<PAGE>
[Logo] MFS SM Annual Report
INVESTMENT MANAGEMENT for Year Ended
March 31, 1997
MFS(R) MUNICIPAL INCOME FUND
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
A Discussion with the Portfolio Manager .................................... 2
Portfolio Manager's Profile ................................................ 5
Fund Facts ................................................................. 5
Performance Summary ........................................................ 6
Portfolio of Investments ................................................... 8
Financial Statements .......................................................15
Notes to Financial Statements ..............................................22
Independent Auditors' Report ...............................................28
Trustees and Officers ......................................................29
HIGHLIGHTS
* FOR THE YEAR ENDED MARCH 31, 1997, CLASS A SHARES OF THE FUND PROVIDED
A TOTAL RETURN AT NET ASSET VALUE OF 4.28%, CLASS B SHARES 3.44%, AND
CLASS C SHARES 3.62%.
* THE MUNICIPAL MARKET EXPERIENCED A QUIET YEAR, WITH NO MAJOR CREDIT
DISASTERS LIKE THE ORANGE COUNTY BANKRUPTCY OF 1994. FURTHERMORE, THE
FLAT-TAX SCARE OF 1995 FADED AWAY IN 1996, ALLOWING MUNICIPALS TO
OUTPERFORM U.S. TREASURIES ON A RELATIVE BASIS (ALTHOUGH PRINCIPAL
VALUE AND INTEREST ON TREASURY SECURITIES ARE GUARANTEED BY THE U.S.
GOVERNMENT IF HELD TO MATURITY).
* IN GENERAL, THE FINANCIAL STRENGTH AND CREDIT QUALITY OF MUNICIPAL
ENTITIES ARE BETTER THAN THEY HAVE BEEN IN MANY YEARS, A RESULT OF
STRONG REVENUE GROWTH, ECONOMIC EXPANSION, AND CONSERVATIVE FISCAL
MANAGEMENT.
* THE FUND'S AVERAGE DURATION (A MEASURE OF INTEREST-RATE SENSITIVITY)
IS APPROXIMATELY SEVEN YEARS, OR ABOUT 5% LESS THAN THAT OF THE LEHMAN
BROTHERS MUNICIPAL BOND INDEX, BECAUSE OF OUR CONCERN THAT THE PACE OF
ECONOMIC GROWTH MAY CAUSE THE FEDERAL RESERVE BOARD TO RAISE INTEREST
RATES AGAIN.
<PAGE>
LETTER FROM THE CHAIRMAN
- ---------------------------
[Photo of A. Keith Brodkin]
- ---------------------------
Dear Shareholders:
After more than six years of expansion, the U.S. economy is experiencing
another year of moderate growth in 1997, although a few signs point to the
possibility of a modest rise in inflation during the year. On the positive
side, the pattern of moderate growth and inflation set over the past few years
now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Also, gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be
seen in the continuing high levels of consumer debt and rising personal
bankruptcies, as well as in the ongoing tightness in the labor market, which
could add some inflationary pressures to the economy. Given these somewhat
conflicting indicators, we expect real (inflation-adjusted) growth to revolve
around 2% in 1997, with more strength occurring earlier in the year.
In the bond markets, conflicting signals over the strength of the economy
have created near-term volatility, and the Federal Reserve Board has begun
taking measured steps to control inflation by raising short-term interest
rates. Should additional signs of more rapid economic growth and,
particularly, of higher inflation appear, we would expect the Fed to continue
its anti-inflationary stance. While inflationary forces largely remained in
check in 1996, the continued strength in the labor market means that a pickup
in inflation is still possible. At the same time, the U.S. budget deficit
continues to decline and, as a percentage of gross domestic product, is now
less than 2%, which we consider a positive development for the bond markets.
Although interest rates may move higher over the coming months, we believe
that, at current levels, fixed-income markets remain equitably valued.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[Graphic Omitted]
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
April 14, 1997
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Graphic Omitted]
Geoffrey L. Schechter
For the year ended March 31, 1997, Class A shares of the Fund provided a total
return of 4.28%, Class B shares 3.44%, and Class C shares 3.62%. These returns
assume the reinvestment of distributions but exclude the effects of any sales
charges and compare to a 5.43% return for the Lehman Brothers Municipal Bond
Index (the Lehman Index), an unmanaged index of national municipal bond
investments rated "Baa" or higher, and a 4.81% return for the average tax-
exempt municipal bond fund as reported by Lipper Analytical Services, an
independent firm that reports mutual fund performance.
Q. WHAT DO YOU SEE AS SOME OF THE REASONS FOR THIS PERFORMANCE?
A. There were two primary reasons. The first was the Fund's defensive posture
during the fall of 1996. At that time, investors in the fixed-income markets
were concerned that the pace of economic growth, combined with low
unemployment, would lead to an increase in the rate of inflation. However, the
markets rallied strongly when subsequent economic data pointed to a moderation
in growth, thereby allaying inflationary concerns. The second cause of the
underperformance was deterioration in the value of a couple of the Fund's
holdings due to credit concerns. These issues have since been resolved.
Q. IN GENERAL, HOW WOULD YOU DESCRIBE THE PAST YEAR'S FIXED-INCOME
ENVIRONMENT?
A. "Volatile" best describes that environment. Yields on the 30-year U.S.
Treasury bond, a proxy for the fixed-income markets, traded in a range between
6.35% and 7.20%. Rates generally rose during the spring and summer due to
concerns that strong growth would lead to an increase in inflation. Rates then
fell during the fall as economic growth moderated, hitting their lows in
November. Most recently, rates have been rising as inflation fears have
resurfaced in light of the recent uptick in economic activity and the Federal
Reserve Board's decision to raise interest rates.
Q. AND WHAT ABOUT THE MUNICIPAL ENVIRONMENT? HAVE YOU SEEN ANY IMPORTANT
DEVELOPMENTS THERE?
A. The municipal bond market had a very quiet year, especially compared to the
previous three years, with no major credit disasters like the Orange County
bankruptcy of 1994. Furthermore, the flat-tax scare of 1995 faded away in
1996, allowing municipals to outperform U.S. Treasuries on a relative basis
(although principal value and interest on Treasury securities are guaranteed
by the U.S. government if held to maturity). As of March 31, 1997, the ratio
of "Aaa"-rated tax-exempt securities to the 30-year U.S. Treasury bond stood
at approximately 80%, down significantly from the 86% ratio at the beginning
of the fiscal year.
Q. HOW WOULD YOU DESCRIBE THE CURRENT CONDITION OF THE MUNICIPAL MARKET, IN
TERMS OF FINANCIAL STRENGTH AND QUALITY OF ISSUES?
A. In general, the financial strength and credit quality of municipal entities
are better than they have been in many years. This can be attributed to the
combination of strong revenue growth at the state and local levels, the
economic expansion of the past six years, and conservative fiscal management,
an offspring of lessons learned during the recession of the late 1980s.
Q. LAST YEAR, WE SAW A FAIRLY DRAMATIC DECLINE IN THE YIELD RATIO OF THE
MUNICIPAL MARKET TO COMPARABLE-MATURITY U.S. TREASURIES. WHY DID THIS HAPPEN,
AND WHERE DOES THAT RATIO STAND NOW?
A. As we mentioned briefly above, tax-exempt securities outperformed U.S.
Treasuries during the past 12 months. This was primarily due to the
diminishment of the flat-tax scare. Also, there was a reduction in the
tradeable supply of municipal bonds. For the third straight year, more bonds
were redeemed, were due to mature, or were being called in before maturity
than were issued. This caused a decline in the number of outstanding municipal
bonds. The market also saw strong demand from property and casualty insurance
companies, resulting from their profitability and need for tax-exempt income.
Individual investors were also a factor in the municipal market's strong
relative performance, especially when yield levels approached 6%.
Q. DO YOU EXPECT TO SEE MUCH CHANGE IN THE 80% RATIO OF TOP-RATED MUNICIPALS
TO COMPARABLE-MATURITY TREASURIES IN THE COMING YEAR? IF SO, WHY?
A. We expect the ratio to remain at or near the current 80% level. However,
events that might cause a dramatic change in this ratio cannot be foreseen.
For example, a re-emergence of significant tax-reform proposals in Washington
or a credit disaster on the scale of the Orange County bankruptcy would shake
investors' confidence. At this time, we do not foresee any such event and,
thus, we believe municipals will maintain their recent valuations relative to
taxable securities going forward.
Q. IN YOUR LAST REPORT, YOU NOTED THAT IT WAS GETTING MORE DIFFICULT TO FIND
ATTRACTIVE VALUATIONS AND UNUSUAL OPPORTUNITIES IN THE INVESTMENT-GRADE
SEGMENT OF THE MUNICIPAL MARKET. WHY DID THIS HAPPEN?
A. The primary reason was the increased participation of bond insurers in
recent years. During 1996, insured issues accounted for 47% of all new issues.
The effect of this has been twofold. First, and quite simply, the availability
of securities that are not enhanced by bond insurers has been reduced. As
institutional investors continue to seek opportunities for higher income, the
strong demand for uninsured securities has outstripped the available supply,
thereby reducing credit spreads. Second, with so many bonds being insured, the
opportunities to trade between sectors, as credits improve or decline, have
been diminished because the majority of insured bonds trade generically.
Q. HAS THAT SITUATION CHANGED AT ALL, AND DO YOU SEE ANY REASON IT MIGHT
CHANGE IN THE COMING YEAR?
A. We don't see any reason for this situation to change in the foreseeable
future. Bond insurers continue to seek market share, and most of them are
insuring securities that were considered uninsurable in past years. As long as
insurers maintain their strong market share, it is difficult to construct a
scenario in which the current situation would change.
Q. WHAT ABOUT THE FUND'S DURATION? WHERE DOES IT STAND RELATIVE TO YOUR
BENCHMARK, AND WHY ARE YOU AT THAT LEVEL? AND DO YOU SEE THAT CHANGING IN THE
NEAR FUTURE?
A. The Fund is currently taking a slightly defensive posture, with its average
duration (a measure of interest-rate sensitivity) at approximately seven
years, which makes it approximately 5% less than that of the Lehman Index. We
are positioned this way because of our concern that the recent pace of
economic growth may cause the Federal Reserve to raise interest rates further
in the near term. However, we believe that the Federal Reserve's recent step
to tighten monetary policy and help control inflation is a positive one in the
long run. Should we see signs that economic growth is beginning to moderate,
we will begin to lengthen the Fund's duration.
/s/ Geoffrey L. Schechter
Geoffrey L. Schechter
Portfolio Manager
<PAGE>
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 became portfolio manager of MFS(R) Municipal Income Fund in February 1996.
Mr. Schechter is a Certified Public Accountant (C.P.A.) and a Chartered
Financial Analyst (C.F.A.).
TAX FORM SUMMARY
IN JANUARY 1997, SHAREHOLDERS WERE MAILED A TAX FORM SUMMARY REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 1996.
EXEMPT-INTEREST DIVIDENDS
FOR FEDERAL INCOME TAX PURPOSES, 99.1% OF THE TOTAL DIVIDENDS PAID BY
THE FUND FROM NET INVESTMENT INCOME DURING THE YEAR ENDED MARCH 31,
1997, WERE DESIGNATED AS EXEMPT-INTEREST DIVIDENDS.
FUND FACTS
STRATEGY: THE FUND'S OBJECTIVE IS TO PROVIDE AS HIGH A LEVEL OF
CURRENT INCOME EXEMPT FROM FEDERAL INCOME TAXES AS IS
CONSIDERED CONSISTENT WITH PRUDENT INVESTING WHILE
SEEKING PROTECTION OF SHAREHOLDERS' CAPITAL.
COMMENCEMENT OF
INVESTMENT OPERATIONS: CLASS A: SEPTEMBER 7, 1993
CLASS B: DECEMBER 29, 1986
CLASS C: JANUARY 3, 1994
SIZE: $397.3 MILLION NET ASSETS AS OF MARCH 31, 1997
<PAGE>
PERFORMANCE SUMMARY
The information below and 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 5-year graph reflect the
current maximum contingent deferred sales charge (CDSC) of 2%. Fund results in
the 10-year graph do not reflect the deduction of any CDSC since the CDSC is
not applicable after a six-year period. Benchmark comparisons are unmanaged
and do not reflect any fees or expenses. The performance of other share
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. It is not possible to invest in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-Year Period Ended March 31, 1997)
[Graphic Omitted]
MFS Lehman Consumer
Municipal Brothers Price
Income Municipal Index -
Fund - Class B Bond Index U.S.
-------------- ---------- --------
3/92 10000.0 10000.0 10000.0
3/93 11163.0 11252.0 10309.0
3/94 11361.0 11513.0 10567.0
3/95 11966.0 12369.0 10869.0
3/96 12669.0 13406.0 11165.0
3/97 13105.0 14137.0 11491.0
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period Ended March 31, 1997)
[Graphic Omitted]
MFS Lehman Consumer
Municipal Brothers Price
Income Municipal Index -
Fund - Class B Bond Index U.S.
-------------- ---------- --------
3/87 10000.0 10000.0 10000.0
3/89 10841.0 10989.0 10904.0
3/91 12426.0 13270.0 12036.0
3/93 15165.0 16424.0 12803.0
3/95 16256.0 18053.0 13498.0
3/97 17803.0 20634.0 14272.0
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Municipal Income Fund (Class A)
including 4.75% sales charge -0.67% +4.08% +5.21% +5.76%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class A) at net asset value +4.28% +5.80% +6.24% +6.28%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class B) with CDSC -0.50% +3.96% +5.23% +5.94%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class B) at net asset value +3.44% +4.87% +5.56% +5.94%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class C) with CDSC +2.63% +4.98% +5.60% +5.96%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal Income Fund (Class C) at net asset value +3.62% +4.98% +5.60% +5.96%
- --------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ +5.43% +7.08% +7.17% +7.15%
- --------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index*+ +2.91% +2.83% +2.82% +3.62%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*The Consumer Price Index is measured by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
+Source: CDA/Wiesenberger.
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 B share 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 operating expenses
(e.g., Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering 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. These results represent
the percentage change in net asset value. Returns would have been lower had
sales charges been reflected.
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.
<PAGE>
PORTFOLIO OF INVESTMENTS - MARCH 31, 1997
Municipal Bonds - 98.3%
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ----------------------------------------------------------------------------------------------
General Obligation - 8.0%
<S> <C> <C>
Commonwealth of Massachusetts, 7s, 2007 $ 725 $ 790,286
Crowley, TX, Independent School District, Capital
Appreciation, FGIC, 0s, 2015 3,690 1,248,548
Escondido, CA, Unified High School District, Capital
Appreciation, MBIA, 0s, 2018 2,000 556,000
Escondido, CA, Unified High School District, Capital
Appreciation, MBIA, 0s, 2020 2,000 488,080
Harris County, TX, Certificates of Obligation
(Astrodome Improvements Project), 8.1s, 2008 1,385 1,483,654
Lewisville, TX, Independent School District, 0s, 2019 2,500 644,650
New Orleans, LA, AMBAC, 0s, 2015 5,800 1,970,434
New York, NY, 8.2s, 2003 4,145 4,676,638
New York, NY, 7.5s, 2008 1,350 1,485,918
Northwest Texas Independent School District, 0s, 2011 3,000 1,310,160
Rio, CA, School District, Certificates of
Participation, FSA, 0s, 2028 1,140 675,803
State of Texas, 7.625s, 2018 14,405 15,440,287
State of Wisconsin, 7.6s, 2020 980 1,016,495
-------------
$ 31,786,953
- ----------------------------------------------------------------------------------------------
State and Local Appropriation - 2.3%
New York Dormitory Authority Rev. (City University),
7.5s, 2010 $ 2,500 $ 2,883,150
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2008 410 451,939
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.75s, 2020 680 735,032
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2020 1,860 2,032,701
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.5s, 2021 540 590,409
Philadelphia, PA, Regional Port Authority Lease
Rev., MBIA, 8.58s, 2020 2,500 2,537,050
-------------
$ 9,230,281
- ----------------------------------------------------------------------------------------------
Refunded and Special Obligation - 24.2%
Adams County, CO, Single Family Mortgage Rev.,
8.875s, 2011 $ 2,510 $ 3,236,269
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street Project), 8.125s, 2013 915 1,033,630
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street Project), 8.25s, 2023 1,000 1,133,810
Colorado Health and Retirement Facilities, 0s, 2020 2,150 436,149
Colquitt County, GA, Development Authority Rev., "A", 0s, 2021 2,815 525,842
Colquitt County, GA, Development Authority Rev., "C", 0s, 2021 5,725 1,069,430
Commonwealth of Massachusetts, 7s, 2007 1,865 2,052,694
Commonwealth of Massachusetts, 7.5s, 2007 1,990 2,213,776
Commonwealth of Massachusetts, 7.5s, 2007 2,010 2,236,025
Fredericksburg, VA, Industrial Development
Authority, Hospital Facilities Rev., FGIC, INFLOS,
9.24s, 2023* 1,500 1,745,640
Illinois Education and Facilities Authority, 8.75s, 2015 60 61,501
Massachusetts Health & Education Facilities
Authority (Suffolk University), 8s, 2010 1,000 1,108,470
Massachusetts Industrial Finance Agency, Tunnel Rev.
(Mass. Turnpike), 9s, 2020 2,840 3,269,635
Massachusetts Water Resources Authority, 7.625s, 2014 3,200 3,520,896
New York Local Government Assistance Corp., 7.25s, 2018 2,750 3,045,158
New York Medical Care Facilities Finance Agency,
7.75s, 2020 1,375 1,512,926
New York Medical Care Facilities Finance Agency,
7.5s, 2021 1,460 1,625,637
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2008 1,005 1,122,726
New York Medical Care Facilities Finance Agency
(Mental Health Services), 7.875s, 2020 4,265 4,764,602
New York Urban Development Corp., 7.5s, 2011 2,500 2,790,850
New York Urban Development Corp., 7.75s, 2014 5,000 5,485,350
New York Urban Development Corp. (Correctional
Facilities), 7.3s, 2008 2,340 2,619,513
New York, NY, 8.2s, 2003 855 985,097
New York, NY, 8.25s, 2010 4,140 4,778,429
New York, NY, 8s, 2018 2,970 3,378,880
Pennsylvania Industrial Development Authority Rev.,
7s, 2011 7,000 7,690,270
Philadelphia, PA, Municipal Authority Rev., 7s, 2004 2,000 2,214,000
Richmond County, GA, Development Authority Rev., 0s, 2021 9,000 1,681,200
Richmond County, GA, Development Authority Rev., 0s, 2021 8,185 1,528,958
Savannah, GA, Economic Development Authority, 0s, 2021 6,125 1,144,150
Texas Turnpike Authority (Houston Ship Channel
Bridge), 12.625s, 2020 3,000 4,084,590
Washington County, PA, AMBAC, 7.45s, 2018 1,200 1,328,652
Washington Public Power Supply System
(Nuclear Project #1), 14.375s, 2001 1,000 1,219,630
Washington Public Power Supply System
(Nuclear Project #1), 7.25s, 2015 3,350 3,627,983
Washington Public Power Supply System
(Nuclear Project #2), 7.375s, 2012 5,355 5,876,363
Washington Public Power Supply System
(Nuclear Project #3), 7s, 2011 4,050 4,399,110
Washington Public Power Supply System
(Nuclear Project #3), 7.25s, 2015 5,000 5,414,900
-------------
$ 95,962,741
- ----------------------------------------------------------------------------------------------
Airport and Port Revenue - 14.4%
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (American Airlines), 7.875s, 2025 $ 3,500 $ 3,713,745
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 1,960 2,110,861
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 2,840 3,169,781
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), "84-B", 8.85s,
2018 6,300 7,031,556
Cleveland, OH, Airport Special Facilities Rev.
(Continental Airlines), 9s, 2019 4,300 4,649,332
Connecticut Airport Rev. (Bradley International
Airport), FGIC, 7.65s, 2012 1,000 1,137,970
Dallas-Fort Worth, TX, International Airport
(American Airlines), 7.5s, 2025 5,000 5,307,200
Denver, CO, City & County Airport Rev., 8.75s, 2023 4,750 5,545,483
Hawaii Airport Systems Rev., FGIC, 7.5s, 2020 5,350 5,816,360
Hillsborough County, FL, Aviation Authority Rev.
(USAir), 8.6s, 2022 2,000 2,208,360
Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 1,000 1,066,660
Lake Charles, LA, Harbor & Terminal District Port
(Occidental Petroleum), 7.2s, 2020 1,000 1,077,090
St. Augustine, FL, Airport Authority (Grumman Repair
Facility), 11s, 2004 500 517,045
Tulsa, OK, Municipal Airport Trust Rev. (American
Airlines), 7.375s, 2020 10,000 10,565,200
Virginia Port Authority, 8.2s, 2008 3,000 3,184,020
-------------
$ 57,100,663
- ----------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 13.4%
Austin, TX, Utility Systems Rev., AMBAC, 0s, 2010 $ 7,500 $ 3,461,100
Austin, TX, Utility Systems Rev., AMBAC, 6.75s,
2011** 3,325 3,649,753
Chicago, IL, Gas Supply Rev. (People's Gas), 8.1s,
2020 2,000 2,189,820
Georgia Municipal Electric Power Authority Rev.,
6.375s, 2016 2,000 2,160,700
Georgia Municipal Electric Power Authority Rev.,
MBIA-IBC, 6.5s, 2020 7,350 8,084,192
Intermountain Power Agency, Power Supply Rev., MBIA,
6s, 2016 4,000 4,043,480
Midland, MI, Environmental Development Authority,
Pollution Control Rev. (Midland Cogeneration),
9.5s, 2009 2,000 2,173,060
Montana Board of Investment Resources Recovery Rev.
(Yellowstone Energy), 7s, 2019 100 95,894
North Carolina Eastern Municipal Power Agency, MBIA-
IBC, 7s, 2007 3,250 3,685,695
Pittsylvania County, VA, Industrial Development
Authority Rev., 7.5s, 2014 6,000 6,236,400
Southern Minnesota Municipal Power Agency, MBIA,
0s, 2019 15,500 4,302,955
Southern Minnesota Municipal Power Agency, MBIA,
0s, 2020 13,500 3,532,950
Southern Minnesota Municipal Power Agency, MBIA,
0s, 2021 10,660 2,629,822
Southern Minnesota Municipal Power Agency, MBIA,
0s, 2025 6,400 1,229,888
Tampa, FL, Utility Tax, Capital Appreciation, AMBAC,
0s, 2017 2,110 644,394
Texas Municipal Power Agency Rev., AMBAC, 0s, 2011 5,930 2,626,990
Washington Public Power Supply System, BIGI, 0s,
2013 4,000 1,492,600
Washington Public Power Supply System, BIGI, 0s,
2014 3,350 1,166,638
-------------
$ 53,406,331
- ----------------------------------------------------------------------------------------------
Health Care Revenue - 4.2%
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 10.5s, 2018 $ 1,870 $ 1,496,000
Bell County, TX, Health Facilities Development Corp.
(Kings Daughters Hospital), 9.25s, 2008 1,575 1,708,544
Gadsden County, FL, Industrial Development Authority
(RHA/FLA Properties), 10.45s, 2018 1,925 1,987,948
Louisiana Public Facilities Authority (Southwest
Medical Center), 11s, 2006 1,473 500,097
Massachusetts Health & Education Facilities Authority
(New England Deaconess Hospital), 6.875s, 2022 4,140 4,377,636
Montgomery County, PA, Industrial Development
Authority, Health Facilities Rev., 8.5s, 2023 300 303,768
Philadelphia, PA, Industrial Development Authority,
10.25s, 2018 1,920 1,975,546
Philadelphia, PA, Industrial Development Authority,
10.25s, 2018 1,465 1,497,201
Tennessee State Veterans Home Board Rev. (Humboldt
Project), 6.75s, 2021 1,000 1,033,900
Torrance, CA, Hospital Rev., 6.875s, 2015 1,740 1,819,657
-------------
$ 16,700,297
- ----------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 4.3%
Burns Habor, IN, Solid Waste Disposal Facilities
Rev. (Bethlehem Steel), 8s, 2024 $ 3,000 $ 3,193,260
Dayton, OH, Special Facilities Rev. (Emery Air
Freight), 12.5s, 2009 1,000 1,116,440
East Chicago, IN, Exempt Facilities Rev. (Inland
Steel Co.), 6.7s, 2012 2,070 2,054,786
Erie County, PA (International Paper), 7.875s, 2016 1,200 1,293,780
Farmington, NM, Pollution Control Rev. (Public
Service Co. of NM), 6.375s, 2022 2,500 2,498,925
Northampton County, PA, Industrial Development
Authority (Bethlehem Steel), 7.55s, 2017 1,200 1,257,456
Port of New Orleans, LA (Avondale Industries), 8.5s,
2014 2,000 2,296,240
Port of New Orleans, LA (Continental Grain Co.),
7.5s, 2013 1,000 1,069,950
West Side Calhoun County, TX, Navigation District
(Union Carbide), 8.2s, 2021 2,000 2,190,180
-------------
$ 16,971,017
- ----------------------------------------------------------------------------------------------
Insured Health Care Revenue - 3.1%
Clermont County, OH, Hospital Facilities Rev. (Mercy
Health Systems), AMBAC, MURICs, 9.443s, 2021* $ 1,500 $ 1,685,700
Henrico County, VA, Industrial Development Authority
Rev., FSA, RIBs, 8.005s, 2027* 5,000 4,969,450
Jefferson County, KY, Hospital Rev. (Alliant Health
System), MBIA, INFLOS, 9.039s, 2014* 1,500 1,593,165
Mississippi Hospital Equipment & Facilities
Authority Rev. (Rush Medical Foundation), Connie
Lee, 6.7s, 2018 1,000 1,046,010
Rio Grande Valley, TX, Health Facilities Development
Corp., MBIA, 8.1074s, 2015++ 2,800 2,881,844
-------------
$ 12,176,169
- ----------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 4.1%
Colorado Housing Finance Authority, FHA, 8.3s, 2023 $ 2,750 $ 2,874,383
Maryland Community Development Administration,
8.5s, 2028 3,000 3,063,180
Pennsylvania Housing Finance Agency, 7.6s, 2013 1,000 1,064,430
Texas State Department of Housing & Community
Affairs, 10s, 2026 2,325 2,316,281
Vermont Housing Finance Agency, 8.375s, 2020 2,685 2,772,209
Wisconsin Housing & Economic Development Authority,
7.2s, 2013 4,000 4,156,720
-------------
$ 16,247,203
- ----------------------------------------------------------------------------------------------
Single-Family Housing Revenue - 7.6%
Berkeley, Brookes, & Fayette Counties, WV, Single
Family Mortgage Rev., MBIA, 0s, 2016 $14,000 $ 1,713,180
Chicago, IL, Residential Mortgage Rev., MBIA, 0s,
2009 3,275 1,377,989
Cook County, IL, Single Family Housing Rev., 0s,
2015 7,220 971,740
De Kalb, IL, Single Family Mortgage Rev., 7.45s,
2009 225 236,826
Delaware Housing Authority Rev., 9.125s, 2018 740 755,851
Harris County, TX, Housing Finance Corp., 9.625s,
2003 205 205,875
Harris County, TX, Housing Finance Corp., 9.875s,
2014 360 361,534
Kentucky Housing Corp., 7.45s, 2023 5,005 5,131,977
Minnesota Housing Finance Agency, 9s, 2018 4,655 4,745,447
Mississippi Home Corp., Single Family Rev., 7.1s,
2023 675 705,301
New Hampshire Housing Finance Authority, 7.2s, 2010 6,250 6,524,750
New Hampshire Housing Finance Authority, 8.625s, 2013 720 741,967
Utah Housing Finance Agency, 8.625s, 2019 1,035 1,076,700
Utah Housing Finance Agency, 9.125s, 2019 90 93,443
Utah Housing Finance Agency, 9.25s, 2019 55 57,236
West Virginia Housing Development Fund, 7.85s, 2014 5,185 5,319,188
-------------
$ 30,019,004
- ----------------------------------------------------------------------------------------------
Solid Waste Revenue - 0.9%
Charleston County, SC, Resource Recovery Rev.
(Foster Wheeler), 9.25s, 2010 $ 3,200 $ 3,385,856
- ----------------------------------------------------------------------------------------------
Student Loan Revenue - 1.5%
Pennsylvania State Higher Educational Assistance
Agency, AMBAC, RIBS, 9.863s, 2026 $ 5,500 $ 6,107,090
- ----------------------------------------------------------------------------------------------
Transportation - 4.6%
Foothill/Eastern Transportation Corridor Agency, CA,
0s, 2012 $ 5,000 $ 3,226,850
Foothill/Eastern Transportation Corridor Agency, CA,
0s, 2013 5,000 3,251,500
Foothill/Eastern Transportation Corridor Agency, CA,
0s, 2029 20,080 2,522,851
New Jersey Turnpike Authority Rev., MBIA, 6.5s, 2016 1,450 1,587,576
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2004 3,000 1,953,930
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2005 1,800 1,100,322
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2009 6,750 3,048,368
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2014 5,000 1,704,150
-------------
$ 18,395,547
- ----------------------------------------------------------------------------------------------
Universities - 0.8%
Islip, NY, Community Development Agency Rev. (New
York Institute of Technology), 7.5s, 2026 $ 2,000 $ 2,044,160
St. Joseph County, IN, Educational Facilities Rev.
(University of Notre Dame), 6.5s, 2026 1,000 1,090,530
-------------
$ 3,134,690
- ----------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 3.0%
Massachusetts Water Resources Authority, 6.5s, 2019 $ 7,495 $ 8,048,431
Salt Lake County, UT, Water Conservancy District
Rev., AMBAC, 0s, 2008 2,100 1,110,396
Salt Lake County, UT, Water Conservancy District
Rev., AMBAC, 0s, 2009 3,800 1,873,514
Westmoreland County, PA, Municipal Authority, FGIC,
0s, 2022 5,000 1,101,600
-------------
$ 12,133,941
- ----------------------------------------------------------------------------------------------
Other - 1.9%
Dade County, FL, Special Obligation, 0s, 2032 $ 6,000 $ 629,880
Illinois State Dedicated Tax (Civic Center), AMBAC,
0s, 2016 5,000 1,524,400
Martha's Vineyard, MA, Land Bank (Land Acquisition),
8.125s, 2011 1,800 1,845,090
Massachusetts Health & Education Facilities
Authority (Learning Center for the Deaf), 9.25s,
2014 1,000 1,064,812
Metropolitan Pier & Exposition Authority, IL,
Capital Appreciation, MBIA, 0s, 2016 8,400 2,634,492
-------------
$ 7,698,674
- ----------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $362,977,849) $ 390,456,457
- ----------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 1.1%
- ----------------------------------------------------------------------------------------------
East Baton Rouge, LA, Pollution Control Rev.
(Exxon), due 3/1/22 $ 800 $ 800,000
Harris County, TX, Health Facilities Development
Corp. (Methodist Hospital), due 12/1/25 2,000 2,000,000
Jackson County, MS, Pollution Control Rev.
(Chevron), due 6/1/23 1,000 1,000,000
New York, NY, Municipal Water Finance Authority,
due 6/15/23 300 300,000
New York, NY, Municipal Water Finance Authority,
due 6/15/24 50 50,000
Perry County, GA, Pollution Control Rev. (Leaf River
Forest), due 3/1/02 200 200,000
Uinta County, WY, Pollution Control Rev. (Chevron),
due 8/15/20 100 100,000
- ----------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Cost $ 4,450,000
- ----------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $367,427,849) $ 394,906,457
Other Assets, Less Liabilities - 0.6% 2,429,459
- ----------------------------------------------------------------------------------------------
Net Assets - 100% $ 397,335,916
- ----------------------------------------------------------------------------------------------
++Indexed security.
*Inverse floating rate security.
**When-issued security. At March 31, 1997, the Fund had sufficient cash and/or securities at
least equal to the value of the when-issued security.
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ---------------------------------------------------------------------------------------------
March 31, 1997
- ---------------------------------------------------------------------------------------------
Assets:
<S> <C>
Investments, at value (identified cost, $367,427,849) $394,906,457
Cash 34,836
Receivable for Fund shares sold 182,986
Receivable for investments sold 948,548
Interest receivable 6,826,937
Other assets 5,031
------------
Total assets $402,904,795
------------
Liabilities:
Distributions payable $ 780,031
Payable for Fund Shares reacquired 1,045,839
Payable for when-issued investments purchased 3,488,125
Payable to affiliates -
Management fee 32,903
Shareholder servicing agent fee 5,679
Distribution fee 31,170
Accrued expenses and other liabilities 185,132
------------
Total liabilities $ 5,568,879
------------
Net assets $397,335,916
============
Net assets consist of:
Paid-in capital $384,287,071
Unrealized appreciation on investments 27,478,608
Accumulated net realized loss on investments (14,583,208)
Accumulated undistributed net investment income 153,445
------------
Total $397,335,916
============
Shares of beneficial interest outstanding 46,698,290
==========
Class A shares:
Net asset value per share
(net assets of $152,039,035 / 17,881,552 shares of beneficial
interest outstanding) $8.50
=====
Offering price per share (100 / 95.25) $8.92
=====
Class B shares:
Net asset value and offering price per share
(net assets of $226,137,649 / 26,567,509 shares of beneficial
interest outstanding) $8.51
=====
Class C shares:
Net asset value and offering price per share
(net assets of $19,159,232 / 2,249,229 shares of beneficial interest
outstanding) $8.52
=====
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.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Operations
- ------------------------------------------------------------------------------------------
Year Ended March 31, 1997
- ------------------------------------------------------------------------------------------
Net investment income:
<S> <C>
Interest income $ 29,774,688
------------
Expenses -
Management fee $ 3,180,446
Trustees' compensation 47,141
Shareholder servicing agent fee (Common) 131,078
Shareholder servicing agent fee (Class A) 148,400
Shareholder servicing agent fee (Class B) 462,174
Shareholder servicing agent fee (Class C) 18,246
Distribution and service fee (Class A) 337,983
Distribution and service fee (Class B) 2,700,976
Distribution and service fee (Class C) 167,150
Administrative fee 4,646
Custodian fee 197,944
Postage 46,985
Auditing fees 33,458
Printing 21,225
Legal fees 5,945
Miscellaneous 313,603
------------
Total expenses $ 7,817,400
Fees paid indirectly (31,139)
------------
Net expenses $ 7,786,261
------------
Net investment income $ 21,988,427
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (4,185,956)
Futures contracts 619,956
------------
Net realized loss on investments $ (3,566,000)
------------
Change in unrealized appreciation (depreciation) -
Investments $ (2,534,741)
Futures contracts 129,375
------------
Net unrealized loss on investments $ (2,405,366)
------------
Net realized and unrealized loss on investments $ (5,971,366)
------------
Increase in net assets from operations $ 16,017,061
============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------
Year Ended March 31, 1997 1996
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
<S> <C> <C>
Net investment income $ 21,988,427 $ 23,512,793
Net realized gain (loss) on investments and futures
transactions (3,566,000) 196,458
Net unrealized gain (loss) on investments and futures
transactions (2,405,366) 2,512,218
------------- -------------
Increase in net assets from operations $ 16,017,061 $ 26,221,469
------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (7,739,363) $ (5,156,665)
From net investment income (Class B) (13,259,117) (17,735,118)
From net investment income (Class C) (829,094) (621,010)
In excess of net investment income (Class A) -- (3,546)
In excess of net investment income (Class B) -- (12,197)
In excess of net investment income (Class C) -- (427)
------------- -------------
Total distributions declared to shareholders $ (21,827,574) $ (23,528,963)
------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 116,212,889 $ 192,708,458
Net asset value of shares issued in connection with the
acquisition of Advantage Fund -- 28,956,459
Net asset value of shares issued to shareholders in
reinvestment of distributions 11,859,004 12,674,803
Cost of shares reacquired (170,221,627) (240,907,535)
------------- -------------
Decrease in net assets from Fund share transactions $ (42,149,734) $ (6,567,815)
------------- -------------
Total decrease in net assets $ (47,960,247) $ (3,875,309)
Net assets:
At beginning of period 445,296,163 449,171,472
------------- -------------
At end of period (including accumulated undistributed
(distributions in excess of) net investment income of
$153,445 and $(242,580), respectively) $ 397,335,916 $445,296,163
============= ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, Year Ended
---------------------------------------------------------------------- November 30,
1997 1996 1995 1994+++ 1993**
- ----------------------------------------------------------------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of
period $ 8.62 $ 8.56 $ 8.56 $ 8.99 $ 9.15
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.49 $ 0.51 $ 0.50 $ 0.15 $ 0.12
Net realized and unrealized
gain (loss) on investments (0.12) 0.05 0.02 (0.51) (0.16)
------ ------ ------ ------ ------
Total from investment
operations $ 0.37 $ 0.56 $ 0.52 $(0.36) $(0.04)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.49) $(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 $(0.49) $(0.50) $(0.52) $(0.07) $(0.12)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.50 $ 8.62 $ 8.56 $ 8.56 $ 8.99
====== ====== ====== ====== ======
Total return(+) 4.28% 6.81% 6.33% (7.90)%+ (1.80)%+
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.31% 1.28% 1.13% 1.07%+ 0.76%+
Net investment income 5.75% 5.75% 6.20% 5.31%+ 4.94%+
Portfolio turnover 30% 23% 25% 9% 30%
Net assets at end of period
(000 omitted) $152,039 $121,903 $25,270 $5,595 $461
**For the period from the commencement of offering 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, 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.
(++)Includes distributions in excess of net investment income of $0.0003 per share for Class
A shares for the year ended March 31, 1996.
(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 ratios of
expenses to average net assets and net investment income to average net assets would have
been 1.38% and 5.66%, respectively.
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended
Year Ended March 31, November 30,
------------------------------------------------------------------- -------------------------------
1997 1996 1995 1994+++ 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Class B
- ----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value -
beginning of period $ 8.63 $ 8.57 $ 8.56 $ 8.99 $ 8.73 $ 8.50
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.43 $ 0.43 $ 0.44 $ 0.14 $ 0.42 $ 0.47
Net realized and unrealized
gain (loss) on investments (0.13) 0.06 -- (0.51) 0.42 0.26
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.30 $ 0.49 $ 0.44 $(0.37) $ 0.84 $ 0.73
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment
income $(0.42) $(0.43)(++) $(0.43) $(0.01) $(0.45) $(0.48)
From net realized gain
on investments -- -- -- (0.01) (0.10) --
In excess of net
investment income -- -- -- -- (0.03) --
In excess of net
realized gain on
investments -- -- -- (0.04) -- --
From paid-in-capital -- -- -- -- -- (0.02)
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.42) $(0.43) $(0.43) $(0.06) $(0.58) $(0.50)
------ ------ ------ ------ ------ ------
Net asset value - end of
period $ 8.51 $ 8.63 $ 8.57 $ 8.56 $ 8.99 $ 8.73
====== ====== ====== ====== ====== ======
Total return 3.44% 5.87% 5.32% (8.97)%+ 9.95% 8.82%
Ratios (to average net assets)/Supplemental data:
Expenses## 2.11% 2.13% 2.16% 2.24%+ 2.11% 2.03%
Net investment income 4.95% 4.90% 5.15% 4.74%+ 4.92% 5.50%
Portfolio turnover 30% 23% 25% 9% 30% 52%
Net assets at end of
period (000 omitted) $226,138 $306,889 $412,965 $479,478 $518,179 $449,949
+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
B shares for the year ended March 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
---------------------------------------------------------------------------
1991 1990 1989 1988 1987*
- ---------------------------------------------------------------------------------------------------------------------
Class B
- ---------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.25 $ 8.41 $ 8.11 $ 7.67 $ 8.47
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.49 $ 0.49 $ 0.51 $ 0.50 $ 0.38
Net realized and unrealized gain
(loss) on investments 0.25 (0.15) 0.30 0.43 (0.83)
------ ------ ------ ------ ------
Total from investment operations $ 0.74 $ 0.34 $ 0.81 $ 0.93 $(0.45)
------ ------ ------ ------ ------
Less distributions declared to shareholders
from net investment income $(0.49) $(0.50) $(0.51) $(0.49) $(0.35)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67
====== ====== ====== ====== ======
Total return 9.21% 4.18% 10.24% 12.53% (5.79)%+
Ratios (to average net assets)/Supplemental data:
Expenses 2.04% 2.05% 2.07% 2.09% 2.03%+
Net investment income 5.82% 5.99% 6.09% 6.38% 6.00%+
Portfolio turnover 73% 91% 127% 171% 138%
Net assets at end of period
(000 omitted) $409,084 $379,239 $343,887 $244,825 $183,935
</TABLE>
*For the period from the commencement of investment operations, December 29,
1986, to November 30, 1987.
+Annualized.
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------------
Year Ended March 31,
-------------------------------------------------------------------
1997 1996 1995 1994**
- -------------------------------------------------------------------------------------------------------------------
Class C
- -------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.64 $ 8.57 $ 8.56 $ 9.07
------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.43 $ 0.43 $ 0.44 $ 0.09
Net realized and unrealized gain (loss) on
investments (0.12) 0.07 0.01 (0.59)
------ ------ ------ ------
Total from investment operations $ 0.31 $ 0.50 $ 0.45 $(0.50)
------ ------ ------ ------
Less distributions declared to shareholders from
net investment income $(0.43) $(0.43)(++) $(0.44) $(0.01)
------ ------ ------ ------
Net asset value - end of period $ 8.52 $ 8.64 $ 8.57 $ 8.56
====== ====== ====== ======
Total return 3.62% 5.94% 5.39% (19.42)%+
Ratios (to average net assets)/Supplemental data:
Expenses## 2.06% 2.05% 2.09% 2.18%+
Net investment income 5.00% 4.95% 5.23% 4.62%+
Portfolio turnover 30% 23% 25% 9%
Net assets at end of period (000 omitted) $19,159 $16,504 $10,936 $6,393
**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 the fiscal periods ending after September 1, 1995, the Fund's expenses are calculated
without reductions for fees paid indirectly.
(++)Includes distributions in excess of net investment income of $0.0003 per share for Class 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
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 valued at closing settlement
prices. Securities for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction of the
Trustees.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or contracts based on financial indices at a fixed price
on a future date. In entering such contracts, the Fund is required to deposit
either in cash or securities an amount equal to a certain percentage of the
contract amount. Subsequent payments are made or received by the Fund each day,
depending on the daily fluctuations in the value of the underlying security, and
are recorded for financial statement purposes as unrealized gains or losses by
the Fund. The Fund's investment in futures contracts is designed to hedge
against anticipated future changes in interest rates or securities prices.
Investments in interest rate futures for purposes other than hedging may be made
to modify the duration of the portfolio without incurring the additional
transaction costs involved in buying and selling the underlying securities.
Should interest rates or securities prices move unexpectedly, the Fund may not
achieve the anticipated benefits of the futures contracts and may realize a
loss.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Interest
payments received in additional securities are recorded on the ex- interest date
in an amount equal to the value of the security on such date. The Fund uses the
effective interest method for reporting interest income on payments-in-kind
(PIK) bonds, whereby interest income on PIK bonds is recorded ratably by the
Fund at a constant yield to maturity. Legal fees and other related expenses
incurred to preserve and protect the value of a security owed are added to the
cost of the security; other legal fees are expensed. Capital infusions, which
are generally non-recurring, incurred to protect or enhance the value of
high-yield debt securities, are reported as an addition to the cost basis of the
security. Costs that are incurred to negotiate the terms or conditions of
capital infusions or that are expected to result in a plan of reorganization are
reported as realized losses. Ongoing costs incurred to protect or enhance an
investment, or costs incurred to pursue other claims or legal actions, are
reported as operating expenses.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. The Fund files a tax return annually
using tax accounting methods required under provisions of the Code which may
differ from generally accepted accounting principles, the basis on which these
financial statements are prepared. Accordingly, the amount of net investment
income and net realized gain reported on these financial statements may differ
from that reported on the Fund's tax return and, consequently, the character of
distributions to shareholders reported in the financial highlights may differ
from that reported to shareholders on Form 1099-DIV.
Distributions paid by the Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for federal
income tax purposes because the Fund intends to meet certain requirements of the
Code applicable to regulated investment companies, which will enable the Fund to
pay exempt-interest dividends. The portion of such interest, if any, earned on
private activity bonds issued after August 7, 1986, may be considered a
tax-preference item to shareholders. Distributions to shareholders are recorded
on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended March 31, 1997, $235,172 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, 1997, the Fund, for federal income tax purposes, had 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 their 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 Class A,
Class B, and Class C shares. The three 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, without
distinction between share classes. Dividends are declared separately for each
class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate of
0.30% of the Fund's average daily net assets and 6.43% of 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 Trust 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 $11,490 for the year ended
March 31, 1997.
Administrator - Effective March 1, 1997, the Fund has an administrative services
agreement with MFS to provide the Fund with certain financial, legal,
compliance, shareholder communications, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$20,133 as its portion of the sales charge on sales of Class A shares for the
year ended March 31, 1997.
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 $74,623 for the year ended March 31,
1997. Payment of the 0.10% per annum Class A distribution fee will commence on
such date as the Trustees of the Trust may determine. Fees incurred under the
distribution plan during the year ended March 31, 1997, were 0.25% of the Fund's
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 $89,938 and $11,658 for Class B and Class C shares,
respectively, for the year ended March 31, 1997. Fees incurred under the
distribution plan during the year ended March 31, 1997, were 1.00% of the Fund's
average daily net assets attributable to Class B and Class C shares on an
annualized basis.
Purchases over $1 million of Class A shares are subject to a contingent deferred
sales charge in the event of a shareholder redemption within 12 months following
such purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B shares in the event of a shareholder redemption within
six years of purchase. A contingent deferred sales charge is imposed on
shareholder redemptions of Class C shares in the event of a shareholder
redemption within 12 months of purchases made on or after April 1, 1996. MFD
receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended March 31, 1997, were $0, $492,585, and
$5,259, 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
0.13%. Prior to January 1, 1997, the fee was 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
$124,039,466 and $168,981,038, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Funds, as computed on a federal income tax basis, are as follows:
Aggregate cost $367,423,057
============
Gross unrealized appreciation $ 29,370,120
Gross unrealized depreciation (1,886,720)
------------
Net unrealized appreciation $ 27,483,400
============
(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
<TABLE>
<CAPTION>
Year Ended March 31, 1997 Year Ended March 31, 1996
--------------------------------- ----------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Shares sold 10,598,452 $ 91,183,934 17,027,633 $ 148,288,168
Shares issued to shareholders
in reinvestment of distributions 421,941 3,631,704 261,154 2,281,429
Shares reacquired (7,272,704) (62,547,556) (6,107,403) (53,310,814)
---------- ------------ ---------- -------------
Net increase 3,747,689 $ 32,268,082 11,181,384 $ 97,258,783
========== ============ ========== =============
<CAPTION>
Class B Shares
Year Ended March 31, 1997 Year Ended March 31, 1996
--------------------------------- ----------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,742,931 $ 15,013,335 3,291,894 $ 30,271,749
Share issued in connection with
the acquisition of Advantage Fund -- -- 3,398,645 28,956,459
Shares issued to shareholders
in reinvestment of distributions 885,494 7,626,737 1,143,435 9,961,921
Shares reacquired (11,607,867) (99,999,564) (20,493,625) (178,612,133)
----------- ------------ ---------- -------------
Net decrease (8,979,442) $(77,359,492) (12,659,651) $(109,422,004)
=========== ============ ========== =============
<CAPTION>
Class C Shares
Year Ended March 31, 1997 Year Ended March 31, 1996
-------------------------------- ----------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,159,265 $10,015,620 1,614,476 $14,148,541
Shares issued to shareholders
in reinvestment of distributions 69,652 600,563 49,315 431,453
Shares reacquired (890,281) (7,674,507) (1,029,259) (8,984,588)
---------- ----------- ---------- -----------
Net increase 338,636 $ 2,941,676 634,532 $ 5,595,406
========== =========== ========== ===========
</TABLE>
(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 $400 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,
1997, was $4,166.
(7) Financial Instruments
The Fund invests in indexed securities whose value may be linked to interest
rates, commodities, indices, or other financial indicators. Indexed securities
are fixed-income securities whose proceeds at maturity (principal-indexed
securities) or interest rates (coupon-indexed securities) rise and fall
according to the change in one or more specified underlying instruments. Indexed
securities may be more volatile than the underlying instrument itself. The
following is a summary of such securities held at March 31, 1997:
<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, 8.1074s, 2015 J.J. Kenny $2,800 $2,881,844 $115,080
========
</TABLE>
(8) Acquisitions
At the 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, 1997, the related
statement of operations for the year then ended, the statement of changes in net
assets for the years ended March 31, 1997 and 1996, and the financial highlights
for each of the years in the three-year period ended March 31, 1997, the
four-month period 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, 1997, 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, 1997, 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 25, 1997
--------------------------------------------
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
<TABLE>
<CAPTION>
<S> <C>
TRUSTEES ASSISTANT SECRETARY
A. Keith Brodkin* - Chairman and President James R. Bordewick, Jr.*
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), CUSTODIAN
Massachusetts Financial Services Company; State Street Bank and Trust Company
Director, Cambridge Bancorp;
Director, Cambridge Trust Company AUDITORS
Marshall N. Cohan - Private Investor Deloitte & Touche LLP
Lawrence H. Cohn, M.D. - Chief of Cardiac
Surgery, Brigham and Women's Hospital; INVESTOR INFORMATION
Professor of Surgery, Harvard Medical School For MFS stock and bond market outlooks,
The Hon. Sir J. David Gibbons, KBE - Chief call toll free: 1-800-637-4458 anytime from
Executive Officer, Edmund Gibbons Ltd.; a touch-tone telephone.
Chairman, Bank of N.T. Butterfield & Son Ltd.
Abby M. O'Neill - Private Investor; For information on MFS mutual funds,
Director, Rockefeller Financial Services, Inc. call your financial adviser or, for an
(investment advisers) information kit, call toll free:
Walter E. Robb, III - President and Treasurer, 1-800-637-2929 any business day from
Benchmark Advisors, Inc. (corporate financial 9 a.m. to 5 p.m. Eastern time (or leave
consultants); President, Benchmark Consulting a message anytime).
Group, Inc. (office services); Trustee,
Landmark Funds (mutual funds) INVESTOR SERVICE
Arnold D. Scott* - Senior Executive Vice MFS Service Center, Inc.
President, Director and Secretary, P.O. Box 2281
Massachusetts Financial Services Company Boston, MA 02107-9906
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company For general information, call toll free:
J. Dale Sherratt - President, Insight Resources, Inc. 1-800-225-2606 any business day from
(acquisition planning specialists) 8 a.m. to 8 p.m. Eastern time.
Ward Smith - Former Chairman (until 1994),
NACCO Industries; Director, Sundstrand For service to speech- or hearing-impaired,
Corporation call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
INVESTMENT ADVISER (To use this service, your phone must be equipped
Massachusetts Financial Services Company with a Telecommunications Device for the Deaf.)
500 Boylston Street
Boston, MA 02116-3741 For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
DISTRIBUTOR (1-800-637-8255) anytime from a touch-tone
MFS Fund Distributors, Inc. telephone.
500 Boylston Street
Boston, MA 02116-3741 WORLD WIDE WEB
www.mfs.com
PORTFOLIO MANAGER
Geoffrey L. Schecter For the third year in a row,
[DALBAR MFS earned a #1 ranking in the
TREASURER LOGO] DALBAR, Inc. Broker/Dealer
W. Thomas London* Survey, Main Office Operations
Service Quality Category. The
ASSISTANT TREASURER firm achieved a 3.48 overall score on a
James O. Yost* scale of 1 to 4 in the 1996 survey. A total
of 110 firms responded, offering input on the
SECRETARY quality of service they received from 29
Stephen E. Cavan* mutual fund companies nationwide. The survey
contained questions about service quality in
15 categories, including "knowledge of phone
service contracts," "accuracy of transaction
processing," and "overall ease of doing
*Affiliated with the Investment Adviser business with the firm."
</TABLE>
<PAGE>
MFS(R) MUNICIPAL -------------
INCOME FUND [DALBAR BULK RATE
LOGO] U.S. POSTAGE
P A I D
PERMIT #55638
500 Boylston Street BOSTON, MA
Boston, MA 02116-3741 -------------
[LOGO]
WE INVENTED THE MUTUAL FUND(SM)
MMI-2 5/97 25M 02/202/302
(C) 1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
