<PAGE>
[Logo] MFS(SM)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND[SM]
MFS(R) Municipal
Income Fund
Annual Report o March 31, 1998
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IN MEMORIAM
A. KEITH BRODKIN
1935 - 1998
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MFS INVESTMENT MANAGEMENT(SM)
[Photo of A. Keith Brodkin]
On February 2, 1998, Keith Brodkin, a friend
and leader to everyone at MFS, died
unexpectedly at age 62. His thoughtful
letters to shareholders on the markets and
economy have been an integral part of
MFS shareholder reports like this one for
many years.
Keith joined MFS in 1970 as the firm's first
fixed-income manager, managing the
bond portion of MFS(R) Total Return Fund. He went on to manage our first
pure bond fund, MFS(R) Bond Fund, when it was introduced in 1974, and he
was considered a pioneer in the art of active bond management.
Keith was named President and Chief Investment Officer of MFS
in 1987 and four years later became Chairman and Chief Executive
Officer. During his stewardship, MFS has achieved significant growth in
total assets under management, rising from some $25 billion in 1991 to
the over $80 billion today entrusted to us by three million individual
and institutional investors worldwide. Under Keith's leadership, MFS has
carefully but steadily built its domestic and international investment
capabilities through the introduction of a range of new products and a
still-growing staff that now numbers over 100 equity and fixed-income
professionals.
Throughout his career, Keith was very active in a wide range of
charitable endeavors. He is survived by his wife and three children.
His leadership, friendship, and wise counsel will be sorely missed.
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TABLE OF CONTENTS
Letter from the Chairman .................................................. 2
A Discussion with the Portfolio Manager ................................... 4
Portfolio Manager's Profile ............................................... 7
Fund Facts ................................................................ 8
Performance Summary ....................................................... 8
Portfolio Concentration ................................................... 10
Federal Tax Information ................................................... 11
Portfolio of Investments .................................................. 12
Financial Statements ...................................................... 19
Notes to Financial Statements ............................................. 26
Independent Auditors' Report .............................................. 32
Trustees and Officers ..................................................... 33
HIGHLIGHTS
o FOR THE 12 MONTHS ENDED MARCH 31, 1998, CLASS A SHARES OF THE FUND PROVIDED
A TOTAL RETURN AT NET ASSET VALUE OF 11.61%, CLASS B SHARES 10.77%, AND
CLASS C SHARES 10.75%. (SEE PERFORMANCE SUMMARY FOR MORE INFORMATION.)
o THE FUND HAS BENEFITED FROM ITS "BARBELL" STRUCTURE OF SHORT-TERM, CALLABLE
BONDS OFFSET BY SOME LONGER-TERM SECURITIES.
o A MAJOR THEME OF THE PAST YEAR HAS BEEN THE FISCAL STRENGTH OF MOST
MUNICIPALITIES, WHICH ARE IN THEIR BEST FINANCIAL SHAPE IN MANY YEARS.
THEIR RECEIPTS ARE UP, AND THEIR FISCAL RESTRAINT HAS IMPROVED.
o AS A RESULT OF STRENGTHENING CREDITS, THE YIELD SPREAD BETWEEN THE HIGHEST-
AND LOWEST-RATED INVESTMENT-GRADE SECURITIES HAS NARROWED, WHICH HAS
ALLOWED LOWER-QUALITY INVESTMENT-GRADE BONDS TO OUTPERFORM.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders:
As investment managers we take a long-term view of the world's economies, as
well as of the stock and bond markets, and try to avoid getting caught up in
short-term fluctuations. However, it is hard to ignore unexpected events such
as the Asian economic turmoil or closely watched companies that miss their
quarterly earnings estimates. Given the potential for these events and their
possible impact on major market indices, we think it's important to offer some
perspective about recent market behavior and to let you know what MFS is doing
in an effort to provide you with favorable long-term investment performance.
The most notable recent event affecting investment markets has been the Asian
turmoil, which began in the summer of 1997 as a result of slowing growth rates
in the region and excess speculation in real estate markets. Since then, most
countries in the region have begun to implement the economic and regulatory
restructuring needed to put themselves on a stronger financial foundation.
While it may be a few years before some of these countries return to solid
economic footing, and while there will probably be a relatively short-term
impact on the U.S. economy, we believe the long-term outlook for the region is
quite positive.
The Asian situation has brought home the lesson that major events can quickly
impact investment markets around the world, including those of the United
States. Although U.S. equities have enjoyed a bull market lasting more than 15
years and have continued to set records in the first few months of 1998, there
have been brief bouts of volatility associated with the Asian turmoil, as well
as with perceived downturns for certain industries such as technology.
While we believe the long-term outlook for the equity markets is favorable, we
also believe we are overdue for a market correction in which prices will
remain flat or decline, possibly for an extended period of time. Since no one
can predict market cycles, that makes it that much more important to find
companies that can keep growing in the face of the occasional downturn and
even gain market share. For us, this means using original, bottom-up research
to examine each company's earnings potential and position as well as the
overall prospects for its industry. To that end, MFS continues to increase the
research support available to portfolio managers of MFS funds.
On the fixed-income side, MFS uses active portfolio management based on
extensive research and credit analysis to reduce the potential for price
declines and enhance the opportunity for price appreciation. For both equity
and fixed-income managers, this means visiting and meeting with thousands of
companies and issuers of credit every year, as well as attending many
presentations and closely following sources of industry research.
We believe this approach, based on thorough research, teamwork, innovative
thinking, and the free exchange of ideas, is the best way to get the most
performance for shareholders in MFS funds -- in any market environment.
We appreciate your support 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
April 14, 1998
JEFFREY L. SHAMES, A GRADUATE OF WESLEYAN UNIVERSITY AND THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY SLOAN SCHOOL OF MANAGEMENT, JOINED
MFS IN 1983. AFTER FOUR YEARS AS AN INDUSTRY ANALYST AND PORTFOLIO
MANAGER, HE WAS NAMED CHIEF EQUITY OFFICER IN 1987 AND PRESIDENT AND A
MEMBER OF THE BOARD OF DIRECTORS IN 1993. MR. SHAMES WAS APPOINTED
CHAIRMAN AND CHIEF EXECUTIVE OFFICER IN FEBRUARY 1998.
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A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of John P. Kihn]
John P. Kihn
For the 12 months ended March 31, 1998, Class A shares of the Fund provided a
total return of 11.61%, Class B shares 10.77%, and Class C shares 10.75%.
These returns include the reinvestment of distributions but exclude the
effects of any sales charges and compare to a 10.70% return for the Lehman
Brothers Municipal Bond Index (the Lehman Index), an unmanaged index of
national municipal bond investments rated "Baa" or higher, and to a 10.61%
return for the average general municipal debt fund as reported by Lipper
Analytical Services, Inc., an independent firm that reports mutual fund
performance.
Q. WHAT DO YOU SEE AS SOME OF THE THINGS THAT CONTRIBUTED TO THE FUND'S
PERFORMANCE?
A. The Fund has been helped in part by its structure. We have a lot of short-
term, callable bonds in the portfolio, along with some offsetting longer-
term securities, which makes for what we call a "barbell" combination.
Also, in the past couple of years there have been a fair number of pre-
refundings in the portfolio, with issuers refinancing
into new bonds at lower interest rates. These pre-refundings have resulted
in the portfolio's quality rising somewhat, so we now have a reasonably
large weighting in high-quality holdings, particularly in
"AAA"-rated bonds.
Q. HOW WOULD YOU DESCRIBE THE FIXED-INCOME ENVIRONMENT OF THE PAST YEAR?
A. Interest rates generally declined in 1997 after fluctuating at the
beginning of the year. We've seen a similar trend so far this year.
Despite the general choppiness, there's been a slight downward bias in
interest-rate movements, particularly in the Treasury and municipal
markets, in both of which we've seen a flattening yield curve that has
caused longer-term yields to approach short-term yields. Interest-rate
levels reflect inflation expectations; the flattening yield curve reflects
a slowing economy.
Q. WHAT ABOUT THE MUNICIPAL MARKET? HOW WOULD YOU DESCRIBE THAT ENVIRONMENT?
A. One of the biggest themes of the past year or two has been the fiscal
strength of most municipalities. With very few exceptions, most of them are
in their best financial shape in many years. Their receipts are up and
their fiscal restraint has improved, so instead of spending all the money
coming in, they seem to be maintaining their reserves. In terms of other
sectors, we have liked water and sewer, as well as select electric
utilities. Basically, these are required or essential services, and we
prefer to skew the portfolio toward such services when we can. We've done
well with cyclical holdings because the economy's been strong, but at some
point we might want to trade some of the cyclical exposure for more
essential services holdings.
Q. HAVE THERE BEEN ANY MAJOR NEW DEVELOPMENTS IN THIS MARKET SINCE THE
LAST REPORT?
A. The ratio of credit-rating upgrades to downgrades has been extraordinary.
According to Moody's Investors Service, 258 issuers were upgraded, versus
101 downgrades during the last calendar year. You see that occasionally in
the corporate market, but it's pretty unusual in the municipal market, in
which politics tends to create more spending, not less. For whatever
reason, and it may grow out of voting patterns, municipalities have decided
they should spend more conservatively. As a result of strengthening
credits, the yield spread between the highest- and lowest-rated investment-
grade securities has narrowed, which has allowed lower-quality investment-
grade bonds to outperform.
Q. WHAT ABOUT THE FUND'S DURATION, OR SENSITIVITY TO CHANGE IN INTEREST
RATES? HOW DOES THIS REFLECT YOUR OUTLOOK?
A. Relative to its peers, it's been slightly shorter than neutral. We're
trying to get close to neutral. That's a reflection of our outlook on
interest rates. If rates go down any more, we don't want to underperform.
Q. COULD YOU TALK ABOUT SOME OF THE LARGEST SECTORS IN THE FUND, AND WHY YOU
LIKE THEM?
A. The biggest sector is represented by pre-refunded bonds but, beyond that,
housing is pretty big, with multi- and single-family housing representing
about 11% of assets. Airlines make up another big area, at about 13%. These
are mostly facilities and can include hangars, terminals, and parking
garages. Electric and gas utilities represent a big area that's very
issuer-specific because of deregulation, with some utilities coming out of
deregulation in a stronger position than others.
Q. WHAT ABOUT THE RISE IN BOND INSURANCE? COULD YOU TELL US HOW THIS HAS
AFFECTED THE MUNICIPAL MARKET, AND HOW YOU MANAGE THE FUND?
A. A lot of bonds rated "AAA" are covered by bond insurance. Close to half of
the Fund's holdings are insured. The insurers have become much bigger
players, and they've taken away a lot of the credit plays, which has made
it a little more difficult to find good deals.
Q. WHAT DO YOU SEE AS THE BIGGEST RISK TO YOUR PART OF THE MUNICIPAL MARKET
AND THE FUND IN COMING MONTHS?
A. The biggest risk is the possibility of changes in interest rates, and we're
trying to neutralize the Fund against that. Even though we think interest
rates will tend to flatten, or perhaps even go down a little bit, they
might not. So we don't think it's prudent to take a great deal of interest-
rate risk in the current environment.
Q. LOOKING AHEAD, WHAT KIND OF CHANGES DO YOU SEE IN YOUR INVESTMENT
ENVIRONMENT, AND HOW ARE YOU POSITIONING THE FUND FOR THEM?
A. We don't expect spreads between credit qualities to tighten much more from
here. We also expect a continuation of the theme of better fiscal restraint
at the municipal level. Also, if interest rates go down any more, the
declines won't be that dramatic. So in this environment, we think the best
way to add value is to accentuate the Fund's advantages, which include its
pre-refunded bonds and relatively high yield. At the same time, we're
trying to neutralize the Fund's duration to help minimize its exposure to
possible changes in interest rates.
/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
EFFECTIVE MARCH 4, 1998, THE FUND IS BEING MANAGED BY JOHN P. KIHN, WHO
SUCCEEDS GEOFFREY L. SCHECHTER.
JOHN P. KIHN IS A VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT AND
PORTFOLIO MANAGER OF MFS(R) MUNICIPAL INCOME FUND, MFS(R) MUNICIPAL
LIMITED MATURITY FUND, AND MFS FLORIDA, NEW YORK, AND TENNESSEE
MUNICIPAL BOND FUNDS.
MR. KIHN JOINED MFS AS A QUANTITATIVE ANALYST IN OCTOBER 1997 AFTER
WORKING 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 IN 1984, 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.
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FUND FACTS
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: $383.2 MILLION NET ASSETS AS OF MARCH 31, 1998
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. Class B share performance results do not reflect
the contingent deferred sales charge (CDSC); 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
differences in charges and fees paid by shareholders investing in different
classes. It is not possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year period ended March 31, 1998)
[Graphic Omitted]
MFS Lehman Consumer
Municipal Brothers Price
Income Fund Municipal Index
-- Class B Bond Index -- U.S.
- --------------------------------------------
3/93 $10,000 $10,000 $10,000
3/94 10,178 10,232 10,251
3/95 10,719 10,992 10,543
3/96 11,349 11,914 10,830
3/97 11,740 12,564 11,142
3/98 13,004 13,908 11,295
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended March 31, 1998)
MFS Lehman Consumer
Municipal Brothers Price
Income Fund Municipal Index
-- Class B Bond Index -- U.S.
- --------------------------------------------
3/88 $10,000 $10,000 $10,000
3/90 11,882 11,853 11,047
3/92 13,730 14,239 11,957
3/94 15,600 16,394 12,635
3/96 17,395 19,089 13,350
3/98 19,931 22,285 13,923
AVERAGE ANNUAL TOTAL RETURNS AS OF MARCH 31, 1998
CLASS A INVESTMENT RESULTS
(net asset value change including reinvested distributions)
1 Year 3 Years 5 Years 10 Years
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Average Annual Total Return +11.61% +7.52% +6.24% +7.57%
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SEC Results + 6.31% +5.79% +5.21% +7.05%
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CLASS B INVESTMENT RESULTS
(net asset value change including reinvested distributions)
1 Year 3 Years 5 Years 10 Years
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Average Annual Total Return +10.77% +6.65% +5.39% +7.14%
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SEC Results + 6.77% +5.77% +5.07% +7.14%
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CLASS C INVESTMENT RESULTS
(net asset value change including reinvested distributions)
1 Year 3 Years 5 Years 10 Years
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Average Annual Total Return +10.75% +6.73% +5.45% +7.17%
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SEC Results + 9.75% +6.73% +5.45% +7.17%
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COMPARATIVE INDICES
1 Year 3 Years 5 Years 10 Years
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Average General Municipal Debt
Fund* +10.61% +7.54% +6.18% +8.05%
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Lehman Brothers Municipal Bond
Index** +10.70% +8.16% +6.82% +8.34%
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Consumer Price Index**# + 1.38% +2.32% +2.47% +3.37%
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* Source: Lipper Analytical Services, Inc.
** Source: CDA/Wiesenberger.
# The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
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.
A small portion of income may be subject to federal and/or alternative minimum
tax. Capital gains, if any, are subject to a capital gains tax.
PORTFOLIO CONCENTRATION AS OF MARCH 31, 1998
QUALITY RATINGS
"AAA" 44.0%
"AA" 13.0%
"A" 8.2%
"BBB" 16.0%
"BB" 1.6%
"B" 0.9%
Not Rated 16.3%
FEDERAL TAX INFORMATION
IN JANUARY 1999, SHAREHOLDERS WILL BE MAILED A FORM 1099 REPORTING THE
FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR YEAR
1998.
FOR FEDERAL INCOME TAX PURPOSES, 100% OF THE TOTAL DIVIDENDS PAID BY THE
FUND FROM NET INVESTMENT INCOME DURING THE YEAR ENDED MARCH 31, 1998, IS
DESIGNATED AS AN EXEMPT-INTEREST DIVIDEND.
<PAGE>
PORTFOLIO OF INVESTMENTS - March 31, 1998
<TABLE>
<CAPTION>
Municipal Bonds - 99.6%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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<S> <C> <C>
General Obligation - 8.7%
Chicago, IL, Board of Education, Capital Appreciation,
AMBAC, 0s, 2015 $ 1,500 $ 601,860
Commonwealth of Massachusetts, 7s, 2007 725 799,740
Crowley, TX, Independent School District, Capital
Appreciation, FGIC, 0s, 2015 3,690 1,511,387
Harris County, TX, Capital Appreciation Refunding,
MBIA, 0s, 2016 8,000 3,030,400
Lewisville, TX, Independent School District, PSF, 0s, 2019 2,500 809,350
New Orleans, LA, AMBAC, 0s, 2015 3,000 1,250,910
New York City, NY, 8.2s, 2003 4,175 4,798,703
New York City, NY, 8.2s, 2003 825 937,192
New York City, NY, 7.5s, 2008 1,350 1,504,373
Northwest Texas Independent School District, AMBAC,
0s, 2011 3,000 1,558,800
Shelby County, TN, Capital Appreciation Refunding, 0s, 2013 3,000 1,409,820
State of Texas, 7.625s, 2018 14,405 15,235,016
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$ 33,447,551
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State and Local Appropriation - 1.8%
New York Dormitory Authority Rev. (City University),
7.5s, 2010 $ 2,500 $ 3,084,575
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.875s, 2008 235 258,335
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.75s, 2020 290 313,041
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.5s, 2021 205 225,953
Philadelphia, PA, Regional Port Authority Lease Rev.,
MBIA, MVRICS, 8.37s, 2020(++) 2,500 2,899,825
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$ 6,781,729
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Refunded and Special Obligations - 23.3%
Adams County, CO, Single Family Mortgage Rev.,
8.875s, 2011 $ 2,510 $ 3,471,606
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street), 8.125s, 2000 890 995,340
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street), 8.25s, 2000 1,000 1,121,480
Clermont County, OH, Hospital Facilities Rev. (Mercy
Health Systems), AMBAC, MVRICs, 9.271s, 2021(++) 1,500 1,799,325
Colquitt County, GA, Development Authority Rev.,
"A", 0s, 2021 5,725 1,626,759
Colquitt County, GA, Development Authority Rev.,
"C", 0s, 2021 2,815 799,882
Commonwealth of Massachusetts, 7s, 2007 1,865 2,060,266
Fredericksburg, VA, Industrial Development Authority,
Hospital Facilities Rev., FGIC, INFLOS, 8.358s, 2023(++) 1,500 1,788,975
Illinois Education and Facilities Authority, 8.75s, 2015 60 61,286
Massachusetts Health & Education Facilities Authority
(New England Deaconess Hospital), 6.875s, 2022 3,000 3,348,990
Massachusetts Health & Education Facilities Authority
(Suffolk University), 8s, 2000 1,000 1,097,540
Massachusetts Industrial Finance Agency, Tunnel Rev
(Mass. Turnpike), 9s, 2020 2,800 3,169,180
Massachusetts Water Resources Authority, 7.625s, 2000 3,200 3,482,592
New York City, NY, 8.25s, 2001 4,140 4,765,388
New York Local Government Assistance Corp., 7.25s, 2001 2,750 3,040,455
New York Medical Care Facilities Finance Agency,
7.75s, 2000 1,765 1,917,231
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.875s, 2000 1,180 1,303,676
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.875s, 2000 5,180 5,722,916
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.5s, 2001 1,795 1,990,296
New York Urban Development Corp., 7.75s, 2000 5,000 5,410,150
New York Urban Development Corp., 7.5s, 2001 2,500 2,781,500
New York Urban Development Corp. (Correctional
Facilities), 7.3s, 2002 2,340 2,633,108
Pennsylvania Industrial Development Authority Rev.,
7s, 2001 7,000 7,710,430
Richmond County, GA, Development Authority Rev., 0s, 2021 8,450 2,401,068
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2004 3,000 2,336,340
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2005 1,800 1,337,688
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2009 6,750 4,097,520
Savannah, GA, Economic Development Authority, 0s, 2021 6,125 1,740,419
Texas Turnpike Authority (Houston Ship Channel Bridge),
12.625s, 2002 3,000 4,009,140
Washington Public Power Supply System Rev
(Nuclear Project #1), 14.375s, 2001 805 943,017
Washington Public Power Supply System Rev
(Nuclear Project #2), 7.375s, 2000 5,355 5,830,738
Washington Public Power Supply System Rev
(Nuclear Project #3), 7s, 2011 4,050 4,377,524
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$ 89,171,825
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Airport and Port Revenue - 13.1%
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (American Airlines), 7.875s, 2025 $ 3,500 $ 3,813,530
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 1,920 2,044,877
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 2,780 3,122,106
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 6,165 6,923,665
Cleveland, OH, Airport Special Facilities Rev
(Continental Airlines), 5.7s, 2019(S)(S) 1,000 976,710
Cleveland, OH, Airport Special Facilities Rev
(Continental Airlines), 9s, 2019 4,300 4,714,993
Connecticut Airport Rev. (Bradley International
Airport), FGIC, 7.65s, 2012 1,000 1,178,750
Dallas-Fort Worth, TX, International Airport (American
Airlines), 7.5s, 2025 5,000 5,409,350
Denver, CO, City & County Airport Rev., 8.75s, 2023 1,260 1,469,777
Denver, CO, City & County Airport Rev., 8.75s, 2023 3,490 4,064,629
Hawaii Airports Systems Rev., FGIC, 7.5s, 2020 5,350 5,790,091
Hillsborough County, FL, Aviation Authority Rev
(USAir), 8.6s, 2022 2,000 2,278,320
Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 1,000 1,106,260
Louisville & Jeff County, KY, Regional Airport
Authority, "A", MBIA, 6.5s, 2017 3,000 3,368,580
Tulsa, OK, Municipal Airport Trust Rev. (American
Airlines), 7.375s, 2020 3,500 3,795,015
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$ 50,056,653
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Electric and Gas Utility Revenue - 15.0%
Austin, TX, Utility Systems Rev., AMBAC, 0s, 2010 $ 7,500 $ 4,062,600
Austin, TX, Utility Systems Rev., AMBAC, 6.75s, 2011(S)(S) 3,325 3,911,995
Austin, TX, Utility Systems Rev., FGIC, 0s, 2018 10,000 3,547,900
Chelan County, WA, Public Utility District No. 1
(Columbia River Rock Island Hydroelectric), MBIA, 0s, 2024 10,000 2,525,900
Chicago, IL, Gas Supply Rev. (People's Gas), 8.1s, 2020 2,000 2,178,480
Clark County, NV, Industrial Development Rev. (Nevada
Power Co.), 5.9s, 2032 1,000 1,015,010
Georgia Municipal Electric Power Authority Rev.,
MBIA, 6.375s, 2016 2,000 2,331,380
Georgia Municipal Electric Power Authority Rev.,
MBIA-IBC, 6.5s, 2020 7,350 8,682,702
Midland, MI, Environmental Development Authority,
Pollution Control Rev. (Midland Cogeneration), 9.5s, 2009 2,000 2,208,340
North Carolina Eastern Municipal Power Agency,
MBIA-IBC, 7s, 2007 3,250 3,801,980
Pima County, AZ, Industrial Development Authority
(Tuscon Electric Power Co.), 6s, 2029 1,000 1,030,140
Pittsylvania County, VA, Industrial Development
Authority Rev., 7.5s, 2014 6,000 6,617,820
Southern Minnesota Municipal Power Agency, MBIA, 0s, 2020 13,500 4,404,375
Southern Minnesota Municipal Power Agency, MBIA, 0s, 2021 10,660 3,303,108
Southern Minnesota Municipal Power Agency, MBIA, 0s, 2025 6,400 1,592,512
Texas Municipal Power Agency Rev., AMBAC, 0s, 2011 5,930 3,050,392
Washington Public Power Supply System Rev., MBIA,
BIGI, 0s, 2013 4,000 1,848,520
Washington Public Power Supply System Rev., MBIA,
BIGI, 0s, 2014 3,350 1,460,098
------------
$ 57,573,252
- -------------------------------------------------------------------------------------------------------
Health Care Revenue - 2.9%
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.25s, 2001### $ 85 $ 83,695
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.75s, 2006 140 135,506
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.125s, 2016 505 480,169
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.5s, 2026 1,130 1,071,364
Bell County, TX, Health Facilities Development Corp.
(Kings Daughters Hospital), 9.25s, 2008 1,495 1,612,133
Gadsden County, FL, Industrial Development Authority
(RHA/FLA Properties), 10.45s, 2018 1,900 1,941,781
Louisiana Public Facilities Authority (Southwest
Medical Center), 11s, 2006 1,368 367,738
Millbrae, CA, Residential Facility (Magnolia Of
Millbrae), 7.375s, 2027 1,000 1,035,740
Montgomery County, PA, Industrial Development
Authority, Health Facilities Rev. (AHF/Ambler), 8.5s, 2023 300 337,356
Stillwater, OK, Medical Center Authority (Stillwater
Medical Center), 6.5s, 2019 1,000 1,079,290
Tennessee Veterans Home Board Rev. (Humboldt),
6.75s, 2021 1,000 1,107,930
Torrance, CA, Hospital Rev., 6.875s, 2015 1,695 1,842,414
------------
$ 11,095,116
- -------------------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 6.7%
Burns Habor, IN, Solid Waste Disposal Facilities Rev
(Bethlehem Steel), 8s, 2024 $ 3,000 $ 3,397,920
Carbon County, UT, Solid Waste Disposal Rev. (Laidlaw
Environmental), 7.45s, 2017 2,500 2,772,925
Dayton, OH, Special Facilities Rev. (Emery Air
Freight), 12.5s, 2009 1,000 1,071,910
East Chicago, IN, Exempt Facilities Rev
(Inland Steel Co.), 6.7s, 2012 2,070 2,302,709
Erie County, PA (International Paper), 7.875s, 2016 1,200 1,307,556
Lake Charles, LA, Harbor & Terminal District Port
(Occidental Petroleum), 7.2s, 2020 1,000 1,111,200
Navajo County, AZ, Industrial Development Authority
(Stone Container Corp.), 7.4s, 2026 5,150 5,769,339
Navajo County, AZ, Industrial Development Authority
(Stone Container Corp.), 7.2s, 2027 1,000 1,117,530
Northampton County, PA, Industrial Development
Authority (Bethlehem Steel), 7.55s, 2017 1,200 1,347,852
Port of New Orleans, LA (Avondale Industries), 8.5s, 2014 2,000 2,307,680
Port of New Orleans, LA (Continental Grain Co.), 7.5s, 2013 1,000 1,106,330
West Side Calhoun County, TX, Navigation District
(Union Carbide), 8.2s, 2021 2,000 2,214,420
------------
$ 25,827,371
- -------------------------------------------------------------------------------------------------------
Insured Health Care Revenue - 3.1%
Henrico County, VA, Industrial Development Authority Rev
(Bon Secours), FSA, RIBS, 7.651s, 2027(++) $ 5,000 $ 6,163,900
Jefferson County, KY, Hospital Rev. (Alliant Health
System), MBIA, INFLOS, 9.09s, 2014(++) 1,500 1,775,685
Mississippi Hospital Equipment & Facilities Authority Rev
(Rush Medical Foundation), Connie Lee, 6.7s, 2018 1,000 1,089,340
Rio Grande Valley, TX, Health Facilities Development
Corp., MBIA, 7.71s, 2015(S) 2,800 3,023,468
------------
$ 12,052,393
- -------------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 5.1%
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 7.25s, 2027 $ 1,000 $ 1,147,390
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 7.25s, 2027 610 643,983
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 10s, 2027 380 392,001
Colorado Housing Finance Authority, FHA, 8.3s, 2023 2,750 2,949,127
Eaglebend, CO, Affordable Housing Corp., 6.2s, 2012 1,000 1,055,520
Maryland Community Development Administration, 8.5s, 2028 3,000 3,037,500
Pennsylvania Housing Finance Agency, 7.6s, 2013 1,000 1,075,820
Texas Department of Housing & Community Affairs,
10s, 2026 2,310 2,385,791
Vermont Housing Finance Agency, 8.375s, 2020 2,645 2,749,663
Wisconsin Housing & Economic Development Authority,
7.2s, 2013 4,000 4,259,280
------------
$ 19,696,075
- -------------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 1.4%
Metropolitan Pier & Exposition Authority, IL, MBIA, 0s, 2016 $ 8,400 $ 3,254,496
Southeast, WI, Baseball Park Sales Tax Rev., MBIA, 0s, 2025 1,000 234,190
Southeast, WI, Baseball Park Sales Tax Rev., MBIA, 0s, 2027 1,500 311,700
Southeast, WI, Baseball Park Sales Tax Rev., MBIA, 0s, 2028 5,800 1,142,948
Southeast, WI, Baseball Park Sales Tax Rev., MBIA, 0s, 2029 1,730 323,302
------------
$ 5,266,636
- -------------------------------------------------------------------------------------------------------
Single Family Housing Revenue - 6.4%
Chicago, IL, Residential Mortgage Rev., MBIA, 0s, 2009 $ 3,210 $ 1,450,760
Colorado Housing Finance Authority, 6.875s, 2028 1,000 1,110,040
Cook County, IL, Single Family Housing Rev., 0s, 2015 5,415 828,224
De Kalb, IL, Single Family Mortgage Rev., GNMA,
7.45s, 2009### 200 219,436
Harris County, TX, Housing Finance Corp., 9.625s, 2003 195 198,475
Harris County, TX, Housing Finance Corp., 9.875s, 2014 315 320,613
Kentucky Housing Corp., FHA, 7.45s, 2023 4,190 4,430,464
Mississippi Home Corp., GNMA, 7.1s, 2023 610 654,829
New Hampshire Housing Finance Authority, 7.2s, 2010 5,670 6,044,277
Tennessee Housing Development Agency, 0s, 2017 3,445 1,153,214
Utah Housing Finance Agency, 8.625s, 2019 585 599,022
Utah Housing Finance Agency, 9.125s, 2019 50 52,345
Utah Housing Finance Agency, 9.25s, 2019 50 52,351
Utah State Housing Finance Agency, 6.3s, 2028 2,000 2,121,620
West Virginia Housing Development Fund, 7.85s, 2014 5,185 5,360,771
------------
$ 24,596,441
- -------------------------------------------------------------------------------------------------------
Student Loan Revenue - 1.7%
Pennsylvania State Higher Educational Assistance
Agency, RIBS, AMBAC, 9.48s, 2026(++) $ 5,500 $ 6,379,010
- -------------------------------------------------------------------------------------------------------
Turnpike Revenue - 3.7%
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s to 2005, 7.15s to 2012 $ 5,000 $ 3,768,150
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s to 2005, 7.15s to 2013 5,000 3,790,350
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2030 5,000 867,850
Indiana Transportation Finance Authority Highway,
Highway Rev., AMBAC, 0s, 2018 5,250 1,840,177
New Jersey Turnpike Authority Rev., MBIA, 6.5s, 2016 1,450 1,713,306
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2014 5,000 2,259,850
------------
$ 14,239,683
- -------------------------------------------------------------------------------------------------------
Universities - 1.3%
Islip, NY, Community Development Agency Rev. (New York
Institute of Technology), 7.5s, 2026 $ 2,000 $ 2,198,660
New Hampshire Higher Education & Health Facilities
Authority Rev. (New Hampshire College), 6.375s, 2027 1,435 1,511,256
St. Joseph County, IN, Educational Facilities Rev
(University of Notre Dame), 6.5s, 2026 1,000 1,226,580
------------
$ 4,936,496
- -------------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 4.1%
Massachusetts Water Resources Authority, 6.5s, 2019 $ 7,495 $ 9,103,877
Pittsburgh, PA, Water & Sewer Authority, FGIC, 0s, 2017 2,300 841,409
Pittsburgh, PA, Water & Sewer Authority, FGIC, 0s, 2018 2,300 795,754
Salt Lake County, UT, Water Conservancy District Rev.,
AMBAC, 0s, 2008 2,100 1,291,038
Salt Lake County, UT, Water Conservancy District Rev.,
AMBAC, 0s, 2009 3,800 2,198,148
Westmoreland County, PA, Municipal Authority, FGIC, 0s, 2022 5,000 1,435,250
------------
$ 15,665,476
- -------------------------------------------------------------------------------------------------------
Other - 1.3%
Illinois State Dedicated Tax (Civic Center), AMBAC, 0s, 2016 $ 5,000 $ 1,897,800
Martha's Vineyard, MA, Land Bank (Land Acquisition),
8.125s, 2011 1,800 1,956,960
Massachusetts Health & Education Facilities Authority
(Learning Center for Deaf Children), 9.25s, 2014 900 958,383
------------
$ 4,813,143
- -------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $336,534,023) $381,598,850
Other Assets, Less Liabilities - 0.4% 1,598,274
- -------------------------------------------------------------------------------------------------------
Net assets - 100.0% $383,197,124
- -------------------------------------------------------------------------------------------------------
### Security segregated as collateral for an open futures contract.
(S) Indexed security.
(S)(S) When-issued security. At March 31, 1998, the Fund had sufficient cash and/or securities
at least equal to the value of the when-issued security.
(++) Inverse floating rate security.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
MARCH 31, 1998
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $336,534,023) $381,598,850
Cash 3,310
Receivable for daily variation margin on open futures
contracts 54,688
Receivable for Fund shares sold 1,631,423
Receivable for investments sold 1,366,428
Interest receivable 6,127,471
Other assets 3,690
------------
Total assets $390,785,860
------------
Liabilities:
Cash overdraft $ 1,653,269
Distributions payable 733,556
Payable for Fund shares reacquired 493,173
Payable for when-issued investments purchased 4,476,195
Payable to affiliates -
Management fee 22,671
Distribution and service fee 19,719
Administrative fee 468
Accrued expenses and other liabilities 189,685
------------
Total liabilities $ 7,588,736
------------
Net assets $383,197,124
============
Net assets consist of:
Paid-in capital $348,320,614
Unrealized appreciation on investments 45,028,065
Accumulated net realized loss on investments (10,465,843)
Accumulated undistributed net investment income 314,288
------------
Total $383,197,124
============
Shares of beneficial interest outstanding 42,602,476
==========
Class A shares:
Net asset value per share
(net assets of $189,055,679 / 21,031,460 shares of
beneficial interest outstanding) $8.99
=====
Offering price per share (100 / 95.25) $9.44
=====
Class B shares:
Net asset value and offering price per share
(net assets of $172,338,972 / 19,150,440 shares of
beneficial interest outstanding) $9.00
=====
Class C shares:
Net asset value and offering price per share
(net assets of $21,802,473 / 2,420,576 shares of
beneficial interest outstanding) $9.01
=====
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
- ----------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1998
- ----------------------------------------------------------------------------
Net investment income:
Interest income $26,016,757
-----------
Expenses -
Management fee $ 2,841,328
Trustees' compensation 41,610
Shareholder servicing agent fee 486,012
Distribution and service fee (Class A) 426,466
Distribution and service fee (Class B) 1,992,428
Distribution and service fee (Class C) 197,552
Administrative fee 55,640
Custodian fee 137,641
Printing 41,827
Postage 43,758
Auditing fees 34,749
Legal fees 6,893
Miscellaneous 143,888
-----------
Total expenses $ 6,449,792
Fees paid indirectly (50,303)
-----------
Net expenses $ 6,399,489
-----------
Net investment income $19,617,268
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions $ 4,086,509
Futures contracts 22,448
-----------
Net realized gain on investments $ 4,108,957
-----------
Change in unrealized appreciation (depreciation) -
Investments $17,586,219
Futures contracts (36,762)
-----------
Net unrealized gain on investments $17,549,457
-----------
Net realized and unrealized gain on investments $21,658,414
-----------
Increase in net assets from operations $41,275,682
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 19,617,268 $ 21,988,427
Net realized gain (loss) on investments 4,108,957 (3,566,000)
Net unrealized gain (loss) on investments 17,549,457 (2,405,366)
------------ ------------
Increase in net assets from operations $ 41,275,682 $ 16,017,061
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (9,235,834) $ (7,739,363)
From net investment income (Class B) (9,293,144) (13,259,117)
From net investment income (Class C) (919,039) (829,094)
------------ ------------
Total distributions declared to shareholders $(19,448,017) $(21,827,574)
------------ ------------
Net decrease in net assets from Fund share transactions $(35,966,457) $(42,149,734)
------------ ------------
Total decrease in net assets $(14,138,792) $(47,960,247)
Net assets:
At beginning of period 397,335,916 445,296,163
------------ ------------
At end of period (including accumulated undistributed net
investment income of $314,288 and $153,445, respectively) $383,197,124 $397,335,916
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, YEAR ENDED
--------------------------------------------------------------------- NOVEMBER 30,
1998 1997 1996 1995 1994+++ 1993*
- ------------------------------------------------------------------------------------------------------------------------------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of
period $ 8.50 $ 8.62 $ 8.56 $ 8.56 $ 8.99 $ 9.15
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.48 $ 0.49 $ 0.51 $ 0.50 $ 0.15 $ 0.12
Net realized and unrealized
gain (loss) on investments 0.49 (0.12) 0.05 0.02 (0.51) (0.16)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.97 $ 0.37 $ 0.56 $ 0.52 $(0.36) $(0.04)
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income(++) $(0.48) $(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(+++) -- -- -- (0.00) (0.04) (0.01)
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.48) $(0.49) $(0.50) $(0.52) $(0.07) $(0.12)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 8.99 $ 8.50 $ 8.62 $ 8.56 $ 8.56 $ 8.99
====== ====== ====== ====== ====== ======
Total return(+) 11.61% 4.28% 6.81% 6.33% (7.90)%+ (1.80)%+
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.23% 1.31% 1.28% 1.13% 1.07%+ 0.76%+
Net investment income 5.44% 5.75% 5.75% 6.20% 5.31%+ 4.94%+
Portfolio turnover 23% 30% 23% 25% 9% 30%
Net assets at end of period
(000 omitted) $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.
+++ 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 years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the
results would have been lower.
(++) For the year ended March 31, 1996, the per share distribution in excess of net investment income was $0.0003.
(+++) For the year ended March 31, 1995, the per share distributions in excess of net realized gains were less than $0.01.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
YEAR ENDED MARCH 31, NOVEMBER 30,
------------------------------------------------------------------------- ----------------------
1998 1997 1996 1995 1994+++ 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -
beginning of period $ 8.51 $ 8.63 $ 8.57 $ 8.56 $ 8.99 $ 8.73 $ 8.50
------ ------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.42 $ 0.43 $ 0.43 $ 0.44 $ 0.14 $ 0.42 $ 0.47
Net realized and
unrealized gain (loss)
on investments 0.48 (0.13) 0.06 0.00 (0.51) 0.42 0.26
------ ------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.90 $ 0.30 $ 0.49 $ 0.44 $(0.37) $ 0.84 $ 0.73
------ ------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders -
From net investment
income $(0.41) $(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(++) -- -- (0.00) -- -- (0.03) --
In excess of net
realized gain on
investments -- -- -- -- (0.04) -- --
From paid-in capital -- -- -- -- -- -- (0.02)
------ ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.41) $(0.42) $(0.43) $(0.43) $(0.06) $(0.58) $(0.50)
------ ------ ------ ------ ------ ------ ------
Net asset value - end of
period $ 9.00 $ 8.51 $ 8.63 $ 8.57 $ 8.56 $ 8.99 $ 8.73
====== ====== ====== ====== ====== ====== ======
Total return 10.77% 3.44% 5.87% 5.32% (8.97)%+ 9.95% 8.82%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.98% 2.11% 2.13% 2.16% 2.24%+ 2.11% 2.03%
Net investment income 4.69% 4.95% 4.90% 5.15% 4.74%+ 4.92% 5.50%
Portfolio turnover 23% 30% 23% 25% 9% 30% 52%
Net assets at end of
period (000 omitted) $172,339 $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 years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(++) For the year ended March 31, 1996, the per share distribution in excess of net investment income was $0.0003.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.25 $ 8.41 $ 8.11 $ 7.67
------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.49 $ 0.49 $ 0.51 $ 0.50
Net realized and unrealized gain (loss) on
investments 0.25 (0.15) 0.30 0.43
------ ------ ------ ------
Total from investment operations $ 0.74 $ 0.34 $ 0.81 $ 0.93
------ ------ ------ ------
Less distributions declared to shareholders from
net investment income $(0.49) $(0.50) $(0.51) $(0.49)
------ ------ ------ ------
Net asset value - end of period $ 8.50 $ 8.25 $ 8.41 $ 8.11
====== ====== ====== ======
Total return 9.21% 4.18% 10.24% 12.53%
Ratios (to average net assets)/ Supplemental data:
Expenses 2.04% 2.05% 2.07% 2.09%
Net investment income 5.82% 5.99% 6.09% 6.38%
Portfolio turnover 73% 91% 127% 171%
Net assets at end of period (000 omitted) $409,084 $379,239 $343,887 $244,825
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1998 1997 1996 1995 1994***
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.52 $ 8.64 $ 8.57 $ 8.56 $ 9.07
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.41 $ 0.43 $ 0.43 $ 0.44 $ 0.09
Net realized and unrealized gain (loss) on
investments 0.49 (0.12) 0.07 0.01 (0.59)
------ ------ ------ ------ ------
Total from investment operations $ 0.90 $ 0.31 $ 0.50 $ 0.45 $(0.50)
------ ------ ------ ------ ------
Less distributions declared to shareholders
from net investment income(++) $(0.41) $(0.43) $(0.43) $(0.44) $(0.01)
------ ------ ------ ------ ------
Net asset value - end of period $ 9.01 $ 8.52 $ 8.64 $ 8.57 $ 8.56
====== ====== ====== ====== ======
Total return 10.75% 3.62% 5.94% 5.39% (19.42)%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.98% 2.06% 2.05% 2.09% 2.18%+
Net investment income 4.69% 5.00% 4.95% 5.23% 4.62%+
Portfolio turnover 23% 30% 23% 25% 9%
Net assets at end of period (000 omitted) $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.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(++) For the year ended March 31, 1996, the per share distributions in excess of net investment income were $0.0003.
</TABLE>
See notes to financial statements
<PAGE>
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 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 average daily 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. During
the year ended March 31, 1998, $8,408 was reclassified from accumulated
undistributed 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, 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 the average daily net assets and 6.43% of investment income.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain 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
$10,966 for the year ended March 31, 1998.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$27,449 for the year ended March 31, 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 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 $93,979 for the year ended March 31,
1998. Fees incurred under the distribution plan during the year ended March
31, 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 $72,905 and $14,451 for
Class B and Class C shares, respectively, for the year ended March 31, 1998.
Fees incurred under the distribution plan during the year ended March 31,
1998, were 1.00% of average daily net assets attributable to both Class B and
Class C shares.
Certain Class A shares 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 year ended
March 31, 1998, were $185, $249,736, and $11,733 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%. Prior to January 1, 1998, the fee was calculated as a
percentage of the average daily net assets at an effective annual rate of up
to 0.13%.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $88,625,573 and $122,884,564, 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 $336,541,893
------------
Gross unrealized appreciation $ 46,008,463
Gross unrealized depreciation (951,506)
------------
Net unrealized appreciation $ 45,056,957
============
(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
YEAR ENDED MARCH 31, 1998 YEAR ENDED MARCH 31, 1997
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 12,070,927 $106,632,791 10,598,452 $ 91,183,934
Shares issued to shareholders
in reinvestment of
distributions 550,723 4,890,595 421,941 3,631,704
Shares reacquired (9,471,742) (83,631,135) (7,272,704) (62,547,556)
---------- ------------ ---------- ------------
Net increase 3,149,908 $ 27,892,251 3,747,689 $ 32,268,082
========== ============ ========== ============
<CAPTION>
Class B Shares
YEAR ENDED MARCH 31, 1998 YEAR ENDED MARCH 31, 1997
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,479,892 $ 13,073,953 1,742,931 $ 15,013,335
Shares issued to shareholders
in reinvestment of
distributions 585,567 5,182,707 885,494 7,626,737
Shares reacquired (9,482,528) (83,714,203) (11,607,867) (99,999,564)
---------- ------------ ---------- ------------
Net decrease (7,417,069) $(65,457,543) (8,979,442) $(77,359,492)
========== ============ ========== ============
<CAPTION>
Class C Shares
YEAR ENDED MARCH 31, 1998 YEAR ENDED MARCH 31, 1997
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,245,893 $ 10,996,941 1,159,265 $ 10,015,620
Shares issued to shareholders
in reinvestment of
distributions 89,791 789,466 69,652 600,563
Shares reacquired (1,164,337) (10,187,572) (890,281) (7,674,507)
---------- ------------ ---------- ------------
Net increase 171,347 $ 1,598,835 338,636 $ 2,941,676
========== ============ ========== ============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $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
year ended March 31, 1998, was $1,942.
(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
DESCRIPTION EXPIRATION CONTRACTS POSITION DEPRECIATION
- --------------------------------------------------------------------------------
Municipal Bond Index June 1998 125 Short $36,762
At March 31, 1998, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
<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, 1998, the
related statement of operations for the year then ended, the statement of
changes in net assets for the years ended March 31, 1998 and 1997, and the
financial highlights for each of the years in the four-year period ended March
31, 1998, the four month period ended March 31, 1994, and each of the years in
the six-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, 1998 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, 1998, 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
May 8, 1998
<PAGE>
MFS(R) MUNICIPAL INCOME
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 State Street Bank and Trust Company
Cardiac Surgery, Brigham and Women's
Hospital; Professor of Surgery, AUDITORS
Harvard Medical School Deloitte & Touche LLP
The Hon. Sir J. David Gibbons, KBE - INVESTOR INFORMATION
Chief Executive Officer, Edmund For MFS stock and bond market
Gibbons Ltd. outlooks, call toll free:
1-800-637-4458 anytime from a
Abby M. O'Neill - Private Investor touch-tone telephone.
For information on MFS mutual funds,
Walter E. Robb, III - President and call your financial adviser or, for an
Treasurer, Benchmark Advisors, Inc. information kit, call toll free:
(corporate financial consultants); 1-800-637-2929 any business day from
President, Benchmark Consulting Group, 9 a.m. to 5 p.m. Eastern time (or
Inc. (office services) leave a message anytime).
Arnold D. Scott* - Senior Executive INVESTOR SERVICE
Vice President, Director, and MFS Service Center, Inc.
Secretary, MFS Investment Management P.O. Box 2281
Boston, MA 02107-9906
Jeffrey L. Shames* - Chairman, Chief For general information, call toll
Executive Officer, and Director, MFS free: 1-800-225-2606 any business day
Investment Management from 8 a.m. to 8 p.m. Eastern time.
For service to speech- or
J. Dale Sherratt - President, Insight hearing-impaired, call toll free:
Resources, Inc. (acquisition planning 1-800-637-6576 any business day from
specialists) 9 a.m. to 5 p.m. Eastern time. (To use
this service, your phone must be
Ward Smith - Former Chairman (until equipped with a Telecommunications
1994), NACCO Industries (holding Device for the Deaf.)
company) For share prices, account balances,
and exchanges, call toll free:
INVESTMENT ADVISER 1-800-MFS-TALK (1-800-637-8255)
Massachusetts Financial Services anytime from a touch-tone telephone.
Company
500 Boylston Street WORLD WIDE WEB
Boston, MA 02116-3741 www.mfs.com
DISTRIBUTOR [DALBAR Logo] For the fourth year in a
MFS Fund Distributors, Inc. row, MFS earned a #1 ranking in the
500 Boylston Street DALBAR, Inc. Broker/Dealer Survey,
Boston, MA 02116-3741 Main Office Operations Service Quality
Category. The firm achieved a 3.42
PORTFOLIO MANAGER overall score on a scale of 1 to 4 in
John P. Kihn* the 1997 survey. A total of 111 firms
responded, offering input on the
TREASURER quality of service they received from
W. Thomas London* 29 mutual fund companies nationwide.
The survey contained questions about
ASSISTANT TREASURERS service quality in 11 categories,
Mark E. Bradley* including "knowledge of operations
Ellen Moynihan* contact," "keeping you informed," and
James O. Yost* "ease of doing business" with the
firm.
*Affiliated with the Investment Adviser
<PAGE>
MFS(R) Municipal --------------
Income Fund Bulk Rate
U.S. Postage
[Logo] MFS(SM) Paid
INVESTMENT MANAGEMENT MFS
WE INVENTED THE MUTUAL FUND(SM) --------------
500 Boylston Street
Boston, MA 02116-3741
[DALBAR LOGO]
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MMI-2 5/98 26M 02/202/302
