[Graphic of Man and Woman in front of Oval Window]
[MFS logo]
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND[RegTM]
MFS[RegTM] Municipal Income Trust
Annual Report
for Year Ended
October 31, 1998
<PAGE>
Letter from the Chairman
Dear Shareholders,
In 1999, MFS celebrates its 75th anniversary. The nation's first mutual fund --
our Massachusetts Investors Trust (MIT) -- was introduced to the public on March
21, 1924. Since then, MFS Investment Management[RegTM], the company that grew
out of that original fund, has helped guide shareholders through many economic
and investment cycles, primarily by focusing on the long-term opportunities
created by an expanding global economy. As of October 31, 1998, MFS manages
nearly $87 billion, and the firm's 2,000 people serve 3.8 million investors and
their financial advisers worldwide, while MIT's assets have grown to over $10
billion.
A major factor in our growth was the development of one of the industry's first
in-house research departments in 1932. Unlike many other companies that rely on
Wall Street research reports, which can be used by many investors at the same
time, MIT's managers built its long-term track record by visiting companies,
talking to managers and competitors, and "kicking the tires" so they could judge
the quality and potential of each company's products and services for
themselves. Today, MFS has more than 100 full-time portfolio managers, stock
analysts, and credit analysts who track the equity and bond markets. That number
includes nearly 40 equity analysts who specialize in industries such as
aviation, media, technology, automobiles, and utilities.
While MIT was the first mutual fund, it was not our only invention. We also
established the nation's first global bond fund, first high-yield municipal bond
fund, and first high-yield municipal closed-end bond fund.
We are proud of the record of MIT and of the funds offered by MFS, but we are
also proud of our long-standing relationship with financial advisers. Not only
do we believe investors can benefit from the advice of these experts but, as was
shown during the market volatility of 1998, people who work with financial
advisers are less likely to abandon their carefully designed, long-term
investment strategies.
Our ability to service your investment and information needs is also extremely
important to us. Today, the MFS Service Center handles millions of transactions
and phone calls every year. Supporting the work of financial advisers, promptly
sending out statements and confirmations, and answering hundreds of investors'
questions every day are crucial elements in maintaining long-term relationships
with our fund shareholders.
If there is a common thread running through these milestones, it is our
always-increasing commitment to providing you with the best possible investment
management and shareholder service, just as we have done for the past 75 years.
As we celebrate this anniversary, it is also a time for MFS to look ahead and
build on our 75 years of innovation and experience to help meet your investment
needs in the next century. 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[RegTM]
November 16, 1998
1
<PAGE>
Management Review and Outlook
Dear Shareholders,
For the 12 months ended October 31, 1998, shares of the Trust provided a total
return of 8.37% based on its New York Stock Exchange price and assuming the
reinvestment of distributions paid during the period. The net asset value of the
Trust rose from $8.51 to $8.55 over the period, providing a total return of
7.39%. Over the same period, the Lehman Brothers Municipal Bond Index (the
Lehman Index), an unmanaged index of fixed-rate, below-investment-grade
municipal bonds, provided a total return of 8.02%. Additionally, the Trust
primarily invests in lower-quality municipal issues rated "Baa" or below or
those that are unrated. These lower-rated securities have high coupon rates
relative to the market and generally are less price sensitive in a volatile
interest-rate environment; hence, they provide less price fluctuation during
these periods (although investments in high-yield securities involve greater
degrees of credit and market risk than investments in higher-rated securities
and tend to be more sensitive to economic conditions).
Municipal bonds today are as cheap in comparison to U.S. Treasuries as they have
been since 1987, thanks in part to a surge in supply over the past year.
(Principal value and interest on Treasury securities are guaranteed by the U.S.
government if held to maturity.) The excess supply is due to lower interest
rates that have sparked a wave of refinancing, as people refinanced old debt
with new bonds at lower interest rates. The lower rates have also caused an
increase in borrowing in general.
MFS[RegTM] Original Research(SM) differentiates our approach by helping us gain
an intimate understanding of the credit risks that we take in the portfolio.
And, for this Trust, credit risk is the primary factor in determining overall
portfolio performance. The Trust seeks as its primary goal high current income,
and we've worked toward this goal by investing in bonds that offer good,
sustainable yield but do not represent undue credit risk.
Until July and August of this year, the investment environment for high-yield
municipal securities had been very favorable. Interest rates had declined, and
credit spreads had tightened. Issues that were credit sensitive did very well as
the economy continued to grow while showing no signs of inflation. Over the
summer, we saw some weakening in credit fundamentals, especially among
corporate-backed bonds, as a result of general unease about the economy. Bonds
backed by corporations with exposure to international markets that were in
turmoil began to weaken, and the impact was most severe on those bonds that were
based in the commodity markets. As commodity prices fell, commodity-backed
bonds' performance weakened. However, spreads here have remained tight, while
other spreads widened significantly over this period. This continuance of tight
spreads has generally allowed high-yield bond returns to outpace those of
high-quality bonds, as evidenced by the Trust's outperformance in relation to
the high-grade Lehman Index.
We believe that the economy is slowing and may slow further, though we don't
believe we're headed for a recession. Therefore, we favor investment
opportunities in bonds that are not as dependent on economic cycles. Utilities,
health care, and certain housing issues are offering good risk-to-reward ratios
at the moment, though the portfolio is actively managed and holdings may vary.
However, it's important to note that not all of these issues are created equal,
nor do they offer the same quality in all markets or regions. This is where our
research advantage comes into play, once again, in helping us determine the real
needs in each area of the country, the competitive outlook in a particular
market, and the strength of individual issues. As a result, we feel that we are
well positioned to uncover the best municipal bond investments in particular
markets. From a regional perspective, we are reexamining areas of the economy
and the country that are most affected by export revenue. For example, in the
western part of the country exports comprise a significant amount of gross
product and are heavily weighted toward exports to Asian economies, which are
currently suffering. So
2
<PAGE>
we're being very cautious with our investments in that region.
As MFS heads into its 75th anniversary year, we look to enhance our research
focus in the municipal bond realm because we believe research is as critical to
our success here as it has been for the equity and other fixed-income investment
portfolios we offer. Of equal historical importance to us in the Municipal Bond
Department is that MFS offered the industry's first municipal high-yield bond
fund in 1984, and we look to remain in the forefront of that market as we enter
the 21st century.
Respectfully,
/s/ Michael W. Roberge
Michael W. Roberge
Portfolio Manager
November 14, 1998
The opinions expressed in this report are those of the portfolio manager and
are only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
----------------------------------------------
In accordance with Section 23(c) of the Investment Company Act of 1940, the
Trust hereby gives notice that it may from time to time repurchase shares of the
Trust in the open market at the option of the Board of Trustees and on such
terms as the Trustees shall determine.
Performance Summary
(For the year ended October 31, 1998)
<TABLE>
<S> <C>
Net Asset Value Per Share
October 31, 1997 $ 8.51
October 31, 1998 $ 8.55
New York Stock Exchange Price
October 31, 1997 $ 9.063
February 9, 1998 (high)* $ 9.625
May 27, 1998 (low)* $ 8.625
October 31, 1998 $ 9.188
</TABLE>
*For the period November 1, 1997, through October 31, 1998.
Federal Tax Information
(For the year ended October 31, 1998)
In January 1999, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1998.
For federal income tax purposes, 100% of the total dividends paid by the Trust
from net investment income during the year ended October 31, 1998, is designated
as an exempt-interest dividend.
Number of Employees
The Trust is organized as a Massachusetts business trust and is registered under
the Investment Company Act of 1940, as amended, as a closed-end, nondiversified,
management investment company and has no employees.
3
<PAGE>
Number of Shareholders
As of October 31, 1998, our records indicate that there are 6,088 registered
shareholders and approximately 16,600 shareholders owning Trust shares in
"street" name, such as through brokers, banks, and other financial
intermediaries.
If you are a "street" name shareholder and wish to directly receive our reports,
which contain important information about the Trust, please write or call:
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
1-800-637-2304
New York Stock Exchange Symbol
The New York Stock Exchange symbol is MFM.
Results of Shareholder Meeting
At the annual meeting of shareholders of MFS[RegTM] Municipal Income Trust,
which was held on September 17, 1998, the following actions were taken:
Item 1. The election of Richard B. Bailey, Peter G. Harwood, and Charles W.
Schmidt as Trustees of the Trust.
<TABLE>
<CAPTION>
Number of Shares
Nominee For Withhold Authority
- -------------------- -------------------- -------------------
<S> <C> <C>
Richard B. Bailey 32,596,365.0786 730,527.3213
Peter G. Harwood 32,427,813.7394 899,078.6605
Charles W. Schmidt 32,604,745.0454 722,147.3545
</TABLE>
Trustees continuing in office who were not subject to re-election at this
meeting are J. Atwood Ives, Lawrence T. Perera, William J. Poorvu, Arnold D.
Scott, Jeffrey L. Shames, Elaine R. Smith, and David B. Stone.
Item 2. The ratification of the election of Deloitte & Touche LLP as
the independent public accountants to be employed by the Trust
for the fiscal year ending October 31, 1999.
<TABLE>
<CAPTION>
Number of Shares
--------------------
<S> <C>
For 32,561,212.0130
Against 350,287.0869
Abstain 415,393.3000
</TABLE>
Investment Objective and Policies
The investment objective of the Trust is to provide a high current income exempt
from federal income taxes.
The Trust seeks to achieve its objective by investing primarily in medium- and
lower-quality municipal bonds and notes. The Trust may also enter into futures
contracts and purchase securities on a "when-issued" basis.
Dividend Reinvestment and
Cash Purchase Plan
MFS offers a Dividend Reinvestment and Cash Purchase Plan which allows you to
reinvest either all of the distributions paid by the Trust or only the long-term
capital gains. Purchases are made at the market price unless that price exceeds
the net asset value (the shares are trading at a premium). If the shares are
trading at a premium, purchases will be made at a discounted price of either the
net asset value or 95% of the market price, whichever is greater. Twice each
year you can also buy shares. Investments from $100 to $500 can be made in
January and July on the 15th of the month or shortly thereafter.
If your shares are in the name of a brokerage firm, bank or other nominee, you
can ask the firm or nominee to participate in the Plan on your behalf. If the
nominee does not offer the Plan, you may wish to request that your shares be
re-registered in your own name so that you can participate.
There is no service charge to reinvest distributions, nor are there brokerage
charges for shares issued directly by the Trust. However, when shares are bought
on the New York Stock Exchange or otherwise on the open market, each participant
pays a pro rata share of the commissions. A service fee of $0.75 is charged for
each cash purchase as well as a pro rata share of the brokerage commissions. The
automatic reinvestment of distributions does not relieve you of any income tax
that may be payable (or required to be withheld) on the distributions.
To enroll in or withdraw from the Plan, call 1-800-637-2304 any business day
from 8 a.m. to 8 p.m.
4
<PAGE>
Eastern time. Please have available the name of the Trust and your account and
Social Security numbers. For certain types of registrations, such as corporate
accounts, instructions must be submitted in writing. Please call for additional
details. When you withdraw, you can receive the value of the reinvested shares
in one of two ways: a check for the value of the full and fractional shares, or
a certificate for the full shares and a check for the fractional shares.
If you have any questions or would like a brochure providing a complete
description of the plan, please call 1-800-637-2304 any business day from 8 a.m.
to 8 p.m. Eastern time.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
5
<PAGE>
Portfolio of Investments -- October 31, 1998
Municipal Bonds -- 98.1%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
General Obligation -- 1.5%
Chicago, IL, FGIC, 5.125s, 2025 .................... $2,000 $ 2,000,980
Markham, IL, 9s, 2012 .............................. 1,265 1,283,975
New York City, NY, 6.125s, 2025 .................... 1,470 1,595,038
-----------
$ 4,879,993
-----------
State and Local
Appropriation -- 0.6%
Riverside County, CA, Asset
Leasing Corp., Leashold Rev.
(Riverside County Hospital),
MBIA, 0s, 2026 ................................... $8,595 $ 2,098,555
-----------
Refunded and Special
Obligations -- 20.9%
Arapahoe County, CO, Capital
Improvement, Highway Rev.,
0s, 2005 ......................................... $1,000 $ 368,550
Arapahoe County, CO, Water &
Sanitation District, 9.25s, 1998 ................. 2,000 2,029,140
Clermont County, OH, Hospital
Facilities Rev. (Mercy Health
Systems), AMBAC, 9.696s,
2001++++ ......................................... 500 598,470
Colorado Health Facilities
Authority, Retirement Facilities
Rev. (Liberty Heights), 0s, 2024 10,000 2,601,500
Dade County, FL, AMBAC,
0s, 2008 ......................................... 15,080 2,227,165
Denver, CO, City & County Airport
Rev., 8.75s, 2001 ................................ 400 463,932
Desert Hospital District, CA,
Hospital Rev. (Desert Hospital
Corp.), 8.874s, 2002++++ ......................... 1,500 1,831,620
Hannibal, MO, Industrial
Development Authority (Hannibal
Regional Healthcare), 9.5s,
2001+ ............................................ 1,500 1,780,860
Illinois Development Finance
Authority, Retirement Housing
Rev. (Regency Park), 0s, 2025 .................... 26,000 5,918,640
Jefferson County, OH, Asset
Guaranty, 7.125s, 2005 ........................... 1,000 1,205,980
Maine Health & Higher Education
Facilities Authority (St. Mary's
General Hospital), 8.625s, 1999 1,000 1,055,600
Massachusetts Health & Education
Facilities Authority (Fairview
Extended Care Facility), 10.25s,
2001 ............................................. 1,500 1,746,885
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Refunded and Special
Obligations -- continued
Massachusetts Industrial Finance
Agency, Tunnel Rev. (Mass.
Turnpike), 9s, 2000 .............................. $3,710 $ 4,145,406
Mississippi Hospital Equipment &
Facilities Authority Rev. (Rush
Medical Foundation), 8.75s,
2001 ............................................. 1,000 1,124,460
New Lenox, IL, Community Park
Development Authority, 8.25s,
2004 ............................................. 2,000 2,463,880
New York City, NY, 6.125s, 2006 .................... 530 604,338
North Carolina Medical Care
Commission, Hospital Rev.
(Valdese General), 8.75s, 2001 ..................... 1,370 1,585,720
Prince William County, VA,
Industrial Development Authority,
Residential Care Facility
(Westminster at Lake Ridge),
10s, 2002 ........................................ 1,500 1,803,315
Russellville, AR, Industrial
Development Rev. (Charles
Meyers), 10s, 1999 ............................... 4,985 5,342,923
San Joaquin Hills, CA,
Transportation Corridor Agency,
Toll Road Rev., 0s, 2006 ......................... 2,300 1,726,150
San Joaquin Hills, CA,
Transportation Corridor Agency,
Toll Road Rev., 0s, 2011 ......................... 6,600 3,765,894
San Joaquin Hills, CA,
Transportation Corridor Agency,
Toll Road Rev., 0s, 2019 ......................... 10,000 3,675,500
Telluride, CO, Gondola Transit Co.,
Real Estate Transfer
Assessment Rev., 11.5s, 2012 ..................... 2,475 4,018,930
Telluride, CO, Gondola Transit Co.,
Real Estate Transfer
Assessment Rev., 11.5s, 2012 ..................... 425 676,736
Texas Turnpike Authority (Houston
Ship Channel Bridge), 12.625s,
2002 ............................................. 10,565 13,882,938
Walton, GA, Industrial
Development Rev. (Ultima
Rubber Products), 10s, 2000 ...................... 1,630 1,816,390
Washington Public Power Supply
System Rev. (Nuclear Project
#1), 14.375s, 2001 ............................... 1,090 1,252,792
-----------
$69,713,714
-----------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Airport and Port Revenue -- 6.2%
Atlanta, GA, Special Purpose
Facilities Rev. (Delta Airlines),
7.9s, 2018 .......................................... $2,100 $ 2,211,993
California Statewide Communities
Development Authority (United
Air Lines, Inc.), 5.625s, 2034 ...................... 2,000 2,055,720
Cleveland, OH, Airport Special
Facilities Rev. (Continental
Airlines), 9s, 2019 ................................. 3,150 3,402,315
Denver, CO, City & County Airport
Rev., 8.75s, 2023 ................................... 1,100 1,249,259
Hillsborough County, FL, Aviation
Authority Rev. (US Air), 8.6s,
2022 ................................................ 650 730,197
Kenton County, KY, Airport Board
Special Facilities (Delta Airlines),
7.5s, 2020 .......................................... 1,000 1,092,780
Tulsa, OK, Municipal Airport Trust
Rev. (American Airlines), 7.375s,
2020 ................................................ 3,400 3,627,528
Tulsa, OK, Municipal Airport Trust
Rev. (American Airlines), 7.6s,
2030 ................................................ 3,000 3,261,780
Wayne County, MI, Charter Airport
Rev. (Detroit Metropolitan Wayne
County), 5s, 2022 ................................... 3,000 2,934,450
-----------
$20,566,022
-----------
Electric and Gas Utility
Revenue -- 8.2%
Alaska Industrial Development &
Export Authority, Power Rev.
(Upper Lynn Canal Regulatory
Power), 5.8s, 2018 .................................. $ 830 $ 845,289
Clark County, NV, Industrial
Development Rev. (Nevada
Power Co.), 5.6s, 2030 .............................. 3,000 3,013,050
Clark County, NV, Industrial
Development Rev. (Nevada
Power Co.), 5.9s, 2032 .............................. 1,000 1,023,020
Midland, MI, Environmental
Development Authority, Pollution
Control Rev. (Midland
Cogeneration), 9.5s, 2009 ........................... 1,500 1,625,595
New York City, NY, Industrial
Development Rev. (Brooklyn
Navy Yard Cogeneration
Partners), 5.65s, 2028 .............................. 4,500 4,564,305
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Electric and Gas Utility
Revenue -- continued
New York City, NY, Industrial
Development Rev. (Brooklyn
Navy Yard Cogeneration
Partners), 5.75s, 2036 .............................. $2,500 $ 2,555,200
Ohio Water Development, Pollution
Control Rev. (Cleveland Electric),
8s, 2023 ............................................ 2,500 2,874,375
Pima County, AZ, Industrial
Development Authority (Tuscon
Electric Power Co.), 6s, 2029 ....................... 3,000 3,028,890
Pittsylvania County, VA, Industrial
Development Authority Rev.,
7.5s, 2014 .......................................... 2,000 2,199,060
Southern California Public Power
Authority, Transmission Project
Rev., 7.893s, 2012++++ .............................. 3,650 4,191,222
West Feliciana Parish, LA,
Pollution Control Rev. (Gulf
States Utilities Co.), 5.8s, 2015 ................... 1,500 1,529,235
-----------
$27,449,241
-----------
Health Care Revenue -- 23.3%
Baltimore County, MD, Nursing
Facility Mortgage Rev. (Eastpoint
Rehabilitation & Nursing Center),
6.75s, 2028 ......................................... $ 500 $ 493,165
Bell County, TX, Health Facilities
Development Corp. (Advanced
Living Technology), 7.25s, 2001 160 158,021
Bell County, TX, Health Facilities
Development Corp. (Advanced
Living Technology), 7.75s, 2006 300 291,321
Bell County, TX, Health Facilities
Development Corp. (Advanced
Living Technology), 8.125s,
2016 ................................................ 1,085 1,035,231
Bell County, TX, Health Facilities
Development Corp. (Advanced
Living Technology), 8.5s, 2026 ...................... 2,405 2,287,997
Bell County, TX, Health Facilities
Development Corp. (Kings
Daughters Hospital), 9.25s,
2008 ................................................ 695 734,184
Booneville, MO, Health Facilities
Rev. (Gericare, Inc.), 11s, 2017 .................... 1,900 1,946,360
Boston, MA, Industrial
Development Finance Authority
Rev. (Stonehedge Convalescent
Center), 10.75s, 2011 ............................... 680 702,841
</TABLE>
7
<PAGE>
Portfolio of Investments -- continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Health Care Revenue -- continued
Brevard County, FL, Health
Facilities Authority Rev. (Friendly
Village), 9.25s, 2012 .............................. $2,245 $2,277,530
Broward County, FL, Industrial
Development Authority (Beverly
Enterprises, Inc.), 9.8s, 2010 ..................... 2,200 2,418,658
Cambria County, PA, Industrial
Development Authority (Beverly
Enterprises), 10s, 2012 ............................ 680 891,160
Cheneyville, LA, Westside
Habilitation Center, 8.375s,
2013 ............................................... 2,500 2,740,425
Chester County, PA, Industrial
Development Authority (RHA/PA
Nursing Home), 10.125s, 2019 ....................... 952 875,840
Connecticut Health & Educational
Facilities (Johnson Evergreen),
8.5s, 2014 ......................................... 650 706,804
Contra Costa County, CA,
Residential Rental Facilities Rev.
(Cypress Meadows), 7s, 2028 ........................ 1,840 1,826,016
Denver, CO, Health & Hospital
Rev., 5.25s, 2013 .................................. 635 636,295
Denver, CO, Health & Hospital
Rev., 5.375s, 2018 ................................. 1,500 1,502,400
District of Columbia, Hospital Rev.
(Hospital for Sick Children),
8.875s, 2021 ....................................... 475 514,078
Fairfax, Fauquier & Loudoun
Counties, VA, Health Center
Commission, Nursing Home
Rev., 9s, 2020 ..................................... 1,840 1,983,612
Gadsden County, FL, Industrial
Development Authority (RHA/
FLA Properties), 10.45s, 2018 ...................... 2,485 2,534,228
Greenville County, SC, Hospital
Facility Rev. (Chestnut Hill),
10.375s, 2016 ...................................... 2,795 2,403,700
Hobbs County, NM, Health
Facilities Rev. (Nemecal
Associates), 9.625s, 2014 .......................... 870 913,648
Illinois Health Facilities Authority
Rev. (Centegra Health Systems),
5.25s, 2018 ........................................ 1,000 993,800
Iowa Finance Authority, Health
Care Facilities Rev. (Care
Initiatives), 5.75s, 2018 .......................... 500 499,550
Lee County, FL, Industrial
Development Authority (Beverly
Enterprises), 10s, 2010 ............................ 1,855 2,051,444
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Health Care Revenue -- continued
Louisiana Public Facilities Authority
(Chateau Riviere Home for the
Aged), 10.25s, 2016 ................................ $3,240 $3,309,142
Louisiana Public Facilities Authority
(Southwest Medical Center),
11s, 2006 .......................................... 3,607 865,724
Lufkin, TX, Health Facilities
Development Corp. (Memorial
Health System of East Texas),
5.7s, 2028 ......................................... 500 505,555
Massachusetts Health & Education
Facilities Authority (St. Memorial
Medical Center), 6s, 2023 .......................... 465 465,367
Massachusetts Industrial Finance
Agency (Metropolitan Health
Foundation, Inc.), 6.75s, 2027 ..................... 1,500 1,560,375
Massachusetts Industrial Finance
Agency (Needham/Hamilton
House), 11s, 2010 .................................. 800 848,496
Massachusetts Industrial Finance
Agency (WNR, Inc.), 9s, 2023++ ..................... 525 449,610
Michigan Hospital Finance
Authority Rev. (Genesys
Regional Medical), 5.5s, 2018 ...................... 2,000 2,016,500
Michigan Hospital Finance
Authority Rev. (Genesys
Regional Medical), 5.5s, 2027 ...................... 1,000 1,003,830
Millbrae, CA, Residential Facility
(Magnolia Of Millbrae), 7.375s,
2027 ............................................... 1,000 1,058,620
Mississippi Business Finance
Corp., Health Facilities Rev.
(Medical Foundation, Inc.),
5.625s, 2023 ....................................... 1,445 1,421,360
Monongalia County, WV, Health
Facilities Rev. (Beverly
Enterprises, Inc.), 10s, 2007 ...................... 980 1,037,614
Montgomery County, PA, Higher
Education & Health Authority
Rev. (AHF/Montgomery), 10.5s,
2020 ............................................... 2,440 2,581,081
New Hampshire Higher
Educational & Health Facilities
Authority Rev., 5.8s, 2018 ......................... 1,000 994,030
New Jersey Economic
Development Authority
(Courthouse Convalescent
Center), 8.7s, 2014 ................................ 650 694,512
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Health Care Revenue -- continued
New Jersey Economic
Development Authority (Geriatric
& Medical Services), 9.625s,
2004 .............................................. $ 155 $ 169,928
New Jersey Economic
Development Authority (Geriatric
& Medical Services), 9.625s,
2022 .............................................. 675 737,444
New Jersey Economic
Development Authority
(Greenwood Health Care),
9.75s, 2011 ....................................... 1,345 1,424,167
New Jersey Economic
Development Authority
(Wanaque Convalescent
Center), 8.6s, 2011 ............................... 1,000 1,100,700
New Jersey Health Care Facilities
Financing Authority (Cherry Hill),
8s, 2027 .......................................... 1,000 1,093,740
Ohio County, WV, County
Commission Health System
(Ohio Valley Medical Center),
5.75s, 2013 ....................................... 850 845,682
Okaloosa County, FL, Retirement
Rental Housing Rev. (Beverly
Enterprises), 10.75s, 2003 ........................ 1,115 1,154,594
Orange County, FL, Industrial
Development Rev. (Friendly
Village), 9.25s, 2012 ............................. 1,805 1,830,252
Osceola County, FL, Industrial
Development Rev. (Community
Provider Pooled Loan), 7.75s,
2017 .............................................. 1,300 1,374,373
Reedley, CA, Certificates of
Participation (Mennonite Home),
7.5s, 2026 ........................................ 3,000 3,158,040
Rochester, MN, Health Care
Facilities Rev. (Mayo Medical
Foundation), 8.462s, 2021[sec] .................... 1,000 1,078,530
San Francisco, CA, City & County
(Coventry Park), 8.5s, 2026 ....................... 2,000 2,249,100
Santa Fe, NM, Industrial
Development Rev. (Casa Real
Nursing Home), 9.75s, 2013 ........................ 1,125 1,237,748
Seminole County, FL, Industrial
Development Authority (Friendly
Village), 10s, 2011 ............................... 1,630 1,661,182
St. Charles County, MO, Industrial
Development Authority (Garden
View Care Center), 10s, 2016 ...................... 2,215 2,222,952
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Health Care Revenue -- continued
Suffolk County, NY, Industrial
Development Agency (APPLE),
9.75s, 2015** ..................................... $1,350 $ 675,000
Washington County, FL, Industrial
Development Authority
(Washington County), 10s, 2016 1,065 1,068,003
Waterford Township, MI, Economic
Development Rev. (Canterbury
Health Care), 8.375s, 2023** ...................... 1,500 1,425,000
Wilkinsburg, PA, Municipal
Authority Health (Monroeville
Christian), 8.25s, 2027 ........................... 1,000 1,087,480
-----------
$77,824,039
-----------
Industrial Revenue
(Corporate Guarantee) -- 12.8%
Courtland, AL, Industrial
Development Board, Solid
Waste Disposal Rev. (Champion
International Corp.), 6.375s,
2029 .............................................. $2,000 $ 2,115,340
Eastern Band of Cherokee Indian
Community, NC (Carolina Mirror
Co.), 10.25s, 2009+ ............................... 6,125 6,197,030
Eastern Band of Cherokee Indian
Community, NC (Carolina Mirror
Co.), 11s, 2012+ .................................. 650 659,113
Hardeman County, TN
(Correctional Facilities Corp.),
7.75s, 2017 ....................................... 2,220 2,472,902
Hernando County, FL, Water &
Sewer Rev. (Florida Crushed
Stone), 8.5s, 2014 ................................ 3,600 4,157,964
Hodge Village, LA, Utilities Rev.
(Stone Container), 9s, 2010 ....................... 7,585 8,069,985
Indiana Development Finance
Authority Rev. (Inland Steel),
5.75s, 2011 ....................................... 1,000 975,200
Lawrenceburg, TN, Industrial
Development Board (Tridon,
Inc.), 9.875s, 2006 ............................... 1,300 1,366,040
Mesa County, CO (Joy
Technologies), 8.5s, 2006 ......................... 650 725,218
Navajo County, AZ, Industrial
Development Authority (Stone
Container Corp.), 7.2s, 2027 ........................ 880 982,274
New Jersey Economic
Development Authority (Holt
Hauling & Warehousing), 8.4s,
2015 .............................................. 1,000 1,078,350
</TABLE>
9
<PAGE>
Portfolio of Investments -- continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Industrial Revenue
(Corporate Guarantee) -- continued
New Jersey Economic
Development Authority (Holt
Hauling & Warehousing), 8.6s,
2017 .............................................. $ 1,000 $ 1,084,040
Ohio Solid Waste Rev. (Republic
Engineered Steels), 8.25s, 2014 3,000 3,215,610
Ohio Solid Waste Rev. (Republic
Engineered Steels), 9s, 2021 ...................... 3,000 3,334,680
Philadelphia, PA, Industrial
Development Authority Rev.,
7.75s, 2017 ....................................... 3,255 3,620,830
Port of New Orleans, LA, 8.25s,
2004 .............................................. 800 900,304
Port of New Orleans, LA (Avondale
Industries), 8.5s, 2014 ........................... 1,625 1,862,721
-----------
$42,817,601
-----------
Insured Health Care
Revenue -- 1.1%
Bexar County, TX, Health Facilities
Development (Baptist Health
Systems), MBIA, 5.25s, 2027 ....................... $ 1,000 $ 1,012,950
North Central, TX, Health Facilities
Development Corp.
(Presbyterian Hospital), MBIA,
9.407s, 2021++++ .................................. 1,500 1,766,070
Salt Lake City, UT, Hospital Rev.
(Intermountain Health Care),
AMBAC, 9.92s, 2020++++ ............................ 650 757,432
-----------
$ 3,536,452
-----------
Multi-Family Housing
Revenue -- 4.4%
Austin, TX, Housing Finance Corp.
(Woodland Heights Apartments),
10s, 2027 ......................................... $ 995 $ 1,026,770
Colorado Housing Finance
Authority, FHA, 9s, 2025 .......................... 865 866,159
Dade County, FL, Housing Finance
Agency (Blackstone), 8.375s,
2002+ ............................................. 5,467 5,639,952
Dade County, FL, Housing Finance
Agency (Silverblue), 8.375s,
2002+ ............................................. 3,683 3,799,346
Dallas, TX, Housing Finance Corp.,
8.5s, 2011 ........................................ 1,220 1,281,269
Eaglebend, CO, Affordable
Housing Corp., 6.4s, 2017 ......................... 1,000 1,050,000
Florida Multi-Family Housing
Finance Agency Rev. (Center
Court Apartments), 8.5s, 2018 ..................... 1,025 1,069,608
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Multi-Family Housing
Revenue -- continued
Memphis, TN, Health, Education &
Housing Facilities Board (Wesley
Highland Terrace), 8.25s,
2015*** .......................................... $ 100 $ 89,000
-----------
$14,822,104
-----------
Sales and Excise Tax
Revenue -- 0.9%
Black Hawk, CO, Device Tax Rev.,
5.625s, 2021 ..................................... $ 250 $ 246,250
Chicago, IL, Tax Increment Rev.
(Ryan Garfield), 10.125s, 2007 ................... 1,510 1,548,928
Denver, CO, Urban Renewal Tax
(Downtown Denver), 8.5s, 2013 450 468,000
Virgin Islands Public Finance
Authority, 6s, 2006 .............................. 250 262,507
Virgin Islands Public Finance
Authority, 5.875s, 2018 .......................... 500 519,115
-----------
$ 3,044,800
-----------
Single Family Housing
Revenue -- 6.8%
Bexar County, TX, Housing
Finance Corp., 0s, 2015 ........................... $10,385 $ 1,728,791
Cook County, IL, Single Family
Housing Rev., 0s, 2015 ............................ 675 110,572
Corpus Christi, TX, Housing
Finance Corp., MBIA, 0s, 2011 ....................... 3,000 872,340
Dallas, TX, Housing Finance Corp.,
Single Family Mortgage Rev.,
MBIA, 0s, 2016 .................................... 13,890 2,177,258
Denver, CO, City & County Single
Family Mortgage Rev., 0s, 2015 576 90,414
Duval County, FL, Housing
Finance Authority, 0s, 2015 ....................... 17,905 2,733,019
Georgia Housing & Finance
Authority Rev., FHA, 0s, 2031 ..................... 16,385 1,529,376
Harris County, TX, Housing
Finance Corp., 9.625s, 2003 ....................... 673 682,684
Harris County, TX, Housing
Finance Corp., 9.875s, 2014 ....................... 439 445,313
Jackson County, MO, 0s, 2016 ........................ 1,765 243,358
Nebraska Investment Finance
Authority, 0s, 2015 .............................. 29,250 6,002,977
Nebraska Investment Finance
Authority, 6.25s, 2021 ........................... 1,990 2,112,405
Nevada Housing Division, Single
Family Mortgage Rev., 0s, 2015 ................... 364 69,145
Ohio Housing Finance Agency,
Single Family Mortgage Rev.,
GNMA, 9.796s, 2031++++ ........................... 800 900,384
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Single Family Housing
Revenue -- continued
Reno County, KS, Single Family
Mortgage Rev., AMBAC, 0s,
2014 ............................................. $ 1,500 $ 250,110
Saline County, KS, 0s, 2014 ........................ 475 82,517
South Dakota Housing
Development Authority,
Homeownership Mortgage,
5.8s, 2028 ....................................... 1,830 1,889,402
Utah Housing Finance Agency,
Residential Mortgage Rev., 9s,
2019 ............................................. 10 10,280
Wisconsin Housing & Economic
Development Authority,
Homeownership Rev., RIBS,
9.855s, 2022++++ ................................. 655 735,441
------------
$ 22,665,786
------------
Solid Waste Revenue -- 0.1%
Southwestern Illinois Development
Authority, Solid Waste Disposal
Rev., 5.9s, 2014 ................................. $ 395 $ 396,497
------------
Special Assessment District -- 0.2%
Heritage Isles, FL, Community
Development District, 5.75s,
2005 ............................................. $ 650 $ 653,263
------------
Student Loan Revenue -- 0.7%
Arizona Student Loan Acquisition
Authority, "C", 7.625s, 2010 ..................... $ 750 $ 835,995
Pennsylvania Higher Education
Assistance Agency, AMBAC,
8.589s, 2022++++ ................................. 1,300 1,476,046
------------
$ 2,312,041
------------
Turnpike Revenue -- 3.9%
Foothill/Eastern Transportation
Corridor Agency, CA, 0s, 2030 .................... $25,950 $ 5,006,533
Massachusetts Turnpike Authority,
Capital Appreciation, "C", MBIA,
0s, 2022 ......................................... 10,000 3,188,400
Pocahontas Parkway Assn., VA,
Toll Road Rev., 0s, 2011 ......................... 1,000 482,110
Pocahontas Parkway Assn., VA,
Toll Road Rev., 0s, 2012 ......................... 1,000 452,330
Pocahontas Parkway Assn., VA,
Toll Road Rev., 0s, 2015 ......................... 1,750 683,200
San Joaquin Hills, CA,
Transportation Corridor Agency,
Toll Road Rev., MBIA, 5.25s,
2030 ............................................. 1,500 1,532,490
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Turnpike Revenue -- continued
Telluride, CO, Gondola Transit Co.,
9s, 2016 ......................................... $ 965 $ 1,131,289
West Virginia Parkways, Economic
Development & Tourism
Authority, FGIC, RIBS, 7.626s,
2019++++ ......................................... 600 669,102
------------
$ 13,145,454
------------
Universities -- 1.5%
Islip, NY, Community Development
Agency Rev. (New York Institute
of Technology), 7.5s, 2026 ....................... $ 2,500 $ 2,743,950
Massachusetts Industrial Finance
Agency (Emerson College),
8.9s, 2018 ....................................... 2,000 2,173,220
------------
$ 4,917,170
------------
Water and Sewer Utility
Revenue -- 1.9%
Detroit, MI, Sewage Disposal Rev.,
FGIC, 7.618s, 2023++++ ........................... $ 2,500 $ 2,826,675
Harrisburg, PA, Authority Water
Rev., FGIC, 7.97s, 2015++++ ...................... 2,000 2,298,760
New York City, NY, Municipal
Water Finance Authority, FSA,
5.375s, 2026 ..................................... 1,100 1,132,582
------------
$ 6,258,017
------------
Other -- 3.1%
Danville, VA, Industrial
Development Rev. (Piedmont
Mall), 8s, 2017 .................................. $ 5,795 $ 6,181,584
District of Columbia (National
Public Radio), 7.7s, 2023 ........................ 2,500 2,728,500
Mississippi Development Bank
(Diamond Lakes Utilities), 6.25s,
2017 ............................................. 1,000 1,017,460
St. Louis County, MO, Industrial
Development Authority (Kiel
Center Arena), 7.875s, 2024 ...................... 300 328,929
------------
$ 10,256,473
------------
Total Municipal Bonds (Identified Cost,
$300,375,323) .................................. $327,357,222
------------
</TABLE>
11
<PAGE>
Portfolio of Investments -- continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Floating Rate Demand Notes -- 0.1%
Pinellas County, FL, Health Facility
Authority, due 12/01/15 .......................... $100 $ 100,000
St. Lucie County, FL, Pollution
Control Rev. Power & Light, due
3/01/27 .......................................... 100 100,000
------------
Total Floating Rate Demand Notes, at
Identified Cost ................................ $ 200,000
------------
Total Investments (Identified Cost,
$300,575,323) .................................. $327,557,222
Other Assets,
Less Liabilities -- 1.8% 5,986,775
------------
Net assets -- 100.0% ............................. $333,543,997
============
</TABLE>
** Non-income producing security -- in default.
*** Security accruing partial interest -- in default.
+ Restricted security.
[sec] Indexed security.
++ Security valued by or at the direction of the Trustees.
++++ Inverse floating rate security.
See notes to financial statements
12
<PAGE>
Statement of Assets and Liabilities -- October 31, 1998
<TABLE>
<S> <C>
Assets:
Investments, at value (identified cost, $300,575,323) .................................. $327,557,222
Cash ................................................................................... 102,837
Receivable for investments sold ........................................................ 1,166,777
Interest receivable .................................................................... 6,390,722
Other assets ........................................................................... 2,180
------------
Total assets ........................................................................ $335,219,738
------------
Liabilities:
Payable to dividend disbursing agent ................................................... $ 231,892
Payable for investments purchased ...................................................... 999,269
Payable to affiliates --
Management fee ........................................................................ 16,133
Transfer and dividend disbursing agent fee ............................................ 9,283
Administrative fee .................................................................... 275
Accrued expenses and other liabilities ................................................. 418,889
------------
Total liabilities ................................................................... $ 1,675,741
------------
Net assets ............................................................................... $333,543,997
============
Net assets consist of:
Paid-in capital ........................................................................ $355,386,206
Unrealized appreciation on investments ................................................. 26,981,899
Accumulated net realized loss on investments ........................................... (49,503,976)
Accumulated undistributed net investment income ........................................ 679,868
------------
Total ............................................................................... $333,543,997
============
Shares of beneficial interest outstanding: ............................................... 39,017,915
============
Net asset value per share (net assets [divided by] shares of beneficial interest $8.55
outstanding) ============
</TABLE>
Statement of Operations -- Year Ended October 31, 1998
<TABLE>
<S> <C>
Net investment income:
Interest income ........................................................ $ 25,595,983
------------
Expenses --
Management fee ........................................................ $ 2,952,210
Trustees' compensation ................................................ 141,006
Administrative fee .................................................... 47,009
Transfer and dividend disbursing agent fee ............................ 111,024
Custodian fee ......................................................... 108,602
Printing .............................................................. 31,286
Postage ............................................................... 35,661
Auditing fees ......................................................... 38,081
Legal fees ............................................................ 16,308
Miscellaneous ......................................................... 179,820
------------
Total expenses ...................................................... $ 3,661,007
Fees paid indirectly ................................................... (60,552)
------------
Net expenses ........................................................ $ 3,600,455
------------
Net investment income .............................................. $ 21,995,528
------------
Realized and unrealized gain (loss) on investments:
Realized loss on investment transactions (identified cost basis) ....... $ (1,258,751)
Change in unrealized appreciation on investments ....................... 3,065,054
------------
Net realized and unrealized gain on investments ....................... $ 1,806,303
------------
Increase in net assets from operations ............................... $ 23,801,831
============
</TABLE>
See notes to financial statements
13
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (decrease) in net assets: Year Ended October 31,
----------------------------------
From operations -- 1998 1997
------------ ------------
<S> <C> <C>
Net investment income ............................................................ $ 21,995,528 $ 23,593,846
Net realized loss on investments ................................................. (1,258,751) (15,621,735)
Net unrealized gain on investments ............................................... 3,065,054 14,018,262
--------------- --------------
Increase in net assets from operations .......................................... $ 23,801,831 $ 21,990,373
--------------- --------------
Distributions declared to shareholders from net investment income ................. $ (22,462,751) $ (24,833,070)
--------------- --------------
Net increase in net assets from Trust share transactions .......................... $ 2,923,015 $ 3,494,657
--------------- --------------
Total increase in net assets .................................................... $ 4,262,095 $ 651,960
Net assets:
At beginning of period ........................................................... 329,281,902 328,629,942
--------------- --------------
At end of period (including accumulated undistributed net investment income of
$679,868 and $1,016,723, respectively) .......................................... $ 333,543,997 $ 329,281,902
=============== ==============
</TABLE>
See notes to financial statements
14
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended October 31,
Per share data (for a share outstanding ---------------------------------------------------------------------
throughout each period): 1998 1997 1996 1995 1994
----------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of period ............ $ 8.51 $ 8.58 $ 8.84 $ 8.73 $ 9.04
-------- -------- -------- ------- --------
Income from investment operations# --
Net investment income ............................ $ 0.57 $ 0.61 $ 0.66 $ 0.68 $ 0.68
Net realized and unrealized gain (loss)
on investments .................................. 0.05 (0.03) (0.26) 0.13 (0.29)
-------- -------- -------- -------- --------
Total from investment operations ................ $ 0.62 $ 0.58 $ 0.40 $ 0.81 $ 0.39
-------- -------- -------- -------- --------
Less distributions declared to shareholders from
net investment income ............................ $ (0.58) $ (0.65) $ (0.66) $ (0.70) $ (0.70)
--------- --------- -------- -------- -------
Net asset value -- end of period .................. $ 8.55 $ 8.51 $ 8.58 $ 8.84 $ 8.73
========= ========= ======== ======== ========
Per share market value -- end of period ........... $ 9.19 $ 9.06 $ 9.38 $ 9.50 $ 9.13
========= ========= ======== ======== ========
Total return ...................................... 8.37% 3.90% 4.50% 12.57% (1.47)%
Ratios (to average net assets)/Supplemental data:
Expenses## ....................................... 1.10% 1.19% 1.24% 1.33% 1.31%
Net investment income ............................ 6.62% 7.26% 7.47% 7.66% 7.58%
Portfolio turnover ................................ 12% 21% 13% 14% 22%
Net assets at end of period (000 omitted) ......... $333,544 $329,282 $328,630 $334,985 $327,193
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31,
Per share data (for a share outstanding ---------------------------------------------------------------------
throughout each period): 1993 1992 1991 1990 1989
----------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of period ............ $ 8.78 $ 8.94 $ 9.02 $ 9.44 $ 9.22
------- -------- -------- -------- --------
Income from investment operations# --
Net investment income ............................ $ 0.75 $ 0.73 $ 0.70 $ 0.75 $ 0.76
Net realized and unrealized gain (loss)
on investments .................................. 0.21 (0.17) (0.05) (0.41) 0.22
------- -------- -------- ------- --------
Total from investment operations ................ $ 0.96 $ 0.56 $ 0.65 $ 0.34 $ 0.98
------- -------- -------- ------- --------
Less distributions declared to shareholders from
net investment income ............................ $ (0.70) $ (0.72) $ (0.73) $ (0.76) $ (0.76)
-------- -------- -------- ------- --------
Net asset value -- end of period .................. $ 9.04 $ 8.78 $ 8.94 $ 9.02 $ 9.44
======= ======== ======== ======== ========
Per share market value -- end of period ........... $ 10.00 $ 9.00 $ 9.25 $ 8.38 $ 9.88
======= ======== ======== ======== ========
Total return ...................................... 10.95% 5.34% 19.88% (7.87)% 8.32%
Ratios (to average net assets)/Supplemental data:
Expenses ......................................... 1.33% 1.34% 1.27% 1.21% 1.28%
Net investment income ............................ 7.55% 8.17% 7.79% 8.07% 8.15%
Portfolio turnover ................................ 14% 17% 21% 19% 16%
Net assets at end of period (000 omitted) ......... $335,256 $323,060 $325,077 $325,767 $338,461
</TABLE>
# Per share data for the periods subsequent to October 31, 1992, are based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Trust has an expense
offset arrangement which reduces the Trust's custodian fee based upon the
amount of cash maintained by the Trust with its custodian and dividend
disbursing agent. The Trust's expenses are calculated without reduction for
this expense.
See notes to financial statements
15
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Municipal Income Trust (the Trust) is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
a non-diversified, closed-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.
The Trust can invest at least 65% of its portfolio in high-yield securities
rated below investment grade. Investments in high-yield securities involve
greater degrees of credit and market risk than investments in higher-rated
securities and tend to be more sensitive to economic conditions.
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. 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.
Indexed Securities -- The Trust 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. Some securities
may be purchased on a "when-issued" or "forward delivery" basis, which means
that the securities will be delivered to the Trust at a future date, usually
beyond customary settlement time.
The Trust 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.
16
<PAGE>
Fees Paid Indirectly -- The Trust's custody fee is calculated as a percentage of
the Trust'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 Trust. This
amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions -- The Trust'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 Trust 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 Trust'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 Trust from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for federal
income tax purposes because the Trust intends to meet certain requirements of
the Code applicable to regulated investment companies, which will enable the
Trust 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 Trust
distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a tax return of capital.
Differences in the recognition or classification of income between the financial
statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains. During
the year ended October 31, 1998, $126,540 and $3,828 were reclassified to
accumulated undistributed net investment income from accumulated net realized
loss on investments and paid-in capital, respectively. This change had no effect
on the net assets or net asset value per share.
At October 31, 1998, the Trust, for federal tax purposes, had a capital loss
carryforward of $49,468,448, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on October 31, 1999, ($1,898,227), October 31, 2000, ($4,765,334),
October 31, 2001, ($3,636,033), October 31, 2002, ($7,977,644), October 31,
2003, ($4,513,979), October 31, 2004, ($8,774,606), October 31, 2005,
($16,518,819), and October 31, 2006, ($1,383,806).
(3) Transactions with Affiliates
Investment Adviser -- The Trust 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 0.40% of
average daily net assets and 6.32% of investment income.
The Trust pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Trust, all of whom receive
remuneration for their services to the Trust from MFS. Certain officers and
Trustees of the Trust are officers or directors of MFS, and MFS Service Center,
Inc. (MFSC). The Trust has an unfunded defined benefit plan for all of its
independent Trustees and Mr. Bailey. Included in Trustees' compensation is a net
periodic pension expense of $42,211 for the year ended October 31, 1998.
17
<PAGE>
Notes to Financial Statements -- continued
Administrator -- The Trust has an administrative services agreement with MFS to
provide the Trust with certain financial, legal, shareholder servicing,
compliance and other administrative services. As a partial reimbursement for the
cost of providing these services, the Trust pays MFS an administrative fee at
the following annual percentages of the Trust's average daily net assets:
<TABLE>
<S> <C>
First $1 billion ................ 0.0150%
Next $1 billion ................. 0.0125%
Next $1 billion ................. 0.0100%
In excess of $3 billion ......... 0.0000%
</TABLE>
Transfer Agent -- MFSC acts as registrar and dividend disbursing agent for the
Trust. The agreement provides that the Trust will pay MFSC an account
maintenance fee of no more than $9.00 and a dividend service fee of $0.75 per
reinvestment and will reimburse MFSC for reasonable out-of-pocket expenses.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $41,030,366, and $38,846,484, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Trust, as computed on a federal income tax basis, are as follows:
<TABLE>
<S> <C>
Aggregate cost ........................ $300,625,149
============
Gross unrealized appreciation ......... $ 30,585,780
Gross unrealized depreciation ......... (3,653,707)
------------
Net unrealized appreciation .......... $ 26,932,073
============
</TABLE>
(5) Shares of Beneficial Interest
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Trust shares were as follows:
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------
1998 1997
------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares issued to shareholders in reinvestment of distributions ....... 338,271 390,535
======= =======
</TABLE>
(6) Line of Credit
The Trust and other affiliated funds participate in an $805 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of Trust
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 Trust for the year ended October 31, 1998, was $2,331.
(7) Restricted Securities
The Trust may invest not more than 15% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At October 31, 1998,
the Trust owned the following restricted securities (constituting 5.39% of total
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Trust does not have the right to demand that such securities be
registered. The value of these
18
<PAGE>
securities is determined by valuations furnished by dealers or by a pricing
service, or if not available, are valued at fair value as determined in good
faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
Date of
Description Acquisition
- -------------------------------------------------------------------------------- -------------
<S> <C>
Dade County, FL, Housing Finance Agency (Blackstone), 8.375s, 2002 4/22/94
Dade County, FL, Housing Finance Agency (Silverblue), 8.375s, 2002 4/22/94
Eastern Band of Cherokee Indian Community, NC (Carolina Mirror Co.),
10.25s, 2009 12/10/86
Eastern Band of Cherokee Indian Community, NC (Carolina Mirror Co.), 11s, 2012 2/05/88
Hannibal, MO, Industrial Development Authority (Hannibal Regional Healthcare),
9.5s, 2001 8/28/92
<CAPTION>
Par
Description Amount Cost Value
- -------------------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Dade County, FL, Housing Finance Agency (Blackstone), 8.375s, 2002 $5,466,500 $5,466,500 $ 5,639,952
Dade County, FL, Housing Finance Agency (Silverblue), 8.375s, 2002 3,682,500 3,682,500 3,799,346
Eastern Band of Cherokee Indian Community, NC (Carolina Mirror Co.),
10.25s, 2009 6,125,000 6,002,498 6,197,030
Eastern Band of Cherokee Indian Community, NC (Carolina Mirror Co.), 11s, 2012 650,000 601,250 659,113
Hannibal, MO, Industrial Development Authority (Hannibal Regional Healthcare),
9.5s, 2001 1,500,000 1,485,827 1,780,860
-----------
$18,076,301
===========
</TABLE>
19
<PAGE>
Independent Auditors' Report
To the Trustees and Shareholders of MFS Municipal Income Trust:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Municipal Income Trust as of October 31,
1998, the related statement of operations for the year then ended, the statement
of changes in net assets for the years ended October 31,1998 and 1997, and the
financial highlights for each of the years in the ten year period ended October
31, 1998. 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
October 31, 1998 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Municipal Income
Trust at October 31, 1998, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 11, 1998
20
<PAGE>
<PAGE>
<PAGE>
<PAGE>
MFS[RegTM] Municipal Income Trust
Trustees
Richard B. Bailey*(2)
Private Investor; Former Chairman and
Director (until 1991), MFS Investment
Management
Peter G. Harwood(1)
Private Investor
J. Atwood Ives(2)
Chairman and Chief Executive Officer,
Eastern Enterprises
(diversified services company)
Lawrence T. Perera(2)
Partner, Hemenway & Barnes
(attorneys)
William J. Poorvu(1)
Adjunct Professor, Harvard University
Graduate School of Business
Administration
Charles W. Schmidt(1)
Private Investor
Arnold D. Scott*
Senior Executive Vice President,
Director, and Secretary,
MFS Investment Management
Jeffrey L. Shames*
Chairman, Chief Executive Officer,
and Director, MFS Investment
Management
Elaine R. Smith(1)
Independent Consultant
David B. Stone(1)(2)
Chairman, North American
Management Corp.
(investment advisers)
Portfolio Manager
Michael W. Roberge*
Treasurer
W. Thomas London*
Assistant Treasurers
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Transfer Agent,
Registrar, and Dividend
Disbursing Agent
State Street Bank and
Trust Company
c/o MFS Service Center, Inc.
P.O. Box 9024
Boston, MA 02205-9824
1-800-637-2304
Custodian
State Street Bank and
Trust Company
Independent Auditors
Deloitte & Touche LLP
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116-3741
* Affiliated with the Investment Adviser.
(1) Member of Audit Committee.
(2) Member of Portfolio Trading Committee.
[Recycle logo]This report is printed on recycled paper. MFMCE-2 12/98 32M
