<PAGE>
[Logo] M F S (R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
[Graphic Omitted]
MFS(R) HIGH
INCOME FUND
ANNUAL REPORT o JANUARY 31, 2000
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MUTUAL FUND GIFT KITS (see page 39)
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<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 7
Portfolio of Investments .................................................. 11
Financial Statements ...................................................... 22
Notes to Financial Statements ............................................. 29
Independent Auditors' Report .............................................. 36
MFS' Year 2000 Readiness Disclosure ....................................... 38
Trustees and Officers ..................................................... 41
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
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
One could easily argue that the Internet represents the greatest technological
development most of us may see in our lifetimes. There is no disputing that
this new communication medium is changing forever the way we work, play, and
shop. One might also argue that investing in this new technology represents
the investment opportunity of a lifetime. The question for any investor is
whether and how to take advantage of it.
The popular press, it seems, would have us believe that by surfing the Web, we
can learn everything we need to know about investing. Indeed, there is no
doubt that Internet-delivered information and brokerage services enable
individual investors to be well informed and to trade at bargain prices. But
we believe the numbers and facts argue that, for most of us, mutual funds
purchased through an investment professional will continue to be one of the
best products for long-term investing in this new millennium.
According to a survey by the Investment Company Institute, the national
association of American investment companies, 44% of American households own
stock or bond mutual funds, while only 25.5% own individual stocks.(1) Of
course that doesn't tell us how well they did owning those funds or stocks,
but another statistic gives us a clue. In the third quarter of 1999, during a
period of volatility in the greatest bull market in history, a quarter of the
7,500 stocks tracked by Morningstar, a popular rating service, lost more than
20% of their value. But during the same period, less than 1% of the mutual
funds tracked by Morningstar -- 6 out of 10,000 funds -- were down by a
similar amount.(2) So an investor's chance of picking one of those losing
stocks was about 25 times greater than his or her chance of picking an equally
losing fund.
The numbers also show that a majority of Americans seek professional advice
when buying mutual funds. Outside of employer-sponsored retirement plans,
approximately 68% of fund shareholders state that their primary method of
purchasing shares is through an investment professional.(1)
Why do we at MFS(R) believe that mutual funds plus professional advice will
continue to define the best course of action for many investors? Let's look at
some of the characteristics of a successful long-term investment approach:
o HAVING A PLAN AND STICKING TO IT: Our experience is that successful investors
-- those whose lives are enriched by the fruits of their investing -- share
two characteristics. They have a plan for reaching their monetary goals, and
they stick with that plan through up as well as down markets. And for many
investors, working with an investment professional may be the best way to
develop a plan. Although the Internet abounds with calculators for developing
all sorts of investment plans, none has your investment professional's high
level of experience and an understanding of your unique situation. And no
calculator can counsel you during a down market, when you may be tempted to
abandon your goals and your plan.
o DIVERSIFICATION: Few investors can afford to own a large number of holdings,
so poor performance of one company can potentially drag down their entire
portfolio. This is especially true when investing in volatile new areas such
as the Internet. On the other hand, a diversified mutual fund that owns dozens
or even hundreds of holdings is better positioned to survive a disappointment
in one or several investments.
o GOOD IN A DOWN MARKET: As we enter the tenth year of the greatest bull market
in history, it's easy to forget that market downturns are an almost inevitable
part of investing. Few mutual funds, of course, are going to be up when the
overall market is down. But as the numbers above from the third quarter of
1999 demonstrate, mutual funds may be less likely to suffer the extreme
downturns experienced by a large number of individual holdings when the market
heads south.
o MFS ORIGINAL RESEARCH(R): The Internet is one of the greatest research tools
ever invented, but it's still not the same as being eyeball to eyeball with
the management of a company and discussing their plans for their firm's
future.
o GOOD PERFORMANCE AT AN ACCEPTABLE LEVEL OF RISK: Investing in individual
stocks or bonds does indeed offer the potential of exhilarating performance
that few mutual funds even attempt. The downside is that the most exciting
investments are also likely to be the ones that give you sleepless nights. The
diversification and professional management of mutual funds help make them
inherently less risky than individual stock picking, and funds are available
in a wide range of risk profiles.
We believe that now, more than ever, mutual funds sold by an investment
professional may offer many investors the best way to participate in whatever
investment opportunities the new millennium may bring. The combination of
professional portfolio management and professional advice recognizes the key
reason that investors give us their money: because they don't want to make a
hobby or a second profession out of investing; they simply want their money to
work for them so they have a better likelihood of realizing their dreams.
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)
February 15, 2000
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(1) Source: Investment Company Institute.
(2) Source: Morningstar CEO Don Phillips' keynote address at The Baltimore
Sun's Dollars and Sense Conference, 10/99. In the period 7/1/99 through
9/30/99, of the 7,500 stocks tracked by Morningstar, 1,865 lost 20% or more;
of the 10,000 mutual funds tracked by Morningstar, six lost 20% or more.
Mutual fund results are at net asset value; if sales charges had been
reflected, results would have been lower.
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 12 months ended January 31, 2000, Class A shares of the Fund provided
a total return of 4.35%, Class B shares 3.63%, Class C shares 3.83%, and Class
I shares 4.68%. These returns include the reinvestment of any distributions
but exclude the effects of any sales charges and compare to a 0.53% 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 2.29% return for the average high current yield fund tracked
by Lipper Inc., an independent firm that reports mutual fund performance.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S OUTPERFORMANCE OF ITS BENCHMARK
DURING THE PERIOD?
A. There were two main factors that benefited the Fund's performance. First and
foremost, we feel our bottom-up credit research led to successful avoidance
of credit problems and bankruptcies across a variety of sectors in the
market. Additionally, strong security selection within the
telecommunications, media, and cable industries contributed significantly to
total return.
Q. CAN YOU DESCRIBE THE MARKET ENVIRONMENT FOR HIGH-YIELD SECURITIES DURING
THE PERIOD? HOW DID THIS ENVIRONMENT AFFECT PERFORMANCE?
A. During much of the period, the market environment for high-yield bonds was
difficult due to the heavy supply of new bonds, which exerted downward
pressure on the prices of existing issues. Credit problems within a variety
of sectors, including health care and energy, caused additional weakness.
Concerns over Medicare reforms undermined investor sentiment toward health
care companies, and previously low oil prices resulted in earnings weakness
at energy companies. These factors hurt bond prices in these sectors and the
high-yield market in general. Recently, however, the market has recovered
due to generally strong corporate earnings and attractive yields, which we
believe will help lure investors back to the high-yield marketplace.
Q. COULD YOU PROVIDE SOME ADDITIONAL DETAILS REGARDING THE INDUSTRIES YOU'RE
EMPHASIZING AND WHICH HOLDINGS PRODUCED STRONG PERFORMANCE?
A. In the telecommunications industry, widespread consolidation and
accelerating earnings growth worldwide provided a strong boost to the Fund's
relative performance. In the media and cable industries, robust demand for
data transmission provided a favorable backdrop for strong anticipated
growth. In addition, advertising spending by Internet and technology
companies contributed solidly to earnings growth for media and cable
companies. Given the strong demand for voice, data, and wireless
communications, we favored the issues of telecommunications companies such
as VoiceStream, Nextlink, Nextel Communications, and MetroNet. Our position
in Nextel rose considerably following Microsoft's announcement that it would
invest $600 million with the company. MetroNet, a competitive local exchange
company (CLEC) that provides a broad range of telecommunications services,
saw its bonds rally after it announced plans to merge with AT&T of Canada. A
core holding in the cable and media industry was Charter Communications,
which continued to experience rapid earnings and customer growth fueled by
the increased usage of cable lines to access the Internet.
Q. WHICH HOLDINGS DETRACTED FROM FUND PERFORMANCE?
A. While the Fund's exposure to supermarket operators was relatively small,
this highly defensive industry did not perform well during the period. Our
holdings in companies such as Pathmark and Jitney-Jungle Stores produced
weak results due to concerns about increasing competition from the likes of
Wal-Mart and a generally weak pricing environment.
Q. WHAT IS YOUR OUTLOOK FOR THE HIGH-YIELD MARKET IN THE COMING MONTHS?
A. We expect the high-yield market to perform well in 2000. The premiums --
that is, the yield difference that investors are being paid for owning
high-yield bonds versus U.S. Treasury bonds -- are at historically high
levels and, over the long term, we expect these premiums to more than
compensate for credit risks. (Principal value and interest on Treasury
securities are guaranteed by the U.S. government if held to maturity.) In
addition, we think the present environment of healthy economic growth and
low inflation is a favorable one for high-yield bonds. However, given
interest-rate uncertainties in the world economies, careful credit selection
will remain a primary focus for the Fund and crucial to performance.
/s/ Robert J. Manning
Robert J. Manning
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are current only through the end of the period of the report as stated on the
cover. The manager's views are subject to change at any time based on market
and other conditions, and no forecasts can be guaranteed.
<PAGE>
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PORTFOLIO MANAGER'S PROFILE
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ROBERT J. MANNING IS SENIOR VICE PRESIDENT, CHIEF FIXED INCOME
STRATEGIST, DIRECTOR OF FIXED INCOME RESEARCH, AND A MEMBER OF THE FIXED
INCOME MANAGEMENT GROUP OF MFS INVESTMENT MANAGEMENT(R). HE IS PORTFOLIO
MANAGER OF MFS(R) HIGH INCOME FUND, MFS(R) HIGH YIELD OPPORTUNITIES
FUND, AND MFS(R) SPECIAL VALUE TRUST, A CLOSED-END FUND.
MR. MANNING JOINED MFS IN 1984 AS A RESEARCH ANALYST IN THE HIGH YIELD
BOND DEPARTMENT. HE WAS NAMED VICE PRESIDENT IN 1988, PORTFOLIO MANAGER
IN 1992, SENIOR VICE PRESIDENT IN 1993, AND CHIEF FIXED INCOME
STRATEGIST AND DIRECTOR OF FIXED INCOME RESEARCH IN 1999.
HE IS A GRADUATE OF THE UNIVERSITY OF LOWELL AND EARNED A MASTER OF
SCIENCE DEGREE IN FINANCE FROM BOSTON COLLEGE.
ALL PORTFOLIO MANAGERS AT MFS INVESTMENT MANAGEMENT(R) ARE SUPPORTED BY
AN INVESTMENT STAFF OF OVER 100 PROFESSIONALS UTILIZING MFS 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>
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FUND FACTS
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OBJECTIVE: SEEKS HIGH CURRENT INCOME BY INVESTING PRIMARILY
IN A DIVERSIFIED PORTFOLIO OF FIXED-INCOME
SECURITIES, SOME OF WHICH MAY INVOLVE EQUITY
FEATURES.
COMMENCEMENT OF
INVESTMENT OPERATIONS: FEBRUARY 17, 1978
CLASS INCEPTION: CLASS A FEBRUARY 17, 1978
CLASS B SEPTEMBER 27, 1993
CLASS C JANUARY 3, 1994
CLASS I JANUARY 2, 1997
SIZE: $1.4 BILLION NET ASSETS AS OF JANUARY 31, 2000
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.) It is not possible to
invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended January 31, 2000)
MFS High Income Lehman Brothers High
Fund - Class A Yield Bond Index
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1/90 $ 9,525 $10,000
1/92 12,922 14,123
1/94 17,762 18,539
1/96 20,127 21,761
1/98 25,727 27,907
1/00 27,131 28,046
<TABLE>
<CAPTION>
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
THROUGH JANUARY 31, 2000
CLASS A
1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +4.35% +20.88% +59.03% +184.84%
- ------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge +4.35% + 6.53% + 9.72% + 11.04%
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Average Annual Total Return Including Sales Charge -0.60% + 4.81% + 8.66% + 10.50%
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<CAPTION>
CLASS B
1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +3.63% +18.37% +53.24% +171.35%
- ------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge +3.63% + 5.78% + 8.91% + 10.50%
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Average Annual Total Return Including Sales Charge -0.17% + 4.95% + 8.63% + 10.50%
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<CAPTION>
CLASS C
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +3.83% +18.57% +53.62% +173.35%
- ------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge +3.83% + 5.84% + 8.97% + 10.58%
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Average Annual Total Return Including Sales Charge +2.87% + 5.84% + 8.97% + 10.58%
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<CAPTION>
CLASS I
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +4.68% +22.01% +60.55% +187.56%
- ------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge +4.68% + 6.85% + 9.93% + 11.14%
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<CAPTION>
COMPARATIVE INDICES
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average high current yield fund+ +2.29% + 4.54% + 8.65% + 10.27%
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Lehman Brothers High Yield Bond Index# +0.53% + 4.86% + 8.84% + 10.86%
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+ Source: Lipper Inc.
# Source: Standard & Poor's Micropal, Inc.
</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 prior 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 peformance 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 JANUARY 31, 2000
QUALITY RATINGS (U.S. PORTION ONLY)
Source: Standard & Poor's and Moody's
"B" 77.1%
"BB" 10.0%
"CCC" 9.9%
"BBB" 1.9%
Not Rated 0.6%
D 0.3%
CC 0.2%
The portfolio is actively managed, and current holdings may be different.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS -- January 31, 2000
<CAPTION>
Bonds - 89.5%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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<S> <C> <C>
U.S. Bonds - 75.4%
Aerospace - 3.5%
Airplane Pass-Through Trust, 10.875s, 2019+ $ 5,241 $ 4,455,903
Argo Tech Corp., 8.625s, 2007 11,250 9,903,375
BE Aerospace, Inc., 9.875s, 2006 2,550 2,422,500
BE Aerospace, Inc., 8s, 2008 2,550 2,173,875
BE Aerospace, Inc., 9.5s, 2008 1,550 1,433,750
K & F Industries, Inc., 9.25s, 2007 9,290 8,895,175
L-3 Communications Corp., 10.375s, 2007 3,565 3,680,862
L-3 Communications Corp., 8s, 2008 3,200 2,808,000
L-3 Communications Corp., 8.5s, 2008 1,565 1,461,319
MOOG, Inc., 10s, 2006 9,515 9,633,938
United Defense Industries, Inc., 8.75s, 2007 2,410 2,241,300
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$ 49,109,997
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Building Materials - 4.0%
AAF- McQuay, Inc., 8.875s, 2003 $ 1,575 $ 1,334,812
Building Materials Corp., 8.625s, 2006 10,540 9,960,300
Building Materials Corp., 8s, 2007 3,000 2,730,000
Formica Corp., 10.875s, 2009 9,450 8,268,750
MMI Products, Inc., 11.25s, 2007 4,840 4,961,000
Nortek, Inc., 9.875s, 2004 9,442 9,276,765
Nortek, Inc., 9.25s, 2007 7,925 7,588,187
Schuff Steel Co., 10.5s, 2008 1,635 1,334,569
UDC Homes, Inc., 0s, 2000 30 16,650
Williams Scotsman, Inc., 9.875s, 2007 10,850 10,470,250
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$ 55,941,283
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Business Services - 1.6%
Anacomp, Inc., 10.875s, 2004 $ 6,175 $ 6,144,125
Iron Mountain, Inc., 10.125s, 2006 10,275 10,429,125
Pierce Leahy Corp., 11.125s, 2006 1,977 2,105,505
Pierce Leahy Corp., 9.125s, 2007 3,225 3,160,500
Unisys Corp., 12s, 2003 350 373,625
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$ 22,212,880
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Chemicals - 2.2%
Huntsman ICI Chemicals, Inc., 10.125s, 2009## $ 7,725 $ 7,802,250
Huntsman ICI Holdings, LLC, 0s, 2009 975 298,594
Lyondell Chemical Co., 9.625s, 2007 3,700 3,653,750
Lyondell Chemical Co., 9.875s, 2007 2,305 2,270,425
Lyondell Petrochemical Co., 8.875s, 2006 (Bank Debt) 3,970 4,039,475
Sterling Chemicals, Inc., 11.75s, 2006 8,965 7,172,000
Sterling Chemicals, Inc., 12.375s, 2006 150 156,000
Sterling Chemicals, Inc., 11.25s, 2007 5,775 4,389,000
Sterling Chemicals, Inc., 0s to 2001, 13.5s to 2008 2,360 708,000
--------------
$ 30,489,494
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Consumer Goods and Services - 2.9%
American Safety Razor Co., 9.875s, 2005 $ 7,060 $ 6,795,250
General Binding Corp., 9.375s, 2008 4,560 1,812,600
Kindercare Learning Centers, Inc., 9.5s, 2009 4,320 4,104,000
Polymer Group, Inc., 9s, 2007 1,890 1,795,500
Polymer Group, Inc., 8.75s, 2008 3,000 2,812,500
Remington Products Co. LLC, 11s, 2006 2,725 2,254,938
Revlon Consumer Products Corp., 8.125s, 2006 430 305,300
Samsonite Corp., 10.75s, 2008 15,100 12,835,000
Simmons Co., 10.25s, 2009 2,515 2,238,350
Synthetic Industries, Inc., 13s, 2000 5,966 5,876,756
--------------
$ 40,830,194
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Container, Forest and Paper Products - 5.3%
Applied Extrusion Technologies, Inc., 11.5s, 2002 $ 9,550 $ 9,669,375
Atlantis Plastics, Inc., 11s, 2003 3,875 3,875,000
Buckeye Cellulose Corp., 8.5s, 2005 1,250 1,212,500
Buckeye Cellulose Corp., 9.25s, 2008 3,875 3,875,000
Buckeye Technologies, Inc., 8s, 2010 3,225 2,967,000
Consolidated Container Co., LLC, 10.125s, 2009## 1,725 1,725,000
Gaylord Container Corp., 9.75s, 2007 12,750 11,889,375
Gaylord Container Corp., 9.875s, 2008 5,140 4,394,700
Riverwood International Corp., 10.25s, 2006 5,435 5,407,825
Riverwood International Corp., 10.875s, 2008 4,455 4,299,075
Silgan Holdings, Inc., 9s, 2009 5,650 5,409,875
Speciality Paperboard, Inc., 9.375s, 2006 5,350 5,396,812
U.S. Can Corp., 10.125s, 2006 7,150 7,293,000
U.S. Timberlands, 9.625s, 2007 7,060 6,539,325
--------------
$ 73,953,862
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Energy - 4.5%
AmeriGas Partners LP, 10.125s, 2007 $ 3,400 $ 3,468,000
Cheasapeake Energy Corp., 9.625s, 2005 14,410 13,257,200
Clark Refining & Marketing, Inc., 8.625s, 2008 4,900 3,221,750
Clark USA, Inc., 10.875s, 2005 3,890 1,760,225
Continental Resources, Inc., 10.25s, 2008 8,150 7,009,000
Forest Oil Corp., 10.5s, 2006 7,050 7,085,250
HS Resources, Inc., 9.25s, 2006 3,000 2,910,000
Ocean Energy, Inc., 8.875s, 2007 5,680 5,566,400
P&L Coal Holdings Corp., 8.875s, 2008 4,100 3,925,750
P&L Coal Holdings Corp., 9.625s, 2008 11,900 11,260,375
Pool Energy Services Co., 8.625s, 2008 1,955 1,969,662
Pride International, Inc., 10s, 2009 610 610,000
--------------
$ 62,043,612
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Entertainment - 0.4%
AMC Entertainment, Inc., 9.5s, 2009 $ 1,650 $ 1,320,000
American Skiing Co., 12s, 2006 5,300 4,597,750
--------------
$ 5,917,750
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Financial Institutions - 1.5%
Americo Life, Inc., 9.25s, 2005 $ 2,050 $ 2,029,500
Merrill Lynch Mortgage Investors, Inc., 8.429s, 2022+ 4,500 4,199,766
Morgan Stanley Capital I, Inc., 6.86s, 2010 2,938 2,263,876
Willis Corroon Corp., 9s, 2009 14,625 11,882,812
--------------
$ 20,375,954
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Gaming and Hotels - 4.4%
Aztar Corp., 8.875s, 2007 $ 6,915 $ 6,430,950
Boyd Gaming Corp., 9.5s, 2007 6,585 6,321,600
Coast Hotels & Casinos, Inc., 9.5s, 2009 10,465 9,680,125
Eldorado Resorts LLC, 10.5s, 2006 5,455 5,550,462
Hollywood Park, Inc., 9.25s, 2007 6,850 6,593,125
Isle of Capri Casinos, Inc., 8.75s, 2009 9,320 8,388,000
Lady Luck Gaming Corp., 11.875s, 2001 3,245 3,245,000
Park Place Entertainment Corp., 7.875s, 2005 1,175 1,107,438
Prime Hospitality Corp., 9.75s, 2007 6,095 5,790,250
Santa Fe Hotel, Inc., 11s, 2000 5,295 5,175,862
Station Casinos, Inc., 8.875s, 2008 3,750 3,487,500
--------------
$ 61,770,312
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Industrial - 5.4%
Allied Waste North America, Inc., 10s, 2009## $ 9,000 $ 7,830,000
Blount, Inc., 13s, 2009## 4,250 4,489,062
Columbus Mckinnon Corp., 8.5s, 2008 5,375 4,756,875
Day International Group, Inc., 11.125s, 2005 3,670 3,729,637
Dura Operating Corp., 9s, 2009 2,110 1,962,300
Fairfield Manufacturing, Inc., 9.625s, 2008 885 825,263
Hayes Wheels International, Inc., 11s, 2006 4,900 5,010,250
Hayes Wheels International, Inc., 9.125s, 2007 5,875 5,551,875
Haynes International, Inc., 11.625s, 2004 6,825 4,777,500
IMO Industries, Inc., 11.75s, 2006 7,825 8,226,031
International Knife & Saw, Inc., 11.375s, 2006 2,060 1,578,475
Johnstown America Industries, 11.75s, 2005 2,670 2,706,713
Motors & Gears, Inc., 10.75s, 2006 1,785 1,767,150
Newcor, Inc., 9.875s, 2008 2,775 1,248,750
Numatics, Inc., 9.625s, 2008 1,440 1,137,600
Oxford Automotive, Inc., 10.125s, 2007 4,025 3,713,063
Simonds Industries, Inc., 10.25s, 2008 5,825 4,427,000
Thermadyne Holdings Corp., 0s to 2003, 12.5s to 2008 12,375 5,445,000
Thermadyne Manufacturing/Capital Corp., 9.875s, 2008 6,400 5,416,000
--------------
$ 74,598,544
- ------------------------------------------------------------------------------------------------------
Media - 13.1%
Acme Television LLC, 0s to 2000, 10.875s to 2004 $ 2,575 $ 2,314,281
Adelphia Communications Corp., 8.375s, 2008 9,225 8,348,625
Adelphia Communications Corp., 9.375s, 2009 2,125 2,029,375
Allbritton Communications Co., 9.75s, 2007 4,775 4,679,500
Avalon Cable Holdings LLC, 0s to 2003, 11.875s to 2008 8,000 5,260,000
Bresnan Communications Group, 8s, 2009 4,775 4,810,812
Bresnan Communications Group, 9.25s, 2009 3,475 2,397,750
Century Communications Corp., 0s, 2008 100 41,500
Chancellor Media Corp., 8.125s, 2007 1,550 1,542,250
Chancellor Media Corp., 8.75s, 2007 4,135 4,155,675
Chancellor Media Corp., 8s, 2008 7,975 7,935,125
Charter Communications Holdings, 8.25s, 2007 15,175 14,036,875
Charter Communications Holdings, 0s to 2004, 9.92s to 2011 3,750 2,193,750
CSC Holdings, Inc., 9.25s, 2005 150 154,500
CSC Holdings, Inc., 8.125s, 2009 5,000 4,941,600
Cumulus Media, Inc., 10.375s, 2008 8,855 9,076,375
Echostar DBS Corp., 9.375s, 2009 6,650 6,550,250
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 5,285 5,364,275
FrontierVision Holdings LP, 0s to 2001, 11.87s to 2007 1,445 1,282,438
FrontierVision Holdings LP, 0s to 2001, 11.875s to 2007 1,150 1,023,500
FrontierVision Operating Partnership LP, 11s, 2006 7,575 7,972,687
Golden Books Publishing, Inc., 7.65s, 2002** 7,285 3,132,550
Granite Broadcasting Corp., 10.375s, 2005 4,600 4,669,000
Granite Broadcasting Corp., 8.875s, 2008 1,475 1,393,875
Insight Midwest, 9.75s, 2009## 12,000 12,000,000
Lenfest Communications, Inc., 10.5s, 2006 6,990 7,671,525
Liberty Group Operating, Inc., 9.375s, 2008 4,770 4,149,900
LIN Holdings Corp., 0s to 2003, 10s to 2008 8,390 5,369,600
Mail-Well I Corp., 8.75s, 2008 3,900 3,627,000
Marvel Holdings, Inc., 0s, 2000**(+) 11,125 0
NTL Communications Corp., 9.25s, 2006## 4,850 4,768,614
NTL Communications Corp., 0s to 2003, 12.375s to 2008 14,400 9,828,000
NTL Communications Corp., 9.75s, 2009+ 6,600 6,089,172
NTL, Inc., 0s to 2003, 9.75s to 2008## 1,290 865,913
Paxson Communications Corp., 11.625s, 2002 2,000 2,070,000
Pegasus Communications Corp., 12.5s, 2007## 7,100 7,597,000
Telemundo Holdings, Inc., 0s to 2003, 11.5s to 2008 11,125 7,008,750
World Color Press, Inc., 8.375s, 2008 1,595 1,571,075
World Color Press, Inc., 7.75s, 2009 2,725 2,546,158
Young Broadcasting, Inc., 8.75s, 2007 1,850 1,702,000
--------------
$ 182,171,275
- ------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.7%
Alaris Medical, Inc., 0s to 2003, 11.125s to 2008## $ 6,410 $ 2,564,000
Fresenius Medical Care Capital Trust II, 7.875s, 2008 2,400 2,148,000
Prime Medical Services, Inc., 8.75s, 2008 5,985 5,386,500
--------------
$ 10,098,500
- ------------------------------------------------------------------------------------------------------
Metals and Minerals - 3.7%
Acme Metals, Inc., 10.875s, 2007 $ 2,675 $ 321,000
AK Steel Holdings Corp., 9.125s, 2006 937 921,774
Algoma Steel, Inc., 12.375s, 2005 6,079 5,683,865
Commonwealth Aluminum Corp., 10.75s, 2006 4,925 4,925,000
Doe Run Resources Corp., 11.25s, 2005 4,750 4,370,000
Jorgansen Bank, 9.438s, 2004 4,913 4,838,812
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 3,550 3,461,250
Kaiser Aluminum & Chemical Corp., 12.75s, 2003 9,020 8,884,700
LTV Corp., 11.75s, 2009## 3,000 3,120,000
Metal Management, Inc., 10s, 2008 7,700 5,813,500
Northwestern Steel & Wire Co., 9.5s, 2001 4,809 2,644,950
Ryerson Tull, Inc., 9.125s, 2006 1,050 1,091,115
WCI Steel, Inc., 10s, 2004 5,450 5,368,250
Wheeling Pittsburgh Corp., 9.25s, 2007 600 564,000
--------------
$ 52,008,216
- ------------------------------------------------------------------------------------------------------
Printing and Publishing - 0.6%
Hollinger International Publishing, 9.25s, 2007 $ 9,075 $ 8,712,000
- ------------------------------------------------------------------------------------------------------
Retail - 1.7%
Cole National Group, Inc., 8.625s, 2007 $ 15 $ 10,688
Duane Reade, Inc., 9.25s, 2008 4,920 4,797,000
Finlay Enterprises, Inc., 9s, 2008 2,250 2,053,125
Finlay Fine Jewelry Corp., 8.375s, 2008 5,725 5,281,312
J.Crew Group, Inc., 0s to 2002, 13.125s to 2008 4,530 2,389,575
J.Crew Operating Corp., 10.375s, 2007 5,265 4,462,088
Musicland Group, Inc., 9s, 2003 2,160 2,079,000
Musicland Group, Inc., 9.875s, 2008 2,475 2,289,375
--------------
$ 23,362,163
- ------------------------------------------------------------------------------------------------------
Supermarkets - 0.1%
Jitney-Jungle Stores of America, Inc., 12s, 2006** $ 5,275 $ 1,055,000
Jitney-Jungle Stores of America, Inc., 10.375s, 2007** 500 9,375
Pathmark Stores, Inc., 10.75s, 2003 465 69,750
Penn Traffic Co., 11s, 2009 1 623
--------------
$ 1,134,748
- ------------------------------------------------------------------------------------------------------
Telecommunications - 19.6%
Allegiance Telecommunications, Inc., 0s to 2003,
11.75s to 2008 $ 6,475 $ 4,629,625
Allegiance Telecommunications, Inc., 12.875s, 2008 4,000 4,520,000
American Cellular Corp., 10.5s, 2008 300 339,750
AMSC Acquisition Co., Inc., 12.25s, 2008 3,570 2,731,050
Caprock Communications Corp., 11.5s, 2009 5,975 6,049,688
Centennial Cellular Operating Co., 10.75s, 2008 10,970 11,381,375
Crown Castle International Corp., 9s, 2011## 5,700 5,372,250
Cybernet Internet Services International, 14s, 2009## 6,125 5,145,000
DTI Holdings, Inc., 0s to 2003, 12.5s to 2008 9,175 4,128,750
Esat Holdings Ltd., 0s to 2002, 12.5s to 2007 2,825 2,528,375
Exodus Communications, Inc., 11.25s, 2008 9,125 9,444,375
Exodus Communications, Inc., 10.75s, 2009## 4,800 4,896,000
Focal Communications Corp., 11.875s, 2010 3,575 3,664,375
GCI, Inc., 9.75s, 2007 2,345 2,198,438
Globenet Communications Group, 13s, 2007## 4,760 4,617,200
Globix Corp., 12.5s, 2010 4,230 4,272,300
Hyperion Telecommunication, Inc., 12s, 2007 910 944,125
ICG Holdings, Inc., 0s to 2001, 12.5s to 2006 9,325 7,506,625
Intermedia Communications, Inc., 8.875s, 2007 5,460 5,023,200
Intermedia Communications, Inc., 8.5s, 2008 1,000 900,000
ITC Deltacom, Inc., 11s, 2007 5,594 5,817,760
ITC Deltacom, Inc., 9.75s, 2008 5,585 5,529,150
Level 3 Communications, Inc., 9.125s, 2008 15,870 14,719,425
McCaw International Ltd., 0s to 2002, 13s to 2007 5,675 4,114,375
Metromedia Fiber Network, Inc., 10s, 2008 10,620 10,646,550
MJD Communications, Inc., 9.5s, 2008 3,850 3,667,125
Nextel Communications, Inc., 0s to 2002, 9.75s to 2007 3,305 2,338,288
Nextel Communications, Inc., 0s to 2003, 9.95s to 2008 14,375 9,954,687
Nextel International, Inc., 0s to 2003, 12.125s to 2008 3,525 2,203,125
Nextlink Communications, Inc., 9.625s, 2007 3,025 2,911,563
Nextlink Communications, Inc., 10.75s, 2009 13,975 14,079,812
Nextlink Communications, Inc., 0s to 2004, 12.25s to 2009 3,100 1,860,000
Northeast Optic Network, 12.75s, 2008 2,350 2,479,250
Orbital Imaging Corp., 11.625s, 2005 505 340,875
Pagemart Wireless, Inc., 0s to 2003, 11.25s to 2008 1,840 736,000
PSINET, Inc., 10.5s, 2006## 6,025 6,070,187
PSINET, Inc., 11.5s, 2008 3,850 4,023,250
PSINET, Inc., 11s, 2009 11,380 11,636,050
Rhythms Netconnections, Inc., 12.75s, 2009 925 878,750
Rural Cellular Corp., 9.625s, 2008 3,200 3,284,000
SBA Communications Corp., 0s to 2003, 12s to 2008 4,050 2,754,000
Spectrasite Holdings, Inc., 0s to 2003, 12s to 2008 18,845 11,215,000
Sprint Spectrum LP, 11s, 2006 450 493,983
Telesystem International Wireless, Inc., 0s to 2002,
13.25s to 2007 6,115 4,028,256
Time Warner Telecommunications LLC, 9.75s, 2008 4,500 4,511,250
United International Holdings, 0s to 2003, 10.75s to 2008 15,125 9,982,500
Verio, Inc., 10.375s, 2005 1,025 1,042,938
Verio, Inc., 10.625s, 2009## 3,725 3,827,437
Viatel, Inc., 11.25s, 2008 3,375 3,155,625
Viatel, Inc., 0s to 2003, 12.5s to 2008 1,875 1,087,500
VoiceStream Wire, 10.375s, 2009## 14,450 14,811,250
Western Wireless Corp., 10.5s, 2007 7,900 8,413,500
Worldwide Fiber, Inc., 12s, 2009## 9,930 10,327,200
--------------
$ 273,233,162
- ------------------------------------------------------------------------------------------------------
Utilities - Electric - 0.2%
International Utility Structures, 10.75s, 2008 $ 3,600 $ 2,871,000
- ------------------------------------------------------------------------------------------------------
Total U.S. Bonds $1,050,834,946
- ------------------------------------------------------------------------------------------------------
Foreign Bonds - 14.1%
Belgium - 2.5%
Hermes Europe Railtel B.V., 10.375s, 2009
(Telecommunications) $ 8,550 $ 8,293,500
Tele1 Europe B.V., 11.875s, 2009 (Telecommunications) 4,500 4,501,339
Tele1 Europe B.V., 13s, 2009 (Telecommunications) 9,575 9,910,125
Versatel Telecom B.V., 13.25s, 2008 (Telecommunications) 9,650 10,204,875
Versatel Telecom International, 13.25s, 2008
(Telecommunications) 2,250 2,379,375
--------------
$ 35,289,214
- ------------------------------------------------------------------------------------------------------
Bermuda - 0.5%
Global Crossing Holdings Ltd., 9.625s, 2008
(Telecommunications) $ 7,600 $ 7,353,000
- ------------------------------------------------------------------------------------------------------
Canada - 1.0%
GT Group Telecom, Inc., 0s to 2005, 13.25s to 2010
(Telecommunications) $ 11,450 $ 6,068,500
MetroNet Communications Corp., 0s to 2002, 10.75s
to 2007 (Telecommunications)## 1,200 1,012,800
MetroNet Communications Corp., 0s to 2003, 9.95s to
2008 (Telecommunications) 2,195 1,731,175
PCI Chemicals Canada, Inc., 9.25s, 2007 (Chemicals) 1,115 852,975
Russel Metals, Inc., 10s, 2009 (Metals and Minerals) 3,900 3,851,250
--------------
$ 13,516,700
- ------------------------------------------------------------------------------------------------------
Greece - 0.1%
Fage Dairy Industries S.A., 9s, 2007 (Food and
Beverage Product) $ 2,360 $ 2,006,000
- ------------------------------------------------------------------------------------------------------
Luxembourg - 1.1%
Millicom International Cellular Communications Corp.,
0s to 2001, 13.5s to 2006 (Telecommunications) $ 8,325 $ 7,201,125
PTC International Finance B.V., 11.25s, 2009
(Telecommunications)## 8,000 7,960,000
--------------
$ 15,161,125
- ------------------------------------------------------------------------------------------------------
Mexico - 0.3%
Satelites Mexicanos S.A. de CV, 10.125s, 2004
(Telecommunications) $ 5,675 $ 3,972,500
- ------------------------------------------------------------------------------------------------------
Netherlands - 1.7%
Completel Europe N.V., 0s to 2004, 14s to 2009
(Telecommunications) $ 9,475 $ 4,927,000
United Pan Europe Commerce N.V., 11.25s, 2010 (Media) 5,620 5,648,100
United Pan Europe Commerce N.V., 11.5s, 2010 (Media) 1,000 1,005,000
United Pan Europe Communication, 10.875s, 2009 (Media)## 12,540 12,257,850
--------------
$ 23,837,950
- ------------------------------------------------------------------------------------------------------
Norway - 0.1%
Ocean Rig Norway, 10.25s, 2008 (Oil Services) $ 2,225 $ 1,835,625
- ------------------------------------------------------------------------------------------------------
Thailand - 0.2%
Jasmine Submarine Telecom Ltd., 8.483s, 2011 (Industrial)## $ 3,220 $ 2,526,287
- ------------------------------------------------------------------------------------------------------
Turkey - 0.3%
Cellco Finance N.V. Turkcell, 12.75s, 2005 (Industrial) $ 3,700 $ 3,866,500
- ------------------------------------------------------------------------------------------------------
United Kingdom - 6.3%
Colt Telecommunications Group PLC, 0s to 2001,
12s to 2006 (Telecommunications) $ 14,395 $ 12,667,600
Dialog Corp. PLC, 11s, 2007 (Telecommunications) 5,410 2,475,075
Dolphin Telecom PLC, 0s to 2003, 11.50s to 2008
(Telecommunications) 3,545 1,524,350
Dolphin Telecom PLC, 0s to 2003, 11.50s to 2008
(Telecommunications) 10,900 5,054,875
Energis PLC, 9.75s, 2009 (Telecomminications) 5,350 5,644,250
Esat Telecom Group PLC, 0s to 2002, 12.5s to 2007
(Telecommunications) 3,150 2,819,250
Esat Telecom Group PLC, 11.875s, 2008 (Telecommunications) 11,165 13,063,050
Esprit Telecom Group PLC, 11.5s, 2007 (Telecommunications)## 2,500 2,412,500
Esprit Telecom Group PLC, 10.875s, 2008 (Telecommunications) 1,725 1,621,500
Jazztel PLC, 13.25s, 2009 (Telecommunications)## 4,375 4,392,313
Jazztel PLC, 14s, 2009 (Telecommunications) 8,240 8,446,000
Ono Finance PLC, 13s, 2009 (Media) 12,105 12,710,250
Telewest Commerce New PLC, 9.875s, 2010 (Media) 4,875 4,875,000
Telewest Commerce New PLC, 11.375s, 2010 (Media) 6,025 3,554,750
Telewest Communications PLC, 9.625s, 2006 (Media) 1,770 1,796,550
Telewest Communications PLC, 11.25s, 2008 (Media) 2,000 2,170,000
Telewest Communications PLC, 0s to 2004, 9.875s to
2009 (Media)## 3,940 2,442,800
--------------
$ 87,670,113
- ------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 197,035,014
- ------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $1,332,890,195) $1,247,869,960
- ------------------------------------------------------------------------------------------------------
Stocks - 1.2%
- ------------------------------------------------------------------------------------------------------
SHARES
- ------------------------------------------------------------------------------------------------------
U.S. Stocks - 0.4%
Building Materials
Atlantic Gulf Communities Corp.*+ 690 $ 90
- ------------------------------------------------------------------------------------------------------
Consumer Goods and Services
Ranger Industries, Inc.*++ 266,768 $ 366,806
- ------------------------------------------------------------------------------------------------------
Container, Forest and Paper Products - 0.2%
Gaylord Container Corp.* 320,500 $ 1,923,000
- ------------------------------------------------------------------------------------------------------
Media
Classic Communications, Inc.*(+) 9,000 $ 90,000
Granite Broadcasting Corp.* 5,000 53,750
--------------
$ 143,750
- ------------------------------------------------------------------------------------------------------
Telecommunications - 0.2%
Completel Holdings LLC*## 94,750 $ 1,895,000
Viatel, Inc.* 27,394 1,011,866
--------------
$ 2,906,866
- ------------------------------------------------------------------------------------------------------
Total U.S. Stocks $ 5,340,512
- ------------------------------------------------------------------------------------------------------
Foreign Stocks - 0.8%
United Kingdom
Colt Telecom Group PLC, ADR (Telecommunications)* 49,732 $ 9,467,729
Ono Finance PLC (Media)* 12,105 1,815,750
- ------------------------------------------------------------------------------------------------------
Total Foreign Stocks $ 11,283,479
- ------------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $11,871,648) $ 16,623,991
- ------------------------------------------------------------------------------------------------------
Preferred Stock - 3.1%
Consumer Goods and Services
Renaissance Cosmetics, Inc., 14s* 8,898 0
- ------------------------------------------------------------------------------------------------------
Energy - 0.1%
Clark USA, Inc.11.5s 3,562 $ 961,740
- ------------------------------------------------------------------------------------------------------
Media - 1.1%
CSC Holdings, Inc., 11.25s 60,603 $ 6,575,426
Primedia, Inc., 8.625s 88,550 8,146,600
--------------
$ 14,722,026
- ------------------------------------------------------------------------------------------------------
Supermarkets
Supermarkets General Holdings Corp. 3.25s* 323,098 $ 646,196
- ------------------------------------------------------------------------------------------------------
Telecommunications - 1.9%
Crown Castle International Corp. 12.75s 10,328 $ 10,637,840
Global Crossings Holdings Ltd. 10.5s 47,500 4,702,500
Nextel Communications, Inc., 11.125s 2,170 2,159,150
Nextel Communications, Inc., 13s* 2,289 2,369,115
Rural Cellular Corp., 11.375s 6,568 6,535,160
--------------
$ 26,403,765
- ------------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $52,505,264) $ 42,733,727
- ------------------------------------------------------------------------------------------------------
Warrants - 1.1%
- ------------------------------------------------------------------------------------------------------
U.S. Warrants - 0.2%
Allegiance Telecommunications, Inc. (Telecommunications) 7,700 $ 130,900
American Mobile Satellite Corp. (Telecommunications)## 3,570 124,950
CHC Helicopter Corp. (Transportation) 16,000 16,000
Cybernet Internet Services International
(Telecommunications)* 6,125 735,000
DTI Holdings, Inc. (Telecommunications)* 45,875 459
Envirosource, Inc. (Industrial)*+ 238 107
Esat Holdings Ltd. (Telecommunications)*## 2,825 635,625
Grand Palais Resorts (Gaming & Hotels)*## 111,660 0
Hemmeter (Entertainment)* 111,660 0
ICO, Inc. (Energy)* 706,250 430,812
Knology Holdings, Inc. (Telecommunications)* 2,475 4,950
Loral Orion Network Systems, Inc. (Telecommunications)* 5,000 40,000
Loral Orion Network Systems, Inc. (Telecommunications)* 11,775 211,950
McCaw International Ltd. (Telecommunications)*## 7,225 108,375
Metronet Communications Corp. (Telecommunications)*## 3,250 455,000
Orbital Imaging Corp. (Telecommunications)*## 505 10,100
Renaissance Cosmetics, Inc. (Consumer Goods and Services)* 7,189 0
Republic Health Corp. (Medical Health and Technology)* 2,500 0
- ------------------------------------------------------------------------------------------------------
Total U.S. Warrants $ 2,904,228
- ------------------------------------------------------------------------------------------------------
Foreign Warrants - 0.9%
Jazztel PLC (Telecommunications)*## 33,200 $ 6,640,000
Tele1 Europe B. V. (Telecommunications)* 6,575 1,249,250
Versatel Telecom B.V. (Telecommunications)* 10,925 4,260,750
- ------------------------------------------------------------------------------------------------------
Total Foreign Warrants $ 12,150,000
- ------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $2,758,230) $ 15,054,228
- ------------------------------------------------------------------------------------------------------
Convertible Bond
- ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- ------------------------------------------------------------------------------------------------------
U.S. Bonds
Medical and Health Technology and Services
Total Renal Care Holdings, Inc., 7s, 2009##
(Identified Cost, $918,263) $ 1,405 $ 886,906
- ------------------------------------------------------------------------------------------------------
Municipal Bond
- ------------------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee)
Mesa County, CO, 8.5s, 2006** (Identified Cost, $350,625) $ 750 $ 562,500
- ------------------------------------------------------------------------------------------------------
Short-Term Obligation - 2.5%
- ------------------------------------------------------------------------------------------------------
Anheuser Busch, Inc., due 2/01/00, at Amortized Cost $ 34,515 $ 34,515,000
- ------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,435,809,225) $1,358,246,312
Other Assets, Less Liabilities - 2.6% 36,486,921
- ------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,394,733,233
- ------------------------------------------------------------------------------------------------------
* 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 represents 5% or more of the
outstanding voting securities of the issuer.
(+) Security valued by or at the direction of the Trustees.
See notes to financial statements.
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- -------------------------------------------------------------------------------
JANUARY 31, 2000
- -------------------------------------------------------------------------------
Assets:
Investments, at value:
Unaffiliated issuer (identified cost, $1,428,585,306) $1,357,879,506
Affiliated issuer (identified cost $7,223,919) 366,806
--------------
Total investments, at value (identified cost
$1,435,809,225) $1,358,246,312
Net receivable for forward foreign currency exchange
contracts closed or subject to master netting agreements 719,270
Receivable for Fund shares sold 7,585,213
Receivable for investments sold 17,187,554
Interest and dividends receivable 30,625,356
Other assets 15,245
--------------
Total assets $1,414,378,950
--------------
Liabilities:
Payable to custodian $ 245,063
Distributions payable 4,520,238
Payable for Fund shares reacquired 3,874,070
Payable for investments purchased 10,464,789
Payable to affiliates -
Management fee 53,368
Shareholder servicing agent fee 11,336
Distribution and service fee 68,184
Administrative fee 1,620
Accrued expenses and other liabilities 407,049
--------------
Total liabilities $ 19,645,717
--------------
Net assets $1,394,733,233
==============
Net assets consist of:
Paid-in capital $1,601,182,329
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (76,851,839)
Accumulated net realized loss on investments and foreign
currency transactions (121,785,773)
Accumulated distributions in excess of net investment
income (7,811,484)
--------------
Total $1,394,733,233
==============
Shares of beneficial interest outstanding 281,518,654
===========
Class A shares:
Net asset value per share
(net assets of $768,734,358 / 155,213,458 shares of
beneficial interest outstanding) $4.95
=====
Offering price per share (100 / 95.25) $5.20
=====
Class B shares:
Net asset value and offering price per share
(net assets of $499,829,554 / 100,881,685 shares of
beneficial interest outstanding) $4.95
=====
Class C shares:
Net asset value and offering price per share
(net assets of $108,253,401 / 21,801,808 shares of
beneficial interest outstanding) $4.97
=====
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $17,915,920 / 3,621,703 shares of
beneficial interest outstanding) $4.95
=====
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, 2000
- -------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 141,367,643
Dividends 1,430,379
--------------
Total investment income $ 142,798,022
--------------
Expenses -
Management fee $ 6,463,845
Trustees' compensation 73,840
Shareholder servicing agent fee 1,450,355
Distribution and service fee (Class A) 2,347,973
Distribution and service fee (Class B) 5,151,708
Distribution and service fee (Class C) 1,106,711
Administrative fee 173,808
Custodian fee 318,696
Printing 92,457
Postage 173,723
Auditing fees 35,198
Legal fees 8,877
Miscellaneous 909,914
--------------
Total expenses $ 18,307,105
Fees paid indirectly (300,217)
--------------
Net expenses $ 18,006,888
--------------
Net investment income $ 124,791,134
--------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (19,610,784)
Foreign currency transactions 267,963
--------------
Net realized loss on investments and foreign currency
transactions $ (19,342,821)
--------------
Change in unrealized appreciation (depreciation) -
Investments $ (48,636,075)
Translation of assets and liabilities in foreign
currencies 551,882
--------------
Net unrealized loss on investments and foreign currency
translation $ (48,084,193)
--------------
Net realized and unrealized loss on investments and
foreign currency $ (67,427,014)
--------------
Increase in net assets from operations $ 57,364,120
==============
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 2000 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 124,791,134 $ 106,043,440
Net realized loss on investments and foreign
currency transaction (19,342,821) (17,292,751)
Net unrealized loss on investments and foreign
currency translation (48,084,193) (69,417,161)
-------------- --------------
Increase in net assets from operations $ 57,364,120 $ 19,333,528
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (71,000,452) $ (64,963,363)
From net investment income (Class B) (43,240,914) (34,576,764)
From net investment income (Class C) (9,263,379) (5,923,315)
From net investment income (Class I) (1,286,389) (579,998)
In excess of net investment income (Class A) (2,483,499) (1,294,009)
In excess of net investment income (Class B) (1,512,509) (688,737)
In excess of net investment income (Class C) (324,020) (117,987)
In excess of net investment income (Class I) (44,996) (11,553)
-------------- --------------
Total distributions declared to shareholders $ (129,156,158) $ (108,155,726)
-------------- --------------
Net increase in net assets from Fund share transactions $ 92,713,085 $ 247,514,049
-------------- --------------
Total increase in net assets $ 20,921,047 $ 158,691,851
Net assets:
At beginning of period 1,373,812,186 1,215,120,335
-------------- --------------
At end of period (including accumulated distributions
in excess of net investment income of $7,811,484 and
$3,855,509, respectively) $1,394,733,233 $1,373,812,186
============== ==============
See notes to financial statements.
</TABLE>
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 5.21 $ 5.62 $ 5.35 $ 5.24 $ 4.84
------- ------- ------- ------- -------
Income from investment operations# -
Net investment income $ 0.46 $ 0.46 $ 0.47 $ 0.47 $ 0.45
Net realized and unrealized gain (loss) on
investments and foreign currency (0.24) (0.40) 0.27 0.10 0.39
------- ------- ------- ------- -------
Total from investment operations $ 0.22 $ 0.06 $ 0.74 $ 0.57 $ 0.84
------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (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 $ (0.48) $ (0.47) $ (0.47) $ (0.46) $ (0.44)
------- ------- ------- ------- -------
Net asset value - end of period $ 4.95 $ 5.21 $ 5.62 $ 5.35 $ 5.24
======= ======= ======= ======= =======
Total return(+) 4.35% 1.06% 14.63% 11.52% 17.97%
Ratios (to average net assets)/Supplemental data:
Expenses## 0.98% 0.99% 1.01% 1.02% 1.00%
Net investment income 9.08% 8.62% 8.56% 8.92% 8.83%
Portfolio turnover 91% 135% 137% 87% 59%
Net assets at end of period (000,000 Omitted) $769 $792 $766 $672 $620
# 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.
See notes to financial statements.
</TABLE>
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 5.21 $ 5.62 $ 5.35 $ 5.24 $ 4.84
------- ------- ------- ------- -------
Income from investment operations# -
Net investment income $ 0.42 $ 0.43 $ 0.43 $ 0.43 $ 0.41
Net realized and unrealized gain (loss) on
investments and foreign currency (0.24) (0.40) 0.27 0.10 0.39
------- ------- ------- ------- -------
Total from investment operations $ 0.18 $ 0.03 $ 0.70 $ 0.53 $ 0.80
------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (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 $ (0.44) $ (0.44) $ (0.43) $ (0.42) $ (0.40)
------- ------- ------- ------- -------
Net asset value - end of period $ 4.95 $ 5.21 $ 5.62 $ 5.35 $ 5.24
======= ======= ======= ======= =======
Total return 3.63% 0.35% 13.83% 10.66% 16.98%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.68% 1.69% 1.70% 1.79% 1.85%
Net investment income 8.38% 7.92% 7.82% 8.13% 7.99%
Portfolio turnover 91% 135% 137% 87% 59%
Net assets at end of period (000,000 Omitted) $500 $479 $385 $301 $283
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangement.
See notes to financial statements.
</TABLE>
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 5.22 $ 5.64 $ 5.36 $ 5.25 $ 4.85
------- ------- ------- ------- -------
Income from investment operations# -
Net investment income $ 0.43 $ 0.42 $ 0.43 $ 0.43 $ 0.41
Net realized and unrealized gain (loss) on
investments and foreign currency (0.24) (0.40) 0.28 0.11 0.39
------- ------- ------- ------- -------
Total from investment operations $ 0.19 $ 0.02 $ 0.71 $ 0.54 $ 0.80
------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (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 $ (0.44) $ (0.44) $ (0.43) $ (0.43) $ (0.40)
------- ------- ------- ------- -------
Net asset value - end of period $ 4.97 $ 5.22 $ 5.64 $ 5.36 $ 5.25
======= ======= ======= ======= =======
Total return 3.83% 0.35% 13.81% 10.71% 17.03%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.68% 1.69% 1.70% 1.72% 1.77%
Net investment income 8.38% 7.93% 7.78% 8.16% 8.02%
Portfolio turnover 91% 135% 137% 87% 59%
Net assets at end of period (000,000 Omitted) $108 $94 $60 $28 $16
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangement.
See notes to financial statements.
</TABLE>
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 2000 1999 1998 1997*
- -------------------------------------------------------------------------------------------------------------------------
CLASS I
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 5.21 $ 5.61 $ 5.35 $ 5.34
------- ------- ------- -------
Income from investment operations# -
Net investment income $ 0.48 $ 0.49 $ 0.49 $ 0.04
Net realized and unrealized gain (loss) on investments
and foreign currency (0.24) (0.40) 0.25 0.01
------- ------- ------- -------
Total from investment operations $ 0.24 $ 0.09 $ 0.74 $ 0.05
------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.48) $ (0.48) $ (0.48) $ (0.04)
In excess of net investment income (0.02) (0.01) -- --
------- ------- ------- -------
Total distributions declared to shareholders $ (0.50) $ (0.49) $ (0.48) $ (0.04)
------- ------- ------- -------
Net asset value - end of period $ 4.95 $ 5.21 $ 5.61 $ 5.35
======= ======= ======= =======
Total return 4.68% 1.55% 14.77% 0.91%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.68% 0.69% 0.71% 0.59%+
Net investment income 9.38% 8.99% 8.86% 8.70%+
Portfolio turnover 91% 135% 137% 87%
Net assets at end of period (000,000 Omitted) $18 $9 $4 $3
* For the period from the commencement of offering Class I, 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 arrangement.
See notes to financial statements.
</TABLE>
<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
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. 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, by the Trustees. Equity
securities listed on securities exchanges or reported through the NASDAQ
system are reported at market value using last sale prices. Unlisted equity
securities or listed equity securities for which last sale prices are not
available are reported at market value using last quoted bid prices.
Securities for which there are no such quotations or valuations are valued 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 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 calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
Distributions to shareholders are recorded on the ex-dividend date. The Fund
distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits be reported in the financial statements as a distribution 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.
During the year ended January 31, 2000, $63,696,263 and $409,049 were
reclassified to accumulated net realized loss on investments and foreign
currency transactions and accumulated distributions in excess of net
investment income, respectively, from paid-in capital, due to differences
between book and tax accounting for defaulted securities, currency
transactions 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, 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, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on the value
of settled shares outstanding of each class, without distinction between share
classes. Dividends are declared separately for each class. Differences in per
share dividend rates are generally due to differences in separate class
expenses. Class B shares will convert to Class A shares approximately eight
years after purchase.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at the following annual
rates:
BASED ON AVERAGE NET ASSETS BASED ON GROSS INCOME
- --------------------------------------- -----------------------------------
First $200 million 0.22% 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 and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of
$31,198 for the year ended January 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 pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$449,010 for the year ended Janauary 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 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 $273,415 for the year ended January 31, 2000. Fees incurred
under the distribution plan during the year ended January 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 $36,535 and $1,863 for
Class B and Class C shares, respectively, for the year ended January 31, 2000.
Fees incurred under the distribution plan during the year ended January 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 12 months following
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B shares in the event of a shareholder redemption within
six years of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the year ended January 31,
2000, were $23,149, $1,382,253, and $80,596 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%. Prior to April 1, 1999, the fee was calculated as a percentage of the
Fund's average daily net assets at an annual rate of 0.1125%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$1,351,706,293 and $1,224,421,533, 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 $1,437,337,239
--------------
Gross unrealized appreciation $ 47,698,037
Gross unrealized depreciation (126,788,964)
--------------
Net unrealized depreciation $ (79,090,927)
==============
(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, 2000 YEAR ENDED JANUARY 31, 1999
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 68,008,698 $ 347,321,283 69,138,322 $ 367,556,417
Shares issued to shareholders
in reinvestment of distributions 8,627,991 43,975,808 7,327,609 39,296,362
Shares reacquired (73,457,249) (375,946,847) (60,757,910) (328,524,451)
----------- ------------- ----------- -------------
Net increase 3,179,440 $ 15,350,244 15,708,021 $ 78,328,328
=========== ============= =========== =============
<CAPTION>
Class B Shares
YEAR ENDED JANUARY 31, 2000 YEAR ENDED JANUARY 31, 1999
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 53,701,585 $ 275,366,696 64,848,309 $ 348,181,856
Shares issued to shareholders
in Reinvestment of distributions 4,639,347 23,640,151 3,523,279 18,851,542
Shares reacquired (49,378,103) (251,932,760) (45,051,012) (242,322,297)
----------- ------------- ----------- -------------
Net increase 8,962,829 $ 47,074,087 23,320,576 $ 124,711,101
=========== ============= =========== =============
<CAPTION>
Class C Shares
YEAR ENDED JANUARY 31, 2000 YEAR ENDED JANUARY 31, 1999
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 18,812,025 $ 96,547,176 19,892,685 $ 106,915,192
Shares issued to shareholders
in Reinvestment of distributions 1,032,152 5,266,847 713,228 3,853,384
Shares reacquired (15,975,020) (81,551,415) (13,353,162) (71,990,060)
----------- ------------- ----------- -------------
Net increase 3,869,157 $ 20,262,608 7,252,751 $ 38,778,516
=========== ============= =========== =============
<CAPTION>
Class I Shares
YEAR ENDED JANUARY 31, 2000 YEAR ENDED JANUARY 31, 1999
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,196,852 $ 11,228,025 1,073,851 $ 5,962,205
Shares issued to shareholders
in Reinvestment of distributions 189,291 962,738 110,691 583,071
Shares reacquired (428,729) (2,164,617) (162,953) (849,172)
----------- ------------- ----------- -------------
Net increase 1,957,414 $ 10,026,146 1,021,589 $ 5,696,104
=========== ============= =========== =============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in an $820 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of Fund
shares. Interest is charged to each fund, based on its borrowings, at a rate
equal to the bank's base rate. In addition, a commitment fee, based on the
average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated to
the Fund for the year ended January 31, 2000, was $10,903. 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.
At January 31, 2000, forward foreign currency sales under master netting
agreements amounted to a net receivable of $258,465 with Merrill Lynch and
$460,805 with Deutsche Bank. 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, 2000, is set forth below:
<TABLE>
<CAPTION>
BEGINNING SHARE ENDING SHARE DIVIDEND
AFFILIATE AMOUNT AMOUNT INCOME ENDING VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ranger Industries, Inc. 266,768 266,768 $ -- $366,806
</TABLE>
(9) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At January 31,
2000, the Fund owned the following restricted securities, excluding securities
issued under Rule 144A, constituting 1.1% of net assets which may not be
publicly sold without registration under the Securities Act of 1933. The Fund
does not have the right to demand that such securities be registered. The
value of these securities is determined by valuations furnished by dealers or
by a pricing service, or if not available, in good faith, at fair value, by
the Trustees.
<TABLE>
<CAPTION>
DATE OF SHARE/PAR
DESCRIPTION ACQUISITION AMOUNT COST VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Airplane Pass Through Trust, 10.875s, 2019 3/13/1996 $5,240,541 $5,240,541 $ 4,455,903
Atlantic Gulf Communities Corp. 9/25/1995 690 -- 90
Envirosource, Inc. 5/15/1991 238 7,289 107
Merrill Lynch Mortgage Investors, Inc.,
8.429s, 2022 6/22/1994 $4,500,000 3,119,063 4,199,766
NTL Communications Corp. 9.75s, 2009 9/23/1999 $6,600,000 6,859,399 6,089,172
-----------
$14,745,038
===========
</TABLE>
<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, of MFS
High Income Fund (a series of MFS Series Trust III), including the portfolio
of investments, as of January 31, 2000, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund'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, 2000 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, the financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS High Income Fund
at January 31, 2000, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then
ended, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 9, 2000
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
- --------------------------------------------------------------------------------
IN JANUARY 2000, SHAREHOLDERS WERE MAILED A FORM 1099-DIV REPORTING THE
FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR YEAR
1999.
<PAGE>
MFS' YEAR 2000 READINESS DISCLOSURE
MFS Investment Management(R), as an investment adviser and
on behalf of the MFS funds, is committed to the effective
use of technology in managing our portfolio investments,
delivering high-quality service to MFS fund shareholders, [Graphic Omitted]
retirement plan participants, and MFS' institutional
clients, and supporting the financial consultants who sell
our products.
MFS can now say that it is ready for the Year 2000. Our testing has demonstrated
that MFS' computer hardware and software will recognize "00" as the Year 2000
and will not confuse those digits with 1900. All of our critical business
applications and processes have been successfully tested, and we have adopted
companywide policies that will help us maintain our readiness through the
remainder of the year. Any new technology that is brought into the company
before the end of the year will be held to the same stringent standards as our
current technology. We have also developed a vendor readiness survey, contacted
over 700 of our vendors, and established an ongoing process to review responses,
as well as to review readiness statements of new vendors and products.
MFS recognizes that fund shareholders and institutional clients also are
concerned about whether the companies whose securities are held in their
portfolios are addressing Y2K issues. As part of the MFS Original Research(R)
process of evaluating portfolio investments, one of the many relevant factors
that MFS' portfolio managers and research analysts may consider is a company's
Y2K readiness.
Y2K readiness is an enormously complex, worldwide issue. No company or
institution can guarantee that it will be unaffected by the Y2K issue. While MFS
is taking significant steps to protect the integrity of its internal systems,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on MFS fund shareholders, retirement plan participants, or
institutional clients.
If you have further questions regarding MFS' Year 2000 Readiness Program, please
visit our Web site at www.mfs.com, call our toll-free line, 1-800-637-4406, or
write to the MFS Year 2000 Program Management Office by e-mail at [email protected] or
by letter at 500 Boylston Street, Boston, MA 02116-3741.
<PAGE>
<TABLE>
MFS(R) HIGH INCOME FUND
<S> <C>
TRUSTEES SECRETARY
J. Atwood Ives+ - Chairman and Chief Executive Stephen E. Cavan*
Officer, Eastern Enterprises (diversified services Assistant Secretary
company) James R. Bordewick, Jr.*
Lawrence T. Perera+ - Partner, Hemenway CUSTODIAN
& Barnes (attorneys) State Street Bank and Trust Company
William J. Poorvu+ - Adjunct Professor, Harvard AUDITORS
University Graduate School of Business Deloitte & Touche LLP
Administration
INVESTOR INFORMATION
Charles W. Schmidt+ - Private Investor For information on MFS mutual funds, call your
investment professional or, for an information
Arnold D. Scott* - Senior Executive kit, call toll free: 1-800-637-2929 any business
Vice President, Director, and Secretary, day from 9 a.m. to 5 p.m. Eastern time (or leave a
MFS Investment Management message anytime).
Jeffrey L. Shames* - Chairman and Chief INVESTOR SERVICE
Executive Officer, MFS Investment Management MFS Service Center, Inc.
P.O. Box 2281
Elaine R. Smith+ - Independent Consultant Boston, MA 02107-9906
David B. Stone+ - Chairman, For general information, call toll free:
North American Management Corp. 1-800-225-2606 any business day from
(investment adviser) 8 a.m. to 8 p.m. Eastern time.
INVESTMENT ADVISER For service to speech- or hearing-impaired, call
Massachusetts Financial Services Company toll free: 1-800-637-6576 any business day from 9
500 Boylston Street a.m. to 5 p.m. Eastern time. (To use this service,
Boston, MA 02116-3741 your phone must be equipped with a
Telecommunications Device for the Deaf.)
DISTRIBUTOR
MFS Fund Distributors, Inc. For share prices, account balances, exchanges, or
500 Boylston Street stock and bond outlooks, call toll free:
Boston, MA 02116-3741 1-800-MFS-TALK (1-800-637-8255) anytime from a
touch-tone telephone.
CHAIRMAN AND PRESIDENT
Jeffrey L. Shames* WORLD WIDE WEB
www.mfs.com
PORTFOLIO MANAGER
Robert J. Manning*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
+ Independent Trustee
* MFS Investment Management
</TABLE>
<PAGE>
MFS(R) HIGH INCOME FUND ------------
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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-2 03/00 94M 18/218/318/818
