UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-2794
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MFS SERIES TRUST III
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(Exact name of registrant as specified in charter)
500 Boylston Street, Boston, Massachusetts 02116
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(Address of principal executive offices) (Zip code)
James R. Bordewick, Jr.
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
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(Name and address of agents for service)
Registrant's telephone number, including area code: (617) 954-5000
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Date of fiscal year end: January 31
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Date of reporting period: July 31, 2004
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ITEM 1. REPORTS TO STOCKHOLDERS.
MFS(R) Mutual Funds
SEMIANNUAL REPORT 7/31/04
MFS(R) HIGH YIELD
OPPORTUNITIES FUND
A path for pursuing opportunity
[graphic omitted]
[logo] M F S(R)
INVESTMENT MANAGEMENT
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MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
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Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about every MFS investment product and service that we
offer and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information;
we maintain information and records about you, your investments, and the
services you use. Examples of the nonpublic personal information we maintain
include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates, or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may share information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about MFS' privacy policy, please call 1-800-225-2606
any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUIF
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MFS(R) HIGH YIELD OPPORTUNITIES FUND
The fund seeks high current income.
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A PROSPECTUS FOR ANY MFS PRODUCT CAN BE OBTAINED FROM YOUR INVESTMENT
PROFESSIONAL. YOU SHOULD READ THE PROSPECTUS CAREFULLY BEFORE INVESTING AS IT
CONTAINS COMPLETE INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE(s), THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THE FUND, AND THE FEES, CHARGES, AND EXPENSES
INVOLVED. THESE ELEMENTS, AS WELL AS OTHER INFORMATION CONTAINED IN THE
PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY BEFORE INVESTING.
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TABLE OF CONTENTS
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MFS PRIVACY POLICY
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LETTER FROM THE CEO 1
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MFS ORIGINAL RESEARCH(R) 5
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MANAGEMENT REVIEW 6
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PORTFOLIO COMPOSITION 8
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PERFORMANCE SUMMARY 9
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EXPENSE TABLES 12
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PORTFOLIO OF INVESTMENTS 14
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FINANCIAL STATEMENTS 32
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NOTES TO FINANCIAL STATEMENTS 45
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TRUSTEES AND OFFICERS 57
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MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS 61
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ASSET ALLOCATION 62
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CONTACT INFORMATIONBACK COVER
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LETTER FROM THE CEO
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Dear Shareholders,
[Photo of Robert J. Manning]
Our firm was built on the strength of MFS Original Research(R), our in-depth
analysis of every security we consider for our portfolios. We've been honing
this process since 1932, when we created one of the mutual fund industry's
first research departments. And we continue to fine-tune this process so that
we can provide strong and consistent long-term investment performance to help
you achieve your financial goals.
While we have achieved strong investment performance in many of our portfolios,
our goal is to achieve the same strong results across all asset classes. To
ensure that our portfolio teams are doing the best possible job for our firm's
clients and shareholders, I am focusing the vast majority of my time on the
three key elements that I believe truly differentiate MFS from its competitors:
people, process, and culture.
PEOPLE
Our people have always been our most valuable resource. Our philosophy is to
deliver consistent, repeatable investment results by hiring the most talented
investors in our industry. We recruit from the nation's top business schools
and hire experienced analysts, both domestically and around the globe.
Our analysts are the engine that powers our entire investment team because
their recommendations have a direct impact on the investment performance of our
portfolios. To demonstrate our ongoing commitment in this area, we increased
the number of equity analysts at MFS from less than 40 at the end of 2000 to
about 50 in June 2004. During that same period, we doubled the average
investment experience of our domestic equity analysts, in part by recruiting
more seasoned analysts to the firm. Moreover, our international network of
investment personnel now spans key regions of the world with offices in London,
Mexico City, Singapore, and Tokyo, as well as Boston.
One of the major advantages that MFS has over many of its competitors is that
the position of research analyst is a long-term career for many members of our
team, not simply a steppingstone toward becoming a portfolio manager. We have
worked to elevate the stature of the analyst position to be on par with that of
a portfolio manager. In fact, an exceptional research analyst has the
opportunity to earn more at MFS than some portfolio managers.
At the same time, we look within the firm to promote talented analysts who
choose a path toward becoming a portfolio manager. We rarely hire portfolio
managers from our competitors because we believe the best investors are those
steeped in the MFS process and culture. In the past few months, we have
identified three senior research analysts who will assume roles on the
management teams of several of our larger portfolios. MFS is fortunate to have
a deep bench of talented investment personnel, and we welcome the opportunity
to put their skills to work for our clients.
PROCESS
MFS was built on the strength of its bottom-up approach to researching
securities. We have enhanced the mentoring process for our research analysts by
calling on several of our most seasoned portfolio managers to supplement the
work of Director of Global Equity Research David A. Antonelli. These portfolio
managers are taking a special interest in developing the careers of our
research analysts and strengthening our investment process. Kenneth J. Enright
of our value equity group is working with a team of domestic analysts; David E.
Sette-Ducati of our small- and mid-cap equity team is working with analysts
concentrating on small- and mid-cap companies; and Barnaby Wiener of our
international equity team in London heads the European equity research team.
We have combined the bottom-up approach of our research process with a top-
down approach to risk controls on portfolio composition. We have a very strong
quantitative team under the leadership of industry veteran Deborah H. Miller,
who represents the equity management department on the Management Committee of
the firm. Quantitative analysis helps us generate investment ideas and, more
importantly, assess the appropriate level of risk for each portfolio. The risk
assessment is designed to assure that each portfolio operates within its
investment objectives.
Additionally, we have increased the peripheral vision of our investment
personnel across asset classes through the collaboration of our Equity, Fixed
Income, Quantitative Analysis, and Risk Management teams. We recently codified
this key aspect of our culture by forming an Investment Management Committee,
composed of key members of these teams. This committee will work to ensure that
all teams are sharing information, actively debating investment ideas, and
creating a unified investment team.
CULTURE
Teamwork is at the heart of our ability to deliver consistent and competitive
investment performance over time. At MFS, each member of our team is involved
in our success; we have no superstars. The collaborative nature of our process
works to assure a consistent investment approach across all of our products and
provides a high level of continuity in portfolio management because our
investment performance never depends on the contributions of just a single
individual. Our culture is based on an environment of teamwork that allows our
investment personnel to be successful. In turn, we demand superior investment
results from every member of our team.
We have created a meritocracy at our firm based on investment results. We hold
all of our portfolio managers accountable for the performance of their
portfolios and their contributions to the team. We also track the equity and
fixed-income ratings of our analysts so we can evaluate them based on the
performance of their recommendations. We align bonus compensation to investment
performance by weighting rewards to those who have created the greatest
long-term benefit for our shareholders and who contribute most successfully to
the Original Research(SM) process.
The strength of our culture has resulted in a tremendous amount of stability.
Although we have dismissed members of our team whose performance did not meet
MFS' high standards, only one portfolio manager has voluntarily left the firm
over the past six months, based on a decision to retire from the industry.
In short, we can help you achieve your financial goals by hiring talented
people, following a disciplined process, and maintaining our firm's unique
culture. The enhancements described in this letter reflect the collaborative
spirit and the depth of resources in our investment teams.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
August 20, 2004
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
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MFS ORIGINAL RESEARCH(R)
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THE MFS(R) DIFFERENCE
For 80 years MFS has been offering investors clear paths to pursuing specific
investment objectives. Today, millions of individuals and thousands of
institutions all over the world look to MFS to manage their assets with
insight and care.
Our success, we believe, has to do with the fact that we see investors as
people with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers' ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain first-hand
knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies' customers and competitors
o developing our own proprietary estimates of companies' earnings
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MANAGEMENT REVIEW
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MARKET ENVIRONMENT
The six-month period ended July 31, 2004, was a volatile time for fixed-income
markets, marked by fairly significant movements in interest rates and divergent
returns across different bond sectors. Interest rates trended generally lower
early in the period and then rose dramatically in April. At that time, in our
view, a series of strong jobs reports from the U.S. Department of Labor
signaled the economy was in full recovery, causing investors to conclude that
an interest rate hike was imminent. Indeed, the Federal Reserve Board raised
short-term rates by 0.25% on June 30 and, shortly after the period ended, by
another 0.25% on August 10.
The high-yield bond market began the period with strong performance as cash
continued to flow rapidly into the sector. However, mixed economic data and a
large new issue calendar appeared, in our view, to dampen market enthusiasm in
February, while rising interest rates applied further pressure on the market
during the second quarter. As interest rates rose during the period, cash flows
reversed and capital flowed out of the high-yield sector. For the six- month
period, however, high-yield securities, as represented by the fund's benchmark,
the Lehman Brothers High Yield Index, outperformed U.S. Treasuries and
investment-grade bonds, as represented by the Lehman Brothers U.S. Credit
Index, as their higher coupons provided some protection against rising rates.
(The principal value and interest on Treasury securities are guaranteed by the
U.S. government if held to maturity.) Higher rates also impacted emerging
market bonds, with an April selloff erasing many previous gains in that sector.
DETRACTORS FROM PERFORMANCE
The fund's underperformance versus its benchmark was attributable, in part, to
our avoidance of several sectors of the high-yield market that we view as quite
volatile. These included textiles and finance companies, which rallied strongly
during the period.
Additionally, our exposure to emerging markets debt, specifically Latin
American countries, was a source of volatility and relative underperformance
during the period. Several specific holdings also detracted from relative
performance, including Dobson Communications, a regional wireless services
provider that was hampered by slower than expected subscriber growth. Our
investment in MCI Inc., the successor to Worldcom Inc., was a source of
underperformance during the period as the predecessor company's debt was
converted to new securities, including equity, as part of its Chapter 11
bankruptcy restructuring.
CONTRIBUTORS TO PERFORMANCE
The portfolio's relative performance was helped by an underweighted position in
utilities and airlines and by an overweighting in the securities of packaging
companies. Among the holdings contributing to performance was Mission Energy
Holdings, an owner and operator of electric power generation facilities whose
liquidity and operating results have improved. Also adding to the portfolio's
relative performance were the sovereign bonds of Turkey and specialty chemical
producer Resolution Performance Products, as well as mortgage backed
securities.
Respectfully,
/s/ John F. Addeo /s/ Scott B. Richards
John F. Addeo Scott B. Richards
Portfolio Manager Portfolio Manager
Note to Shareholders: Effective May 24, 2004, Scott B. Richards became a
co-manager of the fund.
The views expressed in this report are those of the portfolio managers only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market and
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or as an indication of
trading intent on behalf of any MFS fund. References to specific securities are
not recommendations of such securities and may not be representative of any MFS
fund's current or future investments.
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Visit mfs.com for our latest economic and investment outlook.
o Under Updates & Announcements, click Week in Review for a summary of recent
investment-related news.
o From Week in Review, link to MFS Global Perspective for our current view of
the world.
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PORTFOLIO COMPOSITION
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PORTFOLIO STRUCTURE*
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Bonds 91.66%
Cash 5.79%
Stocks 2.55%
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BOND MARKET SECTORS*
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High Yield Corporate 68.8%
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Emerging Markets Debt 20.1%
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Cash & Cash Equivalents 5.8%
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Domestic Equity 1.9%
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Commercial Mortgage Backed 1.6%
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High Grade Corporates 1.1%
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Domestic Convertibles 0.6%
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International Equity 0.1%
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International Convertible 0.00%
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CREDIT QUALITY*
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AAA 0.2%
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A 0.1%
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BBB 4.5%
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BB 15.1%
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B 43.6%
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CCC 24.3%
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CC 2.3%
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D 1.5%
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Not Rated 0.0%
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Equity 2.6%
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Other 5.8%
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PORTFOLIO FACTS
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Average Duration 4.52
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Average Life 8.47 Yrs.
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Average Maturity 9.29 Yrs.
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Percentages are based on total net assets as of July 31, 2004.
Credit quality ratings are based on a weighted average of each security's
rating from Moody's Investors Service. If not rated by Moody's, the rating
will be that assigned by Standard & Poor's. Likewise, if not assigned a rating
by Standard & Poor's, it will be based on the rating assigned by Fitch, Inc.
If not rated by any of the three agencies, the security is considered not
rated, except for U.S. Treasuries and mortgage-backed securities, which are
included in the "AAA"-rating category.
* For purposes of this graphical presentation, accrued interest is included
within the bond component.
The portfolio is actively managed, and current holdings may be different.
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PERFORMANCE SUMMARY THROUGH 7/31/04
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Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for
the applicable time periods. Performance results reflect the percentage change
in net asset value, including the reinvestment of any dividends and capital
gains distributions. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS WERE PRIMARILY ACHIEVED DURING FAVORABLE MARKET
CONDITIONS, WHICH MAY NOT BE REPEATED. THE PERFORMANCE SHOWN DOES NOT REFLECT
THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
TOTAL RETURNS
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Average annual
without sales charge
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Class
Share inception
class date 6-mo 1-yr 3-yr 5-yr Life*
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A 7/01/1998 0.55% 13.67% 10.57% 7.37% 5.55%
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B 7/01/1998 0.23% 12.92% 9.90% 6.70% 4.90%
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C 7/01/1998 0.35% 12.95% 9.92% 6.69% 4.86%
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I 7/01/1998 0.75% 14.07% 10.84% 7.67% 5.94%
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Average annual
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Comparative benchmarks
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Average high current yield
fund+ 0.65% 11.91% 7.64% 3.46% 2.31%
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Lehman Brothers High Yield
Index# 0.81% 13.07% 9.26% 5.26% 4.31%
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Periods less than one year are actual, not annualized.
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Average annual
with sales charge
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Share
class 6-mo 1-yr 3-yr 5-yr Life*
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A -4.23% 8.27% 8.79% 6.33% 4.71%
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B -3.62% 8.92% 9.06% 6.44% 4.81%
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C -0.62% 11.95% 9.92% 6.69% 4.86%
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Class I shares do not have a sales charge. Please see Notes to Performance
Summary for more details.
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Cumulative without
sales charge
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A 0.55% 13.67% 35.18% 42.73% 38.87%
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B 0.23% 12.92% 32.73% 38.31% 33.77%
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C 0.35% 12.95% 32.81% 38.26% 33.46%
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I 0.75% 14.07% 36.19% 44.69% 42.07%
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Periods less than one year are actual, not annualized.
* For the period from the commencement of the fund's investment operations,
July 1, 1998, through July 31, 2004. Index information is from July 1, 1998.
+ Source: Lipper Inc., an independent firm that reports mutual fund performance.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITION
LEHMAN BROTHERS HIGH YIELD INDEX - measures the performance of the high-yield
bond market.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
Class A results, including sales charge, reflect the deduction of the maximum
4.75% sales charge. Class B results, including sales charge, reflect the
deduction of the applicable contingent deferred sales charge (CDSC), which
declines over six years from 4% to 0%. Class C results, including sales
charge, redeemed within one year from the end of the calendar month of
purchase, reflect the deduction of the 1% CDSC. Class I shares have no sales
charges and are available only to certain investors.
The fund will charge a 2% redemption fee on proceeds from shares redeemed or
exchanged within 30 calendar days of acquiring (either by purchasing or
exchanging) fund shares. See the prospectus for complete details.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers the fund's
performance results would be less favorable. Please see the prospectus and
financial statements for complete details.
KEY RISK CONSIDERATIONS
The portfolio invests in foreign and/or emerging markets securities which
involves risks relating to interest rates, currency exchange rates, economic,
and political conditions.
The portfolio invests in high yield or lower-rated securities which may
provide greater returns but are subject to greater-than-average risk.
These risks may increase share price volatility. Please see the prospectus for
further information regarding these and other risk considerations.
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EXPENSE TABLES
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FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM
FEBRUARY 1, 2004, THROUGH JULY 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and
(2) ongoing costs, including management fees; distribution and service
(12b-1) fees; and other fund expenses. This example is intended to help you
understand your ongoing costs (in dollars) of investing in the fund and to
compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning
of the period and held for the entire period, February 1, 2004 through
July 31, 2004.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table below provides information
about hypothetical account values and hypothetical expenses based on the
fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the fund's actual return. The hypothetical
account values and expenses may not be used to estimate the actual ending
account balance or expenses you paid for the period. You may use this
information to compare the ongoing costs of investing in the fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have
been higher.
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Share Class
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Expenses
Paid During
Annualized Beginning Ending Period
Expense Account Value Account Value 2/01/04-
Ratio 2/01/04 7/31/04 7/31/04
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A Actual 0.88% $1,000 $1,006 $4.40
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Hypothetical** 0.88% $1,000 $1,021 $4.43
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B Actual 1.53% $1,000 $1,002 $7.64
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Hypothetical** 1.53% $1,000 $1,017 $7.70
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C Actual 1.53% $1,000 $1,004 $7.64
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Hypothetical** 1.53% $1,000 $1,017 $7.70
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I Actual 0.53% $1,000 $1,008 $2.65
Hypothetical** 0.53% $1,000 $1,022 $2.67
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* Expenses paid is equal to each class" annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
** Assumed rate of return of 5% per year before expenses.
Effective March 1, 2004, the fund's management fee was reduced from 0.65% to
0.50% (as described in Note 3 to the Notes to the Financial Statements). The
above total is restated below to take into effect this fee reduction as if the
fee reduction had been in effect throughout the entire six month period.
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- --------------
Share Class
- --------------
- -------------------------------------------------------------------------------
Expenses
Paid During
Annualized Beginning Ending Period
Expense Account Value Account Value 2/01/04-
Ratio 2/01/04 7/31/04 7/31/04
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A Actual 0.86% $1,000 $1,006 $4.30
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Hypothetical 0.86% $1,000 $1,021 $4.33
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B Actual 1.51% $1,000 $1,003 $7.54
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Hypothetical 1.51% $1,000 $1,017 $7.60
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C Actual 1.51% $1,000 $1,004 $7.54
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Hypothetical 1.51% $1,000 $1,017 $7.60
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I Actual 0.51% $1,000 $1,008 $2.55
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Hypothetical 0.51% $1,000 $1,022 $2.57
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PORTFOLIO OF INVESTMENTS (unaudited) - 7/31/04
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The Portfolio of Investments is a complete list of all securities owned by your fund. It is
categorized by broad-based asset classes.
Bonds - 89.9%
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PAR AMOUNT
ISSUER (000 Omitted) $ VALUE
- -----------------------------------------------------------------------------------------------
U.S. Bonds - 62.1%
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Advertising & Broadcasting - 3.7%
- -----------------------------------------------------------------------------------------------
Allbritton Communications Co., 7.75%, 2012 $1,537 $1,517,788
- -----------------------------------------------------------------------------------------------
DIRECTV Holdings LLC, 8.375%, 2013 150 168,000
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Granite Broadcasting Corp., 9.75%, 2010## 3,775 3,454,125
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LBI Media Holdings, Inc., 0% to 2008, 11% to 2013 4,375 3,111,719
- -----------------------------------------------------------------------------------------------
Muzak LLC, 10%, 2009 925 814,000
- -----------------------------------------------------------------------------------------------
Paxson Communications Corp., 10.75%, 2008 310 316,200
- -----------------------------------------------------------------------------------------------
Paxson Communications Corp., 0% to 2006,
12.25% to 2009 2,975 2,595,688
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Spanish Broadcasting System, Inc., 9.625%, 2009 1,600 1,684,000
- -----------------------------------------------------------------------------------------------
XM Satellite Radio Holdings, Inc., 0% to 2005,
14% to 2009 1,097 1,043,425
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XM Satellite Radio, Inc., 12%, 2010 901 1,031,645
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$15,736,590
- -----------------------------------------------------------------------------------------------
Aerospace - 1.9%
- -----------------------------------------------------------------------------------------------
Argo-Tech Corp., 9.25%, 2011## $875 $918,750
- -----------------------------------------------------------------------------------------------
BE Aerospace, Inc., 8.875%, 2011 2,665 2,598,375
- -----------------------------------------------------------------------------------------------
Hexcel Corp., 9.75%, 2009 3,000 3,150,000
- -----------------------------------------------------------------------------------------------
K&F Industries, Inc., 9.25%, 2007 294 301,350
- -----------------------------------------------------------------------------------------------
K&F Industries, Inc., 9.625%, 2010 143 156,228
- -----------------------------------------------------------------------------------------------
TransDigm Holding Co., 8.375%, 2011 715 754,325
- -----------------------------------------------------------------------------------------------
$7,879,028
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Airlines - 1.5%
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Continental Airlines, Inc., 7.568%, 2006 $2,500 $1,901,767
- -----------------------------------------------------------------------------------------------
Continental Airlines, Inc., 6.748%, 2017 533 411,377
- -----------------------------------------------------------------------------------------------
Continental Airlines, Inc., 6.9%, 2017 294 236,796
- -----------------------------------------------------------------------------------------------
Continental Airlines, Inc., 8.307%, 2018 1,507 1,237,102
- -----------------------------------------------------------------------------------------------
Continental Airlines, Inc., 6.795%, 2018 2,557 2,074,956
- -----------------------------------------------------------------------------------------------
Continental Airlines, Inc., 7.566%, 2020 301 236,598
- -----------------------------------------------------------------------------------------------
$6,098,596
- -----------------------------------------------------------------------------------------------
Apparel Manufacturers - 0%
- -----------------------------------------------------------------------------------------------
WestPoint Stevens, Inc., 7.875%, 2005 - 2008** $3,905 $24,407
- -----------------------------------------------------------------------------------------------
Asset Backed & Securitized - 1.6%
- -----------------------------------------------------------------------------------------------
Anthracite CDO Ltd., 6%, 2037## $1,500 $1,173,150
- -----------------------------------------------------------------------------------------------
Asset Securitization Corp., 7.525%, 2029 1,073 909,811
- -----------------------------------------------------------------------------------------------
Deutsche Mortgage & Asset Receiving Corp., 7.5%, 2031 850 667,434
- -----------------------------------------------------------------------------------------------
Falcon Auto Dealership LLC, 3.8486%, 2025^^ 2,350 428,557
- -----------------------------------------------------------------------------------------------
First Union-Lehman Brothers Commercial Mortgage Trust,
7%, 2029## 1,000 1,081,869
- -----------------------------------------------------------------------------------------------
First Union-Lehman Brothers Commercial Mortgage Trust,
7.5%, 2029 1,000 1,022,344
- -----------------------------------------------------------------------------------------------
GMAC Commercial Mortgage Securities, Inc., 6.02%, 2033 750 692,800
- -----------------------------------------------------------------------------------------------
Lehman Brothers Commercial Conduit Mortgage Trust,
0.9668%, 2030^^ 8,220 307,770
- -----------------------------------------------------------------------------------------------
Morgan Stanley Capital I, Inc., 1.5921%, 2039^^## 4,927 379,314
- -----------------------------------------------------------------------------------------------
$6,663,049
- -----------------------------------------------------------------------------------------------
Automotive - 2.4%
- -----------------------------------------------------------------------------------------------
Advanced Accessory Systems LLC, 10.75%, 2011 $760 $761,900
- -----------------------------------------------------------------------------------------------
Dana Corp., 10.125%, 2010 615 701,100
- -----------------------------------------------------------------------------------------------
Dana Corp., 9%, 2011 200 236,000
- -----------------------------------------------------------------------------------------------
Delco Remy International, Inc., 9.375%, 2012## 340 329,800
- -----------------------------------------------------------------------------------------------
Eagle-Picher Industries, Inc., 9.75%, 2013 825 874,500
- -----------------------------------------------------------------------------------------------
Intermet Corp., 9.75%, 2009 885 805,350
- -----------------------------------------------------------------------------------------------
Metaldyne Corp., 11%, 2012 1,805 1,606,450
- -----------------------------------------------------------------------------------------------
Metaldyne Corp., 10%, 2013## 295 295,000
- -----------------------------------------------------------------------------------------------
Oxford Automotive, Inc., 12%, 2010## 1,795 1,382,150
- -----------------------------------------------------------------------------------------------
Tenneco Automotive, Inc., 10.25%, 2013 $925 1,054,500
- -----------------------------------------------------------------------------------------------
TRW Automotive, Inc., 9.375%, 2013 397 452,580
- -----------------------------------------------------------------------------------------------
TRW Automotive, Inc., 11%, 2013 1,076 1,291,200
- -----------------------------------------------------------------------------------------------
TRW Automotive, Inc., 11.75%, 2013 EUR 117 170,202
- -----------------------------------------------------------------------------------------------
$9,960,732
- -----------------------------------------------------------------------------------------------
Basic Industry - 0.5%
- -----------------------------------------------------------------------------------------------
Thermadyne Holdings Corp., 9.25%, 2014 $630 $630,000
- -----------------------------------------------------------------------------------------------
Trimas Corp., 9.875%, 2012 1,385 1,447,325
- -----------------------------------------------------------------------------------------------
$2,077,325
- -----------------------------------------------------------------------------------------------
Broadcast & Cable TV - 4.6%
- -----------------------------------------------------------------------------------------------
Adelphia Communications Corp., 9.375%, 2009** $350 $306,250
- -----------------------------------------------------------------------------------------------
Adelphia Communications Corp., 10.25%, 2011** 975 867,750
- -----------------------------------------------------------------------------------------------
Avalon Cable Holdings LLC, 11.875%, 2008 63 66,645
- -----------------------------------------------------------------------------------------------
CCO Holdings LLC, 8.75%, 2013## 505 484,800
- -----------------------------------------------------------------------------------------------
CSC Holdings, Inc., 8.125%, 2009 680 707,200
- -----------------------------------------------------------------------------------------------
CSC Holdings, Inc., 6.75%, 2012## 715 689,975
- -----------------------------------------------------------------------------------------------
Cablevision Systems Corp., 8%, 2012## 1,195 1,174,088
- -----------------------------------------------------------------------------------------------
Charter Communications, Inc., 8.625%, 2009 1,315 992,825
- -----------------------------------------------------------------------------------------------
Charter Communications, Inc., 9.92%, 2011 7,000 5,232,500
- -----------------------------------------------------------------------------------------------
Charter Communications, Inc., 8.375%, 2014## 435 419,775
- -----------------------------------------------------------------------------------------------
Frontiervision Holdings LP, 11.875%, 2007** 550 684,750
- -----------------------------------------------------------------------------------------------
Frontiervision Operating Partners LP, 11%, 2006** 795 977,850
- -----------------------------------------------------------------------------------------------
Grande Communications, 14%, 2011## 1,695 1,610,250
- -----------------------------------------------------------------------------------------------
Insight Midwest LP, 9.75%, 2009 860 890,100
- -----------------------------------------------------------------------------------------------
Mediacom Broadband LLC, 11%, 2013 2,735 2,803,375
- -----------------------------------------------------------------------------------------------
Mediacom LLC/Mediacom Capital Co., 9.5%, 2013 75 69,375
- -----------------------------------------------------------------------------------------------
Renaissance Media LLC, 10%, 2008 1,055 1,084,013
- -----------------------------------------------------------------------------------------------
$19,061,521
- -----------------------------------------------------------------------------------------------
Building - 2.0%
- -----------------------------------------------------------------------------------------------
Building Materials Corp. of America, 7.75%, 2005 $635 $642,938
- -----------------------------------------------------------------------------------------------
Building Materials Corp. of America, 8%, 2007 1,000 1,010,000
- -----------------------------------------------------------------------------------------------
Interface, Inc., 10.375%, 2010 864 969,840
- -----------------------------------------------------------------------------------------------
Interface, Inc., 9.5%, 2014## 850 854,250
- -----------------------------------------------------------------------------------------------
Jacuzzi Brands, Inc., 9.625%, 2010 505 545,400
- -----------------------------------------------------------------------------------------------
PLY Gem Industries, Inc., 9%, 2012## 1,060 1,070,600
- -----------------------------------------------------------------------------------------------
Williams Scotsman, Inc., 9.875%, 2007 3,360 3,326,381
- -----------------------------------------------------------------------------------------------
$8,419,409
- -----------------------------------------------------------------------------------------------
Business Services - 0.7%
- -----------------------------------------------------------------------------------------------
General Binding Corp., 9.375%, 2008 $1,480 $1,509,600
- -----------------------------------------------------------------------------------------------
Lucent Technologies, Inc., 6.45%, 2029 1,815 1,383,938
- -----------------------------------------------------------------------------------------------
$2,893,538
- -----------------------------------------------------------------------------------------------
Chemicals - 4.8%
- -----------------------------------------------------------------------------------------------
Equistar Chemicals LP, 10.625%, 2011 $1,405 $1,559,550
- -----------------------------------------------------------------------------------------------
Huntsman International LLC, 0%, 2009 3,225 1,612,500
- -----------------------------------------------------------------------------------------------
Huntsman International LLC, 9.875%, 2009 100 106,750
- -----------------------------------------------------------------------------------------------
Huntsman International LLC, 10.125%, 2009 3,420 3,479,850
- -----------------------------------------------------------------------------------------------
IMC Global, Inc., 10.875%, 2013 940 1,146,800
- -----------------------------------------------------------------------------------------------
JohnsonDiversey Holding, Inc., "B", 9.625%, 2012 1,255 1,380,500
- -----------------------------------------------------------------------------------------------
JohnsonDiversey Holding, Inc., 0% to 2007, 10.67% to 2013 2,120 1,643,000
- -----------------------------------------------------------------------------------------------
Lyondell Chemical Co., 9.5%, 2008 1,000 1,046,250
- -----------------------------------------------------------------------------------------------
Lyondell Chemical Co., 11.125%, 2012 545 608,356
- -----------------------------------------------------------------------------------------------
Nalco Co., 7.75%, 2011## 355 369,200
- -----------------------------------------------------------------------------------------------
Nalco Co., 8.875%, 2013## 665 698,250
- -----------------------------------------------------------------------------------------------
Nalco Finance Holdings, Inc., 0% to 2009, 9% to 2014## 2,110 1,434,800
- -----------------------------------------------------------------------------------------------
Resolution Performance Products LLC, 13.5%, 2010 1,740 1,679,100
- -----------------------------------------------------------------------------------------------
Rockwood Specialties Group, Inc., 10.625%, 2011 1,500 1,612,500
- -----------------------------------------------------------------------------------------------
Sovereign Specialty Chemicals, Inc., 11.875%, 2010 1,410 1,452,300
- -----------------------------------------------------------------------------------------------
$19,829,706
- -----------------------------------------------------------------------------------------------
Conglomerates - 0.2%
- -----------------------------------------------------------------------------------------------
Rexnord Industries, Inc., 10.125%, 2012 $760 $839,800
- -----------------------------------------------------------------------------------------------
Construction - 0.1%
- -----------------------------------------------------------------------------------------------
Technical Olympic USA, Inc., 7.5%, 2011 $400 $372,000
- -----------------------------------------------------------------------------------------------
Consumer Goods & Services - 2.2%
- -----------------------------------------------------------------------------------------------
K2, Inc., 7.375%, 2014## $170 $173,188
- -----------------------------------------------------------------------------------------------
KinderCare Learning Centers, Inc., 9.5%, 2009 679 690,883
- -----------------------------------------------------------------------------------------------
Leiner Health Products, Inc., 11%, 2012## 620 644,800
- -----------------------------------------------------------------------------------------------
Remington Arms Co., Inc., 10.5%, 2011 2,065 2,023,700
- -----------------------------------------------------------------------------------------------
Revlon Consumer Products Corp., 8.625%, 2008 3,084 2,652,240
- -----------------------------------------------------------------------------------------------
Samsonite Corp., 8.875%, 2011## 1,465 1,490,638
- -----------------------------------------------------------------------------------------------
Tempur-Pedic International, Inc., 10.25%, 2010 595 670,119
- -----------------------------------------------------------------------------------------------
Werner Holding Co., Inc., 10%, 2007 995 875,600
- -----------------------------------------------------------------------------------------------
$9,221,168
- -----------------------------------------------------------------------------------------------
Containers - 2.2%
- -----------------------------------------------------------------------------------------------
Graham Packaging Co., Inc., 8.75%, 2008 $1,410 $1,452,300
- -----------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.875%, 2009 685 744,938
- -----------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.75%, 2012 1,765 1,941,500
- -----------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.25%, 2013 765 801,338
- -----------------------------------------------------------------------------------------------
Plastipak Holdings, Inc., 10.75%, 2011 755 812,569
- -----------------------------------------------------------------------------------------------
Pliant Corp., 0% to 2006, 11.125% to 2009 1,020 902,700
- -----------------------------------------------------------------------------------------------
Pliant Corp., 13%, 2010 2,055 1,877,688
- -----------------------------------------------------------------------------------------------
Portola Packaging, Inc., 8.25%, 2012## 870 743,850
- -----------------------------------------------------------------------------------------------
$9,276,883
- -----------------------------------------------------------------------------------------------
Electronics - 0.1%
- -----------------------------------------------------------------------------------------------
ON Semiconductor Corp., 13%, 2008 $422 $475,805
- -----------------------------------------------------------------------------------------------
Energy - Independent - 1.0%
- -----------------------------------------------------------------------------------------------
Belden Blake Corp., 8.75%, 2012## $605 $616,344
- -----------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 7%, 2014## 427 431,270
- -----------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 6.875%, 2016 2,765 2,723,525
- -----------------------------------------------------------------------------------------------
Magnum Hunter Resources, Inc., 9.6%, 2012 245 270,725
- -----------------------------------------------------------------------------------------------
$4,041,864
- -----------------------------------------------------------------------------------------------
Entertainment - 1.0%
- -----------------------------------------------------------------------------------------------
AMC Entertainment, Inc., 9.5%, 2011 $396 $403,920
- -----------------------------------------------------------------------------------------------
AMF Bowling Worldwide, Inc., 10%, 2010## 675 696,938
- -----------------------------------------------------------------------------------------------
Loews Cineplex Entertainment Corp., 9%, 2014## 590 590,000
- -----------------------------------------------------------------------------------------------
Six Flags, Inc., 9.75%, 2013 2,780 2,571,500
- -----------------------------------------------------------------------------------------------
$4,262,358
- -----------------------------------------------------------------------------------------------
Financial Institutions - 0.1%
- -----------------------------------------------------------------------------------------------
Refco Finance Holdings LLC, 9%, 2012## $565 $565,000
- -----------------------------------------------------------------------------------------------
Food & Non-Alcoholic Beverages - 0.7%
- -----------------------------------------------------------------------------------------------
Merisant Co., 9.5%, 2013## $905 $950,250
- -----------------------------------------------------------------------------------------------
Michael Foods, Inc., 8%, 2013 750 781,875
- -----------------------------------------------------------------------------------------------
Seminis Vegetable Seeds, Inc., 10.25%, 2013 1,000 1,095,000
- -----------------------------------------------------------------------------------------------
$2,827,125
- -----------------------------------------------------------------------------------------------
Forest & Paper Products - 1.1%
- -----------------------------------------------------------------------------------------------
Buckeye Technologies, Inc., 8%, 2010 $875 $822,500
- -----------------------------------------------------------------------------------------------
Graphic Packaging International, Inc., 9.5%, 2013 1,105 1,215,500
- -----------------------------------------------------------------------------------------------
Greif, Inc., 8.875%, 2012 540 588,600
- -----------------------------------------------------------------------------------------------
Newark Group, Inc., 9.75%, 2014## 2,240 2,150,400
- -----------------------------------------------------------------------------------------------
$4,777,000
- -----------------------------------------------------------------------------------------------
Gaming & Lodging - 1.4%
- -----------------------------------------------------------------------------------------------
Ameristar Casinos, Inc., 10.75%, 2009 $140 $157,500
- -----------------------------------------------------------------------------------------------
Corrections Corp. of America, 9.875%, 2009 650 722,313
- -----------------------------------------------------------------------------------------------
Corrections Corp. of America, 7.5%, 2011 330 340,313
- -----------------------------------------------------------------------------------------------
GEO Group, Inc., 8.25%, 2013 395 400,925
- -----------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc., 9.25%, 2007 127 130,175
- -----------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc., 8.25%, 2012## 1,145 1,099,200
- -----------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc., 8.75%, 2013 300 298,500
- -----------------------------------------------------------------------------------------------
Resorts International Hotel & Casino, Inc., 11.5%, 2009 1,600 1,800,000
- -----------------------------------------------------------------------------------------------
Venetian Casino Resort LLC, 11%, 2010 840 957,600
- -----------------------------------------------------------------------------------------------
$5,906,526
- -----------------------------------------------------------------------------------------------
Industrial - 1.0%
- -----------------------------------------------------------------------------------------------
Communications & Power Industries, Inc., 8%, 2012 $280 $282,800
- -----------------------------------------------------------------------------------------------
Da-Lite Screen Co., Inc., 9.5%, 2011## 895 936,394
- -----------------------------------------------------------------------------------------------
Milacron Escrow Corp., 11.5%, 2011## 1,445 1,502,800
- -----------------------------------------------------------------------------------------------
Polypore International, Inc., 8.75%, 2012## 1,305 1,383,300
- -----------------------------------------------------------------------------------------------
$4,105,294
- -----------------------------------------------------------------------------------------------
Machinery & Tools - 2.0%
- -----------------------------------------------------------------------------------------------
Amsted Industries, Inc., 10.25%, 2011## $1,365 $1,474,200
- -----------------------------------------------------------------------------------------------
Case New Holland, Inc., 9.25%, 2011## 550 595,375
- -----------------------------------------------------------------------------------------------
Columbus McKinnon Corp., 8.5%, 2008 1,370 1,274,100
- -----------------------------------------------------------------------------------------------
Manitowoc Co., Inc., 10.375%, 2011 EUR 835 1,114,305
- -----------------------------------------------------------------------------------------------
Manitowoc Co., Inc., 10.5%, 2012 $355 405,588
- -----------------------------------------------------------------------------------------------
United Rentals, Inc., 6.5%, 2012 690 665,850
- -----------------------------------------------------------------------------------------------
United Rentals, Inc., 7.75%, 2013 2,155 2,084,963
- -----------------------------------------------------------------------------------------------
United Rentals, Inc., 7%, 2014 565 515,563
- -----------------------------------------------------------------------------------------------
$8,129,944
- -----------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 1.0%
- -----------------------------------------------------------------------------------------------
Alliance Imaging, Inc., 10.375%, 2011 $1,430 $1,483,625
- -----------------------------------------------------------------------------------------------
Healthsouth Corp., 8.5%, 2008 600 595,500
- -----------------------------------------------------------------------------------------------
InSight Health Services Corp., 9.875%, 2011 100 107,750
- -----------------------------------------------------------------------------------------------
NDCHealth Corp., 10.5%, 2012 305 333,975
- -----------------------------------------------------------------------------------------------
Tenet Healthcare Corp., 9.875%, 2014## 975 1,007,906
- -----------------------------------------------------------------------------------------------
Universal Hospital Services, Inc., 10.125%, 2011 700 705,250
- -----------------------------------------------------------------------------------------------
$4,234,006
- -----------------------------------------------------------------------------------------------
Medical Equipment - 0.6%
- -----------------------------------------------------------------------------------------------
Alpharma, Inc., 8.625%, 2011## $760 $784,700
- -----------------------------------------------------------------------------------------------
MedCath Holdings Corp., 9.875%, 2012## 1,740 1,770,450
- -----------------------------------------------------------------------------------------------
$2,555,150
- -----------------------------------------------------------------------------------------------
Metals & Mining - 1.5%
- -----------------------------------------------------------------------------------------------
Commonwealth Aluminum Corp., 10.75%, 2006 $505 $507,525
- -----------------------------------------------------------------------------------------------
Doe Run Resources Corp., 8.5%, 2008 44 34,185
- -----------------------------------------------------------------------------------------------
Earle M. Jorgensen Co., 9.75%, 2012 395 436,475
- -----------------------------------------------------------------------------------------------
Foundation PA Coal Co., 7.25%, 2014## 450 453,375
- -----------------------------------------------------------------------------------------------
Ispat Inland PLC, 9.75%, 2014## 1,740 1,796,550
- -----------------------------------------------------------------------------------------------
Kaiser Aluminum & Chemical Corp., 9.875%, 2002** 1,630 1,719,650
- -----------------------------------------------------------------------------------------------
Oregon Steel Mills, Inc., 10%, 2009 740 788,100
- -----------------------------------------------------------------------------------------------
U.S. Steel Corp., 9.75%, 2010 500 556,250
- -----------------------------------------------------------------------------------------------
$6,292,110
- -----------------------------------------------------------------------------------------------
Natural Gas - Pipeline - 2.2%
- -----------------------------------------------------------------------------------------------
ANR Pipeline Co., 8.875%, 2010 $210 $231,525
- -----------------------------------------------------------------------------------------------
ANR Pipeline Co., 9.625%, 2021 545 618,575
- -----------------------------------------------------------------------------------------------
El Paso Energy Corp., 7%, 2011 4,755 4,279,500
- -----------------------------------------------------------------------------------------------
El Paso Energy Corp., 7.75%, 2013 1,575 1,500,188
- -----------------------------------------------------------------------------------------------
Williams Cos., Inc., 8.625%, 2010 930 1,043,925
- -----------------------------------------------------------------------------------------------
Williams Cos., Inc., 7.125%, 2011 1,600 1,664,000
- -----------------------------------------------------------------------------------------------
$9,337,713
- -----------------------------------------------------------------------------------------------
Oil Services - 0.8%
- -----------------------------------------------------------------------------------------------
Dresser, Inc., 9.375%, 2011 $900 $974,250
- -----------------------------------------------------------------------------------------------
Parker Drilling Co., 9.625%, 2013 2,000 2,100,000
- -----------------------------------------------------------------------------------------------
Sesi LLC, 8.875%, 2011 220 237,600
- -----------------------------------------------------------------------------------------------
$3,311,850
- -----------------------------------------------------------------------------------------------
Oils - 0.3%
- -----------------------------------------------------------------------------------------------
Citgo Petroleum Corp., 11.375%, 2011 $800 $928,000
- -----------------------------------------------------------------------------------------------
Premcor Refining Group, Inc., 7.75%, 2012 420 446,250
- -----------------------------------------------------------------------------------------------
$1,374,250
- -----------------------------------------------------------------------------------------------
Pollution Control - 0.8%
- -----------------------------------------------------------------------------------------------
Allied Waste North America, Inc., 7.875%, 2013 $1,450 $1,517,063
- -----------------------------------------------------------------------------------------------
Allied Waste North America, Inc., 6.125%, 2014## 1,750 1,596,875
- -----------------------------------------------------------------------------------------------
$3,113,938
- -----------------------------------------------------------------------------------------------
Printing & Publishing - 2.7%
- -----------------------------------------------------------------------------------------------
American Media Operations, Inc., 8.875%, 2011 $110 $109,175
- -----------------------------------------------------------------------------------------------
Cenveo Corp., 7.875%, 2013 1,250 1,140,625
- -----------------------------------------------------------------------------------------------
Dex Media East LLC, 12.125%, 2012 1,000 1,185,000
- -----------------------------------------------------------------------------------------------
Dex Media West LLC, 9.875%, 2013 625 704,688
- -----------------------------------------------------------------------------------------------
Dex Media, Inc., 0% to 2008, 9% to 2013## 3,835 2,665,325
- -----------------------------------------------------------------------------------------------
Hollinger International, Inc., 9%, 2010 240 278,400
- -----------------------------------------------------------------------------------------------
Hollinger, Inc., 12.875%, 2011## 871 1,010,360
- -----------------------------------------------------------------------------------------------
Houghton Mifflin Co., 9.875%, 2013 870 893,925
- -----------------------------------------------------------------------------------------------
Houghton Mifflin Co., 0% to 2008, 11.5% to 2013 2,615 1,490,550
- -----------------------------------------------------------------------------------------------
Mail-Well Corp., 9.625%, 2012 520 559,000
- -----------------------------------------------------------------------------------------------
PRIMEDIA, Inc., 8.875%, 2011 680 668,100
- -----------------------------------------------------------------------------------------------
R.H. Donnelley Finance Corp., 10.875%, 2012 270 315,900
- -----------------------------------------------------------------------------------------------
$11,021,048
- -----------------------------------------------------------------------------------------------
Retailers - 2.6%
- -----------------------------------------------------------------------------------------------
Cole National Group, Inc., 8.625%, 2007 $325 $330,281
- -----------------------------------------------------------------------------------------------
Cole National Group, Inc., 8.875%, 2012 1,060 1,155,400
- -----------------------------------------------------------------------------------------------
Couche-Tard, Inc., 7.5%, 2013 1,795 1,835,388
- -----------------------------------------------------------------------------------------------
Dollar General Corp., 8.625%, 2010 510 567,375
- -----------------------------------------------------------------------------------------------
Duane Reade, Inc., 9.75%, 2011## 410 408,975
- -----------------------------------------------------------------------------------------------
J. Crew Operating Corp., 10.375%, 2007 1,885 1,922,700
- -----------------------------------------------------------------------------------------------
Levi Strauss & Co., 7%, 2006 1,745 1,692,650
- -----------------------------------------------------------------------------------------------
PCA LLC, 11.875%, 2009 940 991,700
- -----------------------------------------------------------------------------------------------
Rite Aid Corp., 9.5%, 2011 480 526,800
- -----------------------------------------------------------------------------------------------
Rite Aid Corp., 6.875%, 2013 1,065 974,475
- -----------------------------------------------------------------------------------------------
Rite Aid Corp., 9.25%, 2013 505 528,988
- -----------------------------------------------------------------------------------------------
$10,934,732
- -----------------------------------------------------------------------------------------------
Supermarkets - 0.2%
- -----------------------------------------------------------------------------------------------
Jitney Jungle Stores of America, Inc., 12%, 2006** $45 $675
- -----------------------------------------------------------------------------------------------
Roundy's, Inc., 8.875%, 2012 775 811,813
- -----------------------------------------------------------------------------------------------
$812,488
- -----------------------------------------------------------------------------------------------
Telecommunications - Wireless - 5.4%
- -----------------------------------------------------------------------------------------------
Alamosa Holdings, Inc., 0% to 2005, 12% to 2009 $2,578 $2,519,995
- -----------------------------------------------------------------------------------------------
Alamosa Holdings, Inc., 11%, 2010 260 285,350
- -----------------------------------------------------------------------------------------------
American Tower Corp., 9.375%, 2009 987 1,053,623
- -----------------------------------------------------------------------------------------------
American Tower, Inc., 7.25%, 2011 930 936,975
- -----------------------------------------------------------------------------------------------
Centennial Communications Corp., 10.125%, 2013 3,445 3,548,350
- -----------------------------------------------------------------------------------------------
Crown Castle International Corp., 7.5%, 2013 840 837,900
- -----------------------------------------------------------------------------------------------
Dobson Communications Corp., 8.875%, 2013 2,385 1,800,675
- -----------------------------------------------------------------------------------------------
MetroPCS, Inc., 10.75%, 2011 1,665 1,731,600
- -----------------------------------------------------------------------------------------------
Nextel Communications, Inc., 7.375%, 2015 5,705 5,990,250
- -----------------------------------------------------------------------------------------------
Rural Cellular Corp., 9.75%, 2010 2,223 2,045,160
- -----------------------------------------------------------------------------------------------
Rural Cellular Corp., 9.875%, 2010 100 99,750
- -----------------------------------------------------------------------------------------------
Rural Cellular Corp., 8.25%, 2012## 285 292,125
- -----------------------------------------------------------------------------------------------
U.S. Unwired, Inc., 10%, 2012## 1,210 1,231,175
- -----------------------------------------------------------------------------------------------
$22,372,928
- -----------------------------------------------------------------------------------------------
Telecommunications - Wireline - 2.8%
- -----------------------------------------------------------------------------------------------
Citizens Communications Co., 9%, 2031 $1,055 $1,034,534
- -----------------------------------------------------------------------------------------------
Qwest Corp., 9.125%, 2012## 890 979,000
- -----------------------------------------------------------------------------------------------
Qwest Services Corp., 14%, 2010## 6,105 7,150,481
- -----------------------------------------------------------------------------------------------
Time Warner Telecom, Inc., 10.125%, 2011 1,310 1,162,625
- -----------------------------------------------------------------------------------------------
Time Warner Telecom, Inc., 9.25%, 2014## 1,245 1,188,975
- -----------------------------------------------------------------------------------------------
$11,515,615
- -----------------------------------------------------------------------------------------------
Utilities - Electric Power - 4.2%
- -----------------------------------------------------------------------------------------------
AES Corp., 8.75%, 2013## $325 $355,063
- -----------------------------------------------------------------------------------------------
AES Corp., 9%, 2015## 1,285 1,403,863
- -----------------------------------------------------------------------------------------------
Calpine Corp., 8.5%, 2008 1,500 933,750
- -----------------------------------------------------------------------------------------------
Calpine Corp., 8.75%, 2013## 3,400 2,720,000
- -----------------------------------------------------------------------------------------------
Dynegy Holdings, Inc., 6.875%, 2011 1,030 927,000
- -----------------------------------------------------------------------------------------------
FirstEnergy Corp., 6.45%, 2011 1,095 1,158,218
- -----------------------------------------------------------------------------------------------
Midwest Generation LLC, 8.75%, 2034## 1,185 1,262,025
- -----------------------------------------------------------------------------------------------
Mirant Americas Generation, Inc., 8.3%, 2011** 2,000 1,580,000
- -----------------------------------------------------------------------------------------------
Mission Energy Holding Co., 13.5%, 2008 1,275 1,581,000
- -----------------------------------------------------------------------------------------------
NGC Corp. Capital Trust, 8.316%, 2027 1,975 1,476,313
- -----------------------------------------------------------------------------------------------
PG&E Corp., 6.875%, 2008## 215 228,169
- -----------------------------------------------------------------------------------------------
PSEG Energy Holdings LLC, 8.625%, 2008 760 824,600
- -----------------------------------------------------------------------------------------------
Reliant Resources, Inc., 9.25%, 2010 785 836,025
- -----------------------------------------------------------------------------------------------
Reliant Resources, Inc., 9.5%, 2013 760 817,000
- -----------------------------------------------------------------------------------------------
Sierra Pacific Resources, 8.625%, 2014## 1,540 1,593,900
- -----------------------------------------------------------------------------------------------
$17,696,926
- -----------------------------------------------------------------------------------------------
Utilities - Telephone - 0.2%
- -----------------------------------------------------------------------------------------------
Cincinnati Bell, Inc., 7.25%, 2013 $1,020 $951,150
- -----------------------------------------------------------------------------------------------
Total U.S. Bonds $258,968,572
- -----------------------------------------------------------------------------------------------
Foreign Bonds - 27.8%
- -----------------------------------------------------------------------------------------------
Argentina - 0.7%
- -----------------------------------------------------------------------------------------------
Republic of Argentina, 1.234%, 2012 (Emerging Market
Sovereign) $4,057 $2,753,080
- -----------------------------------------------------------------------------------------------
Australia - 0.6%
- -----------------------------------------------------------------------------------------------
Burns, Philip & Co. Ltd., 9.75%, 2012 (Food & Non-
Alcoholic Beverages) $2,290 $2,387,325
- -----------------------------------------------------------------------------------------------
Belgium - 0.7%
- -----------------------------------------------------------------------------------------------
Telenet Group Holdings N.V., 0% to 2008, 11.5% to 2014
(Broadcast & Cable TV)## $4,220 $2,764,100
- -----------------------------------------------------------------------------------------------
Brazil - 4.2%
- -----------------------------------------------------------------------------------------------
Federal Republic of Brazil, 2.125%, 2012 (Emerging Market
Sovereign) $5,032 $4,315,360
- -----------------------------------------------------------------------------------------------
Federal Republic of Brazil, 8%, 2014 (Emerging Market
Sovereign) 8,987 8,492,655
- -----------------------------------------------------------------------------------------------
Federal Republic of Brazil, 2.0625%, 2024 (Emerging
Market Sovereign) 1,617 1,309,770
- -----------------------------------------------------------------------------------------------
Federal Republic of Brazil, 11%, 2040 (Emerging Market
Sovereign) 3,294 3,228,120
- -----------------------------------------------------------------------------------------------
$17,345,905
- -----------------------------------------------------------------------------------------------
Bulgaria - 0.1%
- -----------------------------------------------------------------------------------------------
Republic of Bulgaria, 8.25%, 2015 (Emerging Market
Sovereign) $196 $232,750
- -----------------------------------------------------------------------------------------------
Canada - 1.2%
- -----------------------------------------------------------------------------------------------
Acetex Corp., 10.875%, 2009 (Chemicals) $770 $843,150
- -----------------------------------------------------------------------------------------------
Bombardier, Inc., 8.375%, 2013 (Industrial)## 1,075 1,091,125
- -----------------------------------------------------------------------------------------------
Norske Skog Canada Ltd., 7.375%, 2014 (Forest & Paper
Products)## 645 641,775
- -----------------------------------------------------------------------------------------------
Nortel Networks Ltd., 6.125%, 2006 (Business Services) 1,685 1,682,894
- -----------------------------------------------------------------------------------------------
Rogers Wireless, Inc., 6.375%, 2014 (Telecommunications -
Wireless)## 640 596,800
- -----------------------------------------------------------------------------------------------
$4,855,744
- -----------------------------------------------------------------------------------------------
Chile - 0.6%
- -----------------------------------------------------------------------------------------------
Empresa Nacional de Electricidad S.A., 8.35%, 2013
(Utilities - Electric Power) $1,626 $1,773,364
- -----------------------------------------------------------------------------------------------
Enersis S.A., 7.375%, 2014 (Utilities - Electric Power) 782 787,177
- -----------------------------------------------------------------------------------------------
$2,560,541
- -----------------------------------------------------------------------------------------------
Colombia - 0.6%
- -----------------------------------------------------------------------------------------------
Republic of Colombia, 10.75%, 2013 (Emerging Market
Sovereign) $1,208 $1,349,940
- -----------------------------------------------------------------------------------------------
Republic of Colombia, 11.75%, 2020 (Emerging Market
Sovereign) 1,125 1,293,750
- -----------------------------------------------------------------------------------------------
$2,643,690
- -----------------------------------------------------------------------------------------------
El Salvador - 0.3%
- -----------------------------------------------------------------------------------------------
Republic of El Salvador, 8.25%, 2032 (Emerging Market
Sovereign) $1,156 $1,092,420
- -----------------------------------------------------------------------------------------------
France - 1.7%
- -----------------------------------------------------------------------------------------------
Crown European Holdings S.A., 10.875%, 2013 (Containers) $2,495 $2,863,013
- -----------------------------------------------------------------------------------------------
Rhodia S.A., 6%, 2006 (Chemicals) EUR 720 856,964
- -----------------------------------------------------------------------------------------------
Rhodia S.A., 8.875%, 2011 (Chemicals)## $4,175 3,590,500
- -----------------------------------------------------------------------------------------------
$7,310,477
- -----------------------------------------------------------------------------------------------
Germany - 0.4%
- -----------------------------------------------------------------------------------------------
Kabel Deutschland, 10.625%, 2014 (Broadcast & Cable TV)## $1,635 $1,675,875
- -----------------------------------------------------------------------------------------------
Kronos International, Inc., 8.875%, 2009 (Chemicals) EUR 55 70,256
- -----------------------------------------------------------------------------------------------
$1,746,131
- -----------------------------------------------------------------------------------------------
Ireland - 0.2%
- -----------------------------------------------------------------------------------------------
MDP Acquisitions PLC, 9.625%, 2012 (Forest & Paper
Products) $755 $845,600
- -----------------------------------------------------------------------------------------------
Kazakhstan - 0.9%
- -----------------------------------------------------------------------------------------------
Hurricane Finance B.V., 9.625%, 2010 (Oils) $1,160 $1,232,500
- -----------------------------------------------------------------------------------------------
Kazkommerts International B.V., 10.125%, 2007 (Banks &
Credit Companies) 153 169,065
- -----------------------------------------------------------------------------------------------
Kazkommerts International B.V., 8.5%, 2013 (Banks &
Credit Companies) 750 750,995
- -----------------------------------------------------------------------------------------------
Turanalem Finance B.V., 8%, 2014 (Banks & Credit
Companies) 1,522 1,418,107
- -----------------------------------------------------------------------------------------------
$3,570,667
- -----------------------------------------------------------------------------------------------
Luxembourg - 1.4%
- -----------------------------------------------------------------------------------------------
BCP Caylux Holdings Luxembourg S.A., 9.625%, 2014
(Chemicals)## $1,075 $1,122,031
- -----------------------------------------------------------------------------------------------
Lighthouse International Co. S.A., 8%, 2014 (Printing &
Publishing) EUR 1,000 1,157,165
- -----------------------------------------------------------------------------------------------
Safilo Capital International S.A., 9.625%, 2013 (Consumer
Goods & Services)## 2,645 2,989,153
- -----------------------------------------------------------------------------------------------
SGL Carbon International S.A., 8.5%, 2012 (Metals &
Mining)## 400 466,473
- -----------------------------------------------------------------------------------------------
$5,734,822
- -----------------------------------------------------------------------------------------------
Malaysia - 0.3%
- -----------------------------------------------------------------------------------------------
Petroliam Nasional Berhad, 7.75%, 2015 (Emerging Market
Sovereign) $1,047 $1,196,082
- -----------------------------------------------------------------------------------------------
Mexico - 3.0%
- -----------------------------------------------------------------------------------------------
Axtel S.A. de C.V., 11%, 2013 (Telecommunications -
Wireline) $1,559 $1,520,025
- -----------------------------------------------------------------------------------------------
Banco Mercantil del Norte S.A., 5.875%, 2014 (Banks &
Credit Companies) 800 786,000
- -----------------------------------------------------------------------------------------------
Innova S. de R.L., 9.375%, 2013 (Telecommunications - Wireless) 800 844,000
- -----------------------------------------------------------------------------------------------
Pemex Project Funding Master Trust, 8.625%, 2022
(Emerging Market Agencies) 2,835 3,061,800
- -----------------------------------------------------------------------------------------------
Petroleos Mexicanos, 9.5%, 2027 (Emerging Market Agencies) 2,123 2,452,065
- -----------------------------------------------------------------------------------------------
TFM S.A. de C.V., 10.25%, 2007 (Transportation - Services) 292 293,460
- -----------------------------------------------------------------------------------------------
TFM S.A. de C.V., 11.75%, 2009 (Transportation - Services) 598 595,010
- -----------------------------------------------------------------------------------------------
TFM S.A. de C.V., 12.5%, 2012 (Transportation - Services) 650 697,125
- -----------------------------------------------------------------------------------------------
TV Azteca S.A. de C.V., 10.5%, 2007 (Broadcast & Cable TV) 150 154,500
- -----------------------------------------------------------------------------------------------
United Mexican States, 8%, 2022 (Emerging Market Sovereign) 1,915 2,049,050
- -----------------------------------------------------------------------------------------------
$12,453,035
- -----------------------------------------------------------------------------------------------
Netherlands - 0.2%
- -----------------------------------------------------------------------------------------------
ASPropulsion Capital B.V., 9.625%, 2013 (Aerospace)## EUR 100 $125,034
- -----------------------------------------------------------------------------------------------
Kappa Beheer B.V., 10.625%, 2009 (Forest & Paper
Products) $765 807,075
- -----------------------------------------------------------------------------------------------
$932,109
- -----------------------------------------------------------------------------------------------
Norway - 0.7%
- -----------------------------------------------------------------------------------------------
NCL Corp., 10.625%, 2014 (Gaming & Lodging)## $2,140 $2,174,775
- -----------------------------------------------------------------------------------------------
Ocean Rig Norway S.A., 10.25%, 2008 (Oil Services) 650 643,500
- -----------------------------------------------------------------------------------------------
$2,818,275
- -----------------------------------------------------------------------------------------------
Panama - 0.9%
- -----------------------------------------------------------------------------------------------
Republic of Panama, 2%, 2016 (Emerging Market Sovereign) $1,501 $1,305,447
- -----------------------------------------------------------------------------------------------
Republic of Panama, 9.375%, 2023 - 2029 (Emerging Market
Sovereign) 2,371 2,489,630
- -----------------------------------------------------------------------------------------------
$3,795,077
- -----------------------------------------------------------------------------------------------
Peru - 0.7%
- -----------------------------------------------------------------------------------------------
Republic of Peru, 8.375%, 2016 (Emerging Market
Sovereign) $565 $536,750
- -----------------------------------------------------------------------------------------------
Republic of Peru, 4.5%, 2017 (Emerging Market Sovereign) 970 797,825
- -----------------------------------------------------------------------------------------------
Republic of Peru, 5%, 2017 (Emerging Market Sovereign) 2,033 1,763,575
- -----------------------------------------------------------------------------------------------
$3,098,150
- -----------------------------------------------------------------------------------------------
Philippines - 0.6%
- -----------------------------------------------------------------------------------------------
Republic of Philippines, 9.375%, 2017 (Emerging Market
Sovereign) $1,291 $1,342,640
- -----------------------------------------------------------------------------------------------
Republic of Philippines, 10.625%, 2025 (Emerging Market
Sovereign) 1,203 1,308,263
- -----------------------------------------------------------------------------------------------
$2,650,903
- -----------------------------------------------------------------------------------------------
Poland - 0.4%
- -----------------------------------------------------------------------------------------------
PTC International Finance II S.A., 11.25%, 2009
(Telecommunications - Wireless) $1,623 $1,720,380
- -----------------------------------------------------------------------------------------------
Russia - 3.8%
- -----------------------------------------------------------------------------------------------
Gaz Capital S.A., 8.625%, 2034 (Oils) $1,975 $1,945,375
- -----------------------------------------------------------------------------------------------
Gazprom OAO, 9.625%, 2013 (Oils) 1,080 1,129,275
- -----------------------------------------------------------------------------------------------
Mobile TeleSystems OJSC, 9.75%, 2008 (Telecommunications
- - Wireless) 333 346,320
- -----------------------------------------------------------------------------------------------
Mobile TeleSystems OJSC, 8.375%, 2010 (Telecommunications
- - Wireless) 1,144 1,086,800
- -----------------------------------------------------------------------------------------------
Russian Federation, 3%, 2008 - 2011 (Emerging Market
Sovereign) 2,329 1,814,990
- -----------------------------------------------------------------------------------------------
Russian Federation, 11%, 2018 (Emerging Market Sovereign) 2,857 3,604,106
- -----------------------------------------------------------------------------------------------
Russian Ministry of Finance, 12.75%, 2028 (Emerging
Market Sovereign) 1,223 1,780,321
- -----------------------------------------------------------------------------------------------
Siberian Oil Co., 10.75%, 2009 (Energy - Integrated) 735 749,700
- -----------------------------------------------------------------------------------------------
Tyumen Oil Co., 11%, 2007 (Energy - Integrated) 737 807,015
- -----------------------------------------------------------------------------------------------
Vimpel-Communications, 10.45%, 2005 (Telecommunications - Wireless) 425 442,000
- -----------------------------------------------------------------------------------------------
Vimpel-Communications, 10%, 2009 (Telecommunications - Wireless) 2,320 2,325,800
- -----------------------------------------------------------------------------------------------
$16,031,702
- -----------------------------------------------------------------------------------------------
South Africa - 0.3%
- -----------------------------------------------------------------------------------------------
Republic of South Africa, 8.5%, 2017 (Emerging Market
Sovereign) $1,000 $1,157,500
- -----------------------------------------------------------------------------------------------
South Korea - 0.5%
- -----------------------------------------------------------------------------------------------
Sun Sage B.V., 8.25%, 2009 (Machinery & Tools) $1,500 $1,470,000
- -----------------------------------------------------------------------------------------------
Woori Bank, 5.75%, 2014 (Banks & Credit Companies) 675 672,469
- -----------------------------------------------------------------------------------------------
$2,142,469
- -----------------------------------------------------------------------------------------------
Sweden - 0.2%
- -----------------------------------------------------------------------------------------------
Stena AB, 7.5%, 2013 (Transportation - Services) $825 $796,125
- -----------------------------------------------------------------------------------------------
Turkey - 1.1%
- -----------------------------------------------------------------------------------------------
Republic of Turkey, 9%, 2011 (Emerging Market Sovereign) $142 $148,745
- -----------------------------------------------------------------------------------------------
Republic of Turkey, 11%, 2013 (Emerging Market Sovereign) 1,180 1,359,950
- -----------------------------------------------------------------------------------------------
Republic of Turkey, 11.875%, 2030 (Emerging Market
Sovereign) 2,322 2,960,550
- -----------------------------------------------------------------------------------------------
$4,469,245
- -----------------------------------------------------------------------------------------------
Ukraine - 0.3%
- -----------------------------------------------------------------------------------------------
Bayerische Vereinsbank, 8.625%, 2011 (Emerging Market
Agencies) $991 $1,010,820
- -----------------------------------------------------------------------------------------------
Ukraine Cabinet of Ministers, 7.65%, 2013 (Emerging
Market Sovereign) 357 342,720
- -----------------------------------------------------------------------------------------------
$1,353,540
- -----------------------------------------------------------------------------------------------
United Kingdom - 0.8%
- -----------------------------------------------------------------------------------------------
Dunlop Standard Aerospace Holdings PLC, 11.875%, 2009
(Aerospace)## $578 $612,680
- -----------------------------------------------------------------------------------------------
Invensys PLC, 9.875%, 2011 (Electronics)## 880 897,600
- -----------------------------------------------------------------------------------------------
NTL Cable PLC, 8.75%, 2014 (Broadcast & Cable TV)## 140 145,250
- -----------------------------------------------------------------------------------------------
Premier International Foods PLC, 12%, 2009 (Food & Non-
Alcoholic Beverages) 820 873,300
- -----------------------------------------------------------------------------------------------
United Biscuits Finance PLC, 10.625%, 2011 (Food & Non-
Alcoholic Beverages) EUR 650 843,979
- -----------------------------------------------------------------------------------------------
$3,372,809
- -----------------------------------------------------------------------------------------------
Venezuela - 0.3%
- -----------------------------------------------------------------------------------------------
Republic of Venezuela, 2.75%, 2007 (Emerging Market
Sovereign) $1,333 $1,286,615
- -----------------------------------------------------------------------------------------------
Vietnam - 0.1%
- -----------------------------------------------------------------------------------------------
Republic of Vietnam, 3.75%, 2028 (Emerging Market
Sovereign) $950 $636,500
- -----------------------------------------------------------------------------------------------
Total Foreign Bonds $115,753,768
- -----------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $366,833,594) $374,722,340
- -----------------------------------------------------------------------------------------------
Stocks - 1.6%
- -----------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -----------------------------------------------------------------------------------------------
U.S. Stocks - 1.5%
- -----------------------------------------------------------------------------------------------
Advertising & Broadcasting - 0.2%
- -----------------------------------------------------------------------------------------------
Sinclair Broadcast Group, Inc., "A" 75,683 $750,019
- -----------------------------------------------------------------------------------------------
Sirius Satellite Radio, Inc. 8,389 21,224
- -----------------------------------------------------------------------------------------------
$771,243
- -----------------------------------------------------------------------------------------------
Apparel Manufacturers - 0%
- -----------------------------------------------------------------------------------------------
Sind Holdings, Inc.* 385 $30,030
- -----------------------------------------------------------------------------------------------
Automotive - 0.2%
- -----------------------------------------------------------------------------------------------
Hayes Lemmerz International, Inc.* 52,901 $690,358
- -----------------------------------------------------------------------------------------------
Oxford Automotive, Inc.* 29 0
- -----------------------------------------------------------------------------------------------
$690,358
- -----------------------------------------------------------------------------------------------
Basic Industry - 0.1%
- -----------------------------------------------------------------------------------------------
Thermadyne Holdings Corp.* 22,113 $331,695
- -----------------------------------------------------------------------------------------------
Broadcast & Cable TV - 0.1%
- -----------------------------------------------------------------------------------------------
NTL, Inc.* 12,137 $632,580
- -----------------------------------------------------------------------------------------------
Food & Drug Stores - 0.1%
- -----------------------------------------------------------------------------------------------
Rite Aid Corp.* 131,000 $643,210
- -----------------------------------------------------------------------------------------------
Specialty Chemicals - 0%
- -----------------------------------------------------------------------------------------------
Sterling Chemicals, Inc.* 7 $168
- -----------------------------------------------------------------------------------------------
Telephone Services - 0.3%
- -----------------------------------------------------------------------------------------------
MCI, Inc.* 75,503 $1,153,686
- -----------------------------------------------------------------------------------------------
XO Communications, Inc.* 235 919
- -----------------------------------------------------------------------------------------------
$1,154,605
- -----------------------------------------------------------------------------------------------
Utilities - Electric Power - 0.3%
- -----------------------------------------------------------------------------------------------
DPL, Inc. 67,490 $1,346,426
- -----------------------------------------------------------------------------------------------
Utilities - Gas - 0.2%
- -----------------------------------------------------------------------------------------------
Ferrell Gas Partners LP 40,712 $815,868
- -----------------------------------------------------------------------------------------------
Total U.S. Stocks $6,416,183
- -----------------------------------------------------------------------------------------------
Foreign Stocks - 0.1%
- -----------------------------------------------------------------------------------------------
Netherlands - 0%
- -----------------------------------------------------------------------------------------------
Completel Europe N.V. (Telephone Services)* 1,841 $44,820
- -----------------------------------------------------------------------------------------------
VersaTel Telecom International N.V. (Telephone Services)* 2,616 4,372
- -----------------------------------------------------------------------------------------------
$49,192
- -----------------------------------------------------------------------------------------------
Sweden - 0%
- -----------------------------------------------------------------------------------------------
Song Networks Holding AB (Telephone Services) 22,299 $124,571
- -----------------------------------------------------------------------------------------------
United Kingdom - 0.1%
- -----------------------------------------------------------------------------------------------
Jazztel PLC (Telephone Services) 70,861 $22,150
- -----------------------------------------------------------------------------------------------
Telewest Global, Inc. (Broadcast & Cable TV)* 30,109 340,232
- -----------------------------------------------------------------------------------------------
$362,382
- -----------------------------------------------------------------------------------------------
Total Foreign Stocks $536,145
- -----------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $8,490,378) $6,952,328
- -----------------------------------------------------------------------------------------------
Convertible Preferred Stocks - 0.6%
- -----------------------------------------------------------------------------------------------
U.S. Stocks - 0.6%
- -----------------------------------------------------------------------------------------------
Advertising & Broadcasting - 0.4%
- -----------------------------------------------------------------------------------------------
Spanish Broadcasting Systems, Inc., "B" 1,778 $1,822,450
- -----------------------------------------------------------------------------------------------
Automotive - 0.2%
- -----------------------------------------------------------------------------------------------
Ford Motor Co. Capital Trust II 12,105 $647,012
- -----------------------------------------------------------------------------------------------
HLI Operating Co., Inc., "A"* 59 4,897
- -----------------------------------------------------------------------------------------------
$651,909
- -----------------------------------------------------------------------------------------------
Total U.S. Stocks $2,474,359
- -----------------------------------------------------------------------------------------------
Foreign Stocks - 0%
- -----------------------------------------------------------------------------------------------
Sweden - 0%
- -----------------------------------------------------------------------------------------------
Song Networks Holding AB (Telephone Services)* 2,412 $9,737
- -----------------------------------------------------------------------------------------------
Total Convertible Preferred Stocks (Identified Cost,
$2,444,183) $2,484,096
- -----------------------------------------------------------------------------------------------
Preferred Stocks - 0.3%
- -----------------------------------------------------------------------------------------------
Advertising & Broadcasting - 0.3%
- -----------------------------------------------------------------------------------------------
Paxson Communications Corp., 14.25% 133 $1,150,450
- -----------------------------------------------------------------------------------------------
Printing & Publishing - 0%
- -----------------------------------------------------------------------------------------------
PRIMEDIA, Inc., 8.625% 650 $56,550
- -----------------------------------------------------------------------------------------------
Telephone Services - 0%
- -----------------------------------------------------------------------------------------------
PTV, Inc., "A" 13 $64
- -----------------------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $1,296,775) $1,207,064
- -----------------------------------------------------------------------------------------------
Warrants - 0%
- -----------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -----------------------------------------------------------------------------------------------
Grande Communications Holdings (Broadcast & Cable TV)* 1,695 $170
- -----------------------------------------------------------------------------------------------
Pliant Corp. (Containers)* 815 8
- -----------------------------------------------------------------------------------------------
Sterling Chemicals, Inc. (Specialty Chemicals)* 11 12
- -----------------------------------------------------------------------------------------------
Thermadyne Holdings Corp. (Basic Industry)* 338 169
- -----------------------------------------------------------------------------------------------
XM Satellite Radio, Inc. (Broadcast & Cable TV)* 300 16,500
- -----------------------------------------------------------------------------------------------
XO Communications, Inc. (Telecommunications - Wireline)* 352 204
- -----------------------------------------------------------------------------------------------
XO Communications, Inc. (Telecommunications - Wireline)* 352 264
- -----------------------------------------------------------------------------------------------
XO Communications, Inc. (Telecommunications - Wireline)* 470 550
- -----------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $143,262) $17,877
- -----------------------------------------------------------------------------------------------
Short-Term Obligations - 6.4%
- -----------------------------------------------------------------------------------------------
PAR AMOUNT
ISSUER (000 Omitted) $ VALUE
- -----------------------------------------------------------------------------------------------
Citibank Credit Card Issuance Trust, due 8/11/04 $3,600 $3,598,680
- -----------------------------------------------------------------------------------------------
General Electric Capital Corp., due 8/02/04 9,063 9,062,665
- -----------------------------------------------------------------------------------------------
General Motors Acceptance Corp., due 8/11/04 2,000 1,999,183
- -----------------------------------------------------------------------------------------------
Jupiter Securitization Corp., due 8/13/04 12,000 11,994,760
- -----------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $26,655,288
- -----------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $405,863,480) $412,038,993
- -----------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 1.2% 4,854,681
- -----------------------------------------------------------------------------------------------
Net Assets - 100.0% $416,893,674
- -----------------------------------------------------------------------------------------------
* Non-income producing security.
** Non-income producing security - in default.
^^ Interest only security.
## SEC Rule 144A restriction.
Abbreviations have been used throughout this report to indicate amounts shown in currencies
other than the U.S. dollar. A list of abbreviations is shown below.
EUR = Euro
SEE NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES (unaudited)
- --------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets
and liabilities composing the total value of your fund.
AT 7/31/04
ASSETS
Investments, at value (identified cost, $405,863,480) $412,038,993
- --------------------------------------------------------------------------------------------------
Cash 151
- --------------------------------------------------------------------------------------------------
Receivable for forward foreign currency
exchange contracts 62,145
- --------------------------------------------------------------------------------------------------
Receivable for investments sold 89,391
- --------------------------------------------------------------------------------------------------
Receivable for fund shares sold 2,590,600
- --------------------------------------------------------------------------------------------------
Interest receivable 7,869,895
- --------------------------------------------------------------------------------------------------
Total assets $422,651,175
- --------------------------------------------------------------------------------------------------
LIABILITIES
Distributions payable $2,577,603
- --------------------------------------------------------------------------------------------------
Payable for forward foreign currency exchange contracts 8,646
- --------------------------------------------------------------------------------------------------
Payable for investments purchased 2,353,935
- --------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 790,210
- --------------------------------------------------------------------------------------------------
Payable to affiliates
- --------------------------------------------------------------------------------------------------
Management fee 11,369
- --------------------------------------------------------------------------------------------------
Distribution and service fee 15,738
- --------------------------------------------------------------------------------------------------
Total liabilities $5,757,501
- --------------------------------------------------------------------------------------------------
Net assets $416,893,674
- --------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $409,912,038
- --------------------------------------------------------------------------------------------------
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 6,226,642
- --------------------------------------------------------------------------------------------------
Accumulated undistributed net realized gain on investments
and foreign currency transactions 2,153,156
- --------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment
income (1,398,162)
- --------------------------------------------------------------------------------------------------
Net assets $416,893,674
- --------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 56,593,335
- --------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) - continued
Class A shares
Net assets $188,798,435
- --------------------------------------------------------------------------------------------------
Shares outstanding 25,642,843
- --------------------------------------------------------------------------------------------------
Net asset value per share $7.36
- --------------------------------------------------------------------------------------------------
Offering price per share (100 / 95.25 X $7.36) $7.73
- --------------------------------------------------------------------------------------------------
Class B shares
Net assets $137,242,074
- --------------------------------------------------------------------------------------------------
Shares outstanding 18,587,995
- --------------------------------------------------------------------------------------------------
Net asset value and offering price per share $7.38
- --------------------------------------------------------------------------------------------------
Class C shares
Net assets $84,680,076
- --------------------------------------------------------------------------------------------------
Shares outstanding 11,527,168
- --------------------------------------------------------------------------------------------------
Net asset value and offering price per share $7.35
- --------------------------------------------------------------------------------------------------
Class I shares
Net assets $6,173,089
- --------------------------------------------------------------------------------------------------
Shares outstanding 835,329
- --------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $7.39
- --------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS (unaudited) STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and paid in expenses. It
also describes any gains and/or losses generated by fund operations.
FOR THE SIX MONTHS ENDED 7/31/04
NET INVESTMENT INCOME
Income
- --------------------------------------------------------------------------------------------------
Interest $17,140,878
- --------------------------------------------------------------------------------------------------
Dividends 299,788
- --------------------------------------------------------------------------------------------------
Total investment income $17,440,666
- --------------------------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------------------------
Management fee $1,276,111
- --------------------------------------------------------------------------------------------------
Trustees' compensation 7,162
- --------------------------------------------------------------------------------------------------
Shareholder servicing costs 293,373
- --------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 293,530
- --------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 684,615
- --------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 425,115
- --------------------------------------------------------------------------------------------------
Administrative fee 24,216
- --------------------------------------------------------------------------------------------------
Custodian fee 71,827
- --------------------------------------------------------------------------------------------------
Printing 34,807
- --------------------------------------------------------------------------------------------------
Postage 1,289
- --------------------------------------------------------------------------------------------------
Auditing fees 26,925
- --------------------------------------------------------------------------------------------------
Legal fees 3,027
- --------------------------------------------------------------------------------------------------
Miscellaneous 97,233
- --------------------------------------------------------------------------------------------------
Total expenses $3,239,230
- --------------------------------------------------------------------------------------------------
Fees paid indirectly (8,162)
- --------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (798,919)
- --------------------------------------------------------------------------------------------------
Net expenses $2,432,149
- --------------------------------------------------------------------------------------------------
Net investment income $15,008,517
- --------------------------------------------------------------------------------------------------
Statement of Operations (unaudited) - continued
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (identified cost basis)
- --------------------------------------------------------------------------------------------------
Investment transactions $3,524,784
- --------------------------------------------------------------------------------------------------
Foreign currency transactions 84,920
- --------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions $3,609,704
- --------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- --------------------------------------------------------------------------------------------------
Investments $(16,952,504)
- --------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign
currencies 8,208
- --------------------------------------------------------------------------------------------------
Net unrealized loss on investments and foreign
currency translation $(16,944,296)
- --------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments and
foreign currency $(13,334,592)
- --------------------------------------------------------------------------------------------------
Increase in net assets from operations $1,673,925
- --------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets resulting from operations,
any distributions, and any shareholder transactions.
SIX MONTHS ENDED YEAR ENDED
7/31/04 1/31/04
(UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income $15,008,517 $23,586,816
- ----------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions 3,609,704 13,934,431
- ----------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation (16,944,296) 29,433,499
- ------------------------------------------------------ ------------- -------------
Increase in net assets from operations $1,673,925 $66,954,746
- ------------------------------------------------------ ------------- -------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income
- ----------------------------------------------------------------------------------------------------
Class A $(6,770,040) $(10,400,791)
- ----------------------------------------------------------------------------------------------------
Class B (5,072,920) (8,831,107)
- ----------------------------------------------------------------------------------------------------
Class C (3,147,584) (4,977,549)
- ----------------------------------------------------------------------------------------------------
Class I (169,879) (318,334)
- ----------------------------------------------------------------------------------------------------
From net realized gain on investments and
foreign currency transactions
- --------------------------------------------------------------------------------------------------
Class A (670,258) --
- ----------------------------------------------------------------------------------------------------
Class B (512,352) --
- ----------------------------------------------------------------------------------------------------
Class C (326,756) --
- ----------------------------------------------------------------------------------------------------
Class I (15,541) --
- ------------------------------------------------------ ------------- -------------
Total distributions declared to shareholders $(16,685,330) $(24,527,781)
- ------------------------------------------------------ ------------- -------------
Net increase in net assets from fund
share transactions $53,132,358 $152,480,828
- ------------------------------------------------------ ------------- -------------
Redemption fees $13,515 $--
- ------------------------------------------------------ ------------- -------------
Total increase in net assets $38,134,468 $194,907,793
- ------------------------------------------------------ ------------- -------------
NET ASSETS
At beginning of period $378,759,206 $183,851,413
- ----------------------------------------------------------------------------------------------------
At end of period (including accumulated distributions
in excess of net investment income of $1,398,162 and
$1,246,256, respectively) $416,893,674 $378,759,206
- ----------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the semiannual period and
the past 5 fiscal years (or, if shorter, the period of the fund's operation). Certain information reflects financial results for
a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an
investment in the fund (assuming reinvestment of all distributions) held for the entire period.
SIX MONTHS YEAR ENDED 1/31
ENDED -------------------------------------------------------------------
CLASS A 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
Net asset value, beginning
of period $7.65 $6.61 $7.08 $7.96 $8.79 $8.53
- --------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.29 $0.60 $0.62 $0.80 $0.92 $0.91
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency (0.25) 1.05 (0.43) (0.85) (0.67) 0.25
- ------------------------------------- ------ ------ ------ ------ ------ ------
Total from investment operations $0.04 $1.65 $0.19 $(0.05) $0.25 $1.16
- ------------------------------------- ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.30) $(0.61) $(0.66) $(0.82) $(0.95) $(0.90)
- --------------------------------------------------------------------------------------------------------------------------------
From net realized gain on
investments and foreign currency
transactions (0.03) -- -- -- (0.07) --
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (0.01) (0.02) --
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- -- (0.04) --
- ------------------------------------- ------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.33) $(0.61) $(0.66) $(0.83) $(1.08) $(0.90)
- ------------------------------------- ------ ------ ------ ------ ------ ------
Redemption fees added to
paid-in-capital# $0.00+++ $-- $-- $-- $-- $--
- ------------------------------------- ------ ------ ------ ------ ------ ------
Net asset value, end of period $7.36 $7.65 $6.61 $7.08 $7.96 $8.79
- ------------------------------------- ------ ------ ------ ------ ------ ------
Total return (%)(+) 0.55++ 26.04 2.95 (0.30) 3.28 14.17
- --------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED ------------------------------------------------------------------
CLASS A (CONTINUED) 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
RATIOS (%) TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA(S):
Expenses## 0.88+ 1.01 1.01 1.01 1.02 1.02
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 8.01+ 8.21 9.35 11.18 11.43 10.62
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 40 98 104 133 147 158
- --------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $188,798 $150,334 $70,892 $37,187 $19,982 $8,028
- --------------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually agreed under a temporary expense agreement to pay all of the fund's operating expenses,
exclusive of management, distribution and service fees in excess of 0.00% of average daily net assets. In addition, the
investment adviser contractually waived a portion of its fee for the periods indicated. The investment adviser also has
voluntarily agreed to reimburse the fund for its proportional share of Independent Chief Compliance Officer service fees paid
to Tarantino LLC for certain of the periods indicated. To the extent actual expenses were over this limitation and the
waiver/reimbursement had not been in place, the net investment income loss per share and the ratios would have been:
Net investment income $0.28 $0.57 $0.60 $0.77 $0.88 $0.83
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.29+ 1.34 1.37 1.46 1.53 2.00
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.60+ 7.88 8.99 10.73 10.92 9.64
- --------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective February 1, 2001, the fund adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended January
31, 2002 was to decrease net investment income per share, and increase net realized and unrealized gains and losses per
share. The impact of this change calculates to less than $0.01 per share. In addition, the ratio of net investment income
to average net assets was unaffected by this change. Per share, ratios, and supplemental data for periods prior to
February 1, 2001 have not been restated to reflect this change in presentation.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
(+) 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
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED -------------------------------------------------------------------
CLASS B 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
Net asset value, beginning
of period $7.67 $6.63 $7.09 $7.98 $8.81 $8.54
- --------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.27 $0.55 $0.58 $0.77 $0.89 $0.86
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency (0.25) 1.06 (0.43) (0.87) (0.69) 0.25
- ------------------------------------- ------ ------ ------ ------ ------ ------
Total from investment operations $0.02 $1.61 $0.15 $(0.10) $0.20 $1.11
- ------------------------------------- ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.28) $(0.57) $(0.61) $(0.78) $(0.90) $(0.84)
- --------------------------------------------------------------------------------------------------------------------------------
From net realized gain on
investments and foreign currency
transactions (0.03) -- -- -- (0.07) --
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (0.01) (0.02) --
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- -- (0.04) --
- ------------------------------------- ------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.31) $(0.57) $(0.61) $(0.79) $(1.03) $(0.84)
- ------------------------------------- ------ ------ ------ ------ ------ ------
Redemption fees added to
paid-in-capital# $0.00+++ $-- $-- $-- $-- $--
- ------------------------------------- ------ ------ ------ ------ ------ ------
Net asset value, end of period $7.38 $7.67 $6.63 $7.09 $7.98 $8.81
- ------------------------------------- ------ ------ ------ ------ ------ ------
Total return (%) 0.23++ 25.19 2.43 (1.07) 2.63 13.54
- --------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED ------------------------------------------------------------------
CLASS B (CONTINUED) 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
RATIOS (%) TO AVERAGE
NET ASSETS AND
SUPPLEMENTAL DATA(S):
Expenses## 1.53+ 1.66 1.66 1.66 1.67 1.67
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.36+ 7.61 8.75 10.59 10.83 9.94
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 40 98 104 133 147 158
- --------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $137,242 $140,348 $72,321 $41,481 $26,031 $12,367
- --------------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually agreed under a temporary expense agreement to pay all of the fund's operating expenses,
exclusive of management, distribution and service fees in excess of 0.00% of average daily net assets. In addition, the
investment adviser contractually waived a portion of its fee for the periods indicated. The investment adviser also has
voluntarily agreed to reimburse the fund for its proportional share of Independent Chief Compliance Officer service fees paid
to Tarantino LLC for certain of the periods indicated. To the extent actual expenses were over this limitation and the
waiver/reimbursement had not been in place, the net investment income loss per share and the ratios would have been:
Net investment income $0.26 $0.53 $0.56 $0.73 $0.85 $0.78
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.94+ 1.99 2.02 2.11 2.18 2.65
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 6.95+ 7.28 8.39 10.14 10.32 8.96
- --------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective February 1, 2001, the fund adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended January
31, 2002 was to decrease net investment income per share, and increase net realized and unrealized gains and losses per
share. The impact of this change calculates to less than $0.01 per share. In addition, the ratio of net investment income
to average net assets was unaffected by this change. Per share, ratios, and supplemental data for periods prior to
February 1, 2001 have not been restated to reflect this change in presentation.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED ------------------------------------------------------------------
CLASS C 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
Net asset value, beginning
of period $7.63 $6.60 $7.07 $7.95 $8.78 $8.52
- --------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.27 $0.54 $0.57 $0.77 $0.89 $0.85
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency (0.25) 1.06 (0.43) (0.86) (0.69) 0.25
- ------------------------------------- ------ ------ ------ ------ ------ ------
Total from investment operations $0.02 $1.60 $0.14 $(0.09) $0.20 $1.10
- ------------------------------------- ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.27) $(0.57) $(0.61) $(0.78) $(0.90) $(0.84)
- --------------------------------------------------------------------------------------------------------------------------------
From net realized gain on
investments and foreign currency
transactions (0.03) -- -- -- (0.07) --
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (0.01) (0.02) --
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- -- (0.04) --
- ------------------------------------- ------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.30) $(0.57) $(0.61) $(0.79) $(1.03) $(0.84)
- ------------------------------------- ------ ------ ------ ------ ------ ------
Redemption fees added to
paid-in-capital# $0.00+++ $-- $-- $-- $-- $--
- ------------------------------------- ------ ------ ------ ------ ------ ------
Net asset value, end of period $7.35 $7.63 $6.60 $7.07 $7.95 $8.78
- ------------------------------------- ------ ------ ------ ------ ------ ------
Total return (%) 0.35++ 25.10 2.29 (0.94) 2.64 13.45
- --------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED -----------------------------------------------------------------
CLASS C (CONTINUED) 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
RATIOS (%) TO AVERAGE
NET ASSETS AND
SUPPLEMENTAL DATA(S):
Expenses## 1.53+ 1.66 1.66 1.66 1.67 1.67
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.35+ 7.56 8.67 10.62 10.90 9.93
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 40 98 104 133 147 158
- --------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $84,680 $84,643 $38,130 $17,518 $11,221 $3,251
- --------------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually agreed under a temporary expense agreement to pay all of the fund's operating expenses,
exclusive of management, distribution and service fees in excess of 0.00% of average daily net assets. In addition, the
investment adviser contractually waived a portion of its fee for the periods indicated. The investment adviser also has
voluntarily agreed to reimburse the fund for its proportional share of Independent Chief Compliance Officer service fees paid
to Tarantino LLC for certain of the periods indicated. To the extent actual expenses were over this limitation and the
waiver/reimbursement had not been in place, the net investment income loss per share and the ratios would have been:
Net investment income $0.26 $0.52 $0.55 $0.74 $0.84 $0.77
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.94+ 1.99 2.02 2.11 2.18 2.65
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 6.94+ 7.23 8.31 10.17 10.39 8.95
- --------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective February 1, 2001, the fund adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended January
31, 2002 was to decrease net investment income per share, and increase net realized and unrealized gains and losses per
share. The impact of this change calculates to less than $0.01 per share. In addition, the ratio of net investment income
to average net assets was unaffected by this change. Per share, ratios, and supplemental data for periods prior to
February 1, 2001 have not been restated to reflect this change in presentation.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED ---------------------------------------------------------------------
CLASS I 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
Net asset value, beginning
of period $7.68 $6.64 $7.10 $8.04 $8.85 $8.56
- --------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.30 $0.63 $0.64 $0.59 $1.07 $0.97
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and
foreign currency (0.25) 1.05 (0.42) (0.67) (0.77) 0.25
- ---------------------------------- ------ ------ ------ ------ ------ ------
Total from investment operations $0.05 $1.68 $0.22 $(0.08) $0.30 $1.22
- ---------------------------------- ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.31) $(0.64) $(0.68) $(0.85) $(0.98) $(0.93)
- --------------------------------------------------------------------------------------------------------------------------------
From net realized gain on
investments and foreign currency
transactions (0.03) -- -- -- (0.07) --
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (0.01) (0.02) --
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments and foreign
currency transactions -- -- -- -- (0.04) --
- ---------------------------------- ------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.34) $(0.64) $(0.68) $(0.86) $(1.11) $(0.93)
- ---------------------------------- ------ ------ ------ ------ ------ ------
Redemption fees added to
paid-in-capital# $0.00+++ $-- $-- $-- $-- $--
- ---------------------------------- ------ ------ ------ ------ ------ ------
Net asset value, end of period $7.39 $7.68 $6.64 $7.10 $8.04 $8.85
- ---------------------------------- ------ ------ ------ ------ ------ ------
Total return (%) 0.75++ 26.41 3.45 (0.74) 3.88 14.87
- --------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED -------------------------------------------------------------------
CLASS I (CONTINUED) 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
RATIOS (%) TO AVERAGE
NET ASSETS AND
SUPPLEMENTAL DATA(S):
Expenses## 0.53+ 0.66 0.66 0.66 0.67 0.67
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 8.36+ 8.66 9.76 10.25 11.75 10.43
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 40 98 104 133 147 158
- --------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $6,173 $3,434 $2,508 $155 $0++++ $70
- --------------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually agreed under a temporary expense agreement to pay all of the fund's operating expenses,
exclusive of management fee in excess of 0.00% of average daily net assets. In addition, the investment adviser contractually
waived a portion of its fee for the periods indicated. The investment adviser also has voluntarily agreed to reimburse the
fund for its proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC for certain of the
periods indicated. To the extent actual expenses were over this limitation and the waiver/reimbursement had not been in
place, the net investment income loss per share and the ratios would have been:
Net investment income $0.28 $0.61 $0.62 $0.56 $1.02 $0.78
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 0.94+ 0.99 1.02 1.11 1.18 1.65
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.95+ 8.33 9.40 9.80 11.24 9.45
- --------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective February 1, 2001, the fund adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended January
31, 2002 was to decrease net investment income per share, and increase net realized and unrealized gains and losses per
share. The impact of this change calculates to less than $0.01 per share. In addition, the ratio of net investment income
to average net assets was unaffected by this change. Per share, ratios, and supplemental data for periods prior to
February 1, 2001 have not been restated to reflect this change in presentation.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
++++ Class I net assets were less than $500.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (unaudited)
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS High Yield Opportunities Fund (the fund) is a diversified series of MFS
Series Trust III (the trust). The trust is organized as a Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The preparation of financial statements in conformity with U.S.
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 - Bonds and other fixed income securities (other than
short-term obligations) in the fund's portfolio are valued at an evaluated bid
price as reported by an independent pricing service, or to the extent a
valuation is not reported by a pricing service, such securities are valued on
the basis of quotes from brokers and dealers. Prices obtained from pricing
services utilize both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate 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 quoted prices or exchange or over-
the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Equity securities in the fund's
portfolio for which market quotations are available are valued at the last sale
or official closing price as reported by an independent pricing service on the
primary market or exchange on which they are primarily traded, or at the last
quoted bid price for securities in which there were no sales during the day.
Equity securities traded over the counter are valued at the last sales price
traded each day as reported by an independent pricing service, or to the extent
there are no sales reported, such securities are valued on the basis of
quotations obtained from brokers and dealers. Forward foreign currency
contracts are valued using spot rates and forward points as reported by an
independent pricing source. Short-term obligations with a remaining maturity in
excess of 60 days will be valued upon dealer-supplied valuations. All other
short-term obligations in the fund's portfolio are valued at amortized cost,
which constitutes market value as determined by the Board of Trustees.
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. When pricing service information or market quotations
are not readily available, securities are priced at fair value as determined
under the direction of the Board of Trustees. For example, significant events
(such as movement in the U.S. securities market, or other regional and local
developments) may occur between the time that foreign markets close (where the
security is principally traded) and the time that the fund calculates its net
asset value (generally, the close of the NYSE) that may impact the value of
securities traded in these foreign markets. In these cases, the fund may
utilize information from an external vendor or other sources to adjust closing
market quotations of foreign equity securities to reflect what it believes to
be the fair value of the securities as of the fund's valuation time. Because
the frequency of significant events is not predictable, fair valuation of
foreign equity securities may occur on a frequent basis.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The fund requires
that the securities collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the fund to obtain those
securities in the event of a default under the repurchase agreement. The fund
monitors, on a daily basis, the value of the collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the fund
under each such repurchase agreement. The fund along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a joint
trading account for the purpose of entering into one or more repurchase
agreements.
FOREIGN CURRENCY TRANSLATION - 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 foreign currency exchange contracts for hedging purposes as well as for
non-hedging purposes. For hedging purposes, the fund may enter into contracts
to deliver or receive foreign currency it will receive from or require for its
normal investment activities. The fund may also use contracts in a manner
intended to protect foreign currency-denominated securities from declines in
value due to unfavorable exchange rate movements. For non-hedging purposes, the
fund may enter into contracts with the intent of changing the relative exposure
of the fund's portfolio of securities to different currencies to take advantage
of anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains or
losses on foreign currency transactions.
SHORT TERM FEES - For purchases made on or after May 3, 2004, the fund may
charge a 2% redemption fee (which is retained by the fund) on proceeds from
shares redeemed or exchanged within 30 calendar days following their
acquisition (either by purchase or exchange). The fund may change the
redemption fee period in the future, including changes in connection with
pending Securities and Exchange rules. See the fund's prospectus for details.
These fees are accounted for as an addition to paid-in-capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with U.S. generally accepted accounting principles. All discount is
accreted for 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.
Legal fees and other related expenses incurred to preserve and protect the
value of a security owned are added to the cost of the security; other legal
fees are expensed. Capital infusions made directly to the security issuer,
which are generally non-recurring, incurred to protect or enhance the value of
high-yield debt securities, are reported as additions to the cost basis of the
security. Costs that are incurred to negotiate the terms or conditions of
capital infusions or that are expected to result in a plan of reorganization
are reported as realized losses. Ongoing costs incurred to protect or enhance
an investment, or costs incurred to pursue other claims or legal actions, are
expensed.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. This amount, for the six months ended July 31, 2004, is shown as a
reduction of total expenses on the Statement of Operations.
TAX MATTERS AND DISTRIBUTIONS - The fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
Distributions to shareholders are recorded on the ex-dividend date. The fund
distinguishes between distributions on a tax basis and a financial reporting
basis and only distributions in excess of tax basis earnings and profits are
reported in the financial statements as distributions from paid-in capital.
Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions, derivatives, defaulted bonds, and
amortization and accretion on debt securities.
The tax character of distributions declared for the years ended January 31,
2004 and January 31, 2003 was as follows:
1/31/04 1/31/03
Distributions declared from:
Ordinary income $24,527,781 $12,439,954
--------------------------------------------------------------
As of January 31, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $2,048,998
----------------------------------------------------------
Undistributed long-term capital gain 1,183,148
----------------------------------------------------------
Unrealized appreciation 21,674,258
----------------------------------------------------------
Other temporary differences (2,913,363)
----------------------------------------------------------
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on the value
of settled shares outstanding of each class, without distinction between share
classes. Dividends are declared separately for each class. Differences in per
share dividend rates are generally due to differences in separate class
expenses. Class B shares will convert to Class A shares approximately eight
years after purchase.
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.65% of
the fund's average daily net assets. The investment adviser has contractually
agreed to waive a portion of its fee, which is shown as a reduction of total
expenses in the Statement of Operations. Management fees incurred for the six
months ended July 31, 2004 were 0.52% of average daily net assets on an
annualized basis. The investment adviser has contractually agreed to pay the
fund's operating expenses exclusive of management and distribution fees such
that the fund's other expenses do not exceed 0.00% of its average daily net
assets. This is reflected as a reduction of expenses in the Statement of
Operations. As part of the settlement agreement with the New York Attorney
General concerning market timing and related matters, MFS has agreed to reduce
the fund's management fee to 0.50% of average daily net assets for the period
March 1, 2004 through February 28, 2009. During this time period, the Board of
Trustees will continue to review the appropriateness of all advisory fees in
accordance with their oversight responsibilities. After February 28, 2009 the
management fee will be determined in accordance with then existing review
policies approved by the Board of Trustees overseeing the fund.
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairpersons, and 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 retired Independent Trustees and an unfunded
retirement benefit deferral plan for certain current Independent Trustees.
Included in Trustees' compensation is $10 as a result of the change in the
fund's unfunded retirement benefit deferral plan for certain current
Independent Trustees and a pension expense of $(1) for retired Independent
Trustees for the six months ended July 31, 2004.
The MFS funds, including this fund, have entered into a services agreement (the
"Agreement") which provides for payment of fees by the MFS funds to Tarantino
LLC in return for the provision of services of an Independent Chief Compliance
Officer (ICCO) for the MFS funds. The ICCO is an officer of the MFS funds and
the sole member of Tarantino LLC. MFS has agreed to reimburse each of the MFS
funds for a proportional share of substantially all of the payments made by the
MFS funds to Tarantino LLC and also to provide office space and other
administrative support and supplies to the ICCO. The MFS funds can terminate
the Agreement with Tarantino LLC at any time under the terms of the Agreement.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment adviser. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement
of the costs MFS incurs to provide these services, subject to review and
approval by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. Prior
to April 1, 2004, the fund paid MFS an administrative fee up to the following
annual percentage rates of the fund's average daily net assets:
First $2 billion 0.0175%
----------------------------------------------------------
Next $2.5 billion 0.0130%
----------------------------------------------------------
Next $2.5 billion 0.0005%
----------------------------------------------------------
In excess of $7 billion 0.0000%
----------------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
----------------------------------------------------------
Next $2.5 billion 0.00832%
----------------------------------------------------------
Next $2.5 billion 0.00032%
----------------------------------------------------------
In excess of $7 billion 0.00000%
----------------------------------------------------------
For the six months ended July 31, 2004 the fund paid MFS $24,216 equivalent to
0.01233% of average daily net assets, to partially reimburse MFS for the costs
of providing administrative services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$115,770 for the six months ended July 31, 2004, 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 an annual
percentage of its average daily net assets attributable to certain share
classes 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
based on the average daily net assets of accounts attributable to such dealers.
These fees are calculated based on each class' average daily net assets. The
maximum distribution and service fees for each class of shares are as follows:
CLASS A CLASS B CLASS C
Distribution Fee 0.10% 0.75% 0.75%
- -------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25%
- -------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00%
- -------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities
dealer, which for the six months ended July 31, 2004, amounted to:
CLASS A CLASS B CLASS C
Service Fee Retained by MFD $4,750 $22 $113
- -------------------------------------------------------------------------------
Fees incurred under the distribution plan during the six months ended
July 31, 2004, were as follows:
CLASS A CLASS B CLASS C
Effective Annual Percentage Rates 0.35% 1.00% 1.00%
- -------------------------------------------------------------------------------
Certain Class A and Class C shares are subject to a contingent deferred sales
charge in the event of a shareholder redemption within, for Class A shares, 12
months following the purchase, and, for Class C shares, the first year from
the end of the calendar month of 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 from the end of the calendar month of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the six months ended July 31, 2004 were
as follows:
CLASS A CLASS B CLASS C
Contingent Deferred Sales Charges
Imposed $2,586 $207,148 $29,184
- -------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as shareholder
servicing agent. The fee, which is calculated as a percentage of the fund's
average daily net assets is set periodically under the supervision of the
fund's Trustees. Prior to April 1, 2004, the fee was set at 0.11% of the fund's
average daily net assets. For the period April 1, 2004 through June 30, 2004,
the fee is set at 0.10% of the fund's average daily net assets. Effective July
1, 2004, the fund will be charged up to 0.0861% of its average daily net
assets. For the six months ended July 31, 2004, the fund paid MFSC a fee of
$197,350 for shareholder services which equated to 0.1005% of the fund's
average net assets. Also included in shareholder servicing costs are out-of-
pocket expenses, paid to MFSC, which amounted to $23,710 for the six months
ended July 31, 2004, as well as other expenses paid to unaffiliated vendors.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$179,847,432 and $150,543,140 respectively.
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the fund as computed on a federal income tax basis, are as
follows:
Aggregate cost $406,491,162
----------------------------------------------------------
Gross unrealized appreciation $15,661,782
----------------------------------------------------------
Gross unrealized depreciation (10,113,951)
----------------------------------------------------------
Net unrealized appreciation $5,547,831
----------------------------------------------------------
(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:
Six months ended 7/31/04 Year ended 1/31/04
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 10,132,035 75,282,435 27,456,728 $195,473,132
- ------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 546,518 4,058,349 664,118 4,744,679
- ------------------------------------------------------------------------------------------------------
Shares reacquired (4,692,254) (34,727,056) (19,186,218) (138,572,646
- ------------------------------------------------------------------------------------------------------
Net increase 5,986,299 44,613,728 8,934,628 $61,645,165
- ------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 3,724,745 $27,779,582 10,876,216 $77,359,062
- ------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 414,559 3,092,252 637,819 4,573,131
- ------------------------------------------------------------------------------------------------------
Shares reacquired (3,853,164) (28,557,587) (4,123,693) (29,593,159)
- ------------------------------------------------------------------------------------------------------
Net increase 286,140 $2,314,247 7,390,342 $52,339,034
- ------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 2,723,450 $20,238,454 8,268,232 $59,030,965
- ------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 229,286 1,700,638 334,711 2,387,318
- ------------------------------------------------------------------------------------------------------
Shares reacquired (2,517,373) (18,583,094) (3,290,683) (23,353,436)
- ------------------------------------------------------------------------------------------------------
Net increase 435,363 $3,355,998 5,312,260 $38,064,847
- ------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 427,546 $3,140,735 215,466 $1,485,020
- ------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 4,299 31,977 5,254 38,029
- ------------------------------------------------------------------------------------------------------
Shares reacquired (43,711) (324,327) (151,468) (1,091,267)
- ------------------------------------------------------------------------------------------------------
Net increase 388,134 $2,848,385 69,252 $431,782
- ------------------------------------------------------------------------------------------------------
(6) LINE OF CREDIT
The fund and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the bank's
base rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the six months ended July 31, 2004, was $778 and is
included in miscellaneous expense. The fund had no significant borrowings
during the six months ended July 31, 2004.
(7) FINANCIAL INSTRUMENTS
The fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include forward foreign currency exchange contracts. The notional
or contractual amounts of these instruments represent the investment the fund
has in particular classes of financial instruments and does not necessarily
represent the amounts potentially subject to risk. The measurement of the risks
associated with these instruments is meaningful only when all related and
offsetting transactions are considered.
Forward Foreign Currency Exchange Contracts
NET
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
DATE DELIVER/RECEIVE FOR AT VALUE (DEPRECIATION)
- -----------
SALES
- -----------
- --------------------------------------------------------------------------------
10/06/04 EUR 8,297,533 $10,034,011 $9,971,866 $62,145
- --------------------------------------------------------------------------------
- -----------
PURCHASES
- -----------
- --------------------------------------------------------------------------------
10/06/04 EUR 1,951,103 $2,354,168 $2,345,522 $(8,646)
- --------------------------------------------------------------------------------
At July 31, 2004 the fund had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under
the terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50
million in penalty to certain MFS funds, pursuant to a plan developed by an
independent distribution consultant. The brokerage allocation practices which
were the subject of this proceeding were discontinued by MFS in November 2003.
The agreement with the SEC is reflected in an order of the SEC. Pursuant to the
SEC order, on July 28, 2004, MFS transferred these settlement amounts to the
SEC, and those MFS funds entitled to these settlement amounts accrued an
estimate of their pro rata portion of these amounts. Once the final
distribution plan is approved by the SEC, these amounts will be distributed by
the SEC to the affected MFS funds. The SEC settlement order states that MFS
failed to adequately disclose to the Boards and Trustees and to shareholders of
the MFS funds the specifics of its preferred arrangements with certain
brokerage firms selling MFS fund shares. The SEC settlement order states that
MFS had in place policies designed to obtain best execution of all MFS fund
trades. As part of the settlement, MFS retained an independent compliance
consultant to review the completeness of its current policies and practices
regarding disclosure to MFS fund trustees and to MFS fund shareholders of
strategic alliances between MFS or its affiliates and broker-dealers and other
financial advisers who support the sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New
York Attorney General ("NYAG") and the Bureau of Securities Regulation of the
State of New Hampshire ("NH") to settle administrative proceedings alleging
false and misleading information in certain MFS retail fund prospectuses
regarding market timing and related matters (the "February Settlements"). These
regulators alleged that prospectus language for certain MFS retail funds was
false and misleading because, although the prospectuses for those funds in the
regulators' view indicated that the MFS funds prohibited market timing, MFS did
not limit trading activity in 11 domestic large cap stock, high grade bond and
money market funds. MFS' former Chief Executive Officer, John W. Ballen, and
former President, Kevin R. Parke, also reached agreement with the SEC in which
they agreed to, among other terms, monetary fines and temporary suspensions
from association with any investment adviser or registered investment company.
Messrs. Ballen and Parke have resigned their positions with, and will not be
returning to, MFS and the MFS funds. Under the terms of the February
Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to
increase certain management fees during this period. MFS has also paid an
administrative fine to NH in the amount of $1 million, which will be used for
investor education purposes (NH retained $250,000 and $750,000 was contributed
to the North American Securities Administrators Association's Investor
Protection Trust). In addition, under the terms of the February Settlements,
MFS is in the process of adopting certain governance changes and reviewing its
policies and procedures.
Since December 2003, MFS, Sun Life Financial Inc., various MFS funds, the
Trustees of these MFS funds, and certain officers of MFS have been named as
defendants in multiple lawsuits filed in federal and state courts. The lawsuits
variously have been commenced as class actions or individual actions on behalf
of investors who purchased, held or redeemed shares of the MFS funds during
specified periods, as class actions on behalf of participants in certain
retirement plan accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been
transferred to and consolidated before the United States District Court for the
District of Maryland, as part of a multi-district litigation of market timing
and related claims involving several other fund complexes, In re Mutual Funds
Investment Litigation (Alger, Columbia, Janus, MFS, One Group, Putnam, PIMCO),
No. 1:04-md-15863 (transfer began March 19, 2004). Four lawsuits alleging
improper brokerage allocation practices and excessive compensation are pending
in the United States District Court for the District of Massachusetts, Forsythe
v. Sun Life Financial Inc., et al., No. 04cv10584 (GAO) (March 25, 2004);
Eddings v. Sun Life Financial Inc., et al., No. 04cv10764 (GAO) (April 15,
2004); Marcus Dumond, et al. v. Massachusetts Financial Servs. Co., et al., No.
04cv11458 (RGS) (May 4, 2004); and Koslow v. Sun Life Financial Inc., et al.,
No. 04cv11019 (GAO) (May 20, 2004). The lawsuits generally allege that some or
all of the defendants (i) permitted or acquiesced in market timing and/or late
trading in some of the MFS funds, inadequately disclosed MFS' internal policies
concerning market timing and such matters, and received excessive compensation
as fiduciaries to the MFS funds, or (ii) permitted or acquiesced in the
improper use of fund assets by MFS to support the distribution of MFS fund
shares and inadequately disclosed MFS' use of fund assets in this manner. The
actions assert that some or all of the defendants violated the federal
securities laws, including the Securities Act of 1933 and the Securities
Exchange Act of 1934, the Investment Company Act of 1940 and the Investment
Advisers Act of 1940, the Employee Retirement Income Security Act of 1974, as
well as fiduciary duties and other violations of common law. The lawsuits seek
unspecified compensatory damages. Insofar as any of the actions is
appropriately brought derivatively on behalf of any of the MFS funds, any
recovery will inure to the benefit of the MFS funds. The defendants are
reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed in
the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of the MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution to affected MFS
funds to compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS fund sales. It is not clear whether these
amounts will be sufficient to compensate shareholders for all of the damage
they allegedly sustained, whether certain shareholders or putative class
members may have additional claims to compensation, or whether the damages that
may be awarded in any of the actions will exceed these amounts. In the event
the MFS funds incur any losses, costs or expenses in connection with such
lawsuits, the Boards of Trustees of the affected MFS funds may pursue claims on
behalf of such funds against any party that may have liability to the funds in
respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or
other adverse consequences to the MFS funds.
- -------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- -------------------------------------------------------------------------------------------------------
The Trustees and officers of the Trust, as of September 10, 2004, are listed below, together with
their principal occupations during the past five years. (Their titles may have varied during that
period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS & OTHER
POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
- ------------------- ---------------- --------------- ----------------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial Services
(born 10/20/63) President Company, Chief Executive Officer,
President, Chief Investment
Officer and Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial Services
(born 08/08/46) Company, Chairman (since February
2004); Harvard Law School
(education), John Olin Visiting
Professor (since July 2002);
Secretary of Economic Affairs, The
Commonwealth of Massachusetts
(January 2002 to December 2002);
Fidelity Investments, Vice
Chairman (June 2000 to December
2001); Fidelity Management &
Research Company (investment
adviser), President (March 1997 to
July 2001); The Bank of New York
(financial services), Director;
Bell Canada Enterprises
(telecommunications), Director;
Telesat (satellite
communications), Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair February 1992 Private investor; KeySpan
(born 05/01/36) of Trustees Corporation (energy related
services), Director; Eastern
Enterprises (diversified services
company), Chairman, Trustee and
Chief Executive Officer (until
November 2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 03/11/37) Chief of Cardiac Surgery; Harvard
Medical School, Professor of
Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service provider),
Vice Chairman/Director (since
April 2001); Encinitos Ventures
(private investment company),
Principal (1997 to April 2001);
Lincoln Electric Holdings, Inc.
(welding equipment manufacturer),
Director; Southwest Gas
Corporation (natural gas
distribution company), Director
William R. Gutow Trustee December 1993 Private investor and real estate
(born 09/27/41) consultant; Capitol Entertainment
Management Company (video
franchise), Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co.,
(born 02/08/53) Inc., Managing Director,
Investment Banking Group (1997 to
February 2001); Borders Group,
Inc. (book and music retailer),
Director; Federal Realty
Investment Trust (real estate
investment trust), Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes (attorneys),
(born 06/23/35) Partner
William J. Poorvu Trustee August 1982 Private investor; Harvard
(born 04/10/35) University Graduate School of
Business Administration, Class of
1961 Adjunct Professor in
Entrepreneurship Emeritus; CBL &
Associates Properties, Inc. (real
estate investment trust), Director
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President; Wellfleet
Investments (investor in health
care companies), Managing General
Partner (since 1993); Cambridge
Nutraceuticals (professional
nutritional products), Chief
Executive Officer (until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care industry
(born 04/25/46) consultant
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial Services
(born 10/20/63) Trustee Company, Chief Executive Officer,
President, Chief Investment
Officer and Director
James R. Bordewick, Jr.(3) Assistant September 1990 Massachusetts Financial Services
(born 03/06/59) Secretary and Company, Senior Vice President and
Assistant Clerk Associate General Counsel
Stephanie A. DeSisto(3) Assistant May 2003 Massachusetts Financial Services
(born 10/01/53) Treasurer Company, Vice President (since
April 2003); Brown Brothers
Harriman & Co., Senior Vice
President (November 2002 to April
2003); ING Groep N.V./Aeltus
Investment Management, Senior Vice
President (prior to November 2002)
Robert R. Flaherty(3) Assistant August 2000 Massachusetts Financial Services
(born 09/18/63) Treasurer Company, Vice President (since
August 2000); UAM Fund Services,
Senior Vice President (prior to
August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial Services
(born 08/29/58) Company, Senior Vice President
(since July 2002); The Bank of New
York, Senior Vice President
(September 2000 to July 2002);
Lexington Global Asset Managers,
Inc., Executive Vice President and
Chief Financial Officer (prior to
September 2000); Lexington Funds,
Chief Financial Officer (prior to
September 2000)
Ellen Moynihan(3) Assistant April 1997 Massachusetts Financial Services
(born 11/13/57) Treasurer Company, Vice President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance compliance services), Principal
Officer (since June 2004); CRA Business
Strategies Group (consulting
services), Executive Vice
President (April 2003 to June
2004); David L. Babson & Co.
(investment adviser), Managing
Director, Chief Administrative
Officer and Director (February
1997 to March 2003)
James O. Yost(3) Assistant September 1990 Massachusetts Financial Services
(born 06/12/60) Treasurer Company, Senior Vice President
- ----------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served
continuously since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange
Commission (i.e., "public companies").
(3) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to
as the 1940 Act), which is the principal federal law governing investment companies like the fund.
The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees
are not elected for fixed terms. The Trust will hold a shareholders' meeting in 2005 and at least once
every five years thereafter to elect Trustees. Each Trustee and officer holds office until his or her
successor is chosen and qualified or until his or her earlier death, resignation, retirement or
removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which
MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with
certain affiliates of MFS. Each Trustee serves as a board member of 109 funds within the MFS Family of
Funds.
The Statement of Additional Information contains further information about the Trustees and is
available without charge upon request by calling 1-800-225-2606.
- ---------------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIAN
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 225 Franklin Street, Boston, MA 02110
02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA
02116-3741
PORTFOLIO MANAGERS
John F. Addeo
Scott B. Richards
QUARTERLY PORTFOLIO DISCLOSURE
Beginning with the fund's first and third fiscal quarters following this report, the fund will file a
complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission)
for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed
and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at
1-202-942-8090. The fund's Form N-Q is available on the EDGAR database on the Commission's Internet
website at http://www.sec.gov, and copies of this information may be obtained, upon payment of a
duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by
writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at www.mfs.com.
- -------------------------------------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS
- -------------------------------------------------------------------------------
YOUR GOALS ARE IMPORTANT
MFS offers a complete range of investments and investment services to address
specific financial needs over time. When your investing goals change, you can
easily stay with MFS for the products you need, when you need them. Whether
you're investing for college or retirement expenses or for tax management or
estate planning, MFS will be there.
Ask your investment professional how MFS can help you move toward the goals
you've set.
MFS FAMILY OF FUNDS(R)
More than 50 portfolios offer domestic and international
equity and fixed-income investments across the full risk
spectrum
VARIABLE ANNUITIES
A selection of annuity products with advantages for
building and preserving wealth
MFS 401(k) AND IRA SUITES
Retirement plans for businesses and individuals
MFS COLLEGE SAVINGS PLANS
Investment products to help meet education expenses
MFS PRIVATE PORTFOLIO SERVICES
Investment advisory services that provide custom products
for high-net-worth individuals
Variable annuities are offered through MFS/Sun Life Financial Distributors,
Inc.
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from 8 a.m.
to 8 p.m. Eastern time.
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's Web site at http://www.sec.gov.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Shares prices, account 1-800-MFS-TALK
balances exchanges (1-800-637-8255) 24 hours a day, 365 days a
or stock and bond outlooks touch-tone required year
- --------------------------------------------------------------------------------
WORLD WIDE WEB
Go to MFS.COM for a clear view of market events, investor education, account
access, and product and performance insights.
Go paperless with EDELIVERY: Join your fellow shareholders who are already
taking advantage of this great new benefit from MFS. With eDelivery, we send
you prospectuses, reports, and proxies electronically. You get timely
information without mailbox clutter (and help your fund save printing and
postage costs).
SIGN-UP instructions: If your account is registered with us, go to mfs.com, log
in to your account via MFS Access, and select the eDelivery sign up options.
If you own your MFS fund shares through a financial institution or through a
retirement plan, MFS TALK, MFS Access, and eDelivery may not be available to
you.
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
HYO-SEM-9/04 52M
MFS(R) Mutual Funds
SEMIANNUAL REPORT 7/31/04
MFS(R) HIGH INCOME FUND
A path for pursuing opportunity
[graphic omitted]
[logo] M F S(R)
INVESTMENT MANAGEMENT
- --------------------------------------------------------------------------------
MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
- --------------------------------------------------------------------------------
Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about every MFS investment product and service that we
offer and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information;
we maintain information and records about you, your investments, and the
services you use. Examples of the nonpublic personal information we maintain
include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates, or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may share information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about MFS' privacy policy, please call 1-800-225-2606
any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MFS(R) HIGH INCOME FUND
The fund seeks high current income by investing primarily in a professionally
managed, diversified portfolio of fixed income securities, some of which may
involve equity features.
- --------------------------------------------------------------------------------
A PROSPECTUS FOR ANY MFS PRODUCT CAN BE OBTAINED FROM YOUR INVESTMENT
PROFESSIONAL. YOU SHOULD READ THE PROSPECTUS CAREFULLY BEFORE INVESTING AS IT
CONTAINS COMPLETE INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE(s), THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THE FUND, AND THE FEES, CHARGES, AND EXPENSES
INVOLVED. THESE ELEMENTS, AS WELL AS OTHER INFORMATION CONTAINED IN THE
PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY BEFORE INVESTING.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
----------------------------------------------------
MFS PRIVACY POLICY
----------------------------------------------------
LETTER FROM THE CEO 1
----------------------------------------------------
MFS ORIGINAL RESEARCH(R) 5
----------------------------------------------------
MANAGEMENT REVIEW 6
----------------------------------------------------
PORTFOLIO COMPOSITION 8
----------------------------------------------------
PERFORMANCE SUMMARY 9
----------------------------------------------------
EXPENSE TABLES 12
----------------------------------------------------
PORTFOLIO OF INVESTMENTS 14
----------------------------------------------------
FINANCIAL STATEMENTS 31
----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 50
----------------------------------------------------
TRUSTEES AND OFFICERS 64
----------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES
OF INVESTORS 68
----------------------------------------------------
ASSET ALLOCATION 69
----------------------------------------------------
CONTACT INFORMATION BACK COVER
- --------------------------------------------------------------------------------
LETTER FROM THE CEO
- --------------------------------------------------------------------------------
Dear Shareholders,
[Photo of Robert J. Manning]
Our firm was built on the strength of MFS Original Research(R), our in-depth
analysis of every security we consider for our portfolios. We've been honing
this process since 1932, when we created one of the mutual fund industry's
first research departments. And we continue to fine-tune this process so that
we can provide strong and consistent long-term investment performance to help
you achieve your financial goals.
While we have achieved strong investment performance in many of our portfolios,
our goal is to achieve the same strong results across all asset classes. To
ensure that our portfolio teams are doing the best possible job for our firm's
clients and shareholders, I am focusing the vast majority of my time on the
three key elements that I believe truly differentiate MFS from its competitors:
people, process, and culture.
PEOPLE
Our people have always been our most valuable resource. Our philosophy is to
deliver consistent, repeatable investment results by hiring the most talented
investors in our industry. We recruit from the nation's top business schools
and hire experienced analysts, both domestically and around the globe.
Our analysts are the engine that powers our entire investment team because
their recommendations have a direct impact on the investment performance of our
portfolios. To demonstrate our ongoing commitment in this area, we increased
the number of equity analysts at MFS from less than 40 at the end of 2000 to
about 50 in June 2004. During that same period, we doubled the average
investment experience of our domestic equity analysts, in part by recruiting
more seasoned analysts to the firm. Moreover, our international network of
investment personnel now spans key regions of the world with offices in London,
Mexico City, Singapore, and Tokyo, as well as Boston.
One of the major advantages that MFS has over many of its competitors is that
the position of research analyst is a long-term career for many members of our
team, not simply a steppingstone toward becoming a portfolio manager. We have
worked to elevate the stature of the analyst position to be on par with that of
a portfolio manager. In fact, an exceptional research analyst has the
opportunity to earn more at MFS than some portfolio managers.
At the same time, we look within the firm to promote talented analysts who
choose a path toward becoming a portfolio manager. We rarely hire portfolio
managers from our competitors because we believe the best investors are those
steeped in the MFS process and culture. In the past few months, we have
identified three senior research analysts who will assume roles on the
management teams of several of our larger portfolios. MFS is fortunate to have
a deep bench of talented investment personnel, and we welcome the opportunity
to put their skills to work for our clients.
PROCESS
MFS was built on the strength of its bottom-up approach to researching
securities. We have enhanced the mentoring process for our research analysts by
calling on several of our most seasoned portfolio managers to supplement the
work of Director of Global Equity Research David A. Antonelli. These portfolio
managers are taking a special interest in developing the careers of our
research analysts and strengthening our investment process. Kenneth J. Enright
of our value equity group is working with a team of domestic analysts; David E.
Sette-Ducati of our small- and mid-cap equity team is working with analysts
concentrating on small- and mid-cap companies; and Barnaby Wiener of our
international equity team in London heads the European equity research team.
We have combined the bottom-up approach of our research process with a top-
down approach to risk controls on portfolio composition. We have a very strong
quantitative team under the leadership of industry veteran Deborah H. Miller,
who represents the equity management department on the Management Committee of
the firm. Quantitative analysis helps us generate investment ideas and, more
importantly, assess the appropriate level of risk for each portfolio. The risk
assessment is designed to assure that each portfolio operates within its
investment objectives.
Additionally, we have increased the peripheral vision of our investment
personnel across asset classes through the collaboration of our Equity, Fixed
Income, Quantitative Analysis, and Risk Management teams. We recently codified
this key aspect of our culture by forming an Investment Management Committee,
composed of key members of these teams. This committee will work to ensure that
all teams are sharing information, actively debating investment ideas, and
creating a unified investment team.
CULTURE
Teamwork is at the heart of our ability to deliver consistent and competitive
investment performance over time. At MFS, each member of our team is involved
in our success; we have no superstars. The collaborative nature of our process
works to assure a consistent investment approach across all of our products and
provides a high level of continuity in portfolio management because our
investment performance never depends on the contributions of just a single
individual. Our culture is based on an environment of teamwork that allows our
investment personnel to be successful. In turn, we demand superior investment
results from every member of our team.
We have created a meritocracy at our firm based on investment results. We hold
all of our portfolio managers accountable for the performance of their
portfolios and their contributions to the team. We also track the equity and
fixed-income ratings of our analysts so we can evaluate them based on the
performance of their recommendations. We align bonus compensation to investment
performance by weighting rewards to those who have created the greatest
long-term benefit for our shareholders and who contribute most successfully to
the Original Research(SM) process.
The strength of our culture has resulted in a tremendous amount of stability.
Although we have dismissed members of our team whose performance did not meet
MFS" high standards, only one portfolio manager has voluntarily left the firm
over the past six months, based on a decision to retire from the industry.
In short, we can help you achieve your financial goals by hiring talented
people, following a disciplined process, and maintaining our firm's unique
culture. The enhancements described in this letter reflect the collaborative
spirit and the depth of resources in our investment teams.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
August 20, 2004
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
- -------------------------------------------------------------------------------
MFS ORIGINAL RESEARCH(R)
- -------------------------------------------------------------------------------
THE MFS(R) DIFFERENCE
For 80 years MFS has been offering investors clear paths to pursuing specific
investment objectives. Today, millions of individuals and thousands of
institutions all over the world look to MFS to manage their assets with insight
and care.
Our success, we believe, has to do with the fact that we see investors as
people with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers" ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain first-hand
knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies" customers and competitors
o developing our own proprietary estimates of companies" earnings
- -------------------------------------------------------------------------------
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
MARKET ENVIRONMENT
The six-month period ended July 31, 2004 was a volatile time for fixed-income
markets, marked by fairly significant movements in interest rates and divergent
returns across different bond sectors. Interest rates trended generally lower
early in the period, and then rose dramatically in April. At that time, in our
view, a series of strong jobs reports from the U.S. Department of Labor signaled
the economy was in full recovery, causing investors to conclude that an interest
rate hike was imminent. Indeed, the Federal Reserve Board raised short-term
rates by 0.25% on June 30 and, shortly after the period ended, by another 0.25%
on August 10.
The high-yield bond market began the period with strong performance as cash
continued to flow rapidly into the sector. However, mixed economic data and a
large new issue calendar appeared, in our view, to dampen market enthusiasm in
February, while rising interest rates applied further pressure on the market
during the second quarter. As interest rates rose during the period, cash flows
reversed and capital flowed out of the high-yield sector. For the six- month
period, however, high-yield securities, as represented by the fund's benchmark,
the Lehman Brothers High Yield Index, outperformed U.S. Treasuries and
investment-grade bonds, as represented by the Lehman Brothers U.S. Credit Index,
which is a broad measure of the U.S. investment-grade corporate bond market, as
their higher coupons provided some protection against rising rates. (Principal
value and interest on Treasury securities are guaranteed by the U.S. government
if held to maturity.) Higher rates also impacted emerging market bonds, with an
April sell-off erasing many previous gains in that sector.
DETRACTORS FROM PERFORMANCE
The fund's underperformance versus its benchmark was attributable, in part, to
our avoidance of several sectors of the high-yield market that we view as quite
volatile. These included textiles and finance companies, which rallied strongly
during the period. Specific holdings that detracted from relative performance
included Pegasus Communications, a diversified media company that distributes
satellite television service. We sold our Pegasus position before the end of the
period.
CONTRIBUTORS TO PERFORMANCE
The portfolio's relative performance was helped by an underweighted position in
utilities and airlines and by an overweighting in the securities of packaging
companies. Among the holdings contributing to performance was Doe Run Resources,
a producer of base and precious metals. Also contributing to the portfolio's
relative performance was our exposure to commercial mortgage backed securities.
Respectfully,
/s/ John F. Addeo /s/ Scott B. Richards
John F. Addeo Scott B. Richards
Portfolio Manager Portfolio Manager
Note to Shareholders: Effective May 24, 2004, Scott B. Richards became a
co-manager of the fund.
The views expressed in this report are those of the portfolio managers only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market and
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or as an indication of
trading intent on behalf of any MFS fund. References to specific securities are
not recommendations of such securities and may not be representative of any MFS
fund's current or future investments.
- --------------------------------------------------------------------------------
Visit mfs.com for our latest economic and investment outlook.
o Under Updates & Announcements, click Week in Review for a summary of recent
investment-related news.
o From Week in Review, link to MFS Global Perspective for our current view of
the world.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO STRUCTURE*
- --------------------------------------------------------------------------------
Bonds 95.2%
Stocks 2.8%
Cash 2.0%
---------------------------------------
BOND MARKET SECTORS*
---------------------------------------
High Yield Corporates 88.5%
---------------------------------------
Commercial Mortgage Backed 2.9%
---------------------------------------
Domestic Equity 2.1%
---------------------------------------
Emerging Markets Debt 2.1%
---------------------------------------
Cash & Cash Equivalents 2.0%
---------------------------------------
High Grade Corporate 1.8%
---------------------------------------
Domestic Convertible 0.3%
---------------------------------------
International Equity 0.3%
---------------------------------------
International Convertibles 0.0%
---------------------------------------
Asset Backed Securities 0.0%
---------------------------------------
---------------------------------------
CREDIT QUALITY*
---------------------------------------
AAA 0.4%
---------------------------------------
A 0.1%
---------------------------------------
BBB 0.4%
---------------------------------------
BB 20.5%
---------------------------------------
B 52.0%
---------------------------------------
CCC 17.8%
---------------------------------------
C 2.0%
---------------------------------------
D 2.0%
---------------------------------------
Equity 2.8%
---------------------------------------
Other 2.0%
---------------------------------------
---------------------------------------
PORTFOLIO FACTS
---------------------------------------
Average Duration 4.5
---------------------------------------
Average Life 7.6 Yrs.
---------------------------------------
Average Maturity 8.3 Yrs.
---------------------------------------
Percentages are based on total net assets as of 7/31/04.
Credit quality ratings are based on a weighted average of each security's rating
from Moody's Investors Service. If not rated by Moody's, the rating will be that
assigned by Standard & Poor's. Likewise, if not assigned a rating by Standard &
Poor's, it will be based on the rating assigned by Fitch, Inc. If not rated by
any of the three agencies, the security is considered not rated, except for U.S.
Treasuries and mortgage-backed securities, which are included in the "AAA"-
rating category.
*For purposes of this graphical presentation, accrued interest is included
within the bond component.
The portfolio is actively managed, and current holdings may be different.
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY THROUGH 7/31/04
- --------------------------------------------------------------------------------
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for the
applicable time periods. Performance results reflect the percentage change in
net asset value, including the reinvestment of any dividends and capital gains
distributions. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS WERE PRIMARILY ACHIEVED DURING FAVORABLE MARKET
CONDITIONS, WHICH MAY NOT BE REPEATED. THE PERFORMANCE SHOWN DOES NOT REFLECT
THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
TOTAL RETURNS
- --------------------
Average annual
without sales charge
- --------------------
Class
Share inception
class date 6-mo 1-yr 3-yr 5-yr 10-yr
----------------------------------------------------------------------------
A 2/17/1978 0.19% 12.04% 7.89% 3.62% 6.68%
----------------------------------------------------------------------------
B 9/27/1993 0.10% 11.26% 7.22% 2.95% 5.93%
----------------------------------------------------------------------------
C 1/3/1994 0.11% 11.25% 7.22% 2.95% 5.94%
----------------------------------------------------------------------------
I 1/2/1997 0.34% 12.09% 8.13% 3.93% 6.90%
----------------------------------------------------------------------------
R1 12/31/2002 0.34% 11.83% 7.78% 3.56% 6.65%
----------------------------------------------------------------------------
R2 10/31/2003 0.22% 11.47% 7.29% 2.98% 5.95%
----------------------------------------------------------------------------
529A 7/31/2002 0.04% 11.42% 7.59% 3.45% 6.59%
----------------------------------------------------------------------------
529B 7/31/2002 -0.29% 11.01% 6.87% 2.74% 5.83%
----------------------------------------------------------------------------
529C 7/31/2002 -0.02% 10.99% 6.96% 2.79% 5.87%
----------------------------------------------------------------------------
- --------------------
Average annual
- --------------------
Comparative benchmarks
----------------------------------------------------------------------------
Average high current
yield bond fund+ 0.65% 11.91% 7.64% 3.46% 5.46%
----------------------------------------------------------------------------
Lehman Brothers High
Yield Index# 0.81% 13.07% 9.26% 5.26% 7.33%
----------------------------------------------------------------------------
Periods less than one year are actual, not annualized.
- --------------------
Average annual
with sales charge
- --------------------
Share
class 6-mo 1-yr 3-yr 5-yr 10-yr
----------------------------------------------------------------------------
A -4.57% 6.72% 6.16% 2.62% 6.17%
----------------------------------------------------------------------------
B -3.77% 7.26% 6.38% 2.68% 5.93%
----------------------------------------------------------------------------
C -0.86% 10.25% 7.22% 2.95% 5.94%
----------------------------------------------------------------------------
529A -4.72% 6.13% 5.86% 2.44% 6.08%
----------------------------------------------------------------------------
529B -4.15% 7.01% 6.02% 2.47% 5.83%
----------------------------------------------------------------------------
529C -0.99% 9.99% 6.96% 2.79% 5.87%
----------------------------------------------------------------------------
I, R1, and R2 Class shares do not have a sales charge. Please see Notes to
Performance Summary for more details.
- --------------------
Cumulative
without sales charge
- --------------------
----------------------------------------------------------------------------
A 0.19% 12.04% 25.60% 19.47% 90.98%
----------------------------------------------------------------------------
B 0.10% 11.26% 23.27% 15.62% 77.96%
----------------------------------------------------------------------------
C 0.11% 11.25% 23.28% 15.63% 78.15%
----------------------------------------------------------------------------
I 0.34% 12.09% 26.42% 21.23% 94.97%
----------------------------------------------------------------------------
R1 0.34% 11.83% 25.22% 19.10% 90.40%
----------------------------------------------------------------------------
R2 0.22% 11.47% 23.50% 15.84% 78.29%
----------------------------------------------------------------------------
529A 0.04% 11.42% 24.54% 18.46% 89.37%
----------------------------------------------------------------------------
529B -0.29% 11.01% 22.05% 14.48% 76.19%
----------------------------------------------------------------------------
529C -0.02% 10.99% 22.36% 14.77% 76.83%
----------------------------------------------------------------------------
Periods less than one year are actual, not annualized.
+ Source: Lipper Inc., an independent firm that reports mutual fund
performance.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITION
LEHMAN BROTHERS HIGH YIELD INDEX - measures the performance of the high-yield
bond market.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
Class A and 529A results, including sales charge, reflects the deduction of the
maximum 4.75% sales charge. Class B and 529B results, including sales charge,
reflects the deduction of the applicable contingent deferred sales charge
(CDSC), which declines over six years from 4% to 0%. Class C and 529C results,
including sales charge, redeemed within one year from the end of the calendar
month of purchase reflects the deduction of the 1% CDSC. Class I shares have no
sales charges and are available only to certain investors. Class R1 and R2
shares have no sales charges and are available only to certain retirement plans.
Class 529A, 529B, and 529C shares are only available in conjunction with
qualified tuition programs, such as the MFS 529 Savings Plan.
Performance for I, R1 and 529A shares includes the performance of the fund's
Class A shares for periods prior to their offering. Performance for R2 and 529B
shares includes the performance of the fund's Class B shares for periods prior
to their offering. Performance for 529C shares includes the performance of the
fund's Class C shares for periods prior to their offering. Blended class
performance has been adjusted to take into account differences in sales loads,
if any, applicable to these share classes, but has not been adjusted to take
into account differences in class specific operating expenses (such as Rule
12b-1 fees). Compared to performance these share classes would have experienced
had they been offered for the entire period, the use of blended performance
generally results in higher performance for share classes with higher operating
expenses than the initial share class to which it is blended, and lower
performance for share classes with lower operating expenses than the initial
share class to which it is blended.
The fund will charge a 2% redemption fee on proceeds from Class A, B, C, and I
shares redeemed or exchanged within 30 calendar days of acquiring (either by
purchasing or exchanging) fund shares. See the prospectus for complete details.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers the fund's
performance results would be less favorable. Please see the prospectus and
financial statements for complete details.
KEY RISK CONSIDERATIONS
The portfolio invests in foreign and/or emerging markets securities which
involves risks relating to interest rates, currency exchange rates, economic,
and political conditions.
The portfolio invests in high yield or lower-rated securities which may provide
greater returns but are subject to greater-than-average risk.
These risks may increase share price volatility. Please see the prospectus for
further information regarding these and other risk considerations.
- -------------------------------------------------------------------------------
EXPENSE TABLES
- -------------------------------------------------------------------------------
FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM FEBRUARY 1, 2004,
THROUGH JULY 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and (2)
ongoing costs, including management fees; distribution and service (12b-1) fees;
and other fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in the fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period, February 1, 2004 through July 31, 2004.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table below provides information
about hypothetical account values and hypothetical expenses based on the fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in the fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
- -------------------------------------------------------------------------------
Share Class
- -------------------------------------------------------------------------------
Expenses
Paid During
Annualized Beginning Ending Account Period*
Expense Account Value Value 2/01/04-
Ratio 2/01/04 7/31/04 7/31/04
- -------------------------------------------------------------------------------
Actual 1.02% $1,000 $1,002 $5.09
- -------------------------------------------------------------------------------
A Hypothetical** 1.02% $1,000 $1,020 $5.14
- -------------------------------------------------------------------------------
Actual 1.72% $1,000 $1,000 $8.58
- -------------------------------------------------------------------------------
B Hypothetical** 1.72% $1,000 $1,016 $8.65
- -------------------------------------------------------------------------------
Actual 1.72% $1,000 $1,001 $8.58
- -------------------------------------------------------------------------------
C Hypothetical** 1.72% $1,000 $1,016 $8.65
- -------------------------------------------------------------------------------
Actual 0.72% $1,000 $1,003 $3.60
- -------------------------------------------------------------------------------
I Hypothetical** 0.72% $1,000 $1,021 $3.63
- -------------------------------------------------------------------------------
Actual 1.22% $1,000 $1,003 $6.09
- -------------------------------------------------------------------------------
R1 Hypothetical** 1.22% $1,000 $1,019 $6.14
- -------------------------------------------------------------------------------
Actual 1.46% $1,000 $1,002 $7.29
- -------------------------------------------------------------------------------
R2 Hypothetical** 1.46% $1,000 $1,018 $7.34
- -------------------------------------------------------------------------------
Actual 1.32% $1,000 $1,000 $6.58
- -------------------------------------------------------------------------------
529A Hypothetical** 1.32% $1,000 $1,018 $6.64
- -------------------------------------------------------------------------------
Actual 1.97% $1,000 $997 $9.81
- -------------------------------------------------------------------------------
529B Hypothetical** 1.97% $1,000 $1,015 $9.90
- -------------------------------------------------------------------------------
Actual 1.97% $1,000 $1,000 $9.82
- -------------------------------------------------------------------------------
529C Hypothetical** 1.97% $1,000 $1,015 $9.90
- -------------------------------------------------------------------------------
* Expenses paid is equal to each class" annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
** Assumed rate of return of 5% per year before expenses.
- -------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (unaudited) - 7/31/04
- -------------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your fund.
It is categorized by broad-based asset classes.
Bonds - 93.3%
- -------------------------------------------------------------------------------------------------
PAR AMOUNT
ISSUER (000 Omitted) $ VALUE
- -------------------------------------------------------------------------------------------------
U.S. Bonds - 81.1%
- -------------------------------------------------------------------------------------------------
Advertising & Broadcasting - 4.1%
- -------------------------------------------------------------------------------------------------
Allbritton Communications Co., 7.75%, 2012 $7,940 $7,840,750
- -------------------------------------------------------------------------------------------------
DIRECTV Holding LLC, 8.375%, 2013 2,870 3,214,400
- -------------------------------------------------------------------------------------------------
EchoStar DBS Corp., 6.375%, 2011 4,505 4,471,212
- -------------------------------------------------------------------------------------------------
Emmis Operating Co., 6.875%, 2012## 3,475 3,396,812
- -------------------------------------------------------------------------------------------------
Granite Broadcasting Corp., 9.75%, 2010 7,985 7,306,275
- -------------------------------------------------------------------------------------------------
Muzak LLC, 10%, 2009 5,385 4,738,800
- -------------------------------------------------------------------------------------------------
Paxson Communications Corp., 10.75%, 2008 70 71,400
- -------------------------------------------------------------------------------------------------
Paxson Communications Corp., 0% to 2006,
12.25% to 2009 11,480 10,016,300
- -------------------------------------------------------------------------------------------------
PRIMEDIA, Inc., 8.875%, 2011 3,255 3,198,038
- -------------------------------------------------------------------------------------------------
Spanish Broadcasting System, Inc., 9.625%, 2009 9,275 9,761,937
- -------------------------------------------------------------------------------------------------
XM Satellite Radio, Inc., 6.65%, 2009 2,360 2,389,500
- -------------------------------------------------------------------------------------------------
XM Satellite Radio, Inc., 12%, 2010 2,698 3,089,210
- -------------------------------------------------------------------------------------------------
$59,494,634
- -------------------------------------------------------------------------------------------------
Aerospace - 1.8%
- -------------------------------------------------------------------------------------------------
Argo-Tech Corp., 9.25%, 2011 $4,265 $4,478,250
- -------------------------------------------------------------------------------------------------
BE Aerospace, Inc., 8.875%, 2011 5,860 5,713,500
- -------------------------------------------------------------------------------------------------
Hexcel Corp., 9.75%, 2009 9,560 10,038,000
- -------------------------------------------------------------------------------------------------
K&F Industries, Inc., 9.625%, 2010 1,192 1,302,260
- -------------------------------------------------------------------------------------------------
TransDigm Holding Co., 8.375%, 2011 4,010 4,230,550
- -------------------------------------------------------------------------------------------------
$25,762,560
- -------------------------------------------------------------------------------------------------
Airlines - 1.1%
- -------------------------------------------------------------------------------------------------
Continental Airlines, Inc., 7.568%, 2006 $4,000 $3,042,826
- -------------------------------------------------------------------------------------------------
Continental Airlines, Inc., 6.748%, 2017 2,813 2,171,688
- -------------------------------------------------------------------------------------------------
Continental Airlines, Inc., 6.9%, 2017 1,509 1,214,532
- -------------------------------------------------------------------------------------------------
Continental Airlines, Inc., 6.795%, 2018 9,679 7,853,479
- -------------------------------------------------------------------------------------------------
Continental Airlines, Inc., 7.566%, 2020 2,043 1,607,453
- -------------------------------------------------------------------------------------------------
Delta Air Lines, Inc., 7.92%, 2012 1,450 849,329
- -------------------------------------------------------------------------------------------------
$16,739,307
- -------------------------------------------------------------------------------------------------
Apparel Manufacturers - 0.0%
- -------------------------------------------------------------------------------------------------
WestPoint Stevens, Inc., 7.875%, 2008** $16,805 $105,031
- -------------------------------------------------------------------------------------------------
Asset Backed & Securitized - 2.8%
- -------------------------------------------------------------------------------------------------
Airplane Pass-Through Trust, 10.875%, 2019** $5,185 $25,927
- -------------------------------------------------------------------------------------------------
Anthracite CDO Ltd., 6%, 2037## 5,148 4,026,251
- -------------------------------------------------------------------------------------------------
Asset Securitization Corp., 8.0041%, 2029 1,850 1,855,859
- -------------------------------------------------------------------------------------------------
Commercial Mortgage Acceptance Corp., 5.44%, 2030## 5,000 4,644,403
- -------------------------------------------------------------------------------------------------
Deutsche Mortgage & Asset Receiving Corp., 7.5%, 2031 4,500 3,533,476
- -------------------------------------------------------------------------------------------------
Falcon Auto Dealership LLC, 3.8486%, 2025^^ 18,521 3,378,171
- -------------------------------------------------------------------------------------------------
First Union National Bank Commercial Mortgage Corp.,
6.75%, 2032 2,000 1,783,886
- -------------------------------------------------------------------------------------------------
First Union-Lehman Brothers Commercial Mortgage Trust,
7%, 2029## 4,850 5,247,064
- -------------------------------------------------------------------------------------------------
First Union-Lehman Brothers Commercial Mortgage Trust,
7.5%, 2029 4,000 4,089,375
- -------------------------------------------------------------------------------------------------
GMAC Commercial Mortgage Securities, Inc.,
6.02%, 2033 4,000 3,694,933
- -------------------------------------------------------------------------------------------------
Lehman Brothers Commercial Conduit Mortgage Trust,
0.9668%, 2030^^ 56,004 2,096,899
- -------------------------------------------------------------------------------------------------
Morgan Stanley Capital I, Inc., 1.5921%, 2014##^^ 23,489 1,808,436
- -------------------------------------------------------------------------------------------------
Mortgage Capital Funding, Inc., 7.214%, 2007 2,500 2,504,842
- -------------------------------------------------------------------------------------------------
Nationslink Funding Corp., 5%, 2009 2,500 2,268,489
- -------------------------------------------------------------------------------------------------
$40,958,011
- -------------------------------------------------------------------------------------------------
Automotive - 3.6%
- -------------------------------------------------------------------------------------------------
Advanced Accessory Systems LLC, 10.75%, 2011 $3,215 $3,223,037
- -------------------------------------------------------------------------------------------------
Dana Corp., 10.125%, 2010 1,870 2,131,800
- -------------------------------------------------------------------------------------------------
Dana Corp., 9%, 2011 3,745 4,419,100
- -------------------------------------------------------------------------------------------------
Dana Corp., 7%, 2029 3,790 3,752,100
- -------------------------------------------------------------------------------------------------
Delco Remy International, Inc., 9.375%, 2012## 1,700 1,649,000
- -------------------------------------------------------------------------------------------------
Dura Operating Corp., 8.625%, 2012 2,000 1,980,000
- -------------------------------------------------------------------------------------------------
Eagle-Picher Industries, Inc., 9.75%, 2013 4,330 4,589,800
- -------------------------------------------------------------------------------------------------
Metaldyne Corp., 11%, 2012 4,150 3,693,500
- -------------------------------------------------------------------------------------------------
Metaldyne Corp., 10%, 2013## 2,375 2,375,000
- -------------------------------------------------------------------------------------------------
Navistar International Corp., 7.5%, 2011 7,270 7,506,275
- -------------------------------------------------------------------------------------------------
Oxford Automotive, Inc., 12%, 2010## 2,545 1,959,650
- -------------------------------------------------------------------------------------------------
Tenneco Automotive, Inc., 10.25%, 2013 5,385 6,138,900
- -------------------------------------------------------------------------------------------------
TRW Automotive, Inc., 9.375%, 2013 3,141 3,580,740
- -------------------------------------------------------------------------------------------------
TRW Automotive, Inc., 11%, 2013 3,676 4,411,200
- -------------------------------------------------------------------------------------------------
TRW Automotive, Inc., 11.75%, 2013 EUR 895 1,301,976
- -------------------------------------------------------------------------------------------------
$52,712,078
- -------------------------------------------------------------------------------------------------
Basic Industry - 0.5%
- -------------------------------------------------------------------------------------------------
Thermadyne Holdings Corp., 9.25%, 2014 $2,840 $2,840,000
- -------------------------------------------------------------------------------------------------
Trimas Corp., 9.875%, 2012 4,351 4,546,795
- -------------------------------------------------------------------------------------------------
$7,386,795
- -------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 5.0%
- -------------------------------------------------------------------------------------------------
Adelphia Communications Corp., 9.25%, 2002** $1,245 $1,058,250
- -------------------------------------------------------------------------------------------------
Adelphia Communications Corp., 8.375%, 2008** 7,970 6,694,800
- -------------------------------------------------------------------------------------------------
Adelphia Communications Corp., 9.375%, 2009** 525 459,375
- -------------------------------------------------------------------------------------------------
Avalon Cable Holdings LLC, 11.875%, 2008 5,042 5,331,576
- -------------------------------------------------------------------------------------------------
CCO Holdings LLC, 8.75%, 2013 2,560 2,457,600
- -------------------------------------------------------------------------------------------------
CSC Holdings, Inc., 8.125%, 2009 8,270 8,600,800
- -------------------------------------------------------------------------------------------------
CSC Holdings, Inc., 6.75%, 2012## 3,855 3,720,075
- -------------------------------------------------------------------------------------------------
Cablevision Systems Corp., 8%, 2012## 6,430 6,317,475
- -------------------------------------------------------------------------------------------------
Charter Communications, Inc., 8.625%, 2009 13,435 10,143,425
- -------------------------------------------------------------------------------------------------
Charter Communications, Inc., 9.92%, 2011 12,050 9,007,375
- -------------------------------------------------------------------------------------------------
Charter Communications, Inc., 8.375%, 2014## 2,130 2,055,450
- -------------------------------------------------------------------------------------------------
FrontierVision Holdings LP, 11.875%, 2007** 250 311,250
- -------------------------------------------------------------------------------------------------
FrontierVision Operating Partners LP, 11%, 2006** 6,575 8,087,250
- -------------------------------------------------------------------------------------------------
Insight Midwest LP, 9.75%, 2009 4,115 4,259,025
- -------------------------------------------------------------------------------------------------
Mediacom Broadband LLC, 11%, 2013 4,200 4,305,000
- -------------------------------------------------------------------------------------------------
$72,808,726
- -------------------------------------------------------------------------------------------------
Building - 2.0%
- -------------------------------------------------------------------------------------------------
Building Materials Corp. of America, 8.625%, 2006 $8,720 $8,829,000
- -------------------------------------------------------------------------------------------------
Building Materials Corp. of America, 8%, 2007 2,625 2,651,250
- -------------------------------------------------------------------------------------------------
Interface, Inc., 10.375%, 2010 3,712 4,166,720
- -------------------------------------------------------------------------------------------------
Jacuzzi Brands, Inc., 9.625%, 2010 1,580 1,706,400
- -------------------------------------------------------------------------------------------------
PLY Gem Industries, Inc., 9%, 2012## 4,670 4,716,700
- -------------------------------------------------------------------------------------------------
Williams Scotsman, Inc., 9.875%, 2007 6,050 5,989,500
- -------------------------------------------------------------------------------------------------
Williams Scotsman, Inc., 10%, 2008 1,120 1,215,200
- -------------------------------------------------------------------------------------------------
$29,274,770
- -------------------------------------------------------------------------------------------------
Business Services - 1.8%
- -------------------------------------------------------------------------------------------------
General Binding Corp., 9.375%, 2008 $11,950 $12,189,000
- -------------------------------------------------------------------------------------------------
Iron Mountain, Inc., 8.625%, 2013 815 875,106
- -------------------------------------------------------------------------------------------------
Iron Mountain, Inc., 7.75%, 2015 5,460 5,582,850
- -------------------------------------------------------------------------------------------------
Lucent Technologies, Inc., 6.45%, 2029 2,135 1,627,937
- -------------------------------------------------------------------------------------------------
Xerox Corp., 7.625%, 2013 5,140 5,268,500
- -------------------------------------------------------------------------------------------------
$25,543,393
- -------------------------------------------------------------------------------------------------
Chemicals - 4.4%
- -------------------------------------------------------------------------------------------------
CP Kelco, 5.16%, 2008 $505 $509,280
- -------------------------------------------------------------------------------------------------
CP Kelco, 5.41%, 2008 192 193,662
- -------------------------------------------------------------------------------------------------
CP Kelco, 5.5863%, 2008 83 83,721
- -------------------------------------------------------------------------------------------------
Equistar Chemicals LP, 10.625%, 2011 8,905 9,884,550
- -------------------------------------------------------------------------------------------------
Hercules, Inc., 6.75%, 2029## 4,740 4,645,200
- -------------------------------------------------------------------------------------------------
Huntsman International LLC, 0%, 2009 975 487,500
- -------------------------------------------------------------------------------------------------
Huntsman International LLC, 10.125%, 2009 8,805 8,959,087
- -------------------------------------------------------------------------------------------------
IMC Global, Inc., 10.875%, 2013 5,085 6,203,700
- -------------------------------------------------------------------------------------------------
JohnsonDiversey Holding, Inc., "B", 9.625%, 2012 9,390 10,329,000
- -------------------------------------------------------------------------------------------------
JohnsonDiversey Holding, Inc., 0% to 2007,
10.67% to 2013 6,540 5,068,500
- -------------------------------------------------------------------------------------------------
Lyondell Chemical Co., 9.5%, 2008 3,590 3,756,037
- -------------------------------------------------------------------------------------------------
Nalco Co., 7.75%, 2011## 1,810 1,882,400
- -------------------------------------------------------------------------------------------------
Nalco Co., 8.875%, 2013## 1,555 1,632,750
- -------------------------------------------------------------------------------------------------
Rockwood Specialties Group, Inc., 10.625%, 2011 4,025 4,326,875
- -------------------------------------------------------------------------------------------------
Sovereign Specialty Chemicals, Inc., 11.875%, 2010 5,840 6,015,200
- -------------------------------------------------------------------------------------------------
$63,977,462
- -------------------------------------------------------------------------------------------------
Conglomerates - 0.6%
- -------------------------------------------------------------------------------------------------
Rexnord Industries, Inc., 10.125%, 2012 $3,960 $4,375,800
- -------------------------------------------------------------------------------------------------
SPX Corp., 7.5%, 2013 4,420 4,497,350
- -------------------------------------------------------------------------------------------------
$8,873,150
- -------------------------------------------------------------------------------------------------
Construction - 0.1%
- -------------------------------------------------------------------------------------------------
Technical Olympic USA, Inc., 7.5%, 2011 $1,745 $1,622,850
- -------------------------------------------------------------------------------------------------
Consumer Goods & Services - 1.6%
- -------------------------------------------------------------------------------------------------
K2, Inc., 7.375%, 2014## $780 $794,625
- -------------------------------------------------------------------------------------------------
KinderCare Learning Centers, Inc., 9.5%, 2009 3,050 3,103,375
- -------------------------------------------------------------------------------------------------
Remington Arms Co., Inc., 10.5%, 2011 8,065 7,903,700
- -------------------------------------------------------------------------------------------------
Revlon Consumer Products Corp., 8.625%, 2008 4,895 4,209,700
- -------------------------------------------------------------------------------------------------
Samsonite Corp., 8.875%, 2011## 2,570 2,614,975
- -------------------------------------------------------------------------------------------------
Tempur-Pedic International, Inc., 10.25%, 2010 1,839 2,071,174
- -------------------------------------------------------------------------------------------------
Werner Holding Co., Inc., 10%, 2007 2,665 2,345,200
- -------------------------------------------------------------------------------------------------
$23,042,749
- -------------------------------------------------------------------------------------------------
Containers - 2.7%
- -------------------------------------------------------------------------------------------------
Chesapeake Corp., 10.375%, 2011 GBP 1,176 $2,299,959
- -------------------------------------------------------------------------------------------------
Graham Packaging Co., Inc., 8.75%, 2008 $7,125 7,338,750
- -------------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.875%, 2009 7,905 8,596,687
- -------------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.75%, 2012 7,185 7,903,500
- -------------------------------------------------------------------------------------------------
Plastipak Holdings, Inc., 10.75%, 2011 5,980 6,435,975
- -------------------------------------------------------------------------------------------------
Pliant Corp., 0% to 2006, 11.125% to 2009 4,035 3,570,975
- -------------------------------------------------------------------------------------------------
Pliant Corp., 13%, 2010 4,295 3,928,125
- -------------------------------------------------------------------------------------------------
$40,073,971
- -------------------------------------------------------------------------------------------------
Electronics - 0.1%
- -------------------------------------------------------------------------------------------------
ON Semiconductor Corp., 13%, 2008 $1,412 $1,592,030
- -------------------------------------------------------------------------------------------------
Energy - Independent - 1.3%
- -------------------------------------------------------------------------------------------------
Belden Blake Corp., 8.75%, 2012## $2,905 $2,959,468
- -------------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 8.125%, 2011## 2,770 3,026,225
- -------------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 7%, 2014## 1,942 1,961,420
- -------------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 6.875%, 2016 4,700 4,629,500
- -------------------------------------------------------------------------------------------------
Encore Acquisition Co., 8.375%, 2012 725 786,625
- -------------------------------------------------------------------------------------------------
Encore Acquisition Co., 6.25%, 2014## 850 818,125
- -------------------------------------------------------------------------------------------------
Magnum Hunter Resources, Inc., 9.6%, 2012 2,565 2,834,325
- -------------------------------------------------------------------------------------------------
Plains E&P Co., 7.125%, 2014## 1,300 1,339,000
- -------------------------------------------------------------------------------------------------
$18,354,688
- -------------------------------------------------------------------------------------------------
Entertainment - 1.0%
- -------------------------------------------------------------------------------------------------
AMC Entertainment, Inc., 9.5%, 2011 $2,542 $2,592,840
- -------------------------------------------------------------------------------------------------
American Skiing Co., 12%, 2006+ 5,300 4,505,000
- -------------------------------------------------------------------------------------------------
Loews Cineplex Entertainment Corp., 9%, 2014## 1,750 1,750,000
- -------------------------------------------------------------------------------------------------
Six Flags, Inc., 9.75%, 2013 6,000 5,550,000
- -------------------------------------------------------------------------------------------------
$14,397,840
- -------------------------------------------------------------------------------------------------
Financial Institutions - 0.2%
- -------------------------------------------------------------------------------------------------
Refco Finance Holdings LLC, 9%, 2012## $2,610 $2,610,000
- -------------------------------------------------------------------------------------------------
Food & Non-Alcoholic Beverages - 0.9%
- -------------------------------------------------------------------------------------------------
Merisant Co., 9.5%, 2013## $3,335 $3,501,750
- -------------------------------------------------------------------------------------------------
Michael Foods, Inc., 8%, 2013 3,805 3,966,712
- -------------------------------------------------------------------------------------------------
Seminis Vegetable Seeds, Inc., 10.25%, 2013 4,615 5,053,425
- -------------------------------------------------------------------------------------------------
$12,521,887
- -------------------------------------------------------------------------------------------------
Forest & Paper Products - 2.8%
- -------------------------------------------------------------------------------------------------
Buckeye Technologies, Inc., 9.25%, 2008 $1,875 $1,870,312
- -------------------------------------------------------------------------------------------------
Buckeye Technologies, Inc., 8%, 2010 1,840 1,729,600
- -------------------------------------------------------------------------------------------------
Buckeye Technologies, Inc., 8.5%, 2013 5,000 5,137,500
- -------------------------------------------------------------------------------------------------
Georgia Pacific Corp., 9.375%, 2013 7,650 8,874,000
- -------------------------------------------------------------------------------------------------
Graphic Packaging International, Inc., 9.5%, 2013 6,505 7,155,500
- -------------------------------------------------------------------------------------------------
Greif, Inc., 8.875%, 2012 5,560 6,060,400
- -------------------------------------------------------------------------------------------------
Jefferson Smurfit Corp., 8.25%, 2012 4,110 4,387,425
- -------------------------------------------------------------------------------------------------
Newark Group, Inc., 9.75%, 2014## 6,050 5,808,000
- -------------------------------------------------------------------------------------------------
$41,022,737
- -------------------------------------------------------------------------------------------------
Gaming & Lodging - 5.4%
- -------------------------------------------------------------------------------------------------
Ameristar Casinos, Inc., 10.75%, 2009 $3,460 $3,892,500
- -------------------------------------------------------------------------------------------------
Aztar Corp., 7.875%, 2014## 2,560 2,588,800
- -------------------------------------------------------------------------------------------------
Boyd Gaming Corp., 6.75%, 2014## 7,430 7,142,087
- -------------------------------------------------------------------------------------------------
Caesars Entertainment, Inc., 8.875%, 2008 1,550 1,724,375
- -------------------------------------------------------------------------------------------------
Caesars Entertainment, Inc., 8.125%, 2011 7,715 8,515,431
- -------------------------------------------------------------------------------------------------
Corrections Corp. of America, 9.875%, 2009 1,720 1,911,350
- -------------------------------------------------------------------------------------------------
Corrections Corp. of America, 7.5%, 2011 1,850 1,907,812
- -------------------------------------------------------------------------------------------------
GEO Group, Inc., 8.25%, 2013 2,095 2,126,425
- -------------------------------------------------------------------------------------------------
Isle Capri Casinos, Inc., 7%, 2014 4,770 4,537,462
- -------------------------------------------------------------------------------------------------
MGM Mirage, Inc., 8.5%, 2010 3,075 3,397,875
- -------------------------------------------------------------------------------------------------
MGM Mirage, Inc., 8.375%, 2011 8,115 8,683,050
- -------------------------------------------------------------------------------------------------
Meristar Hospitality Corp., 10.5%, 2009 1,080 1,166,400
- -------------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc., 9.25%, 2007 342 350,550
- -------------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc., 8.25%, 2012 4,855 4,660,800
- -------------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc., 8.75%, 2013 5,380 5,353,100
- -------------------------------------------------------------------------------------------------
Royal Caribbean Cruises Ltd., 6.875%, 2013 4,415 4,453,631
- -------------------------------------------------------------------------------------------------
Starwood Hotels & Resorts Worldwide, Inc.,
7.875%, 2012 6,790 7,316,225
- -------------------------------------------------------------------------------------------------
Station Casinos, Inc., 6.5%, 2014 4,710 4,568,700
- -------------------------------------------------------------------------------------------------
Venetian Casino Resort LLC, 11%, 2010 3,340 3,807,600
- -------------------------------------------------------------------------------------------------
$78,104,173
- -------------------------------------------------------------------------------------------------
Industrial - 0.7%
- -------------------------------------------------------------------------------------------------
Da-Lite Screen Co., Inc., 9.5%, 2011## $4,285 $4,483,181
- -------------------------------------------------------------------------------------------------
Milacron Escrow Corp., 11.5%, 2011## 1,035 1,076,400
- -------------------------------------------------------------------------------------------------
Valmont Industries, Inc., 6.875%, 2014## 4,285 4,242,150
- -------------------------------------------------------------------------------------------------
$9,801,731
- -------------------------------------------------------------------------------------------------
Machinery & Tools - 3.4%
- -------------------------------------------------------------------------------------------------
AGCO Corp., 9.5%, 2008 $2,775 $3,010,875
- -------------------------------------------------------------------------------------------------
AGCO Corp., 6.875%, 2014 EUR 2,835 3,289,085
- -------------------------------------------------------------------------------------------------
Amsted Industries, Inc., 10.25%, 2011## $6,520 7,041,600
- -------------------------------------------------------------------------------------------------
Case New Holland, Inc., 9.25%, 2011## 2,640 2,857,800
- -------------------------------------------------------------------------------------------------
JLG Industries, Inc., 8.25%, 2008 4,745 4,934,800
- -------------------------------------------------------------------------------------------------
Joy Global, Inc., 8.75%, 2012 4,078 4,587,750
- -------------------------------------------------------------------------------------------------
Manitowoc Co., Inc., 10.375%, 2011 EUR 4,650 6,205,411
- -------------------------------------------------------------------------------------------------
Manitowoc Co., Inc., 10.5%, 2012 $945 1,079,662
- -------------------------------------------------------------------------------------------------
Terex Corp., 10.375%, 2011 6,405 7,157,587
- -------------------------------------------------------------------------------------------------
United Rentals, Inc., 6.5%, 2012 3,175 3,063,875
- -------------------------------------------------------------------------------------------------
United Rentals, Inc., 7.75%, 2013 3,480 3,366,900
- -------------------------------------------------------------------------------------------------
United Rentals, Inc., 7%, 2014 2,555 2,331,437
- -------------------------------------------------------------------------------------------------
$48,926,782
- -------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 3.2%
- -------------------------------------------------------------------------------------------------
Alliance Imaging, Inc., 10.375%, 2011 $4,690 $4,865,875
- -------------------------------------------------------------------------------------------------
Beverly Enterprises, Inc., 7.875%, 2014## 3,030 3,045,150
- -------------------------------------------------------------------------------------------------
Extendicare Health Services, Inc., 6.875%, 2014## 2,590 2,473,450
- -------------------------------------------------------------------------------------------------
Fisher Scientific International, Inc., 8.125%, 2012 1,138 1,244,687
- -------------------------------------------------------------------------------------------------
HCA, Inc., 7.875%, 2011 9,860 10,919,121
- -------------------------------------------------------------------------------------------------
Healthsouth Corp., 8.5%, 2008 5,640 5,597,700
- -------------------------------------------------------------------------------------------------
InSight Health Services Corp., 9.875%, 2011 4,905 5,285,138
- -------------------------------------------------------------------------------------------------
Mariner Health Care, Inc., 8.25%, 2013## 4,730 5,013,800
- -------------------------------------------------------------------------------------------------
NDCHealth Corp., 10.5%, 2012 2,115 2,315,925
- -------------------------------------------------------------------------------------------------
Tenet Healthcare Corp., 9.875%, 2014## 4,200 4,341,750
- -------------------------------------------------------------------------------------------------
Universal Hospital Services, Inc., 10.125%, 2011 1,160 1,168,700
- -------------------------------------------------------------------------------------------------
$46,271,296
- -------------------------------------------------------------------------------------------------
Medical Equipment - 0.3%
- -------------------------------------------------------------------------------------------------
Alpharma, Inc., 8.625%, 2011## $4,865 $5,023,113
- -------------------------------------------------------------------------------------------------
Metals & Mining - 2.2%
- -------------------------------------------------------------------------------------------------
Commonwealth Aluminum Corp., 10.75%, 2006 $2,920 $2,934,600
- -------------------------------------------------------------------------------------------------
Doe Run Resources Corp., 8.5%, 2008# 3,244 2,498,118
- -------------------------------------------------------------------------------------------------
Earle M. Jorgensen Co., 9.75%, 2012 3,575 3,950,375
- -------------------------------------------------------------------------------------------------
Foundation PA Coal Co., 7.25%, 2014## 2,135 2,151,013
- -------------------------------------------------------------------------------------------------
Ispat Inland PLC, 9.75%, 2014## 2,775 2,865,188
- -------------------------------------------------------------------------------------------------
Kaiser Aluminum & Chemical Corp., 9.875%, 2002** 4,075 4,299,125
- -------------------------------------------------------------------------------------------------
Oregon Steel Mills, Inc., 10%, 2009 3,495 3,722,175
- -------------------------------------------------------------------------------------------------
Peabody Energy Corp., 5.875%, 2016 7,810 7,204,725
- -------------------------------------------------------------------------------------------------
U.S. Steel Corp., 9.75%, 2010 2,677 2,978,163
- -------------------------------------------------------------------------------------------------
$32,603,482
- -------------------------------------------------------------------------------------------------
Natural Gas - Distribution - 0.4%
- -------------------------------------------------------------------------------------------------
AmeriGas Partners LP, 8.875%, 2011 $5,030 $5,470,125
- -------------------------------------------------------------------------------------------------
Natural Gas - Pipeline - 2.9%
- -------------------------------------------------------------------------------------------------
ANR Pipeline Co., 9.625%, 2021 $5,420 $6,151,700
- -------------------------------------------------------------------------------------------------
El Paso Energy Corp., 7.625%, 2010 4,255 4,425,200
- -------------------------------------------------------------------------------------------------
El Paso Energy Corp., 7%, 2011 10,805 9,724,500
- -------------------------------------------------------------------------------------------------
El Paso Energy Corp., 7.75%, 2013 7,740 7,372,350
- -------------------------------------------------------------------------------------------------
GulfTerra Energy Partners LP, 8.5%, 2010 3,757 4,113,915
- -------------------------------------------------------------------------------------------------
Williams Cos., Inc., 7.125%, 2011 9,710 10,098,400
- -------------------------------------------------------------------------------------------------
$41,886,065
- -------------------------------------------------------------------------------------------------
Oil Services - 1.7%
- -------------------------------------------------------------------------------------------------
Dresser, Inc., 9.375%, 2011 $3,705 $4,010,663
- -------------------------------------------------------------------------------------------------
GulfMark Offshore, Inc., 7.75%, 2014## 3,440 3,336,800
- -------------------------------------------------------------------------------------------------
Hanover Compressor Co., 9%, 2014 2,935 3,089,088
- -------------------------------------------------------------------------------------------------
Hanover Equipment Trust, 8.75%, 2011 2,940 3,167,850
- -------------------------------------------------------------------------------------------------
Parker Drilling Co., 9.625%, 2013 4,565 4,793,250
- -------------------------------------------------------------------------------------------------
Pride International, Inc., 7.375%, 2014## 2,375 2,449,219
- -------------------------------------------------------------------------------------------------
Sesi LLC, 8.875%, 2011 4,320 4,665,600
- -------------------------------------------------------------------------------------------------
$25,512,470
- -------------------------------------------------------------------------------------------------
Oils - 0.7%
- -------------------------------------------------------------------------------------------------
Citgo Petroleum Corp., 11.375%, 2011 $3,935 $4,564,600
- -------------------------------------------------------------------------------------------------
Giant Industries, Inc., 8%, 2014 1,750 1,798,125
- -------------------------------------------------------------------------------------------------
Premcor Refining Group, Inc., 7.75%, 2012 3,585 3,809,063
- -------------------------------------------------------------------------------------------------
$10,171,788
- -------------------------------------------------------------------------------------------------
Pollution Control - 1.2%
- -------------------------------------------------------------------------------------------------
Allied Waste North America, Inc., 8.875%, 2008 $3,875 $4,223,750
- -------------------------------------------------------------------------------------------------
Allied Waste North America, Inc., 7.875%, 2013 6,200 6,486,750
- -------------------------------------------------------------------------------------------------
Allied Waste North America, Inc., 6.125%, 2014 8,250 7,528,125
- -------------------------------------------------------------------------------------------------
$18,238,625
- -------------------------------------------------------------------------------------------------
Printing & Publishing - 2.4%
- -------------------------------------------------------------------------------------------------
American Media Operations, Inc., 8.875%, 2011 $720 $714,600
- -------------------------------------------------------------------------------------------------
Cenveo Corp., 7.875%, 2013 3,630 3,312,375
- -------------------------------------------------------------------------------------------------
Dex Media East LLC, 12.125%, 2012 3,725 4,414,125
- -------------------------------------------------------------------------------------------------
Dex Media West LLC, 9.875%, 2013 3,170 3,574,175
- -------------------------------------------------------------------------------------------------
Dex Media, Inc., 0% to 2008, 9% to 2013## 14,385 9,997,575
- -------------------------------------------------------------------------------------------------
Hollinger International, Inc., 9%, 2010 2,935 3,404,600
- -------------------------------------------------------------------------------------------------
Hollinger, Inc., 12.875%, 2011## 1,596 1,851,360
- -------------------------------------------------------------------------------------------------
Houghton Mifflin Co., 9.875%, 2013 2,795 2,871,863
- -------------------------------------------------------------------------------------------------
Mail-Well Corp., 9.625%, 2012 1,650 1,773,750
- -------------------------------------------------------------------------------------------------
R.H. Donnelley Finance Corp., 10.875%, 2012 2,250 2,632,500
- -------------------------------------------------------------------------------------------------
$34,546,923
- -------------------------------------------------------------------------------------------------
Railroad & Shipping - 0.1%
- -------------------------------------------------------------------------------------------------
Kansas City Southern Railway Co., 7.5%, 2009 $2,000 $2,012,500
- -------------------------------------------------------------------------------------------------
Retailers - 3.9%
- -------------------------------------------------------------------------------------------------
Cole National Group, Inc., 8.875%, 2012 $8,075 $8,801,750
- -------------------------------------------------------------------------------------------------
Couche-Tard, Inc., 7.5%, 2013 9,060 9,263,850
- -------------------------------------------------------------------------------------------------
Dollar General Corp., 8.625%, 2010 4,560 5,073,000
- -------------------------------------------------------------------------------------------------
Duane Reade, Inc., 9.75%, 2011## 1,950 1,945,125
- -------------------------------------------------------------------------------------------------
Finlay Fine Jewelry Corp., 8.375%, 2012## 3,705 3,890,250
- -------------------------------------------------------------------------------------------------
J. Crew Operating Corp., 10.375%, 2007 7,665 7,818,300
- -------------------------------------------------------------------------------------------------
Levi Strauss & Co., 7%, 2006 4,720 4,578,400
- -------------------------------------------------------------------------------------------------
PCA LLC, 11.875%, 2009 5,490 5,791,950
- -------------------------------------------------------------------------------------------------
Rite Aid Corp., 9.5%, 2011 1,315 1,443,213
- -------------------------------------------------------------------------------------------------
Rite Aid Corp., 9.25%, 2013 8,240 8,631,400
- -------------------------------------------------------------------------------------------------
$57,237,238
- -------------------------------------------------------------------------------------------------
Supermarkets - 0.5%
- -------------------------------------------------------------------------------------------------
Jitney Jungle Stores of America, Inc., 12%, 2006** $5,275 $79,125
- -------------------------------------------------------------------------------------------------
Roundy's, Inc., 8.875%, 2012 6,350 6,651,625
- -------------------------------------------------------------------------------------------------
$6,730,750
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireless - 4.3%
- -------------------------------------------------------------------------------------------------
Alamosa Holdings, Inc., 0% to 2005, 12% to 2009 $5,970 $5,835,675
- -------------------------------------------------------------------------------------------------
Alamosa Holdings, Inc., 11%, 2010 1,365 1,498,088
- -------------------------------------------------------------------------------------------------
American Tower Corp., 9.375%, 2009 1,013 1,081,378
- -------------------------------------------------------------------------------------------------
American Tower, Inc., 7.25%, 2011 1,905 1,919,288
- -------------------------------------------------------------------------------------------------
Centennial Communications Corp., 10.125%, 2013 8,320 8,569,600
- -------------------------------------------------------------------------------------------------
Crown Castle International Corp., 7.5%, 2013 3,975 3,965,063
- -------------------------------------------------------------------------------------------------
Dobson Communications Corp., 8.875%, 2013 5,440 4,107,200
- -------------------------------------------------------------------------------------------------
Nextel Communications, Inc., 7.375%, 2015 22,560 23,688,000
- -------------------------------------------------------------------------------------------------
Rural Cellular Corp., 9.75%, 2010 2,951 2,714,920
- -------------------------------------------------------------------------------------------------
Rural Cellular Corp., 9.875%, 2010 4,095 4,084,763
- -------------------------------------------------------------------------------------------------
Rural Cellular Corp., 8.25%, 2012## 1,225 1,255,625
- -------------------------------------------------------------------------------------------------
U.S. Unwired, Inc., 10%, 2012## 4,330 4,405,775
- -------------------------------------------------------------------------------------------------
$63,125,375
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireline - 3.1%
- -------------------------------------------------------------------------------------------------
Citizens Communications Co., 9.25%, 2011 $1,411 $1,508,005
- -------------------------------------------------------------------------------------------------
Citizens Communications Co., 9%, 2031 2,911 2,854,530
- -------------------------------------------------------------------------------------------------
Qwest Communications International, Inc., 7.25%, 2011## 4,905 4,733,325
- -------------------------------------------------------------------------------------------------
Qwest Corp., 9.125%, 2012## 7,050 7,755,000
- -------------------------------------------------------------------------------------------------
Qwest Services Corp., 14%, 2010## 17,245 20,198,206
- -------------------------------------------------------------------------------------------------
Time Warner Telecom, Inc., 10.125%, 2011 3,590 3,186,125
- -------------------------------------------------------------------------------------------------
Time Warner Telecom, Inc., 9.25%, 2014## 4,520 4,316,600
- -------------------------------------------------------------------------------------------------
$44,551,791
- -------------------------------------------------------------------------------------------------
Utilities - Electric Power - 6.3%
- -------------------------------------------------------------------------------------------------
AES Corp., 8.75%, 2013## $2,115 $2,310,638
- -------------------------------------------------------------------------------------------------
AES Corp., 9%, 2015## 11,235 12,274,238
- -------------------------------------------------------------------------------------------------
Allegheny Energy Supply Co. LLC, 8.25%, 2012## 5,480 5,507,400
- -------------------------------------------------------------------------------------------------
Aquila, Inc., 8%, 2006+ 1,365 1,402,620
- -------------------------------------------------------------------------------------------------
CMS Energy Corp., 8.5%, 2011 4,900 5,145,000
- -------------------------------------------------------------------------------------------------
Calpine Corp., 8.5%, 2008 4,500 2,801,250
- -------------------------------------------------------------------------------------------------
Calpine Corp., 8.75%, 2013## 14,495 11,596,000
- -------------------------------------------------------------------------------------------------
Dynegy Holdings, Inc., 6.875%, 2011 3,675 3,307,500
- -------------------------------------------------------------------------------------------------
Edison Mission Energy, 7.73%, 2009 3,500 3,613,750
- -------------------------------------------------------------------------------------------------
FirstEnergy Corp., 6.45%, 2011 4,706 4,977,691
- -------------------------------------------------------------------------------------------------
Illinois Power Co., 11.5%, 2010 1,340 1,594,600
- -------------------------------------------------------------------------------------------------
Midwest Generation LLC, 8.75%, 2034## 5,920 6,304,800
- -------------------------------------------------------------------------------------------------
Mirant Americas Generation, Inc., 8.3%, 2011** 6,300 4,977,000
- -------------------------------------------------------------------------------------------------
Mission Energy Holding Co., 13.5%, 2008 1,975 2,449,000
- -------------------------------------------------------------------------------------------------
Nevada Power Co., 6.5%, 2012## 935 925,650
- -------------------------------------------------------------------------------------------------
NRG Energy, Inc., 8%, 2013## 3,415 3,491,838
- -------------------------------------------------------------------------------------------------
PG&E Corp., 6.875%, 2008## 1,220 1,294,725
- -------------------------------------------------------------------------------------------------
PSEG Energy Holdings LLC, 8.625%, 2008 6,240 6,770,400
- -------------------------------------------------------------------------------------------------
Reliant Resources, Inc., 9.25%, 2010 3,710 3,951,150
- -------------------------------------------------------------------------------------------------
Reliant Resources, Inc., 9.5%, 2013 1,555 1,671,625
- -------------------------------------------------------------------------------------------------
Sierra Pacific Power Co., 6.25%, 2012## 1,650 1,617,000
- -------------------------------------------------------------------------------------------------
Sierra Pacific Resources, 8.625%, 2014## 3,275 3,389,625
- -------------------------------------------------------------------------------------------------
$91,373,500
- -------------------------------------------------------------------------------------------------
Total U.S. Bonds $1,180,462,396
- -------------------------------------------------------------------------------------------------
Foreign Bonds - 12.2%
- -------------------------------------------------------------------------------------------------
Australia - 0.7%
- -------------------------------------------------------------------------------------------------
Burns, Philip & Co. Ltd., 9.75%, 2012 (Food & Non-
Alcoholic Beverages) $10,125 $10,555,313
- -------------------------------------------------------------------------------------------------
Brazil - 0.4%
- -------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 8%, 2014 (Emerging Market
Sovereign) $1,641 $1,550,466
- -------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 11%, 2040 (Emerging Market
Sovereign) 3,728 3,653,440
- -------------------------------------------------------------------------------------------------
$5,203,906
- -------------------------------------------------------------------------------------------------
Canada - 3.0%
- -------------------------------------------------------------------------------------------------
Abitibi-Consolidated, Inc., 8.55%, 2010 (Forest & Paper
Products) $4,000 $4,239,944
- -------------------------------------------------------------------------------------------------
Abitibi-Consolidated, Inc., 7.75%, 2011 (Forest & Paper
Products)## 4,970 5,019,700
- -------------------------------------------------------------------------------------------------
Acetex Corp., 10.875%, 2009 (Chemicals) 3,800 4,161,000
- -------------------------------------------------------------------------------------------------
Bombardier, Inc., 8.375%, 2013 (Industrial)## 4,835 4,907,525
- -------------------------------------------------------------------------------------------------
CHC Helicopter Corp., 7.375%, 2014 (Transportation -
Services)## 2,830 2,822,925
- -------------------------------------------------------------------------------------------------
Norske Skog Canada Ltd., 8.625%, 2011 (Forest & Paper
Products) 1,500 1,612,500
- -------------------------------------------------------------------------------------------------
Norske Skog Canada Ltd., 7.375%, 2014 (Forest & Paper
Products) 2,815 2,800,925
- -------------------------------------------------------------------------------------------------
Nortel Networks Ltd., 6.125%, 2006 (Business Services) 7,850 7,840,188
- -------------------------------------------------------------------------------------------------
Nova Chemicals Corp., 6.5%, 2012 (Chemicals) 2,990 2,975,050
- -------------------------------------------------------------------------------------------------
Rogers Wireless, Inc., 6.375%, 2014 (Telecommunications
- - Wireless) 2,900 2,704,250
- -------------------------------------------------------------------------------------------------
Russel Metals, Inc., 6.375%, 2014 (Metals & Mining) 4,045 3,802,300
- -------------------------------------------------------------------------------------------------
Stone Container Corp., 7.375%, 2014 (Containers)## 1,075 1,083,063
- -------------------------------------------------------------------------------------------------
$43,969,370
- -------------------------------------------------------------------------------------------------
Chile - 0.2%
- -------------------------------------------------------------------------------------------------
Empresa Nacional de Electricidad S.A., 8.35%, 2013
(Utilities - Electric Power) $2,851 $3,109,386
- -------------------------------------------------------------------------------------------------
France - 1.8%
- -------------------------------------------------------------------------------------------------
Crown European Holdings S.A., 10.875%, 2013
(Containers) $13,445 $15,428,138
- -------------------------------------------------------------------------------------------------
Rhodia S.A., 8.875%, 2011 (Chemicals)## 11,800 10,148,000
- -------------------------------------------------------------------------------------------------
$25,576,138
- -------------------------------------------------------------------------------------------------
Germany - 0%
- -------------------------------------------------------------------------------------------------
Kronos International, Inc., 8.875%, 2009 (Chemicals) EUR 300 $383,217
- -------------------------------------------------------------------------------------------------
Ireland - 1.0%
- -------------------------------------------------------------------------------------------------
Eircom Funding PLC, 8.25%, 2013 (Telecommunications -
Wireline) EUR 2,100 $2,688,831
- -------------------------------------------------------------------------------------------------
Eircom Funding PLC, 8.25%, 2013 (Telecommunications -
Wireline) $5,070 5,323,500
- -------------------------------------------------------------------------------------------------
MDP Acquisitions PLC, 9.625%, 2012 (Forest & Paper
Products) 5,315 5,952,800
- -------------------------------------------------------------------------------------------------
$13,965,131
- -------------------------------------------------------------------------------------------------
Luxembourg - 1.3%
- -------------------------------------------------------------------------------------------------
BCP Caylux Holdings Luxembourg S.A., 9.625%, 2014
(Chemicals)## $4,905 $5,119,594
- -------------------------------------------------------------------------------------------------
Lighthouse International Co. S.A., 8%, 2014 (Printing &
Publishing)## EUR 5,450 6,306,551
- -------------------------------------------------------------------------------------------------
Safilo Capital International S.A., 9.625%, 2013
(Consumer Goods & Services)## 5,440 6,147,824
- -------------------------------------------------------------------------------------------------
SGL Carbon International S.A., 8.5%, 2012 (Metals &
Mining)## 1,800 2,099,128
- -------------------------------------------------------------------------------------------------
$19,673,097
- -------------------------------------------------------------------------------------------------
Mexico - 0.6%
- -------------------------------------------------------------------------------------------------
Corporacion Durango S.A. de C.V., 13.75%, 2009 (Forest
& Paper Products)##** $5,729 $3,050,693
- -------------------------------------------------------------------------------------------------
Innova S. de R.L., 9.375%, 2013 (Telecommunications -
Wireless) 3,750 3,956,250
- -------------------------------------------------------------------------------------------------
TFM S.A. de C.V., 12.5%, 2012 (Transportation -
Services) 2,050 2,198,625
- -------------------------------------------------------------------------------------------------
$9,205,568
- -------------------------------------------------------------------------------------------------
Netherlands - 0.3%
- -------------------------------------------------------------------------------------------------
ASPropulsion Capital B.V., 9.625%, 2013 (Aerospace)## EUR 400 $500,136
- -------------------------------------------------------------------------------------------------
Kappa Beheer B.V., 10.625%, 2009 (Forest & Paper
Products) $4,410 4,652,550
- -------------------------------------------------------------------------------------------------
$5,152,686
- -------------------------------------------------------------------------------------------------
Norway - 0.7%
- -------------------------------------------------------------------------------------------------
Ocean Rig Norway S.A., 10.25%, 2008 (Oil Services) $4,605 $4,558,950
- -------------------------------------------------------------------------------------------------
Petroleum Geo-Services A.S.A., 8%, 2006 (Oil Services) 5,000 5,112,500
- -------------------------------------------------------------------------------------------------
$9,671,450
- -------------------------------------------------------------------------------------------------
Panama - 0.2%
- -------------------------------------------------------------------------------------------------
Republic of Panama, 9.375%, 2023 (Emerging Market
Sovereign) $2,935 $3,052,400
- -------------------------------------------------------------------------------------------------
Russia - 0.6%
- -------------------------------------------------------------------------------------------------
Gaz Capital S.A., 8.625%, 2034 (Oils)## $3,897 $3,838,545
- -------------------------------------------------------------------------------------------------
Gazprom OAO, 9.625%, 2013 (Oils)## 2,140 2,237,638
- -------------------------------------------------------------------------------------------------
Russian Ministry of Finance, 12.75%, 2028 (Emerging
Market Sovereign) 1,759 2,560,576
- -------------------------------------------------------------------------------------------------
$8,636,759
- -------------------------------------------------------------------------------------------------
Singapore - 0.3%
- -------------------------------------------------------------------------------------------------
Flextronics International Ltd., 6.5%, 2013
(Electronics) $4,720 $4,637,400
- -------------------------------------------------------------------------------------------------
Sweden - 0.3%
- -------------------------------------------------------------------------------------------------
Stena AB, 7.5%, 2013 (Transportation - Services) $4,075 $3,932,375
- -------------------------------------------------------------------------------------------------
United Kingdom - 0.8%
- -------------------------------------------------------------------------------------------------
Dunlop Standard Aerospace Holdings PLC, 11.875%, 2009
(Aerospace) $396 $419,760
- -------------------------------------------------------------------------------------------------
Dunlop Standard Aerospace Holdings PLC, 11.875%, 2009
(Aerospace)## 2,720 2,883,200
- -------------------------------------------------------------------------------------------------
NTL Cable PLC, 8.75%, 2014 (Broadcast & Cable TV)## 415 430,563
- -------------------------------------------------------------------------------------------------
Premier International Foods PLC, 12%, 2009 (Food & Non-
Alcoholic Beverages) 2,530 2,694,450
- -------------------------------------------------------------------------------------------------
United Biscuits Finance PLC, 10.625%, 2011 (Food & Non-
Alcoholic Beverages) EUR 1,000 1,298,430
- -------------------------------------------------------------------------------------------------
United Biscuits Finance PLC, 10.75%, 2011 (Food & Non-
Alcoholic Beverages) GBP 2,000 3,784,144
- -------------------------------------------------------------------------------------------------
$11,510,547
- -------------------------------------------------------------------------------------------------
Total Foreign Bonds $178,234,743
- -------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $1,349,494,203) $1,358,697,139
- -------------------------------------------------------------------------------------------------
Stocks - 2.0%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
U.S. Stocks - 1.4%
- -------------------------------------------------------------------------------------------------
Apparel Manufacturers - 0.1%
- -------------------------------------------------------------------------------------------------
Sind Holdings, Inc.* 13,126 $1,023,809
- -------------------------------------------------------------------------------------------------
Automotive - 0.3%
- -------------------------------------------------------------------------------------------------
Hayes Lemmerz International, Inc.* 306,692 $4,002,331
- -------------------------------------------------------------------------------------------------
Oxford Automotive, Inc.* 1,087 11
- -------------------------------------------------------------------------------------------------
$4,002,342
- -------------------------------------------------------------------------------------------------
Basic Industry - 0.0%
- -------------------------------------------------------------------------------------------------
Thermadyne Holdings Corp.* 42,893 $643,395
- -------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 0.6%
- -------------------------------------------------------------------------------------------------
NTL, Inc.* 92,270 $4,809,112
- -------------------------------------------------------------------------------------------------
Sinclair Broadcast Group, Inc., "A" 393,554 3,900,120
- -------------------------------------------------------------------------------------------------
Sirius Satellite Radio, Inc.* 254,763 644,550
- -------------------------------------------------------------------------------------------------
$9,353,782
- -------------------------------------------------------------------------------------------------
Specialty Chemicals - 0.0%
- -------------------------------------------------------------------------------------------------
Sterling Chemicals, Inc.* 539 $12,936
- -------------------------------------------------------------------------------------------------
Telephone Services - 0.1%
- -------------------------------------------------------------------------------------------------
MCI, Inc.* 110,653 $1,690,778
- -------------------------------------------------------------------------------------------------
XO Communications, Inc.* 1,320 5,161
- -------------------------------------------------------------------------------------------------
$1,695,939
- -------------------------------------------------------------------------------------------------
Utilities - Electric Power - 0.3%
- -------------------------------------------------------------------------------------------------
DPL, Inc. 185,247 $3,695,678
- -------------------------------------------------------------------------------------------------
Total U.S. Stocks $20,427,881
- -------------------------------------------------------------------------------------------------
Foreign Stocks - 0.6%
- -------------------------------------------------------------------------------------------------
Canada - 0.0%
- -------------------------------------------------------------------------------------------------
Manitoba Telecom Services, Inc. (Telephone Services)* 6,371 $215,294
- -------------------------------------------------------------------------------------------------
Netherlands - 0.1%
- -------------------------------------------------------------------------------------------------
Completel Europe N.V. (Telephone Services)* 76,474 $1,861,802
- -------------------------------------------------------------------------------------------------
VersaTel Telecom International N.V. (Telephone
Services)* 19,740 32,988
- -------------------------------------------------------------------------------------------------
$1,894,790
- -------------------------------------------------------------------------------------------------
Sweden - 0.2%
- -------------------------------------------------------------------------------------------------
Song Networks Holding AB (Telephone Services) 373,880 $2,088,633
- -------------------------------------------------------------------------------------------------
United Kingdom - 0.3%
- -------------------------------------------------------------------------------------------------
Jazztel PLC (Telephone Services)* 1,919,995 $600,161
- -------------------------------------------------------------------------------------------------
Telewest Global, Inc. (Broadcast & Cable TV)* 331,455 3,745,442
- -------------------------------------------------------------------------------------------------
$4,345,603
- -------------------------------------------------------------------------------------------------
Total Foreign Stocks $8,544,320
- -------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $56,928,793) $28,972,201
- -------------------------------------------------------------------------------------------------
Convertible Preferred Stocks - 0.4%
- -------------------------------------------------------------------------------------------------
U.S. Stocks - 0.4%
- -------------------------------------------------------------------------------------------------
Automotive - 0.2%
- -------------------------------------------------------------------------------------------------
Ford Motor Co. Capital Trust II 58,040 $3,102,238
- -------------------------------------------------------------------------------------------------
HLI Operating Co., Inc., "A"* 522 43,326
- -------------------------------------------------------------------------------------------------
$3,145,564
- -------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 0.2%
- -------------------------------------------------------------------------------------------------
Spanish Broadcasting Systems, Inc., "B"* 1,831 $1,876,775
- -------------------------------------------------------------------------------------------------
Total U.S. Stocks $5,022,339
- -------------------------------------------------------------------------------------------------
Foreign Stocks - 0.0%
- -------------------------------------------------------------------------------------------------
Sweden - 0.0%
- -------------------------------------------------------------------------------------------------
Song Networks Holding AB (Telephone Services)* 40,357 $162,912
- -------------------------------------------------------------------------------------------------
Total Convertible Preferred Stocks (Identified Cost,
$5,146,445) $5,185,251
- -------------------------------------------------------------------------------------------------
Preferred Stocks - 0.4%
- -------------------------------------------------------------------------------------------------
Printing & Publishing - 0.4%
- -------------------------------------------------------------------------------------------------
PRIMEDIA, Inc., 8.625% 74,390 $6,471,930
- -------------------------------------------------------------------------------------------------
Telephone Services - 0.0%
- -------------------------------------------------------------------------------------------------
PTV, Inc., "A", 0.0% 101 $495
- -------------------------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $7,358,291) $6,472,425
- -------------------------------------------------------------------------------------------------
Warrants - 0.0%
- -------------------------------------------------------------------------------------------------
Loral Space & Communications Ltd. (Business Services)* 5,000 $0
- -------------------------------------------------------------------------------------------------
Loral Space & Communications Ltd. (Business Services)* 11,775 0
- -------------------------------------------------------------------------------------------------
Metronet Communications Corp. (Broadcast &
Cable TV)##* 3,250 33
- -------------------------------------------------------------------------------------------------
Pliant Corp. (Containers)##* 6,795 68
- -------------------------------------------------------------------------------------------------
Sterling Chemicals, Inc. (Specialty Chemicals)* 876 920
- -------------------------------------------------------------------------------------------------
Thermadyne Holdings Corp. (Basic Industry)* 21,743 10,872
- -------------------------------------------------------------------------------------------------
XM Satellite Radio, Inc. (Broadcast & Cable TV)* 4,020 221,100
- -------------------------------------------------------------------------------------------------
XO Communications, Inc. (Telecommunications -
Wireline)* 2,640 3,089
- -------------------------------------------------------------------------------------------------
XO Communications, Inc. (Telecommunications -
Wireline)* 1,980 1,485
- -------------------------------------------------------------------------------------------------
XO Communications, Inc. (Telecommunications -
Wireline)* 1,980 1,148
- -------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $1,743,629) $238,715
- -------------------------------------------------------------------------------------------------
Short-Term Obligations - 2.9%
- -------------------------------------------------------------------------------------------------
PAR AMOUNT
ISSUER (000 Omitted) $ VALUE
- -------------------------------------------------------------------------------------------------
Citicorp, Inc., due 8/02/04 $30,245 $30,243,883
- -------------------------------------------------------------------------------------------------
General Electric Capital Corp., due 8/02/04 12,243 12,242,548
- -------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $42,486,431
- -------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,463,157,792) (+) $1,442,052,162
- -------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 1.0% 14,463,816
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,456,515,978
- -------------------------------------------------------------------------------------------------
* Non-income producing security. **Non-income producing security - in default.
^^ Interest only security.
# Payment-in-kind security.
## SEC Rule 144A restriction.
(+) As of July 31, 2004, two securities representing $1,023,820 and 0.07% of net assets were fair
valued in accordance with the policies adopted by the Board of Trustees.
+ Restricted security.
Abbreviations have been used throughout this report to indicate amounts shown in currencies other than
the U.S. dollar. A list of abbreviations is shown below.
EUR = Euro GBP = British Pound
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES (unaudited)
- -----------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets
and liabilities composing the total value of your fund.
AT 7/31/04
ASSETS
Investments, at value (identified cost, $1,463,157,792) $1,442,052,162
- -----------------------------------------------------------------------------------------------------
Cash 1,013
- -----------------------------------------------------------------------------------------------------
Receivable for forward foreign currency exchange
contracts 212,690
- -----------------------------------------------------------------------------------------------------
Receivable for investments sold 3,919,209
- -----------------------------------------------------------------------------------------------------
Receivable for fund shares sold 1,494,459
- -----------------------------------------------------------------------------------------------------
Interest receivable 29,362,917
- -----------------------------------------------------------------------------------------------------
Other assets 7,569
- -----------------------------------------------------------------------------------------------------
Total assets $1,477,050,019
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Distributions payable $8,741,553
- -----------------------------------------------------------------------------------------------------
Payable for forward foreign currency exchange contracts 48,846
- -----------------------------------------------------------------------------------------------------
Payable for investments purchased 7,450,026
- -----------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 3,499,197
- -----------------------------------------------------------------------------------------------------
Payable to affiliates
- ------------------------------------------------------------------------------
Management fee 31,264
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 30,938
- -----------------------------------------------------------------------------------------------------
Distribution and service fee 42,693
- -----------------------------------------------------------------------------------------------------
Administrative fee 463
- -----------------------------------------------------------------------------------------------------
Program manager fee 12
- -----------------------------------------------------------------------------------------------------
Administrative service fee 1
- -----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 689,048
- -----------------------------------------------------------------------------------------------------
Total liabilities $20,534,041
- -----------------------------------------------------------------------------------------------------
Net assets $1,456,515,978
- -----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $1,885,502,849
- -----------------------------------------------------------------------------------------------------
Unrealized depreciation on investments and translation
of assets and liabilities in foreign currencies (20,951,672)
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (403,370,923)
- -----------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment
income (4,664,276)
- -----------------------------------------------------------------------------------------------------
Net assets $1,456,515,978
- -----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 377,878,763
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) - continued
Class A shares
Net assets $794,242,663
- -----------------------------------------------------------------------------------------------------
Shares outstanding 206,187,414
- -----------------------------------------------------------------------------------------------------
Net asset value per share $3.85
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/95.25X$3.85) $4.04
- -----------------------------------------------------------------------------------------------------
Class B shares
Net assets $392,058,360
- -----------------------------------------------------------------------------------------------------
Shares outstanding 101,617,830
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $3.86
- -----------------------------------------------------------------------------------------------------
Class C shares
Net assets $146,675,482
- -----------------------------------------------------------------------------------------------------
Shares outstanding 37,939,666
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $3.87
- -----------------------------------------------------------------------------------------------------
Class I shares
Net assets $119,990,906
- -----------------------------------------------------------------------------------------------------
Shares outstanding 31,212,449
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $3.84
- -----------------------------------------------------------------------------------------------------
Class R1 shares
Net assets $2,637,020
- -----------------------------------------------------------------------------------------------------
Shares outstanding 684,598
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $3.85
- -----------------------------------------------------------------------------------------------------
Class R2 shares
Net assets $41,999
- -----------------------------------------------------------------------------------------------------
Shares outstanding 10,908
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $3.85
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) - continued
Class 529A shares
Net assets $453,475
- -----------------------------------------------------------------------------------------------------
Shares outstanding 117,940
- -----------------------------------------------------------------------------------------------------
Net asset value per share $3.84
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/95.25X$3.84) $4.03
- -----------------------------------------------------------------------------------------------------
Class 529B shares
Net assets $117,064
- -----------------------------------------------------------------------------------------------------
Shares outstanding 30,447
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $3.84
- -----------------------------------------------------------------------------------------------------
Class 529C shares
Net assets $299,009
- -----------------------------------------------------------------------------------------------------
Shares outstanding 77,511
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $3.86
- -----------------------------------------------------------------------------------------------------
On sales of $100,000 or more, the offering price of Class A and 529A shares arereduced. A contingent
deferred sales charge may be imposed on redemptions of Class A, Class B, Class 529B, Class C and
529C shares.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS (unaudited)
- -----------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and
paid in expenses. It also describes any gains and/or losses generated by fund
operations.
FOR THE SIX MONTHS ENDED 7/31/04
NET INVESTMENT INCOME
Income
- -----------------------------------------------------------------------------------------------------
Interest $67,571,762
- -----------------------------------------------------------------------------------------------------
Dividends 996,358
- -----------------------------------------------------------------------------------------------------
Total investment income $68,568,120
- -----------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------
Management fee $3,525,565
- -----------------------------------------------------------------------------------------------------
Trustees" compensation 22,615
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 1,089,542
- -----------------------------------------------------------------------------------------------------
Distribution and service fee Class A 1,254,680
- -----------------------------------------------------------------------------------------------------
Distribution and service fee Class B 2,127,796
- -----------------------------------------------------------------------------------------------------
Distribution and service fee Class C 822,557
- -----------------------------------------------------------------------------------------------------
Distribution and service fee Class R1 5,210
- -----------------------------------------------------------------------------------------------------
Distribution and service fee Class R2 104
- -----------------------------------------------------------------------------------------------------
Distribution and service fee Class 529A 794
- -----------------------------------------------------------------------------------------------------
Distribution and service fee Class 529B 603
- -----------------------------------------------------------------------------------------------------
Distribution and service fee Class 529C 1,290
- -----------------------------------------------------------------------------------------------------
Program manager fee Class 529A 567
- -----------------------------------------------------------------------------------------------------
Program manager fee Class 529B 151
- -----------------------------------------------------------------------------------------------------
Program manager fee Class 529C 322
- -----------------------------------------------------------------------------------------------------
Administrative service fee (Class R2) 52
- -----------------------------------------------------------------------------------------------------
Administrative fee 96,520
- -----------------------------------------------------------------------------------------------------
Custodian fee 150,940
- -----------------------------------------------------------------------------------------------------
Printing 76,100
- -----------------------------------------------------------------------------------------------------
Postage 14,397
- -----------------------------------------------------------------------------------------------------
Auditing fees 26,975
- -----------------------------------------------------------------------------------------------------
Legal fees 2,484
- -----------------------------------------------------------------------------------------------------
Miscellaneous 524,934
- -----------------------------------------------------------------------------------------------------
Total expenses $9,744,198
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (15,004)
- -----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (26,363)
- -----------------------------------------------------------------------------------------------------
Net expenses $9,702,831
- -----------------------------------------------------------------------------------------------------
Net investment income $58,865,289
- -----------------------------------------------------------------------------------------------------
Statement of Operations (unaudited) - continued
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (identified cost basis)
- -----------------------------------------------------------------------------------------------------
Investment transactions $2,359,017
- -----------------------------------------------------------------------------------------------------
Foreign currency transactions 646,310
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions $3,005,327
- -----------------------------------------------------------------------------------------------------
Change in unrealized depreciation
- -----------------------------------------------------------------------------------------------------
Investments $(61,491,550)
- -----------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign
currencies (247,146)
- -----------------------------------------------------------------------------------------------------
Net unrealized loss on investments and foreign
currency translation $(61,738,696)
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments and
foreign currency $(58,733,369)
- -----------------------------------------------------------------------------------------------------
Increase in net assets from operations $131,920
- -----------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets resulting from operations,
any distributions, and any shareholder transactions.
SIX MONTHS ENDED YEAR ENDED
7/31/04 1/31/04
(UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income $58,865,289 $125,664,382
- -------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency
transactions 3,005,327 24,710,165
- -------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation (61,738,696) 183,154,584
- ---------------------------------------------------------- --------------- -------------
Increase in net assets from operations $131,920 $333,529,131
- ---------------------------------------------------------- --------------- -------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income
- -------------------------------------------------------------------------------------------------------
Class A $(31,618,757) $(75,068,442)
- -------------------------------------------------------------------------------------------------------
Class B (14,595,097) (34,094,049)
- -------------------------------------------------------------------------------------------------------
Class C (5,641,364) (15,414,624)
- -------------------------------------------------------------------------------------------------------
Class I (4,317,900) (4,495,135)
- -------------------------------------------------------------------------------------------------------
Class R1 (76,991) (41,217)
- -------------------------------------------------------------------------------------------------------
Class R2 (1,479) (769)*
- -------------------------------------------------------------------------------------------------------
Class 529A (16,520) (18,677)
- -------------------------------------------------------------------------------------------------------
Class 529B (3,988) (4,480)
- -------------------------------------------------------------------------------------------------------
Class 529C (8,566) (7,816)
- ---------------------------------------------------------- --------------- -------------
Total distributions declared to shareholders $(56,280,662) $(129,145,209)
- ---------------------------------------------------------- --------------- -------------
Net increase (decrease) in net assets from fund
share transactions $(204,739,516) $122,504,832
- ---------------------------------------------------------- --------------- -------------
Redemption fees $9,705 $--
- ---------------------------------------------------------- --------------- -------------
Total increase (decrease) in net assets $(260,878,553) $326,888,754
- ---------------------------------------------------------- --------------- -------------
NET ASSETS
At beginning of period $1,717,394,531 $1,390,505,777
- -------------------------------------------------------------------------------------------------------
At end of period (including accumulated distributions
in excess of net investment loss of $4,664,276 and
$7,248,903, respectively) $1,456,515,978 $1,717,394,531
- -------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R2, October 31, 2003, through January 31, 2004.
SEE NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the semiannual period and
the past 5 fiscal years (or, if shorter, the period of the fund's operation). Certain information reflects financial results for
a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an
investment in the fund (assuming reinvestment of all distributions) held for the entire period.
SIX MONTHS YEAR ENDED 1/31
ENDED -----------------------------------------------------------------------
CLASS A 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
Net asset value, beginning
of period $3.98 $3.52 $3.78 $4.44 $4.95 $5.21
- -------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.15 $0.30 $0.33 $0.41 $0.47 $0.46
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments
and foreign currency (0.13) 0.46 (0.25) (0.65) (0.51) (0.24)
- ----------------------------------- ------- ------ ------ ------ ------ ------
Total from investment
operations $0.02 $0.76 $0.08 $(0.24) $(0.04) $0.22
- ----------------------------------- ------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.15) $(0.30) $(0.34) $(0.41) $(0.47) $(0.46)
- -------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (0.01) (0.00)+++ (0.02)
- ----------------------------------- ------- ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.15) $(0.30) $(0.34) $(0.42) $(0.47) $(0.48)
- ----------------------------------- ------- ------ ------ ------ ------ ------
Redemption fees added to
paid-in capital $0.00+++ $-- $-- $-- $-- $--
- ----------------------------------- ------- ------ ------ ------ ------ ------
Net asset value, end of period $3.85 $3.98 $3.52 $3.78 $4.44 $4.95
- ----------------------------------- ------- ------ ------ ------ ------ ------
Total return (%)(+) 0.19++ 22.83 2.34 (5.50) (0.65) 4.35
- -------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED ------------------------------------------------------------------------
CLASS A (CONTINUED) 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
RATIOS (%) TO AVERAGE
NET ASSETS AND
SUPPLEMENTAL DATA:
Expenses## 1.02+ 0.99 1.00 1.06 1.00 0.98
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.91+ 7.87 9.32 10.12 10.07 9.08
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 33 81 80 72 64 91
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $794,243 $934,958 $769,069 $746,096 $785,256 $768,734
- -------------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In addition, the
investment adviser has voluntarily agreed to reimburse the fund for its proportional share of Independent Chief Compliance
Officer service fees paid to Tarantino LLC for certain of the periods indicated. If this fee had been incurred by the fund,
the net investment income per share and the ratios would have been:
Net investment income $0.15 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.02+ -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income(S) 7.91+ -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective February 1, 2001, the fund adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
January 31, 2002 was to decrease net investment income per share and increase net realized and unrealized gains and
losses per share. The impact of this change calculates to less than $0.01 per share. In addition, the ratio of net
investment income to average net assets decreased by 0.04%. Per share, ratios, and supplemental data for periods prior
to February 1, 2001 have not been restated to reflect this change in presentation.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01. # Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
(+) 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
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED -------------------------------------------------------------------------
CLASS B 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
Net asset value, beginning
of period $3.99 $3.53 $3.79 $4.44 $4.95 $5.21
- -------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.14 $0.27 $0.31 $0.38 $0.44 $0.42
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments
and foreign currency (0.14) 0.47 (0.26) (0.64) (0.51) (0.24)
- ----------------------------------- ------- ------ ------ ------ ------ ------
Total from investment
operations $0.00 $0.74 $0.05 $(0.26) $(0.07) $0.18
- ----------------------------------- ------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.13) $(0.28) $(0.31) $(0.38) $(0.44) $(0.42)
- -------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (0.01) (0.00)+++ (0.02)
- ----------------------------------- ------- ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.13) $(0.28) $(0.31) $(0.39) $(0.44) $(0.44)
- ----------------------------------- ------- ------ ------ ------ ------ ------
Net asset value, end of period $3.86 $3.99 $3.53 $3.79 $4.44 $4.95
- ----------------------------------- ------- ------ ------ ------ ------ ------
Total return (%) 0.10++ 21.65 1.64 (5.94) (1.35) 3.63
- -------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED ------------------------------------------------------------------------
CLASS B (CONTINUED) 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
RATIOS (%) TO AVERAGE
NET ASSETS AND
SUPPLEMENTAL DATA:
Expenses## 1.72+ 1.69 1.70 1.76 1.69 1.68
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.23+ 7.18 8.65 9.45 9.37 8.38
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 33 81 80 72 64 91
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $392,058 $471,520 $411,533 $439,987 $463,638 $499,830
- -------------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In addition, the
investment adviser has voluntarily agreed to reimburse the fund for its proportional share of Independent Chief
Compliance Officer service fees paid to Tarantino LLC for certain of the periods indicated. If this fee had been
incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income $0.14 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.72+ -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income(S) 7.23+ -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective February 1, 2001, the fund adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
January 31, 2002 was to decrease net investment income per share and increase net realized and unrealized gains and
losses per share. The impact of this change calculates to less than $0.01 per share. In addition, the ratio of net
investment income to average net assets decreased by 0.04%. Per share, ratios, and supplemental data for periods prior to
February 1, 2001 have not been restated to reflect this change in presentation.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01. # Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED ------------------------------------------------------------------------
CLASS C 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
Net asset value, beginning
of period $4.00 $3.54 $3.80 $4.45 $4.97 $5.22
- -------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.14 $0.27 $0.30 $0.38 $0.44 $0.43
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments and
foreign currency (0.14) 0.47 (0.25) (0.64) (0.52) (0.24)
- ------------------------------------- ------ ------ ------ ------ ------ ------
Total from investment operations $0.00 $0.74 $0.05 $(0.26) $(0.08) $0.19
- ------------------------------------- ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.13) $(0.28) $(0.31) $(0.38) $(0.44) $(0.43)
- -------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (0.01) (0.00)+++ (0.01)
- ------------------------------------- ------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.13) $(0.28) $(0.31) $(0.39) $(0.44) $(0.44)
- ------------------------------------- ------ ------ ------ ------ ------ ------
Redemption fees added to
paid-in capital# $0.00+++ $-- $-- $-- $-- $--
- ------------------------------------- ------ ------ ------ ------ ------ ------
Net asset value, end of period $3.87 $4.00 $3.54 $3.80 $4.45 $4.97
- ------------------------------------- ------ ------ ------ ------ ------ ------
Total return (%) 0.11++ 21.61 1.64 (5.91) (1.55) 3.83
- -------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED -----------------------------------------------------------------------
CLASS C (CONTINUED) 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
RATIOS (%) TO AVERAGE
NET ASSETS AND
SUPPLEMENTAL DATA:
Expenses## 1.72+ 1.69 1.70 1.76 1.69 1.68
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.22+ 7.18 8.59 9.39 9.38 8.38
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 33 81 80 72 64 91
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000
Omitted) $146,675 $214,915 $183,364 $160,798 $128,567 $108,253
- -------------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In addition, the
investment adviser has voluntarily agreed to reimburse the fund for its proportional share of Independent Chief
Compliance Officer service fees paid to Tarantino LLC for certain of the periods indicated. If this fee had been incurred
by the fund, the net investment income per share and the ratios would have been:
Net investment income $0.14 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.72+ -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income(S) 7.22+ -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective February 1, 2001, the fund adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
January 31, 2002 was to decrease net investment income per share and increase net realized and unrealized gains and
losses per share. The impact of this change calculates to less than $0.01 per share. In addition, the ratio of net
investment income to average net assets decreased by 0.05%. Per share, ratios, and supplemental data for periods prior to
February 1, 2001 have not been restated to reflect this change in presentation.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01. # Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED -------------------------------------------------------------------------
CLASS I 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
Net asset value, beginning
of period $3.98 $3.52 $3.78 $4.43 $4.95 $5.21
- -------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.16 $0.30 $0.33 $0.42 $0.48 $0.48
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments
and foreign currency (0.15) 0.47 (0.24) (0.64) (0.52) (0.24)
- ----------------------------------- ------- ------ ------ ------ ------ ------
Total from investment
operations $0.01 $0.77 $0.09 $(0.22) $(0.04) $0.24
- ----------------------------------- ------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.15) $(0.31) $(0.35) $(0.42) $(0.48) $(0.48)
- -------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (0.01) (0.00)+++ (0.02)
- ----------------------------------- ------- ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.15) $(0.31) $(0.35) $(0.43) $(0.48) $(0.50)
- ----------------------------------- ------- ------ ------ ------ ------ ------
Net asset value, end of period $3.84 $3.98 $3.52 $3.78 $4.43 $4.95
- ----------------------------------- ------- ------ ------ ------ ------ ------
Total return (%) 0.34++ 22.88 2.66 (4.99) (0.57) 4.68
- -------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED ------------------------------------------------------------------------
CLASS I (CONTINUED) 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
RATIOS (%) TO AVERAGE
NET ASSETS AND
SUPPLEMENTAL DATA:
Expenses## 0.72+ 0.69 0.70 0.76 0.70 0.68
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 8.22+ 8.03 9.58 10.43 10.39 9.38
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 33 81 80 72 64 91
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $119,991 $93,887 $26,373 $19,352 $22,128 $17,916
- -------------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In addition, the
investment adviser has voluntarily agreed to reimburse the fund for its proportional share of Independent Chief
Compliance Officer service fees paid to Tarantino LLC for certain of the periods indicated. If this fee had been incurred
by the fund, the net investment income per share and the ratios would have been:
Net investment income $0.16 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 0.72+ -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income(S) 8.22+ -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective February 1, 2001, the fund adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
January 31, 2002 was to decrease net investment income per share and increase net realized and unrealized gains and
losses per share. The impact of this change calculates to less than $0.01 per share. In addition, the ratio of net
investment income to average net assets decreased by 0.04%. Per share, ratios, and supplemental data for periods prior to
February 1, 2001 have not been restated to reflect this change in presentation.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01. # Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEAR PERIOD
ENDED ENDED ENDED
CLASS R1 7/31/04 1/31/04 1/31/03*
(UNAUDITED)
Net asset value, beginning of period $3.98 $3.52 $3.50
- ----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.14 $0.28 $0.02
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and foreign currency (0.13) 0.48 0.03
- -------------------------------------------------------------- -------- ------ ------
Total from investment operations $0.01 $0.76 $0.05
- -------------------------------------------------------------- -------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
Net investment income $(0.14) $(0.30) $(0.03)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $3.85 $3.98 $3.52
- -------------------------------------------------------------- -------- ------ ------
Total return (%) 0.34++ 22.29 1.32++
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA:
Expenses## 1.22+ 1.20 1.20+
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income 7.42+ 7.46 7.97+
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 33 81 80
- ----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $2,637 $1,359 $40
- ----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In addition, the
investment adviser has voluntarily agreed to reimburse the fund for its proportional share of Independent Chief
Compliance Officer service fees paid to Tarantino LLC for certain of the periods indicated. If this fee had been incurred
by the fund, the net investment income per share and the ratios would have been:
Net investment income $0.14 -- --
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.22+ -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income(S) 7.42+ -- --
- ----------------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31,
2002, through January 31, 2003.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS PERIOD
ENDED ENDED
CLASS R2 7/31/04 1/31/04*
(UNAUDITED)
Net asset value, beginning of period $3.98 $3.85
- -------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.14 $0.07
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign
currency (0.13) 0.13^
- ----------------------------------------------------------------------- -------- ------
Total from investment operations $0.01 $0.20
- ----------------------------------------------------------------------- -------- ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
Net investment income $(0.14) $(0.07)
- -------------------------------------------------------------------------------------------------------
Net asset value, end of period $3.85 $3.98
- ----------------------------------------------------------------------- -------- ------
Total return (%) 0.22++ 5.32++
- -------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA:
Expenses## 1.46+ 1.43+
- -------------------------------------------------------------------------------------------------------
Net investment income 7.13+ 7.07+
- -------------------------------------------------------------------------------------------------------
Portfolio turnover 33 81
- -------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $42 $42
- -------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods
indicated. In addition, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC for
certain of the periods indicated. If this fee had been incurred by the fund, the net investment
income per share and the ratios would have been:
Net investment income $0.14 --
- -------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.46+ --
- -------------------------------------------------------------------------------------------------------
Net investment income(S) 7.13+ --
- -------------------------------------------------------------------------------------------------------
* For the period from inception of Class R2 shares, October 31, 2003, through January 31, 2004.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
^ The per share amount is not in accordance with the net realized and unrealized gain/loss from the
period because of the timing of sales of the fund shares and the amount per share realized and
unrealized gains and losses at such time.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEAR PERIOD
ENDED ENDED ENDED
CLASS 529A 7/31/04 1/31/04 1/31/03*
(UNAUDITED)
Net asset value, beginning of period $3.98 $3.52 $3.43
- -----------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.14 $0.28 $0.13
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and foreign currency (0.14) 0.47 0.12
- --------------------------------------------------------------- ------- ------ ------
Total from investment operations $0.00 $0.75 $0.25
- --------------------------------------------------------------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
Net investment income $(0.14) $(0.29) $(0.16)
- -----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $3.84 $3.98 $3.52
- --------------------------------------------------------------- ------- ------ ------
Total return (%)(+) 0.04++ 22.16 7.39++
- -----------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA:
Expenses## 1.32+ 1.30 1.30+
- -----------------------------------------------------------------------------------------------------------------
Net investment income 7.28+ 7.42 8.66+
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover 33 81 80
- -----------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $453 $406 $53
- -----------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In
addition, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
Independent Chief Compliance Officer service fees paid to Tarantino LLC for certain of the periods
indicated. If this fee had been incurred by the fund, the net investment income per share and the ratios
would have been:
Net investment income $0.14 -- --
- -----------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.32+ -- --
- -----------------------------------------------------------------------------------------------------------------
Net investment income(S) 7.28+ -- --
- -----------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529A shares, July 31, 2002, through January 31, 2003.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
(+) Total returns for Class 529A 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
Financial Highlights - continued
SIX MONTHS YEAR PERIOD
ENDED ENDED ENDED
CLASS 529B 7/31/04 1/31/04 1/31/03*
(UNAUDITED)
Net asset value, beginning of period $3.98 $3.52 $3.43
- -----------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.13 $0.25 $0.11
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and foreign currency (0.14) 0.48 0.13
- ------------------------------------------------------------- --------- ------ ------
Total from investment operations $(0.01) $0.73 $0.24
- ------------------------------------------------------------- --------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
Net investment income $(0.13) $(0.27) $(0.15)
- -----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $3.84 $3.98 $3.52
- ------------------------------------------------------------- --------- ------ ------
Total return (%) (0.29)++ 21.39 7.04++
- -----------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA:
Expenses## 1.97+ 1.95 1.95+
- -----------------------------------------------------------------------------------------------------------------
Net investment income 6.65+ 6.80 8.37+
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover 33 81 80
- -----------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $117 $119 $31
- -----------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In
addition, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
Independent Chief Compliance Officer service fees paid to Tarantino LLC for certain of the periods
indicated. If this fee had been incurred by the fund, the net investment income per share and the ratios
would have been:
Net investment income $0.13 -- --
- -----------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.97+ -- --
- -----------------------------------------------------------------------------------------------------------------
Net investment income(S) 6.65+ -- --
- -----------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529B shares, July 31, 2002, through January 31, 2003.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEAR PERIOD
ENDED ENDED ENDED
CLASS 529C 7/31/04 1/31/04 1/31/03*
(UNAUDITED)
Net asset value, beginning of period $3.99 $3.53 $3.44
- -----------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.13 $0.26 $0.13
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and
foreign currency (0.13) 0.47 0.11
- ------------------------------------------------------------- --------- ------ ------
Total from investment operations $0.00 $0.73 $0.24
- ------------------------------------------------------------- --------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
Net investment income $(0.13) $(0.27) $(0.15)
- -----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $3.86 $3.99 $3.53
- ------------------------------------------------------------- --------- ------ ------
Total return (%) (0.02)++ 21.35 7.02++
- -----------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA:
Expenses## 1.97+ 1.95 1.95+
- -----------------------------------------------------------------------------------------------------------------
Net investment income 6.67+ 6.79 8.05+
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover 33 81 80
- -----------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $299 $189 $43
- -----------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for certain of the periods indicated. In
addition, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
Independent Chief Compliance Officer service fees paid to Tarantino LLC for certain of the periods
indicated. If this fee had been incurred by the fund, the net investment income per share and the ratios
would have been:
Net investment income $0.13 -- --
- -----------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.97+ -- --
- -----------------------------------------------------------------------------------------------------------------
Net investment income(S) 6.67+ -- --
- -----------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529C shares, July 31, 2002, through January 31, 2003.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS High Income Fund (the fund) is a diversified series of MFS Series Trust III
(the trust). The trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The preparation of financial statements in conformity with U.S.
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 - Bonds and other fixed income securities (other than
short-term obligations) in the fund's portfolio are valued at an evaluated bid
price as reported by an independent pricing service, or to the extent a
valuation is not reported by a pricing service, such securities are valued on
the basis of quotes from brokers and dealers. Prices obtained from pricing
services utilize both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate 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 quoted prices or exchange or over-
the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Equity securities in the fund's
portfolio for which market quotations are available are valued at the last sale
or official closing price as reported by an independent pricing service on the
primary market or exchange on which they are primarily traded, or at the last
quoted bid price for securities in which there were no sales during the day.
Equity securities traded over the counter are valued at the last sales price
traded each day as reported by an independent pricing service, or to the extent
there are no sales reported, such securities are valued on the basis of
quotations obtained from brokers and dealers. Forward foreign currency
contracts are valued using spot rates and forward points as reported by an
independent pricing source. Short-term obligations with a remaining maturity in
excess of 60 days will be valued upon dealer-supplied valuations. All other
short-term obligations in the fund's portfolio are valued at amortized cost,
which constitutes market value as determined by the Board of Trustees.
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. When pricing service information or market quotations
are not readily available, securities are priced at fair value as determined
under the direction of the Board of Trustees. For example, significant events
(such as movement in the U.S. securities market, or other regional and local
developments) may occur between the time that foreign markets close (where the
security is principally traded) and the time that the fund calculates its net
asset value (generally, the close of the NYSE) that may impact the value of
securities traded in these foreign markets. In these cases, the fund may
utilize information from an external vendor or other sources to adjust closing
market quotations of foreign equity securities to reflect what it believes to
be the fair value of the securities as of the fund's valuation time. Because
the frequency of significant events is not predictable, fair valuation of
foreign equity securities may occur on a frequent basis.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The fund requires
that the securities collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the fund to obtain those
securities in the event of a default under the repurchase agreement. The fund
monitors, on a daily basis, the value of the collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the fund
under each such repurchase agreement. The fund, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a joint
trading account for the purpose of entering into one or more repurchase
agreements.
FOREIGN CURRENCY TRANSLATION - 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 foreign currency exchange contracts for hedging purposes as well as for
non-hedging purposes. For hedging purposes, the fund may enter into contracts
to deliver or receive foreign currency it will receive from or require for its
normal investment activities. The fund may also use contracts in a manner
intended to protect foreign currency-denominated securities from declines in
value due to unfavorable exchange rate movements. For non-hedging purposes, the
fund may enter into contracts with the intent of changing the relative exposure
of the fund's portfolio of securities to different currencies to take advantage
of anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains or
losses on foreign currency transactions.
SHORT TERM FEES - For purchases made on or after May 3, 2004, the fund may
charge a 2% redemption fee (which is retained by the fund) on proceeds from
shares redeemed or exchanged within 30 calendar days following their
acquisition (either by purchase or exchange). The fund may change the
redemption fee period in the future, including changes in connection with
pending Securities and Exchange rules. See the fund's prospectus for details.
These fees are accounted for as an addition to paid-in-capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with U.S. generally accepted accounting principles. All discount is
accreted for 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. Legal fees and other related expenses incurred to
preserve and protect the value of a security owned are added to the cost of the
security; other legal fees are expensed. Capital infusions made directly to the
security issuer, which are generally non-recurring, incurred to protect or
enhance the value of high-yield debt securities, are reported as additions to
the cost basis of the security. Costs that are incurred to negotiate the terms
or conditions of capital infusions or that are expected to result in a plan of
reorganization are reported as realized losses. Ongoing costs incurred to
protect or enhance an investment, or costs incurred to pursue other claims or
legal actions, are expensed.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. This amount, for the six months ended July 31, 2004, is shown as a
reduction of total expenses on the Statement of Operations.
TAX MATTERS AND DISTRIBUTIONS - The fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. Distributions to
shareholders are recorded on the ex-dividend date. The fund distinguishes
between distributions on a tax basis and a financial reporting basis and only
distributions in excess of tax basis earnings and profits are reported in the
financial statements as distributions from paid-in capital. Differences in the
recognition or classification of income between the financial statements and
tax earnings and profits, which result in temporary over-distributions for
financial statement purposes, are classified as distributions in excess of net
investment income or net realized gains. Common types of book and tax
differences that could occur include differences in accounting for currency
transactions, defaulted bonds, and amortization and accretion on debt
securities.
The tax character of distributions declared for the years ended January 31,
2004 and January 31, 2003 was as follows:
1/31/04 1/31/03
Distributions declared from:
Ordinary income $129,145,209 $118,233,379
--------------------------------------------------------------
As of January 31, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $9,741,230
----------------------------------------------------------
Capital loss carryforward (349,666,815)
----------------------------------------------------------
Post-October capital loss deferral (7,582,097)
----------------------------------------------------------
Unrealized depreciation (8,718,740)
----------------------------------------------------------
Other temporary differences (16,611,707)
----------------------------------------------------------
Post-October capital loss deferrals represent losses realized during the current
fiscal year, but recognized for tax purposes in the next fiscal year.
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the earlier
of its utilization or expiration.
EXPIRATION DATE
January 31, 2007 $(17,432,351)
----------------------------------------------------------
January 31, 2008 (10,853,391)
----------------------------------------------------------
January 31, 2009 (24,778,024)
----------------------------------------------------------
January 31, 2010 (137,538,425)
----------------------------------------------------------
January 31, 2011 (159,064,624)
----------------------------------------------------------
Total $(349,666,815)
----------------------------------------------------------
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 and Class 529B shares will convert to Class A and Class 529A
shares, respectively 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:
First $1.4 billion of average net assets 0.46%
--------------------------------------------------------------
In excess $1.4 billion of average net assets 0.44%
--------------------------------------------------------------
Management fees incurred for the six months ended July 31, 2004 were 0.46% of
average daily net assets on an annualized basis.
As part of the settlement agreement with the New York Attorney General
concerning market timing and related matters, MFS has agreed to reduce the
fund's management fee to 0.39% in excess of $1.4 billion of average daily net
assets for the period March 1, 2004 through February 28, 2009. During this time
period, the Board of Trustees will continue to review the appropriateness of
all advisory fees in accordance with their oversight responsibilities. After
February 28, 2009 the management fee will be determined in accordance with then
existing review policies approved by the Board of Trustees overseeing the fund.
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairpersons, and 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 retired Independent Trustees and an unfunded
retirement benefit deferral plan for certain current Independent Trustees.
Included in Trustees" compensation is a net increase of $1,006 as a result of
the change in the fund's unfunded retirement benefit deferral plan for certain
current Independent Trustees and a pension expense of $4,748 for retired
Independent Trustees for the six months ended July 31, 2004.
The MFS funds, including this fund, have entered into a services agreement (the
"Agreement") which provides for payment of fees by the MFS funds to Tarantino
LLC in return for the provision of services of an Independent Chief Compliance
Officer (ICCO) for the MFS funds. The ICCO is an officer of the MFS funds and
the sole member of Tarantino LLC. MFS has agreed to reimburse each of the MFS
funds for a proportional share of substantially all of the payments made by the
MFS funds to Tarantino LLC and also to provide office space and other
administrative support and supplies to the ICCO. The MFS funds can terminate
the Agreement with Tarantino LLC at any time under the terms of the Agreement.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment adviser. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement
of the costs MFS incurs to provide these services, subject to review and
approval by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. Prior
to April 1, 2004, the fund paid MFS an administrative fee up to the following
annual percentage rates of the fund's average daily net assets:
First $2 billion 0.0175%
----------------------------------------------------------
Next $2.5 billion 0.0130%
----------------------------------------------------------
Next $2.5 billion 0.0005%
----------------------------------------------------------
In excess of $7 billion 0.0000%
----------------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
----------------------------------------------------------
Next $2.5 billion 0.00832%
----------------------------------------------------------
Next $2.5 billion 0.00032%
----------------------------------------------------------
In excess of $7 billion 0.00000%
----------------------------------------------------------
For the six months ended July 31, 2004, the fund paid MFS $96,520, equivalent
to 0.0126% of average daily net assets, to partially reimburse MFS for the
costs of providing administrative services.
In addition to the administrative services provided by MFS to the fund as
described above, MFS is responsible for providing certain administrative
services with respect to Class R2 shares. These services include various
administrative, recordkeeping, and communication/educational services with
respect to the retirement plans which invest in Class R2 shares, and may be
provided directly by MFS or by a third party. The fund pays an annual 0.25%
administrative service fee solely from the assets of Class R2 shares to MFS for
the provision of these services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$70,299 and $615 for the six months ended July 31, 2004, as its portion of the
sales charge on sales of Class A and Class 529A shares of the fund,
respectively.
The Trustees have adopted a distribution plan for Class A, Class B, Class C,
Class R1, Class R2, Class 529A, Class 529B and Class 529C 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 an annual
percentage of its average daily net assets attributable to certain share
classes 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
based on the average daily net assets of accounts attributable to such dealers.
These fees are calculated based on each class" average daily net assets. The
maximum distribution and service fees for each class of shares are as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Distribution Fee 0.10% 0.75% 0.75% 0.25% 0.25%
- ------------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25% 0.25% 0.25%
- ------------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00% 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Distribution Fee 0.25% 0.75% 0.75%
- --------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25%
- --------------------------------------------------------------------------------
Total Distribution Plan 0.50% 1.00% 1.00%
- --------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities dealer, which for the six months, ended
July 31, 2004, amounted to:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Service Fee Retained by MFD $42,316 $1,018 $543 $30 $52
- ------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Service Fee Retained by MFD $53 $4 $22
- --------------------------------------------------------------------------------
Fees incurred under the distribution plan during the six months ended July 31, 2004 were as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Effective Annual Percentage Rates 0.30% 1.00% 1.00% 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Effective Annual Percentage Rates 0.35% 1.00% 1.00%
- --------------------------------------------------------------------------------
A portion of the Class A distribution fee is currently being paid by the fund.
Payment of the remaining 0.05% per annum Class A distribution fee is currently
not imposed and will be implemented on such date as the Trustees of the fund
may determine.
A portion of the Class 529A distribution fee is currently being paid by the
fund. Payment of the remaining 0.15% per annum Class 529A distribution fee is
currently not imposed and will be implemented on such date as the Trustees of
the fund may determine.
Certain Class A, Class C and Class 529C shares are subject to a contingent
deferred sales charge in the event of a shareholder redemption within, for
Class A shares, 12 months following the purchase, and, for Class C and 529C
shares, the first year from the end of the calendar month of purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B and Class 529B shares in the event of a shareholder redemption within six
years from the end of the calendar month of purchase. MFD receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the six month ended July 31, 2004, were as follows:
CLASS A CLASS B CLASS C CLASS 529B CLASS 529C
Contingent Deferred Sales Charges Imposed $21,307 $606,881 $31,141 $480 --
- ------------------------------------------------------------------------------------------------------------------
The fund has and may from time to time enter into contracts with program
managers and other parties which administer the tuition programs through which
an investment in the fund's 529 share classes is made. The fund has entered
into an agreement with MFD pursuant to which MFD receives an annual fee of up
to 0.35% from the fund based solely upon the value of the fund's 529 share
classes attributable to tuition programs to which MFD or a third party which
contracts with MFD provides administrative services. The current fee has been
established at 0.25% annually of average net assets of the fund's 529 share
classes attributable to such programs. The fee may only be increased with the
approval of the board of trustees that oversees the fund. The services provided
by MFD or a third party with which MFD contracts include recordkeeping and tax
reporting and account services, as well as services designed to maintain the
program's compliance with the Internal Revenue Code and other regulatory
requirements.
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as shareholder
servicing agent. The fee, which is calculated as a percentage of the fund's
average daily net assets is set periodically under the supervision of the
fund's Trustees. Prior to April 1, 2004, the fee was set at 0.11% of the fund's
average daily net assets. For the period April 1, 2004 through June 30, 2004,
the fee is set at 0.10% of the fund's average daily net assets. Effective July
1, 2004, the fund will be charged up to 0.0861% of its average daily net
assets. For the six months, period ended July 31, 2004, the fund paid MFSC a
fee of $775,452 for shareholder services which equated to 0.101% of the fund's
average net assets. Also included in shareholder servicing costs are
out-of-pocket expenses, paid to MFSC, which amounted to $62,645 for the six
months ended July 31, 2004, as well as other expenses paid to unaffiliated
vendors.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$500,872,633 and $718,794,750, respectively.
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $1,466,395,525
----------------------------------------------------------
Gross unrealized depreciation $(76,811,910)
----------------------------------------------------------
Gross unrealized appreciation 52,468,547
----------------------------------------------------------
Net unrealized depreciation $(24,343,363)
----------------------------------------------------------
(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:
Six months ended 7/31/04 Year ended 1/31/04
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 29,564,952 $114,953,250 263,429,037 $975,201,278
- ----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 5,639,020 22,020,650 13,148,655 49,086,946
- ----------------------------------------------------------------------------------------------------------
Shares reacquired (63,641,133) (247,081,256) (260,225,852) (975,175,194)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) (28,437,161) $(110,107,356) 16,351,840 $49,113,030
- ----------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 6,463,443 $25,255,885 39,953,134 $148,493,538
- ----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 2,191,130 8,564,794 5,260,172 19,632,842
- ----------------------------------------------------------------------------------------------------------
Shares reacquired (25,177,458) (97,801,789) (43,703,120) (164,021,969)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) (16,522,885) $(63,981,110) 1,510,186 $4,104,411
- ----------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 6,909,238 $27,014,394 39,363,788 $146,852,010
- ----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 921,270 3,612,985 2,695,233 10,072,343
- ----------------------------------------------------------------------------------------------------------
Shares reacquired (23,623,444) (92,416,524) (40,186,145) (150,393,766)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) (15,792,936) $(61,789,145) 1,872,876 $6,530,587
- ----------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 9,085,718 $35,278,775 16,395,513 $61,976,872
- ----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 1,024,520 3,979,667 1,011,179 3,809,085
- ----------------------------------------------------------------------------------------------------------
Shares reacquired (2,502,976) (9,646,513) (1,299,110) (4,861,745)
- ----------------------------------------------------------------------------------------------------------
Net increase 7,607,262 $29,611,929 16,107,582 $60,924,212
- ----------------------------------------------------------------------------------------------------------
CLASS R1 SHARES
Shares sold 403,760 $1,577,809 378,986 $1,440,673
- ----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 17,700 68,826 8,675 33,018
- ----------------------------------------------------------------------------------------------------------
Shares reacquired (77,966) (304,544) (57,996) (219,929)
- ----------------------------------------------------------------------------------------------------------
Net increase 343,494 $1,342,091 329,665 $1,253,762
- ----------------------------------------------------------------------------------------------------------
Six months ended 7/31/04 Period ended 1/31/04*
SHARES AMOUNT SHARES AMOUNT
CLASS R2 SHARES
Shares sold 0 $0 10,394 $40,020
- ----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 379 1,476 135 527
- ----------------------------------------------------------------------------------------------------------
Net increase 379 $1,476 10,529 $40,547
- ----------------------------------------------------------------------------------------------------------
Six months ended 7/31/04 Year ended 1/31/04
SHARES AMOUNT SHARES AMOUNT
CLASS 529A SHARES
Shares sold 22,338 $87,265 91,513 $344,021
- ----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 4,097 15,919 4,463 16,834
- ----------------------------------------------------------------------------------------------------------
Shares reacquired (10,623) (40,469) (8,855) (35,102)
- ----------------------------------------------------------------------------------------------------------
Net increase 15,812 $62,715 87,121 $325,753
- ----------------------------------------------------------------------------------------------------------
CLASS 529B SHARES
Shares sold 3,816 $14,815 20,449 $77,682
- ----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 1,021 3,972 1,044 3,939
- ----------------------------------------------------------------------------------------------------------
Shares reacquired (4,295) (16,772) (386) (1,493)
- ----------------------------------------------------------------------------------------------------------
Net increase 542 $2,015 21,107 $80,128
- ----------------------------------------------------------------------------------------------------------
CLASS 529C SHARES
Shares sold 31,561 $123,544 33,329 $125,486
- ----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 2,035 7,928 1,873 7,079
- ----------------------------------------------------------------------------------------------------------
Shares reacquired (3,488) (13,603) (41) (163)
- ----------------------------------------------------------------------------------------------------------
Net increase 30,108 $117,869 35,161 $132,402
- ----------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R2, October 31, 2003, through January 31, 2004.
(6) LINE OF CREDIT
The fund and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the bank's
base rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the six months ended July 31, 2004, was $4,390, and
is included in miscellaneous expense. The fund had no significant borrowings
during the six months ended July 31, 2004.
(7) FINANCIAL INSTRUMENTS
The fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include forward foreign currency exchange contracts. The notional
or contractual amounts of these instruments represent the investment the fund
has in particular classes of financial instruments and does not necessarily
represent the amounts potentially subject to risk. The measurement of the risks
associated with these instruments is meaningful only when all related and
offsetting transactions are considered.
Forward Foreign Currency Exchange Contracts
- ---------------------------------------------------------------------------------------------------------------
SALES
NET
UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
8/04/04 - 10/06/04 EUR 32,763,161 $39,587,963 $39,375,273 $212,690
8/17/04 GBP 2,611,260 4,708,102 4,743,022 (34,920)
----------- ----------- --------
$44,296,065 $44,118,295 $177,770
=========== =========== ========
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
PURCHASES
8/04/04 6,005,824 $7,233,838 $7,219,912 $(13,926)
- ---------------------------------------------------------------------------------------------------------------
At July 31, 2004, the fund had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) RESTRICTED SECURITIES
The fund may invest not more than 15% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At July 31, 2004,
the fund owned the following restricted securities, excluding securities issued
under Rule 144A, constituting 0.41% 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 the direction of the Trustees.
DATE OF
DESCRIPTION ACQUISITION PAR AMOUNT COST VALUE
American Skiing Co., 12%, 2006 1/22/97 $5,300,000 $5,255,022 $4,505,000
- ------------------------------------------------------------------------------------------------------------
Aquila, Inc., 8%, 2006 4/08/03 1,365,080 1,355,929 1,402,620
- ------------------------------------------------------------------------------------------------------------
$5,907,620
- ------------------------------------------------------------------------------------------------------------
(9) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under
the terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50
million in penalty to certain MFS funds, pursuant to a plan developed by an
independent distribution consultant. The brokerage allocation practices which
were the subject of this proceeding were discontinued by MFS in November 2003.
The agreement with the SEC is reflected in an order of the SEC. Pursuant to the
SEC order, on July 28, 2004, MFS transferred these settlement amounts to the
SEC, and those MFS funds entitled to these settlement amounts accrued an
estimate of their pro rata portion of these amounts. Once the final
distribution plan is approved by the SEC, these amounts will be distributed by
the SEC to the affected MFS funds. The SEC settlement order states that MFS
failed to adequately disclose to the Boards and Trustees and to shareholders of
the MFS funds the specifics of its preferred arrangements with certain
brokerage firms selling MFS fund shares. The SEC settlement order states that
MFS had in place policies designed to obtain best execution of all MFS fund
trades. As part of the settlement, MFS retained an independent compliance
consultant to review the completeness of its current policies and practices
regarding disclosure to MFS fund trustees and to MFS fund shareholders of
strategic alliances between MFS or its affiliates and broker-dealers and other
financial advisers who support the sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New
York Attorney General ("NYAG") and the Bureau of Securities Regulation of the
State of New Hampshire ("NH") to settle administrative proceedings alleging
false and misleading information in certain MFS retail fund prospectuses
regarding market timing and related matters (the "February Settlements"). These
regulators alleged that prospectus language for certain MFS retail funds was
false and misleading because, although the prospectuses for those funds in the
regulators" view indicated that the MFS funds prohibited market timing, MFS did
not limit trading activity in 11 domestic large cap stock, high grade bond and
money market funds. MFS" former Chief Executive Officer, John W. Ballen, and
former President, Kevin R. Parke, also reached agreement with the SEC in which
they agreed to, among other terms, monetary fines and temporary suspensions
from association with any investment adviser or registered investment company.
Messrs. Ballen and Parke have resigned their positions with, and will not be
returning to, MFS and the MFS funds. Under the terms of the February
Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to
increase certain management fees during this period. MFS has also paid an
administrative fine to NH in the amount of $1 million, which will be used for
investor education purposes (NH retained $250,000 and $750,000 was contributed
to the North American Securities Administrators Association's Investor
Protection Trust). In addition, under the terms of the February Settlements,
MFS is in the process of adopting certain governance changes and reviewing its
policies and procedures.
Since December 2003, MFS, Sun Life Financial Inc., various MFS funds, the
Trustees of these MFS funds, and certain officers of MFS have been named as
defendants in multiple lawsuits filed in federal and state courts. The lawsuits
variously have been commenced as class actions or individual actions on behalf
of investors who purchased, held or redeemed shares of the MFS funds during
specified periods, as class actions on behalf of participants in certain
retirement plan accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been
transferred to and consolidated before the United States District Court for the
District of Maryland, as part of a multi-district litigation of market timing
and related claims involving several other fund complexes, In re Mutual Funds
Investment Litigation (Alger, Columbia, Janus, MFS, One Group, Putnam, PIMCO),
No. 1:04-md-15863 (transfer began March 19, 2004). Four lawsuits alleging
improper brokerage allocation practices and excessive compensation are pending
in the United States District Court for the District of Massachusetts, Forsythe
v. Sun Life Financial Inc., et al., No. 04cv10584 (GAO) (March 25, 2004);
Eddings v. Sun Life Financial Inc., et al., No. 04cv10764 (GAO) (April 15,
2004); Marcus Dumond, et al. v. Massachusetts Financial Servs. Co., et al., No.
04cv11458 (RGS) (May 4, 2004); and Koslow v. Sun Life Financial Inc., et al.,
No. 04cv11019 (GAO) (May 20, 2004). The lawsuits generally allege that some or
all of the defendants (i) permitted or acquiesced in market timing and/or late
trading in some of the MFS funds, inadequately disclosed MFS" internal policies
concerning market timing and such matters, and received excessive compensation
as fiduciaries to the MFS funds, or (ii) permitted or acquiesced in the
improper use of fund assets by MFS to support the distribution of MFS fund
shares and inadequately disclosed MFS" use of fund assets in this manner. The
actions assert that some or all of the defendants violated the federal
securities laws, including the Securities Act of 1933 and the Securities
Exchange Act of 1934, the Investment Company Act of 1940 and the Investment
Advisers Act of 1940, the Employee Retirement Income Security Act of 1974, as
well as fiduciary duties and other violations of common law. The lawsuits seek
unspecified compensatory damages. Insofar as any of the actions is
appropriately brought derivatively on behalf of any of the MFS funds, any
recovery will inure to the benefit of the MFS funds. The defendants are
reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed in
the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of the MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution to affected MFS
funds to compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS fund sales. It is not clear whether these
amounts will be sufficient to compensate shareholders for all of the damage
they allegedly sustained, whether certain shareholders or putative class
members may have additional claims to compensation, or whether the damages that
may be awarded in any of the actions will exceed these amounts. In the event
the MFS funds incur any losses, costs or expenses in connection with such
lawsuits, the Boards of Trustees of the affected MFS funds may pursue claims on
behalf of such funds against any party that may have liability to the funds in
respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or
other adverse consequences to the MFS funds.
- ---------------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- ---------------------------------------------------------------------------------------------------------------
The Trustees and officers of the Trust, as of September 10, 2004, are listed below, together with their
principal occupations during the past five years. (Their titles may have varied during that period.) The
address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS & OTHER
DIRECTORSHIPS(2) DURING POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
- ----------------------- ---------------- --------------- -----------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial Services
(born 10/20/63) President Company, Chief Executive Officer,
President, Chief Investment Officer and
Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial Services
(born 08/08/46) Company, Chairman (since February 2004);
Harvard Law School (education), John
Olin Visiting Professor (since July
2002); Secretary of Economic Affairs,
The Commonwealth of Massachusetts
(January 2002 to December 2002);
Fidelity Investments, Vice Chairman
(June 2000 to December 2001); Fidelity
Management & Research Company
(investment adviser), President (March
1997 to July 2001); The Bank of New York
(financial services), Director; Bell
Canada Enterprises (telecommunications),
Director; Telesat (satellite
communications), Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair of February 1992 Private investor; KeySpan Corporation
(born 05/01/36) Trustees (energy related services), Director;
Eastern Enterprises (diversified
services company), Chairman, Trustee and
Chief Executive Officer (until November
2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital, Chief of
(born 03/11/37) Cardiac Surgery; Harvard Medical School,
Professor of Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining products
(born 05/30/42) and service provider), Vice Chairman/
Director (since April 2001); Encinitos
Ventures (private investment company),
Principal (1997 to April 2001); Lincoln
Electric Holdings, Inc. (welding
equipment manufacturer), Director;
Southwest Gas Corporation (natural gas
distribution company), Director
William R. Gutow Trustee December 1993 Private investor and real estate
(born 09/27/41) consultant; Capitol Entertainment
Management Company (video franchise),
Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co., Inc.,
(born 02/08/53) Managing Director, Investment Banking
Group (1997 to February 2001); Borders
Group, Inc. (book and music retailer),
Director; Federal Realty Investment
Trust (real estate investment trust),
Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes (attorneys), Partner
(born 06/23/35)
William J. Poorvu Trustee August 1982 Private investor; Harvard University
(born 04/10/35) Graduate School of Business
Administration, Class of 1961 Adjunct
Professor in Entrepreneurship Emeritus;
CBL & Associates Properties, Inc. (real
estate investment trust), Director
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc. (acquisition
(born 09/23/38) planning specialists), President;
Wellfleet Investments (investor in
health care companies), Managing General
Partner (since 1993); Cambridge
Nutraceuticals (professional nutritional
products), Chief Executive Officer
(until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care industry
(born 04/25/46) consultant
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial Services
(born 10/20/63) Trustee Company, Chief Executive Officer,
President, Chief Investment Officer and
Director
James R. Bordewick, Jr.(3) Assistant Secretary September 1990 Massachusetts Financial Services
(born 03/06/59) and Assistant Clerk Company, Senior Vice President and
Associate General Counsel
Stephanie A. DeSisto(3) Assistant Treasurer May 2003 Massachusetts Financial Services
(born 10/01/53) Company, Vice President (since April
2003); Brown Brothers Harriman & Co.,
Senior Vice President (November 2002 to
April 2003); ING Groep N.V./Aeltus
Investment Management, Senior Vice
President (prior to November 2002)
Robert R. Flaherty(3) Assistant Treasurer August 2000 Massachusetts Financial Services
(born 09/18/63) Company, Vice President (since August
2000); UAM Fund Services, Senior Vice
President (prior to August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial Services
(born 08/29/58) Company, Senior Vice President (since
July 2002); The Bank of New York, Senior
Vice President (September 2000 to July
2002); Lexington Global Asset Managers,
Inc., Executive Vice President and Chief
Financial Officer (prior to September
2000); Lexington Funds, Chief Financial
Officer (prior to September 2000)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial Services
(born 11/13/57) Company, Vice President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of compliance
(born 03/07/44) Compliance Officer services), Principal (since June 2004);
CRA Business Strategies Group
(consulting services), Executive Vice
President (April 2003 to June 2004);
David L. Babson & Co. (investment
adviser), Managing Director, Chief
Administrative Officer and Director
(February 1997 to March 2003)
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial Services
(born 06/12/60) Company, Senior Vice President
- ----------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since
appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission
(i.e., "public companies").
(3) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to as the 1940
Act), which is the principal federal law governing investment companies like the fund. The address of MFS is
500 Boylston Street, Boston, Massachusetts 02116.
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees are not
elected for fixed terms. The Trust will hold a shareholders" meeting in 2005 and at least once every five years
thereafter to elect Trustees. Each Trustee and officer holds office until his or her successor is chosen and
qualified or until his or her earlier death, resignation, retirement or removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or a
subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates
of MFS. Each Trustee serves as a board member of 109 funds within the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is available without
charge upon request by calling 1-800-225-2606.
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIANS
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 02116-3741 225 Franklin Street, Boston, MA 02110
JP Morgan Chase Bank
DISTRIBUTOR One Chase Manhattan Plaza
MFS Fund Distributors, Inc. New York, NY 10081
500 Boylston Street, Boston, MA
02116-3741
PORTFOLIO MANAGERS
John F. Addeo
Scott B. Richards
QUARTERLY PORTFOLIO DISCLOSURE
Beginning with the fund's first and third fiscal quarters following this report, the fund will file a complete
schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and
third quarters of each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at
1-202-942-8090. The fund's Form N-Q is available on the EDGAR database on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference
Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at www.mfs.com.
- --------------------------------------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS
- --------------------------------------------------------------------------------
YOUR GOALS ARE IMPORTANT
MFS offers a complete range of investments and investment services to address
specific financial needs over time. When your investing goals change, you can
easily stay with MFS for the products you need, when you need them. Whether
you're investing for college or retirement expenses or for tax management or
estate planning, MFS will be there.
Ask your investment professional how MFS can help you move toward the goals
you've set.
MFS FAMILY OF FUNDS(R)
More than 50 portfolios offer domestic and international equity and
fixed-income investments across the full risk spectrum
VARIABLE ANNUITIES
A selection of annuity products with advantages for
building and preserving wealth
MFS 401(k) AND IRA SUITES
Retirement plans for businesses and individuals
MFS COLLEGE SAVINGS PLANS
Investment products to help meet education expenses
MFS PRIVATE PORTFOLIO SERVICES
Investment advisory services that provide custom products
for high-net-worth individuals
Variable annuities are offered through MFS/Sun Life Financial Distributors, Inc.
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from 8
a.m. to 8 p.m. Eastern time.
A general description of the MFS funds" proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is available
without charge by visiting the Proxy Voting section of mfs.com or by visiting
the SEC's Web site at http://www.sec.gov.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Shares prices, account 1-800-MFS-TALK
balances exchanges (1-800-637-8255) 24 hours a day, 365 days a
or stock and bond outlooks touch-tone required year
- --------------------------------------------------------------------------------
WORLD WIDE WEB
Go to MFS.COM for a clear view of market events, investor education, account
access, and product and performance insights.
Go paperless with EDELIVERY: Join your fellow shareholders who are already
taking advantage of this great new benefit from MFS. With eDelivery, we send you
prospectuses, reports, and proxies electronically. You get timely information
without mailbox clutter (and help your fund save printing and postage costs).
SIGN-UP instructions: If your account is registered with us, go to mfs.com, log
in to your account via MFS Access, and select the eDelivery sign up options.
If you own your MFS fund shares through a financial institution or through a
retirement plan, MFS TALK, MFS Access, and eDelivery may not be available to
you.
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
MFH-SEM-9/04 117M
MFS(R) Mutual Funds
SEMIANNUAL REPORT 7/31/04
MFS(R) MUNICIPAL HIGH
INCOME FUND
A path for pursuing opportunity
[graphic omitted]
[logo] M F S(R)
INVESTMENT MANAGEMENT
- --------------------------------------------------------------------------------
MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
- --------------------------------------------------------------------------------
Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about every MFS investment product and service that we
offer and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information;
we maintain information and records about you, your investments, and the
services you use. Examples of the nonpublic personal information we maintain
include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates, or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may share information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about MFS' privacy policy, please call 1-800-225-2606
any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUIF
- --------------------------------------------------------------------------------
MFS(R) MUNICIPAL HIGH INCOME FUND
The fund seeks high current income exempt from federal income taxes by investing
primarily in municipal bonds and notes which may be of medium and lower quality.
TABLE OF CONTENTS
----------------------------------------------------
MFS PRIVACY POLICY
----------------------------------------------------
LETTER FROM THE CEO 1
----------------------------------------------------
MFS ORIGINAL RESEARCH(R) 5
----------------------------------------------------
MANAGEMENT REVIEW 6
----------------------------------------------------
PORTFOLIO COMPOSITION 9
----------------------------------------------------
PERFORMANCE SUMMARY 10
----------------------------------------------------
EXPENSE TABLES 13
----------------------------------------------------
PORTFOLIO OF INVESTMENTS 15
----------------------------------------------------
FINANCIAL STATEMENTS 42
----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 52
----------------------------------------------------
TRUSTEES AND OFFICERS 65
----------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES
OF INVESTORS 69
----------------------------------------------------
ASSET ALLOCATION 70
----------------------------------------------------
CONTACT INFORMATION BACK COVER
- --------------------------------------------------------------------------------
LETTER FROM THE CEO
- --------------------------------------------------------------------------------
Dear Shareholders,
[Photo of Robert J. Manning]
Our firm was built on the strength of MFS Original Research(R), our in-depth
analysis of every security we consider for our portfolios. We've been honing
this process since 1932, when we created one of the mutual fund industry's
first research departments. And we continue to fine-tune this process so that
we can provide strong and consistent long-term investment performance to help
you achieve your financial goals.
While we have achieved strong investment performance in many of our portfolios,
our goal is to achieve the same strong results across all asset classes. To
ensure that our portfolio teams are doing the best possible job for our firm's
clients and shareholders, I am focusing the vast majority of my time on the
three key elements that I believe truly differentiate MFS from its competitors:
people, process, and culture.
PEOPLE
Our people have always been our most valuable resource. Our philosophy is to
deliver consistent, repeatable investment results by hiring the most talented
investors in our industry. We recruit from the nation's top business schools
and hire experienced analysts, both domestically and around the globe.
Our analysts are the engine that powers our entire investment team because
their recommendations have a direct impact on the investment performance of our
portfolios. To demonstrate our ongoing commitment in this area, we increased
the number of equity analysts at MFS from less than 40 at the end of 2000 to
about 50 in June 2004. During that same period, we doubled the average
investment experience of our domestic equity analysts, in part by recruiting
more seasoned analysts to the firm. Moreover, our international network of
investment personnel now spans key regions of the world with offices in London,
Mexico City, Singapore, and Tokyo, as well as Boston.
One of the major advantages that MFS has over many of its competitors is that
the position of research analyst is a long-term career for many members of our
team, not simply a steppingstone toward becoming a portfolio manager. We have
worked to elevate the stature of the analyst position to be on par with that of
a portfolio manager. In fact, an exceptional research analyst has the
opportunity to earn more at MFS than some portfolio managers.
At the same time, we look within the firm to promote talented analysts who
choose a path toward becoming a portfolio manager. We rarely hire portfolio
managers from our competitors because we believe the best investors are those
steeped in the MFS process and culture. In the past few months, we have
identified three senior research analysts who will assume roles on the
management teams of several of our larger portfolios. MFS is fortunate to have
a deep bench of talented investment personnel, and we welcome the opportunity
to put their skills to work for our clients.
PROCESS
MFS was built on the strength of its bottom-up approach to researching
securities. We have enhanced the mentoring process for our research analysts by
calling on several of our most seasoned portfolio managers to supplement the
work of Director of Global Equity Research David A. Antonelli. These portfolio
managers are taking a special interest in developing the careers of our
research analysts and strengthening our investment process. Kenneth J. Enright
of our value equity group is working with a team of domestic analysts; David E.
Sette-Ducati of our small- and mid-cap equity team is working with analysts
concentrating on small- and mid-cap companies; and Barnaby Wiener of our
international equity team in London heads the European equity research team.
We have combined the bottom-up approach of our research process with a top-
down approach to risk controls on portfolio composition. We have a very strong
quantitative team under the leadership of industry veteran Deborah H. Miller,
who represents the equity management department on the Management Committee of
the firm. Quantitative analysis helps us generate investment ideas and, more
importantly, assess the appropriate level of risk for each portfolio. The risk
assessment is designed to assure that each portfolio operates within its
investment objectives.
Additionally, we have increased the peripheral vision of our investment
personnel across asset classes through the collaboration of our Equity, Fixed
Income, Quantitative Analysis, and Risk Management teams. We recently codified
this key aspect of our culture by forming an Investment Management Committee,
composed of key members of these teams. This committee will work to ensure that
all teams are sharing information, actively debating investment ideas, and
creating a unified investment team.
CULTURE
Teamwork is at the heart of our ability to deliver consistent and competitive
investment performance over time. At MFS, each member of our team is involved
in our success; we have no superstars. The collaborative nature of our process
works to assure a consistent investment approach across all of our products and
provides a high level of continuity in portfolio management because our
investment performance never depends on the contributions of just a single
individual. Our culture is based on an environment of teamwork that allows our
investment personnel to be successful. In turn, we demand superior investment
results from every member of our team.
We have created a meritocracy at our firm based on investment results. We hold
all of our portfolio managers accountable for the performance of their
portfolios and their contributions to the team. We also track the equity and
fixed-income ratings of our analysts so we can evaluate them based on the
performance of their recommendations. We align bonus compensation to investment
performance by weighting rewards to those who have created the greatest
long-term benefit for our shareholders and who contribute most successfully to
the Original Research(SM) process.
The strength of our culture has resulted in a tremendous amount of stability.
Although we have dismissed members of our team whose performance did not meet
MFS' high standards, only one portfolio manager has voluntarily left the firm
over the past six months, based on a decision to retire from the industry.
In short, we can help you achieve your financial goals by hiring talented
people, following a disciplined process, and maintaining our firm's unique
culture. The enhancements described in this letter reflect the collaborative
spirit and the depth of resources in our investment teams.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
August 20, 2004
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
- -------------------------------------------------------------------------------
MFS ORIGINAL RESEARCH(R)
- -------------------------------------------------------------------------------
THE MFS(R) DIFFERENCE
For 80 years MFS has been offering investors clear paths to pursuing specific
investment objectives. Today, millions of individuals and thousands of
institutions all over the world look to MFS to manage their assets with insight
and care.
Our success, we believe, has to do with the fact that we see investors as
people with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers' ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain first-hand
knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies' customers and competitors
o developing our own proprietary estimates of companies' earnings
- -------------------------------------------------------------------------------
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
MARKET ENVIRONMENT
The six-month period ended July 31, 2004, was a volatile one for the bond
market. Investors, in our view, favored higher-quality debt early in 2004 but
by the second quarter began to shift into higher-yielding bonds.
As the period began, interest rates were at historical lows. However, the bond
market changed dramatically over the next few months, after the U.S. Department
of Labor began releasing a string of strong monthly jobs reports. We think many
investors viewed the jobs reports as an indication that the U.S. economy was in
a full recovery. Inflation, while still quite low on a historical basis, began
to pick up. We believe investors began to anticipate the shift to a rising
interest rate environment. That expectation was fulfilled on June 30, when the
U.S. Federal Reserve Board (the Fed) raised interest rates for the first time
in four years and, in our view, set expectations for a continuing series of
modest rate hikes. Indeed, shortly after the period ended, the Fed hiked rates
by another 0.25% on August 10.
That anticipation of rising rates and the subsequent rate hikes by the Fed, we
believe, caused investors to move from higher-quality debt into lower-quality
issues. While bonds across most asset classes were hurt by rising rates in the
final months of the period, lower-rated debt was less affected than higher-
rated issues and tended to show better performance. After the period ended, we
believe the release of job reports showing substantially lower rates of job
creation in July and August injected further uncertainty and volatility into
the bond market.
For the six-month period as a whole, interest rates rose across the yield
curve. However, the sharpest increases occurred in shorter-maturity issues,
which were most affected by the Fed's rate hike; this resulted in a flattening
of the yield curve. For example, two-year U.S. Treasury rates rose 0.83%, 10-
year Treasury rates climbed 0.32%, and 30-year Treasury rates went up 0.23%.
Municipal bond rates rose in a similar manner. Interest rates on two-year
"AAA"-rated general obligation bonds, as an illustration, were up 0.48%, while
rates on similar 10-year issues rose 0.25% and 30-year issues rose 0.31%.
CONTRIBUTORS TO PERFORMANCE
For the six-month period, the fund outperformed its benchmark, the Lehman
Brothers Municipal Bond Index (the Lehman Index). That outperformance was in
part a product of the fund's relative overweighting in high-yield bonds during
a period in which high yield outperformed. The fund had a larger position in
"BBB"-rated debt than the Lehman Index. In addition, the fund had significant
holdings in below-investment-grade debt (bonds rated lower than "BBB"), whereas
the index does not contain bonds rated below "BBB".
Within the high-yield area, sector and security selection also helped relative
performance. The fund was overweighted in the health care sector, which
performed strongly over the period. In our view, health care providers in
general benefited from strong revenue growth driven by a combination of higher
payments from HMOs, favorable Medicare and Medicaid reimbursement rates, and
the containment of cost pressures from labor and insurance companies. Within
the sector, our specific bond selection also boosted relative results. One area
of opportunity, in our view, has been debt issued by rural hospitals that have
limited competition and a dominant market share.
Security selection in the utilities sector also helped relative performance. As
the Enron bankruptcy and its aftermath became more distant memories, we believe
investor confidence in the sector continued to revive. Our focus on traditional
regulated utilities and our tendency to avoid firms with significant energy
trading exposure proved positive for the fund. Regulated firms in general,
according to our research, reduced their debt and stabilized their cash flows.
Both actions, in our view, were seen by the investment community as helping to
improve the credit quality of regulated utilities' bonds.
The fund's overweighting in housing bonds was another area of relative
strength. In 2003, prepayment risk - caused by homeowners refinancing their
mortgages at lower rates - had been the major factor causing housing bonds to
underperform. (Prepayments are bad for holders of housing bonds because their
bonds are redeemed and the proceeds reinvested at lower prevailing rates.) As
interest rates climbed during the six months ended July 31, 2004, the risk of
prepayment subsided, and housing bonds performed well.
In addition, positioning on the yield curve aided relative results during the
period. (A yield curve for bonds shows the relationship between yield and time
to maturity. In a majority of market environments, longer-maturity bonds offer
higher yields.) The fund's overweighting in the 15- to 20-year area of the
curve helped performance as rates in that area of the curve rose less than in
some other areas. Similarly, an underweighting in the one- to five-year part of
the curve benefited results as rates in that area saw the largest increases.
DETRACTORS FROM PERFORMANCE
Over the period, the portfolio had a slightly longer duration, or sensitivity
to interest rate changes, than its benchmark. This duration positioning
modestly hurt performance during a time when rising interest rates tended to
erode bond prices.
Respectfully,
/s/ Geoffrey L. Schechter
Geoffrey L. Schechter
Portfolio Manager
Note to shareholders: Effective February 17, 2004, Geoffrey L. Schechter became
the sole manager of the portfolio. Previous to that date, Michael W. Roberge
had also been a manager of the portfolio.
The views expressed in this report are those of the portfolio manager only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market and
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or as an indication of
trading intent on behalf of any MFS fund. References to specific securities are
not recommendations of such securities and may not be representative of any MFS
fund's current or future investments.
- --------------------------------------------------------------------------------
Visit mfs.com for our latest economic and investment outlook.
o Under Updates & Announcements, click Week in Review for a summary of recent
investment- related news.
o From Week in Review, link to MFS Global Perspective for our current view of
the world.
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- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
---------------------------------------
PORTFOLIO STRUCTURE*
---------------------------------------
Bonds 99.7%
Cash 0.3%
---------------------------------------
BOND MARKET SECTORS*
---------------------------------------
Municipal 99.7%
---------------------------------------
Cash & Cash Equivalents 0.3%
---------------------------------------
---------------------------------------
CREDIT QUALITY*
---------------------------------------
AAA 18.1%
---------------------------------------
AA 4.0%
---------------------------------------
A 5.6%
---------------------------------------
BBB 32.3%
---------------------------------------
BB 20.5%
---------------------------------------
B 15.8%
---------------------------------------
CCC 2.1%
---------------------------------------
CC 0.3%
---------------------------------------
C 0.1%
---------------------------------------
D 0.7%
---------------------------------------
Not Rated 0.2%
---------------------------------------
Other 0.30%
---------------------------------------
---------------------------------------
PORTFOLIO FACTS
---------------------------------------
Average Duration 7.5
---------------------------------------
Average Life 16.5 Yrs.
---------------------------------------
Average Maturity 18.8 Yrs.
---------------------------------------
Percentages based on total net assets as of 7/31/04.
Credit quality ratings are based on a weighted average of each security's
rating from Moody's Investors Service. If not rated by Moody's, the rating will
be that assigned by Standard & Poor's. Likewise, if not assigned a rating by
Standard & Poor's, it will be based on the rating assigned by Fitch, Inc. If
not rated by any of the three agencies, the security is considered not rated,
except for U.S. Treasuries and mortgage-backed securities, which are included
in the "AAA"-rating category.
* For purposes of this graphical presentation, accrued interest is included
within the bond component.
The portfolio is actively managed, and current holdings may be different.
- -------------------------------------------------------------------------------
PERFORMANCE SUMMARY THROUGH 7/31/04
- -------------------------------------------------------------------------------
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for the
applicable time periods. Performance results reflect the percentage change in
net asset value, including the reinvestment of any dividends and capital gains
distributions. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS WERE PRIMARILY ACHIEVED DURING FAVORABLE MARKET
CONDITIONS, WHICH MAY NOT BE REPEATED. THE PERFORMANCE SHOWN DOES NOT REFLECT
THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
TOTAL RETURNS
- --------------------
Average annual
without sales charge
- --------------------
Share Class
class inception date 6-mo 1-yr 3-yr 5-yr 10-yr
- ----------------------------------------------------------------------------
A 2/24/1984 1.00% 7.22% 5.24% 4.89% 5.62%
- ----------------------------------------------------------------------------
B 9/07/1993 0.73% 6.40% 4.42% 4.07% 4.73%
- ----------------------------------------------------------------------------
C 9/25/1998 0.50% 6.03% 4.19% 3.84% 4.60%
- ----------------------------------------------------------------------------
- --------------------
Average annual
- --------------------
Comparative benchmarks
- ----------------------------------------------------------------------------
Average high-yield municipal
debt fund+ 0.57% 6.38% 4.55% 3.99% 4.94%
- ----------------------------------------------------------------------------
Lehman Brothers Municipal Bond
Index# 0.06% 5.79% 5.36% 6.07% 6.38%
- ----------------------------------------------------------------------------
Periods less than one year are actual, not annualized.
- --------------------
Average annual
with sales charge
- --------------------
Share
class 6-mo 1-yr 3-yr 5-yr 10-yr
- ----------------------------------------------------------------------------
A -3.80% 2.13% 3.55% 3.87% 5.11%
- ----------------------------------------------------------------------------
B -3.20% 2.40% 3.52% 3.74% 4.73%
- ----------------------------------------------------------------------------
C -0.48% 5.03% 4.19% 3.84% 4.60%
- ----------------------------------------------------------------------------
- --------------------
Cumulative
without sales charge
- --------------------
- ----------------------------------------------------------------------------
A 1.00% 7.22% 16.57% 26.95% 72.82%
- ----------------------------------------------------------------------------
B 0.73% 6.40% 13.86% 22.05% 58.72%
- ----------------------------------------------------------------------------
C 0.50% 6.03% 13.12% 20.76% 56.73%
- ----------------------------------------------------------------------------
Periods less than one year are actual, not annualized.
+ Source: Lipper Inc., an independent firm that reports mutual fund performance.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITION
LEHMAN BROTHERS MUNICIPAL BOND INDEX - is a broad measure of the municipal bond
market.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
Class A results, including sales charge, reflect the deduction of the maximum
4.75% sales charge. Class B results, including sales charge, reflect the
deduction of the applicable contingent deferred sales charge (CDSC), which
declines over six years from 4% to 0%. Class C results, including sales charge,
redeemed within one year from the end of the calendar month of purchase,
reflect the deduction of the 1% CDSC.
Performance for C shares includes the performance of the fund's Class B shares
prior to their offering. Blended class performance has been adjusted to take
into account differences in sales loads, if any, applicable to these share
classes, but has not been adjusted to take into account differences in class
specific operating expenses (such as Rule 12b-1 fees). Compared to performance
this share class would have experienced had it been offered for the entire
period, the use of blended performance generally results in higher performance
for a share class with higher operating expenses than the initial share class
to which it is blended, and lower performance for a share class with lower
operating expenses than the initial share class to which it is blended.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers the fund's
performance results would be less favorable. Please see the prospectus and
financial statements for complete details.
KEY RISK CONSIDERATIONS
A portion of income may be subject to state, federal, and/or alternative
minimum tax. Capital gains, if any, are subject to a capital gains tax.
The portfolio invests in high yield or lower-rated securities which may provide
greater returns but are subject to greater-than-average risk.
These risks may increase share price volatility. Please see the prospectus for
further information regarding these and other risk considerations.
- -------------------------------------------------------------------------------
EXPENSE TABLES
- -------------------------------------------------------------------------------
FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM FEBRUARY 1, 2004,
THROUGH JULY 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and (2)
ongoing costs, including management fees; distribution and service (12b-1)
fees; and other fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire period, February 1, 2004 through July 31,
2004.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table below provides information
about hypothetical account values and hypothetical expenses based on the fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
- --------------
Share Class
- --------------
- -------------------------------------------------------------------------------
Expenses
Paid During
Annualized Beginning Ending Period*
Expense Account Value Account Value 2/01/04-
Ratio 2/01/04 7/31/04 7/31/04
- -------------------------------------------------------------------------------
A Actual 0.71% $1,000 $1,010 $3.56
- -------------------------------------------------------------------------------
Hypothetical** 0.71% $1,000 $1,021 $3.58
- -------------------------------------------------------------------------------
B Actual 1.49% $1,000 $1,007 $7.46
- -------------------------------------------------------------------------------
Hypothetical** 1.49% $1,000 $1,018 $7.49
- -------------------------------------------------------------------------------
C Actual 1.72% $1,000 $1,005 $8.60
- -------------------------------------------------------------------------------
Hypothetical** 1.72% $1,000 $1,016 $8.65
- -------------------------------------------------------------------------------
* Expenses paid is equal to each class' annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
** Assumed rate of return of 5% per year before expenses.
Effective March 1, 2004, the fund's management fee was reduced from 0.60% to
0.50% (as described in note 3 to the Notes to the Financial Statements). The
above total is restated below to take into effect this fee reduction as if the
fee reduction had been in effect throughout the entire six month period.
- --------------
Share Class
- --------------
- -------------------------------------------------------------------------------
Expenses
Paid During
Annualized Beginning Ending Period
Expense Account Value Account Value 2/01/04-
Ratio 2/01/04 7/31/04 7/31/04
- -------------------------------------------------------------------------------
A Actual 0.69% $1,000 $1,010 $3.46
- -------------------------------------------------------------------------------
Hypothetical 0.69% $1,000 $1,022 $3.48
- -------------------------------------------------------------------------------
B Actual 1.47% $1,000 $1,007 $7.36
- -------------------------------------------------------------------------------
Hypothetical 1.47% $1,000 $1,018 $7.39
- -------------------------------------------------------------------------------
C Actual 1.70% $1,000 $1,005 $8.50
- -------------------------------------------------------------------------------
Hypothetical 1.70% $1,000 $1,017 $8.55
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (unaudited) - 7/31/04
- -------------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your fund. It is
categorized by broad-based asset classes.
Municipal Bonds - 98.2%
- -------------------------------------------------------------------------------------------------
PAR AMOUNT
ISSUER (000 Omitted) $ VALUE
- -------------------------------------------------------------------------------------------------
Airport & Port Revenue - 0.8%
- -------------------------------------------------------------------------------------------------
Chicago, IL, O'Hare International Airport Rev., RITES,
FSA, 9.8475%, 2022+(+) $6,250 $6,988,250
- -------------------------------------------------------------------------------------------------
Denver, CO, City & County Airport Rev. RITES, AMBAC,
10.59%, 2017+(+) 2,500 2,931,050
- -------------------------------------------------------------------------------------------------
$9,919,300
- -------------------------------------------------------------------------------------------------
General Obligations - General Purpose - 3.2%
- -------------------------------------------------------------------------------------------------
Cranston, RI, FGIC, 6.375%, 2014 $855 $997,033
- -------------------------------------------------------------------------------------------------
Delaware County, OH, 6.25%, 2010(++) 1,000 1,161,540
- -------------------------------------------------------------------------------------------------
Hidalgo County, TX, AMBAC, 6%, 2016 1,010 1,150,824
- -------------------------------------------------------------------------------------------------
Houston County, AL, AMBAC, 6.25%, 2019 3,500 4,062,170
- -------------------------------------------------------------------------------------------------
Little Rock, AR, Capital Improvement Rev., 5.7%, 2018 855 872,750
- -------------------------------------------------------------------------------------------------
Los Angeles, CA, RITES, FGIC, 8.9508%, 2015+(+) 5,310 6,454,730
- -------------------------------------------------------------------------------------------------
New York City, NY, 6.125%, 2006(++) 5,000 5,390,650
- -------------------------------------------------------------------------------------------------
New York City, NY, FGIC, 5.875%, 2024 7,000 7,564,690
- -------------------------------------------------------------------------------------------------
New York City, NY, FGIC, 6.125%, 2025 8,000 8,819,760
- -------------------------------------------------------------------------------------------------
State of Florida, Board of Education, RITES, 8.4279%,
2017+(+) 2,300 2,516,752
- -------------------------------------------------------------------------------------------------
State of Massachusetts, ROLs, 9.582%, 2017+(+++) 2,000 2,448,360
- -------------------------------------------------------------------------------------------------
West Warwick, RI, 7.45%, 2013 495 508,845
- -------------------------------------------------------------------------------------------------
$41,948,104
- -------------------------------------------------------------------------------------------------
General Obligations - Improvement - 0.5%
- -------------------------------------------------------------------------------------------------
Birmingham, AL, 5.75%, 2019 $1,000 $1,103,900
- -------------------------------------------------------------------------------------------------
District of Columbia, 6%, 2007(++) 5,000 5,611,500
- -------------------------------------------------------------------------------------------------
$6,715,400
- -------------------------------------------------------------------------------------------------
General Obligations - Schools - 2.5%
- -------------------------------------------------------------------------------------------------
Chicago, IL, Board Education, RITES, 8.9164%, 2020+(+) $7,910 $9,599,892
- -------------------------------------------------------------------------------------------------
Forsyth County, GA, School District, 6%, 2016 1,700 1,939,394
- -------------------------------------------------------------------------------------------------
Houston, TX, Independent School District, RITES, PSF,
8.9279%, 2017+(+) 5,000 5,624,200
- -------------------------------------------------------------------------------------------------
Kane Cook & Dupage Counties, IL, FSA, 6.5%, 2017 1,355 1,576,328
- -------------------------------------------------------------------------------------------------
Kane Cook & Dupage Counties, IL, FSA, 6.375%, 2019 1,255 1,446,450
- -------------------------------------------------------------------------------------------------
Lake County, IL, FGIC, 6%, 2020 2,500 2,757,175
- -------------------------------------------------------------------------------------------------
McHenry & Lake County, IL, FSA, 6.125%, 2018 1,700 1,932,713
- -------------------------------------------------------------------------------------------------
State of Florida Board of Education, RITES, FGIC,
8.9508%, 2012+(+) 1,500 1,826,730
- -------------------------------------------------------------------------------------------------
State of Florida Board of Education, RITES, FGIC,
8.9508%, 2013+(+) 5,000 6,073,400
- -------------------------------------------------------------------------------------------------
$32,776,282
- -------------------------------------------------------------------------------------------------
Healthcare Revenue - Hospitals - 21.4%
- -------------------------------------------------------------------------------------------------
Allegheny County, PA, Hospital Development Authority
Rev. (South Hills Health Systems), 6.75%, 2025 $1,200 $1,205,688
- -------------------------------------------------------------------------------------------------
Allegheny County, PA, Hospital Development Authority
Rev. (West Penn Allegheny Health), 9.25%, 2022 3,360 3,786,317
- -------------------------------------------------------------------------------------------------
Allegheny County, PA, Hospital Development Authority
Rev. (West Penn Allegheny Health), 9.25%, 2030 6,100 6,873,968
- -------------------------------------------------------------------------------------------------
Athens County, OH, Hospital Facilities Rev. (O'Bleness
Memorial Hospital), 7.125%, 2033 2,500 2,512,750
- -------------------------------------------------------------------------------------------------
Baldwin County, AL, Eastern Shore Health Care Authority
Rev. (Thomas Hospital), 6.75%, 2015 500 510,950
- -------------------------------------------------------------------------------------------------
Baldwin County, AL, Eastern Shore Health Care Authority
Rev. (Thomas Hospital), 5.75%, 2027 1,900 1,778,571
- -------------------------------------------------------------------------------------------------
Baxter County, AR, Hospital Rev., 5.6%, 2021 2,250 2,258,910
- -------------------------------------------------------------------------------------------------
Brookhaven, NY, Industrial Development Agency Rev.
(Memorial Hospital Medical Center Inc.), 8.25%, 2030 2,500 2,634,925
- -------------------------------------------------------------------------------------------------
Chautauqua County, NY, Civic Facilities Rev. (Women's
Christian Assn.), 6.35%, 2017 1,355 1,345,447
- -------------------------------------------------------------------------------------------------
Chautauqua County, NY, Civic Facilities Rev. (Women's
Christian Assn.), 6.4%, 2029 3,430 3,213,258
- -------------------------------------------------------------------------------------------------
Chemung County, NY, Civic Facilities Rev. (St. Joseph's
Hospital-Elmira), 6%, 2013 2,180 2,151,769
- -------------------------------------------------------------------------------------------------
Chemung County, NY, Civic Facilities Rev. (St. Joseph's
Hospital-Elmira), 6.35%, 2013 1,550 1,562,385
- -------------------------------------------------------------------------------------------------
Chester County, PA, Health & Educational Facilities
Rev. (Chester County Hospital), 6.75%, 2031 2,500 2,565,925
- -------------------------------------------------------------------------------------------------
Citrus County, FL, Hospital Development Authority Rev.
(Citrus Memorial Hospital), 6.25%, 2023 990 1,011,493
- -------------------------------------------------------------------------------------------------
Colorado Health Facilities Authority Rev. (Parkview
Medical Center), 6%, 2016 7,000 7,245,910
- -------------------------------------------------------------------------------------------------
Colorado Health Facilities Authority Rev. (Parkview
Medical Center), 6.5%, 2020 770 812,242
- -------------------------------------------------------------------------------------------------
Colorado Health Facilities Authority Rev. (Portercare
Adventist Health Systems), 6.625%, 2026 2,200 2,391,796
- -------------------------------------------------------------------------------------------------
Comal County, TX, Health Facilities Development Rev.
(McKenna Memorial Hospital), 6.125%, 2022 2,000 2,002,080
- -------------------------------------------------------------------------------------------------
Crittenden County, AR, 7.15%, 2025 1,165 1,128,827
- -------------------------------------------------------------------------------------------------
Cullman, AL, Cullman Medical Park South, Medical Clinic
Board Rev. (Cullman Regional Medical Center), 6.5%, 2013 1,395 1,402,087
- -------------------------------------------------------------------------------------------------
Cuyahoga County, OH, Hospital Facilities Rev. (Canton,
Inc.), 7.5%, 2030 5,020 5,489,370
- -------------------------------------------------------------------------------------------------
Denver, CO, Health & Hospital Authority Rev., 5.375%, 2018 3,700 3,642,428
- -------------------------------------------------------------------------------------------------
Denver, CO, Health & Hospital Authority Rev., 6%, 2023 750 752,955
- -------------------------------------------------------------------------------------------------
Denver, CO, Health & Hospital Authority Rev., 5.375%, 2028 2,500 2,346,675
- -------------------------------------------------------------------------------------------------
District of Columbia, Health & Hospital Authority Rev.
(Medstar University Hospital), 6.875%, 2007(++) 3,875 4,318,959
- -------------------------------------------------------------------------------------------------
Grand Forks, ND, Health Care Authority Rev. (Altru
Health Systems Obligation Group), 7.125%, 2024 2,250 2,417,715
- -------------------------------------------------------------------------------------------------
Highlands County, FL, Health Facilities Authority Rev.
(Adventist/Sunbelt Hospital), 6%, 2031 3,000 3,141,960
- -------------------------------------------------------------------------------------------------
Illinois Health Facilities Authority Rev. (Sinai
Health), FHA, 5.15%, 2037 2,500 2,461,875
- -------------------------------------------------------------------------------------------------
Indiana Health Facilities Financing Authority, Hospital
Rev. (Munster Medicial Research Foundation, Inc.),
6.375%, 2021 3,300 3,346,365
- -------------------------------------------------------------------------------------------------
Indiana Health Facilities Financing Authority, Hospital
Rev. (Munster Medical Research Foundation, Inc.),
6.375%, 2031 8,950 9,053,194
- -------------------------------------------------------------------------------------------------
Indiana Health Facilities Financing Authority, Hospital
Rev. (Riverview Hospital), 6.125%, 2031 3,750 3,793,088
- -------------------------------------------------------------------------------------------------
Kentucky Economic Development Finance Authority, Health
Systems Rev. (Norton Healthcare, Inc.), 6.5%, 2020 5,000 5,228,700
- -------------------------------------------------------------------------------------------------
Kentucky Economic Development Finance Authority, Health
Systems Rev. (Norton Healthcare, Inc.), 6.625%, 2028 2,000 2,080,960
- -------------------------------------------------------------------------------------------------
Knox County, TN, Health Educational Housing Facilities
Board, Hospital Facilities Rev. (Baptist Health
Systems), 6.5%, 2031 5,350 4,914,564
- -------------------------------------------------------------------------------------------------
Lufkin, TX, Health Facilities Rev. (Memorial Health
System of East Texas), 6.875%, 2026 1,325 1,367,294
- -------------------------------------------------------------------------------------------------
Lufkin, TX, Health Facilities Rev. (Memorial Health
System of East Texas), 5.7%, 2028 3,305 3,160,472
- -------------------------------------------------------------------------------------------------
Macomb County, MI, Hospital Finance Authority Rev.
(Mount Clemens General Hospital), 5.75%, 2025 2,000 1,849,180
- -------------------------------------------------------------------------------------------------
Macomb County, MI, Hospital Finance Authority Rev.
(Mount Clemens General Hospital), 5.875%, 2034 4,345 3,965,377
- -------------------------------------------------------------------------------------------------
Maryland Health & Higher Educational Facilities
Authority Rev. (Medstar Health), 5.5%, 2033 1,200 1,167,924
- -------------------------------------------------------------------------------------------------
Maryland Health & Higher Educational Facilities
Authority Rev. (University of Maryland Medical System),
6.75%, 2030 1,000 1,119,220
- -------------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (Anna Jaques Hospital), 6.875%, 2012 2,560 2,583,142
- -------------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (Caritas Christi Obligation), 6.5%, 2012 1,500 1,641,480
- -------------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (Caritas Christi Obligation), 5.7%, 2015 3,500 3,538,465
- -------------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (Jordan Hospital), 5.25%, 2018 4,600 4,120,082
- -------------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (Milford Whitinsville Hospital), 6.35%, 2032 1,450 1,465,269
- -------------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (North Adams Regional Hospital), 6.625%, 2018 2,990 2,917,313
- -------------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (Saints Memorial Medical Center), 6%, 2023 13,530 12,508,485
- -------------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (University of Massachusetts Memorial Health), 6.5%, 2021 500 516,445
- -------------------------------------------------------------------------------------------------
Mecosta County, MI, General Hospital Rev., 6%, 2018 1,200 1,157,604
- -------------------------------------------------------------------------------------------------
Miami Beach, FL, Health Facilities Rev. (Mount Sinai
Medical Center), 6.7%, 2019 3,505 3,580,638
- -------------------------------------------------------------------------------------------------
Miami Beach, FL, Health Facilities Rev. (Mount Sinai
Medical Center), 6.75%, 2029 2,490 2,516,568
- -------------------------------------------------------------------------------------------------
Michigan Hospital Finance Authority Rev. (Memorial
Healthcare Center), 5.875%, 2021 1,000 1,001,870
- -------------------------------------------------------------------------------------------------
Mississippi Business Finance Corp., Health Facilities
Rev. (Rush Medical Foundation, Inc.), 5.375%, 2015 700 664,090
- -------------------------------------------------------------------------------------------------
Mississippi Business Finance Corp., Health Facilities
Rev. (Rush Medical Foundation, Inc.), 5.625%, 2023 250 231,123
- -------------------------------------------------------------------------------------------------
New Hampshire Health & Educational Facilities Authority
Rev. (Covenant Health), 6.5%, 2017 4,445 4,869,898
- -------------------------------------------------------------------------------------------------
New Hampshire Higher Educational & Health Facilities
Authority Rev. (Catholic Medical Center), 6.125%, 2032 1,500 1,501,890
- -------------------------------------------------------------------------------------------------
New Hampshire Higher Educational & Health Facilities
Authority Rev. (Littleton Regional Hospital), 5%, 2008 780 749,346
- -------------------------------------------------------------------------------------------------
New Hampshire Higher Educational & Health Facilities
Authority Rev. (Littleton Regional Hospital), 5.9%, 2018 1,750 1,600,358
- -------------------------------------------------------------------------------------------------
New Jersey Health Care Facilities, Financing Authority
Rev. (Palisades Medical Center), 6.625%, 2031 1,115 1,144,191
- -------------------------------------------------------------------------------------------------
New Jersey Health Care Facilities, Financing Authority
Rev. (St. Peter's University Hospital), 6.875%, 2030 4,000 4,359,400
- -------------------------------------------------------------------------------------------------
New York City, NY, Industrial Development Agency, Civic
Facilities Rev. (Staten Island University Hospital),
6.375%, 2031 1,980 1,830,352
- -------------------------------------------------------------------------------------------------
New York City, NY, Industrial Development Agency, Civic
Facilities Rev. (Staten Island University Hospital),
6.45%, 2032 940 876,719
- -------------------------------------------------------------------------------------------------
Ohio County, WV, County Commission Health System Rev.
(Ohio Valley Medical Center), 5.75%, 2013 5,000 4,535,700
- -------------------------------------------------------------------------------------------------
Oklahoma Development Finance Authority Rev. (Comanche
County Hospital), 6%, 2014 2,400 2,523,960
- -------------------------------------------------------------------------------------------------
Oklahoma Development Finance Authority Rev. (Comanche
County Hospital), 6.6%, 2031 4,720 4,856,644
- -------------------------------------------------------------------------------------------------
Peninsula Ports Authority Rev. (Whittaker Memorial),
FHA, 8.7%, 2023 495 597,940
- -------------------------------------------------------------------------------------------------
Rhode Island Health & Education Building Rev., Hospital
Financing (Lifespan Obligation Group), 6.5%, 2032 9,000 9,364,950
- -------------------------------------------------------------------------------------------------
Richardson, TX, Hospital Authority Rev. (Baylor-
Richardson), 5.25%, 2013 1,500 1,514,085
- -------------------------------------------------------------------------------------------------
Royston, GA, Hospital Authority Rev. (Ty Cobb
Healthcare Systems, Inc.), 6.375%, 2014 1,395 1,364,882
- -------------------------------------------------------------------------------------------------
Royston, GA, Hospital Authority Rev. (Ty Cobb
Healthcare Systems, Inc.), 6.5%, 2027 1,855 1,731,105
- -------------------------------------------------------------------------------------------------
Russell, KY (Franciscan Sisters of the Poor), 8.1%,
2006(++) 310 343,418
- -------------------------------------------------------------------------------------------------
Shelby County, TN, Health Educational and Housing
Facilities Board, Hospital Rev. (Methodist Healthcare),
6%, 2016 1,200 1,283,124
- -------------------------------------------------------------------------------------------------
Shelby County, TN, Health Educational and Housing
Facilities Board, Hospital Rev. (Methodist Healthcare),
6%, 2017 2,000 2,128,960
- -------------------------------------------------------------------------------------------------
Shelby County, TN, Health Educational and Housing
Facilities Board, Hospital Rev. (Methodist Healthcare),
6.25%, 2018 2,000 2,178,480
- -------------------------------------------------------------------------------------------------
Sierra View, CA, Local Health Care District Rev., 5.4%, 2022 4,000 3,774,680
- -------------------------------------------------------------------------------------------------
South Carolina Jobs & Economic Development Authority,
Hospital Facilities Rev. (Palmetto Health Alliance),
6.25%, 2031 2,725 2,810,402
- -------------------------------------------------------------------------------------------------
South Carolina Jobs & Economic Development Authority
(Bon Secours Health Systems, Inc.), "A", 5.625%, 2030 1,200 1,189,284
- -------------------------------------------------------------------------------------------------
Southwestern Illinois Development Authority Rev.
(Anderson Hospital), 5.375%, 2015 1,385 1,382,673
- -------------------------------------------------------------------------------------------------
Southwestern Illinois Development Authority Rev.
(Anderson Hospital), 5.5%, 2020 1,625 1,570,839
- -------------------------------------------------------------------------------------------------
Southwestern Illinois Development Authority Rev.
(Anderson Hospital), 5.625%, 2029 4,200 3,997,140
- -------------------------------------------------------------------------------------------------
Springfield, TN, Health & Educational Facilities Rev.
(Northcrest Medical Center), 5.25%, 2018 3,500 3,312,855
- -------------------------------------------------------------------------------------------------
Springfield, TN, Health & Educational Facilities Rev.
(Northcrest Medical Center), 5.375%, 2024 4,000 3,621,040
- -------------------------------------------------------------------------------------------------
State of Arkansas, Development Finance Authority Rev.
(Washington Regional Medical Center), 7.25%, 2020 2,500 2,742,100
- -------------------------------------------------------------------------------------------------
Suffolk County, NY, Industrial Development Agency Rev.
(Southampton Hospital), 7.25%, 2020 3,500 3,417,995
- -------------------------------------------------------------------------------------------------
Suffolk County, NY, Industrial Development Agency Rev.
(Southampton Hospital), 7.625%, 2030 1,500 1,497,345
- -------------------------------------------------------------------------------------------------
Tallahassee, FL, Health Facilities Rev. (Tallahassee
Memorial Healthcare), 6.25%, 2020 4,500 4,542,975
- -------------------------------------------------------------------------------------------------
Texas Metro Health Facilities Development Corp., Metro
Health Facilities Development Rev. (Wilson N. Jones
Memorial Hospital), 7.2%, 2021 4,300 4,308,471
- -------------------------------------------------------------------------------------------------
Texas Metro Health Facilities Development Corp., Metro
Health Facilities Development Rev. (Wilson N. Jones
Memorial Hospital), 7.25%, 2031 2,000 2,003,940
- -------------------------------------------------------------------------------------------------
Tom Green County, TX, Health Facilities Rev. (Shannon
Health System), 6.75%, 2021 3,150 3,312,635
- -------------------------------------------------------------------------------------------------
Upper Illinois River Valley Development, Health
Facilities Rev. (Morris Hospital), 6.625%, 2031 1,900 1,990,801
- -------------------------------------------------------------------------------------------------
Valley, AL, Financing Authority Rev. (Lanier Memorial
Hospital), 5.45%, 2011 1,175 1,156,083
- -------------------------------------------------------------------------------------------------
Wapello County, IA, Hospital Authority Rev. (Ottumwa
Regional Health Center), 6.25%, 2022 2,000 2,035,640
- -------------------------------------------------------------------------------------------------
Wapello County, IA, Hospital Authority Rev. (Ottumwa
Regional Health Center), 6.375%, 2031 2,595 2,655,230
- -------------------------------------------------------------------------------------------------
Weirton, WV, Municipal Hospital Building, Commission
Rev. (Weirton Hospital Medical Center), 6.375%, 2031 3,885 3,662,156
- -------------------------------------------------------------------------------------------------
Weslaco, TX, Health Facilities Rev. (Knapp Medical
Center), 6.25%, 2032 4,000 4,058,800
- -------------------------------------------------------------------------------------------------
West Plains, MO, Industrial Development Authority Rev.
(Ozarks Medical Center), 6.75%, 2024 810 816,512
- -------------------------------------------------------------------------------------------------
West Shore Pennsylvania, Hospital Authority Rev. (Holy
Spirit Hospital), 6.2%, 2026 4,500 4,547,250
- -------------------------------------------------------------------------------------------------
Wichita, KS, Hospital Authority Rev. (Via Christi
Health System), 6.25%, 2020 2,500 2,752,700
- -------------------------------------------------------------------------------------------------
Wisconsin Health & Educational Facilities (Aurora
HealthCare), 5.625%, 2029 1,100 1,079,221
- -------------------------------------------------------------------------------------------------
Wisconsin Health & Educational Facilities Authority
Rev. (Aurora Health Care, Inc.), 6.875%, 2030 2,250 2,481,435
- -------------------------------------------------------------------------------------------------
Yonkers, NY, Industrial Development Agency, Civic
Facilities Rev. (St. John's Riverside Hospital), 6.8%, 2016 1,670 1,700,427
- -------------------------------------------------------------------------------------------------
Yonkers, NY, Industrial Development Agency, Civic
Facilities Rev. (St. John's Riverside Hospital),
7.125%, 2031 3,495 3,529,041
- -------------------------------------------------------------------------------------------------
Yonkers, NY, Industrial Development Agency, Civic
Facilities Rev. (St. Joseph's Hospital), 6.15%, 2015 2,000 1,853,820
- -------------------------------------------------------------------------------------------------
$279,615,039
- -------------------------------------------------------------------------------------------------
Healthcare Revenue - Long Term Care - 12.2%
- -------------------------------------------------------------------------------------------------
Abilene, TX, Health Facilities Development Co.,
Retirement Facilities Rev. (Sears Methodist
Retirement), 7%, 2033 $1,155 $1,175,675
- -------------------------------------------------------------------------------------------------
Arizona Health Facilities Authority Rev. (The Terraces
Project), 7.75%, 2033 2,250 2,288,003
- -------------------------------------------------------------------------------------------------
Healthcare Revenue - Long Term Care - continued
- -------------------------------------------------------------------------------------------------
Bell County, TX, Health Facilities Development Rev.
(Advanced Living Technology), 7.75%, 2006 $255 $241,401
- -------------------------------------------------------------------------------------------------
Bell County, TX, Health Facilities Development Rev.
(Advanced Living Technology), 8.125%, 2016 1,420 1,140,175
- -------------------------------------------------------------------------------------------------
Bell County, TX, Health Facilities Development Rev.
(Advanced Living Technology), 8.5%, 2026 3,150 2,441,124
- -------------------------------------------------------------------------------------------------
Blair County, PA, Industrial Development Authority Rev.
(Village of Penn St.), 7%, 2034 1,050 1,056,626
- -------------------------------------------------------------------------------------------------
Cambria County, PA, Industrial Development Authority
Rev. (Beverly Enterprises, Inc.), 10%, 2012 660 733,346
- -------------------------------------------------------------------------------------------------
Chester County, PA, Industrial Development Authority
Rev. (RHA Nursing Home), 8.5%, 2032 1,190 1,148,707
- -------------------------------------------------------------------------------------------------
Clarion, PA, Industrial Development Authority Rev.
(Beverly Enterprises, Inc.), 7.5%, 2012 1,950 1,987,967
- -------------------------------------------------------------------------------------------------
Colorado Health Facilities Authority Rev. (Covenant
Retirement Communities, Inc.), 6.125%, 2033 1,500 1,505,895
- -------------------------------------------------------------------------------------------------
Colorado Health Facilities Authority Rev. (National
Benevolent), 7.125%, 2030* 1,300 1,027,000
- -------------------------------------------------------------------------------------------------
Contra Costa County, CA, Residential Rental Facilities
Rev. (Cypress Meadows), 7%, 2028* 3,000 2,625,120
- -------------------------------------------------------------------------------------------------
Cumberland County, PA, Retirement Community Rev.
(Wesley Affiliated Services), 7.25%, 2035 2,725 2,754,948
- -------------------------------------------------------------------------------------------------
Daphne, AL, Special Care Facilities Financing Authority
(1st Mortgage Presbyterian), 0%, 2008+(++) 29,975 26,166,377
- -------------------------------------------------------------------------------------------------
Daphne, AL, Special Care Facilities Financing Authority
(2nd Mortgage Presbyterian), 0%, 2008+(++) 4,500 3,928,230
- -------------------------------------------------------------------------------------------------
Daphne, AL, Special Care Facilities Financing Authority
(Presbyterian Hospital), 0%, 2008+(++) 48,475 12,008,712
- -------------------------------------------------------------------------------------------------
Fulton County, GA, Residential Care Facilities
(Canterbury Court), "A", 6.125%, 2034 1,020 1,007,117
- -------------------------------------------------------------------------------------------------
Goldsboro, NC, Housing Authority Rev. (North Carolina
Housing Foundation, Inc.), 7.25%, 2029 2,135 1,827,517
- -------------------------------------------------------------------------------------------------
Grand Prairie, TX, Housing Finance Corp., Independent
Senior Living Center Rev., 7.5%, 2017 1,900 1,843,190
- -------------------------------------------------------------------------------------------------
Illinois Health Facilities Authority Rev. (Lutheran
Senior Ministries), 7.375%, 2031 2,700 2,660,445
- -------------------------------------------------------------------------------------------------
Iowa Finance Authority, Health Care Facilities Rev.
(Care Initiatives Project), 5.75%, 2018 2,520 2,301,214
- -------------------------------------------------------------------------------------------------
Iowa Finance Authority, Health Care Facilities Rev.
(Care Initiatives Project), 9.25%, 2025 5,675 6,641,169
- -------------------------------------------------------------------------------------------------
Jacksonville, FL, Health Facilities Authority,
Industrial Development Rev. (National Benevolent),
6.4%, 2016* 1,625 1,283,750
- -------------------------------------------------------------------------------------------------
Jacksonville, FL, Health Facilities Authority,
Industrial Development Rev. (National Benevolent), 7%, 2022* 1,000 790,000
- -------------------------------------------------------------------------------------------------
Jefferson County, KY, Health Care Authority Rev.
(Beverly Enterprises, Inc.), 5.875%, 2007 115 113,135
- -------------------------------------------------------------------------------------------------
Kansas City, MO, Industrial Development Authority Rev.
(Bishop Spencer Place, Inc.), 8%, 2024 7,720 7,884,204
- -------------------------------------------------------------------------------------------------
Lenexa, KS, Health Care Facilities Rev. (Lakeview
Village, Inc.), 6.25%, 2026 1,500 1,497,915
- -------------------------------------------------------------------------------------------------
Lenexa, KS, Health Care Facilities Rev. (Lakeview
Village, Inc.), 6.875%, 2032 1,250 1,290,363
- -------------------------------------------------------------------------------------------------
Loves Park, IL (Hoosier Care), 7.125%, 2034 1,935 1,579,463
- -------------------------------------------------------------------------------------------------
Luzerne County, PA, Industrial Development Authority
Rev. (Beverly Enterprise, Inc.), 6.75%, 2008 1,100 1,100,528
- -------------------------------------------------------------------------------------------------
Maine Health & Higher Educational Facilities Rev.
(Piper Shores), 7.5%, 2019 1,500 1,561,545
- -------------------------------------------------------------------------------------------------
Massachusetts Industrial Finance Agency Rev. (GF/
Revere, Inc.), 8.875%, 2025 7,135 7,311,020
- -------------------------------------------------------------------------------------------------
Massachusetts Industrial Finance Agency Rev.
(Glenmeadow Retirement Community), 8.375%, 2006(++) 2,300 2,564,914
- -------------------------------------------------------------------------------------------------
Massachusetts Industrial Finance Agency Rev.
(Glenmeadow Retirement Community), 8.625%, 2006(++) 3,520 3,938,634
- -------------------------------------------------------------------------------------------------
Massachusetts Industrial Finance Agency Rev. (Metro
Health Foundation, Inc.), 6.75%, 2027 5,830 5,451,691
- -------------------------------------------------------------------------------------------------
Millbrae, CA, Residential Facilities Rev. (Magnolia of
Millbrae), 7.375%, 2027 7,300 7,553,237
- -------------------------------------------------------------------------------------------------
Mocksville, NC (Housing Foundation, Inc.), 7.25%, 2029 2,115 1,810,398
- -------------------------------------------------------------------------------------------------
Monongalia County, WV, Health Facilities Rev. (Beverly
Enterprises, Inc.), 5.875%, 2007 405 399,443
- -------------------------------------------------------------------------------------------------
Montgomery County, PA, Higher Education & Health
Authority Rev. (AHF/Montgomery), 10.5%, 2020 2,220 2,197,112
- -------------------------------------------------------------------------------------------------
New Hampshire Business Finance Authority, Health Care
Facilities Rev. (Metro Health Foundation, Inc.), 6.55%,
2028 2,845 2,642,208
- -------------------------------------------------------------------------------------------------
New Hampshire Industrial Development Authority (Tall
Pines), 11.25%, 2016* 1,265 20,240
- -------------------------------------------------------------------------------------------------
New Jersey Economic Development Authority Rev.
(Courthouse Convalescent Center), 8.7%, 2014 1,350 1,356,156
- -------------------------------------------------------------------------------------------------
New Jersey Economic Development Authority Rev., First
Mortgage Gross Rev. (Wanaque Convalescent Center),
8.5%, 2009 700 705,425
- -------------------------------------------------------------------------------------------------
New Jersey Economic Development Authority Rev., First
Mortgage Gross Rev. (Wanaque Convalescent Center),
8.6%, 2011 1,000 1,008,130
- -------------------------------------------------------------------------------------------------
New Jersey Health Care Facilities Financing Authority
Rev. (Cherry Hill), 8%, 2027 4,000 3,698,520
- -------------------------------------------------------------------------------------------------
Oklahoma Development Finance Authority Rev. (Inverness
Village), 8%, 2032 2,990 2,755,165
- -------------------------------------------------------------------------------------------------
Reedley, CA, Certificate of Participation (Mennonite
Home), 7.5%, 2026 5,020 5,030,191
- -------------------------------------------------------------------------------------------------
Santa Fe, NM, Industrial Development Rev. (Casa Real
Nursing Home), 9.75%, 2013 1,520 1,536,583
- -------------------------------------------------------------------------------------------------
Shelby County, TN, Health Educational Rev. (Germantown
Village), 7.25%, 2034 950 964,203
- -------------------------------------------------------------------------------------------------
Shelby County, TN, Nursing Home Rev. (Beverly
Enterprises, Inc.), 7.4%, 2011 880 875,213
- -------------------------------------------------------------------------------------------------
State of Hawaii, Department of Budget & Finance,
Special Purpose Rev. (Kahala Nui Senior Living
Community), 8%, 2033 1,500 1,506,480
- -------------------------------------------------------------------------------------------------
Sterling, IL (Hoosier Care), 7.125%, 2034 1,350 1,101,951
- -------------------------------------------------------------------------------------------------
Waterford Township, MI, Economic Development Corp. Rev.
(Canterbury Health), 6%, 2039 3,125 2,279,344
- -------------------------------------------------------------------------------------------------
Wilkinsburg, PA, Municipal Authority Health Rev.
(Monroeville Christian), 8.25%, 2027 7,025 6,636,939
- -------------------------------------------------------------------------------------------------
$158,954,058
- -------------------------------------------------------------------------------------------------
Human Services - 1.7%
- -------------------------------------------------------------------------------------------------
California Statewide Communities Development Authority
(Prides Industries), 7.125%, 2016 $1,750 $1,778,473
- -------------------------------------------------------------------------------------------------
Cheneyville, LA, Westside Habilitation Center Rev.,
8.375%, 2013 4,690 4,793,274
- -------------------------------------------------------------------------------------------------
Lehigh County, PA, General Purpose Authority (Kidspeace
Obligation Group), 6%, 2018 3,550 3,262,912
- -------------------------------------------------------------------------------------------------
Montgomery County, PA, Industrial Development Authority
(Wordsworth Academy), 8%, 2024 2,850 2,838,087
- -------------------------------------------------------------------------------------------------
New Hapmshire Higher Educational & Health Facilities
Authority Rev. (Child & Family Services), 6.125%, 2019 1,265 1,278,105
- -------------------------------------------------------------------------------------------------
New York City Industrial Development Agency Rev.
(Special Needs Facilities Pooled Program), 6.1%, 2012 1,955 1,996,720
- -------------------------------------------------------------------------------------------------
Orange County, FL, Health Facilities Authority Rev.
(GF/Orlando Healthcare Facilities), 9%, 2031 2,185 2,219,283
- -------------------------------------------------------------------------------------------------
Orange County, FL, Health Facilities Authority Rev.
(GF/Orlando), 8.875%, 2021 1,925 1,938,129
- -------------------------------------------------------------------------------------------------
Osceola County, FL, Industrial Development Authority
Rev. (Community Provider), 7.75%, 2017 1,149 1,160,456
- -------------------------------------------------------------------------------------------------
Philadelphia, PA, Industrial Development Authority
Rev., 6.125%, 2019 1,430 1,115,400
- -------------------------------------------------------------------------------------------------
$22,380,839
- -------------------------------------------------------------------------------------------------
Industrial Revenue - Airlines - 1.4%
- -------------------------------------------------------------------------------------------------
Alliance Airport Authority, Inc., Special Facilities
Rev. (AMR Corp.), 7.5%, 2029 $1,500 $1,046,280
- -------------------------------------------------------------------------------------------------
Cleveland, OH, Special Facilities Rev. (Continental
Airlines, Inc.), 5.375%, 2027 2,500 1,646,275
- -------------------------------------------------------------------------------------------------
Dallas Fort Worth, TX, International Airport Facilitiy
Improvement Corp. (Delta Airlines, Inc.), 7.625%, 2021 1,150 536,705
- -------------------------------------------------------------------------------------------------
Dallas Fort Worth, TX, International Airport Facility
Improvement Corp. (American Airlines, Inc.), 6.375%,
2035 5,315 3,313,371
- -------------------------------------------------------------------------------------------------
Dallas Fort Worth, TX, International Airport Facility
Improvement Corp. (American Airlines, Inc.) "B", 6.05%, 2029 1,505 1,436,839
- -------------------------------------------------------------------------------------------------
Los Angeles, CA, Regional Airport Lease Rev. (American
Airlines, Inc.), 7%, 2012 1,700 1,506,217
- -------------------------------------------------------------------------------------------------
Los Angeles, CA, Regional Airport Lease Rev. (AMR
Corp.), 7.5%, 2024 3,800 3,230,190
- -------------------------------------------------------------------------------------------------
New Jersey Economic Development Authority, Special
Facilities Rev. (Continental Airlines, Inc.), 6.25%, 2019 3,205 2,540,956
- -------------------------------------------------------------------------------------------------
New Jersey Economic Development Authority, Special
Facilities Rev. (Continental Airlines, Inc.), 6.25%, 2029 725 528,648
- -------------------------------------------------------------------------------------------------
New York City, NY, Industrial Development Agencies Rev.
(Continental Airlines, Inc.), 7.25%, 2008 750 724,965
- -------------------------------------------------------------------------------------------------
New York City, NY, Industrial Development Agencies Rev.
(Continental Airlines, Inc.), 8%, 2012 950 898,805
- -------------------------------------------------------------------------------------------------
Tulsa, OK, Municipal Airport Trust Rev. (AMR Corp.),
5.8%, 2035 1,145 1,139,275
- -------------------------------------------------------------------------------------------------
$18,548,526
- -------------------------------------------------------------------------------------------------
Industrial Revenue - Chemicals - 1.2%
- -------------------------------------------------------------------------------------------------
Brazos River, TX, Harbor Navigation District (Dow
Chemical Co.), 5.7%, 2033 $5,000 $5,359,800
- -------------------------------------------------------------------------------------------------
Power County, ID, Pollution Control Rev. (FMC Corp.),
5.625%, 2014 1,000 999,850
- -------------------------------------------------------------------------------------------------
Red River Authority, TX, Pollution Control Rev.
(Celanese Project), 6.7%, 2030 6,000 5,860,920
- -------------------------------------------------------------------------------------------------
Sweetwater County, WY, Solid Waste Disposal Rev. (FMC
Corp.), 7%, 2024 3,835 3,899,927
- -------------------------------------------------------------------------------------------------
$16,120,497
- -------------------------------------------------------------------------------------------------
Industrial Revenue - Environmental Services - 1.6%
- -------------------------------------------------------------------------------------------------
California Pollution Control Financing Authority, Solid
Waste Disposal Rev. (Browning Ferris, Inc.), 5.8%, 2016 $5,000 $4,639,200
- -------------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority, Solid Waste Rev.
(Waste Disposal Management, Inc.), 5.7%, 2018 540 546,399
- -------------------------------------------------------------------------------------------------
Henrico County, VA, Industrial Development Authority
Rev. (Browning Ferris, Inc.), 5.3%, 2011 3,000 3,021,900
- -------------------------------------------------------------------------------------------------
Henrico County, VA, Industrial Development Authority
Rev. (Browning Ferris, Inc.), 5.45%, 2014 2,000 1,835,560
- -------------------------------------------------------------------------------------------------
Massachusetts Development Finance Agency Rev., Resource
Recovery Rev. (Waste Management, Inc.),
6.9%, 2029 1,700 1,915,186
- -------------------------------------------------------------------------------------------------
Nevada Department of Business (Republic Services,
Inc.), 5.625%, 2026 2,000 2,062,460
- -------------------------------------------------------------------------------------------------
New Morgan, PA, Industrial Development Authority, Solid
Waste Disposal Rev. (New Morgan Landfill Co, Inc./
Browning Ferris, Inc.), 6.5%, 2019 2,500 2,449,525
- -------------------------------------------------------------------------------------------------
Ohio Solid Waste Rev., Ohio Water Development Authority
Rev. (Waste Management), 4.85%, 2022 3,000 3,108,960
- -------------------------------------------------------------------------------------------------
Schuylkill County, PA, Industrial Development Authority
Rev. (Waste Managment, Inc.), 5.1%, 2019 1,000 1,036,450
- -------------------------------------------------------------------------------------------------
Tooele County, UT, Pollution Control Rev. (Laidlaw
Environmental Services), 7.55%, 2027* 5,000 225,000
- -------------------------------------------------------------------------------------------------
$20,840,640
- -------------------------------------------------------------------------------------------------
Industrial Revenue - Metals - 0.6%
- -------------------------------------------------------------------------------------------------
Burns Harbor, IN, Solid Waste Disposal Facilities Rev.
(Bethlehem Steel), 8%, 2024* $10,455 $13,069
- -------------------------------------------------------------------------------------------------
Cambria County, PA, Industrial Development Authority
Rev. (Bethlehem Steel), 7.5%, 2015* 3,890 4,863
- -------------------------------------------------------------------------------------------------
Indiana Development Finance Authority Rev. (Inland
Steel), 7.25%, 2011 5,000 4,570,400
- -------------------------------------------------------------------------------------------------
Mobile County, AL, Industrial Development Authority
Rev. (Ipsco, Inc.), 6.875%, 2030 2,850 2,903,951
- -------------------------------------------------------------------------------------------------
Ohio Solid Waste Rev. (Republic Engineered Steels,
Inc.), 8.25%, 2014* 7,000 70
- -------------------------------------------------------------------------------------------------
$7,492,353
- -------------------------------------------------------------------------------------------------
Industrial Revenue - Other - 3.3%
- -------------------------------------------------------------------------------------------------
Gulf Coast, TX, Waste Disposal Rev. (Valero Energy
Corp.), 6.65%, 2032 $1,500 $1,593,060
- -------------------------------------------------------------------------------------------------
Hardeman County, TN, Correctional Facilities Rev.,
7.75%, 2017 6,500 6,749,730
- -------------------------------------------------------------------------------------------------
Janesville, WI, Industrial Development Rev. (Simmons
Manufacturing Co.), 7%, 2017 3,900 3,944,850
- -------------------------------------------------------------------------------------------------
New Jersey Economic Development Authority, Economic
Development Rev. (Holt Hauling & Warehousing),
8.4%, 2015+** 4,000 2,280,000
- -------------------------------------------------------------------------------------------------
New Jersey Economic Development Authority, Economic
Development Rev. (Holt Hauling & Warehousing),
8.6%, 2017+** 8,000 4,560,000
- -------------------------------------------------------------------------------------------------
Park Creek Metropolitan District, CO, Rev., 7.875%,
2032## 6,090 6,183,969
- -------------------------------------------------------------------------------------------------
Philadelphia, PA, Industrial Development Authority Rev.
(Host Marriott LP), 7.75%, 2017 2,000 2,022,860
- -------------------------------------------------------------------------------------------------
Port Corpus Christ, TX, Industrial Development
Authority Rev. (Citgo Petroleum Corp.), 8.25%, 2031 2,300 2,408,169
- -------------------------------------------------------------------------------------------------
Spirit Lake, IA, Industrial Development Rev. (Crystal
Tips, Inc.), 9.75%, 2008(++) 7,737 9,515,474
- -------------------------------------------------------------------------------------------------
Tooele County, UT, Hazardous Waste Treatment Rev.
(Union Pacific Corp.), 5.7%, 2026 3,895 3,865,476
- -------------------------------------------------------------------------------------------------
$43,123,588
- -------------------------------------------------------------------------------------------------
Industrial Revenue - Paper - 4.3%
- -------------------------------------------------------------------------------------------------
Arkansas State Development Finance Authority,
Industrial Facilities Rev. (Potlatch Corp.), 7.75%,
2025 $1,200 $1,279,500
- -------------------------------------------------------------------------------------------------
Beauregard Parish, LA (Boise Cascade Corp.), 6.8%, 2027 3,250 3,302,033
- -------------------------------------------------------------------------------------------------
Butler, AL, Solid Waste Disposal Rev. (James River
Corp.), 8%, 2028 7,000 7,148,960
- -------------------------------------------------------------------------------------------------
Courtland, AL, Solid Waste Disposal Rev. (Champion
International Corp.), 6.375%, 2029 2,500 2,534,750
- -------------------------------------------------------------------------------------------------
De Soto Parish, LA, Environmental Improvement Rev.
(International Paper Co.), 6.35%, 2025 1,650 1,704,747
- -------------------------------------------------------------------------------------------------
Delta County, MI, Economic Development Corp.,
Environmental Improvements Rev. (Mead Westvaco
Escanaba), 6.45%, 2023 1,100 1,145,859
- -------------------------------------------------------------------------------------------------
Delta County, MI, Economic Development Corp.,
Environmental Improvements Rev. (Mead Westvaco
Escanaba), 6.25%, 2027 3,100 3,208,655
- -------------------------------------------------------------------------------------------------
Florence County, SC, Industrial Development Rev. (Stone
Container Corp.), 7.375%, 2007 860 874,276
- -------------------------------------------------------------------------------------------------
Green Bay, WI, Redevelopment Authority, Industrial Rev.
(Fort James), 5.6%, 2019 1,000 942,730
- -------------------------------------------------------------------------------------------------
Hodge, LA, Utilities Rev. (Stone Container Corp.),
7.45%, 2024 3,000 3,045,030
- -------------------------------------------------------------------------------------------------
Maine Finance Authority, Solid Waste Recycling Facility
Rev. (Bowater, Inc.), 7.75%, 2022 8,500 8,500,510
- -------------------------------------------------------------------------------------------------
Onondaga County, NY, Industrial Development Authority
Rev., Solid Waste Disposal Rev. (Solvay Paperboard
LLC), 6.8%, 2014 3,800 3,980,614
- -------------------------------------------------------------------------------------------------
Sabine River Authority Rev., Louisiana Water Facilities
(International Paper Co.), 6.2%, 2025 2,250 2,333,048
- -------------------------------------------------------------------------------------------------
Savannah, GA, Economic Development Authority Rev.
(Stone Container Corp.), 7.4%, 2026 7,500 7,596,750
- -------------------------------------------------------------------------------------------------
Wabash, IN, Solid Waste Disposal Rev. (Jefferson
Smurfit Corp.), 7.5%, 2026 2,000 2,013,500
- -------------------------------------------------------------------------------------------------
West Point, VA, Solid Waste Disposal Rev. (Chesapeake
Corp.), 6.25%, 2019 6,475 5,980,181
- -------------------------------------------------------------------------------------------------
$55,591,143
- -------------------------------------------------------------------------------------------------
Industrial Revenue - Retail - 0.2%
- -------------------------------------------------------------------------------------------------
Chester County, SC, Industrial Development Rev.
(Springs Industries, Inc.), 7.35%, 2014 $1,500 $1,506,825
- -------------------------------------------------------------------------------------------------
Chester County, SC, Industrial Development Rev.
(Springs Industries, Inc.), 7.8%, 2014 1,025 1,028,731
- -------------------------------------------------------------------------------------------------
$2,535,556
- -------------------------------------------------------------------------------------------------
Miscellaneous Revenue - Entertainment & Tourism - 2.4%
- -------------------------------------------------------------------------------------------------
California Statewide Communities Development Authority
Rev., East Valley Tourist (Cabazon Casino), "A", 9.25%,
2020## $3,845 $4,009,412
- -------------------------------------------------------------------------------------------------
Capital Trust Agency of Florida Rev. (Seminole Tribe
Convention), 10%, 2033 11,000 13,278,430
- -------------------------------------------------------------------------------------------------
Harris County-Houston, TX, Sports Authority Rev., MBIA,
0%, 2032 6,310 1,218,461
- -------------------------------------------------------------------------------------------------
Long Beach, CA (Aquarium of Pacific), 6.125%, 2005(++) 1,000 1,061,090
- -------------------------------------------------------------------------------------------------
Mississippi Development Bank, Special Obligation
(Diamond Lakes Utilities), 6.25%, 2017 3,600 3,649,140
- -------------------------------------------------------------------------------------------------
Nevada Department of Business & Industry Rev. (Las
Vegas Monorail), 7.375%, 2040 6,185 6,096,122
- -------------------------------------------------------------------------------------------------
Sandoval County, NM (Santa Ana Pueblo), 7.75%, 2015## 2,005 2,030,885
- -------------------------------------------------------------------------------------------------
$31,343,540
- -------------------------------------------------------------------------------------------------
Miscellaneous Revenue - Other - 1.3%
- -------------------------------------------------------------------------------------------------
Austin, TX, Convention Center (Convention Enterprises,
Inc.), 6.6%, 2021 $1,300 $1,371,058
- -------------------------------------------------------------------------------------------------
Austin, TX, Convention Center (Convention Enterprises,
Inc.), 6.7%, 2028 2,000 2,089,300
- -------------------------------------------------------------------------------------------------
Gallery Certificate Trust, PA, Parking Rev., FSA, 4.5%,
2013## 3,035 3,024,772
- -------------------------------------------------------------------------------------------------
Harris County, TX, Cultural Education Facility (Space
Center Houston), 9.25%, 2023 70 58,401
- -------------------------------------------------------------------------------------------------
New Jersey Economic Development Authority Rev.
(Kapowski Project), 6.8%, 2018 4,000 4,480,320
- -------------------------------------------------------------------------------------------------
Rockbridge County, VA, Industrial Development Authority
Rev. (Virginia Horse Center), 6.85%, 2021 2,300 2,133,319
- -------------------------------------------------------------------------------------------------
Southwestern Illinois Development Authority Rev., Solid
Waste Disposal Rev., 5.9%, 2014 2,330 2,358,822
- -------------------------------------------------------------------------------------------------
St. Louis County, MO, Industrial Development Authority
Rev. (Kiel Center Multipurpose Arena), 7.875%, 2024 1,000 1,014,840
- -------------------------------------------------------------------------------------------------
$16,530,832
- -------------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 2.9%
- -------------------------------------------------------------------------------------------------
Alexandria, VA, Redevelopment & Housing Finance
Authority Rev. (Buckingham Village), 5.5%, 2029 $3,360 $3,361,882
- -------------------------------------------------------------------------------------------------
Alexandria, VA, Redevelopment & Housing Finance
Authority Rev. (Jefferson Village Apartments), "B", 9%,
2018 1,860 1,845,622
- -------------------------------------------------------------------------------------------------
Charter Mac Equity Issuer Trust, 6.625%, 2009## 8,000 8,769,920
- -------------------------------------------------------------------------------------------------
Dallas Fort Worth, TX, Housing Corp., 8.5%, 2011 2,200 2,202,860
- -------------------------------------------------------------------------------------------------
Florida Multi-Family Housing Finance Agency Rev.
(Center Court Apartments), 8.5%, 2018 1,495 1,445,306
- -------------------------------------------------------------------------------------------------
Maplewood, RI, Housing Development Corp. (Terrace
Apartments), 6.9%, 2025 3,920 3,930,349
- -------------------------------------------------------------------------------------------------
Memphis, TN, Educational & Housing Facilities (Wesley
Highland Terrace), 8.5%, 2024 5,385 5,338,851
- -------------------------------------------------------------------------------------------------
Munimae TE Bond Subsidiaries LLC, 6.875%, 2009## 6,000 6,570,960
- -------------------------------------------------------------------------------------------------
Ridgeland, MS, Urban Renewal (Northbrook I & III
Apartments), 6.25%, 2029* 5,000 2,381,450
- -------------------------------------------------------------------------------------------------
Texas Housing & Community Board (Harbors & Plumtree),
10%, 2026+ 1,675 1,588,369
- -------------------------------------------------------------------------------------------------
$37,435,569
- -------------------------------------------------------------------------------------------------
Parking - 0.1%
- -------------------------------------------------------------------------------------------------
Rail Connections, Inc., MA Rev., 0%, 2009(++) $375 $223,853
- -------------------------------------------------------------------------------------------------
Rail Connections, Inc., MA Rev., 0%, 2009(++) 450 251,348
- -------------------------------------------------------------------------------------------------
Rail Connections, Inc., MA Rev., 0%, 2009(++) 975 509,213
- -------------------------------------------------------------------------------------------------
Rail Connections, Inc., MA Rev., 0%, 2009(++) 1,235 604,088
- -------------------------------------------------------------------------------------------------
$1,588,502
- -------------------------------------------------------------------------------------------------
Sales & Excise Tax Revenue - 0.1%
- -------------------------------------------------------------------------------------------------
Illinois Sales Tax, 6.25%, 2015 $1,500 $1,718,445
- -------------------------------------------------------------------------------------------------
Single Family Housing - Local - 1.0%
- -------------------------------------------------------------------------------------------------
California Rural Home Mortgage Finance Authority Rev.,
GNMA, 6.55%, 2030 $985 $1,037,806
- -------------------------------------------------------------------------------------------------
Chicago, IL, Single Family Mortgage Rev., GNMA, 7.05%, 2030 150 153,560
- -------------------------------------------------------------------------------------------------
Cook County, IL, Single Family Mortgage Rev., "A", 0%, 2015 325 97,978
- -------------------------------------------------------------------------------------------------
Corpus Christi, TX, Housing Finance Authority Rev.,
MBIA, 0%, 2011 3,395 1,723,302
- -------------------------------------------------------------------------------------------------
Escambia County, FL, Single Family Housing Rev., GNMA,
6.95%, 2024 610 652,981
- -------------------------------------------------------------------------------------------------
Jefferson County, TX, Housing Finance Corp., MBIA, 0%, 2015 1,090 327,065
- -------------------------------------------------------------------------------------------------
Jefferson Parish, LA, Single Family Mortgage Rev.,
GNMA, 6.625%, 2023 745 813,823
- -------------------------------------------------------------------------------------------------
Jefferson Parish, LA, Single Family Mortgage Rev.,
GNMA, 7.5%, 2026 360 377,320
- -------------------------------------------------------------------------------------------------
Jefferson Parish, LA, Single Family Mortgage Rev.,
GNMA, 6.75%, 2030 925 999,740
- -------------------------------------------------------------------------------------------------
Lee County, FL, Housing Finance Authority Rev., GNMA,
7%, 2031 220 225,232
- -------------------------------------------------------------------------------------------------
New Castle County, DE, Single Family Mortgage Rev.,
FGIC, 0%, 2016 90 26,627
- -------------------------------------------------------------------------------------------------
Pima County, AZ, Industrial Development Authority,
GNMA, 7.05%, 2030 930 958,328
- -------------------------------------------------------------------------------------------------
San Bernardino County, CA, Single Family Mortgage Rev.,
GNMA, 7.375%, 2020 35 35,952
- -------------------------------------------------------------------------------------------------
Sedgwick & Shawnee Counties, KS, Single Family Housing
Rev., GNMA, 6.875%, 2026 1,185 1,225,006
- -------------------------------------------------------------------------------------------------
Sedgwick & Shawnee Counties, KS, Single Family Housing
Rev., GNMA, 6.45%, 2029 665 720,587
- -------------------------------------------------------------------------------------------------
Sedgwick & Shawnee Counties, KS, Single Family Housing
Rev., GNMA, 6.45%, 2033 2,030 2,199,525
- -------------------------------------------------------------------------------------------------
Sedgwick & Shawnee Counties, KS, Single Family Housing
Rev., GNMA, 4%, 2035 1,940 2,081,989
- -------------------------------------------------------------------------------------------------
$13,656,821
- -------------------------------------------------------------------------------------------------
Single Family Housing - Other - 0.1%
- -------------------------------------------------------------------------------------------------
Texas Veteran Housing Assistance Program, 7%, 2025 $1,100 $1,125,410
- -------------------------------------------------------------------------------------------------
Single Family Housing - State - 2.2%
- -------------------------------------------------------------------------------------------------
California Housing Finance Agency Rev., Home Mortgage,
MBIA, 0%, 2027 $985 $280,016
- -------------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 7.15%, 2014 71 72,458
- -------------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 6.75%, 2021 350 352,349
- -------------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 5.9%, 2023 920 961,087
- -------------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 6.1%, 2023 485 503,673
- -------------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 6.55%, 2025 284 284,750
- -------------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 7.4%, 2027 180 180,376
- -------------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 7.15%, 2030 230 231,447
- -------------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 6.6%, 2032 990 1,027,323
- -------------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 6.55%, 2033 575 600,335
- -------------------------------------------------------------------------------------------------
Delaware Single Family Housing Authority Rev., 6.75%, 2024 895 913,974
- -------------------------------------------------------------------------------------------------
Louisiana Housing Finance Agency, Single Family
Mortgage Rev., GNMA, 7.55%, 2031 875 938,604
- -------------------------------------------------------------------------------------------------
Mississippi Home Corp. Rev., "A-2", GNMA, 6.5%, 2032 4,460 4,951,849
- -------------------------------------------------------------------------------------------------
Mississippi Home Corp. Rev., GNMA, 6.1%, 2034 4,100 4,207,297
- -------------------------------------------------------------------------------------------------
Missouri State Housing Development Commission, Single
Family Mortgage Rev. (Home Loan Program), 6.35%, 2032 870 914,126
- -------------------------------------------------------------------------------------------------
Missouri State Housing Development Commission, Single
Family Mortgage Rev. (Home Loan Program), GNMA, 6.7%, 2030 1,590 1,651,326
- -------------------------------------------------------------------------------------------------
Missouri State Housing Development Commission, Single
Family Mortgage Rev. (Home Loan Program), GNMA, 6.85%, 2032 660 725,050
- -------------------------------------------------------------------------------------------------
Missouri State Housing Development Commission, Single
Family Mortgage Rev. (Home Loan Program), GNMA, 6.75%, 2034 830 887,834
- -------------------------------------------------------------------------------------------------
Missouri State Housing Development Commission, Single
Family Mortgage Rev., GNMA, 7.45%, 2031 255 265,152
- -------------------------------------------------------------------------------------------------
New Hampshire Housing Finance Authority Rev., 5.875%, 2030 710 735,468
- -------------------------------------------------------------------------------------------------
New Hampshire Housing Finance Authority Rev., 6.3%, 2031 705 758,862
- -------------------------------------------------------------------------------------------------
New Mexico Mortgage Finance Authority Rev., GNMA,
6.35%, 2033 1,160 1,237,824
- -------------------------------------------------------------------------------------------------
North Dakota Housing Finance Agency Rev., Housing
Finance, 5%, 2033 2,030 2,046,443
- -------------------------------------------------------------------------------------------------
Oklahoma Housing Finance Agency, Single Family, 7.55%, 2028 495 526,017
- -------------------------------------------------------------------------------------------------
Phoenix, AZ, Single Family Mortgage Rev., GNMA, 6.1%, 2028 450 477,311
- -------------------------------------------------------------------------------------------------
Texas Housing & Community Affairs, Residential Mortgage
Rev., GNMA, 7.1%, 2021 3,265 3,391,388
- -------------------------------------------------------------------------------------------------
$29,122,339
- -------------------------------------------------------------------------------------------------
Solid Waste Revenue - 1.3%
- -------------------------------------------------------------------------------------------------
Delaware County, PA, Industrial Development Authority
Rev. (American Ref-fuel), 6.2%, 2019 $3,900 $4,012,554
- -------------------------------------------------------------------------------------------------
Delaware County, PA, Industrial Development Authority
Rev., Resource Recovery Facilities, (American Ref-fuel)
"A", 6.1%, 2005 3,460 3,489,998
- -------------------------------------------------------------------------------------------------
Hudson County, NJ, Solid Waste System Rev., 6%, 2019 2,000 1,947,820
- -------------------------------------------------------------------------------------------------
Massachusetts Industrial Finance Agency Rev., Resource
Recovery Rev. (Ogden Haverhill Associates), 5.5%, 2013 2,475 2,454,359
- -------------------------------------------------------------------------------------------------
Massachusetts Industrial Finance Agency Rev., Resource
Recovery Rev. (Ogden Haverhill Associates), 5.6%, 2019 5,425 5,280,261
- -------------------------------------------------------------------------------------------------
$17,184,992
- -------------------------------------------------------------------------------------------------
State & Local Appropriation - 3.3%
- -------------------------------------------------------------------------------------------------
Alabama Building Renovation Authority, AMBAC, 6%, 2017 $1,805 $2,054,722
- -------------------------------------------------------------------------------------------------
Alabama Building Renovation Authority, AMBAC, 6%, 2018 1,155 1,314,217
- -------------------------------------------------------------------------------------------------
Chicago, IL, Public Building Commerce Rev., RITES,
FGIC, 8.4803%, 2017+(+) 4,500 5,552,550
- -------------------------------------------------------------------------------------------------
College Park, GA (Civic Center), AMBAC, 5.75%, 2020 3,000 3,317,100
- -------------------------------------------------------------------------------------------------
Delaware Valley, PA, Regional Finance Authority, RITES,
AMBAC, 9.525%, 2018(+) 7,000 8,810,620
- -------------------------------------------------------------------------------------------------
Essex County, NJ, RITES, FGIC, 10.1092%, 2020+(+) 6,000 7,335,000
- -------------------------------------------------------------------------------------------------
Golden State Tobacco Securization, Tobacco Settlement,
5.375%, 2028 2,500 2,500,625
- -------------------------------------------------------------------------------------------------
Harris County, TX, 5.8%, 2014 1,496 1,454,992
- -------------------------------------------------------------------------------------------------
Harris County, TX, 5.625%, 2020 2,575 2,456,128
- -------------------------------------------------------------------------------------------------
Houston, TX, Certificates of Participation, 6.3%, 2020 5,000 5,471,750
- -------------------------------------------------------------------------------------------------
Northumberland County, PA (Country Careers And Arts
Center), 6.65%, 2020 1,210 1,246,324
- -------------------------------------------------------------------------------------------------
Northumberland County, PA (Mountain View Manor),
7%, 2020 1,000 1,031,120
- -------------------------------------------------------------------------------------------------
Shawnee County, KS (Community Mental Health Center,
Inc.), 5.35%, 2019 250 230,250
- -------------------------------------------------------------------------------------------------
$42,775,398
- -------------------------------------------------------------------------------------------------
Student Loan Revenue - 1.1%
- -------------------------------------------------------------------------------------------------
Access to Loans for Learning, California Student Loan
Rev., 7.95%, 2030 $2,700 $2,775,924
- -------------------------------------------------------------------------------------------------
Arizona Student Loan Acquisition Authority, Student
Loan Rev., 7.25%, 2010 2,970 3,044,369
- -------------------------------------------------------------------------------------------------
Arizona Student Loan Acquisition Authority, Student
Loan Rev., 7.625%, 2010 4,610 4,726,356
- -------------------------------------------------------------------------------------------------
Arizona Student Loan Acquisition Authority, Student
Loan Rev., 6.15%, 2029 1,500 1,559,205
- -------------------------------------------------------------------------------------------------
South Dakota Student Loan Rev., Education Loans, Inc.,
5.6%, 2020 2,700 2,731,158
- -------------------------------------------------------------------------------------------------
$14,837,012
- -------------------------------------------------------------------------------------------------
Tax Assessment - 3.5%
- -------------------------------------------------------------------------------------------------
Broadview, IL, Tax Increment Rev., 5.25%, 2012 $4,180 $4,319,110
- -------------------------------------------------------------------------------------------------
Broadview, IL, Tax Increment Rev., 5.375%, 2015 3,400 3,483,402
- -------------------------------------------------------------------------------------------------
Capital Region Community Development District of
Florida, Capital Improvement Rev., 5.95%, 2006 580 586,426
- -------------------------------------------------------------------------------------------------
Capital Region Community Development District of
Florida, Capital Improvement Rev., 6.85%, 2031 720 761,047
- -------------------------------------------------------------------------------------------------
Double Branch Community Development, District of
Florida, 5.6%, 2007 580 589,877
- -------------------------------------------------------------------------------------------------
Fishhawk Community Development District of Florida,
5.125%, 2009 1,095 1,095,471
- -------------------------------------------------------------------------------------------------
Greyhawk Landing Community Development of Florida,
6.25%, 2009 950 968,573
- -------------------------------------------------------------------------------------------------
Heritage Harbour South Community of Florida, Capital
Improvement, 5.4%, 2008 1,935 1,956,304
- -------------------------------------------------------------------------------------------------
Hyland Hills Metropolitan Park & Recreation District of
Colorado, 6.75%, 2015 2,500 2,644,250
- -------------------------------------------------------------------------------------------------
Katy, TX, Development Authority Rev., 5.8%, 2011 2,750 2,846,938
- -------------------------------------------------------------------------------------------------
Katy, TX, Development Authority Rev., 6%, 2018 6,000 6,094,860
- -------------------------------------------------------------------------------------------------
Killarney Community Development District, FL, "B",
5.125%, 2009 1,130 1,128,734
- -------------------------------------------------------------------------------------------------
Lake Elsinore, CA, Public Financing Authority, 7.1%, 2020 2,375 2,503,939
- -------------------------------------------------------------------------------------------------
Lakes By The Bay South Community of Florida, 5.3%, 2009 1,875 1,878,731
- -------------------------------------------------------------------------------------------------
Markham, IL, Tax Increment Rev., 9%, 2012 2,250 2,283,638
- -------------------------------------------------------------------------------------------------
Middle Village, FL, Community Development District
Rev., 5.8%, 2022 900 897,660
- -------------------------------------------------------------------------------------------------
Panther Trace, FL, Community Development District Rev.,
5.4%, 2008 2,095 2,095,084
- -------------------------------------------------------------------------------------------------
Panther Trace, FL, Community Development District Rev.,
6.5%, 2009 755 767,782
- -------------------------------------------------------------------------------------------------
Parkway Center, FL, Community Development District
Rev., 5.625%, 2014 3,080 3,062,629
- -------------------------------------------------------------------------------------------------
Preserve At Wilderness Lake, FL, 6.2%, 2008 660 669,319
- -------------------------------------------------------------------------------------------------
Renaissance Community Development of Florida, "B",
6.25%, 2008 2,275 2,342,590
- -------------------------------------------------------------------------------------------------
Reunion East Community Development District, FL,
Special Assessment, 5.9%, 2007 1,070 1,088,340
- -------------------------------------------------------------------------------------------------
Sterling Hill Community Development District of
Florida, Capital Improvement Rev., 5.5%, 2010 1,710 1,724,279
- -------------------------------------------------------------------------------------------------
$45,788,983
- -------------------------------------------------------------------------------------------------
Tax - Other - 0.4%
- -------------------------------------------------------------------------------------------------
Black Hawk, CO, Device Tax Rev., 5.625%, 2021 $2,750 $2,645,335
- -------------------------------------------------------------------------------------------------
Virgin Islands Public Finance Authority Rev., 6%, 2006 500 524,465
- -------------------------------------------------------------------------------------------------
Virgin Islands Public Finance Authority Rev., 5.875%, 2018 1,500 1,538,070
- -------------------------------------------------------------------------------------------------
$4,707,870
- -------------------------------------------------------------------------------------------------
Tobacco - 3.0%
- -------------------------------------------------------------------------------------------------
Badger Tobacco, WI (Asset Securitization Corp.),
6.125%, 2027 $6,525 $6,009,134
- -------------------------------------------------------------------------------------------------
California Statewide Financing Authority, Tobacco
Settlement, 5.625%, 2029 4,665 3,899,753
- -------------------------------------------------------------------------------------------------
District of Columbia, Tobacco Settlement, 6.25%, 2024 3,785 3,485,796
- -------------------------------------------------------------------------------------------------
Golden State Tobacco Securization, Tobacco Settlement,
7.8%, 2042 3,000 3,047,310
- -------------------------------------------------------------------------------------------------
Iowa Tobacco Settlement Authority, 5.3%, 2025 5,000 4,026,700
- -------------------------------------------------------------------------------------------------
Louisiana Tobacco Settlement Authority, 5.5%, 2030 4,915 4,162,514
- -------------------------------------------------------------------------------------------------
Louisiana Tobacco Settlement Financing Corp., Asset
Backed, "B", 5.875%, 2039 4,325 3,530,714
- -------------------------------------------------------------------------------------------------
New Jersey Tobacco Settlement Authority, 5.75%, 2032 6,025 5,258,198
- -------------------------------------------------------------------------------------------------
South Carolina Tobacco Settlement Authority, 6.375%, 2028 3,500 3,030,125
- -------------------------------------------------------------------------------------------------
Southern California Tobacco Settlement Authority,
5.25%, 2027 2,310 2,193,715
- -------------------------------------------------------------------------------------------------
Washington Tobacco Settlement Authority, 6.5%, 2026 1,110 1,037,450
- -------------------------------------------------------------------------------------------------
$39,681,409
- -------------------------------------------------------------------------------------------------
Toll Roads - 3.7%
- -------------------------------------------------------------------------------------------------
Arapahoe County, CO, Capital Improvement (Highway
Rev.), 0%, 2005(++) $69,000 $14,155,350
- -------------------------------------------------------------------------------------------------
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev. 0s to 2005, 7.15% to 2013, 0%, 2010(++) 5,000 5,872,400
- -------------------------------------------------------------------------------------------------
New Jersey Turnpike Authority, RITES, MBIA, 9.2123%,
2020+(+) 5,000 5,520,600
- -------------------------------------------------------------------------------------------------
Pocahontas Parkway Assn., VA, Toll Road Rev., 0%, 2011 2,700 1,175,607
- -------------------------------------------------------------------------------------------------
Pocahontas Parkway Assn., VA, Toll Road Rev., 0%, 2012 2,100 1,143,009
- -------------------------------------------------------------------------------------------------
Pocahontas Parkway Assn., VA, Toll Road Rev., 0%, 2012 1,700 657,662
- -------------------------------------------------------------------------------------------------
Pocahontas Parkway Assn., VA, Toll Road Rev., 0%, 2013 7,000 3,507,980
- -------------------------------------------------------------------------------------------------
Pocahontas Parkway Assn., VA, Toll Road Rev., 0%, 2014 5,100 2,372,316
- -------------------------------------------------------------------------------------------------
Pocahontas Parkway Assn., VA, Toll Road Rev., 0%, 2015 7,250 3,118,225
- -------------------------------------------------------------------------------------------------
Pocahontas Parkway Assn., VA, Toll Road Rev., 0%, 2016 2,000 796,880
- -------------------------------------------------------------------------------------------------
San Joaquin Hills, CA, Toll Road Rev. (Transportation
Corridor Agency), 0%, 2011(++) 13,400 10,517,660
- -------------------------------------------------------------------------------------------------
$48,837,689
- -------------------------------------------------------------------------------------------------
Transportation - Special Tax - 0.9%
- -------------------------------------------------------------------------------------------------
Telluride, CO (Gondola Transit Co.), 9%, 2006(++) $2,010 $2,242,256
- -------------------------------------------------------------------------------------------------
Telluride, CO, Real Estate Transfer Assessment Rev.
(Gondola Transit Co.), 11.5%, 2012(++) 6,000 8,852,700
- -------------------------------------------------------------------------------------------------
Texas Department of Transportation, 7%, 2012 161 164,248
- -------------------------------------------------------------------------------------------------
$11,259,204
- -------------------------------------------------------------------------------------------------
Universities - Colleges - 2.4%
- -------------------------------------------------------------------------------------------------
California Educational Facilities Authority Rev. (L.A.
College of Chiropractic), 5.6%, 2017 $2,000 $1,884,880
- -------------------------------------------------------------------------------------------------
Houston, TX, Community College Systems, MBIA,
7.875%, 2025 9,150 11,439,788
- -------------------------------------------------------------------------------------------------
Illinois Educational Facilities Authority Rev.
(Augustana College), 5.625%, 2022 1,300 1,334,632
- -------------------------------------------------------------------------------------------------
Illinois Educational Facilities Authority Rev.
(Columbia), 6.875%, 2017 750 763,620
- -------------------------------------------------------------------------------------------------
Indiana State Educational Facilities Authority Rev.
(Manchester College), 5.75%, 2018 1,000 1,014,990
- -------------------------------------------------------------------------------------------------
Islip, NY, Community Development Agency Rev. (New York
Institute of Technology), 7.5%, 2006(++) 6,000 6,636,300
- -------------------------------------------------------------------------------------------------
Massachusetts Development Finance Agency Rev. (Eastern
Nazarene College), 5.625%, 2019 1,235 1,095,309
- -------------------------------------------------------------------------------------------------
New Hampshire Higher Educational & Health Facilities
Authority Rev. (Franklin Pierce Law Center), 5.5%, 2018 1,200 1,247,784
- -------------------------------------------------------------------------------------------------
New Hampshire Higher Educational & Health Facilities
Authority Rev. (New Hampshire College), 6.3%, 2016 1,690 1,759,003
- -------------------------------------------------------------------------------------------------
Savannah, GA, Economic Development Authority Rev.
(College of Art & Design, Inc.), 6.2%, 2009 820 906,420
- -------------------------------------------------------------------------------------------------
Savannah, GA, Economic Development Authority Rev.
(College of Art & Design, Inc.), 6.5%, 2013 2,000 2,338,080
- -------------------------------------------------------------------------------------------------
State of Massachusetts, Development Finance Agency Rev.
(Eastern Nazarene College), 5.625%, 2029 1,250 1,018,638
- -------------------------------------------------------------------------------------------------
$31,439,444
- -------------------------------------------------------------------------------------------------
Universities - Dormitories - 0.1%
- -------------------------------------------------------------------------------------------------
Illinois Educational Facilities Authority, Educational
Advancement Fund (University Center Project), 6.625%, 2017 $1,500 $1,606,035
- -------------------------------------------------------------------------------------------------
Universities - Secondary Schools - 1.9%
- -------------------------------------------------------------------------------------------------
California Statewide Communities, Development Authority
Rev. (Aspire Public Schools Lodi Project), 7.25%, 2032 $4,695 $4,755,284
- -------------------------------------------------------------------------------------------------
California Statewide Communities, Development Authority
Rev. (Escondido Charter High School), 7.5%, 2023 1,965 1,965,275
- -------------------------------------------------------------------------------------------------
California Statewide Communities, Development Authority
Rev. (Escondido Charter High School), 7.5%, 2036 3,485 3,490,018
- -------------------------------------------------------------------------------------------------
Illinois Development Finance Authority, Economic
Development Rev. (Latin School of Chicago), 5.6%, 2018 850 882,870
- -------------------------------------------------------------------------------------------------
Illinois Development Finance Authority, Economic
Development Rev. (Latin School of Chicago), 5.65%, 2028 1,730 1,672,685
- -------------------------------------------------------------------------------------------------
Massachusetts Development Finance Agency Rev.
(Williston Northampton School), 6.5%, 2028 1,400 1,454,586
- -------------------------------------------------------------------------------------------------
Michigan Municipal Bond Authority Rev. (Detroit Academy
of Arts & Sciences), 8%, 2031 2,700 2,597,481
- -------------------------------------------------------------------------------------------------
Michigan Municipal Bond Authority Rev. (YMCA Service
Learning Academy), 7.625%, 2021 1,150 1,150,391
- -------------------------------------------------------------------------------------------------
Michigan Municipal Bond Authority Rev. (YMCA Service
Learning Academy), 7.75%, 2031 2,450 2,456,811
- -------------------------------------------------------------------------------------------------
Pima County, AZ, Industrial Development Authority
Education Rev. (Arizona Charter Schools), 6.4%, 2013 1,065 1,077,663
- -------------------------------------------------------------------------------------------------
Pima County, AZ, Industrial Development Authority
Education Rev. (Arizona Charter Schools), "C", 6.75%,
2031 3,000 3,041,790
- -------------------------------------------------------------------------------------------------
$24,544,854
- -------------------------------------------------------------------------------------------------
Utilities - Cogeneration - 3.3%
- -------------------------------------------------------------------------------------------------
Alaska Industrial Development & Export Authority, 5.7%,
2012 $1,230 $1,178,069
- -------------------------------------------------------------------------------------------------
Alaska Industrial Development & Export Authority, Power
Rev., 5.875%, 2032 1,800 1,540,278
- -------------------------------------------------------------------------------------------------
Carbon County, PA, Industrial Development Authority
Rev. (Panther Creek Partners), 6.65%, 2010 7,605 8,197,582
- -------------------------------------------------------------------------------------------------
Klamath Falls, OR, Electric Rev. (Klamath
Cogeneration), 6%, 2025 6,765 6,546,491
- -------------------------------------------------------------------------------------------------
Mecklenburg County, VA, Industrial Development
Authority Rev. (UAE Mecklenburg, LP), 6.5%, 2017 2,800 2,837,044
- -------------------------------------------------------------------------------------------------
Ohio Water Development Authority (Bay Shore Power),
5.875%, 2020 2,000 1,860,040
- -------------------------------------------------------------------------------------------------
Pennsylvania Economic Development Financing Authority
Rev., Resources Recovery Rev. (Northampton Generating),
6.5%, 2013 2,300 2,331,855
- -------------------------------------------------------------------------------------------------
Pennsylvania Economic Development Financing Authority
Rev., Resources Recovery Rev. (Northampton Generating),
6.6%, 2019 5,000 5,053,700
- -------------------------------------------------------------------------------------------------
Pittsylvania County, VA, Industrial Development
Authority Rev. (Multi-trade of Pittsylvania), 7.55%, 2019 10,000 10,360,300
- -------------------------------------------------------------------------------------------------
Port Authority NY & NJ (KIAC), 6.75%, 2019 1,750 1,792,718
- -------------------------------------------------------------------------------------------------
Suffolk County, NY, Industrial Development Agency
(Nissequogue Cogen Partners Facility), 5.3%, 2013 1,750 1,703,835
- -------------------------------------------------------------------------------------------------
$43,401,912
- -------------------------------------------------------------------------------------------------
Utilities - Investor Owned - 6.0%
- -------------------------------------------------------------------------------------------------
Beaver County, PA, Pollution Control Rev. (Toledo
Edison), 7.75%, 2020 $1,500 $1,624,890
- -------------------------------------------------------------------------------------------------
Brazos River Authority, TX, Pollution Control Rev.
(Texas Utility Co.), 7.7%, 2033 2,225 2,522,216
- -------------------------------------------------------------------------------------------------
Brazos River Authority, TX, Pollution Control Rev.
(Texas Utility Co.), "B", 6.3%, 2032 1,250 1,298,175
- -------------------------------------------------------------------------------------------------
Brazos River Authority, TX, Pollution Control Rev.
(Texas Utility Co.), "C", 6.75%, 2038 3,500 3,649,135
- -------------------------------------------------------------------------------------------------
Calcasieu Parish, LA, Industrial Development Board,
Pollution Control Rev. (Entergy Gulf States, Inc.),
5.45%, 2010 4,800 4,900,992
- -------------------------------------------------------------------------------------------------
California Pollution Control Financing Authority,
Pollution Control Rev. (Pacific Gas & Electric Co.),
MBIA, 5.35%, 2016 3,400 3,598,390
- -------------------------------------------------------------------------------------------------
California Pollution Control Financing Authority,
Pollution Control Rev. (Southern California Edison
Co.), 6.4%, 2024 4,000 4,058,960
- -------------------------------------------------------------------------------------------------
Clark County, NV, Industrial Development Rev. (Nevada
Power Co.), FGIC, 6.7%, 2022 4,000 4,012,080
- -------------------------------------------------------------------------------------------------
Farmington, NM, Pollution Control Rev. (New Mexico
Public Service), 6.95%, 2020 3,000 3,127,830
- -------------------------------------------------------------------------------------------------
Farmington, NM, Pollution Control Rev. (New Mexico
Public Service), 5.8%, 2022 5,890 5,926,047
- -------------------------------------------------------------------------------------------------
Farmington, NM, Pollution Control Rev. (New Mexico
Public Services), "A", 6.3%, 2016 3,240 3,453,775
- -------------------------------------------------------------------------------------------------
Forsyth, MT, Pollution Control Rev. (Portland General),
5.2%, 2033 770 803,849
- -------------------------------------------------------------------------------------------------
Maricopa County, AZ, Pollution Control Rev. (El Paso
Electric), 6.375%, 2015 4,000 4,134,120
- -------------------------------------------------------------------------------------------------
Matagorda County, TX, Pollution Control Rev. (Central
Power & Light Co.), 4.55%, 2029 5,000 5,144,650
- -------------------------------------------------------------------------------------------------
Matagorda County, TX, Pollution Control Rev. (Reliant
Energy), 5.95%, 2030 3,095 2,988,037
- -------------------------------------------------------------------------------------------------
New Hampshire Industrial Development Authority,
Pollution Control Rev. (CT Light and Power), 5.9%, 2018 1,000 1,055,730
- -------------------------------------------------------------------------------------------------
Ohio Water Development, Pollution Control Rev.
(Cleveland Electric), 8%, 2023 4,700 4,841,329
- -------------------------------------------------------------------------------------------------
Pima County, AZ, Industrial Development Authority Rev.
(Tucson Electric Power Co.), 6.1%, 2025 2,000 1,946,300
- -------------------------------------------------------------------------------------------------
Pima County, AZ, Industrial Development Authority Rev.
(Tucson Electric Power Co.), 6%, 2029 6,845 6,731,510
- -------------------------------------------------------------------------------------------------
Pointe Coupee Parish, LA, Pollution Control Rev. (Gulf
States), 6.7%, 2013 1,000 1,005,060
- -------------------------------------------------------------------------------------------------
Port Morrow, OR, Pollution Control Rev. (Portland
General Electric), 5.2%, 2033 1,900 1,983,524
- -------------------------------------------------------------------------------------------------
Trinity River Authority, TX, Pollution Control Rev.
(TXU Electric Co.), 6.25%, 2028 1,500 1,554,840
- -------------------------------------------------------------------------------------------------
West Feliciana Parish, LA, Pollution Control Rev.
(Energy Gulf States), 6.6%, 2028 3,335 3,398,298
- -------------------------------------------------------------------------------------------------
West Feliciana Parish, LA, Pollution Control Rev. (Gulf
States Utilities Co.), 7.7%, 2014 2,000 2,032,380
- -------------------------------------------------------------------------------------------------
West Feliciana Parish, LA, Pollution Control Rev. (Gulf
States Utilities Co.), 9%, 2015 2,500 2,537,800
- -------------------------------------------------------------------------------------------------
$78,329,917
- -------------------------------------------------------------------------------------------------
Utilities - Municipal Owned - 0.3%
- -------------------------------------------------------------------------------------------------
North Carolina Municipal Power Agency, Catawba Electric
Rev., 6.375%, 2013 $2,750 $3,056,515
- -------------------------------------------------------------------------------------------------
Southern California Public Power Authority
(Transmission Project Rev.), RIBS, 9.84%, 2012(+) 150 150,963
- -------------------------------------------------------------------------------------------------
$3,207,478
- -------------------------------------------------------------------------------------------------
Water & Sewer Utility Revenue - 2.0%
- -------------------------------------------------------------------------------------------------
Forsyth County, GA, Water & Sewage Authority, 6.25%,
2010(++) $2,010 $2,341,690
- -------------------------------------------------------------------------------------------------
Massachusetts Water Resources Authority, RITES, FGIC,
11.2492%, 2019+(+) 765 1,069,791
- -------------------------------------------------------------------------------------------------
Michigan Municipal Bond Authority Rev., RITES,
9.4279%, 2021+(+) 7,585 9,518,720
- -------------------------------------------------------------------------------------------------
New York City, NY, Municipal Water Finance Authority
Rev., 5.75%, 2029 8,590 9,046,644
- -------------------------------------------------------------------------------------------------
Phoenix, AR, FGIC, 6.25%, 2010(++) 1,000 1,171,260
- -------------------------------------------------------------------------------------------------
State of Virginia, Clean Water Rev., 5.75%, 2019 2,500 2,795,650
- -------------------------------------------------------------------------------------------------
$25,943,755
- -------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $1,278,962,108) $1,282,628,735
- -------------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 0.9%
- -------------------------------------------------------------------------------------------------
Allegheny County, PA, Hospital Development Authority
Rev. (Presbyterian University Hospital), "A",
1.10%, due 8/04/04 $1,230 $1,230,000
- -------------------------------------------------------------------------------------------------
Bay Area Toll Authority, CA, Toll Bridge Rev. "A",
1.07%, due 8/04/04 850 850,000
- -------------------------------------------------------------------------------------------------
California Health Facilities Financing Authority Rev.,
"A", 1.08%, due 8/02/04 2,700 2,700,000
- -------------------------------------------------------------------------------------------------
Jefferson County, AL, Sewer Rev., 1.10%, due 8/04/04 3,600 3,600,000
- -------------------------------------------------------------------------------------------------
Oklahoma Industries Authority, Health System Rev.
(Integris Baptist Medical Center), "B", 1.10%, due 8/
02/04 295 295,000
- -------------------------------------------------------------------------------------------------
Pinellas County, FL, Health Facilities Authority Rev.,
Pooled Hospital Loan Program, 1.12%, due 8/02/04 100 100,000
- -------------------------------------------------------------------------------------------------
Sevier County, TN, Public Building Authority, 1.10%,
due 8/04/04 155 155,000
- -------------------------------------------------------------------------------------------------
South Central, CT, Regional Water Authority, Water
Systems Rev., "B", 1.09%, due 8/04/04 2,000 2,000,000
- -------------------------------------------------------------------------------------------------
State of California, Department of Water Resources,
Power Supply Rev., "C-2", 1.10%, due 8/04/04 900 900,000
- -------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes
(Identified Cost, $11,830,000) $11,830,000
- -------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,290,792,108) $1,294,458,735
- -------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.9% 11,935,605
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,306,394,340
- -------------------------------------------------------------------------------------------------
* Non-income producing security-in default.
** Security is making payment less than stated coupon.
+ Restricted security.
(+) Inverse floating rate security.
(++) Refunded bond.
## SEC Rule 144A restriction.
The following abbreviations for insurers and inverse floaters are used in the Portfolio of
Investments and are defined:
INSURERS: INVERSE FLOATERS:
AMBAC = AMBAC Indemnity Corp. RIBS = Residual Interest Bonds
FGIC = Financial Guaranty Insurance Co. RITES = Residual Interest Tax-Exempt Security
FHA = Federal Housing Administration ROLS = Residual Option Longs
FSA = Financial Security Assurance, Inc.
GNMA = Government National Mortgage Assn.
MBIA = Municipal Bond Investors Corp.
PSF = Permanent School Fund
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES (unaudited)
- -----------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets
and liabilities composing the total value of your fund.
AT 7/31/04
ASSETS
Investments, at value (identified cost, $1,290,792,108) $1,294,458,735
- -----------------------------------------------------------------------------------------------------
Cash 7,152
- -----------------------------------------------------------------------------------------------------
Receivable for investments sold 3,660,158
- -----------------------------------------------------------------------------------------------------
Receivable for fund shares sold 1,558,590
- -----------------------------------------------------------------------------------------------------
Interest receivable 20,484,337
- -----------------------------------------------------------------------------------------------------
Receivable from investment adviser 1,036
- -----------------------------------------------------------------------------------------------------
Other assets 8,796
- -----------------------------------------------------------------------------------------------------
Total assets $1,320,178,804
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Distributions payable $5,932,858
- -----------------------------------------------------------------------------------------------------
Payable for investments purchased 4,837,602
- -----------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 2,049,507
- -----------------------------------------------------------------------------------------------------
Unrealized depreciation on interest rate swap agreements 399,533
- -----------------------------------------------------------------------------------------------------
Payable to affiliates
- -----------------------------------------------------------------------------------------------------
Management fee 35,743
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 75,933
- -----------------------------------------------------------------------------------------------------
Distribution and service fee 40,418
- -----------------------------------------------------------------------------------------------------
Administrative fee 415
- -----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 412,455
- -----------------------------------------------------------------------------------------------------
Total liabilities $13,784,464
- -----------------------------------------------------------------------------------------------------
Net assets $1,306,394,340
- -----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $1,432,887,179
- -----------------------------------------------------------------------------------------------------
Unrealized appreciation on investments 3,267,094
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (127,501,105)
- -----------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment
income (2,258,828)
- -----------------------------------------------------------------------------------------------------
Net assets $1,306,394,340
- -----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 160,575,437
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) - continued
Class A shares
Net assets $929,420,185
- -----------------------------------------------------------------------------------------------------
Shares outstanding 114,273,754
- -----------------------------------------------------------------------------------------------------
Net asset value per share $8.13
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/95.25X$8.13) $8.54
- -----------------------------------------------------------------------------------------------------
Class B shares
Net assets $301,599,175
- -----------------------------------------------------------------------------------------------------
Shares outstanding 37,046,343
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $8.14
- -----------------------------------------------------------------------------------------------------
Class C shares
Net assets $75,374,980
- -----------------------------------------------------------------------------------------------------
Shares outstanding 9,255,340
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $8.14
- -----------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS (unaudited)
- -----------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and paid in expenses.
It also describes any gains and/or losses generated by fund operations.
FOR THE SIX MONTHS ENDED 7/31/04
NET INVESTMENT INCOME
Interest income $44,563,627
- -----------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------
Management fee $4,076,945
- -----------------------------------------------------------------------------------------------------
Trustees' compensation 18,880
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 906,092
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 1,232,913
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 387,423
- -----------------------------------------------------------------------------------------------------
Administrative fee 84,959
- -----------------------------------------------------------------------------------------------------
Custodian fee 121,840
- -----------------------------------------------------------------------------------------------------
Printing 34,266
- -----------------------------------------------------------------------------------------------------
Postage 4,235
- -----------------------------------------------------------------------------------------------------
Auditing fees 24,410
- -----------------------------------------------------------------------------------------------------
Legal fees 6,984
- -----------------------------------------------------------------------------------------------------
Miscellaneous 128,750
- -----------------------------------------------------------------------------------------------------
Total expenses $7,027,697
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (5,604)
- -----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (561,862)
- -----------------------------------------------------------------------------------------------------
Net expenses $6,460,231
- -----------------------------------------------------------------------------------------------------
Net investment income $38,103,396
- -----------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized loss (identified cost basis)
- -----------------------------------------------------------------------------------------------------
Investment transactions $(366,978)
- -----------------------------------------------------------------------------------------------------
Swap transactions (1,774,675)
- -----------------------------------------------------------------------------------------------------
Net realized loss on investments $(2,141,653)
- -----------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- -----------------------------------------------------------------------------------------------------
Investments $(24,948,108)
- -----------------------------------------------------------------------------------------------------
Swap transactions 1,556,124
- -----------------------------------------------------------------------------------------------------
Net unrealized loss on investments $(23,391,984)
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments $(25,533,637)
- -----------------------------------------------------------------------------------------------------
Increase in net assets from operations $12,569,759
- -----------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets resulting
from operations, any distributions, and any shareholder transactions.
SIX MONTHS ENDED YEAR ENDED
7/31/04 1/31/04
(UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income $38,103,396 $80,635,859
- -------------------------------------------------------------------------------------------------------
Net realized loss on investments (2,141,653) (11,194,131)
- -------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments (23,391,984) 39,054,433
- ------------------------------------------------------- ------------------ ------------
Increase in net assets from operations $12,569,759 $108,496,161
- ------------------------------------------------------- ------------------ ------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income
- -------------------------------------------------------------------------------------------------------
Class A $(27,344,700) $(60,366,666)
- -------------------------------------------------------------------------------------------------------
Class B (7,794,578) (17,673,877)
- -------------------------------------------------------------------------------------------------------
Class C (1,804,986) (3,642,138)
- ------------------------------------------------------- ------------------ ------------
Total distributions declared to shareholders $(36,944,264) $(81,682,681)
- ------------------------------------------------------- ------------------ ------------
Net decrease in net assets from fund
share transactions $(88,600,783) $(84,770,683)
- ------------------------------------------------------- ------------------ ------------
Redemption fees $1,902 $--
- ------------------------------------------------------- ------------------ ------------
Total decrease in net assets $(112,973,386) $(57,957,203)
- ------------------------------------------------------- ------------------ ------------
NET ASSETS
At beginning of period $1,419,367,726 $1,477,324,929
- -------------------------------------------------------------------------------------------------------
At end of period (including accumulated distributions
in excess of net investment loss of $2,258,828 and
$3,417,960, respectively) $1,306,394,340 $1,419,367,726
- -------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the semiannual period
and the past 5 fiscal years (or, if shorter, the period of the fund's operation). Certain information reflects financial
results for a single fund share. The total returns in the table represent the rate by which an investor would have earned
(or lost) on an investment in the fund (assuming reinvestment of all distributions) held for the entire period.
SIX MONTHS YEAR ENDED 1/31
ENDED -----------------------------------------------------------------------
CLASS A 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
Net asset value, beginning
of period $8.28 $8.12 $8.23 $8.24 $8.06 $9.03
- ----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.24 $0.47 $0.48 $0.51 $0.51 $0.51
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and
unrealized
gain (loss) on
investments (0.12) 0.17 (0.09) (0.02) 0.19 (0.95)
- ----------------------------- -------- ------ ------ ------ ------ ------
Total from investment
operations $0.12 $0.64 $0.39 $0.49 $0.70 $(0.44)
- ----------------------------- -------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment
income $(0.27) $(0.48) $(0.50) $(0.50) $(0.51) $(0.53)
- ----------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- (0.01) (0.00)+++
- ----------------------------- -------- ------ ------ ------ ------ ------
Total distributions
declared
to shareholders $(0.27) $(0.48) $(0.50) $(0.50) $(0.52) $(0.53)
- ----------------------------- -------- ------ ------ ------ ------ ------
Redemption fees added to
paid-in capital# $0.00+++ $-- $-- $-- $-- $--
- ----------------------------- -------- ------ ------ ------ ------ ------
Net asset value, end of
period $8.13 $8.28 $8.12 $8.23 $8.24 $8.06
- ----------------------------- -------- ------ ------ ------ ------ ------
Total return (%)(+) 1.00++ 7.98 4.96 6.13 9.04 (5.09)
- ----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED -----------------------------------------------------------------------
CLASS A (CONTINUED) 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
RATIOS (%) TO AVERAGE
NET ASSETS AND
SUPPLEMENTAL DATA(S):
Expenses## 0.71+ 0.79 0.79 0.76 0.76 0.76
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.86+ 5.80 5.88 6.11 6.29 5.94
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 11 9 20 17 22 27
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of
period (000 Omitted) $929,420 $1,003,328 $1,050,204 $1,037,925 $981,580 $985,622
- ------------------------------------------------------------------------------------------------------------------------------
(S) Prior to June 1, 2003, the investment adviser contractually waived a portion of its fee for the periods indicated. From
June 1, 2003 to March 1, 2004 the management fee waiver was terminated. Effective March 1, 2004, the investment adviser
contractually waived a portion of its fee. In addition, the investment adviser has voluntarily agreed to reimburse the
fund for its proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC for certain
of the periods indicated. If these fees had been incurred by the fund, the net investment income per share and the
ratios would have been:
Net investment income $0.23 $0.47 $0.48 $0.50 $0.51 $0.50
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 0.79+ 0.81 0.84 0.83 0.84 0.82
- ------------------------------------------------------------------------------------------------------------------------------
Net investment
income(S)(S) 5.78+ 5.78 5.83 6.04 6.21 5.88
- ------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective February 1, 2001, the fund adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
January 31, 2002 was to increase net investment income per share and decrease net realized and unrealized gains and
losses per share. The impact of this change calculates to less than $0.01 per share. In addition, the ratio of net
investment income to average net assets increased by 0.02%. Per share, ratios, and supplemental data for periods
prior to February 1, 2001 have not been restated to reflect this change in presentation.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01. # Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
(+) 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
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED -------------------------------------------------------------------
CLASS B 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
Net asset value,
beginning of period $8.28 $8.13 $8.24 $8.25 $8.07 $9.04
- ----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.21 $0.41 $0.42 $0.44 $0.45 $0.44
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (0.12) 0.16 (0.10) (0.01) 0.19 (0.95)
- ---------------------------------- --------- ------ ------ ------ ------ ------
Total from investment operations $0.09 $0.57 $0.32 $0.43 $0.64 $(0.51)
- ---------------------------------- --------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.23) $(0.42) $(0.43) $(0.44) $(0.45) $(0.46)
- ----------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- (0.01) (0.00)+++
- ---------------------------------- --------- ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.23) $(0.42) $(0.43) $(0.44) $(0.46) $(0.46)
- ---------------------------------- --------- ------ ------ ------ ------ ------
Redemption fees added to paid-in
capital# $0.00+++ $-- $-- $-- $-- $--
- ---------------------------------- --------- ------ ------ ------ ------ ------
Net asset value, end of period $8.14 $8.28 $8.13 $8.24 $8.25 $8.07
- ---------------------------------- --------- ------ ------ ------ ------ ------
Total return (%) 0.73++ 7.15 4.01 5.28 8.17 (5.85)
- ----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED -------------------------------------------------------------------
CLASS B (CONTINUED) 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
RATIOS (%) TO AVERAGE
NET ASSETS AND
SUPPLEMENTAL DATA(S):
Expenses## 1.49+ 1.57 1.58 1.56 1.54 1.57
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.08+ 5.02 5.09 5.29 5.50 5.13
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 11 9 20 17 22 27
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of
period (000 Omitted) $301,599 $337,065 $355,602 $382,280 $343,841 $340,157
- ------------------------------------------------------------------------------------------------------------------------------
(S) Prior to June 1, 2003, the investment adviser contractually waived a portion of its fee for the periods indicated.
From June 1, 2003 to March 1, 2004 the management fee waiver was terminated. Effective March 1, 2004, the investment
adviser contractually waived a portion of its fee. In addition, the investment adviser has voluntarily agreed to
reimburse the fund for its proportional share of Independent Chief Compliance Officer service fees paid to Tarantino
LLC for certain of the periods indicated. If these fees had been incurred by the fund, the net investment income per
share and the ratios would have been:
Net investment income $0.20 $0.41 $0.41 $0.43 $0.44 $0.43
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.57+ 1.59 1.63 1.63 1.62 1.63
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 5.00+ 5.00 5.04 5.22 5.42 5.07
- ------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective February 1, 2001, the fund adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
January 31, 2002 was to increase net investment income per share and decrease net realized and unrealized gains and
losses per share. The impact of this change calculates to less than $0.01 per share. In addition, the ratio of net
investment income to average net assets increased by 0.02%. Per share, ratios, and supplemental data for periods
prior to February 1, 2001 have not been restated to reflect this change in presentation.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED ---------------------------------------------------------------
CLASS C 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
Net asset value,
beginning of period $8.29 $8.13 $8.24 $8.25 $8.07 $9.04
- ----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.20 $0.39 $0.40 $0.43 $0.43 $0.43
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments (0.13) 0.17 (0.10) (0.02) 0.19 (0.96)
- --------------------------------------- --------- ------ ------ ------ ------ ------
Total from investment operations $0.07 $0.56 $0.30 $0.41 $0.62 $(0.53)
- --------------------------------------- --------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.22) $(0.40) $(0.41) $(0.42) $(0.43) $(0.44)
- ----------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- -- (0.01) (0.00)+++
- --------------------------------------- --------- ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.22) $(0.40) $(0.41) $(0.42) $(0.44) $(0.44)
- --------------------------------------- --------- ------ ------ ------ ------ ------
Redemption fees added to paid-in
capital# $0.00+++ $-- $-- $-- $-- $--
- -------------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $8.14 $8.29 $8.13 $8.24 $8.25 $8.07
- -------------------------------------------------- ------ ------ ------ ------ ------
Total return (%) 0.50++ 6.91 3.92 5.07 7.95 (6.04)
- ----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 1/31
ENDED ---------------------------------------------------------------
CLASS C (CONTINUED) 7/31/04 2004 2003 2002 2001 2000
(UNAUDITED)
RATIOS (%) TO AVERAGE
NET ASSETS AND
SUPPLEMENTAL DATA(S):
Expenses## 1.72+ 1.79 1.79 1.76 1.76 1.76
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 4.85+ 4.78 4.86 5.07 5.27 4.94
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 11 9 20 17 22 27
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $75,375 $78,975 $71,519 $59,799 $25,413 $17,378
- ------------------------------------------------------------------------------------------------------------------------------
(S) Prior to June 1, 2003, the investment adviser contractually waived a portion of its fee for the periods indicated.
From June 1, 2003 to March 1, 2004 the management fee waiver was terminated. Effective March 1, 2004, the investment
adviser contractually waived a portion of its fee. In addition, the investment adviser has voluntarily agreed to
reimburse the fund for its proportional share of Independent Chief Compliance Officer service fees paid to Tarantino
LLC for certain of the periods indicated. If these fees had been incurred by the fund, the net investment income per
share and the ratios would have been:
Net investment income(S)(S) $0.19 $0.39 $0.39 $0.42 $0.42 $0.42
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.80+ 1.81 1.84 1.83 1.84 1.82
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 4.77+ 4.76 4.81 5.00 5.19 4.88
- ------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective February 1, 2001, the fund adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
January 31, 2002 was to increase net investment income per share and decrease net realized and unrealized gains and
losses per share. The impact of this change calculates to less than $0.01 per share. In addition, the ratio of net
investment income to average net assets increased by 0.02%. Per share, ratios, and supplemental data for periods
prior to February 1, 2001 have not been restated to reflect this change in presentation.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (unaudited)
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Municipal High Income Fund (the fund) is a non-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 U.S.
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. Municipal securities backed by
current or anticipated revenues from a specific project or specific assets can
be negatively affected by the discontinuance of the taxation supporting the
projects or assets or the inability to collect revenues for the project or from
the assets. If the Internal Revenue Service determines an issuer of a municipal
security has not complied with applicable tax requirements, interest from the
security could become taxable and the security could decline in value.
INVESTMENT VALUATIONS - Bonds and other fixed income securities (other than
short-term obligations) in the fund's portfolio are valued at an evaluated bid
price as reported by an independent pricing service, or to the extent a
valuation is not reported by a pricing service, such securities are valued on
the basis of quotes from brokers and dealers. Prices obtained from pricing
services utilize both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate 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 quoted prices or exchange or over-
the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations with a
remaining maturity in excess of 60 days will be valued upon dealer-supplied
valuations. All other short-term obligations in the fund's portfolio are valued
at amortized cost, which constitutes market value as determined by the Board of
Trustees. When pricing service information or market quotations are not readily
available, securities are priced at fair value as determined under the
direction of the Board of Trustees.
SWAP AGREEMENTS - The fund may enter into swap agreements. A swap is an
exchange of cash payments between the fund and another party, which is based on
a specific financial index. Cash payments are exchanged at specified intervals
and the expected income or expense is recorded on the accrual basis. The value
of the swap is adjusted daily and the change in value is recorded as unrealized
appreciation or depreciation. Risks may arise upon entering into these
agreements from the potential inability of counterparties to meet the terms of
their contract and from unanticipated changes in the value of the financial
index on which the swap agreement is based. The fund uses swaps for both
hedging and non-hedging purposes. For hedging purposes, the fund may use swaps
to reduce its exposure to interest and foreign exchange rate fluctuations. For
non-hedging purposes, the fund may use swaps to take a position on anticipated
changes in the underlying financial index.
INTEREST RATE SWAP AGREEMENTS - Interest rate swap agreements are agreements to
exchange cash flows periodically based on a notional principal amount, for
example the exchange of fixed rate interest payments for floating rate interest
payments which are based on a specific financial index, or the exchange of two
distinct floating rate payments. The net receivable or payable associated with
these payments is accrued daily and is recorded as net interest income or
expense. For financial statement purposes, the net interest income or expense
periodically recognized for an interest rate swap is recorded in the same line
item as any unrealized and realized gains or losses recognized for that
instrument. The primary risk associated with interest rate swap agreements is
that unfavorable changes in the fluctuation of interest rates could adversely
impact the fund.
RATE LOCK SWAPS - The fund may enter into rate lock swaps, which are used to
reduce the interest rate risk of the portfolio. A rate lock swap is a payment
or receipt of cash on a specified future date, calculated as the difference
between the strike rate and a specific index yield on that date. The payment
received or made at the end of the measurement period is recorded as a realized
gain or loss in the Statement of Operations. The value of the swap is adjusted
daily and the change in value is recorded as unrealized appreciation or
depreciation.
SHORT TERM FEES - For purchases made on or after May 3, 2004, the fund may
charge a 2% redemption fee (which is retained by the fund) on proceeds from
shares redeemed or exchanged within 30 calendar days following their
acquisition (either by purchase or exchange). The fund may change the
redemption fee period in the future, including changes in connection with
pending Securities and Exchange rules. See the fund's prospectus for details.
These fees are accounted for as an addition to paid-in capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with U.S. generally accepted accounting principles. All premium and
original issue discount is amortized or accreted for tax reporting purposes as
required by federal income tax regulations. Legal fees and other related
expenses incurred to preserve and protect the value of a security owned are
added to the cost of the security; other legal fees are expensed. Capital
infusions made directly to the security issuer, which are generally non-
recurring, incurred to protect or enhance the value of high-yield debt
securities, are reported as additions to the cost basis of the security. Costs
that are incurred to negotiate the terms or conditions of capital infusions or
that are expected to result in a plan of reorganization are reported as
realized losses. Ongoing costs incurred to protect or enhance an investment, or
costs incurred to pursue other claims or legal actions, are expensed.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. This amount, for the six months ended July 31, 2004, is shown as a
reduction of total expenses on the Statement of Operations.
TAX MATTERS AND DISTRIBUTIONS - The fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net tax-
exempt and taxable net income, including any net realized gain on investments.
Accordingly, no provision for federal income or excise tax is provided.
Distributions paid by the fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for federal
income tax purposes because the fund intends to meet certain requirements of
the Code applicable to regulated investment companies, which will enable the
fund to pay exempt-interest dividends. The portion of such interest, if any,
earned on private activity bonds issued after August 7, 1986 may be considered
a tax-preference item to shareholders.
Distributions to shareholders are recorded on the ex-dividend date. The fund
distinguishes between distributions on a tax basis and a financial reporting
basis and only distributions in excess of tax basis earnings and profits are
reported in the financial statements as distributions from paid-in capital.
Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains. Common
types of book and tax differences that could occur include differences in
accounting for derivatives, defaulted bonds, capital losses, and amortization
and accretion on debt securities.
The tax character of distributions declared for the years ended January 31,
2004 and January 31, 2003 was as follows:
1/31/04 1/31/03
Distributions declared from:
---------------------------------------------------------------
Tax-exempt income $81,663,941 $86,746,184
---------------------------------------------------------------
Ordinary income 18,740 381,762
---------------------------------------------------------------
Total distributions declared $81,682,681 $87,127,946
---------------------------------------------------------------
As of January 31, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed tax-exempt income $4,391,464
----------------------------------------------------------
Undistributed ordinary income 829,813
----------------------------------------------------------
Capital loss carryforward (126,842,788)
----------------------------------------------------------
Post-October capital loss deferral (601,539)
----------------------------------------------------------
Unrealized appreciation 28,288,358
----------------------------------------------------------
Other temporary differences (8,183,642)
----------------------------------------------------------
Post-October capital loss deferrals represent losses realized during the current
fiscal year, but recognized for tax purposes in the next fiscal year.
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the earlier
of its utilization or expiration.
EXPIRATION DATE
January 31, 2005 $(26,148,057)
----------------------------------------------------------
January 31, 2006 (45,409,970)
----------------------------------------------------------
January 31, 2007 (6,121,853)
----------------------------------------------------------
January 31, 2008 (1,353,678)
----------------------------------------------------------
January 31, 2009 (10,935,605)
----------------------------------------------------------
January 31, 2010 (2,971,573)
----------------------------------------------------------
January 31, 2011 (18,364,839)
----------------------------------------------------------
January 31, 2012 (15,537,213)
----------------------------------------------------------
Total $(126,842,788)
----------------------------------------------------------
The availability of a portion on these respective capital carryforwards, which
were acquired on March 9, 2001 in connection with the Paine Webber Municipal
High Income Fund acquisition, may be limited in a given year.
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:
First $1.4 billion of average net assets 0.60%
----------------------------------------------------------
In excess of $1.4 billion 0.57%
----------------------------------------------------------
The investment adviser has contractually agreed to waive a portion of its fee,
which is shown as a reduction of total expenses on the Statement of Operations.
Management fees incurred for the six months ended July 31, 2004 were 0.52% of
average daily net assets on an annualized basis. As part of the settlement
agreement with the New York Attorney General concerning market timing and
related matters, MFS has agreed to reduce the fund's management fee to 0.50% of
average daily net assets for the period March 1, 2004 through February 28,
2009. During this time period, the Board of Trustees will continue to review
the appropriateness of all advisory fees in accordance with their oversight
responsibilities. After February 28, 2009 the management fee will be determined
in accordance with then existing review policies approved by the Board of
Trustees overseeing the fund.
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and committee
chairpersons, and 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 retired Independent Trustees. Included in
Trustees' compensation is a pension expense of $3,087 for retired Independent
Trustees for the six months ended July 31, 2004.
The MFS funds, including this fund, have entered into a service agreement (the
"Agreement") which provides for payment of fees by the MFS funds to Tarantino
LLC in return for the provision of services of an Independent Chief Compliance
Officer (ICCO) for MFS. The ICCO is an officer of the MFS funds and the sole
member of Tarantino LLC. MFS has agreed to reimburse each of the MFS funds for
a proportional share of substantially all of the payments made by the MFS funds
to Tarantino LLC and also to provide office space and other administrative
support and supplies to ICCO. The MFS funds can terminate the Agreement with
Tarantino LLC at any time under the terms of the Agreement.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment adviser. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement
of the costs MFS incurs to provide these services, subject to review and
approval by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. Prior
to April 1, 2004, the fund paid MFS an administrative fee up to the following
annual percentage rates of the fund's average daily net assets:
First $2 billion 0.0175%
----------------------------------------------------------
Next $2.5 billion 0.0130%
----------------------------------------------------------
Next $2.5 billion 0.0005%
----------------------------------------------------------
In excess of $7 billion 0.0000%
----------------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
----------------------------------------------------------
Next $2.5 billion 0.00832%
----------------------------------------------------------
Next $2.5 billion 0.00032%
----------------------------------------------------------
In excess of $7 billion 0.00000%
----------------------------------------------------------
For the year six months ended July 31, 2004, the fund paid MFS $84,959,
equivalent to 0.01252% of average daily net assets, to partially reimburse MFS
for the costs of providing administrative services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$132,052 for the six months ended July 31, 2004 as its portion of the sales
charge on sales of Class A shares of the fund, respectively. The Trustees have
adopted a distribution plan for 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 an annual
percentage of its average daily net assets attributable to certain share
classes 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
based on the average daily net assets of accounts attributable to such dealers.
These fees are calculated based on each class' average daily net assets. The
maximum distribution and service fees for each class of shares are as follows:
CLASS B CLASS C
Distribution Fee 0.75% 0.75%
- ------------------------------------------------------------------------------
Service Fee 0.25% 0.25%
- ------------------------------------------------------------------------------
Total Distribution Plan 1.00% 1.00%
- ------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities
dealer, which for the six months ended July 31, 2004 amounted to:
CLASS B CLASS C
Service Fee Retained by MFD $-- $--
- ------------------------------------------------------------------------------
Except in the case of 0.25% per annum Class B service fee paid by the fund upon
the sale of Class B shares in the first year, payment of Class B service fee
will not be implemented until such date as the Trustees of the fund may
determine.
Fees incurred under the distribution plan during the six months ended July 31,
2004 were as follows:
CLASS B CLASS C
Effective Annual Percentage Rates 0.77% 1.00%
- ------------------------------------------------------------------------------
Certain share classes are subject to a contingent deferred sales charge in the
event of a shareholder redemption within, for Class A shares, 12 months
following the purchase, and, for Class C shares, the first year from the end of
the calendar month of purchase. A contingent deferred sales charge is imposed
on shareholder redemptions of Class B in the event of a shareholder redemption
within six years from the end of the calendar month of purchase. MFD receives
all contingent deferred sales charges. Contingent deferred sales charges
imposed during the six months ended July 31, 2004, were as follows:
CLASS A CLASS B CLASS C
Contingent Deferred Sales Charges
Imposed $17,683 $282,924 $10,358
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as shareholder
servicing agent. The fee, which is calculated as a percentage of the fund's
average daily net assets is set periodically under the supervision of the
fund's Trustees. Prior to April 1, 2004, the fee was set at 0.11% of the fund's
average daily net assets. For the period April 1, 2004 through June 30, 2004,
the fee is set at 0.10% of the fund's average daily net assets. Effective July
1, 2004, the fund will be charged up to 0.0861% of its average daily net
assets. For the six months ended July 31, 2004 the fund paid MFSC a fee of
$685,141 for shareholder services which equated to 0.1009% of the fund's
average net assets. Also included in shareholder servicing costs are out-of-
pocket expenses, paid to MFSC, which amounted to $40,925 for the six months,
ended July 31, 2004, as well as other expenses paid to unaffiliated vendors.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$147,023,125 and $197,383,456, respectively.
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $1,289,010,149
----------------------------------------------------------
Gross unrealized appreciation $66,523,022
----------------------------------------------------------
Gross unrealized depreciation (61,074,436)
----------------------------------------------------------
Net unrealized appreciation $5,448,586
----------------------------------------------------------
(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:
Six months ended 7/31/04 Year ended 1/31/04
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 6,055,060 $49,728,559 16,347,299 $133,584,017
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 1,606,671 13,164,885 3,498,198 28,504,250
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (14,626,909) (119,579,103) (27,960,137) (227,975,544)
- -----------------------------------------------------------------------------------------------------------
Net decrease (6,965,178) $(56,685,659) (8,114,640) $(65,887,277)
- -----------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 1,039,322 $8,520,532 4,119,151 $33,652,826
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 383,475 3,144,918 873,782 7,126,966
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (5,066,890) (41,400,204) (8,058,106) (65,735,798)
- -----------------------------------------------------------------------------------------------------------
Net decrease (3,644,093) $(29,734,754) (3,065,173) $(24,956,006)
- -----------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 903,198 $7,446,319 2,990,402 $24,471,351
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 102,195 838,203 212,339 1,732,691
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (1,280,857) (10,464,892) (2,468,888) (20,131,442)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) (275,464) $(2,180,370) 733,853 $6,072,600
- -----------------------------------------------------------------------------------------------------------
(6) LINE OF CREDIT
The fund and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the bank's
base rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the six months ended July 31, 2004 was $1,522, and is
included in miscellaneous expense. The fund had no significant borrowings
during the six months ended July 31, 2004.
(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 swap agreements. 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.
Interest Rate Swap Agreements
NOTIONAL
PRINCIPAL CASH FLOWS UNREALIZED
AMOUNT OF CASH FLOWS PAID RECEIVED BY APPRECIATION
EXPIRATION CONTRACT BY THE FUND THE FUND (DEPRECIATION)
11/15/04 USD 21,400,000 Fixed Rate - 1.945% Floating - 7 day $(155,880)
BMA Swap Index
- ------------------------------------------------------------------------------------------------------
10/27/14 USD 26,600,000 Fixed Rate - 3.444% Floating - 7 day 859,840
BMA Swap Index
- ------------------------------------------------------------------------------------------------------
11/09/14 USD 26,600,000 Fixed Rate - 3.73% Floating - 7 day 264,940
BMA Swap Index
- ------------------------------------------------------------------------------------------------------
11/17/14 USD 20,000,000 Fixed Rate - 4.1125% Floating - 7 day (374,866)
BMA Swap Index
- ------------------------------------------------------------------------------------------------------
12/15/16 USD 10,000,000 Fixed Rate - 4.071% Floating - 7 day (33,523)
BMA Swap Index
- ------------------------------------------------------------------------------------------------------
10/27/34 USD 14,000,000 Floating - 7 day Fixed Rate - 4.132% (656,453)
BMA Swap Index
- ------------------------------------------------------------------------------------------------------
11/09/34 USD 14,000,000 Floating - 7 day Fixed Rate - 4.320% (303,591)
BMA Swap Index
- ------------------------------------------------------------------------------------------------------
$(399,533)
- ------------------------------------------------------------------------------------------------------
At July 31, 2004 the fund had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) RESTRICTED SECURITIES
The fund may invest not more than 15% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At July 31, 2004,
the fund owned the following restricted securities, excluding securities issued
under Rule 144A, constituting 9.5% 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 the direction of the Trustees.
DATE OF PAR
DESCRIPTION ACQUISITION AMOUNT COST VALUE
Chicago, IL Board of Education, RITES, 8.9164%, 2020 2/9/2000 $7,910,000 $6,211,881 $9,599,892
- -----------------------------------------------------------------------------------------------------------------
Chicago, IL, Public Building Commerce Rev.,
RITES, FGIC, 8.4803%, 2017 3/18/1999 4,500,000 4,815,180 5,552,550
- -----------------------------------------------------------------------------------------------------------------
Chicago, IL, O'Hare International Airport Rev.,
RITES, FSA, 9.8475%, 2022 8/21/2003 6,250,000 6,664,625 6,988,250
- -----------------------------------------------------------------------------------------------------------------
Daphne, AL, Special Care Facilities Financing
Authority (1st Mortgage Presbyterian),
0%, 2008 10/28/1988 $29,975,000 $11,283,959 $26,166,377
- -----------------------------------------------------------------------------------------------------------------
Daphne, AL, Special Care Facilities Financing
Authority (2nd Mortgage Presbyterian),
0%, 2008 10/28/1988 4,500,000 2,079,043 3,928,230
- -----------------------------------------------------------------------------------------------------------------
Daphne, AL, Special Care Facilities Financing
Authority (Presbyterian Hospital), 0%, 2008 4/19/1988 48,475,000 85,670 12,008,712
- -----------------------------------------------------------------------------------------------------------------
Denver, CO, City & County Airport Rev., RITES,
AMBAC, 10.59%, 2017 8/28/2000 2,500,000 2,683,700 2,931,050
- -----------------------------------------------------------------------------------------------------------------
Essex County, NJ, RITES, FGIC,
10.1092%, 2020 4/6/2000 6,000,000 5,968,080 7,335,000
- -----------------------------------------------------------------------------------------------------------------
Houston, TX, Independent School District, RITES,
PSF, 8.9279%, 2017 2/26/1999 5,000,000 5,249,100 5,624,200
- -----------------------------------------------------------------------------------------------------------------
Los Angeles, CA, RITES, FGIC, 8.9508%, 2015 7/21/1999 5,310,000 5,563,924 6,454,730
- -----------------------------------------------------------------------------------------------------------------
Massachusetts Water Resource Authority, RITES,
FGIC, 11.2492%, 2019 3/16/2000 765,000 904,780 1,069,791
- -----------------------------------------------------------------------------------------------------------------
Michigan Municipal Bond Authority Rev, RITES,
9.4279%, 2021 2/23/2000 7,585,000 6,633,841 9,518,720
- -----------------------------------------------------------------------------------------------------------------
New Jersey Economic Development Authority,
Economic Development Rev. (Holt Hauling &
Warehousing), 8.4%, 2015 1/30/1997 4,000,000 4,197,120 2,280,000
- -----------------------------------------------------------------------------------------------------------------
New Jersey Economic Development Authority,
Economic Development Rev. (Holt Hauling &
Warehousing), 8.6%, 2017 1/31/1997 8,000,000 8,415,520 4,560,000
- -----------------------------------------------------------------------------------------------------------------
New Jersey Turnpike Authority, RITES, MBIA,
9.2123%, 2020 4/19/2000 5,000,000 4,637,900 5,520,600
- -----------------------------------------------------------------------------------------------------------------
State of Florida, Board of Education, RITES,
8.4279%, 2017 4/9/1999 2,300,000 2,332,844 2,516,752
- -----------------------------------------------------------------------------------------------------------------
State of Florida, Board of Education, RITES,
FGIC, 8.9508%, 2012 2/25/2002 1,500,000 1,756,860 1,826,730
- -----------------------------------------------------------------------------------------------------------------
State of Florida, Board of Education, RITES,
FGIC, 8.9508%, 2013 2/25/2002 5,000,000 5,791,400 6,073,400
- -----------------------------------------------------------------------------------------------------------------
State of Massachusetts, ROLs, 9.582%, 2017 8/28/2002 2,000,000 2,226,440 2,448,360
- -----------------------------------------------------------------------------------------------------------------
Texas Housing & Community Board (Harbor &
Plumtree), 10%, 2026 10/31/1996 1,675,000 1,675,000 1,588,369
- -----------------------------------------------------------------------------------------------------------------
Total: $123,991,713
- -----------------------------------------------------------------------------------------------------------------
(9) CONCENTRATION OF CREDIT RISK
As of July 31, 2004, 11.84% of securities in the portfolio of investments were
backed by letters of credit or bond insurance of various financial institutions
and financial guaranty assurance agencies. The percentage of investments
insured by or supported (backed) by a letter of credit from any one institution
or agency did not exceed 4.23% of total investments.
(10) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under
the terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50
million in penalty to certain MFS funds, pursuant to a plan developed by an
independent distribution consultant. The brokerage allocation practices which
were the subject of this proceeding were discontinued by MFS in November 2003.
The agreement with the SEC is reflected in an order of the SEC. Pursuant to the
SEC order, on July 28, 2004, MFS transferred these settlement amounts to the
SEC, and those MFS funds entitled to these settlement amounts accrued an
estimate of their pro rata portion of these amounts. Once the final
distribution plan is approved by the SEC, these amounts will be distributed by
the SEC to the affected MFS funds. The SEC settlement order states that MFS
failed to adequately disclose to the Boards and Trustees and to shareholders of
the MFS funds the specifics of its preferred arrangements with certain
brokerage firms selling MFS fund shares. The SEC settlement order states that
MFS had in place policies designed to obtain best execution of all MFS fund
trades. As part of the settlement, MFS retained an independent compliance
consultant to review the completeness of its current policies and practices
regarding disclosure to MFS fund trustees and to MFS fund shareholders of
strategic alliances between MFS or its affiliates and broker-dealers and other
financial advisers who support the sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New
York Attorney General ("NYAG") and the Bureau of Securities Regulation of the
State of New Hampshire ("NH") to settle administrative proceedings alleging
false and misleading information in certain MFS retail fund prospectuses
regarding market timing and related matters (the "February Settlements"). These
regulators alleged that prospectus language for certain MFS retail funds was
false and misleading because, although the prospectuses for those funds in the
regulators' view indicated that the MFS funds prohibited market timing, MFS did
not limit trading activity in 11 domestic large cap stock, high grade bond and
money market funds. MFS' former Chief Executive Officer, John W. Ballen, and
former President, Kevin R. Parke, also reached agreement with the SEC in which
they agreed to, among other terms, monetary fines and temporary suspensions
from association with any investment adviser or registered investment company.
Messrs. Ballen and Parke have resigned their positions with, and will not be
returning to, MFS and the MFS funds. Under the terms of the February
Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to
increase certain management fees during this period. MFS has also paid an
administrative fine to NH in the amount of $1 million, which will be used for
investor education purposes (NH retained $250,000 and $750,000 was contributed
to the North American Securities Administrators Association's Investor
Protection Trust). In addition, under the terms of the February Settlements,
MFS is in the process of adopting certain governance changes and reviewing its
policies and procedures.
Since December 2003, MFS, Sun Life Financial Inc., various MFS funds, the
Trustees of these MFS funds, and certain officers of MFS have been named as
defendants in multiple lawsuits filed in federal and state courts. The lawsuits
variously have been commenced as class actions or individual actions on behalf
of investors who purchased, held or redeemed shares of the MFS funds during
specified periods, as class actions on behalf of participants in certain
retirement plan accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits relating to market timing and related matters have been
transferred to and consolidated before the United States District Court for the
District of Maryland, as part of a multi-district litigation of market timing
and related claims involving several other fund complexes, In re Mutual Funds
Investment Litigation (Alger, Columbia, Janus, MFS, One Group, Putnam, PIMCO),
No. 1:04-md-15863 (transfer began March 19, 2004). Four lawsuits alleging
improper brokerage allocation practices and excessive compensation are pending
in the United States District Court for the District of Massachusetts, Forsythe
v. Sun Life Financial Inc., et al., No. 04cv10584 (GAO) (March 25, 2004);
Eddings v. Sun Life Financial Inc., et al., No. 04cv10764 (GAO) (April 15,
2004); Marcus Dumond, et al. v. Massachusetts Financial Servs. Co., et al., No.
04cv11458 (RGS) (May 4, 2004); and Koslow v. Sun Life Financial Inc., et al.,
No. 04cv11019 (GAO) (May 20, 2004). The lawsuits generally allege that some or
all of the defendants (i) permitted or acquiesced in market timing and/or late
trading in some of the MFS funds, inadequately disclosed MFS' internal policies
concerning market timing and such matters, and received excessive compensation
as fiduciaries to the MFS funds, or (ii) permitted or acquiesced in the
improper use of fund assets by MFS to support the distribution of MFS fund
shares and inadequately disclosed MFS' use of fund assets in this manner. The
actions assert that some or all of the defendants violated the federal
securities laws, including the Securities Act of 1933 and the Securities
Exchange Act of 1934, the Investment Company Act of 1940 and the Investment
Advisers Act of 1940, the Employee Retirement Income Security Act of 1974, as
well as fiduciary duties and other violations of common law. The lawsuits seek
unspecified compensatory damages. Insofar as any of the actions is
appropriately brought derivatively on behalf of any of the MFS funds, any
recovery will inure to the benefit of the MFS funds. The defendants are
reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed in
the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of the MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution to affected MFS
funds to compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS fund sales. It is not clear whether these
amounts will be sufficient to compensate shareholders for all of the damage
they allegedly sustained, whether certain shareholders or putative class
members may have additional claims to compensation, or whether the damages that
may be awarded in any of the actions will exceed these amounts. In the event
the MFS funds incur any losses, costs or expenses in connection with such
lawsuits, the Boards of Trustees of the affected MFS funds may pursue claims on
behalf of such funds against any party that may have liability to the funds in
respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or
other adverse consequences to the MFS funds.
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TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- ---------------------------------------------------------------------------------------------------------------
The Trustees and officers of the Trust, as of September 10, 2004, are listed below, together with their
principal occupations during the past five years. (Their titles may have varied during that period.) The
address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS & OTHER
DIRECTORSHIPS(2) DURING POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
- ----------------------- ---------------- --------------- -----------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial Services
(born 10/20/63) President Company, Chief Executive Officer,
President, Chief Investment Officer and
Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial Services
(born 08/08/46) Company, Chairman (since February 2004);
Harvard Law School (education), John
Olin Visiting Professor (since July
2002); Secretary of Economic Affairs,
The Commonwealth of Massachusetts
(January 2002 to December 2002);
Fidelity Investments, Vice Chairman
(June 2000 to December 2001); Fidelity
Management & Research Company
(investment adviser), President (March
1997 to July 2001); The Bank of New York
(financial services), Director; Bell
Canada Enterprises (telecommunications),
Director; Telesat (satellite
communications), Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair of February 1992 Private investor; KeySpan Corporation
(born 05/01/36) Trustees (energy related services), Director;
Eastern Enterprises (diversified
services company), Chairman, Trustee and
Chief Executive Officer (until November
2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital, Chief of
(born 03/11/37) Cardiac Surgery; Harvard Medical School,
Professor of Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining products
(born 05/30/42) and service provider), Vice Chairman/
Director (since April 2001); Encinitos
Ventures (private investment company),
Principal (1997 to April 2001); Lincoln
Electric Holdings, Inc. (welding
equipment manufacturer), Director;
Southwest Gas Corporation (natural gas
distribution company), Director
William R. Gutow Trustee December 1993 Private investor and real estate
(born 09/27/41) consultant; Capitol Entertainment
Management Company (video franchise),
Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co., Inc.,
(born 02/08/53) Managing Director, Investment Banking
Group (1997 to February 2001); Borders
Group, Inc. (book and music retailer),
Director; Federal Realty Investment
Trust (real estate investment trust),
Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes (attorneys), Partner
(born 06/23/35)
William J. Poorvu Trustee August 1982 Private investor; Harvard University
(born 04/10/35) Graduate School of Business
Administration, Class of 1961 Adjunct
Professor in Entrepreneurship Emeritus;
CBL & Associates Properties, Inc. (real
estate investment trust), Director
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc. (acquisition
(born 09/23/38) planning specialists), President;
Wellfleet Investments (investor in
health care companies), Managing General
Partner (since 1993); Cambridge
Nutraceuticals (professional nutritional
products), Chief Executive Officer
(until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care industry
(born 04/25/46) consultant
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial Services
(born 10/20/63) Trustee Company, Chief Executive Officer,
President, Chief Investment Officer and
Director
James R. Bordewick, Jr.(3) Assistant Secretary September 1990 Massachusetts Financial Services
(born 03/06/59) and Assistant Clerk Company, Senior Vice President and
Associate General Counsel
Stephanie A. DeSisto(3) Assistant Treasurer May 2003 Massachusetts Financial Services
(born 10/01/53) Company, Vice President (since April
2003); Brown Brothers Harriman & Co.,
Senior Vice President (November 2002 to
April 2003); ING Groep N.V./Aeltus
Investment Management, Senior Vice
President (prior to November 2002)
Robert R. Flaherty(3) Assistant Treasurer August 2000 Massachusetts Financial Services
(born 09/18/63) Company, Vice President (since August
2000); UAM Fund Services, Senior Vice
President (prior to August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial Services
(born 08/29/58) Company, Senior Vice President (since
July 2002); The Bank of New York, Senior
Vice President (September 2000 to July
2002); Lexington Global Asset Managers,
Inc., Executive Vice President and Chief
Financial Officer (prior to September
2000); Lexington Funds, Chief Financial
Officer (prior to September 2000)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial Services
(born 11/13/57) Company, Vice President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of compliance
(born 03/07/44) Compliance Officer services), Principal (since June 2004);
CRA Business Strategies Group
(consulting services), Executive Vice
President (April 2003 to June 2004);
David L. Babson & Co. (investment
adviser), Managing Director, Chief
Administrative Officer and Director
(February 1997 to March 2003)
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial Services
(born 06/12/60) Company, Senior Vice President
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(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since
appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission
(i.e., "public companies").
(3) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to as the 1940
Act), which is the principal federal law governing investment companies like the fund. The address of MFS is
500 Boylston Street, Boston, Massachusetts 02116.
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees are not
elected for fixed terms. The Trust will hold a shareholders' meeting in 2005 and at least once every five years
thereafter to elect Trustees. Each Trustee and officer holds office until his or her successor is chosen and
qualified or until his or her earlier death, resignation, retirement or removal.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or a
subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of
MFS. Each Trustee serves as a board member of 109 funds within the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is available without
charge upon request by calling 1-800-225-2606.
- ----------------------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIAN
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 02116-3741 225 Franklin Street, Boston, MA 02110
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA
02116-3741
PORTFOLIO MANAGER
Geoffrey L. Schechter
QUARTERLY PORTFOLIO DISCLOSURE
Beginning with the fund's first and third fiscal quarters following this report, the fund will file a complete
schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and
third quarters of each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by calling the Commission at
1-202-942-8090. The fund's Form N-Q is available on the EDGAR database on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section
at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at www.mfs.com.
- -------------------------------------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS
- -------------------------------------------------------------------------------
YOUR GOALS ARE IMPORTANT
MFS offers a complete range of investments and investment services to address
specific financial needs over time. When your investing goals change, you can
easily stay with MFS for the products you need, when you need them. Whether
you're investing for college or retirement expenses or for tax management or
estate planning, MFS will be there.
Ask your investment professional how MFS can help you move toward the goals
you've set.
MFS FAMILY OF FUNDS(R)
More than 50 portfolios offer domestic and international equity and
fixed-income investments across the full risk spectrum
VARIABLE ANNUITIES
A selection of annuity products with advantages for
building and preserving wealth
MFS 401(k) AND IRA SUITES
Retirement plans for businesses and individuals
MFS COLLEGE SAVINGS PLANS
Investment products to help meet education expenses
MFS PRIVATE PORTFOLIO SERVICES
Investment advisory services that provide custom products
for high-net-worth individuals
Variable annuities are offered through MFS/Sun Life Financial Distributors, Inc.
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from 8 a.m.
to 8 p.m. Eastern time.
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's Web site at http://www.sec.gov.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Shares prices, account 1-800-MFS-TALK
balances exchanges (1-800-637-8255) 24 hours a day, 365 days a
or stock and bond outlooks touch-tone required year
- --------------------------------------------------------------------------------
WORLD WIDE WEB
Go to MFS.COM for a clear view of market events, investor education, account
access, and product and performance insights.
Go paperless with EDELIVERY: Join your fellow shareholders who are already
taking advantage of this great new benefit from MFS. With eDelivery, we send
you prospectuses, reports, and proxies electronically. You get timely
information without mailbox clutter (and help your fund save printing and
postage costs).
SIGN-UP instructions: If your account is registered with us, go to mfs.com, log
in to your account via MFS Access, and select the eDelivery sign up options.
If you own your MFS fund shares through a financial institution or through a
retirement plan, MFS TALK, MFS Access, and eDelivery may not be available to
you.
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc., 500
Boylston Street, Boston, MA 02116.
MMH-SEM-9/04 70M
ITEM 2. CODE OF ETHICS.
[Applicable for semi-annual reports if the registrant has amended the code of
ethics during the period covered by the report or has granted a waiver,
including an implicit waiver, from a provision of the code of ethics.] Not
applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not Applicable for semi-annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not Applicable for semi-annual reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to the Registrant.
ITEM 6. SCHEDULE OF INVESTMENTS
A schedule of investments for each series of the Registrant is included as part
of the report to shareholders of such series under Item 1 of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to the Registrant.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Board of Trustees of the Registrant has adopted procedures by which
shareholders may send communications, including recommendations for nominees to
the Registrant's Board, to the Board. Shareholders may mail written
communications to the Board to the attention of the Board of Trustees, [name of
series of the Registrant], Massachusetts Financial Services Company, 500
Boylston Street, Boston, MA 02116, c/o Frank Tarantino, Independent Chief
Compliance Officer of the Fund. Shareholder communications must (i) be in
writing and be signed by the shareholder, (ii) identify the series of the
Registrant to which they relate, and (iii) identify the class and number of
shares held by the shareholder.
ITEM 10. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures as conducted within 90 days of the filing date of this Form
N-CSR, the registrant's principal financial officer and principal executive
officer have concluded that those disclosure controls and procedures
provide reasonable assurance that the material information required to be
disclosed by the registrant on this report is recorded, processed,
summarized and reported within the time periods specified in the Securities
and Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the registrant's last fiscal half-year (the registrant's second fiscal
half-year in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrant's internal
control over financial reporting.
ITEM 11. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(1) [An amendment to the code of ethics, that is the subject of the
disclosure required by Item 2, to the extent that the registrant
intends to satisfy the Item 2 requirements through filing of an
exhibit: The amendment is attached hereto.] Not applicable.
(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Act (17 CFR 270.30a-2): Attached hereto.
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the Act (17 CFR
270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17
CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350) as an exhibit. A
certification furnished pursuant to this paragraph will not be deemed
"filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r),
or otherwise subject to the liability of that section. Such certification
will not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act, except to the extent that
the registrant specifically incorporates it by reference: Attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) MFS SERIES TRUST III
By (Signature and Title)* ROBERT J. MANNING
-----------------------------------------------------
Robert J. Manning, President
Date: September 22, 2004
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* ROBERT J. MANNING
-----------------------------------------------------
Robert J. Manning, President
(Principal Executive Officer)
Date: September 22, 2004
------------------
By (Signature and Title)* RICHARD M. HISEY
-----------------------------------------------------
Richard M. Hisey, Treasurer (Principal Financial
Officer and Accounting Officer)
Date: September 22, 2004
------------------
* Print name and title of each signing officer under his or her signature.