<PAGE>
[Logo]M F S(R)
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
[Graphic Omitted]
MFS(R) MUNICIPAL
INCOME FUND
ANNUAL REPORT o MARCH 31, 1999
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DIVERSIFYING YOUR INVESTMENT PORTFOLIO (see page 35)
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<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 7
Portfolio of Investments .................................................. 11
Financial Statements ...................................................... 19
Notes to Financial Statements ............................................. 25
Independent Auditors' Report .............................................. 31
MFS' Year 2000 Readiness Disclosure ....................................... 33
Trustees and Officers ..................................................... 37
MFS CELEBRATES ITS DIAMOND ANNIVERSARY!
MARCH 21, 1999, MARKED THE 75TH ANNIVERSARY OF MFS' INVENTION OF THE
MUTUAL FUND. THE MUTUAL FUND INDUSTRY HAS BROUGHT THE POWER OF INVESTING
TO EVERY AMERICAN, OFFERING THEM THE OPPORTUNITY FOR COLLEGE DEGREES,
HOME OWNERSHIP, AND COMFORTABLE RETIREMENT.
IMAGINE TODAY'S WORLD WITHOUT MUTUAL MFS 75 YEARS
FUNDS. WE COULDN'T. AND WHILE THE
YEARS AHEAD WILL BRING A NUMBER OF [GRAPHIC OMITTED]
CHALLENGES, OUR 75 YEARS OF EXPERIENCE
WILL HELP GUIDE A NEW GENERATION OF EXPERIENCE THE FUTURE(SM)
INVESTORS INTO THE FUTURE.
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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,
Since we launched Massachusetts Investors Trust, the nation's first mutual fund,
75 years ago, MFS has weathered numerous market and economic cycles, from the
occasional recession to long periods of growth and prosperity. Throughout that
time, we have tried to give investors a realistic assessment of the investment
markets and, when necessary, to sound a note of caution -- even when market
conditions appear quite favorable.
Although the equity markets have overcome last year's volatility, we still think
stocks are overdue for a correction that will rid them of the excesses that have
developed. Perhaps the most glaring measure of those excesses is the high level
of valuations, that is, the amount equity investors are paying for each dollar
of earnings. By mid-March, the price-to-earnings (P/E) ratio of the average
stock in the Standard & Poor's 500 Composite Index, a popular, unmanaged index
of common stock total return performance, was almost 28% higher than it was a
year ago. While P/E ratios keep going up, earnings have essentially been flat,
and we believe they are likely to stay that way, for a few months at least. This
leaves stock prices vulnerable to negative events such as a domestic or
international crisis, a sudden increase in interest rates, or a slowing economy,
any of which could lead to lower corporate earnings.
While risks in the overall market have increased, one industry calls for
particular attention. For several months, Internet-related stocks have exhibited
extreme price volatility. The Internet's potential impact on the way individuals
and companies communicate and conduct business is certainly great, but we feel
that most of the recent run-up in the share prices of these companies is
unjustified. Many of them have not yet reported any profits, and there is no way
of knowing which of today's "hot" Internet stocks will be successful -- or even
in existence -- a few years from now. Therefore, we think the frenzy surrounding
even the best-known Internet stocks is purely speculative.
However, there are some established companies offering Internet-related products
and services that may generate revenue. These include companies that provide
networking equipment, that make servers to store information, and that help
customers make better use of Internet services. Because they already have
profitable businesses as well as the potential to use the Internet to increase
their opportunities to generate revenue, these companies have been the focus of
our research efforts.
Although we think valuations for the overall equity market, and especially for
Internet stocks, are excessive, we see this situation as an opportunity for our
portfolio managers to capitalize on MFS(R) Original Research(SM). This is a
fundamental, company-by-company process that helps us find investments that we
believe are most likely to achieve long-term earnings growth, through both
negative and positive market cycles.
We also rely heavily on our research process when investing in the fixed-income
markets. Last year, turmoil in emerging markets and volatility in the U.S. stock
market helped create a "flight to quality," meaning that investors moved toward
U.S. Treasury securities, which are seen as carrying less risk, and away from
almost everything else. As a result, yields on non-Treasury securities
increased, while yields on Treasuries fell. Some of these yield spreads, or
differentials, have narrowed, but they have not returned to the levels seen
before last year's market turmoil. We think this has created opportunities for
our portfolio managers to find attractive yields in these markets.
Individual investors, meanwhile, should keep in mind that the tremendous
increases in the broad stock market averages of the past several years are a
historical aberration and do not necessarily indicate future market performance.
If they are not already diversified across a range of investments, including
growth stock funds, value-oriented funds, and fixed-income funds, investors may
want to talk to their financial advisers about developing well-diversified
portfolios with greater potential to weather unexpected changes in the markets.
Doing so may help investors more effectively meet their long-term financial
goals. 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)
April 16, 1999
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of John P. Kihn]
John P. Kihn
For the 12 months ended March 31, 1999, Class A shares of the Fund provided a
total return of 5.16%, Class B shares 4.38%, and Class C shares 4.37%. These
returns include the reinvestment of distributions but exclude the effects of any
sales charges and compare to a 6.27% return over the same period 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 4.87% return for the
average general municipal debt fund as tracked by Lipper Analytical Services,
Inc., an independent firm that reports mutual fund performance.
Q. WHAT ARE SOME FACTORS THAT HAVE CONTRIBUTED TO THE FUND'S PERFORMANCE?
A. The biggest factor helping performance was our moving the Fund's average
maturity toward the middle of the intermediate-term range, which is 10 to 20
years. While prices of shorter-maturity bonds are less volatile when interest
rates change, their yields generally are too low to be attractive.
Conversely, while longer-maturity bonds have higher yields, their prices are
more volatile when interest rates change. Our new strategy has provided a
somewhat higher -- and, we believe, more sustainable -- yield.
Q. COULD YOU TELL US A LITTLE MORE ABOUT THE STRATEGY OF THE FUND?
A. We feel this Fund offers a competitive income from bonds whose credit ratings
are, on average, somewhere between those of high-grade, national tax-free
funds and high-yield, national tax-free funds. Therefore, the Fund should
have less exposure to interest rate changes than a high-grade fund and less
credit risk than a high-yield fund. We try to sustain income over time, and
we think the way to do that is through responsible, conservative credit risk
and maintaining an average maturity that is neither too long nor too short.
Q. IS IT HARDER OR EASIER TO SUSTAIN YIELD IN THE CURRENT LOW-INTEREST-RATE
ENVIRONMENT?
A. It's harder because generally interest rates have come down over the past
five to 10 years. When rates decline, issuers redeem outstanding bonds before
maturity in order to borrow at lower rates. As bonds have been called, we
have had to reinvest the money at lower yields. However, that's true of all
bond funds, particularly municipal bond funds.
Q. WHAT CAN YOU TELL US ABOUT THE CREDIT QUALITY OF THE FUND?
A. The Fund has concentrated on higher-rated bonds even though some lower- rated
securities have done reasonably well because of the strong economy.
Performance benefited from our strategy of avoiding issuers whose credit
ratings have been downgraded while still having some exposure to the higher
yield that comes from taking on limited credit risk.
Q. WHAT HAS THE MUNICIPAL MARKET BEEN LIKE OVER THE PAST YEAR OR SO?
A. In contrast to other fixed-income markets, the municipal market has been
extraordinarily well behaved. Prices and yields have traded in a narrow
range, with the average return around 5%.
Q. WHY IS THAT?
A. One reason is stable interest rates but another, more important, reason is
the financial condition of state and local governments. For several months in
a row, we saw more municipal bonds upgraded than downgraded by credit- rating
agencies. The economy is strong, people have jobs, and they're buying houses
and paying taxes. Also, even though local and state governments have good
revenue coming in, they haven't increased their spending very much. In the
past, when times were good, governments tended to spend a lot more. But, in
this economic cycle, they have been much more conservative. As a result,
most, if not all, of the states are either running surpluses or have been
able to cut taxes while keeping strong credit ratings.
Q. ARE THERE SOME SECTORS YOU LIKE BETTER THAN OTHERS?
A. We have preferred bonds used to fund essential services, such as water and
sewer systems, over those used to fund nonessential services, such as
stadiums. You don't have to go to a baseball or a football game, but people
must have water and sewers. As new housing is built, new water and sewer
lines, as well as streets and roads, are needed. These services are paid for
by taxes.
Q. ARE YOU CAUTIOUS ON ANY ISSUERS?
A. Health care could be a problem. Rules regarding Medicare reimbursement for
hospitals and other health care providers are tightening, so we think these
providers will be under tremendous financial pressure for at least the next
year. Therefore, we're looking for health care facilities with the strongest
balance sheets.
Q. ARE THERE ANY PARTICULAR PARTS OF THE COUNTRY YOU'RE FOCUSING ON NOW?
A. We have had concerns about areas of the country, such as farm regions, which
depend on sales of commodities to some overseas markets, particularly Asia.
If a farm community is totally dependent on soybeans, that community could
have financial problems if soybean prices go down or worldwide demand is
reduced. But Asia's problems seems to be getting better, so we're carefully
moving back into some of those domestic regions.
/s/ John P. Kihn
John P. Kihn
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and are
current 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.
Note to Shareholders: Effective May 1, Christopher J. Mier becomes portfolio
manager of the Fund, succeeding John P. Kihn.
<PAGE>
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PORTFOLIO MANAGER'S PROFILE
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JOHN P. KIHN IS VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(R) AND PORTFOLIO
MANAGER OF MFS(R) MUNICIPAL INCOME FUND AND MFS(R) MUNICIPAL LIMITED MATURITY
FUND. HE IS ALSO A PORTFOLIO MANAGER OF ALL STATE MUNICIPAL BOND FUNDS.
MR. KIHN JOINED MFS AS A QUANTITATIVE ANALYST IN 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 HAS 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.
ALL PORTFOLIO MANAGERS AT MFS INVESTMENT MANAGEMENT(R) ARE SUPPORTED BY AN
INVESTMENT STAFF OF OVER 100 PROFESSIONALS UTILIZING MFS(R) ORIGINAL
RESEARCH(SM), A COMPANY-ORIENTED, BOTTOM-UP PROCESS OF SELECTING SECURITIES.
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>
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: $388.9 MILLION NET ASSETS AS OF MARCH 31, 1999
PERFORMANCE SUMMARY
The following information illustrates the historical performance of the Fund's
original share class in comparison to various market indicators. Performance
results include any applicable contingent deferred sales charges and reflect the
percentage change in net asset value, including reinvestment of dividends.
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. (See Notes to Performance Summary for more information.) 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, 1999)
MFS Municipal Lehman Brothers
Income Fund Municipal
- Class B Bond Index
- ----------------------------------------------
3/94 $10,000 $10,000
3/95 10,532 10,743
3/96 11,151 11,644
3/97 11,535 12,279
3/98 12,776 13,593
3/99 13,336 14,445
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended March 31, 1999)
MFS Municipal Lehman Brothers
Income Fund Municipal
- Class B Bond Index
- ----------------------------------------------
3/89 $10,000 $10,000
3/91 11,463 12,076
3/93 13,989 14,946
3/95 14,995 16,428
3/97 16,423 18,777
3/99 18,987 22,089
AVERAGE ANNUAL TOTAL RETURNS THROUGH MARCH 31, 1999
CLASS A
1 Year 3 Years 5 Years 10 Years/Life
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Average Annual Total Return +5.16% +6.97% +6.81% +7.13%
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SEC Results +0.17% +5.25% +5.77% +6.61%
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CLASS B
1 Year 3 Years 5 Years 10 Years/Life
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Average Annual Total Return +4.38% +6.15% +5.93% +6.62%
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SEC Results +0.39% +5.25% +5.61% +6.62%
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CLASS C
1 Year 3 Years 5 Years 10 Years/Life
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Average Annual Total Return +4.37% +6.20% +5.99% +6.65%
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SEC Results +3.37% +6.20% +5.99% +6.65%
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COMPARATIVE INDICES
1 Year 3 Years 5 Years 10 Years/Life
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Average general municipal debt fund* +4.87% +6.73% +6.81% +7.67%
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Lehman Brothers Municipal Bond Index** +6.27% +7.45% +7.63% +8.25%
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* Source: Lipper Analytical Services, Inc.
** Source: Wiesenberger(R).
<PAGE>
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. See the
prospectus for details.
<PAGE>
PORTFOLIO CONCENTRATION AS OF MARCH 31, 1999
QUALITY RATINGS
Source: Standard & Poor's and Moody's
"AAA" 49.9%
"AA" 11.9%
"A" 4.6%
"BBB" 13.1%
"BB" 1.3%
"B" 1.1%
Not Rated 18.1%
The portfolio is actively managed, and holdings are subject to change.
<PAGE>
PORTFOLIO OF INVESTMENTS -- March 31, 1999
<TABLE>
<CAPTION>
Municipal Bonds - 98.5%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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<S> <C> <C>
General Obligation - 15.9%
Anchorage, AK, FGIC, 5.125s, 2014 $ 1,640 $ 1,670,914
Bethlehem, PA, Area School District, FGIC, 5s, 2015 3,270 3,303,779
Chicago, IL, Board of Education, AMBAC, 0s, 2015 1,500 642,375
Crowley, TX, Independent School District, Capital
Appreciation, FGIC, 0s, 2015 3,690 1,625,334
Cypress-Fairbanks, TX, Independent School District,
PSF, 5.125s, 2017 3,300 3,324,882
Denver, CO, City & County School District, FGIC, 5.5s, 2013 2,000 2,151,180
Denver, CO, City & County School District, FGIC, 5.5s, 2014 2,000 2,142,440
Detroit, MI, City School District, 5.375s, 2014 3,905 4,117,861
Detroit, MI, MBIA, 5s, 2018 4,800 4,770,672
Harris County, TX, Capital Appreciation Refunding, MBIA, 0s, 2016 8,000 3,294,960
Houston, TX, Independent School District, PSF, 6.679s, 2017 2,325 2,409,979
Katy, TX, Independent School District, PSF, 5.125s, 2012 1,815 1,871,973
Nazareth, PA, Area School District, FGIC, 5s, 2017 3,180 3,175,866
New Orleans, LA, AMBAC, 0s, 2015 3,000 1,326,480
New York City, NY, 8.2s, 2003 590 661,089
New York City, NY, 7.5s, 2008 1,350 1,487,093
Northwest Texas Independent School District, AMBAC, 0s, 2011 3,000 1,671,630
Philadelphia, PA, FGIC, 5.125s, 2013 4,000 4,113,120
Philadelphia, PA, FSA, 5.25s, 2013 1,000 1,043,890
San Antonio, TX, 5s, 2020(S)(S) 700 666,841
Shelby County, TN, 0s, 2013 3,000 1,517,280
State of Texas, 7.625s, 2018 14,405 14,783,131
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$ 61,772,769
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State and Local Appropriation - 1.7%
Chicago, IL, Public Building Commission Rev., 7.137s, 2016(++) $ 1,500 $ 1,619,220
Chicago, IL, Public Building Commission Rev., 7.137s, 2017(++) 1,250 1,340,525
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.875s, 2008 235 251,229
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.75s, 2020 290 304,039
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.5s, 2021 205 220,254
Philadelphia, PA, Regional Port Authority Lease Rev.,
MBIA, 8.77s, 2020(++) 2,500 2,943,750
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$ 6,679,017
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Refunded and Special Obligations - 11.9%
Adams County, CO, Single Family Mortgage Rev., 8.875s, 2011 $ 2,510 $ 3,478,207
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street), 8.125s, 2000 860 940,978
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street), 8.25s, 2000 1,000 1,096,150
Clermont County, OH, Hospital Facilities Rev. (Mercy
Health Systems), AMBAC, 9.996s, 2001(++) 1,500 1,769,610
Denver, CO, City & County Airport Rev., 8.75s, 2001 1,260 1,439,651
Massachusetts Industrial Finance Agency, Tunnel Rev.
(Mass. Turnpike), 9s, 2000 2,760 3,028,658
Massachusetts Water Resources Authority, 7.625s, 2000 2,000 2,125,000
New York City, NY, 8.2s, 2001 4,410 4,976,641
New York City, NY, 8.25s, 2001 4,140 4,677,082
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.875s, 2000 1,180 1,272,807
New York Urban Development Corp. (Correctional
Facilities), 7.3s, 2002+ 2,340 2,599,436
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2004 3,000 2,500,800
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2005 1,800 1,435,806
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2009 6,750 4,460,805
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2014 5,000 2,468,500
Savannah, GA, Economic Development Authority, 0s, 2021 6,125 1,772,453
Texas Turnpike Authority (Houston Ship Channel Bridge),
12.625s, 2002 3,000 3,846,420
Torrance, CA, Hospital Rev., 6.875s, 2015 1,650 1,773,139
Washington Public Power Supply System Rev. (Nuclear
Project #1), 14.375s, 2001 600 677,328
------------
$ 46,339,471
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Airport and Port Revenue - 13.3%
Alaska International Airport Rev., AMBAC, 5s, 2019 $ 2,000 $ 1,935,180
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (American Airlines), 7.875s, 2025 3,500 3,748,815
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 1,880 1,941,250
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 8,735 9,565,349
Cleveland, OH, Airport Special Facilities Rev.
(Continental Airlines), 5.7s, 2019(S)(S) 1,000 978,390
Cleveland, OH, Airport Special Facilities Rev.
(Continental Airlines), 9s, 2019+ 4,300 4,540,843
Connecticut Airport Rev. (Bradley International
Airport), FGIC, 7.65s, 2012 1,000 1,161,970
Dallas-Fort Worth, TX, International Airport (American
Airlines), 7.5s, 2025 5,000 5,324,150
Denver, CO, City & County Airport Rev., 8.75s, 2023 3,490 3,894,735
Hawaii Airports Systems Rev., FGIC, 7.5s, 2020 5,350 5,669,021
Hillsborough County, FL, Aviation Authority Rev. (US Air),
8.6s, 2022 2,000 2,219,580
Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 1,000 1,087,530
Louisville & Jeff County, KY, Regional Airport
Authority, "A", MBIA, 6.5s, 2017 3,000 3,404,370
Tulsa, OK, Municipal Airport Trust Rev. (American
Airlines), 7.375s, 2020 3,500 3,723,860
Wayne County, MI, Charter Airport Rev. (Detroit
Metropolitan Wayne County), MBIA, 5s, 2022 2,700 2,616,273
------------
$ 51,811,316
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Electric and Gas Utility Revenue - 11.3%
Austin, TX, Utility Systems Rev., AMBAC, 0s, 2010 $ 7,500 $ 4,404,225
Austin, TX, Utility Systems Rev., AMBAC, 6.75s, 2011 3,325 4,009,484
Chicago, IL, Gas Supply Rev. (People's Gas), 8.1s, 2020 2,000 2,130,920
Georgia Municipal Electric Power Authority Rev., MBIA,
6.375s, 2016 2,000 2,334,100
Georgia Municipal Electric Power Authority Rev., MBIA,
6.5s, 2020 7,350 8,731,947
Intermountain Power Agency, UT, Refunding Series A,
MBIA, 5s, 2019 2,050 2,013,961
Long Island , NY, Power Authority Rev., FSA, 5.125s, 2016 2,500 2,536,000
Midland, MI, Environmental Development Authority,
Pollution Control Rev. (Midland Cogeneration), 9.5s, 2009 2,000 2,139,900
North Carolina Eastern Municipal Power Agency, MBIA, 7s, 2007 3,250 3,799,283
Pima County, AZ, Industrial Development Authority
(Tuscon Electric Power Co.), 6s, 2029 1,000 997,430
Pittsylvania County, VA, Industrial Development
Authority Rev., 7.5s, 2014 6,000 6,559,260
San Antonio, TX, Electricity and Gas Rev., 5s, 2018 2,500 2,463,700
Washington Public Power Supply System Rev., BIGI, 0s, 2013 4,000 1,980,800
------------
$ 44,101,010
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Health Care Revenue - 4.6%
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.25s, 2001 $ 65 $ 64,260
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.75s, 2006 140 135,927
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.125s, 2016 505 480,714
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.5s, 2026 1,130 1,071,828
Bell County, TX, Health Facilities Development Corp.
(Kings Daughters Hospital), 9.25s, 2008 1,410 1,465,455
Gadsden County, FL, Industrial Development Authority
(RHA/FLA Properties), 10.45s, 2018 1,870 1,892,702
Indiana Health Facilities Financing Authority, Hospital
Rev. (Riverview Hospital), 5.25s, 2014 400 394,500
Indiana Health Facilities Financing Authority, Hospital
Rev. (Riverview Hospital), 5.5s, 2019 650 647,556
Indiana Health Facilities Financing Authority Rev.
(Metro Health/Indiana, Inc.), 6.3s, 2023 1,250 1,247,763
Louisiana Public Facilities Authority (Southwest
Medical Center), 11s, 2006 1,256 213,440
Massachusetts Health & Educational Facilities Authority
Rev., Obligation Group A (Caritas Christi), 5.7s, 2015 1,000 1,004,600
Millbrae, CA, Residential Facility (Magnolia Of
Millbrae), 7.375s, 2027 1,000 1,072,120
New Hampshire Business Finance Authority, Health Care
Facilities Rev. (Metropolitian Health Foundation,
Inc.), 6.55s, 2028 1,000 999,200
Ohio County, WV, County Commission Health System (Ohio
Valley Medical Center), 5.75s, 2013 1,000 993,080
Stillwater, OK, Medical Center Authority (Stillwater
Medical Center), 6.5s, 2019 1,000 1,077,850
Tennessee Veterans Home Board Rev. (Humboldt), 6.75s, 2021 1,000 1,101,390
Virginia Beach, VA, Virginia Develpment Authority
Health Care Facilities Rev. (Sentara Health Systems),
5.25s, 2013 4,000 4,125,960
------------
$ 17,988,345
- -----------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 6.8%
Burns Habor, IN, Solid Waste Disposal Facilities Rev.
(Bethlehem Steel), 8s, 2024 $ 3,000 $ 3,308,850
Carbon County, UT, Solid Waste Disposal Rev. (Laidlaw
Environmental), 7.45s, 2017 2,500 2,757,025
East Chicago, IN, Exempt Facilities Rev. (Inland Steel
Co.), 6.7s, 2012 2,070 2,295,858
Erie County, PA (International Paper), 7.875s, 2016 1,200 1,281,180
Lake Charles, LA, Harbor & Terminal District Port
(Occidental Petroleum), 7.2s, 2020 1,000 1,096,980
Navajo County, AZ, Industrial Development Authority
(Stone Container Corp.), 7.4s, 2026 5,150 5,677,102
Navajo County, AZ, Industrial Development Authority
(Stone Container Corp.), 7.2s, 2027 1,000 1,100,560
Northampton County, PA, Industrial Development
Authority (Bethlehem Steel), 7.55s, 2017 1,200 1,308,252
Onondaga County, NY Industrial Development Agency,
Refunding Solvay Paperboard Llc Project, 6.8s, 2014 1,000 1,038,080
Port of New Orleans, LA (Avondale Industries), 8.5s, 2014 1,975 2,225,825
Port of New Orleans, LA (Continental Grain Co.), 7.5s, 2013 1,000 1,062,900
Virginia Peninsula Ports Authority Rev. (Zeigler Coal),
6.9s, 2022 1,250 1,251,313
West Side Calhoun County, TX, Navigation District
(Union Carbide), 8.2s, 2021 2,000 2,162,580
------------
$ 26,566,505
- -----------------------------------------------------------------------------------------------
Insured Health Care Revenue -- 6.1%
Henrico County, VA, Industrial Development Authority
Rev. (Bon Secours), FSA, 8.339s, 2027(++) $ 5,000 $ 6,363,150
Illinois Health Facilities Authority Rev. (Alexian
Brothers Health Systems), FSA, 5s, 2019 1,000 975,380
Jefferson County, KY, Hospital Rev., MBIA, 9.344s, 2014(++) 1,500 1,805,230
Jefferson Parish, LA, Hospital Services, District No. 2
Hospital Rev., FSA, 5.25s, 2014 4,085 4,217,599
Maryland Health & Higher Educational Facilities
Authority Rev. (Medlantic/Helix), AMBAC, 5.25s, 2014 4,225 4,382,508
Mississippi Hospital Equipment & Facilities Authority
Rev. (Rush Medical Foundation), Connie Lee, 6.7s,
2018 1,000 1,081,210
Montgomery, AL, Special Care Facilities Financing
Authority Rev. (Baptist Health), MBIA, 5.25s, 2014 1,880 1,947,078
Rio Grande Valley, TX, Health Facilities Development
Corp., MBIA, 8.275s, 2015(++) 2,800 3,070,760
------------
$ 23,842,915
- -----------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 4.6%
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 7.25s, 2027 $ 1,000 $ 1,150,450
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 7.25s, 2027 610 649,254
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 10s, 2027 380 391,054
Colorado Housing Finance Authority, FHA, 8.3s, 2023 2,750 2,931,995
Eaglebend, CO, Affordable Housing Corp., 6.2s, 2012 1,000 1,056,450
Pennsylvania Housing Finance Agency, 7.6s, 2013 1,000 1,062,700
Ridgeland, MS, Urban Renewal Housing Rev. (Northbrook I
& III Apartments), 6.15s, 2019 1,250 1,239,812
Texas Department of Housing & Community Affairs, 10s, 2026 2,285 2,353,527
Vermont Housing Finance Agency, 8.375s, 2020 2,600 2,676,128
Wisconsin Housing & Economic Development Authority,
7.2s, 2013 4,000 4,259,760
------------
$ 17,771,130
- -----------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.9%
Metropolitan Pier & Exposition Authority, IL, MBIA, 0s, 2016 $ 8,400 $ 3,517,668
- -----------------------------------------------------------------------------------------------
Single Family Housing Revenue - 4.4%
Chicago, IL, Residential Mortgage Rev., MBIA, 0s, 2009 $ 2,120 $ 1,025,190
Colorado Housing Finance Authority, 7.4s, 2027 390 427,850
Colorado Housing Finance Authority, 6.875s, 2028 1,000 1,104,270
Cook County, IL, Single Family Mortgage Rev., 0s, 2015 4,055 693,283
De Kalb, IL, Single Family Mortgage Rev., GNMA, 7.45s, 2009 140 152,331
Kentucky Housing Corp., FHA, 7.45s, 2023 3,340 3,495,577
Mississippi Home Corp., GNMA, 7.1s, 2023 494 524,567
Mississippi Home Corp., GNMA, 5s to 1999, 6.35s to 2030 1,305 1,408,043
New Hampshire Housing Finance Authority, 7.2s, 2010 4,665 4,919,383
Tennessee Housing Development Agency, 0s, 2017 3,445 1,217,945
Utah Housing Finance Agency, GNMA, 8.625s, 2019 250 255,377
Utah Housing Finance Agency, FHA, 9.125s, 2019 10 10,423
Utah Housing Finance Agency, FHA, 9.25s, 2019 25 26,035
Utah Housing Finance Agency, FHA, 6.3s, 2028 1,890 1,987,694
------------
$ 17,247,968
- -----------------------------------------------------------------------------------------------
Solid Waste Revenue - 0.3%
Hudson County, NJ, Solid Waste System Rev., 5.9s, 2015 $ 1,000 $ 1,000,550
- -----------------------------------------------------------------------------------------------
Student Loan Revenue - 1.8%
Pennsylvania State Higher Educational Assistance
Agency, AMBAC, 10.149s, 2026(++) $ 5,500 $ 6,786,175
- -----------------------------------------------------------------------------------------------
Turnpike Revenue - 5.9%
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2012 $ 5,000 $ 4,238,400
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2013 5,000 4,305,300
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2030 5,000 965,850
Indiana Transportation Finance Authority Highway,
Highway Rev., AMBAC, 0s, 2018 5,250 1,957,515
New Hampshire Turnpike Systems Rev., FGIC, 5s, 2015 2,185 2,199,902
New Hampshire Turnpike Systems Rev., FGIC, 5.125s, 2018 1,215 1,220,504
New Jersey Turnpike Authority Rev., MBIA, 6.5s, 2016 1,450 1,721,991
New York Thruway Authority, Highway & Bridge, FGIC,
5.125s, 2015 4,000 4,079,480
Southeastern Pennsylvania Transportation Authority,
Special Rev., FGIC, 5.25s, 2013 1,000 $ 1,043,760
Southeastern Pennsylvania Transportation Authority,
Special Rev., FGIC, 5.25s, 2015 1,000 1,032,720
------------
$ 22,765,422
- -----------------------------------------------------------------------------------------------
Universities - 2.7%
Illinois Education and Facilities Authority, 8.75s, 2015 $ 60 $ 60,785
Indiana Educational Facilities Authority Rev. (Depaul
University), 5.1s, 2013 1,565 1,587,020
Islip, NY, Community Development Agency Rev. (New York
Institute of Technology), 7.5s, 2026 2,000 2,184,200
New Hampshire Higher Education & Health Facilities
Authority Rev. (New Hampshire College), 6.375s, 2027 1,435 1,501,383
St. Joseph County, IN, Educational Facilities Rev.
(University of Notre Dame), 6.5s, 2026 1,000 1,214,140
Texas Southern University Rev., AMBAC, 5.125s, 2015 2,310 2,336,958
Texas Southern University Rev., Texas Public Finance
Authority, AMBAC, 5.125s, 2015 1,700 1,719,839
------------
$ 10,604,325
- -----------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 4.6%
Honolulu, HI, City & County Wastewater Systems Rev.,
FGIC, 5.25s, 2014 $ 3,265 $ 3,355,800
Massachusetts Water Resources Authority, 6.5s, 2019 7,495 8,808,873
Pittsburgh, PA, Water & Sewer Authority Rev., FGIC, 0s, 2017 2,300 909,167
Pittsburgh, PA, Water & Sewer Authority Rev., FGIC, 0s, 2018 2,300 854,657
Salt Lake County, UT, Water Conservancy District Rev.,
AMBAC, 0s, 2008 2,100 1,380,624
Salt Lake County, UT, Water Conservancy District Rev.,
AMBAC, 0s, 2009 3,800 2,363,638
------------
$ 17,672,759
- -----------------------------------------------------------------------------------------------
Other - 1.7%
Illinois State Dedicated Tax (Civic Center), AMBAC, 0s, 2016 $ 5,000 $ 2,041,500
Iowa Finance Authority Community Provider Rev. (Boys &
Girls Home), 6.25s, 2028 500 492,585
Louisiana Stadium & Expo District, Hotel Occupancy Tax
& Stadium Rev., FGIC, 5.25s, 2013 1,340 1,394,793
Martha's Vineyard, MA, Land Bank (Land Acquisition),
8.125s, 2011 1,600 1,758,912
Massachusetts Health & Education Facilities Authority
(Learning Center for Deaf Children), 9.25s, 2014 900 932,949
------------
$ 6,620,739
- -----------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $351,189,094) $383,088,084
- -----------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 0.9%
- -----------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- -----------------------------------------------------------------------------------------------
District of Columbia, due 04/01/99 $ 2,300 $ 2,300,000
East Baton Rouge, LA, Pollution Control Rev. (Exxon
Corp.), due 04/01/99 700 700,000
Lincoln County, WY, Pollution Control Rev. (Exxon Corp.),
due 04/01/99 300 300,000
- -----------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Identified Cost $ 3,300,000
- -----------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $354,489,094) $386,388,084
Other Assets, Less Liabilities - 0.6% 2,504,957
- -----------------------------------------------------------------------------------------------
Net assets - 100.0% $388,893,041
- -----------------------------------------------------------------------------------------------
+ Restricted security.
(++) Inverse floating rate security.
(S)(S) When-issued security. At March 31, 1999, the Fund had sufficient cash and/or securities
at least equal to the value of the when-issued security.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
MARCH 31, 1999
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $354,489,094) $386,388,084
Receivable for Fund shares sold 1,413,511
Receivable for investments sold 3,790,395
Interest receivable 6,203,371
Other assets 5,093
------------
Total assets $397,800,454
------------
Liabilities:
Payable to custodian $ 2,746
Distribution payable 720,431
Payable for Fund shares reacquired 3,057,713
Payable for investments purchased 3,236,409
Payable for when-issued investments purchased 1,706,983
Payable to affiliates -
Management fee 2,952
Shareholder servicing agent fee 1,190
Distributions and service fee 6,183
Administrative fee 159
Accrued expenses and other liabilities 172,647
------------
Total liabilities $ 8,907,413
------------
Net assets $388,893,041
============
Net assets consist of:
Paid-in capital $354,925,576
Unrealized appreciation on investments 31,898,990
Accumulated net realized gain on investments 1,464,837
Accumulated undistributed net investment income 603,638
------------
Total $388,893,041
============
Shares of beneficial interest outstanding 43,336,297
==========
Class A shares:
Net asset value per share
(net assets of $215,858,071 / 24,068,097 shares of
beneficial interest outstanding) $ 8.97
======
Offering price per share (100 / 95.25) $ 9.42
======
Class B shares:
Net asset value and offering price per share
(net assets of $140,870,770 / 15,689,509 shares of
beneficial interest outstanding) $ 8.98
======
Class C shares:
Net asset value and offering price per share
(net assets of $32,164,200 / 3,578,691 shares of
beneficial interest outstanding) $ 8.99
======
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, 1999
- -----------------------------------------------------------------------------
Net investment income:
Interest income $ 24,392,691
------------
Expenses -
Management fee $ 2,701,406
Trustees' compensation 39,618
Shareholder servicing agent fee 426,384
Distribution and service fee (Class A) 492,877
Distribution and service fee (Class B) 1,554,223
Distribution and service fee (Class C) 264,345
Administrative fee 47,527
Custodian fee 133,134
Printing 57,068
Postage 41,239
Auditing fees 34,580
Legal fees 5,158
Miscellaneous 179,242
------------
Total expenses $ 5,976,801
Fees paid indirectly (87,621)
Reduction of expenses by investment adviser and distributor (487,190)
------------
Net expenses $ 5,401,990
------------
Net investment income $ 18,990,701
------------
Realized and unrealized gain on investments:
Realized gain (identified cost basis) -
Investment transactions $ 11,584,528
Futures contracts 349,756
------------
Net realized gain on investments $ 11,934,284
------------
Change in unrealized appreciation (depreciation)
Investments $(13,165,837)
Futures contracts 36,762
------------
Net unrealized loss on investments $(13,129,075)
------------
Net realized and unrealized loss on investments $ (1,194,791)
------------
Increase in net assets from operations $ 17,795,910
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1999 1998
- --------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
<S> <C> <C>
Net investment income $ 18,990,701 $ 19,617,268
Net realized gain on investments 11,934,284 4,108,957
Net unrealized gain (loss) on investments (13,129,075) 17,549,457
------------ ------------
Increase in net assets from operations $ 17,795,910 $ 41,275,682
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $(10,453,353) $ (9,235,834)
From net investment income (Class B) (7,052,099) (9,293,144)
From net investment income (Class C) (1,199,356) (919,039)
------------ ------------
Total distributions declared to shareholders $(18,704,808) $(19,448,017)
------------ ------------
Net increase (decrease) in net assets from Fund share
transactions $ 6,604,815 $(35,966,457)
------------ ------------
Total increase (decrease) in net assets $ 5,695,917 $(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 $603,638 and $314,288,
respectively) $388,893,041 $383,197,124
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.99 $ 8.50 $ 8.62 $ 8.56 $ 8.56
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.47 $ 0.48 $ 0.49 $ 0.51 $ 0.50
Net realized and unrealized gain (loss)
on investments (0.02) 0.49 (0.12) 0.05 0.02
------ ------ ------ ------ ------
Total from investment operations $ 0.45 $ 0.97 $ 0.37 $ 0.56 $ 0.52
------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.47) $(0.48) $(0.49) $(0.50) $(0.52)
In excess of net investment income -- -- -- (0.00)+ --
In excess of net realized gain on
investments -- -- -- -- (0.00)+
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.47) $(0.48) $(0.49) $(0.50) $(0.52)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.97 $ 8.99 $ 8.50 $ 8.62 $ 8.56
====== ====== ====== ====== ======
Total return(+) 5.16% 11.61% 4.28% 6.81% 6.33%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.08% 1.23% 1.31% 1.28% 1.13%
Net investment income 5.35% 5.44% 5.75% 5.75% 6.20%
Portfolio turnover 31% 23% 30% 23% 25%
Net assets at end of period (000 omitted) $215,858 $189,056 $152,039 $121,903 $25,270
+ Per share amount was less than $0.01.
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly. The Fund has an expense offset arrangement
which reduces the Fund's custodian fee based upon the amount of cash maintained by the Fund with its custodian and
dividend dispersing agent. For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The investment adviser and/or distributor voluntarily waived a portion of their management fee and/or distribution fee,
respectively, for certain of the periods indicated. If these fees had been incurred by the Fund, the net investment income
per share and the ratios would have been:
Net investment income $ 0.47 $ -- $ -- $ -- $ --
Ratios (to average net assets):
Expenses## 1.21% -- -- -- --
Net investment income 5.22% -- -- -- --
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 9.00 $ 8.51 $ 8.63 $ 8.57 $ 8.56
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.41 $ 0.42 $ 0.43 $ 0.43 $ 0.44
Net realized and unrealized gain (loss)
on investments (0.02) 0.48 (0.13) 0.06 --
------ ------ ------ ------ ------
Total from investment operations $ 0.39 $ 0.90 $ 0.30 $ 0.49 $ 0.44
------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.41) $(0.41) $(0.42) $(0.43) $(0.43)
In excess of net investment income -- -- -- (0.00)+ --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.41) $(0.41) $(0.42) $(0.43) $(0.43)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.98 $ 9.00 $ 8.51 $ 8.63 $ 8.57
====== ====== ====== ====== ======
Total return 4.38% 10.77% 3.44% 5.87% 5.32%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.83% 1.98% 2.11% 2.13% 2.16%
Net investment income 4.59% 4.69% 4.95% 4.90% 5.15%
Portfolio turnover 31% 23% 30% 23% 25%
Net assets at end of period (000 omitted) $140,871 $172,339 $226,138 $306,889 $412,965
+ Per share amount was less than $0.01.
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly. The Fund has an expense offset arrangement
which reduces the Fund's custodian fee based upon the amount of cash maintained by the Fund with its custodian and
dividend dispersing agent. For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for this expense offset arrangement.
(S) The investment adviser and/or distributor voluntarily waived a portion of their management fee and/or distribution fee,
respectively, for certain of the periods indicated. If these fees had been incurred by the Fund, the net investment income
per share and the ratios would have been:
Net investment income $ 0.40 $ -- $ -- $ -- $ --
Ratios (to average net assets):
Expenses## 1.96% -- -- -- --
Net investment income 4.46% -- -- -- --
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 9.01 $ 8.52 $ 8.64 $ 8.57 $ 8.56
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.41 $ 0.41 $ 0.43 $ 0.43 $ 0.44
Net realized and unrealized gain (loss)
on investments (0.02) 0.49 (0.12) 0.07 0.01
------ ------ ------ ------ ------
Total from investment operations $ 0.39 $ 0.90 $ 0.31 $ 0.50 $ 0.45
------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.41) $(0.41) $(0.43) $(0.43) $(0.44)
In excess of net investment income -- -- -- (0.00)+ --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.41) $(0.41) $(0.43) $(0.43) $(0.44)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.99 $ 9.01 $ 8.52 $ 8.64 $ 8.57
====== ====== ====== ====== ======
Total return 4.37% 10.75% 3.62% 5.94% 5.39%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.81% 1.98% 2.06% 2.05% 2.09%
Net investment income 4.59% 4.69% 5.00% 4.95% 5.23%
Portfolio turnover 31% 23% 30% 23% 25%
Net assets at end of period (000 omitted) $32,164 $21,802 $19,159 $16,504 $10,936
+ Per share amount was less than $0.01.
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly. The Fund has an expense offset arrangement
which reduces the Fund's custodian fee based upon the amount of cash maintained by the Fund with its custodian and
dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for this expense offset arrangement.
(S) The investment adviser and/or distributor voluntarily waived a portion of their management fee and/or distribution fee,
respectively, for certain of the periods indicated. If these fees had been incurred by the Fund, the net investment income
per share and the ratios would have been:
Net investment income $ 0.40 $ -- $ -- $ -- $ --
Ratios (to average net assets):
Expenses## 1.94% -- -- -- --
Net investment income 4.46% -- -- -- --
</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 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 paid by the
Fund from net interest received on tax-exempt municipal bonds are not includable
by shareholders as gross income for federal income tax purposes because the Fund
intends to meet certain requirements of the Code applicable to regulated
investment companies, which will enable each Fund to pay exempt-interest
dividends. The portion of such interest, if any, earned on private activity
bonds issued after August 7, 1986, may be considered a tax-preference item to
shareholders.
Distributions to shareholders are recorded on the ex-dividend date. The Fund
distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits are reported in the financial statements as distributions from paid in
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, 1999, $3,457 and $147 were reclassified to accumulated
undistributed net investment income and paid in capital, respectively, from
accumulated net realized gain 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.
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 investment adviser
has voluntarily agreed to waive a portion of its fee, which is reflected as a
reduction of expenses in the Statement of Operations.
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
$49,981 for the year ended March 31, 1999, 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, commissions to
dealers and payments to MFD wholesalers for sales at or above a certain dollar
level, and other such distribution-related expenses that are approved by the
Trustees. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $45,896 for the year ended March 31, 1999.
Fees incurred under the distribution plan during the year ended March 31, 1999,
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 $30,001 and $705 for Class B and Class C shares, respectively, for
the year ended March 31, 1999. Fees incurred under the distribution plan during
the year ended March 31, 1999, 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, 1999,
were $0, $211,592, and $11,502 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 $118,064,895 and $118,667,991, 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 $354,505,099
------------
Gross unrealized appreciation $ 33,231,634
Gross unrealized depreciation (1,348,649)
------------
Net unrealized appreciation $ 31,882,985
============
(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, 1999 YEAR ENDED MARCH 31, 1998
----------------------------------- -----------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 17,940,018 $ 161,458,718 12,070,927 $ 106,632,791
Shares issued to shareholders
in reinvestment of
distributions 656,208 5,905,944 550,723 4,890,595
Shares reacquired (15,559,589) (140,049,954) (9,471,742) (83,631,135)
----------- ------------- ---------- -------------
Net increase 3,036,637 $ 27,314,708 3,149,908 $ 27,892,251
=========== ============= ========== =============
<CAPTION>
Class B Shares
YEAR ENDED MARCH 31, 1999 YEAR ENDED MARCH 31, 1998
----------------------------------- -----------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,719,464 $ 15,505,630 1,479,892 $ 13,073,953
Shares issued to shareholders
in reinvestment of
distributions 438,965 3,957,222 585,567 5,182,707
Shares reacquired (5,619,360) (50,627,988) (9,482,528) (83,714,203
---------- ------------- ---------- -------------
Net decrease (3,460,931) $ (31,165,136) (7,417,069) $ (65,457,543)
=========== ============= ========== =============
<CAPTION>
Class C Shares
YEAR ENDED MARCH 31, 1999 YEAR ENDED MARCH 31, 1998
----------------------------------- -----------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,793,587 $ 16,187,441 1,245,893 $ 10,996,941
Shares issued to shareholders
in reinvestment of
distributions 85,755 773,910 89,791 789,466
Shares reacquired (721,227) (6,506,108) (1,164,337) (10,187,572)
---------- ------------- ---------- -------------
Net increase 1,158,115 $ 10,455,243 171,347 $ 1,598,835
=========== ============= ========== =============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $720 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, 1999, was $254.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees 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, 1999, the related
statement of operations for the year then ended, the statement of changes in net
assets for the years ended March 31, 1999 and 1998, and the financial highlights
for each of the years in the five-year period ended March 31, 1999. These
financial statements and financial highlights are the responsibility of the
Trust'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, 1999 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, 1999, 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 7, 1999
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
- --------------------------------------------------------------------------------
IN JANUARY 2000, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY REPORTING THE
FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR YEAR 1999.
FOR FEDERAL INCOME TAX PURPOSES, APPROXIMATELY 99% OF THE TOTAL DIVIDENDS PAID
BY THE FUND FROM NET INVESTMENT INCOME DURING THE YEAR ENDED MARCH 31, 1999, IS
DESIGNATED AS AN EXEMPT-INTEREST DIVIDEND.
<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 AUDITORS
Deloitte & Touche LLP
The Hon. Sir J. David Gibbons, KBE - Chief
Executive Officer, Edmund Gibbons Ltd.; INVESTOR INFORMATION
Chairman, Colonial Insurance Company, Ltd. For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime from
Abby M. O'Neill - Private Investor a touch-tone telephone.
Walter E. Robb, III - President and Treasurer, For information on MFS mutual funds, call
Benchmark Advisors, Inc. (corporate financial your financial adviser or, for an information
consultants); President, Benchmark kit, call toll free: 1-800-637-2929 any
Consulting Group, Inc. (office services) business day from 9 a.m. to 5 p.m. Eastern
time (or leave a message anytime).
Arnold D. Scott* - Senior Executive
Vice President, Director, and Secretary, INVESTOR SERVICE
MFS Investment Management MFS Service Center, Inc.
P.O. Box 2281
Jeffrey L. Shames* - Chairman, Chief Boston, MA 02107-9906
Executive Officer, and Director,
MFS Investment Management For general information, call toll free:
1-800-225-2606 any business day from
J. Dale Sherratt - President, Insight Resources, 8 a.m. to 8 p.m. Eastern time.
Inc. (acquisition planning specialists)
For service to speech- or hearing-impaired,
Ward Smith - Former Chairman (until 1994), call toll free: 1-800-637-6576 any business
NACCO Industries (holding company) day from 9 a.m. to 5 p.m. Eastern time. (To
use this service, your phone must be equipped
INVESTMENT ADVISER with a Telecommunications Device for the Deaf.)
Massachusetts Financial Services Company
500 Boylston Street For share prices, account balances, and
Boston, MA 02116-3741 exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
DISTRIBUTOR telephone.
MFS Fund Distributors, Inc.
500 Boylston Street WORLD WIDE WEB
Boston, MA 02116-3741 www.mfs.com
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)1999 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MMI-2 5/99 17M 02/202/302
