[MFS logo] MFS(SM)
INVESTMENT MANAGEMENT
MFS(R) Municipal Income Trust
Semiannual Report
April 30, 1998
[graphic of man and woman having a discussion]
<PAGE>
In Memoriam
A. Keith Brodkin
1935 - 1998
Chairman and Chief Executive Officer
MFS Investment Management(SM)
[Photo of On February 2, 1998, Keith Brodkin, a friend and leader
A. Keith Brodkin] to everyone at MFS, died unexpectedly at age 62. His
thoughtful letters to shareholders on the markets and
economy have been an integral part of MFS shareholder
reports like this one for many years.
Keith joined MFS in 1970 as the firm's first
fixed-income manager, managing the bond portion of
MFS(R) Total Return Fund. He went on to manage our
first pure bond fund, MFS(R) Bond Fund, when it was
introduced in 1974, and he was considered a pioneer in
the art of active bond management.
Keith was named President and Chief Investment Officer of MFS in 1987 and four
years later became Chairman and Chief Executive Officer. During his stewardship,
MFS has achieved significant growth in total assets under management, rising
from some $25 billion in 1991 to the over $80 billion today entrusted to us by
three million individual and institutional investors worldwide. Under Keith's
leadership, MFS has carefully but steadily built its domestic and international
investment capabilities through the introduction of a range of new products and
a still-growing staff that now numbers over 100 equity and fixed-income
professionals.
Throughout his career, Keith was very active in a wide range of charitable
endeavors. He is survived by his wife and three children. His leadership,
friendship, and wise counsel will be sorely missed.
<PAGE>
Dear Shareholders:
For the six months ended April 30, 1998, shares of the Trust provided a total
return of -1.61% based on its New York Stock Exchange price. The net asset value
of the Trust rose from $8.51 to $8.52 over the period, providing a total return
of 3.68%. Over the same period, the Lehman Brothers Municipal Bond Index (the
Lehman Index), an unmanaged index of fixed-rate, investment-grade municipal
bonds, provided a total return of 2.77%. The Trust's return assumes the
reinvestment of distributions. 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).
The overperformance of the Trust's net asset value relative to the Lehman Index
was due to two factors. First, municipal bond yields have remained relatively
flat over the past six months. In a stable interest rate environment with income
being the main contributor to total return, the Trust's higher yield has led to
favorable performance. Second, the Trust benefited from a narrowing of yield
spreads among credit qualities of municipal bonds during the period, as
investors looked for higher returns in a relatively low interest-rate
environment.
The primary objective of the Trust is to seek high current income exempt from
federal income taxes. Consistent with this objective, in recent months, there
has been a change in emphasis from maximizing current yield to sustaining an
above-average yield. We believe the most successful way of achieving that goal
is to purchase securities we think offer the most favorable risk/reward
tradeoffs and that will produce high tax-exempt yield well into the future.
Attempting to maximize yield can result in credit problems that may penalize
future income. Therefore, our goal is to pay an above-average, but sustainable,
yield versus our competitors. We believe that the best way to accomplish this is
to use thorough, fundamental credit research, which we believe is our strongest
competitive advantage. While many of our competitors have been reallocating
resources away from research, we have made a concerted effort to bolster our
municipal research capabilities. This is especially important given that the
U.S. economy is now in its seventh year of expansion. While we do not believe an
economic slowdown is imminent, history has shown that economic cycles do occur
and the duration of this expansion has been relatively long. Therefore, we are
carefully analyzing all our holdings and potential purchases in that light, and
we believe this will prove to be invaluable during the next business downturn.
While the general decline in interest rates has been favorable for all
fixed-income investments, including municipals, some issues particular to the
municipal market have presented challenges for investors. First, the decline in
interest rates has had a compounding impact on market technicals. Lower rates
have spurred refinancings and expanded supply significantly. At the same time,
retail demand for municipals, which is a major component of overall demand, has
waned as market rates have declined and the stock markets have continued their
strong performance. This has caused municipals to underperform other
fixed-income markets, especially in the latter part of 1997 and the first
quarter of 1998. Second, the continued penetration of municipal bond insurers,
which insure over 50% of new-issue supply, has turned a good portion of the
market into a commodity and made finding value difficult.
Turning specifically to the high-yield market, there has been a very strong
demand for these securities due to the relatively low level of interest rates.
Unlike the investment-grade segment of the market, technicals for high-yield
paper are strong, with a strong demand for bonds and a limited amount of
new-issue supply. Not only are high-yield funds looking to invest new cash in
higher-yielding
2
<PAGE>
securities, but high-grade funds, which are experiencing calls of higher-coupon
bonds issued in the much higher interest-rate environment of the 1980s, are
increasingly taking on more risk and purchasing higher-yielding bonds. This is
the main reason that the yield spread between high-yield and high-grade bonds
has narrowed so significantly. Due to the tight yield spreads among credits, we
do not believe investors are getting sufficiently paid for risking more.
Therefore, we have increased the average credit quality of the Trust compared to
six months ago.
Among sectors, one that appears to offer a good risk/reward tradeoff is health
care, particularly long-term care facilities. While this sector is benefiting
from favorable demographics and strong demand, the quality of the transactions
we see varies widely, so a careful analysis of each transaction is imperative.
We typically avoid projects in which the population demographics do not appear
to be sufficiently supportive, in which excessive competition appears likely to
impair an ability to sustain sufficient long-term occupancy, and in which
managements do not appear sufficiently qualified.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management
/s/ Michael Roberge
Michael Roberge
Portfolio Manager
May 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.
3
<PAGE>
- -----------------------------------------
Performance Summary
(For the six months ended April 30, 1998)
<TABLE>
<S> <C>
Net Asset Value Per Share
October 31, 1997 $8.51
April 30, 1998 $8.52
New York Stock Exchange Price
October 31, 1997 $9.063
February 9, 1998 (high)* $9.625
April 30, 1998 (low)* $8.625
April 30, 1998 $8.625
</TABLE>
*For the period November 1, 1997, through April 30, 1998.
- -----------------------------------------
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.
Number of Shareholders
As of April 30, 1998, our records indicate that there are 6,413 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.
Investment Objective and Policies
The investment objective of MFS[RegTM] Municipal Income 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
The Trust offers a Dividend Reinvestment and Cash Purchase Plan which allows you
to reinvest either all of the distributions or only the long-term capital gains
paid by the Trust. Unless the shares are trading at a premium (exceeding net
asset value), purchases are made at the market price. Otherwise, purchases will
be made at a discounted price of either the net asset value or 95% of the market
price, whichever is greater. You can also buy shares of the Trust. 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, if
any. 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 or to receive a brochure providing a
complete description of the Plan, please contact the Plan agent at the address
and telephone number located on the back cover of this report. 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. When you withdraw from the Plan, 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.
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- --------------------------------------------------------------------------------
4
<PAGE>
Portfolio of Investments (Unaudited) -- April 30, 1998
Municipal Bonds -- 98.0%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
General Obligation -- 1.6%
Chicago, IL, FGIC, 5.125s,
2025 ............................. $2,000 $1,925,580
Markham, IL, 9s, 2012 .............. 1,285 1,304,275
New York City, NY, 6.125s,
2025 ............................. 2,000 2,123,560
----------
$5,353,415
----------
State and Local
Appropriation -- 0.6%
Riverside County, CA, Asset
Leasing Corp., Leashold
Rev. (Riverside County
Hospital), MBIA, 0s, 2026 ........ $8,595 $1,883,766
----------
Refunded and Special
Obligations -- 20.1%
Arapahoe County, CO, Capital
Improvement, Highway Rev.,
0s, 2015 ......................... $1,000 $ 344,750
Arapahoe County, CO, Water
& Sanitation District, 9.25s,
1998 ............................. 1,700 1,768,493
Arapahoe County, CO, Water
& Sanitation District, 9.25s,
2013 ............................. 300 312,087
Clermont County, OH, Hospital
Facilities Rev. (Mercy Health
Systems), AMBAC, MVRICs,
9.271s, 2021[dbldag][dbldag] ..... 500 593,205
Colorado Health Facilities
Authority, Retirement
Facilities Rev. (Liberty
Heights), 0s, 2024 ............... 10,000 2,426,300
Dade County, FL, AMBAC, 0s,
2032 ............................. 15,080 2,062,190
Denver, CO, City & County
Airport Rev., 8.75s, 2023 ........ 400 463,136
Desert Hospital District, CA,
Hospital Rev. (Desert
Hospital Corp.), 8.684s,
2020[dbldag][dbldag] ............. 1,500 1,781,295
Hannibal, MO, Industrial
Development Authority
(Hannibal Regional
Healthcare), 9.5s, 2022+ ......... 1,500 1,789,185
Illinois Development Finance
Authority, Retirement
Housing Rev. (Regency
Park), ETM, 0s, 2025 ............. 26,000 5,975,840
Jefferson County, OH, 7.125s,
2019 ............................. 1,000 1,177,560
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Municipal Bonds -- continued
Refunded and Special
Obligations -- continued
Maine Health & Higher
Education Facilities Authority
(St. Mary's General
Hospital), 8.625s, 1999 .......... $1,000 $1,071,330
Massachusetts Health &
Education Facilities Authority
(Fairview Extended Care
Facility), 10.25s, 2021 .......... 1,500 1,759,665
Massachusetts Industrial
Finance Agency, Tunnel Rev.
(Mass. Turnpike), 9s, 2020 ....... 3,760 4,231,993
Mississippi Hospital Equipment
& Facilities Authority Rev.
(Rush Medical Foundation),
8.75s, 2001 ...................... 1,000 1,128,320
New Lenox, IL, Community
Park Development Authority,
8.25s, 2004 ...................... 2,000 2,428,000
Prince William County, VA,
Industrial Development
Authority, Residential Care
Facility (Westminster at Lake
Ridge), 10s, 2022 ................ 1,500 1,803,375
Russellville, AR, Industrial
Development Rev. (Charles
Meyers), 10s, 1999 ............... 4,985 5,424,129
San Joaquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev., 0s,
2006 ............................. 2,300 1,611,633
San Joaquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev., 0s,
2011 ............................. 6,600 3,550,734
San Joaquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev., 0s,
2019 ............................. 10,000 3,436,800
Telluride, CO, Gondola Transit
Co., Real Estate Transfer,
11.5s, 2012 ...................... 2,475 3,959,356
Texas Turnpike Authority
(Houston Ship Channel
Bridge), 12.625s, 2002 ........... 10,565 13,959,640
Walton, GA, Industrial
Development Rev. (Ultima
Rubber Products), 10s,
2010 ............................. 1,700 1,918,263
</TABLE>
5
<PAGE>
Portfolio of Investments (Unaudited) -- continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Municipal Bonds -- continued
Refunded and Special
Obligations -- continued
Washington Public Power
Supply System Rev.
(Nuclear Project #1),
14.375s, 2001 .................... $1,460 $ 1,701,265
-----------
$66,678,544
-----------
Airport and Port
Revenue -- 5.4%
Atlanta, GA, Special Purpose
Facilities Rev. (Delta Airlines),
7.9s, 2018 ....................... $2,100 $ 2,234,652
California Statewide
Communities Development
Authority Lease Rev. (United
Air Lines Inc.), 5.625s,
2034 ............................. 2,000 2,006,560
Cleveland, OH, Airport Special
Facilities Rev. (Continental
Airlines), 9s, 2019 .............. 3,150 3,436,555
Denver, CO, City & County
Airport Rev., 8.75s, 2023 ........ 1,100 1,261,150
Hillsborough County, FL,
Aviation Authority Rev.
(USAir), 8.6s, 2022 .............. 650 738,322
Kenton County, KY, Airport
Board Special Facilities
(Delta Airlines), 7.5s, 2020 ..... 1,000 1,101,530
Tulsa, OK, Municipal Airport
Trust Rev. (American
Airlines), 7.375s, 2020 .......... 3,400 3,672,918
Tulsa, OK, Municipal Airport
Trust Rev. (American
Airlines), 7.6s, 2030 ............ 3,000 3,292,620
-----------
$17,744,307
-----------
Electric and Gas Utility
Revenue -- 7.4%
Alaska Industrial Development
& Export Authority, Power
Rev. (Upper Lynn Canal
Regulatory Power), 5.8s,
2018 ............................. $ 830 $ 815,508
Clark County, NV, Industrial
Development Rev. (Nevada
Power Co.), 5.6s, 2030 ........... 3,000 2,947,590
Clark County, NV, Industrial
Development Rev. (Nevada
Power Co.), 5.9s, 2032 ........... 1,000 1,008,920
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Municipal Bonds -- continued
Electric and Gas Utility
Revenue -- continued
Midland, MI, Environmental
Development Authority,
Pollution Control Rev.
(Midland Cogeneration),
9.5s, 2009 ....................... $ $1,500 $ 1,650,870
New York City, NY, Industrial
Development Agency
(Brooklyn Navy Yard
Cogeneration Partners),
5.65s, 2028 ...................... 4,500 4,494,060
Ohio Water Development,
Pollution Control Rev.
(Cleveland Electric), 8s,
2023 ............................. 2,500 2,836,275
Pima County, AZ, Industrial
Development Authority
(Tuscon Electric Power Co.),
6s, 2029 ......................... 3,000 3,085,920
Pittsylvania County, VA,
Industrial Development
Authority Rev., 7.5s, 2014 ....... 2,000 2,201,800
Southern California Public
Power Authority,
Transmission Project Rev.,
RIBS, 7.812s, 2012[dbldag][dbldag] 3,650 4,084,277
West Feliciana Parish, LA,
Pollution Control Rev. (Gulf
States Utilities Co.), 5.8s,
2015 ............................. 1,500 1,498,905
-----------
$24,624,125
-----------
Health Care
Revenue -- 22.6%
Arkansas Development
Finance Authority, Economic
Development Rev.
(Southwest Homes), 10.8s,
2018 ............................. $1,380 $ 1,428,535
Baltimore County, MD, Nursing
Facility Mortgage Rev.
(Eastpoint Rehabilitation &
Nursing Center), 6.75s,
2028 ............................. 500 490,510
Bell County, TX, Health
Facilities Development Corp.
(Advanced Living
Technology), 7.25s, 2001 ......... 160 157,501
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Municipal Bonds -- continued
Health Care
Revenue -- continued
Bell County, TX, Health
Facilities Development Corp.
(Advanced Living
Technology), 7.75s, 2006 ......... $300 $ 290,091
Bell County, TX, Health
Facilities Development Corp.
(Advanced Living
Technology), 8.125s, 2016 ........ 1,085 1,029,882
Bell County, TX, Health
Facilities Development Corp.
(Advanced Living
Technology), 8.5s, 2026 .......... 2,405 2,275,731
Bell County, TX, Health
Facilities Development Corp.
(Kings Daughters Hospital),
9.25s, 2008 ...................... 735 789,956
Booneville, MO, Health
Facilities Rev. (Gericare,
Inc.), 11s, 2017 ................. 1,900 1,964,904
Boston, MA, Industrial
Development Finance
Authority Rev. (Stonehedge
Convalescent Center),
10.75s, 2011 ..................... 735 777,365
Brevard County, FL, Health
Facilities Authority Rev.
(Friendly Village), 9.25s,
2012 ............................. 2,245 2,314,662
Broward County, FL, Industrial
Development Authority
(Beverly Enterprises, Inc.),
9.8s, 2010 ....................... 2,345 2,612,940
Cambria County, PA, Industrial
Development Authority
(Beverly Enterprises), 10s,
2012 ............................. 720 944,676
Cheneyville, LA, Westside
Habilitation Center, 8.375s,
2013 ............................. 2,500 2,751,400
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 ............................. 650 712,179
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Municipal Bonds -- continued
Health Care
Revenue -- continued
Daphne, AL, Special Care
Facilities Financing Authority
(Westminster Village), 8.25s,
2026+ ............................ $ 500 $ 482,500
District of Columbia, Hospital
Rev. (Hospital for Sick
Children), 8.875s, 2021 .......... 475 517,465
Fairfax, Fauquier & Loudoun
Counties, VA, Health Center
Commission, Nursing Home
Rev., 9s, 2020 ................... 1,870 2,039,366
Gadsden County, FL, Industrial
Development Authority
(RHA/FLA Properties),
10.45s, 2018 ..................... 2,520 2,569,216
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 ........ 895 939,678
Illinois Health Facilities
Authority Rev. (Centegra
Health Systems), 5.25s,
2018 ............................. 1,000 969,490
Lee County, FL, Industrial
Development Authority
(Beverly Enterprises), 10s,
2010 ............................. 1,930 2,164,514
Louisiana Public Facilities
Authority (Chateau Riviere
Home for the Aged), 10.25s,
2016 ............................. 3,240 3,324,920
Louisiana Public Facilities
Authority (Southwest
Medical Center), 11s, 2006........ 3,822 1,027,201
Massachusetts Health &
Education Facilities Authority
(St. Memorial Medical
Center), 6s, 2023 ................ 465 463,201
Massachusetts Industrial
Finance Agency (Martha's
Vineyard Long-Term Care
Facility), 9.25s, 2022**[dbldag] . 1,700 436,900
</TABLE>
7
<PAGE>
Portfolio of Investments (Unaudited) -- continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Municipal Bonds -- continued
Health Care
Revenue -- continued
Massachusetts Industrial
Finance Agency
(Metropolitan Health
Foundation, Inc.), 6.75s,
2027 ............................. $1,500 $1,555,485
Massachusetts Industrial
Finance Agency (Needham/
Hamilton House), 11s, 2010........ 800 865,824
Michigan Hospital Finance
Authority Rev. (Genesys
Regional Medical), 5.5s,
2018 ............................. 2,000 1,965,360
Michigan Hospital Finance
Authority Rev. (Genesys
Regional Medical), 5.5s,
2027 ............................. 1,000 972,130
Millbrae, CA, Residential
Facility (Magnolia Of
Millbrae), 7.375s, 2027 .......... 1,000 1,033,830
Monongalia County, WV,
Health Facilities Rev.
(Beverly Enterprises, Inc.),
10s, 2007 ........................ 980 1,055,372
Montgomery County, PA,
Higher Education & Health
Authority Rev. (AHF/
Montgomery), 10.5s, 2020 ......... 2,460 2,616,579
New Jersey Economic
Development Authority
(Courthouse Convalescent
Center), 8.7s, 2014 .............. 650 701,025
New Jersey Economic
Development Authority
(Geriatric & Medical
Services), 9.625s, 2004 .......... 155 172,025
New Jersey Economic
Development Authority
(Geriatric & Medical
Services), 9.625s, 2022 .......... 675 745,761
New Jersey Economic
Development Authority
(Greenwood Health Care),
9.75s, 2011 ...................... 1,395 1,481,713
New Jersey Economic
Development Authority
(Wanaque Convalescent
Center), 8.6s, 2011 .............. 1,000 1,108,150
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Municipal Bonds -- continued
Health Care
Revenue -- continued
New Jersey Health Care
Facilities Financing Authority
(Cherry Hill), 8s, 2027 .......... $1,000 $1,092,590
North Carolina Medical Care
Commission, Hospital Rev.
(Valdese General), 8.75s,
2016 ............................. 1,400 1,576,680
Okaloosa County, FL,
Retirement Rental Housing
Rev. (Beverly Enterprises),
10.75s, 2003 ..................... 1,230 1,277,970
Orange County, FL, Industrial
Development Rev. (Friendly
Village), 9.25s, 2012 ............ 1,805 1,847,598
Osceola County, FL, Industrial
Development Rev.
(Community Provider Pooled
Loan), 7.75s, 2017 ............... 1,300 1,374,672
Reedley, CA, Certificates of
Participation (Mennonite
Home), 7.5s, 2026 ................ 3,000 3,162,630
Rochester, MN, Health Care
Facilities Rev. (Mayo Medical
Foundation), 7.58s, 2021[sec] .... 1,000 1,040,080
San Francisco, CA, City &
County (Coventry Park),
8.5s, 2026 ....................... 2,000 2,191,700
Santa Fe, NM, Industrial
Development Rev. (Casa
Real Nursing Home), 9.75s,
2013 ............................. 1,125 1,227,150
Seminole County, FL, Industrial
Development Authority
(Friendly Village), 10s, 2011..... 1,695 1,726,815
St. Charles County, MO,
Industrial Development
Authority (Garden View Care
Center), 10s, 2016 ............... 2,215 2,244,637
St. Petersburg, FL, Health
Facilities Rev. (Swanholm
Nursing), 10s, 2022 .............. 770 693,000
Suffolk County, NY, Industrial
Development Agency
(APPLE), 9.75s, 2015** ........... 1,350 607,500
Washington County, FL,
Industrial Development
Authority (Washington
County), 10s, 2016 ............... 1,090 1,093,684
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Municipal Bonds -- continued
Health Care
Revenue -- continued
Waterford Township, MI,
Economic Development Rev.
(Canterbury Health Care),
8.375s, 2023 ..................... $1,500 $ 1,500,000
Wilkinsburg, PA, Municipal
Authority Health (Monroeville
Christian), 8.25s, 2027 .......... 1,000 1,085,800
-----------
$74,770,083
-----------
Industrial Revenue
(Corporate Guarantee) -- 15.4%
Courtland, AL, Industrial
Development Board, Solid
Waste Disposal Rev.
(Champion International
Corp.), 6.375s, 2029 ............. $2,000 $ 2,132,060
Dayton, OH, Special Facilities
Rev. (Emery Air Freight),
12.5s, 2009 ...................... 1,000 1,063,890
Eastern Band of Cherokee
Indian Community, NC
(Carolina Mirror Co.),
10.25s, 2009+ .................... 6,410 6,454,037
Eastern Band of Cherokee
Indian Community, NC
(Carolina Mirror Co.), 11s,
2012+ ............................ 650 654,413
Gulf Coast Waste Disposal
Authority, TX (Valero Energy
Corp.), 5.6s, 2032 ............... 1,000 986,710
Hardeman County, TN
(Correctional Facilities
Corp.), 7.75s, 2017 .............. 2,220 2,470,327
Hernando County, FL, Water &
Sewer Rev. (Florida Crushed
Stone), 8.5s, 2014 ............... 3,600 4,186,512
Hodge Village, LA, Utilities
Rev. (Stone Container), 9s,
2010 ............................. 7,585 8,186,718
Indiana Development Finance
Authority Rev. (Inland Steel),
5.75s, 2011 ...................... 1,000 1,043,170
Lawrenceburg, TN, Industrial
Development Board (Tridon,
Inc.), 9.875s, 2006 .............. 1,400 1,494,584
Mesa County, CO (Joy
Technologies), 8.5s, 2006 ........ 650 734,513
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Municipal Bonds -- continued
Industrial Revenue (Corporate
Guarantee) -- continued
Navajo County, AZ, Industrial
Development Authority
(Stone Container Corp.),
7.2s, 2027 ....................... $ 880 $ 981,473
New Hampshire Business
Authority, Sewer & Solid
Waste Disposal (Crown
Paper), 7.875s, 2026 ............. 1,550 1,795,164
New Jersey Economic
Development Authority (Holt
Hauling & Warehousing),
8.4s, 2015 ....................... 1,000 1,082,630
New Jersey Economic
Development Authority (Holt
Hauling & Warehousing),
8.6s, 2017 ....................... 1,000 1,089,100
New York City, NY, Industrial
Development Rev. (Brooklyn
Navy Yard Cogeneration
Partners), 5.75s, 2036 ........... 2,500 2,518,800
Ohio Solid Waste Rev.
(Republic Engineered
Steels), 8.25s, 2014 ............. 3,000 3,215,280
Ohio Solid Waste Rev.
(Republic Engineered
Steels), 9s, 2021 ................ 3,000 3,334,770
Philadelphia, PA, Industrial
Development Authority Rev.,
7.75s, 2017 ...................... 3,255 3,628,446
Port of New Orleans, LA,
8.25s, 2004 ...................... 900 1,018,044
Port of New Orleans, LA
(Avondale Industries), 8.5s,
2014 ............................. 1,650 1,899,579
Riverdale, IL, Enviromental
Improvement Rev. (Acme
Metals), 7.9s, 2024 .............. 1,000 1,126,810
-----------
$51,097,030
-----------
Insured Health Care
Revenue -- 1.1%
Bexar County, TX, Health
Facilities Development
(Baptist Health Systems),
MBIA, 5.25s, 2027 ................. $1,000 $ 972,390
</TABLE>
9
<PAGE>
Portfolio of Investments (Unaudited) -- continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Municipal Bonds -- continued
Insured Health Care
Revenue -- continued
North Central, TX, Health
Facilities Development Corp.
(Presbyterian Hospital),
MBIA, 9.345s, 2021[dbldag][dbldag] $ 1,500 $ 1,751,055
Salt Lake City, UT, Hospital
Rev. (Intermountain Health
Care), AMBAC, 9.287s,
2020[dbldag][dbldag] ............. 650 751,016
-----------
$ 3,474,461
-----------
Multi-Family Housing
Revenue -- 4.6%
Austin, TX, Housing Finance
Corp. (Woodland Heights
Apartments), 10s, 2027 ........... $ 1,000 $ 1,030,080
Colorado Housing Finance
Authority, FHA, 9s, 2025 ......... 865 874,152
Dade County, FL, Housing
Finance Agency
(Blackstone), 8.375s,
2002+ ............................ 5,467 5,656,133
Dade County, FL, Housing
Finance Agency (Silverblue),
8.375s, 2002+ .................... 3,788 3,918,888
Dallas, TX, Housing Finance
Corp., 8.5s, 2011 ................ 1,270 1,337,793
Eaglebend, CO, Affordable
Housing Corp., 6.4s, 2017 ........ 1,000 1,057,990
Florida Multi-Family Housing
Finance Agency Rev.
(Center Court Apartments),
8.5s, 2018 ....................... 1,150 1,198,576
Memphis, TN, Health,
Education & Housing
Facilities Board (Wesley
Highland Terrace), 12.75s,
2015++, .......................... 100 85,000
-----------
$15,158,612
-----------
Sales and Excise Tax
Revenue -- 0.8%
Black Hawk, CO, Device Tax
Rev., 5.625s, 2021 ............... $ 250 $ 242,903
Chicago, IL, Tax Increment
Rev. (Ryan Garfield),
10.125s, 2007 .................... 1,510 1,556,297
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Municipal Bonds -- continued
Sales and Excise Tax
Revenue -- continued
Denver, CO, Urban Renewal
Authority, Tax Increment
Rev. (Downtown Denver),
8.5s, 2013 ....................... $ 465 $ 483,274
Virgin Islands Public Finance
Authority Rev., 5.875s,
2018 ............................. 500 494,375
-----------
$ 2,776,849
-----------
Single Family Housing
Revenue -- 7.7%
Bexar County, TX, Housing
Finance Corp., 0s, 2015 .......... $21,420 $ 3,381,575
Cook County, IL, 0s, 2015 .......... 800 124,360
Corpus Christi, TX, Housing
Finance Corp., MBIA, 0s,
2011 ............................. 3,000 831,000
Dallas, TX, Housing Finance
Corp., Single Family
Mortgage Rev., MBIA, 0s,
2016 ............................. 13,890 2,064,471
Denver, CO, City & County,
Single Family Mortgage
Rev., 0s, 2015 ................... 1,980 293,951
Duval County, FL, Housing
Finance Authority, 0s, 2015....... 19,975 2,888,784
Georgia Housing & Finance
Authority Rev., FHA, 0s,
2031 ............................. 17,080 1,523,536
Harris County, TX, Housing
Finance Corp., 9.625s,
2003 ............................. 840 851,869
Harris County, TX, Housing
Finance Corp., 9.875s,
2014 ............................. 535 542,554
Jackson County, MO, 0s,
2016 ............................. 2,260 293,868
Nebraska Investment Finance
Authority, 6.25s, 2021 ........... 1,990 2,108,564
Nebraska Investment Finance
Authority, Single Family
Mortgage Rev., 0s, 2015 .......... 32,625 6,377,861
Nevada Housing Division,
Single Family Mortgage
Rev., 0s, 2015 ................... 364 65,540
Ohio Housing Finance Agency,
Single Family Mortgage
Rev., GNMA, RIBS, 8.832s,
2031[dbldag][dbldag] ............. 800 901,760
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Municipal Bonds -- continued
Single Family Housing
Revenue -- continued
Reno County, KS, Single
Family Mortgage Rev.,
AMBAC, 0s, 2014 .................. $ 2,225 $ 349,881
Saline County, KS, 0s, 2014 ........ 750 123,390
South Dakota Housing
Development Authority,
Homeownership Mortgage,
5.8s, 2028 ....................... 1,830 1,873,261
Utah Housing Finance Agency,
Residential Mortgage Rev.,
9s, 2019 ......................... 15 15,279
Wisconsin Housing &
Economic Development
Authority, Home Ownership
Rev., RIBS, 9.855s,
2022[dbldag][dbldag].............. 855 965,586
------------
$ 25,577,090
------------
Special Assessment
District -- 0.2%
Heritage Isles, FL, Community
Development District, 5.75s,
2005 ............................. $ 650 $ 638,833
------------
Student Loan
Revenue -- 0.7%
Arizona Student Loan
Acquisition Authority, "C",
7.625s, 2010 ..................... $ 750 $ 838,238
Pennsylvania Higher Education
Assistance Agency, AMBAC,
8.138s, 2022[dbldag][dbldag] ..... 1,300 1,468,753
------------
$ 2,306,991
------------
Turnpike
Revenue -- 3.4%
Foothill/Eastern Transportation
Corridor Agency, CA, Toll
Road Rev., 0s, 2030 .............. $25,950 $ 4,484,419
Massachusetts Turnpike
Authority, Capital
Appreciation, "C", MBIA, 0s,
2022 ............................. 10,000 2,829,200
San Joaquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev.,
MBIA, 5.25s, 2030 ................ 1,500 1,475,220
Telluride, CO, Gondola Transit
Co., 11.5s, 2012 ................. 425 675,971
Telluride, CO, Gondola Transit
Co., 9s, 2016 .................... 965 1,133,586
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Municipal Bonds -- continued
Turnpike Revenue -- continued
West Virginia Parkways,
Economic Development &
Tourism Authority, FGIC,
RIBS, 7.452s, 2019[dbldag][dbldag] $ 600 $ 651,834
------------
$ 11,250,230
------------
Universities -- 1.5%
Islip, NY, Community
Development Agency Rev.
(New York Institute of
Technology), 7.5s, 2026 .......... $ 2,500 $ 2,743,125
Massachusetts Industrial
Finance Agency (Emerson
College), 8.9s, 2018 ............. 2,000 2,198,180
------------
$ 4,941,305
------------
Water and Sewer Utility
Revenue -- 1.8%
Detroit, MI, Sewage Disposal
Rev., FGIC, 7.263s,
2023[dbldag][dbldag].............. $ 2,500 $ 2,625,075
Harrisburg, PA, Authority
Water Rev., FGIC, 7.32s,
2015[dbldag][dbldag] ............. 2,000 2,227,160
New York City, NY, Municipal
Water Finance Authority,
Water & Sewer Systems
Rev., FSA, 5.375s, 2026 .......... 1,100 1,094,599
------------
$ 5,946,834
------------
Other -- 3.1%
Danville, VA, Industrial
Development Rev.
(Piedmont Mall), 8s, 2017 ........ $ 5,795 $ 6,142,642
District of Columbia (National
Public Radio), 7.7s, 2023 ........ 2,500 2,740,350
Mississippi Development Bank
(Diamond Lakes Utilities),
6.25s, 2017 ...................... 1,000 1,012,250
St. Louis County, MO,
Industrial Development
Authority (Kiel Center Arena),
7.875s, 2024 ..................... 300 330,576
------------
$ 10,225,818
------------
Total Municipal Bonds (Identified Cost,
$300,041,562)................................. $324,448,293
------------
</TABLE>
11
<PAGE>
Portfolio of Investments (Unaudited) -- continued
Floating Rate Demand Notes -- 1.0%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Burke County, GA,
Development Authority,
Pollution Control Rev.
(Georgia Power Co.), due
09/01/25 ...................... $ 100 $ 100,000
Harris County, TX, Health
Facilities Development
Corp., Hospital Rev.
(Methodist Hospital), due
12/01/25 ...................... 100 100,000
Harris County, TX, Industrial
Development Corp. (Shell
Oil Co.), due 04/01/27 ........ 100 100,000
Lincoln County, WY, Pollution
Control Rev. (Exxon), due
11/01/14 ...................... 300 300,000
Lincoln County, WY, Pollution
Control Rev. (Exxon), due
07/01/17 ...................... 1,000 1,000,000
St. Lucie County, FL, Pollution
Control Rev. (Florida Power
& Light Co.), due 01/01/26..... 1,100 1,100,000
Uinta County, WY, Pollution
Control Rev. (Chevron), due
08/15/20 ...................... 600 600,000
------------
Total Floating Rate Demand
Notes, at Identified Cost ..... $ 3,300,000
------------
Total Investments (Identified
Cost, $303,341,562)............ $327,748,293
Other Assets,
Less Liabilities -- 1.0% ..................... 3,469,317
------------
Net Assets -- 100.0% ........................... $331,217,610
------------
</TABLE>
** Non-income producing security-in default.
+ Restricted security.
++ Security accruing partial interest-in default.
[sec] Indexed security.
[dbldag] Security valued by or at the direction of the Trustees.
[dbldag][dbldag] Inverse floating rate security.
See notes to financial statements
12
<PAGE>
Statement of Assets and Liabilities (Unaudited) -- April 30, 1998
<TABLE>
<S> <C>
Assets:
Investments, at value (identified cost, $303,341,562) ................................... $ 327,748,293
Cash .................................................................................... 11,659
Receivable for investments sold ......................................................... 85,835
Interest receivable ..................................................................... 6,448,662
Other assets ............................................................................ 2,893
-------------
Total assets .......................................................................... $ 334,297,342
-------------
Liabilities:
Payable to dividend disbursing agent .................................................... $ 237,850
Payable for investments purchased ....................................................... 2,485,946
Payable to affiliates -
Management fee ......................................................................... 8,078
Transfer and dividend disbursing agent fee ............................................. 9,291
Administrative fee ..................................................................... 136
Accrued expenses and other liabilities .................................................. 338,431
-------------
Total liabilities ..................................................................... $ 3,079,732
-------------
Net assets ............................................................................... $ 331,217,610
=============
Net assets consist of:
Paid-in capital ......................................................................... $ 353,977,473
Unrealized appreciation on investments .................................................. 24,406,731
Accumulated net realized loss on investments ............................................ (47,967,188)
Accumulated undistributed net investment income ......................................... 800,594
-------------
Total ................................................................................. $ 331,217,610
=============
Shares of beneficial interest outstanding ................................................ 38,853,106
=============
Net asset value per share (net assets [divided by] shares of beneficial interest $ 8.52
outstanding) =============
</TABLE>
See notes to financial statements
13
<PAGE>
Statement of Operations (Unaudited) -- Six Months Ended April 30, 1998
<TABLE>
<S> <C>
Net investment income:
Interest income ......................................................... $12,828,584
-----------
Expenses --
Management fee ......................................................... $ 1,465,755
Trustees' compensation ................................................. 66,220
Administrative fee ..................................................... 21,764
Transfer and dividend disbursing agent fee ............................. 55,401
Custodian fee .......................................................... 54,273
Printing ............................................................... 15,043
Postage ................................................................ 21,776
Auditing fees .......................................................... 19,640
Legal fees ............................................................. 2,601
Miscellaneous .......................................................... 107,522
-----------
Total expenses ........................................................ $ 1,829,995
Fees paid indirectly ................................................... (30,612)
-----------
Net expenses .......................................................... $ 1,799,383
-----------
Net investment income ................................................ $11,029,201
-----------
Realized and unrealized gain on investments:
Realized gain on investment transactions (identified cost basis) ....... $ 151,497
Change in unrealized appreciation on investments ....................... 489,886
-----------
Net realized and unrealized gain on investments ....................... $ 641,383
-----------
Increase in net assets from operations ............................... $11,670,584
===========
</TABLE>
See notes to financial statements
14
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1998 Year Ended
(Unaudited) October 31, 1997
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations --
Net investment income ........................................................ $ 11,029,201 $ 23,593,846
Net realized gain (loss) on investments ...................................... 151,497 (15,621,735)
Net unrealized gain on investments ........................................... 489,886 14,018,262
------------- -------------
Increase in net assets from operations ...................................... $ 11,670,584 $ 21,990,373
------------- -------------
Distributions declared to shareholders
from net investment income ................................................... $ (11,245,330) $(24,833,070)
------------- -------------
Net increase in net assets from Trust share transactions ...................... $ 1,510,454 $ 3,494,657
------------- -------------
Total increase in net assets ................................................ $ 1,935,708 $ 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
$800,594 and $1,016,723, respectively)....................................... $ 331,217,610 $ 329,281,902
============= =============
</TABLE>
See notes to financial statements
15
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Six Months
Ended
April 30,
1998
(Unaudited)
Per share data (for a share outstanding throughout each period): ----------------
<S> <C>
Net asset value --
beginning of period ............................................. $ 8.51
---------
Income from investment operations# --
Net investment income ........................................... $ 0.28
Net realized and unrealized gain (loss) on investments .......... 0.02
---------
Total from investment operations ............................... $ 0.30
---------
Less distributions declared to shareholders
from net investment income ..................................... $ (0.29)
---------
Net asset value -- end of period ................................. $ 8.52
=========
Per share market value -- end of period .......................... $ 8.63
=========
Total return ..................................................... (1.61)%++
Ratios (to average net assets)/Supplemental data:
Expenses ## .................................................... 1.11%+
Net investment income .......................................... 6.71%+
Portfolio turnover ............................................... 7%
Net assets at end of period
(000 omitted) ................................................... $ 331,218
<CAPTION>
Year Ended October 31,
-----------------------------------------------
1997 1996 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value --
beginning of period ............................................. $ 8.58 $ 8.84 $ 8.73 $ 9.04
------- ------- ------- -------
Income from investment operations# --
Net investment income ........................................... $ 0.61 $ 0.66 $ 0.68 $ 0.68
Net realized and unrealized gain (loss) on investments .......... (0.03) (0.26) 0.13 (0.29)
-------- -------- ------- -------
Total from investment operations ............................... $ 0.58 $ 0.40 $ 0.81 $ 0.39
-------- -------- ------- -------
Less distributions declared to shareholders
from net investment income ..................................... $ (0.65) $ (0.66) $ (0.70) $ (0.70)
-------- -------- -------- -------
Net asset value -- end of period ................................. $ 8.51 $ 8.58 $ 8.84 $ 8.73
======== ======== ======== =======
Per share market value -- end of period .......................... $ 9.06 $ 9.38 $ 9.50 $ 9.13
======== ======== ======== =======
Total return ..................................................... 3.90% 4.50% 12.57% (1.47)%
Ratios (to average net assets)/Supplemental data:
Expenses ## .................................................... 1.19% 1.24% 1.33% 1.31%
Net investment income .......................................... 7.26% 7.47% 7.66% 7.58%
Portfolio turnover ............................................... 21% 13% 14% 22%
Net assets at end of period
(000 omitted) ................................................... $329,282 $328,630 $334,985 $327,193
</TABLE>
+ Annualized.
++ Not annualized.
# 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's expenses are
calculated without reduction for fees paid indirectly.
See notes to financial statements
16
<PAGE>
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------
1993 1992
Per share data (for a share outstanding throughout each period): ------------ ------------
<S> <C> <C>
Net asset value --
beginning of period ................................................ $ 8.78 $ 8.94
------- -------
Income from investment operations# --
Net investment income .............................................. $ 0.75 $ 0.73
Net realized and unrealized gain (loss) on investments ............. 0.21 (0.17)
------- -------
Total from investment operations .................................. $ 0.96 $ 0.56
------- -------
Less distributions declared to shareholders
from net investment income ........................................ $ (0.70) $ (0.72)
------- -------
Net asset value -- end of period .................................... $ 9.04 $ 8.78
======= =======
Per share market value -- end of period ............................. $ 10.00 $ 9.00
======= =======
Total return ........................................................ 10.95% 5.34%
Ratios (to average net assets)/Supplemental data:
Expenses .......................................................... 1.33% 1.34%
Net investment income ............................................. 7.55% 8.17%
Portfolio turnover .................................................. 14% 17%
Net assets at end of period
(000 omitted) ...................................................... $335,256 $323,060
<CAPTION>
Year Ended October 31,
--------------------------------------------
Per share data (for a share outstanding throughout each period): 1991 1990 1989 1988
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value --
beginning of period ................................................ $ 9.02 $ 9.44 $ 9.22 $ 8.67
------- ------- ------- -------
Income from investment operations# --
Net investment income .............................................. $ 0.70 $ 0.75 $ 0.76 $ 0.75
Net realized and unrealized gain (loss) on investments ............. (0.05) (0.41) 0.22 0.54
------- ------- ------- -------
Total from investment operations .................................. $ 0.65 $ 0.34 $ 0.98 $ 1.29
------- ------- ------- -------
Less distributions declared to shareholders
from net investment income ........................................ $ (0.73) $ (0.76) $ (0.76) $ (0.74)
------- ------- ------- --------
Net asset value -- end of period .................................... $ 8.94 $ 9.02 $ 9.44 $ 9.22
======= ======= ======= ========
Per share market value -- end of period ............................. $ 9.25 $ 8.38 $ 9.88 $ 9.88
======= ======= ======= ========
Total return ........................................................ 19.88% (7.87)% 8.32% 26.11%
Ratios (to average net assets)/Supplemental data:
Expenses .......................................................... 1.27% 1.21% 1.28% 1.25%
Net investment income ............................................. 7.79% 8.07% 8.15% 8.35%
Portfolio turnover .................................................. 21% 19% 16% 37%
Net assets at end of period
(000 omitted) ...................................................... $325,077 $325,767 $338,461 $327,193
</TABLE>
# Per share data for the periods subsequent to October 31, 1992, are based on
average shares outstanding.
See notes to financial statements
17
<PAGE>
Notes to Financial Statements (Unaudited)
(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.
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.
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.
18
<PAGE>
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 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 accumulated net realized
gains.
At October 31, 1997, the Trust, for federal tax purposes, had a capital loss
carryforward of $48,084,642, 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), and October 31, 2005,
($16,518,819).
(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.
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>
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 $ 20,620 for the period ended April 30, 1998.
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.
19
<PAGE>
Notes to Financial Statements (Unaudited) -- continued
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $ 25,091,707 and $23,076,071, 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 ........................ $303,341,562
============
Gross unrealized appreciation ......... $ 29,643,358
Gross unrealized depreciation ......... (5,236,627)
------------
Net unrealized appreciation .......... $ 24,406,731
============
</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>
Period Year Ended
Ended April 30, October 31,
1998 1997
----------------- ------------
<S> <C> <C>
Shares issued to shareholders in
reinvestment of distributions ......... 173,462 390,535
======= =======
</TABLE>
(6) Line of Credit
The Trust and other affiliated funds participate in a $805 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of 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 period ended April 30, 1998, was $853.
20
<PAGE>
(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 April 30, 1998,
the Trust owned the following restricted securities (constituting 5.7% of net
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 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 Principal
Description Acquisition Amount Cost Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dade County, FL, Housing Finance Agency
(Blackstone), 8.375s, 2002 ..................................... 4/22/94 $ 5,466,500 $5,466,500 $ 5,656,133
Dade County, FL, Housing Finance Agency
(Silverblue), 8.375s, 2002 ..................................... 4/22/94 3,787,500 3,787,500 3,918,888
Daphne, AL, Special Care Facilities
Financing Authority (Westminster Village), 8.25s, 2026 ......... 10/28/88 500,000 500,186 482,500
Eastern Band of Cherokee Indian Community, NC
(Carolina Mirror Co.), 10.25s, 2009 ............................ 12/10/86 6,410,000 6,281,798 6,454,037
Eastern Band of Cherokee Indian Community, NC
(Carolina Mirror Co.), 11s, 2012 ............................... 2/05/88 650,000 601,250 654,413
Hannibal, MO, Industrial Development Authority
(Hannibal Regional Healthcare), 9.5s, 2022 ..................... 8/28/92 1,500,000 1,485,745 1,789,185
-----------
$18,955,156
===========
</TABLE>
21
<PAGE>
MFS(R) 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
Lawrence T. Perera(2)
Partner, Hemenway & Barnes
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 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
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 symbol] This report is printed on recycled paper. MFMCE-3 6/98 36M
