Dear Shareholders,
The current investment and economic environment bears little resemblance to last
year's. One year ago, global economies were floundering, and the crisis in Asia
threatened an already weak U.S. economy. Corporate earnings were flat, and
economists used the word "deflation" for the first time in recent memory.
Entering 1999, expectations for corporate earnings growth were lowered
dramatically. In an attempt to foster U.S. growth, the Federal Reserve Board
(the Fed) lowered interest rates.
As a result, this year the U.S. economy is booming and unemployment is low. Many
corporations are focused on improving their profitability, and investors have
been rewarded with positive surprises across a variety of industries. Our
analysts predict that corporate earnings growth for 1999 will average 12% - 15%.
Global economies also are showing signs of strength, and the Asian crisis has
passed. In fact, Japan's economic woes seem to have reached bottom. Although the
process is in its infancy, some Japanese corporations not only are talking about
restructuring and cost cutting, they also are beginning to take action, looking
within to become more competitive and improve returns on equity. While still
lagging the United States, Europe is beginning to restructure and consolidate.
These signs of international growth have contributed to concerns that the U.S.
economy now may be too strong. In June, and again in August, the Fed raised
rates by one-quarter of a percentage point to help ward off the specter of
inflation.
After an unprecedented four years of 20% annual returns in the U.S. equity
market, we fear that many investors have become accustomed to high returns and
have lost sight of the risks they take on to achieve them. In the current market
many investors are taking on additional risk -- whether through day trading or
investing in speculative Internet stocks.
Risks are as much a part of the market today as they were one year ago. We
believe the market remains overvalued, with stocks priced 30% above our
analysts' earnings projections. And market narrowness has not abated; the top 25
stocks in the Standard & Poor's 500 Composite Index, a popular, unmanaged index
of common stock total return performance, are still the most overvalued. Such
extreme overvaluation makes the stock market sensitive to interest-rate news and
any negative earnings surprises. The Year 2000 (Y2K) computer problem is another
factor causing investor concern. While we believe corporate America is well
prepared to address any Y2K situations that may arise at year-end, no one can
predict investor behavior. In our opinion, it is investor behavior that has the
greatest potential to create market volatility.
We believe the best way to address Y2K and other market risks is through our
continuing commitment to MFS Original Research[RegTM] and our fundamental
investment tenet of long-term investing. Whether markets are up or down, MFS
analysts focus on analyzing industries and visiting companies to determine the
long-term winners and the prices that will make them attractive opportunities.
Because all companies will not benefit equally from the improving international
environment, bottom-up research remains critical to identifying those that we
believe are successfully restructuring, consolidating, and gaining market share.
Changes in market and economic conditions can't be predicted but should always
be expected. The changes we have seen over the past year only reinforce our
commitment to long-term planning and investing. We believe volatility helps to
create opportunity for long-term investors to buy solid companies at attractive
prices. For this reason, we are continuing to expand our domestic and
international capabilities to ensure that MFS has primary, in-house research on
companies worldwide. We believe that we have built the right investment team,
backed by MFS Original Research, to take advantage of those opportunities for
our shareholders.
1
<PAGE>
We appreciate your confidence and welcome any questions or comments you may
have.
Respectfully,
[Graphic: Signature of Jeffrey L. Shames]
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management[RegTM]
November 15, 1999
Management Review and Outlook
Dear Shareholders,
For the 12 months ended October 31, 1999, shares of the Trust provided a total
return of -17.20% 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 fell from $8.55 to $7.96 over the period, providing a total return of -
0.59%. 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 -1.77%.
Throughout the Trust's fiscal year, interest rates were on the rise. That
backdrop hurt all bonds, including municipal issues. For their part, municipals
entered 1999 at extremely attractive valuations after having suffered a very
difficult 1998 due to an incredible glut of new issuance. Early in 1999,
municipal securities rebounded to more historical levels before once again
cheapening relative to U.S. Treasury securities. (Principal value and interest
on Treasury securities are guaranteed by the U.S. government if held to
maturity.)
Municipals were not the only fixed-income market lagging Treasuries over the
past few months. With the year 2000 (Y2K) -- and the potential for Y2K computer
problems -- approaching, bond investors flocked to the safer haven provided by
Treasury securities. As a result, as of October 31, 1999, the average yield on
30-year, general-obligation municipal bonds rated "AAA" by Moody's Investors
Service, Inc. was 97% that of Treasuries with comparable maturities, well above
the historical range of around 84%.
Municipal securities typically are most attractive to investors in high tax
brackets due to their exemption from federal taxes. However, with municipals
trading at their current levels, even investors in the lowest tax bracket might
find them attractive. We expect municipals to trade back to the more narrow
historical relationship to Treasuries once Y2K fears abate.
Within the context of rising interest rates, the Trust benefited from its
concentration in lower-quality municipal issues rated "Baa" or below and from
those that are unrated. These securities were issued several years ago in a much
higher yield environment and therefore tend to be premium bonds. These bonds are
generally more immune to the effects of rising interest rates. Investments in
high-yield securities involve greater degrees of credit and market risk than
investments in higher-rated securities. On the other hand, they tend to be more
sensitive to economic conditions.
As such, the Trust's lower-rated and nonrated municipal securities enjoyed
better performance than the municipal market as a whole because the U.S. economy
continued to grow while sparking only modest inflation. The portfolio's
corporate-backed bonds also performed well. With the international economy
showing signs of strengthening, we believe the prospects for improved exports
bode well for these securities.
Across-the-board financial health helped sustain municipal bonds among the
various U.S. geographic regions. That was an improvement from the recent past,
when concerns about economic growth in the Pacific Rim and Latin America led us
to be cautious choosing issues that trade with those overseas regions. However,
we've started to see Asian countries rebound to post steadier economic growth,
and Latin America has stabilized. As
2
<PAGE>
a result, we've felt more comfortable investing in the southeast and the far
west of the United States. Going forward, we will tread carefully in the midwest
due to concerns about the farm economy.
We continued to favor electric utility and housing bonds, which offered
stability in a sometimes volatile environment. The positive forces of
deregulation exerted their influence on the electric utility sector, which
looked poised to benefit from a wave of consolidation. Housing benefited from
the overall health of the economy, as demand for both single-family and
multifamily development remained strong.
On the other hand, we pursued a very cautious approach in choosing health care
bonds for the Trust. Reductions in federal Medicare payments were particularly
debilitating to hospitals and nursing homes.
Since the Trust invests in high-yield bonds that can be riskier than
investment-grade or U.S. government securities, we rely intensely on MFS
Original Research to choose credits that can contribute to performance and that
are, we feel, more immune to credit difficulties. We leverage the research
capabilities of both MFS' fixed-income and equity teams to help the Trust meet
its investment objective of high current income without undue credit risk.
Looking ahead to the new millennium, we remain cautious in our interest-rate
outlook because the economy continues to grow rapidly. The Federal Reserve Board
may pursue interest-rate hikes but has so far appeared to be on top of the
inflation situation. In any case, a rising interest-rate environment would tend
to favor the Trust because its high-yield focus is less sensitive to changes in
interest rates than a higher-rated portfolio would be. Instead, the Trust is
more sensitive to the fate of the economy and the corresponding credit health of
issuers in the municipal market. We have a positive outlook concerning the
continued growth of the U.S. economy, feeling that problems would occur only if
there was a significant trade-off in the stock market that might undermine
consumer confidence and pull back consumer spending.
Respectfully,
[Graphic: Signature of Michael W. Roberge]
Michael W. Roberge
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and are
current only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
It is not possible to invest directly in an index. The portfolio is actively
managed, and current holdings may be different.
- --------------------------------------------------------------------------------
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, 1999)
<TABLE>
<S> <C>
Net Asset Value Per Share
October 31, 1998 $8.55
October 31, 1999 $7.96
New York Stock Exchange Price
October 31, 1998 $9.188
November 17, 1998 (high) $9.375
October 27, 1999 (low) $6.813
October 31, 1999 $7.125
</TABLE>
- --------------------------------------------------------------------------------
Federal Tax Information
(For the year ended October 31, 1999)
In January 2000, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1999.
For federal income tax purposes, 100% of the total dividends paid by the Trust
from net investment
3
<PAGE>
income during the year ended October 31, 1999, 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.
Number of Shareholders
As of October 31, 1999, our records indicate that there are 5,433 registered
shareholders and approximately 14,809 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 recieve 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 Municipal Income Trust, which was
held on September 16, 1999, the following actions were taken:
Item 1. The election of William J. Poorvu, Elaine R. Smith, and David B. Stone
as Trustees of the Trust.
<TABLE>
<CAPTION>
Number of Shares
Nominee For Withhold Authority
- ------- --- ------------------
<S> <C> <C>
William J. Poorvu 33,353,402.3520 653,336.6453
Elaine R. Smith 33,314,347.5324 692,391.4649
David B. Stone 33,271,495.7733 735,243.2240
</TABLE>
Trustees continuing in office who were not subject to re-election at this
meeting are Richard B. Bailey, J. Atwood Ives, Lawrence T. Perera, Charles W.
Schmidt, Arnold D. Scott, and Jeffrey L. Shames.
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, 2000.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
For 33,327,130.1425
Against 251,350.9394
Abstain 428,257.9154
</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
4
<PAGE>
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. 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, 1999
Municipal Bonds -- 97.4%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
General Obligation -- 1.4%
Chicago, IL, FGIC, 5.125s,
2025 ........................... $ 2,000 $ 1,707,120
Markham, IL, 9s, 2012 ............ 1,240 1,258,600
New York City, NY, 6.125s,
2025 ........................... 1,470 1,468,457
------------
$ 4,434,177
------------
State and Local
Appropriation -- 1.2%
Chicago, IL, Public Building
Commission, Building Rev.,
6.841s, 2016+++++ .............. $ 1,300 $ 1,153,698
Chicago, IL, Public Building
Commission, Building Rev.,
6.841s, 2017+++++ .............. 1,050 914,508
Riverside County, CA, Asset
Leasing Corp., Leasehold
Rev. (Riverside County
Hospital), MBIA, 0s, 2026 ...... 8,595 1,685,480
------------
$ 3,753,686
------------
Refunded and Special
Obligations -- 22.1%
Arapahoe County, CO, Capital
Improvement, Highway Rev.,
0s, 2005 ....................... $ 1,000 $ 362,110
Broward County, FL, Industrial
Development Authority
(Beverly Enterprises, Inc.),
9.8s, 2000 ..................... 2,100 2,221,674
Clermont County, OH, Hospital
Facilities Rev. (Mercy Health
Systems), AMBAC, 9.271s,
2001++++ ....................... 500 562,105
Colorado Health Facilities
Authority, Retirement
Facilities Rev. (Liberty
Heights), 0s, 2024 ............. 9,000 1,842,570
Dade County, FL, AMBAC, 0s,
2008 ........................... 15,080 2,121,454
Denver, CO, City & County
Airport Rev., 8.75s, 2001 ...... 400 441,052
Desert Hospital District, CA,
Hospital Rev. (Desert
Hospital Corp.), 8.684s,
2002 ........................... 1,500 1,714,380
Fairfax, Fauquier & Loudoun
Counties, VA, Health Center
Commission, Nursing Home
Rev., 9s, 2000 ................. 1,810 1,922,310
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Refunded and Special
Obligations -- continued
Foothill/Eastern Transportation
Corridor Agency, CA, Toll
Road Rev., 0s, 2030 ............ $25,950 $ 4,179,766
Hannibal, MO, Industrial
Development Authority
(Hannibal Regional
Healthcare), 9.5s, 2001+ ....... 1,500 1,689,330
Illinois Development Finance
Authority, Retirement
Housing Rev. (Regency
Park), 0s, 2025 ................ 26,000 4,583,800
Jefferson County, OH, Asset
Guaranty, 7.125s, 2005 ......... 1,000 1,135,110
Massachusetts Health &
Education Facilities Authority
(Fairview Extended Care
Facility), 10.25s, 2001 ........ 1,500 1,645,050
Massachusetts Industrial
Finance Agency, Tunnel Rev.
(Mass. Turnpike), 9s, 2000 ..... 3,650 3,864,912
Massachusetts Industrial
Finance Agency (Emerson
College), 8.9s, 2001 ........... 2,000 2,144,080
Mississippi Hospital Equipment
& Facilities Authority Rev.
(Rush Medical Foundation),
8.75s, 2001 .................... 1,000 1,069,170
New Jersey Economic
Development Authority
(Geriatric & Medical
Services), 9.625s, 2004 ........ 135 143,277
New Lenox, IL, Community
Park Development Authority,
8.25s, 2004 .................... 2,000 2,324,160
New York City, NY, 6.125s,
2006 ........................... 530 571,282
North Carolina Medical Care
Commission, Hospital Rev.
(Valdese General Hospital),
8.75s, 2001 .................... 1,335 1,466,885
North Central, TX, Health
Facilities Development Corp.
(Presbyterian Hospital),
MBIA, 9.345s, 2001 ............. 1,500 1,663,620
Prince William County, VA,
Industrial Development
Authority, Residential Care
Facility (Westminster at Lake
Ridge), 10s, 2002 .............. 1,500 1,692,840
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Refunded and Special
Obligations -- continued
Russellville, AR, Industrial
Development Rev. (Charles
Meyers), 10s, 1999 ................... $ 4,750 $ 4,771,850
San Joaquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev., 0s,
2006 ................................. 2,300 1,704,806
San Joaquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev., 0s,
2011 ................................. 6,600 3,649,272
Telluride, CO, Gondola Transit
Co., Real Estate Transfer
Assessment Rev., 11.5s,
2012 ................................. 2,475 3,695,868
Telluride, CO, Gondola Transit
Co., Real Estate Transfer
Assessment Rev., 11.5s,
2012 ................................. 425 623,139
Texas Turnpike Authority
(Houston Ship Channel
Bridge), 12.625s, 2002 ............... 10,565 12,875,460
Walton, GA, Industrial
Development Rev. (Ultima
Rubber Products), 10s,
2000 ................................. 1,555 1,636,218
Washington Public Power
Supply System Rev.
(Nuclear Project #1),
14.375s, 2001 ........................ 725 787,024
------------
$ 69,104,574
------------
Airport and Port
Revenue -- 5.4%
Atlanta, GA, Special Purpose
Facilities Rev. (Delta Airlines),
7.9s, 2018 ........................... $ 2,100 $ 2,145,402
Cleveland, OH, Airport Special
Facilities Rev. (Continental
Airlines), 9s, 2019 .................. 3,095 3,168,475
Denver, CO, City & County
Airport Rev., 8.75s, 2023 ............ 1,100 1,189,331
Hillsborough County, FL,
Aviation Authority Rev. (US
Air), 8.6s, 2022 ..................... 650 698,594
Kenton County, KY, Airport
Board Special Facilities
(Delta Airlines), 7.5s, 2020 ......... 1,000 1,052,970
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Airport and Port
Revenue -- continued
New Jersey Economic
Development Authority,
Special Facilities Rev.
(Continental Airlines, Inc.),
6.4s, 2023 ........................... $2,000 $ 1,914,640
Tulsa, OK, Municipal Airport
Trust Rev. (American
Airlines), 7.375s, 2020 .............. 3,400 3,539,570
Tulsa, OK, Municipal Airport
Trust Rev. (American
Airlines), 7.6s, 2030 ................ 3,000 3,143,730
------------
$ 16,852,712
------------
Electric and Gas Utility
Revenue -- 9.0%
Alaska Industrial Development
& Export Authority, Power
Rev. (Upper Lynn Canal
Regulatory Power), 5.8s,
2018 ................................. $ 830 $ 743,846
Brazos River Authority, TX
(Reliant Energy, Inc.),
5.375s, 2019 ......................... 1,000 881,440
Calcasieu Parish, LA, Industrial
Development Board,
Pollution Control Rev.
(Energy Gulf States, Inc.),
5.45s, 2010 .......................... 1,250 1,174,125
Clark County, NV, Industrial
Development Rev. (Nevada
Power Co.), 5.6s, 2030 ............... 3,000 2,609,640
Clark County, NV, Industrial
Development Rev. (Nevada
Power Co.), 5.9s, 2032 ............... 1,000 907,610
Connecticut Development
Authority, Pollution Control
Rev. (Connecticut Light &
Power), 5.85s, 2028 .................. 825 734,803
Klamath Falls, OR,
Electric Rev. (Klamath
Cogeneration), 6s, 2025 .............. 2,500 2,290,550
Matagorda County, TX (Reliant
Energy), 5.95s, 2030 ................. 2,000 1,824,420
Midland, MI, Environmental
Development Authority,
Pollution Control Rev.
(Midland Cogeneration),
9.5s, 2009 ........................... 1,500 1,563,720
</TABLE>
7
<PAGE>
Portfolio of Investments -- continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Electric and Gas Utility
Revenue -- continued
North Carolina Municipal
Power Agency, Catawba
Electric Rev., 6.5s, 2020 ...... $2,000 $ 1,957,700
Ohio Water Development,
Pollution Control Rev.
(Cleveland Electric), 8s,
2023 ........................... 2,500 2,726,400
Pima County, AZ, Industrial
Development Authority
(Tuscon Electric Power Co.),
6.1s, 2025 ..................... 650 586,008
Pima County, AZ, Industrial
Development Authority
(Tuscon Electric Power Co.),
6s, 2029 ....................... 3,000 2,687,250
Pittsylvania County, VA,
Industrial Development
Authority Rev., 7.5s, 2014 ..... 2,000 2,090,360
Southern California Public
Power Authority,
Transmission Project Rev.,
7.812s, 2012++++ ............... 3,650 3,803,555
West Feliciana Parish, LA,
Pollution Control Rev. (Gulf
States Utilities Co.), 5.8s,
2015 ........................... 1,500 1,388,625
------------
$ 27,970,052
------------
Health Care Revenue -- 21.3%
Alachua County, FL, Health
Facilities Rev. (Beverly
Enterprises), 6.75s, 2010 ...... $ 900 $ 872,838
Baltimore County, MD, Nursing
Facility Mortgage Rev.
(Eastpoint Rehabilation &
Nursing Center), 6.75s,
2028 ........................... 500 442,665
Bell County, TX, Health
Facilities Development
Corp. (Advanced Living
Technology), 7.25s, 2001 ....... 125 121,826
Bell County, TX, Health
Facilities Development
Corp. (Advanced Living
Technology), 7.75s, 2006 ....... 300 278,619
Bell County, TX, Health
Facilities Development
Corp. (Advanced Living
Technology), 8.125s, 2016 ...... 1,085 957,958
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Health Care Revenue -- continued
Bell County, TX, Health
Facilities Development Corp.
(Advanced Living
Technology), 8.5s, 2026 ........ $2,405 $ 2,095,236
Bell County, TX, Health
Facilities Development Corp.
(Kings Daughters Hospital),
9.25s, 2008 .................... 650 672,613
Booneville, MO, Health
Facilities Rev. (Gericare,
Inc.), 11s, 2017 ............... 1,900 1,926,353
Boston, MA, Industrial
Development Finance
Authority Rev. (Stonehedge
Convalescent Center),
10.75s, 2011 ................... 630 644,522
Brevard County, FL, Health
Facilities Authority Rev.
(Friendly Village), 9.25s,
2012 ........................... 2,165 2,182,233
Cambria County, PA, Industrial
Development Authority
(Beverly Enterprises), 10s,
2012 ........................... 640 781,062
Chautauqua County, NY,
Industrial Development
Agency, Civic Facility Rev.
(Woman's Christian Assn.),
6.35s, 2017 .................... 300 277,704
Chautauqua County, NY,
Industrial Development
Agency, Civic Facility Rev.
(Woman's Christian Assn.),
6.4s, 2029 ..................... 1,000 896,270
Chemung County, NY,
Industrial Development
Agency, Civic Facilities Rev.
(St. Joseph's Hospital-
Elmira), 6s, 2013 .............. 805 741,550
Chemung County, NY,
Industrial Development
Agency, Civic Facilities Rev.
(St. Joseph's Hospital-
Elmira), 6.35s, 2013 ........... 200 186,460
Cheneyville, LA, Westside
Habilitation Center, 8.375s,
2013 ........................... 2,400 2,542,512
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Health Care Revenue -- continued
Chester County, PA, Industrial
Development Authority
(RHA/PA Nursing Home),
10.125s, 2019* ................. $ 952 $ 780,640
Connecticut Health &
Educational Facilities
(Johnson Evergreen), 8.5s,
2014 ........................... 650 685,698
Contra Costa County, CA,
Residential Rental Facilities
Rev. (Cypress Meadows),
7s, 2028 ....................... 1,840 1,669,138
Denver, CO, Health & Hospital
Rev., 5.25s, 2013 .............. 635 566,534
Denver, CO, Health & Hospital
Rev., 5.375s, 2018 ............. 1,500 1,291,545
District of Columbia, Hospital
Rev. (Hospital for Sick
Children), 8.875s, 2021 ........ 470 490,248
Gadsden County, FL, Industrial
Development Authority
(RHA/FL Properties),
10.45s, 2018 ................... 2,440 2,456,055
Goldsboro, NC, Housing
Authority Rev. (North
Carolina Housing
Foundation, Inc.),
7.25s, 2029 .................... 400 371,572
Greenville County, SC,
Hospital Facility Rev.
(Chestnut Hill), 10.375s,
2016* .......................... 2,740 1,370,000
Illinois Health Facilities
Authority Rev. (Centegra
Health Systems), 5.25s,
2018 ........................... 1,000 862,070
Indiana Health Facilities
Financing Authority Rev.
(Metro Health/Indiana, Inc.),
6.3s, 2023 ..................... 1,240 1,119,187
Iowa Finance Authority, Health
Care Facilities Rev. (Care
Initiatives), 5.75s, 2018 ...... 500 451,980
Lee County, FL, Industrial
Development Authority
(Beverly Enterprises), 10s,
2010 ........................... 1,770 1,879,988
</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 ........................... $3,180 $ 3,232,565
Louisiana Public Facilities
Authority (Southwest
Medical Center), 11s, 2006 ..... 3,269 555,654
Lufkin, TX, Health Facilities
Development Corp.
(Memorial Health System of
East Texas), 6.875s, 2026 ...... 325 330,398
Lufkin, TX, Health Facilities
Development Corp.
(Memorial Health System of
East Texas), 5.7s, 2028 ........ 500 428,970
Massachusetts Health &
Education Facilities Authority
(St. Memorial Medical
Center), 6s, 2023 .............. 465 405,345
Massachusetts Industrial
Finance Agency
(Metropolitan Health
Foundation, Inc.), 6.75s,
2027 ........................... 1,500 1,427,370
Massachusetts Industrial
Finance Agency (Needham/
Hamilton House), 11s, 2010...... 700 725,004
Massachusetts Industrial
Finance Agency (WNR, Inc.),
9s, 2023++ ..................... 525 449,610
Millbrae, CA, Residential
Facility (Magnolia Of
Millbrae), 7.375s, 2027 ........ 1,000 1,005,130
Mississippi Business Finance
Corp., Health Facilities Rev.
(Medical Foundation, Inc.),
5.625s, 2023 ................... 1,445 1,210,202
Mocksville, NC (Housing
Foundation, Inc.), 7.25s,
2029 ........................... 400 372,912
Montgomery County, PA,
Higher Education & Health
Authority Rev. (AHF/
Montgomery), 10.5s, 2020 ....... 2,415 2,495,009
New Hampshire Business
Finance Authority, Health
Care Facilities Rev.
(Metropolitan Health
Foundation, Inc.), 6.55s,
2028 ........................... 800 717,280
</TABLE>
9
<PAGE>
Portfolio of Investments -- continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Health Care Revenue -- continued
New Hampshire Higher
Educational & Health
Facilities Authority Rev.,
5.8s, 2018 ............................ $1,000 $ 880,690
New Jersey Economic
Development Authority
(Courthouse Convalescent
Center), 8.7s, 2014 ................... 650 678,106
New Jersey Economic
Development Authority
(Geriatric & Medical
Services), 9.625s, 2022 ............... 675 715,493
New Jersey Economic
Development Authority
(Greenwood Health Care),
9.75s, 2011 ........................... 1,290 1,363,994
New Jersey Economic
Development Authority
(Wanaque Convalescent
Center), 8.6s, 2011 ................... 1,000 1,064,760
New Jersey Health Care
Facilities Financing Authority
(Cherry Hill), 8s, 2027 ............... 1,000 1,034,050
Ohio County, WV, County
Commission Health System
(Ohio Valley Medical Center),
5.75s, 2013 ........................... 850 773,730
Orange County, FL, Industrial
Development Rev. (Friendly
Village), 9.25s, 2012 ................. 1,805 1,809,278
Osceola County, FL, Industrial
Development Rev.
(Community Provider Pooled
Loan), 7.75s, 2017 .................... 1,300 1,337,830
Reedley, CA, Certificates of
Participation (Mennonite
Home), 7.5s, 2026 ..................... 2,965 3,009,890
Rochester, MN, Health Care
Facilities Rev. (Mayo Medical
Foundation), 8.21s, 2021 .............. 1,000 1,024,730
San Francisco, CA, City &
County (Coventry Park),
8.5s, 2026 ............................ 2,000 2,187,460
Santa Fe, NM, Industrial
Development Rev. (Casa
Real Nursing Home), 9.75s,
2013 .................................. 1,100 1,166,792
Seminole County, FL, Industrial
Development Authority
(Friendly Village), 10s, 2011 ......... 1,560 1,569,454
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Health Care Revenue -- continued
Sterling, IL (Hoosier Care),
7.125s, 2034 .......................... $ 745 $ 692,954
Suffolk County, NY, Industrial
Development Agency
(Southampton Hospital),
7.25s, 2020 ........................... 750 734,790
Washington County, FL,
Industrial Development
Authority (Washington
County), 10s, 2016 .................... 1,045 1,047,309
Waterford Township, MI,
Economic Development
Corp. Rev. (Canterbury
Health), 6s, 2039 ..................... 1,570 1,460,100
West Plains, MO, Industrial
Development Authority,
Hospital Rev. (Ozarks
Medical Center), 6.75s,
2024 .................................. 170 159,630
Wilkinsburg, PA, Municipal
Authority Health (Monroeville
Christian), 8.25s, 2027 ............... 1,000 938,780
------------
$ 66,620,345
------------
Industrial Revenue
(Corporate Guarantee) -- 13.4%
Courtland, AL, Industrial
Development Board, Solid
Waste Disposal Rev.
(Champion International
Corp.), 6.375s, 2029 .................. $2,000 $ 1,969,860
Eastern Band of Cherokee
Indian Community, NC
(Carolina Mirror Co.),
10.25s, 2009+ ......................... 5,815 5,824,246
Eastern Band of Cherokee
Indian Community, NC
(Carolina Mirror Co.), 11s,
2012+ ................................. 650 651,001
Hardeman County, TN
(Correctional Facilities
Corp.), 7.75s, 2017 ................... 2,220 2,341,523
Hernando County, FL, Water &
Sewer Rev. (Florida Crushed
Stone), 8.5s, 2014 .................... 3,600 3,967,236
Hodge Village, LA, Utilities
Rev. (Stone Container), 9s,
2010 .................................. 7,585 7,797,759
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Industrial Revenue
(Corporate Guarantee) -- continued
Indiana Development Finance
Authority Rev. (Inland Steel),
5.75s, 2011 ...................... $1,000 $ 882,030
Mesa County, CO, Industrial
Development Rev. (Joy
Technologies, Inc.), 8.5s,
2006* ............................ 950 665,000
Navajo County, AZ, Industrial
Development Authority
(Stone Container Corp.),
7.2s, 2027 ....................... 880 912,877
New Jersey Economic
Development Authority (Holt
Hauling & Warehousing),
8.4s, 2015 ....................... 1,000 1,043,340
New Jersey Economic
Development Authority (Holt
Hauling & Warehousing),
8.6s, 2017 ....................... 1,000 1,049,960
Ohio Solid Waste Rev.
(Republic Engineered
Steels), 8.25s, 2014 ............. 3,000 3,056,820
Ohio Solid Waste Rev.
(Republic Engineered
Steels), 9s, 2021 ................ 3,000 3,158,700
Onondaga County, NY,
Industrial Development
Agency, Solid Waste
Disposal Facility Rev. (Solvay
Paperboard LLC), 6.8s,
2014 ............................. 1,000 966,510
Philadelphia, PA, Industrial
Development Authority Rev.
(Host Marriott LP), 7.75s,
2017 ............................. 3,255 3,465,793
Port of New Orleans, LA
(Avondale Industries), 8.25s,
2004 ............................. 700 742,623
Port of New Orleans, LA
(Avondale Industries), 8.5s,
2014 ............................. 1,625 1,758,445
St. Charles Parish, LA,
Pollution Control Rev. (Union
Carbide Corp.), 5.1s, 2012 ....... 300 275,313
Virginia Peninsula Ports
Authority Rev. (Zeigler Coal),
6.9s, 2022 ....................... 1,250 1,179,675
------------
$ 41,708,711
------------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Insured Health Care
Revenue -- 0.5%
Bexar County, TX, Health
Facilities Development
(Baptist Health Systems),
MBIA, 5.25s, 2027 ................ $1,000 $ 876,760
Salt Lake City, UT, Hospital
Rev. (Intermountain Health
Care), AMBAC, 9.287s,
2020++++ ......................... 600 637,284
------------
$ 1,514,044
------------
Multi-Family Housing
Revenue -- 5.3%
Austin, TX, Housing Finance
Corp. (Woodland Heights
Apartments), 10s, 2027 ........... $ 985 $ 951,865
Colorado Housing Finance
Authority, FHA, 9s, 2025 ......... 740 740,725
Dade County, FL, Housing
Finance Agency
(Blackstone), 8.375s, 2002+ 5,467 5,495,199
Dade County, FL, Housing
Finance Agency (Silverblue),
8.375s, 2002+ .................... 3,458 3,475,652
Dallas, TX, Housing Finance
Corp., 8.5s, 2011 ................ 1,165 1,181,811
Eaglebend, CO, Affordable
Housing Corp., 6.4s, 2017 ........ 1,000 967,600
Florida Multi-Family Housing
Finance Agency Rev.
(Center Court Apartments),
8.5s, 2018 ....................... 1,005 986,628
Munimae Te Bond Subsidiary
LLC, 6.875s, 2009# ............... 2,000 1,985,700
Ridgeland, MS, Urban
Renewal, Multifamily
Housing Rev. (Northbrook I
& III Apartments), 6.15s,
2019 ............................. 280 253,546
Ridgeland, MS, Urban
Renewal, Multifamily
Housing Rev. (Northbrook I
& III Apartments), 6.25s,
2029 ............................. 475 422,731
------------
$ 16,461,457
------------
Sales and Excise Tax
Revenue -- 0.3%
Black Hawk, CO, Device Tax
Rev., 5.625s, 2021 ............... $ 250 $ 230,505
</TABLE>
11
<PAGE>
Portfolio of Investments -- continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Sales and Excise Tax
Revenue -- continued
Virgin Islands Public Finance
Authority, 6s, 2006 ............. $ 250 $ 252,060
Virgin Islands Public Finance
Authority, 5.875s, 2018 ......... 500 473,935
------------
$ 956,500
------------
Single Family Housing
Revenue -- 6.0%
Bexar County, TX, Housing
Finance Corp., 0s, 2015 ......... $ 5,135 $ 950,694
Colorado Housing Finance
Authority, 7.15s, 2014 .......... 105 112,094
Cook County, IL, Single Family
Mortgage Rev., 0s, 2015 ......... 490 89,155
Corpus Christi, TX, Housing
Finance Corp., MBIA, 0s,
2011 ............................ 3,000 959,130
Dallas, TX, Housing Finance
Corp., Single Family
Mortgage Rev., MBIA, 0s,
2016 ............................ 13,890 2,405,470
Duval County, FL, Housing
Finance Authority, 0s, 2015 ..... 13,500 2,295,810
Georgia Housing & Finance
Authority Rev., FHA, 0s,
2031 ............................ 14,120 1,359,474
Jackson County, MO, 0s,
2016 ............................ 1,040 160,170
Missouri Housing Development
Commission, Mortgage
Rev., GNMA/FNMA, 6.45s,
2029 ............................ 200 210,776
Nebraska Investment Finance
Authority, 0s, 2015 ............. 22,850 5,153,360
Nebraska Investment Finance
Authority, 6.25s, 2021 .......... 1,990 1,999,174
Ohio Housing Finance Agency,
Single Family Mortgage
Rev., GNMA/FNMA, 8.832s,
2031++++ ........................ 600 637,902
Reno County, KS, Single
Family Mortgage Rev.,
AMBAC, 0s, 2014 ................. 900 167,202
Saline County, KS, 0s, 2014 ....... 200 38,632
South Dakota Housing
Development Authority,
Homeownership Mortgage,
FHLMC, 5.8s, 2028 ............... 1,830 1,737,457
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Single Family Housing
Revenue -- continued
Wisconsin Housing &
Economic Development
Authority, Homeownership
Rev., 9.855s, 2022++++ .......... $ 455 $ 477,177
------------
$ 18,753,677
------------
Solid Waste Revenue -- 0.1%
Southwestern Illinois
Development Authority, Solid
Waste Disposal Rev., 5.9s,
2014 ............................ $ 395 $ 363,021
------------
Special Assessment
District -- 1.5%
Chicago, IL, Tax Increment
Rev. (Ryan Garfield),
10.125s, 2007 ................... $ 1,400 $ 1,428,336
Denver, CO, Urban Renewal
Tax (Downtown Denver),
8.5s, 2013 ...................... 435 440,325
Heritage Isles, FL, Community
Development District, 5.75s,
2005 ............................ 650 636,402
Katy, TX, Development
Authority Rev., 5.8s, 2011 ...... 945 888,602
Katy, TX, Development
Authority Rev., 6s, 2018 ........ 1,325 1,226,513
------------
$ 4,620,178
------------
Student Loan Revenue -- 0.7%
Arizona Student Loan
Acquisition Authority, "C",
7.625s, 2010 .................... $ 750 $ 802,440
Pennsylvania Higher Education
Assistance Agency, AMBAC,
8.138s, 2022++++ ................ 1,300 1,320,800
------------
$ 2,123,240
------------
Turnpike Revenue -- 2.7%
Massachusetts Turnpike
Authority, Capital
Appreciation, "C",
MBIA, 0s, 2022 .................. $10,000 $ 2,571,800
Niagara Falls, NY, Bridge
Commission, Toll Rev.,
FGIC, 6.87s, 2015+++++ .......... 1,500 1,362,120
Pocahontas Parkway Assn., VA,
Toll Road Rev., 0s, 2011 ........ 1,000 451,980
Pocahontas Parkway Assn., VA,
Toll Road Rev., 0s, 2012 ........ 1,000 419,930
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Turnpike Revenue -- continued
Pocahontas Parkway Assn., VA,
Toll Road Rev., 0s, 2015 ........................................ $1,750 $ 608,755
San Joaquin Hills, CA,
Transportation Corridor
Agency, Toll Road Rev.,
MBIA, 5.25s, 2030 ............................................... 1,500 1,336,215
Telluride, CO, Gondola Transit
Co., 9s, 2016 ................................................... 940 1,045,656
West Virginia Parkways,
Economic Development &
Tourism Authority, FGIC,
7.452s, 2019++++ ................................................ 600 573,966
------------
$ 8,370,422
------------
Universities -- 1.1%
Islip, NY, Community
Development Agency Rev.
(New York Institute of
Technology), 7.5s, 2026 ......................................... $2,500 $ 2,590,425
Nassau County, NY, Industrial
Development Agency, Civic
Facilities Rev. (New York
Institute of Technology),
6.15s, 2029 ..................................................... 1,000 915,600
------------
$ 3,506,025
------------
Water and Sewer Utility
Revenue -- 1.8%
Detroit, MI, Sewer Disposal
Rev., FGIC, 7.618s, 2023++++..................................... $1,900 $ 2,106,663
Detroit, MI, Sewer Disposal
Rev., FGIC, 7.618s, 2023++++..................................... 600 544,458
Harrisburg, PA, Authority
Water Rev., FGIC, 7.57s,
2015++++ ........................................................ 2,000 2,008,980
New York City, NY, Municipal
Water Finance Authority
Rev., FSA, 5.375s, 2026 ......................................... 1,100 999,592
------------
$ 5,659,693
------------
Other -- 3.6%
Danville, VA, Industrial
Development Rev.
(Piedmont Mall), 8s, 2017 ....................................... $5,795 $ 5,918,144
District of Columbia (National
Public Radio), 7.7s, 2023 ....................................... 2,500 2,673,850
Iowa Finance Authority
Community Provider Rev.
(Boys & Girls Home), 6.25s,
2028 ............................................................ 500 448,980
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Other -- continued
Lehigh County, PA, General
Purpose Authority
(Kidspeace Obligation
Group), 6s, 2023 ................................................ $1,000 $ 916,740
Memphis, TN, Health,
Educational & Housing
Facilities Board (Wesley
Highland Terrace), 8.5s,
2024 ............................................................ 115 117,300
Mississippi Development Bank
(Diamond Lakes Utilities),
6.25s, 2017 ..................................................... 1,000 933,800
St. Louis County, MO,
Industrial Development
Authority (Kiel Center Arena),
7.875s, 2024 .................................................... 300 317,364
------------
$ 11,326,178
------------
Total Municipal Bonds
(Identified Cost, $300,869,048) ..................................................... $304,098,692
------------
Floating Rate Demand Notes -- 0.3%
East Baton Rouge Parish, LA,
Pollution Control Rev. (Exxon
Corp.), due 11/01/99 ............................................ $ 200 $ 200,000
Harris County, TX, Industrial
Development Corp., Pollution
Control Rev. (Exxon Corp.),
due 11/01/99 .................................................... 100 100,000
Long Island, NY, Power
Authority, Electric Systems
Rev., due 11/01/99 .............................................. 200 200,000
Martin County, FL, Pollution
Control Rev. (Power & Light
Co.), due 11/01/99 .............................................. 300 300,000
------------
Total Floating Rate Demand Notes, at
Identified Cost ..................................................................... $ 800,000
------------
Total Investments
(Identified Cost, $301,669,048) ..................................................... $304,898,692
------------
Other Assets,
Less Liabilities -- 2.3% 7,296,137
------------
Net assets--100.0% .................................................................... $312,194,829
------------
</TABLE>
* Non-income producing security -- in default.
# SEC Rule 144A restriction.
+ Restricted security.
++ Security valued by or at the direction of the Trustees.
++++ Inverse floating rate security.
See notes to financial statements.
13
<PAGE>
Statement of Assets and Liabilities -- October 31, 1999
<TABLE>
<S> <C>
Assets:
Investments, at value (identified cost, $301,669,048) ................................... $304,898,692
Cash .................................................................................... 20,585
Receivable for investments sold ......................................................... 3,494,193
Interest receivable ..................................................................... 6,368,317
Other assets ............................................................................ 4,322
------------
Total assets .......................................................................... $314,786,109
------------
Liabilities:
Payable to dividend disbursing agent .................................................... $ 193,289
Payable for investments purchased ....................................................... 1,952,690
Payable to affiliates--
Management fee ......................................................................... 18,756
Transfer and dividend disbursing agent fee ............................................. 8,678
Administrative fee ..................................................................... 383
Accrued expenses and other liabilities .................................................. 417,484
------------
Total liabilities ..................................................................... $ 2,591,280
------------
Net assets ............................................................................... $312,194,829
============
Net assets consist of:
Paid-in capital ......................................................................... $355,603,287
Unrealized appreciation on investments .................................................. 3,229,644
Accumulated net realized loss on investments ............................................ (47,661,950)
Accumulated undistributed net investment income ......................................... 1,023,848
------------
Total ................................................................................. $312,194,829
============
Shares of beneficial interest outstanding: 39,241,840
==========
Net asset value per share (net assets [divided by] shares of beneficial interest
outstanding) .......................................................................... $7.96
=====
</TABLE>
See notes to financial statements.
14
<PAGE>
Statement of Operations -- Year Ended October 31, 1999
<TABLE>
<S> <C>
Net investment income:
Interest income ......................................................... $ 24,593,869
------------
Expenses --
Management fee ......................................................... $ 2,855,706
Trustees' compensation ................................................. 144,098
Administrative fee ..................................................... 40,847
Transfer and dividend disbursing agent fee ............................. 103,534
Custodian fee .......................................................... 119,364
Printing ............................................................... 24,377
Postage ................................................................ 23,044
Auditing fees .......................................................... 37,458
Legal fees ............................................................. 4,792
Miscellaneous .......................................................... 110,235
------------
Total expenses ........................................................ $ 3,463,455
Fees paid indirectly ................................................... (46,212)
------------
Net expenses .......................................................... $ 3,417,243
------------
Net investment income ................................................ $ 21,176,626
------------
Realized and unrealized gain (loss) on investments:
Realized gain on investment transactions (identified cost basis) ....... $ 169,824
Change in unrealized depreciation on investments ....................... (23,752,255)
------------
Net realized and unrealized loss on investments ....................... $(23,582,431)
------------
Decrease in net assets from operations ............................... $ (2,405,805)
============
</TABLE>
See notes to financial statements.
15
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations--
Net investment income ........................................................ $ 21,176,626 $ 21,995,528
Net realized gain (loss) on investments ...................................... 169,824 (1,258,751)
Net unrealized gain (loss) on investments .................................... (23,752,255) 3,065,054
------------ ------------
Increase (decrease) in net assets from operations ........................... $ (2,405,805) $ 23,801,831
------------ ------------
Distributions declared to shareholders
from net investment income ................................................... $(20,838,296) $(22,462,751)
------------ ------------
Net increase in net assets from Trust shares reinvested ....................... $ 1,894,933 $ 2,923,015
------------ ------------
Total increase (decrease) in net assets ..................................... $(21,349,168) $ 4,262,095
Net assets:
At beginning of period ....................................................... 333,543,997 329,281,902
------------ ------------
At end of period (including accumulated undistributed net investment income of
$1,023,848 and $679,868, respectively) ...................................... $312,194,829 $333,543,997
============ ============
</TABLE>
See notes to financial statements.
16
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended
---------------------
1999 1998
-------- --------
<S> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value--beginning of period ............................. $ 8.55 $ 8.51
-------- --------
Income from investment operations#--
Net investment income ........................................... $ 0.54 $ 0.57
Net realized and unrealized gain (loss) on investments ......... (0.60) 0.05
-------- --------
Total from investment operations .............................. $ (0.06) $ 0.62
-------- --------
Less distributions declared to shareholders from net
investment income ............................................... $ (0.53) $ (0.58)
-------- --------
Net asset value--end of period ................................... $ 7.96 $ 8.55
======== ========
Per share market value--end of period ............................ $ 7.13 $ 9.19
======== ========
Total return ..................................................... (0.59)% 8.37%
Ratios (to average net assets)/Supplemental data:
Expenses## ..................................................... 1.06% 1.10%
Net investment income .......................................... 6.49% 6.62%
Portfolio turnover ............................................... 15% 12%
Net assets at end of period (000 omitted) ........................ $312,195 $333,544
<CAPTION>
Year Ended
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <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
-------- -------- --------
Income from investment operations#--
Net investment income ........................................... $ 0.61 $ 0.66 $ 0.68
Net realized and unrealized gain (loss) on investments ......... (0.03) (0.26) 0.13
-------- -------- --------
Total from investment operations .............................. $ 0.58 $ 0.40 $ 0.81
-------- -------- --------
Less distributions declared to shareholders from net
investment income ............................................... $ (0.65) $ (0.66) $ (0.70)
-------- -------- --------
Net asset value--end of period ................................... $ 8.51 $ 8.58 $ 8.84
======== ======== ========
Per share market value--end of period ............................ $ 9.06 $ 9.38 $ 9.50
======== ======== ========
Total return ..................................................... 3.90% 4.50% 12.57%
Ratios (to average net assets)/Supplemental data:
Expenses## ..................................................... 1.19% 1.24% 1.33%
Net investment income .......................................... 7.26% 7.47% 7.66%
Portfolio turnover ............................................... 21% 13% 14%
Net assets at end of period (000 omitted) ........................ $329,282 $328,630 $334,985
</TABLE>
#Per share data are based on average shares outstanding.
##Ratios do not reflect expense reductions from certain expense offset
arrangements.
See notes to financial statements.
17
<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 in good faith by
the Trustees.
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 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 made directly to the
security issuer, 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.
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.
18
<PAGE>
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 distributions from paid-in
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains. During
the year ended October 31, 1999, accumulated undistributed net investment income
was increased by $5,650, accumulated undistributed net realized loss on
investments was decreased by $1,672,202 and paid in capital was decreased by
$1,677,852, due to differences between book and tax accounting. This change had
no effect on the net assets or net asset value per share.
At October 31, 1999, the Trust, for federal income tax purposes, had a capital
loss carryforward of $47,570,221, 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, 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
the Trust's 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 $53,192 for the year ended October 31, 1999.
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 services fee of $0.75 per
reinvestment and will reimburse MFSC for reasonable out-of-pocket expenses.
19
<PAGE>
Notes to Financial Statements -- continued
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $46,831,928 and $49,513,053, respectively.
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the Trust, as computed on a federal income tax basis, are
as follows:
<TABLE>
<S> <C>
Aggregate cost ........................ $301,776,296
============
Gross unrealized appreciation ......... $ 14,248,337
Gross unrealized depreciation ......... (11,125,941)
------------
Net unrealized appreciation .......... $ 3,122,396
============
</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. Transactions in Trust shares
were as follows:
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Shares issued to shareholders in reinvestment of distributions ..... 223,925 338,271
======= =======
</TABLE>
(6) Line of Credit
The Trust and other affiliated funds participate in a $820 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of 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, 1999, was $2,261.
(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, 1999,
the Trust owned the following restricted securities, constituting 6.53% 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 securities is determined by valuations furnished
by dealers or by a pricing service, or if not available, are valued in good
faith by the Trustees.
<TABLE>
<CAPTION>
Date of Par
Description Acquisition Amount Cost Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Chicago, IL, Public Building Commission, Building Rev.,
6.841s, 2016 ......................................... 3/11/99 $1,300,000 $1,403,610 $ 1,153,698
Chicago, IL, Public Building Commission, Building Rev.,
6.841s, 2017 ......................................... 3/11/99 1,050,000 1,123,542 914,508
Dade County, FL, Housing Finance Agency (Blackstone),
8.375s, 2002 ......................................... 4/22/94 5,466,500 5,466,500 5,495,199
Dade County, FL, Housing Finance Agency (Silverblue),
8.375s, 2002 ......................................... 4/22/94 3,457,500 3,457,500 3,475,652
Eastern Band of Cherokee Indian Community, NC
(Carolina Mirror Co.), 10.25s, 2009 .................. 11/25/86 5,815,000 5,698,698 5,824,246
Eastern Band of Cherokee Indian Community, NC
(Carolina Mirror Co.), 11s, 2012 ..................... 2/05/88 650,000 601,250 651,001
Hannibal, MO, Industrial Development Authority
(Hannibal Regional Healthcare), 9.5s, 2001 ........... 3/23/92 1,500,000 1,485,000 1,689,330
Niagara Falls, NY, Bridge Commission, Toll Rev.
6.87s, 2015 .......................................... 5/21/99 1,500,000 1,609,680 1,362,120
-----------
$20,565,754
===========
</TABLE>
20
<PAGE>
Independent Auditor's Report
To the Trustees and Shareholders of MFS Municipal Income Trust:
We have audited the accompanying statement of assets and liabilities of MFS
Municipal Income Trust (the "Trust") including the portfolio of investments, as
of October 31, 1999, the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended. 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 securities owned at October
31, 1999, by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Municipal Income Trust as of October 31, 1999, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 9, 1999
21
<PAGE>
MFS' Year 2000 Readiness Disclosure
[Graphic: MFS > Year 2000; Y2K]
MFS Investment Management[RegTM], as an investment adviser and on behalf of the
MFS funds, is committed to the effective use of technology in managing our
portfolio investments, delivering high-quality service to MFS fund shareholders,
retirement plan participants, and MFS' institutional clients, and supporting the
financial consultants who sell our products.
MFS can now say that it is ready for the Year 2000. Our testing has demonstrated
that MFS' computer hardware and software will recognize "00" as the Year 2000
and will not confuse those digits with 1900. All of our critical business
applications and processes have been successfully tested, and we have adopted
companywide policies that will help us maintain our readiness through the
remainder of the year. Any new technology that is brought into the company
before the end of the year will be held to the same stringent standards as our
current technology. We have also developed a vendor readiness survey, contacted
over 700 of our vendors, and established an ongoing process to review responses,
as well as to review readiness statements of new vendors and products.
MFS recognizes that fund shareholders and institutional clients also are
concerned about whether the companies whose securities are held in their
portfolios are addressing Y2K issues. As part of the MFS Original
Research[RegTM] process of evaluating portfolio investments, one of the many
relevant factors that MFS' portfolio managers and research analysts may consider
is a company's Y2K readiness.
Y2K readiness is an enormously complex, worldwide issue. No company or
institution can guarantee that it will be unaffected by the Y2K issue. While MFS
is taking significant steps to protect the integrity of its internal systems,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on MFS fund shareholders, retirement plan participants, or
institutional clients.
If you have further questions regarding MFS' Year 2000 Readiness Program,
please visit our Web site at www.mfs.com, call our toll-free line,
1-800-637-4406, or write to the MFS Year 2000 Program Management Office by
e-mail at [email protected] or by letter at 500 Boylston Street, Boston, MA
02116-3741.
22
<PAGE>
[Back cover]
MFS[RegTM] Municipal Income Trust
Trustees
Richard B. Bailey (2)
Private Investor; Former Chairman and
Director (until 1991), MFS Investment Management
J. Atwood Ives+(2)
Chairman and Chief Executive Officer,
Eastern Enterprises
(diversified services company)
Lawrence T. Perera+(1)
Partner, Hemenway & Barnes
(attorneys)
William J. Poorvu+(1)
Adjunct Professor, Harvard University
Graduate School of Business
Administration
Charles W. Schmidt+(2)
Private Investor
Arnold D. Scott *
Senior Executive Vice President,
Director, and Secretary,
MFS Investment Management
Jeffrey L. Shames*
Chairman and Chief Executive
Officer, MFS Investment Management
Elaine R. Smith+(1)
Independent Consultant
David B. Stone+(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
+ Independent Trustee.
* MFS Investment Management.
(1) Member of Audit Committee.
(2) Member of Portfolio Trading Committee.
[Recycle logo] This report is printed on recycled paper. MFMCE-2 12/99 32M
[Front cover]
[Background graphic: BOND repeating horizontally and vertically]
[Graphic: MFS[RegTM] Logo]
INVESTMENT MANAGEMENT
We invented the mutual fund[RegTM]
MFS[RegTM] Municipal
Income Trust
Annual Report o October 31, 1999
