<PAGE>
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) HIGH INCOME FUND
ANNUAL REPORT o JANUARY 31, 1998
MFS(R) HIGH INCOME FUND
20TH ANNIVERSARY
1978-1998
THE ROTH IRA IS NOW AVAILABLE (see page 40)
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
A Discussion with the Portfolio Manager ................................... 4
Portfolio Manager's Profile ............................................... 8
Fund Facts ................................................................ 9
Performance Summary ....................................................... 9
Portfolio Concentration ................................................... 12
Tax Form Summary .......................................................... 12
Portfolio of Investments .................................................. 13
Financial Statements ...................................................... 23
Notes to Financial Statements ............................................. 31
Independent Auditors' Report .............................................. 39
Roth IRA .................................................................. 40
Trustees and Officers ..................................................... 41
HIGHLIGHTS
o FOR THE YEAR ENDED JANUARY 31, 1998, CLASS A SHARES OF THE FUND PROVIDED A
TOTAL RETURN AT NET ASSET VALUE OF 14.63%, CLASS B SHARES 13.83%, CLASS C
SHARES 13.81%, AND CLASS I SHARES 14.77%. (SEE PERFORMANCE SUMMARY FOR MORE
INFORMATION.)
o THE FUND HAS BENEFITED FROM BEING IN SECTORS THAT PERFORMED WELL DURING THE
YEAR, INCLUDING AEROSPACE AND DEFENSE, GENERAL INDUSTRIALS, AND
TELECOMMUNICATIONS.
o THE CONSUMER PRODUCTS WEIGHTING HAS BEEN REDUCED SIGNIFICANTLY BECAUSE MANY
OF THE CREDITS THAT HAD BEEN IN THE PORTFOLIO PERFORMED WELL; AS A RESULT,
THEY NO LONGER OFFER THE KIND OF RELATIVE VALUE WE'RE LOOKING FOR.
o AS THE ECONOMY REMAINS STRONG, WE EXPECT DEFAULT RATES AMONG HIGH-YIELD
BONDS TO REMAIN BELOW HISTORICAL LEVELS. GENERALLY, DEFAULTS AVERAGE AROUND
3% TO 3 1/2% OF THE MARKET, BUT THEY HAVE BEEN SUBSTANTIALLY UNDER 2% FOR
THE PAST THREE YEARS.
o ON FEBRUARY 17, 1998, THE FUND MARKED ITS 20TH ANNIVERSARY.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
MFS Mourns Chairman's Passing
- --------------------------- It is with deep regret that we inform you
[Photo of A. Keith Brodkin] of the death on February 2, 1998, of A. Keith
- --------------------------- Brodkin, Chairman and Chief Executive Officer
A. Keith Brodkin of MFS Investment Management(SM). Mr. Brodkin
joined MFS in 1970 and made enormous
contributions to the organization, including
helping to build the firm's investment staff,
which will continue to manage all of the MFS
investment portfolios. His leadership,
friendship, and wise counsel will be sorely
missed.
more on Mr. Brodkin on page 3
LETTER FROM THE CHAIRMAN
Dear Shareholders:
Thanks to a sustained period of relative stability and moderate growth, the
U.S. economy has produced thousands of new jobs, inflation has remained under
control, and the investment climate has -- for the most part -- been
favorable. The increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Based on
preliminary data, the U.S. economy grew at a 4.3% annual rate in the fourth
quarter of 1997, up from 3.1% in the third quarter. For all of 1997, the
economy grew by 3.8% (adjusted for inflation), the fastest pace since 1988.
While U.S. economic growth continues to be impressive, events in the Pacific
Rim will somewhat offset that and, therefore, markets are likely to continue
to focus on Federal Reserve Board (Fed) activity.
The U.S. government bond market has benefited from the deflationary events in
Asia, while the high-yield and emerging-debt markets have come under some
pressure. Inflation remains under control, and the Fed will most likely
continue to take a wait-and-see attitude toward raising interest rates. As a
result, our near-term outlook for high-grade markets is neutral to moderately
positive. At the same time, high-yield markets, having gone through a
correction, could offer reasonable value but require careful selection.
Overall, fixed-income markets appear to be reasonably valued.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management
February 17, 1998
JEFFREY L. SHAMES, A GRADUATE OF WESLEYAN UNIVERSITY AND THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY SLOAN SCHOOL OF MANAGEMENT, JOINED
MFS IN 1983. AFTER FOUR YEARS AS AN INDUSTRY ANALYST AND PORTFOLIO
MANAGER, HE WAS NAMED CHIEF EQUITY OFFICER IN 1987 AND PRESIDENT AND A
MEMBER OF THE BOARD IN 1993. MR. SHAMES WAS APPOINTED CHAIRMAN AND CHIEF
EXECUTIVE OFFICER IN FEBRUARY 1998.
<PAGE>
IN MEMORIAM
A. KEITH BRODKIN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MFS INVESTMENT MANAGEMENT
On February 2, 1998, Keith Brodkin, a friend and leader to everyone at
MFS, died unexpectedly at age 62. His thoughtful letters to shareholders
on the markets and economy have been an integral part of MFS shareholder
reports like this one for many years.
Keith joined MFS in 1970 as the firm's first fixed-income manager,
managing the bond portion of MFS(R) Total Return Fund. He went on to
manage our first pure bond fund, MFS(R) Bond Fund, when it was
introduced in 1974, and he was considered a pioneer in the art of active
bond management.
Keith was named President and Chief Investment Officer of MFS
in 1987 and four years later became Chairman and Chief Executive
Officer. During his stewardship, MFS has achieved significant growth in
total assets under management, rising from some $25 billion in 1991 to
the over $70 billion today entrusted to us by three million individual
and institutional investors worldwide. Under Keith's leadership, MFS has
carefully but steadily built its domestic and international investment
capabilities through the introduction of a range of new products and a
still-growing staff that now numbers over 100 equity and fixed-income
professionals.
Throughout his career, Keith was very active in a wide range of
charitable endeavors. He is survived by his wife and three children.
His leadership, friendship, and wise counsel will be sorely missed.
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
- ----------------------------
[Photo of Robert J. Manning]
- ----------------------------
Robert J. Manning
For the year ended January 31, 1998, Class A shares of the Fund provided a
total return of 14.63%, Class B shares 13.83%, Class C shares 13.81%, and
Class I shares 14.77%. All of these returns assume the reinvestment of
distributions but exclude the effects of any sales charges and compare to an
11.42% 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.
Q. WHAT DO YOU SEE AS SOME OF THE REASONS FOR THE FUND'S FAVORABLE
PERFORMANCE RELATIVE TO ITS BENCHMARK DURING THE PAST YEAR?
A. We have done a good job in terms of being in the right sectors and in the
right credits within those sectors. Three particular areas in which we've
been overweighted during the past year have been aerospace and defense,
general industrials, and telecommunications. At the same time, we have been
underweighted in retailing, because retailers have had high default rates
and a number of companies have filed for bankruptcy.
Q. LET'S LOOK AT YOUR OVERWEIGHTINGS, STARTING WITH AEROSPACE. WHAT,S
HAPPENING THERE?
A. This sector has seen tremendous business in aircraft manufacturing and
retrofitting. For several years the airlines lost money, but now they've
become very profitable. The companies in the portfolio are dominant in the
aircraft component business and include names like MOOG, BE Aerospace, and
ArgoTech, all companies that get 60% to 70% of their revenues from
retrofitting, as opposed to new aircraft construction. That sector has done
very well for the Fund over the past year, and we think that the cycle of
aircraft being built or renovated is going to continue for many years.
Q. WHAT ABOUT THE GENERAL INDUSTRIAL SECTOR?
A. Here, the theme has been consolidation. We try to buy niche companies with
high market shares that generate a lot of free cash flow. Many of these
companies have improved their credit profiles by deleveraging or have been
bought out by investment-grade entities. Two examples would be Clark
Schwebel and Tiphook.
Q. AND TELECOMMUNICATIONS?
A. We think this industry could provide an excellent investment opportunity.
With the 1996 Telecommunications Act, Congress deregulated both local and
long-distance telephone service. Now we have a new industry, the
competitive local telephone exchange companies. We've invested in many of
these companies, including MFS Communications, Brooks Fibre, and Teleport,
all of which were later bought out by investment-grade companies. The local
telephone business is a $100 billion market, and the long-distance business
is an $80 billion market. These businesses, along with Internet
communications companies and related telecommunications industries, are
going to create tremendous opportunities.
Q. HOW WOULD YOU DESCRIBE THE FIXED-INCOME ENVIRONMENT OVER THE PAST YEAR?
A. It's been perfect, particularly for high-yield bonds, with a low-inflation
environment and steady economic growth over 2%. In that environment, in
which high-yield bonds are paying 3 1/2% more than U.S. Treasuries, which
in turn are paying 6% or less on 30-year bonds, that incremental compounded
yield becomes a powerful story. (Principal value and interest on Treasury
securities are guaranteed by the U.S. government if held to maturity.) With
this slow, steady growth, we think credit quality will continue to improve.
High-yield bonds, as represented by the Lehman Index, have been the best-
performing fixed-income market in the 1990s, and we're very bullish about
the next 12 months.
Q. HAS THERE BEEN ANY SIGNIFICANT CHANGE IN DEFAULT RATES IN THE HIGH-YIELD
MARKET THIS YEAR?
A. Default rates over time average around 3% to 3 1/2%, and the market has
been substantially under 2% for the past three years. We don't see that
changing, again thanks to the strong economy. A few problems crop up now
and then with a specific company, but we don't see an endemic problem on
the horizon.
Q. WHAT CHARACTERISTICS OR QUALITIES DO YOU LOOK FOR IN SELECTING BONDS
FOR THE FUND?
A. We start by evaluating the quality of a company's management. Then we do
cash-flow projections to try and make sure it can meet its debt payments.
We also try to buy asset-laden companies, which means staying away from
technology-driven issuers. Finally, we look for strong industry
fundamentals that we think will help put us in the right industries at the
right time.
Q. HAVE YOU CHANGED THE FUND'S WEIGHTINGS IN ANY PARTICULAR SECTORS?
A. Consumer products companies comprised a much bigger weighting in the
portfolio a year ago than they do today because many of our credits worked
out very well. So now we don't think they offer the kind of relative value
we're looking for, and we've lightened up on those positions, which include
companies like West Point Pepperel, Samsonite Luggage, Revlon, and
Remington Products.
Q. HAVE ANY SEGMENTS OR COMPANIES IN THE HIGH-YIELD BOND MARKET PERFORMED
BETTER THAN YOU EXPECTED?
A. No, and that's because the market trades at 100 cents on the dollar now.
It's not like five or six years ago, when we were coming out of the
recession and bonds traded at 65 cents on the dollar. What you're trying to
do in the high-yield market today is avoid mistakes, so you hope to make
the coupon, plus some capital appreciation if a credit is upgraded or
bought out. We've been able to avoid mistakes, but we don't expect to see
tremendous price appreciation on any given credit or sector because of
where bonds are priced today.
Q. HAVE ANY POSITIONS NOT WORKED OUT AS WELL AS YOU EXPECTED?
A. There was one industry that we missed that did really well, and that was
energy. We were underweighted there based on our feeling that it's a very
cyclical industry. Also, it's very difficult to predict where energy prices
are going because of OPEC's (the Organization of Petroleum Exporting
Countries) unpredictability and other variables that we don't feel
comfortable analyzing. This industry was strong last year, and we were hurt
by not being exposed to it, but so far this year it has substantially
underperformed, which is helping. But there wasn't any one industry that we
were exposed to that really hurt us.
Q. WHAT WOULD BE THE BIGGEST RISK TO THE FUND RIGHT NOW?
A. It would probably be a recession. If we have a severe economic downturn,
yield spreads are going to widen and that could hurt us. Other risk is
specific, as opposed to economic. Our job, and the job of our research
team, is to focus on specific risk, and if we were to go into a recession,
we think the fact that we have a higher-quality portfolio than the average
high-yield fund would help us. We're late in this economic cycle, and we
don't think investors are getting paid to take on a lot of speculative risk
at this point. However, if we saw danger of a downturn, we would increase
the quality even further, and we could raise the cash position.
Q. DO YOU SEE ANY POTENTIAL IMPACT ON THE FUND FROM THE ASIAN CRISIS?
A. We only had one half of one percent of assets in Asia, in an Indonesian
paper company, and we've traded in and out of it. But, primarily, this is a
high-yield, domestic corporate Fund, and we don't buy a lot of emerging
market debt. We don't stray from what we know best, so emerging market
problems, or opportunities, are really not going to affect this Fund. The
Fund has provided good risk-adjusted returns over time because we don't
have the type of volatility that the emerging markets present.
Q. WHAT KIND OF MARKET OR ECONOMIC ENVIRONMENT DO YOU SEE GOING FORWARD, AND
HOW ARE YOU POSITIONING THE FUND FOR IT?
A. We've been in a bull market for several years now, and people have been
getting paid to take on an enormous amount of credit risk, but I think that
as we move to the end of 1998 and the beginning of 1999, and the economic
cycle begins to mature, credit problems are going to creep into the system.
It doesn't have to be a big recession to cause this; it may just be that
growth slows from 3% per year to 2%. So I'm more concerned about being
prepared for a downturn than I am about participating in any upside we
might have. Hopefully, the types of companies we own, the higher-quality
businesses, will fare substantially better.
/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.
PORTFOLIO MANAGER'S PROFILE
ROBERT J. MANNING BEGAN HIS CAREER AT MFS IN 1984 AS A RESEARCH ANALYST
IN THE HIGH YIELD BOND DEPARTMENT AND WAS NAMED VICE PRESIDENT --
INVESTMENTS IN 1988, SENIOR VICE PRESIDENT IN 1993, AND HIGH YIELD FIXED
INCOME DEPARTMENT HEAD IN 1997. A GRADUATE OF THE UNIVERSITY OF LOWELL
AND THE BOSTON COLLEGE GRADUATE SCHOOL OF MANAGEMENT, HE HAS MANAGED
MFS(R) HIGH INCOME FUND SINCE 1994.
<PAGE>
FUND FACTS
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: $1.2 BILLION NET ASSETS AS OF JANUARY 31, 1998
PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS High Income Fund -- Class A shares in comparison to various
market indicators. Class A share performance results reflect the deduction of
the 4.75% maximum sales charge; benchmark comparisons are unmanaged and do not
reflect any fees or expenses. The performance of other share classes will be
greater than or less than the line shown, based on differences in charges and
fees paid by shareholders investing in different classes. It is not possible
to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year period ended January 31, 1998)
MFS High Lehman Brothers Consumer Price
Income Fund Corporate Index
-- Class A Bond Index -- U.S.
---------- ---------- -------
1/93 $ 9,530 $10,000 $10,000
1/94 11,170 11,170 10,250
1/95 10,730 10,750 10,540
1/96 12,660 12,960 10,820
1/97 14,120 13,310 11,160
1/98 16,185 14,829 11,372
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended January 31, 1998)
MFS High Lehman Brothers Consumer Price
Income Fund Corporate Index
-- Class A Bond Index -- U.S.
---------- ---------- -------
1/88 $ 9,520 $10,000 $10,000
1/89 10,620 10,670 10,460
1/90 9,730 11,840 11,010
1/91 8,770 13,000 11,630
1/92 13,210 15,020 11,930
1/93 15,370 16,920 12,320
1/94 18,150 18,910 12,630
1/95 17,440 18,190 12,980
1/96 20,570 21,920 13,330
1/97 22,940 22,530 13,740
1/98 26,293 25,091 14,008
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF JANUARY 31, 1998
1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C>
MFS High Income Fund (Class A)
including 4.75% sales charge (SEC results) + 9.12% +12.84% 10.28% + 10.17%
- ------------------------------------------------------------------------------------------------------------
MFS High Income Fund (Class A)
at net asset value +14.63% +14.68% +11.34% +10.71%
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MFS High Income Fund (Class B)
with CDSC (SEC results) + 9.83% +13.02% +10.31% +10.33%
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MFS High Income Fund (Class B)
at net asset value +13.83% +13.80% +10.57% +10.33%
- ------------------------------------------------------------------------------------------------------------
MFS High Income Fund (Class C)
with CDSC (SEC results) +12.81% +13.82% +10.68% +10.38%
- ------------------------------------------------------------------------------------------------------------
MFS High Income Fund (Class C)
at net asset value +13.81% +13.82% +10.68% +10.38%
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MFS High Income Fund (Class I)
at net asset value +14.77% +14.72% +11.36% +10.72%
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Average high current yield fund* +13.86% +14.64% +11.18% +10.51%
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Lehman Brothers Corporate Bond Index+ +11.42% +11.31% + 8.20% + 9.64%
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Consumer Price Index#+ + 1.93% + 2.56% + 2.60% + 3.43%
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* Source: Lipper Analytical Services, Inc.
+ Source: CDA/Wiesenberger.
# The Consumer Price Index is published by the U.S. Bureau of Labor Statistics and measures
the cost of living (inflation).
</TABLE>
<PAGE>
All results are historical and assume the reinvestment of dividends and
capital gains. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost.
Past performance is no guarantee of future results.
Class A share ("A") SEC results include the maximum 4.75% sales charge. Class
B share ("B") SEC results reflect the applicable contingent deferred sales
charge (CDSC), which declines over six years from 4% to 0%. 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"), which became available on
January 2, 1997, 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.
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.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
The Fund may invest up to 50% and expects to invest between 5% and 20% of its
total assets in foreign and emerging market securities. The Fund may also
invest up to 100% in high-yield securities. Lower rated securities may provide
greater returns, but they are also associated with greater-than-average risk.
The Fund also has the flexibility to invest in derivative securities when its
manager believes such securities can provide better
value to direct investments in stocks or bonds. These risks may involve
price volatility.
<PAGE>
PORTFOLIO CONCENTRATION AS OF JANUARY 31, 1998
QUALITY RATINGS
"B" 72.4%
"BB" 16.0%
"CCC" & Below 5.4%
Nonrated 3.5%
Cash 2.6%
"BBB" 0.1%
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WERE MAILED A TAX FORM SUMMARY REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 1997.
<PAGE>
PORTFOLIO OF INVESTMENTS -- January 31, 1998
<TABLE>
<CAPTION>
Bonds - 90.7%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 81%
Aerospace - 4.4%
Airplane Pass-Through Trust, 10.875s, 2019 $ 5,250 $ 5,952,345
Argo Tech Corp., 8.625s, 2007 5,550 5,702,625
BE Aerospace, Inc., 9.875s, 2006 7,150 7,686,250
K & F Industries, Inc., 9.25s, 2007## 8,375 8,846,094
MOOG, Inc., 10s, 2006 13,015 14,186,350
Stellex Inds, Inc., 9.5s, 2007## 2,000 2,065,000
Synthetic Industries, Inc., 9.25s, 2007 6,140 6,539,100
Wyman Gordon Co., 8s, 2007 2,500 2,543,750
--------------
$ 53,521,514
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Building - 2.5%
AAF-McQuay, Inc., 8.875s, 2003 $ 7,125 $ 7,062,656
American Standard, Inc., 7.375s, 2008 4,850 4,837,875
Building Materials Corp., 8.625s, 2006 7,090 7,338,150
Building Materials Corp., 8s, 2007## 3,000 3,030,000
Nortek, Inc., 9.875s, 2004 2,300 2,374,750
Nortek, Inc., 9.25s, 2007 5,925 6,073,125
UDC Homes, Inc., 2000 30 16,650
--------------
$ 30,733,206
- ------------------------------------------------------------------------------------------------------
Business Services - 1.4%
Iron Mountain, Inc., 10.125s, 2006 $ 10,275 $ 11,225,437
Pierce Leahy Corp., 11.125s, 2006 3,477 3,963,780
Pierce Leahy Corp., 9.125s, 2007 2,225 2,358,500
--------------
$ 17,547,717
- ------------------------------------------------------------------------------------------------------
Chemicals - 1.8%
Harris Chemical North America, Inc., 10.25s, 2001 $ 6,065 $ 6,353,087
International Specialty Products Holdings, Inc., 9s, 2003 4,560 4,742,400
NL Industries, Inc., 11.75s, 2003 9,500 10,545,000
Sterling Chemicals, Inc., 11.25s, 2007 175 180,250
--------------
$ 21,820,737
- ------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 5.5%
American Safety Razor Co., 9.875s, 2005 $ 6,000 $ 6,435,000
E & S Holdings Corp., 10.375s, 2006 14,005 12,849,587
Kindercare Learning Centers, Inc., 9.5s, 2009 5,000 5,112,500
Polymer Group, Inc., 9s, 2007 11,440 11,826,100
Reeves Industries, Inc., 11s, 2002** 2,370 1,753,800
Remington Products Co. LLC, 11s, 2006 7,520 6,533,000
Revlon Consumer Products Corp., 8.125s, 2006## 4,125 4,135,313
Revlon Consumer Products Corp., 8.625s, 2008## 8,915 8,937,287
Westpoint Stevens, Inc., 9.375s, 2005 9,050 9,570,375
--------------
$ 67,152,962
- ------------------------------------------------------------------------------------------------------
Containers - 2.6%
Atlantis Plastics, Inc., 11s, 2003 $ 7,500 $ 7,725,000
Calmar, Inc., 11.5s, 2005 8,000 8,600,000
Plastic Specialty & Technology Corp., 11.25s, 2003 2,735 2,974,313
Silgan Holdings, Inc., 9s, 2009 5,650 5,904,250
U.S. Can Corp., 10.125s, 2006 5,900 6,254,000
--------------
$ 31,457,563
- ------------------------------------------------------------------------------------------------------
Corporate Asset Backed - 0.4%
Merrill Lynch Mortgage Investors, Inc., 8.171s, 2023+ $ 4,500 $ 4,484,531
- ------------------------------------------------------------------------------------------------------
Energy - 1.5%
AmeriGas Partners LP, 10.125s, 2007 $ 3,400 $ 3,697,500
Clark USA, Inc., 10.875s, 2005 5,940 6,489,450
Cross Timbers Oil Co., 8.75s, 2009 3,425 3,510,625
Giant Industries, Inc., 9s, 2007 5,100 5,074,500
--------------
$ 18,772,075
- ------------------------------------------------------------------------------------------------------
Entertainment - 1.7%
AMC Entertainment, Inc., 9.5s, 2009 $ 6,875 $ 7,218,750
American Skiing Co., 12s, 2006 5,300 5,916,125
Cinemark USA, Inc., 9.625s, 2008 4,700 4,993,750
Hollywood Theaters, Inc., 10.625s, 2007## 2,025 2,192,062
Plitt Theatres, Inc., 10.875s, 2004 135 147,319
--------------
$ 20,468,006
- ------------------------------------------------------------------------------------------------------
Financial Services - 0.6%
Americo Life, Inc., 9.25s, 2005 $ 2,050 $ 2,106,375
Williams Scotsman, Inc., 9.875s, 2007 4,525 4,711,656
--------------
$ 6,818,031
- ------------------------------------------------------------------------------------------------------
Food and Beverage Products - 2.1%
Chiquita Brands International Inc., 9.125s, 2004 $ 1,080 $ 1,128,600
Delta Beverage Group, Inc., 9.75s, 2003 2,425 2,546,250
Friendly Ice Cream Corp., 10.5s, 2007## 3,970 4,193,312
Keebler Corp., 10.75s, 2006 1,500 1,717,500
PMI Acquisition Corp., 10.25s, 2003 1,495 1,588,438
Specialty Foods Corp., 10.25s, 2001 8,525 8,567,625
Texas Bottling Group, Inc., 9s, 2003 5,750 5,936,875
--------------
$ 25,678,600
- ------------------------------------------------------------------------------------------------------
Forest and Paper Products - 4.2%
Buckeye Cellulose Corp., 8.5s, 2005 $ 2,000 $ 2,060,000
Florida Coast Paper Co. LLC, 12.75s, 2003 6,400 6,816,000
Gaylord Container Corp., 9.75s, 2007 12,500 12,812,500
Graham Packaging Co. GPC Capital, 8.75s, 2008 2,530 2,567,950
Pacific Lumber Co., 10.5s, 2003 11,010 11,354,062
Speciality Paperboard, Inc., 9.375s, 2006 5,350 5,584,063
U.S. Timberlands, 9.625s, 2007 9,500 9,951,250
--------------
$ 51,145,825
- ------------------------------------------------------------------------------------------------------
Gaming - 5.7%
Boyd Gaming Corp., 9.5s, 2007 $ 9,475 $ 10,233,000
Casino America, Inc., 12.5s, 2003 5,900 6,549,000
Coast Hotels & Casinos, Inc., 13s, 2002 3,625 4,168,750
Eldorado Resorts LLC, 10.5s, 2006 5,455 6,000,500
Grand Casinos, Inc., 10.125s, 2003 7,655 8,334,381
Grand Casinos, Inc., 9s, 2004## 3,600 3,726,000
Harveys Casinos Resorts, 10.625s, 2006 3,525 3,837,844
HorseShoe Gaming LLC, 9.375s, 2007 155 167,013
Prime Hospitality Corp., 9.75s, 2007 9,895 10,785,550
Red Roof Inns, Inc., 9.625s, 2003 9,260 9,630,400
Sam Houston Race Park Ltd., 11s, 2001** 2,014 1,006,804
Santa Fe Hotel, Inc., 11s, 2000 5,195 4,935,250
--------------
$ 69,374,492
- ------------------------------------------------------------------------------------------------------
Industrial - 6.7%
AGCO Corp., 8.5s, 2006 $ 2,200 $ 2,282,500
Alliant Techsystem., Inc., 11.75s, 2003 2,850 3,156,375
Clark-Schwebel, Inc., 10.5s, 2006 4,675 5,142,500
Day International Group, Inc., 11.125s, 2005 2,350 2,655,500
Delco Remy International, Inc., 8.625s, 2007 2,500 2,575,000
Hayes Wheels International, Inc., 11s, 2006 4,525 5,068,000
Hayes Wheels International, Inc., 9.125s, 2007 5,250 5,499,375
IMO Industries, Inc., 11.75s, 2006 7,825 8,685,750
Interlake Corp., 12s, 2001 12,135 13,318,162
Interlake Corp., 12.125s, 2002 2,200 2,315,500
International Knife & Saw, Inc., 11.375s, 2006 5,360 5,842,400
L3 Communications Corp., 10.375s, 2007 3,740 4,142,050
Mark IV Industries, Inc., 7.5s, 2007 8,750 8,796,375
Oxford Automotive, Inc., 10.125s, 2007 6,275 6,682,875
Thermadyne Industries Holdings Corp., 10.75s, 2003 45 47,363
United Defense Industries, Inc., 8.75s, 2007## 2,535 2,585,700
Venture Holdings Trust, 9.75s, 2004 3,160 3,191,600
--------------
$ 81,987,025
- ------------------------------------------------------------------------------------------------------
Media - 10.8%
Acme Television LLC, 0s to 2000, 10.875s to 2004## $ 4,500 $ 3,504,375
Albritton Communications Co., 9.75s, 2007 10,275 10,763,062
Cablevision Systems Corp., 8.125s, 2009 6,000 6,300,000
Century Communications Corp., 0, 2008 10,100 4,292,500
Chancellor Media Corp., 8.75s, 2007 5,560 5,740,700
Charter Communications Southeast LP, 11.25s, 2006 7,300 8,139,500
Digital Television Services, Inc., 12.5s, 2007 7,100 8,147,250
EchoStar Communications Corp., 0s to 1999, 12.875s to 2004 3,775 3,548,500
EchoStar Satellite Broadcasting Corp.,
0s to 2000, 13.125s to 2004 8,625 7,590,000
Falcon Holdings Group, Inc., 11s, 2003 11,570 12,900,753
Fox/Liberty Networks LLC, Inc., 8.875s, 2007## 9,525 9,739,312
FrontierVision Holding LP, 0s to 2001, 11.87s to 2007 7,195 5,504,175
Granite Broadcasting Corp., 10.375s, 2005 7,900 8,492,500
Hollinger International Publishing, Inc., 9.25s, 2007 7,475 7,998,250
Intermedia Capital Partners IV, LP, 11.25s, 2006 6,200 6,882,000
Lenfest Communications, Inc., 8.375s, 2005 2,000 2,070,000
Lenfest Communications, Inc. 10.5s, 2006 5,925 6,754,500
Marvel Holdings, Inc., 0s, 1998** 11,125 458,906
Outdoor Systems, Inc., 8.875s, 2007 3,950 4,157,375
Star Choice Communications, Inc., 13s, 2005 5,000 5,225,000
United International Holdings, Inc., 0s to 2003,
10.75s to 2008## 4,350 2,569,502
Young Broadcasting, Inc., 8.75s, 2007 1,000 1,027,500
--------------
$ 131,805,660
- ------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.6%
Beverly Enterprises, Inc., 9s, 2006 $ 4,550 $ 4,663,750
Physician Sales & Service, Inc, 8.5s, 2007## 5,495 5,728,537
Quorum Health Group, Inc., 8.75s, 2005 2,750 2,901,250
Tenet Healthcare Corp., 8s, 2005 6,425 6,641,844
--------------
$ 19,935,381
- ------------------------------------------------------------------------------------------------------
Metals and Minerals - 6.5%
AK Steel Holdings Corp., 9.125s, 2006 $ 6,025 $ 6,386,500
Armco, Inc., 9s, 2007 3,650 3,650,000
Commonwealth Aluminum Corp., 10.75s, 2006 10,550 11,209,375
Envirosource, Inc., 9.75s, 2003## 4,000 4,075,000
GS Technologies Operating, Inc., 12.25s, 2005 4,640 5,243,200
Haynes International, Inc., 11.625s, 2004 11,825 13,480,500
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 3,700 3,820,250
Kaiser Aluminum & Chemical Corp., 10.875s, 2006 3,900 4,231,500
Keystone Consolidated Industries, Inc., 9.625s, 2007## 6,545 6,675,900
Renco Metals, Inc., 11.5s, 2003 3,430 3,687,250
Ryerson Tull, Inc., 9.125s, 2006 6,050 6,534,000
WCI Steel, Inc., 10s, 2004 8,825 9,178,000
Wheeling Pittsburgh Corp., 9.25s, 2007## 450 441,000
--------------
$ 78,612,475
- ------------------------------------------------------------------------------------------------------
Mining - 0.3%
AEI Holdings, Inc., 10s, 2007## $ 3,250 $ 3,388,125
- ------------------------------------------------------------------------------------------------------
Printing and Publishing - 1.6%
Big Flower Press Holdings, Inc., 8.875s, 2007## $ 4,430 $ 4,607,200
Golden Books Publishing, Inc., 7.65s, 2002 7,535 7,082,900
Liberty Group Operating, Inc., 9.375s, 2008## 3,625 3,706,563
Liberty Group Publishing, Inc., 0s to 2003, 11.625s to 2009## 1,875 1,115,625
Transwestern Publishing Co. LP, 9.625s, 2007## 3,150 3,323,250
--------------
$ 19,835,538
- ------------------------------------------------------------------------------------------------------
Stores - 1.4%
Affinity Group Holding, Inc., 11s, 2007 $ 2,500 $ 2,700,000
Cole National Group, Inc., 8.625s, 2007 8,900 8,855,500
Finlay Fine Jewelry Corp., 10.625s, 2003 375 392,813
K Mart Corp., 8.125s, 2006 1,750 1,780,625
Proffitts, Inc., 8.125s, 2004 3,125 3,317,500
--------------
$ 17,046,438
- ------------------------------------------------------------------------------------------------------
Supermarkets - 0.8%
Jitney-Jungle Stores of America, Inc., 12s, 2006 $ 1,000 $ 1,132,500
Marsh Supermarkets, Inc., 8.875s, 2007 1,075 1,119,344
Ralph's Grocery Co., 10.45s, 2004 2,800 3,192,000
Ralph's Grocery Co., 11s, 2005 3,175 3,659,187
--------------
$ 9,103,031
- ------------------------------------------------------------------------------------------------------
Technology - 1.4%
Anacomp, Inc., 10.875s, 2004 $ 5,650 $ 5,932,500
Unisys Corp., 12s, 2003 9,425 10,744,500
--------------
$ 16,677,000
- ------------------------------------------------------------------------------------------------------
Telecommunications - 14.0%
Allegiance Telecom Inc., 0s to 2003, 11.75s to 2008 $ 523 $ 2,929,396
Crown Castle International Corp., 0s to 2002,
10.625s to 2007## 5,125 3,382,500
Esat Holdings Ltd., 0s to 2002, 12.5s to 2007 2,825 2,062,250
Facilicom International, Inc., 10.5s, 2008## 3,375 3,480,469
GCI, Inc., 9.75s, 2007 4,245 4,510,313
GlobalStar LP/Capital, 11.375s, 2004## 6,905 7,051,731
GST USA, Inc., 0s to 2000, 13.875s to 2005 1,490 1,236,700
ICG Holdings, Inc., 0s to 2001, 12.5s to 2006 13,950 10,950,750
Intermedia Communications, Inc., 0s to 2002,
11.125s to 2007 1,650 1,208,625
Intermedia Communications, Inc., 8.875s, 2007 5,100 5,380,500
ITC Deltacom, Inc., 11s, 2007 6,300 7,103,250
Knology Holdings, Inc., 0s to 2002, 11875s to 2007## 248 1,378,575
McCaw International Ltd., 0s to 2002, 13s to 2007 7,225 4,587,875
Mobile Telecommunication Technologies Corp., 13.5s, 2002 8,515 9,898,687
Nextel Communications, Inc., 0s to 1999, 9.75s to 2004 10,030 9,578,650
Nextel Communications, Inc., 0s to 2002, 9.75s to 2007 10,205 6,633,250
Nextlink Communications, Inc., 9.625s, 2007 4,800 5,124,000
Orion Network Systems, Inc., 11.25s, 2007 5,000 5,800,000
Orion Network Systems, Inc., 0s to 2002, 12.5s to 2007 10,050 7,688,250
Pagemart Wireless, Inc., 0s to 2003, 11.25s to 2008## 6,240 3,697,200
Qwest Communications International, Inc., 0s to 2002,
9.47s to 2007## 5,225 3,690,156
Qwest Communications International, Inc., 10.875s, 2007 5,425 6,238,750
RCN Corp., 0s to 2002, 11.125s to 2007## 10,390 6,883,375
Sprint Spectrum LP, 11s, 2006 9,250 10,614,375
Sygnet Wireless, Inc., 11.5s, 2006 5,750 6,353,750
Teleport Communications Group, Inc., 9.875s, 2006 3,400 3,910,000
Teleport Communications Group, Inc., 0s to 2001,
11.125s to 2007 3,455 2,962,663
Telesystem International Wireless, Inc., 0s to 2002,
13.25s to 2007## 10,240 6,835,200
Telesystem International Wireless, Inc., 0s to 2002,
10.5s to 2007## 4,815 2,889,000
Teletrac Holdings, Inc., 14s, 2007 5,500 5,335,000
Western Wireless Corp., 10.5s, 2007 7,900 8,709,750
WorldCommunications, Inc., 8.875s, 2006 1,076 1,180,028
--------------
$ 169,285,018
- ------------------------------------------------------------------------------------------------------
Transportation - 0.5%
First Wave Marine, Inc., 11s, 2008 $ 1,525 $ 1,574,563
Moran Transportation Co., 11.75s, 2004 3,500 3,911,250
--------------
$ 5,485,813
- ------------------------------------------------------------------------------------------------------
Utilities - Electric - 1.0%
CalEnergy Co., Inc., 7.63s, 2007 $ 4,700 $ 4,815,103
CMS Energy Corp., 7s, 2005 2,125 2,066,563
El Paso Electric Co., 8.9s, 2006 4,550 5,064,650
--------------
$ 11,946,316
- ------------------------------------------------------------------------------------------------------
Total U.S. Bonds $ 984,083,079
- ------------------------------------------------------------------------------------------------------
Foreign Bonds - 9.7%
Bermuda - 0.8%
Flag Limited, 8.25s, 2008 (Telecommunications)## $ 9,000 $ 9,236,250
- ------------------------------------------------------------------------------------------------------
Canada - 3.7%
Acetex, Inc., 9.75s, 2003 (Chemicals) $ 4,075 $ 4,243,094
CHC Helicopter Corp., 11.5s, 2002 (Aerospace) 6,675 7,175,625
Clearnet Communications Inc, 0s to 2000, 14.75s to
2005 (Telecommunications) 6,025 4,880,250
Echo Bay Mines Limited, 11s, 2027 (Metals and Minerals) 1,830 1,619,550
International Utility Structures Inc., 10.75s, 2008
(Utilities - Electric)## 2,175 2,234,813
Metronet Communications Corp., 0s to 2002, 10.75s
to 2007 (Telecommunications)## 6,000 3,870,000
Metronet Communications Corp., 12s, 2007 (Telecommunications) 3,250 3,705,000
PCI Chemicals Canada, Inc., 9.25s, 2007 (Chemicals)## 4,875 4,935,937
Repap New Brunswick, Inc., 10.625s, 2005
(Forest and Paper Products) 5,520 5,326,800
Rogers Cablesystems, Inc., 9.625s, 2002 (Telecommunications) 750 810,000
Rogers Cablesystems, Inc., 10.125s, 2012 (Telecommunications) 5,700 6,298,500
--------------
$ 45,099,569
- ------------------------------------------------------------------------------------------------------
Indonesia - 0.5%
Indah Kiat Finance Mauritius Limited, 10s, 2007
(Financial Services) $ 8,475 $ 6,525,750
- ------------------------------------------------------------------------------------------------------
Luxembourg - 0.7%
Millicom International Cellular Communications Corp.,
0s to 2001, 13.25s to 2006 (Telecommunications) $ 11,315 $ 8,655,975
- ------------------------------------------------------------------------------------------------------
Mexico - 0.3%
Satelites Mexicanos S A De C V, 10.125s, 2004
(Telecommunications)## $ 4,190 $ 4,305,225
- ------------------------------------------------------------------------------------------------------
Netherlands - 0.1%
Ptc International Finance Bv, 10.75s, 2007
(Financial Services) $ 2,515 $ 1,697,625
- ------------------------------------------------------------------------------------------------------
South Korea - 0.2%
Samsung Elecronics Ltd., 7.45s, 2002 (Electronics) $ 2,225 $ 1,991,375
- ------------------------------------------------------------------------------------------------------
United Kingdom - 3.4%
Colt Telecommunications Group PLC, 0s to 2001, 12s
to 2006 (Telecommunications) $ 14,395 $ 11,876,774
Colt Telecommunications Group Plc, 8.875s, 2007
(Telecommunications) 8,000 4,646,078
Dialog Corp. PLC, 11s, 2007 (Telecommunications)## 8,925 9,661,312
Diamond Cable Communications Corp. PLC, 0s to 2000,
11.75s to 2005 (Telecommunications) 4,635 3,444,938
Newsquest Capital PLC, 11s, 2006 (Printing and Publishing) 3,921 4,401,323
Telewest PLC, 9.625s, 2006 (Telecommunications) 6,425 6,874,750
--------------
$ 40,905,175
- ------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 118,416,944
- ------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $1,053,848,064) $1,102,500,023
- ------------------------------------------------------------------------------------------------------
Convertible Bond - 0.2%
- ------------------------------------------------------------------------------------------------------
Automotive - 0.2%
Exide Corp., 2.9s, 2005##, (Identified Cost $3,660,767) $ 5,800 $ 1,972,500
- ------------------------------------------------------------------------------------------------------
Stocks - 0.1%
- ------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- ------------------------------------------------------------------------------------------------------
Apparel and Textiles - 0.1%
Ithaca Industries, Inc. 304,000 $ 1,178,000
- ------------------------------------------------------------------------------------------------------
Building
Atlantic Gulf Communities Corp.+* 690 $ 2,760
- ------------------------------------------------------------------------------------------------------
Consumer Goods and Services
Ranger Industries, Inc.++* 266,768 $ 158,393
- ------------------------------------------------------------------------------------------------------
Restaurants and Lodging
Sharp Equity Inc. 481 $ 0
- ------------------------------------------------------------------------------------------------------
Steel
Envirosource, Inc.+* 1,666 $ 4,061
- ------------------------------------------------------------------------------------------------------
Telecommunications
NEXTEL Communications, Inc.* 19,466 $ 531,665
- ------------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $11,355,253) $ 1,874,879
- ------------------------------------------------------------------------------------------------------
Convertible Preferred Stocks - 0.2%
- ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- ------------------------------------------------------------------------------------------------------
Telecommunications - 0.2%
ICG Funding LLC, 6.75%##*, (Identified Cost,
$1,750,000) $ 35,000 $ 2,205,000
- ------------------------------------------------------------------------------------------------------
Preferred Stock - 4.9%
- ------------------------------------------------------------------------------------------------------
SHARES
- ------------------------------------------------------------------------------------------------------
Oil Services - 0.3%
Clark USA, Inc.*## 2,850 $ 3,120,750
- ------------------------------------------------------------------------------------------------------
Special Products and Services - 0.8%
Primedia, Inc.* 93,526 $ 10,100,763
- ------------------------------------------------------------------------------------------------------
Supermarkets - 0.6%
Supermarkets General Holdings Corp., $3.52 Exch.,
2007#* 529,098 $ 7,407,372
- ------------------------------------------------------------------------------------------------------
Telecommunications - 0.3%
NEXTEL Communications, Inc., 13s* 3,404 $ 3,914,600
- ------------------------------------------------------------------------------------------------------
Telecommunications - 2.7%
American Communications* 2,760 $ 3,118,800
Cablevision Systems Corp., 11.125s* 41,856 4,802,976
Dobson Communications Corporation Oklahoma* 3,575 3,646,500
Granite Broadcasting Corp. 1,000 55,125
Hyperion Telecommunications 1,965 2,190,975
Renaissance Cosmetics, Inc.# 8,292 1,492,560
Time Warner, Inc., 10.25## 14,967 16,987,545
--------------
$ 32,294,481
- ------------------------------------------------------------------------------------------------------
Utilities - Electric - 0.2%
El Paso Electric Co. 26,451 $ 2,863,321
- ------------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $57,271,536) $ 59,701,287
- ------------------------------------------------------------------------------------------------------
Warrants - 0.2%
- ------------------------------------------------------------------------------------------------------
Atlantic Gulf Communities Corp. (Building)* 61 $ 0
CHC Helicopter Corp. (Aerospace)* 16,000 48,000
Crystal Oil Co., $0.075 (Oil & Gas)* 3,954,527 0
Crystal Oil Co., $0.10 (Oil & Gas)* 3,455,042 0
Crystal Oil Co., $0.125 (Oil & Gas)* 4,107,411 0
Crystal Oil Co., $0.15 (Oil & Gas)* 4,041,943 0
Crystal Oil Co., $0.25 (Oil & Gas)* 4,041,943 0
Esat Holdings Ltd. (Telecommunications)* 2,825 98,875
GlobalStar Telecommunications (Telecommunications)* 6,905 863,125
Grand Palais Resorts (Gaming)##* 111,660 0
Hemmeter (Entertainment)* 111,660 0
ICO, Inc. (Telecommunications) 706,250 466,125
McCaw International Ltd. Warrants
(Telecommunications)* 7,225 9,031
Metronet Communications Corp. (Telecommunications)*## 3,250 104,000
Orion Network Systems, Inc. (Telecommunications)* 5,000 50,000
Orion Network Systems, Inc. (Telecommunications)* 11,775 235,500
Republic Health Corp. (Medical Health and Technology)* 2,500 0
Renaissance Cosmetics, Inc. (Consumer Goods and Services)* 7,189 72
Teletrac Holdings, Inc. (Telecommunication)* 5,500 275,000
- ------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $1,963,329) $ 2,149,728
- ------------------------------------------------------------------------------------------------------
Short-Term Obligations - 2.1%
- ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage, due 2/03/98 $ 10,290 $ 10,286,919
Federal National Mortgage Assn., due 2/09/98 - 2/17/98 15,140 15,114,192
Student Loan Marketing, due 2/10/98 400 399,464
- ------------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 25,800,575
- ------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,155,649,524) $1,196,203,992
Other Assets, Less Liabilities - 1.6% 18,916,343
- ------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,215,120,335
- ------------------------------------------------------------------------------------------------------
* Non-income producing security.
** Non-income producing security - in default.
## SEC Rule 144A restriction.
+ Restricted security.
# Payment-in-kind 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 notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
JANUARY 31, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value -
Unaffiliated issuers (identified cost,
$1,148,425,605) $1,196,045,600
Affiliated issuer (identified cost, $7,223,919) 158,393
--------------
Total investments, at value (identified cost,
$1,155,649,524) $1,196,203,993
Cash 270,574
Net receivable for forward foreign currency exchange
subject to
master netting agreements 96,396
Receivable for investments sold 30,849,426
Receivable for Fund shares sold 14,707,997
Interest and dividends receivable 24,062,290
Other assets 8,714
--------------
Total assets $1,266,199,390
--------------
Liabilities:
Distributions payable $ 3,279,376
Payable for investments purchased 43,774,948
Payable for Fund shares reacquired 3,369,241
Payable to affiliates -
Management fee 20,977
Shareholder servicing agent fee 8,363
Distribution and service fee 307,887
Administrative fee 967
Accrued expenses and other liabilities 317,296
--------------
Total liabilities $ 51,079,057
--------------
Net assets $1,215,120,335
--------------
Net assets consist of:
Paid-in capital $1,406,461,599
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 40,649,515
Accumulated net realized loss on investments and
foreign currency transactions (229,189,864)
Accumulated distributions in excess of net investment
income (2,800,915)
--------------
Total $1,215,120,335
==============
Shares of beneficial interest outstanding 216,246,877
===========
Class A shares:
Net asset value per share
(net assets of $765,848,703 / 136,325,997 shares of
beneficial interest outstanding) $5.62
=====
Offering price per share (100 / 95.25) $5.90
=====
Class B shares:
Net asset value and offering price per share
(net assets of $385,452,808 / 68,598,280 shares of
beneficial interest outstanding) $5.62
=====
Class C shares:
Net asset value and offering price per share
(net assets of $60,210,327 / 10,679,900 shares of
beneficial interest outstanding) $5.64
=====
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $3,608,497 / 642,700 shares of
beneficial interest outstanding) $5.61
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B, and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations
- ------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1998
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $100,057,256
Dividends 2,073,899
------------
Total investment income $102,131,155
------------
Expenses -
Management fee $ 4,780,801
Administrative fee 137,896
Trustees' compensation 65,223
Shareholder servicing agent fee 1,380,008
Distribution and service fee (Class A) 2,113,612
Distribution and service fee (Class B) 3,361,080
Distribution and service fee (Class C) 407,599
Custodian fee 334,436
Postage 162,272
Printing 55,331
Auditing fees 51,624
Legal fees 7,319
Miscellaneous 596,955
------------
Total expenses $ 13,454,156
Fees paid indirectly (314,613)
------------
Net expenses $ 13,139,543
------------
Net investment income $ 88,991,612
------------
Realized and unrealized gain on investments:
Realized gain (identified cost basis) -
Investment transaction $ 39,201,600
Foreign currency transactions 143,139
------------
Net realized gain on investments and foreign currency
transactions $ 39,344,739
------------
Change in unrealized appreciation (depreciation) -
Investments $ 15,019,415
Translation of assets and liabilities in foreign currency 95,046
------------
Net unrealized gain on investments and foreign
currency translation $ 15,114,461
------------
Net realized and unrealized gain on investments
and foreign currency translation $ 54,459,200
------------
Increase in net assets from operations $143,450,812
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 88,991,612 $ 80,418,610
Net realized gain on investments and foreign currency
transactions 39,344,739 1,477,653
Net unrealized gain on investments and foreign
currency translations 15,114,461 18,445,626
-------------- --------------
Increase in net assets from operations $ 143,450,812 $ 100,341,889
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (59,383,797) $ (54,869,246)
From net investment income (Class B) (26,332,601) (23,285,081)
From net investment income (Class C) (3,173,754) (1,760,418)
From net investment income (Class I) (296,634) (21,807)
-------------- --------------
Total distributions declared to shareholders $ (89,186,786) $ (79,936,552)
-------------- --------------
Net increase in net assets from Fund share
transactions $ 156,558,951 $ 64,103,824
-------------- --------------
Total increase in net assets $ 210,822,977 $ 84,509,161
Net assets:
At beginning of period 1,004,297,358 919,788,197
-------------- --------------
At end of period (Including accumulated (distributions
in excess of) undistributed net investment income of
$(2,800,915) and $1,677,232 respectively) $1,215,120,335 $1,004,297,358
============== ==============
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 5.35 $ 5.24 $ 4.84 $ 5.50 $ 5.11
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.47 $ 0.47 $ 0.45 $ 0.44 $ 0.40
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 0.27 0.10 0.39 (0.66) 0.48
------ ------ ------ ------ ------
Total from investment operations $ 0.74 $ 0.57 $ 0.84 $(0.22) $ 0.88
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(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 $(0.47) $(0.46) $(0.44) $(0.44) $(0.49)
------ ------ ------ ------ ------
Net asset value - end of period $ 5.62 $ 5.35 $ 5.24 $ 4.84 $ 5.50
====== ====== ====== ====== ======
Total return(+) 14.63% 11.52% 17.97% (3.95)% 18.13%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.01% 1.02% 1.00% 0.99% 1.00%
Net investment income 8.56% 8.92% 8.83% 8.65% 8.22%
Portfolio turnover 137% 87% 59% 59% 68%
Net assets at end of period (000,000
omitted) $766 $672 $620 $524 $645
# 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. If the charge had been included, the results
would have been lower.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights -- continued
- -----------------------------------------------------------------------------------------------------------------------------
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 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.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights -- continued
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1998 1997 1996 1995 1994***
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 5.35 $ 5.24 $ 4.84 $ 5.50 $ 5.27
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.43 $ 0.43 $ 0.41 $ 0.39 $ 0.15
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 0.27 0.10 0.39 (0.65) 0.22
------ ------ ------ ------ ------
Total from investment operations $ 0.70 $ 0.53 $ 0.80 $(0.26) $ 0.37
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(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 $(0.43) $(0.42) $(0.40) $(0.40) $(0.14)
------ ------ ------ ------ ------
Net asset value - end of period $ 5.62 $ 5.35 $ 5.24 $ 4.84 $ 5.50
====== ====== ====== ====== ======
Total return 13.83% 10.66% 16.98% (4.77)% 20.29%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.70% 1.79% 1.85% 1.85% 1.79%+
Net investment income 7.82% 8.13% 7.99% 7.79% 6.94%+
Portfolio turnover 137% 87% 59% 59% 68%
Net assets at end of period (000,000 omitted) $385 $301 $283 $286 $371
+ 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.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights -- continued
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1998 1997 1996 1995 1994***
- -----------------------------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 5.36 $ 5.25 $ 4.85 $ 5.50 $ 5.41
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $
$ 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 $ 0.71 $ 0.54 $ 0.80 $(0.25) $ 0.09
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(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 $(0.43) $(0.43) $(0.40) $(0.40) $ --
------ ------ ------ ------ ------
Net asset value - end of period $ 5.64 $ 5.36 $ 5.25 $ 4.85 $ 5.50
====== ====== ====== ====== ======
Total return 13.81% 10.71% 17.03% (4.51)% 20.94%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.70% 1.72% 1.77% 1.79% 1.36%+
Net investment income 7.78% 8.16% 8.02% 8.01% 5.92%+
Portfolio turnover 137% 87% 59% 59% 68%
Net assets at end of period (000,000 omitted) $60 $28 $16 $3 $1
+ 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.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights -- continued
- -----------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1998 1997***
- -----------------------------------------------------------------------------------------------------
CLASS I
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.35 $ 5.34
------ ------
Income from investment operations# -
Net investment income $ 0.49 $ 0.04
Net realized and unrealized gain on investments and foreign
currency transactions 0.25 0.01
------ ------
Total from investment operations $ 0.74 $ 0.05
------ ------
Less distributions declared to shareholders -
From net investment income $(0.48) $(0.04)
------ ------
Total distributions declared to shareholders $(0.48) $(0.04)
------ ------
Net asset value - end of period $ 5.61 $ 5.35
====== ======
Total return 14.77% 0.91%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.71% 0.59%+
Net investment income 8.86% 8.70%+
Portfolio turnover 137% 87%
Net assets at end of period (000,000 omitted) $4 $3
*** For the period from the inception of Class I, January 2, 1997, through January 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.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS High Income Fund (the Fund) is a non-diversified series of MFS Series
Trust III (The Trust). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended,
as a 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, forward contracts,
and interest rate swaps, 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 market value.
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 result 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
Fund's portfolio 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 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-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 average daily net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its 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 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 are
profits are reported in the financial statements as a tax return of capital.
Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or net realized gains. During
the year ended January 31, 1998, $4,282,973 and $1,288,916 was reclassified
from accumulated distributions in excess of net investment income and paid in
capital, respectively, to accumulated net realized loss on investments and
foreign currency transactions due to differences between book and tax
accounting for defaulted securities and currency transactions. This change had
no effect on the net assets or net asset value per share.
At January 31, 1998, the Fund, for federal tax purposes, had a capital loss
carryforward of $228,425,134, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration, on January 31, 1999 ($81,401,094), January 31, 2000 ($64,105,312),
January 31, 2001 ($16,884,352), January 31, 2003 ($30,373,319), and January
31, 2004 ($35,661,057).
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares. The classes of shares differ in their respective
distribution and service fees. All shareholders bear the common expenses of
the Fund based on 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 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 - Effective March 1, 1997, the Fund has an administrative
services agreement with MFS to provide the Fund with certain financial, legal,
compliance, shareholder servicing, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee at the following annual percentages of the Fund's
average daily net assets, provided that the administrative fee is not assessed
on Fund assets that exceed $3 billion:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has an unfunded
defined benefit plan for all of its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of
$26,488 for the year ended January 31, 1998.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$293,651 for the year ended January 31, 1998, as its portion of the sales
charge on sales of Class A 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 (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, a
distribution fee to MFD of up to 0.10% per annum (reduced to a maximum of
0.05% per annum for an indefinite 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 $380,004 for Class A for the year ended January 31, 1998. Payment
of the remaining portion of the 0.10% per annum Class A distribution fee will
commence on such date as the Trustees of the Fund may determine. Fees incurred
under the distribution plan during the year ended January 31, 1998, 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 $207,815
and $32,009 for Class B and Class C shares, respectively, for the year ended
January 31, 1998. Fees incurred under the distribution plan during the year
ended January 31, 1998, 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
12 months of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the year ended January 31,
1998, were $25,625, $442,794, and $24,613 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. Effective January 1,
1998, the fee is calculated as a percentage of the Fund's average daily net
assets at an effective annual rate of 0.1125%. Prior to January 1, 1998, the
fee was calculated as a percentage of the Fund's average daily net assets at
an effective annual rate of up to 0.13%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$1,565,174,073 and $1,409,296,816, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Trust, as computed on a federal income tax basis, are
as follows:
Aggregate cost $1,156,414,254
--------------
Gross unrealized appreciation $ 74,704,668
Gross unrealized depreciation (34,914,929)
--------------
Net unrealized appreciation $ 39,789,739
==============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
YEAR ENDED JANUARY 31, 1998 YEAR ENDED JANUARY 31, 1997
----------------------------------- ------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 61,813,593 $337,332,651 52,421,821 $ 275,165,167
Shares issued to shareholders
in reinvestment of
distributions 6,289,201 34,320,907 6,071,848 31,874,153
Shares reacquired (57,415,426) (312,709,612) (51,220,588) (268,276,630)
----------- ------------ ----------- -------------
Net increase 10,687,368 $ 58,943,946 7,273,081 $ 38,762,690
=========== ============ =========== =============
<CAPTION>
Class B Shares
YEAR ENDED JANUARY 31, 1998 YEAR ENDED JANUARY 31, 1997
----------------------------------- ------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 46,709,978 $254,431,772 35,443,924 $ 185,987,481
Shares issued to shareholders
in reinvestment of
distributions 2,517,816 13,755,688 2,271,608 11,933,444
Shares reacquired (36,845,461) (200,663,673) (35,539,089) (187,014,906)
----------- ------------ ----------- -------------
Net increase 12,382,333 $ 67,523,787 2,176,443 $ 10,906,019
=========== ============ =========== =============
<CAPTION>
Class C Shares
YEAR ENDED JANUARY 31, 1998 YEAR ENDED JANUARY 31, 1997
----------------------------------- ------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 9,605,530 $ 52,647,803 4,433,093 $ 23,275,757
Shares issued to shareholders
in reinvestment of
distributions 308,317 1,690,469 203,510 1,071,206
Shares reacquired (4,499,907) (24,626,101) (2,477,675) (12,968,265)
----------- ------------ ----------- -------------
Net increase 5,413,940 $ 29,712,171 2,158,928 $ 11,378,698
=========== ============ =========== =============
<CAPTION>
Class I Shares
YEAR ENDED JANUARY 31, 1998 PERIOD ENDED JANUARY 31, 1997*
----------------------------------- -------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 69,923 $ 380,529 568,279 $ 3,034,610
Shares issued to shareholders
in reinvestment of
distributions 54,394 296,608 4,076 21,807
Shares reacquired (53,972) (298,090) -- --
----------- ------------ ----------- -------------
Net increase 70,345 $ 379,047 572,355 $ 3,056,417
=========== ============ =========== =============
*For the period from the inception of Class I, January 2, 1997, through January 31, 1997.
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of
Fund shares. Interest is charged to each fund, based on its borrowings, at a
rate equal to the bank's base rate. In addition, a commitment fee, based on
the average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated
to the Fund for the year ended
January 31, 1998, was $6,752.
(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 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 are considered.
Forward foreign currency sales under master netting agreement amounted to a
net receivable of $96,396 with Deutsche Bank at January 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 year ended January
31, 1998, is set forth below:
BEGINNING ENDING DIVIDEND ENDING
AFFILIATES SHARES SHARES INCOME VALUE
- -------------------------------------------------------------------------------
Ranger Industries, Inc. 266,768 266,768 $ -- $158,393
(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 0.4% 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 $ -- $ 2,760
Envirosource, Inc. 5/15/91 1,666 7,289 4,061
Merrill Lynch Mortgage
Investors, Inc.,
8.171s 2023 6/22/94 $4,500,000 3,119,063 4,484,531
----------
$4,491,352
==========
<PAGE>
INDEPENDENT AUDITORS, REPORT
To the Trustees of MFS Series Trust III and Shareholders of MFS High Income
Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS High Income Fund (a series of
MFS Series Trust III) as of January 31, 1998, the related statement of
operations for the year then ended, the statement of changes in net assets for
the years ended January 31, 1998 and 1997, and the financial highlights for
each of the years in the ten-year period ended January 31, 1998. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of the
securities owned at January 31, 1998, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS High Income Fund
at January 31, 1998, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 6, 1998
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) HIGH INCOME FUND
<TABLE>
<S> <C>
TRUSTEES CUSTODIAN
Richard B. Bailey* - Private Investor; State Street Bank and Trust Company
Former Chairman and Director (until 1991),
MFS Investment Management AUDITORS
Deloitte & Touche LLP
Peter G. Harwood - Private Investor
INVESTOR INFORMATION
J. Atwood Ives - Chairman and Chief For MFS stock and bond market outlooks,
Executive Officer, Eastern Enterprises call toll free: 1-800-637-4458 anytime from
a touch-tone telephone.
Lawrence T. Perera - Partner, Hemenway
& Barnes For information on MFS mutual funds, call
your financial adviser or, for an
William J. Poorvu - Adjunct Professor, information kit, call toll free:
Harvard University Graduate School of 1-800-637-2929 any business day from 9 a.m.
Business Administration to 5 p.m. Eastern time (or leave a message
anytime).
Charles W.Schmidt - Private Investor
INVESTOR SERVICE
Arnold D. Scott* - Senior Executive Vice MFS Service Center, Inc.
President, Director, and Secretary, MFS P.O. Box 2281
Investment Management Boston, MA 02107-9906
Jeffrey L. Shames* - Chairman and Chief For general information, call toll free:
Executive Officer, MFS Investment 1-800-225-2606 any business day from
Management 8 a.m. to 8 p.m. Eastern time.
Elaine R. Smith - Independent Consultant For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
David B. Stone - Chairman, North American day from 9 a.m. to 5 p.m. Eastern time. (To
Management Corp. (investment advisers) use this service, your phone must be
equipped with a Telecommunications Device
INVESTMENT ADVISER for the Deaf.)
Massachusetts Investment Management
500 Boylston Street For share prices, account balances, and
Boston, MA 02116-3741 exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
DISTRIBUTOR telephone.
MFS Fund Distributors, Inc.
500 Boylston Street WORLD WIDE WEB
Boston, MA 02116-3741 www.mfs.com
PORTFOLIO MANAGER [Dalbar logo] For the fourth year in a row,
Robert J. Manning* MFS earned a #1 ranking in the DALBAR, Inc.
Broker/Dealer Survey, Main Office Operations
TREASURER Service Quality Category. The firm achieved a
W. Thomas London* 3.42 overall score on a scale of 1 to 4 in
the 1997 survey. A total of 111 firms
ASSISTANT TREASURERS responded, offering input on the quality of
Mark E. Bradley* service they received from 29 mutual fund
Ellen Moynihan* companies nationwide. The survey contained
James O. Yost* questions about service quality in 11
categories, including "knowledge of
SECRETARY operations contact," "keeping you informed,"
Stephen E. Cavan* and "ease of doing business" with the firm.
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
Paid
MFS
----------------
[LOGO] MFS(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
500 Boylston Street
Boston, MA 02116-3741
[DALBAR
LOGO]
TOP-RATED SERVICE
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MHI-2 3/98 82M 18/218/318/818
