Table of Contents
Letter from the Chairman ..................... 1
Tax Form Summary ............................ 2
Fund Manager's Overview ..................... 3
Fund Manager's Profile ...................... 5
Fund Facts .................................. 5
Performance Summary ......................... 6
Portfolio of Investments .................... 8
Financial Statements ........................ 18
Notes to Financial Statements ............... 24
Independent Auditor Report .................. 30
It's Easy to Contact Us ..................... 31
MFS Family of Funds(R) ...................... 32
Trustees and Officers ....................... 33
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Highlights
[bullet] Class A shares of the Fund provided a total return of 4.67% over the
past year, while Class B shares returned 3.69%. Both represent net
asset value returns.
[bullet] Reflecting a healthy economy and generally sound financial practices,
the fiscal condition of state and local governments is the strongest
it's been in several years.
[bullet] The yield ratio of 30-year, AAA-rated municipals has declined from 87%
to 81%, reflecting the municipal market's strong technical position.
[bullet] Casualty insurance companies have been active buyers in the market this
year, while the apparent collapse of support for extreme tax reform
proposals has also proved beneficial.
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1
<PAGE>
Letter from the Chairman
[Photo of A. Keith Brodkin]
Dear Shareholders:
With over half of 1996 behind us, the U.S. economy appears to have settled
into a pattern of moderate growth and inflation -- two factors that we think
can be important contributors to a favorable long-term investment climate.
During the first quarter of 1996, real (inflation-adjusted) economic growth
was 2.3% on an annualized basis, followed by a rate of 4.7% in the second
quarter. Real growth in gross domestic product has surpassed our expectations
so far this year, and we now expect growth for all of 1996 could exceed 2.5%.
Although individual consumers appear to be carrying an excessive debt load,
the consumer sector itself, which represents two-thirds of the economy,
continues to be impressive as the automobile and housing markets remain
resilient. Consumer spending has also been positively impacted by widespread
job growth. However, the economies of Europe and Japan continue to be in the
doldrums, weakening U.S. export markets while subduing the capital spending
plans of American corporations.
In the bond market, persistent signs of economic weakness led to decreases in
short-term interest rates by the Federal Reserve Board in late 1995 and early
1996. Should signs of economic growth and, particularly, of higher inflation
continue, we would expect the Fed to maintain its anti-inflationary stance.
In the beginning of the year, bond markets traded in a narrow range as
investors shifted between concern for the lack of a budget resolution in
Washington and hope that sluggish economic reports and low inflation might
lead to lower interest rates. Later, fixed-income markets began reacting to
conflicting signals regarding the economy's strength with more volatile
trading patterns marked by an upward bias in interest rates. Interest rates
may move even higher over the coming months, but we believe the current rise
in bond yields is reaching a point where fixed-income markets are equitably
valued.
Finally, you may notice, this shareholders' report incorporates a number of
changes which we hope you will find informative and useful. Near the
1
<PAGE>
back of the report, telephone numbers and addresses are listed if you would
like to contact MFS.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
September 18, 1996
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Tax Form Summary
Of the dividends paid from the net investment income for the fiscal year ended
August 31, 1996, 98.61% were exempt interest dividends which are tax exempt for
purposes of regular federal income tax.
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2
<PAGE>
Fund Manager's Overview
[Photo: Robert A. Dennis]
Dear Shareholders:
Following trends in the fixed-income market, the municipal bond market has
been unusually volatile during the past 12 months. The last four months of
1995 were marked by declining interest rates as the economy appeared to be in
a slow-growth, low-inflation mode. However, rates have been sporadically
rising in 1996 as greater-than-expected job growth and other economic data
have raised fears about eventual inflation pressures. Since the beginning of
1996, long-term, high-grade municipal yields have increased by about 55 basis
points (0.55%), essentially offsetting the decline in rates of late 1995.
Overall yield trends have been extremely volatile each month, as major market
moves have followed unexpectedly strong employment data and have been
typically retraced through the course of each month.
Over the 12 months ended August 31, 1996, Class A shares of the Fund provided
a total return of 4.67%, while Class B shares returned 3.69%. These figures
assume the reinvestment of distributions but exclude the effects of any sales
charges. Over this period, the Fund paid tax-exempt dividends of $0.582 per
share on Class A shares, equivalent to an annualized yield of 5.37% (equal to
an SEC yield of 5.15%) based on the net asset value on August 31,1995. The
5.37% yield equates to a taxable equivalent yield of 8.89% for investors in
the maximum 39.6% individual income tax bracket and to a rate of 7.46% for
investors in the 28% marginal tax bracket.
Perhaps the most salient commentary on the municipal bond market this year
has been its significantly favorable performance compared to U.S. Treasury
bonds (principal value and interest on Treasury securities are guaranteed by
the U.S. government if held to maturity). The 55-basis point increase in
long-term, high-grade yields since January 1, 1996 compares to a rise of
about 110 basis points (1.10%) by long-term Treasuries. The yield ratio of
30-year municipals rated AAA by Standard & Poor's to comparable Treasuries
has declined from 87% to 81%. These trends reflect the market's strong
technical position. Supply remains moderate as rising rates have choked off
any possible rise in refundings, and the overall tenor of state and local
governments remains conservative relative to new spending and borrowing. On
the demand side, casualty insurance companies have been strong buyers and
retail interest has increased in response to the higher rates. The apparent
collapse of support for extreme tax reform proposals has benefited this
year's market.
3
<PAGE>
The overall strength of municipal credits contributed to the market's
relatively good performance. Reflecting a healthy economy and generally sound
financial practices, the fiscal condition of state and local governments is
the strongest it's been in several years, and most revenue bond issuers have
also posted favorable results. These trends, along with the continued
dramatic proliferation of bond insurance, have resulted in continued
historically narrow yield spreads in the market. Special values or unusual
opportunities in the investment-grade segment of the municipal market have
therefore diminished. With the insufficient inducement to buy lower-rated
credits, the Fund's overall credit quality remains high, with 70% of its
assets invested in AAA and AA credits.
While the 4.67% total return for the Fund's Class A shares lagged the 5.24%
return of the Lehman Brothers Municipal Bond Index (the Lehman Index), it was
virtually identical to the 4.68% average return for the general municipal
debt category reported by Lipper Analytical Services, Inc., an independent
firm which reports mutual fund performance. The Lehman Brothers Municipal
Bond Index is unmanaged and is comprised of 8,000 actual bonds (with no
floating or zero coupons) which have investment-grade, fixed-rate, long-term
maturities (greater than two years). It is not possible to invest in an
index. Since there have been no significant changes in trading relationships
between sectors, regions, or individual credits in the municipal bond market,
performance results are predominantly attributed to decisions affecting
portfolio duration. The Fund's performance during the final four months of
1995 was aided by its long duration and interest rate sensitivity, which
helped it achieve significant capital appreciation during that period.
However, heading into 1996, no action was taken to shorten the Fund's
duration as we did not anticipate the economic climate that led to the
market's sharp sell-off in the early part of the year. As a result, the
Fund's performance lagged the Lehman Index during the first eight months of
1996. The Fund's effective duration has been shortened in recent months to a
more neutral position. Future adjustments in its interest rate sensitivity
will be guided by our assessment of economic and political trends.
If and when we determine that the trend toward higher rates has run its
course, we believe the Fund's underlying portfolio is structured to perform
well. More than 30% of the Fund's assets are invested in long-term,
non-callable bonds and much of the balance consists of call-protected bonds
likely to benefit from a declining interest rate environment.
We are pleased to report that during the past year we made some key additions
to our staff of municipal credit analysts, and we believe the group is now
one of the strongest in the industry. The depth and experience of
4
<PAGE>
this staff will be invaluable to us as we examine important credit
developments such as the new welfare reform bill's effect on specific
municipal credits, as well as the fiscal ramifications of future efforts to
balance the federal budget; the increasingly competitive environment facing
electric utilities as a result of deregulation trends; and the effect of
continuing cost pressures in the struggling health care industry.
Respectfully,
/s/ Robert A. Dennis
Robert A. Dennis
Fund Manager
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Fund Manager's Profile
A graduate of Massachusetts Institute of Technology and its Sloan School of
Management, Robert Dennis began his career at MFS in 1980 and was promoted to
Vice President - Investments in 1983. In 1986, he was named Senior Vice
President. He has been Fund Manager of MFS Municipal Bond Fund since 1984.
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Fund Facts
Strategy: The Fund's investment objective is to provide as high a
level of current income exempt from federal income
taxes as is considered consistent with prudent
investing and protection of shareholders' capital.
Commencement of
investment operations: December 16, 1976
Size: $1.9 billion as of August 31, 1996
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5
<PAGE>
Performance Summary
The following information illustrates the historical performance of MFS
Municipal Bond Fund Class A shares in comparison to various market
indicators. Class A share results reflect the deduction of the 4.75% maximum
sales charge; benchmark comparisons are unmanaged and do not reflect any fees
or expenses. You cannot invest in an index. All results reflect the
reinvestment of all dividends and capital gains.
The performance of Class B shares will be greater than or less than the line
shown, based on the differences in loads or fees paid by shareholders
investing in the different classes.
Growth of a Hypothetical $10,000 Investment
(For the 10-Year Period Ended August 31, 1996)
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[Line Chart]
Consumer
MFS Price Lehman
Municipal Index-- Brothers
Bond A U.S.[S] Municipals
------ ------- ----------
9/1/86 9525 10000 10000
12/31/86 9836 10076 10372
12/31/87 10011 10520 10527
12/30/88 11178 10982 11596
12/29/89 12263 11493 12847
12/31/90 13034 12194 13785
12/31/91 14708 12568 15459
12/31/92 16088 12929 16822
12/31/93 18292 13288 18888
12/30/94 17103 13644 17918
12/29/95 20075 13980 21038
8/30/96 19784 14333 21129
- --------------------------------------------------------------------------------
Average Annual Total Returns 1 Year 3 Years 5 Years 10 Years
- ------------------------------------- -------- --------- --------------------
MFS Municipal Bond Fund (Class A)
including 4.75% sales charge -0.30% +1.95% +6.10% +7.06%
- ------------------------------------- -------- --------- --------------------
MFS Municipal Bond Fund (Class A)
at net asset value +4.20% +3.62% +7.14% +7.58%
- ------------------------------------- -------- --------- --------------------
MFS Municipal Bond Fund (Class B)
with CDSC -0.28% +1.44% +6.02% +7.17%
- ------------------------------------- -------- --------- --------------------
MFS Municipal Bond Fund (Class B)
without CDSC +3.31% +2.33% +6.33% +7.17%
- ------------------------------------- -------- --------- --------------------
Average general municipal debt fund +4.68% +3.65% +6.93% +7.12%
- ------------------------------------- -------- --------- --------------------
Lehman Brothers Municipal Bond Index +5.24% +4.69% +7.43% +7.77%
- ------------------------------------- -------- --------- --------------------
Consumer Price Index[S] +2.86% +2.79% +2.86% +3.67%
- ------------------------------------- -------- --------- --------------------
[S]The Consumer Price Index is a popular measure of change in prices.
6
<PAGE>
Average Annual Total Returns - continued
In the preceding table, we have included the average annual total returns of
all general municipal debt funds (including the Fund) tracked by Lipper
Analytical Services, Inc. for the applicable time period (228, 151, 103, and
61 funds for the 1-, 3-, 5-, and 10-year periods ended August 31, 1996,
respectively). Because these returns do not reflect any applicable sales
charges, we have also included the Fund's results at net asset value (no
sales charge) for comparison.
Class A SEC results include the maximum 4.75% sales charge. Class B SEC
results reflect the applicable contingent deferred sales charge (CDSC), which
declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. See the
prospectus for details. Class B share performance includes the performance of
the Fund's Class A shares for periods prior to the commencement of offering
of Class B shares on September 7, 1993. Sales charges and operating expenses
for Class A and Class B shares differ. The Class A share performance, which
is included within the Class B share SEC performance, has been adjusted to
reflect the CDSC generally applicable to Class B shares rather than the
initial sales charge generally applicable to Class A shares. Class B share
performance has not been adjusted, however, to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares. All results are historical and assume the reinvestment of
dividends and capital gains. Investment return and principal value will
fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. Past performance is no guarantee of future results.
7
<PAGE>
Portfolio of Investments - August 31, 1996
Municipal Bonds - 98.5%
=============================================================================
S&P Principal
Bond Amount
Rating Issuer (000 Omitted) Value
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General Obligation - 15.3%
AAA Chicago, IL, AMBAC, 5.5s, 2018 $10,500 $ 10,015,950
AAA Chicago, IL, Board of Education, MBIA,
6.25s, 2012 2,500 2,648,775
AAA Clark County, NV, School District,
MBIA, 7s, 2010 4,000 4,541,960
A+ Commonwealth of Massachusetts, 7s, 2007 4,590 5,016,686
A+ Commonwealth of Massachusetts, 6.5s,
2008 6,400 7,079,168
AAA Commonwealth of Massachusetts, FGIC,
7s, 2009 7,000 7,952,560
AAA Dade County, FL, School Board,
Certificate of Participation, AMBAC,
5.5s, 2025 10,500 9,867,795
BBB Detroit, MI, 6.25s, 2009 5,235 5,306,562
AA Florida Board of Education, Capital
Outlay, 9.125s, 2014 1,735 2,380,993
AAA Florida Board of Education, Capital
Outlay, FGIC, 5.5s, 2026 26,000 24,551,800
BBB+ New York City, NY, 7.5s, 2002 12,500 13,638,750
BBB+ New York City, NY, 7.75s, 2004 780 845,481
BBB+ New York City, NY, 7.5s, 2006 5,000 5,365,750
BBB+ New York City, NY, 7.65s, 2006 5,000 5,465,050
BBB+ New York City, NY, 7.5s, 2007 15,500 16,994,045
BBB+ New York City, NY, 7.5s, 2008 10,000 10,914,900
BBB+ New York City, NY, 6.75s, 2009 3,000 3,118,890
BBB+ New York City, NY, 7.7s, 2009 4,000 4,432,240
BBB+ New York City, NY, 8.25s, 2013 60 68,145
BBB+ New York City, NY, 5.75s, 2014 5,000 4,640,350
BBB+ New York City, NY, 5.75s, 2015 11,085 10,185,341
BBB+ New York City, NY, 8.25s, 2015 240 273,607
BBB+ New York City, NY, 6.6s, 2016** 4,000 3,994,600
BBB+ New York City, NY, 8s, 2018 25 28,160
BBB+ New York City, NY, 5.75s, 2019 9,000 8,197,290
A+ State of California, 5.5s, 2011 3,750 3,674,513
A+ State of California, 5.5s, 2013 5,000 4,917,800
AAA State of California, AMBAC, 5.5s, 2014 10,485 10,207,567
AAA State of California, FGIC, 5.5s, 2015 10,980 10,499,625
AA State of Florida, Broward County
Expressway Authority, 10s, 2014 4,350 6,332,512
AAA State of Illinois, FGIC, 5.125s, 2013 5,000 4,617,150
AA State of Nevada, 6.8s, 2012 85 90,884
AA State of Nevada, 5.75s, 2026 23,615 22,771,236
AAA State of Nevada, FGIC, 5.5s, 2025 6,500 6,123,390
AA State of Texas, 5s, 2014 15,450 14,200,404
AA State of Washington, 0s, 2008 1,500 769,020
AA State of Washington, 6.75s, 2010 3,880 4,298,419
AA State of Washington, 5.75s, 2012 5,000 5,029,050
AA State of Washington, 6s, 2012 4,360 4,497,122
AA State of Washington, 5s, 2017 5,000 4,470,350
AA State of Washington, 5.375s, 2021 10,000 9,269,800
AA State of Washington (Motor Vehicle Fuel
Tax), 6.125s, 2017 6,400 6,694,336
--------------
$285,988,026
8
<PAGE>
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State and Local Appropriation - 29.1%
A California Public Works Board, Lease
Rev. (Community College Projects),
5.625s, 2013 $12,605 $11,941,851
A California Public Works Board, Lease
Rev. (Community College Projects),
5.625s, 2018 3,750 3,503,700
A California Public Works Board, Lease
Rev. (Department of Corrections), 5.5s,
2019 5,000 4,592,300
AAA California Public Works Board, Lease
Rev. (Department of Corrections),
AMBAC, 5.25s, 2013 6,795 6,431,535
AAA California Public Works Board, Lease
Rev. (Department of Corrections), MBIA,
5.375s, 2019## 10,055 9,342,302
A California Public Works Board, Lease
Rev. (University of California
Projects), 5.25s, 2013 4,200 3,833,508
A California Public Works Board, Lease
Rev. (University of California
Projects), 5.5s, 2014 7,000 6,648,180
A California Public Works Board, Lease
Rev. (University of California
Projects), 5.5s, 2014 5,000 4,665,650
A California Public Works Board, Lease
Rev. (University of California
Projects), 5.5s, 2019 3,345 3,072,249
A California Public Works Board, Lease
Rev. (University of California
Projects), 5s, 2023 19,000 16,213,080
AAA Chicago, IL, Board of Education Lease
Certificates, MBIA, 6.25s, 2009 5,160 5,456,390
AAA Chicago, IL, Board of Education Lease
Certificates, MBIA, 6.25s, 2015 27,295 28,567,220
A+ Indiana Office Building Community
Capital Complex Rev., 6.9s, 2011 9,500 10,565,235
A+ Massachusetts Bay Transportation
Authority, 6.1s, 2013 10,200 10,673,790
A+ Massachusetts Bay Transportation
Authority, 5.875s, 2015 4,500 4,557,330
A+ Massachusetts Bay Transportation
Authority, 7s, 2021 19,185 22,016,706
A+ Massachusetts Bay Transportation
Authority, 5.75s, 2025 5,500 5,270,595
A+ Massachusetts Bay Transportation
Authority, 5.625s, 2026 46,500 43,740,690
AAA Massachusetts Bay Transportation
Authority, MBIA, 5.75s, 2018 4,000 3,922,160
A Metropolitan Government of Nashville &
Davidson Counties, TN, 7s, 2011 5,280 5,729,803
BBB Metropolitan Transportation Authority,
NY, Service Contract, 7.4s, 2001 4,075 4,445,703
BBB Metropolitan Transportation Authority,
NY, Service Contract, 7.375s, 2008 5,000 5,563,050
BBB Metropolitan Transportation Authority,
NY, Service Contract, 5.75s, 2013 5,600 5,415,368
BBB Metropolitan Transportation Authority,
NY, Service Contract, 5.5s, 2017 10,850 10,084,207
BBB New York Dormitory Authority Rev. (City
University), 5.75s, 2009 10,000 9,700,300
BBB New York Dormitory Authority Rev. (City
University), 7s, 2009 13,765 14,960,903
9
<PAGE>
State and Local Appropriation - continued
BBB New York Dormitory Authority Rev. (City
University), 7.5s, 2010 $15,650 $17,698,272
BBB New York Dormitory Authority Rev. (City
University), 5.75s, 2013 22,150 21,374,307
BBB New York Dormitory Authority Rev.
(Department of Health), 5.75s, 2017 4,500 4,203,405
BBB+ New York Dormitory Authority Rev.
(Mental Health Facilities), 5.375s,
2026 5,000 4,365,300
BBB+ New York Dormitory Authority Rev.
(State University Educational
Facilities), 7.375s, 2010 16,100 18,267,382
BBB+ New York Dormitory Authority Rev.
(State University Educational
Facilities), 5.25s, 2015 8,125 7,331,513
BBB+ New York Dormitory Authority Rev.
(State University Educational
Facilities), 5.5s, 2019 5,000 4,615,150
BBB+ New York Dormitory Authority Rev.
(State University Educational
Facilities), 5.25s, 2021 7,875 6,951,184
Aaa New York Medical Care Facilities
Finance Agency, FGIC, 5.25s, 2019 48,140 43,917,903
BBB+ New York Medical Care Facilities
Finance Agency (Mental Health
Services), 8.875s, 2007 4,205 4,437,957
BBB+ New York Medical Care Facilities
Finance Agency (Mental Health
Services), 5.25s, 2019 4,100 3,571,633
BBB+ New York Medical Care Facilities
Finance Agency (Mental Health
Services), 7.875s, 2020 4,050 4,455,122
BBB New York Urban Development Corp., 5.5s,
2015 31,200 28,555,176
BBB New York Urban Development Corp.
(Correctional Facilities), 5.75s, 2013 10,530 10,030,773
BBB New York Urban Development Corp.
(Correctional Facilities), 5.5s, 2014 5,000 4,663,800
BBB New York Urban Development Corp.
(Correctional Facilities), 5.375s, 2015 10,000 9,017,200
BBB New York Urban Development Corp.
(Correctional Facilities), 5.25s, 2021 15,700 13,603,893
AAA New York Urban Development Corp.
(Correctional Facilities), MBIA, 5.5s,
2025 4,855 4,544,766
AAA New York Urban Development Corp., MBIA,
5.5s, 2019 3,500 3,317,825
BBB New York Urban Development Corp. (State
Facilities), 5.7s, 2020 3,000 2,821,890
AAA Orange County, CA, Recovery
Certificates of Participation, MBIA,
5.8s, 2016 2,000 1,967,220
AAA Orange County, CA, Recovery
Certificates of Participation, MBIA,
5.878s, 2019 2,500 2,464,150
AAA Rhode Island Convention Center
Authority Rev., MBIA, 5.25s, 2015 15,500 14,330,835
AAA Rhode Island Convention Center
Authority Rev., MBIA, 5s, 2023 31,110 26,586,295
10
<PAGE>
State and Local Appropriation - continued
A San Bernardino, CA, Joint Powers
Financing Authority Lease Rev.
(California Department of
Transportation), 5.5s, 2014 $10,000 $ 9,489,700
A San Bernardino, CA, Joint Powers
Financing Authority Lease Rev.
(California Department of
Transportation), 5.5s, 2020 4,000 3,716,680
AAA Vallejo, CA, Sanitation and Flood
Control District, Certificates of
Participation, FGIC, 5s, 2019 7,000 6,303,360
--------------
$543,516,496
------------------------------------------------------------- --------------
Refunded and Special Obligations* -
24.7%
AAA Alameda County, CA, Certificates of
Participation, BIGI, 7.25s, 2000 $20,570 $ 23,010,219
AAA Alameda County, CA, Certificates of
Participation, BIGI, 7.25s, 2000+++ 9,330 10,436,818
AAA Austin, TX, Utility Systems Rev.,
10.75s, 2000 2,615 3,138,575
AAA Austin, TX, Water, Sewer & Electric
Rev., 14.25s, 1997 1,305 1,395,776
AA Chicago, IL, Metropolitan Water
Reclamation District (Capital
Improvement), 6.8s, 2000 5,000 5,409,550
AAA Chicago, IL, Public Building Commission
Mortgage Rev., ETM, MBIA, 7.125s, 2015 6,590 7,093,410
AAA Clark County, NV, School District,
MBIA, 7s, 2001 10,050 11,069,874
A+ Commonwealth of Massachusetts, 6.875s,
2001 4,825 5,345,376
AAA Commonwealth of Massachusetts, FGIC,
7.25s, 2000 7,520 8,278,768
AAA Commonwealth of Massachusetts, FGIC,
7.25s, 2000 3,700 4,073,330
AAA Delaware County, PA, Hospital Rev.
(Keystone Health System), MBIA, 7.2s,
1999 5,440 5,948,694
AAA Detroit, MI, Water Supply System Rev.,
FGIC, 7.25s, 2000 4,575 5,068,597
A Eden Township, CA, Health Facilities
Authority (Eden Hospital), 7.8s, 1998 4,000 4,329,760
AAA Florida Board of Education
Administration, Capital Outlay, ETM,
9.125s, 2014 265 368,811
NR Indianapolis, IN, Local Public
Improvement Rev., 7.4s, 2000 3,710 4,122,626
AAA Maryland Health & Higher Education
Facilities Authority Rev. (University
of Maryland Medical System), FGIC, 7s,
2001 7,945 8,844,295
AAA Massachusetts Port Authority Rev., ETM,
13s, 2013 3,500 5,569,270
AAA Massachusetts Water Resources
Authority, 7.5s, 2000 15,850 17,605,863
AAA Massachusetts Water Resources
Authority, 7.625s, 2000 15,760 17,570,036
AAA Metropolitan Transportation Authority,
NY, Service Contract, 7.5s, 2000 4,350 4,856,993
AAA Michigan Hospital Finance Authority
Rev. (Oakwood Hospital), FGIC, 7.1s,
2000 4,000 4,410,760
AAA Michigan Hospital Finance Authority
Rev. (Oakwood Hospital), FGIC, 7.2s,
2000 18,590 20,595,861
11
<PAGE>
Refunded and Special Obligations* - continued
AAA Michigan Municipal Bond Authority Rev.
(Wayne County), FGIC, 7s, 2000 $10,000 $10,976,300
AAA Missouri Regional Convention & Sports
Complex Authority, 6.8s, 2003 8,950 9,957,054
AAA Missouri Regional Convention & Sports
Complex Authority, 6.9s, 2003 21,520 24,067,107
BBB+ New York City, NY, 7.75s, 2000 8,240 9,161,479
BBB+ New York City, NY, 8s, 2001 2,475 2,852,735
BBB+ New York City, NY, 8.25s, 2001 2,940 3,410,576
BBB New York Dormitory Authority Rev. (City
University), 7.875s, 2000 10,600 11,973,230
AAA New York Medical Care Facilities
Finance Agency Rev. (Mental Health
Services), 8.875s, 1997 3,745 3,989,249
AAA New York Medical Care Facilities
Finance Agency Rev. (Mental Health
Services), 7.875s, 2000 5,590 6,332,408
NR New York Urban Development Corp.
(Correctional Facilities), 7.625s, 2001 7,570 8,543,729
NR New York Urban Development Corp.
(Correctional Facilities), 7.375s, 2002 4,000 4,536,440
AAA North Carolina Municipal Power Agency
Rev. (Catawba Electric), AMBAC, 5.5s,
2013 8,330 8,318,838
AAA Pennsylvania Convention Center
Authority Rev., FGIC, 6.7s, 2016 51,195 57,520,654
AAA Pennsylvania Higher Educational
Facilities Authority (Hahnemann
University Project), MBIA, 7.2s, 1999 4,015 4,378,719
AAA Philadelphia, PA, Municipal Authority
Rev., FGIC, 7.8s, 1998 385 413,251
AAA Philadelphia, PA, Municipal Authority
Rev., FGIC, 7.8s, 2000 3,765 4,148,390
AAA Philadelphia, PA, Municipal Authority
Rev. (Justice Lease), FGIC, 7.1s, 2001 6,000 6,729,840
AAA Philadelphia, PA, Municipal Authority
Rev. (Justice Lease), FGIC, 7.125s,
2001 4,500 5,052,510
AAA Philadelphia, PA, School District,
MBIA, 7s, 2005 9,440 10,411,659
AAA San Diego, CA, Regional Building
Authority Lease Rev. (San Miguel),
MBIA, 7.25s, 2000 4,000 4,395,440
AAA Santa Clara County, CA, Certificates of
Participation (American Baptist Homes
West), CA-MTG-INS, 8s, 1998 5,200 5,590,208
AAA Southern California Public Power
Authority Rev., 12s, 1997 2,400 2,556,096
AA State of Florida, 7.375s, 1999 4,000 4,380,720
AAA State of Florida, Jacksonville
Transportation Authority, ETM, 9.2s,
2015 2,000 2,708,240
AAA Sullivan County, TN, Health,
Educational and Housing Facilities
Board Rev. (Holston Valley Health
Care), MBIA, 7.25s, 2000 4,000 4,399,640
12
<PAGE>
Refunded and Special Obligations* - continued
AAA Washington Public Power Supply System
Rev., Nuclear Project #2, 7.375s, 2000 $28,845 $ 32,028,334
AA Washington Public Power Supply System
Rev., Nuclear Project #2, 7.625s, 2001 10,815 12,183,530
AA Washington Public Power Supply System
Rev., Nuclear Project #3, 7.25s, 2000 20,000 21,912,200
--------------
$461,471,838
------------------------------------------------------------- --------------
Single Family Housing Revenue - 0.3%
AA Connecticut Housing Finance Authority,
5.9s, 2015 $ 5,000 $ 4,999,550
- ------ --------------------------------------- -------------- --------------
Multi-Family Housing Revenue - 0.4%
AA Colorado Housing Finance Authority,
FHA, 8.3s, 2023 $ 4,000 $ 4,176,600
AAA New York Housing Finance Agency Rev.,
FSA, 6.125s, 2020 4,000 3,962,160
--------------
$ 8,138,760
------------------------------------------------------------- --------------
Insured Health Care Revenue - 4.1%
AAA Columbus, GA, Medical Center, Hospital
Authority Rev., Anticipation
Certificates, MBIA, 8.749s, 2010*** $ 4,000 $ 4,290,520
AAA Davenport, IA, Hospital Rev. (St.
Luke's Hospital), AMBAC, 7.4s, 2020 2,715 2,957,042
AAA Illinois Health Facilities Authority
(Methodist Healthcare Center), MBIA,
9.872s, 2021*** 3,000 3,347,310
AAA Kalamazoo, MI, Hospital Finance
Authority (Bronson Methodist), MBIA,
5.875s, 2026 6,000 5,872,140
AAA Maryland Health & Higher Educational
Facilities Authority Rev. (Francis
Scott Key Medical Center), FGIC, 5s,
2013 3,200 2,928,704
AAA Massachusetts Health & Education
Facilities Authority (University
Hospital), MBIA, 7.25s, 2019 4,500 4,900,995
AAA Metropolitan Health Facilities
Development Corp., TX (Wilson N. Jones
Memorial Hospital), Connie Lee, 5.6s,
2017 4,250 4,017,525
AAA Michigan Hospital Finance Authority
Rev. (Sisters of Mercy), MBIA, 5.375s,
2014 9,000 8,574,930
AA New York Medical Care Facilities
Financing Agency Rev. (Hospital and
Nursing Home FHA Mortgage), 7.625s,
2023 3,500 3,699,080
AAA Oklahoma Industrial Authority Rev.
(Integris Baptist), AMBAC, 5s, 2014 5,000 4,463,850
AAA Peninsula Ports Authority, VA, Hospital
Facilities Rev. (Whittaker Memorial),
FHA, 8.7s, 2023 1,595 1,671,305
AAA Salt Lake City, UT, Hospital Rev.
(Intermountain Health Care Hospitals,
Inc.), AMBAC, INFLOS, 9.779s, 2020*** 2,000 2,199,960
AAA Sayre, PA, Health Care Facilities
Authority Rev. (Guthrie Healthcare
Systems), AMBAC, 7s, 2011 6,000 6,445,380
13
<PAGE>
Insured Health Care Revenue - continued
AAA Tarrant County, TX, Health Facilities
Development Corp., Hospital Rev. (Ft.
Worth Osteopathic), MBIA, 6s, 2021 $ 6,000 $ 6,148,320
AAA Tulsa, OK, Industrial Authority
Hospital Rev. (Hillcrest Medical Center
Project), Connie Lee, 6s, 2017 5,250 5,157,285
AAA Washington County, PA, Hospital
Authority Rev. (Washington Hospital),
AMBAC, 7.15s, 2017 9,000 9,728,730
--------------
$76,403,076
------------------------------------------------------------- --------------
Health Care Revenue - 1.4%
AA- Cuyahoga County, OH, Hospital Rev.
(Cleveland Clinic), 8s, 2015## $ 8,550 $ 8,955,014
AA- Maryland Health & Higher Educational
Facilities Authority Rev. (The Johns
Hopkins Hospital), 5s, 2023 7,595 6,660,359
AA Pennsylvania Higher Educational
Facilities Authority, Health Services
Rev. (University of Pennsylvania),
5.75s, 2022 10,000 9,663,200
--------------
$25,278,573
------------------------------------------------------------- --------------
Electric and Gas Utility Revenue - 7.6%
AAA Anchorage, AK, Electric Utility Rev.,
MBIA, 5.5s, 2026 $ 1,750 $ 1,618,435
AAA Austin, TX, Utility Systems Rev.,
AMBAC, 6.75s, 2012 2,500 2,612,325
AAA Georgia Municipal Electric Authority
Rev., AMBAC, 7.8s, 2020 7,000 7,334,810
AAA Georgia Municipal Electric Authority
Rev., MBIA, 6.375s, 2016 5,000 5,240,200
AA- Intermountain Power Agency, Utah Power
Supply Rev., 6.15s, 2014# 40,000 40,959,600
AAA Intermountain Power Agency, Utah Power
Supply Rev., AMBAC, 6s, 2021 5,000 4,861,150
AAA Intermountain Power Agency, Utah Power
Supply Rev., MBIA, 5.7s, 2017 14,000 13,631,520
AAA Municipal Electric Authority of
Georgia, Special Obligation, AMBAC,
6.5s, 2017 8,510 9,161,611
AAA North Carolina Power Agency Rev.
(Catawba Electric), AMBAC, 5.375s, 2020 4,000 3,711,280
AAA Northern California Transmission Agency
(Oregon Transmission), MBIA, 7s, 2013 4,000 4,605,480
AAA Piedmont, SC, Municipal Power Agency,
Electric Rev., FGIC, 6.25s, 2021 4,150 4,330,691
AAA South Carolina Public Service Authority
Rev., MBIA, 5.75s, 2022 4,000 3,890,600
AAA Southern California Public Power
Authority Rev. (San Juan Unit Power
Project), MBIA, 5.25s, 2014 14,940 13,982,944
14
<PAGE>
Electric and Gas Utility Revenue - continued
A+ Southern California Public Power
Authority Rev., Transmission Project
Rev., 0s, 2005 $11,185 $ 6,862,892
AA Washington Public Power Supply System
Rev., Nuclear Project #1, 7s, 2008 500 553,310
AAA Washington Public Power Supply System
Rev., Nuclear Project #1, FGIC, 0s,
2005 6,895 4,256,215
AA Washington Public Power Supply System
Rev., Nuclear Project #2, 7s, 2012 6,000 6,403,320
AA- Washington Public Power Supply System
Rev., Nuclear Project #3, 7.125s, 2016 5,145 5,771,610
AAA Washington Public Power Supply System
Rev., Nuclear Project #3, BIGI, 0s,
2010 5,860 2,591,409
AAA Washington Public Power Supply System
Rev., Nuclear Project #3, MBIA, 7.125s,
2016 425 483,710
--------------
$142,863,112
------------------------------------------------------------- --------------
Water and Sewer Utility Revenue - 3.7%
AAA Detroit, MI, Water Supply System, MBIA,
5.5s, 2025 $ 4,935 $ 4,630,461
AAA East Bay, CA, Municipal Utilities
District (Water Systems Rev.), MBIA,
5s, 2014 7,900 7,211,278
AAA New York City Municipal Water Finance
Authority Rev. (Water and Sewer
System), MBIA, 5.75s, 2026 56,095 54,158,601
AAA Philadelphia, PA, Water & Wastewater
Rev., FSA, 5s, 2016 4,500 4,005,585
--------------
$ 70,005,925
------------------------------------------------------------- --------------
Toll Road and Transit Revenue - 1.4%
BBB Triborough Bridge & Tunnel Authority,
NY, 7.25s, 2010 $22,905 $ 25,512,963
- ------ --------------------------------------- -------------- --------------
Airport and Port Revenue - 2.2%
AAA Chicago, IL, O'Hare International
Airport Rev., AMBAC, 5.625s, 2014 $ 6,345 $ 6,108,776
AAA Connecticut Airport Rev. (Bradley
International Airport), FGIC, 7.65s,
2012 5,000 5,687,350
AAA Denver, CO, City and County Airport
Rev., MBIA, 5.6s, 2020 31,530 30,237,585
--------------
$ 42,033,711
------------------------------------------------------------- --------------
Sales and Excise Tax Revenue - 2.1%
AAA Chico, CA, Public Financing Authority
Rev. (Southeast Chico Redevelopment
Project), FGIC, 6.625s, 2021 $ 5,000 $ 5,299,050
AAA Illinois Dedicated Tax Rev. (Civic
Center), AMBAC, 6.25s, 2011 3,640 3,829,826
AAA Illinois Sales Tax Rev., 6.5s, 2022 5,000 5,374,800
AAA Illinois Sales Tax Rev. (Public
Improvement), 0s, 2009 8,965 4,279,891
AA- Metropolitan Atlanta, GA, Rapid Transit
Authority, 6.25s, 2018 4,580 4,809,595
AAA Rhode Island Depositors Economic
Protection Corp., FSA, 5.75s, 2014 14,800 14,666,208
--------------
$ 38,259,370
15
<PAGE>
------------------------------------------------------------- --------------
Industrial Revenue (Corporate Guarantee) - 0.4%
AAA Mercer County, ND, Pollution Control
Rev. (Antelope Valley Station), AMBAC,
7.2s, 2013 $ 4,000 $ 4,619,160
AAA Michigan State Strategic Fund Limited
Obligation Rev. (Detroit Edison), MBIA,
7s, 2008 3,000 3,381,450
--------------
$ 8,000,610
------------------------------------------------------------- --------------
Universities - 3.5%
AAA Massachusetts Health and Education
Facilities Authority Rev. (Harvard
University), 6.25s, 2020 $32,200 $ 33,966,814
AAA Massachusetts Health and Education
Facilities Authority Rev. (Harvard
University), 5.625s, 2026 5,000 4,828,500
AAA Massachusetts Health and Education
Facilities Authority Rev.
(Massachusetts Institute of
Technology), 5s, 2023 3,000 2,609,010
AAA Massachusetts Industrial Finance Agency
Rev. (College of the Holy Cross), MBIA,
5.5s, 2016 5,000 4,768,750
AAA Oregon Health Sciences University Rev.,
MBIA, 5.25s, 2028 7,000 6,276,200
AA+ Texas A & M University (Permanent
University Fund), 0s, 2007 6,695 3,744,781
AA+ Texas A & M University (Permanent
University Fund), 0s, 2008 7,175 3,760,202
AAA University of Washington Rev. (Housing
and Dining), MBIA, 5s, 2021 1,000 870,640
AA Vermont Educational and Health
Buildings Finance Agency Rev.
(Middlebury College Project), 5.375s,
2026 4,750 4,326,110
--------------
$ 65,151,007
------------------------------------------------------------- --------------
Special Assessment District
AAA Culver City, CA, Redevelopment Finance
Authority, AMBAC, 7.1s, 2010 $ 560 $ 602,958
- ------ --------------------------------------- -------------- --------------
Solid Waste - 0.4%
AAA Northeast Maryland, Waste Disposal
Authority (Southwest County Resource
Recovery), MBIA, 7.2s, 2005 $ 3,000 $ 3,384,690
AA- York County, PA, Industrial Development
Rev., 8.2s, 2014 4,250 4,537,215
--------------
$ 7,921,905
------------------------------------------------------------- --------------
Miscellaneous Revenue - 1.9%
AAA Metropolitan Government of Nashville &
Davidson Counties, TN, Sports Authority
(Stadium Project), AMBAC, 5.75s, 2026 $ 5,000 $ 4,861,200
AAA San Antonio, TX, Hotel Occupancy Rev.
(Henry B. Gonzalez Convention Center
Project), FGIC, 5.7s, 2026 31,400 30,098,784
--------------
$ 34,959,984
- ------ --------------------------------------- -------------- --------------
Total Municipal Bonds
(Identified Cost, $1,730,246,565) $1,841,107,864
16
<PAGE>
- ----------------------------------------------- -------------- --------------
NR Dade County, FL, Industrial Development
Authority, due 2020 $ 435 $ 435,000
A1+ Lincoln County, WY, Pollution Control
(Exxon), due 2014 100 100,000
NR Uinta County, WY, Pollution Control
Rev. (Chevron), due 2020 10,300 10,300,000
- ------ --------------------------------------- -------------- --------------
Total Floating Rate Demand Notes
(Identified Cost, $10,835,000) $ 10,835,000
------------------------------------------------------------- --------------
Total Investments
(Identified Cost, $1,741,081,565) $1,851,942,864
Other Assets, Less Liabilities - 0.9% 16,647,917
- ----------------------------------------------- -------------- --------------
Net Assets - 100.0% $1,868,590,781
- -----------------------------------------------------------------------------
* Dates indicated are refunding dates.
** Indexed security.
*** Inverse floating rate security.
+++ Restricted security.
# SEC Rule 144A restriction.
## Security segregated as collateral for an open futures contract.
See notes to financial statements
17
<PAGE>
Financial Statements
Statement of Assets and Liabilities
=============================================================================
August 31, 1996
---------------------------------------------------------- ---------------
Assets:
Investments, at value (identified cost, $1,741,081,565) $1,851,942,864
Cash 62,428
Receivable for daily variation margin on open futures
contracts 1,881,250
Receivable for Fund shares sold 423,505
Receivable for investments sold 200,000
Interest and dividends receivable 26,679,119
Other assets 22,187
---------------
Total assets $1,881,211,353
---------------
Liabilities:
Distributions payable $ 3,547,986
Payable for Fund shares reacquired 1,157,431
Payable for investments purchased 7,388,875
Payable to affiliates -
Management fee 44,594
Shareholder servicing agent fee 12,524
Distribution fee 12,443
Accrued expenses and other liabilities 456,719
---------------
Total liabilities $ 12,620,572
---------------
Net assets $1,868,590,781
---------------
Net assets consist of:
Paid-in capital $1,758,798,334
Unrealized appreciation on investments 112,649,737
Accumulated undistributed net realized loss on investments (1,640,397)
Accumulated distributions in excess of net investment
income (1,216,893)
---------------
Total $1,868,590,781
---------------
Shares of beneficial interest outstanding 173,803,924
---------------
Class A shares:
Net asset value per share
(net assets of $1,797,674,565 / 167,203,931 shares of
beneficial interest outstanding) $10.75
---------------
Offering price per share (100/95.25) $11.26
---------------
Class B shares:
Net asset value and offering price per share
(net assets of $70,916,216 / 6,599,993 shares of
beneficial interest outstanding) $10.74
---------------
On sales of $100,000 or more, the offering price of Class
A shares is reduced. A contingent deferred sales charge
may be imposed on redemptions of Class A and Class B
shares.
See notes to financial statements
18
<PAGE>
Statement of Operations
Year Ended August 31, 1996
- ------------------------------------------------------ ----------------
Net investment income:
Interest income $117,460,624
----------------
Expenses -
Management fee $ 7,990,167
Trustees' compensation 94,800
Shareholder servicing agent fee (Class A) 2,175,476
Shareholder servicing agent fee (Class B) 141,419
Distribution and service fee (Class B) 541,038
Custodian fee 534,866
Postage 223,827
Auditing fees 39,880
Printing 22,856
Legal fees 9,760
Miscellaneous 629,323
----------------
Total expenses $ 12,403,412
Fees paid indirectly (281,761)
----------------
Net expenses $ 12,121,651
----------------
Net investment income $105,338,973
----------------
Realized and unrealized gain on investments:
Realized gain (identified cost basis) -
Investment transactions $ 23,768,430
Futures contracts 616,649
----------------
Net realized gain on investments $ 24,385,079
----------------
Change in unrealized appreciation (depreciation) -
Investments $(35,258,989)
Futures contracts 1,750,938
----------------
Net unrealized loss on investments $(33,508,051)
----------------
Net realized and unrealized loss on investments $ (9,122,972)
----------------
Increase in net assets from operations $ 96,216,001
----------------
See notes to financial statements
19
<PAGE>
Statement of Changes in Net Assets
======================================================================
Year Ended August 31, 1996 1995
------------------------------------ --------------- ----------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 105,338,973 $ 111,803,151
Net realized gain (loss) on
investments 24,385,079 (16,663,804)
Net unrealized gain (loss) on
investments (33,508,051) 47,294,564
--------------- ----------------
Increase in net assets from
operations $ 96,216,001 $ 142,433,911
--------------- ----------------
Distributions declared to
shareholders -
From net investment income (Class A) $ (101,464,492) $ (109,114,422)
From net investment income (Class B) (2,800,303) (2,258,122)
--------------- ----------------
Total distributions declared to
shareholders $ (104,264,795) $ (111,372,544)
--------------- ----------------
Fund share (principal) transactions
- -
Net proceeds from sale of shares $ 1,980,944,467 $ 1,013,395,465
Net asset value of shares issued to
shareholders in reinvestment of
distributions 60,332,570 65,324,925
Cost of shares reacquired (2,169,208,109) (1,180,849,407)
--------------- ----------------
Decrease in net assets from Fund
share transactions $ (127,931,072) $ (102,129,017)
--------------- ----------------
Total decrease in net assets $ (135,979,866) $ (71,067,650)
--------------- ----------------
Net assets:
At beginning of period 2,004,570,647 2,075,638,297
--------------- ----------------
At end of period (including
accumulated distributions in
excess of net investment income of
$1,216,893 and $4,956,742,
respectively) $ 1,868,590,781 $ 2,004,570,647
--------------- ----------------
See notes to financial statements
20
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Ten
Months
Year Ended August Ended Year Ended October
31, August 31, 31,
-------------------- ------------- ---------------------
1996 1995 1994 1993 1992
- --------------------------- --------- --------- ------------- -------------------
Class A
- --------------------------- --------- --------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $10.83 $10.68 $11.64 $10.73 $10.80
--------- --------- ------------- -------------------
Income from investment
operations# -
Net investment income $ 0.59 $ 0.60 $ 0.51 $ 0.61 $ 0.66
Net realized and
unrealized gain (loss)
on investments (0.09) 0.15 (0.77) 1.14 0.09
--------- --------- ------------- -------------------
Total from investment
operations
$ 0.50 $ 0.75 $(0.26) $ 1.75 $ 0.75
--------- --------- ------------- -------------------
Less distributions declared to
shareholders -
From net investment income $(0.58) $(0.60) $(0.47) $(0.66) $(0.66)
In excess of net
investment income -- -- (0.04) (0.03) --
From net realized gain on
investments -- -- (0.16) (0.15) (0.16)
In excess of net realized
gain on investments -- -- (0.03) -- --
--------- --------- ------------- -------------------
Total distributions
declared to
shareholders $(0.58) $(0.60) $(0.70) $(0.84) $(0.82)
--------- --------- ------------- -------------------
Net asset value - end of
period $10.75 $10.83 $10.68 $11.64 $10.73
--------- --------- ------------- -------------------
Total return### 4.67% 7.31% (2.33)%+++ 16.97% 7.35%
Ratios (to average net assets)/Supplemental data:
Expenses## 0.60% 0.61% 0.59%+ 0.59% 0.57%
Net investment income 5.37% 5.70% 5.49%+ 5.63% 6.12%
Portfolio turnover 84% 90% 74% 56% 87%
Net assets at end of period
(000,000 omitted) $1,798 $1,949 $2,031 $2,195 $1,878
</TABLE>
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to October 31, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been
lower.
See notes to financial statements
21
<PAGE>
Financial Highlights - continued
Year Ended October 31, 1991 1990 1989 1988 1987
- --------------------------- --------- --------- --------- --------- ---------
Class A
- --------------------------- --------- ----------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $10.11 $10.53 $10.57 $ 9.71 $11.00
--------- --------- --------- --------- ---------
Income from investment
operations -
Net investment income $ 0.68 $ 0.68 $ 0.72 $ 0.73 $ 0.72
Net realized and
unrealized gain (loss)
on investments 0.69 (0.13) 0.04 0.86 (0.90)
--------- --------- --------- --------- ---------
Total from investment
operations $ 1.37 $ 0.55 $ 0.76 $ 1.59 $(0.18)
--------- --------- --------- --------- ---------
Less distributions declared to
shareholders -
From net investment income $(0.68) $(0.69) $(0.72) $(0.73) $(0.72)
In excess of net
investment income -- -- (0.08) -- (0.39)
From net realized gain on
investments -- (0.27) -- -- --
From paid-in capital -- (0.01) -- -- --
--------- --------- --------- --------- ---------
Total distributions
declared to
shareholders $(0.68) $(0.97) $(0.80) $(0.73) $(1.11)
--------- --------- --------- --------- ---------
Net asset value - end of
period $10.80 $10.11 $10.53 $10.57 $ 9.71
--------- --------- --------- --------- ---------
Total return### 13.85% 5.42% 7.54% 16.95% (1.98)%
Ratios (to average net assets)/Supplemental data:
Expenses 0.59% 0.60% 0.64% 0.65% 0.61%
Net investment income 6.47% 6.69% 6.87% 7.16% 6.96%
Portfolio turnover 98% 160% 199% 190% 218%
Net assets at end of period
(000,000 omitted) $1,715 $1,409 $1,259 $1,003 $903
### Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been
lower.
See notes to financial statements
22
<PAGE>
Financial Highlights - continued
Ten
Year Months
Ended Year Ended Year
October Ended August Ended
31, August 31, 31, October 31,
---------- --------------------------- ------------
1986 1996 1995 1994 1993*
- --------------------------------------------------------------------------------
Class A Class B
--------------------------------- ------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 10.02 $11.10 $10.67 $11.63 $11.68
---------- --------- ----------------- ------------
Income from investment
operations# -
Net investment income $ 0.78 $ 0.49 $ 0.49 $ 0.40 $ 0.07
Net realized and
unrealized gain (loss)
on investments 1.27 (0.37) 0.16 (0.77) (0.05)
---------- --------- ----------------- ------------
Total from
investment operations $ 2.05 $ 0.12 $ 0.65 $(0.37) $ 0.02
---------- --------- ----------------- ------------
Less distributions declared to shareholders -
From net investment
income $ (0.78) $(0.48) $(0.49) $(0.40) $(0.07)++++
In excess of net
investment income (0.29) -- -- -- --
From net realized gain
on investments -- -- -- (0.16) --
In excess of net
realized gain on
investments -- -- -- (0.03) --
---------- --------- ----------------- ------------
Total distributions
declared to
shareholders $ (1.07) $(0.48) $(0.49) $(0.59) $(0.07)
---------- --------- ----------------- ------------
Net asset value - end
of period $ 11.00 $10.74 $10.83 $10.67 $11.63
---------- --------- ----------------- ------------
Total return### 21.79% 3.69% 6.35% (3.25)%+++ 1.49%+
Ratios (to average net assets)/Supplemental data:
Expenses## 0.64% 1.55% 1.60% 1.72%+ 1.70%+
Net investment income 7.45% 4.42% 4.68% 4.41%+ 3.85%+
Portfolio turnover 164% 83% 90% 74% 56%
Net assets at end of
period (000,000
omitted) $844 $71 $56 $45 $10
* For the period from the commencement of offering of Class B shares,
September 7, 1993 to October 31, 1993.
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to October 31, 1993 is based
on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been
lower.
++++ Amount includes a per share distribution in excess of net investment
income of $0.002.
See notes to financial statements
23
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Municipal Bond Fund (the Fund) is a diversified series of MFS Series
Trust IV (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, are valued on the
basis of valuations furnished by dealers or by a pricing service with
consideration to factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in
60 days or less, are valued at amortized cost, which approximates market
value. Futures contracts, options, and options on futures contracts listed on
commodities exchanges are valued at closing settlement prices.
Over-the-counter options are valued by brokers through the use of a pricing
model which takes into account closing bond valuations, implied volatility
and short-term repurchase rates. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Trustees.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or contracts based on financial indices at a fixed
price on a future date. In entering such contracts, the Fund is required to
deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Fund
each day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized
gains or losses by the Fund. The Fund's investment in futures contracts is
designed to hedge against anticipated future changes in interest or exchange
rates or securities prices. Investments in interest rate futures for purposes
other than hedging may be made to modify the duration of the portfolio
without incurring the additional transaction costs involved in buying and
selling the underlying securities. Should interest or exchange rates or
securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the futures contracts and may realize a loss.
24
<PAGE>
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the
ex-interest date in an amount equal to the value of the security on such
date.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on
the Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. The Fund files a tax return
annually using tax accounting methods required under provisions of the Code
which may differ from generally accepted accounting principles, the basis on
which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial
statements may differ from that reported on the Fund's tax return and,
consequently, the character of distributions to shareholders reported in the
financial highlights may differ from that reported to shareholders on Form
1099-DIV.
Distributions paid by the Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for
federal income tax purposes because the Fund intends to meet certain
requirements of the Code applicable to regulated investment companies, which
will enable the Fund to pay exempt-interest dividends. The portion of such
interest, if any, earned on private activity bonds issued after August 7,
1986 may be considered a tax-preference item to shareholders. Distributions
to shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as return of
capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are
classified as distributions in excess of net investment income or accumulated
net realized gains. During the year ended August 31, 1996, $2,665,671 was
reclassified from accumulated distributions in excess of net investment
income to accumulated net realized
25
<PAGE>
gain on investments due to differences between book and tax accounting. This
change had no effect on the net assets or net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers both
Class A and Class B shares. The two classes of shares differ in their
respective shareholder servicing agent, and distribution and service fees.
All shareholders bear the common expenses of the Fund pro rata based on
settled shares outstanding of each class, without distinction between share
classes. Dividends are declared separately for each class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.19%
of average daily net assets and 3.59% of investment income.
The Fund pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain of the officers
and Trustees of the Fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Fund has an
unfunded defined benefit plan for all its independent Trustees and Mr.
Bailey. Included in Trustees' compensation is a net periodic pension expense
of $27,375 for the year ended August 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$289,161 for the year ended August 31, 1996, as its portion of the sales
charge on sales of Class A shares of the Fund. The Trustees have adopted a
distribution plan relating solely to Class B shares pursuant to Rule 12b-1 of
the Investment Company Act of 1940 as follows:
The Class B distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B shares.
Except in the case of the 0.25% per annum Class B service fee paid by the
Fund upon the sale of Class B shares, payment of the Class B service fee will
be suspended until such date as the Trustees of the Trust may determine. MFD
will pay to securities dealers that enter into a sales agreement with MFD all
or a portion of the service fee attributable to Class B shares. The service
fee is intended to be additional consideration for services rendered by the
dealer with respect to Class B shares. MFD retains the service fee for
accounts not attributable to a securities dealer. No amounts were retained
during the year ended August 31, 1996. Fees incurred under the distribution
plan during the
26
<PAGE>
year ended August 31, 1996 were 0.84% of average daily net assets
attributable to Class B shares on an annualized basis.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a
shareholder redemption within 12 months following the share purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended August 31, 1996 were
$1,862 and $186,111 for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15% and up to 0.22% attributable to Class A
and Class B shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$1,608,202,157 and $1,647,451,006, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $1,741,081,565
---------------
Gross unrealized appreciation $ 116,257,524
Gross unrealized depreciation (5,396,225)
---------------
Net unrealized appreciation $ 110,861,299
---------------
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares Year Ended Year Ended
August 31, 1996 August 31, 1995
--------------------------------- ---------------------------------
Shares Amount Shares Amount
- ----------------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 178,715,545 $ 1,948,177,673 93,895,405 $ 988,178,343
Shares issued to shareholders in
reinvestment of distributions 5,345,853 58,555,788 6,046,921 63,804,833
Shares reacquired (196,714,962) (2,150,166,037) (110,192,105) (1,164,453,444)
---------------- ---------------- ---------------- ----------------
Net decrease (12,653,564) $ (143,432,576) (10,249,779) $ (112,470,268)
---------------- ---------------- ---------------- ----------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Class B Shares Year Ended Year Ended
August 31, 1996 August 31, 1995
------------------------------ ------------------------------
Shares Amount Shares Amount
- ----------------------------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 2,997,177 $ 32,766,794 2,382,993 $ 25,217,122
Shares issued to shareholders in
reinvestment of distributions 162,309 1,776,782 143,928 1,520,092
Shares reacquired (1,734,057) (19,042,072) (1,559,038) (16,395,963)
-------------- --------------- -------------- ---------------
Net increase 1,425,429 $ 15,501,504 967,883 $ 10,341,251
-------------- --------------- -------------- ---------------
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to
each fund, based on its borrowings, at a rate equal to the bank's base rate.
In addition, a commitment fee, based on the average daily unused portion of
the line of credit, is allocated among the participating funds at the end of
each quarter. The commitment fee allocated to the Fund for the year ended
August 31, 1996, was $16,111.
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates. These financial instruments include
futures contracts. The notional or contractual amounts of these instruments
represent the investment the Fund has in particular classes of financial
instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions
are considered. A summary of obligations under these financial instruments at
August 31, 1996, is as follows:
Futures Contracts
Unrealized
Expiration Contracts Position Appreciation
------------------ -------------------------- ----------- ---------------
September 1996 2,100 U.S. Treasury Bonds Short $1,328,586
September 1996 400 Municipal Bonds Short 459,852
---------------
$1,788,438
---------------
At August 31, 1996, the Fund had sufficient cash and/or securities to
cover margin requirements on open futures contracts.
The Fund also invests in indexed securities whose value may be linked to
interest rates, indices, or other financial indicators. Indexed securities
are fixed-income securities whose interest rates (coupon-indexed securities)
rise and fall according to the change in one or more specified underlying
instruments. Indexed securities may be more volatile than the underlying
instrument itself.
28
<PAGE>
The following is a summary of such securities held at August 31, 1996:
Principal Unrealized
Description Index Amount Value Appreciation
- ------------------ ----------- ------------- ------------- ---------------
Coupon-Indexed
Security:
PSA
New York City, Municipal
NY, 6.6s, 2016 Swap $4,000,000 $3,994,600 $5,400
---------------
(8) Restricted Securities
The Fund may invest not more than 15% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At August 31,
1996, the Fund owned the following restricted securities (constituting 0.6%
of total assets) which may not be publicly sold without registration under
the Securities Act of 1933. The Fund does not have the right to demand that
such securities be registered. The value of these securities is determined by
valuations supplied by a pricing service or brokers.
Date of Par
Description Acquisition Amount Cost Value
------------------- -------------- ------------- ------------- -------------
Alameda County, CA,
Certificates of
Participation,
BIGI, 7.25s, 2000 9/21/90 $4,560,000 $4,448,690 $ 5,100,953
Alameda County, CA,
Certificates of
Participation,
BIGI, 7.25s, 2000 9/19/90 4,770,000 4,667,397 5,335,865
-------------
$10,436,818
-------------
29
<PAGE>
Independent Auditor Report
To the Trustees of MFS Series Trust IV and Shareholders
of MFS Municipal Bond Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Municipal Bond Fund (one of
the series constituting MFS Series Trust IV) as of August 31, 1996, the
related statement of operations for the year then ended, the statement of
changes in net assets for the years August 31, 1996 and 1995, and the
financial highlights for each of the years in the two-year period ended
August 31, 1996, the ten months ended August 31, 1994, and each of the years
in the eight-year period ended October 31, 1993. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned at August 31, 1996 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Municipal
Bond Fund at August 31, 1996, the results of its operations, the changes in
its net assets, and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 4, 1996
-----------------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
30
<PAGE>
It's Easy to Contact Us
[icon: phone receiver]
MFS Automated Information
Account Information:
Call 1-800-MFS-TALK (1-800-637-8255)
anytime.
Investment Outlook:
Call 1-800-637-4458 anytime for the MFS outlook
on the bond and stock markets.
[icon: question mark]
MFS Personal Service
Account Service/Literature:
Call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
Product Information:
Call 1-800-637-2929 any business day
from 9 a.m. to 5 p.m. Eastern time.
Service for the Hearing-Impaired:
Call 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time (TDD required).
[icon: envelope]
MFS Addresses
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
Web Site
http://www.mfs.com
31
<PAGE>
The MFS Family of Funds(R)
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the
types of securities in their portfolios. For free prospectuses containing
more complete information, including the exchange privilege and all charges
and expenses, please contact your financial adviser or call MFS at
1-800-637-2929 any business day from 9 a.m. to 5 p.m. Eastern time (or, leave
a message anytime). This material should be read carefully before investing
or sending money.
Stock
- -------------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Capital Growth Fund
MFS(R) Emerging Growth Fund
MFS(R) Gold & Natural Resources Fund
MFS(R) Growth Opportunities Fund
MFS(R) Managed Sectors Fund
MFS(R) OTC Fund
MFS(R) Research Fund
MFS(R) Value Fund
Stock and Bond
- -------------------------------------------------------------
MFS(R) Total Return Fund
MFS(R) Utilities Fund
Bond
- -------------------------------------------------------------
MFS(R) Bond Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Securities Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
Limited Maturity Bond
- -------------------------------------------------------------
MFS(R) Government Limited Maturity Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
- -------------------------------------------------------------
World
- ----------------------------------------------------------------
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
MFS(R)/Foreign & Colonial International Growth Fund
MFS(R)/Foreign & Colonial International Growth and Income Fund
MFS(R) World Asset Allocation Fund(SM)
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
National Tax-Free Bond
- ----------------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
State Tax-Free Bond
- ----------------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia,
Maryland, Massachusetts, Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee, Virginia,
West Virginia
Money Market
- ----------------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
- ----------------------------------------------------------------
32
<PAGE>
MFS(R) Municipal Bond Fund
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director,
Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive
Officer, Eastern Enterprises
Lawrence T. Perera - Partner,
Hemenway & Barnes
William J. Poorvu - Adjunct Professor,
Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive
Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American
Management Corp. (investment advisers)
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Fund Manager
Robert A. Dennis*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Auditor
Deloitte & Touche LLP
*Affiliated with the Investment Adviser
Custodian
State Street Bank and Trust Company
Investor Information
For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime from
a touch-tone telephone.
For information on MFS mutual funds,
call your financial adviser or, for an
information kit, call toll free:
1-800-637-2929 any business day from
9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For current account service, call toll free:
1-800-225-2606 any business day from
8 a.m to 8 p.m. Eastern time.
For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be
equipped with a Telecommunications Device
for the Deaf.)
For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
telephone.
Web Site
http://www.mfs.com
DALBAR SEAL
[Dalbar seal:] For the second year in a
- ------------------- row, MFS earned a #1
MFS Rated #1 ranking in DALBAR,
TOP-RATED SERVICE Inc.'s Broker/Dealer
- ------------------- Survey, Main Office
Operations Service
Quality category. The
Firm achieved a 3.49
overall score -- on a scale of 1 to 4 -- in the 1995
survey. A total of 71 firms responded, offering
input on the quality of service they receive from
36 mutual fund companies nationwide. The
survey contained questions about service quality
in 17 categories, including "knowledge of phone
service contacts," "accuracy of transaction
processing," and "overall ease of doing business
with the firm." The 1996 survey results were not
available at the time of this printing.
33
<PAGE>
[BACK COVER]
MFS(R) Municipal
Bond Fund
500 Boylston Street
Boston, MA 02116
[MFS logo](SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
(C)1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
MMB-2 10/96 57M 17/217
[Dalbar seal:]
- -----------------------
DALBAR
MFS #1 MFS
TOP-RATED SERVICE
- -----------------------
<PAGE>
[FRONT COVER]
[MFS logo](SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) Municipal Bond Fund
Annual Report
for Year Ended
August 31, 1996
[Photo: perspective of elaborate suspension bridge]
