<PAGE>
[Logo] Semiannual Report
INVESTMENT MANAGEMENT September 30, 1997
MFS(R) MUNICIPAL INCOME FUND
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Portfolio Manager's Overview .............................................. 2
Portfolio Manager's Profile ............................................... 3
Fund Facts ................................................................ 4
Performance Summary ....................................................... 4
Portfolio Concentration ................................................... 5
Portfolio of Investments .................................................. 6
Financial Statements ...................................................... 14
Notes to Financial Statements ............................................. 23
Trustees and Officers ..................................................... 29
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HIGHLIGHTS
o FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 7.49%, CLASS B SHARES 7.08%,
AND CLASS C SHARES 6.95%. (SEE PERFORMANCE SUMMARY FOR MORE INFORMATION.)
o THE PAST SIX MONTHS SAW A DRAMATIC DECLINE IN INTEREST RATES, DRIVEN BY A
MODERATION IN ECONOMIC ACTIVITY. YIELDS ON 30-YEAR U.S. TREASURY BONDS
DECLINED 0.67%, WHILE YIELDS ON 30-YEAR, "AAA"- RATED MUNICIPAL BONDS FELL
0.50%. (PRINCIPAL VALUE AND INTEREST ON TREASURY SECURITIES ARE GUARANTEED
BY THE U.S. GOVERNMENT IF HELD TO MATURITY.)
o THE FUND BENEFITED FROM THE CONTINUING COMPRESSION OF YIELD SPREADS BETWEEN
CREDIT QUALITIES, THE IMPACT OF HOLDING ZERO-COUPON AND NONCALLABLE BONDS,
AND REFUNDINGS OF SOME OF THE FUND'S HOLDINGS.
o THE FUND HAS MAINTAINED A DURATION (OR SENSITIVITY TO CHANGES IN INTEREST
RATES) THAT IS SOMEWHAT LONGER THAN THAT OF ITS BENCHMARK INDEX, A POSITION
TAKEN IN LIGHT OF OUR POSITIVE OUTLOOK FOR THE OVERALL MARKET.
- --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still
uncomfortably high. The rapid pace of growth seen in the first quarter slowed
in the second quarter, to an annual rate of 3.3%. While real (inflation-
adjusted) growth could moderate further in the third quarter, we believe
economic momentum will carry well into the first quarter of 1998. Although the
economy appears to be in a modest lull, the money supply is increasing at a
rapid rate, and it still appears that Christmas sales could be quite good.
Because economic growth continues to be impressive, markets are likely to
begin focusing on the Federal Reserve Board's (the Fed's) willingness to raise
interest rates.
In the fixed-income markets, we have been encouraged by the Fed's decision at
its July meeting not to raise short-term interest rates. Inflation remains
under control, and events in the Pacific Rim countries appear to be clearly
disinflationary. At the same time, we are concerned that tight labor markets
could lead to inflationary pressures. As a result, our near-term outlook is
neutral to modestly positive. However, it is imperative that investors not
lose sight of the potential for a strengthening economy, which would encourage
the Fed to tighten monetary conditions.
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 15, 1997
<PAGE>
PORTFOLIO MANAGER'S OVERVIEW
[Photo of Geoffrey L. Schechter]
Geoffrey L. Schechter
Dear Shareholders:
The six-month period ended September 30, 1997, was marked by a dramatic
decline in interest rates. The yield on the 30-year U.S. Treasury bond fell
from 7.07% on April 1, 1997, to 6.40% on September 30, a drop of 67 basis
points (0.67%). Driving this steep decline in interest rates was a moderation
in the level of economic activity from the torrid pace experienced during the
first quarter of 1997. This, combined with an inflation rate that remains
quiescent, led to a diminished possibility of the Fed's further tightening
monetary policy in the near term. As fears of further tightening faded,
interest rates marched lower.
Municipal bond yields also declined during this period. The yield on 30-year
general-obligation bonds rated "AAA" by Standard & Poor's fell from 5.75% on
April 1, 1997, to 5.25% on September 30, a drop of 50 basis points (0.50%).
This resulted in a yield ratio of 30-year municipals to comparable-maturity
Treasury securities of 82%, slightly higher than the 81% ratio at the end of
March. (Principal value and interest on Treasury securities are guaranteed by
the U.S. government if held to maturity.) The modest increase is primarily
attributable to a surge in the issuance of tax-exempt bonds during the last
half of September, as issuers took advantage of the year's lowest interest
rates.
In this environment, Class A shares of the Fund provided a total return of
7.49%, Class B shares 7.08%, and Class C shares 6.95% for the period. These
returns assume the reinvestment of distributions but exclude the effects of
any sales charges. The Fund's returns compare favorably to a 6.56% return for
the Lehman Brothers Municipal Bond Index (the Lehman Index), an unmanaged
index of national municipal bond investments rated "Baa" or higher. They also
compare favorably to the 6.55% average return for tax-exempt municipal bond
funds as reported by Lipper Analytical Services, Inc., an independent firm
that reports mutual fund performance.
The main factors behind these positive returns were the continuing compression
of yield spreads between credit qualities, the impact of holding zero-coupon
and noncallable bonds, and refundings of some of the Fund's holdings. The past
six months have seen a continuation of the trend toward tighter credit
spreads, with the spread between "AAA"- and "BBB"-rated bonds tightening from
approximately 40 basis points (0.40%) to approximately 20 basis points
(0.20%). This tightening benefited the Fund because about 30% of the portfolio
is invested in lower-grade securities. Further contributing to the Fund's
positive performance was the maintenance of a duration (or sensitivity to
changes in interest rates) that was somewhat longer than that of the Lehman
Index, a position taken in light of our positive outlook for the overall
market.
We currently remain positive about the future course of interest rates and,
thus, are keeping the Fund's duration modestly longer than that of the Lehman
Index. However, the continued strength of the economy does temper our
enthusiasm, and we remain concerned about a possible increase in inflationary
pressures and a concomitant tightening in monetary policy by the Fed. If
inflationary pressures should occur, we would take any steps necessary to
reduce the Fund's interest-rate sensitivity in an effort to protect
shareholders' capital.
Respectfully,
/s/ Geoffrey L. Schechter
- ----------------------------
Geoffrey L. Schechter
Portfolio Manager
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
GEOFFREY L. 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 HAS MANAGED MFS(R) MUNICIPAL INCOME FUND SINCE
1996. MR. SCHECHTER IS A CERTIFIED PUBLIC ACCOUNTANT (C.P.A.) AND A CHARTERED
FINANCIAL ANALYST (C.F.A.).
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FUND FACTS
OBJECTIVE: THE FUND SEEKS 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.
COMMENCEMENT OF
INVESTMENT OPERATIONS: DECEMBER 29, 1986
CLASS INCEPTION: CLASS A SEPTEMBER 7, 1993
CLASS B DECEMBER 29, 1986
CLASS C JANUARY 3, 1994
SIZE: $389.8 MILLION NET ASSETS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
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 AS OF SEPTEMBER 30, 1997
CLASS A INVESTMENT RESULTS
(net asset value change including reinvested distributions)
<TABLE>
<CAPTION>
6 Months 1 Year 5 Years 10 Years
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return +7.49% +9.30% +37.33% +115.49%
- -----------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +9.30% + 6.55% + 7.98%
- -----------------------------------------------------------------------------------------------------------------------------------
SEC Results -- +4.10% + 5.51% + 7.45%
- -----------------------------------------------------------------------------------------------------------------------------------
<PAGE>
PERFORMANCE SUMMARY -- continued
CLASS B INVESTMENT RESULTS
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return +7.08% +8.46% +32.44% +107.84%
- -----------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +8.46% + 5.78% + 7.59%
- -----------------------------------------------------------------------------------------------------------------------------------
SEC Results -- +4.46% + 5.46% + 7.59%
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS C INVESTMENT RESULTS
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return +6.95% +8.48% +32.56% +108.03%
- -----------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +8.48% + 5.80% + 7.60%
- -----------------------------------------------------------------------------------------------------------------------------------
SEC Results -- +7.48% + 5.80% + 7.60%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All results are historical and assume the reinvestment of dividends and
capital gains. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost.
Past performance is no guarantee of future results.
Class A share SEC results include the maximum 4.75% sales charge. Class B
share 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. Class C share
purchases are subject to a 1% CDSC if redeemed within 12 months of purchase.
Class A and Class C share results include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class B shares for periods
prior to the inception of Class A and Class C shares. Because operating
expenses attributable to Class A shares are lower than those of Class B
shares, Class A share performance generally would have been higher than Class
B share performance. Operating expenses attributable to Class C shares are not
significantly different from those of Class B shares. The Class B share
performance 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
C share SEC performance has been adjusted to reflect the lower CDSC generally
applicable to Class C shares rather than the CDSC generally applicable to
Class B shares.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time.
PORTFOLIO CONCENTRATION AS OF SEPTEMBER 30, 1997
QUALITY RATINGS
"AAA" 43.7%
"AA" 11.7%
"A" 10.3%
"BBB" 15.7%
"BB" 1.3%
"B" 0.9%
Not Rated 16.4%
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS (Unaudited) - September 30, 1997
Municipal Bonds - 99.7%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
General Obligation - 8.3%
Commonwealth of Massachusetts, 7s, 2007 $ 725 $ 806,468
Crowley, TX, Independent School District, Capital
Appreciation, FGIC, 0s, 2015 3,690 1,434,967
East Whittier, CA, City School District, Capital
Appreciation, "A", FGIC, 0s, 2018 965 310,499
East Whittier, CA, City School District, Capital
Appreciation, "A", FGIC, 0s, 2019 960 292,512
East Whittier, CA, City School District, Capital
Appreciation, "A", FGIC, 0s, 2020 965 278,441
East Whittier, CA, City School District, Capital
Appreciation, "A", FGIC, 0s, 2021 960 262,311
Harris County, TX, Capital Appreciation Refunding,
MBIA, 0s, 2016 8,000 2,924,640
Lewisville, TX, Independent School District, PSF, 0s, 2019 2,500 760,150
New Orleans, LA, AMBAC, 0s, 2015 3,000 1,153,410
New York City, NY, 8.2s, 2003 855 994,861
New York City, NY, 8.2s, 2003 4,145 4,741,507
New York City, NY, 7.5s, 2008 1,350 1,506,154
Northwest Texas Independent School District, AMBAC,
0s, 2011 3,000 1,478,430
State of Texas, 7.625s, 2018 14,405 15,408,020
------------
$ 32,352,370
- ------------------------------------------------------------------------------------------------
State and Local Appropriation - 1.7%
New York Dormitory Authority Rev. (City University),
7.5s, 2010 $ 2,500 $ 3,032,750
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2008 235 260,157
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.75s, 2020 290 313,809
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.5s, 2021 205 226,711
Philadelphia, PA, Regional Port Authority Lease Rev.,
MBIA, MVRIC, 8.42s, 2020(++) 2,500 2,856,450
------------
$ 6,689,877
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Refunded and Special Obligations - 22.5%
Adams County, CO, Single Family Mortgage Rev.,
8.875s, 2011 $ 2,510 $ 3,438,474
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street Project), 8.125s, 2000 915 1,038,580
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street Project), 8.25s, 2000 1,000 1,138,730
Colquitt County, GA, Development Authority Rev., "A",
0s, 2021 2,815 734,208
Colquitt County, GA, Development Authority Rev., "C",
0s, 2021 5,725 1,493,195
Commonwealth of Massachusetts, 7s, 2007 1,865 2,074,570
Fredericksburg, VA, Industrial Development Authority,
Hospital Facilities Rev., FGIC, INFLOS, 9.326s, 2023(++) 1,500 1,792,605
Illinois Education and Facilities Authority, 8.75s, 2015 60 61,555
Massachusetts Health & Education Facilities Authority
(Suffolk University), 8s, 2000 1,000 1,111,640
Massachusetts Industrial Finance Agency, Tunnel Rev.
(Mass. Turnpike), 9s, 2020 2,800 3,226,496
Massachusetts Water Resources Authority, 7.625s, 2000 3,200 3,529,152
Montgomery County, TX, Health Facilities Development
Corp., 0s, 2023 6,620 1,577,414
Montgomery County, TX, Health Facilities Development
Corp., FSA, 0s, 2023 5,000 1,191,400
New York City, NY, 8.25s, 2001 4,140 4,824,963
New York Local Government Assistance Corp., 7.25s, 2001 2,750 3,070,375
New York Medical Care Facilities Finance Agency,
7.75s, 2000 1,765 1,944,200
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2000 1,180 1,321,258
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2000 5,180 5,800,098
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.5s, 2001 1,795 2,012,051
New York Urban Development Corp., 7.75s, 2000 5,000 5,487,400
New York Urban Development Corp., 7.5s, 2001 2,500 2,811,375
New York Urban Development Corp. (Correctional
Facilities), 7.3s, 2002 2,340 2,651,477
Pennsylvania Industrial Development Authority Rev.,
7s, 2001 7,000 7,773,710
Philadelphia, PA, Municipal Authority Rev., FGIC, 7s, 2001 2,000 2,241,640
Richmond County, GA, Development Authority Rev.,
0s, 2021 10,755 2,805,119
Richmond County, GA, Development Authority Rev.,
0s, 2021 9,000 2,347,380
Savannah, GA, Economic Development Authority, 0s, 2021 6,125 1,597,523
Texas Turnpike Authority (Houston Ship Channel
Bridge), 12.625s, 2002 3,000 4,091,430
Washington County, PA, AMBAC, 7.45s, 2000 1,200 1,334,904
Washington Public Power Supply System Rev. (Nuclear
Project #1), 14.375s, 2001 805 981,504
Washington Public Power Supply System Rev. (Nuclear
Project #2), 7.375s, 2000 5,355 5,898,211
Washington Public Power Supply System Rev. (Nuclear
Project #3), 7s, 2011 4,050 4,421,831
Washington, GA, Wilkes Payroll Development Authority
Rev., 0s, 2021 8,000 2,086,560
------------
$ 87,911,028
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Airport and Port Revenue -- 12.7%
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (American Airlines), 7.875s, 2025 $ 3,500 $ 3,817,415
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 1,960 2,112,586
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 2,840 3,199,516
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 6,300 7,097,517
Cleveland, OH, Airport Special Facilities Rev.
(Continental Airlines), 9s, 2019 4,300 4,713,789
Connecticut Airport Rev. (Bradley International
Airport), FGIC, 7.65s, 2012 1,000 1,172,220
Dallas-Fort Worth, TX, International Airport (American
Airlines), 7.5s, 2025 5,000 5,429,100
Denver, CO, City & County Airport Rev., 8.75s, 2023 4,750 5,581,535
Hawaii Airports Systems Rev., FGIC, 7.5s, 2020 5,350 5,857,073
Hillsborough County, FL, Aviation Authority Rev.
(USAir), 8.6s, 2022 2,000 2,279,140
Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 1,000 1,100,720
Louisville & Jefferson County, KY, Regional Airport
Authority, "A", MBIA, 6.5s, 2017 3,000 3,298,380
Tulsa, OK, Municipal Airport Trust Rev. (American
Airlines), 7.375s, 2020 3,500 3,796,590
------------
$ 49,455,581
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Electric and Gas Utility Revenue - 13.5%
Austin, TX, Utility Systems Rev., AMBAC, 0s, 2010 $ 7,500 $ 3,845,025
Austin, TX, Utility Systems Rev., AMBAC, 6.75s,
2011(S)(S) 3,325 3,853,309
Austin, TX, Utility Systems Rev., FGIC, 0s, 2018 10,000 3,248,300
Chicago, IL, Gas Supply Rev. (People's Gas), 8.1s, 2020 2,000 2,199,660
Georgia Municipal Electric Power Authority Rev., MBIA,
6.375s, 2016 2,000 2,297,880
Georgia Municipal Electric Power Authority Rev., MBIA-
IBC, 6.5s, 2020 7,350 8,516,151
Midland, MI, Environmental Development Authority,
Pollution Control Rev. (Midland Cogeneration), 9.5s, 2009 2,000 2,204,460
North Carolina Eastern Municipal Power Agency, MBIA-
IBC, 7s, 2007 3,250 3,843,743
Pima County, AZ, Industrial Development Authority
(Tuscon Electric Power Co.), 6s, 2029 1,000 1,005,970
Pittsylvania County, VA, Industrial Development
Authority Rev., 7.5s, 2014 6,000 6,540,360
Southern Minnesota Municipal Power Agency, MBIA,
0s, 2020 13,500 4,056,210
Southern Minnesota Municipal Power Agency, MBIA,
0s, 2021 10,660 3,034,262
Southern Minnesota Municipal Power Agency, MBIA,
0s, 2025 6,400 1,447,616
Tampa, FL, Utility Tax, Capital Appreciation, AMBAC,
0s, 2017 2,110 738,437
Texas Municipal Power Agency Rev., AMBAC, 0s, 2011 5,930 2,880,260
Washington Public Power Supply System Rev., BIGI,
0s, 2013 4,000 1,705,240
Washington Public Power Supply System Rev., BIGI,
0s, 2014 3,350 1,341,876
------------
$ 52,758,759
- ------------------------------------------------------------------------------------------------
Health Care Revenue - 4.9%
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.25s, 2001 $ 95 $ 93,260
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.75s, 2006 140 135,433
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.125s, 2016 505 481,002
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.5s, 2026 1,130 1,070,822
Bell County, TX, Health Facilities Development Corp.
(Kings Daughters Hospital), 9.25s, 2008 1,495 1,622,359
Gadsden County, FL, Industrial Development Authority
(RHA/FLA Properties), 10.45s, 2018 1,900 1,966,823
Louisiana Public Facilities Authority (Southwest
Medical Center), 11s, 2006 1,401 435,587
Massachusetts Health & Education Facilities Authority
(New England Deaconess Hospital), 6.875s, 2022 4,140 4,524,151
Millbrae, CA, Residential Facility (Magnolia of
Millbrae Project), 7.375s, 2027 1,000 1,003,230
Montgomery County, PA, Industrial Development
Authority, Health Facilities Rev. (AHF/Ambler),
8.5s, 2023 300 312,618
Philadelphia, PA, Industrial Development Authority
(RHA/Pavillion), 10.25s, 2018 1,465 1,465,923
Philadelphia, PA, Industrial Development Authority
(RHA/Philadelphia), 10.25s, 2018 1,890 1,892,400
Stillwater, OK, Medical Center Authority (Stillwater
Medical Center), 6.5s, 2019 1,000 1,058,970
Tennessee State Veterans Home Board Rev. (Humboldt
Project), 6.75s, 2021 1,000 1,093,990
Torrance, CA, Hospital Rev., 6.875s, 2015 1,695 1,835,041
------------
$ 18,991,609
- ------------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 7.0%
Braxton County, WV, Solid Waste Disposal Rev.
(Weyerhaeuser Co. Project), 5.8s, 2027 $ 1,390 $ 1,407,862
Burns Harbor, IN, Solid Waste Disposal Facilities Rev.
(Bethlehem Steel), 8s, 2024 3,000 3,290,880
Carbon County, UT, Solid Waste Disposal Rev. (Laidlaw
Environmental), 7.45s, 2017 2,500 2,580,400
Dayton, OH, Special Facilities Rev. (Emery Air
Freight), 12.5s, 2009 1,000 1,093,300
East Chicago, IN, Exempt Facilities Rev. (Inland Steel
Co.), 6.7s, 2012 2,070 2,254,623
Erie County, PA (International Paper), 7.875s, 2016 1,200 1,314,804
Lake Charles, LA, Harbor & Terminal District Port
(Occidental Petroleum), 7.2s, 2020 1,000 1,111,690
Navajo County, AZ, Industrial Development Authority
(Stone Container Corp. Project), 7.4s, 2026 5,150 5,573,278
Navajo County, AZ, Industrial Development Authority
(Stone Container Corp. Project), 7.2s, 2027 1,000 1,072,640
Northampton County, PA, Industrial Development
Authority (Bethlehem Steel), 7.55s, 2017 1,200 1,313,940
Port of New Orleans, LA (Avondale Industries), 8.5s, 2014 2,000 2,295,660
Port of New Orleans, LA (Continental Grain Co.),
7.5s, 2013 1,000 1,094,330
St. Augustine, FL, Airport Authority (Grumman Repair
Facility), 11s, 2004 500 518,230
West Side Calhoun County, TX, Navigation District
(Union Carbide), 8.2s, 2021 2,000 2,224,040
------------
$ 27,145,677
- ------------------------------------------------------------------------------------------------
Insured Health Care Revenue - 3.5%
Clermont County, OH, Hospital Facilities Rev. (Mercy
Health Systems), AMBAC, MVRICs, 9.391s, 2021(++) $ 1,500 $ 1,809,330
Henrico County, VA, Industrial Development Authority
Rev. (Bon Secours), FSA, RIBS, 7.843s, 2027(++) 5,000 5,796,450
Jefferson County, KY, Hospital Rev. (Alliant Health
System), MBIA, INFLOS, 8.857s, 2014(++) 1,500 1,772,175
Mississippi Hospital Equipment & Facilities Authority
Rev. (Rush Medical Foundation), Connie Lee, 6.7s, 2018 1,000 1,081,960
Rio Grande Valley, TX, Health Facilities Development
Corp., MBIA, 7.308s, 2015(S) 2,800 3,033,352
------------
$ 13,493,267
- ------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 4.8%
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments Project), 7.25s, 2027 $ 1,000 $ 1,134,810
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments Project), 7.25s, 2027 610 635,364
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 10s, 2027 380 386,931
Colorado Housing Finance Authority, FHA, 8.3s, 2023 2,750 2,956,030
Maryland Community Development Administration,
8.5s, 2028 3,000 3,065,010
Pennsylvania Housing Finance Agency, 7.6s, 2013 1,000 1,079,530
Texas State Department of Housing & Community Affairs,
10s, 2026 2,325 2,394,146
Vermont Housing Finance Agency, 8.375s, 2020 2,685 2,803,462
Wisconsin Housing & Economic Development Authority,
7.2s, 2013 4,000 4,249,360
------------
$ 18,704,643
- ------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 1.2%
Metropolitan Pier & Exposition Authority, IL, MBIA, 0s, 2016 $ 8,400 $ 3,012,744
Southeast, WI, Baseball Park Sales Tax Rev., MBIA, 0s, 2025 1,000 214,670
Southeast, WI, Baseball Park Sales Tax Rev., MBIA, 0s, 2027 1,500 284,415
Southeast, WI, Baseball Park Sales Tax Rev., MBIA, 0s, 2028 5,800 1,040,636
Southeast, WI, Baseball Park Sales Tax Rev., MBIA, 0s, 2029 1,730 293,719
------------
$ 4,846,184
- ------------------------------------------------------------------------------------------------
Single Family Housing Revenue - 6.4%
Chicago, IL, Residential Mortgage Rev., MBIA, 0s, 2009 $ 3,710 $ 1,619,786
Cook County, IL, Single Family Housing Rev., 0s, 2015 6,300 898,821
De Kalb, IL, Single Family Mortgage Rev., GNMA,
7.45s, 2009 215 235,356
Harris County, TX, Housing Finance Corp., 9.625s, 2003 200 201,082
Harris County, TX, Housing Finance Corp., 9.875s, 2014 335 336,809
Kentucky Housing Corp. FHA, 7.45s, 2023 4,545 4,819,882
Mississippi Home Corp., Single Family Rev., GNMA,
7.1s, 2023 625 669,562
New Hampshire Housing Finance Authority, 7.2s, 2010 6,030 6,417,669
Tennessee Housing Development Agency, 0s, 2017 3,445 1,099,472
Utah Housing Finance Agency, 8.625s, 2019 790 863,873
Utah Housing Finance Agency, 9.125s, 2019 80 87,190
Utah Housing Finance Agency, 9.25s, 2019 50 54,599
Utah Housing Finance Agency, 6.3s, 2028 2,000 2,088,320
West Virginia Housing Development Fund, 7.85s, 2014 5,185 5,391,570
------------
$ 24,783,991
- ------------------------------------------------------------------------------------------------
Solid Waste Revenue - 0.9%
Charleston County, SC, Resource Recovery Rev.
(Foster Wheeler), 9.25s, 2010 $ 3,200 $ 3,331,872
- ------------------------------------------------------------------------------------------------
Student Loan Revenue - 1.6%
Pennsylvania State Higher Educational Assistance
Agency, RIBS, AMBAC, 9.409s, 2026(++) $ 5,500 $ 6,223,140
- ------------------------------------------------------------------------------------------------
Turnpike Revenue - 4.9%
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s to 1/1/05, 7.15s to 2012 $ 5,000 $ 3,570,950
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s to 1/1/05, 7.15s to 2013 5,000 3,586,600
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2030 5,000 785,000
New Jersey Turnpike Authority Rev., MBIA, 6.5s, 2016 1,450 1,691,048
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2004 3,000 2,255,550
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2005 1,800 1,288,332
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2009 6,750 3,886,515
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2014 5,000 2,165,450
------------
$ 19,229,445
- ------------------------------------------------------------------------------------------------
Universities - 1.2%
Islip, NY, Community Development Agency Rev. (New York
Institute of Technology), 7.5s, 2026 $ 2,000 $ 2,141,280
New Hampshire Higher Education & Health Facilities
Authority Rev. (New Hampshire College), 6.375s, 2027 1,435 1,457,788
St. Joseph County, IN, Educational Facilities Rev.
(University of Notre Dame), 6.5s, 2026 1,000 1,183,830
------------
$ 4,782,898
- ------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 3.4%
Massachusetts Water Resources Authority, 6.5s, 2019 $ 7,495 $ 8,746,140
Salt Lake County, UT, Water Conservancy District Rev.,
AMBAC, 0s, 2008 2,100 1,225,392
Salt Lake County, UT, Water Conservancy District Rev.,
AMBAC, 0s, 2009 3,800 2,086,922
Westmoreland County, PA, Municipal Authority, FGIC,
0s, 2022 5,000 1,284,700
----------------
$ 13,343,154
- ------------------------------------------------------------------------------------------------
Other - 1.2%
Illinois Dedicated Tax (Civic Center), AMBAC, 0s, 2016 $ 5,000 $ 1,735,000
Martha's Vineyard, MA, Land Bank (Land Acquisition),
8.125s, 2011 1,800 1,960,902
Massachusetts Health & Education Facilities Authority
(Learning Center for Deaf Children), 9.25s, 2014 900 960,318
------------
$ 4,656,220
- ------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $345,801,564) $388,699,715
- ------------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 0.4%
Burke County, GA, Development Authority, Pollution
Control Rev. (Georgia Power), due 4/01/32 $ 1,200 $ 1,200,000
Heard County, GA, Development Authority, Pollution
Control Rev. (Georgia Power Co.), due 9/01/29 100 100,000
New York, NY, Municipal Water Finance Authority,
due 6/15/24 200 200,000
- ------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Identified Cost $ 1,500,000
- ------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $347,301,564) $390,199,715
Other Assets, Less Liabilities - (0.1)% (431,085)
- ------------------------------------------------------------------------------------------------
Net Assets - 100.0% $389,768,630
- ------------------------------------------------------------------------------------------------
(S) Indexed security.
(S)(S) When-issued security. At September 30, 1997, the Fund had sufficient cash and/or
securities at least equal to the value of the when-issued security.
(++) Inverse floating rate security.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
-----------------------------------------------------------------------------
SEPTEMBER 30, 1997
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $347,301,564) $390,199,715
Cash 549
Receivable for Fund shares sold 445,640
Receivable for investments sold 629,190
Interest receivable 6,557,054
Other assets 3,690
------------
Total assets $397,835,838
------------
Liabilities:
Distributions payable $ 750,392
Payable for Fund shares reacquired 1,289,468
Payable for investments purchased 2,309,297
Payable for when-issued investments purchased 3,488,125
Payable to affiliates -
Management fee 23,338
Shareholder servicing agent fee 4,151
Distribution and service fee 21,409
Accrued expenses and other liabilities 181,028
------------
Total liabilities $ 8,067,208
------------
Net assets $389,768,630
============
Net assets consist of:
Paid-in capital $359,341,986
Unrealized appreciation on investments 42,898,151
Accumulated net realized loss on investments (12,768,423)
Accumulated undistributed net investment income 296,916
------------
Total $389,768,630
============
Shares of beneficial interest outstanding 43,827,151
==========
Class A shares:
Net asset value per share
(net assets of $170,760,073 / 19,213,570 shares of
beneficial interest outstanding) $8.89
=====
Offering price per share (100 / 95.25) $9.33
=====
Class B shares:
Net asset value and offering price per share
(net assets of $199,108,178 / 22,378,713 shares of
beneficial interest outstanding) $8.90
=====
Class C shares:
Net asset value and offering price per share
(net assets of $19,900,379 / 2,234,868 shares of
beneficial interest outstanding) $8.90
=====
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>
FINANCIAL STATEMENTS - continued
Statement of Operations (Unaudited)
- -------------------------------------------------------------------------------
SIX MONTHS ENDED SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
Net investment income:
Interest income $13,346,585
-----------
Expenses -
Management fee $ 1,422,527
Trustees' compensation 21,351
Shareholder servicing agent fee 255,110
Distribution and service fee (Class A) 202,820
Distribution and service fee (Class B) 1,057,603
Distribution and service fee (Class C) 93,503
Administrative fee 29,612
Custodian fee 66,459
Postage 22,739
Printing 19,279
Auditing fees 15,459
Legal fees 3,750
Miscellaneous 90,630
-----------
Total expenses $ 3,300,842
Fees paid indirectly (27,300)
-----------
Net expenses $ 3,273,542
-----------
Net investment income $10,073,043
-----------
Realized and unrealized gain on investments:
Realized gain (identified cost basis) on investment
transactions $ 1,814,785
Change in unrealized appreciation on investments 15,419,543
-----------
Net realized and unrealized gain on investments $17,234,328
-----------
Increase in net assets from operations $27,307,371
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
SEPTEMBER 30, 1997 YEAR ENDED
(UNAUDITED) MARCH 31, 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 10,073,043 $ 21,988,427
Net realized gain (loss) on investments 1,814,785 (3,566,000)
Net unrealized gain (loss) on investments 15,419,543 (2,405,366)
------------ ------------
Increase in net assets from operations $ 27,307,371 $ 16,017,061
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (4,465,474) $ (7,739,363)
From net investment income (Class B) (5,020,432) (13,259,117)
From net investment income (Class C) (443,666) (829,094)
------------ ------------
Total distributions declared to shareholders $ (9,929,572) $(21,827,574)
------------ ------------
Net decrease in net assets from Fund share transactions $(24,945,085) $(42,149,734)
------------ ------------
Total decrease in net assets $ (7,567,286) $(47,960,247)
Net assets:
At beginning of period 397,335,916 445,296,163
------------ ------------
At end of period including accumulated undistributed net
investment income of $296,916, and $153,445 respectively $389,768,630 $397,335,916
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MARCH 31,
SEPTEMBER 30, 1997 ------------------------------------
(UNAUDITED) 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
CLASS A
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.50 $ 8.62 $ 8.56
------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.24 $ 0.49 $ 0.51
Net realized and unrealized gain (loss) on
investments 0.39 (0.12) 0.05
------ ------ ------
Total from investment operations $ 0.63 $ 0.37 $ 0.56
------ ------ ------
Less distributions declared to shareholders
from net investment income(++) $(0.24) $(0.49) $(0.50)
------ ------ ------
Net asset value - end of period $ 8.89 $ 8.50 $ 8.62
====== ====== ======
Total return(+) 7.49%++ 4.28% 6.81%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.24%+ 1.31% 1.28%
Net investment income 5.57%+ 5.75% 5.75%
Portfolio turnover 15% 30% 23%
Net assets at end of period (000 omitted) $170,760 $152,039 $121,903
+ 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 reduction for
fees paid indirectly.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
(++) For the year ended March 31, 1996, the per share distributions in excess of net investment income were $0.0003.
(S) The distributor did not impose the Class A distribution fee of 0.10% per annum for the year ended March 31, 1996.
If this fee had been incurred by the Fund, the net investment income per share would have been $0.47 and the ratios
of expenses and net investment income to average net assets would have been 1.38% and 5.66%, respectively.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, YEAR ENDED
------------------------------- NOVEMBER 30,
1995 1994+++ 1993*
- -------------------------------------------------------------------------------------------------------------------------
CLASS A
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.56 $ 8.99 $ 9.15
------ ------ ------
Income from investment operations# -
Net investment income $ 0.50 $ 0.15 $ 0.12
Net realized and unrealized gain (loss) on
investments 0.02 (0.51) (0.16)
------ ------ ------
Total from investment operations $ 0.52 $(0.36) $(0.04)
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.52) $(0.02) $(0.11)
From net realized gain on investments -- (0.01) --
In excess of net realized gain on investments(+++) (0.00) (0.04) (0.01)
------ ------ ------
Total distributions declared to shareholders $(0.52) $(0.07) $(0.12)
------ ------ ------
Net asset value - end of period $ 8.56 $ 8.56 $ 8.99
====== ====== ======
Total return(+) 6.33% (7.90)%+ (1.80)%+
Ratios (to average net assets)/Supplemental data:
Expenses 1.13% 1.07%+ 0.76%+
Net investment income 6.20% 5.31%+ 4.94%+
Portfolio turnover 25% 9% 30%
Net assets at end of period (000 omitted) $25,270 $5,595 $461
* For the period from the commencement of the Fund's offering of Class A shares, September 7, 1993, through
November 30, 1993.
+ 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.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
(+++) For the year ended March 31, 1995, the per share distributions in excess of net realized gains were less than $0.01.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MARCH 31,
SEPTEMBER 30, 1997 ------------------------------------
(UNAUDITED) 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.51 $ 8.63 $ 8.57
------ ------ ------
Income from investment operations# -
Net investment income $ 0.21 $ 0.43 $ 0.43
Net realized and unrealized gain (loss) on
investments 0.39 (0.13) 0.06
------ ------ ------
Total from investment operations $ 0.60 $ 0.30 $ 0.49
------ ------ ------
Less distributions declared to shareholders
from net investment income(++) $(0.21) $(0.42) $(0.43)
------ ------ ------
Net asset value - end of period $ 8.90 $ 8.51 $ 8.63
====== ====== ======
Total return 7.08%++ 3.44% 5.87%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.99%+ 2.11% 2.13%
Net investment income 4.80%+ 4.95% 4.90%
Portfolio turnover 15% 30% 23%
Net assets at end of period (000 omitted) $199,108 $226,138 $306,889
+ 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 reduction for fees paid
indirectly.
(++) For the year ended March 31, 1996, the per share distributions in excess of net investment income were $0.0003.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, YEAR ENDED
------------------------------ NOVEMBER 30,
1995 1994+++ 1993
- -------------------------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.56 $ 8.99 $ 8.73
------ ------ ------
Income from investment operations# -
Net investment income $ 0.44 $ 0.14 $ 0.42
Net realized and unrealized gain (loss) on
investments 0.00 (0.51) 0.42
------ ------ ------
Total from investment operations $ 0.44 $(0.37) $ 0.84
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.43) $(0.01) $(0.45)
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) --
------ ------ ------
Total distributions declared to shareholders $(0.43) $(0.06) $(0.58)
------ ------ ------
Net asset value - end of period $ 8.57 $ 8.56 $ 8.99
====== ====== ======
Total return 5.32% (8.97)%+ 9.95%
Ratios (to average net assets)/Supplemental data:
Expenses 2.16% 2.24%+ 2.11%
Net investment income 5.15% 4.74%+ 4.92%
Portfolio turnover 25% 9% 30%
Net assets at end of period (000 omitted) $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.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1992 1991 1990 1989 1988 1987**
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of
period $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.47
------ ------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.47 $ 0.49 $ 0.49 $ 0.51 $ 0.50 $ 0.38
Net realized and unrealized
gain (loss) on investments 0.26 0.25 (0.15) 0.30 0.43 (0.83)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.73 $ 0.74 $ 0.34 $ 0.81 $ 0.93 $(0.45)
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.48) $(0.49) $(0.50) $(0.51) $(0.49) $(0.35)
From paid in capital (0.02) -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.50) $(0.49) $(0.50) $(0.51) $(0.49) $(0.35)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 8.73 $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67
====== ====== ====== ====== ====== ======
Total return 8.82% 9.21% 4.18% 10.24% 12.53% (5.79)%+
Ratios (to average net assets)/Supplemental data:
Expenses 2.03% 2.04% 2.05% 2.07% 2.09% 2.03%+
Net investment income 5.50% 5.82% 5.99% 6.09% 6.38% 6.00%+
Portfolio turnover 52% 73% 91% 127% 171% 138%
Net assets at end of period (000
omitted) $449,949 $409,084 $379,239 $343,887 $244,825 $183,935
** For the period from the commencement of the Fund's investment operations, December 29, 1986, through November 30, 1987.
+ Annualized.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MARCH 31,
SEPTEMBER 30, 1997 ------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994***
- -------------------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.52 $ 8.64 $ 8.57 $ 8.56 $ 9.07
------ ------ ------ ----- ------
Income from investment operations# -
Net investment income $ 0.21 $ 0.43 $ 0.43 $ 0.44 $ 0.09
Net realized and unrealized gain
(loss) on investments 0.38 (0.12) 0.07 0.01 (0.59)
------ ------ ------ ----- ------
Total from investment
operations $ 0.59 $ 0.31 $ 0.50 $ 0.45 $(0.50)
------ ------ ------ ----- ------
Less distributions declared to
shareholders from net investment
income(++) $(0.21) $(0.43) $(0.43) $(0.44) $(0.01)
------ ------ ------ ----- ------
Net asset value - end of period $ 8.90 $ 8.52 $ 8.64 $8.57 $ 8.56
====== ====== ====== ===== ======
Total return 6.95%++ 3.62% 5.94% 5.39% (19.42)%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.99%+ 2.06% 2.05% 2.09% 2.18%+
Net investment income 4.81%+ 5.00% 4.95% 5.23% 4.62%+
Portfolio turnover 15% 30% 23% 25% 9%
Net assets at end of period (000
omitted) $19,900 $19,159 $16,504 $10,936 $6,393
*** For the period from the commencement of the Fund's offering of Class C shares, January 3, 1994, through
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.
(++) For the year ended March 31, 1996, the per share distributions in excess of net investment income were $0.0003.
</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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, 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 listed on commodities exchanges are reported at
market value using closing settlement prices. Securities for which there are
no such quotations or valuations are valued at fair value as determined in
good faith by or at the direction of the Trustees.
Indexed Securities - The Fund may invest 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.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount is amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the ex-
interest date in an amount equal to the value of the security on such date.
Some government securities may be purchased on a "when-issued" or "forward
delivery" basis, which means that the securities will be delivered to the Fund
at a future date, usually beyond customary settlement time. The Fund uses the
effective interest method for reporting interest income on payment-in-kind
(PIK) bonds. 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 additions 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 expensed.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's average daily net assets. The fee is reduced according to an
arrangement which measures the value of cash deposited with the custodian by
the Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. The Fund files a tax return annually
using tax accounting methods required under provisions of the Code which may
differ from generally accepted accounting principles, the basis on which these
financial statements are prepared. Accordingly, the amount of net investment
income and net realized gain reported on these financial statements may differ
from that reported on the Fund's tax return and, consequently, the character
of distributions to shareholders reported in the financial highlights may
differ from that reported to shareholders on Form
1099-DIV.
Distributions 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, 1997, the Fund, for federal income tax purposes, had a capital
loss carryforward of $11,911,166, 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),
March 31, 2004, ($2,228,612), and March 31, 2005, ($1,749,072).
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares. The classes of shares differ in their respective
distribution and service fees. All shareholders bear the common expenses of
the Fund pro rata based on settled shares outstanding of each class, without
distinction between share classes. Dividends are declared separately for each
class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.30%
of average daily net assets and 6.43% of investment income.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets,
provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain 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 its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of $5,438
for the period ended September 30, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$8,478 for the period ended September 30, 1997, as its portion of the sales
charge on sales of Class A shares of the Fund.
The Trustees have adopted a 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 Fund's 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 $44,178 for the period ended September 30, 1997. Payment of the
0.10% per annum Class A distribution fee will commence on such date as the
Trustees of the Fund may determine. Fees incurred under the distribution plan
during the period ended September 30, 1997, were 0.25% of average daily net
assets attributable to Class A shares on an annualized basis.
The Fund's distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B 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 $37,772
and $6,958 for Class B and Class C shares, respectively, for the period ended
September 30, 1997. Fees incurred under the distribution plan during the
period ended September 30, 1997, were 1.00% of average daily net assets
attributable to Class B and Class C shares on an annualized basis,
respectively.
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. MFD receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the period ended September 30, 1997, were $3, $126,795, and $8,116, on
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 Fund's average daily net assets at an effective annual
rate of up to 0.13%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations aggregated
$59,071,998 and $79,891,798, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $347,301,564
============
Gross unrealized appreciation $ 43,661,517
Gross unrealized depreciation (763,366)
------------
Net unrealized appreciation $ 42,898,151
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
PERIOD ENDED SEPTEMBER 30, 1997 YEAR ENDED MARCH 31, 1997
------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 6,165,121 $ 53,490,926 10,598,452 $ 91,183,934
Shares issued to
shareholders in
reinvestment of
distributions 246,123 2,149,218 421,941 3,631,704
Shares reacquired (5,079,226) (44,120,038) (7,272,704) (62,547,556)
---------- ------------- ----------- -------------
Net increase 1,332,018 $ 11,520,106 3,747,689 $ 32,268,082
========== ============= =========== =============
Class B Shares
PERIOD ENDED SEPTEMBER 30, 1997 YEAR ENDED MARCH 31, 1997
------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------
Shares sold 794,627 $ 6,896,356 1,742,931 $ 15,013,335
Shares issued to
shareholders in
reinvestment of
distributions 322,340 2,815,386 885,494 7,626,737
Shares reacquired (5,305,763) (46,094,995) (11,607,867) (99,999,564)
---------- ------------- ----------- -------------
Net decrease (4,188,796) $ (36,383,253) (8,979,442) $ (77,359,492)
========== ============= =========== =============
Class C Shares
PERIOD ENDED SEPTEMBER 30, 1997 YEAR ENDED MARCH 31, 1997
------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------
Shares sold 786,471 $ 6,863,152 1,159,265 $ 10,015,620
Shares issued to
shareholders in
reinvestment of
distributions 55,409 479,818 69,652 600,563
Shares reacquired (856,241) (7,424,908) (890,281) (7,674,507)
---------- ------------- ----------- -------------
Net increase (decrease) (14,361) $ (81,938) 338,636 $ 2,941,676
========== ============= =========== =============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of
Fund shares. Interest is charged to each fund, based on its borrowings, at a
rate equal to the bank's base rate. In addition, a commitment fee, based on
the average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated
to the Fund for the period ended September 30, 1997, was $921.
--------------------------------------------
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 Income Fund
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and State Street Bank and Trust Company
President
INVESTOR INFORMATION
Richard B. Bailey* - Private Investor; For MFS stock and bond market
Former Chairman and Director (until outlooks, call toll free:
1991), Massachusetts Financial 1-800-637-4458 anytime from a
Services Company; Director, Cambridge touch-tone telephone.
Bancorp; Director, Cambridge Trust
Company For information on MFS mutual funds,
call your financial adviser or, for an
Peter G. Harwood - Private Investor information kit, call toll free:
1-800-637-2929 any business day from 9
J. Atwood Ives - Chairman and Chief a.m. to 5 p.m. Eastern time (or leave
Executive Officer, Eastern Enterprises a message anytime).
Lawrence T. Perera - Partner, Hemenway INVESTOR SERVICE
& Barnes MFS Service Center, Inc.
P.O. Box 2281
William J. Poorvu - Adjunct Professor, Boston, MA 02107-9906
Harvard University Graduate School of
Business Administration For general information, call toll free
1-800-225-2606 any business day from
Charles W. Schmidt - Private Investor 8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive For service to speech- or
Vice President, Director and hearing-impaired, call toll free:
Secretary, Massachusetts Financial 1-800-637-6576 any business day from 9
Services Company a.m. to 5 p.m. Eastern time. (To use
this service, your phone must be
Jeffrey L. Shames* - President and equipped with a Telecommunications
Director, Massachusetts Financial Device for the Deaf.)
Services Company
For share prices, account balances,
Elaine R. Smith - Independent and exchanges, call toll free:
Consultant 1-800-MFS-TALK (1-800-637-8255)
anytime from a touch-tone telephone.
David B. Stone - Chairman, North
American Management Corp. (investment WORLD WIDE WEB
advisers) www.mfs.com
INVESTMENT ADVISER
Massachusetts Financial Services
Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Geoffrey L. Schechter* [DALBAR For the fourth year in a row,
LOGO] MFS earned a #1 ranking in the
TREASURER DALBAR, Inc. Broker/Dealer Survey,
W. Thomas London* Main Office Operations Service Quality
Category. The firm achieved a 3.42
ASSISTANT TREASURERS overall score on a scale of 1 to 4 in
Mark E. Bradley* the 1997 survey. A total of 111 firms
Ellen Moynihan* responded, offering input on the
James O. Yost* quality of service they received from
29 mutual fund companies nationwide.
SECRETARY The survey contained questions about
Stephen E. Cavan* service quality in 11 categories,
including "knowledge of operations
ASSISTANT SECRETARY contact," "keeping you informed,"
James R. Bordewick, Jr.* "ease of doing business" with the firm.
*Affiliated with the Investment Adviser
<PAGE>
MFS(R) MUNICIPAL --------------
INCOME FUND Bulk Rate
U.S. Postage
500 Boylston Street Paid
Boston, MA 02116-3741 MFS
--------------
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
[DALBAR LOGO]
TOP-RATED SERVICE
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MMI-3 11/97 25M 02/202/302
