<PAGE>
[Logo] M F S(R)
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
MFS(R) HIGH
INCOME FUND
ANNUAL REPORT O JANUARY 31, 1999
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 12
Financial Statements ...................................................... 22
Notes to Financial Statements ............................................. 29
Independent Auditors' Report .............................................. 37
MFS' Year 2000 Readiness Disclosure ....................................... 39
Trustees and Officers ..................................................... 41
MFS CELEBRATES ITS DIAMOND ANNIVERSARY!
MARCH 21, 1999, MARKS THE 75TH ANNIVERSARY OF MFS' INVENTION OF
THE MUTUAL FUND. THE MUTUAL FUND INDUSTRY HAS BROUGHT THE POWER
OF INVESTING TO EVERY AMERICAN, OFFERING THEM THE OPPORTUNITY FOR
COLLEGE DEGREES, HOME OWNERSHIP, AND COMFORTABLE RETIREMENT.
IMAGINE TODAY'S WORLD WITHOUT MUTUAL
FUNDS. WE COULDN'T. AND WHILE THE MFS 75 YEARS
YEARS AHEAD WILL BRING A NUMBER OF [graphic omitted]
CHALLENGES, OUR 75 YEARS OF EXPERIENCE EXPERIENCE THE FUTURE(SM)
WILL HELP GUIDE A NEW GENERATION OF
INVESTORS INTO THE FUTURE.
- ------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- ------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders:
In 1999, MFS celebrates its 75th anniversary. The nation's first mutual fund
- -- our Massachusetts Investors Trust (MIT) -- was introduced to the public on
March 21, 1924. Since then, MFS Investment Management(R), the company that
grew out of that original fund, has helped guide shareholders through many
economic and investment cycles, primarily by focusing on the long-term
opportunities created by an expanding global economy. As of January 31, 1999,
MFS manages over $100 billion, and the firm's 2,000 people serve almost four
million investors and their financial advisers worldwide. Meanwhile, MIT's
assets have grown to over $12 billion, and 56 mutual funds are offered in the
MFS Family of Funds(R).
One of the elements in the success of MIT did not exist before our founders
invented it in 1924. That is daily redemption. This innovation means that
if you want to sell your investment in any MFS mutual fund, you have
the security of knowing that you may do so immediately by exchanging
into another MFS fund. Or, if you need your money for other purposes,
it can quickly be wired or mailed to you. This daily redemption feature,
through which new shares were created when people invested in MIT and were
redeemed when people sold, brought another important change to
the industry. Now, the price of a mutual fund's shares wasn't determined
by supply and demand, but by the value of the securities owned by
each portfolio.
Another factor in our growth was the development of one of the industry's
first in-house research departments in 1932. Unlike companies that rely on
Wall Street research reports, which can be used by many investors at the same
time, MIT's managers built its long-term track record by visiting companies,
talking to managers and competitors, and "kicking the tires" so they could
judge the quality and potential of each company's products and services for
themselves. Today, MFS has more than 100 full-time portfolio managers, stock
analysts, and credit analysts who track the equity and
bond markets.
While MIT introduced the daily redemption feature, that was not our only
invention. We also established the nation's first global bond fund, first
high-yield municipal bond fund, and first high-yield municipal closed-end bond
fund.
We are proud of the record of MIT and of the funds in the MFS Family of Funds,
but we are also proud of our long-standing relationship with financial
advisers. Not only do we believe investors can benefit from the advice of
these experts but, as was shown during the market volatility of 1998, people
who work with financial advisers are less likely to abandon their carefully
designed, long-term investment strategies.
Our ability to service your investment and information needs is also extremely
important to us. The MFS Service Center handles millions of transactions and
phone calls every year. Supporting the work of financial advisers, promptly
sending out statements and confirmations, and answering hundreds of investors'
questions every day are crucial elements in maintaining long-term relationships
with our fund shareholders. That link to our investors has also been enhanced by
our site on the World Wide Web: WWW.MFS.COM. Since 1996, this site has given
investors and the general public access to up-to-date information about MFS
products and services, as well as market outlooks and retirement information.
The site has rapidly become one of our primary vehicles for communicating with
our investors and educating the public about mutual funds in general and MFS in
particular.
If there is a common thread running through these milestones, it is our
always-increasing commitment to providing you with the best possible
investment management and shareholder service, just as we have done for
the past 75 years.
As we celebrate this anniversary, it is also a time for MFS to look ahead
and build on our 75 years of innovation and experience to help meet your
investment needs in the next century. 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)
February 15, 1999
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of Robert J. Manning]
Robert J. Manning
For the 12 months ended January 31, 1999, Class A shares of the Fund provided
a total return of 1.06%, Class B and Class C shares 0.35%, and Class I shares
1.55%. These returns assume the reinvestment of distributions but exclude the
effects of any sales charges and compare to a 1.55% 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
- -0.93% return for the average high current yield fund as reported by Lipper
Analytical Services, Inc., an independent firm that tracks mutual fund
performance.
Q. WHAT WERE SOME OF THE FACTORS AFFECTING THE FUND'S PERFORMANCE THIS PAST
YEAR?
A. It was a volatile year for most financial markets, including the high-yield
bond market. In the third quarter, high-yield bond prices declined due to
renewed concerns that economic problems in Asia and Russia would negatively
impact the domestic economy. However, some of the more conservative
industries, which are major sectors of the Fund, performed relatively well.
For example, prices of high-yield bonds in the media sector rose as
consolidation among cable television companies and broadcasters caused
valuations to increase substantially. The Fund also benefited from having
no exposure to emerging market sovereign bonds and minimal exposure to
emerging market corporate bonds. On the other hand, the commodity
industries, such as metal and paper companies, performed poorly in 1998,
which hurt performance. Commodity prices, especially in the paper and metal
sectors, were near their all-time lows due to the recession in Asia.
Q. WHAT KIND OF ADJUSTMENTS DID YOU MAKE TO THE PORTFOLIO, GIVEN THE PAST YEAR'S
VOLATILITY IN THE HIGH-YIELD MARKETS?
A. Throughout 1998, our investment strategy became more conservative. We added
better-quality, high-yield companies to the portfolio and reduced our
cyclical exposure. We expect the lower-credit-tier companies in the high-
yield market will have more credit problems as corporate profit growth
declines in 1999. However, we still think the high-yield market is
attractively valued.
Q. WHAT DO YOU MEAN BY ATTRACTIVELY VALUED?
A. The average yield in the high-yield market is 10.3%, compared to an average
yield of 4.6% on comparable U.S. Treasuries, which gives us a spread of
5.7%. (Principal value and interest on Treasury securities are guaranteed
by the U.S. government if held to maturity.) That's the widest level since
1991, the last time the high-yield market offered twice the yield of
Treasuries. Because bond prices move in the opposite direction from yields,
higher yields meant that prices for these securities went down while prices
for Treasuries went up. This resulted in lower total returns for many non-
Treasury fixed-income portfolios. However, in 1991, we were coming out of a
recession, and we had default rates of 10%. In 1998, the default rate ran
at 1.6%. In addition, the credit quality of the typical high-yield issuer
is better today, and while we expect the economy to slow, we don't expect
it to go into a recession. We think this environment of moderate economic
growth and low inflation is favorable for high-yield bonds.
Q. STILL, YIELDS IN THIS MARKET ARE RELATIVELY HIGH, MEANING BOND PRICES ARE
LOW. THAT SEEMS TO INDICATE PROBLEMS CONTINUE TO EXIST. WHY IS THAT?
A. There are a few reasons for that. One is technical. A record $141 billion
in new high-yield bonds were issued in 1998, which surpassed the previous
record by $22 billion. This heavy supply meant that issuers had to offer
higher yields to attract investors. Another reason spreads have widened is
a legitimate concern that the economy is not going to be as strong this
year as it was last year, which could cause problems for some companies in
the high-yield market. Finally, the ongoing turmoil in emerging markets
continues to have an impact on the high-yield market because investors are
still concerned about any type of risk, even though the risks in the two
markets are quite different.
Q. WHERE ARE YOU FINDING INVESTMENT OPPORTUNITIES NOW?
A. We've been focusing primarily on the telecommunications sector, where we see
strong growth and companies with real assets. This is our biggest industry
weighting and, within this sector, we're primarily focusing on the bonds of
competitive local exchange companies, better known as CLECs, which build
fiber-optic networks in metropolitan areas and compete with local telephone
companies for business customers. These companies, such as Colt Telecom and
Metronet, have new assets in the ground and are benefiting from the
tremendous growth in voice and data traffic. Another example is NTL, which
offers cable and telephone services to residential customers in the United
Kingdom. Microsoft just announced that it is going to invest $500 million in
the company. The convergence of cable television, telecommunication, and
Internet technologies provides an opportunity for investors in the high-yield
market.
Q. ANY OTHER INDUSTRIES YOU'D LIKE TO TALK ABOUT?
A. Our second-largest sector is cable and media. Cable television companies
have performed very well, and their valuations have risen substantially
following the announcement that AT&T will acquire Telecommunications, Inc.
That announcement led investors to expect further consolidation in the
industry as better-capitalized, higher-rated telecom companies seek to
acquire cable companies. The cable network is viewed as a very cost-
efficient way to deliver telephone and high-speed Internet services to
the home.
Q. WHAT ABOUT ANY SECTORS YOU'RE AVOIDING?
A. Again, we're not taking big positions in emerging market securities, and
we're keeping our exposure to cyclical industries such as metal and paper
companies to a minimum. Also, the Fund has benefited from being
underweighted in the energy sector. We've been underweighted in that sector
for a couple of years now, so when oil prices collapsed in 1998, we were
largely unaffected.
Q. WHAT CAN YOU TELL US ABOUT THE FUND'S INTERNATIONAL HOLDINGS?
A. Our international exposure is primarily in Europe. There's been a
tremendous growth in new issuance from European companies. The two
industries in which we're investing in Europe are telecommunications
and media, which are the same two sectors we've been favoring domestically.
Again, we see good prospects for these companies going forward as they also
benefit from the growth of the Internet, cable television, and cellular
communications.
Q. WHAT DO YOU SEE AS THE GREATEST RISK TO THE HIGH-YIELD MARKET IN THE COMING
YEAR?
A. Recession would be the greatest risk, but we think that's unlikely to occur
in 1999. We expect the economy to grow at a moderate pace, although more
slowly than in 1998. Consumer confidence and spending are still high, while
unemployment and interest rates are both low. The economy could slow
because of problems in Asia and because a number of sectors in the domestic
economy are performing poorly. One of the major challenges facing investors
in 1999 will be determining how individual companies are impacted by global
economic events. Therefore, we believe that careful credit selection will
remain crucial to the Fund's performance.
/s/ Robert J. Manning
Robert J. Manning
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
- --------------------------------------------------------------------------------
ROBERT J. MANNING IS SENIOR VICE PRESIDENT, 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, MFS(R) SPECIAL VALUE TRUST,
MFS(R) AMERICAN (SM) U.S. HIGH YIELD FUND, AND MFS(R) MERIDIAN(SM) U.S.
HIGH YIELD FUND.
MR. MANNING JOINED MFS IN 1984 AS A RESEARCH ANALYST IN THE HIGH YIELD
BOND DEPARTMENT. HE WAS NAMED VICE PRESIDENT IN 1988, PORTFOLIO MANAGER
OF MFS SPECIAL VALUE TRUST IN 1992, SENIOR VICE PRESIDENT IN 1993,
PORTFOLIO MANAGER OF MFS HIGH INCOME FUND IN 1994, PORTFOLIO MANAGER OF
MFS HIGH YIELD OPPORTUNITIES FUND IN 1998, AND DIRECTOR OF FIXED INCOME
RESEARCH IN 1999. HE IS A GRADUATE OF THE UNIVERSITY OF LOWELL AND
EARNED AN M.B.A. DEGREE IN FINANCE FROM BOSTON COLLEGE.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
- --------------------------------------------------------------------------------
FUND FACTS
- --------------------------------------------------------------------------------
OBJECTIVE: SEEKS HIGH CURRENT INCOME BY INVESTING PRIMARILY
IN A DIVERSIFIED PORTFOLIO OF FIXED-INCOME
SECURITIES, SOME OF WHICH MAY INVOLVE EQUITY
FEATURES. CAPITAL GROWTH, IF ANY, IS INCIDENTAL.
COMMENCEMENT OF
INVESTMENT OPERATIONS: FEBRUARY 17, 1978
CLASS INCEPTION: CLASS A FEBRUARY 17, 1978
CLASS B SEPTEMBER 27, 1993
CLASS C JANUARY 3, 1994
CLASS I JANUARY 2, 1997
SIZE: $1.4 BILLION NET ASSETS AS OF JANUARY 31, 1999
PERFORMANCE SUMMARY
The following information illustrates the historical performance of the Fund's
original share class in comparison to various market indicators. Performance
results include the deduction of the maximum applicable sales charge and
reflect the percentage change in net asset value, including reinvestment of
dividends. Benchmark comparisons are unmanaged and do not reflect any fees or
expenses. The performance of other share classes will be greater than or less
than the line shown. (See Notes to Performance Summary for more information.)
It is not possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year period ended January 31, 1999)
MFS High Lehman Brothers Lehman Brothers
Income Fund Corporate High Yield
- Class A Bond Index Bond Index
- --------------------------------------------------------
1/94 $ 9,532 $10,000 $10,000
1/95 9,155 9,624 9,820
1/96 10,801 11,595 11,753
1/97 12,045 11,915 12,986
1/98 13,807 13,272 14,763
1/99 13,953 14,373 14,992
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended January 31, 1999)
MFS High Lehman Brothers Lehman Brothers
Income Fund Corporate High Yield
- Class A Bond Index Bond Index
- --------------------------------------------------------
1/89 $ 9,527 $10,000 $10,000
1/91 7,867 12,368 9,205
1/93 13,790 16,098 15,600
1/95 15,646 17,310 17,812
1/97 20,584 21,432 23,554
1/99 23,844 25,476 27,192
AVERAGE ANNUAL TOTAL RETURNS THROUGH JANUARY 31, 1999
<TABLE>
CLASS A
<CAPTION>
1 Year 3 Years 5 Years 10 Years/Life
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Annual Total Return +1.06% +8.91% +7.92% +9.61%
- ---------------------------------------------------------------------------------------------------------
SEC Results -3.74% +7.16% +6.87% +9.08%
- ---------------------------------------------------------------------------------------------------------
CLASS B
1 Year 3 Years 5 Years 10 Years/Life
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return +0.35% +8.12% +7.09% +9.15%
- ---------------------------------------------------------------------------------------------------------
SEC Results -3.35% +7.27% +6.80% +9.15%
- ---------------------------------------------------------------------------------------------------------
CLASS C
1 Year 3 Years 5 Years 10 Years/Life
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return +0.35% +8.13% +7.16% +9.21%
- ---------------------------------------------------------------------------------------------------------
SEC Results -0.58% +8.13% +7.16% +9.21%
- ---------------------------------------------------------------------------------------------------------
CLASS I
1 Year 3 Years 5 Years 10 Years/Life
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return +1.55% +9.14% +8.06% +9.68%
- ---------------------------------------------------------------------------------------------------------
COMPARATIVE INDICES
1 Year 3 Years 5 Years 10 Years/Life
- ---------------------------------------------------------------------------------------------------------
Average high current yield fund* - 0.93% + 7.98% +7.19% + 9.33%
- ---------------------------------------------------------------------------------------------------------
Lehman Brothers Corporate Bond Index#** +18.09% +10.55% +7.53% + 9.80%
- ---------------------------------------------------------------------------------------------------------
Lehman Brothers High Yield Bond Index+ + 1.55% + 8.45% +8.44% +10.52%
- ---------------------------------------------------------------------------------------------------------
* Source: Lipper Analytical Services, Inc.
# Source: CDA/Wiesenberger.
+ Source: AIM.
** Effective July 31, 1998, we no longer use the Lehman Brothers Corporate Bond Index as a benchmark
because we believe the Lehman Brothers High Yield Bond Index better reflects the Fund's investment
policies and objectives. The Lehman Corporate Bond Index is an unmanaged, market-value-weighted index
comprised of all public, fixed-rate, nonconvertible, investment-grade corporate debt.
</TABLE>
<PAGE>
NOTES TO PERFORMANCE SUMMARY
Class A share ("A") SEC results include the maximum 4.75% sales charge. Class
B share ("B") SEC results reflect the applicable contingent deferred sales
charge (CDSC), which declines over six years from 4% to 0%. Class C shares
("C") have no initial sales charge but, like B, have higher annual fees and
expenses than A. C SEC results reflect the 1% CDSC applicable to shares
redeemed within 12 months. Class I shares ("I") have no sales charge or Rule
12b-1 fees and are only available to certain institutional investors.
B and C results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of A for periods prior to the inception of B and C.
Because operating expenses of B and C are higher than those of A, B and C
performance generally would have been lower than A performance. The A
performance included in the B and C SEC performance has been adjusted to
reflect the CDSC generally applicable to B and C rather than the initial sales
charge generally applicable to A.
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 JANUARY 31, 1999
QUALITY RATINGS (U.S. BOND PORTION ONLY)
Source: Standard & Poor's and Moody's
"B" 68.7%
"BB" 19.5%
"CCC" 11.1%
"BBB" 0.5%
"CC" 0.2%
The portfolio is actively managed, and holdings are subject to change.
<PAGE>
PORTFOLIO OF INVESTMENTS -- January 31, 1999
<TABLE>
Bonds - 86.5%
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 78.5%
Aerospace - 4.4%
Airplane Pass-Through Trust, 10.875s, 2019+ $ 5,250 $ 5,574,502
Argo Tech Corp., 8.625s, 2007## 7,750 7,373,500
BE Aerospace, Inc., 9.875s, 2006 7,150 7,507,500
BE Aerospace, Inc., 8s, 2008 3,525 3,472,125
BE Aerospace, Inc., 9.5s, 2008## 1,550 1,643,000
K & F Industries, Inc., 9.25s, 2007 8,800 8,976,000
L-3 Communications Corp., 10.375s, 2007 4,440 4,906,200
L-3 Communications Corp., 8s, 2008## 3,200 3,264,000
L-3 Communications Corp., 8.5s, 2008 3,750 3,918,750
MOOG, Inc., 10s, 2006 9,515 9,752,875
Stellex Industries, Inc., 9.5s, 2007 1,540 1,320,550
United Defense Industries, Inc., 8.75s, 2007 2,410 2,428,075
--------------
$ 60,137,077
- --------------------------------------------------------------------------------------------------------
Building Materials - 3.5%
AAF-McQuay, Inc., 8.875s, 2003 $ 7,125 $ 6,929,063
American Standard, Inc., 7.375s, 2008 9,450 9,520,875
Building Materials Corp., 8.625s, 2006 12,890 13,147,800
Building Materials Corp., 8s, 2007## 3,000 2,955,000
Nortek, Inc., 9.875s, 2004 1,392 1,447,680
Nortek, Inc., 9.25s, 2007 5,925 6,117,562
Schuff Steel Co., 10.5s, 2008 3,170 2,813,375
UDC Homes, Inc., 12.5s, 2000 30 16,650
Williams Scotsman, Inc., 9.875s, 2007 4,525 4,683,375
--------------
$ 47,631,380
- --------------------------------------------------------------------------------------------------------
Business Services - 2.4%
Anacomp, Inc., 10.875s, 2004 $ 6,175 $ 6,422,000
Iron Mountain, Inc., 10.125s, 2006 10,275 11,251,125
Pierce Leahy Corp., 11.125s, 2006 3,477 3,807,315
Pierce Leahy Corp., 9.125s, 2007 3,225 3,418,500
Unisys Corp., 12s, 2003 6,825 7,575,750
--------------
$ 32,474,690
- --------------------------------------------------------------------------------------------------------
Chemicals - 1.7%
NL Industries, Inc., 11.75s, 2003 $16,505 $ 17,660,350
Sterling Chemicals, Inc., 11.25s, 2007 6,375 5,355,000
--------------
$ 23,015,350
- --------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 3.7%
American Safety Razor Co., 9.875s, 2005 $ 7,060 $ 7,342,400
General Binding Corp., 9.375s, 2008 4,200 4,226,250
Kindercare Learning Centers, Inc., 9.5s, 2009 5,250 5,250,000
Polymer Group, Inc., 9s, 2007 8,590 8,643,687
Polymer Group, Inc., 8.75s, 2008 3,000 2,985,000
Remington Products Co. LLC, 11s, 2006 5,715 4,043,363
Revlon Consumer Products Corp., 8.125s, 2006 8,190 7,780,500
Samsonite Corp., 10.75s, 2008 1,770 1,416,000
Synthetic Industries, Inc., 9.25s, 2007 8,290 8,621,600
--------------
$ 50,308,800
- --------------------------------------------------------------------------------------------------------
Container, Forest and Paper Products - 4.6%
Applied Extrusion Technologies, Inc., 11.5s, 2002 $ 4,900 $ 5,047,000
Atlantis Group, Inc., 11s, 2003 3,875 3,913,750
Ball Corp., 7.75s, 2006## 2,115 2,220,750
Ball Corp., 8.25s, 2008## 5,140 5,422,700
Buckeye Cellulose Corp., 8.5s, 2005 1,250 1,300,000
Buckeye Cellulose Corp., 9.25s, 2008 3,875 4,107,500
Florida Coast Paper Co. LLC, 12.75s, 2003** 3,775 1,661,000
Gaylord Container Corp., 9.75s, 2007 5,750 5,318,750
Gaylord Container Corp., 9.875s, 2008 5,515 4,329,275
Graham Packaging/GPC Capital Co., 8.75s, 2008 3,930 3,969,300
Silgan Holdings, Inc., 9s, 2009 5,650 5,720,625
Speciality Paperboard, Inc., 9.375s, 2006 5,350 5,403,500
U.S. Can Corp., 10.125s, 2006 5,700 6,013,500
U.S. Timberlands, 9.625s, 2007 8,910 9,021,375
--------------
$ 63,449,025
- --------------------------------------------------------------------------------------------------------
Energy - 3.8%
AmeriGas Partners LP, 10.125s, 2007 $ 3,400 $ 3,434,000
Cheasapeake Energy Corp., 9.625s, 2005 10,750 7,955,000
Clark USA, Inc., 10.875s, 2005 3,890 3,617,700
Continental Resources, Inc., 10.25s, 2009 6,150 4,797,000
Forest Oil Corp., 10.5s, 2006 4,875 4,817,036
Giant Industries, Inc., 9s, 2007 100 93,250
Gulfmark Offshore, Inc., 8.75s, 2008 3,565 3,475,875
HS Resources, Inc., 9.25s, 2006 7,975 7,686,000
P&L Coal Holdings Corp., 8.875s, 2008 2,100 2,170,875
P&L Coal Holdings Corp., 9.625s, 2008 6,950 7,210,625
Petsec Energy, Inc., 9.5s, 2007 2,105 1,094,600
Pool Energy Services Co., 8.625s, 2008 1,955 2,033,200
Pride Petroleum Services, Inc., 9.375s, 2007 4,075 3,850,875
--------------
$ 52,236,036
- --------------------------------------------------------------------------------------------------------
Entertainment - 2.1%
AMC Entertainment, Inc., 9.5s, 2009 $ 7,360 $ 7,304,800
American Skiing Co., 12s, 2006 5,300 5,339,750
Cinemark USA, Inc., 9.625s, 2008 8,950 9,218,500
Hollywood Theaters, Inc., 10.625s, 2007 2,025 1,412,437
Regal Cinemas, Inc., 9.5s, 2008## 5,890 5,948,900
--------------
$ 29,224,387
- --------------------------------------------------------------------------------------------------------
Financial Institutions - 0.8%
Americo Life, Inc., 9.25s, 2005 $ 2,050 $ 2,098,688
Jorgansen Bank, 8.938s, 2004 4,963 4,838,437
Merrill Lynch Mortgage Investors, Inc., 8.331s, 2022+ 4,500 4,265,859
--------------
$ 11,202,984
- --------------------------------------------------------------------------------------------------------
Financial Services - 0.8%
Willis Corroon Corp., 9s, 2009 $11,025 $ 11,093,906
- --------------------------------------------------------------------------------------------------------
Food and Beverage Products - 1.1%
Fage Dairy Industries SA, 9s, 2007 $ 2,700 $ 2,268,000
Friendly Ice Cream Corp., 10.5s, 2007 2,783 2,511,658
Specialty Foods Corp., 10.25s, 2001 10,230 9,718,500
--------------
$ 14,498,158
- --------------------------------------------------------------------------------------------------------
Gaming and Hotels - 3.8%
Boyd Gaming Corp., 9.5s, 2007 $ 3,460 $ 3,529,200
Casino America, Inc., 12.5s, 2003 5,900 6,549,000
Circus Circus Enterprises, Inc., 6.45s, 2006 2,325 2,110,426
Coast Hotels & Casinos, Inc., 13s, 2002 3,625 4,078,125
Eldorado Resorts, 10.5s, 2006 5,455 5,782,300
Lady Luck Gaming Corp., 11.875s, 2001 12,610 12,862,200
Prime Hospitality Corp., 9.75s, 2007 4,795 4,938,850
Red Roof Inns, Inc., 9.625s, 2003 3,630 3,611,850
Santa Fe Hotel, Inc., 11s, 2000 5,295 5,003,775
Station Casinos, Inc., 8.875s, 2008## 3,750 3,853,125
--------------
$ 52,318,851
- --------------------------------------------------------------------------------------------------------
Industrial - 7.6%
Allied Waste North America, 7.875s, 2009## $ 7,125 $ 7,356,563
Clark Refining & Marketing, Inc., 8.625s, 2008 4,900 4,832,625
Day International Group, Inc., 11.125s, 2005 3,670 3,954,425
Envirosource, Inc., 9.75s, 2003 4,000 3,520,000
Furon Co., 8.125s, 2008 4,800 4,776,000
Grove Worldwide LLC/Capital, Inc., 9.25s, 2008## 1,970 1,782,850
Hayes Wheels International, Inc., 11s, 2006 4,525 5,034,062
Hayes Wheels International, Inc., 9.125s, 2007 5,650 5,932,500
Haynes International, Inc., 11.625s, 2004 6,475 5,503,750
IMO Industries, Inc., 11.75s, 2006 7,825 8,059,750
Interlake Corp., 12s, 2001 12,135 12,984,450
Interlake Corp., 12.125s, 2002 1,950 1,969,500
International Knife & Saw, Inc., 11.375s, 2006 2,060 2,114,075
Johnstown America Industries, 11.75s, 2005 2,670 2,830,200
Mark IV Industries, Inc., 7.75s, 2006 2,700 2,639,250
Newcor, Inc., 9.875s, 2008 6,450 5,740,500
Numatics, Inc., 9.625s, 2008 1,440 1,353,600
Oxford Automotive, Inc., 10.125s, 2007 4,025 4,165,875
Psinet, Inc., 10s, 2005 1,445 1,488,350
Psinet, Inc., 11.5s, 2008## 3,850 4,196,500
Simonds Industries, Inc., 10.25s, 2008 2,650 2,729,500
Talon Automotive Group, Inc., 9.625s, 2008 375 348,750
Thermadyne Holdings Corp. 0s to 2003, 12.5s to 2008 12,375 5,321,250
Thermadyne Manufacturing/Capital Corp., 9.875s, 2008 6,250 5,796,875
--------------
$ 104,431,200
- --------------------------------------------------------------------------------------------------------
Media - 15.1%
Acme Television LLC, 0s to 2000, 10.875s to 2004 $ 4,500 $ 3,774,375
Adelphia Communications Corp., 8.375s, 2008## 9,225 9,617,062
Allbritton Communications Co., 9.75s, 2007 4,775 5,097,313
Avalon Cable Holdings LLC, 0s to 2003, 11.875s to 2008## 8,000 4,880,000
Avalon Cable of Michigan, 9.375s, 2008## 2,000 2,102,500
Big Flower Press Holdings, Inc., 8.875s, 2007 4,430 4,529,675
Big Flower Press Holdings, Inc., 8.625s, 2008## 2,225 2,269,500
Bresnan Communications Group, 0s to 2004, 9.25s to 2009## 3,475 2,306,531
Bresnan Communications Group, 8s, 2009## 1,425 1,457,063
Century Communications Corp., 0s, 2008 100 53,500
Chancellor Media Corp., 8.125s, 2007 1,550 1,612,000
Chancellor Media Corp., 8.75s, 2007 4,135 4,383,100
Chancellor Media Corp., 8s, 2008## 7,700 8,296,750
Charter Communications Southeast LP, 11.25s, 2006 7,575 8,673,375
Classic Cable, Inc., 9.875s, 2008## 2,975 3,123,750
Classic Communications, Inc., 0s to 2003, 13.25s to 2009 3,000 1,875,000
CSC Holdings, Inc., 9.25s, 2005 1,900 2,061,500
CSC Holdings, Inc., 8.125s, 2009 6,000 6,614,160
Cumulus Media, Inc., 10.375s, 2008 3,525 3,824,625
Digital Television Services, Inc., 12.5s, 2007 7,100 7,810,000
Echostar Dbs Corp., 9.375s, 2009 7,650 7,841,250
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 9,525 9,906,000
FrontierVision Holding LP, 0s to 2001, 11.87s to 2007 1,445 1,253,538
FrontierVision Holding LP, 0s to 2001, 11.875s to 2007## 4,000 3,490,000
Frontiervision Operating Partnership LP, 11s, 2006## 2,850 3,199,125
Golden Books Publishing, Inc., 7.65s, 2002** 7,285 2,919,537
Granite Broadcasting Corp., 10.375s, 2005 2,600 2,691,000
Granite Broadcasting Corp., 8.875s, 2008 3,500 3,377,500
Hollinger International Publishing, Inc., 9.25s, 2007 7,475 7,979,562
Intermedia Capital Partners IV, LP, 11.25s, 2006 6,200 7,192,000
Jacor Communications Co., 8s, 2010 3,320 3,469,400
Lenfest Communications, Inc., 8.375s, 2005 2,000 2,180,000
Lenfest Communications, Inc., 10.5s, 2006 6,990 8,248,200
Liberty Group Operating, Inc., 9.375s, 2008 4,770 4,722,300
LIN Holdings Corp., 0s to 2003, 10s to 2008 1,500 1,125,000
LIN Television Corp., 8.375s, 2008 6,100 6,389,750
Marcus Cable Operating Co., 0s to 1999, 13.5s to 2004 4,000 4,040,000
Marvel Holdings, Inc., 0s, 1999**(+) 11,125 0
NTL, Inc., 0s to 2003, 12.375s to 2008## 17,390 12,010,387
Outdoor Systems, Inc., 8.875s, 2007 3,950 4,266,000
Rogers Cablesystems, Inc., 9.625s, 2002 750 813,750
Telemundo Holdings, Inc., 0s to 2003, 11.5s to 2008## 11,125 6,341,250
Telewest PLC, 11.25s, 2008## 2,000 2,380,000
Transwestern Publishing Co., 9.625s, 2007 3,150 3,283,875
United International Holdings, Inc., 10.75s, 2008 10,150 6,800,500
World Color Press, Inc., 8.375s, 2008## 4,550 4,663,750
Young Broadcasting, Inc., 8.75s, 2007 1,850 1,914,750
--------------
$ 206,860,203
- --------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 2.2%
Alaris Medical, Inc., 0s to 2003, 11.125s to 2008## $ 6,410 $ 3,813,950
Beverly Enterprises, Inc., 9s, 2006 4,050 4,212,000
Fresenius Medical Care Capital Trust, 7.875s, 2008 2,400 2,400,000
Oxford Health Plans, Inc., 11s, 2005## 2,525 2,537,625
Pharmerica, Inc., 8.375s, 2008 4,450 4,761,500
Prime Medical Services, Inc., 8.75s, 2008 5,985 5,506,200
Tenet Healthcare Corp., 8.125s, 2008## 7,000 7,210,000
--------------
$ 30,441,275
- --------------------------------------------------------------------------------------------------------
Metals and Minerals - 1.7%
Acme Metals, Inc., 10.875s, 2007 $ 2,675 $ 347,750
Ak Steel Holdings Corp., 9.125s, 2006 3,385 3,621,950
Commonwealth Aluminum Corp., 10.75s, 2006 5,050 5,050,000
Doe Run Resources Corp., 11.25s, 2005## 4,250 3,612,500
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 3,550 3,443,500
Metal Management, Inc., 10s, 2008 5,775 3,465,000
Ryerson Tull, Inc., 9.125s, 2006 1,050 1,144,500
WCI Steel, Inc., 10s, 2004 2,750 2,763,750
Wheeling Pittsburgh Corp., 9.25s, 2007 600 564,000
--------------
$ 24,012,950
- --------------------------------------------------------------------------------------------------------
Retail - 2.6%
Affinity Group Holding, Inc., 11s, 2007 $ 2,500 $ 2,581,250
Cole National Group, Inc., 8.625s, 2007 6,325 6,230,125
Finlay Enterprises, Inc., 9s, 2008 1,250 1,131,250
Finlay Fine Jewelry Corp., 8.375s, 2008 5,725 5,410,125
J.Crew Operating Corp., 10.375s, 2007 5,265 4,791,150
Musicland Group, Inc., 9s, 2003 3,150 3,118,500
Musicland Group, Inc., 9.875s, 2008 4,475 4,519,750
Southland Corp., 5s, 2003 9,225 8,118,000
--------------
$ 35,900,150
- --------------------------------------------------------------------------------------------------------
Supermarkets - 1.3%
Jitney-Jungle Stores of America, Inc., 12s, 2006 $ 5,950 $ 6,664,000
Marsh Supermarkets, Inc., 8.875s, 2007 1,060 1,128,900
Pathmark Stores, Inc., 0s to 1999, 10.75s to 2003 465 404,550
Pathmark Stores, Inc., 9.625s, 2003 8,025 8,185,500
Penn Traffic Co., 8.625s, 2003** 4,130 1,982,400
--------------
$ 18,365,350
- --------------------------------------------------------------------------------------------------------
Telecommunications - 13.8%
Allegiance Telecommunications, Inc., 0s to 2003,
11.75s to 2008 $ 5,475 $ 2,956,500
Allegiance Telecommunications, Inc., 12.875s, 2008 4,000 4,120,000
Americian Cellular Corp., 10.5s, 2008## 5,100 5,304,000
AMSC Acquisition Co., Inc., 12.25s, 2008 5,800 2,813,000
Buckeye Technologies, Inc., 8s, 2010 1,750 1,767,500
Centennial Cellular Operating Co., 10.75s, 2008## 6,975 7,358,625
DTI Holdings, Inc., 0s to 2003, 12.5s to 2008 9,675 2,322,000
Esat Holdings Ltd., 0s to 2002, 12.5s to 2007 2,825 1,906,875
Esi Tractebel Acquisition Corp., 7.99s, 2011 2,150 2,136,562
Exodus Communications, Inc., 11.25s, 2008 5,150 5,407,500
Flag Ltd., 8.25s, 2008 1,510 1,479,800
GCI, Inc., 9.75s, 2007 3,345 3,328,275
Global Crossings Holdings Ltd., 9.625s, 2008## 7,600 8,037,000
Hermes Europe Railtel B.V., 10.375s, 2009## 3,450 3,674,250
ICG Holdings, Inc., 0s to 2001, 12.5s to 2006 9,325 7,180,250
Intermedia Communications, Inc., 8.875s, 2007 5,460 5,350,800
Intermedia Communications, Inc., 8.5s, 2008 1,000 962,500
ITC Deltacom, Inc., 11s, 2007 4,094 4,503,400
ITC Deltacom, Inc., 9.75s, 2008## 6,250 6,593,750
Level 3 Communications, Inc., 9.125s, 2008 7,660 7,602,550
McCaw International Ltd., 0s to 2002, 13s to 2007 6,275 3,521,844
Metromedia Fiber Network, Inc., 10s, 2008## 6,075 6,439,500
MJD Communications, Inc., 9.5s, 2008 3,850 3,917,375
Mobile Telecommunication Technologies Corp., 13.5s, 2002 9,015 10,254,562
Nextel Communications, Inc., 0s to 2002, 9.75s to 2007 3,305 2,148,250
Nextel Communications, Inc., 0s to 2003, 9.95s to 2008 6,350 4,064,000
Nextel International, Inc., 0s to 2003, 12.125 to 2008 7,525 3,489,719
Nextlink Communications, Inc., 9.625s, 2007 3,450 3,398,250
Northeast Optic Network, 12.75s, 2008 3,350 3,383,500
Orbital Imaging Corp., 11.625s, 2005 505 525,200
Pagemart Wireless, Inc., 0s to 2003, 11.25s to 2008## 6,240 2,932,800
Pathnet, Inc., 12.25s, 2008 935 542,300
Pinnacle Holdings, Inc., 0s to 2003, 10s to 2008 8,100 4,920,750
Qwest Communications International, Inc., 0s to 2002,
9.47s to 2007 580 464,000
Qwest Communications International, Inc., 10.875s, 2007 1,228 1,416,805
Qwest Communications International, Inc., 7.25s, 2008## 2,100 2,199,750
Qwest Communications International, Inc., 7.5s, 2008## 6,375 6,757,500
Rural Cellular Corp., 9.625s, 2008 3,200 3,312,000
Spectrasite Holdings, Inc., 0s to 2003, 12s to 2008## 5,420 2,710,000
Sprint Spectrum LP, 11s, 2006 450 517,500
Telesystem International Wireless, Inc., 0s to 2002,
13.25s to 2007 11,085 4,567,144
Time Warner Telecommunications, Inc., 9.75s, 2008 9,650 10,325,500
Triton PCS, Inc., 0s to 2003, 11s to 2008 7,925 4,279,500
Unisystem Corp., 7.875s, 2008 3,780 3,969,000
Verio, Inc., 10.375s, 2005 1,025 1,055,750
Viatel, Inc., 0s to 2003, 12.5s to 2008 1,875 1,096,875
Viatel, Inc., 11.25s, 2008 3,375 3,391,875
Western Wireless Corp., 10.5s, 2007 7,900 8,591,250
--------------
$ 188,997,636
- --------------------------------------------------------------------------------------------------------
Transportation - 0.3%
Moran Transportation Co., 11.75s, 2004 $ 3,500 $ 3,784,375
- --------------------------------------------------------------------------------------------------------
Utilities - Electric - 1.2%
CalEnergy Co., Inc., 7.52s, 2008 $ 4,000 $ 4,317,440
El Paso Electric Co., 8.9s, 2006 4,645 5,150,748
International Utility Structures, 10.75s, 2008 3,600 3,402,000
Niagara Mohawk Power Corp., 7.625s, 2005 4,000 4,226,280
--------------
$ 17,096,468
- --------------------------------------------------------------------------------------------------------
Total U.S. Bonds $1,077,480,251
- --------------------------------------------------------------------------------------------------------
Foreign Bonds - 8.0%
Canada - 2.4%
Clearnet Communications, Inc., 0s to 2000, 14.75s
to 2005 (Telecommunications) $ 375 $ 325,313
Metronet Communications Corp., 0s to 2002, 10.75s
to 2007 (Telecommunications) 6,000 4,320,000
Metronet Communications Corp., 0s to 2003, 9.95s to
2008 (Telecommunications) 12,150 8,262,000
Metronet Communications Corp., 12s, 2007
(Telecommunications) $ 3,250 $ 3,721,250
PCI Chemicals Canada, Inc., 9.25s, 2007 (Chemicals) 6,025 4,548,875
Repap New Brunswick, Inc., 9s, 2004 (Container,
Forest and Paper Products) 1,825 1,733,750
Rogers Cablesystems, Inc., 10.125s, 2012 (Media) 5,700 6,327,000
Rogers Cantel, Inc., 9.375s, 2008
(Telecommunications) 4,000 4,320,000
--------------
$ 33,558,188
- --------------------------------------------------------------------------------------------------------
Luxembourg - 0.6%
Millicom International Cellular Communications Corp.,
0s to 2001, 13.5s to 2006 (Telecommunications) $11,315 $ 8,203,375
- --------------------------------------------------------------------------------------------------------
Mexico - 0.3%
Satelites Mexicanos SA De CV, 10.125s, 2004
(Telecommunications)## $ 5,390 $ 4,352,425
- --------------------------------------------------------------------------------------------------------
Netherlands - 1.0%
PTC International Finance B.V., 0s to 2002, 10.75s
to 2007 (Financial Services) 2,515 1,751,069
Versatel Telecom B.V., 13.25s, 2008
(Telecommunications) 10,925 11,307,375
--------------
$ 13,058,444
- --------------------------------------------------------------------------------------------------------
Thailand - 0.2%
Jasmine Submarine Telecommunications Ltd., 8.483s,
2011 (Telecommunications)## $ 3,377 $ 2,727,394
- --------------------------------------------------------------------------------------------------------
United Kingdom - 3.5%
Colt Telecommunications Group PLC, 0s to 2001, 12s
to 2006 (Telecommunications) $14,395 $ 12,235,750
Colt Telecommunications Group PLC, 8.875s, 2007
(Telecommunications) 8,000 4,770,706
Dialog Corp. PLC, 11s, 2007 (Telecommunications) 3,410 3,333,275
Dolphin Telecom PLC, 11.5s, 2008
(Telecommunications) 10,900 4,196,500
Esat Telecom Group PLC, 0s to 2002, 12.5s to 2007
(Telecommunications) 3,150 2,126,250
Esat Telecom Group PLC, 11.875s, 2008
(Telecommunications)## 6,075 6,318,000
Esprit Telecom Group PLC, 11.5s, 2007
(Telecommunications)## 2,500 2,625,000
Espirit Telecom Group PLC, 10.875s, 2008
(Telecommunications) 6,250 6,562,500
Telewest PLC, 9.625s, 2006 (Media) 5,925 6,369,375
--------------
$ 48,537,356
- --------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 110,437,182
- --------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $1,210,570,140) $1,187,917,433
- --------------------------------------------------------------------------------------------------------
Stocks - 0.1%
- --------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------------------------------
U.S. Stocks
Building Materials
Atlantic Gulf Communities Corp.+* 690 $ 712
- --------------------------------------------------------------------------------------------------------
Consumer Goods and Services
Ranger Industries, Inc.++* 266,768 $ 74,962
- --------------------------------------------------------------------------------------------------------
Total U.S. Stocks $ 75,674
- --------------------------------------------------------------------------------------------------------
Container, Forest and Paper Products - 0.1%
Gaylord Container Corp.* 100,000 $ 656,250
- --------------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $7,846,689) $ 731,924
- --------------------------------------------------------------------------------------------------------
Preferred Stock - 3.5%
- ---------------------------------------------------------------------------------------------------------------
Consumer Goods and Services
Renaissance Cosmetics, Inc., 14%##++ 8,898 $ 0
- --------------------------------------------------------------------------------------------------------
Energy - 0.4%
CSC Holdings, Inc., 11.125% 46,708 $ 5,441,482
- --------------------------------------------------------------------------------------------------------
Media - 0.6%
Granite Broadcasting Corp., 12.75% 1,000 $ 38,000
Primedia, Inc., 8.625%* 88,550 8,589,439
--------------
$ 8,627,439
- --------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.2%
Clark USA, Inc.* 3,186 $ 2,548,800
- --------------------------------------------------------------------------------------------------------
Supermarkets - 0.6%
Supermarkets General Holdings Corp.*++ 323,098 $ 8,723,646
- --------------------------------------------------------------------------------------------------------
Telecommunications - 1.5%
Crown Castle International Corp.##* 6,160 $ 6,406,400
E Spire Communications, Inc. 159 60,420
Global Crossing Holdings Ltd.##* 32,200 3,147,550
ICG Funding LLC, 6.75%##* 49,750 2,363,125
Nextel Communications, Inc. 13% 2,016 2,106,720
Rural Cellular Corp., 11.375% 5,873 5,696,810
Viatel, Inc.* 3,528 317,520
--------------
$ 20,098,545
- --------------------------------------------------------------------------------------------------------
Utilities - Electric - 0.2%
El Paso Electric Co.* 29,598 $ 3,129,988
- --------------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $50,150,520) $ 48,569,900
- --------------------------------------------------------------------------------------------------------
Warrants - 0.4%
- --------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------------------------------
Allegiance Telecommunications, Inc.,
(Telecommunications)* 7,700 $ 13,475
American Mobile Satellite Corp.
(Telecommunications)##* 5,800 14,500
CHC Helicopter Corp. (Transportation)* 16,000 48,000
Colt Telecommunications Group PLC
(Telecommunications)##* 6,376 3,830,063
DTI Holdings, Inc. (Telecommunications)* 48,375 2,419
Envirosource, Inc. (Industrial)+* 238 744
Esat Holdings Ltd. (Telecommunications)##* 2,825 190,688
Grand Palais Resorts (Gaming, Hotels)##* 111,660 0
Hemmeter (Entertainment)* 111,660 0
ICO, Inc. (Energy)* 706,250 430,812
Knology Holdings, Inc. (Telecommunications)##* 2,475 4,962
Loral Orion Network Systems Inc.
(Telecommunications)* 16,775 251,950
McCaw International Ltd. (Telecommunications)##* 7,225 9,031
Metronet Communications Corp.
(Telecommunications)##* 3,250 97,500
Orbital Imaging Corp. (Telecommunications)##* 505 20,200
Pathnet, Inc. (Telecommunications)##* 935 9,350
Renaissance Cosmetics, Inc. (Consumer Goods and
Services)*++ 7,189 0
Republic Health Corp. (Medical Health and
Technology and Services)* 2,500 0
Versatel Telecom B.V. (Telecommunications)* 10,925 109,250
- --------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $2,611,690) $ 5,032,944
- --------------------------------------------------------------------------------------------------------
Short-Term Obligations - 8.1%
- ---------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- --------------------------------------------------------------------------------------------------------
Federal Agricultural Mortgage Corp., due 2/02/99 $ 6,100 $ 6,099,188
Federal Home Loan Bank Corp., due 2/03/99 - 2/10/99 20,030 20,015,590
Federal Home Loan Mortgage Corp., due 2/04/99 - 2/22/99 71,500 71,406,188
General Electric Capital Corp., due 2/01/99 14,270 14,270,000
- --------------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 111,790,966
- --------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,382,970,005) $1,354,043,167
Other Assets, Less Liabilities - 1.4% 19,769,019
- --------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,373,812,186
- --------------------------------------------------------------------------------------------------------
* 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.
(+) Security valued by or at the direction of the Trustees.
</TABLE>
See portfolio notes and notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
JANUARY 31, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value:
Unaffiliated issuers (identified cost,
$1,369,303,209) $1,353,968,205
Affiliated issuer (identified cost, $13,666,796) 8,798,608
--------------
Total investments, at value (identified cost,
$1,382,970,005) $1,354,043,167
Cash 682,712
Net receivable for forward foreign currency exchange
contracts subject to
master netting agreements 161,111
Receivable for Fund shares sold 13,773,612
Receivable for investments sold 5,850,079
Interest and dividends receivable 27,820,935
Other assets 7,569
--------------
Total assets $1,402,339,185
--------------
Liabilities:
Distributions payable $ 4,103,204
Payable for Fund shares reacquired 2,415,858
Payable for investments purchased 21,245,692
Payable to affiliates -
Management fee 49,747
Shareholder servicing agent fee 12,617
Distribution and service fee 382,614
Administrative fee 1,607
Accrued expenses and other liabilities 315,660
--------------
Total liabilities $ 28,526,999
--------------
Net assets $1,373,812,186
==============
Net assets consist of:
Paid-in capital $1,572,574,556
Unrealized depreciation on investments and translation
of assets and liabilities in foreign currencies (28,767,646)
Accumulated net realized loss on investments and
foreign currency transactions (166,139,215)
Accumulated distributions in excess of net investment
income (3,855,509)
--------------
Total $1,373,812,186
==============
Shares of beneficial interest outstanding 263,549,814
===========
Class A shares:
Net asset value per share
(net assets of $792,295,943 / 152,034,018 shares of
beneficial interest outstanding) $5.21
=====
Offering price per share (100 / 95.25) $5.47
=====
Class B shares:
Net asset value and offering price per share
(net assets of $479,180,874 / 91,918,856 shares of
beneficial interest outstanding) $5.21
=====
Class C shares:
Net asset value and offering price per share
(net assets of $93,670,542 / 17,932,651 shares of
beneficial interest outstanding) $5.22
=====
Class I shares:
Net asset value, offering price, and redemption price per
share (net assets of $8,664,827 / 1,664,289 shares of
beneficial interest outstanding) $5.21
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B, and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations
- -------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1999
- -------------------------------------------------------------------------------
Net investment income:
Income -
Interest $120,180,854
Dividend 1,659,710
------------
Total investment income $121,840,564
------------
Expenses -
Management fee $ 5,666,195
Trustees' compensation 72,131
Shareholder servicing agent fee 1,433,291
Distribution and service fee (Class A) 2,274,686
Distribution and service fee (Class B) 4,370,497
Distribution and service fee (Class C) 748,223
Administrative fee 153,152
Custodian fee 384,629
Printing 70,862
Postage 199,239
Auditing fees 50,280
Legal fees 17,286
Miscellaneous 692,326
------------
Total expenses $ 16,132,797
Fees paid indirectly (335,673)
------------
Net expenses $ 15,797,124
------------
Net investment income $106,043,440
------------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) -
Investment transactions $(17,055,276)
Foreign currency transactions (237,475)
------------
Net realized loss on investments and foreign currency
transactions $(17,292,751)
------------
Change in unrealized appreciation (depreciation) -
Investments $(69,481,307)
Translation of assets and liabilities in foreign currencies 64,146
------------
Net unrealized loss on investments and foreign currency
translation $(69,417,161)
------------
Net realized and unrealized loss on investments and
foreign currency translation $(86,709,912)
------------
Increase in net assets from operations $ 19,333,528
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED JANUARY 31, 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 106,043,440 $ 88,991,612
-------------- --------------
Net realized gain (loss) on investments and foreign
currency transactions (17,292,751) 39,344,739
Net unrealized gain (loss) on investments and foreign
currency translations (69,417,161) 15,114,461
-------------- --------------
Increase in net assets from operations $ 19,333,528 $ 143,450,812
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (64,963,363) $ (59,383,797)
From net investment income (Class B) (34,576,764) (26,332,601)
From net investment income (Class C) (5,923,315) (3,173,754)
From net investment income (Class I) (579,998) (296,634)
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 $ (108,155,726) $ (89,186,786)
-------------- --------------
Net increase in net assets from Fund share transactions $ 247,514,049 $ 156,558,951
-------------- --------------
Total increase in net assets $ 158,691,851 $ 210,822,977
Net assets:
At beginning of period 1,215,120,335 1,004,297,358
-------------- --------------
At end of period (including accumulated distributions
in excess of net investment income of $3,855,509 and
$2,800,915, respectively) $1,373,812,186 $1,215,120,335
============== ==============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.62 $ 5.35 $ 5.24 $ 4.84 $ 5.50
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.46 $ 0.47 $ 0.47 $ 0.45 $ 0.44
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (0.40) 0.27 0.10 0.39 (0.66)
------ ------ ------ ------ ------
Total from investment operations $ 0.06 $ 0.74 $ 0.57 $ 0.84 $(0.22)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(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 $(0.47) $(0.47) $(0.46) $(0.44) $(0.44)
------ ------ ------ ------ ------
Net asset value - end of period $ 5.21 $ 5.62 $ 5.35 $ 5.24 $ 4.84
====== ====== ====== ====== ======
Total return(+) 1.06% 14.63% 11.52% 17.97% (3.95)%
Ratios (to average net assets)/Supplemental data:
Expenses## 0.99% 1.01% 1.02% 1.00% 0.99%
Net investment income 8.62% 8.56% 8.92% 8.83% 8.65%
Portfolio turnover 135% 137% 87% 59% 59%
Net assets at end of period (000,000
omitted) $792 $766 $672 $620 $524
# 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>
Financial Highlights - continued
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.62 $ 5.35 $ 5.24 $ 4.84 $ 5.50
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.43 $ 0.43 $ 0.43 $ 0.41 $ 0.39
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (0.40) 0.27 0.10 0.39 (0.65)
------ ------ ------ ------ ------
Total from investment operations $ 0.03 $ 0.70 $ 0.53 $ 0.80 $(0.26)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(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 $(0.44) $(0.43) $(0.42) $(0.40) $(0.40)
------ ------ ------ ------ ------
Net asset value - end of period $ 5.21 $ 5.62 $ 5.35 $ 5.24 $ 4.84
====== ====== ====== ====== ======
Total return 0.35% 13.83% 10.66% 16.98% (4.77)%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.69% 1.70% 1.79% 1.85% 1.85%
Net investment income 7.92% 7.82% 8.13% 7.99% 7.79%
Portfolio turnover 135% 137% 87% 59% 59%
Net assets at end of period (000,000
omitted) $479 $385 $301 $283 $286
# 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>
Financial Highlights - continued
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.64 $ 5.36 $ 5.25 $ 4.85 $ 5.50
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.42 $ 0.43 $ 0.43 $ 0.41 $ 0.41
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (0.40) 0.28 0.11 0.39 (0.66)
------ ------ ------ ------ ------
Total from investment operations $ 0.02 $ 0.71 $ 0.54 $ 0.80 $(0.25)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(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 $(0.44) $(0.43) $(0.43) $(0.40) $(0.40)
------ ------ ------ ------ ------
Net asset value - end of period $ 5.22 $ 5.64 $ 5.36 $ 5.25 $ 4.85
====== ====== ====== ====== ======
Total return 0.35% 13.81% 10.71% 17.03% (4.51)%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.69% 1.70% 1.72% 1.77% 1.79%
Net investment income 7.92% 7.78% 8.16% 8.02% 8.01%
Portfolio turnover 135% 137% 87% 59% 59%
Net assets at end of period (000,000
omitted) $94 $60 $28 $16 $3
# 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>
Financial Highlights - continued
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1999 1998 1997***
- -----------------------------------------------------------------------------------------------------------------
CLASS I
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.61 $ 5.35 $ 5.34
------ ------ ------
Income from investment operations# -
Net investment income $ 0.49 $ 0.49 $ 0.04
Net realized and unrealized gain (loss) on investments
and foreign currency transactions (0.40) 0.25 0.01
------ ------ ------
Total from investment operations $ 0.09 $ 0.74 $ 0.05
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.48) $(0.48) $(0.04)
In excess of net investment income (0.01) -- --
------ ------ ------
Total distributions declared to shareholders $(0.49) $(0.48) --
------ ------ ------
Net asset value - end of period $ 5.21 $ 5.61 $ 5.35
====== ====== ======
Total return 1.55% 14.77% 0.91%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.69% 0.71% 0.59%+
Net investment income 8.99% 8.86% 8.70%+
Portfolio turnover 135% 137% 87%
Net assets at end of period (000,000 omitted) $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. 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>
NOTES TO FINANCIAL STATEMENTS
(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
opened-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.
International Funds (Bond and Equity) - Investments in foreign securities are
vulnerable to the effects of changes in the relative values of local currency
and the U.S. dollar and the effects of changes in 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. Equity
securities listed on securities exchanges or reported through the NASDAQ
system are reported at market value using last sale prices. Unlisted equity
securities or listed equity securities for which last sale prices are not
available are reported at market value using last quoted bid prices. Short-
term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The Fund 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.
The Fund can invest up to 100% of its portfolio in high-yield securities rated
below investment grade. Investments in high-yield securities involve greater
degrees of credit and market risk. Than investments in higher-rated
securities, and tend to be more sensitive to economic conditions.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds. Legal fees and other related expenses incurred to
preserve and protect the value of a security owned are added to the cost of
the security; other legal fees are expensed. Capital infusions, which are
generally non-recurring, incurred to protect or enhance the value of high-
yield debt securities, are reported as additions to the cost basis of the
security. Costs that are incurred to negotiate the terms or conditions of
capital infusions or that are expected to result in a plan of reorganization
are reported as realized losses. Ongoing costs incurred to protect or enhance
an investment, or costs incurred to pursue other claims or legal actions, are
expensed.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code, which may differ from generally accepted accounting principles, the
basis on which these financial statements are prepared. Accordingly, the
amount of net investment income and net realized gain reported on these
financial statements may differ from that reported on the Fund's tax return
and, consequently, the character of distributions to shareholders reported in
the financial highlights may differ from that reported to shareholders on Form
1099-DIV.
Distributions to shareholders are recorded on the ex-dividend date. The Fund
distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a tax return of capital.
Differences in the recognition or classification of income between the financial
statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains.During
the year ended January 31, 1999, $1,057,692 and $80,343,400 were reclassified
from accumulated distributions in excess of net investment income and
accumulated net realized loss on investments and foreign currency transactions,
respectively, to paid-in capital due to differences between book and tax
accounting for currency transactions, defaulted securities and the expiration of
capital loss carryforwards. This change had no effect on the net assets or net
asset value per share.
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 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 shares
outstanding of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses. Class B shares will convert to Class A
shares approximately eight years after purchase.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at the following annual
rates:
BASED ON AVERAGE NET ASSETS BASED ON GROSS INCOME
- ------------------------------------- -------------------------------------
First $200 million 0.220% First $22 million 3.00%
In excess of $200 million 0.187% In excess of $22 million 2.55%
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has an unfunded
defined benefit plan for all of its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of
$22,450 for the year ended January 31, 1999.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$546,538 for the year ended January 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. Payment of the remaining portion of the 0.10% per annum Class A
distribution fee will commence on such date as the trustees of the Fund may
determine. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $301,432 for the year ended January 31,
1999. Fees incurred under the distribution plan during the year ended January
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 $38,629 and $642 for
Class B and Class C shares, respectively, for the year ended January 31, 1999.
Fees incurred under the distribution plan during the year ended January 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
redemption's of Class B shares in the event of a shareholder redemption within
six years of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the year ended January 31,
1999, were $27,558, $735,066, and $48,263 for Class A, Class B, and Class C
shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the Fund's average daily net assets at an effective annual
rate of 0.1125%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
Purchases and Sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$1,779,154,890 and $1,623,730,276, respectively
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $1,384,603,866
--------------
Gross unrealized appreciation $ 50,735,411
Gross unrealized depreciation (81,296,110)
--------------
Net unrealized depreciation $ (30,560,699)
==============
(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
YEAR ENDED JANUARY 31, 1999 YEAR ENDED JANUARY 31, 1998
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 69,138,322 $ 367,556,417 61,813,593 $ 337,332,651
Shares issued to shareholders
in reinvestment of distributions 7,327,609 39,296,362 6,289,201 34,320,907
Shares reacquired (60,757,910) (328,524,451) (57,415,426) (312,709,612)
---------- ------------- ---------- -------------
Net increase 15,708,021 $ 78,328,328 10,687,368 $ 58,943,946
========== ============= ========== =============
<CAPTION>
Class B Shares
YEAR ENDED JANUARY 31, 1999 YEAR ENDED JANUARY 31, 1998
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
Shares sold 64,848,309 $ 348,181,856 46,709,978 $ 254,431,772
Shares issued to shareholders
in reinvestment of distributions 3,523,279 18,851,542 2,517,816 13,755,688
Shares reacquired (45,051,012) (242,322,297) (36,845,461) (200,663,673)
---------- ------------- ---------- -------------
Net increase 23,320,576 $ 124,711,101 12,382,333 $ 67,523,787
========== ============= ========== =============
<CAPTION>
Class C Shares
YEAR ENDED JANUARY 31, 1999 YEAR ENDED JANUARY 31, 1998
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 19,892,685 $ 106,915,192 9,605,530 $ 52,647,803
Shares issued to shareholders
in reinvestment of distributions 713,228 3,853,384 308,317 1,690,469
Shares reacquired (13,353,162) (71,990,060) (4,499,907) (24,626,101)
---------- ------------- ---------- -------------
Net increase 7,252,751 $ 38,778,516 5,413,940 $ 29,712,171
========== ============= ========== =============
<CAPTION>
Class I Shares
YEAR ENDED JANUARY 31, 1999 YEAR ENDED JANUARY 31, 1998
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,073,851 $ 5,962,205 69,923 $ 380,529
Shares issued to shareholders
in reinvestment of distributions 110,691 583,071 54,394 296,608
Shares reacquired (162,953) (849,172) (53,972) (298,090)
---------- ------------- ---------- -------------
Net increase 1,021,589 $ 5,696,104 70,345 $ 379,047
========== ============= ========== =============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in an $805 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of Fund
shares. Interest is charged to each fund, based on its borrowings, at a rate
equal to the bank's base rate. In addition, a commitment fee, based on the
average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated to
the Fund for the year ended January 31, 1999, was $8,620. The Fund had no
borrowings during the year.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include, forward foreign currency exchange contracts. The notional
or contractual amounts of these instruments represent the investment the Fund
has in particular classes of financial instruments and does not necessarily
represent the amounts potentially subject to risk. The measurement of the risks
associated with these instruments is meaningful only when all related and
offsetting transactions are considered.
Forward Foreign Currency Exchange Contracts
Forward foreign currency sales under master netting agreements amounted
to a net receivable of $161,111 with Merrill Lynch at January 31, 1999. At
January 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% or more of the
outstanding voting securities of the issuer. A summary of the Fund's
transactions in the securities of these issuers during the year ended January
31, 1999, is set forth below:
BEGINNING
SHARE ENDING SHARE DIVIDEND ENDING
AFFILIATE AMOUNT AMOUNT INCOME VALUE
- -----------------------------------------------------------------------------
Ranger Industries, Inc. 266,768 266,768 $ -- $ 74,962
Supermarkets General Holdings
Corp. 529,098 323,098 $ -- 8,723,646
Renaissance Cosmetics 7,189 16,087 $ -- 0
------- ------ ---------
(9) Restricted Securities
The Fund may invest not more than 15% of its net total assets in securities
which are subject to legal or contractual restrictions on resale. At January 31,
1999, the Fund owned the following restricted securities (constituting 0.7% 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 or at the direction of
the Trustees.
SHARE/
DATE OF PRINCIPAL
DESCRIPTION ACQUISITION AMOUNT COST VALUE
- --------------------------------------------------------------------------------
Airplane Pass Through Trust,
10.875s, 2019 3/13/1996 $5,250,000 $5,250,000 $5,574,502
Atlantic Gulf Communities Corp. 9/25/1995 690 - -- 712
Envirosource, Inc. 5/15/1991 238 - 7,289 744
Merrill Lynch Mortgage
Investors, Inc.,
8.331s, 2022 6/22/1994 4,500,000 -3,119,063 4,265,859
----------
$9,841,817
==========
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust III and Shareholders of MFS High Income
Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS High Income Fund (a series of
MFS Series Trust III) as of January 31, 1999, the related statement of
operations for the year then ended, the statement of changes in net assets for
the years ended January 31, 1999 and 1998, and the financial highlights for
each of the years in the five-year period ended January 31, 1999. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
January 31, 1999 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS High Income Fund
at January 31, 1999, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 5, 1999
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
- --------------------------------------------------------------------------------
IN JANUARY 1999, SHAREHOLDERS WERE MAILED A TAX FORM SUMMARY REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 1998.
<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.*
Peter G. Harwood - Private Investor
CUSTODIAN
J. Atwood Ives - Chairman and Chief Executive State Street Bank and Trust Company
Officer, Eastern Enterprises (diversified
services company) AUDITORS
Deloitte & Touche LLP
Lawrence T. Perera - Partner, Hemenway
& Barnes (attorneys) INVESTOR INFORMATION
For MFS stock and bond market outlooks, call
William J. Poorvu - Adjunct Professor, Harvard toll free: 1-800-637-4458 anytime from a
University Graduate School of Business touch-tone telephone.
Administration
For information on MFS mutual funds, call your
Charles W. Schmidt - Private Investor financial adviser or, for an information kit,
call toll free: 1-800-637-2929 any business day
Arnold D. Scott* - Senior Executive from 9 a.m. to 5 p.m. Eastern time (or leave a
Vice President, Director, and Secretary, message anytime).
MFS Investment Management
INVESTOR SERVICE
Jeffrey L. Shames* - Chairman, Chief 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: 1-800-637-6576 any business day
INVESTMENT ADVISER from 9 a.m. to 5 p.m. Eastern time. (To use
Massachusetts Financial Services Company this service, your phone must be equipped with
500 Boylston Street a Telecommunications Device for the Deaf.)
Boston, MA 02116-3741
For share prices, account balances, and
DISTRIBUTOR exchanges, call toll free: 1-800-MFS-TALK
MFS Fund Distributors, Inc. (1-800-637-8255) anytime from a touch-tone
500 Boylston Street telephone.
Boston, MA 02116-3741
WORLD WIDE WEB
PORTFOLIO MANAGER www.mfs.com
Robert J. Manning*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
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MFS(R) HIGH Bulk Rate
INCOME FUND U.S. Postage
Paid
[Logo] M F S(R) MFS
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
MHI-2 3/99 82M 18/218/318/818
