[COVER]
MFS LOGO] Semiannual Report
July 31, 1996
MFS(R) Municipal High Income Fund
[PHOTO, TWO MEN TALKING]
<PAGE>
Table of Contents
Letter from the Chairman 1
Fund Manager's Overview 3
Fund Manager's Profile 4
Performance Summary 5
Portfolio Concentration 6
Fund Facts 6
Portfolio of Investments 7
Financial Statements 18
Notes to Financial Statements 24
Trustees and Officers 31
MFS Investment Opportunities 32
The MFS Family of Funds(R) 33
Highlights
(bullet) During the past six months, Class A shares of the Fund provided a
total return of -0.93%, while Class B shares had a total return of
-1.39%. Although these results underperformed the Lehman Brothers
Municipal Bond Index, which returned -0.30% over the same period, the
Lehman Index represents investment-grade municipal bonds, while the
Fund primarily invests in lower-quality or unrated municipal issues.
(bullet) A reduction in the Fund's distribution was made necessary by a
restructuring of a portion of the Fund's assets, increased seasonal
bond call activity, and a falling interest rate environment, which
resulted in reduced tax-exempt income.
(bullet) The supply of new-issue and secondary-market tax-exempt issues has
been increasing. Many of the new issues are refunding bonds for issues
that came to the market in mid-1986 during a higher interest rate
environment.
(bullet) In an effort to take advantage of this increased supply, the Fund was
re-opened to new investors as of August 5, 1996.
<PAGE>
Letter from the Chairman
[PHOTO]
Dear Shareholders:
With over half of 1996 behind us, the U.S. economy appears to have settled into
a pattern of fairly reasonable growth and moderate inflation - two factors that
we think can be important contributors to a favorable long-term investment
climate. During the first quarter of 1996, real (inflation-adjusted) economic
growth was 2.3% on an annualized basis, followed by a rate of 4.2% in the second
quarter. Thus, while real growth in gross domestic product has exceeded our
expectations so far this year, we continue to believe that growth from quarter
to quarter will be uneven, but may accelerate slightly to exceed 2.5% by the end
of 1996. Although individual consumers appear to be carrying an excessive debt
load, the consumer sector itself, which represents two-thirds of the economy,
continues to be impressive as the automobile and housing markets remain
resilient. Consumer spending has also been positively impacted by widespread job
growth. At the same time, however, the economies of Europe and Japan continue to
be in the doldrums, weakening U.S. export markets while subduing the capital
spending plans of American corporations.
In the bond markets, persistent signs of economic weakness led to decreases
in short-term interest rates by the Federal Reserve Board in late 1995 and early
1996. However, should signs of economic growth and, particularly, of higher
inflation continue, we would expect the Fed to maintain its anti-inflationary
stance. 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. Later, fixed-income markets began reacting to
conflicting signals regarding the strength of the economy with more volatile
trading patterns marked by an upward bias in interest rates. Interest rates may
move even higher over the coming months, but we believe the current rise in bond
yields is reaching a point where fixed-income markets are fairly valued.
Finally, as you may have noticed, this report to shareholders incorporates a
number of changes which we believe will make it more informative and useful to
you. Following the Fund Manager's Overview, you will find new information on the
Fund's holdings, including charts illustrating the portfolio's concentration in
the different types of investments that meet its
1
<PAGE>
Letter from the Chairman - continued
criteria. Near the back of the report, you will find a list of telephone numbers
and addresses in case you need to contact MFS. We hope to hear from you.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
Chairman and President
August 14, 1996
2
<PAGE>
Fund Manager's Overview
[PHOTO]
Dear Shareholders:
During the six months ended July 31, 1996, Class A shares of the Fund provided a
total return of -0.93%, while Class B shares had a total return of -1.39%
(including the reinvestment of distributions but excluding the effects of any
sales charges). Although these results underperformed the Lehman Brothers
Municipal Bond Index (the Lehman Index), which returned -0.30% over the same
period, 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
primarily invests in lower-quality municipal issues which are rated Baa or below
or which are unrated.
These lower-rated securities have high coupon rates relative to the market
and generally are less price sensitive in a volatile interest rate environment;
hence, they provide less price fluctuation during these periods (although
investments in high-yield securities involve greater degrees of credit and
market risk than investments in higher-rated securities and tend to be more
sensitive to economic conditions). 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
interest rate outlook for the remainder of 1996, we anticipate little
fluctuation in the value of the securities in the Fund over the next six months
and believe that interest income could make up a greater component of its total
return. However, the Fund's monthly distribution has come under pressure during
the past six months and has decreased from $0.051 to $0.048 per share. This
reduction was made necessary by a restructuring of a portion of the Fund's
assets, increased seasonal bond call activity, and a falling interest rate
environment, all of which resulted in reduced tax-exempt income.
In recent months, sentiment in the fixed-income markets has turned decidedly
negative, as strong employment growth has indicated an economy making a
better-than-expected recovery from factors (government shutdowns, severe
weather) that had slowed it during mid-winter. Sharp rises in commodity and
energy prices added to the sudden realization that the best news regarding
inflation may be behind us. Also, the failure of Congress and the administration
to reach a long-term balanced budget agreement added to the negative market
psychology. Nevertheless, compared to markets such as comparable-maturity U.S.
Treasuries, short- and intermediate-maturity municipals actually performed quite
well (although principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity).
3
<PAGE>
Fund Manager's Overview - continued
At the same time, demand for short- to intermediate-maturity municipals has
been strong from investors seeking to avoid the risks of the long-term market.
Another positive for the overall municipal market has been the easing of fears
about radical tax reform following the sharp attacks against the "flat-tax"
concept that were raised during the presidential primary season.
In the past few weeks, supply of new-issue and secondary-market higher-
yielding tax-exempt issues has increased. Many of these new issues are refunding
bonds for issues that came to the market in mid-1986, just prior to that year's
Tax Reform Act and a much higher interest rate environment. During that period
the high-yield tax-exempt market was flooded with new issues in anticipation of
this legislation, which limited the use of tax exemptions for many issuers. Now,
10 years later, these bonds are eligible for refinancing. We expect this pick-up
in supply to continue for the remainder of 1996. As a result, yield spreads
between high-quality and lower-quality municipal issues have widened, and we
will use this opportunity to consider new purchases for the Fund consistent with
its investment objective.
In an effort to take advantage of this increased supply, the Fund was
re-opened to new investors as of August 5, 1996. Given the current interest rate
outlook, we do not believe this re-opening will adversely affect the current
monthly distribution, although we will closely monitor cash flow into the Fund.
Our efforts remain focused on research and preservation of high current
tax-exempt income. We continue to monitor our holdings closely and to seek out
new investment opportunities. Diversification of credit risk and of factors that
might affect liquidity remains an important component of the Fund's overall
strategy.
Respectfully,
/s/ Cynthia M. Brown
Fund Manager
Fund Manager's 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.
4
<PAGE>
Performance Summary
Because mutual funds like MFS Municipal High Income Fund are designed for
investors with long-term goals, we have provided cumulative results as well as
the average annual total returns for Class A and Class B shares for the
applicable time periods.
Average Annual and Cumulative Total Rates of Return
Class A Investment Results
(net asset value change including reinvested distributions)
6 1 5
Months Year Years 10 Years
- ------------------------------ ------- ----- ------ ---------
Cumulative Total Return -0.93% +5.46% +40.65% +94.88%
- ------------------------------ ----- --- ---- -------
Average Annual Total Return -- +5.46% +7.06% +6.90%
- ------------------------------ ----- --- ---- -------
The average annual total returns, calculated for the period ended as of the most
recent calendar quarter as required by the Securities and Exchange Commission
(the SEC), with all distribution reinvested and reflecting the maximum sales
charge of 4.75% on the initial investment for the 1-, 5- and 10-year periods
ended July 31, 1996, were +0.07%, +6.08% and +6.35%, respectively.
Class B Investment Results
(net asset value change including reinvested distributions)
6 1 5
Months Year Years 10 Years
- ------------------------------ ------- ----- ------ ---------
Cumulative Total Return -1.39% +4.46% +36.56% +89.31%
- ------------------------------ ----- --- ---- -------
Average Annual Total Return -- +4.46% +6.43% +6.59%
- ------------------------------ ----- --- ---- -------
The average annual total returns, calculated for the period ended as of the most
recent calendar quarter as required by the SEC, with all distributions
reinvested and reflecting the contingent deferred sales charge (CDSC) of 4%, 2%
and 0% for the 1-, 5-, and 10-year periods ended July 31, 1996, were +0.10%,
+6.20%, and +6.56%, respectively.
All results represent past performance and are not an indication of future
results. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost.
Class B share performance includes the performance of the Fund's Class A shares
for periods prior to the commencement of offering of Class B shares on September
7, 1993. Sales charges and operating expenses for Class A and Class B shares
differ. The Class A share performance which is included within the Class B share
SEC performance has been adjusted to reflect the CDSC generally applicable to
Class B shares rather than the initial sales charge generally applicable to
Class A shares. Class B share performance has not been adjusted, however, to
reflect differences in operating expenses (e.g., Rule 12b-1 fees), which
generally are lower for Class A shares.
5
<PAGE>
Portfolio Concentration as of July 31, 1996
Bond Holdings
Guaranteed Housing Revenue 6.9%
Electric and Gas Utility Revenue 7.9%
Single Family Housing Revenue 8.0%
Turnpike Revenue 8.8%
Airport and Port Revenue 9.5%
Miscellaneous and other (see Portfolio of Investments) 11.5%
Refunded and Special Obligation 13.1%
Industrial Revenue 16.2%
Health Care Revenue 18.1%
Fund Facts
Strategy: The Fund's investment objective is to provide high current
income exempt from federal income taxes by investing
primarily in debt securities, the interest on which is
exempt from federal income tax.
Commencement
of investment
operations: February 24, 1984
Size: $1.0 billion as of July 31, 1996
6
<PAGE>
Portfolio of Investments (Unaudited) - July 31, 1996
<TABLE>
<CAPTION>
Municipal Bonds - 99.0%
- ---------------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------ ------------ -------------
<S> <C> <C>
Airport and Port Revenue - 9.5%
Chicago, IL, O'Hare International Airport, Special Facilities Rev. (United Airlines),
8.4s, 2018 $ 2,680 $ 2,899,680
Chicago, IL, O'Hare International Airport, Special Facilities Rev. (United Airlines),
8.5s, 2018 4,500 4,916,340
Chicago, IL, O'Hare International Airport, Special Facilities Rev. (United Airlines),
8.85s, 2018 5,965 6,663,859
Cleveland, OH, Airport Special Facilities Rev. (Continental Airlines), 9s, 2019 9,120 9,460,450
Dallas-Fort Worth, TX, International Airport Facility Improvement Corp., 7.625s, 2021 4,500 4,824,045
Denver, CO, City & County Airport Rev., 8.875s, 2012 5,000 5,900,300
Denver, CO, City & County Airport Rev., 7.75s, 2021 2,050 2,258,977
Denver, CO, City & County Airport Rev., 8.5s, 2023 2,950 3,370,936
Denver, CO, City & County Airport Rev., 8.75s, 2023 5,770 6,776,057
Denver, CO, City & County Airport Rev., 8s, 2025 1,140 1,281,029
Denver, CO, City & County Airport Rev., 6.875s, 2032 7,130 7,237,948
Hillsborough County, FL, Aviation Authority Rev. (US Air), 8.6s, 2022 4,255 4,570,338
Kenton County, KY, Airport Board Special Facilities (Delta Airlines), 7.5s, 2020 16,570 17,619,212
Tulsa, OK, Municipal Airport Trust Rev., 7.375s, 2020 4,000 4,210,880
Tulsa, OK, Municipal Airport Trust Rev., 7.6s, 2030 14,210 15,141,323
-----------
$97,131,374
------------------------------------------------------------------------------------------ ---------- -----------
Electric and Gas Utility Revenue - 7.9%
Clark County, NV (Nevada Power), FGIC, 6.7s, 2022 $ 4,000 $ 4,172,400
Georgia Municipal Electric Authority, Power Rev., 8.426s, 2022 9,900 10,000,881
Midland Michigan Environmental Development Authority, Pollution Control Rev. (Midland
Cogeneration), 9.5s, 2009 3,000 3,267,870
Montana Board of Investment Resources Recovery Rev. (Yellowstone Energy), 7s, 2019 8,195 7,589,144
New Jersey Economic Development Authority (Vineland Cogeneration), 7.875s, 2019 3,000 3,208,080
New York State Energy Research and Development Authority, Electrical Facilities Rev.,
AMBAC, 7.5s, 2026 4,750 5,143,490
New York State Energy Research and Development Authority, Electrical Facilities Rev. (Long
Island Lighting), 7.15s, 2019 1,650 1,627,379
New York State Energy Research and Development Authority, Electrical Facilities Rev. (Long
Island Lighting), 7.15s, 2020 5,000 4,930,000
New York State Energy Research and Development Authority, Electrical Facilities Rev. (Long
Island Lighting), 7.15s, 2022 6,050 5,964,877
Ohio Water Development Authority Pollution Control Rev. (Cleveland Electric), 8s, 2023 4,700 4,798,841
Palm Beach County, FL, Solid Waste Development, 6.95s, 2022 7,650 6,994,242
Pennsylvania Economic Development Financing Authority, Resources Recovery Rev., 6.6s, 2019 5,000 4,698,000
Pittsylvania County, VA, Industrial Development Authority, 7.55s, 2019 10,000 10,264,100
7
<PAGE>
Portfolio of Investments (Unaudited) - continued
Municipal Bonds -continued
- ---------------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------ ------------ -------------
Electric and Gas Utility Revenue - continued
Southern California Public Power Authority Transmission Project Rev., RIBS, 6.644s, 2012 $ 1,350 $ 1,360,854
West Feliciana Parish, LA, Pollution Control Rev. (Gulf States Utilities Co.), 9s, 2015 2,500 2,775,475
West Feliciana Parish, LA, Pollution Control Rev. (Gulf States Utilities Co.), 8s, 2024 4,000 4,249,440
-----------
$81,045,073
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General Obligation - 2.1%
City of Markham, Cook County, IL, 9s, 2012 $ 2,700 $ 2,869,020
Jefferson County, OH, 7.125s, 2019 8,660 8,995,748
New York City, NY, 6.875s, 2003 1,000 1,061,730
New York City, NY, 7.1s, 2011 1,000 1,047,940
New York City, NY, 7s, 2022 1,700 1,862,877
State of California, 0s, 2009 5,800 2,792,410
Virgin Islands Public Financing Authority, 7.25s, 2018 2,000 2,111,760
West Warwick, RI, 7.3s, 2008 200 208,710
West Warwick, RI, 7.45s, 2013 570 579,599
-----------
$21,529,794
------------------------------------------------------------------------------------------ ---------- -----------
Health Care Revenue - 18.1%
Arkansas Development Finance Authority, Economic Development Rev. (Southwest Homes), 11s, 2018 $ 965 $ 1,012,188
Bell County, TX, Health Facilities Authority (Kings Daughters Hospital), 9.25s, 2008 1,200 1,304,844
Berlin, MD, Hospital Rev. (Atlantic General Hospital), 8.375s, 2022 1,360 1,427,456
Brentwood, TN, Industrial Development Board, 10s, 2001* 1,650 825,000
Brevard County, FL, Health Facilities Authority (Beverly Enterprises), 10s, 2010 1,350 1,493,505
Cambria County, PA, Industrial Development Authority (Beverly Enterprises), 10s, 2012 1,140 1,397,606
Chester County, PA, Industrial Development Authority (RHA/PA Nursing Home, Inc.), 10.125s, 2019 1,958 2,016,329
Clermont County, OH, Hospital Facilities Rev. (Mercy Health Systems), AMBAC, MURIC,
9.221s, 2021 1,300 1,425,060
Colorado Health Facilities Authority Rev. (Gericare, Inc./Denver), 10.5s, 2019* 5,000 3,443,750
Connecticut Health & Educational Facilities (Johnson Evergreen Corp.), 8.5s, 2014 1,350 1,428,934
Daphne, AL, Special Care Facilities Financing Authority (Westminster Village), 8.25s, 2026++ 12,500 9,375,000
Desert Hospital District, CA, Hospital Rev. (Desert Hospital), 8.354s, 2020 4,000 4,152,640
District of Columbia, Hospital Rev. (Hospital for Sick Children), 8.875s, 2021 970 1,028,113
District of Columbia, Hospital Rev. (Washington Hospital), 7.125s, 2019 1,750 1,796,637
8
<PAGE>
Portfolio of Investments (Unaudited) - continued
Municipal Bonds -continued
- ---------------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------ ------------ -------------
Health Care Revenue - continued
Doylestown, PA, Hospital Authority (Doylestown Hospital), 7.2s, 2023 $2,200 $2,186,492
Escondido, CA, Community Development Authority (Las Villas del Norte), 8.875s, 2005 1,660 1,638,968
Fairfax, Fauquier & Loudoun Counties, VA, Health Center Commission, Nursing Home Rev., 9s,
2020 1,885 1,974,292
Fulton County, GA, Residential Care Facilities, Elderly Authority Rev. (Lenbrook Square
Foundation), 9.75s, 2017 3,530 3,581,538
Grand Junction, CO, Hospital Rev. (Lincoln Park Osteopathic Hospital), 6.9s, 2017 2,900 2,621,107
Hannibal, MO, Industrial Development Authority (Hannibal Regional Health Care), 9.5s, 2022+ 3,000 3,764,610
Hobbs, NM, Health Facilities Rev. (Nemecal Associates), 9.625s, 2014 1,725 1,822,894
Illinois Health Facilities Rev. (Memorial Hospital), 7.25s, 2022 1,500 1,513,665
Illinois Health Facility Authority, MBIA, 0s, 2015 5,200 5,702,320
Jacksonville, FL, Health Facilities Authority (National Benevolent), 7s, 2022 1,000 1,027,180
Jacksonville, FL, Industrial Development Rev. (Beverly Enterprises), 9.75s, 2011 980 1,068,690
Jefferson County, KY, Health Facilities Rev. (Beverly Enterprises), 10.125s, 2008 2,200 2,403,214
Kansas City, MO, Industrial Development Authority, Retirement Facilities, 9s, 2013 5,450 5,835,914
Lee County, FL, Industrial Development Authority (Beverly Enterprises), 10s, 2010 930 1,038,131
Louisiana Public Facilities Authority (Southwest Medical Center), 11s, 2006 1,488 591,258
Luzerne County, PA, Industrial Development Authority (Beverly Enterprises), 10.125s, 2008 1,325 1,460,852
Martin County, FL, Industrial Development Authority (Beverly Enterprises), 9.8s, 2010 2,850 3,107,298
Massachusetts Health & Education Facilities Authority Rev., 9.375s, 2014 5,000 5,006,750
Massachusetts Health & Education Facilities Authority Rev. (Fairview Extended Care
Facilities), 10.25s, 2021 3,000 3,382,410
Massachusetts Health & Education Facilities Authority Rev. (Saint Memorial Medical
Center), 6s, 2023 4,060 3,244,996
Massachusetts Industrial Finance Agency, 8.875s, 2025 7,845 8,023,866
Massachusetts Industrial Finance Agency (Glenmeadow Retirement Community), 8.625s, 2026 3,520 3,439,286
Massachusetts Industrial Finance Agency (Martha's Vineyard Long-Term Care), 9.25s, 2022*++ 3,410 2,477,365
Michigan Strategic Fund Ltd. Obligation Rev. (River Valley Recovery Center), 12.875s, 2015 1,032 1,061,934
9
<PAGE>
Portfolio of Investments (Unaudited) - continued
Municipal Bonds -continued
- ---------------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------ ------------ -------------
Health Care Revenue - continued
Montgomery County, OH, Hospital Rev. (Kettering Convalescent Center), 10s, 2020 $5,200 $5,340,088
Montgomery County, PA, Higher Education & Health Authority Rev. (AHF/Montgomery), 10.5s, 2020 2,500 2,616,100
Nebraska Investment Finance Authority (Centennial Park), 10.5s, 2016 2,200 2,274,382
New Hampshire Industrial Development Authority (Tall Pines), 11.25s, 2016 2,400 2,613,840
New Jersey Economic Development Authority (Burnt Tavern Convalescent Center), 9s, 2013 1,700 1,775,429
New Jersey Economic Development Authority (Courthouse Convalescent Center), 8.7s, 2014 1,350 1,398,451
New Jersey Economic Development Authority (Geriatric & Medical Services), 9.625s, 2004 470 524,059
New Jersey Economic Development Authority (Geriatric & Medical Services), 9.625s, 2022 1,350 1,488,051
New Jersey Economic Development Authority (Gerimed Care Inn), 10.5s, 2020 3,000 3,233,490
New Jersey Economic Development Authority (Greenwood Health Care), 9.75s, 2011 3,125 3,144,312
New Jersey Economic Development Authority (Wanaque Convalescent Center), 8.5s, 2009 700 708,533
New Jersey Economic Development Authority (Wanaque Convalescent Center), 8.6s, 2011 1,000 1,012,130
North Carolina Medical Care Commission, Hospital Rev. (Valdese General Hospital), 8.75s,
2016 1,940 2,057,486
North Central Texas, Health Facilities Development Corp. (Baylor University Medical
Center), INFLO, 9.66s, 2016 4,300 5,173,158
North Central Texas, Health Facilities Development Corp. (Presbyterian Health Care
System), MBIA, 8.945s, 2021 4,000 4,262,680
Okaloosa County, FL, Retirement Rental Housing Rev. (Beverly Enterprises), 10.75s, 2003 2,885 3,076,795
Osceola County, FL, Industrial Development Rev. (Community Provider), 7.75s, 2017 2,700 2,708,424
Portsmouth, VA, Industrial Development Authority (Beverly Enterprises), 10s, 2011 2,020 2,267,874
Prince William County, VA, Industrial Development Authority, Residential Care (Westminster
at Lake Ridge), 10s, 2022 3,500 3,762,430
Rochester, MN, Health Care Facilities Rev. (Mayo Medical Foundation), FIRS, 7.93s, 2021 2,000 2,026,840
Salt Lake City, UT, Hospital Rev. (Intermountain Health Care), 9.16s, 2020 1,250 1,361,187
Santa Fe, NM, Industrial Development Rev. (Casa Real Nursing Home), 9.75s, 2013 1,890 1,996,728
Seminole County, FL, Industrial Development Authority (Friendly Village of Florida), 10s, 2011 880 907,782
10
<PAGE>
Portfolio of Investments (Unaudited) - continued
Municipal Bonds -continued
- ---------------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------ ------------ -------------
Health Care Revenue - continued
St. Charles County, MO, Industrial Development Authority (Garden View Care Center), 10s,
2016 $ 1,770 $ 1,809,807
St. Petersburg, FL, Health Facilities Rev. (Swanholm Nursing), 10s, 2022 1,525 1,642,638
State of Montana Health Facilities Authority, AMBAC, 9.32s, 2016 4,000 4,263,240
Suffolk County, NY, Industrial Development Agency (A Planned Program for Life Enrichment),
9.75s, 2015 3,680 3,128,000
Tyler, TX, Health Facilities Development Corp. (Park Place), 8.5s, 2018 4,865 4,747,316
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 3,204,780
Westerville, OH, Industrial Development Rev. (Health Care Corp.), 10s, 2008 535 544,368
Westside Habilitation Center, Cheneyville, LA, 8.375s, 2013 6,400 6,334,016
Wilkins Area, PA, Industrial Development Authority (Beverly Enterprises), 10s, 2011 1,100 1,236,565
-----------
$183,830,871
------------------------------------------------------------------------------------------ ---------- -----------
Industrial Revenue (Corporate Guarantee) - 14.9%
Baltimore County, MD, Pollution Control (Bethlehem Steel), 7.55s, 2017 $ 1,000 $ 1,038,110
Burns Harbor, IN, Solid Waste Disposal Facilities Rev. (Bethlehem Steel), 8s, 2024 10,455 11,085,437
Butler, AL, Industrial Development Rev., 8s, 2028 4,500 4,945,950
Cambria County, PA, Industrial Development Authority, Pollution Control Rev. (Pennsylvania
Electric), 7.5s, 2015 2,950 3,021,980
Courtland, AL, Industrial Development Board, Solid Waste Disposal Rev., 6.375s, 2029 7,500 7,334,550
Dayton, OH, Special Facilities Rev. (Emery Air Freight), "A", 12.5s, 2009 950 1,089,232
DeQueen, AZ, Industrial Development Board (Weyerhaeuser Co.), 9s, 2006 1,000 1,018,010
Eastern Band Cherokee Indian Community, NC (Carolina Mirror Co.), 10.25s, 2009+ 3,270 3,372,580
Eastern Band Cherokee Indian Community, NC (Carolina Mirror Co.), 11s, 2012+ 950 980,296
Florence County, SC, Industrial Rev. (Stone Container), 7.375s, 2007 3,000 3,062,550
Hernando County, FL, Industrial Development Rev. (Crushed Stone Co.), 8.5s, 2014 8,555 9,263,525
Hodge Village, LA, Utilities Rev. (Stone Container Corp.), 9s, 2010 6,800 7,340,192
Hunt County, TX, Industrial Development Rev. (Household Manufacturing), 10.236s, 2003 6,000 6,021,300
11
<PAGE>
Portfolio of Investments (Unaudited) - continued
Municipal Bonds -continued
- ---------------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------ ------------ -------------
Industrial Revenue (Corporate Guarantee) - continued
Lawrenceburg, TN, Industrial Development Board (Tridon, Inc.), 9.875s, 2006 $ 2,800 $ 2,852,584
Maine Finance Authority (Bowater, Inc.), 7.75s, 2022 8,500 9,155,775
Massachusetts Industrial Finance Agency, Solid Waste Disposal Rev. (Molten Metal
Technology Project), 8.25s, 2014 4,000 4,135,680
McMinn County, TN, Industrial Development Board (Bowater, Inc.), 7.4s, 2022 7,000 7,465,010
Mesa County, CO (Joy Technologies), 8.5s, 2006 1,350 1,419,660
New Hampshire Business Finance Authority Sewer & Solid Waste Disposal (Crown Paper
Project), 7.875s, 2026 3,000 3,059,700
Ohio Solid Waste Rev. (Republic Engineered Steel Project), 8.25s, 2014 4,000 3,883,160
Ohio Solid Waste Rev. (Republic Engineered Steel Project), 9s, 2021 6,000 6,149,280
Perry County, KY, Solid Waste (T.J. International), 7s, 2024 11,000 11,213,620
Philadelphia, PA, Authority for Industrial Development Rev., 7.75s, 2017 2,000 2,091,660
Port of New Orleans, LA (Avondale Industries), 8.5s, 2014 23,050 25,242,055
Port of New Orleans, LA (Avondale Industries), 7.5s, 2013 2,000 2,060,240
Sweetwater County, WY, Solid Waste Disposal Rev., 6.9s, 2024 3,000 3,097,890
Sweetwater County, WY, Solid Waste Disposal Rev., 7s, 2024 2,000 2,078,280
Walton, GA, Industrial Development Rev. (Ultima Rubber Products, Inc.), 10s, 2010 4,405 4,671,018
Weirton, WV, Pollution Control Rev. (Weirton Steel Project), 8.625s, 2014 3,630 3,808,269
-----------
$151,957,593
------------------------------------------------------------------------------------------ ---------- -----------
Miscellaneous Revenue - 2.9%
Brush, CO, Industrial Development Rev. (Training Centers International), 12s, 2015 $ 4,679 $ 5,240,340
Brush, CO, Industrial Development Rev. (Training Centers International), "B", 12s, 2015 4,349 4,870,750
Danville, VA, Industrial Development Authority (Piedmont Mall), 8s, 2017 8,280 8,092,210
District of Columbia (National Public Radio), 7.7s, 2023 3,500 3,593,135
Martha's Vineyard, MA, Land Bank, 8.125s, 2011 2,900 2,951,736
Massachusetts Health & Education Facilities Authority (Learning Center for Deaf Children),
9.25s, 2014 900 955,089
St. Louis County, MO, Industrial Development Authority (Eagle Golf Enterprises, Inc.),
10s, 2005 2,200 2,412,080
St. Louis County, MO, Industrial Development Authority (Kiel Center Arena), 7.875s, 2024 1,000 1,064,160
-----------
$ 29,179,500
------------------------------------------------------------------------------------------ ---------- -----------
Multi-Family Housing Revenue - 2.2%
Alexandria, VA, Redevelopment & Housing Authority (Jefferson Village Apartments), 9s, 2018 $ 2,000 $ 2,054,860
Broward County, FL, Housing Finance Authority (Deerfield Beach Apartments), 13s, 2000++ 3,376 2,147,293
12
<PAGE>
Portfolio of Investments (Unaudited) - continued
Municipal Bonds -continued
- ---------------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------ ------------ -------------
Multi-Family Housing Revenue - continued
Dallas, TX, Housing Finance Corp., 8.5s, 2011 $ 3,350 $ 3,440,852
Fairfax County, VA, Redevelopment & Housing Authority (Little River Glen), 8.95s, 2020 2,030 2,085,399
Florida Housing Finance Agency (South Lake Apartments), 8.7s, 2021 3,500 3,532,585
Maplewood Terrace, RI, Housing Development Corp., 6.9s, 2025 4,025 4,154,243
Massachusetts Housing Finance Agency, 8.5s, 2020 15 15,331
Memphis, TN, Health, Education & Housing Facilities Board (Wesley Highland Terrace),
12.75s, 2015* 6,300 5,355,000
-----------
$ 22,785,563
------------------------------------------------------------------------------------------ ---------- -----------
Refunded and Special Obligation - 13.8%
Austin, TX, Combined Utilities System Rev., 10.75s, 2000 $ 1,780 $ 2,149,902
Daphne, AL, Special Care Facilities Financing Authority Rev., "A", 0s, 2008 89,975 46,463,090
Daphne, AL, Special Care Facilities Financing Authority Rev., "B", 0s, 2008 4,500 2,323,800
Daphne, AL, Special Care Facilities Financing Authority Rev. (Presbyterian Project), 0s, 2008 48,475 7,060,384
Hopewell County, VA, Hospital Authority (John Randolph Hospital), 8.85s, 1997 950 985,844
Lexington-Fayette Counties, KY, Health Care Facilities Rev. (Sayre Christian), 10s, 1996 960 998,093
Maine Health & Higher Education Facilities Authority (St. Mary's General Hospital),
8.625s, 1999 5,140 5,811,952
Massachusetts Industrial Finance Agency, Tunnel Rev. (Massachusetts Turnpike), 9s, 2000 11,170 13,156,249
Meridian, MI, Economic Development Corp. (Burcham Hills), 9.625s, 1997 2,360 2,488,455
Mesa County, CO, Residual Rev., 0s, 2003 25,125 7,760,108
Mississippi Hospital Equipment & Facilities Authority Rev. (Rush Medical Center), 8.75s, 2001 2,800 3,020,388
New Lenox, IL, Community Park Development Authority, 8.25s, 2014 4,205 5,127,703
New York Local Government Assistance Corp., 7s, 2001 800 891,448
South Carolina Public Service Authority, 7.1s, 2001 2,000 2,246,400
Spirit Lake, IA, Industrial Development Rev. (Crystal Tips, Inc.), 0s, 2008 3,788 5,129,484
Telluride Gondola Transit Co. (Colorado Real Estate Transfer Assessment Rev.), 11.5s, 2012 2,680 4,199,935
Texas Turnpike Authority (Houston Ship Channel Bridge), 0s, 2002 21,090 29,833,703
Washington Public Power Supply System Rev., Nuclear Project #1, 14.375s, 2001 1,000 1,259,550
-----------
$140,906,488
13
<PAGE>
Portfolio of Investments (Unaudited) - continued
Municipal Bonds -continued
- ---------------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------ ------------ -------------
Sales and Excise Tax Revenue - 0.3%
Denver, CO, Urban Renewal Authority, Tax Increment Rev. (Downtown Denver), 8.5s, 2013 $ 1,415 $ 1,315,469
Denver, CO, Urban Renewal Authority, Tax Increment Rev. (Downtown Denver), 7.25s, 2017 1,250 1,308,725
Denver, CO, Urban Renewal Authority, Tax Increment Rev. (Musicland), 8.5s, 2017 950 877,981
-----------
$ 3,502,175
------------------------------------------------------------------------------------------ ---------- -----------
Single Family Housing Revenue - 8.0%
Arkansas Housing Development Agency Residential Mortgage Rev., 0s, 2015 $11,850 $ 1,593,232
Berkeley, Brookes, & Fayette Counties, WV, 0s, 2016 22,285 2,538,707
California Housing Finance Agency Rev., 0s, 2023 12,950 1,637,398
California Housing Finance Agency Rev., 7.4s, 2026 16,300 17,159,010
Chicago, IL, Single Family Mortgage, 0s, 2017 14,115 1,391,316
Colorado Housing Finance Authority, 8s, 1998 3,000 3,046,320
Cook County, IL, Single Family Housing, 0s, 2015 4,445 556,336
Corpus Christi, TX, Housing Finance Corp., 0s, 2011 3,395 786,044
Delaware Housing Authority Rev. (Single Family Mortgage), 6.75s, 2024 2,715 2,803,075
Denver, CO, City & County Single Family Mortgage Rev., 0s, 2015 1,390 147,882
East Baton Rouge, LA, 0s, 2010 18,620 4,024,154
El Paso, TX, Housing Finance Corp., 8.75s, 2011 895 967,468
Florida Housing Finance Agency, 0s, 2012 330 64,594
Florida Housing Finance Agency, 0s, 2016 10,800 1,484,352
Harris County, TX, Housing Finance Corp., 9.875s, 2014 795 795,564
Jefferson County, CO, 8.875s, 2013 445 470,467
Jefferson County, TX, Health Facilities Rev., 0s, 2015 5,235 663,327
Maine Housing Authority, Mortgage Purchase, 8.2s, 2019 1,820 1,864,554
Maine Housing Authority, Mortgage Purchase, 8.2s, 2022 5,980 6,126,390
Mississippi Home Corp., 9.25s, 2012 270 290,234
Nebraska Investment Finance Authority, 0s, 2016 3,040 301,902
Nevada Housing Division, 0s, 2015 4,028 605,499
New Castle County, DE, 0s, 2016 1,565 198,379
New Hampshire Housing Finance Authority, 0s, 2011 1,010 210,151
New Hampshire Housing Finance Authority, 8.5s, 2014 3,920 4,100,124
New Mexico Mortgage Finance Authority, 12s, 2011 40 40,327
New Mexico Mortgage Finance Authority, 6.9s, 2024 3,245 3,360,490
North Dakota Housing Finance Agency, 8.3s, 2012 445 459,930
North Dakota Housing Finance Agency, 6.8s, 2023 955 985,579
Ohio Housing Finance Agency, Single Family Mortgage Rev., GNMA, RIBS, 9.324s, 2031 1,750 1,844,832
Reno County, KS, Mortgage Rev., 0s, 2014 7,450 960,305
State of Texas, 7s, 2025 1,360 1,439,533
Texas Housing Agency, Residential Mortgage Rev., 8.4s, 2020 1,850 1,936,691
Texas Housing Agency, Single Family Mortgage, 8.2s, 2016 875 898,249
14
<PAGE>
Portfolio of Investments (Unaudited) - continued
Municipal Bonds -continued
- ---------------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------ ------------ -------------
Single Family Housing Revenue - continued
Utah Housing Finance Agency, 0s, 2016 $ 8,965 $ 1,160,260
Vermont Housing Finance Agency, Home Mortgage Purchase, "B", 8.1s, 2022 1,510 1,571,729
Virginia Housing & Development Authority, 7.125s, 2022 9,505 10,064,844
Wisconsin Housing & Economic Development Authority, Home Ownership Rev., 0s, 2016 2,385 325,123
Wisconsin Housing & Economic Development Authority, Home Ownership Rev., RIBS, 9.642s, 2022 2,450 2,576,224
-----------
$81,450,595
------------------------------------------------------------------------------------------ ---------- -----------
Solid Waste Revenue - 6.9%
Maryland Energy Financing Administration (Solid Waste), 9s, 2016 $28,300 $25,991,569
Massachusetts Industrial Finance Agency (Solid Waste Disposal Rev.), 12s, 2016 3,600 1,620,000
Michigan Strategic Fund Ltd. Obligation Rev. (Blue Water Fiber), 8s, 2012 2,000 1,495,240
Michigan Strategic Fund Ltd. Obligation Rev. (Great Lakes Fibre Project), 10.25s, 2016 10,000 7,675,000
Pennsylvania Economic Development Financing Authority, Recycling Rev. (Ponderosa Fibres
Project), 9.25s, 2022 25,000 24,060,000
Port Walla Walla, WA, Solid Waste Recycling Rev. (Ponderosa Fibres Project), 9.125s, 2026 10,000 9,491,200
-----------
$70,333,009
------------------------------------------------------------------------------------------ ---------- -----------
Special Assessment District - 0.2%
Indianapolis, IN, Public Improvement Bond, 6.5s, 2022 $ 2,000 $ 2,027,900
------------------------------------------------------------------------------------------ ---------- -----------
State and Local Appropriation - 0.6%
District of Columbia, Certificates of Participation, 7.3s, 2013 $ 2,500 $ 2,495,050
South Tucson, AZ, Municipal Property Corp., 8.75s, 2010 865 926,891
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, 1997 70 69,819
Williamsburg County, SC, School District, Public Facilities Rev., 7.5s, 1998 75 74,579
Williamsburg County, SC, School District, Public Facilities Rev., 7.5s, 1999 80 79,326
Williamsburg County, SC, School District, Public Facilities Rev., 7.5s, 2000 85 84,063
Williamsburg County, SC, School District, Public Facilities Rev., 7.5s, 2001 95 93,671
Williamsburg County, SC, School District, Public Facilities Rev., 7.5s, 2002 115 113,172
Williamsburg County, SC, School District, Public Facilities Rev., 7.5s, 2003 130 127,703
Williamsburg County, SC, School District, Public Facilities Rev., 7.5s, 2004 150 147,105
15
<PAGE>
Portfolio of Investments (Unaudited) - continued
Municipal Bonds -continued
- ---------------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------ ------------ -------------
State and Local Appropriation - continued
Williamsburg County, SC, School District, Public Facilities Rev., 7.5s, 2005 $ 165 $ 161,565
Williamsburg County, SC, School District, Public Facilities Rev., 7.5s, 2010 235 222,066
Williamsburg County, SC, School District, Public Facilities Rev., 7.5s, 2011 250 235,735
Williamsburg County, SC, School District, Public Facilities Rev., 7.5s, 2013 290 272,414
Williamsburg County, SC, School District, Public Facilities Rev., 7.5s, 2015 335 313,664
Williamsburg County, SC, School District, Public Facilities Rev., 7.5s, 2016 360 336,586
Williamsburg County, SC, School District, Public Facilities Rev., 7.5s, 2017 390 364,147
-----------
$ 6,390,556
------------------------------------------------------------------------------------------ ---------- -----------
Student Loan Revenue - 1.1%
Arizona Student Loan Acquisition Authority, 7.25s, 2010 $ 2,970 $ 3,075,435
Arizona Student Loan Acquisition Authority, 7.625s, 2010 4,610 4,991,892
Pennsylvania State Higher Education Assistance Agency, Student Loan Rev., AMBAC, RIBS,
7.833s, 2022 2,700 2,623,455
-----------
$10,690,782
------------------------------------------------------------------------------------------ ---------- -----------
Turnpike and Transit Revenue - 9.4%
Arapahoe County, CO, Capital Improvement (Highway Rev.), 0s, 2015 $ 76,375 $19,720,789
Arapahoe County, CO, Capital Improvement (Highway Rev.), 0s, 2026 105,000 11,456,550
Florida Mid-Bay Bridge Authority Rev., "B", 8.5s, 2022 2,500 2,807,625
Foothill/Eastern Transportation Corridor Agency, CA, Toll Road Rev., 0s, 2013 5,000 2,981,900
Foothill/Eastern Transportation Corridor Agency, CA, Toll Road Rev., 0s, 2018 44,190 10,549,037
Foothill/Eastern Transportation Corridor Agency, CA, Toll Road Rev., 0s, 2021 25,000 4,799,750
Foothill/Eastern Transportation Corridor Agency, CA, Toll Road Rev., 0s, 2022 30,835 5,531,799
Foothill/Eastern Transportation Corridor Agency, CA, Toll Road Rev., 0s, 2023 5,765 966,445
Foothill/Eastern Transportation Corridor Agency, CA, Toll Road Rev., 0s, 2024 72,045 11,285,129
San Joaquin Hills, CA, Transportation Corridor Agency, Toll Road Rev., 0s, 2001 9,100 6,795,516
San Joaquin Hills, CA, Transportation Corridor Agency, Toll Road Rev., 0s, 2005 1,500 839,370
San Joaquin Hills, CA, Transportation Corridor Agency, Toll Road Rev., 0s, 2007 4,000 1,930,360
San Joaquin Hills, CA, Transportation Corridor Agency, Toll Road Rev., 0s, 2008 5,400 2,416,554
16
<PAGE>
Portfolio of Investments (Unaudited) - continued
Municipal Bonds -continued
- ---------------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------ ------------ -------------
Turnpike and Transit Revenue - continued
San Joaquin Hills, CA, Transportation Corridor Agency, Toll Road Rev., 0s, 2011 $13,400 $ 4,786,614
San Joaquin Hills, CA, Transportation Corridor Agency, Toll Road Rev., 0s, 2028 13,450 1,295,101
Telluride Gondola Transit Co. (Colorado Real Estate Transfer Assessment Rev.), 11.5s, 2012 3,320 3,875,569
Telluride Gondola Transit Co. (Colorado Real Estate Transfer Assessment Rev.), 9s, 2016 2,550 2,437,672
West Virginia State Parkways, Economic Development & Tourism Authority, FGIC, RIBS,
7.408s, 2019 1,200 1,147,020
-----------
$ 95,622,800
------------------------------------------------------------------------------------------ ---------- -----------
Universities - 1.1%
Islip, NY, Community Development Agency (New York Institute of Technology), 7.5s, 2026 $ 6,000 $ 6,035,220
Massachusetts Industrial Finance Agency (Curry College), 8s, 2014 1,500 1,499,220
Massachusetts Industrial Finance Agency (Emerson College), 8.9s, 2018 3,000 3,292,500
-----------
$ 10,826,940
------------------------------------------------------------------------------------------ ---------- -----------
Total Municipal Bonds (Identified Cost, $971,866,279) $1,009,211,013
------------------------------------------------------------------------------------------ ---------- -----------
Floating Rate Demand Note - 0.2%
------------------------------------------------------------------------------------------ ---------- -----------
Uinta County, WY, Pollution Control Rev. (Chevron), due 2020, at Identified Cost $ 2,400 $ 2,400,000
------------------------------------------------------------------------------------------ ---------- -----------
Total Investments (Identified Cost, $974,266,279) $1,011,611,013
Other Assets, Less Liabilities - 0.8% 8,372,365
------------------------------------------------------------------------------------------ ---------- -----------
Net Assets - 100.0% $1,019,983,378
------------------------------------------------------------------------------------------ ---------- -----------
</TABLE>
+ Restricted security.
+++ Security accruing partial interest - in default.
* Non-income producing security.
++ Security valued by or at the direction of the Trustees.
See notes to financial statements
17
<PAGE>
Financial Statements
Statement of Assets and Liabilities (Unaudited)
- -------------------------------------------------------------------------------
July 31, 1996
- -------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $974,266,279) $1,011,611,013
Cash 21,749
Receivable for investments sold 322,897
Receivable for Fund shares sold 605,398
Interest receivable 15,024,557
Other assets 11,650
-----------
Total assets $1,027,597,264
-----------
Liabilities:
Payable for investments purchased $ 3,022,313
Payable for Fund shares reacquired 957,946
Payable to affiliates -
Management fee 18,858
Distribution fee 24,326
Shareholder servicing agent fee 3,960
Accrued expenses and other liabilities 3,586,483
-----------
Total liabilities $ 7,613,886
-----------
Net assets $1,019,983,378
-----------
Net assets consist of:
Paid-in capital $1,102,678,354
Unrealized appreciation on investments 37,344,734
Accumulated net realized loss on investments (124,813,422)
Undistributed net investment income 4,773,712
-----------
Total $1,019,983,378
-----------
Shares of beneficial interest outstanding 116,660,852
-----------
Class A shares:
Net asset value and redemption price per share
(net assets of $943,078,850 / 107,866,040 shares of
beneficial interest outstanding) $8.74
-----------
Offering price per share (100/95.25 of net asset
value per share) $9.18
-----------
Class B shares:
Net asset value and offering price per share
(net assets of $76,904,528 / 8,794,812 shares of
beneficial interest outstanding) $8.74
-----------
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
18
<PAGE>
Financial Statements - continued
Statement of Operations (Unaudited)
- -------------------------------------------------------------------------------
Six Months Ended July 31, 1996
- -------------------------------------------------------------------------------
Net investment income:
Interest income $ 41,522,705
------------
Expenses -
Management fee $ 3,531,559
Trustees' compensation 28,923
Shareholder servicing agent fee (Class A) 652,054
Shareholder servicing agent fee (Class B) 84,846
Distribution and service fee (Class B) 325,061
Custodian fees 175,198
Legal fees 80,215
Postage 56,191
Auditing fees 29,400
Printing 25,850
Transfer agent fees 25,000
Registration fees 19,733
Workout expenditures 10,000
Miscellaneous 183,287
------------
Total expenses $ 5,227,317
Fees paid indirectly (45,000)
------------
Net expenses $ 5,182,317
------------
Net investment income $ 36,340,388
------------
Realized and unrealized loss on investments:
Realized loss (identified cost basis) on investment
transactions $(15,936,531)
Change in unrealized depreciation on investments (30,953,467)
------------
Net realized and unrealized loss on investments $(46,889,998)
------------
Decrease in net assets from operations $(10,549,610)
------------
See notes to financial statements
19
<PAGE>
Financial Statements - continued
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
July 31, 1996 Year Ended
(Unaudited) January 31, 1996
----------------------------------------------------- -------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 36,340,388 $ 71,045,295
Net realized loss on investments (15,936,531) (24,859,595)
Net unrealized gain (loss) on investments (30,953,467) 88,864,128
------------ ---------------
Increase (decrease) in net assets from operations $ (10,549,610) $ 135,049,828
------------ ---------------
Distributions declared to shareholders -
From net investment income (Class A) $ (32,348,276) $ (69,946,556)
From net investment income (Class B) (2,224,265) (4,150,972)
------------ ---------------
Total distributions declared to shareholders $ (34,572,541) $ (74,097,528)
------------ ---------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 42,815,029 $ 158,313,624
Net asset value of shares issued to shareholders in
reinvestment of distributions 12,791,859 27,605,848
Cost of shares reacquired (77,340,390) (135,750,588)
------------ ---------------
Increase (decrease) in net assets from Fund share
transactions $ (21,733,502) $ 50,168,884
------------ ---------------
Total increase (decrease) in net assets $ (66,855,653) $ 111,121,184
Net assets:
At beginning of period 1,086,839,031 975,717,847
------------ ---------------
At end of period (including undistributed net
investment income of $4,773,712 and $3,005,866,
respectively) $1,019,983,378 $1,086,839,031
------------ ---------------
</TABLE>
See notes to financial statements
20
<PAGE>
Financial Statements - continued
Financial Highlights
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Six Months
Ended July 31,
1996++ Year Ended January 31,
--------------------------------------------------
(Unaudited) 1996++ 1995 1994 1993
- ----------------------------------------------------------- ------------ ----------- --------- --------- ---------
Class A
---------------------------------------------------------- ------------ ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.12 $ 8.60 $ 9.38 $ 9.26 $ 9.22
---------- --------- ------- ------- -------
Income from investment operations -
Net investment income $ 0.31 $ 0.61 $ 0.64 $ 0.77 $ 0.73
Net realized and unrealized gain (loss) on investments (0.40) 0.59 (0.75) 0.05 0.06
---------- --------- ------- ------- -------
Total from investment operations $
$ (0.09) $ 1.20 (0.11) $ 0.82 $ 0.79
---------- --------- ------- ------- -------
Less distributions declared to shareholders from net
investment income $ (0.29) $ (0.68) $ (0.67) $ (0.70) $ (0.75)
---------- --------- ------- ------- -------
Total distributions declared to shareholders $ (0.29) $ (0.68) $ (0.67) $ (0.70) $ (0.75)
---------- --------- ------- ------- -------
Net asset value - end of period $ 8.74 $ 9.12 $ 8.60 $ 9.38 $ 9.26
---------- --------- ------- ------- -------
Total return* (0.93)%** 13.92% (1.04)% 9.19% 9.02%
Ratios (to average daily net assets)/Supplemental data:
Expenses# 0.93%+ 0.93% 1.04% 1.10% 1.00%
Net investment income 7.04%+ 6.83% 7.27% 7.15% 7.95%
Portfolio turnover 10% 20% 32% 18% 10%
Net assets at end of period (000 omitted) $943,079 $1,009,031 $920,043 $809,957 $731,968
</TABLE>
+Annualized.
*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.
**Not annualized.
#For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
++Per share data for the periods indicated are based on average shares
outstanding.
See notes to financial statements
21
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31,
-------------------------------------------------------------
1992 1991 1990 1989 1988
- ------------------------------------------------------------ --------- --------- --------- --------- -----------
Class A
- ------------------------------------------------------------ --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.09 $ 9.45 $ 9.55 $ 9.68 $ 10.38
------- ------- ------- ------- ---------
Income from investment operations -
Net investment income $ 0.73 $ 0.74 $ 0.85 $ 0.88 $ 0.84
Net realized and unrealized gain (loss) on investments 0.17 (0.32) (0.09) (0.12) (0.67)
------- ------- ------- ------- ---------
Total from investment operations $ 0.90 $ 0.42 $ 0.76 $ 0.76 $ 0.17
------- ------- ------- ------- ---------
Less distributions declared to shareholders - From net
investment income $ (0.77) $ (0.78) $ (0.81) $ (0.82) $ (0.84)
From net realized gain on investments -- -- (0.04) (0.07) (0.03)
From paid-in capital -- -- (0.01) -- --
------- ------- ------- ------- ---------
Total distributions declared to shareholders $ (0.77) $ (0.78) $ (0.86) $ (0.89) $ (0.87)
------- ------- ------- ------- ---------
Net asset value - end of period $ 9.22 $ 9.09 $ 9.45 $ 9.55 $ 9.68
------- ------- ------- ------- ---------
Total return* 10.34% 4.65% 8.24% 8.32% 1.87%
Ratios (to average daily net assets)/Supplemental data:
Expenses 1.03% 1.05% 1.02% 0.65% 1.03%
Net investment income 7.96% 8.17% 8.90% 9.27% 8.54%
Portfolio turnover 21% 41% 21% 23% 16%
Net assets at end of period (000 omitted) $648,043 $638,185 $485,037 $325,044 $349,655
</TABLE>
*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.
See notes to financial statements
22
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
July 31,
Year Ended 1996++ Year Ended January 31,
----------------------------
January 31,
1987 (Unaudited) 1996++ 1995 1994##
- ---------------------------------------------- ------------- ------------ ------ ------ --------
Class A Class B
- ---------------------------------------------- ------------- ------------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.49 $ 9.12 $ 8.60 $ 9.38 $ 9.40
----------- ---------- ---- ---- ------
Income from investment operations -
Net investment income $ 0.99 $ 0.27 $ 0.52 $ 0.57 $ 0.32
Net realized and unrealized gain (loss) on
investments (0.01) (0.40) 0.59 (0.78) (0.14)
----------- ---------- ---- ---- ------
Total from investment operations $ 0.98 $ (0.13) $ 1.11 $ (0.21) $ 0.18
----------- ---------- ---- ---- ------
Less distributions declared to shareholders -
From net investment income $ (1.01) $ (0.25) $ (0.59) $ (0.57) $(0.20)
From net realized gain on investments (0.08) -- -- -- --
----------- ---------- ---- ---- ------
Total distributions declared to shareholders $ (1.09) $ (0.25) $ (0.59) $ (0.57) $(0.20)
----------- ---------- ---- ---- ------
Net asset value - end of period $
$ 10.38 $ 8.74 $ 9.12 8.60 $ 9.38
----------- ---------- ---- ---- ------
Total return* 10.00% (1.39)%** 12.78% (2.13)% 1.89%
Ratios (to average daily net assets)/Supplemental data:
Expenses# 1.00% 1.86%+ 1.91% 2.10%+ 2.04%+
Net investment income 9.54% 6.12%+ 5.84% 6.32%+ 5.43%+
Portfolio turnover 9% 10% 20% 32% 18%
Net assets at end of period (000 omitted) $442,036 $76,905 $77,808 $55,675 $ 1
</TABLE>
+Annualized.
*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.
**Not annualized.
#For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
++Per share data for the periods indicated are based on average shares
outstanding.
##For the period from the commencement of offering of Class B shares, September
7, 1993 to January 31, 1994.
See notes to financial statements
23
<PAGE>
Notes to Financial Statements (Unaudited)
(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
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
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. The
Fund, along with other affiliated entities of Massachusetts Financial Services
Company (MFS), may utilize a joint trading account for the purpose of entering
into one or more repurchase agreements.
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
24
<PAGE>
Notes to Financial Statements (Unaudited) - continued
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. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as part of an income producing strategy reflecting the view of the
Fund's management on the direction of interest rates.
Futures Contracts - The Fund may enter into 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 futures contracts is designed to
hedge against anticipated future changes in interest rates or securities prices.
Investments in interest rate futures for purposes other than hedging may be made
to modify the duration of the portfolio without incurring the additional
transaction costs involved in buying and selling the underlying securities.
Should interest rates or securities prices move unexpectedly, the Fund may not
achieve the anticipated benefits of the 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 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.
Under normal circumstances, the Fund will invest at least 65% of its portfolio
in high-yield securities rated below investment grade. Investments in high-
yield securities involve greater degrees of credit and market risk than
investments in higher-rated securities, and tend to be more sensitive to
economic conditions.
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
25
<PAGE>
Notes to Financial Statements (Unaudited) - continued
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.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. This fee is reduced according to an expense
offset arrangement with State Street Bank, the dividend disbursing agent, which
provides for partial reimbursement of custody fees based on a formula developed
to measure the value of cash deposited by the Fund with the custodian and with
the dividend disbursing agent. 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.
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.
26
<PAGE>
Notes to Financial Statements (Unaudited) - 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), January 31, 2003 ($27,178,219), and January 31, 2004
($30,637,034).
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 effective annual rate of
0.30% of average daily net assets and 4.75% of gross 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 or 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
$28,923 for the six months ended July 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$175,792 as its portion of the sales charge on sales of Class B 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. Except in
the case of the 0.25% per annum Class B service fee paid by the Fund upon the
sale of Class B shares, payment of the Class B service fee will be suspended
until such date as the Trustees of the Trust may determine. MFD
27
<PAGE>
Notes to Financial Statements (Unaudited) - continued
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. MFD retains the service fee for accounts not
attributable to a securities dealer, which amounted to $0. Fees incurred under
the distribution plan during the six months ended July 31, 1996 were 0.90% of
average daily net assets attributable to Class B shares on an annualized basis.
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 twelve 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 six months ended July 31, 1996 were $21,074 for Class
A shares and $96,879 for Class B shares.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15% and up to 0.22% attributable to Class A and
Class B shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $108,244,469 and $131,947,030, 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 $974,266,279
===========
Gross unrealized appreciation $ 63,387,842
Gross unrealized depreciation (26,043,108)
-----------
Net unrealized appreciation $ 37,344,734
===========
28
<PAGE>
Notes to Financial Statements (Unaudited) - continued
(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 Six Months Ended Year Ended
July 31, 1996 January 31, 1996
-------------------------- -----------------------------
Shares Amount Shares Amount
- ----------------------------------- ---------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Shares sold 4,135,195 $ 36,558,702 15,092,575 $ 134,162,658
Shares issued to shareholders in
reinvestment of distributions 1,349,195 11,912,217 2,921,213 25,867,385
Shares reacquired (8,272,390) (72,618,951) (14,380,028) (128,112,173)
-------- ---------- --------- ------------
Net increase (decrease) (2,788,000) $(24,148,032) 3,633,760 $ 31,917,870
-------- ---------- --------- ------------
Class B Shares Six Months Ended Year Ended
July 31, 1996 January 31, 1996
-------------------------- -----------------------------
Shares Amount Shares Amount
- ----------------------------------- ---------- ------------ ----------- --------------
Shares sold 702,491 $ 6,256,326 2,715,689 $24,150,966
Shares issued to shareholders in
reinvestment of distributions 99,564 879,643 196,030 1,738,463
Shares reacquired (538,899) (4,721,439) (856,621) (7,638,415)
-------- ---------- --------- ------------
Net increase 263,156 $ 2,414,530 2,055,098 $18,251,014
-------- ---------- --------- ------------
</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 repurchase 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 six
months ended July 31, 1996 was $5,582.
29
<PAGE>
(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 July 31, 1996, the
Fund owned the following restricted securities (constituting 0.8% 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>
Date of Par
Description Acquisition Amount Cost Value
-------------------------------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C>
Eastern Band Cherokee Indian
Community, NC, 10.25s, 2009 11/25/86 $3,270,000 $3,392,652 $3,372,580
Eastern Band Cherokee Indian
Community, NC, 11s, 2012 9/16/86 950,000 862,500 980,296
Hannibal, MO, Industrial
Development Authority,
9.5s, 2022 3/23/92 3,000,000 2,970,972 3,764,610
---------
$8,117,486
---------
</TABLE>
- ------------------------------------------------------------------------------
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.
30
<PAGE>
MFS(R) 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; Director, Cambridge Bancorp;
Director, Cambridge Trust 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
Fund Manager
Cynthia M. Brown*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
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.
Web Site
http://www.mfs.com
*Affiliated with the Investment Adviser
[DALBAR LOGO, 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."
31
<PAGE>
MFS Investment Opportunities
The MFS Family of Funds(R), 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 bond 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.
32
<PAGE>
The MFS Family of Funds(R)
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 World
=================================== =========================================
Massachusetts Investors Trust MFS(R)/Foreign & Colonial Emerging
Markets Equity Fund
Massachusetts Investors Growth
Stock Fund MFS(R)/Foreign & Colonial International
Growth Fund
MFS(R) Capital Growth Fund
MFS(R)/Foreign & Colonial International
MFS(R) Emerging Growth Fund Growth and Income Fund
MFS(R) Gold & Natural Resources MFS(R) World Asset Allocation Fund(SM)
Fund
MFS(R) World Equity Fund
MFS(R) Growth Opportunities Fund
MFS(R) World Governments Fund
MFS(R) Managed Sectors Fund
MFS(R) World Growth Fund
MFS(R) OTC Fund
MFS(R) World Total Return Fund
MFS(R) Research Fund
MFS(R) Value Fund National Tax-Free Bond
=========================================
MFS(R) Municipal Bond Fund
Stock and Bond
=================================== MFS(R) Municipal High Income Fund
MFS(R) Total Return Fund
MFS(R) Utilities Fund MFS(R) Municipal Income Fund
Bond State Tax-Free Bond
=================================== =========================================
MFS(R) Bond Fund Alabama, Arkansas, California, Florida,
Georgia, Maryland, Massachusetts,
MFS(R) Government Mortgage Fund Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee,
MFS(R) Government Securities Fund Virginia, West Virginia
MFS(R) High Income Fund
Money Market
MFS(R) Intermediate Income Fund =========================================
MFS(R) Cash Reserve Fund
MFS(R) Strategic Income Fund
MFS(R) Government Money Market Fund
Limited Maturity Bond MFS(R) Money Market Fund
===================================
MFS(R) Government Limited Maturity
Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity
Fund
33
<PAGE>
[BACKPAGE]
MFS(R)
Municipal
High Income Fund [DALBAR LOGO]
500 Boylston Street
Boston, Ma 02116
[MFS LOGO]
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
[Copyright] 1996 MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116 MMH-3-9/96 44M 25/225
