<PAGE>
[Logo] Annual Report for
THE FIRST NAME IN MUTUAL FUNDS Year Ended
January 31, 1995
MFS(R) MUNICIPAL HIGH INCOME FUND
Front Cover: A 6 1/4" by 8 1/4" photo of a highway
<PAGE>
<TABLE>
MFS(R) MUNICIPAL HIGH INCOME FUND
<CAPTION>
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin<F1> - Chairman and President State Street Bank and Trust Company
Richard B. Bailey<F1> - Private Investor; AUDITORS
Former Chairman and Director (until 1991), Ernst & Young LLP
Massachusetts Financial Services Company
INVESTOR INFORMATION
Peter G. Harwood - Former Financial Vice For MFS stock and bond market outlooks,
President, Treasurer and Director (until 1988), call toll-free: 1-800-637-4458 anytime from
Loomis, Sayles & Co., Inc. a touch-tone telephone.
J. Atwood Ives - Chairman and Chief Executive For information on MFS mutual funds
Officer, Eastern Enterprises call your financial adviser or, for an
information kit, call toll-free:
Lawrence T. Perera - Partner, Hemenway & Barnes 1-800-637-2929 any business day from
9 a.m. to 5 p.m. Eastern time (or, leave
William J. Poorvu - Adjunct Professor, Harvard a message anytime).
University Graduate School of Business
Administration INVESTOR SERVICE
MFS Service Center, Inc.
Charles W. Schmidt - Private Investor; P.O. Box 2281
Former Senior Vice President and Group Executive Boston, MA 02107-9906
(until 1990), Raytheon Company
For current account service, call toll free:
Arnold D. Scott<F1> - Senior Executive Vice President, 1-800-225-2606 any business day from
Massachusetts Financial Services Company 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames<F1> - President and Chief Equity For service to speech- or hearing-impaired,
Officer, Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Elaine R. Smith - Independent Consultant
For share prices, account balances and
David B. Stone - Chairman, North American exchanges, call toll free: 1-800-MFS-TALK
Management Corp. (Investment Advisers) (1-800-637-8255) anytime from a touch-tone
telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116-3741
TOP-RATED SERVICE
PORTFOLIO MANAGER (NO. 1) MFS was rated first when
Cynthia M. Brown<F1> securities firms evaluated the
quality of service they receive
TREASURER from 40 mutual fund companies.
W. Thomas London<F1> MFS got high marks for answering
calls quickly, processing transactions
ASSISTANT TREASURER accurately and sending statements
James O. Yost<F1> out on time.
SECRETARY (Source: 1994 DALBAR survey)
Stephen E. Cavan<F1>
ASSISTANT SECRETARY
James R. Bordewick, Jr.<F1>
Cover photo: Through their wide range of
investments, MFS mutual funds help you
share in America's growth.
<FN>
<F1> Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
During the fiscal year ended January 31, 1995, Class A shares of the Fund
provided a total return of -1.04%, while Class B shares had a total return of
- -2.13%. Both of these figures assume the reinvestment of distributions but
exclude the effects of any sales charges. The Fund's performance over this
period was quite favorable relative to the -3.56% return of the Lehman Brothers
Municipal Bond Index. However, it is important to note that the Lehman Index
represents an unmanaged index of investment-grade municipal bonds rated Baa or
higher, while the Fund invests primarily in lower-quality municipal issues which
are rated Baa or below, or are unrated. A discussion of the Fund's results
relative to the Lehman Index may be found in the Portfolio Performance and
Strategy section below.
Economic Outlook
The economic expansion, entering its fifth year, gained firmer underpinnings in
1994 as employers significantly stepped up hiring levels. Increased employment,
stronger capital spending by businesses, and strengthening overseas economies
resulted in 4% real (adjusted for inflation) gross domestic product growth last
year. Interest rates rose substantially over the past year, which should help
restrain, but not curtail, the economic expansion. Based on improving economic
fundamentals both here and abroad, we expect the business expansion to continue
well into 1995.
Interest Rates
Despite a stronger economy, inflation at the consumer level has remained
relatively benign at 2.7% in 1994, the fourth straight year of 3.0% or less. Due
to a prolonged period of below-trend-line growth and continued pressure on
corporations to emphasize effective cost controls, wage growth and unit labor
costs have remained subdued. However, as the economy has exhibited continuing
strength, various industrial commodity prices have been rising substantially
faster than consumer prices. Nevertheless, businesses have had difficulty
passing these price increases on to the consumer. With the economy continuing to
expand, we expect some upward movement in inflation from below 3% to the 3 1/2%
range. The Federal Reserve Board has shown a willingness to raise short-term
rates to slow the economy to dampen inflationary pressures. Most recently, it
raised the federal funds rate 50 basis points (0.50%) after a 75 basis-point
(0.75%) increase in November. We expect the Federal Reserve to raise short-term
rates again in the coming months if it believes its current efforts have failed
to dampen inflationary expectations. Although we believe fundamentals are
favorable for lower long-term rates sometime in 1995, this may not occur until
the Federal Reserve feels that its policy toward slowing the economic expansion
has been successful. Thus, we believe that long-term yields may move moderately
higher in the near term.
Municipal Bond Market
The municipal bond market ended the calendar year on an unsettling note because
of the bankruptcy filing of Orange County, California and the uncertain effect
this will have on other tax-exempt bonds. Although the Fund had no direct
exposure to Orange County itself, 1.5% of total Fund assets is invested in two
issues of the San Joaquin Transportation Corridor Agency. This Agency has
invested one-half of its construction funds and all of its construction
contingency funds with the County. It is now up to the bankruptcy court to
determine the plan of disbursement of funds held within the County's investment
pool. We will closely monitor this situation but, at this time, we do not
believe it will adversely impact the Fund.
<PAGE>
LETTER TO SHAREHOLDERS - continued
The supply of municipal bonds in 1994 decreased 44% from the record-breaking
issuance in 1993, and is not expected to increase in 1995. Selling pressures
which plagued municipal bond performance during the year as a result of
market-related and tax-related transactions are expected to abate. So far in
1995, the supply picture has not improved. Issuance during the month of January
was 40% of that in January of 1994. The anti-big government, tax- cutting
sentiment, which played an important role in the November elections, should
hamper growth in municipal capital spending in the near term. This shortage of
supply, combined with the anticipated return to bond funds of retail buyers
unable to purchase individual bonds, in our opinion bodes well for municipal
bond funds during the year ahead.
Portfolio Performance and Strategy
The Fund's outperformance relative to the Lehman Index during the fiscal year
ended January 31, 1995 can be attributed to its high concentration of bonds with
higher-than-market stated coupons, which are associated with lower-rated bonds.
Generally, these securities are less price sensitive in a volatile interest rate
environment and provide less price fluctuation during these periods. This
portfolio structure is consistent with the Fund's investment objective of
providing a high level of current tax-exempt income through generally
lower-rated or unrated securities. Based on our outlook for interest rates in
1995, capital appreciation in the Fund over the coming year is likely to be
minimal, and interest income should make up a significant component of the
Fund's total return.
Our efforts remain focused on research and preservation of high current
tax-exempt income. We continue to closely monitor our holdings and seek out new
opportunities for investment. This past year has seen credit concerns regarding
Orange County and the much anticipated opening of the new Denver International
Airport, as well as a plethora of financings for de-inked paper facilities and
co-generation power plants. Diversification of credit risk and liquidity factors
remain important components of the Fund's overall strategy.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
A 1 1/2" by 1 5/8" photo of A. Kieth Brodkin, Chairman and President
A 1 1/2" by 1 5/8" photo of Cynthia M. Brown, Portfolio Manager.
A. Keith Brodkin Cynthia M. Brown
Chairman and President Portfolio Manager
February 28, 1995
<PAGE>
PORTFOLIO MANAGER PROFILE
Cynthia Brown began her career at MFS in 1986 in the Fixed Income Department. A
graduate of Boston University, she was named Investment Officer in 1986,
Assistant Vice President in 1987, Vice President in 1989 and Senior Vice
President in 1994. In addition to managing MFS Municipal High Income Fund, she
oversees MFS(R) Municipal Income Trust. Ms. Brown is a member of the Boston
Municipal Analysts Group.
OBJECTIVE AND POLICY
The Fund's investment objective is to provide high current income exempt from
federal income taxes.
The Fund's investment policy is to invest primarily in debt securities, the
interest on which is exempt from federal income tax. Generally, these securities
are in the medium- and lower-rated categories or are unrated. The Fund may enter
into futures contracts and options on futures contracts to protect against
anticipated changes in interest rates. The Fund may also enter into options
transactions and purchase securities on a "when-issued" basis.
TAX FORM SUMMARY
In January 1995, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1994. For
the year ended January 31, 1995, the distributions from investment income of
Class A and Class B shares were $0.67 and $0.57, respectively.
For federal income tax purposes, 100% of the total dividends paid by the Fund
from net investment income during the year ended January 31, 1995 is designated
as an exempt-interest dividend.
PERFORMANCE
The information on the following page illustrates the historical performance of
MFS Municipal High Income Fund Class A shares in comparison to various market
indicators. Class A share results reflect the deduction of the 4.75% maximum
sales charge; benchmark comparisons are unmanaged and do not reflect any fees or
expenses. You cannot invest in an index. All results reflect the reinvestment of
all dividends and capital gains.
Please note that effective September 7, 1993, Class B shares were offered.
Information on Class B share performance appears on the next page.
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (For the 5-Year Period Ended January
31, 1995)
- --------------------------------------------------------------------------------
Line graph representing the growth of a $10,000 investment for the 5-year period
ended January 31, 1995. The graph is scaled from $8,000 to $18,000 in $2,000
segments. The years are marked from 1990 to 1995. There are three lines drawn to
scale. One is a solid line representing MFS Municipal High Income Fund (Class
A), a second line of short dashes represents the Lehman Brothers Municipal Bond
Index, and a third line of long dashes represents the Consumer Price Index.
MFS Municipal High Income Fund (Class A) $12,958
Lehman Brothers Municipal Bond Index $14,407
Consumer Price Index $11,797
- --------------------------------------------------------------------------------
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (For the 10-Year Period Ended
January 31, 1995)
- --------------------------------------------------------------------------------
Line graph representing the growth of a $10,000 investment for the 10-year
period ended January 31, 1995. The graph is scaled from $5,000 to $30,000 in
$5,000 segments. The years are marked from 1985 to 1995. There are three lines
drawn to scale. One is a solid line representing MFS Municipal High Income Fund
(Class A), a second line of short dashes represents the Lehman Brothers
Municipal Bond Index, and a third line of long dashes represents the Consumer
Price Index.
MFS Municipal High Income Fund (Class A) $20,127
Lehman Brothers Municipal Bond Index $24,050
Consumer Price Index $14,244
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------
MFS Municipal High Income Fund
(Class A) including 4.75%
sales charge -5.76% +3.92% +5.32% +7.25%
- ------------------------------------------------------------------------------
MFS Municipal High Income Fund
(Class A) at net asset value -1.04% +5.62% +6.35% +7.77%
- ------------------------------------------------------------------------------
MFS Municipal High Income Fund
(Class B) with CDSC+ -5.79% -- -- -2.83%*
- ------------------------------------------------------------------------------
MFS Municipal High Income Fund
(Class B) without CDSC -2.13% -- -- -0.20%*
- ------------------------------------------------------------------------------
Lehman Brothers Municipal Bond
Index -3.56% +5.94% +7.58% +9.17%
- ------------------------------------------------------------------------------
Consumer Price Index(S) +2.80% +2.86% +3.36% +3.60%
- ------------------------------------------------------------------------------
All of the above results are historical and, therefore, are not an indication of
future results. The principal value and income return of an investment in a
mutual fund will vary with changes in market conditions, and shares, when
redeemed, may be worth more or less than their original cost.
* For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1995.
+ These returns reflect the current maximum Class B contingent deferred sales
charge (CDSC) of 4%.
(S) The Consumer Price Index is a popular measure of change in prices.
<PAGE>
PORTFOLIO OF INVESTMENTS - January 31, 1995
Municipal Bonds - 100.1%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Student Loan Revenue - 2.1%
Arizona Student Loan Acquisition
Authority, 7.25s, 2010 $ 2,970 $ 2,959,367
Arizona Student Loan Acquisition
Authority, 7.625s, 2010 4,610 4,874,522
Nebraska Higher Education Loan Rev., 6.45s, 2018 11,000 10,316,460
Pennsylvania Higher Education Assistance
Agency, AMBAC, RIBS, 7.316s, 2022 2,700 2,229,471
-------------
$ 20,379,820
- -----------------------------------------------------------------------------
General Obligations - 2.0%
City of Markham, Cook County, IL, 9s, 2012 $ 2,700 $ 2,825,766
New Lenox Illinois Community, 8.25s, 2014 4,205 4,095,123
New York City, NY, 6.875s, 2003 1,000 1,018,060
New York City, NY, 7.1s, 2011 1,000 991,190
New York City, NY, 6.5s, 2012 3,000 2,772,390
New York City, NY, 7s, 2022 1,700 1,771,434
State of California, 0s, 2009 5,800 2,267,452
Virgin Islands Public Financing
Authority, 7.25s, 2018 2,000 2,013,760
West Warwick, RI, 6.8s, 1998 655 653,965
West Warwick, RI, 7s, 2002 210 209,101
West Warwick, RI, 7.3s, 2008 200 201,438
West Warwick, RI, 7.45s, 2013 570 548,289
-------------
$ 19,367,968
- -----------------------------------------------------------------------------
State and Local Appropriations - 1.8%
District of Columbia, Certificates of
Participation, 7.3s, 2013 $ 2,500 $ 2,313,675
San Bernardino, CA, Certificates of
Participation (Short Rites), MBIA, 8.66s, 2016 5,000 4,253,100
South Tucson, AZ, Municipal Property
Corp., 8.75s, 2010 865 923,041
State of California Public Works, 5.625s, 2018 5,000 4,278,800
Troy, NY, Certificates of Participation,
Recreational Facilities Rev., 9.75s, 2010 2,805 2,929,318
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 1995 60 59,866
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 1996 65 64,382
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 1997 70 68,852
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 1998 75 73,293
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 1999 80 77,649
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2000 85 82,070
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2001 95 91,281
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2002 115 110,001
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2003 130 123,831
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2004 150 142,331
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
State and Local Appropriations - continued
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2005 $ 165 $ 156,006
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2010 235 212,456
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2011 250 225,298
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2013 290 259,869
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2015 335 298,753
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2016 360 320,364
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2017 390 346,382
-------------
$ 17,410,618
- -----------------------------------------------------------------------------
Refunded and Special Obligations - 12.1%
Austin, TX, Combined Utilities System
Rev., 10.25s, 2012 $ 2,681 $ 2,844,943
Austin, TX, Combined Utilities System
Rev., 10.75s, 2015 1,780 2,197,784
Daphne, AL, Special Care Facilities
Financing Authority, First Mortgage
Rev., 0s, 2028 4,500 1,914,120
Daphne, AL, Special Care Facilities
Financing Authority, Second
Mortgage Rev., 0s, 2028 89,975 38,524,596
Daphne, AL, Special Care Facilities
Financing Authority, Subordinated
Note, 0s, 2018 48,475 5,769,495
Davenport, IA, Health Facilities Rev.
(Ridgecrest Retirement Village),
12.75s, 2005 5,000 5,219,550
Dayton, OH, Special Facilities Rev.
(Emery Air Freight), "A",
12.5s, 2009 950 1,085,004
Highland Park, MI, Hospital Finance
Authority, 12.75s, 2011 3,885 4,016,507
Maine Health & Higher Education
Facilities Authority (St. Mary's
General Hospital), 8.625s, 2022 5,140 5,823,414
Massachusetts Industrial Finance Agency
(Evanswood Bethzatha Corp.), 9s, 2020 1,300 1,306,474
Mesa County, CO, Residual Rev., 0s, 2012 25,125 6,760,133
Mississippi Hospital Equipment &
Facilities Authority Rev.
(Rush Medical Center), 8.75s, 2016 2,800 3,000,256
New York Local Government Assistance
Corp., 7s, 2021 800 875,472
South Carolina Public Service Authority,
7.1s, 2021 2,000 2,198,780
Spirit Lake, IA, Industrial Development
Rev. (Crystal Tips, Inc.),
0s, 2016 3,284 4,149,826
Texas Turnpike Authority (Houston Ship
Channel Bridge), 0s, 2020 21,090 27,319,775
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Refunded and Special Obligations - continued
Washington Public Power Supply System,
Project #1, 14.375s, 2001 $ 1,000 $ 1,357,050
Washington Public Power Supply System,
Project #1, 15s, 2017 1,830 2,121,611
Washington Public Power Supply System,
Project #3, 15s, 2018 1,350 1,565,122
-------------
$118,049,912
- -----------------------------------------------------------------------------
Single Family Housing Revenue - 10.5%
Alaska Housing Finance Corp., 6.5s, 2034 $ 1,900 $ 1,773,137
Arkansas Housing Development Agency
Residential Mortgage Rev.,
0s, 2015 14,000 1,560,300
Berkeley, Brookes, & Fayette Counties,
WV, 0s, 2016 22,285 2,213,346
California Housing Finance Authority,
7.4s, 2026# 17,240 17,948,737
Chicago, IL, Single Family Residence, 0s,
2017 23,135 1,958,378
Colorado Housing Finance Authority, 8s,
2016 3,000 3,048,720
Cook County, IL, Single Family Housing,
0s, 2015 7,245 784,416
Corpus Christi, TX, Housing Finance
Corp., 0s, 2011 3,395 700,355
Delaware State Housing Authority, 6.75s,
2024 3,220 3,135,346
Denver, CO, City & County Rev., 0s, 2015 2,665 242,515
East Baton Rouge, LA, 0s, 2010 29,500 5,520,925
El Paso, TX, Housing Finance Corp.,
8.75s, 2011 1,085 1,173,135
Florida Housing Finance Agency, 0s, 2012 1,025 177,991
Florida Housing Finance Agency, 0s, 2016 10,800 1,303,344
Harris County, TX, Housing Finance Corp.,
9.875s, 2014 1,005 991,412
Jefferson County, CO, 8.875s, 2013 605 647,810
Jefferson County, TX, Health Facilities
Rev., 0s, 2015 6,560 732,293
Maine Housing Authority, Mortgage
Purchase, 8.2s, 2019 1,820 1,844,861
Maine Housing Authority, Mortgage
Purchase, 6.35s, 2022 75 69,211
Maine Housing Authority, Mortgage
Purchase, 8.2s, 2022 5,980 6,061,687
Mississippi Home Corp., 9.25s, 2012 335 360,239
Nebraska Investment Finance Authority,
0s, 2016 8,570 709,168
Nevada Housing Division, 0s, 2015 7,536 995,933
New Castle County, DE, 0s, 2016 2,255 253,146
New Hampshire Housing Finance Authority,
0s, 2011 2,140 384,087
New Hampshire Housing Finance Authority,
8.5s, 2014 4,005 4,174,492
New Mexico Mortgage Finance Authority,
12s, 2011 80 80,803
New Mexico Mortgage Finance Authority,
6.9s, 2024 3,750 3,753,113
North Dakota Housing Finance Agency,
8.3s, 2012 550 570,356
North Dakota Housing Finance Agency,
6.8s, 2023 955 953,778
Ohio Housing Finance Agency, GNMA, RIBS,
9.223s, 2031 1,850 1,901,745
Reno County, KS, Mortgage Rev., 0s, 2014 11,900 1,307,572
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Single Family Housing Revenue - continued
Rhode Island Housing & Mortgage Finance
Corp., 8.4s, 2021 $ 6,100 $ 6,298,799
State of Texas, 7s, 2025 4,150 4,172,202
Tennessee Housing Development Agency,
Homeownership Program,
8.125s, 2021 4,295 4,429,219
Texas Housing Agency, 8.2s, 2016 1,125 1,169,708
Texas Housing Agency, Residential
Mortgage Rev., 8.4s, 2020 2,115 2,213,517
Utah Housing Finance Agency, 10.75s, 2008 25 25,574
Utah Housing Finance Agency, 0s, 2016 29,695 3,367,426
Vermont Housing Finance Agency, Home
Mortgage Purchase, "B",
8.1s, 2022 1,735 1,798,727
Virginia Housing & Development Authority,
7.125s, 2022 9,505 9,659,646
Wisconsin Housing & Economic Development
Authority, Home
Ownership Rev., 0s, 2016 2,535 307,901
Wisconsin Housing & Economic Development
Authority, Home
Ownership Rev., 9.581s, 2022 1,800 1,850,724
-------------
$102,625,794
- -----------------------------------------------------------------------------
Multi-Family Housing Revenue - 3.4%
Alexandria, VA, Redevelopment & Housing
Authority (Jefferson Village
Apartments), 9s, 2018 $ 2,000 $ 2,036,460
Broward County, FL, Housing Finance
Authority (Deerfield
Beach Apartments), 13s, 2000* 3,438 2,406,637
Dallas, TX, Housing Finance Corp., 8.5s,
2011 3,450 3,499,991
Escondido, CA, Community Development
Authority (Las Villas
del Norte), 8.875s, 2005 1,860 1,798,639
Fairfax County, VA, Redevelopment &
Housing Authority
(Little River Glen), 8.95s, 2020 2,060 2,097,410
Florida Housing Finance Agency (Mutual
Benefit Life), 7s, 2004 720 612,000
Florida Housing Finance Agency (South
Lake Apartments), 8.7s, 2021 3,500 3,467,940
Indianapolis, IN, Economic Development
Authority
(Buckingham/Balmoral), 10.5s,
2015*+ 4,385 1,315,500
Maplewood Terrace, RI, Housing
Development Corp., 6.9s, 2025 4,040 4,029,819
Massachusetts Housing Finance Agency,
8.5s, 2020 15 15,296
Memphis, TN, Health, Education & Housing
Facilities Board
(Wesley Highland Terrace), 12.75s,
2015+ 6,300 5,355,000
Montgomery, PA, Redevelopment Authority
(KBF Associates),
6.5s, 2025 7,750 6,942,063
-------------
$ 33,576,755
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Insured Health Care Revenue - 1.9%
Clermont County, OH, Hospital Facilities
Rev. (Mercy Health System), AMBAC,
MVRIC, 9.031s, 2021 $ 1,300 $ 1,360,372
Desert Hospital District, CA, Hospital
Rev. (Desert Hospital), CG, COP,
MVRIC, 8.859s, 2020 4,000 3,949,120
North Central Texas, Health Facilities
Development Corp. (Presbyterian
Hospital), MBIA, RITES, 9.72s, 2021 4,000 4,030,000
Quincy, MA, Rev. (Quincy Hospital), 6.12s, 2011 5,000 3,890,300
Salt Lake City, UT, Hospital Rev. (Intermountain
Health Care), AMBAC, INFLO, 10.632s, 2020 1,250 1,300,200
State of Montana Health Facilities
Authority, 9.042s, 2016 4,000 4,042,600
-------------
$ 18,572,592
- -----------------------------------------------------------------------------
Health Care Revenue - 16.1%
Arkansas Development Finance Authority,
Economic Development Rev. (Southwest
Homes), 10.8s, 2018 $ 985 $ 1,041,303
Bell County, TX, Health Facilities Authority
(Kings Daughters Hospital), 9.25s, 2008 1,305 1,427,539
Berlin, MD, Hospital Rev. (Atlantic
General Hospital), 8.375s, 2022 1,390 1,419,121
Brentwood, TN, Industrial Development
Board, 8.5s, 1995+ 50 25,000
Brentwood, TN, Industrial Development
Board, 9s, 1997+ 15 7,500
Brentwood, TN, Industrial Development
Board, 10s, 2001+ 1,650 825,000
Brevard County, FL, Health Facilities
Authority (Beverly Enterprises), 10s, 2010 1,405 1,550,656
Cambria County, PA, Industrial Development
Authority (Beverly Enterprises), 10s, 2012 1,260 1,469,853
Chester County, PA, Industrial
Development Authority (RHA/PA
Nursing Home, Inc.), 10.125s, 2019 2,000 2,013,100
Colorado Health Facilities Authority Rev.
(Gericare, Inc./Denver), 10.5s, 2019+ 5,000 4,500,000
Colorado Health Facilities Authority Rev.
(Rocky Mountain Adventist), 6.625s, 2013 2,500 2,256,825
Connecticut Development Authority
(Greenwich Woods), 12.5s, 2015 2,000 2,086,020
Connecticut Development Authority
(Waterbury Health), 13.5s, 2014 2,765 2,862,687
Connecticut Health & Educational
Facilities (Johnson Evergreen Corp.), 8.5s, 2014 1,350 1,379,444
Daphne, AL, Special Care Facilities Financing
Authority (Westminster Village), 8.25s, 2026* 12,500 9,000,000
District of Columbia, Hospital Rev.
(Hospital for Sick Children), 8.875s, 2021 980 1,032,783
District of Columbia, Hospital Rev.
(Washington Hospital), 7.125s, 2019 1,750 1,670,568
Doylestown, PA, Hospital Authority
(Doylestown Hospital), 7.2s, 2023 2,200 1,990,010
Fairfax, Fauquier & Loudoun Counties, VA,
Health Center Commission, Nursing
Home Rev., 9s, 2020 1,930 1,948,142
Fulton County, GA, Residential Care
Facilities, Elderly Authority Rev.
(Lenbrook Square Foundation), 9.75s, 2017 3,580 3,681,350
Grand Junction, CO, Hospital Rev.
(Lincoln Park Osteopathic Hospital),
6.9s, 2019 2,900 2,523,348
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Health Care Revenue - continued
Guntersville, AL, Medical Clinic Board
Rev. (Barfield Health Care), 12s, 2010 $ 1,000 $ 1,000,130
Hannibal, MO, Industrial Development
Authority (Hannibal Regional Health
Care System, Inc.), 9.5s, 2022 3,000 3,405,870
Hobbs, NM, Health Facilities Rev.
(Nemecal Associates), 9.5s, 2014 1,790 1,853,294
Hopewell County, VA, Hospital Authority
(John Randolph Hospital), 8.85s, 2013 975 979,046
Illinois Health Facilities Rev. (Memorial
Hospital), 7.25s, 2022 1,500 1,382,820
Jacksonville, FL, Health Facilities
Authority (National Benevolent), 7s, 2022 1,000 940,390
Jacksonville, FL, Industrial Development
Rev. (Beverly Enterprises), 9.75s, 2011 1,015 1,114,287
Jefferson County, KY, Health Facilities
Rev. (Beverly Enterprises), 10.125s, 2008 2,350 2,577,621
Kansas City, MO, Industrial Development
Authority, Retirement Facilities, 9s, 2013 5,450 5,606,688
Lee County, FL, Industrial Development
Authority (Beverly Enterprises), 10s, 2010 955 1,059,429
Lexington-Fayette Counties, KY, Health Care
Facilities Rev. (Sayre Christian Village),
10s, 2012 980 996,983
Louisiana Public Facilities Authority
(Southwest Medical Center), 11s, 2006 1,597 975,150
Luzerne County, PA, Industrial Development
Authority (Beverly Enterprises), 10.125s, 2008 1,375 1,517,546
Martin County, FL, Industrial Development
Authority (Beverly Enterprises), 9.8s, 2010 2,950 3,247,449
Massachusetts Health & Education
Facilities Authority (Fairview
Extended Care Facility), 10.25s, 2021 3,000 3,240,150
Massachusetts Industrial Finance Agency,
Health Care Rev. (Evanswood Bethzatha
Corp.), "B", 9s, 2020 860 864,283
Massachusetts Industrial Finance Agency
(Martha's Vineyard Long-Term Care), 9.25s, 2022 3,410 3,296,583
Meridian, MI, Economic Development Corp.
(Burcham Hills), 9.625s, 2019 2,410 2,518,016
Michigan Strategic Fund Ltd. Obligation
Rev. (River Valley Recovery
Center), 12.875s, 2015+ 1,042 1,138,285
Montgomery County, OH, Hospital Rev.
(Kettering Convalescent Center), 10s, 2020 5,200 5,278,000
Montgomery County, PA, Higher Education &
Health Authority Rev. (AHF/Montgomery,
Inc.), 10.5s, 2020 2,500 2,538,375
Nebraska Investment Finance Authority
(Centennial Park), 10.5s, 2016 2,200 2,283,336
New Hampshire Industrial Development
Authority (Tall Pines), 11.25s, 2016 2,400 2,639,568
New Jersey Economic Development Authority
(Burnt Tavern Convalescent Center), 9s, 2013 1,700 1,716,847
New Jersey Economic Development Authority
(Courthouse Convalescent Center), 8.7s, 2014 1,350 1,349,230
New Jersey Economic Development Authority
(Dover), 13.375s, 2014+ 1,835 917,500
New Jersey Economic Development Authority (Geriatric
& Medical Services), 9.625s, 2004 540 567,319
New Jersey Economic Development Authority
(Geriatric & Medical
Services), 9.625s, 2022 1,350 1,421,199
New Jersey Economic Development Authority
(Gerimed Care Inn), 10.5s, 2020 3,000 3,231,780
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Health Care Revenue - continued
New Jersey Economic Development Authority
(Greenwood Health Care), 9.75s, 2011 $ 3,215 $ 3,126,105
New Jersey Economic Development Authority
(Wanaque Convalescent Center), 8.5s, 2009 700 675,787
New Jersey Economic Development Authority
(Wanaque Convalescent Center), 8.6s, 2011 1,000 963,560
North Carolina Medical Care Commission,
Hospital Rev. (Valdese General Hospital),
8.75s, 2016 2,000 2,038,280
North Central Texas, Health Facilities
Development Corp. (Baylor University
Medical Center), INFLO, 8.66s, 2016 4,300 4,481,546
Okaloosa County, FL, Retirement Rental
Housing Rev. (Beverly Enterprises),
10.75s, 2003 3,045 3,328,733
Osceola County, FL, Industrial
Development Rev. (Community Provider),
7.75s, 2017 2,700 2,566,566
Owensboro, KY (Children's Regional
Hospital), 13s, 2010 3,480 3,602,392
Portsmouth, VA, Industrial Development
Authority (Beverly
Enterprises), 10s, 2011 2,145 2,385,605
Prince William County, VA, Industrial
Development Authority, Residential Care
(Westminster at Lake Ridge), 10s, 2022 3,500 3,685,675
Rochester, MN (Mayo Foundation/Mayo
Medical Foundation), FIRS, 8.07s, 2021 2,000 1,973,320
Santa Fe, NM, Industrial Development Rev.
(Casa Real Nursing Home), 9.75s, 2013 1,920 1,960,992
Seminole County, FL, Industrial
Development Authority (Friendly
Village of Florida), 10s, 2011 905 941,508
St. Charles County, MO, Industrial
Development Authority (Garden
View Care Center), 10s, 2016 1,815 1,841,263
St. Petersburg, FL, Health Facilities
Rev. (Swanholm Nursing), 10s, 2022 1,630 1,708,599
Suffolk County, NY, Industrial
Development Agency (A Planned
Program for Life Enrichment, Inc.), 9.75s, 2015 3,840 3,648,000
Tyler, TX, Health Facilities Development
Corp. (Park Place), 12.5s, 2018++ 4,905 5,094,284
Vincennes, IN, Economic Development
Authority (Lodge of the
Wabash), 12.5s, 2015 1,130 1,107,400
Waterford Township, MI, Economic
Development Rev. (Canterbury
Health Care), 8.375s, 2023 3,100 3,144,454
Westerville, OH, Industrial Development
Rev. (Health Care Corp.), 10s, 2008 555 566,810
Westside Habilitation Center,
Cheneyville, LA, 8.375s, 2013 2,800 2,607,052
Wilkins Area, PA, Industrial Development
Authority (Beverly Enterprises), 10s, 2011 1,175 1,307,893
-------------
$157,123,247
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Electric and Gas Utility Revenue - 10.8%
Beaver County, PA, Industrial Development
Authority (Toledo Edison), 12.25s, 2015 $ 5,610 $ 5,863,628
Brazos River Authority, TX, Pollution
Control Rev. (Texas Utilities
Electric Co.), 8.25s, 2016 3,500 3,662,680
Claiborne County, MS, Pollution Control
Rev. (Middle South Energy, Inc.), 9.5s,
2016 2,350 2,505,875
Clark County, NV (Nevada Power), FGIC,
6.7s, 2022 4,000 4,002,680
Georgia Municipal Electric Authority,
Power Rev., 8.426s, 2022 9,900 8,851,887
Intermountain Power, GA, 0s, 2017 5,000 1,057,450
Lake Charles, LA, Port Facilities Rev.
(Truckline LNG), 7.75s, 2022 3,500 3,610,600
Los Angeles, CA, Department of Water,
Electric Plant Rev., 5.375s, 2023 3,000 2,493,090
Midland Michigan Environmental
Development Authority, Pollution
Control Rev. (Midland Cogeneration),
9.5s, 2009 3,000 3,156,330
Montana Board of Investment Resources
Recovery Rev. (Yellowstone
Energy), 7s, 2019 6,500 5,850,065
New Jersey Economic Development Authority
(Vineland Cogeneration), 7.875s, 2019 3,000 3,046,140
New York Energy Research & Development
Authority, 7.15s, 2020 13,000 11,964,940
New York Energy Research & Development
Authority, 7.5s, 2026 4,750 4,926,462
Palm Beach County, FL, Solid Waste
Development, 6.95s, 2022 6,650 6,090,802
Pennsylvania Economic Development,
Fingauth Research Recovery,
6.6s, 2019 16,950 14,949,392
Pittsylvania County, VA, Industrial
Development Authority,
7.55s, 2019** 10,000 9,747,100
Southern California Public Power
Authority, Transmission Project, RIBS,
8.012s, 2012 1,350 1,266,678
Swanton Village, VT, Electric System
Rev., 6.7s, 2023 1,750 1,695,943
Washington Public Power Supply System,
Project #1, 7.57s, 2012 5,000 3,604,050
West Feliciana Parish, LA, Pollution
Control Rev. (Gulf States
Utilities Co.), 9s, 2015 2,500 2,745,325
West Feliciana Parish, LA, Pollution
Control Rev. (Gulf States
Utilities Co.), 8s, 2024 4,000 4,157,160
-------------
$105,248,277
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Turnpike Revenue - 3.0%
Florida Mid-Bay Bridge Authority Rev.,
"B", 8.5s, 2022 $ 2,500 $ 2,687,875
Massachusetts Industrial Finance Agency,
Tunnel Rev. (Massachusetts
Turnpike), 9s, 2020 11,295 11,983,882
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2001 9,100 5,491,395
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2005 1,500 630,960
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2007 4,000 1,412,560
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2008 5,400 1,747,170
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2011 13,400 3,258,478
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2026 5,765 488,468
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2028 11,750 592,670
West Virginia Parkways, Economic
Development & Tourism Authority,
7.17s, 2019 1,200 1,023,192
-------------
$ 29,316,650
- -----------------------------------------------------------------------------
Airport and Port Revenue - 10.1%
Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.4s, 2018 $ 2,760 $ 2,882,378
Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.5s, 2018 4,500 4,697,190
Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.85s, 2018 6,170 6,678,223
Cleveland, OH, Airport Special Facilities
Rev. (Continental Airlines),
9s, 2019 9,120 9,262,090
Dallas-Fort Worth, TX, International
Airport Facility Improvement
Corp. (American Airlines), 7.625s, 2021 4,500 4,459,995
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Airport and Port Revenue - continued
Denver, CO, City & County Airport Rev.,
8.875s, 2012 $ 5,000 $ 5,371,950
Denver, CO, City & County Airport Rev.,
7.75s, 2021 7,050 7,106,682
Denver, CO, City & County Airport Rev.,
8.5s, 2023 2,950 3,064,371
Denver, CO, City & County Airport Rev.,
8.75s, 2023 5,770 6,105,179
Denver, CO, City & County Airport Rev.,
8s, 2025 1,140 1,154,762
Denver, CO, City & County Airport Rev.,
6.875s, 2032 6,640 5,952,428
Hillsborough County, FL, Aviation
Authority Rev. (US Air), 8.6s, 2022 1,350 1,175,566
Kenton County, KY, Airport Board Special
Facilities (Delta Airlines),
7.5s, 2020 16,570 16,198,832
Texas Port Development Corp., Industrial
Development Rev.
(Agricultural Export), 14.25s, 2001* 11,975 8,741,750
Tulsa, OK, Municipal Airport Trust Rev.,
7.375s, 2020 2,000 1,933,120
Tulsa, OK, Municipal Airport Trust Rev.,
7.6s, 2030 14,210 13,999,834
-------------
$ 98,784,350
- -----------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.4%
Denver, CO, Urban Renewal Authority, Tax
Increment Rev., 8.5s, 2013 $ 1,450 $ 1,289,891
Denver, CO, Urban Renewal Authority, Tax
Increment Rev. (Downtown Denver),
7.25s, 2017 1,250 1,267,263
Denver, CO, Urban Renewal Authority, Tax
Increment Rev. (Musicland), 8.5s, 2017 950 838,518
-------------
$ 3,395,672
- -----------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 13.1%
Baltimore County, MD, Pollution Control
(Bethlehem Steel),
7.55s, 2017 $ 1,000 $ 986,710
Burns Harbor, IN, Solid Waste Disposal
Facilities Rev. (Bethlehem Steel), 8s,
2024 10,455 10,554,322
Butler, AL, Industrial Development Rev.,
8s, 2028 4,500 4,594,635
Courtland, AL, Industrial Development
Board, Solid Waste Disposal
Rev., 6.375s, 2029 4,325 3,882,855
DeQueen, AR, Industrial Development Board
(Weyerhaeuser Co.),
9s, 2006 1,000 1,027,100
Eastern Band Cherokee Indian Community,
NC (Carolina Mirror Co.),
10.25s, 2009 3,515 3,708,290
Eastern Band Cherokee Indian Community,
NC (Carolina Mirror Co.),
11s, 2012 950 1,012,510
El Paso, TX, Industrial Development
Authority (Popular Dry Goods
Co.), 9.875s, 2016 800 816,087
Hernando County, FL, Industrial
Development Rev. (Crushed Stone Co.),
8.5s, 2014 8,000 8,200,320
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - continued
Hodge Village, LA, Utilities Rev. (Stone
Container Corp.), 9s, 2010 $ 6,800 $ 7,073,360
Hunt County, TX, Industrial Development
Rev. (Household
Manufacturing), 10.236s, 2003 6,000 5,716,020
Lawrenceburg, TN, Industrial Development
Board (Tridon, Inc.),
9.625s, 2006 2,800 2,784,823
Maine Finance Authority (Bowater, Inc.),
7.75s, 2022 8,500 8,715,475
Massachusetts Industrial Financing Agency
(Solid Waste Disposal Rev.), 8.25s,
2014 4,000 3,891,760
McMinn County, TN, Industrial Development
Board (Bowater, Inc.),
7.4s, 2022 7,000 7,157,920
Mesa County, CO (Joy Technologies), 8.5s,
2006 1,350 1,389,501
New Hampshire Industrial Development
Authority (Rockingham Park), 13.5s,
1999 1,270 1,308,964
Perry County, KY, Solid Waste (T.J.
International), 7s, 2024 11,000 10,248,480
Port of New Orleans, LA (Continental
Grain Co.), 7.5s, 2013 2,000 1,932,880
Port of New Orleans, LA, Industrial
Development (Avondale Industries),
8.5s, 2014 22,550 22,933,801
Sweetwater County, WY, Solid Waste, 6.9s,
2024 3,000 2,806,410
Sweetwater County, WY, Solid Waste (FMC
Corp.),
7s, 2024 8,725 8,266,327
Valdez, AK, Marine Terminal, 5.65s, 2028 5,000 4,212,250
Walton, GA, Industrial Development
Authority (Ultima Rubber
Products, Inc.), 10s, 2010 4,680 4,848,199
-------------
$128,068,999
- -----------------------------------------------------------------------------
Universities - 0.5%
Massachusetts Industrial Finance Agency
(Curry College), 8s, 2014 $ 1,500 $ 1,433,955
Massachusetts Industrial Finance Agency
(Emerson College), 8.9s, 2018 3,000 3,271,800
-------------
$ 4,705,755
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Miscellaneous Revenue - 12.1%
Atlanta, GA, Downtown Development
Authority (Garnett Station),
11.5s, 2015*+ $ 2,343 $ 703,046
Austell, GA, Downtown Development
Authority, Junior Rev. (Threadmill),
"B", 11s, 2006*+ 1,847 18,473
Austell, GA, Downtown Development
Authority, Senior Rev. (Threadmill),
"A", 11s, 2006*+ 5,542 1,080,647
Bristol, CT, Resource Recovery
Facilities, 6.5s, 2014# 7,000 6,398,840
Brush, CO, Industrial Development Rev.
(Training Centers
International), 12s, 2015 4,735 5,434,027
Brush, CO, Industrial Development Rev.
(Training Centers
International), "A", 12s, 2015 2,135 2,180,155
Brush, CO, Industrial Development Rev.
(Training Centers
International), "B", 12s, 2015 2,320 2,344,290
Connecticut Industrial Development
Authority (Nutmeg Partners),
12.75s, 2015*+** 7,135 2,497,250
Danville, VA, Industrial Development
Authority (Piedmont Mall
Project), 2.75s, 2017 8,280 7,687,069
District of Columbia (National Public
Radio), 7.7s, 2023 3,500 3,575,950
Eastern Connecticut Resources Recovery,
5.5s, 2020 2,000 1,588,240
Fond du Lac, WI, 11s, 2003*+** 2,883 1,758,520
Marion County, WV, Solid Waste Rev., 9s,
2011# 7,000 7,021,280
Martha's Vineyard, MA, Land Bank, 8.125s,
2011 3,000 2,973,360
Maryland Energy Financing Administration
(Solid Waste), 9s, 2016 26,300 26,530,916
Massachusetts Health & Education
Facilities Authority (Learning Center
for Deaf Children), 9.25s, 2014 1,000 1,054,180
Michigan Strategic Fund, 10.25s, 2016 10,000 10,283,000
Michigan Strategic Fund (Blue Water
Fiber), 8s, 2012** 11,000 10,501,370
Pennsylvania Convention, 6.75s, 2019 5,370 4,912,745
Retema, TX, Special Facilities Rev.
(Retema Park Racetrack Project),
8.75s, 2018 10,000 9,893,900
St. Louis County, MO, Industrial
Development Authority (Eagle Golf
Enterprises, Inc.), 10s, 2005 2,200 2,387,528
St. Louis County, MO, Industrial
Development Authority (Kiel Center
Arena), 7.875s, 2024 1,000 988,810
Telluride Gondola Transit Co., CO, Real
Estate Transfer Assessment Rev., 11.5s,
2012 6,000 6,230,880
-------------
$118,044,476
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Special Assessment District - 0.2%
Indianapolis, IN, Public Improvement
Bond, 6.5s, 2022 $ 2,000 $ 1,921,359
- -----------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost,
$997,158,171) $976,592,244
- -----------------------------------------------------------------------------
Floating Rate Demand Notes - 0.8%
- -----------------------------------------------------------------------------
Hillsborough County, FL, Pollution
Control Rev. (Tampa Electric Co.),
due 2018 $ 2,600 $ 2,600,000
Lincoln County, WY, Pollution Control,
due 2014 1,100 1,100,000
Lincoln County, WY, Pollution Control
(Exxon), due 2014 2,300 2,300,000
Lubbock, TX, Health Facilities (St.
Joseph's), due 2013 100 100,000
Peninsula Ports Authority, VA (Shell Oil
Co.), due 2005 100 100,000
Perry County, MS, Pollution Control Rev.,
due 2002 400 400,000
Uinta County, WY, Pollution Control Rev.
(Chevron), due 2020 1,400 1,400,000
- -----------------------------------------------------------------------------
Total Floating Rate Demand Notes, at
Identified Cost $ 8,000,000
- -----------------------------------------------------------------------------
Total Investments (Identified Cost,
$1,005,158,171) $984,592,244
Other Assets, Less Liabilities - (0.9)% (8,874,397)
- -----------------------------------------------------------------------------
Net Assets - 100.0% $975,717,847
- -----------------------------------------------------------------------------
* Security valued by or at the direction of the Trustees.
** Restricted security.
+ Non-income producing security - in default.
++ Security accruing partial interest - in default.
# When-issued security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
January 31, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $1,005,158,171) $ 984,592,244
Cash 38,525
Receivable for investments sold 4,983,346
Receivable for Fund shares sold 2,461,393
Interest receivable 16,911,364
Other assets 10,608
--------------
Total assets $1,008,997,480
--------------
Liabilities:
Payable for investments purchased $ 31,240,000
Payable for Fund shares reacquired 1,427,726
Payable to affiliates -
Management fee 55,550
Distribution fee 15,690
Shareholder servicing agent fee 11,214
Accrued expenses and other liabilities 529,453
--------------
Total liabilities $ 33,279,633
--------------
Net assets $ 975,717,847
--------------
Net assets consist of:
Paid-in capital $1,074,349,204
Unrealized depreciation on investments (20,565,927)
Accumulated net realized loss on investments (79,164,299)
Accumulated undistributed net investment income 1,098,869
--------------
Total $ 975,717,847
--------------
Shares of beneficial interest outstanding 113,496,608
--------------
Class A shares:
Net asset value and redemption price per share
(net assets of $920,042,721 / 107,020,050 shares of
beneficial interest outstanding) $8.60
-----
Offering price per share (100/95.25 of net asset value
per share) $9.03
-----
Class B shares:
Net asset value, redemption price and offering price per
share (net assets of $55,675,126 / 6,476,558 shares of
beneficial interest outstanding) $8.60
-----
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended January 31, 1995
- ------------------------------------------------------------------------------
Net investment income:
Interest income $ 76,354,946
------------
Expenses -
Management fee $ 6,385,098
Trustees' compensation 51,656
Shareholder servicing agent fee (Class A) 1,221,491
Shareholder servicing agent fee (Class B) 73,810
Distribution and service fee (Class B) 335,495
Workout expenditures 603,293
Custodian fees 291,487
Legal fees 109,348
Postage 107,626
Auditing fees 77,459
Printing 72,470
Miscellaneous 583,883
------------
Total expenses $ 9,913,116
------------
Net investment income $ 66,441,830
------------
Realized and unrealized loss on investments:
Realized loss (identified cost basis) -
Investment transactions $(34,044,867)
Change in unrealized appreciation (depreciation) -
Investments (41,635,823)
------------
Net realized and unrealized loss on investments $(75,680,690)
------------
Decrease in net assets from operations $ (9,238,860)
------------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended January 31, 1995 1994
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 66,441,830 $ 55,673,229
Net realized loss on investments (34,044,867) (13,247,478)
Net unrealized gain (loss) on
investments (41,635,823) 25,804,847
------------ ------------
Increase (decrease) in net assets
from operations $ (9,238,860) $ 68,230,598
------------ ------------
Distributions declared to shareholders --
From net investment income (Class A) $(66,774,251) $(58,106,409)
From net investment income (Class B) (1,978,622) (23)
------------ ------------
Total distributions declared to
shareholders $(68,752,873) $(58,106,432)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $345,765,914 $133,406,228
Net asset value of shares issued to
shareholders in reinvestment of
distributions 24,997,370 20,164,884
Cost of shares reacquired (127,012,254) (85,704,557)
------------ ------------
Increase in net assets from Fund
share transactions $243,751,030 $ 67,866,555
------------ ------------
Total increase in net assets $165,759,297 $ 77,990,721
Net assets:
At beginning of year 809,958,550 731,967,829
------------ ------------
At end of year (including
undistributed net investment
income of $1,098,869 and
$1,095,222, respectively) $975,717,847 $809,958,550
------------ ------------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended January 31, 1995<F2> 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 9.38 $ 9.26 $ 9.22 $ 9.09 $ 9.45 $ 9.55
------ ------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.64 $ 0.77 $ 0.73 $ 0.73 $ 0.74 $ 0.85
Net realized and
unrealized gain (loss) on
investments (0.75) 0.05 0.06 0.17 (0.32) (0.09)
------ ------ ------ ------ ------ ------
Total from investment
operations $(0.11) $ 0.82 $ 0.79 $ 0.90 $ 0.42 $ 0.76
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment income $(0.67) $(0.70) $(0.75) $(0.77) $(0.78) $(0.81)
From net realized gain on
investments -- -- -- -- -- (0.04)
From paid-in capital -- -- -- -- -- (0.01)
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.67) $(0.70) $(0.75) $(0.77) $(0.78) $(0.86)
------ ------ ------ ------ ------ ------
Net asset value - end of
period $ 8.60 $ 9.38 $ 9.26 $ 9.22 $ 9.09 $ 9.45
------ ------ ------ ------ ------ ------
Total return<F1> (1.04)% 9.19% 9.02% 10.34% 4.65% 8.24%
Ratios (to average net assets)/
Supplemental data:
Expenses 1.04% 1.10% 1.00% 1.03% 1.05% 1.02%
Net investment income 7.27% 7.15% 7.95% 7.96% 8.17% 8.90%
Portfolio turnover 32% 18% 10% 21% 41% 21%
Net assets at end of period
(000 omitted) $920,043 $809,957 $731,968 $648,043 $638,185 $485,037
<FN>
<F1> Total returns for Class A shares do not include the applicable sales charge
(except for reinvested dividends prior to October 1, 1989). If the sales
charge had been included, the results would have been lower.
<F2> Per share data for the periods indicated are based on average shares
outstanding.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights - continued
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended January 31, 1995<F2> 1989 1988 1987 1986 1995<F2> 1994<F4>
- ----------------------------------------------------------------------------------------------------------------------
Class A Class B
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 9.68 $10.38 $10.49 $ 9.80 $ 9.38 $ 9.40
------ ------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.88 $ 0.84 $ 0.99 $ 0.95 $ 0.57 $ 0.32
Net realized and
unrealized gain (loss) on
investments (0.12) (0.67) (0.01) 0.71 (0.78) (0.14)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.76 $ 0.17 $ 0.98 $ 1.66 $(0.21) $ 0.18
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment income $(0.82) $(0.84) $(1.01) $(0.94) $(0.57) $(0.20)
From net realized gain on
investments (0.07) (0.03) (0.08) (0.03) -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.89) $(0.87) $(1.09) $(0.97) $(0.57) $(0.20)
------ ------ ------ ------ ------ ------
Net asset value - end of
period $ 9.55 $ 9.68 $10.38 $10.49 $ 8.60 $ 9.38
------ ------ ------ ------ ------ ------
Total return<F1> 8.32% 1.87% 10.00% 18.24% (2.13)% 1.89%
Ratios (to average net assets)/
Supplemental data:
Expenses 0.65% 1.03% 1.00% 1.04% 2.10% 2.04%<F1>
Net investment income 9.27% 8.54% 9.54% 9.68% 6.32% 5.43%<F1>
Portfolio turnover 23% 16% 9% 43% 32% 18%
Net assets at end of period
(000 omitted) $325,044 $349,655 $442,036 $294,056 $55,675 $1
<FN>
<F1> Annualized.
<F2> Per share data for the periods indicated are based on average shares
outstanding.
<F3> Total returns for Class A shares do not include the applicable sales charge
(except for reinvested dividends prior to October 1, 1989). If the sales
charge had been included, the results would have been lower.
<F4> For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Municipal High Income Fund (the Fund) is a non-diversified series of MFS
Series Trust III (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company.
(2) Significant Accounting Policies
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the- counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
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.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of securities, currency or contracts based on financial indices
at a fixed price on a future date. In entering such contracts, the Fund is
required to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received by
the Fund each day, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes as
unrealized gains or losses by the Fund. The Fund's investment in financial
futures contracts is designed to hedge against anticipated future changes in
interest or exchange rates or securities prices. The Fund may also invest in
financial futures contracts for non-hedging purposes. Should interest or
exchange rates or securities prices move unexpectedly, the Fund may not achieve
the anticipated benefits of the financial futures contracts and may realize a
loss.
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 are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the
ex-interest date in an amount equal to the value of the security on such date.
The Fund has approximately 60.8% of its portfolio invested in high-yield
securities rated below investment grade. Investments in high-yield securities
are accompanied by a greater degree of credit risk and the risk tends to be more
sensitive to economic conditions than that of higher-rated securities.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. 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 an addition 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 considered workout expenses and 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 reported as operating
expenses.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. The Fund files a tax return annually
using tax accounting methods required under provisions of the Code which may
differ from generally accepted accounting principles, the basis on which these
financial statements are prepared. Accordingly, the amount of net investment
income and net realized gain reported on these financial statements may differ
from that reported on the Fund's tax return and, consequently, the character of
distributions to shareholders reported in the financial highlights may differ
from that reported to shareholders on Form 1099-DIV. Accumulated net realized
loss on investments is different for tax purposes because of deferred
recognition of tax losses occurring after October 31st of the current fiscal
year.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Distributions paid by the Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for federal
income tax purposes because the Fund intends to meet certain requirements of the
Code applicable to regulated investment companies, which will enable the Fund to
pay exempt-interest dividends. The portion of such interest, if any, earned on
private activity bonds issued after August 7, 1986 may be considered a
tax-preference item to shareholders. Distributions to shareholders are recorded
on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a 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. During the year ended January 31, 1995, accumulated undistributed net
investment income was increased by $2,314,690, accumulated net realized loss was
increased by $2,311,955 and paid-in capital was decreased by $2,735 due to
differences between book and tax accounting for income recognition on certain
bonds and differences in the cost of securities. This change had no effect on
the net assets or net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers both Class A
and Class B shares. Class B shares were first offered to the public on September
7, 1993. The two classes of shares differ in their shareholder servicing agent,
distribution and service fees. Shareholders of each class also bear certain
expenses that pertain only to that particular class. All shareholders bear the
common expenses of the Fund pro rata, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses, including distribution and shareholder
service fees.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee, computed daily and paid monthly at an effective annual rate of
0.30% of average daily net assets and 4.75% of gross income, amounted to
$6,385,098 for the year ended January 31, 1995. The Fund pays no compensation
directly to its Trustees who are officers of the investment adviser or to
officers of the Fund, all of whom receive remuneration for their services to the
Fund from MFS. Certain of the officers and Trustees of the Fund are officers and
directors of MFS, MFS Fund Distributors, Inc. (MFD, previously known as MFS
Financial Services, Inc.) and MFS Service Center, Inc. (MFSC). The Fund has an
unfunded defined benefit plan for all of its independent Trustees. Included in
Trustees' compensation is a net periodic pension expense of $15,016 for the year
ended January 31, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$1,576,774 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted a distribution plan relating solely to Class B
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class B Distribution Plan provides that the Fund will pay MFD a monthly
distribution fee, equal to 0.75% per annum, and a quarterly service fee of up to
0.25% per annum, of the Fund's average daily net assets attributable to Class B
shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD, all or a portion of the service fee attributable to Class B shares.
The service fee is intended to be additional consideration for services rendered
by the dealer with respect to Class B shares. Fees incurred under the
distribution plan during the year ended January 31, 1995 were 1.00% of average
daily net assets attributable to Class B shares and amounted to $335,495.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within 12 months following the share purchase. A contingent deferred
sales charge is imposed on shareholder redemptions of Class B shares in the
event of a share redemption within six years of purchase. MFD receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended January 31, 1995 were $57,796 for Class B shares.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$1,221,491 and $73,810 for Class A and Class B shares, respectively, for its
services as shareholder servicing agent. The fee for Class A shares is
calculated as 0.15% of the first $500 million and 0.12% of the next $500 million
of the average daily net assets of the Fund. The fee for Class B shares is
calculated as 0.22% of the first $500 million and 0.18% of the next $500 million
of the average daily net assets of the Fund.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $535,519,780 and $294,793,737, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $1,005,158,171
--------------
Gross unrealized depreciation $ (56,564,238)
Gross unrealized appreciation 35,998,311
--------------
Net unrealized depreciation $ (20,565,927)
--------------
At January 31, 1995, the Fund, for federal income tax purposes, had a capital
loss carryforward of $68,805,964, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on January 31, 1998 ($2,344,797), January 31, 1999 ($2,433,909),
January 31, 2000 ($4,786,449), January 31, 2001 ($5,199,093), January 31, 2002
($26,863,497), and January 31, 2003 ($27,178,219).
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
1995 1994
--------------------------- --------------------------
Year Ended January 31, Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Shares sold 32,283,057 $286,032,399 14,267,320 $133,405,068
Shares issued to
shareholders in
reinvestment of
distributions 2,760,128 24,132,344 2,165,121 20,164,862
Shares reacquired (14,365,883) (123,961,674) (9,163,024) (85,704,545)
----------- ------------ ---------- -------------
Net increase 20,677,302 $186,203,069 7,269,417 $ 67,865,385
----------- ------------ ---------- -------------
Class B Shares
1995 1994*
--------------------------- ------------------------
Year Ended January 31, Shares Amount Shares Amount
- -------------------------------------------------------------------------------
Shares sold 6,732,579 $59,733,515 124 $1,160
Shares issued to
shareholders in
reinvestment of
distributions 100,403 865,026 2 22
Shares reacquired (356,549) (3,050,580) (1) (12)
-------- ---------- --- -----
Net increase 6,476,433 $57,547,961 125 $1,170
--------- ----------- --- ------
* For the period from the commencement of offering of Class B shares, September
7, 1993 to January 31, 1994.
<PAGE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the acquisition of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended January 31, 1995 was $16,879.
NOTES TO FINANCIAL STATEMENTS - continued
(7) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At January 31, 1995, the
Fund owned the following restricted securities (constituting 2.5% of net assets)
which may not be publicly sold without registration under the Securities Act of
1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees.
Date of
Description Acquisition Par Amount Cost Value
- -------------------------------------------------------------------------------
Connecticut Industrial
Development Authority
(Nutmeg Partners),
12.75s, 2015 5/31/85 $ 7,135,000 $ 6,992,300 $ 2,497,250
Fond du Lac, WI,
11s, 2003 9/21/89 2,882,000 2,676,848 1,758,520
Michigan Strategic
Fund (Blue Water
Fiber), 8s, 2012 3/28/94 11,000,000 10,741,750 10,501,370
Pittsylvania County,
VA, Industrial
Development
Authority,
7.55s, 2019 5/16/94 10,000,000 10,000,000 9,747,100
-----------
$24,504,240
===========
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust III and Shareholders of MFS Municipal High
Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Municipal High Income Fund, including the schedule of portfolio investments, as
of January 31, 1995, and the related statements of operations, changes in net
assets and financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The financial statements
of MFS Municipal High Income Fund for the year ended January 31, 1994, and the
financial highlights for each of the nine years in the period ended January 31,
1994 for Class A shares, and for the period from September 7, 1993 (commencement
of operations) to January 31, 1994 for Class B shares, were audited by other
auditors whose report dated March 16, 1994 expressed an unqualified opinion on
those statements and financial highlights.
We conducted our audit 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 as of January 31, 1995, by
correspondence with the custodian and brokers or by other appropriate auditing
procedures where replies from brokers were not received. 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 audit provides 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 High Income Fund as of January 31, 1995, and the results of its
operations, the changes in its net assets, and the financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 24, 1995
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R)
MUNICIPAL NO. 1 BULK RATE
HIGH DALBAR U.S. POSTAGE
INCOME RATING P A I D
FUND PERMIT #55638
BOSTON, MA
500 Boylston Street
Boston, MA 02116
MMH-2 3/95 67.5M 25/225
