<PAGE>
[Logo] M F S(R)
INVESTMENT MANAGEMENT
75 YEARS
We invented the mutual Fund(R)
MFS(R) MUNICIPAL HIGH
INCOME FUND
ANNUAL REPORT o JANUARY 31, 1999
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DIVERSIFYING YOUR INVESTMENT PORTFOLIO (see page 44)
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<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 12
Financial Statements ...................................................... 28
Notes to Financial Statements ............................................. 34
Independent Auditors' Report .............................................. 40
MFS' Year 2000 Readiness Disclosure ....................................... 42
Trustees and Officers ..................................................... 45
MFS CELEBRATES ITS DIAMOND ANNIVERSARY!
MARCH 21, 1999, MARKS THE 75TH ANNIVERSARY OF MFS' INVENTION OF
THE MUTUAL FUND. THE MUTUAL FUND INDUSTRY HAS BROUGHT THE POWER
OF INVESTING TO EVERY AMERICAN, OFFERING THEM THE OPPORTUNITY FOR
COLLEGE DEGREES, HOME OWNERSHIP, AND COMFORTABLE RETIREMENT.
IMAGINE TODAY'S WORLD WITHOUT MUTUAL
FUNDS. WE COULDN'T. AND WHILE THE MFS 75 YEARS
YEARS AHEAD WILL BRING A NUMBER OF [graphic omitted]
CHALLENGES, OUR 75 YEARS OF EXPERIENCE EXPERIENCE THE FUTURE(SM)
WILL HELP GUIDE A NEW GENERATION OF
INVESTORS INTO THE FUTURE.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders:
In 1999, MFS celebrates its 75th anniversary. The nation's first mutual fund
- -- our Massachusetts Investors Trust (MIT) -- was introduced to the public on
March 21, 1924. Since then, MFS Investment Management(R), the company that
grew out of that original fund, has helped guide shareholders through many
economic and investment cycles, primarily by focusing on the long-term
opportunities created by an expanding global economy. As of January 31, 1999,
MFS manages over $100 billion, and the firm's 2,000 people serve almost four
million investors and their financial advisers worldwide. Meanwhile, MIT's
assets have grown to over $12 billion, and 56 mutual funds are offered in the
MFS Family of Funds(R).
One of the elements in the success of MIT did not exist before our founders
invented it in 1924. That is daily redemption. This innovation means that if you
want to sell your investment in any MFS mutual fund, you have the security of
knowing that you may do so immediately by exchanging into another MFS fund. Or,
if you need your money for other purposes, it can quickly be wired or mailed to
you. This daily redemption feature, through which new shares were created when
people invested in MIT and were redeemed when people sold, brought another
important change to the industry. Now, the price of a mutual fund's shares
wasn't determined by supply and demand, but by the value of the securities owned
by each portfolio.
Another factor in our growth was the development of one of the industry's first
in-house research departments in 1932. Unlike companies that rely on Wall Street
research reports, which can be used by many investors at the same time, MIT's
managers built its long-term track record by visiting companies, talking to
managers and competitors, and "kicking the tires" so they could judge the
quality and potential of each company's products and services for themselves.
Today, MFS has more than 100 full-time portfolio managers, stock analysts, and
credit analysts who track the equity and bond markets.
While MIT introduced the daily redemption feature, that was not our only
invention. We also established the nation's first global bond fund, first
high-yield municipal bond fund, and first high-yield municipal closed-end bond
fund.
We are proud of the record of MIT and of the funds in the MFS Family of Funds,
but we are also proud of our long-standing relationship with financial advisers.
Not only do we believe investors can benefit from the advice of these experts
but, as was shown during the market volatility of 1998, people who work with
financial advisers are less likely to abandon their carefully designed,
long-term investment strategies.
Our ability to service your investment and information needs is also extremely
important to us. The MFS Service Center handles millions of transactions and
phone calls every year. Supporting the work of financial advisers, promptly
sending out statements and confirmations, and answering hundreds of investors'
questions every day are crucial elements in maintaining long-term relationships
with our fund shareholders. That link to our investors has also been enhanced by
our site on the World Wide Web: WWW.MFS.COM. Since 1996, this site has given
investors and the general public access to up-to-date information about MFS
products and services, as well as market outlooks and retirement information.
The site has rapidly become one of our primary vehicles for communicating with
our investors and educating the public about mutual funds in general and MFS in
particular.
If there is a common thread running through these milestones, it is our
always-increasing commitment to providing you with the best possible investment
management and shareholder service, just as we have done for the past 75 years.
As we celebrate this anniversary, it is also a time for MFS to look ahead and
build on our 75 years of innovation and experience to help meet your investment
needs in the next century. We appreciate your confidence 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)
February 15, 1999
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of Michael W. Roberge]
Michael W. Roberge
For the 12 months ended January 31, 1999, Class A shares of the Fund provided a
total return of 5.54%, Class B shares 4.62%, and Class C shares 5.05%. These
returns, which include the reinvestment of distributions but exclude the effects
of any sales charges, compare to a 6.73% return for the Lehman Brothers
Municipal Bond Index (the Lehman Index), an unmanaged index of investment-grade
municipal bonds rated "Baa" or higher. The average high-yield municipal debt
fund as tracked by Lipper Analytical Services, Inc., an independent firm that
reports mutual fund performance, returned 5.06% over the same period.
Q. WHAT WERE SOME OF THE FACTORS THAT HAD AN IMPACT ON THE FUND'S PERFORMANCE
OVER THE PAST 12 MONTHS?
A. It is important to remember that the Lehman Index is comprised of higher-
quality bonds than those found in the Fund, which primarily invests in
lower-quality municipal issues rated "Baa" or below. Higher-quality bonds
tend to be more interest-rate sensitive, so the moderate declines in rates
during the period had a more positive impact on the Lehman Index. The Lehman
Index also focuses on bonds that are more likely to gain capital
appreciation, as opposed to income, and is comprised mostly of bonds across
the entire maturity section, while the Fund focuses on longer-term
investments. Over the period, intermediate-term bonds outperformed long-
term investments. We feel the Fund's Class A shares' outperformance relative
to the Lipper average, was attributable to our ability to avoid some of the
mistakes that our competitors experienced in 1998.
Q. WHAT HAPPENED TO MUNICIPAL BOND INTEREST RATES IN 1998, AND WHAT IS YOUR
EXPECTATION FOR 1999?
A. While U.S. Treasury bond rates did decline significantly throughout the
year, municipal rates declined only modestly, because a healthy supply of
municipal issues were used to refinance older, higher-interest-rate debt
with new lower-rate debt. (Principal value and interest on Treasury
securities are guaranteed by the U.S. government if held to maturity.) This
caused municipal securities to trade more cheaply in comparison to U.S.
Treasuries than at any time over the past decade. For 1999, we anticipate
that the continued favorable inflation outlook will keep Treasury rates from
rising significantly. However, the strength of the U.S. economy entering
1999 will most likely restrain significant rate declines. Regardless of the
direction of interest rates, we anticipate that municipal securities will
trade more toward historical levels, which would cause them to outperform
U.S. Treasuries.
Q. THE FUND HAS MODIFIED ITS INVESTMENT STRATEGY OVER THE PAST 12 MONTHS TO
FOCUS ON ACHIEVING SUSTAINABLE, RATHER THAN MAXIMUM, YIELD. WHAT DEGREE OF
SUCCESS HAVE YOU HAD IN FINE-TUNING THE STRATEGY?
A. We feel that the strategy has succeeded. One of the proof points here is the
fact that we were able to maintain our dividend over the course of the year
in the face of declining interest rates. Also, our focus on MFS(R) Original
Research(SM), by which we thoroughly examine the credit and business risks
of each current and potential issue in the portfolio, has helped us avoid
some bond defaults that could have impacted the Fund's yield. We are not
interested simply in finding the cheapest bonds that are paying the highest
yields. We must be convinced by our research of the underlying
creditworthiness of the individual issues and their ability to provide a
steady stream of interest payments into the future.
Q. CALL PROTECTION IS A MEANS OF PROTECTING YIELDS AGAINST THE PROSPECT OF
ISSUERS PAYING OFF HIGHER-YIELDING BONDS BEFORE MATURITY TO REFINANCE DEBT
AT LOWER RATES. HOW DOES THIS FIGURE INTO YOUR INVESTMENT STRATEGY?
A. Because we manage the Fund for income generation, we tend to hold on to
bonds for as long as we can, especially higher-coupon bonds that we
purchased for the portfolio several years back when rates were higher. We
use this tool in an effort to wring as much income as possible from the
issues in which we invest. We believe we have relatively few bonds that can
be called out of the portfolio in the next few years.
Q. WHAT TYPES OF CREDITS PERFORMED WELL FOR YOU OVER THE PAST 12 MONTHS?
A. Our investments in several multi-family housing projects across the country
have performed well, boosted by the continued health of the U.S. economy.
Clearly, however, not all of these issues are created equal, and our
research helps us determine which regions and which projects offer the most
compelling supply and demand and fundamental strength scenarios. Regionally,
we are attempting to minimize our exposure to areas of the country, such as
those in certain parts of the western and southwestern United States, where
economies are highly dependent on exports to the troubled Asian and Latin
American economies.
Q. WHAT CREDITS DID NOT PERFORM UP TO YOUR EXPECTATIONS LAST YEAR?
A. While we didn't have any major disappointments over the year, we did see
weakness in bonds that are backed by cyclical and commodities industries
such as oil, paper products, and natural resource industries. These
industries came under extreme pricing pressure in 1998 due to low commodity
prices spurred by a lack of demand, especially from the faltering Asian
economies. We have pared back on what we think are some of the weakest names
here, but we will continue to hold commodity-backed bonds that we believe
are strong enough to make it through the economic cycle. We are collecting
very high income streams from these bonds and feel that as the cycle turns
more favorable, the stronger issues should rebound and regain the ability to
raise prices.
Q. CAN YOU DISCUSS A COUPLE OF EXAMPLES OF HOW MFS ORIGINAL RESEARCH WAS
EFFECTIVELY USED TO THE FUND'S BENEFIT?
A. Acme Metals, a company whose steel business backed some municipal bonds that
we had been holding, was sold out of the portfolio based on what our
research indicated was a weakening financial position. Our analysts saw that
the company was having difficulty bringing a new mill on line, and this was
raising the potential for customers to defect to other suppliers. We sold
the bonds at a favorable price in the municipal market and, shortly
thereafter, the company declared bankruptcy. A good example of mistake
avoidance occurred with a series of bonds being sold for a hospital in
Pennsylvania. We did not buy the bonds because our research showed us that
the project's backers were experiencing financial trouble, despite
conventional wisdom that the organization was a possible "turnaround"
candidate. Therefore, we passed on the opportunity to buy the bonds, and the
hospital subsequently declared bankruptcy.
Q. WHAT IS YOUR OUTLOOK FOR THE HIGH-YIELD MUNICIPAL BOND MARKET IN 1999?
A. We are seeing lots of interest in the high-yield municipal market from
investors. We see the difference in yields remaining tight between high-
yield and high-quality municipal bonds, so we will continue to be cautious
about taking on added risk for what may be only minimal yield advantage.
We're also closely watching certain sectors. Among the more interesting of
these is the health care sector, which is showing some weakness due to
changes in Medicare funding by the federal government and the bankruptcies
of certain hospitals. These events may result in this sector offering some
values in 1999. Of course, we would only take advantage of these types of
issues if our Original Research indicated that the values are built on solid
fundamentals and a promising outlook.
/s/ Michael W. Roberge
Michael W. 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.
<PAGE>
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PORTFOLIO MANAGER'S PROFILE
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MICHAEL W. ROBERGE IS A 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 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
SERVICE, 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 AS WELL AS
A 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.
<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
CLASS C SEPTEMBER 25, 1998
SIZE: $1.5 BILLION NET ASSETS AS OF JANUARY 31, 1999
PERFORMANCE SUMMARY
The following information illustrates the historical performance of the Fund's
original share class in comparison to various market indicators. Performance
results include the deduction of the maximum applicable sales charge and reflect
the percentage change in net asset value, including reinvestment of dividends.
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. (See Notes to Performance Summary for more information.) 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, 1999)
MFS Municipal Lehman Brothers
High Income Municipal
Fund - Class A Bond Index
- ----------------------------------------
1/94 $ 9,523 $10,000
1/95 9,424 9,644
1/96 10,736 11,096
1/97 11,044 11,522
1/98 12,238 12,687
1/99 12,917 13,538
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended January 31, 1999)
MFS Municipal Lehman Brothers
High Income Municipal
Fund - Class A Bond Index
- ----------------------------------------
1/89 $ 9,521 $10,206
1/91 10,785 12,047
1/93 12,973 14,675
1/95 14,019 15,887
1/97 16,430 18,982
1/99 19,215 21,851
AVERAGE ANNUAL TOTAL RETURNS THROUGH JANUARY 31, 1999
CLASS A
1 Year 3 Years 5 Years 10 Years/Life
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Average Annual Total Return +5.54% +6.36% +6.29% +7.27%
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SEC Results +0.53% +4.65% +5.26% +6.75%
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CLASS B
1 Year 3 Years 5 Years 10 Years/Life
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Average Annual Total Return +4.62% +5.43% +5.29% +6.73%
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SEC Results +0.64% +4.53% +4.97% +6.73%
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CLASS C
1 Year 3 Years 5 Years 10 Years/Life
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Average Annual Total Return +5.05% +6.19% +6.19% +7.22%
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SEC Results +4.05% +6.19% +6.19% +7.22%
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COMPARATIVE INDICES
1 Year 3 Years 5 Years 10 Years/Life
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Average high-yield municipal debt
fund**+ +5.06% +6.65% +5.93% +7.53%
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Lehman Brothers Municipal Bond Index+ +6.73% +6.86% +6.25% +8.13%
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+ Source: CDA/Wiesenberger.
** Source: Lipper Analytical Services, Inc.
<PAGE>
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%. Class C shares ("C") have
no initial sales charge but, like B, have higher annual fees and expenses than
A. C SEC results reflect the 1% CDSC applicable to shares redeemed within 12
months.
B and C results include the performance and the operating expenses (e.g., Rule
12b-1 fees) of A for periods prior to the inception of B and C. Because
operating expenses of B and C are higher than those of A, B and C performance
generally would have been lower than A performance. The A performance included
in the B and C SEC performance has been adjusted to reflect the CDSC generally
applicable to B and C 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. See the
prospectus for details.
PORTFOLIO CONCENTRATION AS OF JANUARY 31, 1999
QUALITY RATINGS
Source: Standard & Poor's and Moody's
"AAA" 24.7%
"AA" 7.9%
"A" 3.2%
"BBB" 24.3%
"BB" 4.3%
"B" 2.7%
Nonrated 31.8%
Other 1.1%
The portfolio is actively managed, and holdings are subject to change.
<PAGE>
PORTFOLIO OF INVESTMENTS -- January 31, 1999
<TABLE>
<CAPTION>
Municipal Bonds - 97.7%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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<S> <C> <C>
General Obligation - 3.8%
Chicago, IL, FGIC, 5.125s, 2025 $ 5,000 $ 5,013,050
Cypress-Fairbanks, TX, Independent School District,
5s, 2018 4,500 4,533,345
District of Columbia, 6s, 2026 5,000 5,266,750
Houston, TX, Independent School District, 5.25s, 2017 5,500 5,670,555
Markham, IL, 9s, 2012 2,630 2,669,450
New York City, NY, 6.875s, 2003 120 131,995
New York City, NY, 7.1s, 2011 120 131,963
New York City, NY, FGIC, 5.875s, 2024 7,000 7,593,740
New York City, NY, 6.125s, 2025 3,675 4,017,032
New York City, NY, FGIC, 6.125s, 2025 8,000 8,984,320
New York City, NY, 5.5s, 2037 5,000 5,174,450
New York City, NY, FSA, 7s, 2022 70 76,638
Orleans Parish, LA, School Board, FGIC, 0s, 2015 9,860 4,512,232
Ukiah, CA, Unified School District, FGIC, 0s, 2017 4,795 1,949,167
Ukiah, CA, Unified School District, FGIC, 0s, 2018 4,085 1,563,656
West Warwick, RI, 7.3s, 2008 200 225,208
West Warwick, RI, 7.45s, 2013 570 646,819
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$ 58,160,370
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State and Local Appropriation - 2.3%
Delaware Valley, PA, Regional Finance Authority,
7.031s, 2018(++) $ 7,000 $ 8,251,880
District of Columbia, Certificates of Participation,
7.3s, 2013 2,500 2,787,500
New York Dormitory Authority Rev., FSA, 5.25s, 2014 5,935 6,294,839
New York Dormitory Authority Rev., Office General
Services, 5s, 2018 5,000 4,956,900
New York Dormitory Authority Rev. (St. Clare's
Hospital), 5.3s, 2019 2,000 2,041,060
New York Dormitory Authority Rev. (Wyckoff Heights
Medical Center), 5.3s, 2021 1,000 1,018,830
New York Urban Development Corp. Rev., Correctional
Facilities, AMBAC, 5.25s, 2015 3,000 3,154,350
New York Urban Development Corp. Rev., Correctional
Facilities, AMBAC, 5.25s, 2016 5,000 5,191,250
San Diego, CA, Convention Center Expansion Financing
Authority, 5.25s, 2015 2,000 2,109,140
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$ 35,805,749
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Refunded and Special Obligations - 20.0%
Arapahoe County, CO, Capital Improvement, Highway
Rev., 0s, 2005 $76,375 $ 28,708,599
Arapahoe County, CO, Capital Improvement, Highway
Rev., 0s, 2005 69,000 11,129,700
Austin, TX, Utilities System Rev., 10.75s, 2000 1,780 1,947,480
Clermont County, OH, Hospital Facilities Rev. (Mercy
Health Systems), AMBAC, MVRICs, 9.271s, 2001(++) 1,300 1,559,792
Colorado Health Facilities Authority, Retirement
Facilities Rev. (Liberty Heights), 0s, 2022 6,850 2,014,174
Colorado Health Facilities Authority, Retirement
Facilities Rev. (Liberty Heights), 0s, 2024 29,295 7,778,408
Daphne, AL, Special Care Facilities Financing
Authority (1st Mortgage Rev.), 0s, 2008 89,975 60,538,779
Daphne, AL, Special Care Facilities Financing
Authority (2nd Mortgage Rev.), 0s, 2008 4,500 3,027,780
Daphne, AL, Special Care Facilities Financing
Authority (Presbyterian), 0s, 2008 48,475 9,255,817
Denver, CO, City & County Airport Rev., 8s, 2000 100 109,770
Denver, CO, City & County Airport Rev., 8.5s, 2000 255 282,099
Denver, CO, City & County Airport Rev., 7.75s, 2001 425 479,583
Denver, CO, City & County Airport Rev., 8.75s, 2001 1,530 1,766,691
Denver, CO, City & County Airport Rev., 8.875s, 2001 1,325 1,534,336
Desert Hospital District, CA, Hospital Rev.
(Desert Hospital Corp.), 9.354s, 2002(++) 4,000 4,901,320
District of Columbia, Hospital Rev. (Washington
Hospital), 7.125s, 2002 1,750 1,974,420
Doylestown, PA, Hospital Authority (Doylestown
Hospital), 7.2s, 2003 2,200 2,548,062
Fairfax County, VA, Redevelopment & Housing Authority
(Little River Glen), 8.95s, 1999 1,980 2,057,161
Fairfax, Fauquier & Loudoun Counties, VA, Health
Center Commission, Nursing Home Rev., 9s, 2000 1,840 2,030,348
Hannibal, MO, Industrial Development Authority
(Hannibal Regional Healthcare), 9.5s, 2001+ 3,000 3,523,560
Illinois Health Facilities Rev. (Memorial Hospital-
Woodstock), 7.25s, 2002 1,500 1,691,370
Jefferson County, OH, Asset Guaranty, 7.125s, 2005 8,660 10,481,544
Jenks Township, PA, Municipal Authority Rev., 8s, 2003 4,650 5,494,068
Kansas City, MO, Industrial Development Authority,
Retirement Facility Rev. (Kingswood), 9s, 2003 5,250 6,591,270
Maine Health & Higher Education Facilities Authority
(St. Mary's General Hospital), 8.625s, 1999 5,140 5,358,501
Massachusetts Health & Educational Facilities
Authority (Fairview Extended Care Facility),
10.25s, 2001 3,000 3,464,400
Massachusetts Industrial Finance Agency (Glenmeadow
Retirement Community), 8.375s, 2006 2,300 2,962,814
Massachusetts Industrial Finance Agency (Glenmeadow
Retirement Community), 8.625s, 2006 3,520 4,588,038
Massachusetts Industrial Finance Agency, Tunnel Rev.
(Mass. Turnpike), 9s, 2000 10,745 11,929,744
Mesa County, CO, Residual Rev., 0s, 2003 25,125 9,216,604
Mississippi Hospital Equipment & Facilities Authority
Rev. (Rush Medical Foundation), 8.75s, 2001 2,800 3,127,292
New Lenox, IL, Community Park Development Authority,
8.25s, 2004 4,205 5,186,321
New York City, NY, 6.875s, 2002 880 974,309
New York City, NY, 7.1s, 2002 880 979,889
New York City, NY, 6.125s, 2006 1,325 1,519,126
New York City, NY, FSA, 7s, 2002 1,630 1,812,886
New York Local Government Assistance Corp., 7s, 2001 800 876,112
North Carolina Medical Care Commission, Hospital Rev.
(Valdese General), 8.75s, 2001 1,820 2,098,879
Prince William County, VA, Industrial Development
Authority, Residential Care Facility (Westminster
at Lake Ridge), 10s, 2002 3,500 4,176,725
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2005 1,500 1,197,270
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2007 4,000 2,912,760
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2008 5,400 3,761,208
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2011 13,400 7,953,168
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., 0s, 2028 13,450 3,273,326
South Carolina Public Service Authority (Santee
Coop), 7.1s, 2001 2,000 2,206,720
South Tucson, AZ, Municipal Property Corp., Municipal
Facilities Rev., 8.75s, 2000 865 934,555
Spirit Lake, IA, Industrial Development Rev. (Crystal
Tips, Inc.), 9.75s, 2008# 4,807 6,647,085
Telluride, CO, Gondola Transit Co., 11.5s, 2012 5,025 8,263,914
Telluride, CO, Gondola Transit Co., 11.5s, 2012 975 1,551,118
Texas Turnpike Authority (Houston Ship Channel
Bridge), 12.625s, 2002 21,090 27,440,621
Virgin Islands Public Financing Authority, 7.25s, 2002 2,000 2,294,460
Walton, GA, Industrial Development Rev. (Ultima
Rubber Products), 10s, 2000 4,075 4,495,988
Washington Public Power Supply System Rev.
(Nuclear Project #1), 14.375s, 2001 600 685,614
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 1999 80 80,863
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2000 85 89,418
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2001 95 103,341
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2002 115 128,609
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2003 130 149,230
Williamsburg County, SC, School District, Public
Facilities Rev., 7.5s, 2003 2,175 2,533,940
--------------
$ 306,400,979
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Airport and Port Revenue - 6.8%
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.4s, 2018 $ 2,575 $ 2,675,425
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.5s, 2018 4,500 4,802,940
Chicago, IL, O'Hare International Airport, Special
Facilities Rev. (United Airlines), 8.85s, 2018 5,730 6,307,183
Cleveland, OH, Airport Special Facilities Rev.
(Continental Airlines), 9s, 2019 9,120 9,725,659
Dallas-Fort Worth, TX, International Airport Facility
Improvement Corp. (Delta), 7.625s, 2021 4,500 4,912,740
Denver, CO, City & County Airport Rev., 8.875s, 2012 3,675 4,176,527
Denver, CO, City & County Airport Rev., 7.75s, 2021 1,625 1,788,020
Denver, CO, City & County Airport Rev., 8.5s, 2023 2,695 2,933,076
Denver, CO, City & County Airport Rev., 8.75s, 2023 4,240 4,783,314
Denver, CO, City & County Airport Rev., 8s, 2025 1,040 1,123,803
Denver, CO, City & County Airport Rev., 6.875s, 2032 7,130 7,693,056
Fulton County, GA, Development Authority, 5.3s, 2013 1,000 1,007,100
Hillsborough County, FL, Aviation Authority Rev. (US
Air), 8.6s, 2022 4,275 4,777,270
Kenton County, KY, Airport Board Special Facilities
(Delta Airlines), 7.5s, 2020 16,570 18,145,144
Port Authority, NY (JFK International Air Terminal),
MBIA, 5.75s, 2022 7,000 7,541,030
Tulsa, OK, Municipal Airport Trust Rev. (American
Airlines), 7.375s, 2020 4,000 4,284,720
Tulsa, OK, Municipal Airport Trust Rev. (American
Airlines), 7.6s, 2030 14,210 15,421,545
Wayne Charter County, MI, Airport Rev. (Detroit
Metropolitan Wayne County), 5s, 2019 3,000 2,950,260
--------------
$ 105,048,812
- ------------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 11.0%
Alaska Industrial Development & Export Authority,
Power Rev. (Upper Lynn Canal Regional Power),
5.875s, 2032 $ 1,800 $ 1,834,704
Calcasieu Parish, LA, Industrial Development Board,
Pollution Control Rev. (Entergy Gulf States, Inc.),
5.45s, 2010 4,000 4,026,840
Clark County, NV, Industrial Development Rev. (Nevada
Power Co.), 5.6s, 2030 10,000 9,996,900
Clark County, NV, Industrial Development Rev. (Nevada
Power Co.), 5.9s, 2032 9,000 9,127,710
Clark County, NV, Industrial Development Rev. (Nevada
Power Co.), FGIC, 6.7s, 2022 4,000 4,369,080
Connecticut Development Authority, Pollution Control
Rev. (Connecticut Light & Power), 5.85s, 2028 3,300 3,325,509
Farmington, NM, Pollution Control Rev. (Tucson
Electric Power Co.), 6.95s, 2020 3,000 3,357,210
Long Island, NY, Power Authority Rev., FSA, 5.125s,
2016 4,000 4,103,800
Long Island, NY, Power Authority Rev., 5s, 2018 11,000 11,051,700
Long Island, NY, Power Authority Rev., FSA, 5.125s, 2022 3,000 3,033,360
Midland, MI, Environmental Development Authority,
Pollution Control Rev. (Midland Cogeneration),
9.5s, 2009 4,500 4,851,405
Municipal Electric Authority, GA, Project#1, AMBAC,
8.426s, 2022(++) 9,900 11,496,375
New Hampshire Business Finance Authority, Pollution
Control Rev. (United Illuminating Co.), 5.875s, 2033 2,985 3,066,192
New Jersey Economic Development Authority (Vineland
Cogeneration), 7.875s, 2019 7,550 8,262,041
New York City, NY, Industrial Development Rev.
(Brooklyn Navy Yard Cogeneration Partners), 5.65s, 2028 7,000 7,177,240
New York Research and Development Authority,
Electrical Facilities Rev. (Consolidated Edison),
AMBAC, 7.5s, 2026 4,750 4,948,075
New York Research and Development Authority,
Electrical Facilities Rev. (Long Island Lighting),
7.15s, 2019 1,650 1,800,200
New York Research and Development Authority,
Electrical Facilities Rev. (Long Island Lighting),
7.15s, 2022 6,050 6,600,731
Ohio Water Development, Pollution Control Rev.
(Cleveland Electric), 8s, 2023 4,700 5,393,767
Pennsylvania Economic Development Financing
Authority, Resources Recovery Rev., 6.5s, 2013 2,300 2,440,461
Pennsylvania Economic Development Financing
Authority, Resources Recovery Rev., 6.6s, 2019 5,000 5,308,850
Pima County, AZ, Industrial Development Authority
(Tuscon Electric Power Co.), 6s, 2029 16,000 15,990,560
Pittsylvania County, VA, Industrial Development
Authority, 7.55s, 2019 10,000 10,992,700
San Antonio, TX, Electric & Gas Rev., 5s, 2018 7,500 7,515,825
Southern California Public Power Authority,
Transmission Project Rev., RIBS, 7.812s, 2012(++) 7,850 9,127,430
West Feliciana Parish, LA, Pollution Control Rev.
(Gulf States Utilities Co.), 5.8s, 2015 2,500 2,555,025
West Feliciana Parish, LA, Pollution Control Rev.
(Gulf States Utilities Co.), 9s, 2015 2,500 2,706,600
West Feliciana Parish, LA, Pollution Control Rev.
(Gulf States Utilities Co.), 8s, 2024 4,000 4,192,240
--------------
$ 168,652,530
- ------------------------------------------------------------------------------------------------
Health Care Revenue - 15.7%
Baltimore County, MD, Nursing Facility Mortgage Rev.
(Eastpoint Rehabilation & Nursing Center), 6.75s, 2028 $ 1,250 $ 1,240,725
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.25s, 2001 170 168,256
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 7.75s, 2006 395 384,908
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.125s, 2016 1,420 1,361,439
Bell County, TX, Health Facilities Development Corp.
(Advanced Living Technology), 8.5s, 2026 3,150 3,012,502
Bell County, TX, Health Facilities Development Corp.
(Kings Daughters Hospital), 9.25s, 2008 1,075 1,125,235
Berlin, MD, Hospital Rev. (Atlantic General
Hospital), 8.375s, 2022 1,327 1,421,306
Brevard County, FL, Health Facilites Authority
(Beverly Enterprises), 10s, 2010 1,245 1,344,824
Cambria County, PA, Industrial Development Authority
(Beverly Enterprises), 10s, 2012 1,020 1,338,526
Cheneyville, LA, Westside Habilitation Center,
8.375s, 2013 5,800 6,349,202
Chester County, PA, Health & Education Facilities
Authority (Jefferson Health Systems), 5.375s, 2027 5,000 5,067,300
Chester County, PA, Industrial Development Authority
(RHA/PA Nursing Home), 10.125s, 2019 1,908 1,640,880
Connecticut Health & Educational Facilities (Johnson
Evergreen), 8.5s, 2014 1,350 1,462,901
Contra Costa County, CA, Residential Rental
Facilities Rev. (Cypress Meadows), 7s, 2028 3,000 2,994,750
Denver, CO, Health & Hospital Rev., 5.375s, 2018 3,700 3,708,658
Denver, CO, Health & Hospital Rev., 5.375s, 2028 5,000 5,003,500
District of Columbia, Hospital Rev. (Hospital for
Sick Children), 8.875s, 2021 930 1,001,136
Elkhart County, IN, Hospital Authority Rev. (Elkhart
General Hospital, Inc), 5.25s, 2018 1,000 1,000,500
Grand Junction, CO, Hospital Rev. (Community
Hospital), 6.9s, 2017 2,900 3,028,470
Illinois Health Facilities Authority Rev. (Centegra
Health Systems), 5.25s, 2018 1,500 1,474,635
Indiana Health Facilities Financing Authority Rev.
(Metro Health/Indiana, Inc.), 6.3s, 2023 4,000 4,016,080
Iowa Finance Authority, Health Care Facilities Rev.
(Care Initiatives), 5.75s, 2018 1,200 1,203,912
Jacksonville, FL, Health Facilities Authority
(National Benevolent), 7s, 2022 1,000 1,099,700
Jacksonville, FL, Industrial Development Rev.
(Beverly Enterprises), 9.75s, 2011 875 922,836
Jefferson County, KY, Health Facilities Rev. (Beverly
Enterprises), 10.125s, 2008 2,045 2,126,432
Kansas City, MO, Industrial Development Authority
(Bishop Spencer Place, Inc.), 8s, 2024 7,720 8,453,014
Lee County, FL, Industrial Development Authority
(Beverly Enterprises), 10s, 2010 835 916,964
Louisiana Public Facilities Authority (Southwest
Medical Center), 11s, 2006 1,226 294,346
Lufkin, TX, Health Facilities Development Corp.
(Memorial Health System of East Texas), 5.7s, 2028 2,800 2,835,364
Luzerne County, PA, Industrial Development Authority
(Beverly Enterprises), 10.125s, 2008 1,150 1,218,322
Martin County, FL, Industrial Development Authority
(Beverly Enterprises), 9.8s, 2010 2,550 2,695,579
Massachusetts Health & Educational Facilities
Authority Rev. (Caritas Christi), 5.7s, 2015 2,500 2,529,100
Massachusetts Health & Educational Facilities
Authority Rev. (St. Anne's Hospital), 9.375s, 2014 5,000 4,998,450
Massachusetts Health & Educational Facilities
Authority Rev. (St. Memorial Medical Center), 6s, 2023 13,530 13,575,867
Massachusetts Industrial Finance Agency, 9.25s, 2009 3,745 3,835,629
Massachusetts Industrial Finance Agency (GF Revere),
8.875s, 2025 7,635 8,788,572
Massachusetts Industrial Finance Agency (Metropolitan
Health Foundation, Inc.), 6.75s, 2027 5,830 6,085,704
Massachusetts Industrial Finance Agency (WNR, Inc.),
9s, 2023(+) 1,050 899,220
Michigan Hospital Finance Authority Rev. (Genesys
Regional Medical), 5.375s, 2013 1,350 1,369,575
Michigan Hospital Finance Authority Rev. (Genesys
Regional Medical), 5.5s, 2018 9,000 9,082,080
Michigan Hospital Finance Authority Rev. (Genesys
Regional Medical), 5.5s, 2027 4,000 4,021,320
Millbrae, CA, Residential Facility (Magnolia Of
Millbrae), 7.375s, 2027 3,000 3,185,940
Mississippi Business Finance Corp., Health Facilities
Rev. (Medical Foundation, Inc.), 5.375s, 2015 1,000 981,290
Mississippi Business Finance Corp., Health Facilities
Rev. (Medical Foundation, Inc.), 5.625s, 2023 2,000 1,980,460
Montgomery County, PA, Higher Education & Health
Authority Rev. (AHF/Montgomery), 10.5s, 2020 2,435 2,569,217
New Hampshire Business Finance Authority, Health Care
Facilities Rev. (Metropolitian Health Foundation, Inc.),
6.55s, 2028 3,000 3,014,580
New Hampshire Higher Educational & Health Facilities
Authority Rev. (Littleton Hospital Assn.), 5.9s, 2018 1,500 1,524,495
New Hampshire Industrial Development Authority (Tall
Pines), 11.25s, 2016 2,200 2,274,426
New Jersey Economic Development Authority (Burnt
Tavern Convalescent Center), 9s, 2013 1,700 1,864,883
New Jersey Economic Development Authority (Courthouse
Convalescent Center), 8.7s, 2014 1,350 1,435,860
New Jersey Economic Development Authority (Geriatric
& Medical Services), 9.625s, 2004 380 413,964
New Jersey Economic Development Authority (Geriatric
& Medical Services), 10.5s, 2020 3,000 3,155,460
New Jersey Economic Development Authority (Geriatric
& Medical Services), 9.625s, 2022 1,350 1,466,370
New Jersey Economic Development Authority (Greenwood
Health Care), 9.75s, 2011 2,825 2,985,601
New Jersey Economic Development Authority (Wanaque
Convalescent Center), 8.5s, 2009 700 772,191
New Jersey Economic Development Authority (Wanaque
Convalescent Center), 8.6s, 2011 1,000 1,106,130
New Jersey Health Care Facilities Financing Authority
(Cherry Hill), 8s, 2027 4,000 4,382,120
New Mexico Hospital Equipment Loan Council, Hospital
Rev. (Memorial Medical Center, Inc.), 5.375s, 2018 2,600 2,573,402
North Carolina Medical Care Commission, Hospital Rev.
(Duke University Hospital), 5.25s, 2026 5,000 5,020,550
North Carolina Medical Care Commission, Hospital Rev.
(Pitt County Memorial Hospital), 5s, 2018 4,450 4,410,929
North Central, TX, Health Facilities Development Corp.
(Baylor University Medical Center), 9.614s, 2016 (++) 4,300 5,105,562
Ohio County, WV County Commission Health System
(Ohio Valley Medical Center), 5.75s, 2013 5,000 4,996,850
Okaloosa County, FL, Retirement Rental Housing Rev.
(Beverly Enterprises), 10.75s, 2003 2,300 2,359,846
Osceola County, FL, Industrial Development Rev.,
Community Provider Pooled Loan, 7.75s, 2017 2,700 2,900,151
Portsmouth, VA, Industrial Development Authority
(Beverly Enterprises), 10s, 2011 1,875 2,080,931
Reedley, CA, Certificates of Participation (Mennonite
Home), 7.5s, 2026 5,380 5,662,988
Rochester, MN, Health Care Facilities Rev. (Mayo
Medical Foundation), 8.79s, 2021 2,000 2,162,760
San Francisco, CA, City & County (Coventry Park),
8.5s, 2026 9,435 10,618,998
Santa Fe, NM, Industrial Development Rev. (Casa Real
Nursing Home), 9.75s, 2013 1,785 1,955,307
Seminole County, FL, Industrial Development Authority
(Friendly Village), 10s, 2011 800 810,768
Sierra View, CA, Local Health Care District, 5.4s, 2022 4,000 3,941,640
Springfield, TN, Health & Educational Facilities
(Northcrest Medical Center), 5.25s, 2018 5,000 4,921,750
Springfield, TN, Health & Educational Facilities
(Northcrest Medical Center), 5.375s, 2024 5,000 4,928,850
Suffolk County, NY, Industrial Development Agency
(APPLE), 9.75s, 2015** 3,680 1,840,000
Vincennes, IN, Economic Development Authority (Lodge
of the Wabash), 12.5s, 2015 1,930 1,891,400
Waterford Township, MI, Economic Development Rev.
(Canterbury Health Care), 6s, 2039 3,190 2,966,700
Westerville, OH, Industrial Development Rev. (1st
Mortgage Health Care), 10s, 2008 465 470,817
Wilkins Area, PA, Industrial Development Authority
(Beverly Enterprises), 10s, 2011 1,000 1,114,950
Wilkinsburg, PA, Municipal Authority Health
(Monroeville Christian), 8.25s, 2027 7,100 7,273,240
Yonkers, NY, Industrial Development Agency (St.
Joseph Hospital), 6.15s, 2015 2,000 2,011,500
--------------
$ 240,230,595
- ------------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 12.9%
Baltimore County, MD, Pollution Control (Bethelehem
Steel), 7.55s, 2017 $ 1,850 $ 2,021,680
Burns Habor, IN, Solid Waste Disposal Facilities Rev.
(Bethlehem Steel), 8s, 2024 10,455 11,596,581
Butler, AL, Industrial Developement Board, Solid
Waste Rev. (James River), 8s, 2028 4,500 5,147,550
Cambria County, PA, Industrial Development Authority
(Beverly Enterprises), 7.5s, 2015 4,390 4,804,899
Courtland, AL, Industrial Development Board, Solid
Waste Disposal Rev. (Champion International Corp.),
6.375s, 2029 2,500 2,648,725
DeQueen, AR, Industrial Development Board
(Weyerhaeuser Co.), 9s, 2006 1,000 1,003,710
Eastern Band of Cherokee Indian Community, NC
(Carolina Mirror Co.), 10.25s, 2009+ 2,885 2,909,898
Eastern Band of Cherokee Indian Community, NC
(Carolina Mirror Co.), 11s, 2012+ 950 960,288
Florence County, SC, Industrial Development Rev.
(Stone Container Corp.), 7.375s, 2007 2,995 3,208,484
Gulf Coast Waste Disposal Authority, TX (USX Corp.),
5.5s, 2017 3,000 3,068,640
Hardeman County, TN (Correctional Facilities Corp.),
7.75s, 2017 6,500 7,250,815
Hernando County, FL, Water & Sewer Rev. (Florida
Crushed Stone), 8.5s, 2014 8,555 9,901,728
Hodge Village, LA, Utilities Rev. (Stone Container),
9s, 2010 6,800 7,184,540
Illinois Development Finance Authority, Solid Waste
Disposal Rev. (Waste Management, Inc.), 5.05s, 2010 4,000 4,000,000
Indiana Development Finance Authority Rev. (Inland
Steel), 5.75s, 2011 3,000 2,852,220
Indiana Development Finance Authority Rev. (Inland
Steel), 7.25s, 2011 10,000 10,543,700
Lawrenceburg, TN, Industrial Development Board
(Tridon, Inc.), 9.625s, 2006 2,300 2,396,393
Maine Finance Authority (Bowater), 7.75s, 2022 8,500 9,456,590
Massachusetts Port Authority Rev., Special Facilities
(Bosfuel), MBIA, 5.75s, 2039 5,000 5,261,750
Mesa County, CO (Joy Technologies), 8.5s, 2006 1,350 1,499,540
New Jersey Economic Development Authority (Holt
Hauling & Warehousing), 8.4s, 2015 4,000 4,305,800
New Jersey Economic Development Authority (Holt
Hauling & Warehousing), 8.6s, 2017 8,000 8,653,920
Ohio Solid Waste Rev. (Republic Engineered Steels),
8.25s, 2014 7,000 7,506,730
Onondaga County, NY, Industrial Development Agency
(Solvay Paperboard), 6.8s, 2014 3,800 3,872,276
Owyhee County, ID, Industrial Development Rev.
(Environsafe) 8.25s, 2002 4,000 4,254,600
Perry County, KY, Solid Waste Disposal Resources (TJ
International), 7s, 2024 11,000 11,942,480
Phenix City, AL, Industrial Development Board,
Environmental Improvement Rev. (Mead Coated Board),
5.3s, 2027 5,000 4,935,700
Philadelphia, PA, Industrial Development Authority Rev.
(Host Marriot LP), 7.75s, 2017 2,000 2,223,440
Port Corpus Christi, TX, Industrial Development Corp.
Rev. (Valero Energy Corp.), 5.4s, 2018 2,400 2,420,880
Port of New Orleans, LA (Avondale Industries), 8.5s,
2014 22,440 25,442,472
Port of New Orleans, LA (Continental Grain Co.),
7.5s, 2013 2,000 2,135,600
Power County, ID, Pollution Control Rev. (FMC Corp.),
5.625s, 2014 1,000 1,038,930
Savannah, GA, Economic Development Authority,
Industrial Development Rev. (Stone Container
Corp.), 7.4s, 2026 7,500 8,317,125
Spokane County, WA, Industrial Development Corp.
(Kaiser Aluminum & Chemical Corp.), 7.6s, 2027 3,700 4,095,900
Sweetwater County, WY, Solid Waste Disposal Rev.
(FMC Corp.), 6.9s, 2024 3,000 3,279,210
Tooele County, UT, Pollution Control Rev.
(Laidlaw Environmental Services), 7.55s, 2027 5,000 5,582,200
--------------
$ 197,724,994
- ------------------------------------------------------------------------------------------------
Insured Health Care Revenue - 2.1%
Chester County, PA, Health & Education Facilities
Authority (Jefferson Health Systems), AMBAC, 5.25s,
2022 $ 5,000 $ 5,078,550
Illinois Health Facilities Authority Rev. (Alexian
Brothers Health Systems), FSA, 5s, 2019 4,500 4,427,235
Illinois Health Facilities Authority Rev. (Sisters of
Mercy), MBIA, 9.532s, 2015(++) 5,200 6,317,480
Montana Health Facility Authority (Deaconess
Hospital), AMBAC, RIBS, 9.884s, 2016(++) 4,000 4,585,120
North Central, TX, Health Facilities Development
Corp. (Presbyterian Hospital), MBIA, 9.345s, 2021
(++) 4,000 4,716,200
Philadelphia, PA, Hospital & Higher Education
Facilities Authority Rev., FGIC, 6.504s, 2012(++) 2,000 2,168,340
Salt Lake City, UT, Hospital Rev. (Intermountain
Health Care), AMBAC, 9.287s, 2020(++) 1,250 1,462,112
Tyler, TX, Health Facilities Development Corp. (East
Texas Medical Center), MBIA, 5.6s, 2027 3,000 3,180,120
--------------
$ 31,935,157
- ------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 2.2%
Alexandria, VA, Redevelopment & Housing Finance
Authority (Jefferson Village Apartments), 9s, 2018 $ 2,000 $ 2,066,080
Austin, TX, Housing Finance Corp. (Woodland Heights
Apartments), 7.25s, 2027 4,000 4,652,160
California Statewide Community Development Authority
(Irvine Apartments), 5.25s, 2025 3,500 3,609,935
Dallas, TX, Housing Finance Corp., 8.5s, 2011 3,005 3,152,425
Florida Multi-Family Housing Finance Agency Rev.
(Center Court Apartments), 8.5s, 2018 1,775 1,856,934
Maplewood, RI, Housing Development Corp. (Terrace
Apartments), 6.9s, 2025 4,000 4,268,000
Maryland Community Development Administration, 0s,
2032 11,550 900,207
Memphis, TN, Health, Education & Housing Facilities
Board (Wesley Highland Terrace), 8.25s, 2015*** 6,300 5,670,000
Ridgeland, MS, Urban Renewal Multifamily Housing Rev.
(Northbrook Apartments), 6.25s, 2029 5,000 5,000,000
Texas Housing & Community Board (Harbors & Plumtree),
10s, 2026 1,760 1,810,371
Virginia Housing & Development Authority, 0s, 2017 2,060 390,844
--------------
$ 33,376,956
- ------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.5%
Black Hawk, CO, Device Tax Rev., 5.625s, 2021 $ 1,250 $ 1,239,613
Denver, CO, Urban Renewal Tax (Downtown Denver),
8.5s, 2013 1,300 1,353,196
Denver, CO, Urban Renewal Tax (Downtown Denver),
7.25s, 2017 1,250 1,346,825
Denver, CO, Urban Renewal Tax (Musicland), 8.5s, 2017 950 988,874
Virgin Islands Public Finance Authority, 6s, 2006 500 532,145
Virgin Islands Public Finance Authority, 5.875s, 2018 1,500 1,564,335
--------------
$ 7,024,988
- ------------------------------------------------------------------------------------------------
Single Family Housing Revenue - 5.9%
Arkansas Housing Development Agency, Residential
Mortgage Rev., 0s, 2015 $ 4,600 $ 805,966
California Housing Finance Authority Rev., FHA, 0s,
2023 3,770 575,868
California Rural Home Mortgage Finance Authority, 0s
to 1999, 5.75s to 2029 1,500 1,678,950
Chicago, IL, Capital Appreciation, Single Family
Mortgage Rev., FGIC, 0s, 2017 5,200 692,536
Colorado Housing Finance Authority, 6.55s, 2025 1,000 1,104,370
Colorado Housing Finance Authority, 7.4s, 2027 1,540 1,703,794
Colorado Housing Finance Authority, 6.35s, 2029 3,750 4,125,075
Connecticut Housing Finance Authority, 5.85s, 2028 4,115 4,323,013
Cook County, IL, Single Family Mortgage Rev., 0s,
2015 1,995 334,641
Corpus Christi, TX, Housing Finance Corp., MBIA, 0s,
2011 3,395 1,008,892
Delaware Single Family Housing Authority Rev., 6.75s,
2024 2,645 2,821,607
Denver, CO, City & County Single Family Mortgage
Rev., 0s, 2015 129 20,816
East Baton Rouge, LA, Capital Appreciation Rev.,
MBIA, 0s, 2010 6,815 1,929,327
El Paso, TX, Housing Finance Corp., Single Family
Mortgage Rev., 8.75s, 2011 580 625,895
Florida Housing Finance Agency Rev., 0s, 2016 6,435 1,121,942
Georgia Housing & Finance Authority Rev., FHA, 0s,
2031 65,900 6,027,873
Harris County, TX, Housing Finance Corp., 9.875s,
2014 482 484,203
Hawaii Housing Finance & Development Corp., 5.75s,
2030 5,000 5,198,000
Jefferson County, CO, Single Family Mortgage Rev.,
MBIA, 8.875s, 2013 210 222,470
Jefferson County, TX, Housing Finance Corp., Single
Family Mortgage Rev., MBIA, 0s, 2015 3,205 532,959
Maryland Community Development Administration, 7.3s,
2025 6,240 6,695,083
Maryland Community Development Administration, 6s,
2039 3,500 3,673,705
Mississippi Home Corp., Single Family Senior Housing
Rev., FGIC, 9.25s, 2012 162 171,600
Nebraska Investment Finance Authority Housing Rev.,
6.3s, 2028 2,485 2,636,113
Nevada Housing Division, Single Family Mortgage Rev.,
0s, 2015 936 181,750
New Castle County, DE, Single Family Mortgage Rev.,
FGIC, 0s, 2016 740 127,287
New Mexico Mortgage Finance Authority, Single Family
Mortgage Rev., 6.9s, 2024 2,530 2,679,068
North Carolina Housing Finance Agency, 5.85s, 2028 9,110 9,539,445
North Dakota Housing Finance Agency, Single Family
Mortgage Rev., 8.3s, 2012 280 289,831
North Dakota Housing Finance Agency, Single Family
Mortgage Rev., 6.8s, 2023 855 902,384
North Dakota Housing Finance Agency, Single Family
Mortgage Rev., 5.9s, 2029 2,230 2,326,559
Ohio Housing Finance Agency, Single Family Mortgage
Rev., GNMA, RIBS, 8.832s, 2031(++) 1,300 1,457,690
Oklahoma Housing Finance Agency, 5.375s, 2020 2,000 2,043,640
Reno County, KS, Single Family Mortgage Rev., AMBAC,
0s, 2014 2,500 427,200
Sedgwick & Shawnee Counties, KS, 5.5s, 2022 5,000 5,422,050
South Dakota Housing Development Authority, 5.8s,
2028 5,000 5,214,900
Texas Housing & Development Agency, Residential
Mortgage Rev., 8.4s, 2020 1,505 1,553,747
Texas Veteran Housing Assistance Program, 7s, 2025 1,285 1,380,026
Vermont Housing Finance Agency, 8.1s, 2022 1,510 1,550,211
Wisconsin Housing & Economic Development Authority,
0s, 2016 1,105 192,380
Wisconsin Housing & Economic Development Authority,
RIBS, 9.855s, 2022(++) 1,270 1,418,565
Wyoming Community Development Authority, 5.85s, 2028 4,875 5,128,695
--------------
$ 90,350,126
- ------------------------------------------------------------------------------------------------
Solid Waste Revenue - 0.5%
Massachusetts Industrial Finance Agency (Ogden
Haverhill), 5.6s, 2019 $ 5,000 $ 5,029,700
Southwestern Illinois Development Authority, Solid
Waste Disposal Rev., 5.9s, 2014 2,500 2,540,475
--------------
$ 7,570,175
- ------------------------------------------------------------------------------------------------
Student Loan Revenue - 0.9%
Arizona Student Loan Acquisition Authority, "C",
7.625s, 2010 $ 4,610 $ 5,140,934
Arizona Student Loan Acquisition Authority, "D",
7.25s, 2010 2,970 3,170,237
Pennsylvania Higher Education Assistance Agency,
AMBAC, 8.15s, 2022(++) 2,700 3,067,146
South Dakota Student Loan Rev. (Education Loans,
Inc.), 5.6s, 2020 2,700 2,748,600
--------------
$ 14,126,917
- ------------------------------------------------------------------------------------------------
Turnpike Revenue - 7.7%
Florida Mid-Bay Bridge Authority Rev., 8.5s, 2022 $ 2,500 $ 2,832,875
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2013 5,000 4,309,500
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2018 44,190 16,407,747
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2021 25,000 7,847,500
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2022 30,835 9,180,196
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2023 5,765 1,627,863
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2024 72,045 19,294,371
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 0s, 2030 22,935 4,469,573
Massachusetts Turnpike Authority, Metropolitan
Highway System Rev., MBIA, 5s, 2027 10,000 9,942,300
Metropolitan Transportation Authority, NY,
Transportation Facility Rev., 5.25s, 2017 5,000 5,102,150
New York Thruway Authority, Service Contract Rev.
(Local Highway & Bridges), MBIA, 5.375s, 2014 5,000 5,317,300
Pocahontas Parkway Assn., VA, Toll Road Rev., 0s, 2011 2,700 1,328,265
Pocahontas Parkway Assn., VA, Toll Road Rev., 0s, 2012 2,100 1,016,442
Pocahontas Parkway Assn., VA, Toll Road Rev., 0s, 2012 1,700 785,145
Pocahontas Parkway Assn., VA, Toll Road Rev., 0s, 2013 7,000 3,186,050
Pocahontas Parkway Assn., VA, Toll Road Rev., 0s, 2014 6,600 2,822,028
Pocahontas Parkway Assn., VA, Toll Road Rev., 0s, 2015 7,250 2,886,008
Pocahontas Parkway Assn., VA, Toll Road Rev., 0s, 2016 2,000 746,080
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Rev., MBIA, 5.25s, 2030 15,200 15,559,480
Telluride, CO, Gondola Transit Co., 9s, 2016 2,410 2,819,435
West Virginia Parkways, Economic Development &
Tourism Authority, FGIC, RIBS, 7.452s, 2019(++) 1,200 1,352,328
--------------
$ 118,832,636
- ------------------------------------------------------------------------------------------------
Universities - 1.7%
Illinois Development Finance Authority, Economic
Development Rev. (Latin School of Chicago), 5.6s, 2018 $ 850 $ 856,409
Illinois Development Finance Authority, Economic
Development Rev. (Latin School of Chicago), 5.65s, 2028 1,730 1,732,872
Islip, NY, Community Development Agency Rev. (New
York Institute of Technology), 7.5s, 2026 6,000 6,591,000
Massachusetts Development Finance Agency Rev.
(Williston Northampton School), 6.5s, 2028 1,700 1,712,648
Massachusetts Industrial Finance Agency (Curry College),
8s, 2014 1,400 1,509,144
Massachusetts Industrial Finance Agency (Emerson
College), 8.9s, 2018 3,000 3,253,050
New Hampshire Higher Educational & Health Facilities
(Franklin Pierce Law Center), 5.5s, 2018### 1,200 1,208,556
New York Dormitory Authority Rev. (City University),
5s, 2018 10,000 9,913,400
--------------
$ 26,777,079
- ------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 1.1%
Detroit, MI, Sewer Disposal Rev., FGIC, 7.973s, 2023(++) $ 1,500 $ 1,782,630
Detroit, MI, Sewer Disposal Rev., FGIC, 7.973s, 2023(++) 500 555,135
Harrisburg, PA, Authority Water Rev., FGIC, 7.32s, 2015(++) 2,000 2,332,180
New York City, NY, Municipal Water Finance Authority,
5.75s, 2029 8,590 9,148,522
New York City, NY, Municipal Water Finance Authority,
FSA, 5.375s, 2026 2,500 2,575,700
--------------
$ 16,394,167
- ------------------------------------------------------------------------------------------------
Other - 2.6%
Brush, CO, Industrial Development Rev. (Training
Centers International), 9.5s, 2015** $ 8,789 $ 4,482,507
Colorado River, TX, Municipal Water District, 6.25s, 2004 3,000 3,014,610
Danville, VA, Industrial Development Authority Rev.
(Piedmont Mall), 8s, 2017 8,280 8,445,600
District of Columbia (National Public Radio), 7.7s, 2023 3,500 3,815,000
Harris County, TX, Cultural Education Facility (Space
Center Houston), 9.25s, 2023 70 73,484
Iowa Finance Authority Community Provider Rev. (Boys
& Girls Home), 6.25s, 2028 2,000 1,944,680
Lehigh County, PA, General Purpose Authority
(Kidspeace Obligation Group), 6s, 2018 5,000 4,969,750
Martha's Vineyard, MA, Land Bank (Land Acquisition),
8.125s, 2011 2,600 2,785,978
Massachusetts Health & Educational Facilities
Authority (Learning Center for Deaf Children),
9.25s, 2014 800 833,696
Massachusetts Industrial Finance Agency (Brandon
Residential Treatment), 8.75s, 2024 5,170 5,827,882
St. Louis County, MO, Industrial Development
Authority (Eagle Golf Enterprises), 10s, 2005 2,200 2,405,722
St. Louis County, MO, Industrial Development
Authority (Kiel Center Arena), 7.875s, 2024 1,000 1,094,570
--------------
$ 39,693,479
- ------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $1,363,842,176) $1,498,105,709
- ------------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 1.7%
- ------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ------------------------------------------------------------------------------------------------
California Statewide Community Development (Sutter
Health), due 07/01/15 $ 4,300 $ 4,300,000
District of Columbia Rev., due 08/15/38 6,200 6,200,000
Harris County, TX, Industrial Development Corp.
(Shell Oil Co.), due 04/01/27 6,200 6,200,000
Kansas City, MO, Industrial Development Hospital,
MBIA, due 10/15/15 800 800,000
Long Island, NY, Power Authority Rev., due 05/01/33 3,300 3,300,000
Massachusetts Health & Educational Facilities
Authority, MBIA, due 01/01/35 500 500,000
New York City Municipal Water Finance Authority,
FGIC, due 06/15/23 2,200 2,200,000
Orange County, CA, Sanitation District, AMBAC, due
08/01/16 2,700 2,700,000
Uinta County, WY, Pollution Control Rev. (Chevron
USA, Inc.), due 04/01/10 100 100,000
Uinta County, WY, Pollution Control Rev. (Chevron
USA, Inc.), due 08/15/20 300 300,000
- ------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Amortized Cost and Value $ 26,600,000
- ------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,390,442,176) $1,524,705,709
Other Assets, Less Liabilities - 0.6% 9,707,341
- ------------------------------------------------------------------------------------------------
Net assets - 100.0% $1,534,413,050
- ------------------------------------------------------------------------------------------------
** Non-income producing security-in default.
*** Security accruing partial interest-in default.
# Payment-in-kind security.
### Security segregated as collateral for an open futures contract.
+ Restricted security.
(+) Security valued by or at the direction of Trustees.
(++) Inverse floating rate security.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
JANUARY 31, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $1,390,442,176) $1,524,705,709
Cash 47,369
Receivable for daily variation margin on open futures
contracts 16,875
Receivable for Fund shares sold 7,638,749
Receivable for investments sold 9,141,207
Interest receivable 20,054,846
Other assets 8,794
--------------
Total assets $1,561,613,549
--------------
Liabilities:
Distributions payable $ 4,465,093
Payable for Fund shares reacquired 995,097
Payable for investments purchased 21,135,115
Payable to affiliates -
Management fee 69,281
Shareholder servicing agent fee 14,171
Distribution and service fee 178,958
Administrative fee 1,780
Accrued expenses and other liabilities 341,004
--------------
Total liabilities $ 27,200,499
--------------
Net assets $1,534,413,050
==============
Net assets consist of:
Paid-in capital
1,571,026,885
Unrealized appreciation on investments 134,670,560
Accumulated net realized loss on investments (173,752,637)
Accumulated undistributed net investment income 2,468,242
--------------
Total $1,534,413,050
==============
Shares of beneficial interest outstanding 169,897,489
===========
Class A shares:
Net asset value per share
(net assets of $1,168,479,181 / 129,407,328 shares of
beneficial interest outstanding) $9.03
=====
Offering price per share (100 / 95.25) $9.48
=====
Class B shares:
Net asset value and offering price per share
(net assets of $363,062,151 / 40,172,395 shares of
beneficial interest outstanding) $9.04
=====
Class C shares:
Net asset value and offering price per share
(net assets of $2,871,718 / 317,766 shares of
beneficial interest outstanding) $9.04
=====
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,
Class B, and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations
- --------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1999
- --------------------------------------------------------------------------
Net investment income:
Interest income - $ 95,677,533
-------------
Expenses -
Management fee $ 8,822,060
Trustees' compensation 72,195
Shareholder servicing agent fee 1,629,155
Distribution and service fee (Class B) 2,756,789
Distribution and service fee (Class C) 4,219
Administrative fee 170,901
Custodian fee 355,527
Printing 79,749
Postage 95,341
Auditing fees 40,980
Legal fees 47,591
Miscellaneous 585,510
-------------
Total expenses $ 14,660,017
Fees paid indirectly (301,289)
Reduction of expenses by investment adviser (201,831)
-------------
Net expenses $ 14,156,897
-------------
Net investment income $ 81,520,636
-------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 642,487
Futures contracts (267,114)
-------------
Net realized gain on investments $ 375,373
-------------
Change in unrealized appreciation (depreciation) -
Investments $ (7,044,022)
Futures contracts 407,027
-------------
Net unrealized loss on investments $ (6,636,995)
-------------
Net realized and unrealized loss on investments $ (6,261,622)
-------------
Increase in net assets from operations $ 75,259,014
=============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 81,520,636 $ 77,180,458
Net realized gain (loss) on investments 375,373 (43,492,930)
Net unrealized gain (loss) on investments (6,636,995) 93,915,575
-------------- --------------
Increase in net assets from operations $ 75,259,014 $ 127,603,103
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (66,082,785) $ (67,068,274)
From net investment income (Class B) (15,565,956) (10,428,729)
From net investment income (Class C) (19,190) --
-------------- --------------
Total distributions declared to shareholders $ (81,667,931) $ (77,497,003)
-------------- --------------
Net increase in net assets from Fund share transactions $ 169,066,341 $ 207,501,009
-------------- --------------
Total increase in net assets $ 162,657,424 $ 257,607,109
Net assets:
At beginning of period 1,371,755,626 1,114,148,517
-------------- --------------
At end of period (including accumulated undistributed
net investment income of $2,468,242 and $534,220,
respectively) $1,534,413,050 $1,371,755,626
============== ==============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
CLASS A
- ----------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 9.07 $ 8.73 $ 9.12 $ 8.60 $ 9.38
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.53 $ 0.57 $ 0.61 $ 0.61 $ 0.64
Net realized and unrealized gain
(loss) on investments (0.04) 0.34 (0.36) 0.59 (0.75)
------ ------ ------ ------ ------
Total from investment operations $ 0.49 $ 0.91 $ 0.25 $ 1.20 $(0.11)
------ ------ ------ ------ ------
Less distributions declared to
shareholders
from net investment income $(0.53) $(0.57) $(0.64) $(0.68) $(0.67)
------ ------ ------ ------ ------
Net asset value - end of period $ 9.03 $ 9.07 $ 8.73 $ 9.12 $ 8.60
====== ====== ====== ====== ======
Total return(+) 5.54% 10.81% 2.87% 13.92% (1.04)%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.81% 0.89% 0.93% 0.93% 1.04%
Net investment income 5.84% 6.42% 6.96% 6.83% 7.27%
Portfolio turnover 12% 19% 17% 20% 32%
Net assets at end of period (000
omitted) $1,168,479 $1,107,181 $988,178 $1,009,031 $920,043
# Per share data for the periods subsequent to January 31, 1995, are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses were calculated without reduction for this expense offset arrangement.
(+) 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.
(S) The investment adviser voluntarily waived a portion of its 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 $ 0.53 -- -- -- --
Ratios (to average net assets):
Expenses## 0.82% -- -- -- --
Net investment income 5.83% -- -- -- --
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 9.08 $ 8.74 $ 9.12 $ 8.60 $ 9.38
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.45 $ 0.49 $ 0.52 $ 0.52 $ 0.57
Net realized and unrealized gain (loss) on
investments (0.04) 0.34 (0.35) 0.59 (0.78)
------ ------ ------ ------ ------
Total from investment operations $ 0.41 $ 0.83 $ 0.17 $ 1.11 $(0.21)
------ ------ ------ ------ ------
Less distributions declared to shareholders
from net investment income $(0.45) $(0.49) $(0.55) $(0.59) $(0.57)
------ ------ ------ ------ ------
Net asset value - end of period $ 9.04 $ 9.08 $ 8.74 $ 9.12 $ 8.60
====== ====== ====== ====== ======
Total return 4.62% 9.87% 1.96% 12.78% (2.13)%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.69% 1.73% 1.86% 1.91% 2.10%
Net investment income 4.95% 5.50% 6.00% 5.84% 6.32%
Portfolio turnover 12% 19% 17% 20% 32%
Net assets at end of period (000 omitted) $363,062 $264,575 $125,971 $77,808 $55,675
# Per share data for the periods subsequent to January 31, 1995, are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser and distributor voluntarily waived a portion of their fees, respectively for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.45 $ 0.49 -- -- --
Ratios (to average net assets):
Expenses## 1.70% 1.80% -- -- --
Net investment income 4.94% 5.43% -- -- --
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
- ------------------------------------------------------------------------------
PERIOD ENDED JANUARY 31, 1999***
- ------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.10
------
Income from investment operations# -
Net investment income(S) $ 0.15
Net realized and unrealized loss on investments (0.06)
------
Total from investment operations $ 0.09
------
Less distributions declared to shareholders
from net investment income $(0.15)
------
Net asset value - end of period $ 9.04
======
Total return 0.96%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.75%+
Net investment income 4.45%+
Portfolio turnover 12%
Net assets at end of period (000 omitted) $2,872
*** For the period from the inception of Class C, September 25, 1998, through
January 31, 1999.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent. For fiscal years ending after
September 1, 1995, the Fund's expenses are calculated without reduction for
this expense offset arrangement.
(S) The investment adviser voluntarily waived a portion of its 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 $ 0.15
Ratios (to average net assets):
Expenses## 1.76%+
Net investment income 4.44%+
See notes to financial statements
<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.
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 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. During
the year ended January 31, 1999, accumulated undistributed net investment income
was increased by $2,081,317, accumulated net realized loss on investments was
decreased by $352,592, and paid in capital was decreased by $2,433,909, 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, 1999, the Fund, for federal income tax purposes, had a capital
loss carryforward of $173,677,480 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, 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), January 31, 2006,
($45,409,970) and January 31, 2007, ($6,151,771).
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 investment adviser has voluntarily agreed to waive a portion of its fee,
which is reflected as a reduction of expenses in the statement of operations.
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 $22,515 for the year ended
January 31, 1999.
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
$871,931 for the year ended January 31, 1999, as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted a distribution
plan relating to Class B and C 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 and C 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 and Class C shares,
and will pay to such security dealers all of the distribution fee attributed to
Class C shares. The service fee is intended to be consideration for services
rendered by the dealer with respect to Class B and C shares. MFD retains the
service fee for accounts not attributable to a securities dealer, which amounted
to $0, and $0 for Class B and Class C shares, respectively, for the year ended
January 31, 1999. Fees incurred under the distribution plan during the year
ended January 31, 1999, were 0.88% and 1.00% of average daily net assets
attributable to Class B and Class C shares on an annualized basis, respectively.
Certain purchases of Class A and Class C 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 year ended January 31,
1999, were $45,596, $767,533, and $92 for Class A, Class B, and Class C 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 $315,279,903 and $164,764,420, 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 $1,390,442,556
--------------
Gross unrealized appreciation $ 144,270,743
Gross unrealized depreciation (10,007,590)
--------------
Net unrealized appreciation $ 134,263,153
==============
(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. Transactions in
Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
YEAR ENDED JANUARY 31, 1999 YEAR ENDED JANUARY 31, 1998
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 30,441,333 $ 274,551,872 25,471,927 $ 224,128,497
Shares issued to shareholders
in reinvestment of
distributions 2,806,743 25,325,360 2,798,867 24,656,251
Shares reacquired (25,859,959) (233,386,980) 19,400,212) (171,063,899)
----------- -------------- ---------- --------------
Net increase 7,388,117 $ 66,490,252 8,870,582 $ 77,720,849
=========== ============== ========== ==============
<CAPTION>
Class B Shares
YEAR ENDED JANUARY 31, 1999 YEAR ENDED JANUARY 31, 1998
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 14,320,086 $ 129,318,514 16,825,264 $ 148,354,869
Shares issued to shareholders
in reinvestment of
distributions 560,385 5,061,249 387,829 3,429,277
Shares reacquired (3,840,591) (34,674,697) (2,492,160) (22,003,986)
----------- -------------- ---------- --------------
Net increase 11,039,880 $ 99,705,066 14,720,933 $ 129,780,160
=========== ============== ========== ==============
<CAPTION>
Class C Shares
PERIOD ENDED JANUARY 31, 1999*
-------------------------------
SHARES AMOUNT
- ------------------------------------------------------------
<S> <C> <C>
Shares sold 326,949 $ 2,954,503
Shares issued to shareholders
in reinvestment of
distributions 1,060 9,568
Shares reacquired (10,243) (93,048)
----------- ------------
Net increase 317,766 $ 2,871,023
=========== =============
* For the period from the inception of Class C, September 25, 1998, through January 31, 1999.
</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 year
ended January 31, 1999, was $10,780.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates. These financial instruments include futures contracts.
The notional or contractual amounts of these instruments represent the
investment the Fund has in particular classses of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
At January 31, 1999 the Fund had sufficient securities to cover any commitments
under these contracts.
Futures Contracts
UNREALIZED
APPRECIATION
DESCRIPTION EXPIRATION CONTRACTS POSITION (DEPRECIATION)
- ------------------------------------------------------------------------------
U.S. Treasury Bonds March 1999 270 Long $ (94,190)
Municipal Bond Index March 1999 270 Short 501,217
-----------
$ 407,027
===========
(8) 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, 1999, 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 PAR
DESCRIPTION ACQUISITION AMOUNT COST VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Eastern Band of Cherokee Indian Community, NC, 10.25s, 2009 11/25/86 $2,885,000 $2,962,419 $2,909,898
Eastern Band of Cherokee Indian Community, NC, 11s, 2012 09/19/86 950,000 858,875 960,288
Hannibal, MO, Industrial Development Authority, 9.5s, 2001 03/23/92 3,000,000 2,971,470 3,523,560
----------
$7,393,746
==========
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust III and Shareholders of MFS Municipal High
Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Municipal High Income Fund, including the schedule of portfolio investments as
of January 31, 1999, 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 five 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of January 31, 1999, 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, 1999, 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 five
years in the period then ended, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
March 10, 1999
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
- --------------------------------------------------------------------------------
IN JANUARY 1999, SHAREHOLDERS WERE MAILED A TAX FORM SUMMARY REPORTING THE
FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR YEAR 1998.
FOR FEDERAL INCOME TAX PURPOSES, 100% OF THE TOTAL DIVIDENDS PAID BY THE FUND
FROM NET INVESTMENT INCOME DURING THE YEAR ENDED JANUARY 31, 1999, IS DESIGNATED
AS AN EXEMPT-INTEREST DIVIDEND.
<PAGE>
<TABLE>
MFS(R) MUNICIPAL HIGH INCOME FUND
<S> <C>
TRUSTEES SECRETARY
Richard B. Bailey* - Private Investor; Stephen E. Cavan*
Former Chairman and Director (until 1991),
MFS Investment Management ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Peter G. Harwood - Private Investor
CUSTODIAN
J. Atwood Ives - Chairman and Chief Executive State Street Bank and Trust Company
Officer, Eastern Enterprises (diversified
services company) AUDITORS
Ernst & Young LLP
Lawrence T. Perera - Partner, Hemenway
& Barnes (attorneys) INVESTOR INFORMATION
For MFS stock and bond market outlooks, call
William J. Poorvu - Adjunct Professor, Harvard toll free: 1-800-637-4458 anytime from a
University Graduate School of Business touch-tone telephone.
Administration
For information on MFS mutual funds, call your
Charles W. Schmidt - Private Investor financial adviser or, for an information kit,
call toll free: 1-800-637-2929 any business day
Arnold D. Scott* - Senior Executive from 9 a.m. to 5 p.m. Eastern time (or leave a
Vice President, Director, and Secretary, message anytime).
MFS Investment Management
INVESTOR SERVICE
Jeffrey L. Shames* - Chairman, Chief MFS Service Center, Inc.
Executive Officer, and Director, P.O. Box 2281
MFS Investment Management Boston, MA 02107-9906
Elaine R. Smith - Independent Consultant For general information, call toll free:
1-800-225-2606 any business day from
David B. Stone - Chairman and Director, 8 a.m. to 8 p.m. Eastern time.
North American Management Corp.
(investment advisers) For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business day
INVESTMENT ADVISER from 9 a.m. to 5 p.m. Eastern time. (To use
Massachusetts Financial Services Company this service, your phone must be equipped with
500 Boylston Street a Telecommunications Device for the Deaf.)
Boston, MA 02116-3741
For share prices, account balances, and
DISTRIBUTOR exchanges, call toll free: 1-800-MFS-TALK
MFS Fund Distributors, Inc. (1-800-637-8255) anytime from a touch-tone
500 Boylston Street telephone.
Boston, MA 02116-3741
WORLD WIDE WEB
PORTFOLIO MANAGER www.mfs.com
Michael W. Roberge*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
MFS(R) MUNICIPAL HIGH ------------
INCOME FUND BULK RATE
U.S. POSTAGE
[logo] M F S(R) PAID
INVESTMENT MANAGEMENT MFS
WE INVENTED THE MUTUAL FUND(R) ------------
500 Boylston Street
Boston, MA 02116-3741
(c)1999 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MMH-2 3/99 48M 25/225/325
