<PAGE>
MFS MUNICIPAL HIGH INCOME FUND
500 BOYLSTON STREET o BOSTON o MASSACHUSETTS 02116-3741
617 o 954-5000
March 22, 1996
VIA EDGAR
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549
Re: MFS SERIES TRUST III (FILE NO. 811-2794), ON BEHALF OF
MFS MUNICIPAL HIGH INCOME FUND
Ladies and Gentlemen:
Pursuant to the requirements of Section 30(b) of the Investment Company
Act of 1940 and Rule 30b2-1 thereunder, we hereby file a copy of the Annual
Report to Shareholders dated January 31, 1996 of MFS Municipal High Income Fund.
Very truly yours,
JOHN MCNAMARA
John McNamara
Production Editor
/jm
<PAGE>
[MFS Logo] ANNUAL REPORT FOR
The first name in Mutual Funds YEAR ENDED
JANUARY 31, 1996
MFS [Registration Mark] MUNICIPAL HIGH INCOME FUND
[Cover: A Photo of a Bridge]
<PAGE>
MFS [Registration Mark] MUNICIPAL HIGH INCOME FUND
TRUSTEES
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor; Former Chairman and Director (until
1991), Massachusetts Financial Services Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive Officer, Eastern Enterprises
Lawrence T. Perera - Partner, Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director, Massachusetts Financial Services
Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management Corp. (investment advisers)
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Cynthia M. Brown*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Steven E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
CUSTODIAN
State Street Bank and Trust Company
AUDITORS
Ernst & Young llp
INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free: 1-800-637-4458 anytime
from a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m. to
5 p.m. Eastern time (or leave a message anytime).
INVESTOR SERVICE
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For current account service, call toll free: 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576 any
business day from 9 a.m. to 5 p.m. Eastern time. (To use this service, your
phone must be equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances and exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone telephone.
TOP-RATED SERVICE
For the second year in a row, MFS earned a #1 ranking in DALBAR, Inc.'s
Broker/Dealer Survey, Main Office Operations Service Quality category. The firm
achieved a 3.49 overall score - on a scale of 1 to 4 - in the 1995 survey. A
total of 71 firms responded, offering input on the quality of service they
receive from 36 mutual fund companies nationwide. The survey contained questions
about service quality in 17 categories, including "knowledge of phone service
contacts," "accuracy of transaction processing," and "overall ease of doing
business with the firm."
*Affiliated with the Investment Adviser
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
During the fiscal year ended January 31, 1996, Class A shares of the Fund
provided a total return of +13.92%, while Class B shares had a total return of
+12.78% (including the reinvestment of distributions but excluding the effects
of any sales charges). These results underperformed the Lehman Brothers
Municipal Bond Index (the Lehman Index), which returned +15.05% over the same
period. It is important to note, however, 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 which are unrated. A discussion of the Fund's results relative to
the Lehman Index may be found in the Portfolio Performance and Strategy section
of this letter.
Economic Outlook
We believe the U.S. economy will continue to grow in 1996 although "subdued" may
be the best way to describe this growth. One factor holding growth in check is
the continued sluggishness of the consumer sector, an area that represents
approximately two-thirds of the economy. Going into this year, consumers have
been left in a somewhat weakened position, due in part to an increase in
consumer installment debt of some 30% over the past two years. A second reason
for the economy's weakness is the "lag effect" of increases in short-term
interest rates by the Federal Reserve Board in 1994 and into 1995. This lag
effect can last up to two years, although a series of reductions in short-term
rates by the Fed, which began late last year, could provide some support to the
economy through 1996. A third reason for weakness is the ongoing economic
doldrums in Europe and Japan, important markets for U.S. exports. Here again, we
are seeing a few signs, particularly in Japan, of modest recoveries that could
lead to improved prospects for U.S. exporters. Also, we believe lower interest
rates will give a boost to the U.S. housing market, an important segment of the
economy since it also affects such industries as major appliances, furniture,
and building-supply companies. Finally, although the first few weeks of 1996 saw
some signs of inflationary pressures, caused primarily by rising energy prices
and followed by an upward movement in gold, we believe inflation will remain
under control this year, due mainly to the subdued level of economic growth.
Interest Rates
Persistent signs of economic weakness led to decreases in short-term interest
rates by the Federal Reserve in late 1995 and early 1996 and, we believe, will
lead to some additional reductions as the year progresses. In the beginning of
the year, bond markets were trading in a narrow range as investors shifted
between concern about the lack of a budget resolution in Washington and hopes
that sluggish economic reports and low inflation might lead to lower interest
rates.
<PAGE>
LETTER TO SHAREHOLDERS - continued
Barring an unexpected shock, we believe that the still-cheap dollar, low
interest rates, and strong total employment will likely cushion the economy from
a sharp decline. Still, we believe that the subdued state of the economy makes
it unlikely that long-term interest rates will test the high end of 5.75% to
6.75%. However, in an environment of 2% to 3% inflation, this still leaves real
(adjusted for inflation) rates of return in the fixed-income markets at
relatively attractive levels.
Municipal Market
Although the municipal market provided impressive returns during 1995, it
significantly underperformed the taxable fixed-income market. For the calendar
period ended December 31, 1995, yields on long-term Treasury bonds declined
roughly 170 basis points (1.70%), while municipal yields for comparable
maturities declined by only 120 basis points (1.20%) (although principal value
and interest on Treasury securities are guaranteed by the U.S. government if
held to maturity). This difference can be attributed in large part to the threat
of tax reform and the effect it might have on the current tax-exempt market.
The impact of a change in the federal tax system on municipal bonds is
difficult to predict. One effect could be the total elimination of the federal
tax exemption on municipal bonds, which could cause yields on these bonds to
rise to levels which would be the same as, or higher than, those for comparable
nontaxable issues. Borrowing costs for state and local issuing authorities could
increase significantly. However, tax reform could also cause the overall level
of interest rates to decrease, which could help to reduce the impact of
potentially higher borrowing costs. Nevertheless, Congress is not likely to act
on any specific tax proposals until after the upcoming November election. Until
that time, the municipal market will remain under a cloud of uncertainty
regarding when, if, and how its fate will be determined particularly so if it
becomes a high-profile issue during the presidential campaign.
Additionally, future negotiations aimed at reducing the federal budget
deficit could impact municipal finances if federal aid to state and local
governments is reduced in an already slowing economy.
Portfolio Performance and Strategy
The Fund's underperformance relative to the Lehman Index can be attributed to
its high concentration of lower-rated bonds with high coupon rates relative to
the market. These securities generally 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 1996, we believe
2
<PAGE>
LETTER TO SHAREHOLDERS - continued
capital appreciation in the Fund over the coming year is likely to be minimal,
and interest income could make up a significant component of the Fund's total
return.
During the past year, the Fund's interest income stream came under pressure
due to the falling interest rate environment. Accordingly, the Fund was forced
to reduce the monthly distribution to $0.051 per share. Lower interest rates
have created the risk of bond calls from issues with double-digit coupons and
will continue to threaten the income stream.
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. Diversification of credit risk and of factors that
might affect liquidity remain important components of the Fund's overall
strategy.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[A Photo of A. Keith Brodkin] [A Photo of Cynthia M. Brown]
[Signature of A. Keith Brodkin] [Signature of Cynthia M. Brown]
A. Keith Brodkin Cynthia M. Brown
Chairman and President Portfolio Manager
February 14, 1996
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 [Registration Mark] Municipal Income Trust. Ms. Brown is a member
of the Boston Municipal Analysts Group.
3
<PAGE>
TAX FORM SUMMARY
In January 1996, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995. For
the year ended January 31, 1996, the distributions from investment income of
Class A and Class B shares were $0.68 and $0.59, respectively. For federal
income tax purposes, 99.6% of the total dividends paid by the Fund from net
investment income during the year ended January 31, 1996, is designated as an
exempt-interest dividend.
PERFORMANCE
The information below and on the following page illustrates the historical
performance of MFS Municipal High Income Fund Class A shares in comparison to
various market indicators. Fund results in the graph 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. Class B shares were offered
effective September 7, 1993. Information on Class B share performance appears
below.
Please note that the performance of other classes will be greater than or less
than the line shown, based on the difference in loads and fees paid by
shareholders investing in the different classes.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year Period Ended January 31, 1996)
[PLOT POINTS]
MFS Municipal High Lehman Brothers
Days Income Fund-A Municipal Bond Index CPI
- --------------------------------------------------------------------------------
2/1/91 0 9,525 10,000 10,000
- --------------------------------------------------------------------------------
1/31/92 365 10,513 11,091 10,260
- --------------------------------------------------------------------------------
1/31/93 730 11,462 12,181 10,594
- --------------------------------------------------------------------------------
1/31/94 1095 12,516 13,675 10,862
- --------------------------------------------------------------------------------
1/31/95 1460 12,386 13,188 11,166
- --------------------------------------------------------------------------------
1/31/96 1825 14,110 15,173 11,471
- --------------------------------------------------------------------------------
4
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period Ended January 31, 1996)
[PLOT POINTS]
MFS Municipal High Lehman Brothers
Days Income Fund-A Municipal Bond Index CPI
- --------------------------------------------------------------------------------
2/1/86 0 9,525 10,000 10,000
- --------------------------------------------------------------------------------
1/31/87 365 10,481 11,607 10,143
- --------------------------------------------------------------------------------
1/31/88 730 10,677 11,845 10,554
- --------------------------------------------------------------------------------
1/31/89 1095 11,566 12,861 11,047
- --------------------------------------------------------------------------------
1/31/90 1460 12,518 13,894 11,621
- --------------------------------------------------------------------------------
1/31/91 1825 13,100 15,178 12,278
- --------------------------------------------------------------------------------
1/31/92 2189 14,455 16,834 12,597
- --------------------------------------------------------------------------------
1/31/93 2556 15,759 18,489 13,008
- --------------------------------------------------------------------------------
1/31/94 2921 17,208 20,755 13,336
- --------------------------------------------------------------------------------
1/31/95 3286 17,030 20,017 13,710
- --------------------------------------------------------------------------------
1/31/96 3651 19,400 23,030 14,084
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Municipal High Income Fund (Class A)
including 4.75% sales charge + 8.49% +5.46% +7.13% +6.85%
- ----------------------------------------------------------------------------------------------
MFS Municipal High Income Fund (Class A)
at net asset value +13.92% +7.17% +8.17% +7.37%
- ----------------------------------------------------------------------------------------------
MFS Municipal High Income Fund (Class B)
with CDSC+ + 8.78% -- -- +3.88%*
- ----------------------------------------------------------------------------------------------
MFS Municipal High Income Fund (Class B)
without CDSC +12.78% -- -- +5.02%*
- ----------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index** +15.05% +7.60% +8.70% +8.70%
- ----------------------------------------------------------------------------------------------
Consumer Price Index[ss]** + 2.73% +2.69% +2.78% +3.48%
- ----------------------------------------------------------------------------------------------
<FN>
+ These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 7, 1993.
* For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1996.
** Source: Lipper Analytical Services, Inc.
[ss] The Consumer Price Index is a popular measure of change in prices.
</FN>
</TABLE>
All results are historical and are not an indication of future results. The
investment return and principal value 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.
A portion of income may be subject to state, federal and/or alternative minimum
tax. Capital gains, if any, are subject to capital gains tax.
5
<PAGE>
PORTFOLIO OF INVESTMENTS - January 31, 1996
<TABLE>
<CAPTION>
Municipal Bonds - 98.8%
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Student Loan Revenue - 2.1%
Arizona Student Loan Acquisition Authority, 7.25s, 2010 $ 2,970 $ 3,149,626
Arizona Student Loan Acquisition Authority, 7.625s, 2010 4,610 5,104,008
Nebraska Higher Education Loan Rev., 6.45s, 2018 11,000 11,759,440
Pennsylvania Higher Education Assistance Agency,
Student Loan Rev., AMBAC, RIBS, 8.228s, 2022 2,700 2,747,223
------------
$ 22,760,297
- -------------------------------------------------------------------------------------------
General Obligation - 2.0%
City of Markham, Cook County, IL, 9s, 2012 $ 2,700 $ 2,933,955
Jefferson County, OH, 7.125s, 2019 8,660 9,331,756
New York City, NY, 6.875s, 2003 1,000 1,088,510
New York City, NY, 7.1s, 2011 1,000 1,078,590
New York City, NY, 7s, 2022 1,700 1,900,056
State of California, 0s, 2009 5,800 2,780,984
Virgin Islands Public Financing Authority, 7.25s, 2018 2,000 2,148,360
West Warwick, RI, 7.3s, 2008 200 214,492
West Warwick, RI, 7.45s, 2013 570 597,024
------------
$ 22,073,727
- -------------------------------------------------------------------------------------------
State and Local Appropriation - 1.1%
District of Columbia, Certificates of
Participation, 7.3s, 2013 $ 2,500 $ 2,569,275
San Bernardino, CA, Certificates of Participation
(Short Rites), MBIA, 8.66s, 2016 5,000 4,996,350
South Tucson, AZ, Municipal Property Corp., 8.75s, 2010 865 947,737
Troy, NY, Certificates of Participation,
Recreational Facilities Rev., 9.75s, 2010* +++ 2,730 273,000
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 1996 65 64,994
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 1997 70 70,078
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 1998 75 75,155
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 1999 80 80,235
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2000 85 85,261
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2001 95 95,397
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2002 115 115,600
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2003 130 130,805
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2004 150 151,063
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2005 165 166,308
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2010 235 230,547
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2011 250 245,110
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
State and Local Appropriation - continued
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2013 $ 290 $ 284,009
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2015 335 327,764
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2016 360 352,073
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 2017 390 381,260
------------
11,642,021
- -------------------------------------------------------------------------------------------
Refunded and Special Obligation - 12.3%
Austin, TX, Combined Utilities System Rev., 10.75s, 2015 $ 1,780 $ 2,231,942
Daphne, AL, Special Care Facilities Financing Authority,
First Mortgage Rev., 0s, 2028 4,500 2,345,400
Daphne, AL, Special Care Facilities Financing Authority,
Second Mortgage Rev., 0s, 2028 89,975 46,894,970
Daphne, AL, Special Care Facilities Financing Authority,
Subordinated Note, 0s, 2018 48,475 7,082,682
Dayton, OH, Special Facilities Rev. (Emery Air Freight),
"A," 12.5s, 2009 950 1,124,990
Hopewell County, VA, Hospital Authority
(John Randolph Hospital), 8.85s, 2013 950 1,010,344
Maine Health & Higher Education Facilities Authority
(St. Mary's General Hospital), 8.625s, 2022 5,140 5,961,475
Mesa County, CO, Residual Rev., 0s, 2012 25,125 7,795,283
Mississippi Hospital Equipment & Facilities Authority
Rev. (Rush Medical Center), 8.75s, 2016 2,800 3,095,904
New Lenox, IL, Community Park Development Authority,
8.25s, 2014 4,205 5,313,690
New York Local Government Assistance Corp., 7s, 2021 800 921,768
Southern California Public Power Authority
(Transmission Project), 0s, 2015 10,000 3,443,900
South Carolina Public Service Authority, 7.1s, 2021 2,000 2,314,980
Spirit Lake, IA, Industrial Development Rev.
(Crystal Tips, Inc.), 0s, 2016 3,612 5,109,709
Telluride Gondola Transit Co. (Colorado Real Estate Transfer
Assessment Rev.), 11.5s, 2012 2,345 3,855,719
Texas Turnpike Authority (Houston Ship Channel Bridge),
12.625s, 2020 21,090 30,048,399
Washington Public Power Supply System,
Project #1, 14.375s, 2001 1,000 1,304,200
Washington Public Power Supply System,
Project #1, 15s, 2017 1,830 1,968,311
Washington Public Power Supply System,
Project #3, 15s, 2018 1,350 1,452,033
------------
$133,275,699
- -------------------------------------------------------------------------------------------
Single Family Housing Revenue - 8.1%
Alaska Housing Finance Corp., 6.5s, 2034 $ 1,645 $ 1,691,455
Arkansas Housing Development Agency Residential Mortgage
Rev., 0s, 2015 12,500 1,536,250
Berkeley, Brookes, & Fayette Counties, WV, 0s, 2016 22,285 2,452,464
California Housing Finance Agency Rev., 7.4s, 2026 16,300 17,662,028
Chicago, IL, Single Family Mortgage, 0s, 2017 16,190 1,542,583
</TABLE>
7
<PAGE>
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Single Family Housing Revenue - continued
Colorado Housing Finance Authority, 8s, 2016 $ 3,000 $ 3,073,470
Cook County, IL, Single Family Housing, 0s, 2015 5,130 618,985
Corpus Christi, TX, Housing Finance Corp., 0s, 2011 3,395 770,699
Delaware Housing Authority Rev
(Single Family Mortgage), 6.75s, 2024 2,770 2,902,240
East Baton Rouge, LA, 0s, 2010 22,095 4,586,922
El Paso, TX, Housing Finance Corp., 8.75s, 2011 975 1,062,194
Florida Housing Finance Agency, 0s, 2012 755 143,940
Florida Housing Finance Agency, 0s, 2016 10,800 1,427,328
Harris County, TX, Housing Finance Corp., 9.875s, 2014 860 860,808
Jefferson County, CO, 8.875s, 2013 495 535,377
Maine Housing Authority, Mortgage Purchase, 8.2s, 2019 1,820 1,889,943
Maine Housing Authority, Mortgage Purchase, 6.35s, 2022 75 76,704
Maine Housing Authority, Mortgage Purchase, 8.2s, 2022 5,980 6,209,811
Mississippi Home Corp., 9.25s, 2012 290 315,978
Nebraska Investment Finance Authority, 0s, 2016 3,040 285,000
Nevada Housing Division, 0s, 2015 4,808 699,519
New Castle County, DE, 0s, 2016 1,870 232,011
New Hampshire Housing Finance Authority, 0s, 2011 1,240 247,802
New Hampshire Housing Finance Authority, 8.5s, 2014 4,005 4,226,316
New Mexico Mortgage Finance Authority, 12s, 2011 40 40,505
New Mexico Mortgage Finance Authority, 6.9s, 2024 3,400 3,568,028
North Dakota Housing Finance Agency, 8.3s, 2012 475 497,966
North Dakota Housing Finance Agency, 6.8s, 2023 955 998,242
Ohio Housing Finance Agency, GNMA, RIBS, Single Family
Mortgage Rev., 9.324s, 2031 1,750 1,884,313
Reno County, KS, Mortgage Rev., 0s, 2014 8,650 1,073,292
State of Texas, 7s, 2025 1,400 1,511,244
Tennessee Housing Development Agency,
Home Ownership Program, 8.125s, 2021 2,080 2,091,378
Texas Housing Agency, 8.2s, 2016 975 1,007,360
Texas Housing Agency, Residential Mortgage Rev.,
8.4s, 2020 1,960 2,074,503
Utah Housing Finance Agency, 0s, 2016 17,690 2,217,443
Vermont Housing Finance Agency, Home Mortgage Purchase, "B",
8.1s, 2022 1,735 1,825,845
Virginia Housing & Development Authority, 7.125s, 2022 9,505 10,263,974
Wisconsin Housing & Economic Development Authority,
Home Ownership Rev., 0s, 2016 2,535 335,634
Wisconsin Housing & Economic Development Authority,
Home Ownership Rev., RIBS, 9.755s, 2022 2,650 2,976,215
------------
$ 87,415,769
- -------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 2.3%
Alexandria, VA, Redevelopment & Housing Authority
(Jefferson Village Apartments), 9s, 2018 $ 2,000 $ 2,080,740
Broward County, FL, Housing Finance Authority
(Deerfield Beach Apartments), 13s, 2000 3,398 2,055,907
Dallas, TX, Housing Finance Corp., 8.5s, 2011 3,350 3,489,092
Escondido, CA, Community Development Authority
(Las Villas del Norte), 8.875s, 2005 1,660 1,664,100
</TABLE>
8
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Multi-Family Housing Revenue - continued
Fairfax County, VA, Redevelopment & Housing Authority
(Little River Glen), 8.95s, 2020 $ 2,040 $ 2,122,028
Florida Housing Finance Agency (South Lake Apartments),
8.7s, 2021 3,500 3,581,655
Maplewood Terrace, RI, Housing Development Corp.,
6.9s, 2025 4,030 4,214,010
Massachusetts Housing Finance Agency, 8.5s, 2020 15 15,490
Memphis, TN, Health, Education & Housing Facilities Board
(Wesley Highland Terrace), 12.75s, 2015* 6,300 5,355,000
------------
$ 24,578,022
- -------------------------------------------------------------------------------------------
Guaranteed Housing Revenue - 7.3%
Maryland Energy Financing Administration
(Solid Waste), 9s, 2016 $ 28,300 $ 28,582,434
Massachusetts Industrial Finance Agency
(Solid Waste Disposal Rev.), 12s, 2016 3,600 3,607,848
Pennsylvania Economic Development Financing
Authority, Recycling Rev.
(Ponderosa Fibres Project), 9.25s, 2022 25,000 26,304,250
Port Walla Walla, WA, Solid Waste Recycling Rev.
(Ponderosa Fibres Project), 9.125s, 2026 20,000 21,164,600
------------
$ 79,659,132
- -------------------------------------------------------------------------------------------
Health Care Revenue - 16.8%
Arkansas Development Finance Authority, Economic
Development Rev. (Southwest Homes), 10.8s, 2018 $ 965 $ 1,021,539
Bell County, TX, Health Facilities Authority
(Kings Daughters Hospital), 9.25s, 2008 1,255 1,395,196
Berlin, MD, Hospital Rev. (Atlantic General
Hospital), 8.375s, 2022 1,375 1,469,820
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 1,350 1,517,157
Cambria County, PA, Industrial Development Authority
(Beverly Enterprises), 10s, 2012 1,200 1,507,404
Chester County, PA, Industrial Development Authority
(RHA/PA Nursing Home, Inc.), 10.125s, 2019 1,980 2,062,586
Clermont County, OH, Hospital Facilities Rev.
(Mercy Health Systems), AMBAC, MURIC, 9.221s, 2021 1,300 1,578,759
Colorado Health Facilities Authority Rev.
(Gericare, Inc./Denver), 10.5s, 2019* 5,000 3,443,750
Connecticut Development Authority
(Waterbury Health), 13.5s, 2014 2,765 2,816,926
Connecticut Health & Educational Facilities
(Johnson Evergreen Corp.), 8.5s, 2014 1,350 1,448,834
Daphne, AL, Special Care Facilities Financing Authority
(Westminster Village), 8.25s, 2026+++ 12,500 7,500,000
Desert Hospital District, CA, Hospital Rev.
(Desert Hospital), 8.354s, 2020 4,000 4,387,800
District of Columbia, Hospital Rev.
(Hospital for Sick Children), 8.875s, 2021 970 1,051,936
District of Columbia, Hospital Rev.
(Washington Hospital), 7.125s, 2019 1,750 1,788,728
</TABLE>
9
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Health Care Revenue - continued
Doylestown, PA, Hospital Authority
(Doylestown Hospital), 7.2s, 2023 $ 2,200 $ 2,222,726
Fairfax, Fauquier & Loudoun Counties, VA, Health
Center Commission, Nursing Home Rev., 9s, 2020 1,910 2,018,927
Fulton County, GA, Residential Care Facilities,
Elderly Authority Rev. (Lenbrook Square
Foundation), 9.75s, 2017 3,530 3,610,802
Grand Junction, CO, Hospital Rev.
(Lincoln Park Osteopathic Hospital), 6.9s, 2019 2,900 2,756,334
Hannibal, MO, Industrial Development Authority
(Hannibal Regional Health Care), 9.5s, 2022+ 3,000 3,522,840
Hobbs, NM, Health Facilities Rev.
(Nemecal Associates), 9.625s, 2014 1,760 1,874,206
Illinois Health Facilities Rev. (Memorial Hospital),
7.25s, 2022 1,500 1,560,135
Jacksonville, FL, Health Facilities Authority
(National Benevolent), 7s, 2022 1,000 1,040,760
Jacksonville, FL, Industrial Development Rev.
(Beverly Enterprises), 9.75s, 2011 980 1,089,976
Jefferson County, KY, Health Facilities Rev.
(Beverly Enterprises), 10.125s, 2008 2,295 2,540,129
Jefferson County, TX, Health Facilities Rev., 0s, 2015 5,810 710,447
Kansas City, MO, Industrial Development Authority,
Retirement Facilities, 9s, 2013 5,450 5,928,183
Lee County, FL, Industrial Development Authority
(Beverly Enterprises), 10s, 2010 930 1,053,885
Lexington-Fayette Counties, KY, Health Care Facilities
Rev. (Sayre Christian Village), 10s, 2012 960 988,445
Louisiana Public Facilities Authority
(Southwest Medical Center), 11s, 2006 1,515 701,874
Luzerne County, PA, Industrial Development Authority
(Beverly Enterprises), 10.125s, 2008 1,325 1,480,303
Martin County, FL, Industrial Development Authority
(Beverly Enterprises), 9.8s, 2010 2,850 3,179,061
Massachusetts Health & Education Facilities Authority
(Fairview Extended Care Facility), 10.25s, 2021 3,000 3,438,660
Massachusetts Health and Educational Facilities
Authority Rev., 9.375s, 2014 5,000 5,058,050
Massachusetts Industrial Finance Agency, 8.875s, 2025 7,845 8,160,683
Massachusetts Industrial Finance Agency (Martha's
Vineyard Long-Term Care), 9.25s, 2022 3,410 3,239,500
Meridian, MI, Economic Development Corp.
(Burcham Hills), 9.625s, 2019 2,390 2,553,715
Michigan Strategic Fund Ltd. Obligation Rev.
(River Valley Recovery Center), 12.875s, 2015 1,032 1,209,062
Montgomery County, OH, Hospital Rev. (Kettering
Convalescent Center), 10s, 2020 5,200 5,408,572
Montgomery County, PA, Higher Education & Health
Authority Rev. (AHF/Montgomery), 10.5s, 2020 2,500 2,652,575
</TABLE>
10
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Health Care Revenue - continued
Nebraska Investment Finance Authority
(Centennial Park), 10.5s, 2016 $ 2,200 $ 2,292,994
New Hampshire Industrial Development Authority
(Tall Pines), 11.25s, 2016 2,400 2,669,184
New Jersey Economic Development Authority
(Burnt Tavern Convalescent Center), 9s, 2013 1,700 1,801,507
New Jersey Economic Development Authority
(Courthouse Convalescent Center), 8.7s, 2014 1,350 1,418,823
New Jersey Economic Development Authority
(Geriatric & Medical Services), 9.625s, 2004 510 576,657
New Jersey Economic Development Authority
(Geriatric & Medical Services), 9.625s, 2022 1,350 1,507,005
New Jersey Economic Development Authority
(Gerimed Care Inn), 10.5s, 2020 3,000 3,276,900
New Jersey Economic Development Authority
(Greenwood Health Care), 9.75s, 2011 3,125 3,229,375
New Jersey Economic Development Authority
(Wanaque Convalescent Center), 8.5s, 2009 700 718,319
New Jersey Economic Development Authority
(Wanaque Convalescent Center), 8.6s, 2011 1,000 1,026,050
North Carolina Medical Care Commission, Hospital Rev.
(Valdese General Hospital), 8.75s, 2016 1,940 2,108,916
North Central Texas, Health Facilities Development Corp.
(Baylor University Medical Center), INFLO, 9.66s, 2016 4,300 5,404,412
North Central Texas, Health Facilities Development Corp.,
MBIA (Presbyterian Health Care System), 9.72s, 2021 4,000 4,485,680
Okaloosa County, FL, Retirement Rental Housing Rev.
(Beverly Enterprises), 10.75s, 2003 2,885 3,131,350
Osceola County, FL, Industrial Development Rev.
(Community Provider), 7.75s, 2017 2,700 2,840,292
Owensboro, KY (Children's Regional Hospital), 13s, 2010 3,400 3,461,166
Portsmouth, VA, Industrial Development Authority
(Beverly Enterprises), 10s, 2011 2,085 2,381,654
Prince William County, VA, Industrial Development
Authority, Residential Care (Westminster
at Lake Ridge), 10s, 2022 3,500 3,814,405
Rochester, MN, Health Care Facilities Rev.
(Mayo Medical Foundation), FIRS, 7.93s, 2021 2,000 2,122,200
Salt Lake City, UT, Hospital Rev. (Intermountain
Health Care), 9.16s, 2020 1,250 1,441,975
Santa Fe, NM, Industrial Development Rev.
(Casa Real Nursing Home), 9.75s, 2013 1,890 2,023,547
Seminole County, FL, Industrial Development Authority
(Friendly Village of Florida), 10s, 2011 880 916,027
St. Charles County, MO, Industrial Development
Authority (Garden View Care Center), 10s, 2016 1,770 1,821,153
St. Petersburg, FL, Health Facilities Rev.
(Swanholm Nursing), 10s, 2022 1,580 1,725,960
</TABLE>
11
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Health Care Revenue - continued
State of Montana Health Facilities Authority,
AMBAC, 9.32s, 2016 $ 4,000 $ 4,528,720
Suffolk County, NY, Industrial Development Agency
(A Planned Program for Life Enrichment),
9.75s, 2015 3,765 3,200,250
Tyler, TX, Health Facilities Development Corp.
(Park Place), 12.5s, 2018++ 4,865 4,851,816
Vincennes, IN, Economic Development Authority
(Lodge of the Wabash), 12.5s, 2015 1,110 1,087,800
Waterford Township, MI, Economic Development Rev
(Canterbury Health Care), 8.375s, 2023 3,100 3,261,882
Westerville, OH, Industrial Development Rev
(Health Care Corp.), 10s, 2008 535 548,075
Westside Habilitation Center, Cheneyville, LA,
8.375s, 2013 6,000 6,038,880
Wilkins Area, PA, Industrial Development Authority
(Beverly Enterprises), 10s, 2011 1,150 1,315,405
------------
$182,876,164
- -------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 7.8%
Claiborne County, MS, Pollution Control Rev.
(Middle South Energy, Inc.), 9.5s, 2016 $ 2,350 $ 2,437,538
Clark County, NV (Nevada Power), FGIC, 6.7s, 2022 4,000 4,278,120
Georgia Municipal Electric Authority, Power Rev.,
8.426s, 2022 9,900 10,801,692
Illinois Development Finance Authority, Solid Waste
Disposal Rev., (Ford Heights Waste Tire Project),
7.875s, 2011 7,975 7,598,421
Intermountain Power Agency, UT, Power Supply
Rev., 0s, 2017 5,000 1,458,100
Lake Charles, LA, Port Facilities Rev.
(Truckline LNG), 7.75s, 2022 3,500 3,969,035
Midland Michigan Environmental Development Authority,
Pollution Control Rev. (Midland Cogeneration),
9.5s, 2009 3,000 3,320,190
Montana Board of Investment Resources Recovery Rev
(Yellowstone Energy), 7s, 2019 4,595 4,535,770
New Jersey Economic Development Authority
(Vineland Cogeneration), 7.875s, 2019 3,000 3,243,180
New York State Energy Research and Development
Authority, Electric Facilities Rev., 7.15s, 2019 1,650 1,713,756
New York Energy Research and Development Authority,
Electric Facilities Rev., AMBAC, 7.5s, 2026 4,750 5,233,835
Palm Beach County, FL, Solid Waste Development,
6.95s, 2022 6,650 6,890,331
Pennsylvania Economic Development Financing Authority,
Resources Recovery Rev., 6.6s, 2019 10,000 10,017,400
Pittsylvania County, VA, Industrial Development
Authority, 7.55s, 2019 10,000 10,761,000
Southern California Public Power Authority,
Transportation Project, RIBS, 7.812s, 2012 1,350 1,465,884
West Feliciana Parish, LA, Pollution Control Rev.
(Gulf States Utilities Co.), 9s, 2015 2,500 2,840,925
West Feliciana Parish, LA, Pollution Control Rev.
(Gulf States Utilities Co.), 8s, 2024 4,000 4,335,800
------------
$ 84,900,977
- -------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Turnpike Revenue - 8.4%
Arapahoe County, CO, Capital Improvement
(Highway Rev.), 0s, 2015 $ 26,355 $ 6,874,438
Arapahoe County, CO, Capital Improvement
(Highway Rev.), 0s, 2026 65,000 7,195,500
Florida Mid-Bay Bridge Authority Rev., "B", 8.5s, 2022 2,500 2,878,925
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2012 8,000 4,749,680
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2013 5,000 2,989,800
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2018 44,190 10,828,318
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2021 25,000 5,051,000
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2022 30,835 5,841,382
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2023 5,765 1,023,979
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2024 72,045 11,998,374
Massachusetts Industrial Finance Agency, Tunnel Rev
(Massachusetts Turnpike), 9s, 2020 11,170 13,598,917
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2001 9,100 6,472,557
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2005 1,500 808,830
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2007 4,000 1,858,120
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2008 5,400 2,338,308
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2011 13,400 4,699,380
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2028 13,450 1,259,055
West Virginia Parkways, Economic Development & Tourism
Authority, FGIC, RIBS, 7.408s, 2019 1,200 1,238,556
------------
$ 91,705,119
- -------------------------------------------------------------------------------------------
Airport and Port Revenue - 9.7%
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 $ 2,720 $ 2,995,210
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.5s, 2018 4,500 5,007,735
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 6,070 6,928,480
Cleveland, OH, Airport Special Facilities Rev.
(Continental Airlines), 9s, 2019 9,120 9,625,886
Dallas-Fort Worth, TX, International Airport Facility
Improvement Corp. (American Airlines), 6s, 2014 2,000 1,994,760
</TABLE>
13
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Airport and Port Revenue - continued
Dallas-Fort Worth, TX, International Airport Facility
Improvement Corp. (Delta Airlines), 7.625s, 2021 $ 4,500 $ 4,854,915
Denver, CO, City & County Airport Rev., 8.875s, 2012 5,000 5,894,450
Denver, CO, City & County Airport Rev., 0s, 2015 1,725 176,277
Denver, CO, City & County Airport Rev., 7.75s, 2021 2,050 2,296,308
Denver, CO, City & County Airport Rev., 8.5s, 2023 2,950 3,360,198
Denver, CO, City & County Airport Rev., 8.75s, 2023 5,770 6,826,949
Denver, CO, City & County Airport Rev., 8s, 2025 1,140 1,274,850
Denver, CO, City & County Airport Rev., 6.875s, 2032 7,130 7,357,661
Hillsborough County, FL, Aviation Authority Rev
(US Air), 8.6s, 2022 4,255 4,686,074
Indianapolis, IN, Airport Authority Rev., 6.5s, 2031 5,000 5,090,050
Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 16,570 17,856,826
Tulsa, OK, Municipal Airport Trust Rev.,
7.375s, 2020 4,000 4,254,480
Tulsa, OK, Municipal Airport Trust Rev., 7.6s, 2030 14,210 15,248,041
------------
$105,729,150
- -------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.3%
Denver, CO, Urban Renewal Authority, Tax Increment Rev.
(Downtown Denver), 7.25s, 2017 $ 1,250 $ 1,348,288
Denver, CO, Urban Renewal Authority, Tax Increment Rev.
(Musicland), 8.5s, 2017 950 915,923
Denver, CO, Urban Renewal Authority, Tax Increment Rev.,
(Downtown Denver), 8.5s, 2013 1,415 1,367,668
------------
$ 3,631,879
- -------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 13.7%
Baltimore County, MD, Pollution Control
(Bethlehem Steel), 7.55s, 2017 $ 1,000 $ 1,058,430
Burns Harbor, IN, Solid Waste Disposal Facilities Rev.
(Bethlehem Steel), 8s, 2024 10,455 11,296,732
Butler, AL, Industrial Development Rev., 8s, 2028 4,500 5,103,135
Cambria County, PA, Industrial Development Auth., Pollution
Control Rev. (Pennsylvania Electric), 7.5s, 2015 2,950 3,096,291
Courtland, AL, Industrial Development Board,
Solid Waste Disposal Rev., 6.5s, 2025 4,000 4,127,880
Courtland, AL, Industrial Development Board,
Solid Waste Disposal Rev., 6.375s, 2029 7,500 7,633,350
DeQueen, AZ, Industrial Development Board
(Weyerhaeuser Co.), 9s, 2006 1,000 1,023,300
East Chicago Industrial Pollution Control Rev.
(Inland Steel Co. Project), 6.8s, 2013 6,000 6,070,920
Eastern Band Cherokee Indian, NC
(Carolina Mirror Co.), 10.25s, 2009+ 3,390 3,541,872
Eastern Band Cherokee Indian Community, NC
(Carolina Mirror Co.), 11s, 2012+ 950 996,484
Hernando County, FL, Industrial Development Rev.
(Crushed Stone Co.), 8.5s, 2014 8,325 9,211,613
Hodge Village, LA, Utilities Rev. (Stone Container
Corp.), 9s, 2010 6,800 7,598,388
</TABLE>
14
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Industrial Revenue (Corporate Guarantee) - continued
Hunt County, TX, Industrial Development Rev
(Household Manufacturing), 10.236s, 2003 $ 6,000 $ 5,998,380
Lawrenceburg, TN, Industrial Development Board
(Tridon, Inc.), 9.62s, 2006 2,800 2,916,256
Maine Finance Authority (Bowater, Inc.), 7.75s, 2022 8,500 9,398,790
Massachusetts Industrial Finance Agency,
Solid Waste Disposal Rev. (Molten Metal
Technology Project), 8.25s, 2014 4,000 4,259,040
McMinn County, TN, Industrial Development Board
(Bowater, Inc.), 7.4s, 2022 7,000 7,609,000
Mesa County, CO (Joy Technologies), 8.5s, 2006 1,350 1,457,879
Perry County, KY, Solid Waste (T.J. International),
7s, 2024 11,000 11,413,490
Philadelphia, PA, Authority for Industrial
Development Rev., 7.75s, 2017 2,000 2,058,200
Port of New Orleans, LA (Avondale Industries),
7.5s, 2013 2,000 2,125,220
Port of New Orleans, LA, 8.5s, 2014 22,550 25,438,430
Sweetwater County, WY, Solid Waste Disposal Rev.,
6.9s, 2024 3,000 3,146,250
Sweetwater County, WY, Solid Waste Disposal Rev.,
7s, 2024 2,000 2,110,720
Valdez, AK, Marine, 5.65s, 2028 5,000 4,957,450
Walton, GA, Industrial Development Authority
(Ultima Rubber Products, Inc.), 10s, 2010 4,550 4,917,367
------------
$148,564,867
- -------------------------------------------------------------------------------------------
Universities - 0.5%
Massachusetts Industrial Finance Agency
(Curry College), 8s, 2014 $ 1,500 $ 1,549,635
Massachusetts Industrial Finance Agency
(Emerson College), 8.9s, 2018 3,000 3,382,950
------------
$ 4,932,585
- -------------------------------------------------------------------------------------------
Miscellaneous Revenue - 6.2%
Brush, CO, Industrial Development Rev.
(Training Centers International), 12s, 2015 $ 4,679 $ 5,369,573
Brush, CO, Industrial Development Rev.
(Training Centers International), "B", 12s, 2015 4,401 5,050,543
Danville, VA, Industrial Development Authority
(Piedmont Mall), 2.75s, 2017 8,280 8,464,975
District of Columbia (National Public Radio), 7.7s, 2023 3,500 3,705,940
Martha's Vineyard, MA, Land Bank, 8.125s, 2011 2,900 3,027,919
Massachusetts Health & Education Facilities Authority
(Learning Center for Deaf Children), 9.25s, 2014 1,000 1,079,980
Michigan Strategic Fund Ltd. Obligation Rev.
(Blue Water Fiber), 8s, 2012 2,000 1,928,620
Michigan Strategic Fund Ltd. Obligation Rev.
(Great Lakes Fibre Project), 10.25s, 2016 18,380 18,934,892
Pennsylvania Convention, 6.75s, 2019 5,370 5,764,051
Retema, TX, Special Facilities Rev.
(Retema Park Racetrack Project), 8.75s, 2018 10,000 3,500,000
St. Louis County, MO, Industrial Development Authority
(Eagle Golf Enterprises, Inc.), 10s, 2005 2,200 2,472,624
St. Louis County, MO, Industrial Development Authority
(Kiel Center Arena), 7.875s, 2024 1,000 1,079,900
</TABLE>
15
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Municipal Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Miscellaneous Revenue - continued
Telluride Gondola Transit Co. (Colorado Real Estate
Transfer Assessment Rev.), 11.5s, 2012 3,655 4,449,195
Telluride Gondola Transit Co. (Colorado Real Estate
Transfer Assessment Rev.), 9s, 2016 $ 2,550 $ 2,548,470
--------------
$ 67,376,682
- -------------------------------------------------------------------------------------------
Special Assessment District - 0.2%
Indianapolis, IN, Public Improvement Bond,
6.5s, 2022 $ 2,000 $ 2,037,160
- -------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $1,004,861,049) $1,073,159,250
Floating Rate Demand Notes - 0.2%
- -------------------------------------------------------------------------------------------
Charleston County, SC, Industrial Rev
(Massey Coal), 3.4s, due 2007 $ 2,000 $ 2,000,000
Uinta County, WY, Pollution Control Rev
(Chevron), 3.4s, due 2020 600 600,000
--------------
Total Floating Rate Demand Notes, at Identified Cost $ 2,600,000
- -------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,007,461,049) $1,075,759,250
Other Assets, Less Liabilities - 1.0% 11,079,781
- -------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,086,839,031
- -------------------------------------------------------------------------------------------
<FN>
+ Restricted security.
++ Security accruing partial interest - in default.
* Non-income producing security - in default.
+++ Security valued by or at the direction of the Trustees.
</FN>
</TABLE>
See notes to financial statements
16
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
================================================================================
January 31, 1996
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $1,007,461,049) $1,075,759,250
Cash 738,588
Receivable for Fund shares sold 3,613,809
Receivable for investments sold 1,344,697
Interest receivable 15,410,810
Other assets 13,097
--------------
Total assets $1,096,880,251
--------------
Liabilities:
Payable for Fund shares reacquired $ 1,201,699
Payable for investments purchased 5,159,564
Payable to affiliates -
Management fee 19,426
Distribution fee 7,354
Shareholder servicing agent fee 4,176
Accrued expenses and other liabilities 3,649,001
--------------
Total liabilities $ 10,041,220
--------------
Net assets $1,086,839,031
==============
Net assets consist of:
Paid-in capital $1,124,411,855
Unrealized appreciation on investments 68,298,201
Accumulated net realized loss on investments (108,876,891)
Accumulated undistributed net investment income 3,005,866
--------------
Total $1,086,839,031
==============
Shares of beneficial interest outstanding 119,185,466
==============
Class A shares:
Net asset value and redemption price per share
(net assets of $1,009,030,818 / 110,653,810
shares of beneficial interest outstanding) $9.12
=====
Offering price per share (100/95.25 of
net asset value per share) $9.57
=====
Class B shares:
Net asset value and redemption price per share
(net assets of $77,808,213 / 8,531,656 shares
of beneficial interest outstanding) $9.12
=====
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
17
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
================================================================================
Year Ended January 31, 1996
- --------------------------------------------------------------------------------
Net investment income:
Interest income $ 81,329,990
------------
Expenses -
Management fee $ 6,996,766
Trustees' compensation 63,313
Shareholder servicing agent fee (Class A) 1,320,561
Shareholder servicing agent fee (Class B) 149,788
Distribution and service fee (Class B) 615,735
Workout expenditures 280,647
Custodian fees 394,572
Miscellaneous 273,836
Legal fees 106,774
Postage 106,187
Printing 68,073
Auditing fees 53,184
------------
Total expenses $ 10,429,436
Fees paid indirectly (144,741)
------------
Net expenses $ 10,284,695
------------
Net investment income $ 71,045,295
------------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) -
Investment transactions $(24,859,595)
Change in unrealized appreciation -
Investments 88,864,128
------------
Net realized and unrealized gain on investments $ 64,004,533
------------
Increase in net assets from operations $135,049,828
============
See notes to financial statements
18
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
===========================================================================================
Year Ended January 31, 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 71,045,295 $ 66,441,830
Net realized loss on investments (24,859,595) (34,044,867)
Net unrealized gain (loss) on investments 88,864,128 (41,635,823)
-------------- ------------
Increase (decrease) in net assets from operations $ 135,049,828 $ (9,238,860)
-------------- ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (69,946,556) $(66,774,251)
From net investment income (Class B) (4,150,972) (1,978,622)
-------------- ------------
Total distributions declared to shareholders $ (74,097,528) $(68,752,873)
-------------- ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 158,313,624 $345,765,914
Net asset value of shares issued to shareholders
in reinvestment of distributions 27,605,848 24,997,370
Cost of shares reacquired (135,750,588) (127,012,254)
-------------- ------------
Increase in net assets from Fund
share transaction $ 50,168,884 $243,751,030
-------------- ------------
Total increase in net assets $ 111,121,184 $165,759,297
Net Assets:
At beginning of year 975,717,847 809,958,550
-------------- ------------
At end of year (including undistributed
net investment income of $3,005,866
and $1,098,869, respectively) $1,086,839,031 $975,717,847
-------------- ------------
</TABLE>
See notes to financial statements
19
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
====================================================================================================================================
Year Ended January 31, 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 8.60 $ 9.38 $ 9.26 $ 9.22 $ 9.09 $ 9.45
--------- -------- -------- -------- --------- --------
Income from investment operations # -
Net investment income $ 0.61 $ 0.64 $ 0.77 $ 0.73 $ 0.73 $ 0.74
Net realized and unrealized gain
(loss) on investments 0.59 (0.75) 0.05 0.06 0.17 (0.32)
--------- -------- -------- -------- --------- --------
Total from investment operations $ 1.20 $ (0.11) $ 0.82 $ 0.79 $ 0.90 $ 0.42
--------- -------- -------- -------- --------- --------
Less distributions declared to
shareholders -
From net investment income $ (0.68) $ (0.67) $ (0.70) $ (0.75) $ (0.77) $ (0.78)
--------- -------- -------- -------- --------- --------
Total distributions declared to shareholders $ (0.68) $ (0.67) $ (0.70) $ (0.75) $ (0.77) $ (0.78)
--------- -------- -------- -------- --------- --------
Net asset value - end of period $ 9.12 $ 8.60 $ 9.38 $ 9.26 $ 9.22 $ 9.09
--------- -------- -------- -------- --------- --------
Total return++ 13.92% (1.04)% 9.19% 9.02% 10.34% 4.65%
Ratios (to average daily net assets)/Supplemental data:
Expenses## 0.93% 1.04% 1.10% 1.00% 1.03% 1.05%
Net investment income 6.83% 7.27% 7.15% 7.95% 7.96% 8.17%
Portfolio turnover 20% 32% 18% 10% 21% 41%
Net assets at end of period
(000 omitted) $1,009,031 $920,043 $809,957 $731,968 $648,043 $638,185
<FN>
# Per share data for the periods subsequent to January 31, 1995 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior to October
1, 1989). If the charge had been included, the results would have been lower.
</FN>
</TABLE>
See notes to financial statements
20
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
====================================================================================================================================
Year Ended January 31, 1990 1989 1988 1987 1996 1995 1994*
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.55 $ 9.68 $ 10.38 $ 10.49 $ 8.60 $ 9.38 $ 9.40
-------- -------- -------- -------- ------- ------- -------
Income from investment operations# -
Net investment income $ 0.85 $ 0.88 $ 0.84 $ 0.99 $ 0.52 $ 0.57 $ 0.32
Net realized and unrealized
gain (loss) on investments (0.09) (0.12) (0.67) (0.01) 0.59 (0.78) (0.14)
-------- -------- -------- -------- ------- ------- -------
Total from investment operations $ 0.76 $ 0.76 $ 0.17 $ 0.98 $ 1.11 $ (0.21) $ 0.18
-------- -------- -------- -------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.81) $ (0.82) $ (0.84) $ (1.01) $ (0.59) $ (0.57) $ (0.20)
From net realized gain on investments (0.04) (0.07) (0.03) (0.08) -- -- --
From paid-in capital (0.01) -- -- -- -- --
-------- -------- -------- -------- ------- ------- -------
Total distributions
declared to shareholders $ (0.86) $ (0.89) $ (0.87) $ (1.09 $ (0.59) $ (0.57) $ (0.20)
-------- -------- -------- -------- ------- ------- -------
Net asset value - end of period $ 9.45 $ 9.55 $ 9.68 $ 10.38 $ 9.12 $ 8.60 $ 9.38
-------- -------- -------- -------- ------- ------- -------
Total return++ 8.24% 8.32% 1.87% 10.00% 12.78% (2.13%) 1.89%
Ratios (to average daily net assets)/Supplemental data:
Expenses## 1.02% 0.65% 1.03% 1.00% 1.91% 2.10% 2.04%+
Net investment income 8.90% 9.27% 8.54% 9.54% 5.84% 6.32% 5.43%+
Portfolio turnover 21% 23% 16% 9% 20% 32% 18%
Net assets at end of period
(000 omitted) $485,037 $325,044 $349,655 $442,036 $77,808 $55,675 $ 1
<FN>
* For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
# Per share data for the periods subsequent to January 31, 1995 is based on average shares outstanding.
+ Annualized.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior to October
1, 1989). If the charge had been included, the results would have been lower.
</FN>
</TABLE>
See notes to financial statements
21
<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.
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 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 may invest up to 100% of its portfolio in high-yield municipal
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.
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,
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
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 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.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. 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 31 of the current fiscal year.
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 pur-poses 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 January 31, 1996, accumulated undistributed net
investment income was increased by $4,959,230, accumulated net realized loss was
increased by $4,852,997, and paid in capital was decreased by $106,233, 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.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
At January 31, 1996, the Fund, for federal income tax purposes, had a capital
loss carryforward of ($99,442,998), 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 ($1,041,407), January 31, 1999 ($2,433,909),
January 31, 2000 ($4,786,449), January 31, 2001 ($5,199,093), January 31, 2002
($28,166,887), and January 31, 2003 ($27,178,219), and January 31, 2004
($30,637,304).
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 respective 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 based on average
daily net assets of each class, 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 is computed daily and paid monthly at an annual rate of 0.30% of
average daily net assets and 4.75% of investment income.
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)
and MFS Service Center, Inc. (MFSC). The Fund 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 $17,303 for the year ended
January 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$670,957 for the year ended January 31, 1996, 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 distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B shares. The service fee
is not charged on Class B shares held over one year. 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 on an annualized basis.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
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
shareholder 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 shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended January 31, 1996 were
$61,548 for Class A shares and $196,890 for Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee for Class A shares
is calculated at an effective annual rate of 0.15% for the first $500 million
and 0.12% for the next $500 million of the average daily net assets of the Fund.
The fee for Class B shares is calculated at an effective annual rate of 0.22%
for the first $500 million and 0.18% for 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 $221,439,352 and $207,912,353, 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 $ 1,007,463,642)
===============
Gross unrealized appreciation $ 90,033,022)
Gross unrealized depreciation (21,737,414)
---------------
Net unrealized appreciation $ 68,295,608)
===============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares 1996 1995
---------------------------- ----------------------------
Year Ended January 31, Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Shares sold 15,092,575 $ 134,162,658 32,283,057 $ 286,032,399
Shares issued to shareholders in
reinvestment of distributions 2,921,213 25,867,385 2,760,128 24,132,344
Shares reacquired (14,380,028) (128,112,173) (14,365,883) (123,961,674)
----------- ------------ ----------- -------------
Net increase 3,633,760 $ 31,917,870 20,677,302 $ 186,203,069
----------- ------------ ----------- -------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Class B Shares 1996 1995
---------------------------- ----------------------------
Year Ended January 31, Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Shares sold 2,715,689 $ 24,150,966 6,732,579 $ 59,733,515
Shares issued to shareholders in
reinvestment of distributions 196,030 1,738,463 100,403 865,026
Shares reacquired (856,621) (7,638,415) (356,549) (3,050,580)
--------- ------------ --------- -------------
Net increase 2,055,098 $ 18,251,014 6,476,433 $ 57,547,961
========= ============= ========= =============
</TABLE>
(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 $350 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, 1996 was $13,646.
(7) Restricted Securities
The Fund may invest not more than 15% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At January 31, 1996,
the Fund owned the following restricted securities (constituting 0.74% 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.
<TABLE>
<CAPTION>
Description Date of Acquisition Par Amount Cost Value
=========================================================================================
<S> <C> <C> <C> <C> <C>
Eastern Band Cherokee
Indian Community, NC
(Carolina Mirror Co.),
10.25s, 2009 12/21/93 $3,390,000 $3,497,779 $3,541,872
Eastern Band Cherokee
Indian Community, NC
(Carolina Mirror Co.),
11s, 2012 9/19/86 $ 950,000 $ 862,500 $ 996,484
Hannibal, MO, Industrial
Development Authority
(Hannibal Regional Health
Care System, Inc.),
9.5s, 2022 3/23/92 $3,000,000 $2,970,840 $3,522,840
----------
$8,061,196
==========
</TABLE>
26
<PAGE>
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 (one of the portfolios constituting the MFS Series
Trust III), including the schedule of portfolio investments, as of January 31,
1996, and the related statement of operations for the year then ended and the
statement of changes in net assets and financial highlights for each of the two
years in the period 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 audits. The financial statements of MFS Municipal High Income Fund
for the year ended January 31, 1994, and the financial highlights for each of
the eight years in the period ended January 31, 1994 for Class A shares, and for
the period 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 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 as of
January 31, 1996, 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 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 High Income Fund at January 31, 1996, the results of its operations
for the year then ended and the changes in its net assets and financial
highlights for each of the two years in the period then ended, in conformity
with generally accepted accounting principles.
[Signature of Ernst & Young LLP]
Boston, Massachusetts
March 8, 1996
--------------------------------------------------------------------
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.
27
<PAGE>
MFS INVESTMENT OPPORTUNITIES
MUTUAL FUNDS
The MFS Family of Funds, shown on the facing page, falls into the eight general
categories below. All offer full-time professional management, a diversified
portfolio, and a wide array of shareholder services.
STOCK FUNDS seek growth of capital rather than income through investments in
stocks.
STOCK AND BOND FUNDS seek current income and growth of capital through
investments in both stocks and bonds.
BOND FUNDS seek current income through investments in debt securities.
WORLD FUNDS seek stock, balanced, and bond fund objectives through investments
in U.S. and foreign stocks and bonds.
LIMITED-MATURITY FUNDS seek current income and preservation of capital through
investments in debt securities with remaining maturities of five years or less.
NATIONAL TAX-FREE BOND FUNDS seek current income exempt from federal income tax
through investments in debt securities issued by states and municipalities.[1]
STATE TAX-FREE BOND FUNDS seek current income exempt from federal and state
income taxes through investments in debt securities issued by a single state and
its municipalities.[1]
MONEY MARKET FUNDS seek preservation of capital and current income through
investments in short-term debt securities.[2]
To determine which MFS fund may be appropriate for you, please contact your
financial adviser, who can help you relate these investment opportunities to
your financial goals. If you prefer, you may call MFS Investor Information for
literature[3] on MFS products and services: 1-800-637-2929, from 9 a.m. to 5
p.m. Eastern time any business day (leave a message anytime).
[1] A small portion of the income may be subject to federal, state and/or
alternative minimum tax.
[2] Investments in money market funds are not issued or guaranteed by the U.S.
government and there is no assurance that the fund will be able to maintain
a stable net asset value.
[3] Including a prospectus containing more complete information including
charges and expenses. Read the prospectus carefully before investing.
28
<PAGE>
THE MFS FAMILY OF FUNDS [Registration Mark]
AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime). This material should be read carefully before investing or sending
money.
STOCK
================================================================================
Massachusetts Investors Trust
- --------------------------------------------------------------------------------
Massachusetts Investors Growth Stock Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Capital Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Emerging Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Gold & Natural Resources Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Growth Opportunities Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Managed Sectors Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] OTC Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Research Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Value Fund
- --------------------------------------------------------------------------------
STOCK AND BOND
================================================================================
MFS [Registration Mark] Total Return Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Utilities Fund
- --------------------------------------------------------------------------------
BOND
================================================================================
MFS [Registration Mark] Bond Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Mortgage Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Securities Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] High Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Intermediate Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Strategic Income Fund
- --------------------------------------------------------------------------------
LIMITED MATURITY BOND
================================================================================
MFS [Registration Mark] Government Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal Limited Maturity Fund
- --------------------------------------------------------------------------------
WORLD
================================================================================
MFS [Registration Mark]/Foreign & Colonial Emerging Market Equity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial International Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial International Growth and Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Asset Allocation Fund [Service Mark]
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Equity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Governments Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Total Return Fund
- --------------------------------------------------------------------------------
NATIONAL TAX-FREE BOND
================================================================================
MFS [Registration Mark] Municipal Bond Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal High Income Fund
(closed to new investors)
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal Income Fund
- --------------------------------------------------------------------------------
STATE TAX-FREE BOND
================================================================================
Alabama, Arkansas, California, Florida, Georgia, Louisiana, Maryland,
Massachusetts, Mississippi, New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Texas, Virginia, Washington, West Virginia
- --------------------------------------------------------------------------------
MONEY MARKET
================================================================================
MFS [Registration Mark] Cash Reserve Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Money Market Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Money Market Fund
- --------------------------------------------------------------------------------
<PAGE>
MFS [Registration Mark] Municipal [Dalbar Logo] Bulk Rate
High Income Fund U.S. Postage
PAID
500 Boylston Street Permit #55638
Boston, MA 02116 Boston, MA
[MFS LOGO]
The first name in Mutual Funds
MMH-2 4/96 45M 25/225
