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[Logo]M F S(R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
MFS(R) HIGH
INCOME FUND
SEMIANNUAL REPORT o JULY 31, 1998
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DIVERSIFYING YOUR INVESTMENT PORTFOLIO (see page 36)
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<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 11
Financial Statements ...................................................... 21
Notes to Financial Statements ............................................. 29
Trustees and Officers ..................................................... 37
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HIGHLIGHTS
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o FOR THE SIX MONTHS ENDED JULY 31, 1998, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 4.40%, CLASS B SHARES 4.04%,
CLASS C SHARES 4.03%, AND CLASS I SHARES 4.56%. (SEE PERFORMANCE SUMMARY
FOR MORE INFORMATION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.)
o THE HIGH-YIELD MARKET IS SEEING AN UNPRECEDENTED PERIOD OF GROWTH AND
STRONG PERFORMANCE. IN THE SECOND QUARTER OF THIS YEAR, A RECORD $53
BILLION IN HIGH-YIELD BONDS WERE ISSUED, AND THE MARKET SURPASSED $570
BILLION IN BONDS OUTSTANDING.
o WHILE THE ECONOMIC SLOWDOWN IN ASIA COULD ADVERSELY AFFECT THE U.S.
ECONOMY, WE DO NOT THINK IT WILL MATERIALLY IMPACT THE CREDIT QUALITY OF
THE HIGH-YIELD COMPANIES OWNED BY THE FUND, WHICH IS PRIMARILY INVESTED IN
BONDS OF DOMESTIC COMPANIES THAT DO NOT HAVE HIGH EXPORTS TO THAT AREA.
o THE BEST-PERFORMING SECTOR IN THE HIGH- YIELD MARKET OVER THE PAST YEAR
HAS BEEN TELECOMMUNICATIONS AND, GIVEN THE GROWTH OPPORTUNITIES OF THESE
COMPANIES AND THE WIDE SPREADS IN THIS SECTOR, WE BELIEVE MANY HIGH-YIELD
TELECOMMUNICATIONS ISSUES CONTINUE TO REPRESENT GOOD VALUE.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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LETTER FROM THE CHAIRMAN
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[Photo of Jeffrey L. Shames]
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Jeffrey L. Shames
Dear Shareholders:
Although the U.S. stock market has enjoyed several years of double-digit
advances, this summer's volatility shows the necessity of taking a cautious
outlook. By most commonly accepted measures, equity valuations appear to have
risen to a point at which stock prices have become more vulnerable to changes
in the investment environment such as rising inflation and interest rates, a
slowing economy, or -- as we have seen recently -- earnings disappointments.
As a result, while we continue to hold a favorable long-term outlook for the
equity markets, we also believe that a significant market correction would be
a healthy near-term event.
Currently, equity investors seem to be primarily focused on the slowdown in
corporate earnings. In the second quarter, average earnings growth for
companies in the Standard & Poor's 500 Composite Index (the S&P 500), a
popular, unmanaged index of common stock total return performance, was about
3%, well below what people were expecting a year ago. As a result, the stock
market has begun to retreat from the record-high levels set in mid-July. This
retreat may help correct some of the overvaluations that have been building in
the market for some time. Prior to July, equity prices had continued to rise
without a corresponding increase in corporate earnings. As a result, price-to-
earnings (P/E) ratios, or the amount investors paid for stocks in relation to
companies' earnings per share, also went up. A year ago this July, the average
P/E ratio for stocks in the S&P 500 stood at approximately 23; this July, the
average P/E ratio was some 20% higher, at about 28. If this summer's downturn
helps create more reasonable valuations, we believe the correction could
provide a sounder long-term foundation for the equity markets. On another
positive note, interest rates have been relatively stable for several months
as inflation has remained low. In an environment of low interest rates, stocks
become more attractive than most fixed-income investments, while low inflation
helps control companies' costs.
As long as interest rates remain low and the economy continues to grow, we
expect stock prices to advance over the next 12 months in line with corporate
earnings, that is, about 8% to 10%. However, just as no one can predict market
cycles, so too no one can predict economic cycles -- except to say that these
cycles do exist and that an economic slowdown at some point is inevitable.
Internationally, the economic turmoil in Asia continues to be a concern to us,
and we believe the United States has yet to see the full impact of this
crisis. There have been brief periods of improvement in a few countries but,
for the most part, the region's economies are still very weak and the
situation could turn worse before getting better. While the crisis has
affected all countries in Asia, Japan was the major factor behind the turmoil
as excesses in its banking and real estate sectors led to severe currency
problems. Although Japan now has a new government, questions remain about the
nation's commitment to ending the loan crisis and reforming its banking
system. At the same time, the Asian turmoil has had the beneficial effect of
moderating U.S. growth and keeping inflation in check, which has helped
establish a favorable interest-rate environment.
Countering the situation in Asia has been the growing strength of European
economies, although European equity markets have also seen some volatility
this summer. But as these countries move toward economic union, they have
benefited from a convergence of interest rates to lower levels, a rapid
expansion of manufacturing and service businesses, and an increasingly strong
consumer sector. This has helped American exporters offset some of their Asian
losses, while providing investment opportunities in developed and emerging
European markets.
Given the uncertainty arising from these conflicting developments, we believe
it is prudent to remind investors of the need to take a long-term view and to
diversify their investments across a range of asset classes. This includes
portfolios that focus on bond and international investments as well as on the
U.S. stock market. At MFS, we also believe our commitment to original,
company-by-company research gives us an advantage, by helping us find
companies that we think can keep growing or gain market share during periods
of market turmoil. To help fulfill this commitment, and to provide the
broadest possible coverage of industry sectors and individual companies, MFS
continues to increase its number of full-time research analysts. These
analysts thoroughly investigate each company's earnings potential and position
in its industry as well as the overall prospects for that industry.
MFS also uses active portfolio management on the fixed-income side, taking
advantage of our extensive research and credit analysis to help reduce the
potential for price declines and enhance the opportunity for appreciation.
Every year, both fixed-income and equity managers meet with thousands of
credit issuers and companies. They also attend many presentations, closely
follow sources of industry research, and keep track of competitors.
We believe that applying this discipline of thorough, bottom-up research to
both the equity and fixed-income markets is the best way to provide favorable
long-term performance for our shareholders -- regardless of changes in the
overall market environment.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
August 14, 1998
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MANAGEMENT REVIEW AND OUTLOOK
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[Photo of Robert J. Manning]
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Robert J. Manning
For the six months ended July 31, 1998, Class A shares of the Fund provided a
total return of 4.40%, Class B shares 4.04%, Class C shares 4.03%, and Class I
shares 4.56%. All of these returns assume the reinvestment of distributions
but exclude the effects of any sales charges and compare to a 2.83% return
during the same period for the Lehman Brothers Corporate Bond Index, an
unmanaged, market-value-weighted index comprised of all public, fixed-rate
nonconvertible, investment-grade corporate debt. The Fund's returns also
compare to a 3.24% return for the Lehman Brothers High Yield Bond Index, an
unmanaged index of noninvestment-grade corporate debt. The Fund is replacing
the Lehman Brothers Corporate Bond Index with the Lehman Brothers High Yield
Bond Index because we feel the latter better reflects the universe in which
the Fund invests.
Q. WHAT'S YOUR VIEW ON THE CURRENT HIGH-YIELD ENVIRONMENT?
A. This market is seeing an unprecedented period of growth and strong
performance. In the second quarter of this year, a record $53 billion in
high-yield bonds were issued, and the market surpassed $570 billion in
bonds outstanding. This was the seventh quarter in the past two years that
high-yield bonds were the best-performing domestic fixed-income asset
class. Healthy economic growth benefited the market's performance as
companies continued to post improved operating results.
Q. HOW IS THIS REFLECTED IN HIGH-INCOME YIELDS?
A. The yield spread between high-yield bonds and U.S. Treasury notes has
widened recently as some global equity investors have sought the security
of the Treasury market following renewed concerns about economic problems
in Asia. (Principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity.) As a result of this
flight to quality, the yield on Treasury notes fell slightly, to 5.4%,
while the yield on the Salomon Brothers High-Yield Bond Index, an unmanaged
index of noninvestment-grade U.S. corporate debt, remained at 9.2%. Given
the low level of interest rates, we believe the high-yield market remains
attractively valued, with the spread to Treasuries at 3.8%, its widest
level in two-and-a-half years.
Q. YOU MENTIONED ASIA. WHAT EFFECT DO YOU THINK THE CRISIS THERE MIGHT HAVE ON
YOUR MARKET?
A. While the economic slowdown in Asia could adversely affect the U.S.
economy, we do not think it will materially impact the credit quality of
the high-yield companies owned by the Fund, which is primarily invested in
the bonds of domestic companies. When the crisis in Southeast Asia
developed last fall we reduced our holdings in companies with high exports
to that area.
Q. HOW WOULD YOU DESCRIBE YOUR INVESTMENT APPROACH?
A. We take a conservative approach to high-income investing and focus on the
combined objectives of high yield and total return. We follow a disciplined
research and investment process that focuses on management evaluations,
cash-flow projections, asset and collateral evaluations, capital-structure
analysis, and industry-fundamental analysis.
Q. WHAT SECTORS IN THE PORTFOLIO HAVE BENEFITED THE MOST FROM THE FAVORABLE
ENVIRONMENT FOR HIGH-YIELD BONDS?
A. The best-performing sector in the high-yield market over the past year has
been telecommunications and, given the growth opportunities of these
companies and the wide spreads in this sector, we believe many high-yield
telecommunications issues continue to represent good value.
Q. ARE THERE OTHER SECTORS YOU LIKE?
A. The Fund is also overweighted in general industrials and in the aerospace
sector, in which equipment suppliers such as BE Aerospace, Moog, and
Argotech are benefiting from aircraft renovation and from orders for new
commercial aircraft. The general industrial holdings include several basic
manufacturing companies. Often, these are niche companies such as Clark
Schwebel, Interlake Corp., and Hayes Wheels with high market shares that
generate a lot of free cash flow.
Q. WHAT ABOUT SECTORS YOU'RE AVOIDING?
A. We are underweighted in the energy, retail, and health care sectors. At
this time, we think these industries have excess capacity and, as a result,
little pricing power.
Q. WHAT ABOUT THE INTERNATIONAL HIGH-YIELD MARKETS? HOW MUCH EXPOSURE DO YOU
HAVE THERE, AND WHAT INDUSTRIES DO YOU FAVOR?
A. We currently have very little international exposure. Although we can
invest up to 50% of the portfolio in non-U.S. bonds and generally will
invest from zero to 20%, we think the best risk-adjusted returns for this
fund are in the domestic market, so our foreign allocation is presently 8%.
Q. WHAT KIND OF MARKET OR ECONOMIC ENVIRONMENT DO YOU SEE GOING FORWARD?
A. As we move to the end of 1998, credit problems could develop as the
economic cycle begins to mature. Given that possibility, we're more
concerned about being prepared for a downturn than we are about
participating in any possible upside. However, we also believe that the
higher-quality companies in the portfolio will fare better in a lower-
growth environment.
/s/ Robert J. Manning
Robert J. Manning
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
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PORTFOLIO MANAGER'S PROFILE
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ROBERT J. MANNING IS SENIOR VICE PRESIDENT AND A MEMBER OF THE FIXED INCOME
MANAGEMENT GROUP OF MFS INVESTMENT MANAGEMENT(R). HE IS PORTFOLIO MANAGER OF
MFS(R) HIGH INCOME FUND, MFS(R) HIGH YIELD OPPORTUNITIES FUND, MFS(R) SPECIAL
VALUE TRUST, MFS(R) AMERICAN(SM) U.S. HIGH YIELD FUND, AND MFS(R)
MERIDIAN(SM) U.S. HIGH YIELD FUND.
MR. MANNING JOINED MFS IN 1984 AS A RESEARCH ANALYST IN THE HIGH YIELD
BOND DEPARTMENT. HE WAS NAMED VICE PRESIDENT IN 1988, PORTFOLIO MANAGER
OF MFS SPECIAL VALUE TRUST IN 1992, SENIOR VICE PRESIDENT IN 1993,
PORTFOLIO MANAGER OF MFS HIGH INCOME FUND IN 1994, AND PORTFOLIO MANAGER
OF MFS HIGH YIELD OPPORTUNITIES FUND IN 1998. HE IS A GRADUATE OF THE
UNIVERSITY OF LOWELL AND EARNED AN M.B.A. IN FINANCE FROM BOSTON
COLLEGE.
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This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
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FUND FACTS
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OBJECTIVE: SEEKS HIGH CURRENT INCOME BY INVESTING PRIMARILY IN
A DIVERSIFIED PORTFOLIO OF FIXED-INCOME SECURITIES,
SOME OF WHICH MAY INVOLVE EQUITY FEATURES. CAPITAL
GROWTH, IF ANY, IS INCIDENTAL.
COMMENCEMENT OF
INVESTMENT OPERATIONS: FEBRUARY 17, 1978
CLASS INCEPTION: CLASS A FEBRUARY 17, 1978
CLASS B SEPTEMBER 27, 1993
CLASS C JANUARY 3, 1994
CLASS I JANUARY 2, 1997
SIZE: $1.4 BILLION NET ASSETS AS OF JULY 31, 1998
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PERFORMANCE SUMMARY
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for
the applicable time periods. Investment results reflect the percentage change
in net asset value, including reinvestment of dividends.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN THROUGH JULY 31, 1998
<TABLE>
CLASS A
<S> <C> <C> <C> <C> <C>
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +4.40% +11.26% +41.13% +62.96% +171.16%
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Average Annual Total Return -- +11.26% +12.17% +10.26% + 10.49%
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SEC Results -- + 5.97% +10.37% + 9.19% + 9.95%
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</TABLE>
<TABLE>
CLASS B
<CAPTION>
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +4.04% +10.48% +38.02% +56.85% +161.03%
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Average Annual Total Return -- +10.48% +11.34% + 9.42% + 10.07%
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SEC Results -- + 6.48% +10.53% + 9.14% + 10.07%
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</TABLE>
<TABLE>
CLASS C
<CAPTION>
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +4.03% +10.66% +38.36% +57.71% +162.46%
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Average Annual Total Return -- +10.66% +11.43% + 9.54% + 10.13%
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SEC Results -- + 9.66% +11.43% + 9.54% + 10.13%
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</TABLE>
<TABLE>
CLASS I
<CAPTION>
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +4.56% +11.60% +41.59% +63.48% +171.90%
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Average Annual Total Return -- +11.60% +12.29% +10.33% + 10.52%
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</TABLE>
<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. Class I shares ("I") have no sales charge or Rule
12b-1 fees and are only available to certain institutional investors.
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.
I results include the performance and the operating expenses (e.g., Rule
12b-1 fees) of A for periods prior to the inception of I. Because operating
expenses of A are greater than those of I, I performance generally would have
been higher than A performance. The A performance included in the
I performance has been adjusted to reflect the fact that I have no initial
sales charge.
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.
Lower-rated securities may provide greater returns, but they are also
associated with greater-than-average risk. These risks may increase share
price volatility.
PORTFOLIO CONCENTRATION AS OF JULY 31, 1998
QUALITY RATINGS
"BBB" 1.2%
"BB" 12.9%
"B" 66.1%
"CCC" 4.3%
"C" 0.1%
Not Rated 15.4%
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS (Unaudited) -- July 31, 1998
Bonds - 88.6%
<CAPTION>
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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<S> <C> <C>
U.S. Bonds - 80.6%
Aerospace - 3.7%
Airplane Pass-Through Trust, 10.875s, 2019 $ 5,250 $ 5,932,448
Argo Tech Corp., 8.625s, 2007 5,550 5,633,250
BE Aerospace, Inc., 9.875s, 2006 7,150 7,668,375
BE Aerospace, 8s, 2008 3,525 3,560,250
K & F Industries, Inc., 9.25s, 2007 8,375 8,458,750
MOOG, Inc., 10s, 2006 13,015 13,958,587
Stellex Industries, Inc., 9.5s, 2007 2,000 1,960,000
United Defense Industries, Inc., 8.75s, 2007 2,535 2,573,025
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$ 49,744,685
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Building - 1.8%
AAF-McQuay, Inc., 8.875s, 2003 $ 7,125 $ 7,027,031
Building Materials Corp., 8.625s, 2006 5,490 5,640,975
Building Materials Corp., 8s, 2007## 3,000 3,015,000
Nortek, Inc., 9.875s, 2004 2,300 2,374,750
Nortek, Inc., 9.25s, 2007 5,925 6,087,937
UDC Homes, Inc., 2000 30 16,650
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$ 24,162,343
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Business Services - 2.8%
Anacomp, Inc., 10.875s, 2004 $ 5,650 $ 5,960,750
Iron Mountain, Inc., 10.125s, 2006 10,275 11,199,750
Pierce Leahy Corp., 11.125s, 2006 3,477 3,907,279
Pierce Leahy Corp., 9.125s, 2007 2,225 2,314,000
Unisys Corp., 12s, 2003 9,425 10,662,031
Zilog, Inc., 9.5s, 2005## 4,500 3,465,000
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$ 37,508,810
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Chemicals - 1.3%
Brunner Mond Group Plc, 11s, 2008 $ 2,005 $ 2,040,088
NL Industries, Inc., 11.75s, 2003 9,655 10,620,500
Sterling Chemicals, Inc., 11.25s, 2007 4,775 4,822,750
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$ 17,483,338
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Consumer Goods and Services - 5.7%
American Safety Razor Co., 9.875s, 2005 $ 6,000 $ 6,397,500
Boyds Collection Ltd., 9s, 2008## 3,200 3,200,000
Galey & Lord, Inc., 9.125s, 2008 3,825 3,691,125
Globe Manufacturing Corp., 10s, 2008# 3,075 3,098,063
Hayes Wheels International, Inc., 11s, 2006 4,525 5,101,937
Haynes International, Inc., 11.625s, 2004 7,495 8,394,400
Kindercare Learning Centers, Inc., 9.5s, 2009 5,000 5,087,500
Polymer Group, Inc., 9s, 2007 9,590 9,841,737
Polymer Group, Inc., 8.75s, 2008## 3,000 3,041,250
Reeves Industries, Inc., 11s, 2002 1,360 1,360,446
Reeves, Inc., 13s, 2004 1,325 662,272
Remington Products Co. LLC, 11s, 2006 7,270 6,597,525
Revlon Consumer Products Corp., 8.125s, 2006## 4,125 4,166,250
Revlon Consumer Products Corp., 8.625s, 2008## 8,915 9,137,875
Synthetic Industries, Inc., 9.25s, 2007 7,290 7,435,800
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$ 77,213,680
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Containers - 1.4%
Atlantis Group, Inc., 11s, 2003 $ 7,500 $ 7,987,500
Silgan Holdings, Inc., 9s, 2009 5,650 5,890,125
U.S. Can Corp., 10.125s, 2006## 5,700 5,928,000
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$ 19,805,625
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Corporate Asset Backed - 0.3%
Merrill Lynch Mortgage Investors, Inc., 8.161s, 2022+ $ 4,500 $ 4,360,781
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Energy - 3.3%
AmeriGas Partners LP, 10.125s, 2007 $ 3,400 $ 3,587,000
Chesapeake Energy Corp., 9.625s, 2005## 6,200 5,983,000
Chiles Offshore Corp., 10s, 2008## 1,400 1,302,000
Clark USA, Inc., 10.875s, 2005 3,890 4,298,450
Continental Resources Inc., 10.25s, 2008## 6,150 6,057,750
El Paso Electric Co., 8.9s, 2006 4,550 5,075,070
Giant Industries, Inc., 9s, 2007 100 101,000
Gulfmark Offshore, 8.75s, 2008## 4,425 4,347,562
P & L Coal Holdings Corp., 9.625s, 2008 6,500 6,760,000
Petsec Energy, Inc., 9.5s, 2007 3,925 3,944,625
Pool Energy Services Co., 8.625s, 2008## 2,575 2,459,125
Wiser Oil Co. Delaware, 9.5s, 2007 675 624,375
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$ 44,539,957
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Entertainment - 2.1%
Allbritton Communications Co., 9.75s, 2007 $ 7,675 $ 8,135,500
AMC Entertainment, Inc., 9.5s, 2009 6,875 6,978,125
American Skiing Co., 12s, 2006 5,300 5,949,250
Cinemark USA, Inc., 9.625s, 2008 4,700 4,864,500
Hollywood Theaters, Inc., 10.625s, 2007 2,025 2,121,188
Marvel Holdings, Inc., 0s, 1998* 11,125 403,281
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$ 28,451,844
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Financial Institutions - 0.4%
Jorgansen Bank, 8.938s, 2004 $ 4,988 $ 4,980,807
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Financial Services - 0.5%
Americo Life, Inc., 9.25s, 2005 $ 2,050 $ 2,116,625
Williams Scotsman, Inc., 9.875s, 2007 4,525 4,672,063
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$ 6,788,688
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Food and Beverage Products - 2.1%
Delta Beverage Group, Inc., 9.75s, 2003 $ 2,425 $ 2,540,188
Fage Dairy Industries SA, 9s, 2007 2,700 2,625,750
Friendly Ice Cream Corp., 10.5s, 2007 5,760 5,875,200
Planet Hollywood, 12s, 2005 5,275 4,457,375
Purina Mills, Inc., 9s, 2010## 3,050 3,141,500
Specialty Foods Corp., 10.25s, 2001 10,225 9,892,687
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$ 28,532,700
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Forest and Paper Products - 3.0%
Buckeye Cellulose Corp., 8.5s, 2005 $ 1,000 $ 1,025,000
Buckeye Cellulose Corp., 9.25s, 2008 1,000 1,055,000
Florida Coast Paper Co. LLC, 12.75s, 2003 6,650 7,248,500
Gaylord Container Corp., 9.75s, 2007 4,500 4,185,000
Gaylord Container Corp., 9.875s, 2008## 5,465 5,027,800
Graham Packaging Co./GPC Capital, 8.75s, 2008## 3,930 3,969,300
Repap New Brunswick, Inc., 9s, 2004 2,125 2,125,000
Speciality Paperboard, Inc., 9.375s, 2006## 5,350 5,604,125
U.S. Timberlands, 9.625s, 2007 9,500 9,808,750
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$ 40,048,475
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Gaming - 4.2%
Boyd Gaming Corp., 9.5s, 2007 $ 9,475 $ 9,901,375
Casino America, Inc., 12.5s, 2003 5,900 6,667,000
Coast Hotels & Casinos, Inc., 13s, 2002 3,625 4,186,875
Eldorado Resorts, 10.5s, 2006 5,455 5,973,225
Grand Casinos, Inc., 10.125s, 2003 6,055 6,599,950
HorseShoe Gaming LLC, 9.375s, 2007 155 165,075
Prime Hospitality Corp., 9.75s, 2007 7,895 8,408,175
Red Roof Inns, Inc., 9.625s, 2003 9,260 9,560,950
Santa Fe Hotel, Inc., 11s, 2000 5,295 5,215,575
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$ 56,678,200
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Industrial - 7.9%
Clark-Schwebel, Inc., 10.5s, 2006 $ 4,675 $ 5,393,781
Columbus Mckinnon Corp., 8.5s, 2008## 3,000 2,940,000
Day International Group, Inc., 11.125s, 2005 2,350 2,561,500
Envirosource, Inc., 9.75s, 2003 4,000 4,030,000
Esi Tractebel, 7.99s, 2011## 2,150 2,144,625
Furon Co., 8.125s, 2008## 4,800 4,836,000
General Binding Corp., 9.375s, 2008## 4,200 4,305,000
Grove Worldwide LLC, 9.25s, 2008## 2,735 2,666,625
Hayes Wheels International, Inc., 9.125s, 2007 5,250 5,538,750
IMO Industries, Inc., 11.75s, 2006 7,825 8,803,125
Interlake Corp., 12s, 2001 12,135 13,166,475
Interlake Corp., 12.125s, 2002 2,200 2,255,000
International Knife & Saw, Inc., 11.375s, 2006 2,060 2,224,800
Johnstown America Industries, Inc., 11.75s, 2005 4,925 5,460,075
Newcor, Inc., 9.875s, 2008## 6,450 6,450,000
Numatics, Inc., 9.625s, 2008## 1,915 1,962,875
Oxford Automotive, Inc., 10.125s, 2007 4,425 4,535,625
Psinet, Inc., 10s, 2005 1,445 1,517,250
Samsonite, Inc., 10.75s, 2008## 3,900 3,851,250
Simonds Industries, Inc., 10.25s, 2008 2,175 2,223,938
Stanadyne Automotive Corp., 10.25s, 2007## 1,540 1,578,500
Talon Automotive Group, Inc., 9.625s, 2008## 1,750 1,741,250
Thermadyne Holdings, 0s to 2003, 12.5s to 2008## 12,375 6,930,000
Thermadyne Manufacturing, 9.875s, 2008## 5,750 5,865,000
Venture Holdings, 9.5s, 2005 250 255,000
Venture Holdings Trust, 9.75s, 2004 679 682,395
Wheeling Pittsburgh Corp., 9.25s, 2007 3,650 3,704,750
--------------
$ 107,623,589
- ------------------------------------------------------------------------------------------------------
Media - 11.4%
American Mobile Satellite Corp., 12.25s, 2008## $ 5,800 $ 5,278,000
Big Flower Press Holdings, Inc., 8.875s, 2007## 4,430 4,562,900
Chancellor Media Corp., 8.75s, 2007 4,135 4,300,400
Charter Communications Southeast LP, 11.25s, 2006 7,575 8,578,687
Classic Cable, Inc., 9.875s, 2008## 2,950 3,082,750
Classic Communications, Inc., 0s to 2003, 13.25s to 2008 3,000 1,725,000
Crown Castle International Corp., 0s to 2002,
10.625s to 2007 3,025 2,151,531
CSC Holdings, Inc., 8.125s, 2009 6,000 6,390,000
Cumulus Media, Inc., 10.375s, 2008 1,825 1,916,250
Dialog Corporation PLC, 11s, 2007 8,925 9,772,875
Digital Television Services, Inc., 12.5s, 2007 7,100 8,111,750
EchoStar Communications Corp., 0s to 1999, 12.875s
to 2004 3,775 3,718,375
EchoStar Satellite Broadcasting Corp., 0s to 2000,
13.125s to 2004 8,625 7,978,125
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 9,525 9,786,937
FrontierVision Holding LP, 0s to 2001, 11.87s to 2007 3,445 2,790,450
Frontiervision Operating Partnership LP, 11s, 2006 2,850 3,167,063
Golden Books Publishing, Inc., 7.65s, 2002 7,285 5,627,663
Granite Broadcasting Corp., 10.375s, 2005 4,400 4,664,000
Granite Broadcasting Corp., 8.875s, 2008## 3,500 3,570,000
Hollinger International Publishing, Inc., 9.25s, 2007 7,475 7,904,813
Intermedia Capital Partners IV, LP, 11.25s, 2006 6,200 7,052,500
Jacor Communications Co., 8s, 2010 3,320 3,386,400
Lenfest Communications, Inc., 8.375s, 2005 2,000 2,127,500
Lenfest Communications, Inc., 10.5s, 2006 5,925 6,932,250
Liberty Group Operating, Inc., 9.375s, 2008## 4,770 4,865,400
LIN Holdings Corp., 0s to 2003, 10s to 2008## 1,500 1,053,750
LIN Television Corp., 8.375s, 2008## 6,100 6,237,250
Outdoor Systems, Inc., 8.875s, 2007 3,950 4,167,250
Renaissance Media Louisiana LLC, 0s to 2003,
10s to 2008## 3,145 1,918,450
Transwestern Publishing Co., 9.625s, 2007 3,150 3,276,000
Triton PCS, Inc., 0s to 2003, 11s to 2008## 10,850 6,238,750
Young Broadcasting, Inc., 8.75s, 2007 2,500 2,625,000
--------------
$ 154,958,069
- ------------------------------------------------------------------------------------------------------
Medical and Health Products - 0.7%
Fresenius Medical Care Capital Trust, 7.875s, 2008## $ 2,400 $ 2,352,000
Mediq, Inc., 11s, 2008## 3,175 3,198,813
Pharmerica, Inc., 8.375s, 2008## 4,450 4,427,750
--------------
$ 9,978,563
- ------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.4%
Alaris Medical Inc., 0s to 2003, 11.125s to 2008## $ 6,410 $ 3,733,825
Beverly Enterprises, Inc., 9s, 2006 4,550 4,652,375
Insight Health Services Corp., 9.625s, 2008## 1,775 1,739,500
Oxford Health Plans, Inc., 11s, 2005## 2,525 2,474,500
Prime Medical Services Inc., 8.75s, 2008## 6,220 6,095,600
--------------
$ 18,695,800
- ------------------------------------------------------------------------------------------------------
Metals and Minerals - 4.1%
Acme Metals Inc., 10.875s, 2007## $ 2,675 $ 1,872,500
Ak Steel Holdings Corp., 9.125s, 2006 7,085 7,403,825
Commonwealth Aluminum Corp., 10.75s, 2006 5,050 5,239,375
Doe Run Resources Corp., 11.25s, 2005## 4,250 4,292,500
GS Technologies Operating, Inc., 12.25s, 2005 1,890 2,022,300
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 3,700 3,811,000
Keystone Consolidated Industries, Inc., 9.625s, 2007 4,620 4,700,850
Metal Management, Inc., 10s, 2008## 6,375 6,311,250
Republic Engineered Steels, Inc., 9.875s, 2001 1,000 1,010,000
Ryerson Tull, Inc., 9.125s, 2006 1,050 1,139,250
Schuff Steel Co., 10.5s, 2008## 5,840 5,840,000
WCI Steel, Inc., 10s, 2004 8,125 8,246,875
WHX Corp., 10.5s, 2005 3,200 3,232,000
--------------
$ 55,121,725
- ------------------------------------------------------------------------------------------------------
Mining - 0.1%
AEI Holdings, Inc., 10s, 2007## $ 1,000 $ 987,500
- ------------------------------------------------------------------------------------------------------
Retail - 2.2%
Affinity Group Holding, Inc., 11s, 2007 $ 2,500 $ 2,659,375
Cole National Group, Inc., 8.625s, 2007 8,900 9,022,375
Finlay Enterprises, Inc., 9s, 2008 3,500 3,561,250
Finlay Fine Jewelry Corp., 8.375s, 2008 3,475 3,544,500
J Crew Operating Corp., 10.375s, 2007 4,075 3,993,500
Musicland Group Inc., 9s, 2003 2,750 2,701,875
Musicland Group, Inc., 9.875s, 2008 4,475 4,508,562
--------------
$ 29,991,437
- ------------------------------------------------------------------------------------------------------
Supermarkets - 0.1%
Jitney-Jungle Stores of America, Inc., 12s, 2006 $ 1,000 $ 1,142,500
Marsh Supermarkets, Inc., 8.875s, 2007 135 138,375
--------------
$ 1,280,875
- ------------------------------------------------------------------------------------------------------
Telecommunications - 19.8%
Acme Television LLC, 0s to 2000, 10.875s to 2004 $ 4,500 $ 3,825,000
Allegiance Telecom Inc., 0s to 2003, 11.75s to 2008## 7,700 3,811,500
Allegiance Telecom Inc., 12.875s, 2008 4,000 4,050,000
Americian Cellular Corp., 10.5s, 2008## 5,100 5,176,500
Century Communications Corp., 0s, 2008 100 47,250
Convergent Communications, Inc., 13s, 2008## 5,500 5,417,500
Digital Teleport Holdings, Inc., 0s to 2003,
12.5s to 2008## 9,675 5,079,375
Dolphin Telecom PLC, 0s to 2003, 11.5s to 2008## 10,900 6,213,000
Esat Holdings Ltd., 0s to 2002, 12.5s to 2007## 2,825 2,076,375
Esat Telecom Group PLC, 0s to 2002, 12.5s to 2007 5,050 3,711,750
Esprit Telecom Group PLC, 11.5s, 2007 800 848,000
Esprit Telecom Group PLC, 10.875s, 2008## 6,250 6,375,000
Exodus Communications, Inc., 11.25s, 2008## 9,350 9,513,625
Flag Ltd., 8.25s, 2008## 5,675 5,760,125
GCI, Inc., 9.75s, 2007 4,245 4,414,800
Global Crossing Holdings Ltd., 9.625s, 2008## 7,700 8,162,000
GlobalStar LP/Capital, 11.375s, 2004## 6,905 6,387,125
ICG Holdings, Inc., 0s to 2001, 12.5s, to 2006 9,325 7,320,125
Intermedia Communications, Inc., 8.875s, 2007 5,100 5,253,000
Intermedia Communications, Inc., 0s to 2002,
11.125s to 2007 1,650 1,245,750
ITC Deltacom, Inc., 11s, 2007 4,095 4,678,537
L-3 Communications Corp., 10.375s, 2007 3,740 4,151,400
L-3 Communications Corp., 8.5s, 2008 3,750 3,834,375
Level 3 Communications, Inc., 9.125s, 2008## 7,200 7,092,000
McCaw International Ltd., 0s to 2002, 13s to 2007 7,225 4,804,625
Metronet Communications Corp., 0s to 2003,
9.95s to 2008## 12,850 8,159,750
MJD Communications, Inc., 9.5s, 2008## 3,850 3,965,500
Mobile Telecommunication Technologies Corp.,
13.5s, 2002 8,515 9,877,400
Nextel Communications, Inc., 0s to 1999, 9.75s to 2004 10,335 9,261,925
Nextel Communications Inc., 0s to 2003, 11.5s to 2008## 4,000 2,630,000
Nextel International, Inc., 0s to 2003,
12.125s to 2008## 11,475 6,770,250
Nextlink Communications, Inc., 9.625s, 2007 4,800 4,944,000
Northeast Optic Network, 12.75s, 2008 3,650 3,650,000
NTL, Inc., 0s to 2003, 9.75s to 2008## 5,265 3,567,038
Onepoint Communications Corp., 14.5s, 2008## 2,825 2,641,375
Orbital Imaging Corp., 11.625s, 2005## 2,930 2,973,950
Orion Network Systems, Inc., 11.25s, 2007 500 558,750
Pagemart Wireless, Inc., 0s to 2003, 11.25s to 2008## 6,240 3,853,200
Pathnet, Inc., 12.25s, 2008## 5,500 5,802,500
Pinnacle Holdings, Inc., 0s to 2003, 10s to 2008## 8,100 5,376,375
Qwest Communications International, Inc., 0s to 2002,
9.47s to 2007 2,225 1,718,813
Qwest Communications International, Inc., 10.875s, 2007 1,890 2,192,400
RCN Corp., 0s to 2002, 11.25s to 2007 8,015 5,189,712
Rhythms Netconnections, Inc., 0s to 2003, 13.5s to 2008## 1,850 841,750
Rogers Cablesystems, Inc., 9.625s, 2002 750 800,625
Rogers Cablesystems, Inc., 10.125s, 2012 5,700 6,241,500
Rural Cellular Corp., 9.625s, 2008## 3,200 3,224,000
Spectrasite Holdings, Inc., 12s, 2008## 11,750 7,167,500
Sprint Spectrum LP, 11s, 2006 450 519,750
Telesystem International Wireless, Inc., 0s to 2002,
13.25s to 2007 7,540 4,995,250
Telesystem International Wireless, Inc., 0s to 2002,
10.5s to 2007## 3,545 2,140,294
Time Warner Telecommunications Inc., 9.75s, 2008 7,650 7,822,125
United International Holdings, Inc., 0s to 2003,
10.75s to 2008## 8,150 5,154,875
Verio, Inc., 10.375s, 2005## 2,475 2,586,375
Versatel Telecom B V, 13.25s, 2008## 7,675 8,077,937
Viatel, Inc., 12.5s, 2008## 5,375 3,547,500
Viatel, Inc., 11.25s, 2008## 4,775 5,228,625
Western Wireless Corp., 10.5s, 2007 7,900 8,512,250
--------------
$ 269,242,031
- ------------------------------------------------------------------------------------------------------
Transportation - 0.3%
Moran Transportation Co., 11.75s, 2004 $ 3,500 $ 3,893,750
- ------------------------------------------------------------------------------------------------------
Total U.S. Bonds $1,092,073,272
- ------------------------------------------------------------------------------------------------------
Foreign Bonds - 8.0%
Bulgaria - 0.3%
National Republic of Bulgaria, 2.5s, 2012 $ 6,000 $ 3,765,000
- ------------------------------------------------------------------------------------------------------
Canada - 2.2%
Acetex, Inc., 9.75s, 2003 (Chemicals) $ 4,075 $ 4,187,062
Clearnet Communications, Inc., 0s to 2000, 14.75s
to 2005 (Telecommunications) 4,650 4,010,625
International Utility Structures, Inc., 10.75s,
2008 (Energy)## 2,175 2,229,375
Metronet Communications Corp., 0s to 2002,
10.75s to 2007 (Telecommunications) 6,000 4,065,000
Metronet Communications Corp., 12s, 2007
(Telecommunications)# 3,250 3,745,625
PCI Chemicals Canada Inc., 9.25s, 2007 (Chemicals)## 4,875 4,582,500
Repap New Brunswick, Inc., 10.625s, 2005
(Forest and Paper Products)## 7,530 7,379,400
--------------
$ 30,199,587
- ------------------------------------------------------------------------------------------------------
China - 0.2%
Dao Heng Bank Ltd., 7.75s, 2007
(Financial Institutions)## $ 3,325 $ 2,819,899
- ------------------------------------------------------------------------------------------------------
Luxembourg - 0.7%
Millicom International Cellular Communications Corp.,
0s to 2001, 13.25s, 2006 (Telecommunications) $ 11,315 $ 9,009,569
- ------------------------------------------------------------------------------------------------------
Mexico - 0.4%
Satelites Mexicanos S A De C V, 10.125s, 2004
(Telecommunications)## $ 5,390 $ 5,160,925
- ------------------------------------------------------------------------------------------------------
Netherlands - 0.1%
Ptc International Finance BV, 0s to 2002, 10.75s, 2007
(Financial Services) $ 2,515 $ 1,766,788
- ------------------------------------------------------------------------------------------------------
Russia - 1.2%
Ministry of Finance, Russia, 10s, 2007 $ 4,700 $ 3,290,000
Ministry of Finance, Russia, 12.75s, 2028## 2,120 1,738,400
Vnesheconombank, Russia, 6.625s, 2015 21,400 10,900,625
--------------
$ 15,929,025
- ------------------------------------------------------------------------------------------------------
South Korea - 0.3%
Republic of Korea, 8.875s, 2008 $ 3,675 $ 3,453,397
- ------------------------------------------------------------------------------------------------------
Thailand - 0.2%
Jasmine Submarine Telecom Ltd., 8.483s, 2011
(Telecommunications)## $ 3,455 $ 3,095,078
- ------------------------------------------------------------------------------------------------------
United Kingdom - 2.4%
Newsquest Capital PLC, 11s, 2006 (Media) $ 3,921 $ 4,430,730
Telewest PLC, 9.625s, 2006 (Telecommunications) 3,925 4,219,375
Colt Telecommunications Group PLC, 12s to 2006,
(Telecommunications) 14,395 11,731,925
Colt Telecommunications Group PLC,
8.875s, 2007 (Telecommunications) 8,000 4,859,119
Hmv Media Group PLC, 10.25s, 2008 (Retail)## 5,825 5,926,938
Middleweb PLC Bankers Trust Lux, 10.5s, 2008
(Financial Institutions)## 865 1,409,013
--------------
$ 32,577,100
- ------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 107,776,368
- ------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $1,176,368,296) $1,199,849,640
- ------------------------------------------------------------------------------------------------------
Stocks
- ------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- ------------------------------------------------------------------------------------------------------
U.S. Stocks
Consumer Goods and Services
Ranger Industries, Inc.++* (Identified Cost, $7,223,919) 266,768 $ 133,384
- ------------------------------------------------------------------------------------------------------
Preferred Stock - 3.1%
- ------------------------------------------------------------------------------------------------------
Consumer Goods and Services
Renaissance Cosmetics, Inc., 14s## 8,898 $ 88,980
- ------------------------------------------------------------------------------------------------------
Energy - 0.5%
Clark USA, Inc. 3,013 $ 3,193,780
El Paso Electric Co.* 27,981 3,021,948
--------------
$ 6,215,728
- ------------------------------------------------------------------------------------------------------
Media - 0.9%
CSC Holdings, Inc. 44,216 $ 5,129,056
Primedia, Inc. 79,300 7,830,875
--------------
$ 12,959,931
- ------------------------------------------------------------------------------------------------------
Supermarkets - 0.7%
Supermarkets General Holdings Corp., $3.52 Exch., 2007 318,098 $ 9,224,842
- ------------------------------------------------------------------------------------------------------
Telecommunications - 1.0%
E Spire Communications, Inc. 151 $ 166,478
Granite Broadcasting Corp. 1,000 55,500
ICG Funding LLC##* 34,750 2,571,500
NEXTEL Communications, Inc.* 3,628 4,008,940
Rural Cellular Corp. 6,440 6,472,200
--------------
$ 13,274,618
- ------------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $41,285,723) $ 41,764,099
- ------------------------------------------------------------------------------------------------------
Convertible Preferred Stock - 0.7%
- ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- ------------------------------------------------------------------------------------------------------
U.S. Stocks - 0.7%
Cendant Corp.* $208,320 $ 6,848,520
ICG Funding LLC, 6.75%*## 35,000 2,835,000
Ithaca Industries, Inc.* 23,600 79,650
- ------------------------------------------------------------------------------------------------------
Total Convertible Preferred Stock (Identified Cost, $8,955,262) $ 9,763,170
- ------------------------------------------------------------------------------------------------------
Warrants - 0.4%
- ------------------------------------------------------------------------------------------------------
SHARES
- ------------------------------------------------------------------------------------------------------
Allegiance Telecom, Inc. (Telecommunications)* 7,700 $ 23,100
Atlantic Gulf Communities Corp. (Building)*+ 690 1,466
CHC Helicopter Corp. (Transportation)* 16,000 48,000
Colt Telecommunications Group PLC
(Telecommunications)* 12,570 4,022,400
Crystal Oil Co., $0.075 (Energy)* 3,954,527 0
Crystal Oil Co., $0.10 (Energy)* 3,455,042 0
Crystal Oil Co., $0.125 (Energy)* 4,107,411 0
Crystal Oil Co., $0.15 (Energy)* 4,041,943 0
Crystal Oil Co., $0.25 (Energy)* 4,041,943 0
Envirosource, Inc. (Industrial)*+ 238 4,076
Esat Holdings Ltd. (Telecommunications)* 2,825 98,875
Grand Palais Resorts (Gaming)##* 111,660 0
Hemmeter (Entertainment)* 111,660 0
ICO, Inc. (Telecommunications)* 706,250 430,812
Knology Holdings, Inc. (Telecommunications)*## 2,475 6,188
Loral Orion Network Systems Inc., 0.8463
(Telecommunications)* 5,000 50,000
Loral Orion Network Systems Inc., 0.6628
(Telecommunications)* 11,775 235,500
McCaw International Ltd. (Telecommunications)*## 7,225 9,031
Metronet Communications Corp. (Telecommunications)* 3,250 130,000
Orbital Imaging Corp. (Telecommunications)* 2,930 146,500
Renaissance Cosmetics, Inc. (Consumer Goods &
Services)* 7,189 72
Republic Health Corp., Warrants (Medical and Health
Technology and Services)* 2,500 0
- ------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $4,029,262) $ 5,206,020
- ------------------------------------------------------------------------------------------------------
Short-Term Obligations - 5.3%
- ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- ------------------------------------------------------------------------------------------------------
Federal Farm Credit Bank, 5.4s, 1998 $ 9,615 $ 9,607,789
Federal Home Loan Mortgage Corp., 5.43s, 1998 11,000 10,980,090
Federal Home Loan Mortgage Corp., 5.45s, 1998 5,000 4,996,972
Federal Home Loan Mortgage Corp., 5.46s, 1998 25,746 25,725,186
Federal Home Loan Mortgage Corp., 5.47s, 1998 5,000 4,995,442
Federal National Mortgage Assn., 5.48s, 1998 5,000 4,987,822
General Electric Capital Corp., due 8/03/98 9,890 9,886,890
- ------------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 71,180,191
- ------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,309,042,653) $1,327,896,504
Other Assets, Less Liabilities - 2.0% 26,911,080
- ------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,354,807,584
- ------------------------------------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
+Restricted security.
++Affiliated issue are those in which the Fund's holdings of an issuer represent 5% or more
of the outstanding voting securities of the issuer.
See Portfolio Notes and Notes to Financial Statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- --------------------------------------------------------------------------------
JULY 31, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $1,301,818,734) $1,327,763,120
Affiliated issuer (identified cost, $7,223,919) 133,384
--------------
Total investments, at value (identified cost,
$1,309,042,653) $1,327,896,504
--------------
Cash 321,249
Net receivable for forward foreign currency exchange
subject to master netting agreements 16,571
Receivable for investments sold 17,064,040
Receivable for Fund shares sold 8,042,929
Interest and dividends receivable 27,111,394
Other assets 7,569
--------------
Total assets $1,380,460,256
--------------
Liabilities:
Distributions payable $ 3,674,956
Payable for investments purchased 20,400,917
Payable for Fund shares reacquired 869,547
Payable to affiliates -
Management fee 16,179
Shareholder servicing agent fee 4,179
Distribution and service fee 370,367
Administrative fee 533
Accrued expenses and other liabilities 315,994
--------------
Total liabilities $ 25,652,672
--------------
Net assets $1,354,807,584
--------------
Net assets consist of:
Paid-in capital $1,542,506,080
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 18,872,432
Accumulated net realized loss on investments and
foreign currency transactions (204,182,456)
Accumulated distributions in excess of net investment
income (2,388,472)
--------------
Total $1,354,807,584
==============
Shares of beneficial interest outstanding 240,266,218
===========
Class A shares:
Net asset value per share
(net assets of $792,248,984 / 140,526,548 shares of
beneficial interest outstanding) $5.64
=====
Offering price per share (100 / 95.25) $5.92
=====
Class B shares:
Net asset value and offering price per share
(net assets of $473,194,293 / 83,915,271 shares of
beneficial interest outstanding) $5.64
=====
Class C shares:
Net asset value and offering price per share
(net assets of $80,526,836 / 14,255,216 shares of
beneficial interest outstanding) $5.65
=====
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $8,837,471 / 1,569,183 shares of
beneficial interest outstanding) $5.63
=====
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>
<TABLE>
FINANCIAL STATEMENTS -- continued
Statement of Operations (Unaudited)
<CAPTION>
- ---------------------------------------------------------------------------------------------
SIX MONTHS ENDED JULY 31, 1998
- ---------------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Interest $ 58,582,659
Dividend 865,376
------------
Total investment income $ 59,448,035
------------
Expenses -
Management fee $ 2,778,209
Trustees' compensation 32,301
Shareholder servicing agent fee 714,813
Distribution and service fee (Class A) 1,166,961
Distribution and service fee (Class B) 2,123,725
Distribution and service fee (Class C) 343,317
Administrative fee 91,689
Postage 99,291
Custodian fee 78,039
Printing 64,412
Auditing fees 25,638
Legal fees 3,719
Miscellaneous 401,162
------------
Total expenses $ 7,923,276
Fees paid indirectly (50,145)
------------
Net expenses $ 7,873,131
------------
Net investment income $ 51,574,904
------------
Realized and unrealized gain on investments:
Realized gain (identified cost basis) -
Investment transactions $ 25,006,250
Foreign currency transactions 1,158
------------
Net realized gain on investments and foreign currency transactions $ 25,007,408
------------
Change in unrealized appreciation (depreciation) -
Investments $(21,700,618)
Translation of assets and liabilities in foreign currencies (76,465)
------------
Net unrealized loss on investments and foreign currency translation $(21,777,083)
------------
Net realized and unrealized gain on investments and foreign
currency translation $ 3,230,325
------------
Increase in net assets from operations $ 54,805,229
============
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JULY 31, 1998 JANUARY 31, 1998
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
<S> <C> <C>
Net investment income $ 51,574,904 $ 88,991,612
Net realized gain on investments and foreign currency
transactions 25,007,408 39,344,739
Net unrealized gain (loss) on investments and foreign
currency translations (21,777,083) 15,114,461
-------------- --------------
Increase in net assets from operations $ 54,805,229 $ 143,450,812
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (32,216,224) $ (59,383,797)
From net investment income (Class B) (16,156,146) (26,332,601)
From net investment income (Class C) (2,602,892) (3,173,754)
From net investment income (Class I) (187,199) (296,634)
-------------- --------------
Total distributions declared to shareholders $ (51,162,461) $ (89,186,786)
-------------- --------------
Net increase in net assets from Fund share transactions $ 136,044,481 $ 156,558,951
-------------- --------------
Total increase in net assets $ 139,687,249 $ 210,822,977
Net assets:
At beginning of period 1,215,120,335 1,004,297,358
-------------- --------------
At end of period (including accumulated distributions
in excess of net investment income of $2,388,472 and
$2,800,915, respectively) $1,354,807,584 $1,215,120,335
============== ==============
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
SIX MONTHS ENDED ------------------------------------------------------------------------
JULY 31, 1998 1998 1997 1996 1995 1994
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of
period $ 5.62 $ 5.35 $ 5.24 $ 4.84 $ 5.50 $ 5.11
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.24 $ 0.47 $ 0.47 $ 0.45 $ 0.44 $ 0.40
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions 0.01 0.27 0.10 0.39 (0.66) 0.48
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.25 $ 0.74 $ 0.57 $ 0.84 $(0.22) $ 0.88
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.23) $(0.47) $(0.46) $(0.44) $(0.43) $(0.42)
From net realized gain on
investments and foreign
currency transactions -- -- -- -- (0.01) (0.07)
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.23) $(0.47) $(0.46) $(0.44) $(0.44) $(0.49)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 5.64 $ 5.62 $ 5.35 $ 5.24 $ 4.84 $ 5.50
====== ====== ====== ====== ====== ======
Total return(+) 4.40%++ 14.63% 11.52% 17.97% (3.95)% 18.13%
Ratios (to average net assets)
/Supplemental data:
Expenses## 0.98%+ 1.01% 1.02% 1.00% 0.99% 1.00%
Net investment income 8.41%+ 8.56% 8.92% 8.83% 8.65% 8.22%
Portfolio turnover 72% 137% 87% 59% 59% 68%
Net assets at end of period
(000,000 omitted) $792 $766 $672 $620 $524 $645
+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.
(+)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.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 4.89 $ 3.71 $ 4.85 $ 6.04 $ 6.17
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.51 $ 0.56 $ 0.65 $ 0.69 $ 0.76
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.24 1.21 (1.08) (1.13) (0.09)
------ ------ ------ ------ ------
Total from investment operations $ 0.75 $ 1.77 $(0.43) $(0.44) $ 0.67
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.51) $(0.56) $(0.71) $(0.75) $(0.75)
From net realized gain on investments and
foreign currency transactions -- -- -- -- (0.05)
From paid in capital### (0.02) (0.03) -- -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.53) $(0.59) $(0.71) $(0.75) $(0.80)
------ ------ ------ ------ ------
Net asset value - end of period $ 5.11 $ 4.89 $ 3.71 $ 4.85 $ 6.04
====== ====== ====== ====== ======
Total return(+) 16.36% 49.64% (10.99)% (9.18)% 10.68%
Ratios (to average net assets)/Supplemental data:
Expenses 1.03% 1.10% 1.05% 0.87% 0.87%
Net investment income 10.21% 11.59% 14.97% 12.17% 12.44%
Portfolio turnover 75% 28% 24% 25% 34%
Net assets at end of period (000,000 omitted) $585 $556 $380 $574 $880
###For the year ended January 1, 1989, the per share distribution from paid-in capital was $0.0004.
(+)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.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
SIX MONTHS ENDED --------------------------------------------------------------------
JULY 31, 1998 1998 1997 1996 1995 1994*
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 5.62 $ 5.35 $ 5.24 $ 4.84 $ 5.50 $ 5.27
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.22 $ 0.43 $ 0.43 $ 0.41 $ 0.39 $ 0.15
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 0.01 0.27 0.10 0.39 (0.65) 0.22
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.23 $ 0.70 $ 0.53 $ 0.80 $(0.26) $ 0.37
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.21) $(0.43) $(0.42) $(0.40) $(0.39) $(0.13)
In excess of net investment income
and foreign currency transactions -- -- -- -- (0.01) (0.01)
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.21) $(0.43) $(0.42) $(0.40) $(0.40) $(0.14)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 5.64 $ 5.62 $ 5.35 $ 5.24 $ 4.84 $ 5.50
====== ====== ====== ====== ====== ======
Total return 4.04%++ 13.83% 10.66% 16.98% (4.77)% 20.29%+
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.68%+ 1.70% 1.79% 1.85% 1.85% 1.79%+
Net investment income 7.70%+ 7.82% 8.13% 7.99% 7.79% 6.94%+
Portfolio turnover 72% 137% 87% 59% 59% 68%
Net assets at end of period
(000,000 omitted) $473 $385 $301 $283 $286 $371
+Annualized.
++Not annualized.
*For the period from the inception of Class B, September 27, 1993, through January 31, 1994.
#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
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
SIX MONTHS ENDED --------------------------------------------------------------------
JULY 31, 1998 1998 1997 1996 1995 1994**
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 5.64 $ 5.36 $ 5.25 $ 4.85 $ 5.50 $ 5.41
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.22 $ 0.43 $ 0.43 $ 0.41 $ 0.41 $ --
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions -- 0.28 0.11 0.39 (0.66) 0.09
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.22 $ 0.71 $ 0.54 $ 0.80 $(0.25) $ 0.09
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.21) $(0.43) $(0.43) $(0.40) $(0.39) $ --
In excess of net investment income
and foreign currency transactions $ -- $ -- $ -- $ -- $(0.01) $ --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.21) $(0.43) $(0.43) $(0.40) $(0.40) --
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 5.65 $ 5.64 $ 5.36 $ 5.25 $ 4.85 $ 5.50
====== ====== ====== ====== ====== ======
Total return 4.03%++ 13.81% 10.71% 17.03% (4.51)% 20.94%+
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.68%+ 1.70% 1.72% 1.77% 1.79% 1.36%+
Net investment income 7.69%+ 7.78% 8.16% 8.02% 8.01% 5.92%+
Portfolio turnover 72% 137% 87% 59% 59% 68%
Net assets at end of period
(000,000 omitted) $ 81 $ 60 $ 28 $ 16 $ 3 $ 1
+Annualized.
++Not annualized.
**For the period from the inception of Class C, January 3, 1994, through January 31, 1994.
#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
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
SIX MONTHS ENDED ------------------------------
JULY 31, 1998 1998 1997***
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
CLASS I
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.61 $ 5.35 $ 5.34
------ ------ ------
Income from investment operations# -
Net investment income $ 0.24 $ 0.49 $ 0.04
Net realized and unrealized gain on investments and
foreign currency transactions 0.02 0.25 0.01
------ ------ ------
Total from investment operations $ 0.26 $ 0.74 $ 0.05
------ ------ ------
Less distributions declared to shareholders from net
investment income $(0.24) $(0.48) $(0.04)
------ ------ ------
Net asset value - end of period $ 5.63 $ 5.61 $ 5.35
====== ====== ======
Total return 4.56%++ 14.77% 0.91%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.69%+ 0.71% 0.59%+
Net investment income 8.67%+ 8.86% 8.70%+
Portfolio turnover 72% 137% 87%
Net assets at end of period (000,000 omitted) $9 $4 $3
+Annualized.
++Not annualized.
***For the period from the inception of Class I, January 2, 1997, through January 31, 1997.
#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
</TABLE>
<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.
Investments in foreign securities are vulnerable to the effects of changes in
the relative values of the local currency and the U.S. dollar and to the
effects of changes in each country's legal, political, and economic
environment.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, forward contracts,
and swap agreements, 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. 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. Short-term obligations, which mature in 60 days or less, are valued at
amortized cost, which approximates markets value. Securities for which there
are no such quotations or valuations are valued at fair value as determined in
good faith by or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The Fund will enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Fund may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. The Fund may also use contracts in a manner intended to
protect foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Funds portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains
or losses on foreign currency transactions.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
discount is 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-dividend 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 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 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.
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.
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 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 $200 million 0.220% First $22 million 3.00%
In excess of $200 million 0.187% In excess of $22 million 2.55%
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%
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 net periodic pension expense of $8,568
for the six months ended July 31, 1998.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$275,473 for the six months ended July 31, 1998, as its portion of the sales
charge on sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan 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
paid to each securities dealer that enters into a sales agreement with MFD of
up to 0.25% per annum (reduced to a maximum of 0.15% per annum for shares
purchased prior to March 1, 1991) of the Fund's average daily net assets
attributable to Class A shares which are attributable to that securities
dealer and a distribution fee to MFD of up to 0.10% per annum of the Fund's
average daily net assets attributable to Class A shares. The Fund is currently
paying a distribution fee in the amount of 0.05%. Payment of the remaining
portion of the 0.10% per annum distribution fee will commence on such date as
Trustees of the Trust may determine. MFD retains the service fee for accounts
not attributable to a securities dealer, which amounted to $154,130 for the
six months ended July 31, 1998. Fees incurred under the distribution plan
during the six months ended July 31, 1998, were 0.30% of average daily net
assets attributable to Class A shares on an annualized basis.
The Trustees have adopted a distribution plan relating solely 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
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 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 $20,509 and $249 for
Class B and Class C shares, respectively, for the six months ended July 31,
1998. Fees incurred under the distribution plan during the six months ended
July 31, 1998, were 1.00% of average daily net assets attributable to Class B
and Class C shares on an annualized basis.
Certain 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
redemption's of Class B shares in the event of a shareholder redemption within
six years of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the six months ended July 31,
1998, were $21,168, $332,465, and $20,849 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%. Prior to January 1, 1998, the fee was calculated as a
percentage of the Fund's average daily net assets at an effective annual rate
of 0.13%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$957,247,740 and $881,569,516, 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 $1,309,042,653
--------------
Gross unrealized appreciation $ 57,890,814
Gross unrealized depreciation (39,036,963)
--------------
Net unrealized appreciation $ 18,853,851
==============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<TABLE>
Class A Shares
<CAPTION>
SIX MONTHS ENDED JULY 31, 1998 YEAR ENDED JANUARY 31, 1998
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 26,995,780 $ 152,731,662 61,813,593 $ 337,332,651
Shares issued to shareholders
in reinvestment of
distributions 3,387,023 19,143,059 6,289,201 34,320,907
Shares reacquired (26,182,252) (148,046,044) (57,415,426) (312,709,612)
----------- ------------- ----------- -------------
Net increase 4,200,551 $ 23,828,677 10,687,368 $ 58,943,946
=========== ============= =========== =============
</TABLE>
<TABLE>
Class B Shares
<CAPTION>
SIX MONTHS ENDED JULY 31, 1998 YEAR ENDED JANUARY 31, 1998
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 30,082,792 $ 170,178,549 46,709,978 $ 254,431,772
Shares issued to shareholders
in reinvestment of
distributions 1,542,430 8,719,089 2,517,816 13,755,688
Shares reacquired (16,308,231) (92,221,310) (36,845,461) (200,663,673)
----------- ------------- ----------- -------------
Net increase 15,316,991 $ 86,676,328 12,382,333 $ 67,523,787
=========== ============= =========== =============
</TABLE>
<TABLE>
Class C Shares
<CAPTION>
SIX MONTHS ENDED JULY 31, 1998 YEAR ENDED JANUARY 31, 1998
------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 8,809,773 $ 49,953,478 9,605,530 $ 52,647,803
Shares issued to shareholders
in reinvestment of
distributions 373,216 2,110,729 308,317 1,690,469
Shares reacquired (5,607,673) (31,742,502) (4,499,907) (24,626,101)
----------- ------------- ----------- -------------
Net increase 3,575,316 $ 20,321,705 5,413,940 $ 29,712,171
=========== ============= =========== =============
</TABLE>
<TABLE>
Class I Shares
<CAPTION>
SIX MONTHS ENDED JULY 31, 1998 YEAR ENDED JANUARY 31, 1998
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 915,235 $ 5,155,222 69,923 $ 380,529
Shares issued to shareholders
in reinvestment of
distributions 33,163 187,125 54,394 296,608
Shares reacquired (21,915) (124,576) (53,972) (298,090)
----------- ------------- ----------- -------------
Net increase 926,483 $ 5,217,771 70,345 $ 379,047
=========== ============= =========== =============
</TABLE>
(6) Line of Credit The Fund and other affiliated funds participate in a $805
million unsecured line of credit provided by a syndication of banks under a line
of credit agreement. Borrowings may be made to temporarily finance the
repurchase of Fund shares. Interest is charged to each fund, based on its
borrowings, at a rate equal to the bank's base rate. In addition, a commitment
fee, based on the average daily unused portion of the line of credit, is
allocated among the participating funds at the end of each quarter. The
commitment fee allocated to the Fund for the six months ended July 31, 1998, was
$2,496.
(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 and foreign currency
exchange rates. These financial instruments include forward foreign currency
exchange contracts. The notional or contractual amounts of these instruments
represent the investment the Fund has in particular classes 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.
Forward foreign currency purchases and sales under master netting agreements
amounted to a net receivable of $16,571 Deutsche Bank at July 31, 1998.
(8) 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 six months ended
July 31, 1998, is set forth below:
BEGINNING ENDING DIVIDEND ENDING
AFFILIATES SHARES SHARES INCOME VALUE
- ------------------------------------------------------------------------------
Ranger Industries, Inc. 266,768 266,768 $ -- $133,384
(9) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At January 31,
1998, the Fund owned the following restricted securities (constituting 0.3% 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.
DATE OF SHARES/
DESCRIPTION ACQUISITION PAR AMOUNT COST VALUE
- ------------------------------------------------------------------------------
Atlantic Gulf Communities
Corp. 9/25/95 690 $ -- $ 1,466
Envirosource, Inc. 5/15/91 238 7,289 4,076
Merrill Lynch Mortgage
Investors, Inc.,
8.161s, 2022 6/22/94 $4,500,000 3,119,063 4,484,531
----------
$4,490,073
==========
<PAGE>
<TABLE>
MFS(R) HIGH INCOME FUND
<S> <C>
TRUSTEES CUSTODIAN
Richard B. Bailey* - Private Investor; State Street Bank and Trust Company
Former Chairman and Director (until 1991),
MFS Investment Management INVESTOR INFORMATION
For MFS stock and bond market outlooks, call
Peter G. Harwood - Private Investor toll free: 1-800-637-4458 anytime from a
touch-tone telephone.
J. Atwood Ives - Chairman and Chief Executive
Officer, Eastern Enterprises (diversified For information on MFS mutual funds, call your
services company) financial adviser or, for an information kit,
call toll free: 1-800-637-2929 any business day
Lawrence T. Perera - Partner, Hemenway from 9 a.m. to 5 p.m. Eastern time (or leave a
& Barnes (attorneys) message anytime).
William J. Poorvu - Adjunct Professor, Harvard INVESTOR SERVICE
University Graduate School of Business MFS Service Center, Inc.
Administration P.O. Box 2281
Boston, MA 02107-9906
Charles W. Schmidt - Private Investor
For general information, call toll free:
Arnold D. Scott* - Senior Executive 1-800-225-2606 any business day from
Vice President, Director, and Secretary, 8 a.m. to 8 p.m. Eastern time.
MFS Investment Management
For service to speech- or hearing-impaired, call
Jeffrey L. Shames* - Chairman, Chief toll free: 1-800-637-6576 any business day from
Executive Officer, and Director, 9 a.m. to 5 p.m. Eastern time. (To use this
MFS Investment Management service, your phone must be equipped with a
Telecommunications Device for the Deaf.)
Elaine R. Smith - Independent Consultant
For share prices, account balances, and
David B. Stone - Chairman and Director, exchanges, call toll free: 1-800-MFS-TALK
North American Management Corp. (1-800-637-8255) anytime from a touch-tone
(investment advisers) telephone.
INVESTMENT ADVISER World Wide Web
Massachusetts Financial Services Company www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Robert J. Manning*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
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MFS(R) 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)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MHI-3 9/98 87M 18/218/318/818
