<PAGE>
[Logo]M F S(R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
MFS(R) Municipal
Income Fund
SEMIANNUAL REPORT o SEPTEMBER 30, 1998
[Graphic Omitted]
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DIVERSIFYING YOUR INVESTMENT PORTFOLIO (see page 32)
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TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 11
Financial Statements ...................................................... 18
Notes to Financial Statements ............................................. 25
Trustees and Officers ..................................................... 33
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HIGHLIGHTS
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o FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 4.03%, CLASS B SHARES 3.64%,
AND CLASS C SHARES 3.63%. (SEE PERFORMANCE SUMMARY FOR MORE INFORMATION.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.)
o THE FUND WAS ABLE TO MAINTAIN GOOD COMPETITIVE PERFORMANCE OVER THE PERIOD
BY HAVING A "BARBELLED" STRUCTURE, IN WHICH SHORT-TERM BONDS WERE OFFSET BY
LONG-TERM BONDS, AND BY AVOIDING MAJOR CREDIT PROBLEMS.
o IN LIGHT OF THE FACT THAT WE DO NOT SEE MANY DEALS WITH POSITIVE CREDIT RISK
PROFILES VERSUS THE YIELDS THEY OFFER, WE HAVE BEEN INCREASING THE CREDIT
QUALITY OF THE PORTFOLIO AND FOCUSING ON ACHIEVING A RELATIVELY HIGH
SUSTAINABLE YIELD.
o THE MUNICIPAL BOND MARKET CURRENTLY APPEARS TO BE IN VERY GOOD SHAPE, WITH
MOST MUNICIPALITIES IN SOUND FINANCIAL CONDITION.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
In the coming year, MFS will celebrate its 75th anniversary. In 1924, our
Massachusetts Investors Trust, the nation's first mutual fund, opened to the
public and helped launch a revolution in investing that continues today. In the
75 years since, MFS has grown with its investors not only through bear markets,
economic and political turmoil, wars, and oil shortages, but also through long
periods of growth and prosperity. We are very proud of our record of investment
management and service to shareholders throughout our history.
One of the best ways for us to serve our shareholders is to help them understand
some of the reasons behind developments in the investment markets and, when
necessary, to take a more cautious outlook. This is particularly important
during periods of market volatility such as we are experiencing this year, when
equity prices do not follow a straight course. In light of this volatility, it
is clear that equity valuations have risen to a point at which stock prices have
become vulnerable to changes in the investment environment such as a slowing
economy, earnings disappointments, and global economic and political turmoil.
While we continue to hold a favorable long-term outlook for the equity markets,
we also believe that the recent market correction was overdue but was also a
healthy near-term event that should rid the financial system of excesses that
have developed.
Currently, equity investors seem to be focused on the slowdown in corporate
earnings and, more recently, on the continuing uncertainty overseas,
particularly in Russia and some of the emerging markets. In the second quarter,
for example, average earnings growth for companies in the Standard & Poor's 500
Composite Index (the S&P 500), a popular, unmanaged index of common stock total
return performance, was about 3%, well below what people were expecting a year
ago. As a result of this and continuing concerns about Asia and emerging
markets, the stock markets pulled back from the record-high levels set in
mid-July. Although the U.S. stock market has responded positively to reductions
in interest rates by the Federal Reserve Board, the market's retreat helped
correct some -- but not all -- of the overvaluations that had been building for
some time. Prior to July, equity prices had been rising without a corresponding
increase in corporate earnings. As a result, price-to-earnings (P/E) ratios, or
the amount investors paid for stocks in relation to companies' earnings per
share, also went up. If this year's downturn helps create more reasonable
valuations, we believe it could provide a sounder long-term foundation for the
equity markets. On another positive note, interest rates have begun to decline
as inflation has remained low. In an environment of low interest rates, stocks
become more attractive than most fixed-income investments, while low inflation
helps control companies' costs.
Internationally, the economic turmoil in Asia continues to be a concern to us,
while Russia is facing political and economic uncertainty and Latin American
economies are feeling substantial pressure. We believe the United States has yet
to see the full impact of this crisis. There have been brief periods of
improvement in a few countries and countries such as Japan and Brazil have taken
positive steps toward economic reform but, for the most part, most of these
economies are still very weak. At the same time, the Asian turmoil has had the
beneficial effect of moderating U.S. growth and keeping inflation in check,
which has helped establish a favorable interest-rate environment.
Countering the situation in Asia has been the growing strength of European
economies, although European equity markets have also seen some volatility this
year. But as these countries move toward economic union, they are benefiting
from a convergence of interest rates to lower levels, a rapid expansion of
manufacturing and service businesses, and an increasingly strong consumer
sector. This has helped American exporters offset some of their Asian losses
while providing investment opportunities in developed and emerging European
markets.
Given the uncertainty arising from these conflicting developments, we believe
that it is prudent to remind investors of the need to take a long-term view and
to diversify their investments across a range of asset classes. This includes
portfolios that focus on bond and international investments as well as on the
U.S. stock market. At MFS, we also believe our decades-long commitment to
original, company-by-company research gives us an advantage by helping us find
companies that we think can keep growing or gain market share during periods of
turmoil. To help fulfill this commitment and to provide the broadest possible
coverage of industry sectors and individual companies, MFS continues to increase
its number of full-time research analysts, who thoroughly investigate each
company's earnings potential and position in its industry as well as the overall
prospects for that industry.
We also use active portfolio management on the fixed-income side, using our
extensive research and credit analysis to help reduce the potential for price
declines and enhance the opportunity for appreciation. Every year, both fixed-
income and equity managers meet with thousands of credit issuers and companies.
They also attend many presentations, closely follow sources of industry
research, and keep track of competitors.
As we have for 75 years, we will continue to apply this discipline of thorough,
bottom-up research to both the equity and fixed-income markets because we
believe it offers the best potential for providing favorable long-term
performance for our shareholders -- regardless of changes in the overall market
environment.
We appreciate your confidence and welcome any questions or comments you may
have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
October 14, 1998
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MANAGEMENT REVIEW AND OUTLOOK
[Photo of John P. Kihn]
John P. Kihn
For the six months ended September 30, 1998, Class A shares of the Fund
provided a total return of 4.03%, Class B shares 3.64%, and Class C shares
3.63%. These returns include the reinvestment of distributions but exclude the
effects of any sales charges and compare to a 4.64% return for the Lehman
Brothers Municipal Bond Index (the Lehman Index), an unmanaged index of
national municipal bond investments rated "Baa" or higher (it is not possible
to invest directly in an index), and to a 4.28% return for the average
national tax-exempt municipal bond fund as reported by Lipper Analytical
Services, Inc., an independent firm that reports mutual fund performance.
Q. COULD YOU TALK ABOUT SOME THINGS THAT CONTRIBUTED TO THE FUND'S PERFORMANCE?
A. The Fund was able to maintain good competitive performance over the period
by having a "barbelled" structure, in which short-term bonds were offset by
long-term bonds. In addition, by avoiding major credit problems during the
period the Fund was able to avoid significant capital losses.
Q. SO ARE YOU MORE CONCERNED ABOUT CREDIT QUALITY THAN ABOUT PROVIDING A HIGHER
YIELD?
A. Sustainability of yield has become very important. We are focused on trading
off credit quality against absolute and relative yield. For example, up to
this point the municipal market has been largely spared the credit problems
and volatility that have plagued many fixed-income markets. However, even a
mild spread of credit trends in the taxable market would negatively and
dramatically impact credit spreads in the municipal market. In light of this
and the fact that we do not see many deals with positive credit risk
profiles versus the yields they offer, we have been increasing the credit
quality of the portfolio. Therefore, while we are somewhat more concerned
about credit quality than about achieving the highest yield, this is merely
a reflection of our focus on achieving a relatively high, but sustainable,
yield.
Q. IS IT HARDER TO WORK TOWARD SUSTAINABILITY OF YIELD IN THIS ECONOMIC
ENVIRONMENT?
A. Yes. The turmoil in domestic and overseas markets, interest rates that have
generally been declining over the last decade, and ever-narrowing municipal
credit spreads have made it difficult to maintain competitive yields without
taking on excessive credit risk.
Q. HOW WOULD YOU DESCRIBE THE MUNICIPAL MARKET?
A. On the surface, it is in very good shape. With few exceptions,
municipalities are in a good financial position, and yield spreads among
municipalities are very narrow. By these measures, we believe municipal
bonds offer good value in the market.
Q. WHAT ABOUT THE FUND'S DURATION, OR ITS SENSITIVITY TO CHANGES IN INTEREST
RATES? HOW DOES THIS REFLECT YOUR OUTLOOK?
A. Relative to its peers, the Fund's duration has been slightly longer than
neutral. Our outlook has been for a slowing domestic economy with flat to
declining interest rates. This continues to be our outlook, but we do not
intend to take any extreme duration positions either way.
Q. WHAT IS YOUR OPINION OF BOND INSURANCE?
A. Roughly half of all municipal bonds are insured. Insurance does not
eliminate credit risk; it merely transfers it to the insurer. Although
bondholders should be happy with this transfer of risk, the market charges a
premium for uninsured bonds rated "Aaa" by Moody's Investors Service, Inc.,
relative to "Aaa"-rated insured bonds. Therefore, the market does not
believe the risk has been completely transferred, and neither do we. In
addition, we do not believe all bond insurers are created equal. Therefore,
we feel it is prudent to be careful when selecting insured bonds.
Q. HOW DO YOU THINK INVESTORS SHOULD VIEW THIS FUND?
A. We feel this Fund offers a competitive yield and an average credit quality
somewhere between that of a high-grade, national tax-free fund and a high-
yield, national tax-free fund. Therefore, this Fund should not be expected
to take as much interest-rate risk as a high-grade national fund nor as much
credit risk as a high-yield national fund.
Q. WHAT DO YOU SEE AS THE BIGGEST RISK TO THE MUNICIPAL MARKET AND THE FUND IN
THE COMING MONTHS?
A. The two biggest risks are that interest rates increase and yield spreads
among credits widen dramatically. We have been positioning the Fund in an
effort to limit its exposure to these risks.
/s/ John P. Kihn
John P. Kihn
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
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PORTFOLIO MANAGER'S PROFILE
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JOHN P. KIHN IS A VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(R) AND PORTFOLIO
MANAGER OF MFS(R) MUNICIPAL INCOME FUND, MFS(R) MUNICIPAL LIMITED MATURITY FUND,
AND MFS(R) ALABAMA, ARKANSAS, CALIFORNIA, FLORIDA, GEORGIA, MARYLAND,
MASSACHUSETTS, MISSISSIPPI, NEW YORK, NORTH CAROLINA, PENNSYLVANIA, SOUTH
CAROLINA, TENNESSEE, AND VIRGINIA MUNICIPAL BOND FUNDS.
MR. KIHN JOINED MFS AS A QUANTITATIVE ANALYST IN OCTOBER 1997 AND WAS NAMED
PORTFOLIO MANAGER LATER THAT YEAR. HE PREVIOUSLY HAD WORKED AS A SENIOR
QUANTITATIVE ANALYST WITH A MAJOR INVESTMENT MANAGEMENT FIRM.
MR. KIHN EARNED A BACHELOR'S DEGREE IN ECONOMICS FROM THE UNIVERSITY OF
CALIFORNIA, BERKELEY, A MASTER'S DEGREE IN BUSINESS ECONOMICS FROM THE
UNIVERSITY OF CALIFORNIA, SANTA BARBARA, AND A DOCTORATE DEGREE IN ACCOUNTING
AND FINANCE FROM THE LONDON SCHOOL OF ECONOMICS.
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. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
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FUND FACTS
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OBJECTIVE: SEEKS AS HIGH A LEVEL OF CURRENT INCOME EXEMPT FROM
FEDERAL INCOME TAXES AS IS 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: $384.9 MILLION NET ASSETS AS OF SEPTEMBER 30, 1998
PERFORMANCE SUMMARY
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for
the applicable time periods. Investment results reflect the percentage change
in net asset value, including reinvestment of dividends.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN THROUGH SEPTEMBER 30, 1998
CLASS A
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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Cumulative Total Return +4.03% +8.02% +24.23% +32.94% +104.57%
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Average Annual Total Return -- +8.02% + 7.50% + 5.86% + 7.42%
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SEC Results -- +2.88% + 5.77% + 4.83% + 6.89%
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CLASS B
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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Cumulative Total Return +3.64% +7.21% +21.34% +27.32% + 95.80%
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Average Annual Total Return -- +7.21% + 6.66% + 4.95% + 6.95%
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SEC Results -- +3.21% + 5.78% + 4.62% + 6.95%
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CLASS C
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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Cumulative Total Return +3.63% +7.32% +21.44% +27.63% + 96.16%
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Average Annual Total Return -- +7.32% + 6.69% + 5.00% + 6.97%
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SEC Results -- +6.32% + 6.69% + 5.00% + 6.97%
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NOTES TO PERFORMANCE SUMMARY
Class A share ("A") SEC results include the maximum 4.75% sales charge. Class B
share ("B") SEC results reflect the applicable contingent deferred sales charge
(CDSC), which declines over six years from 4% to 0%. Class C shares ("C") have
no initial sales charge but, along with B, have higher annual fees and expenses
than A. C SEC results reflect the 1% CDSC applicable to shares redeemed within
12 months.
A and C results include the performance and the operating expenses (e.g., Rule
12b-1 fees) of B for periods prior to the inception of A and C. Because
operating expenses of A are lower than those of B, A performance generally would
have been higher than B performance. Operating expenses of C are not
significantly different from those of B. The B performance included in the A SEC
performance has been adjusted to reflect the maximum initial sales charge
generally applicable to A rather than the CDSC generally applicable to B. The C
SEC performance has been adjusted to reflect the lower CDSC generally applicable
to C rather than the CDSC generally applicable to B.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and waivers
may be rescinded at any time. See the prospectus for details. 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.
A small portion of income may be subject to state, federal, and/or alternative
minimum tax. Capital gains, if any, are subject to a capital gains tax.
PORTFOLIO CONCENTRATION AS OF SEPTEMBER 30, 1998
QUALITY RATINGS
Source: Standard & Poor's and Moody's.
"AAA" 52.0%
"AA" 9.2%
"A" 7.3%
"BBB" 13.0%
"BB" 1.6%
"B" 0.9%
Not Rated 16.0%
Portfolio information is as of September 30, 1998. The portfolio is actively
managed, and current holdings may be different.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS (Unaudited) -- September 30, 1998
Municipal Bonds - 99.6%
<CAPTION>
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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<S> <C> <C>
General Obligation - 7.4%
Chicago, IL, Board of Education, AMBAC, 0s, 2015 $ 1,500 $ 654,075
Crowley, TX, Independent School District, Capital
Appreciation, FGIC, 0s, 2015 3,690 1,654,117
Harris County, TX, Capital Appreciation Refunding,
MBIA, 0s, 2016 8,000 3,368,400
Lewisville, TX, Independent School District, PSF, 0s, 2019 2,500 903,825
New Orleans, LA, AMBAC, 0s, 2015 3,000 1,335,060
New York City, NY, 8.2s, 2003 825 935,781
New York City, NY, 7.5s, 2008 1,350 1,507,896
Northwest Texas Independent School District,
AMBAC, 0s, 2011 3,000 1,686,750
Shelby County, TN, 0s, 2013 3,000 1,536,210
State of Texas, 7.625s, 2018 14,405 15,042,277
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$ 28,624,391
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State and Local Appropriation - 1.8%
New York Dormitory Authority Rev. (City University), 7.5s, 2010 $ 2,500 $ 3,099,575
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.875s, 2008 235 255,614
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.75s, 2020 290 309,621
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.5s, 2021 205 223,807
Philadelphia, PA, Regional Port Authority Lease Rev.,
MBIA, MVRIC, 8.44s, 2020(++) 2,500 2,991,925
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$ 6,880,542
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Refunded and Special Obligations - 24.4%
Adams County, CO, Single Family Mortgage Rev., 8.875s, 2011 $ 2,510 $ 3,546,354
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street), 8.125s, 2000 890 988,238
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street), 8.25s, 2000 1,000 1,112,950
Clermont County, OH, Hospital Facilities Rev. (Mercy
Health Systems), AMBAC, MVRICs, 9.596s, 2001(++) 1,500 1,802,355
Colquitt County, GA, Development Authority Rev.,
"A", 0s, 2021 5,725 1,697,863
Colquitt County, GA, Development Authority Rev., "C",
0s, 2021 2,815 834,845
Commonwealth of Massachusetts, 7s, 2001 1,865 2,057,505
Commonwealth of Massachusetts, 7s, 2001 725 798,827
Denver, CO, City & County Airport Rev., 8.75s, 2001 1,260 1,461,688
Illinois Education and Facilities Authority, 8.75s, 2015 60 61,290
Massachusetts Health & Education Facilities Authority
(New England Deaconess Hospital), 6.875s, 2002 1,000 1,118,870
Massachusetts Health & Education Facilities Authority
(Suffolk University), 8s, 2000 1,000 1,086,650
Massachusetts Industrial Finance Agency, Tunnel Rev
(Mass. Turnpike), 9s, 2000 2,760 3,089,323
Massachusetts Water Resources Authority, 7.625s, 2000 3,200 3,448,192
New York City, NY, 8.2s, 2001 4,175 4,777,954
New York City, NY, 8.25s, 2001 4,140 4,743,943
New York Local Government Assistance Corp., 7.25s, 2001 2,750 3,033,745
New York Medical Care Facilities Finance Agency, 7.75s, 2000 1,765 1,896,192
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.875s, 2000 1,180 1,292,029
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.875s, 2000 5,180 5,671,789
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.5s, 2001 1,795 1,982,829
New York Urban Development Corp., 7.75s, 2000 5,000 5,347,650
New York Urban Development Corp., 7.5s, 2001 2,500 2,772,700
New York Urban Development Corp. (Correctional
Facilities), 7.3s, 2002 2,340 2,632,453
Pennsylvania Industrial Development Authority
Rev., 7s, 2001 6,000 6,610,980
Richmond County, GA, Development Authority
Rev., 0s, 2021 8,450 2,506,017
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2004 3,000 2,452,950
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2005 1,800 1,411,956
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2009 6,750 4,419,225
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2014 5,000 2,446,050
Savannah, GA, Economic Development Authority, 0s, 2021 6,125 1,828,864
Texas Turnpike Authority (Houston Ship Channel Bridge),
12.625s, 2002 3,000 3,953,970
Washington Public Power Supply System Rev. (Nuclear
Project #1), 14.375s, 2001 600 691,860
Washington Public Power Supply System Rev. (Nuclear
Project #2), 7.375s, 2000 5,355 5,788,273
Washington Public Power Supply System Rev. (Nuclear
Project #3), 7s, 2000 4,050 4,352,333
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$ 93,718,712
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Airport and Port Revenue - 13.9%
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (American Airlines), 7.875s, 2025 $ 3,500 $ 3,790,535
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 1,920 2,018,323
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 8,945 9,958,469
Cleveland, OH, Airport Special Facilities Rev
(Continental Airlines), 5.7s, 2019 1,000 994,980
Cleveland, OH, Airport Special Facilities Rev
(Continental Airlines), 9s, 2019 4,300 4,647,827
Connecticut Airport Rev. (Bradley International
Airport), FGIC, 7.65s, 2012 1,000 1,194,360
Dallas-Fort Worth, TX, International Airport (American
Airlines), 7.5s, 2025 5,000 5,378,350
Denver, CO, City & County Airport Rev., 8.75s, 2023 3,490 3,992,001
Hawaii Airports Systems Rev., FGIC, 7.5s, 2020 5,350 5,768,477
Hillsborough County, FL, Aviation Authority Rev
(USAir), 8.6s, 2022 2,000 2,256,760
Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 1,000 1,100,290
Louisville & Jeff County, KY, Regional Airport
Authority, "A", MBIA, 6.5s, 2017 3,000 3,447,390
Tulsa, OK, Municipal Airport Trust Rev. (American
Airlines), 7.375s, 2020 3,500 3,767,085
Wayne County, MI, Charter Airport Rev. (Detroit
Metropolitan Wayne County), MBIA, 5s, 2022 2,700 2,692,683
Wayne County, MI, Charter Airport Rev. (Detroit
Metropolitan Wayne County), MBIA, 5s, 2028 2,700 2,675,646
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$ 53,683,176
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Electric and Gas Utility Revenue - 15.6%
Austin, TX, Utility Systems Rev., AMBAC, 0s, 2010 $ 7,500 $ 4,350,300
Austin, TX, Utility Systems Rev., AMBAC, 6.75s, 2011(S) 3,325 4,100,357
Austin, TX, Utility Systems Rev., FGIC, 0s, 2018 10,000 3,842,600
Chelan County, WA, Public Utility District No. 1
(Columbia River Rock Island Hydroelectric), MBIA, 0s, 2024 5,000 1,409,200
Chicago, IL, Gas Supply Rev. (People's Gas), 8.1s, 2020 2,000 2,155,160
Georgia Municipal Electric Power Authority Rev., MBIA,
6.375s, 2016 2,000 2,406,180
Georgia Municipal Electric Power Authority Rev., MBIA-
IBC, 6.5s, 2020 7,350 9,003,897
Intermountain Power Agency Utah Revenue, Refunding
Series A, MBIA, 5s, 2019 2,050 2,021,218
Midland, MI, Environmental Development Authority,
Pollution Control Rev. (Midland Cogeneration), 9.5s, 2009 2,000 2,176,180
North Carolina Eastern Municipal Power Agency, MBIA-
IBC, 7s, 2007 3,250 3,873,902
Pima County, AZ, Industrial Development Authority
(Tuscon Electric Power Co.), 6s, 2029 1,000 1,018,830
Pittsylvania County, VA, Industrial Development
Authority Rev., 7.5s, 2014 6,000 6,629,100
Southern Minnesota Municipal Power Agency, MBIA, 0s, 2020 13,500 4,821,660
Southern Minnesota Municipal Power Agency, MBIA, 0s, 2021 10,660 3,611,288
Southern Minnesota Municipal Power Agency, MBIA, 0s, 2025 6,400 1,779,776
Texas Municipal Power Agency Rev., AMBAC, 0s, 2011 5,930 3,298,207
Washington Public Power Supply System Rev., BIGI, MBIA,
0s, 2013 4,000 1,960,360
Washington Public Power Supply System Rev., BIGI, MBIA,
0s, 2014 3,350 1,552,323
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$ 60,010,538
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Health Care Revenue - 3.0%
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.25s, 2001 $ 85 $ 84,109
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.75s, 2006 140 136,567
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.125s, 2016 505 485,356
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.5s, 2026 1,130 1,083,873
Bell County, TX, Health Facilities Development Corp.
(Kings Daughters Hospital), 9.25s, 2008 1,410 1,494,600
Gadsden County, FL, Industrial Development Authority
(RHA/FLA Properties), 10.45s, 2018 1,870 1,911,832
Louisiana Public Facilities Authority (Southwest
Medical Center), 11s, 2006 1,291 309,930
Millbrae, CA, Residential Facility (Magnolia Of
Millbrae), 7.5s, 2027 1,000 1,064,890
Ohio County, WV, County Commission Health System (Ohio
Valley Medical Center), 5.75s, 2013 1,000 1,001,840
Stillwater, OK, Medical Center Authority (Stillwater
Medical Center), 6.5s, 2019 1,000 1,097,920
Tennessee Veterans Home Board Rev. (Humboldt), 6.75s, 2021 1,000 1,121,420
Torrance, CA, Hospital Rev., 6.875s, 2015 1,650 1,797,543
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$ 11,589,880
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Industrial Revenue (Corporate Guarantee) - 6.4%
Burns Habor, IN, Solid Waste Disposal Facilities Rev
(Bethlehem Steel), 8s, 2024 $ 3,000 $ 3,392,820
Carbon County, UT, Solid Waste Disposal Rev. (Laidlaw
Environmental), 7.45s, 2017 2,500 2,786,975
East Chicago, IN, Exempt Facilities Rev. (Inland Steel
Co.), 6.7s, 2012 2,070 2,325,417
Erie County, PA (International Paper), 7.875s, 2016 1,200 1,298,364
Lake Charles, LA, Harbor & Terminal District Port
(Occidental Petroleum), 7.2s, 2020 1,000 1,114,970
Navajo County, AZ, Industrial Development Authority
(Stone Container Corp.), 7.4s, 2026 5,150 5,786,180
Navajo County, AZ, Industrial Development Authority
(Stone Container Corp.), 7.2s, 2027 1,000 1,122,780
Northampton County, PA, Industrial Development
Authority (Bethlehem Steel), 7.55s, 2017 1,200 1,347,072
Port of New Orleans, LA (Avondale Industries), 8.5s, 2014 1,975 2,275,022
Port of New Orleans, LA (Continental Grain Co.), 7.5s, 2013 1,000 1,104,570
West Side Calhoun County, TX, Navigation District
(Union Carbide), 8.2s, 2021 2,000 2,201,860
------------
$ 24,756,030
- ------------------------------------------------------------------------------------------------------
Insured Health Care Revenue - 3.4%
Henrico County, VA, Industrial Development Authority Rev
(Bon Secours), FSA, RIBS, 7.924s, 2027(++) $ 5,000 $ 6,934,300
Jefferson County, KY, Hospital Rev. (Alliant Health
System), MBIA, INFLOS, 9.09s, 2014(++) 1,500 1,810,800
Mississippi Hospital Equipment & Facilities Authority Rev
(Rush Medical Foundation), Connie Lee, 6.7s, 2018 1,000 1,091,730
Rio Grande Valley, TX, Health Facilities Development
Corp., MBIA, 7.456s, 2015(S) 2,800 3,095,092
------------
$ 12,931,922
- ------------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 4.7%
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 7.25s, 2027 $ 1,000 $ 1,164,980
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 7.25s, 2027 610 656,086
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 10s, 2027 380 394,778
Colorado Housing Finance Authority, FHA, 8.3s, 2023 2,750 2,959,055
Eaglebend, CO, Affordable Housing Corp., 6.2s, 2012 1,000 1,063,630
Maryland Community Development Administration, 8.5s, 2028 1,440 1,472,400
Pennsylvania Housing Finance Agency, 7.6s, 2013 1,000 1,074,170
Texas Department of Housing & Community Affairs, 10s, 2026 2,300 2,404,282
Vermont Housing Finance Agency, 8.375s, 2020 2,645 2,736,596
Wisconsin Housing & Economic Development Authority,
7.2s, 2013 4,000 4,275,440
------------
$ 18,201,417
- ------------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 1.5%
Metropolitan Pier & Exposition Authority, IL, MBIA, 0s, 2016 $ 8,400 $ 3,581,004
Southeast, WI, Baseball Park Sales Tax Rev., MBIA, 0s, 2025 1,000 256,370
Southeast, WI, Baseball Park Sales Tax Rev., MBIA, 0s, 2027 1,500 347,865
Southeast, WI, Baseball Park Sales Tax Rev., MBIA, 0s, 2028 5,800 1,279,306
Southeast, WI, Baseball Park Sales Tax Rev., MBIA, 0s, 2029 1,730 362,919
------------
$ 5,827,464
- ------------------------------------------------------------------------------------------------------
Single Family Housing Revenue - 4.7%
Chicago, IL, Residential Mortgage Rev., MBIA, 0s, 2009 $ 3,210 $ 1,502,344
Colorado Housing Finance Authority, 6.875s, 2028 1,000 1,121,320
Cook County, IL (Markham), 0s, 2015 4,560 740,453
De Kalb, IL, Single Family Mortgage Rev., GNMA, 7.45s, 2009 180 199,294
Harris County, TX, Housing Finance Corp., 9.625s, 2003 164 166,973
Harris County, TX, Housing Finance Corp., 9.875s, 2014 281 286,095
Kentucky Housing Corp., FHA, 7.45s, 2023### 3,725 3,938,107
Mississippi Home Corp., GNMA, 7.1s, 2023 549 590,500
New Hampshire Housing Finance Authority, 7.2s, 2010 5,375 5,738,888
Tennessee Housing Development Agency, 0s, 2017 3,445 1,186,458
Utah Housing Finance Agency, 8.625s, 2019 385 402,252
Utah Housing Finance Agency, 9.125s, 2019 25 26,646
Utah Housing Finance Agency, 9.25s, 2019 35 37,265
Utah State Housing Finance Agency, 6.3s, 2028 1,995 2,140,994
------------
$ 18,077,589
- --------------------------------------------------------------------------------------------------------
Student Loan Revenue - 1.7%
Pennsylvania State Higher Educational Assistance
Agency, RIBS, AMBAC, 9.672s, 2026(++) $ 5,500 $ 6,352,060
- --------------------------------------------------------------------------------------------------------
Turnpike Revenue - 4.3%
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s to 2005, 7.15s to 2012 $ 5,000 $ 4,178,550
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s to 2005, 7.15s to 2013 5,000 4,246,850
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2030 5,000 981,350
Indiana Transportation Finance Authority Highway,
Highway Rev., AMBAC, 0s, 2018 5,250 1,974,630
New Jersey Turnpike Authority Rev., MBIA, 6.5s, 2016 1,450 1,785,327
Pennsylvania Turnpike Commission, Oil Franchise Tax
Rev., AMBAC, 5s, 2023 1,350 1,355,562
Pennsylvania Turnpike Commission, Oil Franchise Tax
Rev., AMBAC, 5s, 2023 2,160 2,172,831
------------
$ 16,695,100
- ------------------------------------------------------------------------------------------------------
Universities - 1.3%
Islip, NY, Community Development Agency Rev. (New York
Institute of Technology), 7.5s, 2026 $ 2,000 $ 2,206,800
New Hampshire Higher Education & Health Facilities
Authority Rev. (New Hampshire College), 6.375s, 2027 1,435 1,538,492
St. Joseph County, IN, Educational Facilities Rev
(University of Notre Dame), 6.5s, 2026 1,000 1,250,960
------------
$ 4,996,252
- ------------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 4.2%
Massachusetts Water Resources Authority, 6.5s, 2019 $ 7,495 $ 9,115,044
Pittsburgh, PA, Water & Sewer Authority Rev., FGIC, 0s, 2017 2,300 914,733
Pittsburgh, PA, Water & Sewer Authority Rev., FGIC, 0s, 2018 2,300 866,111
Salt Lake County, UT, Water Conservancy District Rev.,
AMBAC, 0s, 2008 2,100 1,379,763
Salt Lake County, UT, Water Conservancy District Rev.,
AMBAC, 0s, 2009 3,800 2,376,178
Westmoreland County, PA, Municipal Authority, FGIC, 0s, 2022 5,000 1,543,400
------------
$ 16,195,229
- --------------------------------------------------------------------------------------------------------
Other - 1.3%
Illinois State Dedicated Tax (Civic Center), AMBAC, 0s, 2016 $ 5,000 $ 2,044,100
Martha's Vineyard, MA, Land Bank (Land Acquisition),
8.125s, 2011 1,800 1,943,586
Massachusetts Health & Education Facilities Authority
(Learning Center for Deaf Children), 9.25s, 2014 900 946,728
------------
$ 4,934,414
- ------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $333,313,804) $383,474,716
- ------------------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 1.8%
- ------------------------------------------------------------------------------------------------------
Allegheny County, PA, Hospital Development Authority
Rev. (Presbyterian University Hospital), due 03/01/18 $ 1,820 $ 1,820,000
Allegheny County, PA, Hospital Development Authority
Rev. (Presbyterian University Hospital), due 03/01/20 2,800 2,800,000
New Castle, PA, Area Hospital Authority (Jameson
Memorial Hospital), due 07/01/26 2,200 2,200,000
- ------------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Identified Cost $ 6,820,000
- ------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $340,133,804) $390,294,716
Other Assets, Less Liabilities - (1.4)% (5,348,131)
- ------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $384,946,585
- --------------------------------------------------------------------------------------------------------
(S) Indexed security.
(++) Inverse floating rate security.
### Security segregated as collateral for an open futures contract.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- ------------------------------------------------------------------------------
SEPTEMBER 30, 1998
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $340,133,804) $390,294,716
Cash 50,764
Receivable for Fund shares sold 513,621
Receivable for investments sold 1,349,784
Interest receivable 5,842,160
Other assets 2,558
------------
Total assets $398,053,603
------------
Liabilities:
Distributions payable $ 705,801
Payable for Fund shares reacquired 504,033
Payable for investments purchased 11,623,627
Payable for daily variation margin on open futures
contracts 129,688
Payable to affiliates -
Management fee 7,428
Shareholder servicing agent fee 1,168
Distribution and service fee 6,318
Administrative fee 156
Accrued expenses and other liabilities 128,799
------------
Total liabilities $ 13,107,018
------------
Net assets $384,946,585
============
Net assets consist of:
Paid-in capital $344,905,649
Unrealized appreciation on investments 49,520,326
Accumulated net realized loss on investments (9,876,071)
Accumulated undistributed net investment income 396,681
------------
Total $384,946,585
============
Shares of beneficial interest outstanding 42,218,889
==========
Class A shares:
Net asset value per share
(net assets of $202,046,876 / 22,172,720 shares of
beneficial interest outstanding) $9.11
=====
Offering price per share (100 / 95.25) $9.56
=====
Class B shares:
Net asset value and offering price per share
(net assets of $157,027,858 / 17,212,881 shares of
beneficial interest outstanding) $9.12
=====
Class C shares:
Net asset value and offering price per share
(net assets of $25,871,851 / 2,833,288 shares of
beneficial interest outstanding) $9.13
=====
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, 1998
- ------------------------------------------------------------------------------
Net investment income:
Interest income $12,271,265
-----------
Expenses -
Management fee $ 1,351,203
Trustees' compensation 22,170
Shareholder servicing agent fee 211,953
Distribution and service fee (Class A) 239,086
Distribution and service fee (Class B) 809,142
Distribution and service fee (Class C) 118,544
Administrative fee 28,261
Custodian fee 62,392
Printing 7,915
Postage 20,193
Auditing fees 19,125
Legal fees 195
Miscellaneous 92,783
-----------
Total expenses $ 2,982,962
Fees paid indirectly (40,751)
-----------
Net expenses $ 2,942,211
-----------
Net investment income $ 9,329,054
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 674,513
Futures contracts (84,742)
-----------
Net realized gain on investments $ 589,771
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 5,096,086
Futures contracts (603,824)
-----------
Net unrealized gain on investments $ 4,492,262
-----------
Net realized and unrealized gain on investments $ 5,082,033
-----------
Increase in net assets from operations $14,411,087
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 MARCH 31, 1998
(UNAUDITED)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 9,329,054 $ 19,617,268
Net realized gain on investments 589,771 4,108,957
Net unrealized gain on investments 4,492,262 17,549,457
------------ ------------
Increase in net assets from operations $ 14,411,087 $ 41,275,682
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (5,052,650) $ (9,235,834)
From net investment income (Class B) (3,658,739) (9,293,144)
From net investment income (Class C) (535,272) (919,039)
------------ ------------
Total distributions declared to shareholders $ (9,246,661) $(19,448,017)
------------ ------------
Net decrease in net assets from Fund share transactions $ (3,414,965) $(35,966,457)
------------ ------------
Total increase (decrease) in net assets $ 1,749,461 $(14,138,792)
Net assets:
At beginning of period 383,197,124 397,335,916
------------ ------------
At end of period (including accumulated undistributed
net investment income of $396,681 and $314,288,
respectively) $384,946,585 $383,197,124
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
- -------------------------------------------------------------------------------------------------------------------------------
SIX FOUR
MONTHS MONTHS PERIOD
ENDED YEAR ENDED MARCH 31, ENDED ENDED
SEPTEMBER 30, ---------------------------------------------------- MARCH 31, NOVEMBER 30,
1998 1998 1997 1996 1995 1994 1993*
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -
beginning of period $ 8.99 $ 8.50 $ 8.62 $ 8.56 $ 8.56 $ 8.99 $ 9.15
------ ------ ------ ------ ------ ------ ------
Income from investment
operations# -
Net investment income $ 0.24 $ 0.48 $ 0.49 $ 0.51 $ 0.50 $ 0.15 $ 0.12
Net realized and unrealized
gain (loss) on investments 0.12 0.49 (0.12) 0.05 0.02 (0.51) (0.16)
------ ------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.36 $ 0.97 $ 0.37 $ 0.56 $ 0.52 $(0.36) $(0.04)
------ ------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders --
From net investment income $(0.24) $(0.48) $(0.49) $(0.50) $(0.52) $(0.02) $(0.11)
From net realized gain
on investments -- -- -- -- -- (0.01) --
In excess of net
investment income -- -- -- (0.00)+++ -- -- --
In excess of net
realized gain on
investments -- -- -- -- (0.00)+++ (0.04) (0.01)
------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.24) $(0.48) $(0.49) $(0.50) $(0.52) $(0.07) $(0.12)
------ ------ ------ ------ ------ ------ ------
Net asset value -
end of period $ 9.11 $ 8.99 $ 8.50 $ 8.62 $ 8.56 $ 8.56 $ 8.99
====== ====== ====== ====== ====== ====== ======
Total return(+) 4.03%++ 11.61% 4.28% 6.81% 6.33% (7.90)%+ (1.80)%+
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.21%+ 1.23% 1.31% 1.28% 1.13% 1.07%+ 0.76%+
Net investment income 5.30%+ 5.44% 5.75% 5.75% 6.20% 5.31%+ 4.94%+
Portfolio turnover 4% 23% 30% 23% 25% 9% 30%
Net assets at end of
period (000 omitted) $202,047 $189,056 $152,039 $121,903 $25,270 $5,595 $461
* For the period from the inception of Class A, September 7, 1993, through November 30, 1993.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data for the periods subsequent to November 30, 1993, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund has an expense offset arrangement with its custodian and dividend
disbursing agent. The Fund's expenses are calculated without reduction for this expense offset arrangement 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.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------------------------------
FOUR
SIX MONTHS MONTHS
ENDED YEAR ENDED MARCH 31, ENDED
SEPTEMBER 30, ---------------------------------------------------------- MARCH 31,
1998 1998 1997 1996 1995 1994
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
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 $ 9.00 $ 8.51 $ 8.63 $ 8.57 $ 8.56 $ 8.99
------ ------ ------ ------ ------ ------
Income from investment
operations# -
Net investment income $ 0.20 $ 0.42 $ 0.43 $ 0.43 $ 0.44 $ 0.14
Net realized and unrealized
gain (loss) on investments 0.12 0.48 (0.13) 0.06 0.00 (0.51)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.32 $ 0.90 $ 0.30 $ 0.49 $ 0.44 $(0.37)
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.20) $(0.41) $(0.42) $(0.43) $(0.43) $(0.01)
From net realized gain on
investments -- -- -- -- -- (0.01)
In excess of net investment
income -- -- -- (0.00)+++ -- --
In excess of net realized gain
on investments -- -- -- -- -- (0.04)
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.20) $(0.41) $(0.42) $(0.43) $(0.43) $(0.06)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 9.12 $ 9.00 $ 8.51 $ 8.63 $ 8.57 $ 8.56
====== ====== ====== ====== ====== ======
Total return 3.64%++ 10.77% 3.44% 5.87% 5.32% (8.97)%+
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.96%+ 1.98% 2.11% 2.13% 2.16% 2.24%+
Net investment income 4.55%+ 4.69% 4.95% 4.90% 5.15% 4.74%+
Portfolio turnover 4% 23% 30% 23% 25% 9%
Net assets at end of period (000
omitted) $157,028 $172,339 $226,138 $306,889 $412,965 $479,478
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data for the periods subsequent to November 30, 1993, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund has an expense offset arrangement with its custodian and dividend
disbursing agent. The Fund's expenses are calculated without reduction for this expense offset arrangement for fees paid
indirectly.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------
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 $ 8.73 $ 8.50 $ 8.25 $ 8.41 $ 8.11 $ 7.67
------ ------ ------ ------ ------ ------
Income from investment
operations -
Net investment income $ 0.42 $ 0.47 $ 0.49 $ 0.49 $ 0.51 $ 0.50
Net realized and unrealized
gain (loss) on investments 0.42 0.26 0.25 (0.15) 0.30 0.43
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.84 $ 0.73 $ 0.74 $ 0.34 $ 0.81 $ 0.93
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.45) $(0.48) $(0.49) $(0.50) $(0.51) $(0.49)
From net realized gain on
investments (0.10) -- -- -- -- --
In excess of net investment
income (0.03) -- -- -- -- --
From paid-in capital -- (0.02) -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.58) $(0.50) $(0.49) $(0.50) $(0.51) $(0.49)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 8.99 $ 8.73 $ 8.50 $ 8.25 $ 8.41 $ 8.11
====== ====== ====== ====== ====== ======
Total return 9.95% 8.82% 9.21% 4.18% 10.24% 12.53%
Ratios (to average net assets)/
Supplemental data:
Expenses 2.11% 2.03% 2.04% 2.05% 2.07% 2.09%
Net investment income 4.92% 5.50% 5.82% 5.99% 6.09% 6.38%
Portfolio turnover 30% 52% 73% 91% 127% 171%
Net assets at end of period
(000 omitted) $518,179 $449,949 $409,084 $379,239 $343,887 $244,825
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------------------------------
PERIOD
SIX MONTHS ENDED YEAR ENDED MARCH 31, ENDED
SEPTEMBER 30, ---------------------------------------------------------- MARCH 31,
1998 1998 1997 1996 1995 1994***
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of
period $ 9.01 $ 8.52 $ 8.64 $ 8.57 $ 8.56 $ 9.07
------ ------ ------ ------ ------ ------
Income from investment
operations# -
Net investment income $ 0.20 $ 0.41 $ 0.43 $ 0.43 $ 0.44 $ 0.09
Net realized and unrealized
gain (loss) on investments 0.12 0.49 (0.12) 0.07 0.01 (0.59)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.32 $ 0.90 $ 0.31 $ 0.50 $ 0.45 $(0.50)
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders from net
investment income+++ $(0.20) $(0.41) $(0.43) $(0.43) $(0.44) $(0.01)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 9.13 $ 9.01 $ 8.52 $ 8.64 $ 8.57 $ 8.56
====== ====== ====== ====== ====== ======
Total return 3.63%++ 10.75% 3.62% 5.94% 5.39% (19.42)%+
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.96%+ 1.98% 2.06% 2.05% 2.09% 2.18%+
Net investment income 4.55%+ 4.69% 5.00% 4.95% 5.23% 4.62%+
Portfolio turnover 4% 23% 30% 23% 25% 9%
Net assets at end of period (000
omitted) $25,872 $21,802 $19,159 $16,504 $10,936 $6,393
*** For the period from the inception of Class C, January 3, 1994, through March 31, 1994.
+ Annualized.
++ Not annualized.
+++ For the year ended March 31, 1996, the per share distributions in excess of net investment income were less than $0.01.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund has an expense arrangement with its custodian and dividend disbursing
agent. The Fund's expenses are calculated without reduction for this expense offset arrangement for fees paid indirectly.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS Municipal Income Fund (the Fund) is a non-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.
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
with the broker 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
contract, 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.
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.
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 month end net assets. The fee is reduced according to an arrangement
that 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 net realized gains.
At March 31, 1998, the Fund, for federal income tax purposes, had a capital loss
carryforward of $10,496,623 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, ($1,409), 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, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on the value
of 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. Class B shares will
convert to Class A shares approximately eight years after purchase.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.30% of
average daily net assets and 6.43% of investment income.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain officers and Trustees of the
Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD), and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $5,571 for the six months
ended September 30, 1998.
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:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$15,485 for the six months ended September 30, 1998, 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 paid 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 and 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. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $49,298 for the six months ended September
30, 1998. Fees incurred under the distribution plan during the six months ended
September 30, 1998, were 0.25% of average daily net assets attributable to Class
A shares on an annualized basis. Payment of the 0.10% per annum Class A
distribution fee will be implemented on such date as the Trustees of the Fund
may determine.
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 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 $30,559 and $8,799 for Class B and Class C shares, respectively, for
the six months ended September 30, 1998. Fees incurred under the distribution
plan during the six months ended September 30, 1998, were 1.00% of average daily
net assets attributable to both Class B and Class C shares.
Certain Class A and Class C shares are subject to a contingent deferred sales
charge in the event of a shareholder redemption within 12 months following
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B shares in the event of a shareholder redemption within
six years of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the six months ended September
30, 1998 were $0, $111,531, and $4,996 for Class A, Class B, and Class C shares,
respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the Fund's average daily net assets at an effective annual rate of
0.1125%.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $15,051,542 and $20,846,376, 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 $340,133,804
------------
Gross unrealized appreciation $ 50,948,882
Gross unrealized depreciation (787,970)
------------
Net unrealized appreciation $ 50,160,912
============
(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
SIX MONTHS ENDED SEPTEMBER 30, 1998 YEAR ENDED MARCH 31, 1998
- --------------------------------------------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 9,037,918 $ 81,241,988 12,070,927 $ 106,632,791
Shares issued to shareholders in
reinvestment of distributions 348,028 3,130,539 550,723 4,890,595
Shares reacquired (8,244,686) (74,079,951) (9,471,742) (83,631,135)
---------- ------------ ---------- --------------
Net increase 1,141,260 $ 10,292,576 3,149,908 $ 27,892,251
========== ============ ========== ==============
<CAPTION>
Class B Shares
SIX MONTHS ENDED SEPTEMBER 30, 1998 YEAR ENDED MARCH 31, 1998
- --------------------------------------------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 840,692 $ 7,572,510 1,479,892 $ 13,073,953
Shares issued to shareholders in
reinvestment of distributions 227,785 2,053,004 585,567 5,182,707
Shares reacquired (3,006,036) (27,050,399) (9,482,528) (83,714,203)
---------- ------------ ---------- --------------
Net decrease (1,937,559) $(17,424,885) (7,417,069) $ (65,457,543)
========== ============ ========== ==============
<CAPTION>
Class C Shares
SIX MONTHS ENDED SEPTEMBER 30, 1998 YEAR ENDED MARCH 31, 1998
- --------------------------------------------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 682,273 $ 6,146,874 1,245,893 $ 10,996,941
Shares issued to shareholders in
reinvestment of distributions 39,864 359,716 89,791 789,466
Shares reacquired (309,425) (2,789,246) (1,164,337) (10,187,572)
---------- ------------ ---------- --------------
Net increase 412,712 $ 3,717,344 171,347 $ 1,598,835
========== ============ ========== ==============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in an $805 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 six months ended September 30, 1998, was $661.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates. These financial instruments include future contracts.
The notional or contractual amounts of these instruments represent the
investment the Fund has in particular classes of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
Future Contracts
UNREALIZED
APPRECIATION
DESCRIPTION EXPIRATION CONTRACTS POSITION (DEPRECIATION)
- -----------------------------------------------------------------------------
Municipal Bond Index December 1998 160 Long $ 373,684
U.S. Treasury Bonds December 1998 206 Short $(1,014,270)
At September 30, 1998, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
<PAGE>
<TABLE>
MFS(R) MUNICIPAL INCOME FUND
<S> <C>
TRUSTEES SECRETARY
Richard B. Bailey* - Private Investor; Stephen E. Cavan*
Former Chairman and Director (until 1991),
MFS Investment Management ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Marshall N. Cohan - Private Investor
CUSTODIAN
Lawrence H. Cohn, M.D. - Chief of Cardiac State Street Bank and Trust Company
Surgery, Brigham and Women's Hospital;
Professor of Surgery, Harvard Medical School INVESTOR INFORMATION
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, Colonial Insurance Company, Ltd.
For information on MFS mutual funds, call
Abby M. O'Neill - Private Investor your financial adviser or, for an information
kit, call toll free: 1-800-637-2929 any
Walter E. Robb, III - President and Treasurer, business day from 9 a.m. to 5 p.m. Eastern
Benchmark Advisors, Inc. (corporate financial time (or leave a message anytime).
consultants); President, Benchmark
Consulting Group, Inc. (office services) INVESTOR SERVICE
MFS Service Center, Inc.
Arnold D. Scott* - Senior Executive P.O. Box 2281
Vice President, Director, and Secretary, Boston, MA 02107-9906
MFS Investment Management
For general information, call toll free:
Jeffrey L. Shames* - Chairman, Chief 1-800-225-2606 any business day from
Executive Officer, and Director, 8 a.m. to 8 p.m. Eastern time.
MFS Investment Management
For service to speech- or hearing-impaired,
J. Dale Sherratt - President, Insight Resources, call toll free: 1-800-637-6576 any business
Inc. (acquisition planning specialists) day from 9 a.m. to 5 p.m. Eastern time. (To
use this service, your phone must be equipped
Ward Smith - Former Chairman (until 1994), with a Telecommunications Device for the Deaf.)
NACCO Industries (holding company)
For share prices, account balances, and
INVESTMENT ADVISER exchanges, call toll free: 1-800-MFS-TALK
Massachusetts Financial Services Company (1-800-637-8255) anytime from a touch-tone
500 Boylston Street telephone.
Boston, MA 02116-3741
WORLD WIDE WEB
DISTRIBUTOR www.mfs.com
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
John P. Kihn*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
----------------
MFS(R) MUNICIPAL INCOME FUND Bulk Rate
U.S. Postage
[Logo]M F S(R) Paid
INVESTMENT MANAGEMENT MFS
We invented the mutual fund(R) ----------------
500 Boylston Street
Boston, MA 02116-3741
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MMI-3 11/98 25M 02/202/302
