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[logo] MFS(SM)
INVESTMENT MANAGEMENT
Semiannual Report
July 31, 1997
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MFS(R) HIGH INCOME FUND
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[GRAPHIC OMITTED]
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TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
Portfolio Manager's Overview ............................................... 2
Portfolio Manager's Profile ................................................ 3
Fund Facts ................................................................. 4
Performance Summary ........................................................ 4
Portfolio Concentration .................................................... 6
Portfolio of Investments ................................................... 7
Financial Statements .......................................................15
Notes to Financial Statements ..............................................23
Trustees and Officers ......................................................29
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HIGHLIGHTS
o FOR THE SIX MONTHS ENDED JULY 31, 1997, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 7.56%, CLASS B SHARES 7.19%,
CLASS C SHARES 6.98%, AND CLASS I SHARES 7.53%. (SEE PERFORMANCE SUMMARY
FOR MORE INFORMATION.)
o THE HIGH-YIELD MARKET REMAINED ONE OF THE BEST-PERFORMING FIXED-INCOME
ASSET CLASSES DURING THE FIRST HALF OF 1997, DUE IN PART TO A STRONG
ECONOMY AND A RESULTING LOW DEFAULT RATE.
o DEMAND FOR HIGH-YIELD BONDS HAS BEEN EXCEPTIONALLY STRONG, WITH NET
INFLOWS INTO HIGH-YIELD MUTUAL FUNDS OVER THE PAST YEAR BREAKING NEW
RECORDS AND MANAGERS OF INVESTMENT-GRADE ACCOUNTS BECOMING SIGNIFICANT
BUYERS OF HIGH- YIELD BONDS.
o GIVEN THE TIGHT LEVEL OF YIELD SPREADS AND THE LENGTH OF THIS ECONOMIC
EXPANSION, WE CONCENTRATED HOLDINGS ON THE BONDS OF BETTER-QUALITY
COMPANIES BECAUSE WE DO NOT THINK INVESTORS ARE ADEQUATELY COMPENSATED FOR
THE RISKS ASSOCIATED WITH LOWER-TIER CREDITS.
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<PAGE>
LETTER FROM THE CHAIRMAN
[Graphic Omitted - Photo of A. Keith Brodkin]
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still uncomfortably
high. While some lenders are beginning to tighten standards to address this
problem, consumer debt and personal bankruptcies continue to rise. Because of
this, plus changes in other indicators, such as a slight decline in average
hourly wages and only small gains in consumer spending on some big-ticket items,
the rapid pace of growth seen in the first quarter of 1997 slowed to an annual
rate of approximately 2.2% in the second quarter, which we consider a
more-sustainable, less-inflationary pace. While growth in the second quarter
slowed dramatically, we expect it to pick up once again in the second half of
the year, with real (inflation-adjusted) growth centering around 2 1/2%.
In the fixed-income markets, we have been encouraged by the Federal Reserve
Board's decision to not raise short-term interest rates at its July meeting. But
we cannot rule out the possibility of future monetary tightening in the second
half of the year if, as we now expect, the economy strengthens during the
balance of 1997. Therefore, our risk/reward outlook for the fixed-income markets
is neutral, and we believe that fixed-income investors should think in terms of
earning the coupon income from their investments rather than seeking possible
gains from price appreciation.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
------------------------------
A. Keith Brodkin
Chairman and President
August 12, 1997
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PORTFOLIO MANAGER'S OVERVIEW
[Graphic Omitted - Photo of Robert J. Manning]
Dear Shareholders:
For the six months ended July 31, 1997, Class A shares of the Fund provided a
total return of 7.56%, Class B shares 7.19%, Class C shares 6.98%, and Class I
shares 7.53%. All of these returns assume the reinvestment of distributions but
exclude the effects of any sales charges and compare to a 6.69% return for the
Lehman Brothers Corporate Bond Index (the Lehman Index) during the same period.
Because the Fund's portfolio generally consists of lower-rated issues, its
results will not necessarily mirror those of the Lehman Index, which is an
unmanaged, market-value-weighted index comprised of all public, fixed-rate,
nonconvertible, investment-grade corporate debt.
The high-yield market remained one of the best-performing fixed-income asset
classes during the first half of 1997. The market's strength was due in part to
a strong economy and a resulting low default rate, which has averaged only 1.6%
over the past 12 months. Demand for high-yield bonds has been exceptionally
strong, with net inflows into high-yield mutual funds over the past year
exceeding the levels recorded in any prior year. At the same time, managers of
investment-grade accounts also have been significant buyers of high-yield bonds.
Although new issuance of high-yield bonds is on track to challenge the
record level set in 1993, supply has not kept pace with demand. At the end of
June 1997, the yield on the Salomon Brothers High Yield Index (the Salomon
Index) was 9.28%, versus 6.48% for U.S. Treasury notes of comparable maturities
(the principal value and interest on U.S. Treasury securities are guaranteed by
the U.S. government if held to maturity). The Salomon Index is an unmanaged,
market-value-weighted index that includes public, nonconvertible, cash-pay, and
deferred-interest U.S. corporate bonds with remaining maturities of at least
seven years and credit ratings between "CCC" and "BB+." Although the spread
between these two yields has narrowed to a record low 2.80% from 3.22% at the
beginning of the year, we believe the economic environment remains favorable for
owning high-yield bonds due to the general outlook for moderate economic growth
and low inflation.
Given the tight level of yield spreads and the length of this economic
expansion, our investment strategy has focused on avoiding mistakes. We have
concentrated our holdings on bonds of better-quality companies because we do not
think investors are adequately compensated for the risks associated with
lower-tier credits. Two industries of note in which we are overweighted are
consumer products and general industrials. In the consumer products sector, we
are invested in such brand name companies as Westpoint Stevens and Sealy. Our
general industrial holdings represent a diversified group of niche manufacturing
companies that are typically leaders in their fields. Such companies include
International Knife, a dominant manufacturer of industrial cutting blades, and
Hayes Wheels, a global supplier of automotive wheels.
Meanwhile, we reduced our weighting in the energy sector because we felt
that the relatively low yields currently available were not appropriate
compensation for the commodity risk associated with these investments.
Respectfully,
/s/ Robert J. Manning
------------------------------
Robert J. Manning
Portfolio Manager
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PORTFOLIO MANAGER'S PROFILE
ROBERT J. MANNING BEGAN HIS CAREER AT MFS IN 1984 AS A RESEARCH ANALYST IN
THE HIGH YIELD BOND DEPARTMENT. A GRADUATE OF THE UNIVERSITY OF LOWELL AND
THE BOSTON COLLEGE GRADUATE SCHOOL OF MANAGEMENT, HE WAS NAMED VICE PRESIDENT
- INVESTMENTS IN 1988, SENIOR VICE PRESIDENT IN 1993, AND PORTFOLIO MANAGER
OF MFS() R HIGH INCOME FUND IN 1994. IN 1997, HE WAS NAMED HIGH YIELD FIXED
INCOME DEPARTMENT HEAD.
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FUND FACTS
OBJECTIVE: THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK HIGH
CURRENT INCOME BY INVESTING PRIMARILY IN FIXED-INCOME
SECURITIES RATED BELOW INVESTMENT GRADE ("BBB").
COMMENCEMENT OF
INVESTMENT OPERATIONS: CLASS A: FEBRUARY 17, 1978
CLASS B: SEPTEMBER 27, 1993
CLASS C: JANUARY 3, 1994
CLASS I: JANUARY 2, 1997
SIZE: $1.1 BILLION NET ASSETS AS OF JULY 31, 1997
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PERFORMANCE SUMMARY
Because mutual funds like MFS High Income Fund are designed for investors with
long-term goals, we have provided cumulative results as well as the average
annual total returns for Class A, Class B, Class C, and Class I shares for the
applicable time periods.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN AS OF JULY 31, 1997
CLASS A INVESTMENT RESULTS
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
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Cumulative Total Return +7.56% +16.37% +73.26% +150.55%
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Average Annual Total Return -- +16.37% +11.62% + 9.62%
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SEC Results -- +10.80% +10.54% + 9.09%
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CLASS B INVESTMENT RESULTS
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
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Cumulative Total Return +7.19% +15.53% +67.98% +142.89%
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Average Annual Total Return -- +15.53% +10.93% + 9.28%
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SEC Results -- +11.53% +10.66% + 9.28%
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CLASS C INVESTMENT RESULTS
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
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Cumulative Total Return +6.98% +15.55% +68.51% +143.78%
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Average Annual Total Return -- +15.55% +11.00% + 9.32%
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SEC Results -- +14.55% +11.00% + 9.32%
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CLASS I INVESTMENT RESULTS
(net asset value change including distributions
6 Months 1 Year 5 Years 10 Years
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Cumulative Total Return +7.53% +16.28% +73.11% +150.55%
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Average Annual Total Return -- +16.28% +11.60% + 9.62%
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All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Class A share SEC results include the maximum 5.75% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C
shares have no initial sales charge but, along with Class B shares, have higher
annual fees and expenses than Class A shares. Class C share purchases are
subject to a 1% CDSC if redeemed within 12 months of purchase. Class I shares,
which became available on January 2, 1997, have no sales charge or Rule 12b-1
fees and are only available to certain institutional investors.
Class B and Class C share results include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods prior
to the commencement of offering of Class B and Class C shares. Because operating
expenses attributable to Class B and Class C shares are higher than those of
Class A shares, Class B and Class C share performance generally would have been
lower than Class A share performance. The Class A share performance included in
the Class B and Class C share SEC performance has been adjusted to reflect the
CDSC generally applicable to Class B and Class C shares rather than the initial
sales charge generally applicable to Class A shares.
Class I share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class A shares for periods prior to the
commencement of offering of Class I shares. Because operating expenses
attributable to Class A shares are greater than those of Class I shares, Class I
share performance generally would have been higher than Class A share
performance. The Class A share performance included in the Class I share
performance has been adjusted to reflect the fact that Class I shares have no
initial sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies and
waivers may be discontinued at any time.
PORTFOLIO CONCENTRATION AS OF JULY 31, 1997
QUALITY RATINGS
[Graphic Omitted - Pie]
"B" 66.6%
"BB" 14.6%
"BBB" 0.4%
"CCC" 6.4%
"D" 0.5%
Cash 2.9%
Unrated 8.6%
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PORTFOLIO OF INVESTMENTS (UNAUDITED) - July 31, 1997
Bonds - 90.6%
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Principal Amount
Issuer (000 Omitted) Value
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U.S. Bonds - 87.6%
Aerospace - 2.7%
Airplane Pass-Thru Trust, 10.875s, 2019 $ 5,250 $ 6,116,250
BE Aerospace, Inc., 9.875s, 2006 5,150 5,471,875
Gpa Delaware, 8.75s, 1998 1,221 1,239,315
K & F Industries, Inc., 10.375s, 2004 4,500 4,843,125
MOOG, Inc., 10s, 2006 10,990 11,704,350
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$1,084,374,915
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Automotive - 1.4%
Hayes Wheels International, Inc., 9.125s, 2007## $ 5,250 $ 5,368,125
Hayes Wheels International, Inc., 11s, 2006 4,525 5,045,375
Oxford Automotive, Inc., 10.125s, 2007## 4,275 4,381,875
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$ 14,795,375
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Building - 2.3%
Building Materials Corp., 8.625s, 2006## $ 1,550 $ 1,615,875
Building Materials Corp., 0s, 1999, 11.75s, 2004 25 22,937
Johns Manville International Group, Inc.,
10.875s, 2004 3,000 3,363,750
Nortek, Inc., 9.25s, 2007 5,225 5,434,000
Nortek, Inc., 9.875s, 2004 3,325 3,374,875
UDC Homes, Inc., 0s, 2000 30 16,650
USG Corp., 9.25s, 2001 9,850 10,613,375
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$ 24,441,462
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Chemicals - 3.7%
Harris Chemical North America, Inc., 10.25s, 2001$ 6,065 $ 6,337,925
INDSPEC Chemical Corp., 0s, 1998, 11.5s, 2003 5,450 5,123,000
NL Industries, Inc., 11.75s, 2003 9,500 10,426,250
Sovereign Specialty Chemicals, 9.5s, 2007## 3,100 3,100,000
Sterling Chemicals, Inc., 11.25s, 2007## 4,250 4,590,000
Sterling Chemicals, Inc., 11.75s, 2006 5,050 5,517,125
UCC Investors Holdings, Inc., 10.5s, 2002 4,750 5,355,625
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$ 40,449,925
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Consumer Goods and Services - 6.3%
American Safety Razor Co., 9.875s, 2005 $ 6,000 $ 6,480,000
Dominion Textile-USA, 9.25s, 2006 2,075 2,173,563
E & S Holdings Corp., 10.375s, 2006## 7,365 7,622,775
Genmar Holdings, Inc., 13.5s, 2001 3,910 3,831,800
International Semi-Tech Microelectronics, Inc.,
11.5s, 2003 5,375 3,440,000
Kindercare Learning Center, Inc., 9.5s, 2009 5,000 4,912,500
Polymer Group, Inc., 9s, 2007## 10,625 10,890,625
Reeves Industries, Inc., 11s, 2002 2,370 1,765,650
Remington Products Co. LLC, 11s, 2006 1,555 1,360,625
Samsonite Corp., 11.125s, 2005 3,668 4,154,010
Sealy Corp., 10.25s, 2003 2,650 2,785,812
Synthetic Industries, Inc., 9.25s, 2007 6,140 6,354,900
Westpoint Stevens, Inc., 9.375s, 2005 11,850 12,546,187
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$ 68,318,447
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Containers - 3.4%
Alantis Group Inc., 11s, 2003 $ 7,500 $ 7,687,500
Calmar, Inc., 11.5s, 2005 8,000 8,670,000
Plastic Specialty & Technology Corp., 11.25s, 200 1,735 1,852,113
Silgan Holdings, Inc., 9s, 2009## 5,000 5,112,500
Stone Container Corp., 9.875s, 2001 6,950 7,167,187
U.S. Can Corp., 10.125s, 2006 6,100 6,435,500
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$ 36,924,800
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Entertainment - 2.4%
Act III Theaters, Inc., 11.875s, 2003 $ 250 $ 270,625
AMC Entertainment, Inc., 9.5s, 2009## 6,875 7,046,875
American Skiing Co., 12s, 2006 5,300 5,657,750
Cinemark USA, Inc., 9.625s, 2008 4,700 4,805,750
Hollywood Theaters, Inc., 10.625s, 2007## 2,025 2,025,000
Plitt Theatres, Inc., 10.875s, 2004 3,100 3,293,750
Speedway Motorsports, Inc., 8.5s, 2007 3,075 3,117,281
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$ 26,217,031
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Financial Institutions - 1.6%
Americo Life, Inc., 9.25s, 2005 $ 3,550 $ 3,638,750
Delta Financial Corporation, 9.5s, 2004 3,150 3,157,875
Integon Capital I, 10.75s, 2027 4,500 5,490,000
Williams Scotsman, Inc., 9.875s, 2007## 4,525 4,570,250
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$ 16,856,875
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Food and Beverage Products - 1.9%
Delta Beverage Group, Inc., 9.75s, 2003 $ 2,800 $ 2,926,000
Keebler Corp., 10.75s, 2006 2,500 2,806,250
PMI Acquisition Corp., 10.25s, 2003 3,495 3,730,912
Specialty Foods Corp., 10.25s, 2001 5,000 4,900,000
Texas Bottling Group, Inc., 9s, 2003 5,750 5,922,500
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$ 20,285,662
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Forest and Paper Products - 3.4%
Buckeye Cellulose Corp., 8.5s 2005 $ 2,000 $ 2,035,000
Florida Coast Paper Co. LLC, 12.75s, 2003 6,400 6,848,000
Gaylord Container Corp., 9.75s, 2007## 11,500 11,845,000
Pacific Lumber Co., 10.5s, 2003 11,010 11,477,925
Speciality Paperboard, Inc., 9.375s, 2006## 5,350 5,590,750
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$ 37,796,675
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Industrial - 8.9%
AAF-McQuay, Inc., 8.875s, 2003 $ 8,325 $ 8,429,063
AGCO Corp., 8.5s, 2006 6,000 6,225,000
Alliant Techsystem, Inc., 11.75s, 2003 4,350 4,812,188
Clark Schwebel, Inc., 10.5s, 2006 4,675 5,119,125
Exide Corp., 10s, 2005## 2,375 2,517,500
Fairfield Manufacturing Corp., 11.375s, 2001 4,830 5,180,175
Harvard Industries, Inc., 11.125s, 2005 170 62,900
Haynes International, Inc., 11.625s, 2004## 11,825 13,125,750
Howmet Corp., 10s, 2003 5,125 5,586,250
IMO Industries, Inc., 11.75s, 2006 7,825 8,529,250
Interlake Corp., 12s, 2001 5,200 5,746,000
Interlake Corp., 12.125s, 2002 9,200 9,694,500
Interlake Revolver, "B", 8.563s, 1997## 999 993,982
International Knife and Saw, Inc., 11.375s, 2006 5,360 5,829,000
L3 Communications Corp., 10.375s, 2007## 3,740 4,029,850
Thermadyne Industries Holdings Corp., 10.25s, 200 4,150 4,357,500
Thermadyne Industries Holdings Corp., 10.75s, 200 4,045 4,287,700
Venture Holdings Trust, 9.75s, 2004 2,535 2,439,938
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$ 96,965,671
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Information, Paging, and Technology - 11.6%
Anacomp, Inc., 10.875s, 2004## $ 4,650 $ 4,824,375
Brooks Fiber Properties, Inc., 0s to 2001,
10.875s to 2006 5,130 3,796,200
Brooks Fiber Properties, Inc., 10s, 2007## 3,275 3,512,437
Brooks Fiber Properties, Inc., 11.875s, 2006 7,000 4,987,500
Colt Telecommunications Group PLC, 0s to 2001,
12s to 2006 12,570 8,390,475
Comcast Cellular Holdings, Inc., 9.5s, 2007## 7,000 7,297,500
Decision Holdings Corp., 0s, 11.5s, 2008 1,625 930,800
ICG Holdings, Inc., 0s to 2001, 12.5s to 2006 13,950 9,904,500
Iron Mountain, Inc., 10.125s, 2006 8,000 8,680,000
ITC Deltacom, Inc., 11s, 2007## 6,300 6,583,500
McCaw International Ltd., 13s, 2007 7,225 3,973,750
MFS Communications, Inc., 0s to 1997,
8.875s to 2006 5,525 4,392,375
Millicom International Cellular
Communications Corp., 0s to 2001, 13.5s to 2006 7,250 5,455,625
Nextel Communications, Inc., 0s to 1999,
9.75s to 2004 13,030 10,684,600
Orion Network Systems, Inc., 11.25s, 2007 5,000 5,250,000
Orion Network Systems, Inc., 0s to 2002,
12.5s to 2007 11,775 7,653,750
Paging Network, Inc., 8.875s, 2006 2,050 1,968,000
Pierce Leahy Corp., 9.125s, 2007 1,550 1,612,000
Pierce Leahy Corp., 11.125s, 2006 3,477 3,876,855
PTC International Finance BV, 0s to 2002,
10.75s to 2007## 2,515 1,587,594
Qwest Communications International, Inc.,
10.875s, 2007## 4,800 5,328,000
Sprint Spectrum LP, 0s to 2001, 12.5s to 2006 3,000 2,250,000
Sprint Spectrum LP, 11s, 2006 6,750 7,576,875
Telesystem International Wireless, Inc.,
0s to 2002, 13.25s to 2007## 10,240 5,913,600
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$ 126,430,311
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Media - 12.1%
Adelphia Communications Corp., 9.785s, 2007 $ 1,100 $ 1,122,000
Allbritton Communications Co., 9.75s, 2007 5,300 5,260,250
American Radio Systems Corp., 9s, 2006 10,650 11,129,250
Bell Cablemedia PLC, 0s to 2000, 11.875s to 2005 7,750 6,587,500
Cablevision Systems Corp., 9.25s, 2005 6,000 6,270,000
Chancellor Radio Broadcasting Corp., 8.75s, 2007# 5,560 5,726,800
Charter Communications Southeast LP, 11.25s, 2006 6,325 6,941,687
Comcast Corp., 9.375s, 2005 4,950 5,265,563
Diamond Cable Communications Corp., 0s to 2000,
11.75s to 2005 13,635 8,807,825
Digital Television Services Llc, 12.5s, 2007 7,100 7,100,000
EchoStar Communications Corp., 0s to 1999,
12.875s to 2004 3,775 3,232,344
EchoStar Satellite Broadcasting Corp., 0s to 2000,
13.125s to 2004 7,825 5,751,375
Falcon Holdings Group, Inc., 11s, 2003 5,415 5,658,534
Hollinger International Publishing, Inc.,
9.25s, 2007 7,475 7,792,687
Intermedia Capital Partners IV, LP, 11.25s, 2006 6,200 6,820,000
Jones Intercable, Inc., 8.875s, 2007 800 832,000
Jones Intercable, Inc., 9.625s, 2002 4,050 4,348,688
Lenfest Communications, Inc., 10.5s, 2006 9,750 10,859,062
Marcus Cable Operating Co., 0s to 1999,
13.5s to 2004 4,000 3,560,000
Marvel Holdings, Inc., 0s, 1998 11,125 1,585,313
Outdoor Systems, Inc., 8.875s, 2007## 3,950 4,068,500
Peoples Choice TV Corp., 0s, 2004 1,350 459,000
Rogers Cablesystems Ltd., 9.625s, 2002 750 806,250
Rogers Cablesystems, Inc., 10.125s, 2012 5,000 5,425,000
Videotron Holdings PLC, 0s to 2000, 11s to 2005* 6,850 5,822,500
--------------
$ 131,232,128
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Medical and Health Technology and Services - 2.2%
Beverly Enterprises, Inc., 9s, 2006 $ 3,500 $ 3,657,500
Quorum Health Group, 8.75s, 2005 2,750 2,887,500
Tenet Healthcare Corp., 8s, 2005 11,250 11,643,750
Vencor Incorporated, 8.625s, 2007 5,300 5,425,875
--------------
$ 23,614,625
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Metals and Minerals - 4.3%
Algoma Steel, Inc., 12.375s, 2005 $ 1,400 $ 1,617,000
AK Steel Corp., 9.125s, 2006 3,950 4,167,250
AK Steel Holdings Corp., 10.75s, 2004 960 1,046,400
Commonwealth Aluminum Corp., 10.75s, 2006 7,450 7,915,625
CSN Iron SA, 9.125s, 2007## 2,250 2,233,125
GS Technologies Operating, Inc., 12.25s, 2005 4,640 5,138,800
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 5,550 5,772,000
Kaiser Aluminum & Chemical Corp., 10.875s, 2006 4,875 5,277,187
Kaiser Aluminum & Chemical Corp., 12.75s, 2003 2,150 2,343,500
WCI Steel, Inc., 10s, 2004 10,750 11,502,500
--------------
$ 47,013,387
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Mortgage Backed Pass-Throughs - 0.4%
Merrill Lynch Mortgage Investors, Inc.,
8.129s, 2023+ $ 4,500 $ 3,954,375
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Oil - 2.1%
AmeriGas Partners, L.P., 10.125s, 2007 $ 3,400 $ 3,604,000
Clark USA, Inc., 10.875s, 2005 5,540 5,913,950
Falcon Drilling, Inc., 8.875s, 2003 3,725 3,957,812
Ferrell Gas L.P., 10s, 2001 4,370 4,643,125
Gulf Canada, 9.25s, 2004 4,000 4,220,000
--------------
$ 22,338,887
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Printing and Publishing - 0.7%
Day International Group, Inc., 11.125s, 2005 $ 2,350 $ 2,514,500
Golden Books Publishing, Inc., 7.65s, 2002 5,000 4,712,500
--------------
$ 7,227,000
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Restaurants and Lodging - 6.5%
Boyd Gaming Corporation, 9.5s, 2007 $ 7,875 $ 7,973,437
Casino America, Inc., 12.5s, 2003 5,900 6,254,000
Coast Hotels & Casinos, Inc., 13s, 2002 3,625 4,060,000
Eldorado Resorts LLC, 10.5s, 2006## 5,455 5,891,400
Grand Casinos, Inc., 10.125s, 2003 7,280 7,826,000
Griffin Gaming & Entertainment, Inc., 0s, 2000 4,400 4,400,000
Harvey's Casinos Resorts, 10.625s, 2006 3,525 3,868,688
HorseShoe Gaming LLC, 9.375s, 2007## 2,145 2,220,075
Prime Hospitality Corp., 9.75s, 2007 9,895 10,587,650
Red Roof Inns, Inc., 9.625s, 2003 8,260 8,528,450
Sam Houston Race Park Ltd, 11s, 2001 1,909 820,712
Santa Fe Hotel, Inc., 11s, 2000 5,055 3,677,513
Station Casinos, Inc., 9.75s, 2007 4,300 4,267,750
--------------
$ 70,375,675
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Retail - 1.1%
Finlay Fine Jewelry Corp., 10.625s, 2003 $ 1,725 $ 1,819,875
Parisian, Inc., 9.875s, 2003 9,480 9,930,300
--------------
$ 11,750,175
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Supermarkets - 3.3%
Brunos, Inc., 10.5s, 2005 $ 2,150 $ 2,195,687
Carr-Gottstein Foods Co., 12s, 2005 1,500 1,672,500
Dominick's Finer Foods, Inc., 10.875s, 2005 3,375 3,813,750
Fleming Cos., Inc., 10.625s, 2007 3,130 3,223,900
Grand Union Co., 12s, 2004 313 147,110
Jitney Jungle Stores of America, Inc.,
12s, 2006 2,315 2,644,888
Marsh Supermarkets, Inc., 8.875s, 2007 1,800 1,822,500
Pathmark Stores, Inc., 9.625s, 2003 500 478,750
Ralph's Grocery Co., 10.45s, 2004 6,550 7,205,000
Shoppers Food Warehouse Corp., 9.75s, 2004## 4,500 4,668,750
Smiths Food & Drug Centers, 11.25s, 2007 2,500 2,968,750
Star Market, Inc., 13s, 2004 1,250 1,425,000
Stater Brothers Holdings, Inc., 9s, 2004 2,850 2,917,688
--------------
$ 35,184,273
- --------------------------------------------------------------------------------
Telecommunications - 3.9%
Esat Holdings Ltd., 12.5s, 2007## $ 2,825 $ 1,695,000
GCI, Inc., 9.75s, 2007 3,245 3,342,350
Globalstar L P/Globalstar Capital,
11.375s, 2004 6,905 6,628,800
Metronet Communications Corp., 2007 3,250 3,461,250
Mobile Telecommunication Technologies Corp.,
13.5s, 2002 5,515 6,011,350
Mobilemedia Communications, Inc., 10.5s, 2003 1,270 171,450
Sygnet Wireless, Inc., 11.5s, 2006 5,500 5,596,250
Teleport Communications Group, Inc.,
9.875s, 2006 3,000 3,277,500
Teleport Communications Group, Inc., 0s, 2001,
11.125s, 2007 5,350 4,079,375
Teletrac, Inc., 14s, 2007## 5,500 5,500,000
Western Wireless Corp., "A", 10.5s, 2007 3,400 3,570,000
--------------
$ 43,333,325
- --------------------------------------------------------------------------------
Transportation - 1.0%
CHC Helicopter Corp., 11.5s, 2002 $ 6,675 $ 7,092,188
Moran Transportation Co., 11.75s, 2004 3,500 3,920,000
--------------
$ 11,012,188
- --------------------------------------------------------------------------------
Utilities - Electric - 0.4%
El Paso Electric Co., 8.9s, 2006 $ 2,550 $ 2,785,773
Kenetech Corp., 12.75s, 2002 1,520 1,656,800
--------------
$ 4,442,573
- --------------------------------------------------------------------------------
Total U.S. Bonds $ 950,335,760
- --------------------------------------------------------------------------------
Foreign Bonds - 3.0%
Canada - 0.2%
Rogers Communications Inc, 8.875s, 2007 $ 2,425 $ 2,461,375
- --------------------------------------------------------------------------------
Indonesia - 0.8%
APP Finance II Mauritius Ltd., 12s, 2049## $ 3,190 $ 3,213,925
Indah Kiat Finance Mautitius Ltd., 10s, 2007## 5,545 5,531,137
--------------
$ 8,745,062
- --------------------------------------------------------------------------------
United Kingdom - 2.0%
Newsquest Capital PLC, 11s, 2006 $ 6,100 $ 6,679,500
Telewest PLC, 9.625s, 2006 6,425 6,778,375
Central Transportation Rental Finance Corp.,
9.5s, 2003 7,724 8,225,630
--------------
$ 21,683,505
- --------------------------------------------------------------------------------
Total Foreign Bonds $ 32,889,942
- --------------------------------------------------------------------------------
Total Bonds (Identified Cost, $940,119,845) $ 983,225,702
- --------------------------------------------------------------------------------
Convertible Bond - 0.5%
- --------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------------
U.S. Bonds - 0.5%
Automotive - 0.5%
Exide Corp., 2.9s, 2005## (Identified Cost,
$4,803,173 $ 7,800 $ 5,050,500
- --------------------------------------------------------------------------------
Stocks - 0.5%
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------------
U.S. Stocks - 0.3%
Apparel and Textiles - 0.3%
Ithaca Industries, Inc.* 304,000 $ 2,432,000
- --------------------------------------------------------------------------------
Building
Atlantic Gulf Communities Corp.+* 690 $ 4,226
- --------------------------------------------------------------------------------
Consumer Goods and Services
Ranger Industries, Inc.++* 266,768 $ 166,730
- --------------------------------------------------------------------------------
Pollution Control
Envirosource, Inc.+* 1,666 $ 3,228
- --------------------------------------------------------------------------------
Gaming and Hotels
Sam Houston Race Park Ltd.* 481 $ 1,924
- --------------------------------------------------------------------------------
General Industrial
IMO Industries, Inc.* 28,000 $ 190,750
- --------------------------------------------------------------------------------
Total U.S. Stocks $ 2,798,858
- --------------------------------------------------------------------------------
Foreign Stocks - 0.2%
United Kingdom - 0.2%
Central Transport Rental Group PLC, ADR 3,790,770 $ 2,369,231
- --------------------------------------------------------------------------------
Total Stocks (Identified Cost, $17,412,130) $ 5,168,089
- --------------------------------------------------------------------------------
Preferred Stock - 5.3%
- --------------------------------------------------------------------------------
Broadcasting
Granite Broadcasting Corp. 1,000 $ 59,563
- --------------------------------------------------------------------------------
Consumer Goods and Services - 0.5%
Renaissance Cosmetics, Inc., 14s, Pref. Stk.## 6,080 $ 5,168,000
- --------------------------------------------------------------------------------
Entertainment - 1.5%
Time-Warner, Inc., "K", 10.25s## 14,230 $ 16,079,900
- --------------------------------------------------------------------------------
Information, Paging, and Technology - 0.3%
Nextel Communications, Inc.* 3,200 $ 3,328,000
- --------------------------------------------------------------------------------
Media - 0.9%
Cablevision Systems Corp., 11.625s, Pref. Stk.## 90,739 $ 9,572,964
- --------------------------------------------------------------------------------
Special Products and Services - 0.9%
K-III Communications Corp., "B" 93,526 $ 9,913,713
- --------------------------------------------------------------------------------
Supermarkets - 1.0%
Supermarkets General Holdings Corp. 539,098 $ 10,916,734
- --------------------------------------------------------------------------------
Utilities - Electric - 0.2%
El Paso Electric Co.* 25,007 $ 2,775,777
- --------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $49,213,126) $ 57,814,651
- --------------------------------------------------------------------------------
Convertible Preferred Stocks - 0.8%
- --------------------------------------------------------------------------------
Media - 0.8%
Granite Broadcasting Corp. (Identified Cost,
$8,091,875) $7,900,000 $ 8,196,250
- --------------------------------------------------------------------------------
Warrants - 0.2%
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------------
CHC Helicopter Corp.* 16,000 $ 36,000
Crystal Oil Co., $0.075 Warrants* 3,954,527 0
Crystal Oil Co., $0.10 Warrants* 3,455,042 0
Crystal Oil Co., $0.125 Warrants* 4,107,411 0
Crystal Oil Co., $0.15 Warrants* 4,041,943 0
Crystal Oil Co., $0.25 Warrants* 4,041,943 0
Esat Holdings Ltd.* 2,825 56,500
Globalstar Telecommunications* 6,905 414,300
Grand Palais Resorts* 111,660 0
Hemmeter* 111,660 0
ICO, Inc.* 706,250 459,063
Renaissance Cosmetics, Inc.* 5,475 591,300
Republic Health Corp., Warrants* 2,500 0
- --------------------------------------------------------------------------------
Total Warrants (Identified Cost, $1,375,683) $ 1,557,163
- --------------------------------------------------------------------------------
Short-Term Obligation - 0.7%
- --------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- --------------------------------------------------------------------------------
General Electric Capital Corp., due 8/01/97,
at Amortized Cost and Value $ 7,780 $ 7,780,000
- --------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,028,795,832) $1,068,792,355
Other Assets, Less Liabilities - 1.4% 15,523,496
- --------------------------------------------------------------------------------
Net Assets - 100.0% $1,084,315,851
- --------------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
+Restricted security.
++Affiliated issuers are those in which the Fund's holdings of an
issuer represents 5% or more of the outstanding voting securities of
the issuer.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- --------------------------------------------------------------------------------
July 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $1,021,571,913) $ 1,068,625,625
Affiliated issuer (identified cost, $7,223,919) 166,730
---------------
Total investments, at value
(identified cost, $1,028,795,832) $ 1,068,792,355
Cash 4,952
Receivable for investments sold 38,140,516
Receivable for Fund shares sold 4,057,407
Interest and dividends receivable 21,563,612
Other assets 8,714
---------------
Total assets $ 1,132,567,556
---------------
Liabilities:
Distributions payable $ 3,129,586
Payable for investments purchased 36,573,443
Payable for Fund shares reacquired 8,013,194
Payable to affiliates -
Management fee 13,197
Shareholder servicing agent fee 3,873
Distribution and service fee 283,424
Administrative fee 441
Accrued expenses and other liabilities 234,547
---------------
Total liabilities $ 48,251,705
---------------
Net assets $ 1,084,315,851
===============
Net assets consist of:
Paid-in capital $ 1,300,371,257
Unrealized appreciation on investments 39,996,523
Accumulated net realized loss on investments and foreign currency
transactions (258,150,034)
Accumulated undistributed net investment income 2,098,105
---------------
Total $ 1,084,315,851
===============
Shares of beneficial interest outstanding 196,971,734
===============
Class A shares:
Net asset value per share
(net assets of $699,333,212 / 127,049,766 shares
of beneficial interest outstanding) $5.50
=====
Offering price per share (100 / 95.25) $5.77
=====
Class B shares:
Net asset value and offering price per share
(net assets of $339,970,824 / 61,756,248 shares
of beneficial interest outstanding) $5.51
======
Class C shares:
Net asset value and offering price per share
(net assets of $41,515,856 / 7,530,183 shares of
beneficial interest outstanding) $5.51
=====
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $3,495,959 / 635,537 shares of beneficial
interest outstanding) $5.50
=====
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 (Unaudited)
- --------------------------------------------------------------------------------
Six Months Ended July 31, 1997
- --------------------------------------------------------------------------------
Net investment income:
Income -
Interest $48,116,048
Dividend 1,512,918
-----------
Total investment income $49,628,966
-----------
Expenses -
Management fee $ 2,302,327
Administrative fee 63,964
Trustees' compensation 37,828
Shareholder servicing agent fee 655,308
Distribution and service fee (Class A) 1,200,129
Distribution and service fee (Class B) 1,534,974
Distribution and service fee (Class C) 160,308
Custodian fee 195,388
Postage 90,346
Printing 38,657
Auditing fee 27,897
Legal fee 3,547
Miscellaneous 266,852
-----------
Total expenses $ 6,577,525
Fees paid indirectly (186,980)
Preliminary reduction of expenses by distributor (166,438)
-----------
Net expenses $ 6,224,107
-----------
Net investment income $43,404,859
-----------
Realized and unrealized gain on investments:
Realized gain on investment transactions (identified cost basis) $15,956,458
Change in unrealized appreciation on investments 14,461,469
-----------
Net realized and unrealized gain on investments $30,417,927
-----------
Increase in net assets from operations $73,822,786
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Six Months Ended
July 31, 1997 Year Ended
(Unaudited) January 31, 1997
- --------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 43,404,859 $ 80,418,610
Net realized gain on investments 15,956,458 1,477,653
Net unrealized gain on investments 14,461,469 18,445,626
--------------- --------------
Increase in net assets from operations $ 73,822,786 $ 100,341,889
--------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (29,184,016) $ (54,869,246)
From net investment income (Class B) (12,369,722) (23,285,081)
From net investment income (Class C) (1,286,355) (1,760,418)
From net investment income (Class I) (143,893) (21,807)
--------------- --------------
Total distributions declared
to shareholders $ (42,983,986) $ (79,936,552)
--------------- --------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 293,840,779 $ 487,463,015
Net asset value of shares issued to
shareholdersin reinvestment of
distributions 24,060,493 44,900,610
Cost of shares reacquired (268,721,579) (468,259,801)
--------------- ---------------
Increase in net assets from Fund share
transactions $ 49,179,693 $ 64,103,824
--------------- --------------
Total increase in net assets $ 80,018,493 $ 84,509,161
Net assets:
At beginning of period 1,004,297,358 919,788,197
--------------- ---------------
At end of period (including accumulated
undistributed net investment income of
$2,098,105 and $1,677,232, respectively) $ 1,084,315,851 $1,004,297,358
=============== ==============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended January 31,
July 31, 1997 ---------------------------------------------------------------------
(Unaudited) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 5.35 $ 5.24 $ 4.84 $ 5.50 $ 5.11 $ 4.89
------- ------- ------- ------- ------- -------
Income from investment operations# -
Net investment income(S) $ 0.24 $ 0.47 $ 0.45 $ 0.44 $ 0.40 $ 0.51
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 0.14 0.10 0.39 (0.66) 0.48 0.24
------- ------- ------- ------- ------- -------
Total from investment operations $ 0.38 $ 0.57 $ 0.84 $ (0.22) $ 0.88 $ 0.75
------- ------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.23) $ (0.46) $ (0.44) $ (0.43) $ (0.42) $ (0.51)
From net realized gain on investments
and foreign currency -- -- -- (0.01) (0.07) --
From paid-in capital -- -- -- -- -- (0.02)
------- ------- ------- ------- ------- -------
Total distributions declared to
shareholders $ (0.23) $ (0.46) $ (0.44) $ (0.44) $ (0.49) $ (0.53)
------- ------- ------- ------- ------- -------
Net asset value - end of period $ 5.50 $ 5.35 $ 5.24 $ 4.84 $ 5.50 $ 5.11
======= ======= ======= ======= ======= =======
Total return(+) 7.56%++ 11.52% 17.97% (3.95)% 18.13% 16.36%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.09%+ 1.02% 1.00% 0.99% 1.00% 1.03%
Net investment income 8.87%+ 8.92% 8.83% 8.65% 8.22% 10.21%
Portfolio turnover 61% 87% 59% 59% 68% 75%
Net assets, end of period
(000,000 omitted) $699 $672 $620 $524 $645 $585
+Annualized.
++Not annualized.
(+)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.
#Per share data for the periods subsequent to January 31, 1994, are
based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
(S)The distributor did not impose a portion of its distribution fee for
certain of the periods indicated. If this fee had been incurred by
the Fund, the net investment income per share and the ratios would
have been:
Net investment income $ 0.24 $ -- $ -- $ 0.43 $ 0.40 $ --
Ratios (to average net assets):
Expenses## 1.14%+ -- -- 1.09% 1.04% --
Net investment income 8.82%+ -- -- 8.55% 8.18% --
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ---------------------------------------------------------------------------------------------------------------
Year Ended January 31, 1992 1991 1990 1989 1988
- ---------------------------------------------------------------------------------------------------------------
Class A
- ---------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period ... $ 3.71 $ 4.85 $ 6.04 $ 6.17 $ 7.11
-------- -------- -------- -------- --------
Income from investment operations -
Net investment income $ 0.56 $ 0.65 $ 0.69 $ 0.76 $ 0.77
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 1.21 (1.08) (1.13) (0.09) (0.83)
-------- -------- -------- -------- --------
Total from investment operations $ 1.77 $ (0.43) $ (0.44) $ 0.67 $ (0.06)
-------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (0.56) $ (0.71) $ (0.75) $ (0.75) $ (0.87)
From net realized gain on investments and
foreign currency transactions -- -- -- (0.05) (0.01)
From paid-in capital(++) (0.03) -- -- -- --
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (0.59) $ (0.71) $ (0.75) $ (0.80) $ (0.88)
-------- -------- -------- -------- --------
Net asset value - end of period $ 4.89 $ 3.71 $ 4.85 $ 6.04 $ 6.17
======== ======== ======== ======== ========
Total return(+) 49.64% (10.99)% (9.18)% 10.68% (1.94)%
Ratios (to average net assets)/Supplemental data:
Expenses 1.10% 1.05% 0.87% 0.87% 0.75%
Net investment income 11.59% 14.97% 12.17% 12.44% 11.49%
Portfolio turnover 28% 24% 25% 34% 28%
Net assets, end of period
(000,000 omitted) $ 556 $ 380 $ 574 $ 880 $ 1,001
</TABLE>
(+)Total returns for Class A shares do not include the applicable sales
charge (except for reinvested dividends prior to March 1, 1991). If
the charge had been included, the results would have been lower.
(++)For the years ended January 1, 1989 and 1988; includes a per share
distribution from paid-in capital of $0.0004 and $0.0006 respectively.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended January 31,
July 31, 1997 ----------------------------------------------------------
(Unaudited) 1997 1996 1995 1994*
- ---------------------------------------------------------------------------------------------------------------------
Class B
- ---------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 5.35 $ 5.24 $ 4.84 $ 5.50 $ 5.27
-------- -------- -------- -------- --------
Income from investment operations# -
Net investment income $ 0.22 $ 0.43 $ 0.41 $ 0.39 $ 0.15
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 0.19 0.10 0.39 (0.65) 0.22
-------- -------- -------- -------- --------
Total from investment operations $ 0.41 $ 0.53 $ 0.80 $ (0.26) $ 0.37
-------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (0.25) $ (0.42) $ (0.40) $ (0.39) $ (0.13)
In excess of net investment income -- -- -- (0.01) (0.01)
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (0.25) $ (0.42) $ (0.40) $ (0.40) $ (0.14)
-------- -------- -------- -------- --------
Net asset value - end of period $ 5.51 $ 5.35 $ 5.24 $ 4.84 $ 5.50
======== ======== ======== ======== ========
Total return 7.19%++ 10.66% 16.98% (4.77)% 20.29%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.74%+ 1.79% 1.85% 1.85% 1.79%+
Net investment income 8.17%+ 8.13% 7.99% 7.79% 6.94%+
Portfolio turnover 61% 87% 59% 59% 68%
Net assets, end of period
(000,000 omitted) $ 340 $ 301 $ 283 $ 286 $ 371
</TABLE>
*For the period from the commencement of the Fund's offering of Class B shares,
September 27, 1993, through January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994, are based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
See notes to financial statements
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended January 31,
July 31, 1997 ----------------------------------------------------------
(Unaudited) 1997 1996 1995 1994**
- ---------------------------------------------------------------------------------------------------------------------
Class C
- ---------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 5.36 $ 5.25 $ 4.85 $ 5.50 $ 5.41
-------- -------- -------- -------- --------
Income from investment operations# -
Net investment income $ 0.25 $ 0.43 $ 0.41 $ 0.41 $ --
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.11 0.11 0.39 (0.66) 0.09
-------- -------- -------- -------- --------
Total from investment operations $ 0.36 $ 0.54 $ 0.80 $ (0.25) $ 0.09
-------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (0.21) $ (0.43) $ (0.40) $ (0.39) $ --
In excess of net investment income -- -- -- (0.01) --
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (0.21) $ (0.43) $ (0.40) $ (0.40) $ --
-------- -------- -------- -------- --------
Net asset value - end of period $ 5.51 $ 5.36 $ 5.25 $ 4.85 $ 5.50
======== ======== ======== ======== ========
Total return 6.98%++ 10.71% 17.03% (4.51)% 20.94%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.73%+ 1.72% 1.77% 1.79% 1.36%+
Net investment income 8.15%+ 8.16% 8.02% 8.01% 5.92%+
Portfolio turnover 61% 87% 59% 59% 68%
Net assets, end of period (000,000 omitted) $ 42 $ 28 $ 16 $ 3 $ 1
</TABLE>
**For the period from the commencement of the Fund's offering of Class C shares,
January 3, 1994, through January 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to January 31, 1994 are based on
average shares outstanding.
##The Fund's expenses are calculated without reduction for fees paid indirectly.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Six Months Ended Year Ended
July 31, 1997 January 31,
(Unaudited) 1997***
- -------------------------------------------------------------------------------------------
Class I
- -------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C>
Net asset value - beginning of period $ 5.35 $ 5.34
-------- --------
Income from investment operations# -
Net investment income $ 0.24 $ 0.04
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.19 0.01
-------- --------
Total from investment operations $ 0.43 $ 0.05
-------- --------
Less distributions declared to shareholders -
From net investment income $ (0.28) $ (0.04)
-------- --------
Total distributions declared to shareholders $ (0.28) $ (0.04)
-------- --------
Net asset value - end of period $ 5.50 $ 5.35
======== ========
Total return 7.53%++ 0.91%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.73%+ 0.59%+
Net investment income 9.19%+ 8.70%+
Portfolio turnover 61% 87%
Net assets, end of period (000,000 omitted) $ 3 $ 3
</TABLE>
***For the period from the commencement of the Fund's offering of Class
I shares, January 2, 1997, through July 31, 1997.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##The Fund's expenses are calculated without reduction for fees paid
indirectly.
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) Business and Organization
MFS High Income Fund (the Fund) is a diversified series of MFS Series Trust III
(the Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics,
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Equity
securities listed on securities exchanges or reported through the NASDAQ system
are reported at market value using last sale prices. Unlisted equity securities
or listed equity securities for which last sale prices are not available are
reported at market value using last quoted bid 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.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividends
received in cash are recorded on the ex-divided date. Dividend and interest
payments received in additional securities are recorded on the ex- dividend or
ex-interest date in an amount equal to the value of the security on such date.
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. The Fund uses the
effective interest method for reporting interest income on payment-in-kind (PIK)
bonds. Legal fees and other related expenses incurred to preserve and protect
the value of a security owned are added to the cost of the security; other legal
fees are expensed. Capital infusions, which are generally non-recurring,
incurred to protect or enhance the value of high-yield debt securities are
reported as additions to the cost basis of the security. Costs that are incurred
to negotiate the terms or conditions of capital infusions or that are expected
to result in a plan of reorganization are reported as realized losses. Ongoing
costs incurred to protect or enhance an investment, or costs incurred to pursue
other claims or legal actions, are expensed.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's average daily net assets. The fee is reduced according to an
arrangement which 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 taxable
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. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex- dividend date.
Distributions to shareholders are recorded on the ex-dividend date. The Fund
distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a tax return of capital.
Differences in the recognition or classification of income between the financial
statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains.
At January 31, 1997, the Fund, for federal income tax purposes, had a capital
loss carryforward of $267,129,382 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on January 31, 1998, ($28,299,632), January 31, 1999, ($91,805,710),
January 31, 2000, ($64,105,312), January 31, 2001, ($16,884,352), January 31,
2003, ($30,373,319), January 31, 2004, ($35,661,057).
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, Class C, and Class I shares. The classes of shares differ in their
respective distribution and service fees. All shareholders bear the common
expenses of the Fund pro rata based on average daily net assets of each class,
without distinction between share classes. Dividends are declared separately for
each class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate of
0.19% of average daily net assets and 2.640% of investment income.
Administrator - Effective March 1, 1997, the Fund has an administrative service
agreement with MFS to provide the Fund with certain financial, legal,
compliance, shareholder communications, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion. 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 its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of $11,623
for the six months ended July 31, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$117,034 for the year ended July 31, 1997, as its portion of the sales charge on
sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A, Class B, and Class 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 up to 0.35% per
annum of its average daily net assets attributable to Class A shares in order
that MFD may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with MFD of up to 0.25% per annum of
the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to MFD of up to 0.10%
per annum (reduced to a maximum of 0.05% per annum for an indefinate period) of
the Fund's average daily net assets attributable to Class A shares, commissions
to dealers and payments to MFD wholesalers for sales at or above a certain
dollar level, and other such distribution-related expenses that are approved by
the Fund. MFD retains the service fee for accounts not attributable to a
securities dealer which amounted to $178,656 for the period ended July 31, 1997.
Payment of the remaining 0.05% will become payable on such date as the trustees'
of the fund may determine. Fees incurred under the distribution plan during the
period ended July 31, 1997, were 0.30% of average daily net assets attributable
to Class A shares on an annualized basis.
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 Class C shares. MFD
will pay to securities dealers that enter into a sales agreement with MFD all or
a portion of the service fee attributable to Class B and Class C shares, and
will pay to such securities dealers all of the distribution fee attributable to
Class C shares. The service fee is intended to be additional consideration for
services rendered by the dealer with respect to Class B and Class C shares. MFD
retains the service fee for accounts not attributable to a securities dealer,
which amounted to $157,062 and $4,568 for Class B and Class C shares,
respectively, for the year ended July 31, 1997. Fees incurred under the
distribution plan during the year ended July 31, 1997, were 1.00% of average
daily net assets attributable to Class B and Class C shares on an annualized
basis.
Purchases over $1 million of Class A shares and certain purchases by retirement
plans are subject to a contingent deferred sales charge in the event of a
shareholder redemption within 12 months following such purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class B shares in
the event of a shareholder redemption within six years of purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class C shares in
the event of a shareholder redemption within twelve months of purchase. MFD
receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended July 31, 1997, were $12,119, $181,601, and
$10,013 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
up to 0.13%. Prior to January 1, 1997, the fee was calculated as a percentage of
the average daily net assets of each class of shares at an effective annual rate
of up to 0.15%, up to 0.22%, and up to 0.15% attributable to Class A, Class B,
and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$666,725,863 and $592,897,773, 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 $1,028,795,832
==============
Gross unrealized appreciation $ 64,209,139
Gross unrealized depreciation (24,212,616)
--------------
Net unrealized appreciation $ 39,996,523
==============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
<TABLE>
<CAPTION>
Six Months Ended July 31, 1997 Year Ended January 31, 1997
------------------------------- ---------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 27,252,361 $ 145,368,836 52,421,821 $ 275,165,167
Shares issued to shareholders in
reinvestment of distributions 3,127,648 16,809,081 6,071,848 31,874,153
Shares reacquired (28,968,872) (155,112,114) (51,220,588) (268,276,630)
----------- ------------- ----------- -------------
Net increase 1,411,137 $ 7,065,803 7,273,081 $ 38,762,690
=========== ============= =========== =============
Class B Shares
Six Months Ended July 31, 1997 Year Ended January 31, 1997
------------------------------- ---------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------
Shares sold 27,760,288 $ 127,123,383 35,443,924 $ 185,987,481
Shares issued to shareholders in
reinvestment of distributions 1,191,603 6,408,888 2,271,608 11,933,444
Shares reacquired (19,411,590) (103,915,542) (35,539,089) (187,014,906)
----------- ------------- ----------- -------------
Net increase 5,540,301 $ 29,616,729 2,176,443 $ 10,906,019
=========== ============= =========== =============
Class C Shares
Six Months Ended July 31, 1997 Year Ended January 31, 1997
------------------------------- ---------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------
Shares sold 3,936,249 $ 21,127,983 4,433,093 $ 23,275,757
Shares issued to shareholders in
reinvestment of distributions 129,630 698,616 203,510 1,071,206
Shares reacquired (1,801,656) (9,668,249) (2,477,675) (12,968,265)
---------- ------------- ---------- -------------
Net increase 2,264,223 $ 12,158,350 2,158,928 $ 11,378,698
========== ============= ========== =============
Class I Shares
Six Months Ended July 31, 1997 Year Ended January 31, 1997*
------------------------------- ---------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------
Shares sold 41,168 $ 220,577 568,279 $ 3,034,610
Shares issued to shareholders in
reinvestment of distributions 26,812 143,908 4,076 21,807
Shares reacquired (4,798) (25,674) -- --
------- ------------- -------- -------------
Net increase 63,182 $ 338,811 572,355 $ 3,056,417
======= ============= ======== =============
</TABLE>
*For the period from the commencement of the Fund's offering of Class I shares,
January 2, 1997, through January 31, 1997.
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended July 31, 1997, was $1,707.
(7) Transactions in Securities of Affiliated Issuers
Affiliated issuers, as defined under the Investment Company Act of 1940, are
those in which the Fund's holdings of an issuer represent 5% or more of the
outstanding voting securities of the issuer. A summary of the Fund's
transactions in the securities of these issuers during the year ended, July 31,
1997, is set forth below.
Beginning Ending
Share Share Dividend Ending
Affiliate Amount Amount Income Value
- -------------------------------------------------------------------------------
Ranger Industries, Inc. 266,768 266,768 $ -- $166,730
(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 July 31, 1997, the
Fund owned the following restricted securities (constituting 0.37% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees.
<TABLE>
<CAPTION>
Date of Share/
Description Acquisition Par Amount Cost Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlantic Gulf Communities Corp. 9/25/95 690 $ 0 $ 4,226
Envirosource, Inc. 5/15/91 1,666 7,289 3,228
Merrill Lynch Mortgage Investors,
Inc., 8.129s, 2023 6/22/94 $4,500,000 $3,119,063 3,954,375
-----------
$ 3,961,829
===========
</TABLE>
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) HIGH INCOME FUND
<TABLE>
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor; INVESTOR INFORMATION
Former Chairman and Director (until 1991), For MFS stock and bond market outlooks,
Massachusetts Financial Services Company; call toll free: 1-800-4458 anytime from
Director, Cambridge Bancorp; Director, a touch-tone telephone.
Cambridge Trust Company
For information on MFS mutual
Peter G. Harwood - Private Investor funds, call your financial adviser
or, for an information kit, call
J. Atwood Ives - Chairman and Chief toll free: 1-800-637-2929 any
Executive Officer, Eastern Enterprises business day from 9 a.m. to 5 p.m.
Eastern time (or leave a message
Lawrence T. Perera - Partner, anytime).
Hemenway & Barnes
INVESTOR SERVICE
William J. Poorvu - Adjunct Professor, MFS Service Center, Inc.
Harvard University Graduate School of P.O. Box 2281
Business Administration Boston, MA 02107-9906
Charles W. Schmidt - Private Investor For general information, call toll free:
1-800-225-2606 any business day from
Arnold D. Scott* - Senior Executive Vice 8 a.m. to 8 p.m. Eastern time.
President, Director and Secretary,
Massachusetts Financial Services Company For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
Jeffrey L. Shames* - President and Director, day from 9 a.m. to 5 p.m. Eastern time.
Massachusetts Financial Services Company (To use this service, your phone must be
equipped with a Telecommunications Device
Elaine R. Smith - Independent Consultant for the Deaf.)
David B. Stone - Chairman, North American For share prices, account balances,
Management Corp. (investment advisers) and exchanges, call toll free:
1-800-MFS-TALK (1-800-637-8255)
INVESTMENT ADVISER anytime from a touch-tone
Massachusetts Financial Services Company telephone.
500 Boylston Street
Boston, MA 02116-3741 WORLD WIDE WEB
www.mfs.com
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street [DALBAR LOGO] For the fourth year in a
Boston, MA 02116-3741 row, MFS earned a #1
ranking in the DALBAR, Inc. Broker/Dealer
PORTFOLIO MANAGER Survey, Main Office Operations Service
Robert J. Manning* Quality Category. The firm achieved a 3.42
overall score on a scale of 1 to 4 in the
TREASURER 1997 survey. A total of 111 firms responded,
W. Thomas London* offering input on the quality of service they
received from 29 mutual fund companies nationwide.
ASSISTANT TREASURERS The survey contained questions about service
Mark E. Bradley* quality in 11 categories, including "knowledge of
Ellen Moynihan* operations contact," "keeping you informed,"
James O. Yost* and "ease of doing business" with the firm.
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
MFS(R) HIGH INCOME
FUND [DALBAR LOGO] ------------
BULK RATE
500 Boylston Street U.S. POSTAGE
Boston, MA 02116-3741 PAID
MFS
[MFS LOGO](SM) ------------
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MHI-3 9/97 74M 18/218/318/818
