<PAGE>
[logo] MFS
THE FIRST NAME IN MUTUAL FUNDS Semiannual Report
September 30, 1995
MFS(R) MUNICIPAL INCOME FUND
Front cover
A photo of two gentlemen talking in
front of a window
<PAGE>
<TABLE>
<S> <C>
MFS(R) MUNICIPAL INCOME FUND
TRUSTEES SECRETARY
Stephen E. Cavan*
A. Keith Brodkin* - Chairman and President
ASSISTANT SECRETARY
Richard B. Bailey* - Private Investor; James R. Bordewick, Jr.*
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company; CUSTODIAN
Director, Cambridge Bancorp; Director, State Street Bank and Trust Company
Cambridge Trust Company
AUDITORS
Marshall N. Cohan - Private Investor Deloitte & Touche LLP
Lawrence H. Cohn, M.D. - Chief of Cardiac INVESTOR INFORMATION
Surgery, Brigham and Women's Hospital; For MFS stock and bond market outlooks,
Professor of Surgery, Harvard Medical School call toll free: 1-800-637-4458 anytime from
a touch-tone telephone.
The Hon. Sir J. David Gibbons, KBE - Chief
Executive Officer, Edmund Gibbons Ltd.; For information on MFS mutual funds,
Chairman, Bank of N.T. Butterfield & Son Ltd. call your financial adviser or, for an
information kit, call toll free:
Abby M. O'Neill - Private Investor; 1-800-637-2929 any business day from
Director, Rockefeller Financial Services, Inc. 9 a.m. to 5 p.m. Eastern time (or leave
(investment adviser) a message anytime).
Walter E. Robb, III - President and Treasurer, INVESTOR SERVICE
Benchmark Advisors, Inc. (corporate MFS Service Center, Inc.
financial consultants); Trustee, Lannmark Funds P.O. Box 2281
(mutual funds) Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice For general information, call toll free:
President, Director and Secretary, 1-800-225-2606 any business day from
Massachusetts Financial Services Company 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, For service to speech- or hearing-impaired,
Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
J. Dale Sherratt - President, Insight Resources, (To use this service, your phone must be
Inc. (acquisition planning specialists) equipped with a Telecommunications Device for
the Deaf.)
Ward Smith - Former Chairman (until 1994),
NACCO Industries; Director, Sundstrand For share prices, account balances and
Corporation exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
INVESTMENT ADVISER telephone.
Massachusetts Financial Services Company
500 Boylston Street ---------------------------------------------
Boston, MA 02116-3741 TOP RATED SERVICE
For the second year in a row,
DISTRIBUTOR DALBAR MFS earned a #1 ranking in
MFS Fund Distributors, Inc. DALBAR, Inc.'s Broker/Dealer
500 Boylston Street LOGO Survey, Main Office Operations
Boston, MA 02116-3741 Service Quality category. The
firm achieved a 3.49 overall score - on a
PORTFOLIO MANAGER scale of 1 to 4 - in the 1995 survey. A total
David B. Smith* of 71 firms responded, offering input on the
quality of service they receive from 36
TREASURER mutual fund companies nationwide. The survey
W. Thomas London* contained questions about service quality in
17 categories, including "knowledge of phone
ASSISTANT TREASURER service contracts," "accuracy of transaction
James O. Yost* processing," and "overall ease of doing
business with the firm."
*Affiliated with the Investment Adviser Source: 1995 DALBAR Survey
---------------------------------------------
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
For the six-month period ended September 30, 1995, Class A shares of the Fund
provided a total return of +4.08%, Class B shares +3.60%, and Class C shares
+3.76% (including the reinvestment of distributions but excluding the effects of
any sales charges). These results underperformed the +5.35% return for the
Lehman Brothers Municipal Bond Index, an unmanaged index of national municipal
bond investments rated Baa or higher. A discussion of the Fund's performance and
our outlook for the months ahead may be found in the Portfolio Performance and
Strategy section of this letter.
Economic Outlook
Moderate, but sustainable growth appears to be the hallmark of the economic
expansion's fifth year. After slowing earlier in the summer, homebuying was
making modest gains by September 30, although consumer spending was still
showing some areas of weakness. Businesses, meanwhile, continued to work off
excess inventories and reduce factory output. At the same time, overseas
economies, particularly those of Germany and Japan, have not recovered as
expected, limiting U.S. export growth. However, we believe the Federal Reserve
Board's consistent and, so far, successful efforts to fight inflation seem to be
giving consumers and businesses enough confidence to help maintain 2 1/2% to 3%
real (adjusted for inflation) growth in gross domestic product, at least through
1995.
Interest Rates
Although the Federal Reserve implemented a one-quarter percentage point decrease
in short-term interest rates in July, the effects of its seven rate increases,
which began in early 1994 and ended in February of this year, are still being
felt throughout the economy. While there have been some increases in commodity
prices, companies have not been able to pass along most of those higher costs.
This is partly due to the need to keep fighting for market share, and also
because wages and benefits of U.S. workers are still growing at a pace that is
near, or perhaps below, the inflation rate, limiting consumer buying power. At
the end of July, the nation's employment cost index had risen at a rate of just
2.8% over the previous year, helping to contain cost pressures. Although
previous monetary easing by the Federal Reserve has been followed by additional
rate reductions, prospects for further decreases in the current environment are
uncertain. Still, with long-term government bonds yielding approximately 6.50%,
in an environment of 2 1/2% to 3% inflation, real rates of return in the
fixed-income markets remain relatively attractive.
Municipal Bond Market
The six-month period ended September 30, 1995 was favorable for the fixed-income
markets. Low inflation and moderating growth led to the Federal Reserve's easing
the overnight federal funds rate by 25 basis points (0.25%), to 5.75%. Yields on
30-year Treasury bonds declined 94 basis points (0.94%) over the period, from
7.44% to 6.50%, as investors reacted to the slowing economy. Principal value and
interest on Treasury securities are guaranteed by the U.S. government if held to
maturity. Yields on long-term municipal bonds, however, declined by only 15
basis points (0.15%) over the same period. This severe underperformance by the
municipal market was caused by investors' tax reform concerns, questions raised
about the general health of municipal governments in the wake of the Orange
County, California financial debacle, and the continued rally of the stock
market fueled by heavy cash flow into equity mutual funds. This has resulted in
the yield ratio of AAA-rated municipals to Treasuries increasing to 89%, the
most attractive value relationship in years.
It is our opinion that, although some tax reform is likely, the special tax
exemption for municipal securities will remain intact. It also appears evident
that the problems of Orange County were indeed a unique and isolated incident
and that a viable fiscal recovery plan is now in place. Generally, we believe
the fiscal health of municipalities continues to improve in the current economic
cycle. These developments, combined with the fact that new issuance is likely to
remain low for the foreseeable future, lead us to believe that municipal bonds
offer attractive values for fixed-income investors in all tax brackets at this
time.
Portfolio Performance and Strategy
Prior emphasis on capturing yield spreads between lower-grade investment bonds
and the non-rated sector enabled the Fund to maintain its dividend rate in a
declining interest rate environment during this period. The Fund has also
benefited over the six-month period from the cyclical improvement in the airline
industry, as investments in this sector outperformed the general municipal
marketplace.
The Fund will remain fully invested, and will continue to look for ways to
improve call protection and augment total return, while seeking to minimize any
adverse effects this may have on distributable income. The Fund will also
continue to look for value in sector and state exposure in making its investment
decisions.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[Photo of A. Keith Brodkin, [Photo of David B. Smith,
Chairman and President] Portfolio Manager]
/s/ A. Keith Brodkin /s/ David B. Smith
A. Keith Brodkin David B. Smith
Chairman and President Portfolio Manager
October 12, 1995
PORTFOLIO MANAGER PROFILE
David Smith joined MFS in 1988 as Senior Treasury Analyst in the Corporate
Treasury Department. A graduate of Union College and Babson College Graduate
School of Business Administration, he was named Research Analyst in the Fixed
Income Department in 1989, Investment Officer in 1990, Assistant Vice President
in 1991 and Vice President in 1993. In 1993, he became Portfolio Manager of MFS
Municipal Income Fund. Mr. Smith is a Chartered Financial Analyst (C.F.A.).
<PAGE>
OBJECTIVE AND POLICIES
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. A small portion of income may
be subject to federal and/or alternative minimum tax.
The Fund seeks to achieve its investment objective by investing primarily in
debt securities issued by or on behalf of states, territories and possessions of
the United States and the District of Columbia and their political subdivisions,
agencies or instrumentalities, the interest on which is exempt from federal
income tax. These include tax-exempt securities rated AAA, AA or A by Standard &
Poor's Ratings Group or by Fitch Investors Service, Inc. or Aaa, Aa or A by
Moody's Investors Service, Inc.; notes of issuers having an issue of outstanding
municipal bonds rated as above or guaranteed by the U.S. government; obligations
issued by the U.S. government or large banks; commercial paper; or tax-exempt
securities which are not rated or which are rated lower than the three highest
grades as explained above, provided not more than one-third of the total assets
of the Fund will be invested in such securities.
PERFORMANCE SUMMARY
Because mutual funds like MFS Municipal Income 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, Class B and Class C shares for the applicable
time periods.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
Class A Investment Results
(net asset value change including reinvested distributions)
9/07/93+ -
6 Months 1 Year 9/30/95
- -----------------------------------------------------------------------------
Cumulative Total Return* +4.08% +8.66% +7.30%
- -----------------------------------------------------------------------------
Average Annual Total Return* -- +8.66% +3.47%
- -----------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the most
recent calendar quarter as required by the Securities and Exchange Commission
(the SEC), with all distributions reinvested and reflecting the maximum sales
charge of 4.75% on the initial investment for the 1-year period ended September
30, 1995 and for the period from September 7, 1993+ to September 30, 1995 were
+3.52% and +1.04%, respectively.
*These results do not include the sales charge. If the charge had been included,
the results would have been lower.
+Commencement of offering of this class of shares.
<PAGE>
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN - continued
Class B Investment Results
(net asset value change including reinvested distributions)
12/29/86* -
6 Months 1 Year 5 Years 9/30/95
- --------------------------------------------------------------------------------
Cumulative Total Return** +3.60% +7.71% +41.58% +69.21%
- --------------------------------------------------------------------------------
Average Annual Total Return** -- +7.71% + 7.20% + 6.19%
- --------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the most
recent calendar quarter as required by the SEC, with all distributions
reinvested and reflecting the contingent deferred sales charge (CDSC) of 4%, 2%
and 0% for the 1- and 5-year periods ended September 30, 1995 and for the period
from December 29, 1986+ to September 30, 1995, were +3.71%, +6.90% and +6.19%,
respectively.
Class C Investment Results
(net asset value change including reinvested distributions)
1/03/94* -
6 Months 1 Year 9/30/95
- --------------------------------------------------------------------------------
Cumulative Total Return(S) +3.76% +7.78% +4.34%
- --------------------------------------------------------------------------------
Average Annual Total Return(S) -- +7.78% +2.47%
- --------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the most
recent calendar quarter as required by the SEC, with all distributions
reinvested for the 1-year period ended September 30, 1995 and for the period
from January 3, 1994* to September 30, 1995, were +7.78% and +2.47%,
respectively.
All results represent past performance and are not necessarily an
indication of future results. Investment return and principal value will
fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. All Class A share results reflect the applicable expense subsidy
which is explained in the Notes to Financial Statements. Had the subsidy not
been in effect, the results would have been less favorable. The subsidy may be
rescinded by MFS at any- time without notice.
* Commencement of offering of this class of shares.
** These results do not include any CDSC. If the charge had been included, the
results would have been lower.
(S) Class C shares have no initial sales charge or CDSC but, along with
Class B shares, have higher annual fees and expenses than Class A shares.
<PAGE>
PORTFOLIO OF INVESTMENTS - September 30, 1995
Municipal Bonds - 99.0%
- -----------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Student Loan Revenue - 1.3%
AAA Pennsylvania State Higher
Educational Assistance
Agency Rev., AMBAC,
9.492s, 2026* $ 5,500 $ 5,861,130
- -----------------------------------------------------------------------------
General Obligation - 9.3%
NR Arlington, TX, Independent
School Refunding Rev., PSF,
0s, 2007 $ 3,070 $ 1,656,971
A+ Commonwealth of
Massachusetts, 7s, 2007 2,590 2,867,052
B District of Columbia, General
Obligation Bond,
5.875s, 2008 500 469,550
AA Harris County, TX,
Certificates of Obligation
(Astrodome Improvements
Project), 8.1s, 2008 1,385 1,534,165
BBB+ New York, NY, 8.2s, 2003 5,000 5,712,000
BBB+ New York, NY, 7.5s, 2008 1,350 1,467,355
BBB+ New York, NY, 8.25s, 2010 2,335 2,666,944
BBB+ New York, NY, 7s, 2016 1,360 1,419,541
BBB+ New York, NY, 7s, 2018 3,625 3,756,334
BBB+ New York, NY, 8s, 2018 30 33,745
AAA Northwest Texas, Independent
School District, AMBAC,
0s, 2011 3,000 1,203,690
A Puerto Rico Commonwealth,
6.45s, 2017 500 519,350
AAA Rio, CA, School District,
Certificates of
Participation, FSA,
0s, 2028 1,140 632,598
AA State of Texas, 7.625s, 2018 14,405 15,873,590
AA State of Wisconsin,
7.6s, 2020 2,865 3,017,017
------------
$ 42,829,902
- -----------------------------------------------------------------------------
State and Local Appropriation - 2.9%
BBB New York Dormitory Authority
Rev. (City University),
7.5s, 2010 $ 2,500 $ 2,864,925
BBB+ New York Medical Care
Facility Financial Agency
Rev., 8.875s, 2007 770 840,632
BBB+ New York Medical Care
Facility Financial Agency
Rev., 7.875s, 2008 745 838,661
BBB+ New York Medical Care
Facility Financial Agency
Rev., 7.875s, 2020 2,580 2,899,610
BBB+ New York Medical Care
Facility Financial Agency
Rev., 7.5s, 2021 540 601,323
BBB New York Urban Development
Corp. (State Facilities),
7.5s, 2011 2,500 2,763,825
AAA Philadelphia, PA, Regional
Port Authority Lease Rev.,
MBIA, MVRIC, 8.24s, 2020* 2,500 2,564,425
------------
$ 13,373,401
- -----------------------------------------------------------------------------
Refunded and Special Obligation - 18.8%
AAA Adams County, CO, Single
Family Mortgage Rev.,
8.875s, 2011 $ 2,510 $ 3,298,768
NR Chapel Hill, NC, Parking
Facilities Rev. (Rosemary
Street Project),
8.125s, 2000 960 1,132,320
NR Chapel Hill, NC, Parking
Facilities Rev. (Rosemary
Street Project),
8.25s, 2000 1,000 1,185,190
AAA Commonwealth of Massachusetts,
7.5s, 2007, 7.5s, 2000 1,990 2,293,555
A+ Commonwealth of Massachusetts,
7.5s, 2007, 7.5s, 2000 2,010 2,316,605
NR Dayton, OH, Special
Facilities Rev. (Emery Air
Freight), "A", 12.5s, 2009 1,000 1,169,680
NR Illinois Education and
Facilities Authority,
8.75s, 2015 60 62,114
AA- Intermountain Power Agency,
UT, Power Supply Rev.,
7s, 2021 5,000 5,528,500
AAA Los Angeles, CA, Convention &
Exhibition Center
Authority, Certficates of
Participation, 7.375s, 2018 2,000 2,245,900
NR Massachusetts Health &
Education Facilities
Authority Rev. (Suffolk
University), 8s, 2000 1,000 1,156,270
NR Massachusetts Health &
Education Facilities
Authority Rev. (Youville
Hospital), 9.1s, 2015 915 948,214
AAA Massachusetts Water Resources
Authority, 7.625s, 2000 3,200 3,654,976
BBB+ New York, NY, Pre-Refunded,
"A", 8s, 2001 2,970 3,521,084
BBB+ New York, NY, Pre-Refunded,
"A", 8.25s, 2001 2,165 2,608,977
AAA New York Local Government
Assistance Corp.,
7.25s, 2001 2,750 3,157,412
AAA New York Medical Care
Facility Financial Agency
Rev., 8.875s, 1997 680 750,502
BBB+ New York Medical Care
Facility Financial Agency
Rev., 7.75s, 2000 1,030 1,182,594
AAA New York Medical Care
Facility Financial Agency
Rev., 7.875s, 2000 670 781,736
AAA New York Medical Care
Facility Financial Agency
Rev., 7.875s, 2000 3,565 4,159,535
AAA New York Medical Care
Facility Financial Agency
Rev., 7.5s, 2001 1,460 1,689,556
NR New York Urban Development
Corp. (Correctional
Facilities), 7.75s, 2000 5,000 5,724,300
NR New York Urban Development
Corp Rev., 7.3s, 2002 2,340 2,714,400
A- Pennsylvania Industrial
Development Authority Rev.,
7s, 2001 7,000 7,946,400
AAA Philadelphia, PA, Municipal
Authority Rev., FGIC,
7s, 2001 2,000 2,289,200
NR Texas Turnpike Authority Rev.
(Houston Ship
Channel Bridge), 0s, 2002 3,000 4,146,510
AAA Washington County, PA,
Authority Lease Rev.,
AMBAC, 7.45s, 2000 1,200 1,380,240
AA Washington Public Power
Supply System Rev., Nuclear
Project #1, 7.25s, 2000 3,350 3,757,259
AAA Washington Public Power
Supply System Rev., Nuclear
Project #1, 14.375s, 2001 1,000 1,343,340
AAA Washington Public Power
Supply System Rev., Nuclear
Project #2, 7.375s, 2000 5,355 6,092,009
AA Washington Public Power
Supply System Rev., Nuclear
Project #3, 7.25s, 2000 5,000 5,607,850
BBB+ West Virginia Water
Development Authority,
8.625s, 2028 1,000 1,136,780
BBB+ West Virginia Water
Development Authority,
8.125s, 2029 1,000 1,122,560
------------
$ 86,104,336
- -----------------------------------------------------------------------------
Single Family Housing Revenue - 7.9%
AAA Berkeley, Brookes & Fayette
Counties, WV, MBIA,
0s, 2016 $ 14,000 $ 1,486,100
AAA Chicago, IL, Residential
Mortgage Rev., MBIA,
0s, 2009 6,635 2,533,707
BB Cook County, IL, Single
Family Housing, 0s, 2015 12,265 1,426,665
NR De Kalb, IL, Single Family
Mortgage Rev.,
7.45s, 2009 270 285,344
NR Delaware Housing Authority
Rev., 9.125s, 2018 915 948,882
BB Harris County, TX, Housing
Finance Corp.,
9.625s, 2003 255 255,997
BB Harris County, TX, Housing
Finance Corp.,
9.875s, 2014 460 461,799
A+ Illinois Housing Development
Agency, 0s, 2016 8,785 1,004,301
AAA Kentucky Housing Corp.,
Housing Rev., FHA,
7.45s, 2023 5,975 6,281,637
AAA Louisiana Housing Finance
Agency, Single Family
Mortgage Rev., FGIC,
9.375s, 2015 295 305,151
AA+ Minnesota Housing Finance
Agency, 9s, 2018 4,655 4,794,417
NR Mississippi Home Corp.,
Single Family Rev.,
7.1s, 2023 855 888,943
A+ New Hampshire Housing Finance
Authority,
7.2s, 2010 6,910 7,237,050
A+ New Hampshire Housing Finance
Authority,
8.625s, 2013 755 787,276
AA Utah Housing Finance Agency,
8.625s, 2019 1,640 1,708,060
AA Utah Housing Finance Agency,
9.125s, 2019 175 182,770
AA Utah Housing Finance Agency,
9.25s, 2019 130 139,812
A+ West Virginia Housing
Development Fund,
7.85s, 2014 5,470 5,656,582
------------
$ 36,384,493
- -----------------------------------------------------------------------------
Multi-Family Housing Revenue - 3.3%
NR Colorado Housing Finance
Authority, 8.3s, 2023 $ 2,750 $ 2,894,595
NR Maryland Community
Development Administration,
8.5s, 2028 3,000 3,111,090
NR Pennsylvania Housing Finance
Agency, 7.6s, 2013 1,000 1,071,450
A+ Tennessee State Vets Home
Board Rev. (Humboldt
Project), 6.75s, 2021 1,000 1,032,080
AA- Vermont Housing Finance
Agency, 8.375s, 2020 2,760 2,875,175
A Wisconsin Housing & Economic
Development Authority,
7.2s, 2013 4,000 4,141,440
------------
$ 15,125,830
- -----------------------------------------------------------------------------
Insured Health Care Revenue - 4.2%
AAA Clermont County, OH, Hospital
Facilities Rev. (Mercy
Health Systems), AMBAC,
MVRIC,
9.221s, 2021* $ 1,500 $ 1,681,965
AAA Colorado Health Facilities
Authority Rev. (PSL Health
Systems), FSA, 7.25s, 2016 2,000 2,222,440
AAA Fredericksburg, VA,
Industrial Development
Authority, Hospital
Facilities Rev., FGIC,
INFLOS, 9.174s, 2023* 1,500 1,613,805
AAA Henrico County, VA,
Industrial Development
Authority Rev., FSA, RIBS,
7.711s, 2027* 5,000 4,985,300
AAA Jefferson County, KY,
Hospital Rev. (Alliant
Health System), INFLOS,
MBIA, 8.583s, 2014* 1,500 1,607,595
AAA Mississippi Hospital
Equipment & Facilities
Authority Rev. (Rush
Medical Foundation),
Connie Lee, 6.7s, 2018 1,000 1,039,000
AAA Rio Grande Valley, TX, Health
Facilities Development
Corp., MBIA, Short Rites,
7.669s, 2015++ 2,800 2,916,732
AAA Tulsa, OK, Industrial
Authority, Hospital Rev.
(St. John's Medical
Center), MBIA, 0s, 2006 6,430 3,497,920
------------
$ 19,564,757
- -----------------------------------------------------------------------------
Health Care Revenue - 4.6%
NR Bell County, TX, Health
Facilities Development
Corp. (Advanced Living
Technology), 10.5s, 2018 $ 1,910 $ 1,661,700
BBB- Bell County, TX, Health
Facilities Development
Corp., (Kings Daughters
Hospital), 9.25s, 2008 1,650 1,823,283
BBB- Cumberland County, PA,
Municipal Refunding
(First Mortgage),
6.8s, 2023 1,000 951,750
A- Erie County, OH, Franciscan
Services Corp.,
Rev., 6s, 2013 405 382,721
NR Fulton County, GA,
Residential Care
Facilities,
Elderly Authority Rev.
(Lenbrook Square
Foundation), 9.75s, 2017 480 494,390
NR Gadsden County, FL,
Industrial Development
Authority (RHA/FLA
Properties), 10.45s, 2018 1,950 2,021,370
NR Louisiana Public Facilities
Authority, (Southwest
Medical Center), 11s, 2006 1,594 805,320
A Massachusetts Health &
Educational Facilities
Rev., 6.875s, 2022 4,000 4,081,440
NR Medical University, SC,
Certificates of
Participation (Harborview
Office Tower Project),
7.5s, 2008 600 646,020
NR Montgomery, PA, Industrial
Development Authority,
Health Facilities Rev.,
8.5s, 2023 300 290,472
BBB+ New York Medical Care
Facilities Agency, Mental
Health Services,
7.75s, 2020 1,025 1,137,043
BBB+ Philadelphia, PA, Hospital &
Higher Educational
Facilities Authority Rev.,
6.25s, 2018 600 563,796
NR Philadelphia, PA, Industrial
Development Authority,
10.25s, 2018 1,485 1,533,678
NR Philadelphia, PA, Industrial
Development Authority,
10.25s, 2018 1,980 2,058,368
BBB- Richardson, TX, Hospital
(Richardson Medical
Center), 6.5s, 2012 330 313,748
A Torrance, CA, Hospital Rev.,
6.875s, 2015 1,780 1,845,718
A- Union City, PA, Hospital
Authority Rev. (Evangelical
Community Hospital
Project), 5.875s, 2023 700 635,607
------------
$ 21,246,424
- -----------------------------------------------------------------------------
Electric and Gas Utility Revenue - 12.0%
AAA Austin, TX, Utility Systems
Rev., AMBAC, 0s, 2010 $ 7,500 $ 3,141,900
A+ Chelan County, WA, Public
Utility District #1,
Consolidated Rev.,
9.3s, 2017 4,450 4,862,382
AAA Georgia Municipal Electric
Authority, MBIA,
6.375s, 2016 2,000 2,118,340
AAA Georgia Municipal Electric
Authority Power Rev., FGIC,
5.7s, 2019 5,000 4,836,900
A Harrisburg, PA, Recovery
Facilities Rev.,
5.875s, 2021 1,250 1,217,662
AAA Intermountain Power Agency,
UT, MBIA, 6s, 2016(S) 4,000 3,897,320
NR Midland, MI, Environmental
Development Authority,
Pollution Control Rev.
(Midland Cogeneration),
9.5s, 2009 2,000 2,157,840
NR Montana Board of Investment
Resources Recovery Rev.
(Yellowstone Energy),
7s, 2019 1,000 957,990
AAA Municipal Electric Authority,
GA, Special
Obligation, MBIA,
6.5s, 2020 7,350 7,964,827
BBB+ North Carolina Eastern
Municipal Power Agency,
7s, 2007 3,250 3,500,218
BBB+ North Carolina Eastern
Municipal Power Agency,
5.75s, 2019 830 753,831
A- Puerto Rico Electric Power
Authority, 6.125s, 2008 700 733,026
AAA Texas Municipal Power Agency
Rev., AMBAC,
0s, 2011 5,930 2,336,717
AAA Texas Municipal Power Agency
Rev., MBIA,
0s, 2013 6,000 2,059,500
AAA Texas Municipal Power Agency
Rev., MBIA,
0s, 2014 10,435 3,343,165
AA Washington Public Power
Supply System Rev., Nuclear
Project #1, 0s, 2003 2,000 1,308,560
AA Washington Public Power
Supply System Rev., Nuclear
Project #1, 7s, 2011 4,050 4,286,115
AA Washington Public Power
Supply System Rev., Nuclear
Project #3, 0s, 2004 4,885 3,000,465
AAA Washington Public Power
Supply Systems, Series "A",
BIGI, 0s, 2013 4,000 1,360,600
AAA Washington Public Power
Supply Systems, Series "A",
BIGI, 0s, 2014 3,350 1,062,553
------------
$ 54,899,911
- -----------------------------------------------------------------------------
Water and Sewer Utility Revenue - 2.9%
BBB- Franklin County, NY, Solid
Waste Management Authority,
6.25s, 2015 $ 700 $ 658,875
A Massachusetts Water Resources
Authority, 6.5s, 2019 7,495 8,147,665
AAA Salt Lake County, UT, Water
Conservancy District Rev.,
AMBAC, 0s, 2008 2,100 1,014,321
AAA Salt Lake County, UT, Water
Conservancy District Rev.,
AMBAC, 0s, 2009 3,800 1,709,696
A- Union County, NJ, Utilities
Authority Solid Waste,
7.2s, 2014 1,500 1,571,055
------------
$ 13,101,612
- -----------------------------------------------------------------------------
Turnpike Revenue - 2.9%
BBB- Foothill, CA, Eastern
Transportation Co.,
0s, 2012 $ 5,000 $ 2,681,050
BBB- Foothill, CA, Eastern
Transportation Co.,
0s, 2013 5,000 2,671,400
NR Massachusetts Industrial
Finance Agency, Tunnel
Rev. (Mass Turnpike),
9s, 2020 2,870 3,132,949
A New Jersey Turnpike
Authority, Turnpike Rev.,
6.5s, 2016 1,450 1,566,189
NR San Jaoquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev.,
0s, 2005 1,800 892,368
NR San Joaquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev., 0s,
0s, 2009 6,750 2,438,978
------------
$ 13,382,934
- -----------------------------------------------------------------------------
Airport and Port Revenue - 12.7%
BB+ Chicago, IL, O'Hare
International Airport,
Special Facilities Rev.
(American Airlines),
7.875s, 2025 $ 3,500 $ 3,673,460
BB Chicago, IL, O'Hare
International Airport,
Special Facilities Rev.
(United Airlines),
8.4s, 2018 2,025 2,217,314
BB Chicago, IL, O'Hare
International Airport,
Special Facilities Rev.
(United Airlines),
8.85s, 2018 2,950 3,376,747
BB Chicago, IL, O'Hare
International Airport,
Special Facilities Rev.
(United Airlines),
8.85s, 2018 6,535 7,480,353
NR Cleveland, OH, Airport
Special Facilities Rev.
(Continental Airlines),
9s, 2019 4,300 4,378,475
AAA Connecticut Airport Rev.,
FGIC, 7.65s, 2012 1,000 1,147,640
BB+ Dallas-Fort Worth, TX,
International Airport
(American Airlines),
7.5s, 2025 5,000 5,270,000
BB Dallas-Fort Worth, TX,
International Airport
Facilities Improvement
Rev., 6.25s, 2013 900 886,194
BB Denver, CO, City & County
Airport Rev.,
8.75s, 2023 4,750 5,475,325
AAA Hawaii Airport Systems Rev.,
FGIC, 7.5s, 2020 5,350 5,930,635
B- Hillsborough County, FL,
Aviation Authority Rev. (US
Air), 8.6s, 2022 2,000 2,090,860
BB Kenton County, KY, Airport
Board Special Facilities
(Delta Airlines),
7.5s,2020 1,000 1,055,610
BBB Lake Charles, LA, Harbor &
Terminal District Port,
7.2s, 2020 1,000 1,079,490
NR St. Augustine, FL, Airport
Authority, Airport
(Grumman Repair Facility),
11s, 2004 500 535,565
BB+ Tulsa, OK, Municipal Airport
Trust Rev. (American
Airlines), 7.375s, 2020 10,000 10,410,200
A+ Virginia Port Authority,
8.2s, 2008 3,000 3,327,840
------------
$ 58,335,708
- -----------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.6%
BBB Inglewood California
Redevelopment Agency TAB,
6.125s, 2023 $ 600 $ 558,090
AAA Metropolitan Pier &
Exposition Authority, MBIA,
0s, 2016 8,400 2,344,272
------------
$ 2,902,362
- -----------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 8.5%
BBB+ Brazos River Authority, TX,
Pollution Control Rev.
(Texas Utilities),
9.875s, 2017 $ 8,890 $ 9,779,089
BBB+ Brazos River Authority, TX,
Pollution Control Rev.
(Texas Utilities),
9.25s, 2018 1,000 1,100,490
A+ Burke County, GA, Pollution
Control Rev. (Georgia Power
Co./Vogtle Project),
9.375s, 2017 2,650 2,960,739
NR Burns Harbor, IN, Solid Waste
Disposal Facilities Rev.
(Bethlehem Steel), 8s, 2024 3,000 3,195,630
A Charleston County, SC,
Resource Recovery Rev.
(Foster Wheeler),
9.25s, 2010 3,200 3,515,296
AA- Chicago, IL, Gas Supply Rev.
(People's Gas),
8.1s, 2020 2,000 2,229,580
BBB Dickinson County, MI,
Pollution Control Revenue
(Champion International),
5.85s, 2018 1,500 1,402,740
A- Erie County, PA,
(International Paper),
7.875s, 2016 1,200 1,317,372
BBB Lawrenceburg Industrial
Pollution Control Revenue,
5.9s, 2019 1,000 942,300
BBB- Massachusetts Industrial
Finance Agency, Pollution
Control Rev. (Eastern
Edison Co. Project),
5.875s, 2008 980 952,080
NR Massachusetts Industrial
Finance Agency (Berkshire
Retirement), 6.5s, 2009 1,000 974,320
A- Matagorda County, TX,
Pollution Control Rev.
(Central Power & Light),
7.875s, 2016 1,500 1,572,465
NR Northhampton County, PA,
Industrial Development
Authority (Bethlehem
Steel), 7.55s, 2017 1,200 1,236,720
A- Oklahoma City, OK, Industrial
& Cultural Facilities Rev.,
6.4s, 2020 575 566,455
BB- Port of New Orleans, LA
(Avondale Industries),
7.5s, 2013 1,000 1,023,000
NR Port of New Orleans, LA
(Continental Grain Co.),
8.5s, 2014 2,000 2,225,660
NR San Joaquin Hills, CA,
Transportation Corridor
Agency, 0s, 2004 3,000 1,604,460
BBB West Side Calhoun County, TX,
Navigation District,
8.2s, 2021 2,000 2,222,800
------------
$ 38,821,196
- -----------------------------------------------------------------------------
Universities - 0.5%
AAA Massachusetts Health &
Educational Facilities
(Harvard University),
6.25s, 2020 $ 2,000 $ 2,161,480
- -----------------------------------------------------------------------------
Miscellaneous Revenue - 6.6%
NR Atlanta, GA, Downtown
Development Authority,
11.5s, 2015@** $ 1,055 $ 258,514
NR Bristol, CT, Resource
Recovery Facilities,
6.5s, 2014 8,000 8,312,640
NR Crystal City, TX, Lease
Obligations, 10.5s, 2008+ 1,251 1,221,393
BBB- Greater Detroit, MI, Resource
Recovery Authority,
9.25s, 2008 2,130 2,208,235
AAA Illinois State Dedicated Tax,
Civic Center, AMBAC,
0s, 2016 5,000 1,358,600
NR Martha's Vineyard, MA, Land
Bank, 8.125s, 2011 1,900 1,958,501
NR Maryland Energy Financing
Administration (Solid
Waste), 9s, 2016 4,000 4,053,960
NR Massachusetts Health &
Education Facilities
Authority (Learning Center
for Deaf), 9.25s, 2014 1,000 1,075,350
NR Pittsylvania County, VA,
Industrial Development
Authority Rev., 7.5s, 2014 6,000 6,271,980
NR Retema, TX, Special
Facilities Rev. (Retema
Park Racetrack Project),
8.75s, 2018 4,000 2,400,000
A- Rhode Island Depositors
Economic Protection Corp.,
SPL Obligation, 5.75s, 2021 1,400 1,332,352
------------
$ 30,451,525
- -----------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $423,488,205) $454,547,001
Other Assets, Less Liabilities - 1.0% 4,386,014
- -----------------------------------------------------------------------------
Net Assets - 100.0% $458,933,015
- -----------------------------------------------------------------------------
+ Restricted security.
++ Indexed security.
@ Security valued by or at the direction of the Trustees.
* Inverse floating rate security.
** Non-income producing security - in default.
(S) When-issued security. At September 30, 1995 the Fund had sufficient cash
and/or securities at least equal to the value of the when-issued security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
September 30, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $423,488,205) $454,547,001
Receivable for Fund shares sold 147,268
Receivable for investments sold 2,386,375
Interest receivable 8,600,107
Other assets 6,059
------------
Total assets $465,686,810
------------
Liabilities:
Cash overdraft $ 1,189,904
Distributions payable 897,362
Payable for Fund shares reacquired 556,487
Payable for when-issued investment purchased 3,784,680
Payable to affiliates -
Management fee 19,074
Shareholder servicing agent fee 5,091
Distribution fee 75,107
Accrued expenses and other liabilities 226,090
------------
Total liabilities $ 6,753,795
------------
Net assets $458,933,015
============
Net assets consist of:
Paid-in capital $438,782,830
Unrealized appreciation on investments 31,058,796
Accumulated net realized loss on investments (10,155,990)
Accumulated distributions in excess of net investment
income (752,621)
------------
Total $458,933,015
============
Shares of beneficial interest outstanding 52,984,159
==========
Class A shares:
Net asset value and redemption price per share
(net assets of $100,523,215 / 11,614,827 shares of
beneficial interest outstanding) $8.65
=====
Offering price per share (100/95.25) $9.08
=====
Class B shares:
Net asset value and offering price per share
(net assets of $347,522,038 / 40,113,362 shares of
beneficial interest outstanding) $8.66
=====
Class C shares:
Net asset value, offering price and redemption price per
share (net assets of $10,887,762 / 1,255,970 shares of
beneficial interest outstanding) $8.67
=====
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
- ------------------------------------------------------------------------------
Six Months Ended September 30, 1995
- ------------------------------------------------------------------------------
Net investment income:
Interest income $16,552,913
-----------
Expenses -
Management fee $ 1,761,733
Trustees' compensation 23,664
Shareholder servicing agent fee (Class A) 49,396
Shareholder servicing agent fee (Class B) 430,613
Shareholder servicing agent fee (Class C) 8,200
Distribution and service fee (Class A) 89,913
Distribution and service fee (Class B) 1,957,336
Distribution and service fee (Class C) 54,668
Custodian fee 96,522
Printing 33,815
Postage 26,378
Auditing fees 23,200
Legal fees 15,880
Miscellaneous 164,178
-----------
Total expenses $ 4,735,496
Fees paid indirectly (17,327)
Preliminary reduction of expenses by distributor (25,487)
-----------
Net expenses $ 4,692,682
-----------
Net investment income $11,860,231
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 704,595
Futures contracts (339,850)
-----------
Net realized gain on investments $ 364,745
-----------
Change in unrealized appreciation on investments $ 5,171,839
Net realized and unrealized gain on investments 5,536,584
-----------
Increase in net assets from operations $17,396,815
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
- -----------------------------------------------------------------------------------------------
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 11,860,231 $ 23,955,748
Net realized gain (loss) on investments 364,745 (8,796,119)
Net unrealized gain on investments 5,171,839 8,226,710
------------ ------------
Increase in net assets from operations $ 17,396,815 $ 23,386,339
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (1,935,673) $ (551,579)
From net investment income (Class B) (9,651,562) (22,598,713)
From net investment income (Class C) (272,996) (491,715)
In excess of net investment income (Class A) (11,171) --
In excess of net investment income (Class B) (55,705) --
In excess of net investment income (Class C) (1,576) --
In excess of net realized gain on investment
transactions (Class A) -- (2,000)
------------ ------------
Total distributions declared to shareholders $(11,928,683) $ (23,644,007)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $103,392,911 $ 63,201,308
Net asset value of shares issued in connection
with the acquisition of Advantage Fund 28,956,459 --
Net asset value of shares issued to
shareholders in
reinvestment of distributions 6,384,295 12,855,706
Cost of shares reacquired (134,440,254) (118,093,995)
------------ ------------
Increase (decrease) in net assets from Fund
share transactions $ 4,293,411 $(42,036,981)
------------ ------------
Total increase (decrease) in net assets $ 9,761,543 $(42,294,649)
Net assets:
At beginning of period 449,171,472 491,466,121
------------ ------------
At end of period (including accumulated
distributions in excess of net investment
income of $752,621 and $684,169,
respectively) $458,933,015 $449,171,472
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- ------------------------------------------------------------------------------
Six Months
Ended Year Ended March 31, Year Ended
September 30, --------------------- November 30,
1995 1995 1994* 1993**
- ------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of
period $ 8.56 $ 8.56 $ 8.99 $ 9.15
------ ------ ------ ------
Income from investment
operations++ -
Net investment
income(S) $ 0.25 $ 0.50 $ 0.15 $ 0.12
Net realized and
unrealized gain
(loss) on investments 0.09 0.02 (0.51) (0.16)
------ ------ ------ ------
Total from
investment
operations $ 0.34 $ 0.52 $ (0.36) $(0.04)
------ ------ ------ ------
Less distributions
declared to
shareholders -
From net
investment
income $(0.25) $(0.52) $(0.02) $(0.11)
In excess of net
investment
income -- -- -- (0.01)
From net
realized gain
on investments -- -- (0.01) --
In excess of net
realized gains
on investments -- -- (0.04) --
------ ------ ------ ------
Total
distributions
declared
to shareholders $(0.25) $(0.52) $(0.07) $(0.12)
------ ------ ------ ------
Net asset value -
end of period $ 8.65 $ 8.56 $ 8.56 $ 8.99
====== ====== ====== ======
Total return# 4.08% 6.33% (7.90)%+ (1.80)%+
Ratios (to average net
assets)/Supplemental
data:
Expenses## 1.28%(S) 1.13% 1.07%+ 0.76%+
Net investment
income 5.89% 6.20% 5.31%+ 4.94%+
Portfolio turnover 14% 25% 9% 30%
Net assets at end
of period (000
omitted) $100,523 $25,270 $5,595 $ 461
* For the four-month period ended March 31, 1994.
** For the period from the commencement of offering of Class A shares,
September 7, 1993 to November 30, 1993.
+ Annualized.
++ Per share data for the periods subsequent to November 30, 1993 is
based on average shares outstanding.
# 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.
## For fiscal periods ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
(S) The distributor did not impose the Class A service fee for the six
months ended September 30, 1995. If this fee had been incurred by the
Fund, the ratios of expenses to average net assets and net investment
income to average net assets would have been 1.36% and 5.82%,
respectively.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months
Ended Year Ended March 31, Year Ended November 30,
September 30, ------------------------------ --------------------------------
1995 1995 1994<F1> 1993 1992
- -----------------------------------------------------------------------------------------------------------
Class B
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 8.57 $ 8.56 $ 8.99 $ 8.73 $ 8.50
------ ------ ------ ------ ------
Income from investment
operations<F3> -
Net investment income $ 0.22 $ 0.44 $ 0.14 $ 0.42 $ 0.47
Net realized and
unrealized gain (loss)
on investments 0.09 -- (0.51) 0.42 0.26
------ ------ ------ ------ ------
Total from investment
operations $ 0.31 $ 0.44 $(0.37) $ 0.84 $ 0.73
------ ------ ------ ------ ------
Less distributions
declared to shareholders -
From net investment
income $(0.22) $(0.43) $(0.01) $(0.45) $(0.48)
In excess of net
investment income -- -- -- (0.03) --
From net realized
gain on investments -- -- (0.01) (0.10) --
In excess of net
realized gain on
investments -- -- (0.04) -- --
From paid-in capital -- -- -- -- (0.02)
------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.22) $(0.43) $(0.06) $(0.58) $(0.50)
------ ------ ------ ------ ------
Net asset value -
end of period $ 8.66 $ 8.57 $ 8.56 $ 8.99 $ 8.73
====== ====== ====== ====== ======
Total return 3.60% 5.32% (8.97)%<F2> 9.95% 8.82%
Ratios (to average net
assets)/Supplemental data:
Expenses<F4> 2.14% 2.16% 2.24%<F2> 2.11% 2.03%
Net investment income 4.95% 5.15% 4.74%<F2> 4.92% 5.50%
Portfolio turnover 14% 25% 9% 30% 52%
Net assets at end
of period (000 omitted) $347,522 $412,965 $479,478 $518,179 $449,949
<F1> For the four-month period ended March 31, 1994.
<F2> Annualized.
<F3> Per share data for the periods subsequent to November 30, 1993 is based on
average shares outstanding.
<F4> For fiscal periods ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Year Ended November 30, 1991 1990 1989 1988 1987<F1>
- -----------------------------------------------------------------------------------------------------------
Class B
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.47
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.49 $ 0.49 $ 0.51 $ 0.50 $ 0.38
Net realized and unrealized
gain (loss) on investments 0.25 (0.15) 0.30 0.43 (0.83)
------ ------ ------ ------ ------
Total from investment
operations $ 0.74 $ 0.34 $ 0.81 $ 0.93 $ (0.45)
------ ------ ------ ------ ------
Less distributions declared
to shareholders from net
investment income $(0.49) $(0.50) $(0.51) $(0.49) $(0.35)
------ ------ ------ ------ ------
Net asset value - end of
period $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67
====== ====== ====== ====== ======
Total return 9.21% 4.18% 10.24% 12.53% (5.79)%<F2>
Ratios (to average net assets)
/Supplemental data:
Expenses 2.04% 2.05% 2.07% 2.09% 2.03%<F2>
Net investment income 5.82% 5.99% 6.09% 6.38% 6.00%<F2>
Portfolio turnover 73% 91% 127% 171% 138%
Net assets at end of period
(000 omitted) $409,084 $379,239 $343,887 $244,825 $183,935
<FN>
<F1>For the period from the commencement of investment operations, December 29,
1986 to November 30, 1987.
<F2>Annualized.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- ------------------------------------------------------------------------------
Six Months
Ended Year Ended March 31,
September 30, --------------------
1995 1995 1994***
- ------------------------------------------------------------------------------
Class C
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.57 $ 8.56 $ 9.07
------ ------ ------
Income from investment operations++ -
Net investment income $ 0.22 $ 0.44 $ 0.09
Net realized and unrealized gain
(loss) on investments 0.10 0.01 (0.59)
------ ------ ------
Total from investment operations $ 0.32 $ 0.45 $(0.50)
------ ------ ------
Less distributions declared to
shareholders from net investment
income $(0.22) $(0.44) $(0.01)
------ ------ ------
Net asset value - end of period $ 8.67 $ 8.57 $ 8.56
====== ====== ======
Total return 3.76% 5.39% (19.42)%+
Ratios (to average net assets)/Supplemental
data:
Expenses## 2.07% 2.09% 2.18%+
Net investment income 5.01% 5.23% 4.62%+
Portfolio turnover 14% 25% 9%
Net assets at end of period (000
omitted) $10,888 $10,936 $6,393
***For the period from the commencement of investment operations, January 3,
1994 to March 31, 1994.
+Annualized.
++Per share data is based on average shares outstanding.
##For fiscal periods ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Municipal Income Fund (the Fund) is a diversified series of MFS Municipal
Series Trust (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
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 futures 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.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities, currency 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. Investments in equity index contracts, or contracts on related
options, for purposes other than hedging may be made when the Fund has cash on
hand and wishes to participate in anticipated market appreciation while the cash
is being invested. 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.
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 calculated 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 a 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.
At March 31, 1995, the Fund, for federal income tax purposes, had a capital loss
carryforward of $7,934,343, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on March 31, 2002 ($1,415,952) and March 31, 2003 ($6,518,391).
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the average
daily net assets 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 effective annual rate of
0.30% of average daily net assets and 6.43% 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 of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $4,689 for the period ended
September 30, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$11,545 for the period ended September 30, 1995, as its portion of the sales
charge on sales of Class A shares of the Fund.
The Trustees have adopted a separate Distribution Plan for Class A, Class B and
Class C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows: The Class A Distribution Plan provides that the Fund will pay MFD up to
0.35% per annum of its average daily net assets attributable to Class A shares
in order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for accounts
not attributable to a securities dealer which amounted to $6,036 for the period
ended September 30, 1995. MFD is currently waiving the 0.10% distribution fees
for an indefinite period. Fees incurred under the distribution plan during the
period ended September 30, 1995 were 0.20% of average daily net assets
attributable to Class A shares on an annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
monthly 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 and
Class C shares. 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
and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended to
be additional consideration for services rendered by the dealer with respect to
Class B and Class C shares. MFD retains the service fee for accounts not
attributable to a securities dealer which amounted to $38,137 and $2,234 for
Class B and Class C shares, respectively, for the period ended September 30,
1995. Fees incurred under the distribution plans during the period ended
September 30, 1995 were 1.00% of average daily net assets attributable to Class
B and Class C 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 period ended September 30, 1995 were $337,268 for
Class B shares.
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%, up to 0.22% and up to 0.15% attributable
to Class A, Class B, and Class C shares, respectively. (4) Portfolio Securities
Purchases and sales of investments, other than U.S government securities, pur-
chased option transactions and short-term obligations, aggregated $64,071,035
and $63,479,597, 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 $423,488,205
============
Gross unrealized appreciation $ 34,941,709
Gross unrealized depreciation (3,882,913)
------------
Net unrealized appreciation $ 31,058,796
============
(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:
Class A Shares
Period Ended Year Ended
September 30, 1995 March 31, 1995
--------------------------- ---------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 9,844,553 $ 85,381,442 2,767,565 $ 23,341,811
Shares issued to
shareholders in
reinvestment
of distributions 96,692 836,672 17,884 151,011
Shares reacquired (1,278,897) (11,002,364) (486,722) (4,100,978)
----------- ------------- ----------- -------------
Net increase 8,662,348 $ 75,215,750 2,298,727 $ 19,391,844
=========== ============= =========== =============
Class B Shares
Period Ended Year Ended
September 30, 1995 March 31, 1995
--------------------------- ---------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 1,515,600 $ 14,629,316 3,236,637 $ 27,296,462
Shares issued in
connection with the
acquisition of
Advantage Fund 3,398,645 28,956,459 -- --
Shares issued to
shareholders in
reinvestment
of distributions 619,964 5,356,752 1,465,533 12,377,112
Shares reacquired (13,627,449) (118,209,818) (12,503,667) (105,578,609)
----------- ------------- ----------- -------------
Net decrease (8,093,240) $ (69,267,291) (7,801,497) $ (65,905,035)
=========== ============= =========== =============
Class C Shares
Period Ended Year Ended
September 30, 1995 March 31, 1995
--------------------------- ---------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 561,604 $ 4,866,952 1,490,674 $ 12,563,035
Shares issued to
shareholders in
reinvestment
of distributions 22,070 190,871 38,763 327,583
Shares reacquired (603,765) (5,233,753) (999,873) (8,414,408)
----------- ------------- ----------- -------------
Net increase
(decrease) (20,091) $ (175,930) 529,564 $ 4,476,210
=========== ============= =========== =============
(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 period ended September
30, 1995 was $2,948. (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 instuments represent the investment the Fund has in
particular classes of financial instruments and does not neccessarily 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. For the period ended September 30, 1995, the Fund
did not hold any of these financial instruments.
The Fund also invests in indexed securities whose value may be linked to
interest rates, commodities, indices or other financial indicators. Indexed
securities are fixed income securities whose proceeds at maturity (principal-
indexed securities) or 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. The
following is a summary of such securities held at September 30, 1995:
<TABLE>
<CAPTION>
Principal Amount Unrealized
Description Index (000 Omitted) Value Appreciation
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rio Grande Valley, TX, Health Facilities
Development Corp., MBIA, Short Rites,
7.669s, 2015 J. J. Kenny $2,800 $2,916,732 $149,968
========== ========
</TABLE>
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At September 30, 1995,
the Fund owned the following restricted security (constituting 0.3% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933 (the 1933 Act). The Fund does not have the right to demand that such
a security be registered. The value of this security is determined by valuations
supplied by a pricing service or brokers. This security may be offered and sold
to "qualified institutional buyers" under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Date of Par Amount
Description Acquisition (000 Omitted) Cost Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Crystal City, TX, Lease Obligations, 10.5s, 2008 5/25/88 $1,251 $948,056 $1,221,393
==========
</TABLE>
(9) Acquisition
At close of business on April 28, 1995, the Fund acquired all of the assets and
liabilities of The National Portfolio, a series of the Advantage Municipal Bond
Fund (The Advantage Fund). The acquisition was accompanied by a tax-free
exchange of 3,398,645 Class B shares of the Fund (valued at $28,956,459) for the
3,122,374 shares of The Advantage Fund. The Advantage Fund's net assets on that
date ($28,956,459) including $1,484,799 of unrealized depreciation were combined
with those of the Fund. The aggregate net assets for Class B shares after the
acquisition were $473,464,579.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Municipal Series Trust and Shareholders of MFS Municipal
Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Municipal Income Fund (one of the series
constituting MFS Municipal Series Trust) as of September 30, 1995, the related
statement of operations for the six months then ended, the statements of changes
in net assets for the six months then ended and the year ended March 31, 1995,
and the financial highlights for the six months ended September 30, 1995, the
year ended March 31, 1995, the period ended March 31, 1994 and for each of the
years in the seven-year period ended November 30, 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 audits.
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
September 30, 1995 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 Income
Fund at September 30, 1995, 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
November 3, 1995
---------------------------------------------
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>
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 any
time). This material should be read carefully before investing or sending money.
<TABLE>
<S> <C>
STOCK LIMITED MATURITY BOND
- ---------------------------------------------------- ----------------------------------------------------
Massachusetts Investors Trust MFS(R) Government Limited Maturity Fund
- ---------------------------------------------------- ----------------------------------------------------
Massachusetts Investors Growth Stock Fund MFS(R) Limited Maturity Fund
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Capital Growth Fund MFS(R) Municipal Limited Maturity Fund
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Emerging Growth Fund
- ---------------------------------------------------- WORLD
MFS(R) Gold & Natural Resources Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Asset Allocation Fund
MFS(R) Growth Opportunities Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Equity Fund
MFS(R) Managed Sectors Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Governments Fund
MFS(R) OTC Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Growth Fund
MFS(R) Research Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Total Return Fund
MFS(R) Value Fund ----------------------------------------------------
- ----------------------------------------------------
NATIONAL TAX-FREE BOND
STOCK AND BOND ----------------------------------------------------
- ---------------------------------------------------- MFS(R) Municipal Bond Fund
MFS(R) Total Return Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) Municipal High Income Fund
MFS(R) Utilities Fund (closed to new investors)
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Municipal Income Fund
BOND ----------------------------------------------------
- ----------------------------------------------------
MFS(R) Bond Fund STATE TAX-FREE BOND
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Government Mortgage Fund Alabama, Arkansas, California, Florida,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Government Securities Fund Georgia, Louisiana, Maryland, Massachusetts,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) High Income Fund Mississippi, New York, North Carolina,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Intermediate Income Fund Pennsylvania, South Carolina, Tennessee,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Strategic Income Fund Texas, Virginia, Washington, West Virginia
(formerly MFS(R) Income & Opportunity Fund) ----------------------------------------------------
- ----------------------------------------------------
MONEY MARKET
----------------------------------------------------
MFS(R) Cash Reserve Fund
----------------------------------------------------
MFS(R) Government Money Market Fund
----------------------------------------------------
MFS(R) Money Market Fund
----------------------------------------------------
</TABLE>
<PAGE>
MFS(R) MUNICIPAL -------------
INCOME FUND [LOGO: NUMBER 1 DALBAR BULK RATE
TOP-RATED SERVICE] U.S. POSTAGE
PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
-------------
[LOGO: M F S
THE FIRST NAME IN MUTUAL FUNDS]
MMI-3 11/95 24M 02/202/302
