<PAGE>
[LOGO] Semiannual Report
INVESTMENT MANAGEMENT September 30, 1996
MFS(R) MUNICIPAL INCOME FUND
[GRAPHIC OMITTED]
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TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Fund Manager's Overview ................................................... 3
Fund Manager's Profile .................................................... 4
Performance Summary ....................................................... 5
Fund Facts ................................................................ 5
Portfolio of Investments .................................................. 7
Financial Statements ...................................................... 14
Notes to Financial Statements ............................................. 21
Trustees and Officers ..................................................... 29
HIGHLIGHTS
* FOR THE PAST SIX MONTHS THE NET ASSET VALUE OF CLASS A SHARES OF THE
FUND PROVIDED A TOTAL RETURN OF 2.55%, CLASS B SHARES 2.12%, AND CLASS C
SHARES 2.16%.
* PERHAPS THE MOST IMPORTANT ASPECT OF THE MUNICIPAL MARKET HAS BEEN ITS
DRAMATICALLY FAVORABLE PERFORMANCE COMPARED TO THE U.S. TREASURY
MARKET, WITH THE YIELD RATIO OF 30-YEAR, "AAA"-RATED MUNICIPALS
DECLINING FROM 86% TO 80%. THE PRINCIPAL VALUE AND INTEREST ON
TREASURY SECURITIES ARE GUARANTEED BY THE U.S. GOVERNMENT IF HELD TO
MATURITY.
* THE SUPPLY OF NEW ISSUES REMAINS MODERATE AS STATE AND LOCAL
GOVERNMENTS CONTINUE TO BE CONSERVATIVE RELATIVE TO NEW SPENDING AND
BORROWING.
* WE HAVE GENERALLY KEPT PORTFOLIO DURATIONS SHORT, PRIMARILY BY HEDGING
WITH TREASURY FUTURES CONTRACTS, WHICH HAS ENHANCED THE FUND'S
RELATIVE PERFORMANCE GIVEN THE INCREASE IN TREASURY YIELDS.
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders:
[Photo of A. Keith Brodkin]
As we enter the last quarter of 1996, the U.S. economy appears to have settled
into a pattern of moderate growth and inflation -- two factors that we think
can be important contributors to a favorable long-term investment climate.
During the first quarter of 1996, real (inflation-adjusted) economic growth
was 2.3% on an annualized basis, followed by a rate of 4.7% in the second
quarter. Real growth in gross domestic product has surpassed our expectations
this year, and we now expect that growth for all of 1996 could exceed 2.5%.
Although the individual consumer appears to be carrying an excessive debt
load, the consumer sector itself, which represents two-thirds of the economy,
continues to be impressive in its support of the automobile and housing
markets. Consumer spending has also been positively impacted by widespread job
growth and, more recently, increasing wages. However, the latest statistics
appear to show signs of slow consumer spending, especially in overall retail
sales, which have been flat for several months. Furthermore, the economies of
Europe and Japan continue to be in the doldrums, weakening U.S. export markets
while subduing the capital spending plans of American corporations. While
economic growth should continue, we expect it could slacken toward the end of
the year.
In the bond markets, persistent signs of economic weakness led to decreases
in short-term interest rates by the Federal Reserve Board in late 1995 and
early 1996. Should signs of more rapid economic growth and, particularly, of
higher inflation resurface, we would expect the Fed to maintain its anti-
inflationary stance. In the beginning of the year, the bond markets traded in
a narrow range as investors shifted between concern for the lack of a budget
resolution in Washington and hope that sluggish economic reports and low
inflation might lead to lower interest rates. Later, fixed-income markets
began reacting to conflicting signals regarding the economy's strength with
more volatile trading patterns marked by an upward bias in interest rates.
Interest rates may move even higher over the coming months, but we believe the
current rise in bond yields is reaching a point where fixed-income markets are
equitably valued.
Finally, you may notice, this report to shareholders incorporates a number
of changes which we hope you will find informative and useful. Following the
Fund Manager's Overview, we have added additional information on the Fund.
Near the back of the report, telephone numbers and addresses are also listed
if you would like to contact MFS.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
October 10, 1996
<PAGE>
FUND MANAGER'S OVERVIEW
Dear Shareholders:
[Photo of Geoffrey L. Schechter]
The six months ended September 30, 1996 marked a period of significant
volatility in the fixed-income markets. Yields on 30-year U.S. Treasury bonds
ranged from a low of 6.60% to a high of 7.19% before settling at 6.92% on
September 30, which represented an increase of approximately 30 basis points
(0.30%) from the beginning of the period. The increase in rates experienced
during this period was primarily a result of concerns that greater-than-
expected job growth and other strong economic data would translate into higher
inflation rates.
Municipal bonds experienced the same type of volatility during this period.
The yield on long-term, high-grade municipals fluctuated between a low of
5.45% and a high of 6.00% before settling at 5.55% on September 30, which
represented a decline of about 15 basis points (0.15%) from the beginning of
the period. In this environment, Class A shares of the Fund provided a total
return of 2.55%, Class B shares 2.12%, and Class C shares 2.16%. These returns
assume the reinvestment of distributions but exclude the effects of any sales
charges. They compare to a 3.07% return for the Lehman Brothers Municipal Bond
Index (the Lehman Index), an unmanaged index of national municipal bond
investments rated "Baa" or higher, and a 2.79% average return for the tax-
exempt municipal bond fund category as reported by Lipper Analytical Services,
an independent firm that reports mutual fund performance.
Perhaps the most important aspect of the municipal market during the past
six months has been its dramatically favorable performance compared to the
U.S. Treasury market. The yield ratio of 30-year municipals rated "AAA" by
Standard & Poor's to comparable-maturity Treasuries has declined from 86% to
80%. (Note that the principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity.) These trends are
attributable to the municipal market's favorable technical position. New-issue
supply remains moderate as state and local governments continue to be
conservative relative to new spending and borrowing. At the same time, the
surge in redeemed bonds has led to a decrease in outstanding tradable supply.
On the demand side, property and casualty insurance companies have been strong
buyers and retail interest has remained consistent. Further aiding the decline
in yield ratios has been the apparent collapse of support for extreme tax
reform proposals.
The overall strength of municipal credits has also contributed to the
market's good relative performance. The fiscal condition of state and local
governments is the strongest it has been in several years, owing to a healthy
economy and generally sound fiscal practices. Most revenue bond issuers have
also posted favorable results. These trends, along with the continued dramatic
proliferation of bond insurance, have resulted in continued historically
narrow yield spreads in the market. Attractive values and unusual
opportunities in the investment-grade segment of the municipal market have
therefore diminished.
During the past six months, we have generally kept portfolio durations short
relative to the Lehman Index, primarily by hedging with Treasury futures
contracts. This enhanced the relative performance of the Fund given the
increase in Treasury yields. We expect to maintain this position in the
foreseeable future. We have also been working to improve the Fund's dividends
by purchasing bonds with higher book yields, or yields comparable to those at
the time they were issued, and bonds with better call protection, that is,
those not imminently eligible to be called by the issuer. Finally, in light of
very narrow yield spreads, we have tried to improve credit quality when
possible. We feel these strategies will enhance the Fund's performance
potential and earnings sustainability.
We are pleased to report that we recently made some key additions to our
staff of municipal credit analysts, and we believe the group is now one of the
strongest in the industry. The depth and experience of this staff will be
invaluable to us as we examine important credit developments such as: the new
welfare reform bill's effect on specific municipal credits; the fiscal
ramifications of future efforts to balance the federal budget; the
increasingly competitive environment facing electric utilities as a result of
deregulation trends; and the effect of continuing cost pressures on the
changing health care industry.
Respectfully,
/s/ Geoffrey L. Schechter
Geoffrey L. Schechter
Fund Manager
FUND MANAGER'S PROFILE
GEOFFREY SCHECHTER JOINED MFS IN 1993 AS AN INVESTMENT OFFICER IN THE
FIXED INCOME DEPARTMENT. A GRADUATE OF THE UNIVERSITY OF TEXAS AND THE
BOSTON UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION, HE WAS
NAMED ASSISTANT VICE PRESIDENT - INVESTMENTS IN 1994 AND VICE PRESIDENT
- INVESTMENTS IN 1995. HE BECAME MANAGER OF MFS MUNICIPAL INCOME FUND IN
FEBRUARY 1992. MR. SCHECHTER IS A CERTIFIED PUBLIC ACCOUNTANT (C.P.A.)
AND A CHARTERED FINANCIAL ANALYST (C.F.A.).
<PAGE>
FUND FACTS
STRATEGY: THE FUND'S INVESTMENT OBJECTIVE IS TO PROVIDE AS HIGH
A LEVEL OF CURRENT INCOME EXEMPT FROM FEDERAL INCOME
TAXES AS IS CONSIDERED CONSISTENT WITH PRUDENT
INVESTING AND PROTECTION OF SHAREHOLDER'S CAPITAL.
COMMENCEMENT OF
INVESTMENT OPERATIONS: DECEMBER 29, 1986
SIZE: $418.9 MILLION NET ASSETS AS OF SEPTEMBER 30, 1996
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)
6 Months 1 Year 5 Years Life
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Cumulative Total Return +2.55% +5.23% +37.01% +81.70%
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Average Annual Total Return -- +5.23% + 6.50% + 6.31%
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SEC Results -2.32% +0.25% + 5.46% + 5.78%
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CLASS B INVESTMENT RESULTS
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years Life
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Cumulative Total Return +2.12% +4.36% +33.13% +76.60%
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Average Annual Total Return -- +4.36% + 5.89% + 6.00%
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SEC Results -1.86% +0.39% + 5.57% + 6.00%
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CLASS C INVESTMENT RESULTS
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years Life
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Cumulative Total Return +2.16% +4.31% +33.26% +76.76%
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Average Annual Total Return -- +4.31% + 5.91% + 6.01%
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SEC Results +1.16% +3.32% + 5.91% + 6.01%
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All results represent past performance and are not 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.
Class A SEC results include the maximum 4.75% sales charge. Class B SEC
results reflect the applicable contingent deferred sales charge (CDSC) which
declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C shares
have no initial sales charge, but along with Class B shares, have higher
annual fees and expenses than Class A shares. As of April 1, 1996, Class C
shares redeemed within 12 months of purchase will be subject to a 1% CDSC. See
the prospectus for details.
Class A and Class C share performance includes the performance of the Fund's
Class B shares for periods prior to the commencement of offering of Class A
shares on September 7, 1993 and of Class C shares on January 3, 1994. Sales
charges and operating expenses for Class A, Class B, and Class C shares
differ. The Class B share performance, which is included within the Class A
share SEC performance has been adjusted to reflect the initial sales charge
generally applicable to Class A shares rather than the CDSC generally
applicable to Class B shares. The Class B share performance included within
the Class C share SEC performance, has been adjusted to reflect the lower CDSC
generally applicable to Class C shares, rather than the higher CDSC generally
applicable to Class B shares. Class A and Class C share performance has not
been adjusted, however, to reflect differences in operating expenses (e.g.,
Rule 12b-1 fees), which generally are higher for Class B shares, and not
significantly different for Class C shares.
<PAGE>
PORTFOLIO OF INVESTMENTS (Unaudited) - September 30, 1996
Municipal Bonds - 99.6%
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Principal Amount
Issuer (000 Omitted) Value
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General Obligation - 8.9%
Arlington, TX, Independent School
Refunding Rev., PSF, 0s, 2007 $ 3,070 $ 1,763,193
Commonwealth of Massachusetts, 7s, 2007 2,590 2,838,303
Crowley, TX, Independent School District,
Capital Appreciation, FGIC, 0s, 2015 3,690 1,230,098
Escondido, CA, Unified High School
District, Capital Appreciation, MBIA,
0s, 2013 1,480 543,708
Escondido, CA, Unified High School
District, Capital Appreciation, MBIA,
0s, 2018 2,000 532,800
Escondido, CA, Unified High School
District, Capital Appreciation, MBIA,
0s, 2020 2,000 472,560
Harris County, TX, Certificates of
Obligation, (Astrodome Improvements
Project), 8.1s, 2008 1,385 1,495,579
Lewisville, TX, Independent School
District, Capital Appreciation, 0s, 2019 2,500 651,000
New Orleans, LA, AMBAC, 0s, 2015 5,800 1,882,042
New York, NY, 8.2s, 2003 5,000 5,678,600
New York, NY, 7.5s, 2008 1,350 1,486,553
Northwest Texas, TX, Independent School
District, AMBAC, 0s, 2011 3,000 1,287,780
Rio, CA, School District, Certificate of
Participation, FSA, 0s, 2028 1,140 660,721
State of Texas, 7.625s, 2018 14,405 15,594,853
State of Wisconsin, 7.6s, 2020 980 1,024,296
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$ 37,142,086
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State and Local Appropriation - 1.9%
New York Dormitory Authority Rev. (City
University), 7.5s, 2010 $ 2,500 $ 2,871,600
New York Medical Care Facility Financial
Agency Rev., 7.875s, 2008 745 829,751
New York Medical Care Facility Financial
Agency Rev., (Mental Health Services),
7.75s, 2020 1,020 1,114,463
New York State Medical Care Facility
Financial Agency, 7.5s, 2021 540 596,084
Philadelphia, PA, Regional Port Authority
Lease Rev., MBIA, MVRIC, 8.57s, 2020*** 2,500 2,590,075
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$ 8,001,973
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Refunded and Special Obligations* - 22.9%
Adams County, CO, Single Family Mortgage
Rev., 8.875s, 2011 $ 2,510 $ 3,282,051
Chapel Hill, NC, Parking Facilities Rev.
(Rosemary Street Project), 8.125s, 2013 940 1,079,656
Chapel Hill, NC, Parking Facilities Rev.
(Rosemary Street Project), 8.25s, 2023 1,000 1,153,250
Charleston County, SC, Resource Recovery
Rev. (Foster Wheeler), 9.25s, 2010 3,200 3,445,440
Colorado Health Retirement Facilities,
0s, 2020 2,150 413,789
Colquitt County, GA, Development
Authority Rev., 0s, 2021 5,725 1,001,532
Colquitt County, GA, Development
Authority Rev., 0s, 2021 2,815 492,456
Commonwealth of Massachusetts, 7.5s, 2007 1,990 2,247,148
Commonwealth of Massachusetts, 7.5s, 2007 2,010 2,269,732
Illinois Education and Facilities
Authority, 8.75s, 2015 60 61,802
Massachusetts Health & Education
Facilities Authority (Suffolk
University), 8s, 2010 1,000 1,128,270
Massachusetts Industrial Finance Agency,
Tunnel Rev. (Mass. Turnpike), 9s, 2020 2,840 3,332,910
Massachusetts Water Resources Authority,
7.625s, 2014 3,200 3,574,784
Matagorda County, TX, Pollution Control
Rev. (Central Power & Light), 7.875s, 2016 1,500 1,539,600
New York City, NY, 8s, 2018 2,970 3,434,241
New York Local Government Assistance
Corp., 7.25s, 2018 2,750 3,087,672
New York Medical Care Facilities Finance
Agency, 7.75s, 2020 1,035 1,156,737
New York Medical Care Facilities Finance
Agency Rev., 8.875s, 2007 680 722,860
New York Medical Care Facilities Finance
Agency Rev., 8.25s, 2010 4,140 4,860,484
New York Medical Care Facilities Finance
Agency Rev., 7.875s, 2020 3,565 4,047,380
New York Medical Care Facilities Finance
Agency Rev., 7.875s, 2020 2,580 2,850,462
New York Medical Care Facilities Finance
Agency Rev., 7.5s, 2021 1,460 1,649,596
New York Medical Care Facilities Finance
Agency Rev. (Mental Health Services),
7.875s, 2008 670 760,658
New York Urban Development Corp.,
7.75s, 2014 5,000 5,571,500
New York Urban Development Corp.
(Correctional Facilities), 7.3s, 2008 2,340 2,656,321
New York Urban Development Corp. Rev.,
7.5s, 2011 2,500 2,832,100
Pennsylvania Industrial Development
Authority Rev., 7s, 2011 7,000 7,789,180
Philadelphia, PA, Municipal Authority
Rev., FGIC, 7s, 2004 2,000 2,243,300
Rhode Island Depositors Economic
Protection Corp., Special Obligation,
5.75s, 2021 845 838,341
Richmond County, GA, Development
Authority Rev., 0s, 2021 9,000 1,593,630
Savannah, Ga, Economic Development
Authority, 0s, 2021 4,500 787,230
Texas Turnpike Authority Rev. (Houston
Ship Channel Bridge), 0s, 2002 3,000 4,213,380
Washington County, PA, Authority Lease
Rev., AMBAC, 7.45s, 2018 1,200 1,347,636
Washington Public Power Supply System
Rev., Nuclear Project #1, 14.375s, 2001 1,000 1,250,070
Washington Public Power Supply System
Rev., Nuclear Project #1, 7.25s, 2015 3,350 3,677,529
Washington Public Power Supply System
Rev., Nuclear Project #2, 7.375s, 2012 5,355 5,960,383
Washington Public Power Supply System
Rev., Nuclear Project #3, 7.25s, 2015 5,000 5,488,850
West Virginia Water Development
Authority, 8.625s, 2028 1,000 1,104,390
West Virginia Water Development
Authority, 8.125s, 2029 1,000 1,094,550
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$ 96,040,900
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Airport and Port Revenue - 13.7%
Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(American Airlines), 7.875s, 2025 $ 3,500 $ 3,731,735
Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.4s, 2018 1,995 2,170,540
Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.85s, 2018 2,895 3,248,074
Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.85s, 2018 6,425 7,208,593
Cleveland, OH, Airport Special Facilities
Rev. (Continental Airlines), 9s, 2019 4,300 4,539,725
Connecticut Airport Rev., FGIC, 7.65s, 2012 1,000 1,141,320
Dallas-Fort Worth, TX, International
Airport (American Airlines), 7.5s, 2025 5,000 5,316,600
Denver, CO, City & County Airport Rev.,
8.75s, 2023 4,750 5,575,075
Hawaii Airports Systems Rev., FGIC, 7.5s, 2020 5,350 5,889,922
Hillsborough County, FL, Aviation
Authority Rev. (USAir), 8.6s, 2022 2,000 2,167,300
Kenton County, KY, Airport Board Special
Facilities (Delta Airlines), 7.5s, 2020 1,000 1,067,690
Lake Charles, LA, Harbor & Terminal
District Port (Occidental Petroleum),
7.2s, 2020 1,000 1,082,570
St. Augustine FL, Airport Authority,
(Grumman Repair Facility), 11s, 2004 500 523,185
Tulsa, OK, Municipal Airport Trust Rev.
(American Airlines), 7.375s, 2020 10,000 10,561,600
Virginia Port Authority, 8.2s, 2008 3,000 3,229,920
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$ 57,453,849
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Electric and Gas Utility Revenue - 16.4%
Austin, TX, Utility Systems Rev., AMBAC,
0s, 2010 $ 7,500 $ 3,336,675
Austin, TX, Utility Systems Rev., AMBAC,
6.75s, 2011** 3,325 3,528,590
Brazos River Authority, TX, Pollution
Control Rev. (Texas Utilities), 9.875s, 2017 4,790 5,097,710
Burke County, GA, Pollution Control Rev.
(Georgia Power Co./Vogtle Project),
9.375s, 2017 2,650 2,853,732
Chelan County, WA, Public Utility
District #1, Consolidated Rev., 9.3s, 2017 4,450 4,725,143
Chicago, IL, Gas Supply Rev. (People's
Gas), 8.1s, 2020 2,000 2,222,380
Georgia Municipal Electric Authority,
MBIA, 6.375s, 2016 2,000 2,136,560
Intermountain Power Agency, UT, MBIA, 6s, 2016 4,000 4,072,240
Midland Michigan Environmental
Development Authority, Pollution
Control Rev. (Midland Cogeneration),
9.5s, 2009 2,000 2,178,880
Montana Board of Investment Resources,
Yellowstone Energy, 7s, 2019 1,000 924,150
Municipal Electric Authority, GA, Special
Obligation, Fourth Crossover Project,
MBIA, 6.5s, 2020 7,350 8,112,415
North Carolina Eastern Municipal Power
Agency, 7s, 2007 3,250 3,551,470
Pittsylvania County, VA, Industrial
Development Authority Rev., 7.5s, 2014 6,000 6,218,580
Southern, MN, Municipal Power Agency
(Power Supply Systems Rev.), Capital
Appreciation, 0s, 2024 4,250 850,425
Southern, MN, Municipal Power Agency
(Power Supply Systems Rev.), Capital
Appreciation, MBIA, 0s, 2020 13,500 3,461,535
Southern, MN, Municipal Power Agency
(Power Supply Systems Rev.), Capital
Appreciation, MBIA, 0s, 2021 10,660 2,577,695
Southern, MN, Municipal Power Agency
(Power Supply Systems Rev.), MBIA, 0s, 2025 6,400 1,207,040
Tampa, FL, Utility Tax, Capital
Appreciation, AMBAC, 0s, 2017 2,110 647,179
Tampa, FL, Utility Tax, Capital
Appreciation, AMBAC, 0s, 2021 2,625 631,522
Tampa, FL, Utility Tax, Capital
Appreciation, AMBAC, 0s, 2021 1,950 452,342
Tampa, FL, Utility Tax, Capital
Appreciation, AMBAC, 0s, 2022 1,955 427,696
Texas Municipal Power Agency Revenue,
AMBAC, 0s, 2011 5,930 2,506,077
Washington Public Power Supply System
Rev., Nuclear Project #1, 7s, 2011 4,050 4,448,763
Washington Public Power Supply Systems,
BIGI, 0s, 2013 4,000 1,467,040
Washington Public Power Supply Systems,
BIGI, 0s, 2014 3,350 1,157,190
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$ 68,793,029
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Health Care Revenue - 5.2%
Bell County, TX, Health Facilities
Development Corp. (Advanced Living
Technology), 10.5s, 2018 $ 1,870 $ 1,496,000
Bell County, TX, Health Facilities
Development Corp. (Kings Daughters Hospital),
9.25s, 2008 1,575 1,711,647
Colorado Health Retirement Facilities
Rev., 0s, 2022 10,450 1,750,898
Fulton County, GA, Residential Care
Facilities, Elderly Authority Rev.
(Lenbrook Square Foundation), 9.75s, 2017 470 480,340
Gadsden County, FL, Industrial
Development Authority (RHA/FLA
Properties), 10.45s, 2018 1,925 1,978,823
Louisiana Public Facilities Authority
(Southwest Medical Center), 11s, 2006 1,503 614,338
Massachusetts Health & Education
Facilities Authority (New England
Deaconess Hospital), 6.875s, 2022 4,000 4,186,480
Massachusetts Health & Education
Facilities Authority (New England
Deaconess Hospital), 7.2s, 2022 2,500 2,663,000
Montgomery County, PA, Industrial
Development Authority, Health
Facilities Rev., 8.5s, 2023 300 295,125
Philadelphia, PA, Industrial Development
Authority, 10.25s, 2018 1,485 1,511,062
Philadelphia, PA, Industrial Development
Authority, 10.25s, 2018 1,945 2,004,478
Tennessee State Vets Home Board Rev.
(Humboldt Project), 6.75s, 2021 1,000 1,037,540
Torrance, CA, Hospital Rev., 6.875s, 2015 1,740 1,815,481
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$ 21,545,212
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Industrial Revenue (Corporate Guarantee) - 3.0%
Burns Harbor, IN, Solid Waste Disposal
Facilities Rev. (Bethlehem Steel), 8s, 2024 $ 3,000 $ 3,197,340
Dayton, OH, Special Facilities Rev.
(Emery Air Freight), 12.5s, 2009 1,000 1,140,600
Erie County, PA (International Paper),
7.875s, 2016 1,200 1,303,788
Northampton County, PA, Industrial
Development Authority (Bethlehem
Steel), 7.55s, 2017 1,200 1,239,204
Port of New Orleans, LA (Avondale
Industries), 8.5s, 2014 2,000 2,198,120
Port of New Orleans, LA (Continental
Grain Co.), 7.5s, 2013 1,000 1,034,920
West Side Calhoun County, TX, Navigation
District (Union Carbide), 8.2s, 2021 2,000 2,207,660
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$ 12,321,632
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Insured Health Care Revenue - 4.2%
Clermont County, OH, Hospital Facilities
Rev. (Mercy Health Systems), 9.651s,
2021, AMBAC*** $ 1,500 $ 1,708,560
Fredericksburg, VA, Industrial
Development Authority, Hospital
Facilities Rev., FGIC, INFLOS, 9.367s, 2023*** 1,500 1,671,405
Henrico County, VA, Industrial
Development Authority Rev., FSA, RIBS,
7.984s, 2027 5,000 5,035,750
Jefferson County, KY, Hospital Rev.
(Alliant Health System), MBIA, 8.508s, 2014*** 1,500 1,614,075
Mississippi Hospital Equipment &
Facilities Authority Rev. (Rush Medical
Foundation), 6.7s, 2018 1,000 1,054,270
Rio Grande Valley, TX, Health Facilities
Development Corp., MBIA, 7.86s, 2015++ 2,800 2,914,828
Tulsa, OK, Industrial Authority, Hospital
Rev. (St. Johns Medical Center), MBIA,
0s, 2006 6,430 3,674,938
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$ 17,673,826
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Other Revenue - 1.4%
Crystal City, TX, Lease Obligations,
10.5s, 2008+ $ 1,240 $ 620,378
Dade County, FL, Special Obligation,
Capital Appreciation, AMBAC, 0s, 2033 8,645 845,395
Illinois Dedicated Tax, Civic Center,
AMBAC, 0s, 2016 5,000 1,505,550
Martha's Vineyard, MA, Land Bank, 8.125s, 2011 1,800 1,839,060
Massachusetts Health & Education
Facilities Authority (Learning Center
for Deaf Children), 9.25s, 2014 1,000 1,061,600
-------------
$ 5,871,983
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Multi-Family Housing Revenue - 3.4%
Colorado Housing Finance Authority, 8.3s, 2023 $ 2,750 $ 2,880,817
Maryland Community Development
Administration, 8.5s, 2028 3,000 3,080,130
Pennsylvania Housing Finance Agency,
7.6s, 2013 1,000 1,068,630
Vermont Housing Finance Agency, 8.375s, 2020 2,725 2,821,547
Wisconsin Housing & Economic Development
Authority, 7.2s, 2013 4,000 4,163,640
-------------
$ 14,014,764
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Sales and Excise Tax Revenue - 0.6%
Metropolitan Pier & Exposition Authority,
IL, MBIA, 0s, 2016 $ 8,400 $ 2,610,636
- -----------------------------------------------------------------------------
Single Family Housing Revenue - 7.6%
Berkeley, Brookes, & Fayette Counties,
WV, MBIA, 0s, 2016 $14,000 $ 1,623,020
Chicago, IL, Residential Mortgage Rev.,
MBIA, 0s, 2009 4,890 1,987,443
Cook County, IL, Single Family Housing,
0s, 2015 9,045 1,152,242
De Kalb, IL, Single Family Mortgage Rev.,
7.45s, 2009 245 258,213
Delaware Housing Authority Rev., 9.125s, 2018** 815 837,005
Harris County, TX, Housing Finance Corp.,
9.625s, 2003 210 210,842
Harris County, TX, Housing Finance Corp.,
9.875s, 2014 380 381,520
Illinois Housing Development Agency, 0s, 2016 3,835 477,918
Kentucky Housing Corp., 7.45s, 2023 5,185 5,322,921
Minnesota Housing Finance Agency, 9s, 2018 4,655 4,762,996
Mississippi Home Corp., Single Family
Rev., 7.1s, 2023 715 748,205
New Hampshire Housing Finance Authority,
7.2s, 2010 6,430 6,726,487
New Hampshire Housing Finance Authority,
8.625s, 2013 740 765,626
Utah Housing Finance Agency, 8.625s, 2019 1,200 1,248,768
Utah Housing Finance Agency, 9.125s, 2019 100 103,855
Utah Housing Finance Agency, 9.25s, 2019 90 93,687
West Virginia Housing Development Fund,
7.85s, 2014 5,185 5,333,602
-------------
$ 32,034,350
- -----------------------------------------------------------------------------
Solid Waste Revenue - 0.8%
Maryland Energy Financing Administration
(Solid Waste), 9s, 2016 $ 4,000 $ 3,306,920
- -----------------------------------------------------------------------------
Student Loan Revenue - 1.4%
Pennsylvania Higher Education Assistance
Agency, Student Loan Rev., RIBS, AMBAC,
9.834s, 2026*** $ 5,500 $ 5,767,300
- -----------------------------------------------------------------------------
Transportation - 3.2%
Foothill, CA, Eastern Transportation Co.,
0s, 2012 $ 5,000 $ 3,082,100
Foothill, CA, Eastern Transportation Co.,
0s, 2013 5,000 3,103,650
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s, 2004 3,000 1,841,790
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s, 2005 1,800 1,025,028
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s, 2009 6,750 2,857,478
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s, 2014 5,000 1,625,500
-------------
$ 13,535,546
- -----------------------------------------------------------------------------
Universities - 1.0%
Islip, NY, Community Development Agency
Rev. (Institute of Technology), 7.5s, 2026 $ 2,000 $ 2,030,060
Massachusetts Health & Education
Facilities (Harvard University), 6.25s, 2020 1,000 1,077,740
St. Joseph County, IN, Educational
Facilities Rev. (University of Notre
Dame), 6.5s, 2026 1,000 1,115,540
-------------
$ 4,223,340
- -----------------------------------------------------------------------------
Water and Sewer Utility Revenue - 4.0%
Massachusetts Water Resources Authority,
6.5s, 2019 $ 7,495 $ 8,213,920
New Jersey Turnpike Authority Rev., MBIA,
6.5s, 2016 1,450 1,617,040
New York City Municipal Water Finance
Authority, 6s, 2025 4,000 4,013,360
Salt Lake County, UT, Water Conservancy
District Rev., AMBAC, 0s, 2008 2,100 1,066,275
Salt Lake County, UT, Water Conservancy
District Rev., AMBAC, 0s, 2009 3,800 1,796,070
-------------
$ 16,706,665
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $387,240,942) $ 417,044,011
Other Assets, Less Liabilities - 0.4% 1,845,050
- -----------------------------------------------------------------------------
Net Assets - 100.0% $ 418,889,061
- -----------------------------------------------------------------------------
+ Restricted security.
++ Indexed security.
* Dates indicated are refunding dates.
** Security segregated as collateral for an open futures contract.
*** Inverse floating rate security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- ------------------------------------------------------------------------------
September 30, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $387,240,942) $417,044,011
Receivable for Fund shares sold 224,749
Receivable for investments sold 726,614
Receivable for daily variation margin on open futures contracts 28,125
Interest receivable 7,694,709
Other assets 5,031
------------
Total assets $425,723,239
------------
Liabilities:
Cash overdraft $ 1,815,723
Distributions payable 817,790
Payable for Fund shares reacquired 506,613
Payable for investments purchased 3,488,124
Payable to affiliates -
Management fee 25,406
Shareholder servicing agent fee 6,746
Distribution fee 26,268
Accrued expenses and other liabilities 147,508
------------
Total liabilities $ 6,834,178
------------
Net assets $418,889,061
============
Net assets consist of:
Paid-in capital $401,426,382
Unrealized appreciation on investments 29,645,937
Accumulated net realized loss on investments (12,250,691)
Accumulated undistributed net investment income 67,433
------------
Total $418,889,061
============
Shares of beneficial interest outstanding 48,678,272
============
Class A shares:
Net asset value per share
(net assets of $134,331,751 / 15,622,216 shares of
beneficial interest outstanding) $8.60
=====
Offering price per share (100 / 95.25) $9.03
=====
Class B shares:
Net asset value and offering price per share
(net assets of $268,581,391 / 31,201,346 shares of
beneficial interest outstanding) $8.61
=====
Class C shares:
Net asset value and offering price per share
(net assets of $15,975,919 / 1,854,710 shares of beneficial
interest outstanding) $8.61
=====
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,
Class B, and Class C shares.
See notes to financial statements
<PAGE>
Statement of Operations (Unaudited)
- ------------------------------------------------------------------------------
Six Months Ended September 30, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income $15,416,687
-----------
Expenses -
Management fee $ 1,616,830
Trustees' compensation 23,571
Shareholder servicing agent fee (Class A) 95,847
Shareholder servicing agent fee (Class B) 315,834
Shareholder servicing agent fee (Class C) 11,734
Distribution and service fee (Class A) 159,744
Distribution and service fee (Class B) 1,435,610
Distribution and service fee (Class C) 78,228
Custodian fee 97,958
Postage 20,807
Auditing fees 18,338
Printing 17,276
Legal fees 1,619
Miscellaneous 154,601
-----------
Total expenses $ 4,047,997
Fees paid indirectly (15,035)
-----------
Net expenses $ 4,032,962
-----------
Net investment income $11,383,725
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(2,579,339)
Futures contracts 1,112,229
-----------
Net realized loss on investments $(1,467,110)
-----------
Change in unrealized depreciation -
Investments $ (210,280)
Futures contracts (27,757)
-----------
Net unrealized loss on investments $ (238,037)
-----------
Net realized and unrealized loss on investments $(1,705,147)
-----------
Increase in net assets from operations $ 9,678,578
===========
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended
September 30, 1996 March 31,
(Unaudited) 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 11,383,725 $ 23,512,793
Net realized gain (loss) on investments and futures transactions (1,467,110) 196,458
Net unrealized gain (loss) on investments and futures transactions (238,037) 2,512,218
------------ ------------
Increase in net assets from operations $ 9,678,578 $ 26,221,469
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (3,659,024) $ (5,156,665)
From net investment income (Class B) (7,026,203) (17,735,118)
From net investment income (Class C) (388,484) (621,010)
In excess of net investment income (Class A) -- (3,546)
In excess of net investment income (Class B) -- (12,197)
In excess of net investment income (Class C) -- (427)
------------ ------------
Total distributions declared to shareholders $(11,073,711) $(23,528,963)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 55,151,408 $192,708,458
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 6,038,712 12,674,803
Cost of shares reacquired (86,202,089) (240,907,535)
------------ ------------
Decrease in net assets from Fund share transactions $(25,011,969) $ (6,567,815)
------------ ------------
Total decrease in net assets $(26,407,102) $ (3,875,309)
Net assets:
At beginning of period 445,296,163 449,171,472
------------ ------------
At end of period (including accumulated undistributed
(distributions in excess of) net investment income of
$67,433 and $(242,580) respectively) $418,889,061 $445,296,163
============ ============
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------------------------
Six Months
Ended
September 30, Year Ended March 31, Year Ended
1996 ---------------------------------- November 30,
(Unaudited) 1996 1995 1994+++ 1993**
- ----------------------------------------------------------------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.62 $ 8.56 $ 8.56 $ 8.99 $ 9.15
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.25 $ 0.51 $ 0.50 $ 0.15 $ 0.12
Net realized and unrealized gain (loss) on investments (0.02) 0.05 0.02 (0.51) (0.16)
------ ------ ------ ------ ------
Total from investment operations $ 0.23 $ 0.56 $ 0.52 $(0.36) $(0.04)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income|| $(0.25) $(0.50) $(0.52) $(0.02) $(0.11)
From net realized gain on investments -- -- -- (0.01) --
In excess of net realized gain on investments -- -- -- (0.04) (0.01)
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.25) $(0.50) $(0.52) $(0.07) $(0.12)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.60 $ 8.62 $ 8.56 $ 8.56 $ 8.99
====== ====== ====== ====== ======
Total return(+) 2.55%++ 6.81% 6.33% (7.90)%+ (1.80)%+
Ratios (to average net assets)/Supplemental data(S)
Expenses## 1.31%+ 1.28% 1.13% 1.07%+ 0.76%+
Net investment income 5.87%+ 5.75% 6.20% 5.31%+ 4.94%+
Portfolio turnover 14% 23% 25% 9% 30%
Net assets at end of period (000 omitted) $134,332 $121,903 $25,270 $5,595 $461
<FN>
**For the period from the commencement of offering of Class A shares, September 7, 1993 to November 30, 1993.
+Annualized.
++Not annualized.
+++For the four-month period ended March 31, 1994.
(+)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.
(S)The distributor did not impose the Class A distribution fee for the year ended March 31, 1996. 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 1.38%
and 5.66%, respectively.
#Per share data for the periods subsequent to November 30, 1993 are 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.
||Includes distributions in excess of net investment income of $0.0003 per share for Class A, Class B, and Class C shares for the
year ended March 31, 1996.
</FN>
</TABLE>
See note to financial statements
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months
Ended Year Ended
September 30, Year Ended March 31, November 30,
1996 ---------------------------------- ---------------------
(Unaudited) 1996 1995 1994+++ 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
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 $ 8.63 $ 8.57 $ 8.56 $ 8.99 $ 8.73 $ 8.50
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.22 $ 0.43 $ 0.44 $ 0.14 $ 0.42 $ 0.47
Net realized and unrealized
gain (loss) on investments (0.03) 0.06 0.00 (0.51) 0.42 0.26
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.19 $ 0.49 $ 0.44 $(0.37) $ 0.84 $ 0.73
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income|| $(0.21) $(0.43) $(0.43) $(0.01) $(0.45) $(0.48)
From net realized gain on investments -- -- -- (0.01) (0.10) --
In excess of net investment income -- -- -- -- (0.03) --
In excess of net realized gain on investments -- -- -- (0.04) -- --
From paid-in-capital -- -- -- -- -- (0.02)
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.21) $(0.43) $(0.43) $(0.06) $(0.58) $(0.50)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 8.61 $ 8.63 $ 8.57 $ 8.56 $ 8.99 $ 8.73
====== ====== ====== ====== ====== ======
Total return 2.12%++ 5.87% 5.32% (8.97)%+ 9.95% 8.82%
Ratios (to average net assets)/Supplemental data:
Expenses## 2.12%+ 2.13% 2.16% 2.24%+ 2.11% 2.03%
Net investment income 5.03%+ 4.90% 5.15% 4.74%+ 4.92% 5.50%
Portfolio turnover 14% 23% 25% 9% 30% 52%
Net assets at end of period (000 omitted) $268,581 $306,889 $412,965 $479,478 $518,179 $449,949
<FN>
+Annualized.
++Not annualized.
+++For the four-month period ended March 31, 1994.
#Per share data for the periods subsequent to November 30, 1993 are 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.
||Includes distributions in excess of net investment income of $0.0003 per share for Class A, Class B, and Class C shares for the
year ended March 31, 1996.
</FN>
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
---------------------------------------------------------------------
1991 1990 1989 1988 1987*
- -----------------------------------------------------------------------------------------------------------------------------------
Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.47
------ ------ ------ ------ ------
Income from investment operations -
Net investment loss $ 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)%+
Ratios (to average net assets)/Supplemental data:
Expenses 2.04% 2.05% 2.07% 2.09% 2.03%+
Net investment loss 5.82% 5.99% 6.09% 6.38% 6.00%+
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>
*For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
+Annualized.
</FN>
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Six Months
Ended
September 30, Year Ended March 31,
1996 -----------------------------------------
(Unaudited) 1996 1995 1994**
- ---------------------------------------------------------------------------------------------------------------------
Class C
- ---------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.64 $ 8.57 $ 8.56 $ 9.07
------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.22 $ 0.43 $ 0.44 $ 0.09
Net realized and unrealized gain (loss) on
investments (0.04) 0.07 0.01 (0.59)
------ ------ ------ ------
Total from investment operations $ 0.18 $ 0.50 $ 0.45 $(0.50)
------ ------ ------ ------
Less distributions declared to shareholders
from net investment income|| $(0.21) $(0.43) $(0.44) $(0.01)
------ ------ ------ ------
Net asset value - end of period $ 8.61 $ 8.64 $ 8.57 $ 8.56
====== ====== ====== ======
Total return 2.16%++ 5.94% 5.39% (19.42)%+
Ratios (to average net assets)/Supplemental data:
Expenses## 2.06%+ 2.05% 2.09% 2.18%+
Net investment income 5.11%+ 4.95% 5.23% 4.62%+
Portfolio turnover 14% 23% 25% 9%
Net assets at end of period (000 omitted) $15,976 $16,504 $10,936 $6,393
<FN>
**For the period from the commencement of offering of Class C shares, January 3, 1994 to March 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to November 30, 1993 are based on average shares outstanding.
##For fiscal periods ending after September 1, 1995, the Fund's expenses are calculated without reductions for fees paid
indirectly.
||Includes distributions in excess of net investment income of $0.0003 per share for Class A, Class B, and Class C shares for the
year ended March 31, 1996.
</FN>
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(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
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect: the reported amounts of assets and liabilities;
disclosure of contingent assets and liabilities at the date of the financial
statements; and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, are valued on the
basis of valuations furnished by dealers or by a pricing service with
consideration to factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in
60 days or less, are valued at amortized cost, which approximates market
value. Futures contracts, options and options on futures contracts listed on
commodities exchanges are valued at closing settlement prices. Over-the-
counter options are valued by brokers through the use of a pricing model which
takes into account closing bond valuations, implied volatility, and short-term
repurchase rates. Securities for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Trustees.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or contracts based on financial indices at a fixed
price on a future date. In entering such contracts, the Fund is required to
deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Fund
each day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized
gains or losses by the Fund. The Fund's investment in futures contracts is
designed to hedge against anticipated future changes in interest 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 interest rate futures for purposes other
than hedging may be made when a Fund has cash on hand and wishes to
participate in anticipated market appreciation while the cash is being
invested. Should interest 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.
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 owed
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 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.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on
the Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. The Fund files a tax return annually
using tax accounting methods required under provisions of the Code which may
differ from generally accepted accounting principles, the basis on which these
financial statements are prepared. Accordingly, the amount of net investment
income and net realized gain reported on these financial statements may differ
from that reported on the Fund's tax return and, consequently, the character
of distributions to shareholders reported in the financial highlights may
differ from that reported to shareholders on Form 1099-DIV.
Distributions paid by the Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for federal
income tax purposes because the Fund intends to meet certain requirements of
the Code applicable to regulated investment companies, which will enable the
Fund to pay exempt-interest dividends. The portion of such interest, if any,
earned on private activity bonds issued after August 7, 1986 may be considered
a tax-preference item to shareholders. Distributions to shareholders are
recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return
of capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains.
At March 31, 1996, the Fund, for federal income tax purposes, had capital loss
carryforward of $10,162,094, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of their utilization
or expiration on March 31, 2002 ($1,415,952), March 31, 2003 ($6,517,530), and
March 31, 2004 ($2,228,612).
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, and distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on settled
shares outstanding, 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 the Fund's average daily net assets and 6.43% of its gross income
for its then-current fiscal year.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has an unfunded
defined benefit plan for all its independent Trustees and Mr. Bailey. Included
in Trustees' compensation is a net periodic pension expense of $5,761 for the
period ended September 30, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$11,994 as its portion of the sales charge on sales of Class A shares for the
period ended September 30, 1996.
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 who 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 $36,570 for the period ended September 30, 1996. Payment of the
0.10% per annum Class A distribution fee will commence on such date as the
Trustees of the Trust may determine. Fees incurred under the distribution plan
during the period ended September 30, 1996 were 0.25%, of the Fund's 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 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 who 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 $47,910
and $4,993 for Class B and Class C shares, respectively, for the period ended
September 30, 1996. Fees incurred under the distribution plans during the
period ended September 30, 1996 were 1.00% of the Fund's average daily net
assets attributable to Class B and Class C shares on an annualized basis.
Purchases over $1 million of Class A shares are subject to a contingent
deferred sales charge in the event of a shareholder redemption within 12
months following such purchase. A contingent deferred sales charge is imposed
on shareholder redemptions of Class B shares in the event of a shareholder
redemption within six years of purchase. A contingent deferred sales charge is
imposed on shareholder redemptions of Class C shares in the event of a
shareholder redemption within 12 months of purchases made on or after April 1,
1996. MFD receives all contingent deferred sales charges. Contingent deferred
sales charges imposed during the period ended September 30, 1996 were $0,
$308,629, and $495 for Class A, Class B, and Class C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, 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
$59,118,752 and $79,880,594, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Funds, as computed on a federal income tax basis, are
as follows (000 omitted):
Aggregate cost $387,240,942
============
Gross unrealized appreciation $ 32,398,597
Gross unrealized depreciation (2,595,528)
------------
Net unrealized appreciation $ 29,803,069
============
(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, 1996 March 31, 1996
--------------------------- -----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 5,100,885 $ 43,668,453 17,027,633 $ 148,288,168
Shares issued to
shareholders in
reinvestment of
distributions 197,755 1,693,475 261,154 2,281,429
Shares
reacquired (3,810,733) (32,625,596) (6,107,403) (53,310,814)
--------- ------------ ---------- -------------
Net increase 1,487,907 $ 12,736,332 11,181,384 $ 97,258,783
========= ============ ========== =============
Class B Shares
Period Ended Year Ended
September 30, 1996 March 31, 1996
--------------------------- -----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 991,833 $ 8,507,510 3,291,894 $ 30,271,749
Shares issued in
connection with
the acquisition
of Advantage
Fund -- -- 3,398,645 28,956,459
Shares issued to
shareholders in
reinvestment of
distributions 473,736 4,060,559 1,143,435 9,961,921
Shares
reacquired (5,814,651) (49,875,379) (20,493,625) (178,612,133)
---------- ------------- ----------- -------------
Net decrease (4,349,082) $ (37,307,310) (12,659,651) $(109,422,004)
========== ============= =========== =============
Class C Shares
Period Ended Year Ended
September 30, 1996 March 31, 1996
--------------------------- -----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 342,113 $ 2,937,467 1,614,476 $14,148,541
Shares issued to
shareholders in
reinvestment of
distributions 33,192 284,679 49,315 431,453
Shares
reacquired (431,656) (3,701,114) (1,029,259) (8,984,588)
------- ----------- --------- -----------
Net increase
(decrease) (56,351) $ (478,968) 634,532 $ 5,595,406
======= =========== ========= ===========
(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, 1996 was $2,115.
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates. These financial instruments include
futures contracts. The notional or contractual amounts of these instruments
represent the investment the Fund has in particular classes of financial
instruments and does not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered.
The following is a summary of such securities held at September 30, 1996:
Futures Contracts
<TABLE>
<CAPTION>
Unrealized
Description Expiration Contracts Position Depreciation
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UST Dec 96 December, 1996 100 UST Short ($157,132)
</TABLE>
At September 30, 1996, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
The Fund also invests in indexed securities whose value may be linked to
interest rates, 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, 1996:
<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, 7.86s, 2015 J.J. Kenny $2,800 $2,914,828 $196,504
========
</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,
1996, the Fund owned the following restricted security (constituting 0.15% 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
securities 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 $1,240 $939,722 $620,378
========
</TABLE>
--------------------------------------------
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>
<TABLE>
MFS(R) MUNICIPAL INCOME FUND
<C> <C>
TRUSTEES ASSISTANT SECRETARY
A. Keith Brodkin* - Chairman and President James R. Bordewick, Jr.*
Richard B. Bailey* - Private Investor; Former CUSTODIAN
Chairman and Director (until 1991), State Street Bank and Trust Company
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director, INVESTOR INFORMATION
Cambridge Trust Company For MFS stock and bond market outlooks call
toll free: 1-800-637-4458 anytime from a
Marshall N. Cohan - Private Investor touch-tone telephone.
Lawrence H. Cohn, M.D. - Chief of Cardiac For information on MFS mutual funds, call
Surgery, Brigham and Women's Hospital; your financial adviser or, for an information
Professor of Surgery, Harvard Medical School kit, call toll free: 1-800-637-2929 any
business day from 9 a.m. to 5 p.m. Eastern
The Hon. Sir J. David Gibbons, KBE - Chief time (or leave a message anytime).
Executive Officer, Edmund Gibbons Ltd.;
Chairman, Bank of N.T. Butterfield & Son Ltd. INVESTOR SERVICE
MFS Service Center, Inc.
Abby M. O'Neill - Private Investor; Director, P.O. Box 2281
Rockefeller Financial Services, Inc. Boston, MA 02107-9906
(investment advisers)
For general information, call toll free:
Walter E. Robb, III - President and 1-800-225-2606 any business day from
Treasurer, Benchmark Advisors, Inc. 8 a.m. to 8 p.m. Eastern time.
(corporate financial consultants);
President, Benchmark Consulting Group, Inc. For service to speech- or hearing-impaired,
(office services); Trustee, Landmark Funds call toll free: 1-800-637-6576 any business
(mutual funds) day from 9 a.m. to 5 p.m. Eastern time.
Arnold D. Scott* - Senior Executive Vice (To use this service, your phone must be
President, Director and Secretary, equipped with a Telecommunications Device for
Massachusetts Financial Services Company the Deaf.)
Jeffrey L. Shames* - President and Director, For share prices, account balances and
Massachusetts Financial Services Company exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
J. Dale Sherratt - President, Insight telephone.
Resources, Inc. (acquisition planning
specialists) WEB SITE
http://www.mfs.com
Ward Smith - Former Chairman (until 1994),
NACCO Industries; Director, Sundstrand
Corporation
INVESTMENT ADVISER
Massachusetts Financial Services Company --------------------------------------------
500 Boylston Street
Boston, MA 02116-3741 [DALBAR For the third year in a row,
LOGO] MFS earned a #1 ranking in
DISTRIBUTOR TOP RATED the DALBAR, Inc. Broker/Dealer
MFS Fund Distributors, Inc. SERVICE Survey, Main Office Operations
500 Boylston Street Service Quality Category. The
Boston, MA 02116-3741 firm achieved a 3.48 overall score on a
scale of 1 to 4 in the 1996 survey. A total
FUND MANAGER of 110 firms responded, offering input on
Geoffrey L. Schechter* the quality of service they received from 29
mutual fund companies nationwide. The survey
TREASURER contained questions about service quality in
W. Thomas London* 15 categories, including "knowledge of phone
service contacts," "accuracy of transaction
ASSISTANT TREASURER processing," and "overall ease of doing
James O. Yost* business with the firm."
SECRETARY
Stephen E. Cavan*
* Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) MUNICIPAL [DALBAR LOGO: #1 BULK RATE
INCOME FUND TOP-RATED SERVICE] U.S. POSTAGE
PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
-------------
[LOGO: M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)]
(C)1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MMI-3 11/96 30M 02/202/302
