AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
FEBRUARY 28, 2006
1940 ACT FILE NO. 811-5400
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) INTERMEDIATE INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
500 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 617-954-5000
Susan S. Newton
Assistant Secretary and Assistant Clerk
MFS Intermediate Income Trust
c/o Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
(Name and Address of Agent for Service)
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MFS INTERMEDIATE INCOME TRUST
PART A.
INFORMATION REQUIRED IN A PROSPECTUS
Items 1 and 2: Omitted pursuant to General Instruction G.3 to Form N-2.
Item 3.1 Fee Table: Inapplicable - 1940 Act filing only.
Items 3.2, 4, 5, 6 and 7: Omitted pursuant to General Instruction G.3 to Form
N-2.
Item 8. General Description of Registrant:
8.1. General: The MFS Intermediate Income 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 December 30, 1987.
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 preserve capital and provide high current
income. The investment objective and policies of the Trust may, unless otherwise
specifically stated, be changed by the Trustees of the Trust without a vote of
the shareholders. A change in a Trust's objective may result in the Trust having
an investment objective different from the objective which the shareholder
considered appropriate at the time of investment in the Trust. The Trust will
attempt to achieve this objective by investing in obligations issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities ("U.S. Government Securities") and in obligations issued or
guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies or instrumentalities, which are not traded on a U.S.
exchange ("Foreign Government Securities"). The Trust will maintain an average
weighted portfolio maturity of approximately seven years or less and will invest
substantially all of its assets in securities with remaining maturities less
than or equal to ten years. Equivalent maturities are utilized with respect to
certain securities, including Government Agencies. Under normal market
conditions, at least 65% of the Fund's total assets will be invested in income
producing securities. Under normal market conditions, the Trust's average
weighted portfolio maturity will not be less than three years. Contractual
rights to dispose of a security will be considered in calculating average
maturity, because such rights limit the period during which the Trust bears a
market risk with respect to the security. The investment adviser, Massachusetts
Financial Services Company, a Delaware corporation ("MFS" or "Investment
Adviser") believes that this strategy will enable the Trust to preserve capital
while seeking high current income. Shorter term U.S. and Foreign Government
Securities generally are more stable and less susceptible to principal loss than
longer term securities. While shorter term securities in most cases offer lower
yields than securities with longer maturities, the Trust may seek to enhance
income by writing options on U.S. and Foreign Government Securities. Option
writing can result in the loss of principal under certain market conditions.
Although the percentage of the Trust's assets invested in Foreign Government
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Securities will vary depending on the state of the economies of the principal
countries around the world, their financial markets and the relationship of
their currencies to the U.S. dollar, under normal conditions the Trust's
portfolio is expected to be globally diversified. See "Special Considerations"
below. There can be no assurance that the Trust will achieve its investment
objective.
For purposes of the foregoing investment policy, securities having a certain
maturity will be deemed to include securities with an equivalent "duration" of
such securities. "Duration" is a commonly used measure of the longevity of a
debt instrument that takes into account the full stream of payments received on
a debt instrument, including both interest and principal payments, based on
their present values. A debt instrument's duration is derived by discounting
principal and interest payments to their present value using the instrument's
current yield to maturity and taking the dollar-weighted average time until
those payments will be received. Contractual rights to dispose of a security,
call options and prepayment assumptions may be considered in calculating
duration and average maturity because such rights limit the period during which
the Trust bears a market risk with respect to the security.
U.S. Government Securities. The U.S. Government Securities in which the Trust
intends to invest include (i) U.S. Treasury obligations, which differ only in
their interest rates, maturities and times of issuance: U.S. Treasury bills
(maturities of one year or less), U.S. Treasury notes (maturities of one to 10
years), and U.S. Treasury bonds (generally original maturities of greater than
10 years), all of which are backed by the full faith and credit of the United
States; (ii) obligations issued or guaranteed by U.S. Government agencies,
authorities or instrumentalities, some of which are backed by the full faith and
credit of the U.S. Treasury, e.g., direct pass-through certificates of the
Government National Mortgage Association ("GNMA"); some of which are supported
by the right of the issuer to borrow from the U.S. Government, e.g., obligations
of Federal Home Loan Banks; and some of which are backed only by the credit of
the issuer itself, e.g., obligations of the Federal National Mortgage
Association ("FNMA"); and (iii) interests in trusts or other entities
representing interests in obligations that are issued and guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities. For a description of
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, see "Description of Obligations Issued or Guaranteed by U.S.
Government Agencies or Instrumentalities" below.
Some U.S. Government Securities do not generally involve the credit risks
associated with other types of interest bearing securities, although, as a
result, the yields available from U.S. Government Securities are generally lower
than the yields available from other interest bearing securities. Like other
interest bearing securities, however, the values of U.S. Government Securities
change as interest rates fluctuate. Shorter-term U.S. and Foreign Government
Securities generally are more stable and less susceptible to principal loss than
longer-term securities.
Foreign Government Securities. The Trust may invest up to 50% of its net assets
in Foreign Government Securities, including up to 20% of the Trust's net assets
in securities of government, government-related, and supranational issuers
located, or primarily conducting their business, in emerging markets (see
"Emerging Markets Securities" below). Up to 10% of the Trust's net assets may
be invested in non-convertible fixed income securities rated BB or lower by
Standard & Poor's Ratings Services, Inc. ("S&P"), Fitch IBCA, Inc. ("Fitch") and
Duff & Phelps Credit Rating Co ("Duff & Phelps") or Ba or lower by Moody's
Investors Service, Inc. ("Moody's") or, if unrated, will be determined by the
Adviser to be comparable quality (commonly referred to as "junk
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bonds"). The percentage of the Trust's assets invested in Foreign Government
Securities will vary depending on the relative yields of such securities, the
economies of the countries in which the investments are made and such countries'
financial markets, the interest rate climate of such countries and the
relationship of such countries' currencies to the U.S. dollar.
Investments in Foreign Government Securities and currency will be evaluated on
the basis of fundamental economic criteria (e.g., relative inflation levels and
trends, growth rate forecasts, balance of payments status, and economic
policies) as well as technical and political data. In addition to the foregoing,
interest rates are evaluated on the basis of differentials or anomalies that may
exist between different countries. The Trust's portfolio, under normal
conditions, will include securities of a number of foreign countries. The
Foreign Government Securities in which the Trust intends to invest will
generally consist of obligations supported by national, state or provincial
governments or similar political subdivisions. 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 for non-hedging purposes.
Consistent with the Fund's investment objective and policies, the Trust may also
invest in fixed income securities of corporate issuers.
Brady Bonds. The Trust may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Croatia, the Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, Panama, Peru, the Philippines, Poland, Slovenia, Uruguay and Venezuela.
Brady Bonds have been issued only recently, and for that reason do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed-rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S. Treasury
zero coupon bonds having the same maturity as the bonds. Brady Bonds are often
viewed as having three or four valuation components: the collateralized
repayment of principal at final maturity; the collateralized interest payments;
the uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the "residual
risk"). In light of the residual risk of Brady Bonds and the history of defaults
of countries issuing Brady Bonds with respect to commercial bank loans by public
and private entities, investments in Brady Bonds may be viewed as speculative.
American Depositary Receipts. The Trust may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under no
obligation to distribute shareholder communications received from the issuer of
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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. Emerging markets in which the Trust may invest
include countries or regions with relatively low gross national product per
capita compared to the world's major economies, and in countries or regions with
the potential for rapid economic growth. Emerging markets will include any
country: (i) having an "emerging stock market" as defined by the International
Finance Corporation; (ii) with low-to middle-income economies according to the
International Bank for Reconstruction and Development (the "World Bank"); (iii)
listed in World Bank publications as developing, or (iv) determined by the
Adviser to be an emerging market as defined above.
Other Investments. When the Investment Adviser believes that investing for
defensive purposes is appropriate, such as during periods of unusual market
conditions, part or all of the 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. The Trust may also invest in similar instruments when relative
yields are attractive, provided that it adheres to the 65% policy stated below.
The investment objective and policies described above may be changed without
shareholder approval, except that, as a fundamental policy, at least 65% of the
Trust's assets under normal circumstances will be invested in U.S. and Foreign
Government Securities. This fundamental policy may not be changed without the
approval of the holders of a majority of the Trust's shares (as defined below
under "Investment Restrictions").
Lower-Rated Fixed Income Securities. The Trust may invest in lower-rated fixed
income securities. 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. However, since yields vary over time, no specific
level of income can ever be assured). These lower-rated high yielding fixed
income securities generally tend to be reflect economic changes,
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short-term corporate and industry developments to a greater extent than higher
rated securities, which react primarily to fluctuations in the general level of
interest rates (although these lower-rated fixed income securities are also
affected by changes in interest rates, the market's perception of their credit
quality, and the outlook for economic growth). In the past, economic downturns
or an increase in interest rates have, under certain circumstances, caused a
higher incidence of default by the issuers of these securities and may do so in
the future, especially in the case of highly leveraged issuers. During certain
periods, the higher yields on the 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. The market for these lower-rated fixed income securities may be
less liquid than the market for investment grade fixed income securities, and
judgment may at time play a greater role in valuing these securities than in the
case of investment grade fixed income securities. Changes in the value of
securities subsequent to their acquisition will not affect cash income or yield
to the Trust but will be reflected in the net asset value of shares of the
Trust.
While the 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 Adviser's
own independent and ongoing review of credit quality. The Trust's achievement of
its investment objective may be more dependent on the Adviser's own credit
analysis than in the case of an investment company primarily investing in higher
quality fixed income securities. For a description of these and other rating
categories, see "Description of Bond Ratings" below.
INVESTMENT PRACTICES
The following investment practices apply to the portfolio investments of the
Trust. These practices may be changed without shareholder approval.
Options on U.S. and Foreign Government Securities. The Trust may write covered
put and call options and purchase put and call options on U.S. and Foreign
Government Securities that are traded on United States and foreign securities
exchanges and over-the-counter. This practice may result in the loss of
principal under certain market conditions. Other than the requirement that
options written on U.S. and Foreign Government Securities be covered, there are
no limitations on the use of such options. For a further discussion of the use,
risks and costs of options trading, see "Options and Futures" below.
Futures Contracts and Options on Futures Contracts. The 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 which otherwise
might either adversely affect the value of the Trust's portfolio securities or
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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.
Options on Foreign Currencies. The Trust may purchase and write put and call
options on foreign currencies for the purpose of protecting against declines in
the dollar value of foreign portfolio securities and against increases in the
dollar cost of foreign securities to be acquired. As in the case of other kinds
of options, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received, and
the Trust could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Trust's position, it may forfeit the entire amount of the premium plus
related transaction costs. Options on foreign currencies to be written or
purchased by the Trust will be traded on U.S. or foreign exchanges or
over-the-counter. Other than the requirement that options written on foreign
currencies only be used for hedging purposes, there are no limitations on the
use of such options. For further discussion of the use, risks and costs of
options on foreign currencies, see "Options and Futures" below.
Forward Foreign Currency Exchange Contracts. The 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. 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 Adviser, a reasonable degree of
correlation can be expected between movements in the values of the two
currencies. By entering into such transactions, however, the 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 expects 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. Such
transactions could involve significant risk of loss.
The Trust has established procedures consistent with the General Statement of
Policy of the Securities and Exchange Commission (the "SEC") and its staff
regarding the use of Forward Contracts by registered investment companies which
require the use of segregated assets or "cover" in connection with the purchase
and sale of such contracts. In those instances in which the Trust satisfies this
requirement through segregation of assets, it will segregate liquid assets,
which will be marked to market on a daily basis, in an amount equal to the value
of its
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commitments under Forward Contracts entered into by the Trust. While
these contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future assert authority to regulate
Forward Contracts. In such event, the Trust's ability to utilize Forward
Contracts in the manner set forth above may be restricted.
Zero Coupon Bonds. U.S. and Foreign Government Securities in which the Trust may
invest also include zero coupon bonds. Zero coupon bonds are debt obligations
which are issued at a significant discount from face value and do not require
the periodic payment of interest. The discount approximates the total amount of
interest the bonds will accrue and compound over the period until maturity or
the first interest payment date at a rate of interest reflecting the market rate
of the security at the time of issuance. Zero coupon bonds benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such investments may experience greater volatility in market value than
debt obligations which make regular payments of interest. The Trust will accrue
income on such investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
the Trust's distribution obligations.
Collateralized Mortgage Obligations. 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 the Federal Home
Loan Mortgage Corporation (such collateral collectively hereinafter referred to
as "Mortgage Assets"). Payments of principal and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs. CMOs may be issued by agencies or instrumentalities of the
U.S. or foreign governments or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing.
In a CMO, a series of bonds or certificates may be issued in multiple classes.
Each class of CMOs, often referred to as a "tranche", is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates resulting in a loss of all or part of the premium if any has been paid.
Interest is paid or accrued on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In a common structure, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of the series of
a CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of CMOs until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. Certain CMOs may be stripped (securities which provide
only the principal or interest factor of the underlying security). See "Stripped
Mortgage-Backed Securities" below for a discussion of the risks of investing in
these stripped securities and of investing in classes consisting primarily of
interest payments or principal payments.
The 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
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more than one class. These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution date of each class,
which, as with other CMO structures, must be retired by its stated maturity date
or final distribution date but may be retired earlier. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.
Indexed Securities. The Trust may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (i.e., principal value) or coupon rate is determined by reference to a
specific instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by references to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value or interest rates may increase
when the specified currency value increases, resulting in a security that
performs similarly to a foreign-denominated instrument, or their maturity value
may decline when foreign currencies increase, resulting in a security whose
price characteristics are similar to a put on the underlying currency and could
involve the loss of all or a portion of the principal amount of or interest on
the instrument. Currency-indexed securities may also have prices that depend on
the values of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Inverse Floating Rate Obligations. The Trust may invest in so-called "inverse
floating rate obligations" or "residual interest" bonds or other obligations or
certificates relating thereto structured to have similar features. Such
obligations generally have floating or variable interest rates that move in the
opposite direction of short-term interest rates and generally increase or
decrease in value in response to changes in short-term interest rates at a rate
which is a multiple of the rate at which fixed-rate long-term securities
increase or decrease in response to such changes. As a result, such obligations
have the effect of providing investment leverage and may be more volatile than
long-term fixed-rate obligations.
Mortgage "Dollar Roll" Transactions. The 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 records these transactions as sale and purchase transactions rather than
as borrowing transactions. 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
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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 foregoes 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.
Stripped Mortgage-Backed Securities. 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 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.
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 a Fund's investment exposure from one
type of investment to another. For example, if a Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease a Fund's
10
exposure to U.S. interest rates and increase its exposure to foreign currency
and interest rates. Caps and floors have an effect similar to buying or writing
options. Depending on how they are used, swap agreements may increase or
decrease the overall volatility of a Fund's investments and its share price and
yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed, or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on the 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 agreements if
MFS 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 MFS
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.
Yield Curve Options. The Trust may also enter into options on the "spread", or
differential, between two U.S. or Foreign Government Securities, in a
transaction referred to as a
11
"yield curve" option. In contrast to other types of options, a yield curve
option is based on the difference between the yields of designated U.S. or
Foreign Government Securities, rather than the prices of the individual
securities, and is usually settled through cash payments. Accordingly, a yield
curve option is profitable to the holder if this differential widens (in the
case of a call) or narrows (in the case of a put), regardless of whether the
yields of the underlying securities increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the 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 U.S. or Foreign Government 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 Adviser, the Trust will be able to profit from movements in the
spread between the yields of the underlying U.S. or Foreign Government
Securities. The trading of yield curve options is subject to all of the risks
associated with the trading of other types of options. In addition, however,
such options present risk of loss even if the yield of one of the underlying
securities remains constant, if the spread moves in a direction or to an extent
which was not anticipated. Yield curve options written by the 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 segregates liquid
assets 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. Because
these securities are traded over-the-counter, the SEC has taken the position
that yield curve options are illiquid, and, therefore, cannot exceed the SEC
illiquidity ceiling.
"Reset Options". In certain instances, the Trust may enter into options on
Treasury securities which provide for periodic adjustment of the premium during
the term of each such option. Like other types of options, these transactions,
which may be referred to as "reset options" or "adjustable strike options",
grant the purchaser the right to purchase (in the case of a call) or sell (in
the case of a put), a specified type and series of U.S. Treasury security at any
time up to a stated expiration date (or, in certain instances, on such date). In
contrast to other types of options, however, the price at which the underlying
security may be purchased or sold under a "reset option" is determined at
various intervals during the term of the option, and such price fluctuates from
interval to interval based on changes in the market value of the underlying
security. As a result, the strike price of a "reset option", at the time of
exercise, may be less advantageous to the Trust than if the strike price had
been fixed at the initiation of the option. In addition, the premium paid for
the purchase of the option may be determined at the termination, rather than the
initiation, of the option. If the premium is paid at termination, the Trust
assumes the risk that (i) the premium may be less than the premium which would
otherwise have been received at the initiation of the option because of such
factors as the volatility in yield of the underlying Treasury security over the
term of the option and adjustments made to the strike price of the option, and
(ii) the option purchaser may default on its obligation to pay the premium at
the termination of the option.
Lending of Portfolio Securities. The 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 SEC. Such loans will usually be made only
12
to member banks of the Federal Reserve System and member firms (and subsidiaries
thereof) of a national securities exchange ("Exchange"), and would be required
to be secured continuously by collateral, including cash, or U.S. Government
Securities, an irrevocable letter of credit or other collateral permissible
under SEC policies and maintained on a current basis at an amount at least equal
to the market value of the securities loaned. The Trust would have the right to
call a loan and obtain the securities loaned at any time on customary industry
settlement notice (which will usually not exceed five days). For the duration of
a loan, the Trust would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned. The Trust would also
receive a fee from the borrower. The Trust would also receive compensation from
the investment of the collateral), less a fee paid to the borrower, if the
collateral is in the form of cash. . The 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. While awaiting delivery of securities purchased on such bases, the Trust
will segregate liquid assets sufficient to cover its commitments. Although the
Trust does not intend to make such purchases for speculative purposes, purchases
on such bases may involve more risk than other types of purchases.
When the Trust commits to purchase a security on a "when-issued" or "forward
delivery" basis, it will segregate liquid assets consistent with the General
Statement of Policy of the SEC described in "Forward Foreign Currency Exchange
Contracts" above, concerning such purchases. However, although the 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 income on available cash or as a temporary defensive measure. Under a
repurchase agreement,
13
the Trust acquires securities subject to the seller's agreement to repurchase at
a specified time and price. If the seller becomes subject to a proceeding under
the bankruptcy laws or its assets are otherwise subject to a stay order, the
Trust's right to liquidate the securities may be restricted (during which time
the value of the securities could decline).
The Trust may enter into repurchase agreements with sellers who are member
firms, or a subsidiary thereof, of an Exchange or members of the Federal Reserve
System, recognized primary U.S. Government Securities dealers or institutions
which the Adviser has determined to be of comparable creditworthiness. The
securities that the 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 prices 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
amount 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 Adviser has determined that the
seller is creditworthy, and the Adviser monitors the seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Trust has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
collateral. For additional information concerning repurchase agreements, see
"Investment Restrictions" below.
Securities Purchased at a Discount. When and if available, fixed income
securities may be purchased at a market discount from face value. However, the
Trust does not intend to hold such securities to maturity for the purpose of
achieving potential capital gains, unless current yields on these securities
remain attractive.
OPTIONS AND FUTURES
Options on U.S. and Foreign Government Securities. The Trust intends to write
covered put and call options and purchase put and call options on U.S. and
Foreign Government Securities that are traded on United States and foreign
securities exchange and over-the-counter.
Call options written by the 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 security covered by the call or has an absolute
and immediate right to acquire that security without additional
14
cash consideration) 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 is (a) equal to or less than the exercise price of the
call written or (b) liquid assets representing greater than the exercise price
of the call written if the difference is segregated by the Trust. . A put option
written by the Trust is "covered" if the Trust segregates liquid assets with a
value equal to the exercise price , or else holds a put on the same security and
in the same principal amount as the put written where the exercise price of the
put held is (a) equal to or greater than the exercise price of the put written
or (b) less than the exercise price of the put written if the difference is
segregated by the Trust . The premium paid by the purchaser of an option will
reflect, among other things, the relationship of the exercise price to the
market price and volatility of the underlying security, the remaining term of
the option, supply and demand and interest rates. Put and call options may also
be covered in such other manner as may be in accordance with the requirements of
the exchange on which, or the counterparty with which, the option is traded and
applicable rules and regulations.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option or purchased, in the case of a put
option, since with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation. Whether
or not an option expires unexercised, the writer retains the amount of the
premium. This amount, of course, may, in the case of a covered call option, be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option is exercised, the
writer must fulfill the obligation to purchase the underlying security at the
exercise price, which will usually exceed the then-market value of the
underlying security. Even if an option is exercised, the writer retains the
amount of the premium.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. However, a
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction". This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will permit
the Trust to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the 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.
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
15
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 an Exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
Exchange; (v) the facilities of an Exchange or the Options Clearing Corporation
may not at all times be adequate to handle current trading volume; or (vi) one
or more Exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on that Exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The 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
16
premium 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 option minus the amount by which the
market price of the security is below the exercise price. Out-of-the-money,
at-the-money, and in-the-money put options may be used by the 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, from
time to time, may purchase securities such as FNMA bonds and Federal Housing
Administration ("FHA") project loans which carry with them the right to sell
them back to the issuer prior to the stated maturity. The Trust will consider
these rights in determining the maturity of such securities.
The Trust may purchase call options to hedge against an increase in the price of
U.S. or Foreign Government 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.
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 financial indices including any index of U.S. or
Foreign Government Securities ("Futures Contracts"). A "sale" of a Futures
Contract means the acquisition of a contractual obligation to deliver the
securities or foreign currencies called for by the contract at a specified price
on a specified date. A "purchase" of a Futures Contract means the acquisition of
a contractual obligation to acquire the securities or foreign currencies called
for by the contract at a specified price on a specified date. U.S. Futures
Contracts have been designed by exchanges which have been designated "contracts
markets" by the Commodity Futures Trading Commission ("CFTC"), and must be
executed through a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Existing contract markets include the
Chicago Board of Trade and International Money Market of the Chicago Mercantile
Exchange. Futures Contracts trade on these markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange. The 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 non-U.S. Government bonds.
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 on a marked-to-market
basis and the Trust may be required to pay or receive a "variation margin,"
which reflects any decline or increase in the contract's value.
At the time of delivery of securities pursuant to such a contract, adjustments
are made to recognize differences in value arising from the delivery of
securities with a different interest rate from that specified in the contract.
In some (but not many) cases, securities called for by a Futures Contract
17
may not have been issued when the contract was written. A Futures Contract on an
index of securities provides for a cash settlement based on changes in the value
of the underlying index.
Although Futures Contracts by their terms call for the actual delivery or
acquisition of securities, or in the case of futures on an index of securities,
a cash settlement, in most cases the contractual obligation is fulfilled before
the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical Futures
Contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Trust will incur brokerage fees when it
purchases or sells Futures Contracts.
The purpose of the acquisition or sale of a Futures Contract, in the case of a
portfolio, such as the portfolio of the Trust, which hold 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 in bonds with short maturities when
interest rates are expected to increase. However, since the futures market is
more liquid than the cash market the use of Futures Contracts as an investment
technique allows the 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 had 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 Trust will segregate liquid assets in an amount equal to the
difference between the fluctuating market value of such Futures Contracts and
the aggregate value of the initial and variation margin payments made by the
Trust with respect to such Futures Contracts, thereby assuring the position is
unleveraged.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of
18
speculators, the margin deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest rate trends by the Investment Adviser may still not result in a
successful transaction.
In addition, Futures Contracts entail risks. Although the Trust believes that
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 positions. In
addition, in such situations, if the Trust has insufficient cash, it may have to
sell bonds from its portfolio to meet daily variation margin requirements. Such
sales of bonds may be, but will not necessarily be, at increased prices which
reflect the rising market. The 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 the price of
the underlying debt securities, it may or may not be less risky than ownership
of the Futures Contract or underlying debt securities. As with the purchase of
Futures Contracts, when the 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 positions, 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 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 risking interest rates.
19
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,
although it may be necessary to exercise the option which will result in a
position in the Futures Contract. In addition to the correlation risks discussed
above, the purchase of an option also entails the risk that changes in the value
of the underlying Futures Contract will not be fully reflected in the value of
the option purchased. The writing of an Option on a Futures Contract involves
all of the risks of purchases or sales of Futures Contracts, including initial
and variation margin requirements.
The 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. Furthermore, the
Trust's ability to engage in options and futures transactions may be limited by
tax considerations.
Options on Futures Contracts may be covered in any such manner as may be in
accordance with the requirements of the exchange on which they are traded and
applicable rules and regulations.
Options on Foreign Currencies. The Trust may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
Futures Contracts on foreign currencies, or Forward Contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the 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 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
20
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 a 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 segregated by the Trust ) upon conversion or
exchange of other foreign currency held in its portfolio. A call option is also
covered if the Trust has purchased a call on the same foreign currency and in
the same principal amount as the call written where the exercise price of the
call held is (a) equal to or less than the exercise price of the call written or
(b) greater than the exercise price of the call written if liquid assets
representing the difference is segregated by the Trust. Call and put options on
foreign currencies may also be covered in such other manner as may be in
accordance with the requirements of the exchange on which they are traded and
applicable rules and regulations.
Call and put options and Options on Futures Contracts may be covered in any such
manner as may be in accordance with the requirements of the exchange on which
they are traded and applicable rules and regulations.
Options on securities may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no clearing house performance
guarantees. In addition, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost.
As a result of its investments in foreign securities, the Trust may receive
interest payments, or the proceeds of the sale or redemption of such securities,
in foreign currencies. In that event, the Trust may promptly convert such
currencies into dollars at the then-current exchange rate. Under certain
circumstances, alternatively, such as where the Investment Adviser anticipates
that the exchange rate will improve, the Trust may hold such currencies for an
indefinite period of time. The Trust may also hold foreign currency in
anticipation of purchasing foreign securities.
In addition, the Trust may be required or elect to receive delivery of the
foreign currencies underlying options on foreign currencies or Forward Contracts
it has entered into. This could occur, for example, if an option written by the
Trust is exercised or the Trust is unable to close out a Forward Contract it has
entered into. The Trust may also elect to take delivery of the currencies
underlying options or Forward Contracts if, in the judgment of the Investment
Adviser, it is in the best interest of the Trust to do so. The holding of
currencies exposes the Trust to risk of loss if currency 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
21
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.
Additional Risks of Options on U.S. and Foreign Government Securities, Options
on Futures Contracts, Forward Contracts and Options on Foreign Currencies.
Unlike transactions entered into by the 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 Exchange, subject to
SEC regulation. Similarly, options on securities may be traded over-the-counter.
In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and trader
of Forward Contracts could lose amounts substantially in excess of their initial
investments, due to the margin and collateral requirements associated with such
positions. In addition, where the Trust enters into Forward Contracts as a
"cross hedge" (i.e., the purchase or sale of a Forward Contract on one currency
to hedge against risk of loss arising from changes in value of a second
currency), the Trust incurs the risk of imperfect correlation between changes in
the values of the two currencies, which could result in losses.
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, Options on Futures Contracts
and Options on Foreign Currencies traded on CFTC - regulated exchange only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-bona fide hedging purposes, provided that the aggregate initial margin and
premiums to establish such non-bona fide hedging positions do not exceed 5% of
the liquidation value of the Trust's assets, after taking into account
unrealized profits and unrealized losses on any such contracts the Trust has
entered into, and excluding, in computing such 5%, the in-the-money amount with
respect to an option that is in-the-money at the time of purchase.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid;
therefore, together with other illiquid securities, such options and assets
cannot exceed a certain percentage of the Trust's assets (the "SEC illiquidity
ceiling"). Although the Investment Adviser disagrees with this 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
22
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 part of the formula
price as illiquid for purposes of the SEC illiquidity ceiling. 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 SEC illiquidity ceiling.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the 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 this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions, on exercise.
In addition, options on U.S. and Foreign Government Securities, Futures
Contracts, Options on Futures Contracts, Forward Contracts and options on
foreign currencies may be traded on foreign exchanges. Such transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies or securities. The value of such positions also could be
adversely affected by (i) other complex foreign political and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the 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 Untied States, and (v) lesser
trading volume.
Future Developments. The Trust proposes to take advantage of opportunities in
the area of options and Futures Contracts and Options on Futures Contracts which
are not presently contemplated for use by the 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
involved in the options and futures activities described above.
23
PORTFOLIO MANAGEMENT
The Trust's portfolio management may include the following strategies:
(1) changing from one U.S. Government Security to an essentially similar U.S.
Government Security when their respective yields are distorted due to market
factors;
(2) changing from U.S. Government Securities to Foreign Government Securities or
from Foreign Government Securities to U.S. Government Securities when
disparities arise in their relative yields;
(3) selling one kind of U.S. Government Security (e.g., Treasury bonds) and
buying another (e.g., FNMA direct pass-through certificates) when disparities
arise in the relative values of each;
(4) shortening the average maturity of its portfolio in anticipation of a rise
in interest rates so as to minimize depreciation of principal; and
(5) lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize appreciation of principal.
The Trust may also use the techniques described above under "Investment
Practices" to manage its portfolio.
While these strategies are designed to increase the Trust's current income
available for distribution to its shareholders, if the Trust's expectations of
changes in interest rates or its evaluation of the normal yield relationship
between two securities or obligations proves to be incorrect, the Trust's income
and net asset value may be reduced.
SPECIAL CONSIDERATIONS
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 a portfolio invested at higher yields can
be expected to rise. Conversely, when interest rates rise, the value of a
portfolio invested at lower yields can be expected to decline. If the Trust'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.
Although changes 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 dividends paid by the Trust 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.
24
The Trust's use of options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and options on foreign currencies may result in the loss of
principal under certain market conditions. See "Options and Futures" above.
Investing in Foreign Government Securities involves considerations and possible
risks not typically associated with investing in U.S. Government Securities. The
value of Foreign Government Securities investments will be affected by changes
in currency rates or exchange control regulations. Because interest and
principal payments of Foreign Government Securities may be made in foreign
currencies, if the exchange rate declines after the Trust receives these
payments the Trust may not have sufficient cash to make distributions to
shareholders without selling portfolio securities. A decline in the exchange
rate would also result in a decrease in the value of certain portfolio
securities. The Trust may enter into Forward Contracts and options on foreign
currencies in an effort to protect against this risk. The value of Foreign
Government Securities can also be affected by the application of foreign tax
laws, including withholding taxes, changes in governmental administration or
economic or monetary policy (in this country or abroad) or changed circumstances
in dealings between nations. Costs may be incurred in connection with
conversions between various currencies. Foreign brokerage commissions are
generally higher than in the United States, and foreign securities markets may
be less liquid, more volatile and less subject to governmental supervision than
in the United States. Investments in foreign countries could be affected by
other factors not present in the United States, including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. A delay in
settlement could hinder the ability of the Trust to take advantage of changing
market conditions with a possible resulting adverse effect on net asset value.
The risks of investing in foreign securities may be intensified in the case of
investments in emerging markets. Securities of many issuers in emerging markets
may be less liquid and more volatile than securities of comparable domestic
issuers. Emerging markets also have different clearance and settlement
procedure, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of the 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 either in losses to the Trust due to subsequent
declines in value of the portfolio security 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. 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
25
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.
For these reasons, an investment in shares of the Trust should not constitute a
complete investment program since it involves the risk of capital depreciation
inherent in seeking higher income.
INVESTMENT RESTRICTIONS
The Trust has adopted the following policies which cannot be changed without the
approval of the holders of a majority of its shares (which means the lesser of
(i) more than 50% of the outstanding shares of the 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).
Except with respect to borrowings and investing in illiquid securities, all
percentage limitations set forth below apply immediately after a purchase or
initial investment and any subsequent change in any applicable percentage
resulting from market fluctuations does not require elimination of any security
from the portfolio. The Trust may not:
(1) borrow money, except as a temporary measure for
extraordinary or emergency purposes or for a repurchase of its shares
or except as contemplated by clause (9) below, and in no event shall
the Trust borrow in excess of 1/3 of its assets. The Trust will not
purchase securities while borrowings are outstanding, except that it
will honor prior commitments to purchase securities.
(2) purchase any security or evidence of interest therein on
margin, except that the Trust may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of securities and
except that the Trust may make deposits on margin in connection with
options, Futures Contracts and Options on Futures Contracts;
(3) underwrite securities issued by other persons except
insofar as the Trust may technically be deemed an underwriter under the
Securities Act of 1933 in selling a portfolio security;
(4) invest in illiquid investments, including securities which
are subject to legal or contractual restrictions on resale or for which
there is no readily available market (e.g.,
26
trading in the security is suspended or, in the case of unlisted
securities, where no market makers exist), if more than 10% of the
Trust's assets (taken at market value) would be invested in such
securities;
(5) purchase or sell real estate (including limited
partnership interests but excluding securities secured by real estate
or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (except currencies, currency options
or futures, Forward Contracts or Futures Contracts) in the ordinary
course of the business of the Trust (the Trust reserves the freedom of
action to hold and to sell real estate acquired as a result of the
ownership of securities);
(6) purchase securities of any issuer if such purchase at the
time thereof would cause more than 10% of the voting securities of such
issuer to be held by the Trust;
(7) issue any senior security (as that term is defined in the
1940 Act), if such issuance is specifically prohibited by the 1940 Act
or the rules and regulations promulgated thereunder (for the purpose of
this restriction, collateral arrangements with respect to options,
Futures Contracts and Options on Futures Contracts and collateral
arrangements with respect to initial and variation margin are not
deemed to be the issuance of a senior security);
(8) make loans to other persons except through the lending of
its portfolio securities not in excess of 30% of its total assets
(taken at market value) and except through the use of repurchase
agreements, the purchase of commercial paper or the purchase of all or
a portion of an issue of debt securities in accordance with its
investment objective, policies and restrictions; or
(9) make short sales of securities or maintain a short
position, unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for
securities of the same issue as, and equal in amount to, the securities
sold short ("short sales against the box"), and unless not more than
10% of the Trust's net assets (taken at market value) is held as
collateral for such sales at any one time .
The Trust's investment limitations and policies are adhered to at the time of
purchase or utilization of assets; a subsequent change in circumstances will not
be considered to result in a violation of policy.
27
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES
Federal Farm Credit System Notes and Bonds-
are bonds issued by a cooperatively owned nationwide system of banks and
associations supervised by the Farm Credit Administration, an independent
agency of the U.S. Government. These bonds are not guaranteed by the U.S.
Government.
Maritime Administration Bonds-
are bonds issued and provided by the Department of Transportation of the
U.S. Government and are guaranteed by the United States.
FHA debentures-
are debentures issued by the Federal Housing Administration of the U. S.
Government and are guaranteed by the United States.
GNMA Certificates-
are mortgage-backed securities which represent a partial ownership
interests in a pool of mortgage loans issued by lenders such as mortgage
bankers, commercial banks and savings and loan associations. Each mortgage
loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.
FHLMC Bonds-
are bonds issued and guaranteed by the Federal Home Loan Mortgage
Corporation and are not guaranteed by the U.S. Government.
FNMA Bonds-
are bonds issued and guaranteed by the Federal National Mortgage
Association and are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds-
are notes and bonds issued by the Federal Home Loan Bank System, and are
not guaranteed by the U.S. Government.
Although this list includes a description of the primary types of U.S.
Government agency or instrumentality obligations in which the 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.
28
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.
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.
29
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 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.
30
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.
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.
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A: High credit quality. "A" ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB: Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB: Speculative. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B: Highly speculative. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A "CC" rating indicates that default of some
kind appears probable. "C" ratings signal imminent default.
DDD, DD, D: Default. 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
32
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.
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 Advisers: 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, MA 02116,
which in turn is 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
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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 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.
34
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 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 except that the Distribution Agreement with MFD requires MFD to pay
for prospectuses that are to be used for sales purposes.
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.
35
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 lesser of the sum of 0.32% of the average daily net assets of the Trust and
5.65% of the daily gross income (i.e., income other than gains from the sale of
securities, gains from options and futures transactions and premium income from
options written) or 0.85% of the average daily net assets of the Trust for the
Trust's then-current fiscal year. This advisory fee is greater than that paid by
most funds.
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.
9.1.c. General - Portfolio Management: James J. Calmas and Erik S. Weisman are
the portfolio managers of the Trust. Mr. Calmas, a Senior Vice President of the
Adviser, has been employed in the investment management area of the Adviser
since 1988. Mr. Weisman, a Vice President of the Adviser, has been employed in
the investment management area of the Adviser since 2002. Prior to joining MFS,
Mr. Weisman was the Assistant to the U.S. Executive Director for the
International Monetary Fund, where he was employed from 2000 to 2002. 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 Services Center,
Inc., 500 Boylston Street, Boston, Massachusetts 02116, a wholly owned
subsidiary of MFS, 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
Trustees to issue an unlimited number of full and fractional Shares of
Beneficial Interest, without par value. Shareholders are entitled to one vote
for each share held and to vote in the election of Trustees and on other matters
submitted to meetings of shareholders. No material amendment may be made to the
Trust's Declaration of Trust without the affirmative vote of a majority of its
shares. Under certain circumstances, shareholders have the right to communicate
with other shareholders
36
and to remove Trustees. Shares have no pre-emptive or conversion rights. Shares
when issued are fully paid and non-assessable, except as set forth below under
"Certain Provisions of the Declaration of Trust."
The Trust's Declaration of Trust permits the Trustees to divide or combine the
shares into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in the Trust. Each share represents an equal
proportionate interest in the Trust with each other share. The Trust has no
present intention of offering additional shares, except that additional shares
may be issued under the Trust's Dividend Reinvestment and Cash Purchase 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 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.
The Trust may enter into a merger or consolidation, or sell all or substantially
all of its assets, if approved by the vote of the holders of two-thirds of its
outstanding shares, except that if the Trustees recommend such transaction, the
approval by the vote of the holders of a majority of its outstanding shares will
be sufficient. The Trust may also be terminated upon liquidation and
distribution of its assets, if approved by the vote of the holders of two-thirds
of its outstanding shares. If not so terminated, the Trust will continue
indefinitely. Upon liquidation of the Trust, the Trust's shareholders are
entitled to share pro rata in the Trust's net assets available for distribution
to its shareholders.
Repurchase of Shares. The Trust is a closed-end management investment company
and as such its shareholders do not, and will not, have the right to redeem
their shares of the 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 10% 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 Items 8.2, 8.3 and 8.4.
The shares of the Trust will trade in the open market at a price which will be a
function of several factors, including their net asset value and yield. The
shares of closed-end investment companies generally sell at market prices
varying from their net asset values. When the 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.
Certain Provisions of the Declaration of Trust. The Trust is an entity of the
type commonly known as a "Massachusetts business trust." Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable as partners for its obligations. However, the Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations
37
of the Trust and provides for indemnification and reimbursement of expenses out
of the Trust property for any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust also provides that the Trust
shall maintain appropriate insurance (for example, fidelity bonding and errors
and omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which both inadequate
insurance exists and the Trust itself is 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 errors of judgment or mistakes of
fact or law, but nothing in the Declaration of Trust protects a Trustee against
any liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Anti-Takeover Provisions. The 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 engage in certain transactions or to modify its structure. The Board
of Trustees is divided into three classes, each having a term of three years.
Each year the term of one class expires. This provision could delay for up to
two years the replacement of a majority of the Board of Trustees. In addition,
the affirmative vote or consent of the holders of 66 2/3% of the shares of the
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
(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, or indirectly 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
38
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 interests 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.
b. Inapplicable.
c. Inapplicable.
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 in the manner required by Subchapter M of the Internal
Revenue Code of 1986, as amended ("the Code") and capital gains, if any, will be
distributed at least annually. Premiums from options, if any, may be distributed
at least annually. See Item 10.4.
Shareholders holding shares in their own names may elect to have all
distributions of dividends and capital gains automatically reinvested by State
Street Bank and Trust Company ("State Street"), as Plan agent, pursuant to the
Dividend Reinvestment and Cash Purchase Plan (the "Plan"), the provisions of
which are set forth below. Shareholders not making such election will receive
all such amounts in cash paid by check mailed directly to the shareholder by
State Street, as dividend paying agent.
Under the Plan, if the Trustees of the Trust declare a dividend or determine to
make a capital gain distribution, the nonparticipants in the Plan will receive
such dividend or distribution in cash and participants in the Plan will receive
the equivalent in shares of the 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, as agent for
the participants, will buy Trust shares in the open market, on the New York
Stock Exchange or elsewhere, for the participants' accounts. If, the market
price exceeds the net asset value of the 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.
39
Participants in the Plan have the option of making additional cash payments to
State Street, semi-annually, for investment in the Trust's shares. Interest will
not be paid on any uninvested cash payments.
State Street maintains all shareholder accounts in the Plan and furnishes
monthly written confirmations of all transactions in the account, including
information needed by shareholders for personal and tax records. Shares in the
account of each Plan participant will be held by State Street in
non-certificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan. While the 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 or distributions,
except for certain brokerage commissions, as described below. State Street's
fees for the handling of the reinvestment of dividends and distributions will be
paid by the Trust. There will be no brokerage charges with respect to shares
issued directly by the Trust as a result of dividends or distributions payable
either in stock or in cash. However, each participant will pay a pro rata share
of brokerage commissions incurred with respect to State Street's open market
purchases in connection with the reinvestment of dividends or distributions as
well as from voluntary cash payments. With respect to purchases from voluntary
cash payments, State Street will charge a service fee of $0.75 for each cash
purchase. Brokerage charges for purchasing small amounts of stock for individual
accounts through the Plan are expected to be less than the usual brokerage
charges for such transactions, as State Street will be purchasing shares for all
participants in blocks and pro-rating the lower commission thus attainable.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax which may be payable or required to be withheld
on such dividends or distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Trust reserves the right to amend or terminate the Plan as applied to any
voluntary cash payments made and any dividend or distribution paid subsequent to
written notice of the change sent to the participants in the Plan at least 90
days before the record date for such dividend or distribution. All
correspondence concerning the Plan should be directed to State Street at 225
Franklin Street, Boston, Massachusetts 02110.
10.2. Long-term debt: Inapplicable.
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
40
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 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
41
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 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.
42
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.
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.
43
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.
10.5. Outstanding Securities: The following information is furnished as of
January 31, 2006:
------------------------------ ---------------------------- --------------------------- ----------------------------
(1) (2) (3) (4)
------------------------------ ---------------------------- --------------------------- ----------------------------
Title of Class Amount Amount Held by Amount
Authorized Trust or for Outstanding
its Account Exclusive
of Amount Shown
Under (3)
------------------------------ ---------------------------- --------------------------- ----------------------------
Shares of 135,059,968.036 15,823,150* 119,236,818.036
Beneficial Interest,
without par value
------------------------------ ---------------------------- --------------------------- ----------------------------
*Treasury Shares
10.6. Securities Ratings: Inapplicable.
Item 11. Defaults and Arrears on Senior Securities: None.
Item 12. Legal Proceedings: 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.
44
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 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
45
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.
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 14. Cover Page: Inapplicable.
Item 15. Table of Contents: Inapplicable.
Item 16. General Information and History: Inapplicable.
Item 17. Investment Objective and Policies:
17.1, 17.2 and 17.3: See 8.2.
17.4. For fiscal year 2005, the Trust's portfolio turnover rate was 58%. For
fiscal year 2004, the Trust's portfolio turnover rate was 45%.
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.
46
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
--------------------------------------- --------------------- --------------------- --------------------------------------
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 J. Manning(3) Trustee February 2004 Massachusetts Financial Services
(born 10/20/63) Company, Chief Executive Officer,
President, Chief Investment Officer
and Director
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial Services
(born 08/08/46) Company, Chairman (since February
2004); Secretary of Economic Affairs, The
Commonwealth 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
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
47
--------------------------------------- --------------------- --------------------- --------------------------------------
Name, Date of Birth Position(s) Held Trustee/Officer Principal Occupations During the
Past Five Years & Other
with Fund Since(1) Directorships(2)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
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)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
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)
--------------------------------------- --------------------- --------------------- --------------------------------------
48
--------------------------------------- --------------------- --------------------- --------------------------------------
Name, Date of Birth Position(s) Held Trustee/Officer Principal Occupations During the
Past Five Years & Other
with Fund Since(1) Directorships(2)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
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)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
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
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
49
Name, Date of Birth Position(s) Held Trustee/Officer Principal Occupations During the
Past Five Years & Other
with Fund Since(1) Directorships(2)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
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)
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
--------------------------------------- --------------------- --------------------- --------------------------------------
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.
50
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.
51
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 COMMITTEE 8 Oversees the development and implementation of the Butler*, Cohn*, Gunning*,
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.
52
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,
and to make its recommendations to the full Board of Thomsen 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.
53
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,
consideration by the Committee may do so by writing Thomsen 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 Perera*
carried out by 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.
54
PRICING COMMITTEE 7 Oversees the determination of the value of the Ives* (ex-officio
portfolio securities and other assets held by the member), Perera*,
Trust and determines or causes to be determined the Thomsen* and 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 Trust's Audit
Committee.
55
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. B D
David H. Gunning A D
William R. Gutow A D
Michael Hegarty A D
J. Atwood Ives A D
Lawrence T. Perera N D
J. Dale Sherratt B D
Laurie J. Thomsen(1) N D
Robert W. Uek(1) N N
------------------
(1) Ms. Thomsen became a Trustee of the Fund on March 23, 2005. Messrs. Butler
and Uek became Trustees of the Fund on January 1, 2006.
18.8. Inapplicable.
18.9. Inapplicable.
18.10. Inapplicable.
18.11. Inapplicable.
18.12: Inapplicable.
56
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) $12,019 $423 $192,518
David H. Gunning(4) $12,103 N/A $204,768
William R. Gutow $12,019 N/A $192,518
Michael Hegarty(4) $10,686 N/A $188,304
J. Atwood Ives $12,842 $275,518
Amy B. Lane(4), (5) $12,225 N/A $215,518
Lawrence T. Perera $11,904 $203,304
William J. Poorvu(5) $ 2,725 N/A N/A
J. Dale Sherratt $12,244 $380 $221,143
Elaine R. Smith(5) $5,379 $ 47,334
Laurie J. Thomsen((6)) $9,964 N/A $187,787
Robert W. Uek(3) N/A N/A N/A
-------------
* Messrs. Manning and Pozen became Trustees of the Fund 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 Trust 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 Trust 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 $3,128.
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
57
compensation is a general unsecured obligation.
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.
58
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.
59
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 of the
nominee's status and a requirement that the resolution be disclosed
together with the reasons for the resolution;
60
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.
61
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
62
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.
63
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.
64
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.
65
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.
66
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.
67
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
68
during the year and the position taken with respect to each issue.
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 (a nominee for the
Depository Trust Company, 7 Hanover Square, New York, New York 10004), was the
record owner of approximately 82% of the outstanding shares of the Trust.
As of January 31, 2006, all Trustees and officers of the Trust as a group own of
record less than 1% of the outstanding shares of the Trust.
Item 20. Investment Advisory and Other Services:
Items 20.1.a. through 20.5. See Item 9.1.b. For the fiscal year ended October
31, 2005, MFS received fees under the Trust's Investment Advisory Agreement of
$5,614,315. For the fiscal year ended October 31, 2004, MFS received fees under
the Investment Advisory Agreement of $6,075,263. For the fiscal year ended
October 31, 2003, MFS received fees under the Trust's Investment Advisory
Agreement of $6,407,150.
20.6. See Item 9.1.e.
20.7. The principal business address of Deloitte & Touche LLP, the Trust's
independent registered public accounting firm, is 125 Summer Street, Boston,
Massachusetts 02110. Deloitte & Touche LLP certify financial statements of the
Trust as required to be certified by any law or regulation and provide certain
other tax-related services for the Trust (such as tax return preparation and
assistance 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.
69
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
------------------------ --------------- ----------------- ------------- ------------------ ------------- --------------------
------------------------ --------------- ----------------- ------------- ------------------ ------------- --------------------
James J. Calmas 8 $3.3 billion 4 $768 million 2 $596 million
------------------------ --------------- ----------------- ------------- ------------------ ------------- --------------------
------------------------ --------------- ----------------- ------------- ------------------ ------------- --------------------
Erik S. Weisman 9 $2.1 billion 3 $1.1 billion 0 N/A
------------------------ --------------- ----------------- ------------- ------------------ ------------- --------------------
----------------
* Includes the Trust.
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.
Item 21.2 Compensation
70
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.
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
------------------------- -----------------------------------------
James J. Calmas N
Erik S. Weisman N
71
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 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
72
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 Trust and
other clients of the Adviser; accordingly, not all of the Research provided by
brokers through which the Trust effects securities transactions may be used by
the Adviser in connection with the Trust. 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.
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.
73
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 $0. For the fiscal year ended October 31, 2004, the Trust paid brokerage
commissions of $0 and for the fiscal year ended October 31, 2003, the Trust paid
brokerage commissions of $0.
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
------------- ------------------------------------------
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Merrill Lynch & Co., Inc. $20,367
------------------------------------------------------------------------------
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:
74
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
75
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 Independent Auditors'
Report
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 2(d) to Amendment No. 9);
incorporated herein by reference.
(e) The section "Dividend Reinvestment and Cash Purchase Plan" on
page 4 of the Trust's Annual Report to its Shareholders, for its
fiscal year ended October 31, 1997; incorporated herein by
reference.
(f) Inapplicable.
(g)(1) Investment Advisory Agreement, dated January 1, 2002; filed
herein.
(g)(2) Master Administrative Services Agreement, dated March 1, 1997,
as amended April 1, 1999, between Massachusetts Financial
Services Company and the Trust; filed herein.
76
(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.
77
(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.
(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 (k)(2) to Amendment No. 8); incorporated herein by
reference.
(k)(2) Amendment, dated February 22, 2005, to the Shareholder
Servicing Agreements; filed herein.
(k)(3) Loan Agreement by and among the Banks named therein, the MFS
Funds named therein, and The First National Bank of Boston, dated
as of February 21, 1995 (previously filed with Amendment No. 8);
incorporated herein by reference.
(l) Omitted pursuant to General Instruction G.3 to Form N-2.
(m) None.
(n) Omitted pursuant to General Instruction G.3 to Form N-2.
(o) Omitted pursuant to General Instructions G.3 to Form N-2.
(p) Form of Purchase Agreement (previously filed as Exhibit 2(p) to
Amendment No. 9); incorporated herein by reference.
(q) Inapplicable.
(r)(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").
(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").
78
(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 7,196
(without par value) (as at 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 insured under the fidelity bond
required by Rule 17g-1 under the Investment Company Act of 1940.
Item 31. Business and Other Connections of Investment Adviser:
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
79
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 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.
80
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 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.
81
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.
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.
82
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 a 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 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
83
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.
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%
84
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,
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)
85
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
86
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 500 Boylston Street
(transfer agent) Boston, Massachusetts 02116
Ropes & Gray One International Place
(counsel) Boston, MA 02110
Item 33. Management Services: Inapplicable.
Item 34. Undertakings: Inapplicable.
87
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 INTERMEDIATE INCOME TRUST
By: SUSAN S. NEWTON
------------------------------------
Susan S. Newton
Assistant Secretary
88
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
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(g)(1) Investment Advisory Agreement, dated January 1, 2002.
2(g)(2) Master Administrative Services Agreement, dated March 1,
1997, as amended April 1, 1999, between Massachusetts
Financial Services Company and the Trust.
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)(2) Amendment, dated February 22, 2005, to the Shareholder
Servicing Agreements.