<PAGE>
[Logo] M F S(R)
INVESTMENT MANAGEMENT
We invented the mutual Fund(R)
MFS(R) MUNICIPAL
HIGH INCOME FUND
SEMIANNUAL REPORT o JULY 31, 1998
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 7
Portfolio of Investments .................................................. 9
Financial Statements ...................................................... 25
Notes to Financial Statements ............................................. 31
Trustees and Officers ..................................................... 37
HIGHLIGHTS
o FOR THE SIX MONTHS ENDED JULY 31, 1998, CLASS A SHARES OF THE FUND PROVIDED
A TOTAL RETURN AT NET ASSET VALUE OF 2.06%, WHILE CLASS B SHARES RETURNED
1.50%. (SEE PERFORMANCE SUMMARY FOR MORE INFORMATION. PAST PERFORMANCE IS
NO GUARANTEE OF FUTURE RESULTS.)
o THE FUND CONTINUES TO FOCUS ON PROVIDING AN ABOVE-AVERAGE SUSTAINABLE
DIVIDEND YIELD OVER THE LONG TERM WHILE, AT THE SAME TIME, RESTRICTING THE
VOLATILITY ASSOCIATED WITH MORE-AGGRESSIVE HIGH-INCOME FUNDS.
o WE ARE FINDING PARTICULARLY STRONG VALUE IN THE HEALTH CARE AND HOUSING
SECTORS.
o THE FUND HAS BENEFITED FROM THE ROBUST DEMAND FOR HIGH-INCOME INVESTMENTS
AND FROM A FAVORABLE INTEREST-RATE SCENARIO.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
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[Photo of Jeffrey L. Shames]
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Jeffrey L. Shames
Dear Shareholders:
Although the U.S. stock market has enjoyed several years of double-digit
advances, this summer's volatility shows the necessity of taking a cautious
outlook. By most commonly accepted measures, equity valuations appear to have
risen to a point at which stock prices have become more vulnerable to changes
in the investment environment such as rising inflation and interest rates, a
slowing economy, or -- as we have seen recently -- earnings disappointments.
As a result, while we continue to hold a favorable long-term outlook for the
equity markets, we also believe that a significant market correction would be
a healthy near-term event.
Currently, equity investors seem to be primarily focused on the slowdown in
corporate earnings. In the second quarter, average earnings growth for
companies in the Standard & Poor's 500 Composite Index (the S&P 500), a
popular, unmanaged index of common stock total return performance, was about
3%, well below what people were expecting a year ago. As a result, the stock
market has begun to retreat from the record-high levels set in mid-July. This
retreat may help correct some of the overvaluations that have been building in
the market for some time. Prior to July, equity prices had continued to rise
without a corresponding increase in corporate earnings. As a result, price-to-
earnings (P/E) ratios, or the amount investors paid for stocks in relation to
companies' earnings per share, also went up. A year ago this July, the average
P/E ratio for stocks in the S&P 500 stood at approximately 23; this July, the
average P/E ratio was some 20% higher, at about 28. If this summer's downturn
helps create more reasonable valuations, we believe the correction could
provide a sounder long-term foundation for the equity markets. On another
positive note, interest rates have been relatively stable for several months
as inflation has remained low. In an environment of low interest rates, stocks
become more attractive than most fixed-income investments, while low inflation
helps control companies' costs.
As long as interest rates remain low and the economy continues to grow, we
expect stock prices to advance over the next 12 months in line with corporate
earnings, that is, about 8% to 10%. However, just as no one can predict market
cycles, so too no one can predict economic cycles -- except to say that these
cycles do exist and that an economic slowdown at some point is inevitable.
Internationally, the economic turmoil in Asia continues to be a concern to us,
and we believe the United States has yet to see the full impact of this
crisis. There have been brief periods of improvement in a few countries but,
for the most part, the region's economies are still very weak and the
situation could turn worse before getting better. While the crisis has
affected all countries in Asia, Japan was the major factor behind the turmoil
as excesses in its banking and real estate sectors led to severe currency
problems. Although Japan now has a new government, questions remain about the
nation's commitment to ending the loan crisis and reforming its banking
system. At the same time, the Asian turmoil has had the beneficial effect of
moderating U.S. growth and keeping inflation in check, which has helped
establish a favorable interest-rate environment.
Countering the situation in Asia has been the growing strength of European
economies, although European equity markets have also seen some volatility
this summer. But as these countries move toward economic union, they have
benefited from a convergence of interest rates to lower levels, a rapid
expansion of manufacturing and service businesses, and an increasingly strong
consumer sector. This has helped American exporters offset some of their Asian
losses, while providing investment opportunities in developed and emerging
European markets.
Given the uncertainty arising from these conflicting developments, we believe
it is prudent to remind investors of the need to take a long-term view and to
diversify their investments across a range of asset classes. This includes
portfolios that focus on bond and international investments as well as on the
U.S. stock market. At MFS, we also believe our commitment to original,
company-by-company research gives us an advantage, by helping us find
companies that we think can keep growing or gain market share during periods
of market turmoil. To help fulfill this commitment, and to provide the
broadest possible coverage of industry sectors and individual companies, MFS
continues to increase its number of full-time research analysts. These
analysts thoroughly investigate each company's earnings potential and position
in its industry as well as the overall prospects for that industry.
MFS also uses active portfolio management on the fixed-income side, taking
advantage of our extensive research and credit analysis to help reduce the
potential for price declines and enhance the opportunity for appreciation. Every
year, both fixed-income and equity managers meet with thousands of credit
issuers and companies. They also attend many presentations, closely follow
sources of industry research, and keep track of competitors.
We believe that applying this discipline of thorough, bottom-up research to
both the equity and fixed-income markets is the best way to provide favorable
long-term performance for our shareholders -- regardless of changes in the
overall market environment.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
August 14, 1998
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of Michael Roberge]
Michael Roberge
For the six months ended July 31, 1998, Class A shares of the Fund provided a
total return of 2.06%, while Class B shares returned 1.50%. These returns, which
include the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 1.89% return for the Lehman Brothers Municipal Bond Index
(the Lehman Index) over the same period. While the Fund outperformed the Lehman
Index, it is important to note that this index is an unmanaged one of
investment-grade municipal bonds rated "Baa" or higher, while the Fund primarily
invests in lower-quality municipal issues rated "Baa" or below.
Q. COULD YOU DISCUSS YOUR INVESTMENT PHILOSOPHY?
A. The Fund's objective is to achieve sustainable high current income.
Sustainability is key here. We don't necessarily look for the highest
possible yield, as that would entail taking on more risk. We invest in
companies and projects that will provide investors with above-average yield
over time, with more stable dividends than those of an aggressive income
fund.
Q. HOW HAVE MUNICIPAL BONDS, IN GENERAL, PERFORMED OVER THE PAST SIX MONTHS?
A. Municipals, in comparison to Treasury bonds, have been relatively cheap
through the entire year. The combination of low inflation and global economic
concerns have driven Treasury rates to historic lows. These lower rates have
led to a dramatic surge in municipal issuance, which has created significant
supply pressure for the municipal market. Municipals have traded as cheaply
as 91% of Treasuries, a level not seen since concerns about a flat-tax, which
would have destroyed municipal bonds' tax advantages, in 1995. We believe
that municipals are currently undervalued and provide a favorable buying
opportunity for investors.
Q. HOW IS THIS FUND DIFFERENT FROM OTHER MUNICIPAL HIGH-INCOME BOND FUNDS?
A. In addition to the Fund's ability to provide a good return with relatively
low volatility, MFS(R) Original Research(SM) is a key differentiator. Before
we invest in any nonrated bonds, and many investment-grade bonds, our
analysts conduct onsite reviews of a given project and hold one-on-one
meetings with managements to get an understanding of the investment from both
a credit and a value perspective. We also employ sophisticated quantitative
analysis in order to minimize interest rate risk and lower portfolio
volatility.
Q. WHAT WERE SOME OF THE FACTORS DRIVING PERFORMANCE IN THE HIGH-INCOME ARENA
OVER THE PAST SIX MONTHS?
A. Currently, relative yields on high-grade investments are low, with 30-year
"AAA" yields slightly below 5.0%. This has resulted in strong demand for
bonds with higher yields, which has caused the spread between higher-quality
and lower-quality bonds to narrow considerably. The Fund, like other
high-yield funds, has benefited from the appreciation of its holdings in
these lower-rated securities. Furthermore, the aforementioned
underperformance of municipals relative to Treasuries has meant that an
investors' total return on municipals has been driven more by yield than by
capital appreciation. This has favored income oriented funds such as this
one.
Q. WHAT SECTORS ARE PARTICULARLY ATTRACTIVE TO YOU NOW?
A. We favor sectors of the market that offer more essential services and are
less sensitive to economic cycles. Health care and housing are two particular
sectors that fulfill this objective. As the population ages, demand for
health care services is increasing, thereby providing solid support for
projects that provide these services. Likewise, as the population grows,
housing needs are increasing faster in some areas of the country than the
available stock of housing, providing solid demand for multi-family housing
projects. However, not all investments are created equal in these areas, so
our research plays an important role in determining the optimum risk/reward
scenario for each potential investment.
Q. WHAT IS THE CURRENT INVESTMENT CLIMATE FOR MUNICIPAL BOND INVESTING?
A. We feel that the environment for municipal bonds, in particular high-income
bonds, is very good right now. Municipal bonds are as cheap as at any time in
the past 10 years. Also, the primary risk of the Fund is credit risk and we
view the economic environment to support moderate growth and continued
subdued inflation, which will help provide stable returns for the Fund. We
see no signs of the types of recessionary pressures that could impact the
Fund.
/s/ Michael Roberge
Michael Roberge
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and are
only through the end of the period of the report as stated on the cover. The
manager's views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
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PORTFOLIO MANAGER'S PROFILE
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MICHAEL ROBERGE IS VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(R) AND PORTFOLIO
MANAGER OF MFS(R) MUNICIPAL HIGH INCOME FUND AND MFS(R) MUNICIPAL INCOME TRUST.
MR. ROBERGE JOINED MFS IN 1996 AS A CREDIT ANALYST IN THE MUNICIPAL FIXED INCOME
DEPARTMENT AND WAS NAMED PORTFOLIO MANAGER IN DECEMBER 1997. PRIOR TO JOINING
MFS, HE WORKED AS A MUNICIPAL CREDIT ANALYST AND PORTFOLIO MANAGER WITH ANOTHER
MAJOR MUTUAL FUND FIRM. BEFORE THAT, HE WAS A CREDIT ANALYST WITH MOODY'S
INVESTORS SERVICES, INC.
MR. ROBERGE IS A 1990 GRADUATE OF BEMIDJI STATE UNIVERSITY AND EARNED AN M.B.A.
FROM HOFSTRA UNIVERSITY IN 1992. HE IS A CERTIFIED FINANCIAL ANALYST AND MEMBER
OF THE BOSTON MUNICIPAL ANALYSTS FORUM AND THE NATIONAL FEDERATION OF MUNICIPAL
ANALYSTS.
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. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
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FUND FACTS
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OBJECTIVE: SEEKS HIGH CURRENT INCOME EXEMPT FROM FEDERAL
INCOME TAXES.
COMMENCEMENT OF
INVESTMENT OPERATIONS: FEBRUARY 24, 1984
CLASS INCEPTION: CLASS A FEBRUARY 24, 1984
CLASS B SEPTEMBER 7, 1993
SIZE: $1.4 BILLION NET ASSETS AS OF JULY 31, 1998
PERFORMANCE SUMMARY
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for the
applicable time periods. Investment results reflect the percentage change in net
asset value, including reinvestment of dividends.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
THROUGH JULY 31, 1998
<TABLE>
<CAPTION>
CLASS A
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +2.06% +7.26% +23.85% +36.37% +107.45%
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Average Annual Total Return -- +7.26% + 7.39% + 6.40% + 7.57%
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SEC Results -- +2.16% + 5.66% + 5.37% + 7.04%
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<CAPTION>
CLASS B
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +1.50% +6.21% +20.46% +30.02% + 97.64%
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Average Annual Total Return -- +6.21% + 6.40% + 5.39% + 7.05%
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SEC Results -- +2.21% + 5.51% + 5.06% + 7.05%
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</TABLE>
NOTES TO PERFORMANCE SUMMARY
Class A share ("A") SEC results include the maximum 4.75% sales charge. Class B
share ("B") SEC results reflect the applicable contingent deferred sales charge
(CDSC), which declines over six years from 4% to 0%.
B results include the performance and the operating expenses (e.g., Rule 12b-1
fees) of A for periods prior to the inception of B. Because operating expenses
of A are lower than those of B, B performance generally would have been lower
than A performance. The A performance included within the B SEC performance has
been adjusted to reflect the CDSC generally applicable to B rather than the
initial sales charge generally applicable to A.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and waivers
may be rescinded at any time. See the prospectus for details. All results are
historical and assume the reinvestment of dividends and capital gains.
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.
A small portion of income may be subject to state, federal, and/or alternative
minimum tax. Capital gains, if any, are subject to a capital gains tax.
PORTFOLIO CONCENTRATION AS OF JULY 31, 1998
QUALITY RATINGS
"A" 4.3%
"AA" 7.7%
"AAA" 22.0%
"B" 2.8%
"BB" 5.2%
"BBB" 23.7%
Not Rated 33.8%
Other 0.5%
<PAGE>
PORTFOLIO OF INVESTMENTS (Unaudited) - July 31, 1998
<TABLE>
Municipal Bonds - 98.5%
<CAPTION>
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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<S> <C> <C>
General Obligation - 3.3%
Chicago, IL, FGIC, 5.125s, 2025 $ 5,000 $ 4,904,700
District of Columbia, 6s, 2026 5,000 5,247,250
Markham, IL, 9s, 2012 2,670 2,710,050
New York City, NY, 6.875s, 2003 120 131,136
New York City, NY, 7.1s, 2011 120 130,940
New York City, NY, 5.875s, 2024 7,000 7,394,800
New York City, NY, 6.125s, 2025 3,675 3,944,966
New York City, NY, 6.125s, 2025 8,000 8,638,160
New York City, NY, 5.5s, 2037 5,000 5,064,650
New York City, NY, FSA, 7s, 2022 70 76,681
Orleans Parish, LA, School Board, FGIC, 0s, 2015 9,860 4,176,301
Texas Veteran Housing Assistance Program, 7s, 2025 1,330 1,440,310
Ukiah, CA, Unified School District, FGIC, 0s, 2017 4,795 1,789,638
Ukiah, CA, Unified School District, FGIC, 0s, 2018 4,085 1,447,520
West Warwick, RI, 7.3s, 2008 200 220,120
West Warwick, RI, 7.45s, 2013 570 638,571
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$ 47,955,793
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State and Local Appropriation - 0.5%
District of Columbia, Certificates of Participation, 7.3s, 2013 $ 2,500 $ 2,807,325
New York Dormitory Authority Rev. (St. Clare's Hospital), 5.3s, 2019 2,000 1,987,560
New York Dormitory Authority Rev. (Wyckoff Heights Medical Center),
5.3s, 2021 1,000 993,460
South Tucson, AZ, Municipal Property Corp., 8.75s, 2010 865 920,680
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$ 6,709,025
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Refunded and Special Obligations - 20.6%
Arapahoe County, CO, Capital Improvement, Highway Rev., 0s, 2015 $ 76,375 $ 27,105,487
Arapahoe County, CO, Capital Improvement, Highway Rev., 0s, 2026 69,000 10,508,010
Austin, TX, Utilities System Rev., 10.75s, 2000 1,780 1,988,865
Clermont County, OH, Hospital Facilities Rev. (Mercy
Health Systems), AMBAC, MVRICs, 9.441s, 2021(++) 1,300 1,541,618
Colorado Health Facilities Authority, Retirement
Facilities Rev. (Liberty Heights), 0s, 2022 6,850 1,881,695
Colorado Health Facilities Authority, Retirement
Facilities Rev. (Liberty Heights), 0s, 2024 29,295 7,223,268
Colquitt County, GA, Development Authority Rev.,"A", 0s, 2021 7,270 1,995,906
Colquitt County, GA, Development Authority Rev.,"C", 0s, 2021 4,250 1,166,795
Daphne, AL, Special Care Facilities Financing
Authority (1st Mortgage Rev.), 0s, 2008 89,975 56,745,433
Daphne, AL, Special Care Facilities Financing
Authority (2nd Mortgage Rev.), 0s, 2008 4,500 2,838,060
Daphne, AL, Special Care Facilities Financing
Authority (Presbyterian), 0s, 2008 48,475 8,676,055
Denver, CO, City & County Airport Rev., 8.875s, 2012 1,325 1,538,034
Denver, CO, City & County Airport Rev., 7.75s, 2021 425 478,826
Denver, CO, City & County Airport Rev., 8.5s, 2023 255 284,378
Denver, CO, City & County Airport Rev., 8.75s, 2023 1,530 1,770,195
Denver, CO, City & County Airport Rev., 8s, 2025 100 110,443
Desert Hospital District, CA, Hospital Rev. (Desert
Hospital Corp.), 8.914s, 2020(++) 4,000 4,767,480
District of Columbia, Hospital Rev. (Washington
Hospital), 7.125s, 2019 1,750 1,962,573
Doylestown, PA, Hospital Authority (Doylestown Hospital), 7.2s, 2023 2,200 2,525,600
Fairfax County, VA, Redevelopment & Housing Authority
(Little River Glen), 8.95s, 2020 1,990 2,113,121
Hannibal, MO, Industrial Development Authority
(Hannibal Regional Healthcare), 9.5s, 2022+ 3,000 3,554,250
Illinois Development Finance Authority, Retirement
Housing Rev., 0s, 2023 30,000 7,508,700
Illinois Development Finance Authority, Retirement
Housing Rev. (Regency Park), ETM, 0s, 2025 8,050 1,714,730
Illinois Health Facilities Rev. (Memorial Hospital-
Woodstock), 7.25s, 2022 1,500 1,685,100
Jefferson County, OH, 7.125s, 2019 8,660 10,308,951
Jenks Township, PA, Municipal Authority Rev., 8s, 2018 4,650 5,466,400
Maine Health & Higher Education Facilities Authority
(St. Mary's General Hospital), 8.625s, 1999 5,140 5,464,899
Massachusetts Health & Education Facilities Authority
(Fairview Extended Care Facility), 10.25s, 2021 3,000 3,503,760
Massachusetts Industrial Finance Agency (Glenmeadow
Retirement Community), 8.375s, 2018 2,300 2,913,571
Massachusetts Industrial Finance Agency (Glenmeadow
Retirement Community), 8.625s, 2026 3,520 4,514,893
Massachusetts Industrial Finance Agency, Tunnel Rev
(Mass. Turnpike), 9s, 2020 10,895 12,220,486
Mesa County, CO, Residual Rev., 0s, 2003 25,125 8,869,125
Mississippi Hospital Equipment & Facilities Authority
Rev. (Rush Medical Foundation), 8.75s, 2001 2,800 3,152,884
New Lenox, IL, Community Park Development Authority, 8.25s, 2004 4,205 5,138,931
New York City, NY, 6.875s, 2003 880 970,086
New York City, NY, 7.1s, 2011 880 976,457
New York City, NY, 6.125s, 2025 1,325 1,483,814
New York City, NY, FSA, 7s, 2022 1,630 1,806,236
New York Local Government Assistance Corp., 7s, 2001 800 875,304
Prince William County, VA, Industrial Development
Authority, Residential Care Facility (Westminster
at Lake Ridge), 10s, 2022 3,500 4,204,620
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2005 1,500 1,138,605
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2007 4,000 2,751,720
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2008 5,400 3,536,838
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2011 13,400 7,351,106
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2028 13,450 2,930,217
South Carolina Public Service Authority (Santee
Coop), 7.1s, 2001 2,000 2,204,020
Spirit Lake, IA, Industrial Development Rev. (Crystal
Tips, Inc.), 0s, 2008 4,583 6,284,755
Telluride, CO, Gondola Transit Co., 11.5s, 2012 5,025 8,066,884
Texas Turnpike Authority (Houston Ship Channel
Bridge), 12.625s, 2002 21,090 27,767,516
Virgin Islands Public Financing Authority, 7.25s, 2018 2,000 2,278,700
Walton, GA, Industrial Development Rev. (Ultima
Rubber Products), 10s, 2010 4,075 4,572,069
Washington Public Power Supply System Rev. (Nuclear
Project#1), 14.375s, 2001 600 693,234
Washington, GA, Wilkes Payroll Development Authority
Rev., 0s, 2021 8,000 2,196,320
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 1999 80 82,248
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2000 85 90,236
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2001 95 103,536
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2002 115 128,415
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2003 130 148,548
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2004 150 173,871
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2005 165 191,258
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2010 235 272,398
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2011 250 289,785
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2013 290 336,151
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2015 335 388,312
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2016 360 417,290
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2017 390 452,064
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$ 298,401,135
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Airport and Port Revenue - 7.9%
California Statewide Community Development Authority
Lease Rev. (United Airlines), 5.7s, 2033 $ 5,000 $ 5,088,400
Charlotte, NC, Special Facilities Rev. (Charlotte
Douglas International Airport), 5.6s, 2027 5,000 4,944,750
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 2,575 2,718,119
Chicago, IL, O'Hare International Airport, Special
Facilites Rev. (United Airlines), 8.5s, 2018 4,500 4,866,390
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 5,730 6,386,543
Cleveland, OH, Airport Special Facilities Rev
(Continental Airlines), 9s, 2019 9,120 9,886,171
Dallas-Fort Worth, TX, International Airport Facility
Improvement Corp. (Delta), 7.625s, 2021 4,500 4,963,815
Denver, CO, City & County Airport Rev., 8.875s, 2012 3,675 4,209,639
Denver, CO, City & County Airport Rev., 7.75s, 2021 1,625 1,802,710
Denver, CO, City & County Airport Rev., 8.5s, 2023 2,695 2,966,872
Denver, CO, City & County Airport Rev., 8.75s, 2023 4,240 4,839,493
Denver, CO, City & County Airport Rev., 8s, 2025 1,040 1,133,798
Denver, CO, City & County Airport Rev., 6.875s, 2032 7,130 7,726,995
Fulton County, GA, Development Authority (Development
Authority), 5.3s, 2013 1,000 999,520
Hillsborough County, FL, Aviation Authority Rev. (US Air), 8.6s, 2022 4,275 4,834,170
Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 16,570 18,238,433
Massachusetts Turnpike Authority, Metropolitan
Highway System Rev., MBIA, 0s, 2025 4,045 1,019,138
Port Authority, NY (JFK International Air Terminal), MBIA, 5.75s, 2022 7,000 7,335,300
Tulsa, OK, Municipal Airport Trust Rev. (American
Airlines), 7.375s, 2020 4,000 4,310,680
Tulsa, OK, Municipal Airport Trust Rev. (American
Airlines), 7.6s, 2030 14,210 15,562,934
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$ 113,833,870
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Electric and Gas Utility Revenue - 9.4%
Alaska Industrial Development & Export Authority,
Power Rev. (Upper Lynn Canal Regional Power), 5.875s, 2032 $ 1,800 $ 1,791,090
Clark County, NV, Industrial Development Rev. (Nevada
Power Co.), 5.6s, 2030 10,000 9,957,000
Clark County, NV, Industrial Development Rev. (Nevada
Power Co.), 5.9s, 2032 9,000 9,118,890
Clark County, NV, Industrial Development Rev. (Nevada
Power Co.), FGIC, 6.7s, 2022 4,000 4,347,920
Farmington, NM, Pollution Control Rev. (Tucson
Electric Power Co.), 6.95s, 2020 3,000 3,356,820
Long Island, NY, Power Authority Rev., FSA, 5.125s, 2022 3,000 2,952,930
Midland, MI, Environmental Development Authority,
Pollution Control Rev. (Midland Cogeneration), 9.5s, 2009 4,500 4,917,285
Municipal Electric Authority, GA, Project#1, AMBAC, 7.882s, 2022(++) 9,900 11,204,325
New Hampshire Business Finance Authority, Pollution
Control Rev. (United Illuminating Co.), 5.875s, 2033 2,985 3,034,133
New Jersey Economic Development Authority (Vineland
Cogeneration), 7.875s, 2019 7,550 8,320,855
New York City, NY, Industrial Development Rev
(Brooklyn Navy Yard Cogeneration Partners), 5.65s, 2028 7,000 7,070,420
New York Research and Development Authority,
Electrical Facilities Rev. (Consolidated Edison),
AMBAC, 7.5s, 2026 4,750 5,004,933
New York Research and Development Authority, Electrical Facilities
Rev. (Long Island Lighting), 7.15s, 2019 1,650 1,800,464
New York Research and Development Authority,
Electrical Facilities Rev. (Long Island Lighting), 7.15s, 2022 6,050 6,601,699
Ohio Water Development, Pollution Control Rev
(Cleveland Electric), 8s, 2023 4,700 5,361,572
Pennsylvania Economic Development Financing
Authority, Resources Recovery Rev., 6.5s, 2013 2,300 2,439,633
Pennsylvania Economic Development Financing
Authority, Resources Recovery Rev., 6.6s, 2019 5,000 5,308,650
Pima County, AZ, Industrial Development Authority
(Tuscon Electric Power Co.), 6s, 2029 16,000 16,120,960
Pittsylvania County, VA, Industrial Development
Authority, 7.55s, 2019 10,000 11,015,400
Southern California Public Power Authority,
Transmission Project Rev., RIBS, 7.893s, 2012(++) 7,850 8,897,818
West Feliciana Parish, LA, Pollution Control Rev
(Gulf States Utilities Co.), 5.8s, 2015 1,000 1,011,560
West Feliciana Parish, LA, Pollution Control Rev
(Gulf States Utilities Co.), 9s, 2015 2,500 2,743,675
West Feliciana Parish, LA, Pollution Control Rev
(Gulf States Utilities Co.), 8s, 2024 4,000 4,249,560
--------------
$ 136,627,592
- --------------------------------------------------------------------------------------------------------
Health Care Revenue - 16.6%
Arkansas Development Finance Authority, Economic
Development Rev. (Southwest Homes), 10.8s, 2018 $ 945 $ 974,342
Baltimore County, MD, Nursing Facility Mortgage Rev
(Eastpoint Rehabilation & Nursing Center), 6.75s, 2028 1,250 1,234,388
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.25s, 2001 215 212,214
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.75s, 2006 395 383,577
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.125s, 2016 1,420 1,355,745
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.5s, 2026 3,150 2,999,461
Bell County, TX, Health Facilities Development Corp.
(Kings Daughters Hospital), 9.25s, 2008 1,075 1,145,799
Berlin, MD, Hospital Rev. (Atlantic General Hospital), 8.375s, 2022 1,327 1,427,359
Brevard County, FL, Health Facilites Authority
(Beverly Enterprises), 10s, 2010 1,245 1,366,051
Cambria County, PA, Industrial Development Authority
(Beverly Enterprises), 10s, 2012 1,020 1,341,453
Cheneyville, LA, Westside Habilitation Center, 8.375s, 2013 5,900 6,489,292
Chester County, PA, Health & Education Facilities
Authority (Jefferson Health Systems), 5.375s, 2027 5,000 5,008,450
Chester County, PA, Industrial Development Authority
(RHA/PA Nursing Home), 10.125s, 2019 1,908 1,755,360
Colorado Health Facilities Authority Rev. (Gericare/
Denver), 10.5s, 2019** 5,000 3,443,750
Connecticut Health & Educational Facilities (Johnson
Evergreen), 8.5s, 2014 1,350 1,475,024
Denver, CO, Health & Hospital Rev., 5.375s, 2018 3,700 3,670,178
Denver, CO, Health & Hospital Rev., 5.375s, 2028 5,000 4,916,100
District of Columbia, Hospital Rev. (Hospital for
Sick Children), 8.875s, 2021 945 1,028,869
Fairfax, Fauquier & Loudoun Counties, VA, Health
Center Commission, Nursing Home Rev., 9s, 2020 1,840 1,996,547
Grand Junction, CO, Hospital Rev. (Community Hospital), 6.9s, 2017 2,900 3,032,327
Hobbs County, NM, Health Facilities Rev. (Nemecal
Associates), 9.625s, 2014 1,640 1,739,925
Illinois Health Facilities Authority Rev. (Centegra
Health Systems), 5.25s, 2018 1,500 1,477,920
Iowa Finance Authority, Health Care Facilities Rev
(Care Initiatives), 5.75s, 2018 1,200 1,198,968
Jacksonville, FL, Health Facilities Authority
(National Benevolent), 7s, 2022 1,000 1,101,970
Jacksonville, FL, Industrial Development Rev
(Beverly Enterprises), 9.75s, 2011 910 975,675
Jefferson County, KY, Health Facilities Rev. (Beverly
Enterprises), 10.125s, 2008 2,045 2,166,984
Kansas City, MO, Industrial Development Authority
(Bishop Spencer Place, Inc.), 8s, 2024 7,720 8,476,251
Kansas City, MO, Industrial Development Authority
(Kingswood), 9s, 2013 5,250 6,000,645
Lee County, FL, Industrial Development Authority
(Beverly Enterprises), 10s, 2010 870 969,624
Louisiana Public Facilities Authority (Southwest
Medical Center), 11s, 2006 1,300 349,248
Lufkin, TX, Health Facilities Development Corp.
(Memorial Health System of East Texas), 5.7s, 2028 2,800 2,803,472
Luzerne County, PA, Industrial Development Authority
(Beverly Enterprises), 10.125s, 2008 1,225 1,320,391
Martin County, FL, Industrial Development Authority
(Beverly Enterprises), 9.8s, 2010 2,650 2,846,232
Massachusetts Health & Education Facilities Authority
(St. Memorial Medical Center), 6s, 2023 13,530 13,533,788
Massachusetts Health & Education Facilities Authority Rev
(St. Anne's Hospital), 9.375s, 2014 5,000 4,974,400
Massachusetts Industrial Finance Agency, 9.25s, 2009 3,745 3,859,410
Massachusetts Industrial Finance Agency (GF Revere), 8.875s, 2025 7,710 8,920,855
Massachusetts Industrial Finance Agency (Martha's
Vineyard Long-Term Care Facility), 9.25s, 2022**(+) 3,410 900,240
Massachusetts Industrial Finance Agency (Metropolitan
Health Foundation, Inc.), 6.75s, 2027 5,830 6,072,819
Michigan Hospital Finance Authority Rev. (Genesys
Regional Medical), 5.375s, 2013 1,350 1,352,133
Michigan Hospital Finance Authority Rev. (Genesys
Regional Medical), 5.5s, 2018 9,000 8,984,700
Michigan Hospital Finance Authority Rev. (Genesys
Regional Medical), 5.5s, 2027 4,000 3,961,920
Michigan Strategic Fund Ltd., Obligation Rev. (River
Valley Recovery Center), 12.875s, 2015 1,007 1,027,184
Millbrae, CA, Residential Facility (Magnolia Of Millbrae),
7.375s, 2027 3,000 3,115,200
Montgomery County, PA, Higher Education & Health
Authority Rev. (AHF/Montgomery), 10.5s, 2020 2,460 2,611,536
Nebraska Investment Finance Authority (Centennial
Park), 10.5s, 2016 2,200 2,239,248
New Hampshire Higher Educational & Health Facilities
Authority Rev. (Littleton Hospital Assn.), 5.9s, 2018 1,500 1,517,655
New Hampshire Industrial Development Authority (Tall
Pines), 11.25s, 2016 2,200 2,311,628
New Jersey Economic Development Authority (Burnt
Tavern Convalescent Center), 9s, 2013 1,700 1,883,889
New Jersey Economic Development Authority (Courthouse
Convalescent Center), 8.7s, 2014 1,350 1,450,211
New Jersey Economic Development Authority (Geriatric
& Medical Services), 9.625s, 2004 380 419,368
New Jersey Economic Development Authority (Geriatric
& Medical Services), 9.625s, 2022 1,350 1,483,907
New Jersey Economic Development Authority (Gerimed), 10.5s, 2020 3,000 3,173,880
New Jersey Economic Development Authority (Greenwood
Health Care), 9.75s, 2011 2,935 3,113,213
New Jersey Economic Development Authority (Wanaque
Convalescent Center), 8.5s, 2009 700 771,820
New Jersey Economic Development Authority (Wanaque
Convalescent Center), 8.6s, 2011 1,000 1,105,980
New Jersey Health Care Facilities Financing Authority
(Cherry Hill), 8s, 2027 4,000 4,381,440
North Carolina Medical Care Commission, Hospital Rev
(Duke University Hospital), 5.25s, 2026 5,000 4,986,050
North Carolina Medical Care Commission, Hospital Rev
(Valdese General), 8.75s, 2016 1,865 2,094,451
North Central, TX, Health Facilities Development
Corp. (Baylor University Medical Center), 9.867s, 2016(++) 4,300 5,095,801
Ohio County, WV County Commission Health System (Ohio
Valley Medical Center), 5.75s, 2013 5,000 4,969,750
Okaloosa County, FL, Retirement Rental Housing Rev
(Beverly Enterprises), 10.75s, 2003 2,530 2,598,943
Osceola County, FL, Industrial Development Rev.,
Community Provider Pooled Loan, 7.75s, 2017 2,700 2,858,247
Portsmouth, VA, Industrial Development Authority
(Beverly Enterprises), 10s, 2011 1,875 2,108,081
Reedley, CA, Certificates of Participation (Mennonite
Home), 7.5s, 2026 5,500 5,802,170
Rochester, MN, Health Care Facilities Rev. (Mayo
Medical Foundation), 7.999s, 2021(++) 2,000 2,146,520
San Francisco, CA, City & County (Coventry Park), 8.5s, 2026 9,435 10,362,460
Santa Fe, NM, Industrial Development Rev. (Casa Real
Nursing Home), 9.75s, 2013 1,825 1,985,892
Seminole County, FL, Industrial Development Authority
(Friendly Village), 10s, 2011 830 840,981
Sierra View, CA, Local Health Care District, 5.4s, 2022 4,000 3,899,480
Springfield, TN, Health & Educational Facilities
(Northcrest Medical Center), 5.25s, 2018 5,000 4,866,900
Springfield, TN, Health & Educational Facilities
(Northcrest Medical Center), 5.375s, 2024 5,000 4,901,000
St. Charles County, MO, Industrial Development
Authority (Garden View Care Center), 10s, 2016 1,710 1,736,762
St. Petersburg, FL, Health Facilities Rev. (Swanholm
Nursing), 10s, 2022 1,450 1,305,000
Suffolk County, NY, Industrial Development Agency
(APPLE), 9.75s, 2015** 3,680 1,656,000
Vincennes, IN, Economic Development Authority (Lodge
of the Wabash), 12.5s, 2015 1,980 1,940,400
Waterford Township, MI, Economic Development Rev
(Canterbury Health Care), 8.375s, 2023 3,100 2,945,000
Westerville, OH, Industrial Development Rev. (1st
Mortgage Health Care), 10s, 2008 495 500,999
Wilkins Area, PA, Industrial Development Authority
(Beverly Enterprises), 10s, 2011 1,000 1,129,790
Wilkinsburg, PA, Municipal Authority Health
(Monroeville Christian), 8.25s, 2027 7,100 7,730,764
Yonkers, NY, Industrial Development Agency (St
Joseph Hospital), 6.15s, 2015 2,000 2,002,100
--------------
$ 240,313,556
- --------------------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 14.6%
Baltimore County, MD, Pollution Control (Bethelehem
Steel), 7.55s, 2017 $ 1,850 $ 2,072,703
Burns Habor, IN, Solid Waste Disposal Facilities Rev
(Bethlehem Steel), 8s, 2024 10,455 11,804,427
Butler, AL, Industrial Developement Board, Solid
Waste Rev. (James River), 8s, 2028 4,500 5,170,185
Cambria County, PA, Industrial Development Authority
(Beverly Enterprises), 7.5s, 2015 4,390 4,858,720
Courtland, AL, Industrial Development Board, Solid
Waste Disposal Rev. (Champion International Corp.),
6.375s, 2029 2,500 2,668,175
Dayton, OH, Special Facilities Rev. (Emery Air Freight), 12.5s, 2009 950 991,107
DeQueen, AR, Industrial Development Board
(Weyerhaeuser Co.), 9s, 2006 1,000 1,003,800
Eastern Band of Cherokee Indian Community, NC
(Carolina Mirror Co.), 10.25s, 2009+ 2,885 2,903,204
Eastern Band of Cherokee Indian Community, NC
(Carolina Mirror Co.), 11s, 2012+ 950 955,947
Florence County, SC, Industrial Development Rev
(Stone Container Corp.), 7.375s, 2007 3,315 3,592,267
Gulf Coast Waste Disposal Authority, TX (USX Corp.), 5.5s, 2017 3,000 3,024,240
Gulf Coast Waste Disposal Authority, TX (Valero
Energy Corp.), 5.6s, 2032 2,000 1,991,300
Hardeman County, TN (Correctional Facilities Corp.), 7.75s, 2017 6,500 7,249,905
Hernando County, FL, Water & Sewer Rev. (Florida
Crushed Stone), 8.5s, 2014 8,555 9,925,853
Hodge Village, LA, Utilities Rev. (Stone Container), 9s, 2010 6,800 7,293,136
Illinois Development Finance Authority, Economic
Development Rev. (Latin School of Chicago), 5.6s, 2018 850 849,958
Illinois Development Finance Authority, Economic
Development Rev. (Latin School of Chicago), 5.65s, 2028 1,730 1,729,913
Indiana Development Finance Authority, 7.25s, 2011 10,000 11,065,700
Indiana Development Finance Authority Rev. (Inland
Steel), 5.75s, 2011 3,000 3,081,660
Lawrenceburg, TN, Industrial Development Board
(Tridon, Inc.), 9.875s, 2006 2,300 2,436,643
Maine Finance Authority (Bowater), 7.75s, 2022 8,500 9,480,730
Massachusetts Port Authority Rev., Special Facilities
(Bosfuel), MBIA, 5.75s, 2039 5,000 5,190,600
Mesa County, CO (Joy Technologies), 8.5s, 2006 1,350 1,519,641
New Hampshire Business Authority, Sewer & Solid Waste
Disposal (Crown Paper), 7.875s, 2026 5,000 5,794,750
New Jersey Economic Development Authority (Holt
Hauling & Warehousing), 8.4s, 2015 4,000 4,325,920
New Jersey Economic Development Authority (Holt
Hauling & Warehousing), 8.6s, 2017 8,000 8,700,480
Ohio Solid Waste Rev. (CSC Limited), 8.5s, 2022 4,500 4,735,305
Ohio Solid Waste Rev. (Republic Engineered Steels), 8.25s, 2014 7,000 7,511,910
Owyhee County, ID, Industrial Development Rev., 8.25s, 2002 4,000 4,272,520
Perry County, KY, Solid Waste Disposal Resources (TJ
International), 7s, 2024 11,000 11,967,230
Phenix City, AL, Industrial Development Board,
Environmental Improvement Rev. (Mead Coated Board), 5.3s, 2027 5,000 4,892,300
Philadelphia, PA, Industrial Development Authority Rev., 7.75s, 2017 2,000 2,229,960
Port Corpus Christi, TX, Industrial Development Corp.
Rev. (Valero Energy Corp.), 5.4s, 2018 2,400 2,396,808
Port of New Orleans, LA (Avondale Industries), 8.5s, 2014 22,440 25,808,917
Port of New Orleans, LA (Continental Grain Co.), 7.5s, 2013 2,000 2,206,360
Power County, ID, Pollution Control Rev. (FMC Corp.), 5.625s, 2014 1,000 1,024,930
Riverdale, IL, Enviromental Improvement Rev. (Acme
Metals), 7.9s, 2024 2,500 2,680,250
Savannah, GA, Economic Development Authority,
Industrial Development Rev. ( Hershey Foods Corp.), 7.4s, 2026 7,500 8,345,175
Spokane County, WA, Industrial Development Corp.
(Kaiser Aluminum & Chemical Corp.), 7.6s, 2027 3,700 4,199,611
Sweetwater County, WY, Solid Waste Disposal Rev., 6.9s, 2024 3,000 3,291,120
Tooele County, UT, Pollution Control Rev., 7.55s, 2027 5,000 5,582,200
--------------
$ 210,825,560
- --------------------------------------------------------------------------------------------------------
Insured Health Care Revenue - 1.9%
Chester County, PA, Health & Education Facilities
Authority (Jefferson Health Systems), AMBAC, 5.25, 2022 $ 5,000 $ 4,993,300
Illinois Health Facilities Authority Rev. (Sisters of
Mercy), MBIA, 9.417s, 2015(++) 5,200 6,201,832
Montana Health Facility Authority (Deaconess
Hospital), AMBAC, RIBS, 9.246s, 2016(++) 4,000 4,542,120
North Central, TX, Health Facilities Development
Corp. (Presbyterian Hospital), MBIA, 9.395s, 2021 (++) 4,000 4,671,280
Philadelphia, PA, Hospital & Higher Education
Facilities Authority Rev., FGIC, 6.449s, 2012(++) 2,000 2,070,260
Salt Lake City, UT, Hospital Rev. (Intermountain
Health Care), AMBAC, 9.566s, 2020(++) 1,250 1,445,150
Tyler, TX, Health Facilities Development Corp. (East
Texas Medical Center), MBIA, 5.6s, 2027 3,000 3,107,490
--------------
$ 27,031,432
- --------------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 2.0%
Alexandria, VA, Redevelopment & Housing Finance
Authority (Jefferson Village Apartments), 9s, 2018 $ 2,000 $ 2,074,600
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 7.25s, 2027 4,000 4,599,840
California Statewide Community, Development Authority
(Irvine Apartments), 5.25s, 2025 3,500 3,522,050
Dallas, TX, Housing Finance Corp., 8.5s, 2011 3,130 3,295,452
Florida Multi-Family Housing Finance Agency Rev
(Center Court Apartments), 8.5s, 2018 1,775 1,856,224
Maplewood, RI, Housing Development Corp. (Terrace
Apartments), 6.9s, 2025 4,005 4,256,314
Maryland Community Development Administration, 0s, 2032 11,550 871,447
Memphis, TN, Health, Education & Housing Facilities
Board (Wesley Highland Terrace), 8.25s, 2015++ 6,300 5,355,000
Texas Housing & Community Board (Harbors & Plumtree), 10s, 2026 1,765 1,813,838
Virginia Housing & Development Authority, 0s, 2017 6,530 1,188,525
--------------
$ 28,833,290
- --------------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.5%
Black Hawk, CO, Device Tax Rev., 5.625s, 2021 $ 1,250 $ 1,223,987
Denver, CO, Urban Renewal Tax (Downtown Denver), 8.5s, 2013 1,340 1,394,967
Denver, CO, Urban Renewal Tax (Downtown Denver), 7.25s, 2017 1,250 1,348,600
Denver, CO, Urban Renewal Tax (Musicland), 8.5s, 2017 950 988,969
Virgin Islands Public Finance Authority, 6s, 2006 500 525,305
Virgin Islands Public Finance Authority, 5.875s, 2018 1,500 1,550,070
--------------
$ 7,031,898
- --------------------------------------------------------------------------------------------------------
Single Family Housing Revenue - 6.2%
Arkansas Housing Development Agency, Residential
Mortgage Rev., 0s, 2015 $ 5,525 $ 921,460
California Housing Finance Authority Rev., 7.4s, 2026 6,940 7,403,523
California Housing Finance Authority Rev., FHA, 0s, 2023 6,400 943,360
California Rural Home Mortgage Finance Authority, 5.75s, 2029 1,500 1,637,325
Chicago, IL, Capital Appreciation, Single Family
Mortgage Rev., FGIC, 0s, 2017 6,830 865,634
Colorado Housing Finance Authority, 8s, 2016 3,000 3,002,610
Colorado Housing Finance Authority, 6.55s, 2025 1,000 1,101,020
Connecticut Housing Finance Authority, 5.85s, 2028 4,125 4,241,408
Cook County, IL (Markham), 0s, 2015 2,245 358,571
Corpus Christi, TX, Housing Finance Corp., MBIA, 0s, 2011 3,395 964,825
Delaware Single Family Housing Authority Rev., 6.75s, 2024 2,660 2,856,095
Denver, CO, City & County Single Family Mortgage Rev., 0s, 2015 445 68,130
East Baton Rouge, LA, Capital Appreciation Rev., MBIA, 0s, 2010 8,715 2,349,477
El Paso, TX, Housing Finance Corp., Single Family
Mortgage Rev., 8.75s, 2011 665 716,338
Florida Housing Finance Agency Rev., 0s, 2016 8,825 1,473,157
Georgia Housing & Finance Authority Rev., FHA, 0s, 2031 69,410 6,303,816
Harris County, TX, Housing Finance Corp., 9.875s, 2014 555 557,392
Hawaii Housing Finance & Development Corp., 5.75s, 2030 5,000 5,113,450
Jefferson County, CO, Single Family Mortgage Rev.,
MBIA, 8.875s, 2013 255 271,455
Jefferson County, TX, Housing Finance Corp., Single
Family Mortgage Rev., MBIA, 0s, 2015 3,480 551,197
Maryland Community Development Administration, 6s, 2039 3,500 3,656,520
Mississippi Home Corp., Single Family Senior Housing
Rev., FGIC, 9.25s, 2012 182 194,234
Nebraska Investment Finance Authority Housing Rev., 6.3s, 2028 2,485 2,647,121
Nevada Housing Division, Single Family Mortgage Rev., 0s, 2015 1,065 197,180
New Castle County, DE, Single Family Mortgage Rev., FGIC, 0s, 2016 845 138,867
New Mexico Mortgage Finance Authority, Single Family
Mortgage Rev., 6.9s, 2024 2,735 2,905,035
North Carolina Housing Finance Agency, 5.85s, 2028 9,110 9,391,499
North Dakota Housing Finance Agency, Single Family
Mortgage Rev., 8.3s, 2012 330 343,084
North Dakota Housing Finance Agency, Single Family
Mortgage Rev., 6.8s, 2023 895 948,369
North Dakota Housing Finance Agency, Single Family
Mortgage Rev., 5.9s, 2029 2,295 2,374,017
Ohio Housing Finance Agency, Single Family Mortgage
Rev., GNMA, RIBS, 9.821s, 2031(++) 1,350 1,521,666
Oklahoma Housing Finance Agency, 5.375s, 2020 2,000 2,000,000
Reno County, KS, Single Family Mortgage Rev., AMBAC, 0s, 2014 3,075 498,765
Sedgwick & Shawnee Counties, KS, 5.5s, 2022 5,000 5,441,250
South Dakota Housing Development Authority, 5.8s, 2028 5,000 5,152,500
Texas Housing & Development Agency, Residential
Mortgage Rev., 8.4s, 2020 1,585 1,657,118
Vermont Housing Finance Agency, 8.1s, 2022 1,510 1,561,793
Wisconsin Housing & Economic Development Authority, 0s, 2016 1,655 275,442
Wisconsin Housing & Economic Development Authority,
RIBS, 10.077s, 2022(++) 1,770 1,989,232
Wyoming Community Development Authority, 5.85s, 2028 4,980 5,143,045
--------------
$ 89,736,980
- --------------------------------------------------------------------------------------------------------
Solid Waste Revenue - 0.3%
Effingham County, GA, Development Authority (Fort
James), 5.625s, 2018 $ 5,000 $ 5,000,000
- --------------------------------------------------------------------------------------------------------
Special Assessment District - 0.1%
Indianapolis, IN, Public Improvement Bond Rev., 6.5s, 2022 $ 2,000 $ 2,004,320
- --------------------------------------------------------------------------------------------------------
Student Loan Revenue - 1.0%
Arizona Student Loan Acquisition Authority,"C", 7.625s, 2010 $ 4,610 $ 5,147,711
Arizona Student Loan Acquisition Authority,"D", 7.25s, 2010 2,970 3,163,822
Education Loans, Inc., SD, 5.6s, 2020 2,700 2,698,677
Pennsylvania Higher Education Assistance Agency,
AMBAC, 8.346s, 2022(++) 2,700 3,057,993
--------------
$ 14,068,203
- --------------------------------------------------------------------------------------------------------
Turnpike Revenue - 8.5%
Florida Mid-Bay Bridge Authority Rev., 8.5s, 2022 $ 2,500 $ 2,825,850
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s to 2005, 7.15s to 2013 5,000 3,914,900
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2018 44,190 15,627,793
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2021 25,000 7,446,500
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2022 30,835 8,700,712
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2023 5,765 1,541,042
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2024 72,045 18,243,235
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2030 22,935 4,195,729
Massachusetts Turnpike Authority, Metropolitan
Highway System Rev., MBIA, 0s, 2021 9,500 2,969,415
Massachusetts Turnpike Authority, Metropolitan
Highway System Rev., MBIA, 0s, 2024 19,500 5,176,665
Massachusetts Turnpike Authority, Metropolitan
Highway System Rev., MBIA, 5s, 2027 10,000 9,663,000
Metropolitan Transportation Authority, NY,
Transportation Facility Rev., 5.25s, 2017 5,000 4,969,750
Pocahontas Parkway Assn., VA, Toll Road Rev., 0s, 2011 2,700 1,281,825
Pocahontas Parkway Assn., VA, Toll Road Rev., 0s, 2012 2,100 965,076
Pocahontas Parkway Assn., VA, Toll Road Rev., 0s, 2012 1,700 788,766
Pocahontas Parkway Assn., VA, Toll Road Rev., 0s, 2013 7,000 3,021,340
Pocahontas Parkway Assn., VA, Toll Road Rev., 0s, 2014 6,600 2,672,934
Pocahontas Parkway Assn., VA, Toll Road Rev., 0s, 2015 7,250 2,729,480
Pocahontas Parkway Assn., VA, Toll Road Rev., 0s, 2016 2,000 704,760
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., MBIA, 5.25s, 2030 15,200 15,192,552
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., MBIA, 0s, 2031 24,000 4,380,720
Telluride, CO, Gondola Transit Co., 11.5s, 2012 975 1,551,157
Telluride, CO, Gondola Transit Co., 9s, 2016 2,465 2,892,406
West Virginia Parkways, Economic Development &
Tourism Authority, FGIC, RIBS, 7.577s, 2019(++) 1,200 1,324,236
--------------
$ 122,779,843
- --------------------------------------------------------------------------------------------------------
Universities - 1.5%
Islip, NY, Community Development Agency Rev. (New
York Institute of Technology), 7.5s, 2026 $ 6,000 $ 6,594,840
Massachusetts Industrial Finance Agency (Curry College), 8s, 2014 1,420 1,532,265
Massachusetts Industrial Finance Agency (Emerson
College), 8.9s, 2018 3,000 3,280,710
New Hampshire Higher Educational & Health Facilities
(Franklin Pierce Law Center), 5.5s, 2018 1,200 1,192,740
New York Dormitory Authority Rev. (City University), 5s, 2018 10,000 9,632,600
--------------
$ 22,233,155
- --------------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 1.1%
Detroit, MI, Sewage Disposal Rev., FGIC, 7.618s, 2023(++) $ 2,000 $ 2,149,380
Harrisburg, PA, Authority Water Rev., FGIC, 7.72s, 2015(++) 2,000 2,255,980
New York City, NY, Municipal Water Finance Authority, 5.75s, 2029 8,590 9,068,549
New York City, NY, Municipal Water Finance Authority,
FSA, 5.375s, 2026 2,500 2,520,375
--------------
$ 15,994,284
- --------------------------------------------------------------------------------------------------------
Other - 2.5%
Brush, CO, Industrial Development Rev. (Training
Centers International), 9.5s, 2015** $ 8,822 $ 6,792,940
Colorado River, TX, Municipal Water District, 6.25s, 2004 3,000 3,007,440
Danville, VA, Industrial Development Authority Rev
(Piedmont Mall), 8s, 2017 8,280 8,825,735
District of Columbia (National Public Radio), 7.7s, 2023 3,500 3,832,185
Harris County, TX, Cultural Education Facility (Space
Center Houston), 9.25s, 2023 70 73,303
Martha's Vineyard, MA, Land Bank (Land Acquisition), 8.125s, 2011 2,600 2,810,730
Massachusetts Health & Education Facilities Authority
(Learning Center for Deaf Children), 9.25s, 2014 800 844,808
Massachusetts Industrial Finance Agency (Brandon
Residential Treatment), 8.75s, 2024 5,225 5,917,521
Southeast Wisconsin Professional Baseball,
Certificates of Participation, MBIA, 0s, 2014 1,000 436,740
Southeast Wisconsin Professional Baseball,
Certificates of Participation, MBIA, 0s, 2015 1,000 413,080
Southeast Wisconsin Professional Baseball,
Certificates of Participation, MBIA, 0s, 2017 1,000 369,570
St. Louis County, MO, Industrial Development
Authority (Eagle Golf Enterprises), 10s, 2005 2,200 2,423,322
St. Louis County, MO, Industrial Development
Authority (Kiel Center Arena), 7.875s, 2024 1,000 1,100,210
--------------
$ 36,847,584
- --------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $1,298,084,953) $1,426,227,520
- --------------------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 1.5%
- --------------------------------------------------------------------------------------------------------
Bartow County, GA, Development Authority, Pollution
Control Rev. (Georgia Power Co.), due 03/01/24 $ 1,700 $ 1,700,000
Burke County, GA, Development Authority Pollution
Rev. (Georgia Power Co.), due 04/01/25 200 200,000
East Baton Rouge, LA, Pollution Control Rev. (Exxon
Corp.), due 11/01/19 1,000 1,000,000
East Baton Rouge, LA, Pollution Control Rev. (Exxon
Corp.), due 03/01/22 200 200,000
Harris County, TX, Industrial Development Corp.,
Pollution Control Rev. (Exxon Corp.), due 03/01/24 900 900,000
Jackson County, MS, Pollution Control Rev. (Chevron
USA, Inc.), due 12/01/16 600 600,000
Lincoln County, WY, Pollution Control Rev. (Exxon Corp.),
due 11/01/14 1,300 1,300,000
Lincoln County, WY, Pollution Control Rev. (Exxon Corp.),
due 11/01/14 600 600,000
Lincoln County, WY, Pollution Control Rev. (Exxon Corp.),
due 07/01/17 100 100,000
Massachusetts Water Resources Authority, due 04/01/28 9,300 9,300,000
New York City, NY, due 02/01/20 100 100,000
New York City, NY, due 08/15/23 100 100,000
New York City Municipal Water Finance Authority, due 06/15/22 600 600,000
Putnam County, GA, Pollution Control Rev. (Georgia
Power Co.), due 06/01/23 200 200,000
St. Charles Parish, LA, Pollution Control Rev. (Shell
Oil Co.), due 10/01/22 2,500 2,500,000
State of Oregon, due 12/01/19 700 700,000
Uinta County, WY, Pollution Control Rev. (Chevron
USA, Inc.), due 08/15/20 1,500 1,500,000
- --------------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Amortized Cost and Value $ 21,600,000
- --------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,319,684,953) $1,447,827,520
Other Assets, Less Liabilities (183,811)
- --------------------------------------------------------------------------------------------------------
Net assets - 100.0% $1,447,643,709
- --------------------------------------------------------------------------------------------------------
** Non-income producing security-in default.
+ Restricted security.
++ Security accruing partial interest-in default.
(+) Security valued by or at the direction of the Trustees.
(++) Inverse floating rate security.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- --------------------------------------------------------------------------------
JULY 31, 1998
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $1,319,684,953) $1,447,827,520
Cash 17,564
Receivable for investments sold 4,027,095
Receivable for Fund shares sold 6,541,421
Interest receivable 19,184,348
Other assets 8,794
--------------
Total assets $1,477,606,742
--------------
Liabilities:
Distributions payable $ 4,291,534
Payable for investments purchased 16,282,577
Payable for Fund shares reacquired 5,807,749
Payable to affiliates -
Management fee 24,305
Shareholder servicing agent fee 4,479
Distribution and service fee 134,722
Administrative fee 566
Accrued expenses and other liabilities 3,417,101
--------------
Total liabilities $ 29,963,033
--------------
Net assets $1,447,643,709
==============
Net assets consist of:
Paid-in capital $1,493,756,973
Unrealized appreciation on investments 128,142,567
Accumulated net realized loss on investments (174,897,760)
Accumulated undistributed net investment income 641,929
--------------
Total $1,447,643,709
==============
Shares of beneficial interest outstanding 161,067,887
===========
Class A shares:
Net asset value per share
(net assets of $1,134,168,421 / 126,214,400 shares of
beneficial interest outstanding) $8.99
=====
Offering price per share (100 / 95.25) $9.44
=====
Class B shares:
Net asset value and offering price per share
(net assets of $313,475,288 / 34,853,487 shares of
beneficial interest outstanding) $8.99
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A
and Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations (Unaudited)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JULY 31, 1998
- --------------------------------------------------------------------------------
Net investment income:
Interest income $ 46,716,142
------------
Expenses -
Management fee $ 4,291,868
Trustees' compensation 39,751
Shareholder servicing agent fee 782,074
Distribution and service fee (Class B) 1,260,324
Administrative fee 99,029
Custodian fee 168,822
Printing 47,226
Postage 52,074
Auditing fees 21,250
Legal fees 19,733
Miscellaneous 301,770
------------
Total expenses $ 7,083,921
Fees paid indirectly (149,593)
------------
Net expenses $ 6,934,328
------------
Net investment income $ 39,781,814
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (660,268)
Futures contracts 243,110
------------
Net realized loss on investments $ (417,158)
------------
Change in unrealized appreciation on investments $(13,164,988)
------------
Net realized and unrealized loss on investments $(13,582,146)
------------
Increase in net assets from operations $ 26,199,668
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
- --------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JULY 31, 1998 JANUARY 31, 1998
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 39,781,814 $ 77,180,458
Net realized loss on investments (417,158) (43,492,930)
Net unrealized gain (loss) on investments (13,164,988) 93,915,575
-------------- --------------
Increase in net assets from operations $ 26,199,668 $ 127,603,103
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (32,561,937) $ (67,068,274)
From net investment income (Class B) (7,112,168) (10,428,729)
-------------- --------------
Total distributions declared to shareholders $ (39,674,105) $ (77,497,003)
-------------- --------------
Net increase in net assets from Fund share
transactions $ 89,362,520 $ 207,501,009
-------------- --------------
Total increase in net assets $ 75,888,083 $ 257,607,109
Net assets:
At beginning of period 1,371,755,626 1,114,148,517
-------------- --------------
At end of period (including undistributed net
investment income of $641,929 and $534,220,
respectively) $1,447,643,709 $1,371,755,626
============== ==============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
SIX MONTHS ENDED ------------------------------------------------------------------------
JULY 31, 1998 1998 1997 1996 1995 1994
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning
of period $ 9.07 $ 8.73 $ 9.12 $ 8.60 $ 9.38 $ 9.26
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.26 $ 0.57 $ 0.61 $ 0.61 $ 0.64 $ 0.77
Net realized and unrealized
gain (loss) on investments (0.08) 0.34 (0.36) 0.59 (0.75) 0.05
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.18 $ 0.91 $ 0.25 $ 1.20 $(0.11) $ 0.82
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders from net investment
income $(0.26) $(0.57) $(0.64) $(0.68) $(0.67) $(0.70)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 8.99 $ 9.07 $ 8.73 $ 9.12 $ 8.60 $ 9.38
====== ====== ====== ====== ====== ======
Total return(+) 2.06%++ 10.81% 2.87% 13.92% (1.04)% 9.19%
Ratios (to average net assets)/Supplemental data:
Expenses## 0.84%+ 0.89% 0.93% 0.93% 1.04% 1.10%
Net investment income 5.92%+ 6.42% 6.96% 6.83% 7.27% 7.15%
Portfolio turnover 4% 19% 17% 20% 32% 18%
Net assets at end of period
(000 omitted) $1,134,168 $1,107,181 $988,178 $1,009,031 $920,043 $809,957
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1995, are 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. If the charge had been included, the results
would have been lower.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 9.22 $ 9.09 $ 9.45 $ 9.55 $ 9.68
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.73 $ 0.73 $ 0.74 $ 0.85 $ 0.88
Net realized and unrealized gain (loss) on
investments 0.06 0.17 (0.32) (0.09) (0.12)
------ ------ ------ ------ ------
Total from investment operations $ 0.79 $ 0.90 $ 0.42 $ 0.76 $ 0.76
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.75) $(0.77) $(0.78) $(0.81) $(0.82)
From net realized gain on investments -- -- -- (0.04) (0.07)
From paid-in capital -- -- -- (0.01) --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.75) $(0.77) $(0.78) $(0.86) $(0.89)
------ ------ ------ ------ ------
Net asset value - end of period $ 9.26 $ 9.22 $ 9.09 $ 9.45 $ 9.55
====== ====== ====== ====== ======
Total return(+) 9.02% 10.34% 4.65% 8.24% 8.32%
Ratios (to average net assets)/Supplemental data:
Expenses 1.00% 1.03% 1.05% 1.02% 0.65%
Net investment income 7.95% 7.96% 8.17% 8.90% 9.27%
Portfolio turnover 10% 21% 41% 21% 23%
Net assets at end of period (000 omitted) $731,968 $648,043 $638,185 $485,037 $325,044
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
SIX MONTHS ENDED ----------------------------------------------------------------------
JULY 31, 1998 1998 1997 1996 1995 1994**
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 9.08 $ 8.74 $ 9.12 $ 8.60 $ 9.38 $ 9.40
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.22 $ 0.49 $ 0.52 $ 0.52 $ 0.57 $ 0.32
Net realized and unrealized gain
(loss) on investments (0.09) 0.34 (0.35) 0.59 (0.78) (0.14)
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.13 $ 0.83 $ 0.17 $ 1.11 $(0.21) $ 0.18
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders from net investment
income $(0.22) $(0.49) $(0.55) $(0.59) $(0.57) $(0.20)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 8.99 $ 9.08 $ 8.74 $ 9.12 $ 8.60 $ 9.38
====== ====== ====== ====== ====== ======
Total return 1.50%++ 9.87% 1.96% 12.78% (2.13)% 1.89%+
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.72%+ 1.73% 1.86% 1.91% 2.10% 2.04%+
Net investment income 5.04%+ 5.50% 6.00% 5.84% 6.32% 5.43%+
Portfolio turnover 4% 19% 17% 20% 32% 18%
Net assets at end of period
(000 omitted) $313,475 $264,575 $125,971 $77,808 $55,675 $1
** For the period from the inception of Class B, September 7, 1993, through January 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1995, are 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.
(S) The distributor voluntarily waived a portion of its distribution fee for certain of the periods indicated. If this fee
had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income -- $ 0.49 -- -- -- --
Ratios (to average net assets):
Expenses## -- 1.80% -- -- -- --
Net investment income -- 5.43% -- -- -- --
</TABLE>
See notes to financial statements
<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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Fund can invest 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.
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 listed on commodities exchanges are reported at
market value using closing settlement prices. 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.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or contracts based on financial indices at a fixed
price on a future date. In entering such contracts, the Fund is required to
deposit with the broker 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, depending on the daily fluctuations in the
value of the contract, 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. Investments in contracts on related options for
purposes other than hedging may be made when the Fund has cash on hand and
wishes to participate in anticipated market appreciation while the cash is
being invested. 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 is amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the ex-
interest date in an amount equal to the value of the security on such date.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds. Legal fees and other related expenses incurred to
preserve and protect the value of a security owned are added to the cost of
the security; other legal fees are expensed. Capital infusions, which are
generally non-recurring, incurred to protect or enhance the value of high-
yield debt securities, are reported as additions to the cost basis of the
security. Costs that are incurred to negotiate the terms or conditions of
capital infusions or that are expected to result in a plan of reorganization
are reported as realized losses. Ongoing costs incurred to protect or enhance
an investment, or costs incurred to pursue other claims or legal actions, are
expensed.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the 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 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 net realized gains.
At January 31, 1998, the Fund, for federal income tax purposes, had a capital
loss carryforward of $169,959,618 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, 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), January 31, 2004, ($30,637,034), January 31, 2005,
($26,148,057) and January 31, 2006, ($45,409,970).
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on the value
of settled shares outstanding 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. Class B shares will
convert to Class A shares approximately eight years after purchase.
(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 the following annual
rates:
BASED ON AVERAGE NET ASSETS BASED ON GROSS INCOME
- ---------------------------------------- ------------------------------------
First $1.3 billion 0.30% 4.75%
In excess of $1.3 billion 0.25%
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
$11,271 for the six months ended July 31, 1998.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$457,620 for the six months ended July 31, 1998, as its portion of the sales
charge on sales of Class A shares of the Fund. The Trustees have adopted a
distribution plan relating solely to Class B shares pursuant to Rule 12b-1 of
the Investment Company Act of 1940 as follows:
The 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.
Except in the case of the 0.25% per annum Class B service fee paid by the Fund
upon sale of Class B shares in the first year, payment of the Class B service
fee will be suspended until such date as the Trustees of the Trust may
determine. MFD will pay to securities dealers that enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class B
shares. The service fee is intended to be additional consideration for
services rendered by the dealer with respect to Class B shares. MFD retains
the service fee for accounts not attributable to a securities dealer, which
amounted to $0 for the six months ended July 31, 1998. Fees incurred under the
distribution plan during the six months ended July 31, 1998, were 0.88% of
average daily net assets attributable to Class B shares on an annualized
basis.
Certain Class A shares are subject to a contingent deferred sales charge in
the event of a shareholder redemption within 12 months following 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, 1998, were
$24,000 and $417,743 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 0.1125%.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $146,234,682 and $52,396,058, 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 $1,319,684,953
--------------
Gross unrealized appreciation $ 139,103,788
Gross unrealized depreciation (10,961,221)
--------------
Net unrealized appreciation $ 128,142,567
==============
(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 JULY 31, 1998 YEAR ENDED JANUARY 31, 1998
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 13,256,336 $119,360,314 25,471,927 $ 224,128,497
Shares issued to shareholders
in reinvestment of distributions 1,317,310 11,857,873 2,798,867 24,656,251
Shares reacquired (10,378,457) (93,438,158) (19,400,212) (171,063,899)
----------- ------------ ----------- -------------
Net increase 4,195,189 $ 37,780,029 8,870,582 $ 77,720,849
=========== ============ =========== =============
<CAPTION>
Class B Shares
SIX MONTHS ENDED JULY 31, 1998 YEAR ENDED JANUARY 31, 1998
--------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 7,394,910 $ 66,671,118 16,825,264 $ 148,354,869
Shares issued to shareholders
in reinvestment of
distributions 252,976 2,278,620 387,829 3,429,277
Shares reacquired (1,926,914) (17,367,247) (2,492,160) (22,003,986)
----------- ------------ ----------- -------------
Net increase 5,720,972 $ 51,582,491 14,720,933 $ 129,780,160
=========== ============ =========== =============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $805 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of
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, 1998, was $1,546.
(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, 1998,
the Fund owned the following restricted securities (constituting 0.5% of net
assets) which may not be publicly sold without registration under the
Securities Act of 1933. The Fund does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations furnished by dealers or by a pricing service, or if not available,
are valued at fair value as determined in good faith by or at the direction of
the Trustees.
<TABLE>
<CAPTION>
DATE OF PRINCIPAL
DESCRIPTION ACQUISITION AMOUNT COST VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Eastern Band Cherokee Indian Community,
NC, 10.25s, 2009 11/25/86 $2,885,000 $2,964,523 $2,903,204
Eastern Band Cherokee Indian Community,
NC, 11s, 2012 9/19/86 950,000 859,632 955,947
Hannibal, MO, Industrial Development
Authority, 9.5s, 2022 3/23/92 3,000,000 2,971,570 3,554,250
----------
$7,413,401
==========
</TABLE>
<PAGE>
<TABLE>
MFS(R) MUNICIPAL HIGH INCOME FUND
<S> <C>
TRUSTEES CUSTODIAN
Richard B. Bailey* - Private Investor; State Street Bank and Trust Company
Former Chairman and Director (until 1991),
MFS Investment Management INVESTOR INFORMATION
For MFS stock and bond market outlooks,
Peter G. Harwood - Private Investor call toll free: 1-800-637-4458 anytime from
a touch-tone telephone.
J. Atwood Ives - Chairman and Chief Executive
Officer, Eastern Enterprises (diversified For information on MFS mutual funds, call your
services company) financial adviser or, for an information kit,
call toll free: 1-800-637-2929 any business
Lawrence T. Perera - Partner, Hemenway day from 9 a.m. to 5 p.m. Eastern time (or
& Barnes (attorneys) leave a message anytime).
William J. Poorvu - Adjunct Professor, Harvard INVESTOR SERVICE
University Graduate School of Business MFS Service Center, Inc.
Administration P.O. Box 2281
Boston, MA 02107-9906
Charles W.Schmidt - Private Investor
For general information, call toll free:
Arnold D. Scott* - Senior Executive 1-800-225-2606 any business day from
Vice President, Director, and Secretary, 8 a.m. to 8 p.m. Eastern time.
MFS Investment Management
For service to speech- or hearing-impaired,
Jeffrey L. Shames* - Chairman, Chief call toll free: 1-800-637-6576 any business
Executive Officer, and Director, day from 9 a.m. to 5 p.m. Eastern time. (To
MFS Investment Management use this service, your phone must be equipped
with a Telecommunications Device for the
Elaine R. Smith - Independent Consultant Deaf.)
David B. Stone - Chairman and Director, For share prices, account balances, and
North American Management Corp. exchanges, call toll free: 1-800-MFS-TALK
(investment advisers) (1-800-637-8255) anytime from a touch-tone
telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company WORLD WIDE WEB
500 Boylston Street www.mfs.com
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Michael Roberge*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
</TABLE>
*Affiliated with the Investment Adviser
<PAGE>
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MFS(R) MUNICIPAL Bulk Rate
HIGH INCOME FUND U.S. Postage
Paid
[Logo] M F S(R) MFS
INVESTMENT MANAGEMENT -----------------
We invented the mutual fund(R)
500 Boylston Street
Boston, MA 02116-3741
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MMH-3 9/98 59M 25/225
