<PAGE>
[LOGO] M F S(SM) Annual Report
INVESTMENT MANAGEMENT for Year Ended
January 31, 1997
- --------------------------------------------------------------------------------
MFS(R) MUNICIPAL HIGH INCOME FUND
- --------------------------------------------------------------------------------
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
A Discussion with the Portfolio Manager .................................... 2
Portfolio Manager's Profile ................................................ 4
Fund Facts ................................................................. 5
Performance Summary ........................................................ 5
Portfolio of Investments ................................................... 8
Financial Statements .......................................................21
Notes to Financial Statements ..............................................27
Independent Auditors' Report ...............................................32
Trustees and Officers ......................................................33
HIGHLIGHTS
o FOR THE YEAR ENDED JANUARY 31, 1997, CLASS A SHARES OF THE FUND PROVIDED
A TOTAL RETURN AT NET ASSET VALUE OF 2.87%, WHILE CLASS B SHARES
RETURNED 1.96%.
o SINCE THE FUND WAS REOPENED TO NEW INVESTORS IN AUGUST, MONEY HAS BEEN
COMING INTO THE FUND AT A NET RATE OF APPROXIMATELY $10 MILLION PER
MONTH, A COMFORTABLE PLAN THAT HAS LET US KEEP UP WITH SUPPLY.
o THE SECOND HALF OF 1996 BROUGHT A HEFTY SUPPLY OF NEW ISSUES, AS A
STRONG AND RELATIVELY STABLE ECONOMY GAVE MANY NEW ISSUERS ACCESS TO THE
HIGH-INCOME MARKET.
o AN IMPROVING ECONOMY HAS ALSO BENEFITED MANY LOCAL AND STATE
GOVERNMENTS, GIVING THEM INCREASED SALES AND INCOME TAX REVENUES, WHICH
HAS HELPED THEIR BALANCE SHEETS AND THEIR ABILITY TO MEET DEBT PAYMENTS.
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
After more than six years of expansion, the U.S. economy appears headed toward
another year of at least moderate growth in 1997, although a few signs point to
the possibility of a modest rise in inflation during the year. On the positive
side, the pattern of moderate growth and inflation set over the past few years
now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Also, recent gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be seen
in the continuing high level of consumer debt and the attendant rise in personal
bankruptcies, as well as in the modestly disappointing level of holiday sales.
Also, the ongoing tightness in labor markets, and price rises in such important
sectors as energy, could add some inflationary pressures to the economy. Given
these somewhat conflicting indicators, we expect real (inflation-adjusted)
growth to revolve around 2% in 1997, which would represent a modest decline from
1996.
In the bond markets, conflicting signals over the strength of the economy have
created near-term volatility, while comments by Federal Reserve Chairman Alan
Greenspan in late 1996 and in February of this year created some uncertainty
over the Federal Reserve Board's next move. However, we expect the Fed to
maintain its anti-inflationary stance should signs of more rapid economic growth
and, particularly, of higher inflation resurface. While inflationary forces
largely remained in check in 1996, the continued strength in the labor market
and rising energy prices mean that a pickup in inflation is still possible. At
the same time, the U.S. budget deficit continues to decline and, as a percentage
of gross domestic product, is now less than 2%, which we consider a positive
development for the bond markets. Although interest rates may move higher over
the coming months, we believe that, at current levels, fixed-income markets
remain equitably valued.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
February 12, 1997
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of Cynthia M. Brown]
Cynthia M. Brown
For the year ended January 31, 1997, Class A shares of the Fund provided a total
return of 2.87%, while Class B shares returned 1.96%. These returns, which
include the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 3.84% return for the Lehman Brothers Municipal Bond Index
(the Lehman Index). While the Fund underperformed the Lehman Index over the same
period, it is important to note that this is an unmanaged index of
investment-grade municipal bonds rated "Baa" or higher, while the Fund primarily
invests in lower-quality municipal issues rated "Baa" or below or which are
unrated.
Q. WHAT DO YOU SEE AS SOME OF THE REASONS FOR THIS PERFORMANCE?
A. The lower-rated securities in which we invest have high coupon rates relative
to the market. This 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. However, while these securities are generally
less price sensitive in a volatile interest rate environment and provide less
price fluctuation during these periods, in a falling interest rate environment
this coupon structure could cause the Fund's performance to lag somewhat.
Q. IN GENERAL, HOW WOULD YOU DESCRIBE THE FIXED-INCOME ENVIRONMENT OVER THE
PAST YEAR?
A. Volatility was very high because of concerns over inflation, and the market
continued to receive conflicting economic signals while hoping to find some
direction, either up or down. At the beginning of 1996, interest rates on
long-term Treasuries hovered at around 6%, then climbed as high as 7.20% before
declining to 6.50% by the end of the year. Meanwhile, demand for tax-exempt
funds was anemic because of concerns over the many different flat-tax proposals
spun prior to the election. Although major tax-reform talk has faded from the
front pages of the newspapers, investor interest in tax-exempt fixed-income
products has not been renewed. The fixed-income markets in general are competing
with the strong returns of the equity market.
Q. AND WHAT ABOUT THE MUNICIPAL HIGH-INCOME ENVIRONMENT? HAS IT SEEN ANY MAJOR
DEVELOPMENTS?
A. The second half of the year brought a hefty supply of new issues, which is
why the Fund was reopened to new investors. A strong and relatively stable
economy helped give many of these new issues access to the high-income market
because of their financial viability in this economic environment.
Q. WE HAD A FEW HIGHLY PUBLICIZED MUNICIPAL DEFAULTS A FEW YEARS AGO. WHAT'S
THE DEFAULT PICTURE LOOK LIKE NOW?
A. The cities of Miami and Washington, D.C. remain in difficult financial
straits and the outcome for these cities is still uncertain at this time.
However, with the overall improvement in the economy, many local and state
budgets have seen the benefits of increased sales and income tax revenues. As a
result, several issuers have improved their balance sheets, as well as their
ability to meet their debt payments. For example, airline and airport debt is
more highly valued today due to strong earnings and increased passenger load.
Q. YOU MENTIONED THAT THE FUND WAS REOPENED TO NEW INVESTORS. THIS HAPPENED ON
AUGUST 5, 1996. WHY WAS THE FUND REOPENED AND WHY DID YOU DECIDE TO OPEN IT AT
THAT PARTICULAR TIME?
A. The supply of what we regard as bonds that are appropriate to our objective
had increased and could be purchased without dilution to existing shareholders.
We believe the Fund benefits from an injection of new money because it helps us
to be a continual participant in new issues and to stay involved in this market.
Q. SINCE THEN, HAS THE NEW MONEY BEEN COMING IN AT A COMFORTABLE PACE,
RELATIVE TO THE INVESTMENT OPPORTUNITIES AVAILABLE?
A. Money has been coming into the Fund at a net rate of approximately $10
million per month. This has been a very comfortable flow and has let us keep up
with supply, even though the fourth quarter of 1996 was the heaviest period for
new issues on record.
Q. WOULD YOU CONSIDER CLOSING THE FUND AGAIN?
A. If the amount of new money coming into the Fund exceeds what we believe are
the number of suitable investments available for us to purchase, we would
consider closing the Fund again. We might also consider closing the Fund if
interest rates were to drop very dramatically and very quickly -- which we see
as very unlikely -- thereby having a dilutive effect on the Fund's income.
Q. HAVE SOME SEGMENTS OF THE HIGH-YIELD BOND MARKETS PERFORMED AS WELL AS OR
BETTER THAN YOU EXPECTED?
A. The corporate-backed bonds in the portfolio, such as those issued by the
airline industry, have done very well. However, we will monitor our
corporate-backed holdings in the event of any sustained economic slowdown. We
believe we are late into the economic expansion cycle and that profits for many
corporations have peaked. At the same time, single-family mortgage revenue bonds
have held up very well against the bond market's volatility. Because of the
zigzagging of interest rates, mortgage pre-payments have been low, keeping the
risk of calls, or early redemptions, down as well.
Q. NOW, WHAT ABOUT SOME SEGMENTS OF THIS MARKET, OR PARTICULAR HOLDINGS, THAT
MAY NOT HAVE PERFORMED AS WELL AS YOU EXPECTED?
A. The one area would be the paper industry. Despite the good economy, paper
prices started to decline toward the end of 1995 and have yet to rebound. This
has been one of the longest periods of depressed paper prices in recent history.
One of our holdings, Maryland Energy Financing Administration Solid Waste
Disposal, has been affected by this sustained downturn in paper prices. We
expect paper prices to remain soft through 1997, which is one reason we cut our
exposure to this industry by 50% in 1996.
Q. AS YOU LOOK AHEAD, WHAT CHANGES DO YOU SEE IN THE OVERALL MARKET OR ECONOMIC
ENVIRONMENT, PARTICULARLY AS IT RELATES TO THE FUND, AND HOW ARE YOU POSITIONING
THE FUND TO TRY AND TAKE ADVANTAGE OF THOSE CHANGES?
A. Because of investor worries about inflation, higher-yielding, higher-coupon
bonds have been in great demand, thereby causing spreads, or yield
differentials, to narrow relative to investment-grade bonds. We will continue to
monitor this spread relationship and will avoid situations where we do not
believe we are being adequately compensated for any added risk resulting from
the narrowing of spreads.
Respectfully,
/s/ Cynthia M. Brown
Cynthia M. Brown
Portfolio Manager
PORTFOLIO MANAGER'S PROFILE
CYNTHIA M. BROWN BEGAN HER CAREER AT MFS IN 1984 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(R)
MUNICIPAL HIGH INCOME FUND, SHE OVERSEES MFS(R) MUNICIPAL INCOME TRUST.
MS. BROWN IS A MEMBER OF THE BOSTON MUNICIPAL ANALYSTS GROUP.
<PAGE>
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: $1.1 BILLION IN NET ASSETS AS OF JANUARY 31, 1997
PERFORMANCE SUMMARY
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. Class A share performance results reflect the
deduction of the 4.75% maximum sales charge; benchmark comparisons are unmanaged
and do not reflect any fees or expenses. The performance of other share classes
will be greater than or less than the line shown, based on the differences in
loads and fees paid by shareholders investing in the different classes. It is
not possible to invest in an index. All results are historical and assume the
reinvestment of dividends and capital gains.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-Year Period Ended January 31, 1997)
MFS Lehman Consumer
Municipal Brothers Price
High Income Municipal Index -
Date Fund - Class A Bond Index U.S.
- ---- -------------- ---------- --------
2/92 9525.0 10000.0 10000.0
1/93 10384.0 10983.0 10326.0
1/94 11339.0 12330.0 10587.0
1/95 11221.0 11891.0 10883.0
1/96 12783.0 13681.0 11174.0
1/97 13151.0 14207.0 11484.0
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period Ended January 31, 1997)
MFS Lehman Consumer
Municipal Brothers Price
High Income Municipal Index -
Date Fund - Class A Bond Index U.S.
- ---- -------------- ---------- --------
2/87 9523.0 10000.0 10000.0
1/89 10406.0 10888.0 11078.0
1/91 11787.0 12102.0 13076.0
1/93 14179.0 12821.0 15928.0
1/95 15322.0 13513.0 17245.0
1/97 17956.0 14259.0 20603.0
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
<CAPTION>
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 -1.96% +3.37% +5.63% +6.13%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal High Income Fund (Class A)
at net asset value +2.87% +5.07% +6.66% +6.65%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal High Income Fund (Class B) with CDSC -1.87% +3.15% +5.65% +6.29%
- --------------------------------------------------------------------------------------------------------------------------------
MFS Municipal High Income Fund (Class B) without CDSC +1.96% +4.02% +5.95% +6.29%
- --------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index+ +3.84% +4.83% +7.28% +7.50%
- --------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index*+ +2.77% +2.75% +2.81% +3.61%
- --------------------------------------------------------------------------------------------------------------------------------
*The Consumer Price Index measures the cost of living (inflation) and is published by the U.S. Bureau of Labor Statistics.
+Source: CDA/Wiesenberger.
</TABLE>
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
Class B results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class B
shares, have higher annual fees and expenses than Class A shares.
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 performance, including the CDSC, 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.
Fund results reflect any applicable expense subsidies and waivers, without which
the performance results would have been less favorable. Subsidies and waivers
may be rescinded at any time. See the prospectus for details.
LARGEST SECTORS
Municipal Bonds 98.0%
Short Term Obligations 1.8%
Other 0.2%
TAX FORM SUMMARY
In January 1997, a Tax Form Summary was mailed to shareholders reporting the
federal tax status of all distributions paid during the calendar year 1996.
For federal income tax purposes, approximately 99.2% of the total dividends
paid by the Fund from net investment income during the year ended January 31,
1997, is designated as an exempt-interest dividend.
<PAGE>
PORTFOLIO OF INVESTMENTS - January 31, 1997
<TABLE>
<CAPTION>
Municipal Bonds - 98.0%
- ----------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
General Obligation - 2.3%
Cook County, IL, (Markham), 9s, 2012 $ 2,685 $ 2,865,029
Jefferson County, OH, 7.125s, 2019 8,660 9,142,882
New York City, NY, 6.125s, 2025 5,000 4,931,050
New York City, NY, 6.875s, 2003 1,000 1,078,090
New York City, NY, 7.1s, 2011 1,000 1,075,080
New York City, NY, 7s, 2022 1,700 1,854,700
Texas Veteran Housing Assistance Program, 7s, 2025 1,330 1,411,968
Virgin Islands Public Financing Authority, 7.25s, 2018 2,000 2,126,220
West Warwick, RI, 7.3s, 2008 200 211,428
West Warwick, RI, 7.45s, 2013 570 591,301
--------------
$ 25,287,748
- ----------------------------------------------------------------------------------------------
State and Local Appropriation - 0.6%
District of Columbia, Certificates of Participation,
7.3s, 2013 $ 2,500 $ 2,585,975
South Tucson, AZ, Municipal Property Corp., 8.75s, 2010 865 932,928
Troy, NY, Certificates of Participation,
Recreational Facilities Rev., 9.75s, 2010*(+) 2,715 271,500
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 1997 70 70,380
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 1998 75 76,659
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 1999 80 82,204
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2000 85 87,357
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2001 95 97,336
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2002 115 117,574
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2003 130 132,291
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2004 150 152,663
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2005 165 167,534
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2010 235 238,027
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2011 250 252,603
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2013 290 292,305
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2015 335 337,663
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2016 360 362,862
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2017 390 393,100
--------------
$ 6,650,961
- ----------------------------------------------------------------------------------------------
Airlines - 7.1%
Chicago, IL, O'Hare International Airport, Special
Facilites Rev. (United Airlines), 8.5s, 2018 $ 4,500 $ 4,929,615
Chicago, IL, O'Hare International Airport, Special
Facilites Rev. (United Airlines), 8.4s, 2018 2,680 2,904,129
Chicago, IL, O'Hare International Airport, Special
Facilites Rev. (United Airlines), 8.85s, 2018 5,965 6,710,088
Cleveland, OH, Airport Special Facilities Rev.
(United Airlines), 9s, 2019 9,120 9,899,304
Dallas-Fort Worth, TX, International Airport
Facility Improvement Corp. (Delta), 7.625s, 2021 4,500 4,863,600
Denver, CO, City & County Airport Rev.
(United Airlines), 6.875s, 2032 7,130 7,361,725
Hillsborough County, FL, Aviation Authority Rev.
(USAir), 8.6s, 2022 4,255 4,639,141
Kenton County, KY, Airport Board Special
Facilities (Delta Airlines), 7.5s, 2020 16,570 17,892,783
Tulsa, OK, Municipal Airport Trust Rev.
(American Airlines), 7.6s, 2030 14,210 15,252,730
Tulsa, OK, Municipal Airport Trust Rev.
(American Airlines), 7.375s, 2020 4,000 4,252,920
--------------
$ 78,706,035
- ----------------------------------------------------------------------------------------------
Airport and Port Revenue - 1.8%
Denver, CO, City & County Airport Rev., 8.75s, 2023 $ 5,770 $ 6,808,715
Denver, CO, City & County Airport Rev., 8.5s, 2023 2,950 3,374,210
Denver, CO, City & County Airport Rev., 8s, 2025 1,140 1,284,449
Denver, CO, City & County Airport Rev., 8.875s, 2012 5,000 5,926,450
Denver, CO, City & County Airport Rev., 7.75s, 2021 2,050 2,263,918
--------------
$ 19,657,742
- ----------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 7.5%
Clark County, NV (Nevada Power), FGIC, 6.7s, 2022 $ 4,000 $ 4,226,400
Midland, MI, Environmental Development Authority,
9.5s, 2009 4,500 4,908,645
Montana Board of Investment Resources Recovery
Rev. (Yellowstone Energy), 7s, 2019 10,495 10,188,021
Municipal Electric Authority, GA, Project #1,
0s, AMBAC, 7.903s, 2022(++) 9,900 10,173,042
New Jersey Economic Development Authority
(Vineland Cogeneration), 7.875s, 2019 3,000 3,237,570
New York Research and Development Authority,
Electrical Facilities Rev. (Consolidated
Edison), AMBAC, 7.5s, 2026 4,750 5,130,997
New York Research and Development Authority,
Electrical Facilities Rev. (Long Island
Lighting), 7.15s, 2022 6,050 6,487,052
New York Research and Development Authority,
Electrical Facilities Rev. (Long Island
Lighting), 7.15s, 2019 1,650 1,769,196
Ohio Water Development Pollution Control Rev.
(Cleveland Electric), 8s, 2023 4,700 5,093,813
Palm Beach County, FL, Solid Waste Development,
6.95s, 2022 7,650 6,528,663
Palm Beach County, FL, Solid Waste Development,
6.85s, 2014 3,000 2,593,290
Pennsylvania Economic Development Financing
Authority, Resources Recovery Rev., 6.6s, 2019 5,000 4,924,400
Pittsylvania County, VA, Industrial Development
Authority, 7.55s, 2019 10,000 10,427,600
Southern California Public Power Authority,
Transmission Project Rev., RIBS, 7.812s, 2012(++) 1,350 1,404,932
West Feliciana Parish, LA, Pollution Control Rev.
(Gulf States Utilities Co.), 9s, 2015 2,500 2,770,725
West Feliciana Parish, LA, Pollution Control Rev.
(Gulf States Utilities Co.), 8s, 2024 4,000 4,287,120
--------------
$ 84,151,466
- ----------------------------------------------------------------------------------------------
Health Care Revenue - 16.1%
Arkansas Development Finance Authority, Economic
Development Rev., 10.8s, 2018 $ 955 $ 996,886
Bell County, TX, Health Facilities Authority
(Kings Daughters Hospital), 9.25s, 2008 1,200 1,307,352
Bell County, TX, Health Facilities Authority
(Living Tech), 10.5s, 2018 2,870 2,296,000
Bell County, TX, Health Facilities Authority
(Living Tech), 10.5s, 2018 2,365 1,892,000
Berlin, MD, Hospital Rev. (Atlantic General
Hospital), 8.375s, 2022 1,360 1,407,002
Brevard County, FL, Health Facilities Authority
(Beverly Enterprises), 10s, 2010 1,350 1,493,383
Cambria County, PA, Industrial Development
Authority (Beverly Enterprises), 10s, 2012 1,140 1,427,098
Cheneyville, LA, Westside Habilitation Center,
8.375s, 2013 6,300 6,381,396
Chester County, PA, Industrial Development
Authority (RHA/PA Nursing Home, Inc.), 10.125s, 2019 1,958 2,034,186
Colorado Health Facilities Authority Rev.
(Gericare/Denver), 10.5s, 2019* 5,000 3,443,750
Colorado Health Retirement Facilities (Liberty
Heights), 0s, 2024 29,295 4,613,084
Colorado Health Retirement Facilities (Liberty
Heights), 0s, 2022 6,850 1,234,233
Connecticut Health & Educational Facilities
(Johnson Evergreen), 8.5s, 2014 1,350 1,444,932
Daphne, AL, Special Care Facilities Financing
Authority (Westminster Village), 8.25s, 2026+ 12,500 10,821,625
District of Columbia, Hospital Rev. (Hospital for
Sick Children), 8.875s, 2021 960 1,021,613
District of Columbia, Hospital Rev. (Washington
Hospital), 7.125s, 2019 1,750 1,819,370
Doylestown, PA, Hospital Authority (Doylestown
Hospital), 7.2s, 2023 2,200 2,266,968
Fairfax, Fauquier & Loudoun Counties, VA, Health
Center Commission, Nursing Home Rev., 9s, 2020 1,885 1,972,916
Grand Junction, CO, Hospital Rev. (Community
Hospital), 6.9s, 2017 2,900 2,684,617
Hobbs County, NM, Health Facilities Rev.
(Nemecal Associates), 9.625s, 2014 1,725 1,821,289
Illinois Health Facilities Rev. (Memorial
Hospital-Woodstock), 7.25s, 2022 1,500 1,580,535
Jacksonville, FL, Health Facilities Authority
(National Benevolent), 7s, 2022 1,000 1,043,850
Jacksonville, FL, Industrial Development Rev.
(Beverly Enterprises), 0s, 9.75s, 2011 945 1,028,992
Jefferson County, KY, Health Facilities Rev.
(Beverly Enterprises), 10.125s, 2008 2,200 2,393,424
Jenks Township, PA, Municipal Authority Rev.,
8s, 2018 4,545 4,514,503
Kansas City, MO, Industrial Development Authority,
Retirement Facilities (Kingswood), 9s, 2013 5,250 5,717,460
Lee County, FL, Industrial Development Authority
(Beverly Enterprises), 10s, 2010 900 1,006,218
Louisiana Public Facilities Authority (Southwest
Medical Center), 11s, 2006 1,428 538,735
Luzerne County, PA, Industrial Development
Authority (Beverly Enterprises), 10.125s, 2008 1,275 1,402,143
Martin County, FL, Industrial Development
Authority (Beverly Enterprises), 9.8s, 2010 2,750 2,995,135
Massachusetts Health & Education Facilities
Authority (Fairview Extended Care Facility),
10.25s, 2021 3,000 3,391,080
Massachusetts Health & Education Facilities
Authority (St. Memorial Medical Center), 6s, 2023 5,640 4,757,848
Massachusetts Health & Education Facilities
Authority Rev. (St. Anne's Hospital), 9.375s, 2014 5,000 4,981,350
Massachusetts Industrial Finance Agency (GF
Revere), 8.875s, 2025 7,780 8,138,813
Massachusetts Industrial Finance Agency
(Glenmeadow Retirement Community), 8.375s, 2018 2,300 2,281,761
Massachusetts Industrial Finance Agency
(Glenmeadow Retirement Community), 8.625s, 2026 3,520 3,534,608
Massachusetts Industrial Finance Agency (Martha's
Vineyard Long-Term Care Facility), 9.25s, 2022* 3,410 2,412,575
Michigan Strategic Fund Ltd., Obligation Rev.
(River Valley Recovery Center), 12.875s, 2015 1,020 1,049,951
Montgomery County, PA, Higher Education & Health
Authority Rev. (AHF/Montgomery), 10.5s, 2020 2,480 2,625,998
Nebraska Investment Finance Authority (Centennial
Park), 10.5s, 2016 2,200 2,276,934
New Hampshire Industrial Development Authority
(Tall Pines), 11.25s, 2016 2,400 2,603,976
New Jersey Economic Development Authority
(Burnt Tavern Convalescent Center), 9s, 2013 1,700 1,799,059
New Jersey Economic Development Authority
(Courthouse Convalescent Center), 8.7s, 2014 1,350 1,420,159
New Jersey Economic Development Authority
(Geriatric Medical Services), 9.625s, 2004 470 525,234
New Jersey Economic Development Authority
(Geriatric Medical Services), 9.625s, 2022 1,350 1,493,357
New Jersey Economic Development Authority
(Gerimed), 10.5s, 2020 3,000 3,199,110
New Jersey Economic Development Authority
(Greenwood Health Care), 9.75s, 2011 3,035 3,141,286
New Jersey Economic Development Authority
(Wanaque Convalescent Center), 8.5s, 2009 700 720,818
New Jersey Economic Development Authority
(Wanaque Convalescent Center), 8.6s, 2011 1,000 1,029,630
North Carolina Medical Care Commission, Hospital
Rev. (Valdese General Hospital), 8.75s, 2016 1,905 2,141,449
North Central, TX, Health Facilities Development
Corp. (Baylor University Medical Center),
9.968s, 2016(++) 4,300 5,180,253
Okaloosa County, FL, Retirement Rental Housing
Rev. (Beverly Enterprises), 10.75s, 2003 2,715 2,858,433
Osceola County, FL, Industrial Development Rev.,
Community Pooled Loan, 7.75s, 2017 2,700 2,773,413
Portsmouth, VA, Industrial Development Authority
(Beverly Enterprises), 0s, 10s, 2011 2,020 2,273,348
Reedley, CA, Certificates of Participation, 7.5s, 2026 5,500 5,492,300
Rochester, MN, Health Care Facilities Rev.
(Mayo Medical Foundation), FIRS, 8.176s, 2021(S) 2,000 2,039,640
San Francisco, CA, City & County (Coventry Park),
8.5s, 2026 9,435 9,360,558
Santa Fe, NM, Industrial Development Rev.
(Casa Real Nursing Home), 9.75s, 2013 1,860 1,986,908
Seminole County, FL, Industrial Development
Authority (Friendly Village), 10s, 2011 855 882,300
St. Charles County, MO, Industrial Development
Authority (Garden View Care Center), 10s, 2016 1,740 1,770,711
St. Petersburg, FL, Health Facilities Rev.
(Swanholm Nursing), 10s, 2022 1,525 1,728,755
Suffolk County, NY, Industrial Development Agency
(APPLE), 9.75s, 2015 3,680 3,128,000
Tyler, TX, Health Facilities Development Corp.
(Park Place), 8.5s, 2018 4,815 4,824,293
Vincennes, IN, Economic Development Authority
(Lodge of the Wabash), 12.5s, 2015 2,025 1,984,500
Waterford Township, MI, Economic Development Rev.
(Canterbury Health Care), 8.375s, 2023 3,100 3,268,640
Westerville, OH, Industrial Development Rev.
(1st Mortgage Health Care), 10s, 2008 515 524,749
Wilkins Area, PA, Industrial Development Authority
(Beverly Enterprises), 10s, 2011 1,100 1,239,810
--------------
$ 179,442,302
- ----------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 17.7%
Baltimore County, MD, Pollution Control
(Bethlehem Steel), 7.55s, 2017 $ 1,000 $ 1,058,430
Burns Habor, IN, Solid Waste Disposal Facilities,
8s, 2024 10,455 11,408,078
Butler, AL, Industrial Developement, 8s, 2028 4,500 5,046,165
Cambria County, PA, Industrial Development
Authority (Beverly Enterprises), 7.5s, 2015 2,950 3,115,731
Courtland , AL, Industrial Development Board Solid
Waste, 6.375s, 2029 7,500 7,492,425
Dayton, OH, Special Facilities Rev, 12.5s, 2009 950 1,069,339
DeQueen, AR, Industrial Development Board
(Weyerhaeuser Co.), 9s, 2006 1,000 1,022,380
Eastern Band of Cherokee Indian Community, NC,
(Carolina Mirror Co.), 10.25s, 2009+ 3,270 3,269,248
Eastern Band of Cherokee Indian Community, NC,
(Carolina Mirror Co.), 11s, 2012+ 950 949,820
Florence County, SC, Industrial Development Rev.
(Stone Container), 7.375s, 2007 2,840 2,963,994
Hernando County, FL, Industrial Development Rev.
(Florida Crushed Stone), 8.5s, 2014 8,555 9,493,569
Hodge Village , LA, Utilities Rev., 9s, 2010 6,800 7,336,316
Hunt County, TX, Industrial Development Rev.
(Household Manufacturing), 10.236s, 2003 6,000 6,022,320
Indiana Development Finance Authority, 7.25s, 2011 10,000 10,443,400
Lawrenceburg, TN, Industrial Development Board
(Tridon), 9.625s, 2006 2,800 2,926,196
Maine Finance Authority (Bowater), 7.75s, 2022 8,500 9,286,760
Massachusetts Industrial Financing Agency, Solid
Waste Disposal Rev. (Molten Metal Technology),
8.25s, 2014 4,000 4,255,280
McMinn County, TN, Industrial Development Board
(Bowater), 7.4s, 2022 7,000 7,531,370
Mesa County, CO, (Joy Technologies), 8.5s, 2006 1,350 1,483,623
New Hampshire Business Authority Sewer & Solid
Waste Disposal (Crown Paper), 7.875s, 2026 3,000 3,150,270
New Jersey Economic Development Authority Rev.,
8.4s, 2015 4,000 4,163,440
New Jersey Economic Development Authority Rev.,
8.6s, 2017 8,000 8,324,240
Ohio Solid Waste Rev. (Republic Engineered Steel),
9s, 2021 8,000 8,140,000
Ohio Solid Waste Rev. (Republic Engineered Steel),
8.25s, 2014 7,000 7,052,500
Owyhee County, ID, Industrial Development Rev.,
8.25s, 2002 4,000 4,228,080
Perry County, KY, Solid Waste Disposal Resources
(TJ International), 7s, 2024 11,000 11,374,440
Philadelphia, PA, Industrial Development Rev.,
7.75s, 2017 2,000 2,120,400
Port New Orleans, LA, Industrial Development,
Refunding Continental Grain Company Project,
6.5s, 2017 5,000 4,995,300
Port of New Orleans, LA (Avondale Industries),
8.5s, 2014 23,050 26,572,962
Port of New Orleans, LA (Continental Grain), 7.5s, 2013 2,000 2,137,860
Riverdale, IL, Enviromental Improvement Rev.
(Acme Metals), 7.9s, 2024 2,500 2,612,325
Sweetwater County, WY, Solid Waste Disposal Rev.,
7s, 2024 2,000 2,119,840
Sweetwater County, WY, Solid Waste Disposal Rev.,
6.9s, 2024 3,000 3,162,150
Texas Special Alliance Airport Authority
(Federal Express), 6.375s, 2021 3,000 3,009,990
Walton, GA, Industrial Development Rev.
(Ultima Rubber Products), 10s, 2010 4,405 4,679,520
Wierton, WV, Pollution Control Rev. (Weirton
Steel), 8.625s, 2014 3,630 3,767,976
--------------
$ 197,785,737
- ----------------------------------------------------------------------------------------------
Insured Health Care Revenue - 2.0%
Clermont County, OH, Hospital Facilities Rev.
(Mercy Health Systems), AMBAC, 9.641s, 2021(++) $ 1,300 $ 1,481,675
Desert Hospital District, CA, Insured Hospital Rev.
(Desert Hospital Corp.), 8.904s, 2020(++) 4,000 4,258,240
Illinois Health Facilities Authority Rev. (Sisters
of Mercy), 0s, MBIA, 9.567s, 2015(++) 5,200 5,972,616
Montana Health Facility Authority (Deaconess
Hospital), AMBAC, RIBS, 9.367s, 2016(++) 4,000 4,430,560
North Central, TX, Health Facilities Development
Corp. (Presbytarian Health Care Systems), MBIA,
9.595s, 2021(++) 4,000 4,738,360
Salt Lake City, UT, Hospital Rev. (Intermountain
Health Care), 0s, AMBAC, 9.718s, 2020(++) 1,250 1,418,687
--------------
$ 22,300,138
- ----------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 2.1%
Alexandria, VA, Redevelopment & Housing Finance
Authority (Jefferson Village Apartments), 9s, 2018 $ 2,000 $ 2,056,840
Dallas, TX, Housing Finance Corp., 8.5s, 2011 3,245 3,339,851
Florida Multi-Family Housing Finance Agency Rev.
(Center Court Apartments), 8.5s, 2018 2,000 2,029,760
Florida Multi-Family Housing Finance Agency Rev.
(South Lake Apartments), 8.7s, 2021 3,500 3,247,475
Maplewood, RI, Housing Development Corp.
(Terrace Apartments), 6.9s, 2025 4,020 4,158,730
Massachusetts Housing Finance Agency, 8.5s, 2020 15 15,304
Memphis, TN, Health, Education & Housing
Facilities Board (Wesley Highland Terrace),
12.75s, 2015++ 6,300 5,355,000
Texas Housing & Community Board (Harbors &
Plumtree), 10s, 2026 1,775 1,771,415
Virginia Housing & Development Authority, Multi-
Family, 0s, 2017 6,530 1,130,604
--------------
$ 23,104,979
- ----------------------------------------------------------------------------------------------
Refunded - 13.7%
Austin, TX, Utilities System Rev., 10.75s, 2015 $ 1,780 $ 2,115,281
Daphne, AL, Special Care Facilities Financing
Authority (1st Mortgage Rev.), 0s, 2028 89,975 48,025,056
Daphne, AL, Special Care Facilities Financing
Authority (2nd Mortgage Rev.), 0s, 2028 4,500 2,401,920
Daphne, AL, Special Care Facilities Financing
Authority (Presbyterian), 0s, 2018 48,475 7,299,365
Fairfax County, VA, Redevelopment & Housing
Authority (Little River Glen), 8.95s, 2020 2,020 2,077,065
Hannibal, MO, Industrial Development Authority
(Hannibal Regional Healthcare), 9.5s, 2022+ 3,000 3,735,870
Illinois Development Finance Authority, Retirement
Housing (Regency Park), 0s, 2025 7,550 1,111,511
Maine Health & Higher Education Facilities
Authority (St. Mary's General Hospital), 8.625s, 2022 5,140 5,747,908
Massachusetts Industrial Finance Agency, Tunnel
Rev. (Mass. Turnpike), 9s, 2020 11,045 12,889,736
Meridian, MI, Economic Development Corp.
(Burcham Hills), 9.625s, 2019 2,360 2,488,313
Mesa County, CO, Residual Rev., 0s, 2012 25,125 8,015,880
Mississippi Hospital Equipment & Facilities
Authority Rev. (Rush Medical Foundation), 8.75s, 2016 2,800 3,170,496
New Lenox, IL, Community Park District, 8.25s, 2014 4,205 5,122,825
New York Local Government Assistance Corp., 7s, 2021 800 889,880
Prince William County,VA, Industrial Development
Authority, Residential Care, 10s, 2022 3,500 4,350,990
South Carolina Public Service Authority (Santee
Coop), 7.1s, 2021 2,000 2,242,740
Spirit Lake, IA, Industrial Development Rev.
(Crystal Tips, Inc.), 0s, 2016 3,973 5,356,700
Telluride, CO, Real Estate Transfer Assessment,
11.5s, 2012 3,685 5,756,965
Texas Turnpike Authority (Houston Ship Channel
Bridge), 0s, 12.625s, 2020 21,090 29,186,240
Washington Public Power Supply System Rev.
(Nuclear Project #1), 14.375s, 2001 1,000 1,233,040
--------------
$ 153,217,781
- ----------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.3%
Denver, CO, Urban Renewal Tax (Musicland), 8.5s, 2017 $ 950 $ 947,521
Denver, CO, Urban Renewal Tax Increment (Downtown
Denver), 7.25s, 2017 1,250 1,316,125
Denver, CO, Urban Renewal Tax Increment (Downtown
Denver), 8.5s, 2013 1,380 1,376,398
--------------
$ 3,640,044
- ----------------------------------------------------------------------------------------------
Single-Family Housing Revenue - 7.2%
Arkansas Housing Development Agency, Residential
Mortgage Rev., 0s, 2015 $ 9,150 $ 1,297,287
Berkeley, Brookes, & Fayette Counties, WV, Single
Family Mortgage Rev., MBIA, 0s, 2016 22,285 2,679,994
California Housing Finance Authority Rev., 7.4s, 2026 14,285 15,086,103
California Housing Finance Authority Rev., 0s, 2023 12,950 1,701,241
Chicago, IL, Capital Appreciation, Single Family
Mortgage Rev., 0s, 2017 11,980 1,246,998
Colorado Housing Finance Authority, 8s, 2016 3,000 3,038,790
Cook County, IL, Single Family Housing Rev., 0s, 2015 3,550 469,417
Corpus Christi, TX, Housing Finance Corp., MBIA,
0s, 2011 3,395 825,596
Delaware Single Family Housing Authority Rev.,
6.75s, 2024 2,715 2,813,202
Denver, CO, Single Family Mortgage Rev., 0s, 2015 1,185 133,692
East Baton Rouge, LA, Capital Appreciation Rev.,
0s, 2010 15,140 3,454,040
El Paso, TX, Housing Finance Corp., Single Family
Mortgage Rev., 8.75s, 2011 845 911,459
Florida Housing Finance Agency Rev. (South Lake
Apartments), 0s, 2012 230 46,984
Florida Housing Finance Agency Rev., 0s, 2016 10,800 1,544,292
Georgia Housing & Finance Authority Rev., 0s, 2031 84,705 6,859,411
Harris County, TX, Housing Finance Corp., 9.875s, 2014 715 715,565
Jefferson County, CO, Single Family Mortgage Rev.,
MBIA, 8.875s, 2013 390 412,710
Jefferson County, TX, Housing Finance Corp.,
Single Family Mortgage Rev., MBIA, 0s, 2015 4,710 630,057
Maine Housing Authority, Mortgage Purchase Rev.,
8.2s, 2019 755 774,335
Maine Housing Authority, Mortgage Purchase Rev.,
8.2s, 2022 5,980 6,133,148
Mississippi Home Corp., Single Family Senior
Housing Rev., 9.25s, 2012 235 252,155
Nevada Housing Division, Single Family Mortgage
Rev., 0s, 2015 3,119 493,191
New Castle County, DE, Single Family Mortgage Rev.,
0s, 2016 1,330 177,422
New Hampshire Housing Finance Authority, Single
Family Mortgage Rev., 8.5s, 2014 3,730 3,890,017
New Hampshire Housing Finance Authority, Single
Family Mortgage Rev., 0s, 2011 95 20,873
New Mexico Mortgage Finance Authority, Single
Family Mortgage Rev., 6.9s, 2024 3,120 3,238,186
North Dakota Housing Finance Agency, 6.8s, 2023 950 982,404
North Dakota Single Family Mortgage Rev., 8.3s, 2012 415 429,189
Ohio Housing Finance Agency, Single Family
Mortgage Rev., GNMA, RIBS, 9.922s, 2031(++) 1,700 1,850,960
Reno County, KS, Single Family Morgage Rev., 0s, 2014 5,725 780,375
Texas Housing & Development Agency, Residential
Mortgage Rev., 8.4s, 2020 1,775 1,853,419
Texas Housing & Development Agency, Single Family
Mortgage Rev., 8.2s, 2016 725 743,314
Utah Housing Finance Agency, Single Family
Mortgage Rev., 0s, 2016 3,835 522,488
Vermont Housing Finance Agency, Single Family Home
Mortgage Purchase, 8.1s, 2022 1,510 1,570,793
Virginia Housing & Development Authority, 7.125s,
2022 9,505 9,846,039
Wisconsin Housing & Economic Development
Authority, Home Ownership Rev., 2016 1,985 284,192
Wisconsin Housing & Economic Development
Authority, Home Ownership Rev., RIBS, 10.209s, 2022(++) 2,150 2,280,527
--------------
$ 79,989,865
- ----------------------------------------------------------------------------------------------
Solid Waste Revenue - 5.0%
Maryland Energy Financing Administration
(Solid Waste), 9s, 2016 $ 28,300 $ 15,848,000
Massachusetts Industrial Finance Agency (Solid
Waste Disposal), 12s, 2016 3,600 540,000
Michigan Strategic Fund. Ltd. Obligation Rev.
(Blue Water Fiber), 8s, 2012 2,000 1,450,000
Pennsylvania Economic Development Finance
Authority, 9.25s, 2022 25,000 22,634,500
Port Walla Walla, WA, Solid Waste Recycling Rev.
(Ponderosa Fibres), 9.125s, 2026 17,000 15,511,310
--------------
$ 55,983,810
- ----------------------------------------------------------------------------------------------
Special Assessment District - 0.2%
Indianapolis, IN, Public Improvement Bond Rev.,
6.5s, 2022 $ 2,000 $ 2,028,960
- ----------------------------------------------------------------------------------------------
Student Loan Revenue - 1.0%
Arizona Student Loan Acquisition Authority, "C",
7.625s, 2010 $ 4,610 $ 5,089,716
Arizona Student Loan Acquisition Authority, "D",
7.25s, 2010 2,970 3,081,583
Pennsylvania Higher Education Assistance Agency,
RIBS, AMBAC, 8.462s, 2022(++) 2,700 2,686,419
--------------
$ 10,857,718
- ----------------------------------------------------------------------------------------------
Turnpike Revenue - 9.6%
Arapahoe County, CO, Capital Improvement
(Highway Rev.), 0s, 2015 $ 76,375 $ 22,070,084
Arapahoe County, CO, Capital Improvement
(Highway Rev.), 0s, 2026 105,000 12,837,300
Florida Mid-Bay Bridge Authority Rev., 8.5s, 2022 2,500 2,782,425
Foothill/Eastern Transportation Corridor Agency,
CA, Toll Road Rev., 0s, 2022 30,835 6,445,132
Foothill/Eastern Transportation Corridor Agency,
CA, Toll Road Rev., 0s, 2018 44,190 12,002,888
Foothill/Eastern Transportation Corridor Agency,
CA, Toll Road Rev., 0s, 2021 25,000 5,565,250
Foothill/Eastern Transportation Corridor Agency,
CA, Toll Road Rev., 0s, 2023 5,765 1,131,439
Foothill/Eastern Transportation Corridor Agency,
CA, Toll Road Rev., 0s, 2024 72,045 13,275,732
Foothill/Eastern Transportation Corridor Agency,
CA, Toll Road Rev., 0s, 2030 14,935 1,854,329
Foothill/Eastern Transportation Corridor Agency,
CA, Toll Road Rev., 0s, 1s, 2013 5,000 3,272,750
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2007 4,000 2,091,360
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2008 5,400 2,630,664
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2028 13,450 1,558,721
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2001 9,100 7,155,694
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2011 13,400 5,285,228
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2005 1,500 900,675
Telluride, CO, Real Estate Transfer Assessment Rev.,
9s, 2016 2,510 2,441,226
Telluride, CO, Real Estate Transfer Assessment
Rev., 11.5s, 2012 2,315 2,736,052
West Virginia Parkways, Economic Development &
Tourism Authority, RIBS, FGIC, 7.829s, 2019(++) 1,200 1,187,400
--------------
$ 107,224,349
- ----------------------------------------------------------------------------------------------
Universities - 1.0%
Islip, NY, Community Developoment Agency
(New York Institiute of Technology), 7.5s, 2026 $ 6,000 $ 6,115,620
Massachusetts Industrial Finance Agency (Curry
College), 8s, 2014 1,480 1,501,712
Massachusetts Industrial Financing Agency
(Emerson College), 8.9s, 2018 3,000 3,294,540
--------------
$ 10,911,872
- ----------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 0.2%
Detroit, MI, Sewage Disposal Rev., FGIC, 7.695s, 2023(++) $ 2,000 $ 1,902,000
- ----------------------------------------------------------------------------------------------
Other - 2.6%
Brush, CO, Industrial Development Rev. (Priority
Training Centers), 12s, 2015 $ 4,615 $ 5,112,820
Brush, CO, Industrial Development Rev. (Training
Centers International), 12s, 2015 4,349 4,818,127
Danville, VA, Industrial Development Authority
Rev. (Piedmont Mall), 8s, 2017 8,280 8,274,369
District of Columbia (National Public Radio),
7.7s, 2023 3,500 3,635,555
Harris County, TX, Cultural Education Facility,
9.25s, 2023 70 67,912
Martha's Vineyard, MA, Land Bank (Land
Acquisition), 8.125s, 2011 2,900 2,979,634
Massachusetts Health & Education Facilities
Authority (Learning Center for Deaf Children),
9.25s, 2014 900 955,152
St. Louis County, MO, Industrial Development
Authority (Eagle Golf Enterprises), 10s, 2005 2,200 2,420,814
St. Louis County, MO, Industrial Development
Authority (Keil Center Arena), 7.875s, 2024 1,000 1,072,370
--------------
$ 29,336,753
- ----------------------------------------------------------------------------------------------
Short-Term Obligations - 1.8%
- ----------------------------------------------------------------------------------------------
Burke County, GA, Development Authority Pollution
Rev. (Bethlehem Steel), due 1997 $ 1,200 $ 1,200,000
Harris County, TX, Health Facilities Hospital, due 1997 100 100,000
Harris County, TX, Industrial Development Corp.
(Exxon), due 1997 300 300,000
Jackson County, MS, Pollution Control Rev.
(Chevron), due 1997 2,600 2,600,000
Lincoln County, WY, "A" (Exxon), due 1997 200 200,000
Lincoln County, WY, "B" (Exxon), due 1997 1,000 1,000,000
Lincoln County, WY, "D" (Exxon), due 1997 200 200,000
Lincoln County, WY, Pollution Control Rev., due 1997 500 500,000
Massachusetts State Health & Education Facility,
due 1997 2,500 2,500,000
New York City, NY, City Municipal Finance Authority,
due 1997 800 800,000
New York City, NY, City Municipal Water Finance
Authority, due 1997 2,400 2,400,000
Uinta County, WY, Pollution Control Rev., due 1997 8,150 8,150,000
- ----------------------------------------------------------------------------------------------
Total Short-Term Obligations (Identified Cost, $19,950,000) $ 19,950,000
- ----------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,064,738,280) $1,112,130,260
Other Assets, Less Liabilities - 0.2% 2,018,257
- ----------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,114,148,517
- ----------------------------------------------------------------------------------------------
*Non-income producing security - in default.
(S)Indexed security.
(+)Security valued by or at the direction of the Trustees.
(++)Inverse floating rate security.
+Restricted security.
++Security accruing partial interest - in default.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------------------
January 31, 1997
- ------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $1,064,738,280) $1,112,130,260
Cash 39,399
Receivable for investments sold 2,528,689
Receivable for Fund shares sold 5,927,230
Interest receivable 15,876,194
Other assets 11,653
--------------
Total assets $1,136,513,425
==============
Liabilities:
Distributions payable $ 3,808,069
Payable for investments purchased 13,039,959
Payable for Fund shares reacquired 1,631,343
Payable to affiliates -
Management fee 19,551
Distribution fee 2,568
Shareholder servicing agent fee 3,947
Accrued expenses and other liabilities 3,859,471
--------------
Total liabilities $ 22,364,908
--------------
Net assets $1,114,148,517
==============
Net assets consist of:
Paid-in capital $1,197,896,807
Unrealized appreciation on investments 47,391,980
Accumulated net realized loss on investments (131,758,565)
Accumulated undistributed net investment income 618,295
--------------
Total $1,114,148,517
==============
Shares of beneficial interest outstanding 127,560,211
===========
Class A shares:
Net asset value and redemption price per share
(net assets of $988,177,785 / 113,148,629 shares of beneficial
interest outstanding) $8.73
=====
Offering price per share (100 / 95.25 of net asset value per share) $9.17
=====
Class B shares:
Net asset value and offering price per share
(net assets of $125,970,732 / 14,411,582 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
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Operations
- ---------------------------------------------------------------------------------
Year Ended January 31, 1997
- ---------------------------------------------------------------------------------
<S> <C>
Net investment income:
Interest income - $ 83,622,285
------------
Expenses -
Management fee $ 7,154,011
Trustees' compensation 60,901
Shareholder servicing agent fee (Class A) 1,202,653
Shareholder servicing agent fee (Class B) 175,755
Shareholder servicing agent fee (Common) 121,510
Distribution and service fee (Class B) 773,776
Custodian fee 373,204
Workout Expenditures 184,400
Postage 117,318
Printing 69,300
Auditing fees 36,000
Legal fees 27,533
Miscellaneous 446,559
------------
Total expenses $ 10,742,920
Fees paid indirectly (137,496)
------------
Net expenses $ 10,605,424
------------
Net investment income $ 73,016,861
------------
Realized and unrealized loss on investments:
Realized loss (identified cost basis) on investment transactions $(22,959,311)
Change in unrealized depreciation on investments (20,906,221)
------------
Net realized and unrealized loss on investments $(43,865,532)
------------
Increase in net assets from operations $ 29,151,329
============
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------
Year Ended January 31, 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 73,016,861 $ 71,045,295
Net realized loss on investments (22,959,311) (24,859,595)
Net unrealized gain (loss) on investments (20,906,221) 88,864,128
--------------- ---------------
Increase in net assets from operations $ 29,151,329 $ 135,049,828
--------------- ---------------
Distributions declared to shareholders -
From net investment income (Class A) $ (70,123,751) $ (69,946,556)
From net investment income (Class B) (5,579,841) (4,150,972)
--------------- ---------------
Total distributions declared to shareholders $ (75,703,592) $ (74,097,528)
--------------- ---------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 205,275,625 $ 158,313,624
Net asset value of shares issued to shareholders in
reinvestment of distributions 27,979,659 27,605,848
Cost of shares reacquired (159,393,535) (135,750,588)
--------------- ---------------
Increase in net assets from Fund share transactions $ 73,861,749 $ 50,168,884
--------------- ---------------
Total increase in net assets $ 27,309,486 $ 111,121,184
Net assets:
At beginning of year 1,086,839,031 975,717,847
--------------- ---------------
At end of year (including undistributed net
investment income of $319,135 and $3,005,866,
respectively) $ 1,114,148,517 $ 1,086,839,031
=============== ===============
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------
Year Ended January 31, 1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning
of period $ 9.12 $ 8.60 $ 9.38 $ 9.26 $ 9.22 $ 9.09
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.61 $ 0.61 $ 0.64 $ 0.77 $ 0.73 $ 0.73
Net realized and
unrealized gain (loss)
on investments (0.36) 0.59 (0.75) 0.05 0.06 0.17
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.25 $ 1.20 $(0.11) $ 0.82 $ 0.79 $ 0.90
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.64) $(0.68) $(0.67) $(0.70) $(0.75) $(0.77)
From net realized gain on
investments -- -- -- -- -- --
From paid-in capital -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.64) $(0.68) $(0.67) $(0.70) $(0.75) $(0.77)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 8.73 $ 9.12 $ 8.60 $ 9.38 $ 9.26 $ 9.22
====== ====== ====== ====== ====== ======
Total return(+) 2.87% 13.92% (1.04)% 9.19% 9.02% 10.34%
Ratios (to average net assets)/Supplemental data:
Expenses## 0.93% 0.93% 1.04% 1.10% 1.00% 1.03%
Net investment income 6.96% 6.83% 7.27% 7.15% 7.95% 7.96%
Portfolio turnover 17% 20% 32% 18% 10% 21%
Net assets at end of period
(000 omitted) $988,178 $1,009,031 $920,043 $809,957 $731,968 $648,043
#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.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------
Year Ended January 31, 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 9.45 $ 9.55 $ 9.68 $10.38
------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.74 $ 0.85 $ 0.88 $ 0.84
Net realized and unrealized gain (loss) on
investments (0.32) (0.09) (0.12) (0.67)
------ ------ ------ ------
Total from investment operations $ 0.42 $ 0.76 $ 0.76 $ 0.17
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(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 $(0.78) $(0.86) $(0.89) $(0.87)
------ ------ ------ ------
Net asset value - end of period $ 9.09 $ 9.45 $ 9.55 $ 9.68
====== ====== ====== ======
Total return(+) 4.65% 8.24% 8.32% 1.87%
Ratios (to average net assets)/Supplemental data:
Expenses 1.05% 1.02% 0.65% 1.03%
Net investment income 8.17% 8.90% 9.27% 8.54%
Portfolio turnover 41% 21% 23% 16%
Net assets at end of period (000 omitted) $638,185 $485,037 $325,044 $349,655
(+)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
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------
Year Ended January 31, 1997 1996 1995 1994*
- -----------------------------------------------------------------------------------------------------------
Class B
- -----------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 9.12 $ 8.60 $ 9.38 $ 9.40
------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.52 $ 0.52 $ 0.57 $ 0.32
Net realized and unrealized gain (loss) on
investments (0.35) 0.59 (0.78) (0.14)
------ ------ ------ ------
Total from investment operations $ 0.17 $ 1.11 $(0.21) $ 0.18
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.55) $(0.59) $(0.57) $(0.20)
------ ------ ------ ------
Total distributions declared to
shareholders $(0.55) $(0.59) $(0.57) $(0.20)
------ ------ ------ ------
Net asset value - end of period $ 8.74 $ 9.12 $ 8.60 $ 9.38
====== ====== ====== ======
Total return 1.96% 12.78% (2.13)% 1.89%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.86% 1.91% 2.10% 2.04%+
Net investment income 6.00% 5.84% 6.32% 5.43%+
Portfolio turnover 17% 20% 32% 18%
Net assets at end of period (000 omitted) $125,971 $77,808 $55,675 $1
*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.
See notes to financial statements
</TABLE>
<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
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
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 invests up to 100% 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 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.
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 tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended January 31, 1997, accumulated undistributed net
investment income was increased by $299,160, accumulated net realized loss on
investments was decreased by $77,637, and paid in capital was decreased by
$376,797, due to differences between book and tax accounting for pension
expense, defaulted bonds, and market discount. This change had no effect on the
net assets or net asset value per share. At January 31, 1997, the Fund, for
federal income tax purposes, had a capital loss carryforward of $125,591,055,
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
($27,178,217), January 31, 2004 ($30,637,034) and January 31, 2005
($26,148,057).
Multiple Classes of Shares of Beneficial Interest - The Fund offers both Class A
and Class B shares. The two classes of shares differ in their respective
distribution and service fees. All shareholders bear the common expenses of the
Fund pro rata based on the 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.
(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 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 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 $17,011 for the year ended
January 31, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$667,359 for the year ended January 31, 1997, as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted a distribution
plan for Class B shares pursuant to Rule 12b-1 of the Investment Company Act of
1940 as follows:
The Fund's 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. 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. Except in the case of the
0.25% per annum Class B service fee paid by 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. 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 plans during the year ended January
31, 1997 were 0.90% of average daily net assets attributable to Class B shares
on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within 12 months following such 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, 1997 were $23,523 and $190,546
for Class A and 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 is calculated as a
percentage of the fund's average daily net assets at an effective annual rate of
0.13%. Prior to January 1, 1997, the fee was 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% 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 $226,617,363 and $176,781,600, 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 $1,064,738,660
==============
Gross unrealized appreciation $ 80,197,008
Gross unrealized depreciation (32,805,408)
--------------
Net unrealized appreciation $ 47,391,600
==============
(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
Year Ended January 31, 1997 Year Ended January 31, 1996
---------------------------------- ----------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Shares sold 16,594,610 $ 145,833,348 15,092,575 $ 134,162,658
Shares issued to shareholders in
reinvestment of distributions 2,943,909 25,881,400 2,921,213 25,867,385
Shares reacquired (17,043,700) (149,563,593) (14,380,028) (128,112,173)
---------- ------------- ---------- -------------
Net increase 2,494,819 $ 22,151,155 3,633,760 $ 31,917,870
========== ============= ========== =============
<CAPTION>
Class B Shares
Year Ended January 31, 1997 Year Ended January 31, 1996
---------------------------------- ----------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Shares sold 6,763,017 $ 59,442,277 2,715,689 $ 24,150,966
Shares issued to shareholders in
reinvestment of distributions 238,469 2,098,259 196,030 1,738,463
Shares reacquired (1,121,560) (9,829,942) (856,621) (7,638,415)
---------- ------------- ---------- -------------
Net increase 5,879,926 $ 51,710,594 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 in an unsecured line of credit with a bank which permits
borrowings up to $400 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 year ended January 31,
1997 was $11,010.
(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, 1997,
the Fund owned the following restricted securities (constituting 1.69% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933 (the 1933 Act). 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
Description Acquisition Par Amount Cost Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Daphne, AL, Special Care Facilities
Financing Authority, 8.25s, 2026 10/28/88 $12,500,000 $12,504,655 $10,821,625
Eastern Band Cherokee Indian
Community, NC, 10.25s, 2009 11/25/86 3,270,000 3,366,458 3,269,248
Eastern Band Cherokee Indian
Community, NC, 11s, 2012 09/19/86 950,000 862,500 949,820
Hannibal, MO, Industrial Development
Authority, 9.5s, 2022 03/23/92 3,000,000 2,971,113 3,735,870
-----------
$18,776,563
===========
</TABLE>
<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, including the schedule of portfolio investments, as
of January 31, 1997, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and financial highlights for each of the three 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 highlights for each of the seven years in the period
ending January 31, 1994 for Class A shares, and for the period September 7, 1993
(commencement of operation) 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 and financial highlights. Our procedures included confirmation of
securities owned as of January 31, 1997, 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, 1997, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the three
years in the period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 7, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) MUNICIPAL HIGH INCOME FUND
<TABLE>
<C> <C>
TRUSTEES AUDITORS
A. Keith Brodkin* - Chairman and President Ernst & Young LLP
Richard B. Bailey* - Private Investor; INVESTOR INFORMATION
Former Chairman and Director (until 1991), For MFS stock and bond market outlooks, call
Massachusetts Financial Services Company; toll free: 1-800-637-4458 anytime from a
Director, Cambridge Bancorp; Director, touch-tone telephone.
Cambridge Trust Company
For information on MFS mutual funds, call
Peter G. Harwood - Private Investor your financial adviser or, for an information
kit, call toll free: 1-800-637-2929 any
J. Atwood Ives - Chairman and Chief business day from 9 a.m. to 5 p.m. Eastern
Executive Officer, Eastern Enterprises time (or leave a message anytime).
Lawrence T. Perera - Partner, INVESTOR SERVICE
Hemenway & Barnes MFS Service Center, Inc.
P.O. Box 2281
William J. Poorvu- Adjunct Professor, Boston, MA 02107-9906
Harvard University Graduate School of
Business Administration For general information, call toll free:
1-800-225-2606 any business day from
Charles W. Schmidt - Private Investor 8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive Vice For service to speech- or hearing-impaired,
President, Director and Secretary, call toll free: 1-800-637-6576 any business
Massachusetts Financial Services Company day from 9 a.m. to 5 p.m. Eastern time. To
use this service, your phone must be equipped
Jeffrey L. Shames* - President and Director, with a Telecommunications Device for the Deaf.
Massachusetts Financial Services Company
For share prices, account balances, and
Elaine R. Smith - Independent Consultant exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
David B. Stone - Chairman, North American telephone.
Management Corp. (investment advisers)
WORLD WIDE WEB
INVESTMENT ADVISER www.mfs.com
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*
[DALBAR For the third year in a row,
TREASURER LOGO] MFS earned a #1 ranking in
W. Thomas London* TOP RATED DALBAR, Inc. Broker/Dealer
SERVICE Survey, Main Office Operations
ASSISTANT TREASURER Service Quality Category. The
James O. Yost* firm achieved a 3.48 overall score on a
scale of 1 to 4 in the 1996 survey. A total
SECRETARY of 110 firms responded, offering input on the
Stephen E. Cavan* quality of service they received from 29
mutual fund companies nationwide. The survey
ASSISTANT SECRETARY contained questions about service quality in
James R. Bordewick, Jr.* 15 categories, including "knowledge of phone
service contacts," "accuracy of transaction
CUSTODIAN processing," and "overall ease of doing
State Street Bank and Trust Company business with the firm."
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) MUNICIPAL [DALBAR LOGO: #1 BULK RATE
HIGH INCOME FUND TOP RATED SERVICE] U.S. POSTAGE
PAID
PERMIT #55638
BOSTON, MA
-------------
500 Boylston Street
Boston, MA 02116
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MHI-2 3/97 93M 18/218/318
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
