<PAGE>
MFS
THE FIRST NAME IN MUTUAL FUNDS
ANNUAL REPORT FOR
YEAR ENDED
MARCH 31, 1995
MFS(R) MUNICIPAL INCOME FUND
<PAGE>
<TABLE>
<CAPTION>
MFS(R) MUNICIPAL INCOME FUND
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor; AUDITORS
Former Chairman and Director (until 1991), Deloitte & Touche LLP
Massachusetts Financial Services Company
INVESTOR INFORMATION
Marshall N. Cohan - Private Investor For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime from
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery, Brigham a touch-tone telephone.
and Women's Hospital; Professor of
Surgery, Harvard Medical School For information on MFS mutual funds,
call your financial adviser or, for an
The Hon. Sir J. David Gibbons, KBE - Chief information kit, call toll free:
Executive Officer, Edmund Gibbons Ltd.; 1-800-637-2929 any business day from
Chairman, Bank of N.T. Butterfield & Son Ltd. 9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Abby M. O'Neill - Private Investor;
Director, Rockefeller Financial Services, Inc. INVESTOR SERVICE
(Investment Advisers) MFS Service Center, Inc.
P.O. Box 2281
Walter E. Robb, III - President and Treasurer, Boston, MA 02107-9906
Benchmark Advisors, Inc. (Corporate Financial
Consultants) For general information, call toll free:
1-800-225-2606 any business day from
Arnold D. Scott* - Senior Executive Vice President 8 a.m. to 8 p.m. Eastern time.
and Secretary, Massachusetts Financial Services
Company For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
Jeffrey L. Shames* - President and Chief Equity day from 9 a.m. to 5 p.m. Eastern time.
Officer, Massachusetts Financial Services Company (To use this service, your phone must be
equipped with a Telecommunications
J. Dale Sherratt - President, Insight Resources, Inc. Device for the Deaf.)
(Acquisition Planning Specialists)
For share prices, account balances and
Ward Smith - Former Chairman (until 1994), exchanges, call toll free: 1-800-MFS-TALK
NACCO Industries; Director, Sundstrand (1-800-637-8255) anytime from a touch-tone
Corporation telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116-3741
PORTFOLIO MANAGER
David B. Smith* TOP-RATED SERVICE
MFS was rated first when
TREASURER securities firms evaluated the
W. Thomas London* quality of service they receive
from 40 mutual fund companies.
ASSISTANT TREASURER MFS got high marks for answering
James O. Yost* calls quickly, processing trans-
actions accurately and sending
SECRETARY statements out on time.
Stephen E. Cavan* (Source: 1994 DALBAR Survey)
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Cover photo: Through their wide range of
investments, MFS mutual funds help you
*Affiliated with the Investment Adviser share in America's growth.
</TABLE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
During the fiscal year ended March 31, 1995, Class A shares of the Fund provided
a total return of +6.33%, Class B shares +5.32%, and Class C shares +5.39%
(including the reinvestment of distributions but excluding the effects of any
sales charges). These results underperformed the +7.43% return for the Lehman
Brothers Municipal Bond Index, an unmanaged index of national municipal bond
investments rated Baa or higher. Over the period, the Fund's holdings of
primarily premium coupon bonds provided below-average sensitivity to changing
interest rates. While this benefited the Fund during the first eight months of
the fiscal year when interest rates were rising, it detracted from performance
over the latter four months of the period when interest rates changed course and
began falling. A discussion of the Fund's performance and our outlook for the
months ahead may be found in the Portfolio Performance and Strategy section
below.
Economic Environment
The economic expansion, entering its fifth year, gained firmer underpinnings in
1994 as employers significantly stepped up hiring levels. Increased employment,
stronger capital spending by businesses, and strengthening overseas economies
resulted in 4.1% real (adjusted for inflation) gross domestic product growth
last year. Interest rates rose substantially over the past year, which should
help restrain, but not curtail, the economic expansion. Based on sound economic
fundamentals both here and abroad, we expect the business expansion to continue
well into 1995. However, recent data, including a March rise in the unemployment
rate and the first decline in industrial production in six months, indicate the
increased likelihood of a deceleration in the economy.
Despite a stonger economy, inflation at the consumer level has remained
relatively benign at 2.7% in 1994, the fourth straight year of 3.0% or less. Due
to a prolonged period of below-trend-line growth and continued pressure on
corporations to emphasize effective cost controls, wage growth and unit labor
costs have remained subdued. However, as the economy has exhibited continuing
strength, various industrial commodity prices have been rising substantially
faster than consumer prices. Nevertheless, businesses have had difficulty
passing these price increases on to the consumer. With the economy continuing to
expand, we expect some upward movement in inflation from below 3% to the 3 1/2%
range.
Municipal Bond Market
Municipal bond investors experienced unusual volatility during the fiscal year
ended March 31, 1995, with long-term yields rising 100 basis points through
mid-November, then retracing to finish the fiscal year unchanged. The municipal
bond market was battered during the first half of the fiscal year by a
combination of rising inflationary fears spurred by strong economic growth, and
heavy selling by tax-exempt mutual funds. However, the market began to improve
in December, when inflation fears subsided and market participants began to
focus on the reduced supply of municipal bonds. During 1994, new-issue supply
declined 44% from 1993's record level, and was down an additional 46% during the
first three months of this year. This reduction in supply, combined with
historically heavy bond calls and redemptions, should result in an unprecedented
two consecutive years of fewer bonds outstanding.
We believe municipals continue to represent good value based on our forecast
of stable to lower long-term interest rates, and that they should provide
attractive after-tax returns relative to alternative fixed-income investments.
Portfolio Performance and Strategy
During the past 12 months, the Fund was able to increase its dividend rate by
capturing additional yield available in the non-rated sector of the market
versus lower investment-grade bonds, and by emphasizing investment-grade bonds
with structures resulting in greater-income characteristics. Over the period, we
added to the Fund's holdings in noncallable bonds, reduced its exposure to
HUD-guaranteed housing bonds, and reduced our holdings in Denver Airport,
capturing a large gain in that position. Our exposure to corporate-guaranteed
airport bonds elsewhere increased slightly during the period, as we endeavored
to capture the cyclical improvement currently being experienced by the major
airlines.
Recent credit developments involving municipalities and the changing
environment for electric utilities and hospitals clearly demonstrate the
importance of fundamental credit analysis. We will continue to search for
relative values in these sectors and look for opportunities to reduce our
exposure to declining credits where appropriate. We will be placing increased
emphasis on improving the call protection of the Fund while, hopefully,
minimizing any adverse effects this may have on distributable income.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
------------------ ------------------
A 1-1/2" x 1-5/8" photo A 1-1/2" x 1-5/8" photo
of A. Keith Brodkin, of Dvid B. Smith,
Chairman and President Portfolio Mnager.
------------------ ------------------
/s/A. Keith Brodkin /s/David B. Smith
------------------- ------------------
A. Keith Brodkin David B. Smith
Chairman and President Portfolio Manager
April 17, 1995
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.
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.
TAX FORM SUMMARY
In January 1995, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1994.
PERFORMANCE
The information below illustrates the historical performance of MFS Municipal
Income Fund Class B shares in comparison to various market indicators. Class B
share results in the graph do not reflect the deduction of any contingent
deferred sales charge (CDSC) since the CDSC is not applicable after a six-year
period. Benchmark comparisons are unmanaged and do not reflect any fees or
expenses. You cannot invest in an index. All results reflect the reinvestment of
all dividends and capital gains.
Class A shares were offered effective September 7, 1993. Information on Class A
share performance appears on the next page.
Class C shares were offered effective January 3, 1994. Information on Class C
share performance appears on the next page.
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from January 1, 1987 to March 31, 1995)
Page 3
Line graph representing the growth of a $10,000 investment for the period from
January 1, 1987 to March 31, 1995. The graph is scaled from $7,500 to $20,000 in
$2,500 segments. The years are marked from 1987 to 1995. There are three lines
drawn to scale. One is a solid line representing MFS Municipal Income Fund
(Class B), a second line of short dashes represents the Lehman Brothers
Municipal Bond Index, and a third line of long dashes represents the Consumer
Price Index.
MFS Municipal Income Fund (Class B) $16,332
Lehman Brothers Municipal Bond Index $18,491
Consumer Price Index $13,698
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Life of Class
through
1 Year 3 Years 5 Years 3/31/95
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Municipal Income Fund (Class A) including
4.75% sales charge +1.24% -- -- -1.19%<F1>
--------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class A) at net
asset value +6.33% -- -- +1.97%<F1>
--------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class B) with CDSC<F5> +1.32% +5.27% +6.38% +6.12%<F2>
--------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class B) without CDSC +5.32% +6.16% +6.69% +6.12%<F2>
--------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class C) +5.39% -- -- +0.46%<F3>
--------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index +7.43% +7.34% +8.24% +7.74%<F4>
--------------------------------------------------------------------------------------------------------------
Consumer Price Index<F6> +2.85% +2.82% +3.30% +3.89%<F4>
--------------------------------------------------------------------------------------------------------------
All results are historical and, therefore, are not an indication of future results. The principal value and
income return of an investment in a mutual fund will vary with changes in market conditions, and shares, when
redeemed, may be worth more or less than their original cost. 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.
<FN>
<F1>For the period from the commencement of offering of Class A shares, September 7, 1993 to March 31, 1995.
<F2>For the period from the commencement of offering of Class B shares, December 29, 1986 to March 31, 1995.
<F3>For the period from the commencement of offering of Class C shares, January 3, 1994 to March 31, 1995.
<F4>Benchmark comparisons begin on January 1, 1987.
<F5>These returns reflect the applicable CDSC of 4%, 3% and 2% for the 1-, 3- and 5-year periods, respectively,
and 0% for the period commencing December 29, 1986.
<F6>The Consumer Price Index is a popular measure of change in prices.
</TABLE>
<PAGE>
PORTFOLIO OF INVESTMENTS - March 31, 1995
Municipal Bonds - 99.7%
------------------------------------------------------------------------------
S&P
Bond
Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
------------------------------------------------------------------------------
Student Loan Revenue - 1.3%
AAA Pennsylvania Higher Education Assistance
Agency, 9.24s, 2026* $ 5,500 $ 5,798,760
------------------------------------------------------------------------------
General Obligation - 10.3%
NR Arlington, TX, Independent School
Refunding Rev., PSF, 0s, 2007 $ 3,070 $ 1,562,017
A+ Commonwealth of Massachusetts, 7s, 2007 2,590 2,834,704
AA+ Harris County, TX, Certificates of
Obligation (Astrodome Improvements
Project), 8.1s, 2008 1,385 1,523,431
A- New York, NY, 8.2s, 2003 5,000 5,610,450
A- New York, NY, 7.5s, 2008 1,350 1,423,927
A- New York, NY, 6.25s, 2009 3,400 3,258,866
A- New York, NY, 8.25s, 2010 2,335 2,559,533
A- New York, NY, 8s, 2018 30 32,343
AAA Northwest Texas, Independent School
District, AMBAC, 0s, 2011 3,000 1,133,400
AA State of Texas, 7.625s, 2018 14,405 15,703,754
AA State of Wisconsin, 8.1s, 2018 7,115 7,773,991
AA State of Wisconsin, 7.6s, 2020 2,865 2,998,309
-----------
$ 46,414,725
------------------------------------------------------------------------------
State and Local Appropriation - 3.2%
A+ Indianapolis, IN, Local Public
Improvement Bond Bank, 6.75s, 2020 $ 1,000 $ 1,019,460
BBB+ New York Dormitory Authority Rev. (City
University), 7.5s, 2010 2,500 2,800,700
BBB+ New York Medical Care Facility,
Financial Agency Rev., 8.875s, 2007 770 843,374
BBB+ New York Medical Care Facility,
Financial Agency Rev., 7.875s, 2008 745 814,427
BBB+ New York Medical Care Facility,
Financial Agency Rev., 7.875s, 2020 2,580 2,808,072
BBB+ New York Medical Care Facility,
Financial Agency Rev., 7.5s, 2021 540 581,678
BBB New York Urban Development Corp. (State
Facilities), 7.5s, 2011 2,500 2,694,550
AAA Philadelphia, PA, Regional Port
Authority Lease Rev., MBIA, MVRIC,
8.87s, 2020* 2,500 2,539,125
-----------
$ 14,101,386
------------------------------------------------------------------------------
Refunded and Special Obligation - 20.3%
AAA Adams County, CO, Single Family Mortgage
Rev., 8.875s, 2011 $ 2,510 $ 3,235,315
NR Chapel Hill, NC, Parking Facilities Rev.
(Rosemary Street Project), 8.125s, 2013 960 1,113,801
NR Chapel Hill, NC, Parking Facilities Rev.
(Rosemary Street Project), 8.25s, 2023 1,000 1,166,270
AAA Commonwealth of Massachusetts, 7.5s, 2007 1,990 2,262,173
A+ Commonwealth of Massachusetts, 7.5s, 2007 2,010 2,284,907
NR Dayton, OH, Special Facilities Rev.
(Emery Air Freight), "A", 12.5s, 2009 1,000 1,176,010
AAA Henrico County, VA, Industrial
Development Authority Rev., 7.34s, 2027* 5,000 4,770,900
NR Illinois Education and Facilities
Authority, 8.75s, 2015 1,440 1,493,338
NR Illinois Education and Facilities
Authority, 8.75s, 2015 60 62,119
AA Intermountain Power Agency, UT, Power
Supply Rev., 7s, 2021 5,000 5,467,900
AAA Los Angeles, CA, Convention & Exhibition
Center Authority, Certficates of
Participation, 7.375s, 2018 $ 2,000 2,220,300
NR Massachusetts Health & Education
Facilities Authority Rev. (Suffolk
University), 8s, 2010 1,000 1,141,650
NR Massachusetts Health & Education
Facilities Authority Rev. (Youville
Hospital), 9.1s, 2015 915 966,834
AAA Massachusetts Water Resources Authority,
7.625s, 2014 3,200 3,616,480
AAA New York Local Government Assistance
Corp., 7.25s, 2018 2,750 3,107,473
A- New York, NY, Pre-Refunded, "A", 8.25s,
2010 2,165 2,562,472
A- New York, NY, Pre-Refunded, "A", 8.25s,
2018 2,970 3,459,307
AAA New York Medical Care Facility,
Financial Agency Rev., 8.875s, 2007 680 756,670
AAA New York Medical Care Facility,
Financial Agency Rev., 7.875s, 2008 670 771,458
BBB+ New York Medical Care Facility,
Financial Agency Rev., 7.75s, 2020 1,030 1,169,278
AAA New York Medical Care Facility,
Financial Agency Rev., 7.875s, 2020 3,565 4,104,848
AAA New York Medical Care Facility,
Financial Agency Rev., 7.75s, 2021 1,460 1,665,042
NR New York Urban Development Corp.
(Correctional Facilities), 7.75s, 2014 5,000 5,663,100
NR New York Urban Development Corp Rev.,
7.3s, 2008 2,340 2,670,548
A- Pennsylvania Industrial Development
Authority Rev., 7s, 2011 7,000 7,784,210
AAA Philadelphia, PA, Municipal Authority
Rev., 7s, 2004 2,000 2,245,380
NR Texas Turnpike Authority Rev. (Houston
Ship Channel Bridge), 0s, 2020 3,000 3,979,920
AAA Washington County, PA, Authority Lease
Rev., 7.45s, 2018 1,200 1,360,645
AAA Washington Public Power Supply System
Rev., Nuclear Project #1, 14.375s, 2001 1,000 1,345,870
AAA Washington Public Power Supply System
Rev., Nuclear Project #1, 7.25s, 2015 3,350 3,694,480
AAA Washington Public Power Supply System
Rev., Nuclear Project #2, 7.375s, 2012 5,355 6,003,222
AA Washington Public Power Supply System
Rev., Nuclear Project #3, 7.25s, 2015 5,000 5,514,150
BBB+ West Virginia Water Development
Authority, 8.625s, 2028 1,000 1,134,490
BBB+ West Virginia Water Development Authority,
8.125s, 2029 1,000 1,118,340
-----------
$ 91,088,900
--------------------------------------------------------------------------------
Single Family Housing Revenue - 9.2%
AAA Berkeley, Brookes, & Fayette Counties,
WV, MBIA, 0s, 2016 $ 14,000 $ 1,415,540
AAA Chicago, IL, Residential Mortgage Rev.,
0s, 2009 7,000 2,495,360
BB Cook County, IL, Single Family Housing,
0s, 2015 14,745 1,625,637
NR De Kalb, IL, Single Family Mortgage
Rev., 7.45s, 2009 280 295,898
NR Delaware Housing Authority Rev., 9.125s,
2018 915 953,192
BB Harris County, TX, Housing Finance
Corp., 9.625s, 2003 285 285,043
BB Harris County, TX, Housing Finance
Corp., 9.875s, 2014 505 505,080
A+ Illinois Housing Development Agency, 0s,
2016 8,785 954,841
AAA Kentucky Housing Corp., Housing Rev.,
FHA, 7.45s, 2023 6,280 6,610,453
AAA Louisiana Housing Finance Agency, Single
Family Mortgage Rev., FGIC, 9.375s, 2015 310 320,628
AA+ Minnesota Housing Finance Agency, 9s, 2018 4,655 4,806,427
NR Mississippi Home Corp., Single Family
Rev., 7.1s, 2023 870 899,388
A+ New Hampshire Housing Finance Authority,
7.2s, 2010 7,000 7,346,990
A+ New Hampshire Housing Finance Authority,
8.625s, 2013 755 789,172
A+ Tennessee Housing Development Agency,
8.25s, 2020 1,880 1,974,620
A+ Tennessee Housing Development Agency,
8.125s, 2021 2,145 2,241,868
AA Utah Housing Finance Agency, 8.625s, 2019 1,750 1,820,962
AA Utah Housing Finance Agency, 9.125s, 2019 195 203,470
AA Utah Housing Finance Agency, 9.25s, 2019 135 145,089
A+ West Virginia Housing Development Fund,
7.85s, 2014 5,470 5,733,763
-----------
$ 41,423,421
------------------------------------------------------------------------------
Multi-Family Housing Revenue - 3.1%
BBB Colorado Housing Finance Authority,
8.3s, 2023 $ 2,750 $ 2,896,768
NR Maryland Community Development
Administration, 8.5s, 2028 3,000 3,125,670
A+ Pennsylvania Housing Finance Agency,
7.6s, 2013 1,000 1,073,540
AA- Vermont Housing Finance Agency, 8.375s,
2020 2,760 2,878,762
A Wisconsin Housing & Economic Development
Authority, 7.2s, 2013 4,000 4,134,200
-----------
$ 14,108,940
------------------------------------------------------------------------------
Insured Health Care Revenue - 3.1%
AAA Clermont County, OH, Hospital Facilities
Rev. (Mercy Health System), AMBAC,
MVRIC, 9.991s, 2021* $ 1,500 $ 1,626,135
AAA Colorado Health Facilities Authority
Rev. (PSL Health Systems), FSA, 7.25s,
2016 2,000 2,157,780
AAA Fredericksburg, VA, Industrial
Development Authority, Hospital
Facilities Rev., FGIC, INFLOS, 8.759s, 2023* 1,500 1,597,785
AAA Jefferson County, KY, Hospital Rev.
(Alliant Health
System), INFLOS, MBIA, 8.38s, 2014* 1,500 1,572,945
AAA Mississippi Hospital Equipment &
Facilities Authority Rev. (Rush
Medical Foundation), Connie Lee, 6.7s, 2018 1,000 1,027,200
AAA Rio Grande Valley, TX, Health Facilities
Development Corp., MBIA, Short Rites,
7.72s, 2015*# 2,800 2,841,749
AAA Tulsa, OK, Industrial Authority,
Hospital Rev. (St. John's Medical
Center), MBIA, 0s, 2006 6,430 3,283,929
-----------
$ 14,107,523
------------------------------------------------------------------------------
Health Care Revenue - 4.6%
NR Bell County, TX, Health Facilities
Development Corp. (Advanced Living
Technology), 10.5s, 2018 $ 2,000 $ 1,840,000
BBB- Bell County, TX, Health Facilities
Development Corp. (Kings Daughters
Hospital), 9.25s, 2008 1,720 1,901,649
BBB Colorado Health Facilities Authority
Rev. (Rocky
Mountain Adventist), 6.625s, 2013 1,000 955,600
NR Fulton County, GA, Residential Care
Facilities, Elderly Authority Rev.
(Lenbrook Square Foundation), 9.75s, 2017 480 497,045
NR Gadsden County, FL, Industrial
Development Authority (RHA/FLA
Properties), 10.45s, 2018 1,970 2,022,699
Health Care Revenue - continued
NR Louisiana Public Facilities Authority
(Southwest Medical Center), 11s, 2006 $ 1,655 $ 992,328
A Massachusetts Health & Educational
Facilities Rev., 6.875s, 2022 6,000 6,050,880
BBB+ New York Medical Care Facilities Agency,
Mental Health Services, 7.75s, 2020 1,025 1,102,336
NR Philadelphia, PA, Industrial Development
Authority, 10.25s, 2018 1,980 2,042,747
NR Philadelphia, PA, Industrial Development
Authority, 10.25s, 2018 1,485 1,529,535
A Torrance, CA, Hospital Rev., 6.875s, 2015 1,815 1,863,242
-----------
$ 20,798,061
------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 9.8%
AAA Austin, TX, Utilities System Rev.,
AMBAC, 0s, 2010 $ 7,500 $ 2,944,875
NR Chelan County, WA, Public Utility
District #1,
Consolidated Rev., 9.3s, 2062 4,450 4,911,020
AAA Georgia Municipal Electric Authority,
MBIA, 6.375s, 2016* 2,000 2,085,240
NR Midland, MI, Environmental Development
Authority, Pollution Control Rev. (Midland
Cogeneration), 9.5s, 2009 2,000 2,139,000
NR Montana Board of Investment Resources
Recovery Rev. (Yellowstone Energy),
7s, 2019 3,000 2,798,910
AAA Municipal Electric Authority, GA,
Special Obligation, MBIA, 6.5s, 2020 7,350 7,712,796
A- North Carolina Eastern Municipal Power
Agency, 7s, 2007 3,250 3,443,277
AAA Texas Municipal Power Agency Rev., 0s,
2011 5,930 2,220,192
AAA Texas Municipal Power Agency Rev., 0s,
2013 6,000 1,957,320
AAA Texas Municipal Power Agency Rev., 0s,
2014 10,435 3,203,023
AA Washington Public Power Supply System
Rev., Nuclear Project #1, 0s, 2003 2,000 1,246,560
AA Washington Public Power Supply System
Rev., Nuclear Project #1, 7s, 2011 4,050 4,228,564
AA Washington Public Power Supply System
Rev., Nuclear Project #3, 0s, 2004 4,885 2,849,469
AAA Washington Public Power Supply Systems,
Series "A", BIGI, 0s, 2013 4,000 1,288,120
AAA Washington Public Power Supply Systems,
Series "A", BIGI, 0s, 2014 3,350 1,013,777
-----------
$ 44,042,143
------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 3.8%
AAA Contra Costa, CA, Water District Rev.,
MBIA, 5.5s, 2019 $ 4,000 $ 3,687,080
AAA Harris County, TX, Flood Control
District, FGIC, 0s, 2010 3,545 1,408,534
A Massachusetts Water Resources Authority,
6.5s, 2019 7,495 7,881,442
AAA Salt Lake County, UT, Water Conservancy
District Rev., AMBAC, 0s, 2008 2,100 946,176
AAA Salt Lake County, UT, Water Conservancy
District Rev., AMBAC, 0s, 2009 3,800 1,604,816
A- Union County, NJ, Utilities Authority
Solid Waste, 7.2s, 2014 1,500 1,520,160
-----------
$ 17,048,208
------------------------------------------------------------------------------
Turnpike Revenue - 3.4%
NR Massachusetts Industrial Finance Agency,
Tunnel Rev. (Mass. Turnpike), 9s, 2020 $ 2,900 $ 3,121,328
AA- Michigan Trunk Line, Series "A", 5.5s,
2021 5,000 4,626,700
AA- Michigan Trunk Line, Series "B", 5.5s,
2021 3,000 2,776,020
A New Jersey Turnpike Authority, Turnpike
Rev., 6.5s, 2016 1,450 1,531,591
NR San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2005 1,800 852,462
NR San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2009 6,750 2,320,650
-----------
$ 15,228,751
------------------------------------------------------------------------------
Airport and Port Revenue - 13.4%
BB+ Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(AMR), 7.875s, 2025 $ 3,500 $ 3,608,430
BB Chicago, IL, O'Hare International
Airport, Special
Facilities Rev. (United Airlines), 8.4s,
2018 2,025 2,151,907
BB Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.85s, 2018 2,950 3,269,573
BB Chicago, IL, O'Hare International
Airport, Special
Facilities Rev. (United Airlines), 8.85s,
2018 6,535 7,242,936
NR Cleveland, OH, Airport, Special
Facilities Rev. (Continental Airlines),
9s, 2019 5,300 5,318,391
AAA Connecticut Airport Rev., FGIC, 7.65s, 2012 1,000 1,130,670
BB+ Dallas-Fort Worth, TX, International
Airport Facilities (AMR), 7.5s, 2025 5,000 5,056,000
BB Denver, CO, City & County Airport Rev.,
8.75s, 2023 4,750 5,234,785
AAA Hawaii Airport Systems Rev., FGIC, 7.5s,
2020 5,350 5,751,945
BB Kenton County, KY, Airport Board Special
Facilities (Delta Airlines), 7.5s, 2020 1,000 1,018,640
AAA Metropolitan Washington District of
Columbia Airports Authority, FGIC,
7.25s, 2010 4,000 4,324,480
NR St. Augustine, FL, Airport Authority
(Grumman Repair Facility), 11s, 2004 500 536,500
BB+ Tulsa, OK, Municipal Airport Trust Rev.
(AMR), 7.375s, 2020 12,000 12,132,360
A+ Virginia Port Authority, 8.2s, 2008 3,000 3,316,080
-----------
$ 60,092,697
------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 7.2%
BBB Brazos River Authority, TX, Pollution
Control Rev. (Texas Utilities), 9.875s, 2017 $ 8,890 $ 9,770,910
BBB Brazos River Authority, TX, Pollution
Control Rev. (Texas Utilities), 9.25s, 2018 1,000 1,090,620
A+ Burke County, GA, Pollution Control Rev.
(Georgia Power Co./Vogtle Project),
9.375s, 2017 2,650 2,945,582
NR Burns Harbor, IN, Solid Waste Disposal
Facilities Rev. (Bethlehem Steel), 8s,
2024 3,000 3,065,460
A Charleston County, SC, Resource Recovery
Rev. (Foster Wheeler), 9.25s, 2010 3,200 3,523,840
AA- Chicago, IL, Gas Supply Rev. (People's
Gas), 8.1s, 2020 2,000 2,230,820
A- Erie County, PA (International Paper),
7.875s, 2016 1,200 1,289,148
A- Matagorda County, TX, Pollution Control
Rev. (Central Power & Light), 7.875s,
2016 1,500 1,582,485
NR Port of New Orleans, LA (Avondale
Industries), 8.5s, 2014 2,000 2,088,560
BB- Port of New Orleans, LA (Continental
Grain Co.), 7.5s, 2013 1,000 1,015,170
NR San Joaquin Hills, CA, Transportation
Corridor Agency, 0s, 2004 3,000 1,534,050
BBB West Side Calhoun County, TX, Navigation
District, 8.2s, 2021 2,000 2,196,880
-----------
$ 32,333,525
------------------------------------------------------------------------------
Universities - 0.4%
AA- Michigan State University Rev., 5.5s,
2022 $ 2,000 $ 1,821,340
------------------------------------------------------------------------------
Miscellaneous Revenue - 6.6%
NR Atlanta, GA, Downtown Development Authority,
11.5s, 2015**++ $ 1,055 $ 316,548
NR Bristol, CT, Resource Recovery
Facilities, 6.5s, 2014## 8,000 7,624,560
NR Crystal City, TX, Lease Obligations, 10.5s,
2008+ 1,252 1,197,172
BBB- Greater Detroit, MI, Resource Recovery
Authority, 9.25s, 2008 2,130 2,224,785
AAA Illinois Dedicated Tax, Civic Center,
AMBAC, 0s, 2016 5,000 1,285,100
NR Martha's Vineyard, MA, Land Bank,
8.125s, 2011 1,900 1,929,698
NR Maryland Energy Financing Administration
(Solid Waste), 9s, 2016 4,000 3,995,480
NR Massachusetts Health & Education
Facilities Authority Rev. (Learning
Center for Deaf Children), 9.25s, 2014 1,000 1,069,290
NR Pittsylvania County, VA, Industrial
Development Authority Rev., 7.5s, 2014 6,000 6,072,780
NR Retema, TX, Special Facilities Rev.
(Retema Park Racetrack Project), 8.75s, 2018 4,000 3,899,400
-----------
$ 29,614,813
------------------------------------------------------------------------------
Total Municipal Bonds $448,023,193
------------------------------------------------------------------------------
Total Investments (Identified Cost, $420,651,437) $448,023,193
Other Assets, Less Liabilities - 0.3% 1,148,279
------------------------------------------------------------------------------
Net Assets - 100.0% $449,171,472
------------------------------------------------------------------------------
+Restricted security.
++Security valued by or at the direction of the Trustees.
*Inverse floating rate security.
**Non-income producing security - in default.
#Indexed security.
##When-issued security. At March 31, 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
------------------------------------------------------------------------------
March 31, 1995
------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $420,651,437) $448,023,193
Cash 56,499
Receivable for investments sold 2,492,940
Receivable for Fund shares sold 237,809
Interest receivable 8,910,475
Other assets 6,957
------------
Total assets $459,727,873
------------
Liabilities:
Distributions payable $ 877,910
Payable for when-issued investments purchased 8,000,000
Payable for Fund shares reacquired 1,461,848
Payable to affiliates -
Management fee 9,525
Shareholder servicing agent fee 2,650
Distribution fee 11,662
Accrued expenses and other liabilities 192,806
------------
Total liabilities $ 10,556,401
------------
Net assets $449,171,472
------------
Net assets consist of:
Paid-in capital $433,004,620
Unrealized appreciation on investments 27,371,756
Accumulated net realized loss on investments (10,520,735)
Accumulated distributions in excess of net investment income (684,169)
------------
Total $449,171,472
------------
Shares of beneficial interest outstanding 52,435,142
------------
Class A shares:
Net asset value and redemption price per share
(net assets of $25,270,127 / 2,952,479 shares of beneficial
interest outstanding) $8.56
----
Offering price per share (100/95.25) $8.99
----
Class B shares:
Net asset value, offering price, and redemption price per
share (net assets of $412,965,394 / 48,206,602 shares of
beneficial interest outstanding) $8.57
----
Class C shares:
Net asset value, offering price, and redemption price per
share (net assets of $10,935,951 / 1,276,061 shares of
beneficial interest outstanding) $8.57
----
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
Statement of Operations
------------------------------------------------------------------------------
Year Ended March 31, 1995
------------------------------------------------------------------------------
Net investment income:
Interest income $33,848,466
----------
Expenses -
Management fee $ 3,545,246
Trustees' compensation 40,748
Shareholder servicing agent fee (Class A) 13,323
Shareholder servicing agent fee (Class B) 977,825
Shareholder servicing agent fee (Class C) 14,272
Distribution and service fee (Class B) 4,444,656
Distribution and service fee (Class C) 95,149
Custodian fee 173,858
Printing 84,123
Auditing fees 60,684
Postage 43,309
Legal fees 26,048
Miscellaneous 373,477
----------
Total expenses $ 9,892,718
----------
Net investment income $23,955,748
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(9,519,481)
Futures contracts 723,362
----------
Net realized loss on investments $(8,796,119)
----------
Change in unrealized appreciation (depreciation) -
Investments $ 8,378,273
Futures contracts (151,563)
----------
Net unrealized gain on investments $ 8,226,710
----------
Net realized and unrealized loss on investments $ (569,409)
----------
Increase in net assets from operations $23,386,339
----------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
------------------------------------------------------------------------------------------------------------------------------
Year Ended Four Months Ended Year Ended
March 31, 1995 March 31, 1994 November 30, 1993
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase in net assets:
From operations -
Net investment income $ 23,955,748 $ 8,135,114 $ 24,569,248
Net realized gain (loss) on investments (8,796,119) (1,579,438) 2,174,746
Net unrealized gain (loss) on investments 8,226,710 (21,759,776) 19,852,443
----------- ----------- -----------
Increase (decrease) in net assets from operations $ 23,386,339 $(15,204,100) $ 46,596,437
----------- ----------- -----------
Distributions declared to shareholders -
From net investment income (Class A) (551,579) (24,388) (2,142)
From net investment income (Class B) (22,598,713) (6,513,043) (25,152,570)
From net investment income (Class C) (491,715) (36,953) --
In excess of net investment income (Class A) -- (444) (150)
In excess of net investment income (Class B) -- (1,488,102) (1,560,580)
In excess of net investment income (Class C) -- (1,021) --
From net realized gain on investments -- (320,243) (5,237,004)
In excess of net realized gain on investments (2,000) (1,230,985) --
----------- ---------- ----------
Total distributions declared to shareholders (23,644,007) (9,615,179) (31,952,446)
----------- ---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 63,201,308 $ 31,229,236 $118,919,014
Net asset value of shares issued to
shareholders in reinvestment of
distributions 12,855,706 5,241,616 18,199,816
Cost of shares reacquired (118,093,995) (38,825,729) (83,071,056)
----------- ----------- -----------
Increase (decrease) in net assets from
Fund share transactions (42,036,981) (2,354,877) $ 54,047,774
----------- --------- -----------
Total increase (decrease) in net assets (42,294,649) (27,174,156) $ 68,691,765
Net assets:
At beginning of period 491,466,121 518,640,277 449,948,512
----------- ----------- -----------
At end of period (including accumulated
distributions in excess of net investment
income of $(684,169), $(1,489,567) and $(1,560,730),
respectively) $449,171,472 $491,466,121 $518,640,277
----------- ----------- -----------
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
-----------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended
March 31, November 30, March 31, November 30,
----------------------------------------------------------------------- ------------ ------------- ------------
1995 1994<F1> 1993<F2> 1995 1994<F1> 1993
------------------------------------------------------------------------------------------------------------------------
Class A Class B
------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.56 $ 8.99 $ 9.15 $ 8.56 $ 8.99 $ 8.73
Income from investment operations<F4>
Net investment income $ 0.50 $ 0.15 $ 0.12 $ 0.44 $ 0.14 $ 0.42
Net realized and unrealized gain (loss)
on investments 0.02 (0.51) (0.16) -- (0.51) 0.42
---- ----- ----- ------ ----- ----
Total from investment operations $ 0.52 $(0.36) $(0.04) $ 0.44 $(0.37) $ 0.84
---- ---- ---- ---- ---- ----
Less distributions declared to shareholders --
From net investment income $(0.52) $(0.02) $(0.11) $(0.43) $(0.01) $(0.45)
In excess of net investment income -- -- (0.01) -- -- (0.03)
From net realized gain on investments -- (0.01) -- -- (0.01) (0.10)
In excess of net realized gain on investments --<F6> (0.04) -- -- (0.04) --
---- ---- ---- ---- ---- ----
Total distributions declared to shareholders $(0.52) $(0.07) $(0.12) $(0.43) $(0.06) $(0.58)
---- ---- ---- ---- ---- ----
Net asset value - end of period $ 8.56 $ 8.56 $ 8.99 $ 8.57 $ 8.56 $ 8.99
====== ====== ====== ====== ====== ======
Total Return<F5> 6.33% (7.90)%<F3> (1.80)%<F3> 5.32% (8.97)%<F3> 9.95%
Ratios (to average net assets)/Supplemental data:
Expenses 1.13% 1.07%<F3> 0.76%<F3> 2.16% 2.24%<F3> 2.11%
Net investment income 6.20% 5.31%<F3> 4.94%<F3> 5.15% 4.74%<F3> 4.92%
Portfolio turnover 25% 9% 30% 25% 9% 30%
Net assets at end of period (000 omitted) $25,270 $5,595 $ 461 $412,965 $479,478 $518,179
<FN>
<F1>For the four-month period ended March 31, 1994.
<F2>For the period from the commencement of offering of Class A shares, September 7, 1993 to November 30, 1993.
<F3>Annualized.
<F4>Per share data for the periods subsequent to November 30, 1993 are based on average shares outstanding.
<F5>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.
<F6>Distributions in excess of net realized gains were less than $0.01 per share.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Year Ended
Year Ended November 30, March 31,
------------------------------------------------------------------------------------------------------- --------------------
1992 1991 1990 1989 1988 1987<F4> 1995 1994<F1>
-----------------------------------------------------------------------------------------------------------------------------------
Class B Class C
-----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.47 $ 8.56 $ 9.07
------- ------ ------- ------- ------- ------- ------ --------
Income from investment operations<F3> -
Net investment income $ 0.47 $ 0.49 $ 0.49 $ 0.51 $ 0.50 $ 0.38 $ 0.44 $ 0.09
Net realized and unrealized gain (loss)
on investments 0.26 0.25 (0.15) 0.30 0.43 (0.83) 0.01 (0.59)
---- ---- ----- ---- ---- ----- ---- -----
Total from investment operations $ 0.73 $ 0.74 $ 0.34 $ 0.81 $ 0.93 $ (0.45) $ 0.45 $ (0.50)
------- ------ ------- ------- ------- ------- ------ --------
Less distributions declared to shareholders -
From net investment income $ (0.48) $(0.49) $ (0.50) $ (0.51) $ (0.49) $(0.35) $ (0.44) $ (0.01)
In excess of net investment income -- -- -- -- -- -- -- --
From paid-in capital (0.02) -- -- -- -- -- -- --
------- ------ ------- ------- ------- ------- ------ --------
Total distributions declared
to shareholders $ (0.50) $(0.49) $ (0.50) $ (0.51) $ (0.49) $ (0.35) $(0.44) $ (0.01)
------- ------ ------- ------- ------- ------- ------ --------
Net asset value - end of period $ 8.73 $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.57 $ 8.56
Total return 8.82% 9.21% 4.18% 10.24% 12.53% (5.79)%<F2> 5.39% (19.42)%<F2>
==== ==== ==== ===== ===== ===== ==== ======
Ratios (to average net assets)/
Supplemental data:
Expenses 2.03% 2.04% 2.05% 2.07% 2.09% 2.03%<F2> 2.09% 2.18%<F2>
Net investment income 5.50% 5.82% 5.99% 6.09% 6.38% 6.00%<F2> 5.23% 4.62%<F2>
Portfolio turnover 52% 73% 91% 127% 171% 138% 25% 9%
Net assets at end of period
(000 omitted) $449,949 $409,084 $379,239 $343,887 $244,825 $183,935 $10,936 $ 6,393
<F1>For the period from the commencement of offering of Class C shares, January 3, 1994 to March 31, 1994.
<F2>Annualized.
<F3>Per share data for the periods subsequent to November 30, 1993 are based on average shares outstanding.
<F4>For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
</TABLE>
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. During 1993 the Fund changed its year
end from November 30 to March 31.
(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 value. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
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.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying security may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as a part of an income-producing strategy reflecting the view of
the Fund's management on the direction of interest rates.
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of securities 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 financial futures contracts is designed to hedge against
anticipated future changes in interest rates or securities prices or for
non-hedging purposes. For example, interest rate futures may be used in
modifying the duration of the portfolio without incurring the additional
transaction costs involved in buying and selling the underlying securities.
Should interest rates or securities prices move unexpectedly, the Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realize a loss.
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund would also continue to earn income on the
securities loaned. At March 31, 1995, the Fund had no securities on loan.
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 both 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.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are considered workout expenses and are reported as realized
losses. Ongoing costs incurred to protect or enhance an investment, or costs
incurred to pursue other claims or legal actions, are reported as operating
expenses.
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 taxable
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 to
shareholders are recorded on the ex-dividend date.
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. That 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.
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. During the year ended March 31, 1995, $491,631 and $26 were reclassified
from accumulated undistributed net realized gain on investments and paid-in
capital, respectively, to accumulated net investment income due to differences
between book and tax accounting. This change had no effect on the net assets or
net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. Class A and Class C shares were first offered to the
public on September 7, 1993 and January 3, 1994, respectively. The three classes
of shares differ in their respective shareholder servicing agent, distribution
and service fees. Shareholders of each class also bear certain expenses that
pertain only to that particular class. 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,
including distribution and shareholder service fees.
(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. Prior to
September 1, 1993, Lifetime Advisors, Inc. (LAI), a wholly owned subsidiary of
MFS, was the investment adviser for the Fund. The management fee, computed daily
and paid monthly at an effective annual rate of 0.30% of average daily net
assets and 6.43% of investment income, amounted to $3,545,246 for the year ended
March 31, 1995.
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 LAI, 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. Included in Trustees'
compensation is a net periodic pension expense of $11,398 for the year ended
March 31, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$9,957 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate distribution plans 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. Payments will commence under the
distribution plan on such date that the net assets of the Fund attributable to
Class A shares first equals or exceeds $40 million.
The Class B and Class C Distribution Plans provide that the Fund will pay MFD a
monthly distribution fee, equal to 0.75% per annum, and a quarterly 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. Fees incurred under the distribution plans during
the year ended March 31, 1995 were 1.00% of average daily net assets
attributable to Class B and Class C shares on an annualized basis and amounted
to $4,444,656 and $95,149, respectively (of which MFD retained $68,521 and
$4,741, respectively).
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 twelve months following the share purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
MFD receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended March 31, 1995 were $708,357 for Class B
shares.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$13,323, $977,825 and $14,272 for Class A, Class B and Class C shares,
respectively, 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,
purchased option transactions and short-term obligations, aggregated
$116,193,500 and $155,479,893, 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 $420,651,437
-------------
Gross unrealized appreciation $ 29,459,510
Gross unrealized depreciation (2,087,754)
-------------
Net unrealized appreciation $ 27,371,756
-------------
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).
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
Year Ended Year Ended Period Ended
March 31, 1995 March 31, 1994<F1> November 30, 1993<F2>
------------------------- ----------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 2,767,565 $ 23,341,811 766,727 $ 6,792,015 51,270 $ 466,122
Shares issued to
shareholders in
reinvestment of
distributions 17,884 151,011 1,368 12,126 134 1,211
Shares reacquired (486,722) (4,100,978) (165,634) (1,507,352) (113) (1,021)
--------- ----------- -------- ------------ ------ ------------
Net increase 2,298,727 $ 19,391,844 602,461 $ 5,296,789 51,291 $ 466,312
========= ============ ======= ============ ====== ============
<CAPTION>
Class B Shares
Year Ended Year Ended Year Ended
March 31, 1995 March 31, 1994<F1> November 30, 1993
------------------------- ----------------------------- --------------------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 3,236,637 $ 27,296,462 1,771,398 $ 16,008,151 13,299,141 $118,452,892
Shares issued to
shareholders in
reinvestment of
distributions 1,465,533 12,377,112 581,143 5,207,213 2,056,699 18,198,605
Shares reacquired (12,503,667) (105,578,609) (3,964,973) (35,578,939) (9,277,213) (83,070,035)
---------- ------------ ---------- ----------- ---------- ------------
Net increase (decrease) (7,801,497) $(65,905,035) (1,612,432) $(14,363,575) 6,078,627 $ 53,581,462
========== ============ ========== ============ ========= ============
<CAPTION>
Class C Shares
Year Ended Year Ended
March 31, 1995 March 31, 1994<F3>
------------------------- -----------------------------
Shares Amount Shares Amount
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,490,674 $ 12,563,035 940,881 $ 8,429,070
Shares issued to
shareholders in
reinvestment of
distributions 38,763 327,583 2,564 22,277
Shares reacquired (999,873) (8,414,408) (196,948) (1,739,438)
------- ------------ ------- ---------
Net increase 529,564 $ 4,476,210 746,497 $ 6,711,909
======= ========== ======= ============
<FN>
<F1>For the four months ended March 31, 1994.
<F2>For the period from the commencement of offering of Class A shares, September 7, 1993 to November 30, 1993.
<F3>For the period from the commencement of offering of Class C shares, January 3, 1994 to March 31, 1994.
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $350 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended March 31, 1995 was $7,371.
(7) Financial Instruments
The Fund 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 March 31, 1995:
Coupon-Indexed Securities
Principal Unrealized
Description Index (000 Omitted) Value Appreciation
------------------------------------------------------------------------------
Rio Grande Valley, TX,
Health Facilities
Development Corp.,
7.72s, 2015 J.J. Kenny $2,800 $2,841,749 $74,985
-------
(8) Restricted Securities
The Fund may invest not more than 15% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At March 31, 1995,
the Fund owned the following restricted security (constituting 0.27% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such security be
registered. The value of this security is determined by valuations supplied by a
pricing service or brokers. This security may be offered to "qualified
institutional buyers" under Rule 144A of the 1933 Act.
Date of Par Amount
Description Acquisition (000 Omitted) Cost Value
--------------------------------------------------------------------------
Crystal City, TX,
Lease Obligations,
10.5s, 2008 5/25/88 $1,252 $948,056 $1,197,172
----------
<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 March 31,
1995, the related statement of operations for the year then ended, the statement
of changes in net assets for the year ended March 31, 1995, the four months
ended March 31, 1994 and the year ended November 30, 1993, and the financial
highlights for the year ended March 31, 1995, the four months ended March 31,
1994 and 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
March 31, 1995 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. 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 March 31, 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
May 5, 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>
MFS MUNICIPAL
INCOME FUND
500 Boylston Street
Boston, MA 02116
MFS(SM)
THE FIRST NAME IN MUTUAL FUNDS
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
MMI-2 5/95 21.5M 02/202/302
