<PAGE>
[graphic omitted] MFS(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) MUNICIPAL
BOND FUND
SEMIANNUAL REPORT o FEBRUARY 28, 1998
<PAGE>
IN MEMORIAM
A. KEITH BRODKIN
1935 - 1998
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MFS INVESTMENT MANAGEMENT(SM)
On February 2, 1998, Keith Brodkin, a friend and
leader to everyone at MFS, died unexpectedly at
[Photo of A. Keith Brodkin] age 62. His thoughtful letters to shareholders on
the markets and economy have been an integral
part of MFS shareholder reports like this one for
many years.
Keith joined MFS in 1970 as the firm's first
fixed-income manager, managing the bond portion
of MFS(R) Total Return Fund. He went on to manage our first pure bond fund,
MFS(R) Bond Fund, when it was introduced in 1974, and he was considered a
pioneer in the art of active bond management.
Keith was named President and Chief Investment Officer of MFS in 1987 and
four years later became Chairman and Chief Executive Officer. During his
stewardship, MFS has achieved significant growth in total assets under
management, rising from some $25 billion in 1991 to the over $70 billion
today entrusted to us by three million individual and institutional investors
worldwide. Under Keith's leadership, MFS has carefully but steadily built its
domestic and international investment capabilities through the introduction
of a range of new products and a still-growing staff that now numbers over
100 equity and fixed-income professionals.
Throughout his career, Keith was very active in a wide range of charitable
endeavors. He is survived by his wife and three children.
His leadership, friendship, and wise counsel will be sorely missed.
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 2
A Discussion with the Portfolio Manager ................................... 4
Fund Facts ................................................................ 8
Performance Summary ....................................................... 8
Portfolio Concentration ................................................... 9
Portfolio of Investments .................................................. 10
Financial Statements ...................................................... 18
Notes to Financial Statements ............................................. 24
Trustees and Officers ..................................................... 29
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HIGHLIGHTS
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o FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 5.01%, WHILE CLASS B SHARES
RETURNED 4.52%. (SEE PERFORMANCE SUMMARY FOR MORE INFORMATION.)
o THE FUND'S PERFORMANCE WAS HELPED BY ITS HOLDINGS IN NONCALLABLE AND
DISCOUNT BONDS. THESE BONDS BENEFITED FROM THE GENERAL DECLINE IN INTEREST
RATES DURING THE PERIOD.
o THE FUND'S LARGEST HOLDINGS ARE IN GENERAL OBLIGATION AND OTHER TAX-BACKED
BONDS. HOLDINGS IN THIS SECTOR ARE SECURED BY A WIDE VARIETY OF TAXES, SUCH
AS SALES AND USE TAXES AND EXCISE TAXES. DURING PERIODS OF STRONG ECONOMIC
GROWTH, THESE SOURCES OF TAX REVENUE RISE DRAMATICALLY.
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders:
As investment managers we take a long-term view of the world's economies, as
well as of the stock and bond markets, and try to avoid getting caught up in
short-term fluctuations. However, it is hard to ignore unexpected events such as
the Asian economic turmoil or closely watched companies that miss their
quarterly earnings estimates. Given the potential for these events and their
possible impact on major market indices, we think it's important to offer some
perspective about recent market behavior and to let you know what MFS is doing
in an effort to provide you with favorable long-term investment performance.
The most notable recent event affecting investment markets has been the Asian
turmoil, which began in the summer of 1997 as a result of slowing growth rates
in the region and excess speculation in real estate markets. Since then, most
countries in the region have begun to implement the economic and regulatory
restructuring needed to put themselves on a stronger financial foundation. While
it may be a few years before some of these countries return to solid economic
footing, and while there will probably be a relatively short-term impact on the
U.S. economy, we believe the long-term outlook for the region is quite positive.
The Asian situation has brought home the lesson that major events can quickly
impact investment markets around the world, including those of the United
States. Although U.S. equities have enjoyed a bull market lasting more than 15
years and have continued to set records in the first several weeks of 1998,
there have been brief bouts of volatility associated with the Asian turmoil, as
well as with perceived downturns for certain industries such as technology.
While we believe the long-term outlook for the equity markets is favorable,
other, unforeseen events can trigger fairly extended periods during which prices
decline or remain relatively flat. Since no one can predict market cycles, that
makes it that much more important to find companies that can keep growing in the
face of the occasional downturn and even gain market share. For us, this means
using original, bottom-up research to examine each company's earnings potential
and position as well as the overall prospects for its industry. To that end, MFS
continues to increase the research support available to portfolio managers of
MFS funds.
On the fixed-income side, MFS uses active portfolio management based on
extensive research and credit analysis to reduce the potential for price
declines and enhance the opportunity for price appreciation. For both equity and
fixed-income managers, this means visiting and meeting with thousands of
companies and issuers of credit every year, as well as attending many
presentations and closely following sources of industry research.
We believe this approach, based on thorough research, teamwork, innovative
thinking, and the free exchange of ideas, is the best way to get the most
performance for shareholders in MFS funds -- in any market environment.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management
March 16, 1998
JEFFREY L. SHAMES, A GRADUATE OF WESLEYAN UNIVERSITY AND THE MASSACHUSETTS
INSTITUTE OF TECHNOLOGY SLOAN SCHOOL OF MANAGEMENT, JOINED MFS IN 1983. AFTER
FOUR YEARS AS AN INDUSTRY ANALYST AND PORTFOLIO MANAGER, HE WAS NAMED CHIEF
EQUITY OFFICER IN 1987 AND PRESIDENT AND A MEMBER OF THE BOARD OF DIRECTORS IN
1993. MR. SHAMES WAS APPOINTED CHAIRMAN AND CHIEF EXECUTIVE OFFICER IN FEBRUARY
1998.
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of Geoffrey L. Schechter]
Geoffrey L. Schechter
For the six months ended February 28, 1998, Class A shares of the Fund provided
a total return of 5.01% and Class B shares 4.52%. These returns, which include
the reinvestment of distributions but exclude the effects of any sales charges,
compare to a 5.04% return for the Lehman Brothers Municipal Bond Index, an
unmanaged index of approximately 40,000 investment-grade bonds, and to a 4.99%
return for the average municipal bond fund as tracked by Lipper Analytical
Services, Inc., an independent firm that reports mutual fund performance.
Q. WHAT DO YOU SEE AS SOME OF THE REASONS FOR THIS PERFORMANCE?
A. The Fund's holdings in noncallable and discount bonds were two factors that
positively contributed to performance. These bonds benefited fully from the
general decline in interest rates during the period. Performance was
negatively impacted by the Fund's limited (14%) exposure to bonds rated
"BBB" by Standard & Poor's. During the past six months, the yield spread
between "AAA"- and "BBB"-rated bonds compressed from approximately 40 basis
points (0.40%) to approximately 25 basis points (0.25%), and holdings rated
"BBB" generally outperformed due to this spread compression.
Q. HOW WOULD YOU DESCRIBE THE FIXED-INCOME ENVIRONMENT OF THE PAST SIX MONTHS?
A. The past six months have been a generally favorable period for fixed-income
investments. Inflation, as measured by the Consumer Price Index, has
declined to its lowest level in over 20 years, providing a positive backdrop
for bonds even in the face of strong economic growth and low unemployment
levels. On the surface, this environment would appear to be negative for
bonds. However, the low inflation in recent months has enabled interest
rates to decline also. In this environment, the yield on long-term,
high-grade municipal bonds fell 27 basis points (0.27%) over the period.
Q. AND HOW WOULD YOU DESCRIBE THE MUNICIPAL ENVIRONMENT?
A. From a credit perspective, the financial health of state and local
governments is the best it has been in many years owing to a combination of
the strong economy with conservative fiscal management. This is evidenced by
Standard & Poor's credit upgrades exceeding downgrades by a ratio of seven
to one in 1997. On the other hand, a surge in new-issue supply in 1997 and
continuing into 1998 has overwhelmed demand, causing municipal bonds to
underperform their taxable counterparts. The surge was due primarily to the
increased amount of refunding bonds, as issuers refinanced older outstanding
issues to take advantage of the low rates. As of February 28, 1998,
municipal-to-U.S. Treasury ratios stood at or near their highest levels of
the past 12 months, a situation we believe will reverse itself in the months
ahead. (Principal value and interest on Treasury securities are guaranteed
by the U.S. government if held to maturity.)
Q. HAVE THERE BEEN ANY MAJOR NEW DEVELOPMENTS IN THIS MARKET SINCE THE LAST
REPORT?
A. The Asian crisis has been the major story in the market since the last
report. The crisis helped spur the rally in the fixed-income markets as
investors began to expect both a decline in economic activity due to slower
exports and a positive impact on inflation due to a stronger dollar and
lower commodity prices. Uncertainty remains over what the impact of the
Asian crisis on the U.S. economy will be and when, if at all, it may be
felt. We continue to monitor the situation closely.
Q. THE CREDIT QUALITY OF THE FUND IS QUITE HIGH, WITH OVER 70% OF ASSETS IN
SECURITIES RATED "AAA" OR "AA." IS THAT UNUSUALLY HIGH FOR THIS FUND, OR IS
IT A REFLECTION OF YOUR OUTLOOK FOR THE MARKET?
A. The credit quality of the Fund is very strong, a result of two major themes.
First, the penetration of bond insurance continues to hit new highs each
year. Indeed, in 1997 over 53% of all new issuance came with some form of
credit enhancement. This percentage does not even take into consideration
tax-exempt securities that are enhanced subsequent to issuance in the
secondary market. Second, given the fiscal strength of municipal
governments, investors are requiring less additional yield to buy
lower-quality securities. With the compression in yield spreads, we believe
investors are not being adequately compensated for the risks of lower-grade
securities and have thus focused our investments in the higher levels of the
credit spectrum.
Q. WHAT ABOUT CALL PROTECTION? WHAT PORTION OF THE FUND IS IN NONCALLABLE
BONDS, AND WHY IS THIS IMPORTANT FOR INVESTORS?
A. The Fund is well protected from call risk, as over 37% of assets are
invested in noncallable securities. This is important because during market
rallies -- that is, when interest rates decline -- noncallable securities
benefit more than callable securities. Also, noncallable securities help us
to sustain the Fund's dividend level.
Q. COULD YOU TALK ABOUT SOME OF THE LARGEST SECTORS IN THE FUND, AND WHY YOU
LIKE THEM?
A. The Fund's largest holdings are in general obligation and other tax-backed
bonds. Holdings in this sector are secured by a wide variety of taxes, such
as ad valorem taxes (those on the value of goods or property such as real
estate and motor vehicles), sales and use taxes, and excise taxes. During
periods of strong economic growth these sources of tax revenue rise
dramatically. Thus, bonds backed by these tax sources become better secured
and rise in value relative to other bonds. We also have large holdings in
bonds issued by financing authorities of the city and state of New York.
These holdings have benefited greatly from the ongoing boom on Wall Street.
In fact, many of these holdings experienced credit upgrades by one or more
of the major credit-rating agencies during the past year.
Q. WHAT HAVE YOU DONE TO MAKE THE FUND LESS VULNERABLE TO UNEXPECTED
INTEREST-RATE MOVES? AND WHAT ABOUT THE USE OF FINANCIAL INSTRUMENTS SUCH AS
FUTURES CONTRACTS?
A. We are continuing to reduce the Fund's interest-rate volatility, primarily
by shortening its average maturity. With the yield curve essentially flat,
we feel that the risks of being in 30-year securities outweigh the benefits;
20-year bonds provide approximately 95% of the yield of 30-year bonds, while
only bearing 80% of the interest-rate sensitivity. Thus, we believe that
shortening the Fund's average maturity will reduce its vulnerability to
unexpected interest-rate moves. In conjunction with such structural moves,
we will continue to reduce our reliance on futures contracts as an
interest-rate management tool. Our use of such instruments has led to
underperformance in the past.
Q. WHAT ABOUT THE RISE IN BOND INSURANCE? COULD YOU TELL US HOW THIS HAS
AFFECTED THE MUNICIPAL MARKET AND HOW YOU MANAGE THE FUND?
A. As we discussed earlier, bond insurance continues to be one of the major
trends in the municipal market in recent years. Along with the improved
fiscal health of state and local governments and the general decline in
interest rates, it has been one of the driving factors behind the narrowing
in credit spreads. This has made it more difficult over the near term to add
value through trading among specific credits or sectors, so portfolio
performance has been largely driven by maturity and structural bond
differentials.
Q. LOOKING AHEAD, WHAT CHANGES DO YOU SEE IN THE GENERAL ECONOMIC OR POLITICAL
ENVIRONMENT, AND HOW ARE YOU POSITIONING THE FUND FOR THOSE CHANGES?
A. We expect more of the same -- healthy economic growth and relatively low
inflation. However, with resources becoming more scarce and unemployment at
historically low levels, we continue to be vigilant for signs of a pick-up
in inflation. As a result, we will continue to try and reduce the Fund's
interest-rate vulnerability. We will also look to add value through market
analysis by our highly experienced research staff.
/s/ Geoffrey L. Schechter
Geoffrey L. Schechter
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and are
only through the end of the period of the report as stated on the cover. The
manager's views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
Note to Shareholders: Effective March 4, 1998, the Fund is being managed
by Geoffrey L. Schechter, who succeeded Robert A. Dennis. Mr. Schechter joined
MFS in 1993 as an Investment Officer in the Fixed Income Department and was
named Assistant Vice President -- Investments in 1994 and Vice President --
Investments in 1995. A graduate of the University of Texas and the Boston
University Graduate School of Business Administration, Mr. Schechter is a
Certified Public Accountant and a Chartered Financial Analyst.
<PAGE>
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FUND FACTS
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OBJECTIVE: SEEKS AS HIGH A LEVEL OF CURRENT INCOME EXEMPT FROM
FEDERAL INCOME TAXES AS IS CONSISTENT WITH PROTECTION
OF SHAREHOLDERS' CAPITAL.
COMMENCEMENT OF
INVESTMENT OPERATIONS: DECEMBER 16, 1976
CLASS INCEPTION: CLASS A DECEMBER 16, 1976
CLASS B SEPTEMBER 7, 1993
SIZE: $1.7 BILLION NET ASSETS AS OF FEBRUARY 28, 1998
PERFORMANCE SUMMARY
Because mutual funds like MFS(R) Municipal Bond Fund are designed for investors
with long-term goals, we have provided cumulative results as well as the average
annual total returns for Class A and Class B shares for the applicable time
periods.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN AS OF FEBRUARY 28, 1998
CLASS A INVESTMENT RESULTS
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
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Cumulative Total Return +5.01% +8.86% +30.82% +112.32%
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Average Annual Total Return -- +8.86% + 5.52% + 7.82%
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SEC Results -- +3.71% + 4.51% + 7.30%
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CLASS B INVESTMENT RESULTS
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
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Cumulative Total Return +4.52% +8.00% +25.28% +103.25%
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Average Annual Total Return -- +8.00% + 4.61% + 7.35%
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SEC Results -- +4.00% + 4.28% + 7.35%
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Class A share ("A") SEC results include the maximum 4.75% sales charge. Class B
share ("B") SEC results reflect the applicable contingent deferred sales charge
(CDSC), which declines over six years from 4% to 0%.
B results include the performance and the operating expenses (e.g., Rule 12b-1
fees) of A for periods prior to the inception of B. Because operating expenses
of A are lower than those of B, B performance generally would have been lower
than A performance. The A performance included within the B SEC performance has
been adjusted to reflect the CDSC generally applicable to B rather than the
initial sales charge generally applicable to A.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and waivers
may be rescinded at any time. See the prospectus for details. 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.
PORTFOLIO CONCENTRATION AS OF FEBRUARY 28, 1998
QUALITY RATINGS
"AAA" 58.0%
"A" 15.7%
"BBB" 14.1%
"AA" 11.3%
Other 0.9%
<PAGE>
PORTFOLIO OF INVESTMENTS (Unaudited) -- February 28, 1998
<TABLE>
<CAPTION>
Municipal Bonds - 97.4%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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<S> <C> <C>
General Obligation - 15.4%
Chicago, IL, Board of Education, AMBAC, 0s, 2011 $ 5,000 $ 2,547,350
Chicago, IL, Board of Education, MBIA, 6.25s, 2012 2,500 2,911,250
Chicago, IL, Board of Education (Capital
Appreciation), AMBAC, 0s, 2012 2,550 1,224,561
Clark County, NV, School District, MBIA, 7s, 2010 4,000 4,894,000
Commonwealth of Massachusetts, 7s, 2007 1,285 1,422,932
Commonwealth of Massachusetts, 6.5s, 2008 6,400 7,428,736
Commonwealth of Massachusetts, FGIC, 7s, 2009 7,000 8,523,130
Commonwealth of Massachusetts, 5s, 2014 5,500 5,468,100
Commonwealth of Massachusetts, 5s, 2017 20,940 20,631,344
Cook County, IL, MBIA, 5.625s, 2016 3,230 3,391,694
Detroit, MI, 6.25s, 2009 5,235 5,651,025
Detroit/Wayne County, MI, Stadium, FGIC, 5.5s, 2017 6,000 6,231,840
District of Columbia, MBIA, 6.5s, 2010 6,000 6,952,080
Florida Board of Education, Capital Outlay, 9.125s, 2014 1,735 2,509,799
Lewisville, TX, Independent School District, PSF, 5s, 2018 8,500 8,350,145
New York City, NY, 7.5s, 2002 12,500 13,900,500
New York City, NY, 7.5s, 2006 3,625 4,046,551
New York City, NY, 7.65s, 2006 295 330,875
New York City, NY, 7.5s, 2007 15,500 17,302,495
New York City, NY, 7.5s, 2008 10,000 11,162,900
New York City, NY, 7.7s, 2009 320 359,482
New York City, NY, 5.75s, 2013 8,500 8,990,195
New York City, NY, 5.25s, 2014 10,000 10,039,800
New York City, NY, 5.75s, 2014 9,500 9,933,105
New York City, NY, 5.75s, 2015 11,085 11,494,480
State of California, 5.5s, 2013### 8,000 8,621,360
State of California, 5s, 2023 55,955 54,386,581
State of Florida, Broward County Expressway Authority, 10s, 2014 4,350 6,686,516
State of Florida, Jacksonville Transportation Authority, 5s, 2022 5,000 4,876,450
State of Washington, 6.75s, 2010 3,880 4,641,139
State of Washington, 6s, 2012 4,360 4,879,843
--------------
$ 259,790,258
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State and Local Appropriation - 27.9%
California Public Works Board, Lease Rev. (California
State University), 5.3s, 2015 $ 6,655 $ 6,761,679
California Public Works Board, Lease Rev. (Department
of Corrections), AMBAC, 5.25s, 2013 6,795 7,159,620
California Public Works Board, Lease Rev. (University
of California), 5.5s, 2014 4,500 4,878,360
Chicago, IL, Board of Education Lease Certificates,
MBIA, 6.25s, 2009 5,160 5,896,384
Chicago, IL, Board of Education Lease Certificates,
MBIA, 6.25s, 2015 27,295 31,688,130
Indiana Office Building Community Capital Complex Rev., 6.9s, 2011 9,500 11,550,195
Kansas City, MO, Municipal Assistance, MBIA, 5.125s, 2015 7,545 7,609,284
King County, IL, Washington Lease Rev. (King Street
Center), MBIA, 5.125s, 2017 6,975 6,936,149
Los Angeles County, CA, Public Works Financing
Authority (Multiple Capital Facilities), AMBAC, 5.125s, 2017 4,900 4,890,494
Massachusetts Bay Transportation Authority, 6.1s, 2013 10,200 11,593,014
Massachusetts Bay Transportation Authority, 5.875s, 2015 4,500 4,996,395
Massachusetts Bay Transportation Authority, 7s, 2021 19,185 24,276,699
Massachusetts Bay Transportation Authority, 5s, 2022 17,000 16,402,620
Massachusetts Bay Transportation Authority, 5s, 2024 13,250 12,766,375
Massachusetts Bay Transportation Authority, FGIC, 5s, 2023 17,970 17,620,304
Metropolitan Government of Nashville & Davidson County, TN, 7s, 2011 5,280 5,788,886
Metropolitan Transportation Authority, NY, Commuter
Facilities Rev., MBIA, 5.5s, 2011 3,430 3,654,974
Metropolitan Transportation Authority, NY, Service
Contract, 7.4s, 2001 4,075 4,465,181
Metropolitan Transportation Authority, NY, Service
Contract, 7.375s, 2008 5,000 6,027,300
Metropolitan Transportation Authority, NY, Service
Contract, 5.75s, 2013 5,600 6,032,208
Metropolitan Transportation Authority, NY,
Transportation Facilities Rev., AMBAC, 5s, 2017 5,000 4,896,250
New York Dormitory Authority Rev. (City University), 7s, 2009 13,765 16,302,165
New York Dormitory Authority Rev. (City University), 7.5s, 2010 15,650 19,360,145
New York Dormitory Authority Rev. (City University), 5.75s, 2013 25,150 27,091,077
New York Dormitory Authority Rev. (City University), 5.75s, 2013 5,000 5,385,900
New York Dormitory Authority Rev. (Mental Health
Services Facilities), 6s, 2007 1,500 1,632,315
New York Dormitory Authority Rev. (Mental Health Services
Facilities), 5.75s, 2010 2,000 2,110,600
New York Dormitory Authority Rev. (State University), 7.375s, 2010 16,100 19,872,230
New York Dormitory Authority Rev. (State University), 5.5s, 2013 7,875 8,436,803
New York Dormitory Authority Rev. (State University), 5s, 2015 15,340 15,128,001
New York Dormitory Authority Rev. (State University), 5.25s, 2015 5,100 5,299,053
New York Dormitory Authority Rev. (State University), 5s, 2017 9,060 8,872,639
New York Dormitory Authority Rev. (State University), 5.125s, 2021 10,000 9,846,500
New York Urban Development Corp., Senior Lien, 5.5s, 2016 14,690 15,475,474
New York Urban Development Corp., Subordinate Lien, 5.5s, 2022 5,000 5,108,000
New York Urban Development Corp., FSA, 5.5s, 2014 4,525 4,856,954
New York Urban Development Corp. (Correctional Facilities), 5.5s, 2014 5,000 5,230,950
New York Urban Development Corp. (Correctional Facilities),
5.375s, 2015 11,405 11,515,629
Philadelphia, PA, Municipal Authority, MBIA, 5.4s, 2017 5,000 5,160,600
Rhode Island Convention Center Authority, MBIA, 5.25s, 2015 20,870 21,734,018
Rhode Island Convention Center Authority, MBIA, 5s, 2023 5,310 5,111,406
San Bernardino, CA, Joint Powers Financing Authority Lease Rev.
(California Dept. of Transportation), 5.5s, 2014 10,000 10,423,400
Santa Clara County, CA, Certificates of Participation, AMBAC,
6.25s, 2016 8,210 8,730,678
Triborough Bridge & Tunnel Authority, NY (Convention Center),
7.25s, 2010 22,905 27,661,911
Wayne County, MI, MBIA, 5.25s, 2016 5,750 5,837,975
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$ 472,074,924
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Refunded and Special Obligations - 12.7%
Austin, TX, Utility Systems Rev., 10.75s, 2000 $ 2,615 $ 2,986,592
Chicago, IL, Public Building Commission Mortgage
Rev., ETM, MBIA, 7.125s, 2015 6,590 7,048,071
Clark County, NV, School District, MBIA, 7s, 2001 10,050 11,036,006
Commonwealth of Massachusetts, 6.875s, 2001 4,825 5,324,339
Commonwealth of Massachusetts, 7s, 2007 3,305 3,665,212
Florida Board of Education, Capital Outlay, ETM, 9.125s, 2014 265 376,952
Maryland Health & Higher Education Facilities Authority Rev.
(University of Maryland Medical System), FGIC, 7s, 2001 7,945 8,810,926
Massachusetts Port Authority Rev., ETM, 13s, 2013 3,500 6,020,280
Missouri Regional Convention & Sports Complex Authority, 6.8s, 2003 8,950 10,142,050
Missouri Regional Convention & Sports Complex Authority, 6.9s, 2003 21,520 24,490,406
New York City, NY, 8s, 2001 2,475 2,820,560
New York City, NY, 7.65s, 2002 4,705 5,371,651
New York City, NY, 7.7s, 2009 3,680 4,208,006
New York Urban Development Corp. (Correctional Facilities),
7.625s, 2001 7,570 8,435,175
New York Urban Development Corp. (Correctional Facilities),
7.375s, 2002 4,000 4,535,200
Pennsylvania Convention Center Authority Rev., FGIC, 6.7s, 2016 51,195 61,831,785
Philadelphia, PA, Municipal Authority Rev. (Justice Lease), FGIC,
7.1s, 2001 6,000 6,718,860
Philadelphia, PA, Municipal Authority Rev. (Justice Lease), FGIC,
7.125s, 2001 4,500 5,042,970
Philadelphia, PA, School District, MBIA, 7s, 2001 9,440 10,370,784
State of Florida, Jacksonville Transportation Authority, ETM,
9.2s, 2015 2,000 2,856,560
Washington Public Power Supply System Rev. (Nuclear Project #2),
7.375s, 2000 10,000 10,940,200
Washington Public Power Supply System Rev. (Nuclear Project #2),
7.625s, 2001 10,815 12,035,689
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$ 215,068,274
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Airport and Port Revenue - 1.7%
Connecticut Airport Rev. (Bradley International Airport), FGIC,
7.65s, 2012 $ 5,000 $ 5,887,550
Massachusetts Port Authority Rev., Series A, 5s, 2027 15,890 15,347,039
Massachusetts Port Authority Rev., Series C, 5.125s, 2020 3,290 3,257,560
Port of Seattle, WA, FGIC, 5.5s, 2021 4,000 4,096,000
--------------
$ 28,588,149
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Electric and Gas Utility Revenue - 17.1%
Austin, TX, Utility Systems Rev., AMBAC, 6.75s, 2012(S)(S) $ 2,500 $ 2,962,600
Chelan County, WA, Public Utility District (Columbia River Rock
Island Hydro), MBIA, 0s, 2020 19,350 6,193,548
Georgia Municipal Electric Authority Rev., AMBAC, 6.5s, 2017 8,510 10,020,865
Georgia Municipal Electric Authority Rev., AMBAC, 5.125s, 2020 11,500 11,432,380
Georgia Municipal Electric Authority Rev., FGIC, 5.5s, 2020 5,045 5,322,677
Georgia Municipal Electric Authority Rev., MBIA, 5.5s, 2020 22,190 23,471,916
Intermountain Power Agency, UT, Power Supply Rev., 6.15s, 2014## 44,600 49,006,926
Intermountain Power Agency, UT, Power Supply Rev., AMBAC, 6s, 2021 9,000 9,843,660
Intermountain Power Agency, UT, Power Supply Rev., MBIA, 6s, 2016 10,000 10,872,100
Massachusetts Municipal Wholesale Electric Co., MBIA, 6.75s, 2017 6,030 6,669,361
Mercer County, ND, Pollution Control Rev. (Antelope Valley Station),
AMBAC, 7.2s, 2013 4,000 4,987,800
Michigan Strategic Fund, Limited Obligation Rev. (Detroit Edison),
MBIA, 7s, 2008 3,000 3,625,680
North Carolina Eastern Municipal Power, MBIA, 5.7s, 2013 7,000 7,475,020
North Carolina Eastern Municipal Power, MBIA, 5.625s, 2014 7,735 8,178,138
North Carolina Eastern Municipal Power, MBIA, 5.125s, 2017 20,925 21,079,008
North Carolina Eastern Municipal Power, MBIA, 6.5s, 2018 9,250 11,035,343
Northern California Transmission Agency, MBIA, 7s, 2013 4,000 4,929,800
Piedmont, SC, Municipal Power Agency, Electric Rev., FGIC,
6.25s, 2021 4,150 4,802,255
Piedmont, SC, Municipal Power Agency, Electric Rev., MBIA,
5.375s, 2025 10,000 10,461,400
Washington Public Power Supply System Rev. (Nuclear Project #1),
MBIA, 5.75s, 2010 13,100 14,108,569
Washington Public Power Supply System Rev. (Nuclear Project #1),
MBIA, 5.75s, 2011 7,500 8,026,875
Washington Public Power Supply System Rev. (Nuclear Project #1),
5.125s, 2014 7,000 6,940,990
Washington Public Power Supply System Rev. (Nuclear Project #2),
MBIA, 5.625s, 2010 10,000 10,669,000
Washington Public Power Supply System Rev. (Nuclear Project #2),
5s, 2012 10,000 9,896,000
Washington Public Power Supply System Rev. (Nuclear Project #2),
MBIA, 5.7s, 2012 15,000 15,981,000
Washington Public Power Supply System Rev. (Nuclear Project #3),
FGIC, 0s, 2005 6,895 4,971,916
Washington Public Power Supply System Rev. (Nuclear Project #3),
7.125s, 2016 5,145 6,292,232
--------------
$ 289,257,059
- -------------------------------------------------------------------------------------------------------
Health Care Revenue - 1.8%
Michigan Hospital Finance Authority Rev. (Henry Ford), 5.25s, 2020 $10,200 $ 10,132,782
Michigan Hospital Finance Authority Rev. (Mercy Health Services),
5.625s, 2016 8,375 8,727,169
New York Dormitory Authority Rev. (Secured Hospital Interfaith
Medical Center), 5.25s, 2016 2,845 2,824,999
Pennsylvania Higher Education Facilities, Health Services Rev.
(University of Pennsylvania), 5.75s, 2022 2,015 2,110,874
Royal Oak, MI, Hospital Finance Authority Rev. (William Beaumont
Hospital), 5.25s, 2020 6,000 5,976,540
--------------
$ 29,772,364
- -------------------------------------------------------------------------------------------------------
Insured Health Care Revenue - 10.5%
Davenport, IA, Hospital Rev. (St. Luke's Hospital), AMBAC, 7.4s, 2020 $ 2,715 $ 2,978,138
District of Columbia Hospital Rev. (Medlantic Healthcare), MBIA,
5.25s, 2019 6,750 6,724,080
Fredericksburg, VA, Industrial Development (Medicorp Health
Systems), AMBAC, 5.25s, 2023 7,000 6,971,160
Huntsville, AL, Health Care Authority, MBIA, 5s, 2017 3,000 2,937,870
Illinois Educational Facilities Authority Rev. (Advocate
Healthcare), MBIA, 5.7s, 2011 4,500 4,823,100
Illinois Educational Facilities Authority Rev. (Holy Family Medical
Center), MBIA, 5.125s, 2017 6,975 6,868,910
Iowa Finance Authority, Health Care Facilities (Genesis Medical
Center), MBIA, 5.2s, 2017 3,500 3,465,875
Lancaster County, NE, Hospital Authority Rev. (Bryan Memorial
Hospital), MBIA, 5.375s, 2017 4,250 4,326,457
Massachusetts Health & Education Facilities Authority (University
Hospital), MBIA, 7.25s, 2019 4,500 4,888,620
Michigan Hospital Finance Authority Rev. (Sisters of Mercy
Hospital), MBIA, 5.375s, 2014 9,000 9,467,370
New York Dormitory Authority Rev. (Secured Hospital Interfaith
Medical Center), AMBAC, 5.25s, 2014 4,320 4,391,237
New York Dormitory Authority Rev. (Wyckoff Heights Medical
Center), AMBAC, 5.2s, 2014 2,500 2,530,125
New York Dormitory Authority Rev. (Wyckoff Heights Medical
Center), AMBAC, 5.2s, 2014 4,915 4,974,226
North Texas Health Facilities Development Corp.
(United Regional Health Care Systems, Inc.), MBIA, 5s, 2014 8,980 8,908,878
Peninsula Ports Authority, VA, Hospital Facilities
Rev. (Whittoker Memorial), FHA, 8.7s, 2023 1,595 1,630,888
Philadelphia, PA, Hospitals & Higher Education Facilities
Authority Rev. (Jefferson Health Systems), AMBAC, 5.125s, 2018 14,000 13,816,460
Sayre, PA, Health Care Facilities Authority Rev.
(Guthrie Healthcare Systems), AMBAC, 7s, 2011 6,000 6,539,880
Scranton-Lackawanna, PA, Health & Welfare Authority
Rev. (Hospital Community Medical Center), FGIC, 5.125s, 2016 4,095 4,072,682
Spartanburg County, SC, Health Service District, Inc., MBIA,
5.125s, 2017 6,125 6,128,920
Tarrant County, TX, Health Facilities Development Corp.
(Fort Worth Osteopathic), MBIA, 6s, 2021 6,000 6,792,420
Tarrant County, TX, Health Facilities Development Corp.
(Harris Methodist Health), AMBAC, 5.125s, 2018 5,000 5,009,500
Tarrant County, TX, Health Facilities Development Corp.
(Texas Health Resources), MBIA, 5.25s, 2018 18,605 18,613,744
Tarrant County, TX, Health Facilities Development Corp.
(Texas Health Resources), MBIA, 5.25s, 2022 20,000 20,009,400
Tarrant County, TX, Health Facilities Development Corp.
(Texas Health Resources), MBIA, 5s, 2026 6,330 6,091,233
Utah County, UT, Hospital Rev. (IHC Health Services, Inc.),
MBIA, 5.25s, 2021 4,000 3,984,160
Washington County, PA, Hospital Authority Rev. (Washington
Hospital), AMBAC, 7.15s, 2017 9,000 9,726,120
--------------
$ 176,671,453
- -------------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 0.3%
Colorado Housing Finance Authority, FHA, 8.3s, 2023 $ 4,000 $ 4,305,800
- -------------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 2.2%
Illinois Dedicated Tax Rev. (Civic Center), AMBAC, 6.25s, 2011 $ 3,640 $ 4,186,655
Illinois Sales Tax Rev., 0s, 2009 8,965 5,273,751
Illinois Sales Tax Rev., 6.5s, 2022 5,000 6,065,150
Metropolitan Atlanta, GA, Rapid Transit Authority, 6.25s, 2018 4,580 5,260,863
New York City, NY, Transitional Finance Authority Rev.,
5.125s, 2021 5,000 4,943,100
Rhode Island Depositors Economic Protection Corp., FSA, 5.75s, 2014 9,800 10,800,874
--------------
$ 36,530,393
- -------------------------------------------------------------------------------------------------------
Solid Waste Revenue - 0.2%
Northeast Maryland Waste Disposal Authority
(Southwest County Resource Recovery), MBIA, 7.2s, 2005 $ 3,000 $ 3,483,540
- -------------------------------------------------------------------------------------------------------
Special Assesment District - 0.4%
Chico, CA, Public Finance Authority Rev. (Southeast Chico
Redevelopment), FGIC, 6.625s, 2021 $ 6,435 $ 6,838,539
- -------------------------------------------------------------------------------------------------------
Turnpike Revenue - 2.6%
Massachusetts Turnpike Authority, Metropolitan
Highway System Rev., MBIA, 5.125s, 2017 $20,500 $ 20,531,980
Massachusetts Turnpike Authority, Metropolitan
Highway System Rev., MBIA, 5.125s, 2023 5,000 4,934,550
New Jersey Transportation Trust Fund Authority,
Transportation Systems, 5.25s, 2016 8,500 8,626,140
New York Thruway Authority, Service Contract Rev.
(Local Highway & Bridge), 5.25s, 2013 6,000 6,067,680
Texas Turnpike Authority, Dallas Thruway (President
George Bush Turnpike), AMBAC, 5s, 2016 4,500 4,452,165
--------------
$ 44,612,515
- -------------------------------------------------------------------------------------------------------
Universities - 1.8%
Massachusetts Health & Education Facilities (Harvard
University), 6.25s, 2020 $22,200 $ 26,219,976
Texas A & M University (Permanent University Fund), 0s, 2007 6,695 4,432,893
--------------
$ 30,652,869
- -------------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 2.5%
Detroit, MI, Sewage Disposal Rev., MBIA, 5s, 2022 $12,750 $ 12,349,140
East Bay, CA, Municipal Utility District, MBIA-IBC, 6s, 2012 5,000 5,384,950
Houston, TX, Water & Sewer Systems Rev., FGIC, 5s, 2018 10,000 9,809,300
Houston, TX, Water & Sewer Systems Rev., FGIC, 5s, 2025 5,000 4,818,850
Massachusetts Water Resource Authority, MBIA, 5s, 2024 5,500 5,320,480
New York City, NY, Municipal Water Finance Authority,
AMBAC, 5.125s, 2021 5,000 4,929,750
--------------
$ 42,612,470
- -------------------------------------------------------------------------------------------------------
Other - 0.3%
Orange County, CA, California Recovery Certificates, MBIA, 6s, 2026 $ 5,000 $ 5,446,850
- -------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $1,506,191,915) $1,645,705,457
- -------------------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 1.2%
- -------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- -------------------------------------------------------------------------------------------------------
Allegheny County, PA, Hospital Development Authority
Rev. (Presbyterian), due 03/05/98 $ 3,850 $ 3,850,000
Allegheny County, PA, Hospital Development Authority
Rev. (Presbyterian), due 03/05/98 5,300 5,300,000
Allegheny County, PA, Hospital Development Authority
Rev. (Presbyterian), due 03/01/20 4,420 4,420,000
Georgia Hospital Financing Authority Rev. (Hospital
Loan Program), due 03/01/01 200 200,000
New Castle, PA, Area Hospital Authority (Jameson
Memorial Hospital), due 03/04/98 2,925 2,925,000
New York City, NY, due 03/04/98 2,900 2,900,000
Pinellas County, FL, Health Facility Authority, due 03/02/98 400 400,000
- -------------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Amortized Cost and Value $ 19,995,000
- -------------------------------------------------------------------------------------------------------
Short-Term Obligations - 0.2%
- -------------------------------------------------------------------------------------------------------
State of California, due 06/30/98, at Amortized Cost and Value $ 2,500 $ 2,507,152
- -------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,528,694,067) $1,668,207,609
Other Assets, Less Liabilities - 1.2% 20,618,843
- -------------------------------------------------------------------------------------------------------
Net assets - 100.0% $1,688,826,452
- -------------------------------------------------------------------------------------------------------
(S)(S)When-issued security. At February 28, 1998, the Fund had sufficient cash and/or securities at least
equal to the value of the when-issued security.
##SEC rule 144A restriction.
###Security segregated as collateral for an open futures contracts.
</TABLE>
See notes to financial statements
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- --------------------------------------------------------------------------------
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $1,528,694,067) $1,668,207,609
Cash 129,490
Receivable for Fund shares sold 5,557,609
Receivable for investments sold 44,109,825
Interest receivable 20,580,928
Other assets 8,586
--------------
Total assets $1,738,594,047
--------------
Liabilities:
Distributions payable $ 2,940,019
Payable for Fund shares reacquired 1,534,724
Payable for investments purchased 42,323,882
Payable for when-issued investments purchased 2,616,425
Payable for daily variation margin on open futures contracts 114,271
Payable to affiliates -
Management fee 36,665
Shareholder servicing agent fee 10,595
Distribution and service fee 15,443
Administrative fee 1,314
Accrued expenses and other liabilities 174,257
--------------
Total liabilities $ 49,767,595
--------------
Net assets $1,688,826,452
==============
Net assets consist of:
Paid-in capital $1,521,930,718
Unrealized appreciation on investments 140,486,529
Accumulated undistributed net realized gain on
investments 23,828,255
Accumulated net investment income 2,580,950
--------------
Total $1,688,826,452
==============
Shares of beneficial interest outstanding 152,535,381
===========
Class A shares:
Net asset value and redemption price per share
(net assets of $1,610,266,766 / 145,435,088
shares of beneficial interest outstanding) $11.07
======
Offering price per share (100 / 95.25) $11.62
======
Class B shares:
Net asset value and offering price per share
(net assets of $78,559,686 / 7,100,293
shares of beneficial interest outstanding) $11.06
======
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
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations (Unaudited)
- ------------------------------------------------------------------------------
SIX MONTHS ENDED FEBRUARY 28, 1998
- ------------------------------------------------------------------------------
Net investment income:
Interest income $48,452,685
-----------
Expenses -
Management fee $ 3,383,218
Trustees' compensation 42,790
Shareholder servicing agent fee 1,081,368
Distribution and service fee (Class B) 310,120
Administration 106,728
Registration fees 480,568
Custodian fee 225,418
Postage 81,883
Auditing fees 14,140
Miscellaneous 89,324
-----------
Total expenses $ 5,815,557
Fees paid indirectly (242,394)
-----------
Net expenses $ 5,573,163
-----------
Net investment income $42,879,522
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $34,359,584
Futures contracts (5,790,998)
-----------
Net realized gain on investments $28,568,586
-----------
Change in unrealized appreciation -
Investments $13,810,273
Futures contracts 918,076
-----------
Net unrealized gain on investments $14,728,349
-----------
Net realized and unrealized gain on investments $43,296,935
-----------
Increase in net assets from operations $86,176,457
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1998 AUGUST 31, 1997
(UNAUDITED)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
From net investment income $ 42,879,522 $ 96,106,390
Net realized gain on investments 28,568,586 30,858,117
Net unrealized gain on investments 14,728,349 13,108,443
-------------- --------------
Increase in net assets from operations $ 86,176,457 $ 140,072,950
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (41,994,153) $ (92,663,173)
From net investment income (Class B) (1,615,684) (3,251,831)
From net realized gain on investments (Class A) (28,341,967) --
From net realized gain on investments (Class B) (1,279,311) --
-------------- --------------
Total distributions declared to shareholders $ (73,231,115) $ (95,915,004)
-------------- --------------
Net decrease in net assets from Fund share transactions $ (60,352,251) $ (176,515,366)
-------------- --------------
Total decrease in net assets $ (47,406,909) $ (132,357,420)
Net assets:
At beginning of period 1,736,233,361 1,868,590,781
-------------- --------------
At end of period (including accumulated undistributed
net investment income of $2,580,950 and $3,311,266,
respectively) $1,688,826,452 $1,736,233,361
============== ==============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------
TEN
SIX MONTHS YEAR ENDED AUGUST 31, MONTHS YEAR
ENDED ENDED ENDED
FEBRUARY 28, ----------------------------------------- AUGUST 31, OCTOBER 31,
1998 1997 1996 1995 1994 1993
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of
period $10.99 $10.75 $10.83 $10.68 $11.64 $10.73
------ ------ ------ ------ ------ ------
Income from investment
operations# -
Net investment income $ 0.27 $ 0.57 $ 0.59 $ 0.60 $ 0.51 $ 0.61
Net realized and unrealized
gain (loss) on investments 0.28 0.24 (0.09) 0.15 (0.77) 1.14
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.55 $ 0.81 $ 0.50 $ 0.75 $(0.26) $ 1.75
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.26) $(0.57) $(0.58) $(0.60) $(0.47) $(0.66)
From net realized gain on
investments (0.21) -- -- -- (0.16) (0.15)
In excess of net investment
income -- -- -- -- (0.04) (0.03)
In excess of net realized gain
on investments -- -- -- -- (0.03) --
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.47) $(0.57) $(0.58) $(0.60) $(0.70) $(0.84)
------ ------ ------ ------ ------ ------
Net asset value - end of period $11.07 $10.99 $10.75 $10.83 $10.68 $11.64
====== ====== ====== ====== ====== ======
Total return(+) 5.01%++ 7.75% 4.67% 7.31% (2.33)%++ 16.97%
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.62%+ 0.60% 0.60% 0.61% 0.59%+ 0.59%
Net investment income 4.88%+ 5.29% 5.37% 5.70% 5.49%+ 5.63%
Portfolio turnover 58% 91% 84% 90% 74% 56%
Net assets at end of period
(000,000 omitted) $1,610 $1,660 $1,798 $1,949 $2,031 $2,195
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to October 31, 1993, are 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.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1992 1991 1990 1989 1988 1987
- -------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.80 $10.11 $10.53 $10.57 $ 9.71 $11.00
------ ------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.66 $ 0.68 $ 0.68 $ 0.72 $ 0.73 $ 0.72
Net realized and unrealized gain
(loss) on investments 0.09 0.69 (0.13) 0.04 0.86 (0.90)
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.75 $ 1.37 $ 0.55 $ 0.76 $ 1.59 $(0.18)
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.66) $(0.68) $(0.69) $(0.72) $(0.73) $(0.72)
From net realized gain on
investments (0.16) -- (0.27) -- -- --
In excess of net investment income -- -- -- (0.08) -- (0.39)
From paid in capital -- -- (0.01) -- -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.82) $(0.68) $(0.97) $(0.80) $(0.73) $(1.11)
------ ------ ------ ------ ------ ------
Net asset value - end of period $10.73 $10.80 $10.11 $10.53 $10.57 $ 9.71
====== ====== ====== ====== ====== ======
Total return(+) 7.35% 13.85% 5.42% 7.54% 16.95% (1.98)%
Ratios (to average net assets)/
Supplemental data:
Expenses 0.57% 0.59% 0.60% 0.64% 0.65% 0.61%
Net investment income 6.12% 6.47% 6.69% 6.87% 7.16% 6.96%
Portfolio turnover 87% 98% 160% 199% 190% 218%
Net assets at end of period
(000,000 omitted) $1,878 $1,715 $1,409 $1,259 $1,003 $903
(+)Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior to
October 31, 1998). If the charge had been included, the results would have been lower.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------------------------------
TEN
SIX MONTHS YEAR ENDED AUGUST 31, MONTHS YEAR
ENDED ENDED ENDED
FEBRUARY 28, ------------------------------------- AUGUST 31, OCTOBER 31,
1998 1997 1996 1995 1994 1993*
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.99 $10.74 $11.10 $10.67 $11.63 $11.68
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.24 $ 0.48 $ 0.49 $ 0.49 $ 0.40 $ 0.07
Net realized and unrealized gain
(loss) on investments 0.26 0.25 (0.37) 0.16 (0.77) (0.05)
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.50 $ 0.73 $ 0.12 $ 0.65 $(0.37) $ 0.02
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.22) $(0.48) $(0.48) $(0.49) $(0.40) $(0.07)(++)
From net realized gain on
investments (0.21) -- -- -- (0.16) --
In excess of net realized gain
on investments -- -- -- -- (0.03) --
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.43) $(0.48) $(0.48) $(0.49) $(0.59) $(0.07)
------ ------ ------ ------ ------ ------
Net asset value - end of period $11.06 $10.99 $10.74 $10.83 $10.67 $11.63
====== ====== ====== ====== ====== ======
Total return 4.52%++ 6.84% 3.69% 6.35% (3.25)%++ 1.49%+
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.42%+ 1.46% 1.55% 1.60% 1.72%+ 1.70%+
Net investment income 4.09%+ 4.42% 4.42% 4.68% 4.41%+ 3.85%+
Portfolio turnover 58% 91% 84% 90% 74% 56%
Net assets at end of period
(000,000 omitted) $79 $76 $71 $56 $45 $10
*For the period from the inception of Class B, September 7, 1993, through October 31, 1993.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to October 31, 1993, are 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.
(++)Amount includes a per share distribution in excess of net investment income of $0.002.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(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 revenues 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 and forward contracts, 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 future contracts listed on
commodities exchanges are valued at closing settlement prices. 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 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 rates or security prices move unexpectedly, the Fund may not
achieve the anticipated benefits of the futures contracts and may realize a
loss.
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 is 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. Some securities
may be purchased on a "when-issued" or "forward delivery" basis, which means
that the securities will be delivered to the fund at a future date, usually
beyond customary settlement time.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's average daily net assets. The fee is reduced according to an
arrangement that measures 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 includible 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 be reported in the financial statements as a tax 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 net realized gains.
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
distribution and service fees. All shareholders bear the common expenses of the
Fund 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 the following annual rates:
BASED ON AVERAGE NET ASSETS BASED ON GROSS INCOME
- -------------------------------------- --------------------------------------
First $200 million 0.220% First $16 million 4.12%
Next $1.8 billion 0.187% Next $144 million 3.51%
In excess of $2 billion 0.168% In excess of $160 million 3.16%
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee at
the following annual percentages of the Fund's average daily net assets,
provided that the administrative fee is not assessed on Fund assets that exceed
$3 billion:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
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 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 $14,802 for the period ended
February 28, 1998.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$106,309 for the period ended February 28, 1998, 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 Fund's 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 sale of
Class B shares in the first year, 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 period
ended February 28, 1998. Fees incurred under the distribution plan during the
period ended February 28, 1998, were 0.80% of the Fund's average daily net
assets attributable to Class B shares on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases by retirement
plans are subject to a contingent deferred sales charge in the event of a
shareholder redemption within 12 months following such 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 period ended February 28, 1998, were $13,234 and $101,301 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. Effective January 1, 1998,
the fee is calculated as a percentage of the Fund's average daily net assets at
an effective annual rate of 0.1125%. Prior to January 1, 1998, the shareholder
servicing fee was 0.13% of the Fund's daily net assets at an effective annual
rate.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities and
short-term obligations, aggregated $931,822,904 and $968,919,521, 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 $1,528,694,067
--------------
Gross unrealized appreciation $ 140,833,690
Gross unrealized depreciation (1,320,148)
--------------
Net unrealized appreciation $ 139,513,542
==============
(5) Shares of Beneficial Interest
The Fund's Declaration of Fund 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
SIX MONTHS ENDED FEBRUARY 28, 1998 YEAR ENDED AUGUST 31, 1997
---------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 90,541,393 $ 1,002,989,319 184,758,268 $ 2,004,238,212
Shares issued to
shareholders in
reinvestment of
distributions 4,085,064 45,043,713 5,291,900 57,558,122
Shares reacquired (100,219,300) (1,110,563,908) (206,226,168) (2,241,605,376)
------------ --------------- ------------ ----------------
Net decrease (5,592,843) $ (62,530,876) (16,176,000) $ (179,809,042)
============ =============== ============ ================
<CAPTION>
Class B Shares
SIX MONTHS ENDED FEBRUARY 28, 1998 YEAR ENDED AUGUST 31, 1997
---------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,027,413 $ 11,385,409 2,698,839 $ 29,287,408
Shares issued to
shareholders in
reinvestment of
distributions 169,576 1,867,650 179,440 1,952,061
Shares reacquired (1,000,819) (11,074,434) (2,574,149) (27,945,793)
------------ --------------- ------------ ----------------
Net increase 196,170 $ 2,178,625 304,130 $ 3,293,676
============ =============== ============ ================
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured line
of credit provided by a syndication of banks under a credit agreement.
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.
(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 future 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.
Futures Contracts
UNREALIZED
DESCRIPTION EXPIRATION CONTRACTS POSITION APPRECIATION
- --------------------------------------------------------------------------------
U.S. Treasury Bonds March 1998 375 Short $518,619
Municipal Bonds March 1998 854 Short 454,368
--------
$972,987
========
At February 28, 1998, the Fund had sufficient cash/or securities to cover margin
requirements on open futures contracts.
--------------------------------------------
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.
<PAGE>
MFS(R) MUNICIPAL BOND FUND
TRUSTEES CUSTODIAN
State Street Bank and Trust Company
Richard B. Bailey* - Private
Investor; Former Chairman and INVESTOR INFORMATION
Director (until 1991), MFS For MFS stock and bond market
Investment Management outlooks, call toll free:
1-800-637-4458 anytime from a
Peter G. Harwood - Private Investor touch-tone telephone.
J. Atwood Ives - Chairman and Chief For information on MFS mutual funds,
Executive Officer, Eastern call your financial adviser or, for
Enterprises an information kit, call toll free:
1-800-637-2929 any business day from
Lawrence T. Perera - Partner, 9 a.m. to 5 p.m. Eastern time (or
Hemenway & Barnes leave a message anytime).
William J. Poorvu - Adjunct INVESTOR SERVICE
Professor, Harvard University MFS Service Center, Inc.
Graduate School of Business P.O. Box 2281
Administration Boston, MA 02107-9906
Charles W. Schmidt - Private For general information, call toll
Investor free: 1-800-225-2606 any business
day from 8 a.m. to 8 p.m. Eastern
Arnold D. Scott* - Senior Executive time.
Vice President, Director, and
Secretary, MFS Investment Management For service to speech- or
hearing-impaired, call toll free:
Jeffrey L. Shames* - Chairman, Chief 1-800-637-6576 any business day from
Executive Officer, and Director, MFS 9 a.m. to 5 p.m. Eastern time. (To
Investment Management use this service, your phone must be
equipped with a Telecommunications
Elaine R. Smith - Independent Device for the Deaf.)
Consultant
David B. Stone - Chairman, North and exchanges, call toll free:
American Management Corp. 1-800-MFS-TALK (1-800-637-8255)
(investment advisers) anytime from a touch-tone telephone.
INVESTMENT ADVISER WORLD WIDE WEB
Massachusetts Financial Services www.mfs.com
Company 500 Boylston Street
Boston, MA 02116-3741 [Dalbar logo] For the fourth year
in a row, MFS earned a #1 ranking
DISTRIBUTOR in the DALBAR, Inc. Broker/Dealer
MFS Fund Distributors, Inc. Survey, Main Office Operations
500 Boylston Street Service Quality Category. The firm
Boston, MA 02116-3741 achieved a 3.42 overall score on a
scale of 1 to 4 in the 1997
PORTFOLIO MANAGER survey. A total of 111 firms
Geoffrey L. Schechter* responded, offering input on the
quality of service they received
TREASURER from 29 mutual fund companies
W. Thomas London* nationwide. The survey contained
questions about service quality in
ASSISTANT TREASURERS 11 categories, including "knowledge
Mark E. Bradley* of operations," "keeping you
Ellen Moynihan* informed," and "ease of doing
James O. Yost* business" with the firm.
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
<PAGE>
MFS(R) MUNICIPAL ------------
BOND FUND BULK RATE
U.S. POSTAGE
[graphic omitted] MFS(SM) PAID
INVESTMENT MANAGEMENT MFS
We invented the mutual fund(SM) ------------
500 Boylston Street
Boston, MA 02116-3741
[DALBAR Logo]
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MMB-3 4/98 66M 17/217
