurer.
MFS Investment Management (LUX) S.A., a joint stock company organized under the
laws of Luxembourg whose registered office is 49, Avenue J.F. Kennedy, L-1855,
Kirchberg, Luxembourg, is the management company of the MFS Investment Funds,
which has 3 portfolios: MFS Investment Funds-Global Equity Ex-Japan Fund, MFS
Investment Funds-Global Equity Fund and MFS Investment Funds-Global Equity
Eurozone Bias Fund.
Maria F. Dwyer, Martin E. Beaulieu and Robin A. Stelmach are Directors, Paul T.
Kirwan is Treasurer, Thomas B. Hastings is Assistant Treasurer, Mark N. Polebaum
is the Secretary and Mitchell C. Freestone, Ethan D. Corey, Jeremy Kream,
Suzanne Michaud, Susan Newton and Brian T. Hourihan are Assistant Secretaries.
Timothy F. Tierney is the Tax Officer.
MFS/Sun Life Financial Distributors, Inc., a Delaware broker dealer jointly
owned by MFS and Sun Life of Canada (U.S.) Financial Services Holdings, Inc.,
whose address is 131 Oliver Street, Boston, Massachusetts 02110, is a
distributor of variable annuity products.
Martin E. Beaulieu and Robert C. Salipante are the Directors, Kevin J. Hart is
the President, Trevor V. Graham is Director & Divisional Controller; Jane F.
Jette is Financial/Operations Principal and Treasurer, George E. Maden is Vice
President and Chief Compliance Officer, Ellen B. King is Secretary and Amy E.
Mihaich is Assistant Secretary.
In addition, the following persons, Directors or officers of MFS, have the
affiliations indicated:
Donald A. Stewart Chief Executive Officer, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street West, Toronto,
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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 Non-Executive Chairman, Sun Life Financial and Sun Life
Assurance Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada; Chairman, Westshore
Terminals Income Fund, Vancouver, British Columbia;
Director, Grant Forest Products Inc., Ontario, Canada and
Trustee, Fording Canadian Coal Trust, Calgary, Alberta
James C. Baillie Counsel, Torys, Ontario, Canada; Chair, Independent
Electricity Market Operator, Ontario, Canada; Chair, Corel
Corporation, Ontario, Canada; Director, Sun Life Financial,
Ontario Canada; Director, FPI Ltd., Newfoundland, Canada
Item 32. Location of Accounts and Records:
The accounts and records of the Trust are located, in whole or in part, at the
office of the Trust and the following locations:
NAME ADDRESS
Massachusetts Financial 500 Boylston Street
Services Company Boston, Massachusetts 02116
State Street Bank and State Street South, 5-West
Trust Company North Quincy, Massachusetts 02171
JP Morgan Chase Bank 270 Park Avenue
New York, NY 10017
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
Ropes & Gray One International Place
Boston, MA 02110
Item 33. Management Services: Inapplicable.
Item 34. Undertakings: Inapplicable.
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SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the Trust
has duly caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Boston and
Commonwealth of Massachusetts on the 28th day of February, 2006.
MFS SPECIAL VALUE TRUST
By: SUSAN S. NEWTON
--------------------------------------
Susan S. Newton
Assistant Clerk and Assistant
Secretary
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INDEX TO EXHIBITS
Exhibit No. Description of Exhibits
2(a) Amended and Restated Declaration of Trust, dated
December 16, 2004.
2(b)(1) Master Amended and Restated By-Laws dated January 1, 2002, as
revised June 23, 2004.
2(b)(2) Appendix A, as revised February 21, 2006, to the Master
Amended and Restated By-Laws, dated January 1, 2002, as revised
June 23, 2004.
2(j)(3) Exhibit A, as revised April 26, 2005, to the Master Custodian
Agreement between Registrant and State Street Bank and Trust
Company, and the Master Global Custody Contract between
Registrant and Chase Manhattan Bank, each dated July 2, 2001.
2(k)(4) Exhibit A as revised July 26, 2005 to the Master Administrative
Services Agreement.
94