<PAGE>
[Logo] M F S (R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
[Graphic Omitted]
MFS(R) HIGH
INCOME FUND
SEMIANNUAL REPORT o JULY 31, 2000
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ...................................................... 9
Portfolio of Investments .................................................. 12
Financial Statements ...................................................... 23
Notes to Financial Statements ............................................. 30
Trustees and Officers ..................................................... 37
MFS ORIGINAL RESEARCH(R)
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
--------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
--------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
I'm sure you've noticed that whenever financial markets suffer a large decline,
as they did very dramatically this past spring, there's a flurry of information
on "how to deal with market volatility" -- both in the popular press and from
those of us in the investment business. Our own thinking on this is that, first,
for long-term investors volatility is not necessarily something to be feared;
occasional volatility may in fact be healthy for the markets.
Second, our experience has been that when markets begin to fall, it's often too
late to act. The best response may be to do nothing -- if you're properly
prepared with a long-term plan, created with the help of your investment
professional. To help you create or update that plan and take market volatility
in stride, here are some points you may want to consider the next time you talk
with your investment professional.
1. VOLATILITY CAN BE A GOOD THING
We would argue that the markets today are much healthier than they were before
the period of volatility this past spring, in the sense that stock prices have
returned to more reasonable levels and we have a stronger base for future
growth. Perhaps the worst of the market's wrath descended on companies with very
high prices, relative to their earnings, or with business concepts that looked
great in the euphoria of a booming market but in the end appeared to have no
fundamental backing. It has always been our view that one of the best
protections against market volatility is to invest in stocks and bonds of
fundamentally good companies selling at reasonable prices. When discussing
potential investments with your investment professional, you may want to ask how
they fared in previous periods of volatility, as well as in the good times.
2. INVEST FOR THE LONG TERM
You've heard that before, but we think it's still probably the most important
concept in investing. Time is one of an investor's greatest allies. Over nearly
all long-term periods -- 5, 10, 20 years, and more -- stock and bond returns, as
represented by most common indices, have been positive and have considerably
outpaced inflation. Investing is the best way we know of to make your money work
for you while you're doing something else.
Where investors can get into trouble is by confusing investing with trading. In
our view, traders who buy securities with the intention of selling them at a
profit in a matter of hours, days, or weeks are gambling. We believe this seldom
turns out to be a good strategy for increasing your wealth.
3. INVEST REGULARLY
Waiting for the "right time" to invest is almost always a poor strategy, because
only in retrospect do we know when that right time really was. Periods of
volatility are probably the worst times to make an investment decision. Faced
with turmoil in the markets, many investors have opted to simply stay on the
sidelines.
On the other hand, we think one of the best techniques for investing is through
automatic monthly or quarterly deductions from a checking or savings account.
This approach has at least three major benefits. First, you can formulate a
long-term plan -- how much to invest, how often, and into what portfolios -- in
a calm, rational manner, working with your investment professional. Second, with
this approach you invest regularly without agonizing over the decision each time
you buy shares.
And, third, if you invest equal amounts of money at regular intervals, you'll be
taking advantage of a strategy called dollar-cost averaging: by investing a
fixed amount while the share cost fluctuates, you end up with an average share
cost to you that is lower than the average share price over your investment
period.(1) If all this sounds familiar, it's probably because you're already
taking advantage of dollar-cost averaging by investing regularly for retirement
through a 401(k) or similar account at work.
4. DIVERSIFY
One of the dangers of not having an investment plan is that you may be tempted
to simply chase performance, i.e., move money into whatever asset class appears
to be outperforming at the moment -- small, mid, or large cap; growth or value;
United States or international; stocks or bonds. The problem with this approach
is that by the time a particular area is generally recognized as "hot," you may
have already missed some of the best performance.
International investing offers a case in point. In the 1980s, international
investments, as represented by the Morgan Stanley Capital International (MSCI)
Europe, Australia, Far East (EAFE) Index, outperformed U.S. investments, as
represented by the Standard & Poor's 500 Composite Index (S&P 500), in 7 out of
10 years.(2) For the decade, the MSCI EAFE's average annual performance was 23%,
compared to 18% for the S&P 500. Going into the 1990s, then, an investor looking
only at recent performance might have favored international investments over
U.S. investments.
But the 1990s turned out to be virtually a mirror image of the '80s. Domestic
investments outperformed international investments in 7 out of 10 years, with
the S&P 500 returning an average of 18% annually for the decade and the MSCI
EAFE returning a 7% annual average. Looking ahead, however, we are optimistic
about international markets because we feel that many of the same forces that
propelled the current U.S. economic boom -- deregulation, restructuring, and
increased adoption of technology -- have taken root overseas.
The lesson to be learned is that nobody really knows what asset class will be
the next to outperform or how long that performance will be sustained. We would
suggest that one way to potentially profit from swings in the market -- to
potentially be invested in various asset classes before the market shifts in
their favor -- is with a diversified portfolio covering several asset classes.
If you haven't already done so, we encourage you to discuss these thoughts with
your investment professional and factor them into your long-range financial
planning. Hopefully, the next time the markets appear to be going wild, you'll
feel confident enough in your plan to view periods of volatility as a time of
potential opportunity -- or perhaps just a time to sit back and do nothing.
As always, we appreciate your confidence in MFS 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 15, 2000
------------
(1)The use of a systematic investing program does not guarantee a profit or
protect against a loss in declining markets. You should consider your
financial ability to continue to invest through periods of low prices.
(2)Sources: Lipper Inc. Decade performance: '80s -- 12/31/79-12/31/89, '90s --
12/31/89-12/31/99. The MSCI EAFE Index is an unmanaged, market-
capitalization-weighted total return index that measures the performance of
the same developed-country global stock markets included in the MSCI World
Index but excludes the United States, Canada, and the South African mining
component. The S&P 500 is a popular, unmanaged index of common stock total
return performance. It is not possible to invest directly in an index. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
A prospectus containing more complete information on any MFS product, including
all charges and expenses, can be obtained from your investment professional.
Please read it carefully before you invest or send money. Investments in mutual
funds will fluctuate and may be worth more or less upon redemption.
The opinions expressed in this letter are those of Jeffrey L. Shames, and no
forecasts can be guaranteed.
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of Robert J. Manning]
Robert J. Manning
For the six months ended July 31, 2000, Class A shares of the fund provided a
total return of 0.61%, Class B shares 0.26%, Class C shares 0.06%, and Class I
shares 0.76%. These returns include the reinvestment of any distributions but
exclude the effects of any sales charges and compare to a -0.03% return for its
benchmark, 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 -0.95% return during the same period for the average high current
yield fund tracked by Lipper Inc., an independent firm that reports mutual fund
performance.
Q. DESPITE THE DIFFICULT ENVIRONMENT FOR HIGH-YIELD SECURITIES, THE FUND
MANAGED TO OUTPERFORM THE LEHMAN INDEX. WHAT FACTORS CONTRIBUTED TO THIS
FAVORABLE PERFORMANCE?
A. In a market where most high-yield bonds traded lower, the portfolio's
performance relative to its benchmark benefited from a number of factors.
First, favorable security selection and industry diversification were
positive contributors. Second, our successful avoidance of the credit
problems, rating downgrades, and bankruptcies that hurt a variety of
industries aided the fund's results. Finally, we weren't afraid to lock in
profits on a number of subscription warrants -- securities issued with a
bond or preferred stock that entitles the holder to buy a proportionate
amount of common stock at a specified price. Some of these warrants, such as
Jazztel PLC, Colt Telecommunications, and Versatel Telecom all spiked up
dramatically early in the period. We could have been tempted to hold on to
all of these warrants given the strong fundamental outlook for these
companies, but because we weren't comfortable with the additional risk, we
decided to reduce our exposure. Many of these telecommunications and
technology securities have subsequently come down quite a bit following the
selloff in the equity market during the second quarter.
Q. HOW DID YOU MANAGE TO AVOID CREDIT DEFAULTS?
A. The key is MFS Original Research(R). We believe MFS' research capabilities
are second to none in the industry. Our portfolio is backed by a large group
of investment professionals dedicated exclusively to the high-income market.
Our research analysts use a variety of models to analyze the credit risk and
business prospects of the companies they cover. Similar to our equity
investment process, our fixed-income research uses an intensive,
company-by-company, bottom-up approach. First, we look at a company's
business risks, then we consider the financial risks. Finally, we look at
all the different ways of investing in the company and how the market is
pricing each one of the securities. From this analysis, we try to pick the
bond that offers the best risk-adjusted return for our shareholders.
Q. MOODY'S RECENTLY ISSUED A REPORT INDICATING THAT THEY ANTICIPATE AN
INCREASE IN THE NUMBER OF DEFAULTS IN THE HIGH-YIELD MARKET FOR 2001. DO
YOU AGREE WITH THIS REPORT? WHAT'S YOUR OUTLOOK FOR DEFAULTS?
A. While the number of defaults has picked up recently, we don't see the
default rate increasing to 8.4% by June of 2001, as Moody's report
suggested. In fact, we anticipate the total number of defaults to trend
downward during this period for a couple of reasons. First, many of the
anticipated defaults are the result of a loose issuance period in 1998,
during which the high-yield market issued a record amount of debt, even
though many of these companies possessed what we felt were weak business
plans. Today, according to our research, the supply of bonds is much lower,
and underwriters are conducting more stringent credit analysis of issuers.
It's also important to point out that Moody's calculates default rates
differently than other companies by including emerging market debt,
convertible securities, and even investment-grade debt. While the
possibility of high-visibility defaults poses "headline" risk to the market
-- meaning the overall high-yield market may react negatively to a
particular default -- we see this as a short-term phenomenon and one that we
strive to avoid through Original Research(SM).
Q. WHICH HOLDINGS PROVIDED A STRONG CONTRIBUTION TO TOTAL RETURN?
A. Last year, we saw significant selling pressure in some energy refiners as a
major buying opportunity. Viewing this selloff as a short-term situation, we
stepped in to buy some fairly distressed securities that we believed were
ready to turn around in a highly cyclical business. Sterling Chemical and
Lyondell Chemical produced strong results during the period following an
improvement in their financial results due to higher prices for their core
products, stronger demand for chemicals, and successful cost reduction
programs. Lyondell also benefited from the successful closing of a large
asset sale and used the proceeds to pay down some of its debt. Another
holding that provided a nice boost to performance was Esat Holdings Ltd.;
following British Telecom's offer to buy this telecommunications company,
its bonds appreciated dramatically.
Q. WHICH HOLDINGS HURT PERFORMANCE?
A. Our holdings in scrap metal trader Metal Management, Inc., was hurt by
weakness in the overall steel market. Our position in PSINet Inc., an
Internet access provider, was down almost 15% during the period. Bond issues
in companies such as this often trade similarly to the company's equity
shares because they tend to reinvest much of their cash into business
expansion rather than building cash reserves or paying down debt. As a
result, our holding in this company suffered during the selloff we
experienced in the technology and Internet sectors during the second
quarter.
Q. WHAT'S YOUR OUTLOOK FOR THE HIGH-YIELD MARKET IN THE COMING MONTHS?
A. It's difficult to rule out further volatility given the uncertain
interest-rate environment. However, the high-income market has been weak for
quite some time now, and we've found that yield spreads -- the yield
difference between noninvestment-grade debt and Treasuries -- have widened
significantly during the past year, making the yields on high-income bonds
very attractive relative to other fixed-income securities. In addition, we
believe the economy will remain healthy and corporate earnings will remain
strong, which could bode well for high-yield bond prices. Historically, we
have found that the high-yield market usually tracks corporate earnings.
Given this environment, we continue to view the telecom and media industries
as defensive positions that also offer compelling growth opportunities
because despite what happens to the economy, we don't believe that people
are likely to turn off their cable or mobile phones. In addition, we're
pretty comfortable that the Federal Reserve Board is either done raising
interest rates or is near the end of its tightening cycle. As a result, we
like the media and telecom sectors, and we've maintained our significant
exposure to these industries.
/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 forecast can be guaranteed.
It is not possible to invest directly in an index.
<PAGE>
--------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
--------------------------------------------------------------------------------
ROBERT J. MANNING IS SENIOR VICE PRESIDENT, CHIEF FIXED INCOME STRATEGIST, AND
DIRECTOR OF FIXED INCOME RESEARCH 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 ORIGINAL RESEARCH(R), A
GLOBAL, COMPANY-ORIENTED, BOTTOM-UP PROCESS OF SELECTING SECURITIES.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your investment professional, 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.
COMMENCEMENT OF
INVESTMENT OPERATIONS: FEBRUARY 17, 1978
CLASS INCEPTION: CLASS A FEBRUARY 17, 1978
CLASS B SEPTEMBER 27, 1993
CLASS C JANUARY 3, 1994
CLASS I JANUARY 2, 1997
SIZE: $1.4 BILLION NET ASSETS AS OF JULY 31, 2000
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 the reinvestment of dividends. (See Notes to Performance
Summary.)
TOTAL RATES OF RETURN THROUGH JULY 31, 2000
<TABLE>
<CAPTION>
CLASS A
6 Months 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +0.61% +1.65% +13.07% +43.45% +172.59%
------------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge -- +1.65% + 4.18% + 7.48% + 10.55%
------------------------------------------------------------------------------------------------------------
Average Annual Total Return Including Sales Charge -- -3.18% + 2.50% + 6.44% + 10.01%
------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
6 Months 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +0.26% +0.94% +10.72% +38.32% +158.79%
------------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge -- +0.94% + 3.45% + 6.70% + 9.98%
------------------------------------------------------------------------------------------------------------
Average Annual Total Return Including Sales Charge -- -2.75% + 2.64% + 6.42% + 9.98%
------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS C
6 Months 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +0.06% +0.94% +10.89% +38.63% +160.16%
------------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge -- +0.94% + 3.51% + 6.75% + 10.03%
------------------------------------------------------------------------------------------------------------
Average Annual Total Return Including Sales Charge -- +0.01% + 3.51% + 6.75% + 10.03%
------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS I
6 Months 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +0.76% +2.17% +14.33% +45.04% +175.62%
------------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge -- +2.17% + 4.57% + 7.72% + 10.67%
------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO PERFORMANCE SUMMARY
Class A Share Performance Including Sales Charge takes into account the
deduction of the maximum 4.75% sales charge. Class B Share Performance Including
Sales Charge takes into account the deduction of the applicable contingent
deferred sales charge (CDSC), which declines over six years from 4% to 0%. Class
C Share Performance Including Sales Charge takes into account the deduction of
the 1% CDSC applicable to Class C shares redeemed within 12 months. Class I
shares have no sales charge and are only available to certain institutional
investors.
Class B, C, and I share performance include the performance of the fund's Class
A shares for periods to their inception (blended performance). Class B and C
blended performance has been adjusted to take into account the CDSC applicable
to Class B and C shares rather than the initial sales charge (load) applicable
to Class A shares. Class I share blended performance has been adjusted to
account for the fact that Class I shares have no sales charge. These blended
performance figures have not been adjusted to take into account differences in
class-specific operating expenses. Because operating expenses of Class B and C
shares are higher than those of Class A, the blended Class B and C share
performance is higher than it would have been had Class B and C shares been
offered for the entire period. Conversely, because operating expenses of Class I
shares are lower than those of Class A, the blended Class I share performance is
lower than it would have been had Class I shares been offered for the entire
period.
All 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 capital gains.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MORE RECENT
RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. PAST PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS.
Lower-rated securities may provide greater returns, but they are also associated
with greater-than-average risk. These risks may increase share price volatility.
See the prospectus for details.
Investments in foreign and emerging-market securities may provide superior
returns but also involve greater risk than U.S. investments. Investments in
foreign and emerging-market securities may be favorably or unfavorably affected
by changes in interest rates and currency exchange rates, market conditions, and
the economic and political conditions of the countries where investments are
made. These risks may increase share price volatility. See the prospectus for
details.
PORTFOLIO CONCENTRATION AS OF JULY 31, 2000
QUALITY RATINGS (U.S. PORTION ONLY)
Source: Standard & Poor's and Moody's
"AA" 1.4%
"BBB" 0.9%
"BB" 11.3%
"B" 66.0%
"CCC" 9.0%
"CC" 0.2%
Not Rated 1.7%
Equity 5.0%
Other 4.5%
The portfolio is actively managed, and current holdings may be different.
<PAGE>
PORTFOLIO OF INVESTMENTS (Unaudited) -- July 31, 2000
<TABLE>
<CAPTION>
Bonds - 88.5%
--------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
--------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 75.4%
Aerospace - 3.2%
Airplane Pass-Through Trust, 10.875s, 2019+ $ 5,185 $ 4,164,052
Argo Tech Corp., 8.625s, 2007 11,250 8,437,500
BE Aerospace, Inc., 9.875s, 2006 2,550 2,473,500
BE Aerospace, Inc., 8s, 2008 2,550 2,224,875
BE Aerospace, Inc., 9.5s, 2008 1,550 1,468,625
K & F Industries, Inc., 9.25s, 2007 9,290 8,895,175
L-3 Communications Corp., 10.375s, 2007 2,150 2,193,000
L-3 Communications Corp., 8s, 2008 3,200 2,888,000
L-3 Communications Corp., 8.5s, 2008 1,565 1,451,538
MOOG, Inc., 10s, 2006 9,515 9,491,212
United Defense Industries, Inc., 8.75s, 2007 820 762,600
--------------
$ 44,450,077
--------------------------------------------------------------------------------------------------
Building - 3.2%
AAF-McQuay, Inc., 8.875s, 2003 $ 1,575 $ 1,354,500
Building Materials Corp., 8.625s, 2006 8,720 7,237,600
Building Materials Corp., 8s, 2007 2,625 2,100,000
Formica Corp., 10.875s, 2009 9,450 7,323,750
MMI Products, Inc., 11.25s, 2007## 4,840 4,779,500
Nortek, Inc., 9.875s, 2004 1,497 1,444,605
Nortek, Inc., 9.25s, 2007 7,925 7,469,313
Nortek, Inc., 8.875s, 2008 1,220 1,125,450
Schuff Steel Co., 10.5s, 2008 910 627,900
UDC Homes, Inc., 0s, 2000 30 16,952
Williams Scotsman, Inc., 9.875s, 2007 11,160 10,044,000
--------------
$ 43,523,570
--------------------------------------------------------------------------------------------------
Business Services - 0.9%
Anacomp, Inc., 10.875s, 2004 $ 6,175 $ 4,168,125
Iron Mountain, Inc., 10.125s, 2006 4,580 4,534,200
Pierce Leahy Corp., 11.125s, 2006 477 490,118
Pierce Leahy Corp., 9.125s, 2007 3,225 3,039,562
--------------
$ 12,232,005
--------------------------------------------------------------------------------------------------
Chemicals - 2.6%
Huntsman ICI Holdings, LLC, 0s, 2009## $ 975 $ 321,750
Huntsman ICI Holdings LLC, 10.125s, 2009 7,725 7,860,187
Lyondell Chemical Co., 9.625s, 2007 2,740 2,740,000
Lyondell Chemical Co., 9.875s, 2007 2,305 2,305,000
Lyondell Chemical Co., 10.875s, 2009 7,350 7,423,500
Sovereign Specialty Chemicals, 11.875s, 2010## 5,920 6,127,200
Sterling Chemicals, Inc., 11.75s, 2006 3,895 3,116,000
Sterling Chemicals, Inc., 12.375s, 2006 160 164,800
Sterling Chemicals, Inc., 11.25s, 2007 5,775 4,562,250
Sterling Chemicals, Inc., 0s to 2001, 13.5s to 2008 2,360 1,014,800
--------------
$ 35,635,487
--------------------------------------------------------------------------------------------------
Consumer Goods and Services - 4.3%
American Safety Razor Co., 9.875s, 2005 $ 7,060 $ 6,804,075
General Binding Corp., 9.375s, 2008 5,710 3,997,000
Kindercare Learning Centers, Inc., 9.5s, 2009 4,320 3,952,800
Polaroid Corp., 11.5s, 2006 3,175 3,309,938
Polymer Group, Inc., 9s, 2007 480 404,400
Polymer Group, Inc., 8.75s, 2008 3,000 2,490,000
Remington Products Co. LLC, 11s, 2006 2,725 2,343,500
Samsonite Corp., 10.75s, 2008 15,275 12,563,687
Simmons Co., 10.25s, 2009 8,925 8,121,750
Synthetic Industries, Inc., 14s, 2000 5,966 5,876,756
Westpoint Stevens, Inc., 7.875s, 2005-2008 10,960 9,263,400
--------------
$ 59,127,306
--------------------------------------------------------------------------------------------------
Container, Forest and Paper Products - 5.0%
Applied Extrusion Technologies, Inc., 11.5s, 2002 $ 9,550 $ 9,406,750
Atlantis Plastics, Inc., 11s, 2003 3,875 3,870,156
Buckeye Cellulose Corp., 8.5s, 2005 1,250 1,198,438
Buckeye Cellulose Corp., 9.25s, 2008 3,875 3,884,687
Buckeye Technologies, Inc., 8s, 2010 3,225 2,926,687
Consolidated Container Co., 10.125s, 2009 1,725 1,729,313
Gaylord Container Corp., 9.375s, 2007 4,800 3,840,000
Gaylord Container Corp., 9.75s, 2007 5,950 4,879,000
Gaylord Container Corp., 9.875s, 2008 5,140 3,238,200
Huntsman Packaging Corp., 13s, 2010## 2,565 2,661,188
Riverwood International Corp., 10.25s, 2006 5,885 5,796,725
Riverwood International Corp., 10.875s, 2008 4,505 4,099,550
Silgan Holdings, Inc., 9s, 2009 5,800 5,307,000
Speciality Paperboard, Inc., 9.375s, 2006## 2,350 2,256,000
U.S. Can Corp., 10.125s, 2006## 7,150 7,328,750
U.S. Timberlands, 9.625s, 2007 7,060 6,212,800
--------------
$ 68,635,244
--------------------------------------------------------------------------------------------------
Energy - 5.6%
AmeriGas Partners LP, 10.125s, 2007 $ 3,400 $ 3,400,000
Cheasapeake Energy Corp., 9.625s, 2005 9,810 9,589,275
Clark Refining & Marketing, Inc., 8.625s, 2008 4,150 3,340,750
Clark USA, Inc., 10.875s, 2005 3,235 1,941,000
Continental Resources, Inc., 10.25s, 2008 8,150 7,335,000
Forest Oil Corp., 10.5s, 2006 5,425 5,574,187
Gothic Production Corp., 11.125s, 2005## 7,330 7,549,900
Gulfmark Offshore, Inc., 8.75s, 2008## 1,450 1,352,125
HS Resources, Inc., 9.25s, 2006 4,900 4,828,500
Ocean Energy, Inc., 8.875s, 2007 5,680 5,651,600
P&L Coal Holdings Corp., 8.875s, 2008 4,100 3,956,500
P&L Coal Holdings Corp., 9.625s, 2008 11,900 11,275,250
Pioneer Natural Resources Co., 9.625s, 2010 6,000 6,240,000
Pride International, Inc., 10s, 2009 610 628,300
R & B Falcon Corp., 9.5s, 2008## 3,975 4,034,625
--------------
$ 76,697,012
--------------------------------------------------------------------------------------------------
Entertainment - 0.3%
American Skiing Co., 12s, 2006 $ 5,300 $ 4,505,000
--------------------------------------------------------------------------------------------------
Financial Institutions - 1.6%
Americo Life, Inc., 9.25s, 2005 $ 2,050 $ 1,927,000
Merrill Lynch Mortgage Investors, Inc., 8.46s,
2009+ 4,500 4,310,156
Morgan Stanley Capital I, Inc., 6.86s, 2010 2,938 2,335,299
Morgan Stanley Capital I, Inc., 7.732s, 2029 3,740 2,784,112
Willis Corroon Corp., 9s, 2009 11,755 10,403,175
--------------
$ 21,759,742
--------------------------------------------------------------------------------------------------
Gaming and Hotels - 6.2%
Agrosy Gaming Co., 10.75s, 2009 $ 575 $ 596,563
Aztar Corp., 8.875s, 2007 8,445 8,022,750
Boyd Gaming Corp., 9.5s, 2007 6,585 6,321,600
Coast Hotels & Casinos, Inc., 9.5s, 2009 10,465 9,994,075
Eldorado Resorts LLC, 10.5s, 2006 2,405 2,411,012
HMH Properties, Inc., 8.45s, 2008 4,245 3,990,300
Hollywood Park, Inc., 9.25s, 2007 2,535 2,547,675
Horseshoe Gaming LLC, 8.625s, 2009 8,620 8,189,000
Isle of Capri Casinos, Inc., 8.75s, 2009## 9,320 8,434,600
Mandalay Resort Group, 10.25s, 2007## 4,180 4,211,350
MGM Grand, Inc., 9.75s, 2007 8,890 9,134,475
Prime Hospitality Corp., 9.75s, 2007 7,070 6,928,600
Santa Fe Hotel, Inc., 11s, 2000 5,295 5,255,287
Station Casinos, Inc., 8.875s, 2008 6,525 6,198,750
Station Casinos, Inc., 9.875s, 2010## 2,305 2,305,000
--------------
$ 84,541,037
--------------------------------------------------------------------------------------------------
Industrial - 4.9%
Actuant Finance Corp., 13s, 2009## $ 2,340 $ 2,366,325
Allied Waste North America, Inc., 7.625s, 2006 4,390 3,961,975
Allied Waste North America, Inc., 10s, 2009 2,125 1,848,750
Blount, Inc., 13s, 2009 4,475 4,502,969
Columbus Mckinnon Corp., 8.5s, 2008 6,235 5,424,450
Day International Group, Inc., 11.125s, 2005 3,670 3,605,775
Hayes Wheels International, Inc., 11s, 2006 4,900 4,924,500
Hayes Wheels International, Inc., 9.125s, 2007 5,875 5,338,906
Haynes International, Inc., 11.625s, 2004 8,025 6,018,750
IMO Industries, Inc., 11.75s, 2006 7,825 7,825,000
International Knife & Saw, Inc., 11.375s, 2006 2,060 1,071,200
Motors & Gears, Inc., 10.75s, 2006 1,785 1,735,912
Newcor, Inc., 9.875s, 2008 2,775 832,500
Numatics, Inc., 9.625s, 2008 1,440 1,123,200
Oxford Automotive, Inc., 10.125s, 2007 2,025 1,802,250
Simonds Industries, Inc., 10.25s, 2008 6,125 4,900,000
Thermadyne Holdings Corp., 0s to 2003, 12.5s to
2008 12,375 4,455,000
Thermadyne Manufacturing/Capital Corp., 9.875s,
2008 6,400 4,920,000
--------------
$ 66,657,462
--------------------------------------------------------------------------------------------------
Media - 14.4%
Adelphia Communications Corp., 8.375s, 2008 $ 9,225 $ 7,933,500
Allbritton Communications Co., 9.75s, 2007 4,775 4,584,000
Avalon Cable Holdings LLC, 0s to 2003, 11.875s to
2008 8,000 5,360,000
Benedek Communications Corp., 0s to 2001, 13.25s to
2006 7,475 5,755,750
CD Radio, Inc., 14.5s, 2009 3,615 3,343,875
Century Communications Corp., 0s, 2008 100 41,000
Chancellor Media Corp., 8.125s, 2007 1,550 1,561,625
Chancellor Media Corp., 8.75s, 2007 4,135 4,176,350
Chancellor Media Corp., 8s, 2008 7,975 8,054,750
Charter Communications Holdings, 8.25s, 2007 15,175 13,505,750
Charter Communications Holdings, 0s to 2004,
9.92s to 2011 3,850 2,213,750
Citadel Broadcasting Co., 9.25s, 2008 7,045 6,939,325
Classic Cable, Inc., 10.5s, 2010 1,485 1,277,100
CSC Holdings, Inc., 9.25s, 2005 150 151,875
CSC Holdings, Inc., 8.125s, 2009 5,000 4,902,300
Cumulus Media, Inc., 10.375s, 2008 2,890 2,601,000
Echostar DBS Corp., 9.375s, 2009 6,650 6,433,875
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 340 341,700
FrontierVision Holding LP, 0s to 2001, 11.87s to
2007 1,445 1,264,375
FrontierVision Operating Partnership LP, 11s, 2006 7,575 7,688,625
Golden Books Publishing, Inc., 10.75s, 2004** 4,225 1,901,385
Granite Broadcasting Corp., 10.375s, 2005 1,276 1,199,440
Granite Broadcasting Corp., 8.875s, 2008 60 51,000
Hollinger International Publishing, 9.25s, 2007 6,395 6,331,050
Insight Midwest, 9.75s, 2009 10,000 9,850,000
Lenfest Communications, Inc., 10.5s, 2006 6,590 7,314,900
Liberty Group Operating, Inc., 9.375s, 2008 1,535 1,266,375
LIN Holdings Corp., 0s to 2003, 10s to 2008 21,940 14,699,800
Marvel Holdings, Inc., 0s, 1998(+)** 11,125 0
NTL Communications Corp., 9.25s, 2006 4,850 3,954,730
NTL Communications Corp., 0s to 2003, 12.375s to
2006 9,400 6,204,000
NTL Communications Corp., 9.75s, 2009 6,600 5,289,793
NTL, Inc., 0s to 2003, 9.75s to 2008## 6,290 3,994,150
Paxson Communications Corp., 11.625s, 2002 6,385 6,528,662
Pegasus Communications Corp., 12.5s, 2007 7,100 7,526,000
Telemundo Holdings, Inc., 0s to 2003, 11.5s to 2008 11,125 7,898,750
United International Holdings, 0s to 2003, 10.75s,
to 2008 15,125 10,965,625
World Color Press, Inc., 8.375s, 2008 1,595 1,538,306
World Color Press, Inc., 7.75s, 2009 2,725 2,549,510
XM Satellite Radio, Inc., 14s, 2010## 7,040 6,564,800
Young Broadcasting, Inc., 8.75s, 2007 3,450 3,225,750
--------------
196,984,551
--------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.6%
Alaris Medical, Inc., 0s to 2003, 11.125s to 2008## $ 6,410 $ 1,089,700
Fresenius Medical Care Capital Trust II, 7.875s,
2008 2,400 2,244,000
Prime Medical Services, Inc., 8.75s, 2008 5,985 4,982,513
--------------
$ 8,316,213
--------------------------------------------------------------------------------------------------
Metals and Minerals - 2.1%
Acme Metals, Inc., 10.875s, 2007 $ 2,675 $ 300,938
AK Steel Holdings Corp., 9.125s, 2006 937 927,630
Commonwealth Aluminum Corp., 10.75s, 2006 3,965 3,885,700
Doe Run Resources Corp., 11.25s, 2005 4,750 1,900,000
Jorgansen Bank, 8.5s, 2004 4,888 4,863,062
Kaiser Aluminum & Chemical Corp., 12.75s, 2003 5,610 5,063,025
Metal Management, Inc., 10s, 2008 7,700 3,850,000
Metallurg, Inc., 11s, 2007 3,250 2,713,750
Northwestern Steel & Wire Co., 9.5s, 2001 4,809 1,995,735
WCI Steel, Inc., 10s, 2004 2,790 2,650,500
Wheeling Pittsburgh Corp., 9.25s, 2007 600 432,000
--------------
$ 28,582,340
--------------------------------------------------------------------------------------------------
Metals and Mining - 0.2%
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 $ 2,550 $ 2,451,188
--------------------------------------------------------------------------------------------------
Retail - 1.7%
Duane Reade, Inc., 9.25s, 2008 $ 4,920 $ 4,428,000
Finlay Enterprises, Inc., 9s, 2008 2,250 2,019,375
Finlay Fine Jewelry Corp., 8.375s, 2008 5,725 5,152,500
J Crew Group, Inc., 0s to 2002, 13.125s to 2008 5,420 2,940,350
J Crew Operating Corp., 10.375s, 2007 5,265 4,369,950
Musicland Group, Inc., 9s, 2003 2,060 1,915,800
Musicland Group, Inc., 9.875s, 2008 2,225 1,863,438
--------------
$ 22,689,413
--------------------------------------------------------------------------------------------------
Supermarkets
Jitney-Jungle Stores of America, Inc., 12s, 2006** $ 5,275 $ 685,750
Jitney-Jungle Stores of America, Inc., 10.375s,
2007** 500 10,000
Pathmark Stores, Inc., 0s to 1999, 10.75s to 2003 465 23,250
Penn Traffic Co., 11s, 2009 1 615
--------------
$ 719,615
--------------------------------------------------------------------------------------------------
Telecommunications - 18.4%
Adelphia Communications Corp., 9.375s, 2009 $ 2,025 $ 1,842,750
Allegiance Telecommunications, Inc., 0s to 2003,
11.75s to 2008 6,475 4,759,124
Allegiance Telecommunications, Inc., 12.875s,
2008## 4,000 4,320,000
AMSC Acquisition Co., Inc., 12.25s, 2008 3,570 2,659,650
Caprock Communications Corp., 11.5s, 2009 3,475 2,154,500
Centennial Cellular Operating Co., 10.75s, 2008 10,970 10,558,625
Crown Castle International Corp., 10.75s, 2011 3,155 3,225,988
Cybernet Internet Services International, 14s, 2009 5,460 2,293,200
Dobson Communications Corp., 10.875s, 2010 4,235 4,160,888
DTI Holdings, Inc., 0s to 2003, 12.5s to 2008 9,175 3,692,938
Esat Holdings Ltd., 0s to 2002, 12.5s to 2007 2,825 2,683,750
Exodus Communications, Inc., 11.25s, 2008 6,975 6,940,125
Exodus Communications, Inc., 10.75s, 2009 975 945,750
Exodus Communications, Inc., 11.625s, 2010## 6,305 6,305,000
Flextronics International Ltd., 9.875s, 2010## 1,590 1,621,800
Focal Communications Corp., 0s to 2003, 12.125s to
2008 4,330 2,836,150
Focal Communications Corp., 11.875s, 2010## 5,360 5,333,200
Globix Corp., 12.5s, 2010 4,230 3,384,000
Hyperion Telecommunication, Inc., 12.25s, 2004 885 867,300
Hyperion Telecommunication, Inc., 12s, 2007 5,395 4,558,775
ICG Holdings, Inc., 0s to 2001, 12.5s to 2006 5,415 4,332,000
Intermedia Communications, Inc., 8.875s, 2007 5,460 4,504,500
Intermedia Communications, Inc., 8.5s, 2008 1,000 805,000
ITC Deltacom, Inc., 11s, 2007 5,594 5,426,180
ITC Deltacom, Inc., 9.75s, 2008 3,585 3,262,350
Leap Wireless International, Inc., 14.5s, 2010## 1,225 514,500
Level 3 Communications, Inc., 9.125s, 2008 13,870 12,032,225
Level 3 Communications, Inc., 10.75s, 2008## 2,350 2,177,511
Madison River, 13.25s, 2010## 2,815 2,575,725
Metromedia Fiber Network, Inc., 10s, 2008 9,020 8,704,300
MGC Communications, Inc., 13s, 2010## 9,405 8,934,750
MJD Communications, Inc., 9.5s, 2008 3,850 3,388,000
Nextel Communications, Inc., 0s to 2002, 9.75s to
2007 3,305 2,462,225
Nextel Communications, Inc., 0s to 2003, 9.95s to
2008 12,855 9,352,012
Nextel International, Inc., 0s to 2003, 12.125s to
2008 3,525 2,220,750
Nextel International Inc., 12.75s, 2010 6,175 6,089,908
Nextlink Communications, Inc., 9.625s, 2007 3,025 2,790,562
Nextlink Communications, Inc., 10.75s, 2009 7,975 7,815,500
Nextlink Communications, Inc., 0s to 2004, 12.25s
to 2009 3,100 1,906,500
North Point Communications, 12.875s, 2010## 4,640 3,201,600
Northeast Optic Network, 12.75s, 2008 460 430,100
PSINet, Inc., 10.5s, 2006 6,025 4,850,125
PSINet, Inc., 11.5s, 2008 3,850 3,195,500
PSINet, Inc., 11s, 2009 12,580 10,064,000
Rhythms Netconnections, Inc., 12.75s, 2009 925 610,500
Rural Cellular Corp., 9.625s, 2008 3,200 3,096,000
SBA Communications Corp., 0s to 2003, 12s to 2008 4,050 2,936,250
Spectrasite Holdings, Inc., 0s to 2003, 12s to 2008 4,070 2,706,550
Spectrasite Holdings, Inc., 0s to 2004, 11.25s to
2009 14,775 8,717,250
Spectrasite Holdings, Inc., 10.75s, 2010## 2,325 2,325,000
Telecorp PCS, Inc., 10.625s, 2010 3,725 3,790,188
Telesystem International Wireless, Inc., 0s to
2002,
13.25s to 2007 4,635 3,290,850
Time Warner Telecommunications LLC, 9.75s, 2008 10,505 10,058,537
Verio, Inc., 10.375s, 2005 1,025 1,117,250
Verio, Inc., 10.625s, 2009 3,725 4,283,750
Viatel, Inc., 11.25s, 2008 4,250 2,550,000
Viatel, Inc., 0s to 2003, 12.5s to 2008 1,910 668,500
Voicestream Wireless Corp., 10.375s, 2009 930 997,425
Western Wireless Corp., 10.5s, 2007 7,900 8,295,000
Worldwide Fiber, Inc., 12s, 2009 11,430 10,287,000
--------------
$ 251,909,386
--------------------------------------------------------------------------------------------------
Utilities - Electric - 0.2%
International Utility Structures, 10.75s, 2008 $ 3,600 $ 2,952,000
--------------------------------------------------------------------------------------------------
Total U.S. Bonds $1,032,368,648
--------------------------------------------------------------------------------------------------
Foreign Bonds - 13.1%
Belgium - 1.2%
Hermes Europe Railtel B.V., 10.375s, 2009
(Telecommunications) $ 8,550 $ 6,583,500
Tele1 Europe B.V., 13s, 2009 (Telecommunications) 9,575 9,718,625
--------------
$ 16,302,125
--------------------------------------------------------------------------------------------------
Bermuda - 0.6%
Global Crossing Holdings Ltd., 9.625s, 2008
(Telecommunications) $ 8,640 $ 8,424,000
--------------------------------------------------------------------------------------------------
Canada - 0.9%
GT Group Telecom, Inc., 0s to 2005, 13.25s to 2010
(Telecommunications)## $ 11,625 $ 6,161,250
Metronet Communications Corp., 0s to 2002, 10.75s
to 2007 (Telecommunications)## 875 782,198
PCI Chemicals Canada, Inc., 9.25s, 2007 (Chemicals) 1,115 702,450
Russel Metals, Inc., 10s, 2009 (Metals & Minerals) 5,405 5,141,506
--------------
$ 12,787,404
--------------------------------------------------------------------------------------------------
Greece - 0.1%
Fage Dairy Industries S.A., 9s, 2007 (Food and
Beverage Products) $ 2,360 $ 1,888,000
--------------------------------------------------------------------------------------------------
Luxembourg - 0.9%
Millicom International Cellular, 0s to 2001, 13.5s
to 2006 (Telecommunications) $ 6,235 $ 5,455,625
PTC International Finance II S.A., 11.25s, 2009
(Telecommunications) 5,920 6,156,800
--------------
$ 11,612,425
--------------------------------------------------------------------------------------------------
Mexico - 0.3%
Satelites Mexicanos S.A. de CV, 10.125s, 2004
(Telecommunications) $ 5,675 $ 3,972,500
--------------------------------------------------------------------------------------------------
Netherlands - 2.7%
Completel Europe N.V., 14s, 2009
(Telecommunications) $ 9,475 $ 4,548,000
Tele1 Europe B.V., 11.875s, 2009
(Telecommunications) EUR 4,500 3,836,125
United Pan Europe Commerce, 10.875s, 2009 (Media) $ 12,540 $ 10,659,000
United Pan Europe Commerce, 11.25s, 2010 (Media) 5,620 4,805,100
United Pan Europe Communication, 11.5s, 2010
(Media) 1,000 855,000
Versatel Telecom International N.V., 13.25s, 2008
(Telecommunications) 11,900 12,197,500
--------------
$ 36,900,725
--------------------------------------------------------------------------------------------------
Norway - 0.1%
Ocean Rig Norway As, 10.25s, 2008 (Oil Services) $ 2,225 $ 1,946,875
--------------------------------------------------------------------------------------------------
United Kingdom - 6.3%
British Telecom PLC, 11.875s, 2008
(Telecommunications) $ 11,165 $ 13,100,453
Callahan Nordrhein, 14s, 2010 (Media) 7,975 7,815,500
COLT Telecom Group PLC, 0s to 2001, 12s to 2006
(Telecommunications) 14,395 12,703,588
Dolphin Telecom PLC, 0s to 2003, 11.50s to 2008
(Telecommunications) 16,960 5,978,894
Energis PLC, 9.75s, 2009 (Telecommunications) 4,350 4,284,750
Esat Telecom Group PLC, 0s to 2002, 12.5s to 2007
(Telecommunications) 3,150 2,992,500
Esprit Telecom Group PLC, 11.5s, 2007
(Telecommunications)## 2,500 1,700,000
Global Tele-Systems Ltd., 10.875s, 2008
(Telecommunications) 1,725 1,207,500
Jazztel PLC, 13.25s, 2009 (Telecommunications) EUR 4,375 3,729,566
Jazztel PLC, 14s, 2009 (Telecommunications) $ 8,285 $ 7,456,500
Ono Finance PLC, 13s, 2009 (Media) 12,105 11,318,175
Telewest Communications PLC, 9.625s, 2006 Media) 1,770 1,681,500
Telewest Communications PLC, 11s to 2007 (Media) 3,090 2,974,125
Telewest Communications PLC, 11.25s, 2008 (Media) 2,000 2,015,000
Telewest Communications PLC, 0s to 2004, 9.875s to
2009 (Media) 3,940 2,240,875
Telewest Communications PLC, 9.875s, 2010 (Media)## 1,770 1,699,200
Telewest Communications PLC, 11.375s, 2010
(Media)## 6,025 3,328,812
--------------
$ 86,226,938
--------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 180,060,992
--------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $1,346,669,501) $1,212,429,641
--------------------------------------------------------------------------------------------------
Stocks - 1.2%
--------------------------------------------------------------------------------------------------
SHARES
--------------------------------------------------------------------------------------------------
U.S. Stocks - 0.2%
Building
Atlantic Gulf Communities Corp.*+ 690 $ 41
--------------------------------------------------------------------------------------------------
Consumer Goods and Services - 0.1%
Ranger Industries, Inc.++* 266,768 $ 416,825
--------------------------------------------------------------------------------------------------
Container, Forest and Paper Products - 0.1%
Gaylord Container Corp.* 320,500 $ 841,313
--------------------------------------------------------------------------------------------------
Media
Classic Communications, Inc.*(+) 9,000 $ 54,000
Golden Books Family Entertainment, Inc. 206,408 180,607
--------------
$ 234,607
--------------------------------------------------------------------------------------------------
Telecommunications
Viatel, Inc.* 27,394 $ 381,804
--------------------------------------------------------------------------------------------------
Total U.S. Stocks $ 1,874,590
--------------------------------------------------------------------------------------------------
Foreign Stocks - 1.0%
Netherlands - 0.7%
Completel Europe N.V. (Telecommunications)* 473,750 $ 4,737,500
Versatel Telecom International N.V.
(Telecommunications)* 143,192 4,582,144
--------------
$ 9,319,644
--------------------------------------------------------------------------------------------------
Sweden - 0.1%
Tele1 Europe Holdings AB, ADR (Telecommunications)* 115,803 $ 1,519,914
--------------------------------------------------------------------------------------------------
United Kingdom - 0.2%
COLT Telecom Group PLC, ADR (Telecommunications)* 13,384 $ 1,696,422
Ono Finance PLC (Media)* 12,105 1,331,550
--------------
$ 3,027,972
--------------------------------------------------------------------------------------------------
Total Foreign Stocks $ 13,867,530
--------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $11,644,039) $ 15,742,120
--------------------------------------------------------------------------------------------------
Preferred Stock - 3.7%
--------------------------------------------------------------------------------------------------
SHARES
--------------------------------------------------------------------------------------------------
Consumer Goods and Services
Renaissance Cosmetics, Inc., 14%* 8,899 $ 0
--------------------------------------------------------------------------------------------------
Media - 1.4%
CSC Holdings, Inc., 11.125% * 107,567 $ 11,348,318
Primedia, Inc., 8.625% 88,550 7,615,300
--------------
$ 18,963,618
--------------------------------------------------------------------------------------------------
Supermarkets
Supermarkets General Holdings Corp., 3.25s* 323,098 $ 20,194
--------------------------------------------------------------------------------------------------
Telecommunications - 2.3%
Crown Castle International Corp., 12.75s 14,625 $ 14,990,625
Global Crossings Holdings Ltd., 10.55s 47,500 4,702,500
Nextel Communications, Inc., 11.125s 2,296 2,250,080
Nextel Communications, Inc., 13s 2,443 2,614,010
Rural Cellular Corp., 11.375s 6,948 6,392,160
--------------
$ 30,949,375
--------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $57,754,714) $ 49,933,187
--------------------------------------------------------------------------------------------------
Warrants - 0.2%
--------------------------------------------------------------------------------------------------
U.S. Warrants - 0.1%
Allegiance Telecommunications, Inc.
(Telecommunications)* 7,700 $ 130,900
CHC Helicopter Corp. (Transportation)* 16,000 16,000
Cybernet Internet Services International
(Telecommunications)* 5,460 109,200
DTI Holdings, Inc. (Telecommunications)* 45,875 459
Envirosource, Inc. (Industrial)##* 238 89
Esat Holdings Ltd. (Telecommunications)## * 2,825 635,625
Grand Palais Resorts (Gaming & Hotels)##* 111,660 0
Hemmeter (Entertainment)* 111,660 0
ICO, Inc. (Energy)* 706,250 430,813
Knology, Inc. (Telecommunications)##* 2,475 4,950
Leap Wireless International, Inc.
(Telecommunications)* 1,225 6,125
Loral Orion Network Systems, Inc.
(Telecommunications) * 5,000 35,000
Loral Orion Network Systems, Inc.
(Telecommunications) * 11,775 200,175
McCaw International Ltd. (Telecommunications)##* 7,225 14,450
Motient Corp. (Telecommunications)* 3,570 142,800
Renaissance Cosmetics, Inc. (Consumer Goods
and Services)* 7,189 0
--------------------------------------------------------------------------------------------------
Total U.S. Warrants $ 1,726,586
--------------------------------------------------------------------------------------------------
Foreign Warrants - 0.1%
Jazztel PLC (Telecommunications)##*
5,400 $ 549,110
Metronet Communications Corp.
(Telecommunications)##* 3,250 357,500
--------------------------------------------------------------------------------------------------
Total Foreign Warrants $ 906,610
--------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $1,826,539) $ 2,633,196
--------------------------------------------------------------------------------------------------
Municipal Bonds
--------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
--------------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee)
Mesa County, CO, 8.5s, 2006** (Identified Cost
$350,625) $ 750 $ 562,500
--------------------------------------------------------------------------------------------------
Short-Term Obligations - 5.7%
--------------------------------------------------------------------------------------------------
Associates Corp. of North America, due 8/01/00 $ 33,311 $ 33,311,000
Federal Home Loan Mortgage Corp., due 8/08/00 - 8/
15/00 34,300 34,233,477
Gillette Co., due 8/01/00 11,000 11,000,000
--------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 78,544,477
--------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,496,789,895) $1,359,845,120
Other Assets, Less Liabilities - 0.7% 10,187,911
--------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,370,033,031
--------------------------------------------------------------------------------------------------
* Non-income producing security.
** Non-income producing security - in default.
## SEC Rule 144A restriction.
+ Restricted security.
++ Affiliated issuers 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.
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. Dollar. The abbreviation is shown below.
EUR = Euro Dollars.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
---------------------------------------------------------------------------
JULY 31, 2000
---------------------------------------------------------------------------
Assets:
Investments, at value:
Unaffiliated issuers (identified cost,
$1,489,565,976) $1,359,428,295
Affiliated issuer (identified cost, $7,223,919) 416,825
--------------
Total investments, at value (identified cost,
$1,496,789,895) $1,359,845,120
Cash 634
Net receivable for forward foreign currency exchange
contracts to sell 469,330
Receivable for investments sold 6,880,802
Receivable for fund shares sold 3,468,037
Interest and dividends receivable 30,859,439
Other assets 15,245
--------------
Total assets $1,401,538,607
--------------
Liabilities:
Distributions payable $ 4,694,655
Payable for investments purchased 9,808,903
Payable for fund shares reacquired 16,485,723
Payable to affiliates -
Management fee 54,973
Shareholder servicing agent fee 11,399
Distribution and service fee 68,104
Administrative fee 1,994
Accrued expenses and other liabilities 379,825
--------------
Total liabilities $ 31,505,576
--------------
Net assets $1,370,033,031
==============
Net assets consist of:
Paid-in capital $1,635,050,257
Unrealized depreciation on investments and translation
of assets and liabilities in foreign currencies (136,479,749)
Accumulated net realized loss on investments and
foreign currency transactions (120,031,686)
Accumulated distributions in excess of net investment
income (8,505,791)
--------------
Total $1,370,033,031
==============
Shares of beneficial interest outstanding 288,819,516
===========
Class A shares:
Net asset value per share
(net assets of $759,417,741 / 160,144,586 shares of
beneficial interest outstanding) $4.74
=====
Offering price per share (100 / 95.25) $4.98
=====
Class B shares:
Net asset value and offering price per share
(net assets of $478,662,949 / 100,907,467 shares of
beneficial interest outstanding) $4.74
=====
Class C shares:
Net asset value and offering price per share
(net assets of $114,538,169 / 24,090,274 shares of
beneficial interest outstanding) $4.75
=====
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $17,414,172 / 3,677,189 shares of
beneficial interest outstanding) $4.74
=====
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, 2000
------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 72,852,998
Dividends 679,878
------------
Total investment income $ 73,532,876
------------
Expenses -
Management fee $ 3,223,918
Trustees' compensation 29,338
Shareholder servicing agent fee 678,333
Distribution and service fee (Class A) 1,130,306
Distribution and service fee (Class B) 2,390,631
Distribution and service fee (Class C) 537,589
Administrative fee 111,442
Custodian fee 179,807
Printing 31,712
Postage 79,685
Auditing fees 20,900
Legal fees 5,350
Miscellaneous 385,099
------------
Total expenses $ 8,804,110
Fees paid indirectly (156,995)
------------
Net expenses $ 8,647,115
------------
Net investment income $ 64,885,761
------------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions $ 471,332
Foreign currency transactions 1,282,755
------------
Net realized gain on investments and foreign
currency transactions $ 1,754,087
------------
Change in unrealized depreciation -
Investments $(59,381,861)
Translation of assets and liabilities in
foreign currencies (246,049)
------------
Net unrealized loss on investments and foreign
currency translations $(59,627,910)
------------
Net realized and unrealized loss on investments
and foreign currency $(57,873,823)
------------
Increase in net assets from operations $ 7,011,938
============
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
---------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JULY 31, 2000 JANUARY 31, 2000
(UNAUDITED)
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 64,885,761 $ 124,791,134
Net realized gain (loss) on investments and foreign
currency transactions 1,754,087 (19,342,821)
Net unrealized loss on investments and foreign
currency translation (59,627,910) (48,084,193)
-------------- --------------
Increase in net assets from operations $ 7,011,938 $ 57,364,120
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (37,562,434) $ (71,000,452)
From net investment income (Class B) (22,151,773) (43,240,914)
From net investment income (Class C) (4,967,247) (9,263,379)
From net investment income (Class I) (898,614) (1,286,389)
In excess of net investment income (Class A) -- (2,483,499)
In excess of net investment income (Class B) -- (1,512,509)
In excess of net investment income (Class C) -- (324,020)
In excess of net investment income (Class I) -- (44,996)
-------------- --------------
Total distributions declared to shareholders $ (65,580,068) $ (129,156,158)
-------------- --------------
Net increase in net assets from fund share transactions $ 33,867,928 $ 92,713,085
-------------- --------------
Total increase (decrease) in net assets $ (24,700,202) $ 20,921,047
Net assets:
At beginning of period 1,394,733,233 1,373,812,186
-------------- --------------
At end of period (including accumulated distributions
in excess of net investment income of $8,505,791 and
$7,811,484, respectively) $1,370,033,031 $1,394,733,233
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
SIX MONTHS ENDED ------------------------------------------------------------------------
JULY 31, 2000 2000 1999 1998 1997 1996
(UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 4.95 $ 5.21 $ 5.62 $ 5.35 $ 5.24 $ 4.84
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.24 $ 0.46 $ 0.46 $ 0.47 $ 0.47 $ 0.45
Net realized and unrealized
gain (loss) on investments
and foreign currency (0.21) (0.24) (0.40) 0.27 0.10 0.39
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.03 $ 0.22 $ 0.06 $ 0.74 $ 0.57 $ 0.84
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment income $(0.24) $(0.46) $(0.46) $(0.47) $(0.46) $(0.44)
In excess of net investment income -- (0.02) (0.01) -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.24) $(0.48) $(0.47) $(0.47) $(0.46) $(0.44)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 4.74 $ 4.95 $ 5.21 $ 5.62 $ 5.35 $ 5.24
====== ====== ====== ====== ====== ======
Total return(+) 0.61%++ 4.35% 1.06% 14.63% 11.52% 17.97%
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.99%+ 0.98% 0.99% 1.01% 1.02% 1.00%
Net investment income 9.79%+ 9.08% 8.62% 8.56% 8.92% 8.83%
Portfolio turnover 32% 91% 135% 137% 87% 59%
Net assets at end of period
(000,000 omitted) $759 $769 $792 $766 $672 $620
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) 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, 2000 2000 1999 1998 1997 1996
(UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 4.95 $ 5.21 $ 5.62 $ 5.35 $ 5.24 $ 4.84
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.22 $ 0.42 $ 0.43 $ 0.43 $ 0.43 $ 0.41
Net realized and unrealized
gain (loss) on investments
and foreign currency (0.21) (0.24) (0.40) 0.27 0.10 0.39
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.01 $ 0.18 $ 0.03 $ 0.70 $ 0.53 $ 0.80
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment income $(0.22) $(0.42) $(0.43) $(0.43) $(0.42) $(0.40)
In excess of net investment income -- (0.02) (0.01) -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.22) $(0.44) $(0.44) $(0.43) $(0.42) $(0.40)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 4.74 $ 4.95 $ 5.21 $ 5.62 $ 5.35 $ 5.24
====== ====== ====== ====== ====== ======
Total return 0.26%++ 3.63% 0.35% 13.83% 10.66% 16.98%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.69%+ 1.68% 1.69% 1.70% 1.79% 1.85%
Net investment income 9.09%+ 8.38% 7.92% 7.82% 8.13% 7.99%
Portfolio turnover 32% 91% 135% 137% 87% 59%
Net assets at end of period
(000,000 omitted) $479 $500 $479 $385 $301 $283
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
SIX MONTHS ENDED ------------------------------------------------------------------------
JULY 31, 2000 2000 1999 1998 1997 1996
(UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------
CLASS C
------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 4.97 $ 5.22 $ 5.64 $ 5.36 $ 5.25 $ 4.85
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.22 $ 0.43 $ 0.42 $ 0.43 $ 0.43 $ 0.41
Net realized and unrealized
gain (loss) on investments
and foreign currency (0.22) (0.24) (0.40) 0.28 0.11 0.39
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.00 $ 0.19 $ 0.02 $ 0.71 $ 0.54 $ 0.80
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment income $(0.22) $(0.43) $(0.43) $(0.43) $(0.43) $(0.40)
In excess of net investment income -- (0.01) (0.01) -- -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.22) $(0.44) $(0.44) $(0.43) $(0.43) $(0.40)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 4.75 $ 4.97 $ 5.22 $ 5.64 $ 5.36 $ 5.25
====== ====== ====== ====== ====== ======
Total return 0.06%++ 3.83% 0.35% 13.81% 10.71% 17.03%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.69%+ 1.68% 1.69% 1.70% 1.72% 1.77%
Net investment income 9.09%+ 8.38% 7.93% 7.78% 8.16% 8.02%
Portfolio turnover 32% 91% 135% 137% 87% 59%
Net assets at end of period
(000,000 omitted) $115 $108 $ 94 $ 60 $ 28 $ 16
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
-----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, PERIOD ENDED
SIX MONTHS ENDED --------------------------------------------- JANUARY 31,
JULY 31, 2000 2000 1999 1998 1997*
(UNAUDITED)
---------------------------------------------------------------------------------------------------------------------------------
CLASS I
---------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 4.95 $ 5.21 $ 5.61 $ 5.35 $ 5.34
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.24 $ 0.48 $ 0.49 $ 0.49 $ 0.04
Net realized and unrealized gain
(loss) on investments and foreign
currency (0.20) (0.24) (0.40) 0.25 0.01
------ ------ ------ ------ ------
Total from investment operations $ 0.04 $ 0.24 $ 0.09 $ 0.74 $ 0.05
------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.25) $(0.48) $(0.48) $(0.48) $(0.04)
In excess of net investment income -- (0.02) (0.01) -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.25) $(0.50) $(0.49) $(0.48) $(0.04)
------ ------ ------ ------ ------
Net asset value - end of period $ 4.74 $ 4.95 $ 5.21 $ 5.61 $ 5.35
====== ====== ====== ====== ======
Total return 0.76%++ 4.68% 1.55% 14.77% 0.91%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.69%+ 0.68% 0.69% 0.71% 0.59%+
Net investment income 10.09%+ 9.38% 8.99% 8.86% 8.70%+
Portfolio turnover 32% 91% 135% 137% 87%
Net assets at end of period
(000,000 omitted) $17 $18 $9 $4 $3
* For the period from the inception of Class I shares, January 2, 1997, through January 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data for the periods are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</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 than investments in higher-rated securities, and tend
to be more sensitive to economic conditions. The fund can invest in foreign
securities. 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. 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 in good faith,
at fair value, 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 discount is
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 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 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 total 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 net 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 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, 2000, the fund, for federal income tax purposes, had a capital
loss carryforward of $111,204,470 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, 2001, ($16,884,352), January 31, 2003, ($30,373,319),
January 31, 2004, ($35,661,057), January 31, 2007, ($17,432,351), and January
31, 2008, ($10,853,391).
Multiple Classes of Shares of Beneficial Interest - The fund offers multiple
classes of shares that 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
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%
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. Included in Trustees' compensation is a net
periodic pension expense of $9,918 for the six months ended July 31, 2000.
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 incurs an administrative fee at
the following annual percentages of the fund's average daily net assets:
First $2 billion 0.0175%
Next $2.5 billion 0.0130%
Next $2.5 billion 0.0005%
In excess of $7 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$189,320 for the six months ended July 31, 2000, 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 $124,398 for the six months ended July 31,
2000. Fees incurred under the distribution plan during the six months ended July
31, 2000, 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 $19,529 and $672 for Class B and Class C shares, respectively, for
the six months ended July 31, 2000. Fees incurred under the distribution plan
during the six months ended July 31, 2000 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 twelve months following
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B shares in the event of a shareholder redemption within
six years of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the six months ended July 31,
2000, were $9,908, $787,731, and $17,648 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 annual rate of 0.10%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$412,545,038 and $409,545,424, 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 $1,496,789,895
--------------
Gross unrealized depreciation $ (171,320,948)
Gross unrealized appreciation 34,376,173
--------------
Net unrealized depreciation $ (136,944,775)
==============
(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, 2000 YEAR ENDED JANUARY 31, 2000
------------------------------------ ------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 43,321,174 $ 210,238,314 68,008,698 $ 347,321,283
Shares issued to shareholders
in reinvestment of
distributions 4,705,427 22,701,584 8,627,991 43,975,808
Shares reacquired (43,095,473) (209,771,809) (73,457,249) (375,946,847)
------------- ------------- ------------- -------------
Net increase 4,931,128 $ 23,168,089 3,179,440 $ 15,350,244
============= ============= ============= =============
<CAPTION>
Class B shares
SIX MONTHS ENDED JULY 31, 2000 YEAR ENDED JANUARY 31, 2000
------------------------------------ ------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 19,499,122 $ 94,375,154 53,701,585 $ 275,366,696
Shares issued to shareholders
in reinvestment of
distributions 2,345,818 11,323,389 4,639,347 23,640,151
Shares reacquired (21,819,158) (106,178,611) (49,378,103) (251,932,760)
------------- ------------- ------------- -------------
Net increase (decrease) 25,782 $ (480,068) 8,962,829 $ 47,074,087
============= ============= ============= =============
<CAPTION>
Class C shares
SIX MONTHS ENDED JULY 31, 2000 YEAR ENDED JANUARY 31, 2000
------------------------------------ ------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 8,394,604 $ 40,644,977 18,812,025 $ 96,547,176
Shares issued to shareholders
in reinvestment of
distributions 552,366 2,672,185 1,032,152 5,266,847
Shares reacquired (6,658,504) (32,402,594) (15,975,020) (81,551,415)
------------- ------------- ------------- -------------
Net increase 2,288,466 $ 10,914,568 3,869,157 $ 20,262,608
============= ============= ============= =============
<CAPTION>
Class I shares
SIX MONTHS ENDED JULY 31, 2000 YEAR ENDED JANUARY 31, 2000
------------------------------------ ------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,058,377 $ 5,155,899 2,196,852 $ 11,228,025
Shares issued to shareholders
in reinvestment of
distributions 118,605 571,726 189,291 962,738
Shares reacquired (1,121,496) (5,462,286) (428,729) (2,164,617)
------------- ------------- ------------- -------------
Net increase 55,486 $ 265,339 1,957,414 $ 10,026,146
============= ============= ============= =============
</TABLE>
(6) Line of Credit
The fund and other affiliated funds participate in a $1.1 billion unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
Borrowings may be made for temporary financing needs. 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, 2000, was $3,967. The fund had no borrowings during the period.
(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.
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts
NET
CONTRACTS TO CONTRACTS UNREALIZED
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE APPRECIATION
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 09/13/00 EUR 15,927,411 $15,264,990 $14,795,660 $469,330
----------- ----------- --------
</TABLE>
At July 31, 2000, 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 six months ended July
31, 2000, is set forth below:
BEGINNING ENDING
SHARE SHARES DIVIDEND ENDING
AFFILIATE AMOUNT AMOUNT INCOME VALUE
---------------------------------------------------------------------------
Ranger Industries, Inc 266,768 266,768 $ -- $416,825
(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, 2000, the
fund owned the following restricted securities, excluding securities issued
under Rule 144A, constituting 0.6% 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, in good faith, at fair value, by the Trustees.
DATE OF SHARE/PAR
DESCRIPTION ACQUISITION AMOUNT COST VALUE
--------------------------------------------------------------------------------
Airplane Pass Through
Trust, 10.875s, 2019 3/13/1996 $5,185,425 $5,185,425 $4,164,052
Atlantic Gulf
Communities Corp. 9/25/1995 690 -- 41
Merrill Lynch Mortgage
Investors, Inc.,
8.46s, 2009 6/22/1994 $4,500,000 3,119,063 4,310,156
----------
$8,474,249
==========
<PAGE>
MFS(R)
HIGH INCOME FUND
<TABLE>
<S> <C>
TRUSTEES SECRETARY
J. Atwood Ives + - Chairman and Chief Stephen E. Cavan*
Executive Officer, Eastern Enterprises
(diversified services company) ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Lawrence T. Perera + - Partner, Hemenway
& Barnes (attorneys) CUSTODIAN
State Street Bank and Trust Company
William J. Poorvu + - Adjunct Professor,
Harvard University Graduate School of INVESTOR INFORMATION
Business Administration For information on MFS mutual funds, call
your investment professional or, for an
Charles W. Schmidt + - Private Investor information kit, call toll free: 1-800-637-2929
any business day from 9 a.m. to 5 p.m.
Arnold D. Scott* - Senior Executive Eastern time (or leave a message anytime).
Vice President, Director, and Secretary,
MFS Investment Management INVESTOR SERVICE
MFS Service Center, Inc.
Jeffrey L. Shames* - Chairman and Chief P.O. Box 2281
Executive Officer, MFS Investment Boston, MA 02107-9906
Management
For general information, call toll free:
Elaine R. Smith + - Independent Consultant 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
David B. Stone + - Chairman, North American
Management Corp. (investment adviser) 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,
DISTRIBUTOR exchanges, or stock and bond
MFS Fund Distributors, Inc. outlooks, call toll free:
500 Boylston Street 1-800-MFS-TALK (1-800-637-8255)
Boston, MA 02116-3741 anytime from a touch-tone telephone.
CHAIRMAN AND PRESIDENT WORLD WIDE WEB
Jeffrey L. Shames* www.mfs.com
PORTFOLIO MANAGER
Robert J. Manning*
TREASURER
James O. Yost*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
+ Independent Trustee
*MFS Investment Management
</TABLE>
<PAGE>
MFS(R) HIGH INCOME FUND ------------
BULK RATE
U.S. POSTAGE
PAID
MFS
[Logo] M F S(R) ------------
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street
Boston, MA 02116-3741
(c)2000 MFS Investment Management(R).
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116
MHI-3 9/00 94.6M 18/218/318/818
