<PAGE>
[Logo] M F S (R)
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
[Graphic Omitted]
MFS(R) HIGH
INCOME FUND
SEMIANNUAL REPORT O JULY 31, 1999
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Diversifying your investment portfolio (see page 38)
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<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 11
Financial Statements ...................................................... 23
Notes to Financial Statements ............................................. 30
MFS' Year 2000 Readiness Disclosure ....................................... 37
Trustees and Officers ..................................................... 41
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 (SM)
INDUSTRY. ORIGINAL RESEARCH(SM) AT MFS IS MORE ORIGINAL RESEARCH
THAN JUST CRUNCHING NUMBERS AND CREATING
ECONOMIC MODELS: IT'S GETTING TO KNOW MFS
EACH SECURITY AND EACH COMPANY PERSONALLY.
MAKES A DIFFERENCE
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
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), 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,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
August 14, 1999
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of Robert J. Manning]
For the six months ended July 31, 1999, Class A shares of the Fund provided a
total return of 3.28%, Class B shares 2.93%, Class C shares 2.92%, and Class I
shares 3.24%. 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 continued strength of the U.S. economy and the recovery of many
international markets have helped the high-yield bond market to rebound in
1999, so the Fund has performed relatively well. Historically, moderate
growth and low inflation in the United States has been a good climate for
owning high-yield bonds because there are relatively fewer credit problems,
such as defaults and bond rating reductions, than in a weaker environment.
As a result, investor confidence in this market seems to have strengthened
because companies issuing high-yield bonds have generated strong cash flows,
which has enhanced their credit worthiness.
Q. WHAT OPPORTUNITIES IS THIS ENVIRONMENT PRESENTING TO THE PORTFOLIO?
A. In our view, telecommunications companies continue to offer some of the best
opportunities for the Fund. Since the industry was deregulated in 1996,
several companies have issued high-yield bonds to help pay for the
development of their communications networks or to help finance mergers and
acquisitions. We have focused on companies 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 grown is because their fiber-optic networks offer a low-cost,
high-quality alternative for many of their customers. These companies
typically have had very good management teams who joined these companies
after spending many years with larger companies like AT&T and MCI. Many of
these CLECs have helped the Fund's performance during the past six months.
Q. COULD YOU MENTION SOME SPECIFIC COMPANIES THAT HAVE HELPED THE
FUND'S PERFORMANCE?
A. MetroNet, a CLEC in Canada, has performed quite well, particularly after it
announced that it was being acquired by AT&T of Canada. The portfolio also
has a position in Global Crossing, which has grown rapidly as it has
acquired other companies and put together integrated communications
networks. Finally, our position in Nextel Communications, a company that
provides a variety of telecommunications services, continues to increase in
value after Microsoft announced earlier this year that it is investing $600
million in the company.
Q. WHAT OTHER SECTORS CONTRIBUTED POSITIVELY TO THE FUND'S PERFORMANCE?
A. We have invested in several companies that manufacture building products.
These companies make products that are used to renovate and remodel existing
houses. Not only have new housing starts been extremely strong but, more
importantly, sales of existing homes are at an all-time high of about 5.5
million units. This trend usually increases the revenue prospects of these
types of companies because when people buy houses, they often renovate and
remodel them. One example is Synthetic Industries, which is a large producer
of the backing material on the bottom of carpets. The strong economy also
has provided many airlines with the financial means to upgrade their
aircraft. We are focusing on companies in the aerospace industry that make
most of their money on remodeling and renovating existing aircraft. Two
examples are BE Aerospace, which has a 70% market share of all seal and
galley equipment put on Boeing and Lockheed airplanes, and K&F Industries,
which has a 30% market share of the braking systems used on most domestic
aircrafts.
Q. WHAT TYPES OF SECTORS HAVE YOU AVOIDED?
A. We did not find much value in the energy sector, especially in oil
companies. We believe the yields these companies offered did not compensate
investors for the cyclical risks inherent in the oil industry. Although oil
prices have rebounded from $12 per barrel to about $19 in recent months, the
$12 price significantly hurt some of the smaller, riskier oil exploration
and production companies. In our view, these companies are not worth the
amount of volatility they would bring to the portfolio.
Q. HISTORICALLY, YOU HAVE STAYED AWAY FROM EMERGING MARKET DEBT. WHY?
A. There are two reasons. First, our expertise is in bottom-up analysis of
companies, and we have used this approach to invest in the high-yield market
since 1978. Emerging market debt analysis is very different. These
securities are more driven by external factors, which means they are subject
to additional types of political and macroeconomic risks. Investing in
emerging market debt requires a much different set of skills and experience
than those used to analyze companies. In addition, it has been a much more
volatile asset class than the high-yield market. Therefore, we historically
have had less than 2% of our assets in emerging market debt.
Instead, we have focused the international portion of the Fund primarily on
Europe. We like telecommunications and media companies such as NTL, which
offers cable and telephone services to homes in the United Kingdom. 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.
Q. GOING FORWARD, DO YOU EXPECT THE HIGH-YIELD MARKET TO REMAIN ATTRACTIVE?
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 U.S. Treasury securities. Currently, high-yield bonds
yield about 11% compared to roughly 6% for Treasury securities. This higher
yield is meant to compensate investors for the risks associated with
investing in high-yield bonds. The last time the spread between high-yield
bonds and Treasury securities was this dramatic was in 1991, when the
economy was slowly coming out of a recession and default rates were over 3%.
In 1999 the spread is virtually the same. However the general strength of
the nation's economy has reduced the level of risk associated with
high-yield investments because the ability of companies to repay their debt
has improved. In our view, this economic trend should continue.
/s/ Robert J. Manning
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.
<PAGE>
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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.
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This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial consultant or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
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FUND FACTS
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OBJECTIVE: SEEKS HIGH CURRENT INCOME BY INVESTING
PRIMARILY IN A PROFESSIONALLY MANAGED
DIVERSIFIED PORTFOLIO OF FIXED- INCOME
SECURITIES, SOME OF WHICH MAY INVOLVE EQUITY
FEATURES.
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: $1.5 BILLION NET ASSETS AS OF JULY 31, 1999
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PERFORMANCE SUMMARY
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for
the applicable time periods. Investment results reflect the percentage change
in net asset value, including reinvestment of dividends. (See Notes
to Performance Summary for more information.)
<TABLE>
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
THROUGH JULY 31, 1999
CLASS A
<CAPTION>
6 Months 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return +3.28% -0.02% +29.43% +59.88% +148.73%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- -0.02% + 8.98% + 9.84% + 9.54%
- ------------------------------------------------------------------------------------------------------------
SEC Results -- -4.77% + 7.23% + 8.77% + 9.01%
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</TABLE>
<TABLE>
CLASS B
<CAPTION>
6 Months 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return +2.93% -0.72% +26.71% +53.93% +137.82%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- -0.72% + 8.21% + 9.01% + 9.05%
- ------------------------------------------------------------------------------------------------------------
SEC Results -- -4.37% + 7.36% + 8.72% + 9.05%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
CLASS C
<CAPTION>
6 Months 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return +2.92% -0.72% +26.95% +54.07% +139.14%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- -0.72% + 8.28% + 9.03% + 9.11%
- ------------------------------------------------------------------------------------------------------------
SEC Results -- -1.63% + 8.28% + 9.03% + 9.11%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
CLASS I
<CAPTION>
6 Months 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return +3.24% +0.27% +30.22% +60.83% +150.32%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +0.27% + 9.20% + 9.97% + 9.61%
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</TABLE>
NOTES TO PERFORMANCE SUMMARY
Class A share ("A") SEC results include the maximum 4.75% sales charge. Class
B share ("B") SEC results reflect the applicable contingent deferred sales
charge (CDSC), which declines over six years from 4% to 0%. Class C shares
("C") have no initial sales charge but, like B, have higher annual fees and
expenses than A. C SEC results reflect the 1% CDSC applicable to shares
redeemed within 12 months. Class I shares ("I") have no sales charge or Rule
12b-1 fees and are only available to certain institutional investors.
B and C results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of A for periods prior to the inception of B and C.
Because operating expenses of B and C are higher than those of A, B and C
performance generally would have been lower than A performance. The A
performance included in the B and C SEC performance has been adjusted to
reflect the CDSC generally applicable to B and C rather than the initial sales
charge generally applicable to A.
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.
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.
<PAGE>
PORTFOLIO CONCENTRATION AS OF JULY 31, 1999
QUALITY RATINGS (U.S. PORTION ONLY)
Source: Standard & Poor's and Moody's
"BB" 16.1%
"B" 71.9%
"CCC" 9.8%
"D" 0.2%
Not Rated 1.7%
"BBB" 0.3%
The portfolio is actively managed, and current holdings may be different.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS (Unaudited) -- July 31, 1999
Bonds - 91.5%
<CAPTION>
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 80.7%
Aerospace - 4.2%
Airplane Pass-Through Trust, 10.875s, 2019+ $ 5,250 $ 5,251,733
Argo Tech Corp., 8.625s, 2007 11,250 10,577,812
BE Aerospace, Inc., 9.875s, 2006 7,150 7,257,250
BE Aerospace, Inc., 8s, 2008 2,550 2,384,250
BE Aerospace, Inc., 9.5s, 2008 1,550 1,565,500
K & F Industries, Inc., 9.25s, 2007 8,800 8,668,000
L-3 Communications Corp., 10.375s, 2007 4,440 4,689,750
L-3 Communications Corp., 8s, 2008 3,200 3,056,000
L-3 Communications Corp., 8.5s, 2008 3,750 3,689,062
MOOG, Inc., 10s, 2006 9,515 9,752,875
Stellex Industries, Inc., 9.5s, 2007 1,540 1,310,925
United Defense Industries, Inc., 8.75s, 2007 2,410 2,376,863
--------------
$ 60,580,020
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Automotive - 0.3%
Motors & Gears, Inc., 10.75s, 2006 $ 5,000 $ 5,000,000
- ------------------------------------------------------------------------------------------------------
Building Materials - 3.6%
AAF-McQuay, Inc., 8.875s, 2003 $ 7,125 $ 6,875,625
American Standard, Inc., 7.375s, 2008 1,475 1,401,250
Building Materials Corp., 8.625s, 2006 12,890 12,632,200
Building Materials Corp., 8s, 2007 3,000 2,850,000
Formica Corp., 10.875s, 2009## 6,575 6,377,750
MMI Products, Inc., 11.25s, 2007## 4,840 4,924,700
Nortek, Inc., 9.875s, 2004 1,392 1,419,840
Nortek, Inc., 9.25s, 2007 7,925 7,984,437
Schuff Steel Co., 10.5s, 2008 3,170 2,936,213
UDC Homes, Inc., 0s, 2000 30 16,650
Williams Scotsman, Inc., 9.875s, 2007 4,525 4,558,937
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$ 51,977,602
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Business Services - 1.6%
Anacomp, Inc., 10.875s, 2004 $ 6,175 $ 6,437,438
Iron Mountain, Inc., 10.125s, 2006 10,275 10,660,312
Pierce Leahy Corp., 11.125s, 2006 1,977 2,154,930
Pierce Leahy Corp., 9.125s, 2007 3,225 3,225,000
Unisys Corp., 12s, 2003 350 381,500
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$ 22,859,180
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Chemicals - 2.6%
Huntsman ICI Chemicals, Inc., 10.125s, 2009## $ 8,725 $ 8,725,000
Lyondell Chemical Co., 9.625s, 2007## 6,200 6,277,500
Lyondell Chemical Co., 9.875s, 2007## 2,305 2,328,050
Lyondell Petrochemical Co., 8.875s, 2006 (Bank Debt) 3,990 4,029,900
Sterling Chemicals Holdings, Inc., 0s to 2001,
13.5s to 2008 2,360 708,000
Sterling Chemicals, Inc., 11.75s, 2006 6,325 4,807,000
Sterling Chemicals, Inc., 12.375s, 2006 5,650 5,777,125
Sterling Chemicals, Inc., 11.25s, 2007 5,775 4,504,500
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$ 37,157,075
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Consumer Goods and Services - 3.7%
American Safety Razor Co., 9.875s, 2005 $ 7,060 $ 7,130,600
General Binding Corp., 9.375s, 2008 5,700 5,365,125
Kindercare Learning Centers, Inc., 9.5s, 2009 5,250 5,118,750
Polymer Group, Inc., 9s, 2007 1,890 1,847,475
Polymer Group, Inc., 8.75s, 2008 3,000 2,902,500
Remington Products Co. LLC, 11s, 2006 2,690 2,252,875
Revlon Consumer Products Corp., 8.125s, 2006 9,190 8,087,200
Samsonite Corp., 10.75s, 2008 10,815 9,192,750
Simmons Co., 10.25s, 2009## 2,990 3,049,800
Synthetic Industries, Inc., 9.25s, 2007 8,290 8,538,700
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$ 53,485,775
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Container, Forest and Paper Products - 5.4%
Applied Extrusion Technologies, Inc., 11.5s, 2002 $ 8,100 $ 8,343,000
Atlantis Plastics, Inc., 11s, 2003 3,875 3,913,750
Ball Corp., 8.25s, 2008 90 88,875
Buckeye Cellulose Corp., 8.5s, 2005 1,250 1,243,750
Buckeye Cellulose Corp., 9.25s, 2008 3,875 3,952,500
Buckeye Technologies, Inc., 8s, 2010 3,225 3,096,000
Consolidated Contaniner Co., LLC, 10.125s, 2009## 1,725 1,755,188
Gaylord Container Corp., 9.75s, 2007 12,750 12,303,750
Gaylord Container Corp., 9.875s, 2008 5,515 5,046,225
Graham Packaging/GPC Capital Co., 8.75s, 2008 3,930 3,812,100
Packaging Corp. of America, 9.625s, 2009## 3,700 3,764,750
Riverwood International Corp., 10.25s, 2006 3,000 3,045,000
Riverwood International Corp., 10.875s, 2008 4,575 4,529,250
Silgan Holdings, Inc., 9s, 2009 5,650 5,593,500
Speciality Paperboard, Inc., 9.375s, 2006## 5,350 5,430,250
U.S. Can Corp., 10.125s, 2006## 5,700 5,999,250
U.S. Timberlands, 9.625s, 2007 7,060 7,104,125
--------------
$ 79,021,263
- ------------------------------------------------------------------------------------------------------
Energy - 4.9%
AmeriGas Partners LP, 10.125s, 2007 $ 3,400 $ 3,536,000
Cheasapeake Energy Corp., 9.625s, 2005 13,460 12,315,900
Clark Refining & Marketing, Inc., 8.625s, 2008 4,900 4,587,625
Clark USA, Inc., 10.875s, 2005 3,890 3,355,125
Continental Resources, Inc., 10.25s, 2008 8,150 5,990,250
Forest Oil Corp., 10.5s, 2006 9,050 9,276,250
Giant Industries, Inc., 9s, 2007 100 92,500
HS Resources, Inc., 9.25s, 2006 7,975 8,009,750
Ocean Energy, Inc., 8.875s, 2007 900 909,000
P&L Coal Holdings Corp., 8.875s, 2008 4,100 4,038,500
P&L Coal Holdings Corp., 9.625s, 2008 11,950 11,920,125
Pool Energy Services Co., 8.625s, 2008 1,955 2,023,425
Pride International, Inc., 10s, 2009 4,250 4,356,250
--------------
$ 70,410,700
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Entertainment - 1.4%
American Skiing Co., 12s, 2006 $ 5,300 $ 4,809,750
Cinemark USA, Inc., 9.625s, 2008 8,950 8,681,500
Regal Cinemas Inc., 9.5s, 2008 7,140 6,426,000
--------------
$ 19,917,250
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Financial Institutions - 1.4%
Americo Life, Inc., 9.25s, 2005 $ 2,050 $ 2,088,437
Merrill Lynch Mortgage Investors, Inc., 8.372s, 2022+ 4,500 4,194,844
Willis Corroon Corp., 9s, 2009## 14,625 13,893,750
--------------
$ 20,177,031
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Food and Beverage Products - 0.3%
Vlasic Foods International Inc., 10.25s, 2009## $ 4,525 $ 4,389,250
- ------------------------------------------------------------------------------------------------------
Gaming and Hotels - 3.8%
Boyd Gaming Corp., 9.5s, 2007 $ 6,585 $ 6,486,225
Coast Hotels & Casinos, Inc., 9.5s, 2009## 7,950 7,632,000
Eldorado Resorts LLC, 10.5s, 2006 5,455 5,802,756
Hollywood Park, Inc., 9.25s, 2007 4,850 4,704,500
Isle of Capri Casinos, Inc., 8.75s, 2009## 3,870 3,579,750
Lady Luck Gaming Corp., 11.875s, 2001 2,015 2,045,225
Park Place Entertainment Corp., 7.875s, 2005 7,550 7,172,500
Prime Hospitality Corp., 9.75s, 2007 4,795 4,747,050
Red Roof Inns, Inc., 9.625s, 2003 3,630 3,716,213
Santa Fe Hotel, Inc., 11s, 2000 5,295 5,030,250
Station Casinos, Inc., 8.875s, 2008 3,750 3,675,000
--------------
$ 54,591,469
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Industrial - 7.0%
Allied Waste North America Inc., 10s, 2009## $ 9,000 $ 8,887,500
Columbus Mckinnon Corp., 8.5s, 2008 5,375 5,334,687
Day International Group, Inc., 11.125s, 2005 3,670 3,890,200
Dura Operating Corp., 9s, 2009## 4,775 4,584,000
Envirosource, Inc., 9.75s, 2003## 4,000 2,670,000
Fairfield Manufacturing Co., Inc., 9.625s, 2008## 7,605 7,376,850
Federal Mogul Corp., 7.5s, 2009## 4,775 4,400,067
Furon Co., 8.125s, 2008## 4,800 4,536,000
Hayes Wheels International, Inc., 11s, 2006 5,400 5,872,500
Hayes Wheels International, Inc., 9.125s, 2007 5,875 5,875,000
Haynes International, Inc., 11.625s, 2004 6,825 6,449,625
IMO Industries, Inc., 11.75s, 2006 7,825 8,431,437
International Knife & Saw, Inc., 11.375s, 2006 2,060 1,890,050
Johnstown America Industries, 11.75s, 2005 2,670 2,800,163
Newcor, Inc., 9.875s, 2008 6,450 5,805,000
Numatics, Inc., 9.625s, 2008 1,440 1,234,800
Oxford Automotive, Inc., 10.125s, 2007 4,025 4,105,500
Simonds Industries, Inc., 10.25s, 2008 5,825 5,621,125
Talon Automotive Group, Inc., 9.625s, 2008 375 322,500
Thermadyne Holdings Corp., 0s to 2003, 12.5s to 2008 12,375 5,878,125
Thermadyne Manufacturing/Capital Corp., 9.875s, 2008 6,250 5,828,125
--------------
$ 101,793,254
- ------------------------------------------------------------------------------------------------------
Media - 14.9%
Acme Television LLC, 0s to 2000, 10.875s to 2004 $ 2,575 $ 2,134,031
Adelphia Communications Corp., 8.375s, 2008 9,225 8,809,875
Allbritton Communications Co., 9.75s, 2007 4,775 4,822,750
Avalon Cable Holdings LLC, 0s to 2003, 11.875s to 2008## 8,000 5,300,000
Avalon Cable of Michigan, 9.375s, 2008## 2,000 2,015,000
Big Flower Press Holdings, Inc., 8.875s, 2007 4,430 4,191,887
Big Flower Press Holdings, Inc., 8.625s, 2008 2,225 2,124,875
Bresnan Communications Group, 8s, 2009## 4,775 4,751,125
Bresnan Communications Group, 0s to 2004, 9.25 to 2009## 3,475 2,276,125
Century Communications Corp., 0s, 2008 100 43,000
Chancellor Media Corp., 8.125s, 2007 1,550 1,511,250
Chancellor Media Corp., 8.75s, 2007 4,135 4,072,975
Chancellor Media Corp., 8s, 2008 7,975 7,735,750
Charter Commerce Holdings LLC, 0s to 2004, 9.92s to 2011## 3,750 2,278,125
Charter Communications Holdings, 8.25s, 2007## 13,175 12,516,250
Classic Cable, Inc., 9.875s, 2008## 2,975 3,041,938
Classic Communications, Inc., 0s to 2003, 13.25s to 2009## 3,000 1,995,000
CSC Holdings, Inc., 9.25s, 2005 1,150 1,201,750
CSC Holdings, Inc., 8.125s, 2009 5,000 4,955,450
Cumulus Media, Inc., 10.375s, 2008 3,525 3,683,625
Digital Television Services, Inc., 12.5s, 2007 7,100 7,916,500
Echostar Dbs Corp., 9.375s, 2009## 9,650 9,722,375
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 5,285 5,496,400
FrontierVision Holding LP, 0s to 2001, 11.87s to 2007 1,445 1,249,925
FrontierVision Holdings LP, 0s to 2001, 11.875s to 2007 1,150 976,063
Frontiervision Operating Partnership LP, 11s, 2006 7,575 8,237,812
Golden Books Publishing, Inc., 7.65s, 2002** 7,285 3,223,613
Granite Broadcasting Corp., 10.375s, 2005 4,600 4,669,000
Granite Broadcasting Corp., 8.875s, 2008 3,500 3,395,000
Hollinger International Publishing, Inc., 9.25s, 2007 9,075 9,279,187
Intermedia Capital Partners IV, LP, 11.25s, 2006 4,340 4,925,900
Lenfest Communications, Inc., 10.5s, 2006 6,990 8,038,500
Liberty Group Operating, Inc., 9.375s, 2008 4,770 4,531,500
LIN Holdings Corp., 0s to 2003, 10s to 2008 1,500 1,005,000
LIN Televison Corp., 8.375s, 2008 5,300 5,088,000
Mail-Well I Corp., 8.75s, 2008 3,900 3,763,500
Marvel Holdings, Inc., 0s, 1999** 11,125 0
NTL Communications Corp., 0s to 2003, 12.375s to 2006 16,100 11,028,500
NTL, Inc., 0s to 2003, 9.75s to 2008## 1,290 875,588
Outdoor Systems, Inc., 8.875s, 2007 1,050 1,092,000
Rogers Cablesystems, Inc., 9.625s, 2002 913 952,944
Telemundo Holdings, Inc., 0s to 2003, 11.5s to 2008 11,125 5,785,000
Transwestern Publishing, 9.625s, 2007 3,150 3,102,750
TV Guide Inc., 8.125s, 2009## 750 708,750
United International Holdings, Inc., 10.75s, 2008 15,125 8,772,500
United Pan Europe, 10.875s, 2009 12,540 12,571,350
World Color Press, Inc., 8.375s, 2008 4,550 4,618,250
World Color Press, Inc., 7.75s, 2009 3,475 3,466,312
Young Broadcasting, Inc., 8.75s, 2007 1,850 1,822,250
--------------
$ 215,775,250
- ------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.2%
Alaris Medical, Inc., 0s to 2003, 11.125s to 2008## $ 6,410 $ 3,365,250
Fresenius Medical Care Capital Trust, 7.875s, 2008 2,400 2,244,000
Prime Medical Services, Inc., 0s to 2008, 11.125s, 8.75s, 2008 5,985 5,835,375
Tenet Healthcare Corp., 8.125s, 2008 6,875 6,445,313
--------------
$ 17,889,938
- ------------------------------------------------------------------------------------------------------
Metals and Minerals - 4.3%
Acme Metals, Inc., 10.875s, 2007 $ 2,675 $ 401,250
AK Steel Holdings Corp., 9.125s, 2006 3,635 3,753,137
AK Steel Holdings Corp., 7.875s, 2009## 1,050 1,018,500
Algoma Steel, Inc., 12.375s, 2005 8,469 8,384,310
Commonwealth Aluminum Corp., 10.75s, 2006 5,050 5,151,000
Doe Run Resources Corp., 11.25s, 2005 4,750 4,251,250
Jorgansen Bank, 8.625s, 2004 4,938 4,894,297
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 3,550 3,558,875
Kaiser Aluminum & Chemical Corp., 12.75s, 2003 8,885 8,973,850
Keystone Consolidated Industries, Inc., 9.625s, 2007 3,100 3,018,625
Metal Management, Inc., 10s, 2008 7,700 6,006,000
Northwestern Steel & Wire Co., 9.5s, 2001 4,809 3,486,525
Ryerson Tull, Inc., 9.125s, 2006 1,050 1,106,408
WCI Steel, Inc., 10s, 2004 5,450 5,613,500
Weirton Steel Corp., 10.75s, 2005 1,975 1,876,250
Wheeling Pittsburgh Corp., 9.25s, 2007 600 576,000
--------------
$ 62,069,777
- ------------------------------------------------------------------------------------------------------
Municipals
Mesa County, CO, 8.5s, 2006 $ 750 $ 525,000
- ------------------------------------------------------------------------------------------------------
Retail - 2.0%
Affinity Group Holding, Inc., 11s, 2007 $ 2,000 $ 2,000,000
Cole National Group, Inc., 8.625s, 2007 15 11,850
Finlay Enterprises, Inc., 9s, 2008 2,250 2,143,125
Finlay Fine Jewelry Corp., 8.375s, 2008 5,725 5,610,500
J Crew Group, Inc., 0s to 2002, 13.125s to 2008 5,130 3,052,350
J Crew Operating Corp., 10.375s, 2007 6,265 6,280,663
Musicland Group, Inc., 9s, 2003 2,160 2,149,200
Musicland Group, Inc., 9.875s, 2008 4,475 4,452,625
Southland Corp., 5s, 2003 4,675 4,043,875
--------------
$ 29,744,188
- ------------------------------------------------------------------------------------------------------
Supermarkets - 0.7%
Jitney-Jungle Stores of America, Inc., 12s, 2006 $ 10,750 $ 8,600,000
Jitney-Jungle Stores of America, Inc., 10.375s, 2007 500 200,000
Pathmark Stores Inc., 0s to 1999, 10.75s to 2003 465 455,700
Penn Traffic Co., 11s, 2009 571 525,066
--------------
$ 9,780,766
- ------------------------------------------------------------------------------------------------------
Telecommunications - 16.7%
Allegiance Telecommunications, Inc., 0s to 2003,
11.75s to 2008## $ 5,475 $ 3,531,375
Allegiance Telecommunications, Inc., 12.875s, 2008## 4,000 4,380,000
American Celluar Corp., 10.5s, 2008 3,100 3,177,500
AMSC Acquisition Co., Inc., 12.25s, 2008 3,570 2,873,850
Caprock Communications Corp., 11.5s, 2009## 5,975 6,034,750
Centennial Cellular Operating Co., 10.75s, 2008## 9,475 9,759,250
Crown Castle International Corp., 9s, 2011## 5,700 5,472,000
Cybernet Internet Services International, 14s, 2009 6,125 6,186,250
Dialog Corporation PLC, 11s, 2007 5,410 5,011,012
DTI Holdings, Inc., 0s to 2003, 12.5s to 2008 9,675 3,289,500
Esat Holdings Ltd., 0s to 2002, 12.5s to 2007 2,825 2,058,719
Exodus Communications, Inc., 11.25s, 2008 5,150 5,150,000
GCI, Inc., 9.75s, 2007 2,345 2,309,825
Global Crossings Holdings Ltd., 9.625s, 2008 7,600 7,866,000
Globenet Communications Group, 13s, 2007 4,760 4,736,200
Hyperion Telecommunications, 12s, 2007## 6,440 6,536,600
ICG Holdings, Inc., 0s to 2001, 12.5s to 2006 9,325 7,646,500
Intermedia Communications, Inc., 8.875s, 2007 5,460 4,995,900
Intermedia Communications Inc., 8.5s, 2008 1,000 895,000
ITC Deltacom, Inc., 11s, 2007 5,594 5,929,640
ITC Deltacom, Inc., 9.75s, 2008 6,250 6,375,000
Level 3 Communications, Inc., 9.125s, 2008 16,160 15,271,200
McCaw International Ltd., 0s to 2002, 13s to 2007 3,225 1,999,500
Metromedia Fiber Network, Inc., 10s, 2008 6,075 6,135,750
MJD Communications, Inc., 9.5s, 2008 3,850 3,835,563
Mobile Telecommunication Technologies Corp., 13.5s, 2002 5,740 6,543,600
Nextel Communications, Inc., 0s to 2002, 9.75s to 2007 3,305 2,363,075
Nextel Communications, Inc., 0s to 2003, 9.95s to 2008 14,375 10,098,437
Nextel International, Inc., 0s to 2003, 12.125 to 2008 3,525 1,881,469
Nextlink Communications, Inc., 9.625s, 2007 3,025 2,934,250
Nextlink Communications, Inc., 10.75s, 2009 13,725 13,930,875
Nextlink Communications, Inc., 0s to 2004, 12.25s to 2009 3,100 1,782,500
Northeast Optic Network, 12.75s, 2008 2,350 2,491,000
Orbital Imaging Corp., 11.625s, 2005 505 459,550
Pagemart Wireless, Inc., 0s to 2003, 11.25s to 2008 4,390 1,997,450
Psinet, Inc., 11.5s, 2008 3,850 3,927,000
Psinet, Inc., 11s, 2009## 9,380 9,286,200
Rhythms Netconnections Inc., 12.75s, 2009## 925 851,000
Rural Cellular Corp., 9.625s, 2008 3,200 3,300,000
Spectrasite Holdings, Inc., 0s to 2003, 12s to
2008## 4,070 2,421,650
Spectrasite Holdings, Inc., 0s to 2004, 11.25s to
2009## 14,650 8,039,187
Sprint Spectrum LP, 11s, 2006 450 506,394
Telesystem International Wireless, Inc., 0s to 2002,
13.25s to 2007 6,115 3,202,731
Time Warner Telecommunications LLC, 9.75s, 2008 9,650 9,843,000
Triton PCS, Inc., 0s to 2003, 11s to 2008 2,645 1,778,763
Verio, Inc., 10.375s, 2005 1,025 1,014,750
Viatel, Inc., 11.25s, 2008 3,375 3,375,000
Viatel, Inc., 0s to 2003, 12.5s to 2008 1,875 1,171,875
Western Wireless Corp., 10.5s, 2007 7,900 8,512,250
Worldwide Fiber Inc., 12s, 2009## 9,930 9,805,875
--------------
$ 242,974,765
- ------------------------------------------------------------------------------------------------------
Utilities - Electric - 0.7%
El Paso Electric Co., 8.9s, 2006 $ 4,645 $ 5,005,824
Esi Tractebel Acquisition Corp., 7.99s, 2011 2,150 2,104,312
International Utility Structures, 10.75s, 2008 3,600 3,573,000
--------------
$ 10,683,136
- ------------------------------------------------------------------------------------------------------
Total U.S. Bonds $1,170,802,689
- ------------------------------------------------------------------------------------------------------
Foreign Bonds - 10.8%
Bulgaria - 0.9%
Hermes Europe Railtel BV, 10.375s, 2009
(Telecommunications) $ 5,700 $ 5,700,000
Telei Europe BV, 13s, 2009 (Telecommunications)## 6,575 6,936,625
--------------
$ 12,636,625
- ------------------------------------------------------------------------------------------------------
Canada - 1.7%
Metronet Communications Corp., 0s to 2002, 10.75s
to 2007 (Telecommunications)## $ 6,000 $ 4,856,340
Metronet Communications Corp., 0s to 2003, 9.95s to
2008 (Telecommunications) 2,570 1,955,333
PCI Chemicals Canada, Inc., 9.25s, 2007 (Chemicals) 4,860 3,693,600
Repap New Brunswick, Inc., 9s, 2004 (Container,
Forest and Paper Products) 3,175 3,048,000
Rogers Cablesystems, Inc., 10.125s, 2012
(Telecommunications) 5,700 6,070,500
Russel Metals Inc., 10s, 2009 (Industrial) 4,900 4,875,500
--------------
$ 24,499,273
- ------------------------------------------------------------------------------------------------------
France - 0.2%
Go Outdoor Systems Holdings, 10.5s, 2009
(Industrial) EUR 3,475 $ 3,726,499
- ------------------------------------------------------------------------------------------------------
Greece - 0.2%
Fage Dairy Industries S.A., 9s, 2007 (Food and
Beverage Products) $ 2,950 $ 2,655,000
- ------------------------------------------------------------------------------------------------------
Luxembourg - 0.6%
Millicom International Cellular Communications Corp.,
0s to 2001, 13.5s to 2006 (Telecommunications) $ 11,540 $ 8,597,300
- ------------------------------------------------------------------------------------------------------
Mexico - 0.3%
Satelites Mexicanos SA De CV, 10.125s, 2004
(Telecommunications) $ 5,675 $ 4,525,813
- ------------------------------------------------------------------------------------------------------
Netherlands - 0.9%
Completel Europe NV, 0s to 2004, 14s to 2009
(Telecommunications)## $ 9,475 $ 4,879,625
Versatel Telecom B.V., 13.25s, 2008
(Telecommunications) 8,675 9,022,000
--------------
$ 13,901,625
- ------------------------------------------------------------------------------------------------------
New Zealand - 0.1%
Versatel Telecom International, 13.25s, 2008
(Telecommunications) $ 2,250 $ 2,340,000
- ------------------------------------------------------------------------------------------------------
Thailand - 0.2%
Jasmine Submarine Telecom Ltd., 8.483s, 2011
(Industrial)## $ 3,300 $ 2,598,561
- ------------------------------------------------------------------------------------------------------
United Kingdom - 5.7%
Colt Telecommunications Group PLC, 0s to 2001,
12s to 2006 (Telecommunications) $ 14,395 $ 11,947,850
Dolphin Telecom PLC, 11.5s, 2008
(Telecommunications) 10,900 5,218,375
Dolphin Telecom PLC, 0s to 2004, 14s to 2009##
(Telecommunications)## 3,545 1,524,350
Energis PLC, 9.75s, 2009 (Telecommunications) 8,350 8,621,375
Esat Telecom Group PLC, 11.875s, 2008
(Telecommunications) 6,075 6,287,625
Esat Telecom Group PLC, 0s to 2002, 12.5s to 2007
(Telecommunications) 3,150 2,295,562
Esprit Telecom Group PLC, 11.5s, 2007
(Telecommunications)## 2,500 2,681,250
Espirit Telecom Group PLC, 10.875s, 2008
(Telecommunications) 2,100 2,121,000
Jazztel PLC, 14s, 2009 (Telecommunications)## 6,640 6,706,400
NTL, Inc., 0s to 2004, 9.75s to 2009+ 6,600 6,469,456
Ono Finance PLC, 13s, 2009 (Telecommunications)## 12,105 12,589,200
Telewest Communications PLC, 9.625s, 2006 (Media) 6,005 6,185,150
Telewest Communications PLC, 11.25s, 2008 (Media) 2,000 2,340,000
Telewest Communications PLC, 0s to 2004, 9.875s to
2009 (Media)## 3,940 2,442,800
ZSC Specialty, 11s, 2009 (Chemicals)## 4,250 4,281,875
--------------
$ 81,712,268
- ------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 157,192,964
- ------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $1,374,136,287) $1,327,995,653
- ------------------------------------------------------------------------------------------------------
Stocks - 0.3%
- ------------------------------------------------------------------------------------------------------
SHARES
- ------------------------------------------------------------------------------------------------------
Building Materials
Atlantic Gulf Communities Corp.*+ 690 $ 561
- ------------------------------------------------------------------------------------------------------
Consumer Goods and Services
Ranger Industries, Inc.*++ 266,768 $ 275,038
- ------------------------------------------------------------------------------------------------------
Container, Forest and Paper Products - 0.1%
Gaylord Container Corp.* 320,500 $ 2,463,844
- ------------------------------------------------------------------------------------------------------
Media
Classic Communications, Inc.* 9,000 $ 150,000
- ------------------------------------------------------------------------------------------------------
Supermarkets - 0.1%
Penn Traffic Co.* 108,453 $ 1,070,973
- ------------------------------------------------------------------------------------------------------
Telecommunications - 0.1%
Viatel, Inc.* 27,394 $ 1,013,578
- ------------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $11,072,996) $ 4,973,994
- ------------------------------------------------------------------------------------------------------
Principal Amount
Convertible Bonds - 0.1% (000 Omitted)
- ------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.1%
Total Renal Care Holdings, Inc., 7s, 2009## $ 1,405 $ 913,250
- ------------------------------------------------------------------------------------------------------
Retail
Corporate Express, Inc., 4.5s, 2000 $ 450 $ 433,125
- ------------------------------------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $1,336,763) $ 1,346,375
- ------------------------------------------------------------------------------------------------------
Preferred Stock - 3.5%
- ------------------------------------------------------------------------------------------------------
ISSUER SHARES
- ------------------------------------------------------------------------------------------------------
Consumer Goods and Services
Renaissance Cosmetics, Inc., 14%++* 8,898 $ 0
- ------------------------------------------------------------------------------------------------------
Energy - 0.1%
Clark USA, Inc.* 3,369 $ 2,189,850
- ------------------------------------------------------------------------------------------------------
Media - 1.0%
CSC Holdings, Inc., 11.125% * 49,342 $ 5,476,962
Primedia, Inc., 8.625% * 88,550 8,500,889
--------------
$ 13,977,851
- ------------------------------------------------------------------------------------------------------
Supermarkets - 0.8%
Supermarkets General Holdings Corp.++* 323,098 $ 11,995,013
- ------------------------------------------------------------------------------------------------------
Telecommunications - 1.6%
Crown Castle International Corp.* 6,558 $ 6,820,320
E Spire Communications, Inc. 169 72,670
Global Crossing Holdings Ltd. 47,500 4,940,000
Nextel Communications Inc. 2,055 2,126,925
Nextel Communications, Inc. 13%* 2,148 2,298,360
Rural Cellular Corp. 6,211 6,273,110
--------------
$ 22,531,385
- ------------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $48,470,397) $ 50,694,099
- ------------------------------------------------------------------------------------------------------
Convertible Preferred Stock - 0.2%
- ------------------------------------------------------------------------------------------------------
Media
Granite Broadcasting Corp. 1,000 $ 37,000
- ------------------------------------------------------------------------------------------------------
Telecommunications - 0.2%
ICG Funding LLC, 3.75%*## 49,750 $ 2,711,375
- ------------------------------------------------------------------------------------------------------
Total Convertible Preferred Stock (Identified Cost, $3,402,406) $ 2,748,375
- ------------------------------------------------------------------------------------------------------
Warrants - 0.6%
- ------------------------------------------------------------------------------------------------------
Allegiance Telecommunications, Inc.
(Telecommunications)* 7,700 $ 51,975
American Mobile Satellite Corp.*## 3,570 178,500
CHC Helicopter Corp. (Transportation)* 16,000 32,000
Colt Telecommunications Group PLC
(Telecommunications)*## 6,376 4,159,511
DTI Holdings, Inc. (Telecommunications)* 48,375 484
Envirosource, Inc.*+ 238 357
Esat Holdings Ltd. (Telecommunications)*## 2,825 197,750
Grand Palais Resorts (Gaming & Hotels)*## 111,660 0
Hemmeter (Entertainment)* 111,660 0
ICO, Inc. (Energy)* 706,250 430,812
Jazztel PLC (Telecommunications)*## 33,200 597,600
Knology Holdings, Inc. (Telecommunications)*## 2,475 4,970
Loral Orion Network Systems, Inc., Expire
(Telecommunications)* 16,775 251,950
McCaw International Ltd. (Telecommunications)*## 7,225 9,031
Metronet Communications Corp.*## 3,250 260,000
Orbital Imaging Corp. (Telecommunications)*## 505 15,150
Renaissance Cosmetics, Inc. (Consumer Goods and
Services)*++ 7,189 0
Republic Health Corp. (Medical and Health
Technology and Services)* 2,500 0
Versatel Telecom B.V. (Telecommunications)* 10,925 1,802,625
- ------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $2,897,229) $ 7,992,715
- ------------------------------------------------------------------------------------------------------
Short-Term Obligations - 2.0%
- ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ------------------------------------------------------------------------------------------------------
Federal Home Loan Bank, due 8/18/99 $ 15,000 $ 14,965,221
Federal National Mortgage Assn., due 8/19/99 7,000 6,982,815
General Electric Capital Corp., due 8/02/99 7,800 7,798,888
- ------------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 29,746,924
- ------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,471,063,002) $1,425,498,135
Other Assets, Less Liabilities - 1.8% 26,595,026
- ------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,452,093,161
- ------------------------------------------------------------------------------------------------------
* Non-income producing security.
** Non-income producing security - in default.
## SEC Rule 144A restriction.
+ Restricted security.
++ Affiliated issue as 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 (Unaudited)
- ------------------------------------------------------------------------------
JULY 31, 1999
- ------------------------------------------------------------------------------
Assets:
Investments, at value:
Unaffiliated issuers
(identified cost, $1,450,734,047) $1,413,228,084
Affiliated issuer (identified cost, $20,328,955) 12,270,051
--------------
Total investments, at value
(identified cost, $1,471,063,002) $1,425,498,135
Cash 2,161,203
Receivable for Fund shares sold 3,391,572
Receivable for investments sold 20,312,999
Interest and dividends receivable 30,651,771
Other assets 15,245
--------------
Total assets $1,482,030,925
--------------
Liabilities:
Distributions payable $ 4,566,600
Net payable for forward foreign currency exchange
contracts closed or
subject to master netting agreements 272,192
Payable for Fund shares reacquired 16,382,917
Payable for investments purchased 8,007,264
Payable to affiliates -
Management fee 36,177
Shareholder servicing agent fee 8,022
Distribution and service fee 414,507
Administrative fee 1,140
Accrued expenses and other liabilities 248,945
--------------
Total liabilities $ 29,937,764
--------------
Net assets $1,452,093,161
==============
Net assets consist of:
Paid-in capital $1,670,955,002
Unrealized depreciation on investments and translation
of assets and liabilities in foreign currencies (45,831,295)
Accumulated net realized loss on investments and
foreign
currency transactions (166,873,842)
Accumulated distributions in excess of net
investment income (6,156,704)
--------------
Total $1,452,093,161
==============
Shares of beneficial interest outstanding 282,492,954
===========
Class A shares:
Net asset value per share
(net assets of $796,241,006 / 154,947,370 shares of
beneficial interest outstanding) $5.14
=====
Offering price per share (100 / 95.25) $5.40
=====
Class B shares:
Net asset value and offering price per share
(net assets of $524,647,822 / 102,063,760 shares of
beneficial interest outstanding) $5.14
=====
Class C shares:
Net asset value and offering price per share
(net assets of $115,258,983 / 22,374,942 shares of
beneficial interest outstanding) $5.15
=====
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $15,945,350 / 3,106,882 shares of
beneficial interest outstanding) $5.13
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B, and Class C shares.
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations (Unaudited)
- ------------------------------------------------------------------------------
SIX MONTHS ENDED JULY 31, 1999
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 69,651,207
Dividends 714,739
-------------
Total investment income $ 70,365,946
-------------
Expenses -
Management fee $ 3,204,652
Trustees' compensation 37,914
Shareholder servicing agent fee 739,910
Distribution and service fee (Class A) 1,195,865
Distribution and service fee (Class B) 2,540,165
Distribution and service fee (Class C) 534,883
Administrative fee 101,364
Custodian fee 172,999
Printing 43,086
Postage 76,699
Legal fees 2,273
Miscellaneous 474,367
-------------
Total expenses $ 9,124,177
Fees paid indirectly (170,311)
-------------
Net expenses $ 8,953,866
-------------
Net investment income $ 61,412,080
-------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (1,276,638)
Foreign currency transactions 542,011
-------------
Net realized loss on investments and foreign
currency transactions $ (734,627)
-------------
Change in unrealized appreciation (depreciation) -
Investments $ (16,638,029)
Translation of assets and liabilities in foreign
currencies (425,620)
-------------
Net unrealized loss on investments and foreign
currency translations $ (17,063,649)
-------------
Net realized and unrealized loss on investments
and foreign $ (17,798,276)
-------------
Increase in net assets from operations $ 43,613,804
=============
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JULY 31, 1999 JANUARY 31, 1999
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 61,412,080 $ 106,043,440
Net realized loss on investments and foreign
currency transactions (734,627) (17,292,751)
Net unrealized loss on investments and foreign
currency translations (17,063,649) (69,417,161)
-------------- --------------
Increase in net assets from operations $ 43,613,804 $ 19,333,528
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (36,905,103) $ (64,963,363)
From net investment income (Class B) (21,714,516) (34,576,764)
From net investment income (Class C) (4,556,486) (5,923,315)
From net investment income (Class I) (537,170) (579,998)
In excess of net investment income (Class A) --
(1,294,009)
In excess of net investment income (Class B) --
(688,737)
In excess of net investment income (Class C) --
(117,987)
In excess of net investment income (Class I) --
(11,553)
-------------- --------------
Total distributions declared to shareholders $ (63,713,275) $ (108,155,726)
-------------- --------------
Net increase in net assets from Fund share transactions $ 98,380,446 $ 247,514,049
-------------- --------------
Total increase in net assets $ 78,280,975 $ 158,691,851
Net assets:
At beginning of period 1,373,812,186 1,215,120,335
-------------- --------------
At end of period (including accumulated distributions
in excess of net investment income of $6,156,704 and
$3,855,509, respectively) $1,452,093,161 $1,373,812,186
============== ==============
See notes to financial statements.
</TABLE>
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
SIX MONTHS ENDED ------------------------------------------------------------------------
JULY 31, 1999 1999 1998 1997 1996 1995
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of
period $ 5.21 $ 5.62 $ 5.35 $ 5.24 $ 4.84 $ 5.50
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.23 $ 0.46 $ 0.47 $ 0.47 $ 0.45 $ 0.44
Net realized and unrealized
gain (loss) on investments
and foreign currency (0.06) (0.40) 0.27 0.10 0.39 (0.66)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.17 $ 0.06 $ 0.74 $ 0.57 $ 0.84 $(0.22)
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.24) $(0.46) $(0.47) $(0.46) $(0.44) $(0.43)
In excess of net investment
income -- (0.01) -- -- -- --
From net realized gain on
investments and foreign
currency transactions -- -- -- -- -- (0.01)
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.24) $(0.47) $(0.47) $(0.46) $(0.44) $(0.44)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 5.14 $ 5.21 $ 5.62 $ 5.35 $ 5.24 $ 4.84
====== ====== ====== ====== ====== ======
Total return(+) 3.28%++ 1.06% 14.63% 11.52% 17.97% (3.95)%
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.99%+ 0.99% 1.01% 1.02% 1.00% 0.99%
Net investment income 8.93%+ 8.62% 8.56% 8.92% 8.83% 8.65%
Portfolio turnover 47% 135% 137% 87% 59% 59%
Net assets at end of period
(000,000 omitted) $796 $792 $766 $672 $620 $524
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained by
the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for this expense offset arrangement.
(+) 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,
SIX MONTHS ENDED -----------------------------------------------------------------------
JULY 31, 1999 1999 1998 1997 1996 1995
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 5.21 $ 5.62 $ 5.35 $ 5.24 $ 4.84 $ 5.50
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income (loss) $ 0.21 $(0.43) $ 0.43 $ 0.43 $ 0.41 $ 0.39
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions (0.06) (0.40) 0.27 0.10 0.39 (0.65)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.15 $ 0.03 $ 0.70 $ 0.53 $ 0.80 $(0.26)
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.22) $(0.43) $(0.43) $(0.42) $(0.40) $(0.39)
In excess of net investment
income -- (0.01) -- -- -- (0.01)
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.22) $(0.44) $(0.43) $(0.42) $(0.40) $(0.40)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 5.14 $ 5.21 $ 5.62 $ 5.35 $ 5.24 $ 4.84
====== ====== ====== ====== ====== ======
Total return 2.93%++ 0.35% 13.83% 10.66% 16.98% (4.77)%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.69%+ 1.69% 1.70% 1.79% 1.85% 1.85%
Net investment income 8.24%+ 7.92% 7.82% 8.13% 7.99% 7.79%
Portfolio turnover 47% 135% 137% 87% 59% 59%
Net assets at end of period
(000,000 omitted) $525 $479 $385 $301 $283 $286
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained by
the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for this expense offset arrangement.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
SIX MONTHS ENDED -----------------------------------------------------------------------
JULY 31, 1999 1999 1998 1997 1996 1995
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of
period $ 5.22 $ 5.64 $ 5.36 $ 5.25 $ 4.85 $ 5.50
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.21 $ 0.42 $ 0.43 $ 0.43 $ 0.41 $ 0.41
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions (0.06) (0.40) 0.28 0.11 0.39 (0.66)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.15 $ 0.02 $ 0.71 $ 0.54 $ 0.80 $(0.25)
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.22) $(0.43) $(0.43) $(0.43) $(0.40) $(0.39)
In excess of net investment
income -- (0.01) -- -- -- (0.01)
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.22) $(0.44) $(0.43) $(0.43) $(0.40) $(0.40)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 5.15 $ 5.22 $ 5.64 $ 5.36 $ 5.25 $ 4.85
====== ====== ====== ====== ====== ======
Total return 2.92%++ 0.35% 13.81% 10.71% 17.03% (4.51)%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.69%+ 1.69% 1.70% 1.72% 1.77% 1.79%
Net investment income 8.24%+ 7.92% 7.78% 8.16% 8.02% 8.01%
Portfolio turnover 47% 135% 137% 87% 59% 59%
Net assets at end of period
(000,000 omitted) $115 $94 $60 $28 $16 $3
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained by
the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for this expense offset arrangement.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
SIX MONTHS ENDED --------------------------------------------------------
JULY 31, 1999 1999 1998 1997*
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS I
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 5.21 $ 5.61 $ 5.35 $ 5.34
------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.23 $ 0.49 $ 0.49 $ 0.04
Net realized and unrealized gain (loss) on
investments and foreign currency transactions (0.06) (0.40) 0.25 0.01
------ ------ ------ ------
Total from investment operations $ 0.17 $ 0.09 $ 0.74 $ 0.05
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.25) $(0.48) $(0.48) $(0.04)
In excess of net investment income -- (0.01) -- --
------ ------ ------ ------
Total distributions declared to shareholders $(0.25) $(0.49) $(0.48) $(0.04)
------ ------ ------ ------
Net asset value - end of period $ 5.13 $ 5.21 $ 5.61 $ 5.35
====== ====== ====== ======
Total return 3.24%++ 1.55% 14.77% .91%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.69%+ 0.69 %0.71 %0.59%+
Net investment income 9.27%+ 8.99% 8.86% 8.70%+
Portfolio turnover 47% 135% 137% 87%
Net assets at end of period (000,000 omitted) $16 $9 $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 has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained by
the Fund with its custodian and dividend disbursing agent. The Fund's expenses are calculated without reduction for this
expense offset arrangement.
</TABLE>
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS High Income Fund (the Fund) is a diversified series of MFS Series Trust III
(the Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. 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 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.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an arrangement
that measures the value of cash deposited with the custodian by the Fund. This
amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
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 $164,505,353 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on January 31, 2000, ($64,105,312), January 31, 2001, ($16,884,352),
January 31, 2003, ($30,373,319), January 31, 2004, ($35,661,057), and January
31, 2007, ($17,481,313).
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 the following annual rate:
BASED ON AVERAGE NET ASSETS BASED ON GROSS INCOME
- ---------------------------------------- ------------------------------------
First $200 million 0.220% First $22 million 3.00%
In excess of $200 million 0.187% In excess of $22 million 2.55%
Administrator - The Fund has an administrative 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%
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 $13,452 for the six months
ended July 31, 1999.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$281,123 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 (reduced to a maximum of 0.15% per annum for shares purchased prior to
March 1, 1991) of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer and a distribution fee
to MFD of up to 0.10% per annum (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. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $139,894 for the six months ended July 31,
1999. Fees incurred under the distribution plan during the six months ended July
31, 1999, 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 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 $17,550 and $815 for Class B and Class C shares, respectively, for
the six months ending July 31, 1999. Fees incurred under the 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 period ending July 31,
1999, were $18,539, $541,544 and $34,768 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 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 U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$799,735,330 and $639,675,103, 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 $1,471,063,002
--------------
Gross unrealized appreciation $ 39,679,686
Gross unrealized depreciation (85,244,553)
--------------
Net unrealized depreciation $ (45,564,867)
==============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions in
Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
SIX MONTHS ENDED JULY 31, 1999 YEAR ENDED JANUARY 31, 1999
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 34,699,667 $ 181,155,122 69,138,322 $ 367,556,417
Shares issued to shareholders
in reinvestment of distributions 4,219,770 22,013,504 7,327,609 39,296,362
Shares reacquired (36,006,085) (188,364,856) (60,757,910) (328,524,451)
------------- ------------- ------------- -------------
Net increase 2,913,352 $ 14,803,770 15,708,021 $ 78,328,328
============= ============= ============= =============
<CAPTION>
Class B Shares
SIX MONTHS ENDED JULY 31, 1999 YEAR ENDED JANUARY 31, 1999
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 30,787,791 $ 160,939,527 64,848,309 $ 348,181,856
Shares issued to shareholders
in reinvestment of distributions 2,219,574 11,576,803 3,523,279 18,851,542
Shares reacquired (22,862,461) (119,516,687) (45,051,012) (242,322,297)
------------- ------------- ------------- -------------
Net increase 10,144,904 $ 52,999,643 23,320,576 $ 124,711,101
============= ============= ============= =============
<CAPTION>
Class C Shares
SIX MONTHS ENDED JULY 31, 1999 YEAR ENDED JANUARY 31, 1999
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 10,564,327 $ 55,285,472 19,892,685 $ 106,915,192
Shares issued to shareholders
in reinvestment of distributions 474,715 2,481,722 713,228 3,853,384
Shares reacquired (6,596,751) (34,656,794) (13,353,162) (71,990,060)
------------- ------------- ------------- -------------
Net increase 4,442,291 $ 23,110,400 7,252,751 $ 38,778,516
============= ============= ============= =============
<CAPTION>
Class I Shares
SIX MONTHS ENDED JULY 31, 1999 YEAR ENDED JANUARY 31, 1999
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,406,716 $ 7,282,910 1,073,851 $ 5,962,205
Shares issued to shareholders
in reinvestment of distributions 89,765 467,384 110,691 583,071
Shares reacquired (53,888) (283,661) (162,953) (849,172)
------------- ------------- ------------- -------------
Net increase 1,442,593 $ 7,466,633 1,021,589 $ 5,696,104
============= ============= ============= =============
</TABLE>
(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. The commitment fee allocated to the Fund for the six
months ended July 31, 1999, was $5,838. The Fund had no borrowings during the
six months ended.
(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 $199,688 with
Deutsche Bank and $72,504 with Merrill Lynch. At July 31, 1999, the Fund had
sufficient cash and/or securities to cover any commitments under these
contracts.
(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 5.0% or more of the
outstanding voting securities of the issuer. A summary of the Fund's
transactions in the securities of these issuers during the six months ended July
31, 1999, is set forth below:
<TABLE>
<CAPTION>
BEGINNING ENDING
SHARE SHARE DIVIDEND ENDING
AFFILIATE AMOUNT AMOUNT INCOME VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ranger Industries, Inc. 266,768 266,768 $ -- $ 275,038
Renaissance Cosmetics, Inc, 7,189 7,189 -- --
Supermarkets General Holdings Corp. 323,098 323,098 -- 11,995,013
------- ------- ------- -----------
597,055 597,055 $ -- $12,270,051
======= ======= ======= ===========
</TABLE>
(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 July 31, 1999, the
Fund owned the following restricted securities, excluding securities issued
under Rule 144A, constituting 1.1% of net assets which may not be publicly sold
without registration under the Securities Act of 1933. The Fund does not have
the right to demand that such securities be registered. The value of these
securities is determined by valuations furnished by dealers or by a pricing
service, or if not available, are valued at fair value as determined in good
faith by the Trustees.
<TABLE>
<CAPTION>
DATE OF SHARE/PAR
DESCRIPTION ACQUISITION AMOUNT COST VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Airplane Pass-Through Trust, 10.875s, 2019 3/13/1996 5,250,000 $5,250,000 $ 5,251,733
Atlantic Gulf Communities Corp. 9/25/1995 690 -- 561
Envirosource, Inc. 5/15/1991 238 7,289 357
Merrill Lynch Mortgage Investors, Inc., 8.372s, 2022 6/22/1994 4,500,000 3,119,063 4,194,844
NTL, Inc. 4/08/1999 6,600,000 6,783,853 6,469,456
-----------
$15,916,951
===========
</TABLE>
<PAGE>
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.
<PAGE>
<TABLE>
MFS(R) HIGH INCOME FUND
<S> <C>
TRUSTEES SECRETARY
Richard B. Bailey* - Private Investor; Stephen E. Cavan*
Former Chairman and Director (until 1991),
MFS Investment Management ASSISTANT SECRETARY
James R. Bordewick, Jr.*
J. Atwood Ives - Chairman and Chief
Executive Officer, Eastern Enterprises CUSTODIAN
(diversified services company) State Street Bank and Trust Company
Lawrence T. Perera - Partner, Hemenway INVESTOR INFORMATION
& Barnes (attorneys) For MFS stock and bond market
outlooks, call toll free:
William J. Poorvu - Adjunct Professor, 1-800-637-4458 anytime from a
Harvard University Graduate School of touch-tone telephone.
Business Administration
For information on MFS mutual funds,
Charles W. Schmidt - Private Investor call your financial consultant or, for
an information kit, call toll free:
Arnold D. Scott* - Senior Executive 1-800-637-2929 any business day from 9
Vice President, Director, and Secretary, a.m. to 5 p.m. Eastern time (or leave
MFS Investment Management a message anytime).
Jeffrey L. Shames* - Chairman, Chief INVESTOR SERVICE MFS Service Center, Inc.
Executive Officer, and Director, P.O. Box 2281
MFS Investment Management Boston, MA 02107-9906
Elaine R. Smith - Independent Consultant For general information, call toll free:
1-800-225-2606 any business day from
David B. Stone - Chairman and Director, 8 a.m. to 8 p.m. Eastern time.
North American Management Corp.
(investment advisers) For service to speech- or
hearing-impaired, call toll free:
INVESTMENT ADVISER 1-800-637-6576 any business day from 9
Massachusetts Financial Services Company a.m. to 5 p.m. Eastern time. (To use
500 Boylston Street this service, your phone must be
Boston, MA 02116-3741 equipped with a Telecommunications
Device for the Deaf.)
DISTRIBUTOR
MFS Fund Distributors, Inc. For share prices, account balances,
500 Boylston Street and exchanges, call toll free:
Boston, MA 02116-3741 1-800-MFS-TALK (1-800-637-8255)
anytime from a touch-tone telephone.
CHAIRMAN AND PRESIDENT
Jeffrey L. Shames* WORLD WIDE WEB
www.mfs.com
PORTFOLIO MANAGER
Robert J. Manning*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
MFS(R) HIGH ------------
INCOME FUND BULK RATE
U.S. POSTAGE
[Logo] M F S(R) PAID
INVESTMENT MANAGEMENT MFS
We invented the mutual fund(R) ------------
500 Boylston Street
Boston, MA 02116-3741
(c)1999 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MHI-3 9/99 82M 18/218/318/818
