<PAGE>
ANNUAL REPORT FOR
[logo] YEAR ENDED
THE FIRST NAME IN MUTUAL FUNDS MARCH 31, 1996
MFS(R) MUNICIPAL INCOME FUND
[graphic omitted]
<PAGE>
MFS(RM) MUNICIPAL INCOME FUND
<TABLE>
<S> <C>
TRUSTEES ASSISTANT SECRETARY
A. Keith Brodkin* - Chairman and President James R. Bordewick, Jr.*
Richard B. Bailey* - Private Investor; CUSTODIAN
Former Chairman and Director (until 1991), State Street Bank and Trust Company
Massachusetts Financial Services Company; Director, Cambridge
Bancorp; Director, AUDITORS
Cambridge Trust Company Deloitte & Touche LLP
Marshall N. Cohan - Private Investor INVESTOR INFORMATION
For MFS stock and bond market outlooks,
Lawrence H. Cohn, M.D. - Chief of Cardiac call toll free: 1-800-637-4458 anytime from
Surgery, Brigham and Women's Hospital; a touch-tone telephone.
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 adviser) 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:
Trustee, Landmark Funds (mutual funds) 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive Vice For service to speech- or hearing-impaired,
President, Director and Secretary, call toll free: 1-800-637-6576 any business
Massachusetts Financial Services Company day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be equipped with a
Jeffrey L. Shames* - President and Director, Massachusetts Telecommunications Device for the Deaf.)
Financial Services Company For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
J. Dale Sherratt - President, Insight Resources, (1-800-637-8255) anytime from a touch-tone telephone.
Inc. (acquisition planning specialists)
Ward Smith - Former Chairman (until 1994), NACCO Industries;
Director, Sundstrand Corporation [Dalbar logo] TOP-RATED SERVICE
For the second year in a row, MFS earned a
INVESTMENT ADVISER #1 ranking in DALBAR, Inc.'s Broker/Dealer Survey, Main Office
Massachusetts Financial Services Company Operations Service Quality category. The firm achieved a 3.49
500 Boylston Street overall score -- on a scale of 1 to 4 -- in the 1995 survey.
Boston, MA 02116-3741 A total of 71 firms responded, offering input on the quality
of service they receive from 36 mutual fund companies
DISTRIBUTOR nationwide. The survey contained questions about service quality
MFS Fund Distributors, Inc. in 17 categories, including "knowledge of phone service
500 Boylston Street contacts," "accuracy of transaction processing," and "overall
Boston, MA 02116-3741 ease of doing business with the firm."
PORTFOLIO MANAGER
Geoffrey L. Schechter*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Stephen E. Cavan*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
The past 12 months have been good for the fixed-income markets. Moderation in
the pace of economic growth and a declining inflation rate combined to create a
favorable environment for fixed-income products. During the fiscal year ended
March 31, 1996, Class A shares of the Fund provided a total return of 6.81%,
Class B shares provided a total return of 5.87%, and Class C shares provided a
total return of 5.94% (including the reinvestment of distributions but excluding
the effects of any sales charges). These results underperformed both the 8.38%
return for the Lehman Brothers Municipal Bond Index, an unmanaged index of
national municipal bond investments rated Baa or higher, and the 7.18% return
for the average tax-exempt municipal bond fund as reported by Lipper Analytical
Services. This underperformance is attributable to the Fund's holdings of
primarily premium coupon bonds which provide below-average sensitivity to
declining interest rates. Interest rates on tax-exempt securities, although
experiencing dramatic swings during the fiscal year, declined modestly from
their levels of a year earlier. The changes in interest rates are discussed more
fully in the Municipal Bond Market section of this letter.
Economic Environment
We believe the U.S. economy will continue to show moderate growth in 1996,
although this growth may be somewhat uneven as we move from quarter to quarter.
Thus, while one quarter may experience an annualized rate of growth in Gross
Domestic Product (GDP) of less than 1%, another quarter may see annualized
growth in excess of 3% -- but, for the year, growth should stay within our
expected range of 2% to 2 1/2%. While some increase in consumer spending has
taken place in the early months of this year, consumers, who represent
two-thirds of the economy, remain in a somewhat weakened position, due in part
to an increase in consumer installment debt in excess of 30% over the past two
years. Meanwhile, growth is also being constrained by ongoing economic doldrums
in Europe and Japan, important markets for U.S. exports. Here again, we are
seeing a few tentative signs, particularly in Japan, of modest recoveries that
could lead to improved prospects for U.S. exporters. Also, the "lag effect" of
increases in short-term interest rates by the Federal Reserve Board in 1994 and
into 1995 is helping to keep growth in check. This lag effect can last up to two
years, and although the Fed did reduce short-term rates late last year and
earlier this year, we expect it to continue its diligent anti-inflationary
policies. Finally, it appears that inflation is likely to remain under control
this year, due in part to continued moderation in wage pressures and the subdued
level of economic growth. At the same time, we believe the current upward
pressure on energy prices bears close scrutiny as energy is an important
component of the inflation outlook.
Municipal Bond Market
Interest rates on municipal bonds experienced dramatic swings during the fiscal
year ended March 31, 1996. Rates declined by approximately 70 basis points
(0.70%) during the first nine months of the fiscal year as a combination of
slowing economic growth and reduced inflationary pressures enabled the Federal
Reserve to begin lowering interest rates. Positive news out of Washington, D.C.
regarding the possibility of a balanced budget provided further impetus for the
rally in fixed-income securities. In the fourth quarter of the fiscal year,
interest rates on municipal securities increased by about 55 basis points
(0.55%) as signs of a reemergence in economic growth and rising commodity prices
raised inflationary concerns. Further driving interest rates higher was the
apparent failure of the federal government to reach an agreement on a balanced
budget.
The overall 15-basis point (0.15%) decline in tax-exempt yields during the
fiscal year ended March 31, 1996 was dwarfed by the approximate 70-basis point
(0.70%) decline in yields on long-term U.S. Treasury securities during the same
period, driving the ratio of 30-year AAA-rated municipal yields to U.S. Treasury
yields from 79% to 86%. The dramatic underperformance by tax-exempt securities
can be attributed to investors' fears concerning major tax reform, more
specifically, the potential of the implementation of a flat tax and the removal
of the special tax status of municipal bonds. While these fears have subsided
somewhat recently as it appears that major tax reform is improbable, tax-exempt
securities are still trading at levels reflective of some modest prospect of tax
reform.
Supply continues to provide a positive foundation for the municipal bond
market. In 1995, new issuance totaled approximately $156 billion, a decline of
5% from the previous year and nearly one-half of 1993's record level. More
importantly, the outstanding supply of municipal bonds declined by approximately
$45 billion during 1995. It is expected that new issuance will again be in the
range of $160 billion barring any sharp decline in interest rates, and that the
outstanding supply will again decline, by approximately $30 billion. Given the
favorable technical outlook for municipal bonds and their current yield ratios
compared to U.S. Treasuries, we believe that tax-exempt securities represent
good value, although principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity.
Portfolio Performance and Strategy
During the past 12 months, the Fund has taken advantage of the relatively narrow
yield spreads between higher-rated securities and lower-rated securities to
upgrade its overall credit quality while reducing the impact on the distribution
rate. Sectors to which we reduced exposure include airport/ airline bonds and
lease/appropriation bonds.
While state and local governments are in their strongest fiscal position in
years, the ongoing budget battles in Washington, D.C. could place future strain
on the lower levels of government. The health care sector remains under pressure
from both the advent of managed care and the potential reforms in Medicare. The
electric utility sector is in the midst of a whirlwind of changes arising from
deregulation at the federal level. We will continue to monitor the changes in
these sectors, as well as others, to look for relative value opportunities.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[Photo of A. Keith Brodkin, [Photo of Geoffrey L. Schechter,
Chairman and President] Portfolio Manager]
/s/ A. Keith Brodkin /s/ Geoffrey L. Schecter
A. Keith Brodkin Geoffrey L. Schechter
Chairman and President Portfolio Manager
April 12, 1996
PORTFOLIO MANAGER 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
and has managed MFS Municipal Income Fund since February 1996. Mr. Schechter is
a Certified Public Accountant (C.P.A.) and a Chartered Financial Analyst
(C.F.A.).
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. Capital gains, if any, are
subject to capital gains tax to the shareholder. A small portion of income may
be subject to federal and/or alternative minimum tax.
The Fund seeks to achieve its investment objective by investing primarily in
debt securities issued by or on behalf of states, territories and possessions of
the United States and the District of Columbia and their political subdivisions,
agencies or instrumentalities, the interest on which is exempt from federal
income tax. These include tax-exempt securities rated AAA, AA or A by Standard &
Poor's Ratings Group or by Fitch Investors Service, Inc. or Aaa, Aa or A by
Moody's Investors Service, Inc.; notes of issuers having an issue of outstanding
municipal bonds rated as above or guaranteed by the U.S. government; obligations
issued by the U.S. government or large banks; commercial paper; or tax-exempt
securities which are not rated or which are rated lower than the three highest
grades as explained above, provided that not more than one-third of the total
assets of the Fund will be invested in such securities.
TAX FORM SUMMARY
In January 1996, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
EXEMPT-INTEREST DIVIDENDS
For federal income tax purposes, 99.9% of the total dividends paid by the Fund
were from net investment income during the year ended March 31, 1996 and are
designated as exempt interest dividends.
PERFORMANCE
The information on the following page illustrates the historical performance of
MFS Municipal Income Fund Class B shares in comparison to various market
indicators. Fund 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.
Please note that effective January 3, 1994, Class C shares were offered.
Information on Class C share performance appears on the next page.
Please note that the performance of other classes will be greater than or less
than the line shown, based on the differences in loads and fees paid by
shareholders investing in the different classes.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from January 1, 1987 to March 31, 1996)
Annual Report thru 3/31/96
Plot Points for MFS Muncipal Income Fund - Class B
- -----------------------------------------------------------------------
$10,000 1/1/87 - 3/31/96
MFS Municipal Income Lehman Brothers
Days Fund - Class B Muncipal Bond Index CPI
---- -------------- ------------------- ------
1/1/87 0 10,000 10,000 10,000
3/31/87 89 10,047 10,243 10,145
3/31/88 455 9,940 10,500 10,540
3/31/89 820 10,891 11,257 11,065
3/31/90 1185 11,812 12,444 11,644
3/31/91 1550 12,484 13,592 12,214
3/31/92 1916 13,649 14,950 12,603
3/31/93 2281 15,236 16,822 12,992
3/31/94 2646 15,507 17,212 13,318
3/31/95 3011 16,332 18,491 13,698
3/31/96 3377 17,291 20,041 14,087
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Life of Class
through
1 Year 3 Years 5 Years 3/31/96
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Municipal Income Fund (Class A)
including 4.75% sales charge +1.70% -- -- +1.86%<F1>
- ------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class A)
at net asset value +6.81% -- -- +3.82%<F1>
- ------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class B) with CDSC<F5> +1.87% +3.41% +6.42% +6.09%<F4>
- ------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class B) without CDSC +5.87% +4.31% +6.73% +6.09%<F4>
- ------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class C) +5.94% -- -- +2.87%<F6>
- ------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index<F2> +8.38% +6.01% +8.08% +7.81%<F3>
- ------------------------------------------------------------------------------------------------------------
Consumer Price Index<F7><F2> +2.84% +2.73% +2.89% +3.77%<F3>
- ------------------------------------------------------------------------------------------------------------
<FN>
<F1> For the period from the commencement of offering of Class A shares, September 7, 1993 to March 31, 1996.
<F2> Source: Lipper Analytical Services, Inc.
<F3> Benchmark comparisons begin on January 1, 1987.
<F4> For the period from the commencement of offering of Class B shares, December 29, 1986 to March 31, 1996.
<F5> These returns reflect the applicable Class B 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> For the period from the commencement of offering of Class C shares, January 3, 1994 to March 31, 1996. Class C shares have
no initial sales charge but, along with Class B shares, have higher annual fees and expenses than Class A shares. Class C
share purchases made on or after April 1, 1996, will be subject to a 1% CDSC if redeemed within 12 months of purchase.
<F7> The Consumer Price Index is a popular measure of change in prices.
</TABLE>
All results are historical and are not an indication of future results. The
investment return and principal value 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. All Class A share results reflect the
applicable expense subsidy which is explained in the Notes to Financial
Statements. Had the subsidy not been in effect, the results would have been less
favorable. The subsidy may be rescinded at any time.
<PAGE>
PORTFOLIO OF INVESTMENTS - March 31, 1996
Municipal Bonds - 98.5%
- -----------------------------------------------------------------------------
S&P
Bond Rating Principal Amount
(Unaudited) Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Student Loan Revenue - 1.3%
AAA Pennsylvania State Higher
Educational Assistance
Agency Rev., AMBAC, 9.492s, 2026* $ 5,500 $ 5,828,020
- -----------------------------------------------------------------------------
General Obligation - 8.2%
NR Arlington, TX, Independent
School Refunding Rev., PSF,
0s, 2007 $ 3,070 $ 1,709,468
A+ Commonwealth of
Massachusetts, 7s, 2007 2,590 2,853,273
NR Coppell, TX, Independent
School District, PSF, 0s, 2025 2,325 394,111
AA Harris County, TX,
Certificates of Obligation
(Astrodome Improvements
Project), 8.1s, 2008 1,385 1,518,943
BBB+ New York, NY, 8.2s, 2003 5,000 5,743,000
BBB+ New York, NY, 7.5s, 2008 1,350 1,462,928
BBB+ New York, NY, 8.25s, 2010 360 416,070
BBB+ New York, NY, 7s, 2016 1,360 1,440,158
BBB+ New York, NY, 8s, 2018 30 34,191
AAA Northwest Texas, Independent
School District, AMBAC, 0s, 2011 3,000 1,246,080
A Puerto Rico Commonwealth,
6.45s, 2017 500 524,945
AAA Rio, CA, School District,
Certificates of
Participation, FSA, 0s, 2028 1,140 636,132
AAA Sherman, TX, Independent
School District, PSF, 0s, 2020 1,100 261,998
AA State of Texas, 7.625s, 2018 14,405 15,654,634
AA State of Wisconsin, 7.6s, 2020 980 1,025,080
AAA Thurston County, WA, Independent
School District FGIC, 0s, 2010 4,000 1,759,720
------------
$ 36,680,731
- -----------------------------------------------------------------------------
State and Local Appropriation - 2.4%
BBB New York Dormitory Authority
Rev. (City
University), 7.5s, 2010 $ 2,500 $ 2,880,475
BBB+ New York Medical Care
Facility Financial Agency
Rev., 8.875s, 2007 770 825,810
BBB+ New York Medical Care
Facility Financial Agency
Rev., 7.875s, 2008 745 833,171
BBB+ New York Medical Care
Facility Financial Agency
Rev., 7.875s, 2020 2,580 2,878,893
BBB+ New York Medical Care
Facility Financial Agency
Rev., 7.5s, 2021 540 598,330
AAA Philadelphia, PA, Regional
Port Authority Lease Rev.,
MBIA, MVRIC, 8.24s, 2020* 2,500 2,595,000
------------
$ 10,611,679
- -----------------------------------------------------------------------------
Refunded and Special
Obligation** - 18.9%
AAA Adams County, CO, Single
Family Mortgage Rev.,
8.875s, 2011 $ 2,510 $ 3,313,853
NR Chapel Hill, NC, Parking
Facilities Rev. (Rosemary
Street Project), 8.125s, 2000 940 1,092,703
NR Chapel Hill, NC, Parking
Facilities Rev. (Rosemary
Street Project), 8.25s, 2000 1,000 1,167,640
A+ Commonwealth of Massachusetts,
7.5s, 2000 1,990 2,270,670
A+ Commonwealth of Massachusetts,
7.5s, 2000 2,010 2,293,490
NR Illinois Education and
Facilities Authority, 8.75s, 2015 60 61,814
BBB Massachusetts Health & Education
Facilities Authority Rev.
(Suffolk University), 8s, 2000 1,000 1,142,000
NR Massachusetts Industrial
Finance Agency, Tunnel Rev.
(Mass. Turnpike), 9s, 2000 2,870 3,417,797
AAA Massachusetts Water Resources
Authority, 7.625s, 2000 3,200 3,615,456
BBB+ New York, NY, Pre-Refunded,
"A", 8s, 2001 2,970 3,487,790
BBB+ New York, NY, Pre-Refunded,
"A", 8.25s, 2001 4,140 4,939,600
AAA New York Local Government
Assistance Corp., 7.25s, 2001 2,750 3,128,923
AAA New York Medical Care
Facility Financial Agency
Rev., 8.875s, 1997 680 739,357
BBB+ New York Medical Care
Facility Financial Agency
Rev., 7.75s, 2000 1,030 1,168,782
AAA New York Medical Care
Facility Financial Agency
Rev., 7.875s, 2000 670 772,610
AAA New York Medical Care
Facility Financial Agency
Rev., 7.875s, 2000 3,565 4,110,980
AAA New York Medical Care
Facility Financial Agency
Rev., 7.5s, 2001 1,460 1,672,926
NR New York Urban Development
Corp., 7.75s, 2000 5,000 5,656,900
BBB New York Urban Development
Corp. Rev., 7.5s, 2001 2,500 2,872,175
NR New York Urban Development
Corp. (Correctional
Facilities), Rev., 7.3s, 2002 2,340 2,691,561
A- Pennsylvania Industrial
Development Authority Rev.,
7s, 2001 7,000 7,849,660
AAA Philadelphia, PA, Municipal
Authority Rev., FGIC, 7s, 2001 2,000 2,260,740
NR Texas Turnpike Authority Rev.
(Houston Ship
Channel Bridge), 0s, 2002 3,000 4,298,400
AAA Washington County, PA,
Authority Lease Rev.,
AMBAC, 7.45s, 2000 1,200 1,361,365
AA Washington Public Power
Supply System Rev., Nuclear
Project #1, 7.25s, 2000 3,350 3,714,446
AAA Washington Public Power
Supply System Rev., Nuclear
Project #1, 14.375s, 2001 1,000 1,284,010
AAA Washington Public Power
Supply System Rev., Nuclear
Project #2, 7.375s, 2000 5,355 6,020,841
AA Washington Public Power
Supply System Rev., Nuclear
Project #3, 7.25s, 2000 5,000 5,543,950
BBB+ West Virginia Water
Development Authority,
8.625s, 2028 1,000 1,122,330
BBB+ West Virginia Water
Development Authority,
8.125s, 2029 1,000 1,110,260
------------
$ 84,183,029
- -----------------------------------------------------------------------------
Single Family Housing Revenue - 7.7%
AAA Berkeley, Brookes, & Fayette
Counties, WV, MBIA, 0s, 2016 $ 14,000 $ 1,567,580
AAA Chicago, IL, Residential
Mortgage Rev., MBIA, 0s, 2009 5,810 2,251,433
BB Cook County, IL, Single
Family Housing, 0s, 2015 10,440 1,282,032
NR De Kalb, IL, Single Family
Mortgage Rev., GNMA,
7.45s, 2009 255 267,230
NR Delaware Housing Authority
Rev., 9.125s, 2018 870 897,240
BB Harris County, TX, Housing
Finance Corp., 9.625s, 2003 240 240,958
BB Harris County, TX, Housing
Finance Corp., 9.875s, 2014 430 431,711
A+ Illinois Housing Development
Agency, 0s, 2016 8,785 1,057,011
AAA Kentucky Housing Corp.,
Housing Rev., FHA, 7.45s, 2023 5,840 5,935,367
AA+ Minnesota Housing Finance
Agency, 9s, 2018 4,655 4,769,001
NR Mississippi Home Corp.,
Single Family Rev. GNMA,
7.1s, 2023 805 839,019
A+ New Hampshire Housing Finance
Authority, 7.2s, 2010 6,640 6,926,383
A+ New Hampshire Housing Finance
Authority, 8.625s, 2013 755 781,417
AA Utah Housing Finance Agency,
8.625s, 2019 1,445 1,492,064
AA Utah Housing Finance Agency,
9.125s, 2019 135 139,817
AA Utah Housing Finance Agency,
9.25s, 2019 110 117,290
A+ West Virginia Housing Development
Fund, 7.85s, 2014 5,185 5,334,328
------------
$ 34,329,881
- -----------------------------------------------------------------------------
Multi-Family Housing Revenue - 3.4%
NR Colorado Housing Finance
Authority, 8.3s, 2023 $ 2,750 $ 2,872,980
NR Maryland Community
Development Administration,
8.5s, 2028 3,000 3,093,540
NR Pennsylvania Housing Finance
Agency, 7.6s, 2013 1,000 1,068,700
A+ Tennessee State Vets Home
Board Rev. (Humboldt
Project), 6.75s, 2021 1,000 1,027,780
AA- Vermont Housing Finance
Agency, 8.375s, 2020 2,725 2,818,849
A Wisconsin Housing & Economic
Development Authority,
7.2s, 2013 4,000 4,149,800
------------
$ 15,031,649
- -----------------------------------------------------------------------------
Insured Health Care Revenue - 4.0%
AAA Clermont County, OH, Hospital
Facilities Rev. (Mercy
Health Systems), AMBAC,
MVRIC, 9.221s, 2021* $ 1,500 $ 1,720,500
AAA Fredericksburg, VA,
Industrial Development
Authority, Hospital
Facilities Rev., FGIC,
INFLOS, 9.174s, 2023* 1,500 1,651,500
AAA Henrico County, VA,
Industrial Development
Authority Rev., FSA, RIBS,
7.711s, 2027* 5,000 5,065,000
AAA Jefferson County, KY,
Hospital Rev. (Alliant
Health System), INFLOS,
MBIA, 8.583s, 2014* 1,500 1,627,500
AAA Mississippi Hospital
Equipment & Facilities
Authority Rev. (Rush
Medical Foundation),
Connie Lee, 6.7s, 2018 1,000 1,044,630
AAA Rio Grande Valley, TX, Health
Facilities Development
Corp., MBIA, Short Rites,
7.46s, 2015++ 2,800 2,939,048
AAA Tulsa, OK, Industrial
Authority, Hospital Rev.
(St. John's Medical
Center), MBIA, 0s, 2006 6,430 3,605,172
------------
$ 17,653,350
- -----------------------------------------------------------------------------
Health Care Revenue - 4.3%
NR Bell County, TX, Health
Facilities Development
Corp. (Advanced Living
Technology), 10.5s, 2018 $ 1,910 $ 1,661,700
BBB- Bell County, TX, Health
Facilities Development
Corp. (Kings Daughters
Hospital), 9.25s, 2008 1,650 1,810,545
BBB- Cumberland County, PA,
Municipal Refunding (First
Mortgage), 6.8s, 2023 1,000 967,160
NR Fulton County, GA, Residential Care
Facilities, Elderly Authority Rev.
(Lenbrook Square Foundation),
9.75s, 2017 470 478,700
NR Gadsden County, FL,
Industrial Development
Authority (RHA/FLA
Properties), 10.45s, 2018 1,950 2,017,236
NR Louisiana Public Facilities
Authority (Southwest
Medical Center), 11s, 2006 1,568 664,837
A Massachusetts Health &
Education Facilities Rev.
(New England Deaconess
Hospital) 6.875s, 2022 4,000 4,120,040
NR Medical University, SC,
Certificates of
Participation (Harborview
Office Tower Project),
7.5s, 2008 600 641,670
NR Montgomery, PA, Industrial
Development Authority,
Health Facilities Rev.,
8.5s, 2023 300 293,562
BBB+ New York Medical Care
Facilities Agency, Mental
Health Services, 7.75s, 2020 1,025 1,123,503
NR Philadelphia, PA, Industrial
Development Authority,
10.25s, 2018 1,485 1,518,695
NR Philadelphia, PA, Industrial
Development Authority,
10.25s, 2018 1,945 2,014,670
A Torrance, CA, Hospital Rev.,
6.875s, 2015 1,780 1,838,028
------------
$ 19,150,346
- -----------------------------------------------------------------------------
Electric and Gas Utility Revenue - 12.6%
AAA Austin, TX, Utility Systems
Rev., AMBAC, 0s, 2010 $ 7,500 $ 3,265,500
A+ Chelan County, WA, Public
Utility District #1,
Consolidated Rev., 9.3s, 2062 4,450 4,797,233
AAA Georgia Municipal Electric
Authority, MBIA, 6.375s, 2016 2,000 2,136,180
AAA Georgia Municipal Electric
Authority Power Rev., FGIC,
5.7s, 2019 5,000 4,875,000
AAA Georgia Municipal Electric
Authority, Special
Obligation, MBIA, 6.5s, 2020 7,350 8,018,850
AAA Intermountain Power Agency,
UT, MBIA, 6s, 2016# 4,000 4,022,120
A Montana St. Board Investment
Resource, (Yellowstone Energy),
7s, 2019 1,000 958,300
NR Midland MI, Environmental Development
Authority, Pollution Control Rev.
(Midland Cogeneration), 9.5s, 2009 2,000 2,196,880
BBB+ North Carolina Eastern Municipal
Power Agency, 7s, 2007 3,250 3,532,425
BBB+ North Carolina Eastern Municipal
Power Agency, 5.75s, 2019 830 779,802
A- Puerto Rico Electric Power
Authority, 6.125s, 2008 700 726,299
AAA Southern, MN, Municipal Power
Agency, Power Supply Systems
Rev., MBIA, 0s, 2025 6,400 1,132,928
AAA Texas Municipal Power Agency
Rev., AMBAC, 0s, 2011 5,930 2,431,122
AAA Texas Municipal Power Agency
Rev., MBIA, 0s, 2014 10,435 3,538,717
AAA Texas Municipal Power Agency
Rev., MBIA, 0s, 2015 7,000 2,217,320
AA Washington Public Power
Supply System Rev., Nuclear
Project #1, 0s, 2003 2,000 1,347,460
AA Washington Public Power
Supply System Rev., Nuclear
Project #1, 7s, 2011 4,050 4,277,529
AA Washington Public Power
Supply System Rev., Nuclear
Project #3, 0s, 2004 4,885 3,092,107
AAA Washington Public Power
Supply Systems, Series "A",
BIGI, 0s, 2013 4,000 1,430,920
AAA Washington Public Power
Supply Systems, Series "A",
BIGI, 0s, 2014 3,350 1,129,017
------------
$ 55,905,709
- -----------------------------------------------------------------------------
Water and Sewer Utility Revenue - 2.8%
A Massachusetts Water Resources
Authority, 6.5s, 2019 $ 7,495 $ 8,120,832
AAA Salt Lake County, UT, Water
Conservancy District Rev.,
AMBAC, 0s, 2008 2,100 1,046,766
AAA Salt Lake County, UT, Water
Conservancy District Rev.,
AMBAC, 0s, 2009 3,800 1,763,542
A- Union County, NJ, Utilities
Authority Solid Waste,
7.2s, 2014 1,500 1,547,535
------------
$ 12,478,675
- -----------------------------------------------------------------------------
Turnpike Revenue - 4.7%
NR Arapahoe County, CO, Federal
Highway Rev., 0s, 2026 $ 20,000 $ 2,184,600
NR Arapahoe County, CO, Federal
Highway Rev., 7s, 2026 4,000 4,228,280
BBB- Foothill, CA, Eastern
Transportation Co., 0s, 2012 5,000 3,007,150
BBB- Foothill, CA, Eastern
Transportation Co., 0s, 2013 5,000 3,029,100
AAA New Jersey Turnpike Authority,
Turnpike Rev., MBIA, 6.5s, 2016 1,450 1,612,052
NR San Joaquin Hills, CA,
Transportation Corridor
Agency, 0s, 2004 3,000 1,721,850
NR San Joaquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev., 0s, 2005 1,800 961,758
NR San Joaquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev., 0s, 2009 6,750 2,675,160
NR San Joaquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev., 0s, 2014 5,000 1,549,150
------------
$ 20,969,100
- -----------------------------------------------------------------------------
Airport and Port Revenue - 12.9%
BB+ Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(American Airlines), 7.875s, 2025 $ 3,500 $ 3,729,670
BB Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.4s, 2018 1,995 2,164,515
BB Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.85s, 2018 2,895 3,240,055
BB Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.85s, 2018 6,425 7,190,796
NR Cleveland, OH, Airport
Special Facilities Rev.
(Continental Airlines), 9s, 2019 4,300 4,471,441
AAA Connecticut Airport Rev.,
FGIC, 7.65s, 2012 1,000 1,163,260
BB+ Dallas-Fort Worth, TX,
International Airport
(American Airlines), 7.5s, 2025 5,000 5,320,400
BBB Denver, CO, City & County
Airport Rev., 8.75s, 2023 4,750 5,644,995
AAA Hawaii Airport Systems Rev.,
FGIC, 7.5s, 2020 5,350 5,896,288
B- Hillsborough County, FL,
Aviation Authority Rev. (US
Air), 8.6s, 2022 2,000 2,140,960
BB Kenton County, KY, Airport
Board Special Facilities
(Delta Airlines), 7.5s, 2020 1,000 1,061,110
BBB Lake Charles, LA, Harbor &
Terminal District Port
(Occidental Petroleum),
7.2s, 2020 1,000 1,078,840
NR St. Augustine, FL, Airport
Authority (Grumman Repair
Facility), 11s, 2004 500 529,585
BB+ Tulsa, OK, Municipal Airport
Trust Rev. (American
Airlines), 7.375s, 2020 10,000 10,581,100
A+ Virginia Port Authority, 8.2s, 2008 3,000 3,280,290
------------
$ 57,493,305
- -----------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.7%
BBB Inglewood California
Redevelopment Agency, TAB,
6.125s, 2023 $ 600 $ 569,154
AAA Metropolitan Pier &
Exposition Authority, MBIA,
0s, 2016 8,400 2,460,528
------------
$ 3,029,682
- -----------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 8.0%
BBB Brazos River Authority, TX,
Pollution Control Rev.
(Texas Utilities), 9.875s, 2017 $ 8,890 $ 9,596,577
BBB+ Brazos River Authority, TX,
Pollution Control Rev.
(Texas Utilities), 9.25s, 2018 1,000 1,083,000
A+ Burke County, GA, Pollution
Control Rev. (Georgia Power
Co./Vogtle Project),
9.375s, 2017 2,650 2,905,725
NR Burns Harbor, IN, Solid Waste
Disposal Facilities Rev.
(Bethlehem Steel), 8s, 2024 3,000 3,178,050
A Charleston County, SC,
Resource Recovery Rev.
(Foster Wheeler), 9.25s, 2010 3,200 3,487,776
AA- Chicago, IL, Gas Supply Rev.
(People's Gas), 8.1s, 2020 2,000 2,223,100
NR Dayton, OH, Special
Facilities Rev. (Emery Air
Freight), "A", 12.5s, 2009 1,000 1,166,760
A- Erie County, PA
(International Paper),
7.875s, 2016 1,200 1,305,360
BBB- Massachusetts Industrial
Finance Agency, Pollution
Control Rev. (Eastern
Edison Co. Project),
5.875s, 2008 980 958,538
NR Massachusetts Industrial
Finance Agency (Berkshire
Retirement), 6.5s, 2009 1,000 983,430
A- Matagorda County, TX,
Pollution Control Rev.
(Central Power & Light),
7.875s, 2016 1,500 1,557,180
NR Northhampton County, PA,
Industrial Development
Authority (Bethlehem
Steel), 7.55s, 2017 1,200 1,230,204
A- Oklahoma City, OK, Industrial
& Cultural Facilities Rev.,
6.4s, 2020 575 563,764
NR Port of New Orleans, LA
(Continental Grain Co.),
7.5s, 2013 1,000 1,039,230
BB- Port of New Orleans, LA
(Avondale Industries),
8.5s, 2014 2,000 2,210,380
BBB West Side Calhoun County, TX,
Navigation District
(Union Carbide), 8.2s, 2021 2,000 2,211,680
------------
$ 35,700,754
- -----------------------------------------------------------------------------
Universities - 0.2%
AAA Massachusetts Health &
Education Facilities
(Harvard University), 6.2s, 2020 $ 1,000 $ 1,077,170
- -----------------------------------------------------------------------------
Miscellaneous Revenue - 6.4%
NR Bristol, CT, Resource
Recovery Facilities
(Ogden Martin), 6.5s, 2014 $ 8,000 $ 8,236,640
NR Crystal City, TX, Lease
Obligations, 10.5s, 2008+ 1,252 1,216,111
BBB- Greater Detroit, MI, Resource
Recovery Authority, 9.25s, 2008 2,130 2,199,225
AAA Illinois State Dedicated Tax,
Civic Center, AMBAC, 0s, 2016 5,000 1,438,000
NR Martha's Vineyard, MA, Land
Bank, 8.125s, 2011 1,800 1,845,540
NR Maryland Energy Financing
Administration (Solid
Waste), 9s, 2016 4,000 4,049,440
NR Massachusetts Health &
Education Facilities
Authority (Learning Center
for Deaf), 9.25s, 2014 1,000 1,067,910
NR Pittsylvania County, VA,
Industrial Development
Authority Rev., 7.5s, 2014 6,000 6,338,160
NR Retama, TX, Special
Facilities Rev. (Retema
Park Racetrack Project),
8.75s, 2018*** 3,869 967,323
A- Rhode Island Depositors
Economic Protection Corp.,
SPL Obligation, 5.75s, 2021 1,400 1,319,794
------------
$ 28,678,143
- -----------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $408,787,874) $438,801,223
Other Assets, Less Liabilities - 1.5% 6,494,940
=============================================================================
Net Assets - 100.0% $445,296,163
- -----------------------------------------------------------------------------
+ Restricted security.
++ Indexed security.
* Inverse floating rate security.
** Dates indicated are refunding dates.
*** Non-income producing security - in default.
# When-issued security. At March 31, 1996, 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, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $408,787,874) $438,801,223
Receivable for investments sold 5,240,235
Receivable for Fund shares sold 1,361,148
Interest receivable 8,149,869
Other assets 6,059
------------
Total assets $453,558,534
------------
Liabilities:
Cash overdraft $ 1,526,174
Distributions payable 837,892
Payable for investments purchased 4,954,280
Payable for Fund shares reacquired 412,168
Payable for daily variation margin on open futures
contracts 172,500
Payable to affiliates -
Management fee 27,612
Shareholder servicing agent fee 7,234
Distribution fee 103,074
Accrued expenses and other liabilities 221,437
------------
Total liabilities $ 8,262,371
------------
Net assets $445,296,163
============
Net assets consist of:
Paid-in capital $426,436,805
Unrealized appreciation on investments 29,883,974
Accumulated net realized loss on investments (10,782,036)
Accumulated distributions in excess of net investment
income (242,580)
------------
Total $445,296,163
============
Shares of beneficial interest outstanding 51,591,407
============
Class A shares:
Net asset value and redemption price per share
(net assets of $121,902,857 / 14,133,863 shares of
beneficial interest outstanding) $8.62
=====
Offering price per share (100/95.25) $9.05
=====
Class B shares:
Net asset value and offering price per share
(net assets of $306,888,922 / 35,546,951 shares of
beneficial interest outstanding) $8.63
=====
Class C shares:
Net asset value, offering price, and redemption price per
share
(net assets of $16,504,384 / 1,910,593 shares of
beneficial interest outstanding) $8.64
=====
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
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended March 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income $32,603,320
-----------
Expenses -
Management fee $ 3,495,983
Trustees' compensation 43,468
Shareholder servicing agent fee (Class A) 135,241
Shareholder servicing agent fee (Class B) 800,319
Shareholder servicing agent fee (Class C) 18,945
Distribution and service fee (Class A) 289,927
Distribution and service fee (Class B) 3,637,818
Distribution and service fee (Class C) 126,300
Custodian fee 198,885
Printing 83,586
Auditing fees 62,180
Postage 48,150
Legal fees 8,432
Miscellaneous 247,651
-----------
Total expenses $ 9,196,885
Fees paid indirectly (23,932)
Reduction of expenses by distributor (82,426)
-----------
Net expenses $ 9,090,527
-----------
Net investment income $23,512,793
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 201,839
Futures contracts (5,381)
-----------
Net realized gain on investments $ 196,458
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 2,641,593
Futures contracts (129,375)
-----------
Net unrealized gain on investments $ 2,512,218
-----------
Net realized and unrealized gain on investments $ 2,708,676
-----------
Increase in net assets from operations $26,221,469
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------
Year Ended March 31, 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 23,512,793 $ 23,955,748
Net realized gain (loss) on investments and futures
transactions 196,458 (8,796,119)
Net unrealized gain on investments and futures
transactions 2,512,218 8,226,710
------------ ------------
Increase in net assets from operations $ 26,221,469 $ 23,386,339
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (5,156,665) $ (551,579)
From net investment income (Class B) (17,735,118) (22,598,713)
From net investment income (Class C) (621,010) (491,715)
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) --
In excess of net realized gain on investment
transactions (Class A) -- (2,000)
------------ ------------
Total distributions declared to shareholders $(23,528,963) $(23,644,007)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $192,708,458 $ 63,201,308
Net asset value of shares issued in connection with the
acquisition of Advantage Fund 28,956,459 --
Net asset value of shares issued to shareholders in
reinvestment of distributions 12,674,803 12,855,706
Cost of shares reacquired (240,907,535) (118,093,995)
------------ ------------
Decrease in net assets from Fund share transactions $ (6,567,815) $(42,036,981)
------------ ------------
Total decrease in net assets $ (3,875,309) $(42,294,649)
Net assets:
At beginning of period 449,171,472 491,466,121
------------ ------------
At end of period (including accumulated distributions
in excess of net investment income of $242,580 and
$684,169, respectively) $445,296,163 $449,171,472
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- ------------------------------------------------------------------------------
Year Ended
Year Ended March 31, November 30,
----------------------------------- ------------
1996 1995 1994+++ 1993**
- ------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 8.56 $ 8.56 $ 8.99 $ 9.15
------ ------ ------ ------
Income from investment operations# -
Net investment
income(S) $ 0.51 $ 0.50 $ 0.15 $ 0.12
Net realized and
unrealized gain
(loss) on
investments 0.05 0.02 (0.51) (0.16)
------ ------ ------ ------
Total from
investment
operations $ 0.56 $ 0.52 $(0.36) $(0.04)
------ ------ ------ ------
Less distributions
declared to shareholders -
From net investment
income(||) $(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 $(0.50) $(0.52) $(0.07) $(0.12)
------ ------ ------ ------
Net asset value - end
of period $ 8.62 $ 8.56 $ 8.56 $ 8.99
====== ====== ====== ======
Total return(++) 6.81% 6.33% (7.90)%+ (1.80)%+
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.28% 1.13% 1.07%+ 0.76%+
Net investment income 5.75% 6.20% 5.31%+ 4.94%+
Portfolio turnover 23% 25% 9% 30%
Net assets at end of
period (000 omitted) $121,903 $25,270 $5,595 $461
** For the period from the commencement of offering of Class A shares,
September 7, 1993 to November 30, 1993.
+ Annualized.
++ Distributions in excess of net realized gains were less than $0.01 per
share for Class A shares for the year ended March 31, 1995.
+++ 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.
(++) 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.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- ------------------------------------------------------------------------------
Year Ended March 31,
---------------------------------------------
1996 1995 1994+++ 1993
- ------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 8.57 $ 8.56 $ 8.99 $ 8.73
------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.43 $ 0.44 $ 0.14 $ 0.42
Net realized and unrealized
gain (loss) on investments 0.06 -- (0.51) 0.42
------ ------ ------ ------
Total from investment
operations $ 0.49 $ 0.44 $(0.37) $ 0.84
------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment
income(||) $(0.43) $(0.43) $(0.01) $(0.45)
In excess of net investment
income -- -- -- (0.03)
From net realized gain on
investments -- -- (0.01) (0.10)
In excess of net realized
gain on investments -- -- (0.04) --
------ ------ ------ ------
Total distributions
declared to
shareholders $(0.43) $(0.43) $(0.06) $(0.58)
------ ------ ------ ------
Net asset value - end of
period $ 8.63 $ 8.57 $ 8.56 $ 8.99
====== ====== ====== ======
Total return 5.87% 5.32% (8.97)%+ 9.95%
------ ------ ------ ------
Ratios (to average net assets)/Supplemental data:
Expenses## 2.13% 2.16% 2.24%+ 2.11%
Net investment income 4.90% 5.15% 4.74%+ 4.92%
Portfolio turnover 23% 25% 9% 30%
Net assets at end of period
(000 omitted) $306,889 $412,965 $479,478 $518,179
+ 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.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Year Ended November 30,
--------------------------------------------------------
1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------
Class B
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.50 $ 8.25 $ 8.41 $ 8.11
------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.47 $ 0.49 $ 0.49 $ 0.51
Net realized and unrealized gain (loss)
on investments 0.26 0.25 (0.15) 0.30
------ ------ ------ ------
Total from investment operations $ 0.73 $ 0.74 $ 0.34 $ 0.81
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.48) $(0.49) $(0.50) $(0.51)
In excess of net investment income -- -- -- --
From net realized gain on investments -- -- -- --
From paid-in capital (0.02) -- -- --
------ ------ ------ ------
Total distributions declared to
shareholders $(0.50) $(0.49) $(0.50) $(0.51)
------ ------ ------ ------
Net asset value - end of period $ 8.73 $ 8.50 $ 8.25 $ 8.41
====== ====== ====== ======
Total return 8.82% 9.21% 4.18% 10.24%
Ratios (to average net assets)/Supplemental data:
Expenses 2.03% 2.04% 2.05% 2.07%
Net investment income 5.50% 5.82% 5.99% 6.09%
Portfolio turnover 52% 73% 91% 127%
Net assets at end of period (000 omitted) $449,949 $409,084 $379,239 $343,887
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Year Ended
November 30, Year Ended March 31,
-------------------------------- ---------------------------------------------------
1988 1987* 1996 1995 1994**
- ------------------------------------------------------------------------------------------------------------
Class B Class C
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 7.67 $ 8.47 $ 8.57 $ 8.56 $ 9.07
------ ------ ------ ------ ------
Income from investment operations# -
Net investment
income $ 0.50 $ 0.38 $ 0.43 $ 0.44 $ 0.09
Net realized
and unrealized
gain (loss) on
investments 0.43 (0.83) 0.07 0.01 (0.59)
------ ------ ------ ------ ------
Total from
investment
operations $ 0.93 $(0.45) $ 0.50 $ 0.45 $(0.50)
------ ------ ------ ------ ------
Less distributions declared to shareholders
From net investment
income(||) $(0.49) $(0.35) $(0.43) $(0.44) $(0.01)
------ ------ ------ ------ ------
Net asset value -
end of period $ 8.11 $ 7.67 $ 8.64 $ 8.57 $ 8.56
====== ====== ====== ====== ======
Total return 12.53% (5.79)%+ 5.94% 5.39% (19.42)%+
Ratios (to average net assets)/Supplemental data:
Expenses## 2.09% 2.03%+ 2.05% 2.09% 2.18%+
Net investment
income 6.38% 6.00%+ 4.95% 5.23% 4.62%+
Portfolio turnover 171% 138% 23% 25% 9%
Net assets at end
of period (000
omitted) $244,825 $183,935 $16,504 $10,936 $6,393
<FN>
* For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
** For the period from the commencement of offering of Class C shares, January 3, 1994 to March 31, 1994.
+ 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 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.
</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.
(2) Significant Accounting Policies
Investment Valuations - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Debt securities (other than short-term obligations which mature in 60 days or
less), including listed issues and forward contracts, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. 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, currency or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the Fund is required
to deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Fund
each day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by the Fund. The Fund's investment in futures contracts is designed to
hedge against anticipated future changes in interest or exchange rates or
securities prices. Investments in interest rate futures for purposes other than
hedging may be made to modify the duration of the portfolio without incurring
the additional transaction costs involved in buying and selling the underlying
securities. Investments in currency futures for purposes other than hedging may
be made to change the Fund's relative position in one or more currencies without
buying and selling portfolio assets. Investments in equity-indexed contracts, or
contracts on related options, for purposes other than hedging may be made when
the Fund has cash on hand and wishes to participate in anticipated market
appreciation while the cash is being invested. Should interest or exchange rates
or securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the futures contracts and may realize a loss.
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 bears 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, 1996, 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 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 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 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. 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.
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. During the year ended March 31, 1996, $457,759 was reclassified from
accumulated distributions in excess of net investment income to accumulated net
realized loss on investments, due to differences between book and tax
accounting. This change had no effect on the net assets or net asset value per
share.
At March 31, 1996, the Fund, for federal income tax purposes, had a 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 its 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, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.30% of
average daily net assets and 6.43% of investment income.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $9,911 for the year ended
March 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$23,697 for the year ended March 31, 1996, as its portion of the sales charge on
sales of Class A shares of the Fund.
The Trustees have adopted a separate distribution plan for Class A, Class B, and
Class C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for accounts
not attributable to a securities dealer which amounted to $20,036 for the year
ended March 31, 1996. MFD is not imposing the 0.10% distribution fee for an
indefinite period. Fees incurred under the distribution plan during the year
ended March 31, 1996 were 0.23% of average daily net assets attributable to
Class A shares on an annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B and Class C
shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $71,303 and $4,283 for Class B and Class C
shares, respectively, for the year ended March 31, 1996. Fees incurred under the
distribution plans during the year ended March 31, 1996, were 1.00% of average
daily net assets attributable to Class B and Class C shares on an annualized
basis.
Purchases over $1 million into Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
MFD receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended March 31, 1996 were $0 and $634,226 for
Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, 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
$103,201,667 and $118,311,540, 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:
<PAGE>
Aggregate cost $408,787,874
============
Gross unrealized appreciation $ 34,439,751
Gross unrealized depreciation (4,426,402)
------------
Net unrealized appreciation $ 30,013,349
============
(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
Year Ended Year Ended
March 31, 1996 March 31, 1995
----------------------------- ----------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------
Shares sold 17,027,633 $ 148,288,168 2,767,565 $ 23,341,811
Shares issued
to shareholders
in reinvestment
of distributions 261,154 2,281,429 17,884 151,011
Shares reacquired (6,107,403) (53,310,814) (486,722) (4,100,978)
---------- ------------- ----------- -------------
Net increase 11,181,384 $ 97,258,783 2,298,727 $ 19,391,844
========== ============= =========== =============
Class B Shares
Year Ended Year Ended
March 31, 1996 March 31, 1995
----------------------------- ----------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------
Shares sold 3,291,894 $ 30,271,749 3,236,637 $ 27,296,462
Shares issued
in connection
with the
acquisition
of Advantage
Fund 3,398,645 28,956,459 -- --
Shares issued
to shareholders
in reinvestment
of distributions 1,143,435 9,961,921 1,465,533 12,377,112
Shares reacquired (20,493,625) (178,612,133) (12,503,667) (105,578,609)
---------- ------------- ----------- -------------
Net decrease (12,659,651) $(109,422,004) (7,801,497) $ (65,905,035)
========== ============= =========== =============
Class C Shares
Year Ended Year Ended
March 31, 1996 March 31, 1995
----------------------------- ----------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------
Shares sold 1,614,476 $ 14,148,541 1,490,674 $ 12,563,035
Shares issued
to shareholders
in reinvestment
of distributions 49,315 431,453 38,763 327,583
Shares reacquired (1,029,259) (8,984,588) (999,873) (8,414,408)
---------- ------------- ----------- -------------
Net increase 634,532 $ 5,595,406 529,564 $ 4,476,210
========== ============= =========== =============
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended March 31,
1996 was $5,521.
(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 and foreign currency exchange rates. These financial
instruments include written options, forward foreign currency exchange contracts
and 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 March 31, 1996:
Futures Contracts Unrealized
Description Expiration Contracts Position Depreciation
- ------------------------------------------------------------------------------
UST March 96 June 1996 230 UST Short $(129,375)
=========
At March 31, 1996, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
The Fund also invests in indexed securities whose value may be linked to foreign
currencies, 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, 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,
7.46s, 2015 J. J. Kenny $2,800 $2,939,048 $172,284
========
</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 March 31, 1996, the
Fund owned the following restricted security (constituting 0.28% of net assets)
which may not be publicly sold without registration under the Securities Act of
1933 (the 1933 Act). The Fund does not have the right to demand that such
security be registered. The value of this security is determined by valuations
supplied by a pricing service or brokers. This security may be offered and sold
to "qualified institutional buyers" under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Date of Par Amount
Description Acquisition (000 Omitted) Cost Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Crystal City, TX, Lease Obligations, 10.5s, 2008 5/25/88 $1,252 $948,056 $1,216,111
=========
</TABLE>
(9) Acquisitions
At close of business on April 28, 1995, the Fund acquired all of the assets and
liabilities of The National Portfolio, a series of The Advantage Municipal Bond
Fund (The Advantage Fund). The acquisition was accomplished by a tax-free
exchange of 3,398,645 Class B shares of the Fund (valued at $28,956,459) for the
3,122,374 shares of The Advantage Fund. The Advantage Fund's net assets on that
date ($28,956,459), including $1,484,799 of unrealized depreciation, were
combined with those of the Fund. The aggregate net assets for Class B shares
after the acquisition were $473,464,579.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Municipal Series Trust and Shareholders of MFS Municipal
Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Municipal Income Fund (one of the series
constituting MFS Municipal Series Trust) as of March 31, 1996, the related
statement of operations for the year then ended, the statement of changes in net
assets for the years ended March 31, 1996 and March 31, 1995, and the financial
highlights for the years ended March 31, 1996 and 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, 1996 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, 1996, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 29, 1996
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
------------------
MFS(R) MUNICIPAL [logo - DALBAR] Bulk Rate
INCOME FUND U.S. Postage
P A I D
500 Boylston Street Permit #55638
Boston, MA 02116 Boston, MA
------------------
[logo]
THE FIRST NAME IN MUTUAL FUNDS
MMI-2 5/96 23M 02/202/302
