<PAGE>
[Logo] MFS(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) Municipal
High Income Fund
Annual Report o January 31, 1998
The Roth IRA is now available (see page 39)
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
A Discussion with the Portfolio Manager ................................... 4
Fund Facts ................................................................ 8
Performance Summary ....................................................... 8
Portfolio Concentration ................................................... 10
Tax Form Summary .......................................................... 10
Portfolio of Investments .................................................. 11
Financial Statements ...................................................... 27
Notes to Financial Statements ............................................. 33
Report of Ernst & Young LLP, Independent Auditors ......................... 38
Roth IRA .................................................................. 39
The MFS Family of Funds(R) ................................................ 40
Trustees and Officers ..................................................... 41
HIGHLIGHTS
o FOR THE YEAR ENDED JANUARY 31, 1998, CLASS A SHARES OF THE FUND PROVIDED A
TOTAL RETURN AT NET ASSET VALUE OF 10.81%, WHILE CLASS B SHARES RETURNED
9.87%. (SEE PERFORMANCE SUMMARY FOR MORE INFORMATION.)
o THE OBJECTIVE OF THE FUND IS TO PROVIDE HIGH CURRENT INCOME EXEMPT FROM
FEDERAL INCOME TAXES. THE FUND FOCUSES ON THE SUSTAINABILITY OF THAT
INCOME OVER TIME BY INVESTING IN SECURITIES THAT WE BELIEVE OFFER THE MOST
FAVORABLE RISK/ REWARD TRADEOFFS.
o TWO SECTORS IN WHICH THE FUND IS CURRENTLY SEEING THE BEST RISK/REWARD
TRADEOFFS ARE HOUSING AND HEALTH CARE/ LIFE CARE, BOTH OF WHICH ARE
BENEFITING FROM FAVORABLE DEMOGRAPHICS AND STRONG DEMAND.
o THE FUND'S DIVIDEND WAS REDUCED TWICE IN THE PAST YEAR DUE TO THE DECLINE
IN INTEREST RATES, WHICH LED TO A LARGE NUMBER OF MUNICIPAL REFINANCINGS,
AS WELL AS TO THE SALE OF SOME HIGH-COUPON DEBT IN THE MIDDLE OF THE YEAR.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
MFS Mourns Chairman's Passing
[Photo of A. Keith Brodkin] It is with deep regret that we inform you of the
A. Keith Brodkin death on February 2, 1998, of A. Keith Brodkin,
Chairman and Chief Executive Officer of MFS
Investment Management(SM). Mr. Brodkin joined MFS
in 1970 and made enormous contributions to the
organization, including helping to build the
firm's investment staff, which will continue to
manage all of the MFS investment portfolios. His
leadership, friendship, and wise counsel will be
sorely missed.
more on Mr. Brodkin on page 3
LETTER FROM THE CHAIRMAN
Dear Shareholders:
Thanks to a sustained period of relative stability and moderate growth, the
U.S. economy has produced thousands of new jobs, inflation has remained under
control, and the investment climate has -- for the most part -- been
favorable. The increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition,
is improving companies' balance sheets and helping control inflation. Based
on preliminary data, the U.S. economy grew at a 4.3% annual rate in the fourth
quarter of 1997, up from 3.1% in the third quarter. For all of 1997, the
economy grew by 3.8% (adjusted for inflation), the fastest pace since 1988.
While U.S. economic growth continues to be impressive, events in the Pacific
Rim will somewhat offset that and, therefore, markets are likely to continue
to focus on Federal Reserve Board (Fed) activity.
The U.S. government bond market has benefited from the deflationary events in
Asia, while the high-yield and emerging-debt markets have come under some
pressure. Inflation remains under control, and the Fed will most likely
continue to take a wait-and-see attitude toward raising interest rates. As a
result, our near-term outlook for high-grade markets is neutral to moderately
positive. At the same time, high-yield markets, having gone through a
correction, could offer reasonable value but require careful selection.
Overall, fixed-income markets appear to be reasonably valued.
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
JEFFREY L. SHAMES, A GRADUATE OF WESLEYAN UNIVERSITY AND THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY SLOAN SCHOOL OF MANAGEMENT, JOINED
MFS IN 1983. AFTER FOUR YEARS AS AN INDUSTRY ANALYST AND PORTFOLIO
MANAGER, HE WAS NAMED CHIEF EQUITY OFFICER IN 1987 AND PRESIDENT AND A
MEMBER OF THE BOARD IN 1993. MR. SHAMES WAS APPOINTED CHAIRMAN AND CHIEF
EXECUTIVE OFFICER IN FEBRUARY 1998.
<PAGE>
IN MEMORIAM
A. KEITH BRODKIN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MFS INVESTMENT MANAGEMENT
On February 2, 1998, Keith Brodkin, a friend and leader to everyone at
MFS, died unexpectedly at age 62. His thoughtful letters to shareholders
on the markets and economy have been an integral part of MFS shareholder
reports like this one for many years.
Keith joined MFS in 1970 as the firm's first fixed-income manager,
managing the bond portion of MFS(R) Total Return Fund. He went on to
manage our first pure bond fund, MFS(R) Bond Fund, when it was
introduced in 1974, and he was considered a pioneer in the art of active
bond management.
Keith was named President and Chief Investment Officer of MFS
in 1987 and four years later became Chairman and Chief Executive
Officer. During his stewardship, MFS has achieved significant growth in
total assets under management, rising from some $25 billion in 1991 to
the over $70 billion today entrusted to us by three million individual
and institutional investors worldwide. Under Keith's leadership, MFS has
carefully but steadily built its domestic and international investment
capabilities through the introduction of a range of new products and a
still-growing staff that now numbers over 100 equity and fixed-income
professionals.
Throughout his career, Keith was very active in a wide range of
charitable endeavors. He is survived by his wife and three children.
His leadership, friendship, and wise counsel will be sorely missed.
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of Michael Roberge]
Michael Roberge
For the year ended January 31, 1998, Class A shares of the Fund provided a
total return of 10.81%, while Class B shares returned 9.87%. These returns,
which include the reinvestment of distributions but exclude the effects of any
sales charges, compare to a 10.13% return for the Lehman Brothers Municipal
Bond Index (the Lehman Index) over the same period. 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 TALK ABOUT THE FUND'S PERFORMANCE RELATIVE TO ITS BENCHMARK OVER
THE PAST YEAR?
A. Even though interest rates declined in 1997, the extra income on the Fund,
as well as the narrowing of yield spreads among credit levels, more than
compensated for the greater price sensitivity of the Lehman Index. In
general, the performance of high-yield municipal bond funds, including this
Fund, is impacted more by the income they earn. As a result, higher-
yielding investments tend to outperform in relatively flat or modestly
declining interest-rate environments. The Lehman Index, on the other hand,
is representative of higher-grade municipal bonds and has a longer
duration, so it's more sensitive to changes in interest rates than the
average for our holdings.
Q. COULD YOU TALK ABOUT HOW YOU'RE MANAGING THE FUND SINCE TAKING OVER AS
PORTFOLIO MANAGER ON DECEMBER 3, 1997?
A. The primary objective of the Fund is to seek high current income. There has
been a change in emphasis in that we are now focusing more on
sustainability of income. We believe the most successful way of achieving
that goal is to purchase securities that we believe offer the most
favorable long-term risk/reward tradeoffs and that will continue to produce
high tax-exempt yields well into the future. Attempting to maximize yield
at any point in time can result in credit problems that may penalize future
income. Therefore, our goal is to pay an above-average, but sustainable,
yield versus our competitors.
Q. SO HOW DO YOU ACCOMPLISH THIS?
A. The only way is to do thorough fundamental credit research. We believe that
is our strongest competitive advantage. While many of our competitors have
been reallocating resources away from research, we have made a concerted
effort to bolster our municipal research capabilities. This is especially
important given that the U.S. economy is now in its seventh year of
expansion. While we do not believe an economic slowdown is imminent,
history has shown that economic cycles do occur and that the duration of
this expansion has been relatively long. Therefore, we are carefully
analyzing our holdings and potential purchases in that light, and we
believe this will prove to be invaluable during the next business downturn.
Q. WHAT PARTICULAR SECTORS DO YOU FAVOR NOW?
A. The two areas in which we are currently seeing the best risk/reward
tradeoffs are the housing and the health care/life care sectors. Both
sectors are benefiting from favorable demographics and strong demand.
However, the quality of the transactions we see varies widely, so a careful
analysis of each transaction is imperative. We typically avoid those
projects in which the population is not growing favorably, the demographics
are suspect, or the market is highly competitive and the supply and demand
balance is unfavorable.
Q. THE FUND'S DIVIDEND WAS REDUCED THIS PAST AUGUST, AS WELL AS IN DECEMBER.
COULD YOU TALK ABOUT THE REASONS FOR THOSE CUTS?
A. There were two primary reasons for this. First, we have experienced a
number of bond calls over the past year. Typically, as the general level of
interest rates declines, which was the case in 1997, municipalities will
refund outstanding debt to take advantage of the lower borrowing costs.
This is similar to homeowners refinancing their mortgages as interest rates
decline. As these refinancings occur, the money received must be reinvested
at lower interest rates, thereby causing the income earned on the Fund to
decline. The second reason for the dividend decline was due to the sale of
some high-coupon debt in the middle of the year. We sold some rather large
holdings in the paper recycling sector in order to avoid what we expected
would be further deterioration in the prices of those securities.
Q. IN GENERAL, HOW WOULD YOU DESCRIBE THE MUNICIPAL BOND ENVIRONMENT OVER THE
PAST YEAR?
A. The general decline in interest rates has been favorable for all fixed-
income investments, including municipals. However, a couple of issues
particular to the municipal market have presented challenges for investors.
First, the decline in interest rates has had a compounding impact on market
technicals. Lower rates have spurred refinancings and expanded supply
significantly. At the same time, retail demand for municipals, which is a
major component of overall demand, has waned as market rates have declined.
This has caused municipals to underperform other fixed-income markets,
especially in the last half of 1997.
Second, the continued penetration of municipal bond insurers, which insure
almost 60% of new-issue supply, has turned a good portion of the market into
a commodity and made finding value difficult.
Q. MORE SPECIFICALLY, WHAT ABOUT THE HIGH-YIELD MUNICIPAL MARKET?
A. Given the decline in rates, there has been a very strong demand for high-
yield securities. Unlike the investment-grade segment of the market,
technicals for high-yield paper are strong, with a strong demand for bonds
and a limited amount of new-issue supply. Not only are high-yield funds
looking to invest new cash in higher-yielding securities, but high-grade
funds, which are experiencing calls of higher-coupon bonds issued in the
much higher rate environment of the 1980s, are increasingly going out on
the risk spectrum and purchasing higher-yielding bonds. This has caused the
yield spread between high-yield and high-grade bonds to narrow
significantly.
Q. ARE THERE ANY POSITIONS IN THE FUND THAT PERFORMED BETTER THAN YOU
EXPECTED IN THE PAST YEAR?
A. We had a couple of solid positions in toll-road bonds that were refunded
last year, one in California, the other in Colorado. These bonds were
refinanced and made a good contribution to performance. Our corporate-
backed bonds also performed well, reflecting the general health of the
economy, with its good growth and low inflation.
Q. AS YOU LOOK AHEAD, WHAT CHANGES DO YOU SEE IN THE GENERAL ECONOMIC
ENVIRONMENT OR YOUR MARKET, AND HOW ARE YOU POSITIONING THE FUND FOR
THOSE CHANGES?
A. The economy appears healthy, with modest economic growth and low inflation.
The Asian crisis appears to have been a brake to the economy's strong
domestic demand and has kept it from overheating. Inflation appears to be
tame, and most economists forecast lower inflation in 1998 than that
experienced in 1997. All of this appears to bode well for interest rates,
and we see rates remaining relatively stable for most of 1998. We think the
economy will continue to grow modestly and that the sectors we're most
heavily invested in, mainly the corporate-backed, health care, and housing
sectors, will continue to perform well.
/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.
Note to Shareholders: Effective December 3, 1997, Michael Roberge succeeded
Cynthia M. Brown as portfolio manager of the Fund. Mr. Roberge joined MFS in
1996 as a credit analyst and was named Vice President -- Investments in 1997.
He is a graduate of Bemidji State University in Minnesota and holds an M.B.A.
from Hofstra University in New York.
<PAGE>
FUND FACTS
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 JANUARY 31, 1998
PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS(R) 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
differences in charges and fees paid by shareholders investing in the
different classes. It is not possible to invest directly in
an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year period ended January 31, 1998)
MFS Municipal Lehman Brothers Consumer Price
High Income Fund Municipal Index
-- Class A Bond Index -- U.S.
--------------- --------------- --------------
1/93 $ 9,530 $10,000 $10,000
1/94 10,340 11,230 10,250
1/95 10,230 10,830 10,540
1/96 11,650 12,460 10,820
1/97 11,990 12,940 11,160
1/98 13,283 14,242 11,372
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended January 31, 1998)
MFS Municipal Lehman Brothers Consumer Price
High Income Fund Municipal Index
-- Class A Bond Index -- U.S.
------------- --------------- --------------
1/88 $ 9,530 $10,000 $10,000
1/89 10,320 10,860 10,460
1/90 11,170 11,730 11,010
1/91 11,690 12,820 11,630
1/92 12,900 14,210 11,930
1/93 14,060 15,610 12,320
1/94 15,360 17,520 12,630
1/95 15,200 16,900 12,980
1/96 17,310 19,440 13,330
1/97 17,810 20,190 13,740
1/98 19,734 22,232 14,008
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS AS OF JANUARY 31, 1998
<CAPTION>
1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C>
MFS Municipal High Income Fund (Class A)
including 4.75% sales charge (SEC results) + 5.50% +7.34% +5.98% +7.03%
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MFS Municipal High Income Fund (Class A)
at net asset value +10.81% +9.10% +7.01% +7.55%
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MFS Municipal High Income Fund (Class B)
with CDSC (SEC results) + 5.87% +7.25% +5.80% +7.10%
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MFS Municipal High Income Fund (Class B)
at net asset value + 9.87% +8.11% +6.11% +7.10%
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Lehman Brothers Municipal Bond Index* +10.13% +9.57% +7.33% +8.32%
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Consumer Price Index*+ + 1.93% +2.56% +2.60% +3.43%
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* Source: CDA/Wiesenberger.
+ The Consumer Price Index is published by the U.S. Bureau of Labor Statistics and measures
the cost of living (inflation).
</TABLE>
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.
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 B are higher than those of A, B performance generally would have been lower
than A performance. The A performance included in 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.
The Fund may invest in high-yield securities. Lower-rated securities may
provide greater returns, but they are also associated with greater-than-
average risk. These risks may increase share price volatility.
PORTFOLIO CONCENTRATION AS OF JANUARY 31, 1998
QUALITY RATINGS
"AAA" ................. 18.4%
"AA" .................. 8.0%
"A" ................... 2.0%
"BBB" ................. 21.9%
"BB" .................. 3.3%
"B" ................... 3.2%
Nonrated .............. 42.3%
Cash .................. 0.9%
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WERE MAILED A TAX FORM SUMMARY REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 1997.
EXEMPT-INTEREST DIVIDEND
FOR FEDERAL INCOME TAX PURPOSES, 100% OF THE TOTAL DIVIDENDS PAID BY THE
FUND FROM NET INVESTMENT INCOME DURING THE YEAR ENDED JANUARY 31, 1998,
IS DESIGNATED AS AN EXEMPT-INTEREST DIVIDEND.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS -- January 31, 1998
Municipal Bonds - 97.6%
<CAPTION>
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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<S> <C> <C>
General Obligation - 4.7%
Chicago, IL, FGIC, 5.125s, 2025 $ 5,000 $ 4,946,650
Cook County, IL (Markham), 9s, 2012 2,670 2,710,050
District of Columbia, 6s, 2026 5,000 5,243,050
Jefferson County, OH, 7.125s, 2019 8,660 9,501,232
New York City, NY, 6.875s, 2003 525 575,474
New York City, NY, 7.1s, 2011 880 987,518
New York City, NY, 7.1s, 2011 120 132,558
New York City, NY, 5.875s, 2024 7,000 7,357,980
New York City, NY, 6.125s, 2025 8,000 8,625,360
New York City, NY, 6.125s, 2025 5,000 5,363,500
New York City, NY, 5.5s, 2037 5,000 5,032,100
New York City, NY, FSA, 7s, 2022 1,695 1,883,975
Orleans Parish, LA, School Board, FGIC, 0s, 2015 9,860 4,233,884
Texas Veteran Housing Assistance Program, 7s, 2025 1,330 1,463,559
Ukiah, CA, Unified School District, FGIC, 0s, 2017 4,795 1,800,954
Ukiah, CA, Unified School District, FGIC, 0s, 2018 4,085 1,459,121
Virgin Islands Public Financing Authority, 7.25s,
2018 2,000 2,259,560
West Warwick, RI, 7.3s, 2008 200 222,770
West Warwick, RI, 7.45s, 2013 570 643,918
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$ 64,443,213
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State and Local Appropriation - 0.5%
District of Columbia, Certificates of Participation,
7.3s, 2013 $ 2,500 $ 2,839,000
South Tucson, AZ, Municipal Property Corp., 8.75s,
2010 865 931,510
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 1998 75 75,688
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 1999 80 83,550
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2000 85 91,500
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2001 95 105,006
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2002 115 130,071
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2003 130 150,314
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2004 150 175,858
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2005 165 193,444
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2010 235 275,512
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2011 250 293,097
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2013 290 339,993
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2015 335 392,751
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2016 360 422,060
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2017 390 457,232
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$ 6,956,586
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Refunded and Special Obligations - 18.5%
Arapahoe County, CO, Capital Improvement (Highway
Rev.), 0s, 2015 $76,375 $ 26,802,279
Arapahoe County, CO, Capital Improvement (Highway
Rev.), 0s, 2026 69,000 10,390,710
Austin, TX, Utilities System Rev., 10.75s, 2000 1,780 2,041,268
Clermont County, OH, Hospital Facilities Rev. (Mercy
Health Systems), AMBAC,MVRICs, 9.093s, 2021(++) 1,300 1,577,238
Colorado Health Retirement Facilities, Retirement
Facilities Rev. (Liberty Heights), 0s, 2022 6,850 1,884,640
Colorado Health Retirement Facilities, Retirement
Facilities Rev. (Liberty Heights), 0s, 2024 29,295 7,213,894
Colquitt County, GA, Development Authority Rev., 0s,
2021 7,270 2,067,006
Colquitt County, GA, Development Authority Rev., 0s,
2021 4,250 1,208,360
Daphne, AL, Special Care Facilities Financing
Authority
(1st Mortgage Rev.), 0s, 2008 89,975 56,022,034
Daphne, AL, Special Care Facilities Financing Authority
(2nd Mortgage Rev.), 0s, 2008 4,500 2,801,880
Daphne, AL, Special Care Facilities Financing
Authority (Presbyterian), 0s, 2008 48,475 8,565,532
Desert Hospital District, CA, Insured Hospital Rev.
(Desert Hospital Corp.), 8.954s, 2020(++) 4,000 4,871,000
District of Columbia, Hospital Rev. (Washington
Hospital), 7.125s, 2019 1,750 1,980,370
Fairfax County, VA, Redevelopment & Housing Authority
(Little River Glen), 8.95s, 2020 2,000 2,168,360
Hannibal, MO, Industrial Development Authority
(Hannibal Regional Healthcare), 9.5s, 2022+ 3,000 3,674,580
Illinois Development Finance Authority, Retirement
Housing Rev., 0s, 2023 30,000 7,828,800
Illinois Development Finance Authority, Retirement
Housing Rev. (Regency Park), ETM, 0s, 2025 8,050 1,879,836
Maine Health & Higher Education Facilities Authority
(St. Mary's General Hospital), 8.625s, 1999 5,140 5,570,424
Massachusetts Health & Education Facilities Authority
(Fairview Extended Care Facility), 10.25s, 2021 3,000 3,585,360
Massachusetts Industrial Finance Agency, Tunnel Rev.
(Mass. Turnpike), 9s, 2020 10,895 12,450,915
Mesa County, CO, Residual Rev., 0s, 2003 25,125 8,683,451
Mississippi Hospital Equipment & Facilities Authority
Rev. (Rush Medical Foundation), 8.75s, 2001 2,800 3,211,460
New Lenox, IL, Community Park Development Authority,
8.25s, 2004 4,205 5,214,494
New York City, NY, 6.875s, 2003 475 529,136
New York City, NY, FSA, 7s, 2022 5 5,603
New York Local Government Assistance Corp., 7s, 2001 800 885,864
Prince William County, VA, Industrial Development
Authority, Residential Care Facility (Westminster at Lake Ridge),
10s, 2022 3,500 4,291,070
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2005 1,500 1,114,230
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2007 4,000 2,702,600
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2008 5,400 3,474,522
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2011 13,400 7,220,054
San Joaquin Hills, CA, Transportation Corridor Agency,
Toll Road Rev., 0s, 2028 13,450 2,974,333
South Carolina Public Service Authority (Santee Coop),
7.1s, 2001 2,000 2,230,560
Spirit Lake, IA, Industrial Development Rev. (Crystal
Tips, Inc.), 0s, 2008 4,370 6,091,642
Telluride, CO, Real Estate Transfer Assessment Rev.,
11.5s, 2012 5,025 8,200,951
Texas Turnpike Authority (Houston Ship Channel
Bridge), 12.625s, 2002 21,090 28,522,116
Washington Public Power Supply System Rev.
(Nuclear Project#1), 14.375s, 2001 805 973,583
Washington, GA, Wilkes Payroll Development Authority
Rev., 0s, 2021 8,000 2,274,560
--------------
$ 253,184,715
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Airport and Port Revenue - 8.2%
California Statewide Community Development Authority
Lease Rev. (United Airlines), 5.7s, 2033 $ 5,000 $ 5,091,500
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 2,630 2,825,541
Chicago, IL, O'Hare International Airport, Special
Facilites Rev. (United Airlines), 8.5s, 2018 4,500 4,962,690
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 5,850 6,667,245
Cleveland, OH, Airport Special Facilities Rev.
(Continental Airlines), 9s, 2019 9,120 9,937,791
Dallas-Fort Worth, TX, International Airport Facility
Improvement Corp. (Delta), 7.625s, 2021 4,500 5,021,955
Denver, CO, City & County Airport Rev., 8.875s, 2012 1,325 1,561,950
Denver, CO, City & County Airport Rev., 8.875s, 2012 3,675 4,287,108
Denver, CO, City & County Airport Rev., 7.75s, 2021 425 485,261
Denver, CO, City & County Airport Rev., 7.75s, 2021 1,625 1,829,165
Denver, CO, City & County Airport Rev., 8.5s, 2023 255 289,093
Denver, CO, City & County Airport Rev., 8.5s, 2023 2,695 3,027,159
Denver, CO, City & County Airport Rev., 8.75s, 2023 1,530 1,799,938
Denver, CO, City & County Airport Rev., 8.75s, 2023 4,240 4,979,922
Denver, CO, City & County Airport Rev., 8s, 2025 100 111,927
Denver, CO, City & County Airport Rev., 8s, 2025 1,040 1,154,722
Denver, CO, City & County Airport Rev. (United
Airlines), 6.875s, 2032 7,130 7,839,506
Hillsborough County, FL, Aviation Authority Rev. (USAir),
8.6s, 2022 4,275 4,880,340
Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 16,570 18,515,981
Port Authority, NY (JFK International Air Terminal),
MBIA, 5.75s, 2022 7,000 7,422,940
Tulsa, OK, Municipal Airport Trust Rev. (American
Airlines), 7.375s, 2020 4,000 4,360,880
Tulsa, OK, Municipal Airport Trust Rev. (American
Airlines), 7.6s, 2030 14,210 15,753,490
--------------
$ 112,806,104
- ------------------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 9.8%
Alaska Industrial Development & Export Authority,
Power Rev. (Upper Lynn Canal Regional Power),
5.875s, 2032 $ 1,800 $ 1,783,224
Clark County, NV, Industrial Development Rev.
(Nevada Power Co.), 5.6s, 2030 10,000 10,023,700
Clark County, NV, Industrial Development Rev.
(Nevada Power Co.), 5.9s, 2032 9,000 9,193,410
Clark County, NV, Industrial Development Rev.
(Nevada Power Co.), FGIC, 6.7s, 2022 4,000 4,396,360
Farmington, NM, Pollution Control Rev.
(Tucson Electric Power Co.), 6.95s, 2020 3,000 3,374,460
Midland, MI, Environmental Development Authority,
Pollution Control Rev. (Midland Cogeneration),
9.5s, 2009 4,500 5,003,820
Municipal Electric Authority, GA, Project#1, AMBAC,
8.426s, 2022(++) 9,900 11,321,739
New Hampshire Business Finance Authority, Pollution
Control Rev. (United Illuminating Co.), 5.875s, 2033 2,985 3,042,730
New Jersey Economic Development Authority
(Vineland Cogeneration), 7.875s, 2019 7,550 8,402,622
New York City, NY, Industrial Development Agency
(Brooklyn Navy Yard Cogeneration Partners), 5.65s, 2028 7,000 7,162,540
New York Research and Development Authority,
Electrical Facilities Rev. (Consolidated Edison),
AMBAC, 7.5s, 2026 4,750 5,084,495
New York Research and Development Authority,
Electrical Facilities Rev. (Long Island Lighting),
7.15s, 2019 1,650 1,804,077
New York Research and Development Authority,
Electrical Facilities Rev. (Long Island Lighting),
7.15s, 2022 6,050 6,614,949
Ohio Water Development, Pollution Control Rev.
(Cleveland Electric), 8s, 2023 4,700 5,429,487
Pennsylvania Economic Development Financing
Authority, Resources Recovery Rev., 6.5s, 2013 2,300 2,449,109
Pennsylvania Economic Development Financing
Authority, Resources Recovery Rev., 6.6s, 2019 5,000 5,336,600
Pima County, AZ, Industrial Development Authority
(Tuscon Electric Power Co.), 6s, 2029 5,000 5,122,500
Pima County, AZ, Industrial Development Authority
(Tuscon Electric Power Co.), 6s, 2029 11,000 11,269,500
Pittsylvania County, VA, Industrial Development
Authority, 7.55s, 2019 10,000 11,093,400
Southern California Public Power Authority,
Transmission Project Rev., RIBS, 7.812s, 2012(++) 7,850 8,976,396
West Feliciana Parish, LA, Pollution Control Rev.
(Gulf States Utilities Co.), 9s, 2015 2,500 2,798,025
West Feliciana Parish, LA, Pollution Control Rev.
(Gulf States Utilities Co.), 8s, 2024 4,000 4,325,600
--------------
$ 134,008,743
- ------------------------------------------------------------------------------------------------------
Health Care Revenue - 16.4%
Arkansas Development Finance Authority, Economic
Development Rev. (Southwest Homes), 10.8s, 2018 $ 955 $ 984,720
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.25s, 2001 215 212,141
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.75s, 2006 395 384,114
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.125s, 2016 1,420 1,360,161
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.5s, 2026 3,150 3,011,431
Bell County, TX, Health Facilities Development Corp.
(Kings Daughters Hospital), 9.25s, 2008 1,140 1,237,721
Berlin, MD, Hospital Rev. (Atlantic General Hospital),
8.375s, 2022 1,345 1,440,845
Brevard County, FL, Health Facilites Authority
(Beverly Enterprises), 10s, 2010 1,295 1,429,641
Cambria County, PA, Industrial Development Authority
(Beverly Enterprises), 10s, 2012 1,080 1,430,406
Cheneyville, LA, Westside Habilitation Center,
8.375s, 2013 6,100 6,450,811
Chester County, PA, Health & Education Facilities
Authority (Jefferson Health Systems), AMBAC, 5.25s, 2022 5,000 5,011,300
Chester County, PA, Health & Education Facilities
Authority (Jefferson Health Systems), 5.375s, 2027 5,000 5,035,800
Chester County, PA, Industrial Development Authority
(RHA/PA Nursing Home), 10.125s, 2019 1,933 1,875,010
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 1,490,036
Daphne, AL, Special Care Facilities Financing
Authority (Westminster Village), 8.25s, 2026+ 12,500 11,705,750
District of Columbia, Hospital Rev. (Hospital for
Sick Children), 8.875s, 2021 945 1,037,931
Doylestown, PA, Hospital Authority (Doylestown Hospital),
7.2s, 2023 2,200 2,551,362
Fairfax, Fauquier & Loudoun Counties, VA, Health
Center Commission, Nursing Home Rev., 9s, 2020 1,865 2,017,781
Grand Junction, CO, Hospital Rev. (Community Hospital),
6.9s, 2017 2,900 3,047,871
Hobbs County, NM, Health Facilities Rev.
(Nemecal Associates), 9.625s, 2014 1,685 1,769,199
Illinois Health Facilities Rev. (Memorial Hospital-
Woodstock), 7.25s, 2022 1,500 1,618,005
Jacksonville, FL, Health Facilities Authority
(National Benevolent), 7s, 2022 1,000 1,109,230
Jacksonville, FL, Industrial Development Rev.
(Beverly Enterprises), 9.75s, 2011 910 983,191
Jefferson County, KY, Health Facilities Rev.
(Beverly Enterprises), 10.125s, 2008 2,150 2,306,047
Kansas City, MO, Industrial Development Authority
(Bishop Spencer Place, Inc.), 8s, 2024 7,720 8,079,520
Kansas City, MO, Industrial Development Authority,
Retirement Facilities (Kingswood), 9s, 2013 5,250 5,700,082
Lee County, FL, Industrial Development Authority
(Beverly Enterprises), 10s, 2010 870 973,156
Louisiana Public Facilities Authority (Southwest
Medical Center), 11s, 2006 1,331 371,707
Luzerne County, PA, Industrial Development Authority
(Beverly Enterprises), 10.125s, 2008 1,225 1,335,397
Martin County, FL, Industrial Development Authority
(Beverly Enterprises), 9.8s, 2010 2,650 2,870,215
Massachusetts Health & Education Facilities Authority
(St. Memorial Medical Center), 6s, 2023 13,405 13,443,606
Massachusetts Health & Education Facilities Authority
Rev. (St. Anne's Hospital), 9.375s, 2014 5,000 5,095,700
Massachusetts Industrial Finance Agency, 9.25s, 2009 3,940 4,087,041
Massachusetts Industrial Finance Agency
(Brandon Residential Treatment), 8.75s, 2024 5,275 5,744,633
Massachusetts Industrial Finance Agency (GF Revere),
8.875s, 2025 7,710 8,499,967
Massachusetts Industrial Finance Agency (Glenmeadow
Retirement Community), 8.375s, 2018 2,300 2,549,941
Massachusetts Industrial Finance Agency (Glenmeadow
Retirement Community), 8.625s, 2026 3,520 3,933,072
Massachusetts Industrial Finance Agency (Martha's
Vineyard Long-Term Care Facility), 9.25s, 2022**(+) 3,410 988,900
Massachusetts Industrial Finance Agency (Metropolitan
Health Foundation, Inc.), 6.75s, 2027 5,830 5,960,067
Michigan Strategic Fund Ltd., Obligation Rev.
(River Valley Recovery Center), 12.875s, 2015 1,007 1,032,317
Millbrae, CA, Residential Facility (Magnolia Of
Millbrae Project), 7.375s, 2027 3,000 3,128,760
Montgomery County, PA, Higher Education & Health
Authority Rev. (AHF/Montgomery), 10.5s, 2020 2,460 2,630,872
Nebraska Investment Finance Authority (Centennial
Park), 10.5s, 2016 2,200 2,261,160
New Hampshire Industrial Development Authority (Tall
Pines), 11.25s, 2016 2,300 2,455,733
New Jersey Economic Development Authority (Burnt
Tavern Convalescent Center), 9s, 2013 1,700 1,854,887
New Jersey Economic Development Authority (Courthouse
Convalescent Center), 8.7s, 2014 1,350 1,439,626
New Jersey Economic Development Authority
(Geriatric & Medical Services), 9.625s, 2004 425 473,867
New Jersey Economic Development Authority
(Geriatric & Medical Services), 9.625s, 2022 1,350 1,497,636
New Jersey Economic Development Authority (Gerimed),
10.5s, 2020 3,000 3,175,650
New Jersey Economic Development Authority (Greenwood
Health Care), 9.75s, 2011 2,935 3,127,360
New Jersey Economic Development Authority (Wanaque
Convalescent Center), 8.5s, 2009 700 755,300
New Jersey Economic Development Authority (Wanaque
Convalescent Center), 8.6s, 2011 1,000 1,082,700
New Jersey Health Care Facilities Financing Authority
(Cherry Hill), 8s, 2027 4,000 4,353,040
North Carolina Medical Care Commission, Hospital Rev.
(Duke University Hospital), 5.25s, 2026 5,000 5,013,400
North Carolina Medical Care Commission, Hospital Rev.
(Valdese General Hospital), 8.75s, 2016 1,865 2,123,731
North Central, TX, Health Facilities Development Corp.
(Baylor University Medical Center), 9.614s, 2016(++) 4,300 5,196,765
Okaloosa County, FL, Retirement Rental Housing Rev.
(Beverly Enterprises), 10.75s, 2003 2,530 2,622,598
Osceola County, FL, Industrial Development Rev.,
Community Pooled Loan, 7.75s, 2017 2,700 2,872,854
Portsmouth, VA, Industrial Development Authority
(Beverly Enterprises), 10s, 2011 1,950 2,223,351
Reedley, CA, Certificates of Participation (Mennonite
Home), 7.5s, 2026 5,500 5,726,105
Rochester, MN, Health Care Facilities Rev. (Mayo
Medical Foundation), 8.15s, 2021(++) 2,000 2,119,380
San Francisco, CA, City & County (Coventry Park),
8.5s, 2026 9,435 10,418,033
Santa Fe, NM, Industrial Development Rev. (Casa Real
Nursing Home), 9.75s, 2013 1,825 1,988,849
Seminole County, FL, Industrial Development Authority
(Friendly Village), 10s, 2011 830 849,289
St. Charles County, MO, Industrial Development
Authority (Garden View Care Center), 10s, 2016 1,710 1,737,907
St. Petersburg, FL, Health Facilities Rev. (Swanholm
Nursing), 10s, 2022 1,490 1,341,000
Suffolk County, NY, Industrial Development Agency
(APPLE), 9.75s, 2015** 3,680 1,656,000
Tyler, TX, Health Facilities Development Corp. (East
Texas Medical Center Project), MBIA, 5.6s, 2027 3,000 3,119,190
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 3,100,000
Westerville, OH, Industrial Development Rev. (1st
Mortgage Health Care), 10s, 2008 495 501,123
Wilkins Area, PA, Industrial Development Authority
(Beverly Enterprises), 10s, 2011 1,050 1,191,845
Wilkinsburg, PA, Municipal Authority Health
(Monroeville Christian), 8.25s, 2027 7,100 7,769,317
--------------
$ 225,357,303
- ------------------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 14.8%
Baltimore County, MD, Pollution Control (Bethlehem Steel),
7.55s, 2017 $ 1,850 $ 2,090,833
Burns Habor, IN, Solid Waste Disposal Facilities Rev.
(Bethlehem Steel), 8s, 2024 10,455 11,915,354
Butler, AL, Industrial Developement Board, Solid
Waste Rev. (James River), 8s, 2028 4,500 5,222,115
Cambria County, PA, Industrial Development Authority
(Beverly Enterprises), 7.5s, 2015 4,390 4,895,904
Courtland, AL, Industrial Development Board, Solid
Waste Disposal Rev. (Champion International Corp.),
6.375s, 2029 2,500 2,672,925
Dayton, OH, Special Facilities Rev. (Emery Air Freight),
12.5s, 2009 950 1,031,244
DeQueen, AR, Industrial Development Board
(Weyerhaeuser Co.), 9s, 2006 1,000 1,026,270
Eastern Band of Cherokee Indian Community, NC
(Carolina Mirror Co.), 10.25s, 2009+ 3,020 3,040,325
Eastern Band of Cherokee Indian Community, NC
(Carolina Mirror Co.), 11s, 2012+ 950 956,336
Florence County, SC, Industrial Development Rev.
(Stone Container Corp.), 7.375s, 2007 3,315 3,621,936
Hardeman County, TN (Correctional Facilities Corp.),
7.75s, 2017 6,500 7,296,250
Hernando County, FL, Water & Sewer Rev. (Florida
Crushed Stone), 8.5s, 2014 8,555 10,043,656
Hodge Village , LA, Utilities Rev. (Stone Container),
9s, 2010 6,800 7,406,968
Indiana Development Finance Authority, 7.25s, 2011 10,000 11,297,600
Indiana Development Finance Authority Rev. (Inland Steel),
5.75s, 2011 3,000 3,161,190
Lawrenceburg, TN, Industrial Development Board
(Tridon, Inc.), 9.625s, 2006 2,600 2,771,054
Maine Finance Authority (Bowater), 7.75s, 2022 8,500 9,580,435
Massachusetts Port Authority Rev., Special Facilities
(Bosfuel), MBIA, 5.75s, 2039 5,000 5,201,650
Mesa County, CO (Joy Technologies), 8.5s, 2006 1,350 1,539,013
New Hampshire Business Authority, Sewer & Solid Waste
Disposal (Crown Paper), 7.875s, 2026 5,000 5,845,050
New Jersey Economic Development Authority (Holt
Hauling & Warehousing), 8.4s, 2015 4,000 4,358,240
New Jersey Economic Development Authority (Holt
Hauling & Warehousing), 8.6s, 2017 8,000 8,771,440
Ohio Solid Waste Rev. (CSC Limited), 8.5s, 2022 4,500 4,756,455
Ohio Solid Waste Rev. (Republic Engineered Steels),
8.25s, 2014 7,000 7,239,190
Owyhee County, ID, Industrial Development Rev.,
8.25s, 2002 4,000 4,308,200
Perry County, KY, Solid Waste Disposal Resources
(TJ International), 7s, 2024 11,000 12,048,410
Philadelphia, PA, Industrial Development Authority
Rev.,
7.75s, 2017 2,000 2,216,320
Port of New Orleans, LA (Avondale Industries), 8.5s,
2014 22,750 26,418,665
Port of New Orleans, LA (Continental Grain Co.),
7.5s, 2013 2,000 2,225,560
Power County, ID, Pollution Control Rev. (FMC Corp.),
5.625s, 2014 1,000 1,028,420
Riverdale, IL, Enviromental Improvement Rev. (Acme
Metals), 7.9s, 2024 2,500 2,841,150
Savannah, GA, Economic Development Authority,
Industrial Development Rev. ( Hershey Foods Corp.),
7.4s, 2026 7,500 8,371,725
Spokane County, WA, Industrial Development Corp.
(Kaiser Aluminum & Chemical Corp. Project), 7.6s,
2027 3,700 4,230,506
Sweetwater County, WY, Solid Waste Disposal Rev.,
6.9s, 2024 3,000 3,312,750
Tooele County, UT, Pollution Control Rev., 7.55s,
2027 5,000 5,455,250
Walton, GA, Industrial Development Rev.
(Ultima Rubber Products), 10s, 2010 4,250 4,872,412
--------------
$ 203,070,801
- ------------------------------------------------------------------------------------------------------
Insured Health Care Revenue - 1.7%
Bexar County, TX, Health Facilities Development
(Baptist Health Systems), MBIA, 5.25s, 2027 $ 4,000 $ 4,008,600
Illinois Health Facilities Authority Rev. (Sisters of
Mercy), MBIA, 9.537s, 2015(++) 5,200 6,317,792
Montana Health Facility Authority (Deaconess
Hospital), AMBAC, RIBS, 9.884s, 2016(++) 4,000 4,624,760
North Central, TX, Health Facilities Development
Corp. (Presbyterian Hospital), MBIA, 9.345s, 2021(++) 4,000 4,790,600
Philadelphia, PA, Hospital & Higher Education
Facilities Authority Rev., FGIC, 6.504s, 2012(++) 2,000 2,055,960
Salt Lake City, UT, Hospital Rev. (Intermountain
Health Care), AMBAC, 9.287s, 2020(++) 1,250 1,484,288
--------------
$ 23,282,000
- ------------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 2.0%
Alexandria, VA, Redevelopment & Housing Finance
Authority (Jefferson Village Apartments), 9s, 2018 $ 2,000 $ 2,083,660
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments Project), 7.25s, 2027 4,000 4,616,400
Butler County, OH, Multifamily Housing (Meadow Ridge
Apartments Project B), 9.5s, 2030 2,130 2,130,000
Dallas, TX, Housing Finance Corp., 8.5s, 2011 3,130 3,312,667
Florida Multi-Family Housing Finance Agency Rev.,
8.5s, 2018 2,000 2,099,120
Maplewood, RI, Housing Development Corp.
(Terrace Apartments), 6.9s, 2025 4,015 4,288,140
Maryland Community Development Administration, 0s, 2032 11,550 843,612
Massachusetts Housing Finance Agency, 8.5s, 2020 15 15,253
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 1,770 1,824,144
Virginia Housing & Development Authority, 0s, 2017 6,530 1,234,758
--------------
$ 27,802,754
- ------------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.4%
Black Hawk, CO, Device Tax Rev., 5.625s, 2017 $ 1,250 $ 1,231,612
Denver, CO, Urban Renewal Tax (Musicland), 8.5s, 2017 950 993,634
Denver, CO, Urban Renewal Tax Increment (Downtown
Denver), 8.5s, 2013 1,340 1,401,546
Denver, CO, Urban Renewal Tax Increment (Downtown
Denver), 7.25s, 2017 1,250 1,358,200
--------------
$ 4,984,992
- ------------------------------------------------------------------------------------------------------
Single Family Housing Revenue - 6.6%
Arkansas Housing Development Agency, Residential
Mortgage Rev., 0s, 2015 $ 6,825 $ 1,079,237
California Housing Finance Authority Rev., FHA, 0s, 2023 12,950 1,836,958
California Housing Finance Authority Rev., 7.4s, 2026 8,545 9,332,165
Chicago, IL, Capital Appreciation, Single Family
Mortgage Rev., FGIC, 0s, 2017 8,430 982,011
Colorado Housing Finance Authority, 8s, 2016 3,000 3,024,750
Connecticut Housing Finance Authority, 5.85s, 2028 4,125 4,249,080
Cook County, IL, Single Family Housing Rev., 0s, 2015 2,665 396,472
Corpus Christi, TX, Housing Finance Corp., MBIA, 0s, 2011 3,395 917,499
Delaware Single Family Housing Authority Rev., 6.75s, 2024 2,685 2,895,236
Denver, CO, City & County Single Family Mortgage Rev.,
0s, 2015 650 86,658
East Baton Rouge, LA, Capital Appreciation Rev., MBIA,
0s, 2010 10,295 2,622,651
El Paso, TX, Housing Finance Corp., Single Family
Mortgage Rev., 8.75s, 2011 740 804,217
Florida Housing Finance Agency Rev., 0s, 2016 10,800 1,709,856
Florida Housing Finance Agency Rev. (South Lake
Apartments), 0s, 2012 10 2,265
Georgia Housing & Finance Authority Rev., FHA, 0s, 2031 72,355 6,337,575
Harris County, TX, Housing Finance Corp., 9.875s, 2014 635 635,889
Hawaii Housing Finance & Development Corp., 5.75s, 2030 5,000 5,079,350
Jefferson County, CO, Single Family Mortgage Rev.,
MBIA, 8.875s, 2013 295 316,287
Jefferson County, TX, Housing Finance Corp., Single
Family Mortgage Rev., MBIA, 0s, 2015 3,810 569,671
Maine Housing Authority, Mortgage Purchase Rev.,
8.2s, 2022 2,775 2,892,216
Maryland Community Development Administration, 6s, 2039 3,500 3,665,130
Mississippi Home Corp., Single Family Senior Housing
Rev., FGIC, 9.25s, 2012 197 212,161
Nebraska Investment Finance Authority Housing Rev.,
6.3s, 2028 2,485 2,654,850
Nevada Housing Division, Single Family Mortgage Rev.,
0s, 2015 1,975 346,780
New Castle County, DE, Single Family Mortgage Rev., FGIC,
0s, 2016 955 143,575
New Hampshire Housing Finance Authority, Single
Family Mortgage Rev., 8.5s, 2014 3,040 3,150,139
New Mexico Mortgage Finance Authority, Single Family
Mortgage Rev., 6.9s, 2024 2,970 3,168,723
North Carolina Housing Finance Agency, 5.85s, 2028 9,110 9,409,719
North Dakota Housing Finance Agency, Single Family
Mortgage Rev., 8.3s, 2012 370 386,887
North Dakota Housing Finance Agency, Single Family
Mortgage Rev., 6.8s, 2023 950 1,012,006
North Dakota Housing Finance Agency, Single Family
Mortgage Rev., 5.9s, 2029 2,295 2,368,555
Ohio Housing Finance Agency, Single Family Mortgage
Rev., GNMA, RIBS, 8.832s, 2031(++) 1,350 1,533,573
Reno County, KS, Single Family Morgage Rev., AMBAC,
0s, 2014 4,525 691,737
South Dakota Housing Development Authority,
Homeownership Mortgage, 5.8s, 2028 5,000 5,136,900
Texas Housing & Development Agency, Residential
Mortgage Rev., 8.4s, 2020 1,655 1,746,521
Texas Housing & Development Agency, Single Family
Mortgage Rev., 8.2s, 2016 630 644,648
Vermont Housing Finance Agency, Single Family Home
Mortgage Purchase, 8.1s, 2022 1,510 1,562,155
Wisconsin Housing & Economic Development Authority,
Home Ownership Rev., 0s, 2016 1,655 262,218
Wisconsin Housing & Economic Development Authority,
Home Ownership Rev., RIBS, 9.855s, 2022(++) 1,770 1,977,143
Wyoming Community Development Authority, 5.85s, 2028 5,000 5,173,900
--------------
$ 91,017,363
- ------------------------------------------------------------------------------------------------------
Solid Waste Revenue - 0.2%
Pennsylvania Economic Development Finance Authority,
Recycling Rev. (Ponderosa Fibers Project), 9.25s, 2022 $ 3,500 $ 2,380,000
- ------------------------------------------------------------------------------------------------------
Special Assesment District - 0.1%
Indianapolis, IN, Public Improvement Bond Rev., 6.5s, 2022 $ 2,000 $ 2,002,720
- ------------------------------------------------------------------------------------------------------
Student Loan Revenue - 0.8%
Arizona Student Loan Acquisition Authority, "D",
7.25s, 2010 $ 2,970 $ 3,196,255
Arizona Student Loan Acquisition Authority, "C",
7.625s, 2010 4,610 5,217,690
Pennsylvania Higher Education Assistance Agency,
AMBAC, RIBS, 8.138s, 2022(++) 2,700 2,897,289
--------------
$ 11,311,234
- ------------------------------------------------------------------------------------------------------
Turnpike Revenue - 7.8%
Florida Mid-Bay Bridge Authority Rev., 8.5s, 2022 $ 2,500 $ 2,865,200
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, to 2005, 7.15s to 2013 5,000 3,790,300
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2018 44,190 15,421,426
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2021 25,000 7,361,000
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2022 30,835 8,606,974
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2023 5,765 1,525,419
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2024 72,045 18,071,047
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2030 22,935 4,173,253
Massachusetts Turnpike Authority, Metropolitan
Highway System Rev., MBIA, 0s, 2021 9,500 2,951,840
Massachusetts Turnpike Authority, Metropolitan
Highway System Rev., MBIA, 0s, 2024 19,500 5,198,310
Massachusetts Turnpike Authority, Metropolitan
Highway System Rev., MBIA, 0s, 2025 6,045 1,531,199
Massachusetts Turnpike Authority, Metropolitan
Highway System Rev., MBIA, 5s, 2027 10,000 9,762,700
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., MBIA, 5.25s, 2030 15,200 15,331,784
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., MBIA, 0s, 2031 24,000 4,464,000
Telluride, CO, Real Estate Transfer Assessment Rev.,
11.5s, 2012 975 1,194,697
Telluride, CO, Real Estate Transfer Assessment Rev.,
9s, 2016 2,465 2,782,590
West Virginia Parkways, Economic Development &
Tourism Authority, FGIC, RIBS, 7.452s, 2019(++) 1,200 1,336,596
--------------
$ 106,368,335
- ------------------------------------------------------------------------------------------------------
Universities - 0.8%
Islip, NY, Community Development Agency Rev.
(New York Institute of Technology), 7.5s, 2026 $ 6,000 $ 6,636,540
Massachusetts Industrial Finance Agency (Curry College),
8s, 2014 1,420 1,504,873
Massachusetts Industrial Finance Agency (Emerson
College), 8.9s, 2018 3,000 3,326,820
--------------
$ 11,468,233
- ------------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 1.2%
Detroit, MI, Sewage Disposal Rev., FGIC, 7.516s, 2023(++) $ 2,000 $ 2,156,300
Harrisburg, PA, Authority Water Rev., FGIC, 7.32s, 2015(++) 2,000 2,274,620
New York City, NY, Municipal Water Finance Authority,
5.75s, 2029 8,590 9,109,094
New York City, NY, Municipal Water Finance Authority,
FSA, 5.375s, 2026 2,500 2,534,350
--------------
$ 16,074,364
- ------------------------------------------------------------------------------------------------------
Other - 3.1%
Brush, CO, Industrial Development Rev. (Training
Centers International), 9.5s, 2015 $ 8,822 $ 11,145,891
Colorado Postsecondary Educational Facilities
Authority Rev. (Colorado Ocean Journey), 8.3s, 2017 3,500 4,130,805
Danville, VA, Industrial Development Authority Rev.
(Piedmont Mall), 8s, 2017 8,280 8,868,542
District of Columbia (National Public Radio), 7.7s, 2023 3,500 3,865,540
Harris County, TX, Cultural Education Facility (Space
Center Houston), 9.25s, 2023 70 73,611
Jenks Township, PA, Municipal Authority Rev., 8s, 2018 4,650 5,536,523
Martha's Vineyard, MA, Land Bank (Land Acquisition),
8.125s, 2011 2,700 2,950,830
Massachusetts Health & Education Facilities Authority
(Learning Center for Deaf Children), 9.25s, 2014 900 963,441
Southeast Wisconsin Professional Baseball,
Certificates of Participation, MBIA, 0s, 2014 1,000 434,280
Southeast Wisconsin Professional Baseball,
Certificates of Participation, MBIA, 0s, 2015 1,000 409,740
Southeast Wisconsin Professional Baseball,
Certificates of Participation, MBIA, 0s, 2017 1,000 367,210
St. Louis County, MO, Industrial Development Authority
(Eagle Golf Enterprises), 10s, 2005 2,200 2,447,236
St. Louis County, MO, Industrial Development Authority
(Kiel Center Arena), 7.875s, 2024 1,000 1,110,420
--------------
$ 42,304,069
- ------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $1,197,515,974) $1,338,823,529
- ------------------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 0.9%
Allegheny County, PA, Hospital Development Authority
Rev. (Presbyterian University Hospital), due 03/01/18 $ 1,000 $ 1,000,000
Allegheny County, PA, Hospital Development Authority
Rev. (Presbyterian University Hospital), due 03/01/20 1,400 1,400,000
Kansas City, MO, Industrial Development Hospital,
due 04/15/15 700 700,000
Lincoln County, WY, Pollution Control Rev. (Exxon),
due 11/01/14 100 100,000
Lincoln County, WY, Pollution Control Rev. (Exxon),
due 11/01/14 1,600 1,600,000
Lubbock, TX, Health Facilities Development Rev. (St.
Joseph Health System), due 07/01/13 1,000 1,000,000
Massachusetts Health & Educational Facilities Authority,
due 01/01/35 200 200,000
New York City, NY,Municipal Water Finance Authority,
due 06/15/24 3,200 3,200,000
New York City, NY, Municipal Water Finance Authority,
due 06/15/22 2,900 2,900,000
Uinta County, WY, Pollution Control Rev. (Chevron),
due 08/15/20 200 200,000
Uinta County, WY, Pollution Control Rev. (Chevron),
due 12/01/22 400 400,000
- ------------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Amortized Cost and Value $ 12,700,000
- ------------------------------------------------------------------------------------------------------
Non-Floating Rate Demand Note - 0.2%
- ------------------------------------------------------------------------------------------------------
State of California, due 06/30/98,
at Amortized Cost and Value $ 2,500 $ 2,509,100
- ------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,212,725,074) $1,354,032,629
Other Assets, Less Liabilities - 1.3% 17,722,997
- ------------------------------------------------------------------------------------------------------
Net assets - 100.0% $1,371,755,626
- ------------------------------------------------------------------------------------------------------
**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.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------
JANUARY 31, 1998
- --------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $1,212,725,074) $1,354,032,629
Cash 218,186
Receivable for investments sold 4,752,062
Receivable for Fund shares sold 4,766,673
Interest receivable 18,918,072
Other assets 9,760
--------------
Total assets $1,382,697,382
--------------
Liabilities:
Distributions payable $ 4,046,816
Payable for Fund shares reacquired 2,165,952
Payable for investments purchased 1,222,461
Payable to affiliates -
Management fee 34,474
Shareholder servicing agent fee 8,459
Distribution and service fees 9,659
Administrative fee 1,077
Accrued expenses and other liabilities 3,452,858
--------------
Total liabilities $ 10,941,756
--------------
Net assets $1,371,755,626
==============
Net assets consist of:
Paid-in capital $1,404,394,453
Unrealized appreciation on investments 141,307,555
Accumulated net realized loss on investments (174,480,602)
Accumulated undistributed net investment income 534,220
--------------
Total $1,371,755,626
==============
Shares of beneficial interest outstanding 151,151,726
===========
Class A shares:
Net asset value per share
(net assets of $1,107,180,560 / 122,019,211 shares of
beneficial interest outstanding) $9.07
=====
Offering price per share (100 / 95.25 of net asset
value per share) $9.52
=====
Class B shares:
Net asset value and offering price per share
(net assets of $264,575,066 / 29,132,515 shares of
beneficial interest outstanding) $9.08
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1998
- --------------------------------------------------------------------------------
Net investment income:
Interest income $ 89,447,132
------------
Expenses -
Management fee $ 7,934,130
Trustees' compensation 67,113
Shareholder servicing agent fee 1,580,544
Distribution and service fee (Class B) 1,729,611
Administrative fee 155,713
Custodian fee 345,095
Postage 87,957
Printing 59,422
Legal fees 36,807
Auditing fees 36,372
Miscellaneous 624,176
------------
Total expenses $ 12,656,940
Fees paid indirectly (253,060)
Reduction of expenses by distributor (137,206)
------------
Net expenses $ 12,266,674
------------
Net investment income $ 77,180,458
------------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) on investment
transactions $(43,492,930)
Change in unrealized appreciation on investments 93,915,575
------------
Net realized gain on investments $ 50,422,645
------------
Increase in net assets from operations $127,603,103
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
- -------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 77,180,458 $ 73,016,861
Net realized loss on investments (43,492,930) (22,959,311)
Net unrealized gain (loss) on investments 93,915,575 (20,906,221)
-------------- --------------
Increase in net assets from operations $ 127,603,103 $ 29,151,329
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (67,068,274) $ (70,123,751)
From net investment income (Class B) (10,428,729) (5,579,841)
-------------- --------------
Total distributions declared to shareholders $ (77,497,003) $ (75,703,592)
-------------- --------------
Net increase in net assets from Fund share
transactions $ 207,501,009 $ 73,861,749
-------------- --------------
Total increase in net assets $ 257,607,109 $ 27,309,486
Net assets:
At beginning of year 1,114,148,517 1,086,839,031
-------------- --------------
At end of year (including accumulated undistributed net
investment income of $534,220 and $618,295,
respectively) $1,371,755,626 $1,114,148,517
============== ==============
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.73 $ 9.12 $ 8.60 $ 9.38 $ 9.26
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.57 $ 0.61 $ 0.61 $ 0.64 $ 0.77
Net realized and unrealized gain
(loss) on investments 0.34 (0.36) 0.59 (0.75) 0.05
------ ------ ------ ------ ------
Total from investment operations $ 0.91 $ 0.25 $ 1.20 $(0.11) $ 0.82
------ ------ ------ ------ ------
Less distributions declared to shareholders
from net investment income $(0.57) $(0.64) $(0.68) $(0.67) $(0.70)
------ ------ ------ ------ ------
Net asset value - end of period $ 9.07 $ 8.73 $ 9.12 $ 8.60 $ 9.38
====== ====== ====== ====== ======
Total return(+) 10.81% 2.87% 13.92% (1.04)% 9.19%
Ratios (to average net assets)/Supplemental data:
Expenses## 0.89% 0.93% 0.93% 1.04% 1.10%
Net investment income 6.42% 6.96% 6.83% 7.27% 7.15%
Portfolio turnover 19% 17% 20% 32% 18%
Net assets at end of period (000 omitted) $1,107,181 $988,178 $1,009,031 $920,043 $809,957
#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.
See notes to financial statements
</TABLE>
<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.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1998 1997 1996 1995 1994**
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.74 $ 9.12 $ 8.60 $ 9.38 $ 9.40
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.49 $ 0.52 $ 0.52 $ 0.57 $ 0.32
Net realized and unrealized gain (loss)
on investments 0.34 (0.35) 0.59 (0.78) (0.14)
------ ------ ------ ------ ------
Total from investment operations $ 0.83 $ 0.17 $ 1.11 $(0.21) $ 0.18
------ ------ ------ ------ ------
Less distributions declared to shareholders
from net investment income $(0.49) $(0.55) $(0.59) $(0.57) $(0.20)
------ ------ ------ ------ ------
Net asset value - end of period $ 9.08 $ 8.74 $ 9.12 $ 8.60 $ 9.38
====== ====== ====== ====== ======
Total return 9.87% 1.96% 12.78% (2.13)% 1.89%+
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.73% 1.86% 1.91% 2.10% 2.04%+
Net investment income 5.50% 6.00% 5.84% 6.32% 5.43%+
Portfolio turnover 19% 17% 20% 32% 18%
Net assets at end of period (000 omitted) $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.
#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 the period
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% -- -- -- --
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 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 may 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.
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 average daily 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. During
the year ended January 31, 1998, accumulated undistributed net investment
income was increased by $232,470, accumulated net realized loss on investments
was decreased by $770,893, and paid in capital was decreased by $1,003,363,
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, 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. The classes of shares differ in their respective
distribution and service fees.
All shareholders bear the common expenses of the Fund based on the 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.
(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%
Administrator - Effective March 1, 1997, 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, provided that the administrative fee is not assessed
on Fund assets that exceed $3 billion:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
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
$18,728 for the year ended January 31, 1998.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$1,044,362 for the year ended January 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 the 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 year ended January 31, 1998. Fees
incurred under the distribution plan during the year ended January 31, 1998,
were 0.84% of average daily net assets attributable to Class B shares on an
annualized basis. The distributor has voluntarily agreed to waive a portion of
its fee, which is reflected as a reduction of expenses in the Statement of
Operations.
Purchases over $1 million of Class A shares 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, 1998, were $42,903 and $397,579 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. Effective January 1,
1998, the fee is calculated as a percentage of the Fund's average daily net
assets at an effective annual rate of 0.1125%. Prior to January 1, 1998, the
fee was calculated as a percentage of the Fund's average daily net assets at
an effective annual rate of 0.13%.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $410,464,783 and $227,083,885, 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 $1,212,725,454
--------------
Gross unrealized appreciation $ 150,849,063
Gross unrealized depreciation (9,541,888)
--------------
Net unrealized appreciation $ 141,307,175
==============
(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>
Class A Shares
<CAPTION>
YEAR ENDED JANUARY 31, 1998 YEAR ENDED JANUARY 31, 1997
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 25,471,927 $ 224,128,497 16,594,610 $ 145,833,348
Shares issued to shareholders
in reinvestment of
distributions 2,798,867 24,656,251 2,943,909 25,881,400
Shares reacquired (19,400,212) (171,063,899) (17,043,700) (149,563,593)
----------- ------------- ----------- -------------
Net increase 8,870,582 $ 77,720,849 2,494,819 $ 22,151,155
=========== ============= =========== =============
</TABLE>
<TABLE>
Class B Shares
<CAPTION>
YEAR ENDED JANUARY 31, 1998 YEAR ENDED JANUARY 31, 1997
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 16,825,264 $ 148,354,869 6,763,017 $ 59,442,277
Shares issued to shareholders
in reinvestment of
distributions 387,829 3,429,277 238,469 2,098,259
Shares reacquired (2,492,160) (22,003,986) (1,121,560) (9,829,942)
----------- ------------- ----------- -------------
Net increase 14,720,933 $ 129,780,160 5,879,926 $ 51,710,594
=========== ============= =========== =============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 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
year ended January 31, 1998 was $7,937.
(7) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At January 31, 1998, the
Fund owned the following restricted securities (constituting 1.41% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service of brokers, or if not available, in good faith by or at the
direction of the Trustees.
<TABLE>
<CAPTION>
DATE OF SHARE/
DESCRIPTION ACQUISITION PAR AMOUNT COST VALUE
- -------------------------------------------------------------------------------------------------------------
Daphne, AL, Special Care Facilities
<S> <C> <C> <C> <C>
Financing Authority, 8.25s, 2026 10/28/88 $12,500,000 $12,504,656 $11,705,750
Eastern Band Cherokee Indian Community,
NC, 10.25s. 2009 11/25/86 3,020,000 3,105,256 3,040,325
Eastern Band Cherokee Indian Community,
NC, 11s, 2012 9/19/86 950,000 860,375 956,336
Hannibal, MO, Industrial Development
Authority, 9.5s, 2022 3/23/92 3,000,000 2,971,412 3,674,580
-----------
$19,376,991
===========
</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 of investments
as of January 31, 1998, 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 the financial highlights for each of the four
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 the periods prior
to the year ended January 31, 1995 indicated herein, were audited by other
auditors whose report dated March 16, 1994 expressed an unqualified opinion on
those 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 the financial highlights. Our procedures included
confirmation of securities owned as of January 31, 1998, 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, 1998, 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 four
years in the period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 6, 1998
--------------------------------------------
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>
<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 Auditors
Ernst & Young LLP
Peter G. Harwood - Private Investor
Investor Information For MFS stock and bond
J. Atwood Ives - Chairman and Chief Executive market outlooks, call toll free: 1-800-637-4458
Officer, Eastern Enterprises anytime from a touch-tone telephone. For
information on MFS mutual funds, call your
Lawrence T. Perera - Partner, Hemenway financial adviser or, for an information kit,
& Barnes call toll free: 1-800-637-2929 any business day
from 9 a.m. to 5 p.m. Eastern time (or leave a
William J. Poorvu - Adjunct Professor, Harvard message anytime).
University Graduate School of Business
Administration Investor Service
MFS Service Center, Inc.
Charles W. Schmidt - Private Investor P.O. Box 2281
Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive
Vice President, Director, and Secretary, For general information, call toll free:
MFS Investment Management 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - Chairman, and
Chief Executive Officer, For service to speech- or hearing-impaired, call
MFS Investment Management toll free: 1-800-637-6576 any business day from
9 a.m. to 5 p.m. Eastern time. (To use this
Elaine R. Smith - Independent Consultant service, your phone must be equipped with a
Telecommunications Device for the Deaf.)
David B. Stone - Chairman, North American
Management Corp. (investment advisers) For share prices, account balances, and
exchanges, call toll free: 1-800-MFS-TALK
Investment Adviser (1-800-637-8255) anytime from a touch-tone
Massachusetts Financial Services Company telephone.
500 Boylston Street
Boston, MA 02116-3741 World Wide Web
www.mfs.com
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street [Dalbar Logo] For the fourth year in a row, MFS
Boston, MA 02116-3741 earned a #1 ranking in the DALBAR, Inc.
Broker/Dealer Survey, Main Office Operations
Portfolio Manager Service Quality Category. The firm achieved a
Michael Roberge* 3.42 overall score on a scale of 1 to 4 in the
1997 survey. A total of 111 firms responded,
Treasurer offering input on the quality of service they
W. Thomas London* received from 29 mutual fund companies
nationwide. The survey contained questions about
Assistant Treasurers service quality in 11 categories, including
Mark E. Bradley* "knowledge of operations contact," "keeping you
Ellen Moynihan* informed," and "ease of doing business" with the
James O. Yost* firm.
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
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MFS(R) Municipal Bulk Rate
High Income Fund U.S. Postage
Paid
MFS
[Logo] MFS(SM) ----------------
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
500 Boylston Street
Boston, MA 02116-3741
[Dalbar Logo]
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MMH-2 3/98 63M 25/225
