<PAGE>
[Logo] M F S(R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
[graphic omitted]
MFS(R) MUNICIPAL
INCOME FUND
ANNUAL REPORT o MARCH 31, 2000
-----------------------------------------
MUTUAL FUND GIFT KITS (see page 39)
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<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 9
Portfolio of Investments .................................................. 13
Financial Statements ...................................................... 23
Notes to Financial Statements ............................................. 29
Independent Auditors' Report .............................................. 36
Trustees and Officers ..................................................... 41
MFS ORIGINAL RESEARCH(R)
RESEARCH HAS BEEN CENTRAL TO INVESTMENT MANAGEMENT AT MFS
SINCE 1932, WHEN WE CREATED ONE OF THE FIRST IN-HOUSE
RESEARCH DEPARTMENTS IN THE MUTUAL FUND (SM)
INDUSTRY. ORIGINAL RESEARCH(SM) AT MFS IS MORE ORIGINAL RESEARCH
THAN JUST CRUNCHING NUMBERS AND CREATING
ECONOMIC MODELS: IT'S GETTING TO KNOW MFS
EACH SECURITY AND EACH COMPANY PERSONALLY.
MAKES A DIFFERENCE
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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,
This spring, the U.S. stock market experienced record point drops and
volatility that have given many investors cause for concern. While the recent
market correction has rattled a lot of nerves, it's important to put the
current market environment into perspective. Throughout the history of the
market, investors have experienced numerous corrections (declines of more than
20%) and periods of extreme volatility. Of course, past performance is no
guarantee of future results, however, over the long-term, stock and bond
investors have enjoyed returns that have solidly outpaced inflation.
From our perspective, as we look at the global investment climate at the
beginning of the new millennium, we see many reasons for optimism, as well as
the need to voice some words of caution. Our reasons for being optimistic
about both stock and bond markets include:
o STRONG CORPORATE EARNINGS GROWTH: We believe that, over time, the most
important driver of stock prices is corporate earnings. Our research
indicates that the average earnings growth for U.S. companies could approach
15% in 2000, which would bode very well for U.S. equities. We are also
seeing encouraging signs that companies worldwide, and particularly in
Europe, are beginning to focus more on earnings and shareholder value --
that is, delivering stock price performance that will reward investors. As
we research companies around the globe, we are finding that specific areas
of opportunity include technology companies, especially those involved in
wireless telecommunications and in supplying infrastructure and services for
the Internet.
o LOW INFLATION WORLDWIDE: We believe accelerating inflation is one of the
chief factors that could end the current economic boom. While the U.S.
economy continues to grow rapidly, we have not experienced significant signs
of inflation. In our opinion, perhaps the major force keeping inflation at
bay is worldwide productivity increases, fueled by advancing technology. A
technological revolution based on computerization and the Internet appears
to be making it possible for companies to produce more products with less
employees, thereby enabling companies to increase earnings without raising
prices. A related factor keeping inflation down is the heightened
competition of an increasingly global marketplace, where, for example,
businesses are beginning to use computer networks and the Internet to shop
worldwide for the lowest prices from suppliers.
o STRONG GLOBAL ECONOMIES: Our outlook is that a majority of national
economies will continue to experience healthy growth with low inflation. In
late January, the current economic boom in the United States became the
longest in the nation's history. It appears to us that the U.S. Federal
Reserve Board's (the Fed's) program of gradual interest-rate increases will
eventually be successful in cooling the somewhat-overheated U.S. economy
while prolonging the boom. In Europe, we see strong evidence that most
countries will continue on a moderate growth path with low inflation. A
major reason for this is that European companies have begun to adopt the
practices of downsizing, outsourcing, and consolidation that have helped
revitalize U.S. industry over the past decade. We are witnessing a similar
situation in Japan, as more firms merge, restructure, and invest in
technology. In the Pacific Rim, most economies have recovered from the
economic turmoil of late summer 1998 and are surging ahead. We believe
progress toward restructuring Asia's banking systems and other ailing
industries bodes well for stronger investor confidence in the region. While
business conditions have been less favorable in Latin America due to
relatively high inflation, increased exports and industrial production
suggest to us that the region's recession has ended.
Amid this positive global outlook, however, we believe investors should also
heed some cautionary notes:
o IT IS HIGHLY UNLIKELY THAT U.S. EQUITY MARKETS WILL CONTINUE TO PERFORM AT
THE PACE OF THE LAST SEVERAL YEARS. Although our outlook for U.S. markets
this year is quite positive, we believe it is unrealistic for investors to
expect stock market returns, as measured by the Standard & Poor's 500
Composite Index,(1) to routinely exceed 20%, as they did for the past four
years.
o HIGH VALUATIONS, ESPECIALLY OF TECHNOLOGY STOCKS, HAVE MADE U.S. MARKETS
INCREASINGLY VOLATILE. Investor excitement over the past year has pushed
many technology-related stocks to very high relative prices, as expressed by
their price/earnings (P/E) ratios. In general, we believe these higher
valuations are largely supported by the strong earnings growth mentioned
earlier. However, as we've recently experienced, this backdrop has led to a
highly volatile environment, where the market is swift to punish companies
whose earnings are less than expected and where fear can rapidly overcome
the desire to invest for long-term goals.
o RISING INTEREST RATES MAY DAMPEN MARKETS IN THE SHORT TERM, PARTICULARLY IN
THE UNITED STATES AND EUROPE. The Fed's current program of raising interest
rates could potentially cool both stock and bond markets, and the European
Central Bank has tended to follow the lead of the Fed in adjusting its own
interest rates. It is our expectation, however, that in the long term
interest rates will trend down again, perhaps by the end of this year. We
believe that could be favorable for both equity and fixed-income
investments.
On balance, it appears to us that the current global investment climate is
well matched to MFS' research-oriented style of investing. In the equity
markets, where we believe earnings growth is the most reliable indicator of
long-term performance, we feel our research team is second to none in
determining the real value of a company and its long-term earnings potential.
To do that, our portfolio managers and our worldwide team of research analysts
spend extensive time visiting with companies, talking to their customers, and
investigating their competition. In fixed-income investing, we believe the
quality of our research gives us an advantage by helping us determine which
types of securities can add the most value to a fund, and by helping us reduce
the credit risk which is the biggest danger to some higher-income bond funds.
In sum, MFS Original Research(R) is one of the most important factors in our
ongoing effort to deliver competitive performance to you, our investors.
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 18, 2000
- --------------
(1) The Standard & Poor's 500 Composite Index (the S&P 500) is a popular,
unmanaged index of common stock total return performance. It is not
possible to invest directly in an index.
Investments in mutual funds will fluctuate and may be worth more or less upon
redemption.
The opinions expressed in this letter are those of Jeffrey L. Shames, and no
forecasts can be guaranteed.
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of Geoffrey L. Schechter]
Geoffrey L. Schechter
For the 12 months ended March 31, 2000, Class A shares of the Fund provided a
total return of -1.15%, Class B shares -1.89%, and Class C shares -1.89%. These
returns include the reinvestment of any distributions but exclude the effects of
any sales charges and compare to a -0.08% return over the same period for the
Fund's benchmark, the Lehman Brothers Municipal Bond Index (the Lehman Index),
an unmanaged index of national municipal bond investments rated "Baa" or higher,
and to a -2.40% return for the average general municipal debt fund tracked by
Lipper Inc., an independent firm that reports mutual fund performance.
Q. WHY DID THE MUNICIPAL BOND MARKET AND THE FUND POST NEGATIVE RETURNS DURING
THE 12-MONTH PERIOD?
A. The past 12 months proved difficult for fixed-income investments. Strong
economic growth in the United States, combined with the lowest unemployment
rate in 30 years, rekindled fears of inflation. These concerns, in turn,
resulted in higher interest rates and falling bond prices (interest rates
and bond prices move in opposite directions). Further fueling the rise in
interest rates was a pickup in global economic activity, as foreign
economies recovered from the emerging market crisis of 1998. This backdrop
helped convince the Federal Reserve Board (the Fed) to raise the federal
funds rate -- the rate banks charge each other for overnight loans -- five
times during the past nine months. By doing so, the Fed was trying to
dampen economic growth to a more sustainable level and thereby moderate
inflationary pressures. As a result, yields on 30-year "AAA"-rated general
obligation municipal bonds increased to 5.62% on March 31, 2000, up from
4.97% a year ago.
The municipal market enjoyed a positive first quarter of 2000. Rates on 30-
year "AAA"-rated general obligation municipal bonds peaked at 5.92% in mid-
January before declining by 30 basis points (0.30%). That's because investors
became more confident that Fed actions would indeed curb economic activity
and contain inflation. Another benefit was a dramatic reduction in new-issue
supply thus far in 2000, which was down by more than 40% compared to the same
period in 1999. This decline followed the 25% drop for all of 1999, down from
the near-record levels of new issuance achieved in 1998, when very low
interest rates encouraged municipalities to come to market for new funding.
Q. WHY DID THE FUND'S PERFORMANCE TRAIL THAT OF THE LEHMAN INDEX?
A. There are two reasons. First, the Lehman Index held more shorter-term
municipal bonds in the one- to 12-year maturity range -- about 48% -- than
the Fund, which held about 15% to 20%. We overweighted longer-maturity
bonds in order to capture the higher yields that they offered. However, in
a rising interest-rate environment, longer-maturity bonds are more
sensitive to price declines than shorter-maturity alternatives. Second, the
Lehman Index is of higher average credit quality than the Fund. Lower-rated
bonds underperformed higher-rated bonds as spreads widened during the past
12 months.
Q. THE FUND DID OUTPERFORM ITS LIPPER AVERAGE.
A. Yes, and we're pleased that the Fund's relative performance held up in a
bad market. The Fund benefited from the fact that we kept its duration
slightly shorter than its competitors'. Duration is an indication of a
portfolio's sensitivity to changes in interest rates. With a shorter
duration, the portfolio was less susceptible than its peers to price
declines resulting from increases in interest rates.
Q. WHAT CAN YOU TELL US ABOUT THE AVERAGE CREDIT QUALITY OF THE MUNICIPAL MARKET
AND ITS EFFECT ON THE FUND?
A. Given the continued strength of the U.S. economy and its long-running
expansion, the fiscal health of many municipal issuers has been sustained
or improved, resulting in overall high credit quality in the market. At the
same time we felt that most lower-quality bonds did not offer enough of a
reward for taking on the additional credit risk. Therefore, we spent much
of this past year reducing the Fund's exposure to lower-quality bonds.
Indeed, lower-quality bonds underperformed higher-rated securities during
the 12-month period, so the reduced weighting in lower-rated credits proved
helpful to the Fund's relative performance. Nevertheless, we were able to
selectively add lower-rated bonds to the portfolio when we felt we were
being paid to take on the added risk. In addition, as interest rates moved
higher, we were able to purchase new issues that offered higher yields and
better protection from being called, or redeemed, before maturity if
interest rates were to fall once again.
We believe that active management can add value to fixed-income mutual funds.
Our investment process relies heavily on fundamental analysis and less on
making major interest-rate projections. While we do generally have an outlook
on the direction of interest rates, we tend to adjust the portfolio's
duration only when we have a strong opinion one way or the other. Instead, we
aim to differentiate ourselves with MFS Original Research(R), through which
we implement an issuer-oriented, bottom-up approach to selecting securities
for the portfolio. We have a strong team of research analysts who examine the
fundamental strengths and weaknesses of each issuer. We attempt to overweight
sectors that we believe have positive risk/reward profiles. Our goal is to
provide the highest sustainable income, while managing risk for the benefit
of our shareholders.
Q. WERE YOU ATTRACTED TO ANY PARTICULAR STATES OR REGIONS?
A. While each state offered its own unique types of securities, issuance
patterns, and cash flows, no one region stood out. The U.S. economy on the
whole has performed very well for several years.
Q. WHAT ABOUT SECTORS? WERE THERE SOME THAT WERE PARTICULARLY ATTRACTIVE?
A. We've gravitated toward sectors that we believe have benefited from the
current economic expansion, including general obligation bonds, tax-backed
bonds, and essential-service credits such as water and sewer, port
authorities, and higher education. We believe that their high credit
quality should help provide the portfolio with a reasonable amount of
stability. Another area that we believe offers relative value is the
utilities sector. In that category, our analysts have selectively
recommended issuers that have generated consistent cash flows due to steady
revenue streams and sizable market shares. In some areas, the utilities
sector has been slow to experience the effects of competitive price
pressures predicted to emerge as a result of deregulation, while offering
opportunities because of restructuring that has occurred over the past few
years. At the same time, we've moved very cautiously on health care bonds.
Managed-care competition and concerns about declines in Medicare and
Medicaid reimbursements resulting from the Balanced Budget Act of 1997
have caused significant difficulties in this industry nationwide. Our
reduced exposure to this sector paid off in terms of the portfolio's
relative performance.
Q. WHAT IS YOUR OUTLOOK?
A. We believe that tax-equivalent yields offered by municipal bonds in today's
markets are extremely compelling. In some cases, municipal bond yields are
equal to or higher than yields on comparable-maturity, taxable U.S.
Treasuries. (Principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity.) Therefore, we feel
that municipal bonds have been a relatively stable, attractive alternative
to other fixed-income asset classes and they have offered investors an
opportunity to reallocate some of their current holdings after the
tremendous runup in the equity markets.
/s/ Geoffrey L. Schechter
Geoffrey L. Schechter
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.
<PAGE>
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PORTFOLIO MANAGER'S PROFILE
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GEOFFREY L. SCHECHTER IS A VICE PRESIDENT OF MFS INVESTMENT
MANAGEMENT(R) AND A PORTFOLIO MANAGER OF MFS(R) MUNICIPAL BOND FUND,
MFS(R) MUNICIPAL LIMITED MATURITY FUND, AND MFS(R) MUNICIPAL INCOME
FUND. HE IS ALSO A PORTFOLIO MANAGER OF ALL STATE MUNICIPAL BOND FUNDS.
MR. SCHECHTER JOINED MFS AS INVESTMENT OFFICER IN 1993 AFTER WORKING AS
A MUNICIPAL CREDIT ANALYST WITH A MAJOR INSURANCE COMPANY. HE WAS NAMED
PORTFOLIO MANAGER IN 1993, ASSISTANT VICE PRESIDENT IN 1994, AND VICE
PRESIDENT IN 1995. MR. SCHECHTER IS A GRADUATE OF THE UNIVERSITY OF
TEXAS AND HAS AN M.B.A. DEGREE FROM BOSTON UNIVERSITY. HE IS A CHARTERED
FINANCIAL ANALYST AND A CERTIFIED PUBLIC ACCOUNTANT.
ALL PORTFOLIO MANAGERS AT MFS INVESTMENT MANAGEMENT(R) ARE SUPPORTED BY
AN INVESTMENT STAFF OF OVER 100 PROFESSIONALS UTILIZING MFS ORIGINAL
RESEARCH(R), A GLOBAL, ISSUER-ORIENTED, BOTTOM-UP PROCESS OF SELECTING
SECURITIES.
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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 investment professional, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
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FUND FACTS
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OBJECTIVE: SEEKS AS HIGH A LEVEL OF CURRENT INCOME
EXEMPT FROM FEDERAL INCOME TAXES AS IS
CONSISTENT WITH PRUDENT INVESTING AND
PROTECTION OF SHAREHOLDERS' CAPITAL.
COMMENCEMENT OF
INVESTMENT OPERATIONS: DECEMBER 29, 1986
CLASS INCEPTION: CLASS A SEPTEMBER 7, 1993
CLASS B DECEMBER 29, 1986
CLASS C JANUARY 3, 1994
SIZE: $337.6 MILLION NET ASSETS AS OF
MARCH 31, 2000
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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.) It is not possible to invest
directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended March 31, 2000)
MFS Municipal Lehman Brothers
Income Fund Municipal
- Class B Bond Index
---------------------------------------------------------
3/90 $10,000 $10,000
3/92 11,560 12,530
3/94 13,130 14,720
3/96 14,640 17,070
3/98 16,770 20,040
3/00 17,177 21,720
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN THROUGH MARCH 31, 2000
CLASS A
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------
Cumulative Total Return Excluding
Sales Charge -1.15% +16.02% +29.22% +81.50%
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Average Annual Total Return
Excluding Sales Charge -1.15% + 5.08% + 5.26% + 6.14%
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Average Annual Total Return
Including Sales Charge -5.85% + 3.39% + 4.24% + 5.63%
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CLASS B
1 Year 3 Years 5 Years 10 Years
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Cumulative Total Return Excluding
Sales Charge -1.89% +13.43% +24.23% +71.77%
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Average Annual Total Return
Excluding Sales Charge -1.89% + 4.29% + 4.44% + 5.56%
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Average Annual Total Return
Including Sales Charge -5.60% + 3.38% + 4.11% + 5.56%
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CLASS C
1 Year 3 Years 5 Years 10 Years
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Cumulative Total Return Excluding
Sales Charge -1.89% +13.42% +24.50% +72.19%
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Average Annual Total Return
Excluding Sales Charge -1.89% + 4.29% + 4.48% + 5.58%
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Average Annual Total Return
Including Sales Charge -2.81% + 4.29% + 4.48% + 5.58%
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COMPARATIVE INDICES(+)
1 Year 3 Years 5 Years 10 Years
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Average general municipal debt
fund* -2.40% + 4.22% + 4.95% + 6.50%
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Lehman Brothers Municipal Bond
Index** -0.08% + 5.52% + 6.07% + 7.15%
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(+) Average annual rate of return.
* Source: Lipper Inc.
** Source: Standard & Poor's Micropal, Inc.
<PAGE>
NOTES TO PERFORMANCE SUMMARY
Class A Share Performance Including Sales Charge takes into account the
deduction of the maximum 4.75% sales charge. Class B Share Performance
Including Sales Charge takes into account the deduction of the applicable
contingent deferred sales charge (CDSC), which declines over six years from 4%
to 0%. Class C Share Performance Including Sales Charge takes into account the
deduction of the 1% CDSC applicable to shares redeemed within 12 months.
Class A and C share performance include the performance of the Fund's Class B
shares for periods prior to their inception (blended performance). Class A
blended performance has been adjusted to take into account the initial sales
charge applicable to Class A shares rather than the CDSC applicable to Class B
shares. Class C blended performance has been adjusted to take into account the
lower CDSC applicable to Class C shares. These blended performance figures
have not been adjusted to take into account differences in class-specific
operating expenses. Because operating expenses for Class A shares are lower
than those of Class B shares, the blended Class A share performance is lower
than it would have been had Class A shares been offered for the entire period.
Because operating expenses of Class B and C shares are approximately the same,
the blended Class C performance is approximately the same as it would have
been had Class C shares been offered for the entire period.
All 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. MORE RECENT
RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. 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.
PORTFOLIO CONCENTRATION AS OF MARCH 31, 2000
QUALITY RATINGS
Source: Standard & Poor's and Moody's
"AAA" 39.5%
"AA" 14.1%
"A" 7.1%
"BBB" 15.1%
"BB" 3.7%
"B" 0.6%
Other 0.7%
Not Rated 19.2%
The portfolio is actively managed, and current holdings may be different.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS -- March 31, 2000
Municipal Bonds - 96.8%
<CAPTION>
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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<S> <C> <C>
General Obligation - 11.9%
Alabama Public School & College, Capital Improvement
Series D, 6s, 2015 $2,850 $ 2,982,240
Birmingham, AL, 5.75s, 2019 210 212,308
Chicago, IL, Board of Education, AMBAC, 0s, 2015 1,500 609,105
Commonwealth of Massachusetts, 5.875s, 2017 3,205 3,282,497
Cranston, RI, 6.375s, 2014 200 215,406
Detroit, MI, City School District, Series B, FGIC,
5s, 2021 2,000 1,785,880
Dudley-Charlton, MA, Regional School District, FGIC,
5.864s, 2017(++)+ 1,495 1,421,566
Florida Board of Education Capital Outlay, Public
Education Series A, 5s, 2019 1,000 913,490
Forsyth County, GA, School District, 6s, 2015 400 418,808
Fresno, CA, Unified School District, MBIA, 6.55s, 2020 1,225 1,352,608
Houston County, AL, AMBAC, 6.25s, 2019 850 887,298
Houston, TX, Independent School District, PSF,
5.669s, 2017(++)+ 2,325 2,081,526
Manistee, MI, Area Public Schools, FGIC, 5.75s, 2019 700 702,527
Mesa, AZ, FGIC, 5s, 2018 3,625 3,361,861
Mobile County, AL, 6s, 2014 800 826,616
New Orleans, LA, AMBAC, 0s, 2015 3,000 1,252,680
Philadelphia, PA, School District, MBIA, 6s, 2016 750 772,740
Regional Transport Authority Illinois, FSA, 5.75s, 2017 5,000 5,125,400
San Antonio, TX, 5s, 2020 700 626,535
Shelby County, TN, 0s, 2013 3,000 1,435,500
Southlake, TX, AMBAC, 0s, 2022 3,185 770,356
Southlake, TX, AMBAC, 0s, 2023 3,150 711,742
Williamson County, TN, Rural School, 6.125s, 2016 1,665 1,737,594
Williamson County, TN, Rural School, 6.125s, 2017 1,765 1,835,124
Wisconsin, Series C, 6s, 2019 1,200 1,230,360
Worcester, MA, FSA, 6s, 2017 3,475 3,606,216
------------
$ 40,157,983
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State and Local Appropriation - 3.2%
Chicago, IL, Public Building Commission Rev., 6.497s, 2016(++)+ $1,500 $ 1,424,490
Chicago, IL, Public Building Commission Rev., 6.497s, 2017(++)+ 1,250 1,171,150
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.875s, 2008 235 242,289
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.75s, 2020 290 298,439
New York Medical Care Facilities Finance Agency (Mental
Health Services), 7.5s, 2021 205 212,700
New York Urban Development Corp. Rev., Correctional
Facilities, FSA, 5.25s, 2014 2,000 1,974,220
New York Urban Development Corp. Rev., Correctional
Facilities Service Contract, AMBAC, 5.875s, 2019 1,000 1,013,080
New York, NY, Series J IBC, MBIA, 5s, 2017 $2,000 1,849,780
Philadelphia, PA, Regional Port Authority Lease Rev.,
MBIA, 8.042s, 2020(++) 2,500 2,588,850
------------
$ 10,774,998
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Refunded and Special Obligations - 5.7%
Adams County, CO, Single Family Mortgage Rev., 8.875s, 2011 $2,510 $ 3,283,381
Chapel Hill, NC, Parking Facilities Rev. (Rosemary
Street), 8.25s, 2000 1,000 1,045,960
Clermont County, OH, Hospital Facilities Rev. (Mercy
Health Systems), AMBAC, 9.296s, 2001(++) 1,500 1,650,510
Denver, CO, City & County Airport Rev., 8.75s, 2001 1,260 1,360,548
Martha's Vineyard, MA, Land Bank (Land Acquisition),
8.125s, 2001 1,500 1,572,210
Massachusetts Industrial Finance Agency, Tunnel Rev.,
(Mass. Turnpike), 9s, 2000 15 15,596
New York City, NY, "B", 7.5s, 2002 180 191,232
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2004 3,000 2,510,640
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2009 1,000 647,830
Savannah, GA, Economic Development Authority, 0s, 2021 6,125 1,477,779
Texas Turnpike Authority (Houston Ship Channel Bridge),
12.625s, 2002 2,995 3,541,647
Torrance, CA, Hospital Rev., 6.875s, 2015 1,600 1,697,744
Washington Public Power Supply System Rev. (Nuclear
Project #1), 14.375s, 2001 400 424,092
------------
$ 19,419,169
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Airport and Port Revenue - 9.9%
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (American Airlines), 7.875s, 2025 $3,500 $ 3,601,185
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 8,510 8,894,567
Cleveland, OH, Airport Special Rev. (Continental
Airlines), 5.7s, 2019 1,000 860,670
Connecticut Airport Rev. (Bradley International
Airport), FGIC, 7.65s, 2012 1,000 1,112,180
Dallas-Fort Worth, TX, International Airport (American
Airlines), 7.5s, 2025 5,000 5,112,800
Denver, CO, City & County Airport Rev., 8.75s, 2023 3,490 3,730,147
Hillsborough County, FL, Aviation Authority Rev. (US
Air), 8.6s, 2022 2,000 2,128,800
Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 1,000 1,030,850
Louisville & Jeff County, KY, Regional Airport
Authority, "A", 6.5s, 2017 3,000 3,177,510
New Jersey Economic Development Authority, Special
Facilities Rev. (Continental Airlines, Inc.),
6.625s, 2012 1,250 1,266,400
Tulsa, OK, Municipal Airport Trust Rev. (American
Airlines), 7.375s, 2020 2,500 2,535,875
------------
$ 33,450,984
- ------------------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 14.1%
Apache County, AZ, Industrial Development Authority,
Pollution Control Rev. (Tucson Electric Power Co.),
5.875s, 2033 $1,000 $ 862,510
Austin, TX, Utility Systems Rev., AMBAC, 6.75s, 2011 3,325 3,774,972
Chicago, IL, Gas Supply Rev. (People's Gas),
8.1s, 2020### 2,000 2,045,360
Connecticut Development Authority, Pollution Control
Rev. (Connecticut Light & Power), 5.85s, 2028 1,000 893,550
Farmington, NM, Pollution Control Rev
(Public Service Co. of NM), 6.3s, 2016 565 557,790
Farmington, NM, Pollution Control Rev
(Public Service Co. of NM), 5.8s, 2022 405 368,850
Farmington, NM, Pollution Control Rev
(Public Service Co. of NM), 6.375s, 2022 1,000 969,320
Farmington, NM, Pollution Control Rev., Refunding
Public Service Company A, 5.8s, 2022 500 455,370
Georgia Municipal Electric Power Authority Rev.,
6.375s, 2016 2,000 2,191,120
Georgia Municipal Electric Power Authority Rev., MBIA,
6.5s, 2020 7,350 8,086,838
Intermountain Power Agency, UT, MBIA, 5s, 2019 2,050 1,854,430
Klamath Falls, OR, Electric Rev. (Klamath
Cogeneration), 6s, 2025 3,500 3,045,070
Matagorda County, TX (Reliant Energy), 5.95s, 2030 3,000 2,675,010
Midland, MI, Environmental Development Authority,
Pollution Control Rev. (Midland Cogeneration),
9.5s, 2009 2,000 2,054,720
North Carolina Eastern Municipal Power Agency, MBIA,
7s, 2007 3,250 3,597,945
North Carolina Municipal Power Agency, No. 1, Catawba
Electric Rev., 6.375s, 2013 750 757,395
Ohio Water Development, Pollution Control Rev
(Cleveland Electric), 5.58s, 2033(++) 1,000 980,220
Pima County, AZ, Industrial Development Authority
(Tuscon Electric Power Co.), 6.1s, 2025 2,000 1,784,640
Pittsylvania County, VA, Industrial Development
Authority Rev., 7.5s, 2014 6,000 6,191,760
Tacoma, WA, Electric Systems Rev., FSA, 5.625s, 2018 3,000 2,948,040
West Feliciana Parish, LA, Pollution Control Rev
(Energy Gulf States), 6.6s, 2028 1,665 1,615,033
------------
$ 47,709,943
- ------------------------------------------------------------------------------------------------------
Health Care Revenue - 5.9%
Baxter County, AR, Hospital Rev., 5.375s, 2014 $1,000 $ 841,130
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.25s, 2001 45 43,786
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.75s, 2006 140 127,750
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.125s, 2016 505 431,119
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.5s, 2026 1,130 946,465
Bell County, TX, Health Facilities Development Corp.
(Kings Daughters Hospital), 9.25s, 2008 1,315 1,349,308
Chemung County, NY, Industrial Development Agency,
Civic Facilities Rev. (St. Joseph's Hospital-Elmira),
6s, 2013 950 838,992
Fulton County, NY, Industrial Development Agency
(Nathan Littauer Hospital Assn.), 5.75s, 2009 250 224,593
Gadsden County, FL, Industrial Development Authority
(RHA/FL Properties), 10.45s, 2018 1,840 1,851,371
Goldsboro, NC, Housing Authority Rev. (North Carolina
Housing Foundation, Inc.), 7.25s, 2029 1,000 923,880
Indiana Health Facilities Financing Authority, Hospital
Rev. (Riverview Hospital), 5.25s, 2014 400 337,240
Indiana Health Facilities Financing Authority, Hospital
Rev. (Riverview Hospital), 5.5s, 2019 650 545,038
Indiana Health Facilities Financing Authority Rev
(Hoosier Care), 7.125s, 2034 850 761,158
Indiana Health Facilities Financing Authority Rev
(Metro Health/Indiana, Inc.), 6.3s, 2023 1,230 1,058,403
Jefferson County, KY, Health Care Authority Rev
(Beverly Enterprises, Inc.), 5.875s, 2007 250 237,943
Louisiana Public Facilities Authority (Southwest
Medical Center), 11s, 2006 1,131 192,293
Lufkin, TX, Health Facilities Development Corp.
(Memorial Health System of East Texas), 6.875s, 2026 345 324,490
Marion County, FL, Hospital District Rev., 5.625s, 2019 750 660,225
Massachusetts Health & Education Facilities Authority
(Caritas Christi), 5.7s, 2015 1,000 833,500
Mecosta County, MI, General Hospital Rev., 6s, 2018 300 258,516
Millbrae, CA, Residential Facility (Magnolia Of
Millbrae), 7.375s, 2027 1,000 998,480
New Hampshire Business Finance Authority, Health Care
Facilities Rev. (Metropolitian Health Foundation, Inc.),
6.55s, 2028 1,000 868,400
Ohio County, WV, County Commission Health System (Ohio
Valley Medical Center), 5.75s, 2013 900 785,907
Richardson, TX, Hospital Authority Rev. (Baylor-Richardson),
5.25s, 2013 600 506,784
Royston, GA, Hospital Authority Rev. (Ty Cobb
Healthcare Systems, Inc.), 6.5s, 2027 $ 290 $ 261,017
State of Michigan Hospital Finance Authority Rev
(Memorial Healthcare Center), 5.75s, 2015 800 692,200
Stillwater, OK, Medical Center Authority (Stillwater
Medical Center), 6.5s, 2019 1,000 954,500
Suffolk County, NY, Southampton Hospital Association,
7.25s, 2020 750 701,782
Suffolk County, NY, Southhampton Hospital Association,
7.625s, 2030 250 239,565
Tennessee Veterans Home Board Rev. (Humboldt), 6.75s, 2021 1,000 1,043,650
West Plains, MO, Industrial Development Authority,
Hospital Rev. (Ozarks Medical Center), 6.75s, 2024 195 173,203
------------
$ 20,012,688
- ------------------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 9.6%
Burns Habor, IN, Solid Waste Disposal Facilities Rev
(Bethlehem Steel), 8s, 2024 $3,000 $ 3,150,540
Carbon County, UT, Solid Waste Disposal Rev. (Laidlaw
Environmental), 7.45s, 2017 2,500 2,424,925
Delaware County, PA, Industrial Development Authority
(Resources Recovery Facility), 5.5s, 2002 270 267,206
Delaware County, PA, Industrial Development Authority
(Resources Recovery Facility), 6s, 2003 460 456,752
Delaware County, PA, Industrial Development Authority
(Resources Recovery Facility), 6.1s, 2005 875 862,470
East Chicago, IN, Exempt Facilities Rev. (Inland Steel Co.),
6.7s, 2012 2,070 2,038,784
Erie County, PA, (International Paper), 7.875s, 2016 1,200 1,233,012
Gulf Coast Industrial Development Authority, Valero
Refinancing Project Convertible, 5.6s, 2031 500 415,515
Lake Charles, LA, Harbor & Terminal District Port
(Occidental Petroleum), 7.2s, 2020 1,000 1,034,460
Luzerne County, PA, Industrial Development Authority
(Beverly Enterprise, Inc.), 6.75s, 2008 500 482,150
Massachusetts Development Finance Agency (Springfield
Resources Recovery), 5.625s, 2019 2,400 2,236,968
Mobile, AL, Industrial Development Board Improvement
Rev. (International Paper Co.), 6.45s, 2019 2,000 2,010,460
Navajo County, AZ, Industrial Development Authority
(Stone Container Corp.), 7.4s, 2026 5,150 5,155,459
Navajo County, AZ, Industrial Development Authority
(Stone Container Corp.), 7.2s, 2027 1,000 980,980
Northampton County, PA, Industrial Development
Authority (Bethlehem Steel), 7.55s, 2017 1,200 1,248,828
Onondaga County, NY, Industrial Development Agency,
Solid Waste Disposal Facility Rev. (Solvay Paperboard LLC),
6.8s, 2014 $1,000 $ 994,690
Port of New Orleans, LA, (Avondale Industries), 8.5s, 2014 1,975 2,154,014
Sweetwater County, WY, Solid Waste Disposal Rev., "A"
(FMC Corp.), 7s, 2024 1,400 1,416,870
Virginia Peninsula Ports Authority Rev. (Zeigler Coal),
6.9s, 2022 2,250 1,952,078
West Side Calhoun County, TX, Navigation District
(Union Carbide), 8.2s, 2021 2,000 2,069,680
------------
$ 32,585,841
- ------------------------------------------------------------------------------------------------------
Insured Health Care Revenue - 4.1%
Henrico County, VA, Industrial Development Authority
Rev. (Bon Secours), FSA, 7.417s, 2027(++) $5,000 $ 5,219,550
Jefferson County, KY, Hospital Rev., MBIA, 6.436s, 2014(++) 500 554,270
Jefferson County, KY, Hospital Rev., MBIA, 6.436s, 2014(++) 1,000 1,084,570
Lauderdale County & Florence, AL (Coffee Health Group),
MBIA, 5.75s, 2014 850 842,333
Lauderdale County & Florence, AL (Coffee Health Group),
Series A, MBIA, 5.25s, 2019 1,100 1,021,702
Lauderdale County & Florence, AL, (Coffee Health
Group), Series A, MBIA, 5.25s, 2024 1,085 998,450
Mississippi Hospital Equipment & Facilities Authority Rev
(Rush Medical Foundation), Connie Lee, 6.7s, 2018, 1,000 1,042,140
Rio Grande Valley, TX, Health Facilities Development
Corp., MBIA, 6.4s, 2015+ 2,800 2,930,228
------------
$ 13,693,243
- ------------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 5.8%
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 7.25s, 2027 $1,000 $ 1,104,240
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 7.25s, 2027 600 611,760
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 10s, 2027 380 364,245
California Statewide Community Development Authority
(Equity Residential), 5.2s, 2029(++) 1,000 976,700
Charter Mac Equity Issuer Trust, 6.625s, 2009 2,000 1,951,240
Colorado Housing Finance Authority, FHA, 8.3s, 2023, 2,750 2,870,285
Eaglebend, CO, Affordable Housing Corp., 6.2s, 2012 1,000 982,250
Panhandle Texas Regional Housing Finance, Senior Series A,
6.625s, 2020 330 325,733
Panhandle Texas Regional Housing Finance, Senior Series
A, 6.75s, 2031 1,670 1,657,091
Pennsylvania Housing Finance Agency, 7.6s, 2013 1,000 1,036,980
Ridgeland, MS, Urban Renewal, Multifamily Housing Rev
(Northbrook I & III Apartments), 6.15s, 2019 1,250 1,139,162
Texas Department of Housing & Community Affairs, 10s, 2026+ 2,270 2,294,017
Wisconsin Housing & Economic Development Authority,
7.2s, 2013 4,000 4,151,040
------------
$ 19,464,743
- ------------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 3.1%
Metropolitan Pier & Exposition Authority, IL, MBIA, 0s, 2016 $8,400 $ 3,280,872
New York, NY, City Transitional, Future Tax Secured FGIC,
5s, 2017 3,475 3,199,780
New York, NY, City Transitional, Future Tax Secured
Series A, 6s, 2017 2,000 2,070,720
Pennsylvania Turnpike Commission Oil, Senior Series A,
AMBAC, 5.25s, 2018 2,000 1,888,340
------------
$ 10,439,712
- ------------------------------------------------------------------------------------------------------
Single Family Housing Revenue - 6.3%
California Housing Finance Agency Rev., Home Mortgage,
MBIA, 0s, 2027 $1,625 $ 361,156
California Housing Finance Agency Rev., Home Mortgage,
MBIA, 0s, 2028 4,455 1,020,418
California Rural Home Mortgage Finance Authority, GNMA,
5.2s, 2030(++) 400 420,104
Chicago, IL, Residential Mortgage Rev., MBIA, 0s, 2009 1,335 691,637
Chicago, IL, Single Family Mortgage Rev., GNMA, 7.05s, 2030 200 213,316
Colorado Housing Finance Authority, 7.15s, 2014 115 120,965
Colorado Housing Finance Authority, 7.45s, 2016 355 385,750
Colorado Housing Finance Authority, 6.75s, 2021 275 289,897
Colorado Housing Finance Authority, 7.4s, 2027 325 342,871
Colorado Housing Finance Authority, 6.875s, 2028 1,000 1,047,690
Colorado Housing Finance Authority, 6.8s, 2030 550 579,205
Cook County, IL, Single Family Mortgage Rev., 0s, 2015 2,910 556,945
DeKalb, IL, Single Family Mortgage Rev., GNMA, 7.45s, 2009 100 103,924
Jefferson Parish, LA, Home Mortgage Authority Rev.,
GNMA, 6.75s, 2030 300 315,609
Kentucky Housing Corp., FHA, 7.45s, 2023 2,465 2,534,932
Lee County, FL, Housing Finance Authority Rev., GNMA,
7s, 2031 190 200,978
Mississippi Home Corp., GNMA, 7.1s, 2023 434 449,477
Missouri Housing Development Commission, Mortgage Rev.,
GNMA, 6.7s, 2030 1,000 1,050,560
Nebraska Investment Finance Authority, GNMA, 5.6s, 2020 945 912,464
New Hampshire Housing Finance Authority, 7.2s, 2010 3,975 4,117,186
New Mexico Mortgage Finance Authority, Single Family
Mortgage, 7.1s, 2030 300 322,485
Pima County, AZ, Industrial Development Authority,
GNMA, 7.05s, 2030 1,400 1,511,244
Sedgwick & Shawnee Counties, KS, GNMA, 5.5s, 2026(++) 750 786,840
Tennessee Housing Development Agency, 0s, 2017 3,445 1,178,534
Texas Housing & Community Affairs, Residential Mortgage
Rev., GNMA, 7.1s, 2021 1,500 1,591,860
Utah Housing Finance Agency, FHA, 9.25s, 2019 10 10,144
Utah Housing Finance Agency, GNMA, 8.625s, 2019 85 85,597
------------
$ 21,201,788
- ------------------------------------------------------------------------------------------------------
Solid Waste Revenue - 1.1%
Gloucester County, NJ, Improvement Authority, Refunding
Waste Management, Inc. Project Series A,
6.85s, 2029(++) $ 150 $ 150,659
Henrico County, VA, Industrial Development Authority
Rev. (Browning-Ferris), 5.3s, 2011 1,000 916,050
Hudson County, NJ, Solid Waste System Rev., 5.9s, 2015 975 930,852
Massachusetts Development Finance Agency, Resource
Recovery Rev., 6.7s, 2014 700 711,781
Massachusetts Industrial Finance Agency (Ogden
Haverhill), 5.6s, 2019 1,000 856,740
------------
$ 3,566,082
- ------------------------------------------------------------------------------------------------------
Special Assesment District - 1.0%
Broadview, IL, Tax Increment Rev., 5.25s, 2012### $1,000 $ 955,990
Katy, TX, Development Authority Rev., 5.8s, 2011 1,000 933,750
Katy, TX, Development Authority Rev., 6s, 2018 1,500 1,374,375
------------
$ 3,264,115
- ------------------------------------------------------------------------------------------------------
Student Loan Revenue - 2.6%
Arizona Student Loan Acquisition Authority, 5.8s, 2016 $ 675 $ 676,944
Arizona Student Loan Acquisition Authority, 5.85s, 2017 700 702,597
Massachusetts Educational Financing Authority
Education, Refunding Issue G Series A, MBIA, 6.1s, 2018 1,045 1,056,652
Pennsylvania State Higher Educational Assistance
Agency, AMBAC, 9.18s, 2026(++) 5,500 6,499,735
------------
$ 8,935,928
- ------------------------------------------------------------------------------------------------------
Turnpike Revenue - 2.0%
Allegheny County, PA, Port Authority Special Rev.,
MBIA, 6.25s, 2017 $1,000 $ 1,049,140
New Jersey Economic Development Authority Rev.,
Transportation Project Sublease, "A", FSA, 6s, 2016 325 336,534
New Jersey Turnpike Authority Rev., MBIA, 6.5s, 2016 1,450 1,620,085
New York Thruway Authority Rev., Highway & Bridges,
FGIC, 5.125s, 2015 4,000 3,820,320
------------
$ 6,826,079
- ------------------------------------------------------------------------------------------------------
Universities - 5.3%
Clark County, NV, Economic Development Rev. (Alexander
Dawson School), 5.5s, 2020 $1,500 $ 1,414,425
Georgia Private Colleges & University Authority Rev
(Emory University), 5.75s, 2016 5,495 5,561,709
Islip, NY, Community Development Agency Rev. (New York
Institute of Technology), 7.5s, 2026 2,000 2,055,960
Maine Finance Authority, Educational Rev. (Waynflete
School), 6.4s, 2019 1,000 996,440
Maine Finance Authority, Educational Rev. (Waynflete
School), 6.5s, 2029 1,000 993,440
Massachusetts Development Finance Agency Rev. (Mass
College of Pharmacy), 6.625s, 2020 100 100,551
New Hampshire Higher Education & Health Facilities
Authority Rev. (New Hampshire College), 6.375s, 2027 1,435 1,378,805
Northern Illinois University Rev., Auxiliary Facilities
Systems, 5.875s, 2018 1,370 1,383,043
Savannah, GA, Economic Development Authority (College
Of Art & Design, Inc.), 6.5s, 2013 500 498,750
St. Joseph County, IN, Educational Facilities Rev
(University of Notre Dame), 6.5s, 2026 1,000 1,119,490
Virginia College Building Authority Virginia, Public
Higher Education Financing Series A, 5.75s, 2019 2,295 2,305,236
------------
$ 17,807,849
- ------------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 3.8%
Alanta, GA, Water & Wastewater Rev., FGIC, 6.167s, 2016(++)+ $1,000 $ 1,009,740
Massachusetts Water Resources Authority, , 6.5s, 2019, 5,965 6,562,574
New York Environmental Facilities Corp., Clean Water &
Drinking, 5s, 2016 2,000 1,861,180
Pittsburgh, PA, Water & Sewer Authority Rev., FGIC, 0s, 2017 2,300 845,917
Pittsburgh, PA, Water & Sewer Authority Rev., FGIC, 0s, 2018 2,300 791,545
Pittsburgh, PA, Water & Sewer Authority Rev.,
Subordinated Series C, FSA, 5.25s, 2022 2,000 1,833,040
------------
$ 12,903,996
- ------------------------------------------------------------------------------------------------------
Other - 1.4%
Alabama Building Renovation Authority, AMBAC, 6s, 2018 $ 760 $ 777,928
Austin Texas Rev., Town Community Events Center Venue,
FGIC, 6s, 2019 1,015 1,032,945
Iowa Finance Authority Community Provider Rev. (Boys &
Girls Home), 6.25s, 2028 500 443,055
Kentucky Economic Development Finance Authority,
Refunding & Improvement Series A MBIA IBC, MBIA, 5s, 2018 2,400 2,139,312
Rail Connections Inc., MA, Rev., 0s, 2016 100 33,827
Rail Connections Inc., MA, Rev., 0s, 2017 210 65,827
Rail Connections Inc., MA, Rev., 0s, 2018 300 87,294
------------
$ 4,580,188
- ------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $323,227,927) $326,795,329
- ------------------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 0.7%
- ------------------------------------------------------------------------------------------------------
Harris County, TX, Hospital Rev. (Methodist Hospital),
due 04/03/00 $1,800 $ 1,800,000
Sevier County, TN, Public Building Authority, due 04/03/00 400 400,000
- ------------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes at identified cost) $ 2,200,000
- ------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $325,427,927) $328,995,329
Other Assets, Less Liabilities - 2.5% 8,577,927
- ------------------------------------------------------------------------------------------------------
Net assets - 100.0% $337,573,256
- ------------------------------------------------------------------------------------------------------
(++) Inverse floating rate security.
+ Restricted security.
### Security segregated as collateral for an open futures contract.
See notes to financial statements.
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- -------------------------------------------------------------------------------
MARCH 31, 2000
- -------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $325,427,927) $328,995,329
Cash 130,121
Receivable for Fund shares sold 2,806,395
Receivable for investments sold 7,688,905
Interest receivable 6,160,302
Other assets 5,093
------------
Total assets $345,786,145
------------
Liabilities:
Distributions payable $ 691,983
Payable for daily variation margin on open futures
contracts 5,937
Payable for investments purchased 6,571,005
Payable for Fund shares reacquired 768,276
Payable to affiliates -
Management fee 3,677
Shareholder servicing agent fee 919
Distribution and service fee 4,754
Administrative fee 161
Accrued expenses and other liabilities 166,177
------------
Total liabilities $ 8,212,889
------------
Net assets $337,573,256
============
Net assets consist of:
Paid-in capital $331,278,987
Unrealized appreciation on investments 3,567,343
Accumulated undistributed net realized gain on
investments 1,682,215
Accumulated undistributed net investment income 1,044,711
------------
Total $337,573,256
============
Shares of beneficial interest outstanding 40,488,979
==========
Class A shares:
Net asset value per share
(net assets of $217,880,373 / 26,145,513 shares of
beneficial interest outstanding) $8.33
=====
Offering price per share (100 / 95.25 of net asset value
per share) $8.75
=====
Class B shares:
Net asset value and offering price per share
(net assets of $93,656,291 / 11,226,292 shares of
beneficial interest outstanding) $8.34
=====
Class C shares:
Net asset value and offering price per share
(net assets of $26,036,592 / 3,117,174 shares of
beneficial interest outstanding) $8.35
=====
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, 2000
- -------------------------------------------------------------------------------
Net investment income:
Interest income $ 23,575,418
------------
Expenses -
Management fee $ 2,601,698
Trustees' compensation 42,374
Shareholder servicing agent fee 361,344
Distribution and service fee (Class A) 534,744
Distribution and service fee (Class B) 1,192,005
Distribution and service fee (Class C) 282,458
Administrative fee 46,838
Custodian fee 127,503
Printing 29,522
Postage 23,649
Auditing fees 33,270
Legal fees 5,524
Miscellaneous 169,510
------------
Total expenses $ 5,450,439
Fees paid indirectly (90,849)
Reduction of expenses by investment adviser (1,149,917)
------------
Net expenses $ 4,209,673
------------
Net investment income $ 19,365,745
------------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions $ 2,851,652
Futures contracts (193,568)
------------
Net realized gain on investments $ 2,658,084
------------
Change in unrealized depreciation -
Investments $(28,331,588)
Futures contracts (59)
------------
Net unrealized loss on investments $(28,331,647)
------------
Net realized and unrealized loss on investments $(25,673,563)
------------
Decrease in net assets from operations $ (6,307,818)
============
See notes to financial statements.
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
<CAPTION>
- --------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 2000 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 19,365,745 $ 18,990,701
Net realized gain on investments 2,658,084 11,934,284
Net unrealized loss on investments (28,331,647) (13,129,075)
------------ ------------
Increase (decrease) in net assets from operations $ (6,307,818) $ 17,795,910
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $(11,884,202) $(10,453,353)
From net investment income (Class B) (5,691,939) (7,052,099)
From net investment income (Class C) (1,349,567) (1,199,356)
From net realized gain on investments (Class A) (1,465,556) --
From net realized gain on investments (Class B) (788,470) --
From net realized gain on investments (Class C) (184,836) --
------------ ------------
Total distributions declared to shareholders $(21,364,570) $(18,704,808)
------------ ------------
Net increase (decrease) in net assets from Fund
share transactions $(23,647,397) $ 6,604,815
------------ ------------
Total increase (decrease) in net assets $(51,319,785) $ 5,695,917
Net assets:
At beginning of period 388,893,041 383,197,124
------------ ------------
At end of period (including accumulated undistributed net
investment income of $1,044,711 and $603,638,
respectively) $337,573,256 $388,893,041
============ ============
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.97 $ 8.99 $ 8.50 $ 8.62 $ 8.56
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.48 $ 0.47 $ 0.48 $ 0.49 $ 0.51
Net realized and unrealized gain (loss)
on investments (0.59) (0.02) 0.49 (0.12) 0.05
------ ------ ------ ------ ------
Total from investment operations $(0.11) $ 0.45 $ 0.97 $ 0.37 $ 0.56
------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.47) $(0.47) $(0.48) $(0.49) $(0.50)
From net realized gain on investments (0.06) -- -- -- --
In excess of net investment income -- -- -- -- (0.00)+
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.53) $(0.47) $(0.48) $(0.49) $(0.50)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.33 $ 8.97 $ 8.99 $ 8.50 $ 8.62
====== ====== ====== ====== ======
Total return(+) (1.15)% 5.16% 11.61% 4.28% 6.81%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 0.88% 1.08% 1.23% 1.31% 1.28%
Net investment income 5.66% 5.35% 5.44% 5.75% 5.75%
Portfolio turnover 57% 31% 23% 30% 23%
Net assets at end of period (000 omitted) $217,880 $215,858 $189,056 $152,039 $121,903
(S) The investment adviser voluntarily waived a portion of its fee, for certain periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.45 $ 0.47 $ -- $ -- $ --
Ratios (to average net assets):
Expenses## 1.20% 1.21% -- -- --
Net investment income 5.34% 5.22% -- -- --
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) 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.
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.98 $ 9.00 $ 8.51 $ 8.63 $ 8.57
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.42 $ 0.41 $ 0.42 $ 0.43 $ 0.43
Net realized and unrealized gain (loss)
on investments (0.59) (0.02) 0.48 (0.13) 0.06
------ ------ ------ ------ ------
Total from investment operations $(0.17) $ 0.39 $ 0.90 $ 0.30 $ 0.49
------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.41) $(0.41) $(0.41) $(0.42) $(0.43)
From net realized gain on investments (0.06) -- -- -- --
In excess of net investment income -- -- -- -- (0.00)+
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.47) $(0.41) $(0.41) $(0.42) $(0.43)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.34 $ 8.98 $ 9.00 $ 8.51 $ 8.63
====== ====== ====== ====== ======
Total return (1.89)% 4.38% 10.77% 3.44% 5.87%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.63% 1.83% 1.98% 2.11% 2.13%
Net investment income 4.89% 4.59% 4.69% 4.95% 4.90%
Portfolio turnover 57% 31% 23% 30% 23%
Net assets at end of period (000 omitted) $93,656 $140,871 $172,339 $226,138 $306,889
(S) The investment adviser voluntarily waived a portion of its fee, for certain periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.39 $ 0.40 $ -- $ -- $ --
Ratios (to average net assets):
Expenses## 1.95% 1.96% -- -- --
Net investment income 4.57% 4.46% -- -- --
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain offset arrangements.
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.99 $ 9.01 $ 8.52 $ 8.64 $ 8.57
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.42 $ 0.41 $ 0.41 $ 0.43 $ 0.43
Net realized and unrealized gain (loss)
on investments (0.59) (0.02) 0.49 (0.12) 0.07
------ ------ ------ ------ ------
Total from investment operations $(0.17) $ 0.39 $ 0.90 $ 0.31 $ 0.50
------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.41) $(0.41) $(0.41) $(0.43) $(0.43)
From net realized gain on investments (0.06) -- -- -- --
In excess of net investment income -- -- -- -- (0.00)+
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.47) $(0.41) $(0.41) $(0.43) $(0.43)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.35 $ 8.99 $ 9.01 $ 8.52 $ 8.64
====== ====== ====== ====== ======
Total return (1.89)% 4.37% 10.75% 3.62% 5.94%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.63% 1.81% 1.98% 2.06% 2.05%
Net investment income 4.89% 4.59% 4.69% 5.00% 4.95%
Portfolio turnover 57% 31% 23% 30% 23%
Net assets at end of period (000 omitted) $26,037 $32,164 $21,802 $19,159 $16,504
(S) The investment adviser voluntarily waived a portion of its fee, for certain periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.39 $ 0.40 $ -- $ -- $ --
Ratios (to average net assets):
Expenses## 1.95% 1.94% -- -- --
Net investment income 4.57% 4.46% -- -- --
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reduction from certain expense offset arrangements.
See notes to financial statements.
</TABLE>
<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. 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, 2000, $1,036 and $808 were reclassified to
accumulated net investment income and paid in capital, respectively, from
accumulated undistributed 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. 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. 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
$48,045 for the year ended March 31, 2000, 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 $46,209 for the
year ended March 31, 2000. Fees incurred under the distribution plan during
the year ended March 31, 2000, 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 $27,738 and $1,711 for
Class B and Class C shares, respectively, for the year ended March 31, 2000.
Fees incurred under the distribution plan during the year ended March 31,
2000, 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, 2000, were $237, $151,711, and $25,082 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 0.10%.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $205,095,534 and $237,718,592, 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 $325,443,676
------------
Gross unrealized appreciation $ 10,993,755
Gross unrealized depreciation (7,442,102)
------------
Net unrealized appreciation $ 3,551,653
============
(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, 2000 YEAR ENDED MARCH 31, 1999
------------------------------ -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 7,249,421 $ 61,517,236 17,940,018 $ 161,458,718
Shares issued to shareholders in
reinvestment of distributions 862,805 7,288,396 656,208 5,905,944
Shares reacquired (6,034,810) (51,044,873) (15,559,589) (140,049,954)
----------- ------------- ----------- --------------
Net increase 2,077,416 $ 17,760,759 3,036,637 $ 27,314,708
=========== ============= =========== =============
<CAPTION>
Class B Shares
YEAR ENDED MARCH 31, 2000 YEAR ENDED MARCH 31, 1999
------------------------------ -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,596,772 $ 13,697,105 1,719,464 $ 15,505,630
Shares issued to shareholders in
reinvestment of distributions 423,242 3,590,412 438,965 3,957,222
Shares reacquired (6,483,231) (54,769,638) (5,619,360) (50,627,988)
----------- ------------- ----------- --------------
Net decrease (4,463,217) $ (37,482,121) (3,460,931) $ (31,165,136)
=========== ============= =========== =============
<CAPTION>
Class C Shares
YEAR ENDED MARCH 31, 2000 YEAR ENDED MARCH 31, 1999
------------------------------ -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 961,741 $ 8,209,806 1,793,587 $ 16,187,441
Shares issued to shareholders in
reinvestment of distributions 111,637 947,356 85,755 773,910
Shares reacquired (1,534,895) (13,083,197) (721,227) (6,506,108)
----------- ------------- ----------- --------------
Net increase (461,517) $ (3,926,035) 1,158,115 $ 10,455,243
=========== ============= =========== =============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in an $820 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, 2000, was $2,529.
(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.
<TABLE>
<CAPTION>
Futures Contracts
UNREALIZED
APPRECIATION/
DESCRIPTION EXPIRATION CONTRACTS POSITION (DEPRECIATION)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bonds June 2000 38 Short $(19,000)
Municipal Bond Index June 2000 38 Long 13,063
--------
$ (5,937)
</TABLE>
At March 31, 2000, the Fund had sufficient cash and/or securities to cover any
margin requirements under these contracts.
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At March 31, 2000, the
Fund owned the following restricted securities, excluding securities issued
under Rule 144A, constituting 3.7% of net assets which may not be publicly sold
without registration under the Securities Act of 1933. The Fund does not have
the right to demand that such securities be registered. The value of these
securities is determined by valuations furnished by dealers or by a pricing
service, or if not available, in good faith by the Trustees.
<TABLE>
<CAPTION>
DATE OF
DESCRIPTION ACQUISITION PAR AMOUNT COST VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlanta, GA, Water & Wastewater Rev., FGIC,
6.167s, 2016 4/20/99 $1,000,000 $1,167,100 $ 1,009,740
Chicago, IL, Public Building Commission
Rev., 6.497s, 2016 3/10/99 1,500,000 1,619,550 1,424,490
Chicago, IL, Public Building Commission
Rev., 6.497s, 2017 3/10/99 1,250,000 1,337,550 1,171,150
Dudley-Charleton, MA, Regional School
District, FGIC, 5.864s, 2017 5/5/99 1,495,000 1,615,945 1,421,566
Houston, TX, Independent School District,
PSF, 5.669s, 2017 2/26/99 2,325,000 2,440,831 2,081,526
Rio Grande Valley, TX, Health Facilities
Development Corp., MBIA, 6.4s, 2015 7/1/92 2,800,000 2,766,764 2,930,228
Texas Department of Housing & Community
Affairs, 10s, 2026 11/1/96 2,270,000 2,280,000 2,294,017
-----------
$12,332,717
===========
</TABLE>
<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, 2000, the
related statement of operations for the year then ended, the statement of
changes in net assets for the years ended March 31, 2000 and 1999, and the
financial highlights for each of the years in the five-year period ended March
31, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 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, 2000, the results of its operations, the changes in
its net assets, and its financial highlights for the respective stated periods
in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
May 4, 2000
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
- --------------------------------------------------------------------------------
IN JANUARY 2001, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 2000.
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, 2000, IS DESIGNATED AS AN EXEMPT-INTEREST DIVIDEND.
<PAGE>
<TABLE>
MFS(R) MUNICIPAL INCOME FUND
<S> <C>
TRUSTEES ASSISTANT TREASURERS
Richard B. Bailey - Private Investor; Mark E. Bradley*
Former Chairman and Director (until 1991), Ellen Moynihan*
MFS Investment Management(R) James O. Yost*
Marshall N. Cohan - Private Investor SECRETARY
Stephen E. Cavan*
Lawrence H. Cohn, M.D. - Chief of Cardiac
Surgery, Brigham and Women's Hospital; ASSISTANT SECRETARY
Professor of Surgery, Harvard Medical School James R. Bordewick, Jr.*
The Hon. Sir J. David Gibbons, KBE - Chief CUSTODIAN
Executive Officer, Edmund Gibbons Ltd.; State Street Bank and Trust Company
Chairman, Colonial Insurance Company, Ltd.
AUDITORS
Abby M. O'Neill - Private Investor Deloitte & Touche LLP
Walter E. Robb, III - President and Treasurer, INVESTOR INFORMATION
Benchmark Advisors, Inc. (corporate financial For information on MFS mutual funds, call your
consultants); President, Benchmark Consulting investment professional or, for an information
Group, Inc. (office services) kit, call toll free: 1-800-637-2929 any
business day from 9 a.m. to 5 p.m. Eastern time
Arnold D. Scott* - Senior Executive (or leave a message anytime).
Vice President, Director, and Secretary,
MFS Investment Management INVESTOR SERVICE
MFS Service Center, Inc.
Jeffrey L. Shames* - Chairman and Chief P.O. Box 2281
Executive Officer, MFS Investment Management Boston, MA 02107-9906
J. Dale Sherratt - President, Insight For general information, call toll free:
Resources, Inc. (acquisition planning 1-800-225-2606 any business day from 8 a.m. to
specialists) 8 p.m. Eastern time.
Ward Smith - Former Chairman (until 1994), For service to speech- or hearing-impaired,
NACCO Industries (holding company) call toll free: 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time. (To use
INVESTMENT ADVISER this service, your phone must be equipped with
Massachusetts Financial Services Company a Telecommunications Device for the Deaf.)
500 Boylston Street
Boston, MA 02116-3741 For share prices, account balances, exchanges,
or stock and bond outlooks, call toll free:
DISTRIBUTOR 1-800-MFS-TALK (1-800-637-8255) anytime from a
MFS Fund Distributors, Inc. touch-tone telephone.
500 Boylston Street
Boston, MA 02116-3741 WORLD WIDE WEB
www.mfs.com
CHAIRMAN AND PRESIDENT
Jeffrey L. Shames*
PORTFOLIO MANAGER
Geoffrey L. Schechter*
TREASURER
W. Thomas London*
+Independent Trustee
*MFS Investment Management
</TABLE>
<PAGE>
MFS(R) MUNICIPAL ------------
INCOME FUND BULK RATE
U.S. POSTAGE
PAID
[Logo] M F S(R) MFS
INVESTMENT MANAGEMENT ------------
We invented the mutual fund(R)
500 Boylston Street
Boston, MA 02116-3741
(c)2000 MFS Investment Management(R).
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116
MMI-2 5/00 19.1M 02/202/302
