M F S
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
MFS(R) HIGH YIELD OPPORTUNITIES FUND
SEMIANNUAL REPORT o JULY 31, 1999
TABLE OF CONTENTS
Letter from the Chairman 1
Management Review and Outlook 3
Performance Summary 8
Portfolio of Investments 11
Financial Statements 18
Notes to Financial Statements 25
MFS' Year 2000 Readiness Disclosure 31
Trustees and Officers 33
MFS(R) ORIGINAL RESEARCH(SM)
RESEARCH HAS BEEN CENTRAL TO INVESTMENT MANAGEMENT AT MFS SINCE 1932, WHEN WE
CREATED ONE OF THE FIRST IN-HOUSE RESEARCH DEPARTMENTS IN THE MUTUAL FUND
INDUSTRY. ORIGINAL RESEARCH(SM) AT MFS IS MORE THAN JUST CRUNCHING NUMBERS AND
CREATING ECONOMIC MODELS: IT'S GETTING TO KNOW EACH SECURITY AND EACH COMPANY
PERSONALLY.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
LETTER FROM THE CHAIRMAN
Jeffrey L. Shames
DEAR SHAREHOLDERS,
It has been almost two years since financial turmoil began to rock markets in
Asia, Russia, and Latin America. Even developed markets such as Europe and the
United States were not immune. In the U.S. equity market, for example,
investors focused on a narrow group of 50 of the largest-company growth stocks
because they seemed to offer less volatility in uncertain times. Fixed-income
investors also became more concerned about risk, moving money into U.S.
Treasury securities and out of corporate and municipal bonds and
mortgage-backed securities.
The narrowness of the market was just one of three broad issues that dominated
the U.S. equity market until recently. The other two were a slowdown in
corporate earnings growth and high valuations, with stocks of many companies
selling at extremely high prices relative to their earnings.
Although these have been challenging issues, we now see signs that we feel
demonstrate each one is changing for the better. Today, we believe the markets
are presenting more opportunities for investors to diversify, for our portfolio
managers to find good values, and for us to show the benefits of staying with
our long-term objectives and strategies. Investors seem to be regaining
confidence in a wider range of companies. Stocks of some small and mid-sized
companies, as well as some large industrial companies, have begun to perform
better in the past months than they had for the previous year or so. These
companies appear to have benefited from signs of stability in emerging markets
and a continuation of economic growth in the United States.
U.S. companies also have produced better earnings. Corporate earnings were, on
average, relatively flat in 1998. However, we expect earnings to grow 12% to
14% this year because more companies have benefited from the strong economy and
from aggressive consolidation and cost-cutting measures they have taken over
the past several years.
Based on their earnings projections, our analysts estimate that the U.S. stock
market is still about 30% overvalued. While there has been some shift to a
wider group of stocks, many investors are still focusing on the large-company
stocks. As a result, most of the overvaluation is in the 50 largest stocks in
the Standard & Poor's 500 Composite Index (the S&P 500),
1
LETTER FROM THE CHAIRMAN -- continued
a popular, unmanaged index of common stock total return performance. That means
about 450 stocks are selling at more attractive prices, particularly given what
we see as the improved earnings outlooks for these and many small and mid-sized
companies not in the S&P 500. These companies also benefit from consolidation,
cost cutting, and global growth. Because they are smaller, they may be able to
respond to these changes more quickly, and thus they have the potential to grow
faster than the big companies.
The past two years have challenged investors. However, we believe we are well
positioned for the current environment because our analysts and portfolio
managers continue to rely on MFS(R) Original Research(SM) to help evaluate the
long-term investment potential of each holding being considered for our
portfolios. Also, we believe our discipline of staying with our clearly defined
investment strategies can help us offer investment products with the potential
to sustain returns over a variety of market cycles.
We appreciate your confidence and welcome any questions or comments you may
have.
Respectfully,
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
August 14, 1999
2
MANAGEMENT REVIEW AND OUTLOOK
Robert J. Manning
For the six months ended July 31, 1999, Class A shares of the Fund provided a
total return of 7.46%, Class B shares 7.10%, Class C shares 7.12%, and Class I
shares 7.85%. These returns assume the reinvestment of distributions but
exclude the effects of any sales charges and compare to a 1.11% return for the
Lehman Brothers High Yield Bond Index (the Lehman Index), an unmanaged index of
noninvestment-grade corporate debt. The Fund's returns also compare to a 1.95%
return for the average high current yield fund tracked by Lipper Analytical
Services, Inc., an independent firm that reports mutual fund performance.
Q. HOW HAS THE ECONOMIC ENVIRONMENT AFFECTED THE FUND'S PERFORMANCE DURING THE
PAST SIX MONTHS?
A. The Fund has benefited from a favorable economic environment for high-yield
securities -- specifically, moderate economic growth and low inflation in the
United States. The combination of a strong U.S. economy and the recovery of
many international markets has helped strengthen investor confidence. These
trends have had a positive impact on the high-yield market, as companies have
generally posted improved operating results. This environment is different from
what took place during the last few months of 1998, when volatility in several
overseas markets, particularly in Asia, caused investors to move toward
highest-quality securities such as U.S. Treasuries and away from high-yield
corporate debt.
Q. WHAT TYPES OF HIGH-YIELD BONDS HAVE MADE THE MOST SIGNIFICANT CONTRIBUTIONS
TO THE FUND'S PERFORMANCE?
A. The strong economy has benefited the high-yield market as a whole, although
lower-quality issues such as "CCC"-rated bonds have experienced the most
dramatic turnaround. In this Fund, we tend to take on a little more risk in
exchange for the opportunity to achieve somewhat higher yields. Lower-quality
bonds generally offer higher yields than most other issues as a way to
compensate an investor for taking on somewhat higher risk. Many of these
lower-quality bonds have done quite well in this economic environment because
companies issuing these bonds have had fewer credit problems, such as defaults
and bond rating reductions, than they would have in a weaker environment. In
other words, the economic environment seems to have lowered the amount of risk
associated with these bonds, which has made them more appealing.
3
MANAGEMENT REVIEW AND OUTLOOK -- continued
Q. HOW DO YOU DECIDE WHICH OF THESE INVESTMENTS TO PUT INTO THE PORTFOLIO?
A. We select all of our investments on a company-by-company basis. Because
"CCC"-rated bonds involve a somewhat higher degree of risk than higher-quality
issues, we rely heavily on MFS(R) Original Research(SM) to determine which of
these bonds we believe may have the best long-term prospects. Our analysts look
for potential catalysts that may result in a credit upgrade or price
appreciation. The analysts meet with the management of these companies, assess
their credit risk, and try to identify those that have improving credit quality
or offer attractive yields given the amount of risk. Our job is to determine
whether we are being compensated adequately for the credit risks associated
with a particular company. For example, we invested in Chesapeake Energy, which
was hurt along with many other oil companies when the price of oil declined
toward the end of last year. We held onto this company because it fit our
criteria, and the value of its bonds have improved dramatically as oil prices
began to recover during the first half of 1999.
Q. WHAT ARE SOME OTHER INVESTMENTS THAT HELPED THE FUND'S PERFORMANCE?
A. We have found several opportunities in the telecommunications and media
sectors. Among telecommunications companies, we are focusing on those that are
building fiber-optic networks to compete for local, long distance and, most
importantly, Internet traffic, the fastest-growing segment. Specifically, a
large portion of our holdings is in competitive local exchange companies
(CLECs). These companies build fiber-optic networks in metropolitan areas and
offer an array of telecommunications services that allow them to compete with
the Baby Bells for business customers. We believe the reason that many of these
CLECs have experienced very good customer growth is because their fiber-optic
networks offer a lower-cost, higher-quality alternative for many of their
customers. Two examples of other telecommunications companies we like are NTL
and United International, which offer cable and telephone services to homes in
Europe. Europe was slower to deregulate these industries than the United
States, but we are now seeing more bonds issued by cable and telecommunications
companies for development in Germany, France, Spain, and the United Kingdom.
One media company worth noting is CD Radio, which provides digital radio
services to the automobile industry. Although the company is in the development
stage, it already has partnered with the automotive
4
MANAGEMENT REVIEW AND OUTLOOK -- continued
industry, and we believe it appears to have very exciting long-term prospects.
Our position in this company's bonds has increased substantially since we
purchased them last May.
Q. HOW HAS THE FUND'S INVESTMENT IN EMERGING MARKETS AFFECTED PERFORMANCE?
A. Emerging debt markets have experienced significant volatility over the past
year but performed better in the first part of 1999. However our investment in
this asset class has had a more positive impact on the Fund's performance
during the past six months. In managing our emerging debt exposure, we have
focused on liquid, government issues with improving credit stories and
manageable debt profiles. The attention to liquidity has allowed the Fund the
necessary flexibility to re-allocate positions as opportunities warrant.
Relative to the index, we have underweighted holdings in Latin America and
overweighted Eastern Europe and the Middle East. We have been impressed with
the strength of Asia's recovery and have taken profits on positions as yields
have fallen to less-attractive levels. In our view, emerging market debt
continues to offer attractive opportunities on a selective basis.
Q. WHAT IS YOUR OUTLOOK FOR THE HIGH-YIELD MARKET?
A. We believe the high-yield market will continue to offer good value through
the second half of the year. One tool we use to determine value in the
high-yield markets is to look at the yield difference, or spread, between
high-yield bonds and Treasury securities. Currently, high-yield bonds are
yielding about 11% compared to Treasury securities, which yield roughly 6%. The
last time the spread between high-yield bonds and Treasury securities was this
dramatic was in 1991, when the economy was just slowly coming out of a
recession and default rates were over 3%. In 1999, this spread is virtually the
same. However, the strength of the nation's economy generally has reduced the
level of risk associated with high-yield investments because the ability of
companies to repay their debt has strengthened. Low commodity prices and worker
productivity have kept U.S. inflation low. Interest rates have risen 1% this
year to the point where we think it will put a bit of a damper on the economy,
but we don't see inflation as a major problem at this point. We believe the
economy seems to be growing at a very good pace. Consumer confidence is high,
jobless rates are low, and we expect earnings to continue to do well for the
rest of
5
MANAGEMENT REVIEW AND OUTLOOK -- continued
the year. In our view, these economic trends -- low inflation and a strong
economy -- will continue to increase the appeal of high-yield bonds.
Robert J. Manning
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are current 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.
It is not possible to invest directly in an index.
6
PORTFOLIO MANAGER'S PROFILE
ROBERT J. MANNING IS SENIOR VICE PRESIDENT, CHIEF FIXED INCOME STRATEGIST,
DIRECTOR OF FIXED INCOME RESEARCH, 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, AND MFS(R) SPECIAL VALUE
TRUST, A CLOSED-END 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 IN 1992,
SENIOR VICE PRESIDENT IN 1993, AND CHIEF FIXED INCOME STRATEGIST AND DIRECTOR
OF FIXED INCOME RESEARCH IN 1999. HE IS A GRADUATE OF THE UNIVERSITY OF LOWELL
AND EARNED A MASTER OF SCIENCE DEGREE IN FINANCE FROM BOSTON COLLEGE.
ALL PORTFOLIO MANAGERS AT MFS INVESTMENT MANAGEMENT(R) ARE SUPPORTED BY AN
INVESTMENT STAFF OF OVER 100 PROFESSIONALS UTILIZING MFS(R) ORIGINAL
RESEARCH(SM), A COMPANY-ORIENTED, BOTTOM-UP PROCESS OF SELECTING SECURITIES.
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 consultant or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
7
FUND FACTS
OBJECTIVE: SEEKS HIGH CURRENT INCOME BY INVESTING PRIMARILY IN A
DIVERSIFIED PORTFOLIO OF FIXED-INCOME SECURITIES. CAPITAL
GROWTH, IF ANY, IS INCIDENTAL.
COMMENCEMENT
OF INVESTMENT
OPERATIONS: JULY 1, 1998
CLASS
INCEPTION: CLASS A JULY 1, 1998
CLASS B JULY 1, 1998
CLASS C JULY 1, 1998
CLASS I JULY 1, 1998
SIZE: $13.3 MILLION NET ASSETS AS OF JULY 31, 1999
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. (See Notes to Performance
Summary for more information.)
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN THROUGH JULY 31, 1999
CLASS A
6 Months 1 Year Life*
-------- ------ ------
Cumulative Total Return +7.46% -2.89% -2.71%
Average Annual Total Return -- -2.89% -2.50%
SEC Results -- -7.51% -6.79%
CLASS B
6 Months 1 Year Life*
-------- ------ ------
Cumulative Total Return +7.10% -3.24% -3.29%
Average Annual Total Return -- -3.24% -3.04%
SEC Results -- -6.75% -6.27%
* For the period from the commencement of the Fund's investment operations,
July 1, 1998, through July 31, 1999.
8
PERFORMANCE SUMMARY -- continued
CLASS C
6 Months 1 Year Life*
-------- ------ ------
Cumulative Total Return +7.12% -3.63% -3.48%
Average Annual Total Return -- -3.63% -3.21%
SEC Results -- -4.50% -4.02%
CLASS I
6 Months 1 Year Life*
-------- ------ ------
Cumulative Total Return +7.85% -2.03% -1.82%
Average Annual Total Return -- -2.03% -1.68%
* From the period from the commencement of the Fund's investment operations,
July 1, 1998, through July 31, 1999.
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.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies and
waivers may be discontinued at any time. 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.
Lower-rated securities may provide greater returns, but they are also
associated with greater-than-average risk. These risks may increase share price
volatility. See the prospectus for details.
Investments in foreign and emerging market securities may provide superior
returns but also involve greater risk than U.S. investments. Investments in
foreign and emerging market securities may be favorably or unfavorably affected
by changes in interest rates and currency exchange rates, market conditions,
and the economic and political conditions of the countries where investments
are made. These risks may increase share price volatility. See the prospectus
for details.
9
PORTFOLIO CONCENTRATION AS OF JULY 31, 1999
PORTFOLIO STRUCTURE
Equities 3.9%
Municipals 1.3%
Cash 1.1%
High Yield Corporates 71.5%
Emerging Markets 22.2%
This portfolio is actively managed, and current holdings may be different.
10
PORTFOLIO OF INVESTMENTS (Unaudited) -- July 31, 1999
Bonds - 91.9%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- --------------------------------------------------------------------------------
U.S. BONDS - 60.3%
AEROSPACE - 1.3%
K & F Industries, Inc., 9.25s, 2007 $ 75 $ 73,875
L-3 Communications Corp., 10.375s, 2007 90 95,063
$168,938
BUILDING MATERIALS - 1.4%
Formica Corp., 10.875s, 2009## $100 $ 97,000
MMI Products, Inc., 11.25s, 2007## 55 55,962
Schuff Steel Co., 10.5s, 2008 40 37,050
$190,012
BUSINESS SERVICES - 1.7%
Anacomp, Inc., 10.875s, 2004 $ 50 $ 52,125
Iron Mountain, Inc., 10.125s, 2006 80 83,000
Pierce Leahy Corp., 11.125s, 2006 85 92,650
$227,775
CHEMICALS - 2.1%
Huntsman ICI Chemicals, Inc., 10.125s, 2009## $ 50 $ 50,000
Lyondell Chemical Co., 9.625s, 2007## 100 101,250
Sterling Chemicals, Inc., 11.75s, 2006 25 19,000
Sterling Chemicals, Inc., 12.375s, 2006 75 76,687
Sterling Chemicals Holdings, Inc.,
0s to 2001, 13.5 to 2008 115 34,500
$281,437
CONSUMER GOODS AND SERVICES - 1.2%
Galey & Lord, Inc., 9.125s, 2008 $ 45 $ 20,250
Remington Products Co. LLC, 11s, 2006 25 20,938
Samsonite Corp., 10.75s, 2008 145 123,250
$164,438
CONTAINER, FOREST AND PAPER PRODUCTS - 3.4%
Applied Extrusion Technologies, Inc.,
11.5s, 2002 $150 $154,500
Consolidated Contaniner Co., LLC,
10.125s, 2009## 50 50,875
Gaylord Container Corp., 9.875s, 2008 180 164,700
Packaging Corp. of America, 9.625s, 2009## 25 25,437
Riverwood International Corp., 10.25s, 2006 50 50,750
Riverwood International Corp., 10.875s, 2008 5 4,950
$451,212
ENERGY - 2.9%
Cheasapeake Energy Corp., 9.625s, 2005 $125 $114,375
Continental Resources, Inc., 10.25s, 2008 25 18,375
Forest Oil Corp., 10.5s, 2006 75 76,875
P&L Coal Holdings Corp., 9.625s, 2008 125 124,687
Pride International, Inc., 10s, 2009 50 51,250
$385,562
11
PORTFOLIO OF INVESTMENTS (Unaudited) -- continued
Bonds - continued
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- --------------------------------------------------------------------------------
U.S. BONDS - CONTINUED
ENTERTAINMENT - 0.4%
Cinemark USA, Inc., 9.625s, 2008 $ 50 $ 48,500
FOOD AND BEVERAGE PRODUCTS - 0.3%
Friendly Ice Cream Corp., 10.5s, 2007 $ 10 $ 8,975
Vlasic Foods International Inc., 10.25s, 2009## 25 24,250
$ 33,225
GAMING AND HOTELS - 1.5%
Boyd Gaming Corp., 9.5s, 2007++ $ 25 $ 24,625
Coast Hotels & Casinos, Inc., 9.5s, 2009## 100 96,000
Lady Luck Gaming Corp., 11.875s, 2001 15 15,225
Red Roof Inns, Inc., 9.625s, 2003 40 40,950
Santa Fe Hotel, Inc., 11s, 2000 25 23,750
$ 200,550
INDUSTRIAL - 5.2%
Allied Waste North America Inc., 10s, 2009 $ 75 $ 74,063
Day International Group, Inc., 11.125s, 2005 42 44,520
Fairfield Manufacturing Co., Inc., 9.625s, 2008## 75 72,750
Hayes Wheels International, Inc., 11s, 2006 175 190,312
Haynes International, Inc., 11.625s, 2004 50 47,250
International Knife & Saw, Inc., 11.375s, 2006 50 45,875
Johnstown America Industries, 11.75s, 2005 75 78,656
Oxford Automotive, Inc., 10.125s, 2007 35 35,700
Simonds Industries, Inc., 10.25s, 2008 50 48,250
Thermadyne Holdings Corp.,
0s to 2003, 12.5s to 2008 120 57,000
$ 694,376
MEDIA - 7.5%
Avalon Cable Holdings LLC,
0s to 2003, 11.875s to 2008## $100 $ 66,250
CD Radio Inc., 14.5s, 2009## 100 108,000
Charter Commerce Holdings LLC,
0s to 2004, 9.92s to 2011 150 91,125
Classic Communications, Inc.,
0s to 2003, 13.25s to 2009 ## 50 33,250
Cumulus Media, Inc., 10.375s, 2008 50 52,250
Frontiervision Operating Partnership LP, 11s, 2006 145 157,688
Granite Broadcasting Corp., 10.375s, 2005 25 25,375
Impsat Corp., 12.375s, 2008 50 38,000
Intermedia Capital Partners IV, LP, 11.25s, 2006 18 20,430
LIN Holdings Corp., 0s to 2003, 10s to 2008 75 50,250
NTL Communications Corp.,
0s to 2003, 12.375s to 2006 180 123,300
NTL, Inc., 0s to 2003, 9.75s to 2008## 55 37,331
Telemundo Holdings, Inc., 0s to 2003, 11.5s to 2008 100 52,000
United International Holdings, Inc., 10.75s, 2008 250 145,000
$1,000,249
12
PORTFOLIO OF INVESTMENTS (Unaudited) -- continued
Bonds - continued
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- --------------------------------------------------------------------------------
U.S. BONDS - CONTINUED
MEDICAL AND HEALTH TECHNOLOGY AND SERVICES - 0.3%
Alaris Medical, Inc.,
0s to 2003, 11.125s to 2008## $ 75 $ 39,375
METALS AND MINERALS - 5.5%
Algoma Steel, Inc., 12.375s, 2005 $100 $ 99,000
Doe Run Resources Corp., 11.25s, 2005 100 89,500
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 50 50,125
Kaiser Aluminum & Chemical Corp., 12.75s, 2003 90 90,900
Metal Management, Inc., 10s, 2008 150 117,000
Metallurg Holdings, Inc.,
0s to 2003, 12.75s to 2008 200 76,000
Northwestern Steel & Wire Co., 9.5s, 2001 150 108,750
NS Group Inc., 13.5s, 2003 50 52,750
WCI Steel, Inc., 10s, 2004 45 46,350
$730,375
MUNICIPALS - 1.3%
Mesa County, CO, 8.5s, 2006 $250 $175,000
RETAIL - 1.0%
J Crew Group, Inc., 0s to 2002, 13.125s to 2008 $120 $ 71,400
J Crew Operating Corp., 10.375s, 2007 60 60,150
$131,550
STEEL - 0.5%
Renco Steel Holdings, Inc., 10.875s, 2005 $ 75 $ 66,750
SUPERMARKETS - 2.8%
Jitney-Jungle Stores of America, Inc.,
12s, 2006 $125 $100,000
Pathmark Stores, Inc., 11.625s, 2002 75 75,750
Pathmark Stores, Inc.,
0s to 1999, 10.75s to 2003 185 181,300
Penn Traffic Co., 11s, 2009 10 9,535
$366,585
TELECOMMUNICATIONS - 18.6%
Allegiance Telecommunications, Inc.,
12.875s, 2008## $155 $169,725
AMSC Acquisition Co., Inc., 12.25s, 2008 155 124,775
Caprock Communications Corp., 11.5s, 2009## 25 25,250
Centennial Cellular Operating Co.,
10.75s, 2008## 105 108,150
Cybernet Internet Services International,
14s, 2009 50 50,500
Dialog Corporation PLC, 11s, 2007 25 23,156
DTI Holdings, Inc., 0s to 2003, 12.5s to 2008 125 42,500
GCI, Inc., 9.75s, 2007 65 64,025
Globenet Communications Group, 13s, 2007 60 59,700
Hyperion Telecommunications, 12s, 2007## 100 101,500
ICG Holdings, Inc., 0s to 2001, 12.5s to 2006 200 164,000
ITC Deltacom, Inc., 11s, 2007 175 185,500
Metromedia Fiber Network, Inc., 10s, 2008 70 70,700
MJD Communications, Inc., 9.5s, 2008 60 59,775
Mobile Telecommunication Technologies Corp.,
13.5s, 2002 95 108,300
13
PORTFOLIO OF INVESTMENTS (Unaudited) -- continued
Bonds - continued
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- --------------------------------------------------------------------------------
U.S. BONDS - CONTINUED
TELECOMMUNICATIONS - CONTINUED
Nextel Communications, Inc.,
0s to 2003, 9.95s to 2008 $170 $ 119,425
Nextel International, Inc.,
0s to 2003, 12.125 to 2008 15 8,006
Nextlink Communications, Inc., 10.75s, 2009 50 50,750
Nextlink Communications, Inc.,
0s to 2004, 12.25s to 2009 125 71,875
Northeast Optic Network, 12.75s, 2008 35 37,100
Orbital Imaging Corp., 11.625s, 2005 25 22,750
Pagemart Wireless, Inc.,
0s to 2003, 11.25s to 2008 25 11,375
Psinet, Inc., 11s, 2009 140 138,600
Rhythms Netconnections Inc., 12.75s, 2009## 75 69,000
Spectrasite Holdings, Inc.,
0s to 2004, 11.25s to 2009 ## 225 123,469
Teligent Inc., 11.5s, 2007 75 72,188
Time Warner Telecommunications LLC, 9.75s, 2008 30 30,600
Triton PCS, Inc.,
0s to 2003, 11s to 2008, 1s, 2008 155 104,238
Verio Inc., 11.25s, 2008## 120 121,800
Worldwide Fiber Inc., 12s, 2009 125 123,437
$2,462,169
UTILITIES - ELECTRIC - 0.6%
International Utility Structures, 10.75s, 2008 $ 75 $ 74,438
TOTAL U.S. BONDS $7,992,766
FOREIGN BONDS - 31.6%
ALGERIA - 2.9%
Algeria Tranche, 6s, 2006 $460 $ 315,100
Algeria Tranche, 6s, 2010 100 64,500
$ 379,600
ARGENTINA - 1.1%
Republic of Argentina, 11s, 2006 $ 74 $ 66,970
Republic of Argentina, 11.75s, 2009 40 35,600
Republic of Argentina, 9.75s, 2027 60 45,300
$ 147,870
BRAZIL - 3.8%
Banco Nacional De Desenvolvi, 13.64s, 2008
(Banks and Credit Cos.) $330 $ 274,725
Federal Republic of Brazil, 11.625s, 2004 15 13,632
Federal Republic of Brazil, 5.938s, 2012 125 73,750
Federal Republic of Brazil, 5.875s, 2024 70 42,175
Federal Republic of Brazil, 10.125s, 2027 145 103,501
$ 507,783
BULGARIA - 1.9%
Hermes Europe Railtel BV, 10.375s, 2009
(Telecommunications) $50 $ 50,000
National Republic of Bulgaria, 5.875s, 2011 110 75,175
Telei Europe BV, 13s, 2009
(Telecommunications)## 125 131,875
$ 257,050
14
PORTFOLIO OF INVESTMENTS (Unaudited) -- continued
Bonds - continued
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- --------------------------------------------------------------------------------
FOREIGN BONDS - CONTINUED
CANADA - 0.7%
PCI Chemicals Canada, Inc., 9.25s, 2007
(Chemicals) $ 60 $ 45,600
Russel Metals Inc., 10s, 2009 (Industrial) 50 49,750
$ 95,350
COLOMBIA - 0.2%
Republic of Colombia, 8.375s, 2027 $ 35 $ 23,975
INDONESIA - 1.2%
Indah Kiat Finance Mauritius Ltd., 10s, 2007
(Container, forest and paper products) $265 $164,300
LUXEMBOURG - 1.4%
Millicom International Cellular
Communications Corp., 0s to 2001,
13.5s to 2006 (Telecommunications) $250 $186,250
MEXICO - 4.1%
Alestra, 12.625s, 2009 (Telecommunications)## $ 65 $ 60,613
Petroleos Mexicanos, 9.5s, 2027 (Oil services) 70 58,800
Satelites Mexicanos SA De CV, 10.125s, 2004
(Telecommunications) 150 119,625
United Mexican States, 10.375s, 2009 75 75,187
United Mexican States, 11.375s, 2016 134 138,020
United Mexican States, 11.5s, 2026 80 85,800
$538,045
NETHERLANDS - 2.6%
Completel Europe NV, 0s to 2004, 14s to 2009
(Telecommunications)## $ 75 $ 38,625
United Pan Europe, 10.875s, 2009
(Telecommunications) 100 100,250
Versatel Telecom B.V., 13.25s, 2008
(Telecommunications) 125 130,000
Versatel Telecom International, 13.25s, 2008
(Telecommunications) 75 78,000
$346,875
PANAMA - 0.6%
Republic of Panama, 8.875s, 2027 $100 $ 80,380
PHILIPPINES - 1.8%
Republic of Philippines, 9.875s, 2019 $245 $237,037
POLAND - 0.9%
Netia Holdings B.V., 10.25s, 2007
(Telecommunications) $130 $113,750
RUSSIA - 2.5%
Government of Russia, 11s, 2018 $ 70 $ 34,650
Ministry of Finance, 12.75s, 2028 520 291,200
$325,850
TURKEY - 1.1%
Cellco Finance NV, 15s, 2005
(Financial Services)## $145 $151,888
UNITED KINGDOM - 4.8%
Dolphin Telecom PLC, 11.5s, 2008
(Telecommunications) $255 $122,081
Esat Telecom Group PLC, 11.875s, 2008
(Telecommunications) 145 150,075
15
PORTFOLIO OF INVESTMENTS (Unaudited) -- continued
Bonds - continued
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- --------------------------------------------------------------------------------
FOREIGN BONDS - CONTINUED
UNITED KINGDOM - CONTINUED
Espirit Telecom Group PLC, 10.875s, 2008
(Telecommunications) $ 75 $ 75,750
Jazztel PLC, 14s, 2009 (Telecommunications)## 135 136,350
Ono Finance PLC., 13s, 2009
(Telecommunications)## 100 104,000
ZSC Specialty, 11s, 2009 (Chemicals)## 50 50,375
$ 638,631
VENEZUELA - 0.7%
Republic of Venezuela, 9.25s, 2027 $ 150 $ 95,070
TOTAL FOREIGN BONDS $ 4,189,454
TOTAL BONDS (IDENTIFIED COST, $12,248,353) $12,182,220
Convertible Bond - 0.3%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- --------------------------------------------------------------------------------
RETAIL - 0.3%
Corporate Express, Inc., 4.5s, 2000
(Identified Cost $ 46,500) $ 50 $ 48,125
Stocks - 0.2%
- --------------------------------------------------------------------------------
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
U.S. STOCKS - 0.2%
MEDIA
Classic Communications, Inc. * 150 $ 2,500
SUPERMARKETS - 0.2%
Penn Traffic Co.** 1,969 $ 19,444
TOTAL STOCKS (IDENTIFIED COST, $26,213) $ 21,944
Preferred Stock - 3.3%
- --------------------------------------------------------------------------------
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
MEDIA - 0.9%
CSC Holdings, Inc., 11.125% * 541 $ 60,051
Primedia, Inc., 8.625% * 650 62,401
$ 122,452
TELECOMMUNICATIONS - 2.4%
Crown Castle International Corp.## 158 $ 164,320
Global Crossing Holdings Ltd. 1,000 104,000
Nextel Communications, Inc. 50 51,750
$ 320,070
TOTAL PREFERRED STOCK (IDENTIFIED COST, $438,725) $ 442,522
16
PORTFOLIO OF INVESTMENTS (Unaudited) -- continued
Warrants - 0.4%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
American Mobile Satellite Corp. (Industrial)*## 155 $ 7,750
DTI Holdings, Inc. (Telecommunications)* 625 6
Jazztel PLC (Telecommunications)*## 675 12,150
Orbital Imaging Corp. (Telecommunications)*## 25 750
Versatel Telecom B.V. (Telecommunications)* 200 33,000
TOTAL WARRANTS (IDENTIFIED COST, $18,445) $ 53,656
Short-Term Obligations - 2.2%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 8/02/99 at
Amortized Cost $ 290 $ 289,960
TOTAL INVESTMENTS (IDENTIFIED COST, $13,068,196) $13,038,427
Other Assets, Less Liabilities - 1.7% 221,681
NET ASSETS - 100.0% $13,260,108
* Non-income producing security.
## SEC Rule 144A restriction.
++ Inverse floating rate security.
SEE NOTES TO FINANCIAL STATEMENTS.
17
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- -------------------------------------------------------------------------------
JULY 31, 1999
- -------------------------------------------------------------------------------
ASSETS:
Investments, at value (identified cost, $13,068,196) $13,038,427
Cash 15,056
Foreign currency, at value (identified cost, $140) 145
Receivable for Fund shares sold 98,058
Receivable for investments sold 50,125
Interest and dividends receivable 265,575
Total assets $13,467,386
LIABILITIES:
Net payable for forward foreign currency exchange
contracts subject to master netting agreements $ 89
Payable for investments purchased 149,244
Payable to affiliates -
Management fee 466
Distribution and service fee 4,286
Accrued expenses and other liabilities 53,193
Total liabilities $ 207,278
NET ASSETS $13,260,108
NET ASSETS CONSIST OF:
Paid-in capital $13,548,757
Unrealized depreciation on investments and translation
of assets and liabilities in foreign currencies (29,853)
Accumulated undistributed net realized loss on investments
and foreign currency transactions (263,021)
Accumulated undistributed net investment income 4,225
Total $13,260,108
SHARES OF BENEFICIAL INTEREST OUTSTANDING 1,519,654
CLASS A SHARES:
Net asset value per share
(net assets of $3,882,361 / 445,284 shares of
benefical interest outstanding) $8.72
OFFERING PRICE PER SHARE (100 / 95.25) $9.15
CLASS B SHARES:
Net asset value and offering price per share
(net assets of $7,441,573 / 852,033 shares of
beneficial interest outstanding) $8.73
CLASS C SHARES:
Net asset value and offering price per share
(net assets of $1,936,025 / 222,320 shares of
beneficial interest outstandng) $8.71
CLASS I SHARES:
Net asset value, offering price, and redemption price
per share (net assets of $149.41 / 17.04 shares of
beneficial interest outstanding) $8.77
On sales of $50,000 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.
18
FINANCIAL STATEMENTS -- continued
Statement of Operations (Unaudited)
- -------------------------------------------------------------------------------
SIX MONTHS ENDED JULY 31, 1999
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME:
Income -
Interest $581,478
Dividends 8,024
Total investment income $589,502
Expenses -
Management fee $ 34,239
Trustee's compensation 4,101
Shareholder servicing agent fee 5,372
Distribution and service fee (Class A) 5,321
Distribution and service fee (Class B) 29,907
Distribution and service fee (Class C) 7,567
Administrative fee 878
Custodian fee 3,743
Printing 15,625
Postage 552
Auditing fees 9,279
Legal fees 1,035
Registration fees 43,943
Miscellaneous 13,402
Total expenses $174,964
Preliminary reduction of expenses by investment adviser (97,928)
Net expenses $ 77,036
Net investment income $512,466
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (identified cost basis) -
Investment transactions $101,363
Foreign currency transactions 5
Net realized gain on investments and
foreign currency transactions $101,368
Change in unrealized appreciation (depreciaton) -
Investments $ 35,944
Translation of assets and liabilities in
foreign currencies (84)
Net unrealized gain on investments and foreign
currency translation $ 35,860
Net realized and unrealized gain on investments
and foreign currency $137,228
Increase in net assets from operations $649,694
SEE NOTES TO FINANCIAL STATEMENTS.
19
FINANCIAL STATEMENTS -- continued
Statements of Changes in Net Assets
- -------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
JULY 31, 1999 JANUARY 31, 1999*
(UNAUDITED)
- -------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
From operations -
Net investment income $ 512,466 $ 256,900
Net realized gain (loss) on investments
and foreign currency transactions 101,368 (363,260)
Net unrealized gain (loss) on
investments and foreign
currency translation 35,860 (65,713)
Increase in net assets from operations $ 649,694 $(172,073)
Distributions declared to shareholders -
From net investment income (Class A) $ (153,221) $(111,834)
From net investment income (Class B) (279,618) (121,561)
From net investment income (Class C) (70,770) (23,497)
From net investment income (Class I) (7) (8)
In excess of net investment income (Class A) -- (2,505)
In excess of net investment income (Class B) -- (2,723)
In excess of net investment income (Class C) -- (526)
Total distributions declared to
shareholders $ (503,616) $ (262,654)
Net increase in net assets from Fund share
transactions $ 5,813,491 $7,735,266
Total increase in net assets $ 5,959,569 $7,300,539
NET ASSETS:
At beginning of period 7,300,539 --
At end of period (including
undistributed net investment
income and accumulated distributions
in excess of net investment income
of $4,225 and $4,625, respectively) $13,260,108 $7,300,539
* For the period from the commencement of the Fund's investment operations,
July 1, 1998, through January 31, 1999.
SEE NOTES TO FINANCIAL STATEMENTS.
20
FINANCIAL STATEMENTS -- continued
Financial Highlights
- -------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
JULY 31, 1999 JANUARY 31,
(UNAUDITED) 1999**
- -------------------------------------------------------------------------------
CLASS A
- -------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value - beginning of period $ 8.53 $10.00
Income from investment operations# -
Net investment income* $ 0.45 $ 0.54
Net realized and unrealized gain (loss) on
investments and foreign currency 0.18 (1.50)
Total from investment operations $ 0.63 $(0.96)
Less distributions declared to shareholders -
From net investment income $(0.44) $(0.50)
In excess of net investment income -- (0.01)
Total distributions declared to
shareholders $(0.44) $(0.51)
Net asset value - end of period $ 8.72 $ 8.53
Total return+++ 7.46%++ (9.45)%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA**:
Expenses 1.00%+ 1.00%+
Net investment income 10.30%+ 10.25%+
PORTFOLIO TURNOVER 98% 127%
NET ASSETS AT END OF PERIOD (000 OMITTED) $3,882 $2,052
* The investment adviser agreed to maintain expenses of the Fund, exclusive
of management and distribution and service fees, at not more than 0.00% of
average daily net assets. To the extent actual expenses were over this
limitation, the net investment income per share and the ratios would have been:
Net investment income $ 0.38 $ 0.33
Ratios (TO AVERAGE NET ASSETS)
Expenses 2.87%+ 4.90%+
Net investment income 8.43%+ 6.35%+
** For the period from the commencement of the Fund's investment operations,
July 1,1998, through January 31,1999.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
+++ Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
SEE NOTES TO FINANCIAL STATEMENTS.
21
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
- -------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
JULY 31, 1999 JANUARY 31,
(UNAUDITED) 1999**
- -------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value - beginning of period $ 8.54 $10.00
Income from investment operations# -
Net investment income* $ 0.41 $0.47
Net realized and unrealized gain (loss)
on investments and foreign currency 0.19 (1.45)
Total from investment operations $ 0.60 $(0.98)
Less distributions declared to shareholders -
From net investment income (0.41) $(0.47)
In excess of net investment income -- (0.01)
Total distributions declared to
shareholders $(0.41) $(0.48)
Net asset value - end of period $ 8.73 $ 8.54
Total return 7.10%++ (9.69)%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA*:
Expenses 1.65%+ 1.65%+
Net investment income 9.56%+ 9.60%+
PORTFOLIO TURNOVER 98% 127%
NET ASSETS AT END OF PERIOD (000 OMITTED) $7,442 $4,308
* The investment adviser agreed to maintain expenses of the Fund, exclusive
of management and distribution and service fees, at not more than 0.00% of
average daily net assets. To the extent actual expenses were over this
limitation, the net investment income per share and the ratios would have been:
Net investment income $ 0.33 $ 0.28
Ratios (TO AVERAGE NET ASSETS)
Expenses 3.52%+ 5.55%+
Net investment income 7.69%+ 5.70%+
** For the period from the commencement of the Fund's investment operations,
July 1, 1998, through January 31, 1999.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
SEE NOTES TO FINANCIAL STATEMENTS.
22
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
- -------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
JULY 31, 1999 JANUARY 31,
(UNAUDITED) 1999**
- -------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value - beginning of period $ 8.52 $10.00
Income from investment operations# -
Net investment income* $ 0.42 $ 0.47
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.18 (1.47)
Total from investment operations $ 0.60 $(1.00)
Less distributions declared to shareholders -
From net investment income $(0.41) $(0.47)
In excess of net investment income -- (0.01)
Total distributions declared to
shareholders $(0.41) $(0.48)
Net asset value - end of period $ 8.71 $ 8.52
Total return 7.12%++ (9.89)%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA*:
Expenses 1.65%+ 1.65%+
Net investment income 9.59%+ 9.60%+
PORTFOLIO TURNOVER 98% 127%
NET ASSETS AT END OF PERIOD (000 OMITTED) $1,936 $ 941
* The investment adviser agreed to maintain expenses of the Fund, exclusive
of management and distribution and service fees, at not more than 0.00% of
average daily net assets. To the extent actual expenses were over this
limitation, the net investment income per share and the ratios would have been:
Net investment income $ 0.33 $ 0.27
Ratios (TO AVERAGE NET ASSETS)
Expenses 3.52%+ 5.55%+
Net investment income 7.72%+ 5.70%+
** For the period from the commencement of the Fund's investment operations,
July 1, 1998, through January 31, 1999.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
SEE NOTES TO FINANCIAL STATEMENTS.
23
Financial Highlights - continued
- -------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
JULY 31, 1999 JANUARY 31,
(UNAUDITED) 1999**
- -------------------------------------------------------------------------------
CLASS I
- -------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value - beginning of period $8.56 $10.00
Income from investment operations# -
Net investment income* $0.47 $0.64
Net realized and unrealized loss on
investments and foreign currency
transactions (0.21) (1.55)
Total from investment operations $0.26 $(0.91)
Less distributions declared to shareholders -
From net investment income $(0.05) $(0.52)
In excess of net investment income -- (0.01)
Total distributions declared to shareholders $(0.05) $(0.53)
Net asset value - end of period $8.77 $8.56
Total return 7.85%++ (8.96)%++
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA*:
Expenses 0.65%+ 0.65%+
Net investment income 10.90%+ 11.10%+
PORTFOLIO TURNOVER 98% 127%
NET ASSETS AT END OF PERIOD (000 OMITTED) -- --
* The investment adviser agreed to maintain expenses of the Fund, exclusive
of management and distribution and service fees, at not more than 0.00% of
average daily net assets. To the extent actual expenses were over this
limitation, the net investment income per share and the ratios would have been:
Net investment income $0.39 $0.41
Ratios (TO AVERAGE NET ASSETS)
Expenses 2.52%+ 4.55%+
Net investment income 9.03%+ 7.20%+
** For the period from the commencement of the Fund's operations, July 1,
1998, through January 31, 1999.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
SEE NOTES TO FINANCIAL STATEMENTS.
24
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS High Yield Opportunities 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.
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 then investments in higher-rated securities
and tend to be more sensitive to economic conditions. 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 and forward
contracts, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics, and other market data, without
exclusive reliance upon exchange or over-the-counter prices. Short-term
obligations, which mature in 60 days or less, are valued at amortized cost,
which approximates market value. Equity securities listed on securities
exchanges or reported through the NASDAQ system are reported at market value
using last sale prices. Unlisted equity securities or listed equity securities
for which last sale prices are not available are reported at market value using
last quoted bid prices. Securities for which there are no such quotations or
valuations are valued at fair value as determined in good faith by 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
25
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- continued
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 may 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 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 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.
Some securities may be purchased on a "when-issued" or "forward delivery"
basis, which means that the securities will be delivered to the Fund at a
future date, usually beyond customary settlement time.
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 made directly to the
security issuer, 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.
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
26
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- continued
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 Funds' 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 distributions from paid-in
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.
At January 31, 1999, the Fund, for federal income tax purposes, had a capital
loss carryforward of $351,410 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, 2007.
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The Fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on the value
of settled shares outstanding of each class, without distinction between share
classes. Dividends are declared separately for each class. 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 an annual rate of 0.65% of
the Fund's average daily net assets. The investment advisor has voluntarily
agreed to pay the Fund's operating expenses exclusive of management and
distribution fees such that the Fund's aggregate expenses do not exceed 0.00%
of its average daily net assets. This is reflected as a reduction of expenses
in the Statement of Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are
27
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- continued
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 $932 for the six months ended July 31, 1999.
ADMINISTRATOR - The Fund has an administrative service agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$4,078 for the six months ended July 31, 1999, as its portion of the sales
charge on sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan 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 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. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $1,201 for the six months ended July 31,
1999. Fees incurred under the distribution plan during the six months ended
July 31, 1999, were 0.35% 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 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 $0 and $0 for Class B and Class C shares, respectively, for the six
months ending July 31, 1999. Fees incurred under the
28
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- continued
distribution plan during the six months ended July 31, 1999, 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
redemptions of Class B shares in the event of a shareholder redemption within
six years of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the six months ending July 31,
1999, were $0, $117,385, and $481 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 was calculated as
a percentage of the Fund's average daily net assets at an effective annual rate
of 0.10%. Prior to April 1, 1999, the fee was calculated as a percentage of the
Fund's average daily net assets at an effective annual rate of 0.1125%.
(4) Portfolio Securities
Purchases and sales of investments, other than short-term obligations,
aggregated $15,449,275 and $9,863,753 , respectively.
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $13,068,196
Gross unrealized appreciation $ 413,514
Gross unrealized depreciation (443,283)
Net unrealized depreciation $ (29,769)
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions in
Fund shares were as follows:
CLASS A SHARES
SIX MONTHS ENDED JULY 31, 1999 PERIOD ENDED JANUARY 31, 1999*
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 272,718 $ 2,391,488 472,706 $ 4,288,642
Shares issued to
shareholders in
Reinvestment of
distributions 12,511 109,493 9,169 78,586
Shares reacquired (80,574) (703,474) (241,246) (1,993,787)
Net increase 204,655 $ 1,797,508 240,629 $ 2,373,441
*For the period from the commencement of the Fund's investment operations, July
1, 1998, through January 31, 1999.
29
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- continued
CLASS B SHARES
SIX MONTHS ENDED JULY 31, 1999 PERIOD ENDED JANUARY 31, 1999*
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 411,204 $ 3,595,625 553,031 $ 4,823,469
Shares issued to
shareholders in
Reinvestment of
distributions 9,407 82,445 3,552 30,138
Shares reacquired (72,758) (639,455) (52,403) (457,181)
Net increase 347,853 $ 3,038,615 504,180 $ 4,396,426
CLASS C SHARES
SIX MONTHS ENDED JULY 31, 1999 PERIOD ENDED JANUARY 31, 1999*
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 167,242 $ 1,469,194 127,217 $ 1,112,271
Shares issued to
shareholders in
Reinvestment of
distributions 3,310 28,929 1,180 9,966
Shares reacquired (58,625) (520,759) (18,004) (157,003)
Net increase 111,927 $ 977,365 110,393 $ 965,234
CLASS I SHARES
SIX MONTHS ENDED JULY 31, 1999 PERIOD ENDED JANUARY 31, 1999*
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold -- $ -- 16 $ 160
Shares issued to
shareholders in
Reinvestment of
distributions -- 3 1 5
Shares reacquired -- -- -- --
Net increase -- $ 3 17 $ 165
*For the period from the commencement of the Fund's investment operations, July
1, 1998, through January 31, 1999.
(6) Line of Credit
The Fund and other affiliated funds participate in a $820 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. There was no commitment fee
allocated to the Fund for the six months ended July 31, 1999. The Fund had no
borrowings during the period.
(7) Financial Instruments
At July 31, 1999, forward foreign currency purchases and sales under master
netting agreements excluded above amounted to a net payable of $89 with
Deutsche Bank. At July 31, 1999, the Fund had sufficient cash and/or securities
to cover any commitments under these contracts.
30
MFS' YEAR 2000 READINESS DISCLOSURE
MFS Investment Management(R), as an investment adviser and on behalf of the MFS
funds, is committed to the effective use of technology in managing our
portfolio investments, delivering high-quality service to MFS fund
shareholders, retirement plan participants and MFS' institutional clients, and
supporting the financial consultants who sell our products. With that in mind,
we created a separately funded Year 2000 Program Management Office in 1996
comprised of a specialized staff reporting directly to MFS senior management.
The Year 2000 (Y2K) problem arises because calendar-year fields in computers
and software applications traditionally have used two-digit codes so that, for
example, the year 1998 is coded as "98," with the "19" being implied. In the
year 2000, unless necessary corrections have been made, computer applications
may assume "00" refers to 1900 rather than 2000, thus resulting in systems
failures or miscalculations. To address this issue, our team of dedicated
business and technology managers, working with outside experts, is taking steps
to ascertain the Y2K readiness of MFS' internal systems and is working with our
external systems vendors to determine whether they expect their systems to be
ready.
MFS recognizes that fund shareholders and institutional clients also are
concerned about whether the companies whose securities are held in their
portfolios are addressing Y2K issues. As part of the MFS(R) Original
Research(SM) process of evaluating portfolio investments, one of the many
relevant factors that MFS' portfolio managers and research analysts may
consider is a company's Y2K readiness. Each year, MFS' research analysts and
portfolio managers conduct more than 1,000 on-site meetings with companies
whose securities are, or may be, held in fund and client portfolios, and host
an additional 1,500 meetings at MFS' headquarters. When assessing the Y2K
readiness of these companies, MFS' research analysts and portfolio managers may
rely upon discussions at these meetings as well as SEC disclosure documents and
third-party reports.
Y2K readiness is an enormously complex, worldwide issue. No company or
institution can guarantee that it will be unaffected by the Y2K issue. While
MFS is taking significant steps to protect the integrity of its internal
systems, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on MFS, shareholders of MFS funds, participants in
retirement plans administered by MFS, or MFS' institutional clients.
If you have further questions regarding MFS' Year 2000 Readiness Program,
please visit our Web site at www.mfs.com or contact the MFS Year 2000 Program
Management Office by e-mail at [email protected] or by letter at 500 Boylston Street,
Boston, MA 02116-3741.
31
MFS FAMILY OF FUNDS (R)
MFS offers a range of mutual funds to meet investors' varying financial needs
and goals. The funds are placed below in descending order of the level of risk
and reward each one offers in relation to the others in that asset class.1 The
objective of the fund you choose should correspond to your financial needs and
goals.
HIGHER RISK/HIGHER REWARD POTENTIAL
BOND FUNDS
MFS(R) GLOBAL GOVERNMENTS FUND
MFS(R) HIGH YIELD OPPORTUNITIES FUND
MFS(R) HIGH INCOME FUND
MFS(R) MUNICIPAL HIGH INCOME FUND
MFS(R) STRATEGIC INCOME FUND
MFS(R) MUNICIPAL STATE FUNDS
AL, AR, CA, FL, GA, MD, MA, MS,
NY, NC, PA, SC, TN, VA, WV
MFS(R) MUNICIPAL INCOME FUND
MFS(R) BOND FUND
MFS(R) MUNICIPAL BOND FUND
MFS(R) GOVERNMENT SECURITIES FUND
MFS(R) GOVERNMENT MORTGAGE FUND
MFS(R) INTERMEDIATE INCOME FUND
MFS(R) MUNICIPAL LIMITED MATURITY FUND
MFS(R) LIMITED MATURITY FUND
MFS(R) GOVERNMENT LIMITED MATURITY FUND
STOCK FUNDS
MFS(R)/FOREIGN & COLONIAL EMERGING MARKETS EQUITY FUND
MFS(R) MANAGED SECTORS FUND
MFS(R) NEW DISCOVERY FUND
MFS(R) EMERGING GROWTH FUND
MFS(R) MID CAP GROWTH FUND
MFS(R) INTERNATIONAL GROWTH FUND
MFS(R) RESEARCH INTERNATIONAL FUND
MFS(R) GLOBAL GROWTH FUND
MFS(R) STRATEGIC GROWTH FUND
MFS(R) RESEARCH FUND
MFS(R) INTERNATIONAL GROWTH AND INCOME FUND
MFS(R) GLOBAL EQUITY FUND
MFS(R) CAPITAL OPPORTUNITIES FUND
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS(R) GROWTH OPPORTUNITIES FUND
MFS(R) LARGE CAP GROWTH FUND
MFS(R) UNION STANDARD(R) EQUITY FUND
MFS(R) RESEARCH GROWTH AND INCOME FUND
MASSACHUSETTS INVESTORS TRUST
MFS(R) EQUITY INCOME FUND
MFS(R) UTILITIES FUND
MFS(R) GLOBAL TOTAL RETURN FUND
MFS(R) TOTAL RETURN FUND
MFS(R) GLOBAL ASSET ALLOCATION FUND
LOWER RISK/LOWER REWARD POTENTIAL
1For information on the specific risks, charges, and expenses associated with
any MFS fund, refer to the prospectus. Read it carefully before investing or
sending money.
32
MFS(R) HIGH YIELD OPPORTUNITIES FUND
TRUSTEES
RICHARD B. BAILEY* - Private Investor; Former Chairman and Director (until
1991), MFS Investment Management
J. ATWOOD IVES - Chairman and Chief Executive Officer, Eastern Enterprises
(diversified services company)
LAWRENCE T. PERERA - Partner, Hemenway & Barnes (attorneys)
WILLIAM J. POORVU - Adjunct Professor, Harvard University Graduate School of
Business Administration
CHARLES W.SCHMIDT - Private Investor
ARNOLD D. SCOTT* - Senior Executive Vice President, Director, and Secretary,
MFS Investment Management
JEFFREY L. SHAMES* - Chairman, Chief Executive Officer, and Director, MFS
Investment Management
ELAINE R. SMITH - Independent Consultant
DAVID B. STONE - Chairman and Director, North American Management Corp.
(investment advisers)
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
CHAIRMAN AND PRESIDENT
JEFFREY L. SHAMES*
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.*
CUSTODIAN
State Street Bank and Trust Company
INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free: 1-800-637-4458 anytime
from a touch-tone telephone.
For information on MFS mutual funds, call your financial consultant or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m. to
5 p.m. Eastern time (or leave a message anytime).
INVESTOR SERVICE
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free: 1-800-225-2606 any business day from 8
a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576 any
business day from 9 a.m. to 5 p.m. Eastern time. (To use this service, your
phone must be equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances, and exchanges, call toll free:
1-800-MFS-TALK (1-800-637-8255) anytime from a touch-tone telephone.
WORLD WIDE WEB
www.mfs.com
*Affiliated with the Investment Adviser
33
MFS(R) HIGH YIELD OPPORTUNITIES FUND
M F S
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 BOYLSTON STREET
BOSTON, MA 02116-3741
(c)1999 MFS Fund Distributors, Inc., 500 Boylston Street, Boston,MA 02116-3741
MHO-3 9/99 3M 70/270/370/870
