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
- -------------------------------------------------------------------------------
MFS SERIES TRUST III
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
500 Boylston Street, Boston, Massachusetts 02116
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
James R. Bordewick, Jr.
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
- -------------------------------------------------------------------------------
(Name and address of agents for service)
Registrant's telephone number, including area code: (617) 954-5000
- -------------------------------------------------------------------------------
Date of fiscal year end: January 31
- -------------------------------------------------------------------------------
Date of reporting period: January 31, 2005
- -------------------------------------------------------------------------------
ITEM 1. REPORTS TO STOCKHOLDERS.
MFS(R) HIGH YIELD OPPORTUNITIES FUND 1/31/05
ANNUAL REPORT
- -------------------------------------------------------------------------------
M F S(SM)
INVESTMENT MANAGEMENT(R)
THIS REPORT HAS BEEN PREPARED FOR THE GENERAL INFORMATION TO SHAREHOLDERS. IT
IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY WHEN PRECEDED OR
ACCOMPANIED BY A CURRENT PROSPECTUS.
ANNUAL REPORT
LETTER FROM THE CEO 1
------------------------------------------------------
PORTFOLIO COMPOSITION 4
------------------------------------------------------
MANAGEMENT REVIEW 5
------------------------------------------------------
PERFORMANCE SUMMARY 7
------------------------------------------------------
EXPENSE TABLE 11
------------------------------------------------------
PORTFOLIO OF INVESTMENTS 13
------------------------------------------------------
FINANCIAL STATEMENTS 30
------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 43
------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 56
------------------------------------------------------
TRUSTEES AND OFFICERS 57
------------------------------------------------------
PROXY VOTING POLICIES AND INFORMATION 61
------------------------------------------------------
QUARTERLY PORTFOLIO DISCLOSURE 61
------------------------------------------------------
FEDERAL TAX INFORMATION 61
------------------------------------------------------
CONTACT INFORMATION BACK COVER
------------------------------------------------------
- -------------------------------------------------------------------------------
LETTER FROM THE CEO
- -------------------------------------------------------------------------------
Dear Shareholders,
[Photo of Robert J. Manning]
Last summer and fall, I wrote to you about enhancements that MFS(R) was making
to its investment process. Our goal, as always, was to deliver strong
performance across all asset classes. I am now happy to report to you that
2004 was a very successful year for MFS, relative to our peers in the mutual
fund industry. While there will always be room for improvement, we believe the
enhancements we have made to our investment process resulted in significantly
improved performance across the MFS Family of Funds(R).
You may remember some of the enhancements I outlined last year.
They included
o increasing collaboration and information sharing among our investment
personnel across asset classes, through an Investment Management Committee
with members from our Domestic Equity, International Equity, Fixed Income,
and Quantitative Research teams
o increasing the number of analysts supporting our portfolio managers and
doubling the average investment experience of our domestic equity analyst
staff
o making additional use of our most-seasoned portfolio managers to mentor
research analysts
o combining more quantitative, top-down risk control and security analysis
with our traditional bottom-up research process
o opening a research office in Mexico City to complement our existing staff in
Boston, London, Singapore, and Tokyo
The effect of these enhancements, I believe, is evident in the 2004 performance
of our funds. For the 12 months ended December 31, 2004, 80% of MFS domestic
equity funds, 100% of MFS international equity funds, and 80% of MFS fixed-
income funds delivered results in the top half of their Lipper peer groups.
Our longer-term performance also benefited from our ongoing commitment to the
MFS Original Research(R) process: more than 75% of MFS funds were in the top
half of their respective Lipper categories over the 3-, 5-, and 10-year periods
ended December 31, 2004.
Of course, I cannot offer any guarantees that our performance will repeat
itself. Still, I am confident that the recent enhancements to our investment
process will continue to benefit shareholders in 2005 and beyond.
What I can tell you with certainty is that the way you manage your investments
will determine how well you take advantage of the performance that financial
markets deliver. Historically, individual investors have tended to underperform
the markets. For example, a 2003 study by DALBAR, Inc. showed that over the
nearly two decades from 1984 through 2002, the average U.S. stock investor
earned a 2.6% average annual return at a time when U.S. stocks, as measured by
the Standard & Poor's 500 Stock Index, delivered a 12.2% average annual
return.(1)
This huge discrepancy, in our view, occurred because nonprofessional investors
generally did not adhere to the basic principles followed by most professional
investors: allocate among asset classes, diversify within each asset class, and
rebalance one's portfolio on a routine schedule. I elaborated on this "ADR"
theme in fund reports over the last few months of 2004. For more information on
how to apply a Disciplined Diversification(SM) strategy to your portfolio using
the principles of ADR, I would urge you to contact your own investment
professional. You may also want to refer to information on the subject on our
Web site, MFS.COM.
As always, we appreciate your confidence in MFS, and you can be sure of our
continued commitment to do the best we can to help you pursue your long-term
financial goals.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
March 15, 2005
It is not possible to invest directly in an index.
Lipper rankings and performance are based on historical average annual returns
of Class A shares, and do not include any sales charges. Past performance is
no guarantee of future results.
Asset allocation and diversification cannot guarantee a profit or protect
against a loss.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
(1) Source: DALBAR July 2003 update to its Quantitative Analysis of Investment
Behavior; DALBAR, Inc., is a financial-services market research firm
headquartered in Boston, MA.
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
PORTFOLIO STRUCTURE*
Bonds 93.2%
Cash & Other Net Assets 4.5%
Stocks 1.4%
Preferred 0.7%
Convertible Preferred 0.2%
TOP FIVE BOND INDUSTRIES*
Sovereign Emerging Market 11.8%
------------------------------------------------
Chemicals 5.9%
------------------------------------------------
Wireless Communications 5.3%
------------------------------------------------
Utilities - Electric 5.2%
------------------------------------------------
Broadcast & Cable TV 4.9%
------------------------------------------------
CREDIT QUALITY OF BONDS**
AAA 0.1%
------------------------------------------------
A 0.3%
------------------------------------------------
BBB 4.5%
------------------------------------------------
BB 21.5%
------------------------------------------------
B 42.2%
------------------------------------------------
CCC 25.3%
------------------------------------------------
CC 2.6%
------------------------------------------------
D 0.4%
------------------------------------------------
Not Rated 3.1%
------------------------------------------------
PORTFOLIO FACTS
Average Duration 4.7
------------------------------------------------
Average Life 9.2 yrs.
------------------------------------------------
Average Maturity*** 9.7 yrs.
------------------------------------------------
Average Quality B
------------------------------------------------
Average Quality Short Term Bonds A-1
------------------------------------------------
COUNTRY WEIGHTINGS
United States 74.9%
------------------------------------------------
Brazil 3.7%
------------------------------------------------
Russia 3.1%
------------------------------------------------
Mexico 2.5%
------------------------------------------------
Canada 2.1%
------------------------------------------------
United Kingdom 1.9%
------------------------------------------------
Luxembourg 1.3%
------------------------------------------------
Turkey 1.2%
------------------------------------------------
Panama 1.0%
------------------------------------------------
Other 8.3%
------------------------------------------------
* For purposes of this graphical presentation, the bond component includes
both accrued interest amounts and the equivalent exposure from any
derivative holdings, if applicable.
** Credit quality ratings are based on a weighted average of each security's
ratings 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 securities, which are included in the "AAA"-rating category.
Percentages are based on market value of investments as of 1/31/05.
*** The average maturity shown is calculated using the final stated maturity on
the portfolio's holdings without taking into account any holdings which have
been pre-refunded to an earlier date or which have a mandatory put date
prior to the stated maturity. The average life shown takes into account
these earlier dates.
Percentages are based on net assets as of 1/31/05 unless otherwise noted.
The portfolio is actively managed, and current holdings may be different.
- -------------------------------------------------------------------------------
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
SUMMARY OF RESULTS
For the twelve months ended January 31, 2005, Class A shares of the fund
provided a total return of 8.98%, not including sales charges. In comparison,
the fund's benchmark, the Lehman Brothers High Yield Index returned 8.91%. The
fund's investment objective is to provide high current income. The fund invests,
under normal market conditions, at least 80% of its net assets in high income
fixed income securities. MFS focuses on bonds issued by companies our analysts
believe have solid or improving credit fundamentals.
MARKET ENVIRONMENT
At the start of the period, we believed that markets were concerned about the
sustainability of the economic recovery. Fixed income markets had finished
strongly in 2003. This bond-friendly environment was interrupted by strong U.S.
employment data in the second quarter of 2004, which we believe precipitated a
bond market selloff. Accelerating domestic demand in the first half of the
period, coupled with rising inflation and a very accommodative monetary stance
caused the U.S. Federal Reserve to begin raising short-term rates in June.
Despite increasing short-term rates four more times in the second half of the
period, we believe U.S. economic conditions contributed to a decline in longer
maturity bond yields, while corporate and emerging bond yields narrowed to U.S.
Treasuries. Under this scenario the yield curve flattened - interest rates on
the short end of the curve moved up while rates on the long end decreased
slightly.
The high yield sector continued its rally through most of the year that ended
January 31, 2005. We believe the sector was bolstered by strong demand from
investors searching for yield and continued evidence of an economic recovery. A
reduction in the rate of defaults and improving balancing sheets also aided the
high yield market.
CONTRIBUTORS TO PERFORMANCE
Over the period, the portfolio benefited from exposure to above-average yielding
bonds relative to its benchmark, the Lehman Brothers High Yield Index. Our
holdings of emerging markets debt also boosted relative results as the sector
outperformed domestic high-yield debt during the period.
Several individual holdings that performed well during the period, including
Safilo, a maker of corrective eyewear and sunglasses, chemical company Rhodia,
Texas energy company El Paso Corp., and retail energy firm Mirant Americas
Generation*, also helped relative performance.
DETRACTORS FROM PERFORMANCE
The portfolio's relative performance was hurt, in part, by our underweighted
positions in some of the more speculative lower-rated sectors of the high-
yield market, which generated above-average returns for the period. Several
specific holdings also detracted from the portfolio's relative results,
including Dobson Communications, a regional wireless services provider, and
auto parts makers Intermet and Oxford Automotive*.
Respectfully,
/s/ John F. Addeo /s/ Scott B. Richards
John F. Addeo Scott B. Richards
Portfolio Manager Portfolio Manager
* Security was not held in the portfolio at period-end.
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.
- -------------------------------------------------------------------------------
PERFORMANCE SUMMARY THROUGH 1/31/05
- -------------------------------------------------------------------------------
The following chart illustrates the historical performance of the fund's Class
A shares in comparison to the fund's benchmark. Performance results include
the deduction of the maximum applicable sales charge and reflect the
percentage change in net asset value, including reinvestment of dividends and
capital gains distributions. Benchmark comparisons are unmanaged and do not
reflect any fees or expenses. The performance of other share classes will be
greater than or less than the line shown. (See Notes to Performance Summary.)
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.
HIGH SHORT-TERM RETURNS FOR ANY PERIOD MAY BE AND LIKELY WERE ATTRIBUTABLE TO
FAVORABLE MARKET CONDITIONS DURING THAT PERIOD, WHICH MAY NOT BE REPEATABLE.
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.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from the commencement of the fund's investment operations,
July 1, 1998, through January 31, 2005. Index information is from July 1,
1998.)
MFS High Yield Lehman Brothers
Opportunities Fund High Yield
- Class A Index
7/98 $ 9,525 $10,000
1/99 8,624 9,893
1/00 9,846 9.938
1/01 10,170 10,100
1/02 10,139 9,961
1/03 10,438 10,078
1/04 13,156 12,819
1/05 14,338 13,960
TOTAL RETURNS
- --------------------
Average annual
without sales charge
- --------------------
Class
Share class inception date 1-yr 3-yr 5-yr Life*
- ------------------------------------------------------------------------------
A 7/1/98 8.98% 12.24% 7.81% 6.41%
- ------------------------------------------------------------------------------
B 7/1/98 8.28% 11.56% 7.11% 5.75%
- ------------------------------------------------------------------------------
C 7/1/98 8.28% 11.49% 7.09% 5.69%
- ------------------------------------------------------------------------------
I 7/1/98 9.23% 12.62% 8.05% 6.78%
- --------------------
Average annual
- --------------------
Comparative benchmarks
- ------------------------------------------------------------------------------
Average high current yield fund+ 8.00% 10.32% 5.10% 3.40%
- ------------------------------------------------------------------------------
Lehman Brothers High Yield Index# 8.91% 11.91% 7.03% 5.20%
- ------------------------------------------------------------------------------
- --------------------
Average annual
with sales charge
- --------------------
Share class
- ------------------------------------------------------------------------------
A 3.81% 10.44% 6.76% 5.62%
- ------------------------------------------------------------------------------
B 4.29% 10.75% 6.84% 5.75%
- ------------------------------------------------------------------------------
C 7.29% 11.49% 7.09% 5.69%
- ------------------------------------------------------------------------------
I Class shares do not have a sales charge. Please see Notes to Performance
Summary for more details.
- --------------------
Cumulative
without sales charge
- --------------------
- ------------------------------------------------------------------------------
A 8.98% 41.41% 45.61% 50.53%
- ------------------------------------------------------------------------------
B 8.28% 38.84% 40.95% 44.52%
- ------------------------------------------------------------------------------
C 8.28% 38.56% 40.88% 44.02%
- ------------------------------------------------------------------------------
I 9.23% 42.85% 47.29% 54.03%
- ------------------------------------------------------------------------------
* For the period from the commencement of the fund's investment operations,
July 1, 1998, through January 31, 2005. 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 universe of non-investment-
grade, fixed-rate debt. Pay-in-kind (PIK) bonds, Eurobonds and debt issues
from countries designated as emerging markets (e.g., Argentina, Brazil,
Venezuela, etc.) are excluded.
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
(assuming redemption within one year from the end of the prior month of
purchase) reflect the deduction of the 1% CDSC. Class I shares have no sales
charges and are available only to certain investors.
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.
From time to time the fund may receive proceeds from litigation settlements,
without which performance would be lower.
KEY RISK CONSIDERATIONS
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to risks relating to interest rates, currency exchange
rates, economic, and political conditions.
The portfolio may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains, as compared to a
portfolio with less active trading policies, which would increase your tax
liability unless you hold your shares through a tax-deferred vehicle (such as
an IRA account). Frequent trading also increases transaction costs, which
could detract from the portfolio's performance.
The portfolio may invest in high yield or lower-rated securities (non-rated,
below "BBB"), which may provide greater returns but are subject to greater-
than-average risk.
Prices of securities react to the economic condition of the company that
issued the security. The portfolio's investments in an issuer may rise and
fall based on the issuer's actual and anticipated earnings, changes in
management and the potential for takeovers and acquisitions.
The portfolio utilizes short sales as an investment technique and will suffer
a loss if it sells a security short and the value of that security rises.
Market risk is the risk that the price of a security held by the portfolio
will fall due to changing economic, political or market conditions or
disappointing earnings results.
The portfolio will allocate its investments among various segments of the
fixed income markets based upon judgments made by MFS. The portfolio could
miss attractive investment opportunities by underweighting markets where there
are significant returns, and could lose value by overweighting markets where
there are significant declines.
Credit risk is the risk that the issuer of a fixed income security will not be
able to pay principal and interest when due. Rating agencies assign credit
ratings to certain fixed income securities to indicate their credit risk. The
price of a fixed income security will generally fall if the issuer defaults on
its obligation to pay principal or interest, the rating agencies downgrade the
issuer's credit rating or other news affects the market's perception of the
issuer's credit risk.
When interest rates rise, the prices of fixed income securities in the
portfolio will generally fall. Conversely, when interest rates fall, the
prices of fixed income securities in the portfolio will generally rise.
The fixed income securities purchased by the portfolio may be traded in the
over-the-counter market rather than on an organized exchange and are subject
to liquidity risk. This means that they may be harder to purchase or sell at a
fair price. The inability to purchase or sell these fixed income securities at
a fair price could have a negative impact on the portfolio's performance.
Interest rate risk will generally affect the price of a fixed income security
more if the security has a longer maturity. Fixed income securities with
longer maturities will therefore be more volatile than other fixed income
securities with shorter maturities. Conversely, fixed income securities with
shorter maturities will be less volatile but generally provide lower returns
than fixed income securities with longer maturities. The average maturity of
the portfolio's fixed income investments will affect the volatility of the
portfolio's share price.
Please see the prospectus for further information regarding these and other
risk considerations.
- -------------------------------------------------------------------------------
EXPENSE TABLE
- -------------------------------------------------------------------------------
FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM
AUGUST 1, 2004, THROUGH JANUARY 31, 2005.
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, August 1, 2004 through
January 31, 2005.
ACTUAL EXPENSES
The first line for each share class in the table on the following page
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 on the following page
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
Annualized Beginning Ending Paid During
Expense Account Value Account Value Period**
Ratio 8/01/04 1/31/05 8/01/04-1/31/05
- -------------------------------------------------------------------------------
Actual 0.86% $1,000 $1,084 $4.52
A ----------------------------------------------------------------------------
Hypothetical* 0.86% $1,000 $1,021 $4.38
- -------------------------------------------------------------------------------
Actual 1.51% $1,000 $1,080 $7.92
B ----------------------------------------------------------------------------
Hypothetical* 1.51% $1,000 $1,018 $7.68
- -------------------------------------------------------------------------------
Actual 1.51% $1,000 $1,079 $7.91
C ----------------------------------------------------------------------------
Hypothetical* 1.51% $1,000 $1,018 $7.68
- -------------------------------------------------------------------------------
Actual 0.50% $1,000 $1,084 $2.63
I ----------------------------------------------------------------------------
Hypothetical* 0.50% $1,000 $1,023 $2.55
- -------------------------------------------------------------------------------
* 5% class return per year before expenses.
** 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.
- -------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - 12/31/04
- -------------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your trust. It is
categorized by broad-based asset classes.
Bonds - 91.7%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
Advertising & Broadcasting - 4.4%
- -------------------------------------------------------------------------------------------------
Allbritton Communications Co., 7.75%, 2012 $1,537,000 $1,583,105
- -------------------------------------------------------------------------------------------------
DIRECTV Holdings LLC, 8.375%, 2013 150,000 168,933
- -------------------------------------------------------------------------------------------------
Echostar DBS Corp., 6.375%, 2011 1,500,000 1,531,870
- -------------------------------------------------------------------------------------------------
Granite Broadcasting Corp., 9.75%, 2010 3,775,000 3,633,433
- -------------------------------------------------------------------------------------------------
Intelsat Ltd., 7.7938%, 2012## 635,000 654,045
- -------------------------------------------------------------------------------------------------
Intelsat Ltd., 8.625%, 2015## 1,260,000 1,311,974
- -------------------------------------------------------------------------------------------------
LBI Media Holdings, Inc., 0% to 2008, 11% to 2013 4,375,000 3,221,094
- -------------------------------------------------------------------------------------------------
PRIMEDIA, Inc., 8.875%, 2011 2,615,000 2,758,825
- -------------------------------------------------------------------------------------------------
Panamsat Holding Corp., 0% to 2009,
10.375% to 2014## 4,070,000 2,716,725
- -------------------------------------------------------------------------------------------------
Paxson Communications Corp., 0% to 2006,
12.25% to 2009 3,815,000 3,681,475
- -------------------------------------------------------------------------------------------------
Spanish Broadcasting System, Inc., 9.625%, 2009 1,600,000 1,680,000
- -------------------------------------------------------------------------------------------------
XM Satellite Radio Holdings, Inc., 0% to 2005,
14% to 2009 1,096,899 1,121,579
- -------------------------------------------------------------------------------------------------
XM Satellite Radio, Inc., 12%, 2010 901,000 1,063,180
- -------------------------------------------------------------------------------------------------
$25,126,238
- -------------------------------------------------------------------------------------------------
Aerospace - 1.4%
- -------------------------------------------------------------------------------------------------
ASPropulsion Capital B.V., 9.625%, 2013## EUR 100,000 $150,006
- -------------------------------------------------------------------------------------------------
Argo Tech Corp., 9.25%, 2011 $875,000 958,125
- -------------------------------------------------------------------------------------------------
BE Aerospace, Inc., 8.875%, 2011 2,665,000 2,718,300
- -------------------------------------------------------------------------------------------------
Hexcel Corp., 9.75%, 2009 3,000,000 3,127,500
- -------------------------------------------------------------------------------------------------
K&F Acquisition, Inc., 7.75%, 2014## 340,000 338,300
- -------------------------------------------------------------------------------------------------
TransDigm Holding Co., 8.375%, 2011 715,000 757,900
- -------------------------------------------------------------------------------------------------
$8,050,131
- -------------------------------------------------------------------------------------------------
Airlines - 1.1%
- -------------------------------------------------------------------------------------------------
Continental Airlines, Inc., 7.568%, 2006 $2,500,000 $1,932,942
- -------------------------------------------------------------------------------------------------
Continental Airlines, Inc., 6.9%, 2017 267,735 212,940
- -------------------------------------------------------------------------------------------------
Continental Airlines, Inc., 6.748%, 2017 532,820 428,579
- -------------------------------------------------------------------------------------------------
Continental Airlines, Inc., 6.795%, 2018 2,516,153 2,068,622
- -------------------------------------------------------------------------------------------------
Continental Airlines, Inc., 8.307%, 2019 1,360,310 1,133,114
- -------------------------------------------------------------------------------------------------
Continental Airlines, Inc., 7.566%, 2020 299,561 242,598
- -------------------------------------------------------------------------------------------------
$6,018,795
- -------------------------------------------------------------------------------------------------
Apparel Manufacturers - 1.1%
- -------------------------------------------------------------------------------------------------
Levi Strauss & Co., 9.75%, 2015## $2,695,000 $2,620,888
- -------------------------------------------------------------------------------------------------
Propex Fabrics, Inc., 10%, 2012## 3,605,000 3,650,063
- -------------------------------------------------------------------------------------------------
$6,270,951
- -------------------------------------------------------------------------------------------------
Asset Backed & Securitized - 2.8%
- -------------------------------------------------------------------------------------------------
ARCap REIT, Inc., 6.0996%, 2045## $1,025,662 $887,583
- -------------------------------------------------------------------------------------------------
Anthracite CDO Ltd., 6%, 2037## 1,500,000 1,280,700
- -------------------------------------------------------------------------------------------------
Asset Securitization Corp., 7.525%, 2029 1,073,128 978,097
- -------------------------------------------------------------------------------------------------
Asset Securitization Corp., 8.7799%, 2029## 2,300,000 1,989,859
- -------------------------------------------------------------------------------------------------
Crest Ltd., 7%, 2040## 993,500 963,948
- -------------------------------------------------------------------------------------------------
Deutsche Mortgage & Asset Receiving Corp., 7.5%, 2031 850,000 801,101
- -------------------------------------------------------------------------------------------------
Falcon Auto Dealership LLC, 3.54%, 2023^^ 2,308,378 410,205
- -------------------------------------------------------------------------------------------------
First Union-Lehman Brothers Commercial Mortgage Trust,
7.5%, 2029 1,000,000 1,168,770
- -------------------------------------------------------------------------------------------------
GMAC Commercial Mortgage Securities, Inc.,
6.02%, 2033 750,000 717,070
- -------------------------------------------------------------------------------------------------
Lehman Brothers Commercial Conduit Mortgage Trust,
1.1511%, 2028^^ 7,218,715 244,534
- -------------------------------------------------------------------------------------------------
Morgan Stanley Capital I, Inc., 1.5911%, 2014##^^ 4,926,790 374,77
- -------------------------------------------------------------------------------------------------
Preferred Term Securities VIII Ltd., 16.43%, 2032## 1,050,000 892,500
- -------------------------------------------------------------------------------------------------
Preferred Term Securities XII Ltd., 17%, 2033## 1,775,000 1,870,406
- -------------------------------------------------------------------------------------------------
Preferred Term Securities XVI Ltd., 17%, 2035## 3,250,000 3,250,000
- -------------------------------------------------------------------------------------------------
$15,829,549
- -------------------------------------------------------------------------------------------------
Automotive - 1.9%
- -------------------------------------------------------------------------------------------------
Advanced Accessory Systems LLC, 10.75%, 2011 $310,000 $286,750
- -------------------------------------------------------------------------------------------------
Affinia Group, Inc., 9%, 2014## 1,100,000 1,133,000
- -------------------------------------------------------------------------------------------------
Dana Corp., 7%, 2029 2,410,000 2,394,007
- -------------------------------------------------------------------------------------------------
Metaldyne Corp., 11%, 2012 2,570,000 2,133,100
- -------------------------------------------------------------------------------------------------
Metaldyne Corp., 10%, 2013## 295,000 275,825
- -------------------------------------------------------------------------------------------------
Navistar International Corp., 7.5%, 2011 1,500,000 1,601,250
- -------------------------------------------------------------------------------------------------
TRW Automotive, Inc., 9.375%, 2013 397,000 446,625
- -------------------------------------------------------------------------------------------------
TRW Automotive, Inc., 11%, 2013 1,076,000 1,258,920
- -------------------------------------------------------------------------------------------------
TRW Automotive, Inc., 11.75%, 2013 EUR 117,000 184,664
- -------------------------------------------------------------------------------------------------
Tenneco Automotive, Inc., 10.25%, 2013 $515,000 605,125
- -------------------------------------------------------------------------------------------------
Tenneco Automotive, Inc., 8.625%, 2014## 375,000 390,000
- -------------------------------------------------------------------------------------------------
$10,709,266
- -------------------------------------------------------------------------------------------------
Banks & Credit Companies - 0.5%
- -------------------------------------------------------------------------------------------------
Banco Mercantil del Norte S.A., 5.875%, 2014## $800,000 $814,000
- -------------------------------------------------------------------------------------------------
Kazkommerts International B.V., 10.125%, 2007## 153,000 165,623
- -------------------------------------------------------------------------------------------------
Kazkommerts International B.V., 8.5%, 2013## 210,000 215,775
- -------------------------------------------------------------------------------------------------
Turanalem Finance B.V., 8%, 2014## 1,522,000 1,480,145
- -------------------------------------------------------------------------------------------------
$2,675,543
- -------------------------------------------------------------------------------------------------
Basic Industry - 0.3%
- -------------------------------------------------------------------------------------------------
Thermadyne Holdings Corp., 9.25%, 2014 $630,000 $611,100
- -------------------------------------------------------------------------------------------------
Trimas Corp., 9.875%, 2012 846,000 879,840
- -------------------------------------------------------------------------------------------------
$1,490,940
- -------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 4.8%
- -------------------------------------------------------------------------------------------------
Adelphia Communications Corp., 10.25%, 2011 $975,000 $867,750
- -------------------------------------------------------------------------------------------------
CCO Holdings LLC, 8.75%, 2013 505,000 512,575
- -------------------------------------------------------------------------------------------------
CSC Holdings, Inc., 8.125%, 2009 680,000 746,300
- -------------------------------------------------------------------------------------------------
CSC Holdings, Inc., 6.75%, 2012## 715,000 750,750
- -------------------------------------------------------------------------------------------------
Cablevision Systems Corp., 8%, 2012## 1,195,000 1,292,094
- -------------------------------------------------------------------------------------------------
Charter Communications, Inc., 8.625%, 2009 1,315,000 1,052,000
- -------------------------------------------------------------------------------------------------
Charter Communications, Inc., 9.92%, 2011 9,000,000 7,155,000
- -------------------------------------------------------------------------------------------------
Charter Communications, Inc., 8.375%, 2014## 435,000 445,875
- -------------------------------------------------------------------------------------------------
FrontierVision Holdings LP, 11.875%, 2007* 550,000 712,250
- -------------------------------------------------------------------------------------------------
FrontierVision Operating Partners LP, 11%, 2006* 795,000 1,009,650
- -------------------------------------------------------------------------------------------------
Grande Communications, 14%, 2011 1,695,000 1,711,950
- -------------------------------------------------------------------------------------------------
Kabel Deutschland, 10.625%, 2014## 1,635,000 1,847,550
- -------------------------------------------------------------------------------------------------
Mediacom Broadband LLC, 9.5%, 2013 2,350,000 2,344,125
- -------------------------------------------------------------------------------------------------
Mediacom Broadband LLC, 11%, 2013 1,235,000 1,330,713
- -------------------------------------------------------------------------------------------------
Renaissance Media LLC, 10%, 2008 1,055,000 1,087,969
- -------------------------------------------------------------------------------------------------
Rogers Cable, Inc., 8.75%, 2032 975,000 1,111,500
- -------------------------------------------------------------------------------------------------
Telenet Group Holdings N.V., 0% to 2008,
11.5% to 2014## 4,220,000 3,186,100
- -------------------------------------------------------------------------------------------------
$27,164,151
- -------------------------------------------------------------------------------------------------
Brokerage & Asset Managers - 0.1%
- -------------------------------------------------------------------------------------------------
Refco Finance Holdings LLC, 9%, 2012## $635,000 $692,150
- -------------------------------------------------------------------------------------------------
Building - 1.8%
- -------------------------------------------------------------------------------------------------
Building Materials Corp. of America, 7.75%, 2005 $635,000 $642,938
- -------------------------------------------------------------------------------------------------
Building Materials Corp. of America, 8%, 2007 1,000,000 1,017,500
- -------------------------------------------------------------------------------------------------
Building Materials Corp. of America, 7.75%, 2014## 2,560,000 2,585,600
- -------------------------------------------------------------------------------------------------
Goodman Global Holdings, Inc., 7.875%, 2012## 1,715,000 1,654,975
- -------------------------------------------------------------------------------------------------
Interface, Inc., 10.375%, 2010 864,000 993,600
- -------------------------------------------------------------------------------------------------
Interface, Inc., 9.5%, 2014 850,000 922,250
- -------------------------------------------------------------------------------------------------
Jacuzzi Brands, Inc., 9.625%, 2010 505,000 563,075
- -------------------------------------------------------------------------------------------------
Nortek, Inc., 8.5%, 2014## 1,484,000 1,524,810
- -------------------------------------------------------------------------------------------------
$9,904,748
- -------------------------------------------------------------------------------------------------
Business Services - 0.9%
- -------------------------------------------------------------------------------------------------
Lucent Technologies, Inc., 6.45%, 2029 $1,815,000 $1,619,888
- -------------------------------------------------------------------------------------------------
Nortel Networks Ltd., 6.125%, 2006 1,500,000 1,520,625
- -------------------------------------------------------------------------------------------------
Northern Telecom Corp., 7.875%, 2026 410,000 404,875
- -------------------------------------------------------------------------------------------------
Xerox Corp., 7.625%, 2013 1,500,000 1,616,250
- -------------------------------------------------------------------------------------------------
$5,161,638
- -------------------------------------------------------------------------------------------------
Chemicals - 5.8%
- -------------------------------------------------------------------------------------------------
ARCO Chemical Co., 9.8%, 2020 $630,000 $711,900
- -------------------------------------------------------------------------------------------------
Acetex Corp., 10.875%, 2009 770,000 833,525
- -------------------------------------------------------------------------------------------------
Crystal U.S. Holdings LLC, 0% to 2009, 10.5% to 2014## 5,345,000 3,627,919
- -------------------------------------------------------------------------------------------------
Crystal U.S. Holdings LLC, 0% to 2010, 10% to 2014## 485,000 337,075
- -------------------------------------------------------------------------------------------------
Equistar Chemicals LP, 10.625%, 2011 1,405,000 1,615,750
- -------------------------------------------------------------------------------------------------
Huntsman International LLC, 10.125%, 2009 2,085,000 2,189,250
- -------------------------------------------------------------------------------------------------
Huntsman International LLC, 0%, 2009 3,225,000 1,810,031
- -------------------------------------------------------------------------------------------------
Huntsman International LLC, 7.375%, 2015## 520,000 517,400
- -------------------------------------------------------------------------------------------------
IMC Global, Inc., 10.875%, 2013 940,000 1,144,450
- -------------------------------------------------------------------------------------------------
KI Holdings, Inc., 0% to 2009, 9.875% to 2014## 4,096,000 2,560,000
- -------------------------------------------------------------------------------------------------
Kronos International, Inc., 8.875%, 2009 EUR 55,000 77,481
- -------------------------------------------------------------------------------------------------
Lyondell Chemical Co., 9.5%, 2008 $1,000,000 1,080,000
- -------------------------------------------------------------------------------------------------
Lyondell Chemical Co., 11.125%, 2012 800,000 940,000
- -------------------------------------------------------------------------------------------------
Nalco Co., 7.75%, 2011 355,000 380,738
- -------------------------------------------------------------------------------------------------
Nalco Co., 8.875%, 2013 320,000 348,800
- -------------------------------------------------------------------------------------------------
Nalco Financial Holdings LLC, 0% to 2009, 9% to 2014 1,401,000 1,054,253
- -------------------------------------------------------------------------------------------------
Nova Chemicals Corp., 6.5%, 2012 1,000,000 1,043,750
- -------------------------------------------------------------------------------------------------
Polypore, Inc., 8.75%, 2012 1,305,000 1,340,888
- -------------------------------------------------------------------------------------------------
Resolution Performance Products LLC, 13.5%, 2010 2,320,000 2,557,800
- -------------------------------------------------------------------------------------------------
Rhodia S.A., 6%, 2006 EUR 720,000 967,343
- -------------------------------------------------------------------------------------------------
Rhodia S.A., 8.875%, 2011 $4,175,000 4,279,375
- -------------------------------------------------------------------------------------------------
Rockwood Specialties Group, Inc., 10.625%, 2011 1,500,000 1,710,000
- -------------------------------------------------------------------------------------------------
Rockwood Specialties Group, Inc., 7.5%, 2014## 180,000 185,400
- -------------------------------------------------------------------------------------------------
Sovereign Specialty Chemicals, Inc., 11.875%, 2010 1,410,000 1,494,600
- -------------------------------------------------------------------------------------------------
$32,807,728
- -------------------------------------------------------------------------------------------------
Conglomerates - 0.6%
- -------------------------------------------------------------------------------------------------
Invensys PLC, 9.875%, 2011## $2,080,000 $2,301,000
- -------------------------------------------------------------------------------------------------
SPX Corp., 7.5%, 2013 890,000 976,775
- -------------------------------------------------------------------------------------------------
$3,277,775
- -------------------------------------------------------------------------------------------------
Construction - 0.4%
- -------------------------------------------------------------------------------------------------
D.R. Horton, Inc., 8%, 2009 $1,000,000 $1,117,717
- -------------------------------------------------------------------------------------------------
Technical Olympic USA, Inc., 9%, 2010 460,000 494,500
- -------------------------------------------------------------------------------------------------
Technical Olympic USA, Inc., 7.5%, 2011 400,000 400,000
- -------------------------------------------------------------------------------------------------
$2,012,217
- -------------------------------------------------------------------------------------------------
Consumer Cyclical - 0.3%
- -------------------------------------------------------------------------------------------------
Corrections Corp. of America, 9.875%, 2009 $535,000 $588,500
- -------------------------------------------------------------------------------------------------
Corrections Corp. of America, 7.5%, 2011 330,000 351,038
- -------------------------------------------------------------------------------------------------
KinderCare Learning Centers, Inc., 9.5%, 2009 679,000 680,698
- -------------------------------------------------------------------------------------------------
$1,620,236
- -------------------------------------------------------------------------------------------------
Consumer Goods & Services - 3.1%
- -------------------------------------------------------------------------------------------------
Bombardier Recreational Products, Inc., 8.375%, 2013 $1,075,000 $1,136,813
- -------------------------------------------------------------------------------------------------
Church & Dwight Co., Inc., 6%, 2012## 675,000 681,750
- -------------------------------------------------------------------------------------------------
Integrated Electrical Services, Inc., 9.375%, 2009 1,795,000 1,678,325
- -------------------------------------------------------------------------------------------------
K2, Inc., 7.375%, 2014 1,170,000 1,256,288
- -------------------------------------------------------------------------------------------------
Leiner Health Products, Inc., 11%, 2012 620,000 675,800
- -------------------------------------------------------------------------------------------------
Remington Arms Co., Inc., 10.5%, 2011 1,045,000 1,005,813
- -------------------------------------------------------------------------------------------------
Revlon Consumer Products Corp., 8.625%, 2008 3,679,000 3,283,508
- -------------------------------------------------------------------------------------------------
Safilo Capital International S.A., 9.625%, 2013## EUR 3,865,000 5,167,544
- -------------------------------------------------------------------------------------------------
Samsonite Corp., 8.875%, 2011 $1,465,000 1,576,706
- -------------------------------------------------------------------------------------------------
Werner Holding Co., Inc., 10%, 2007 1,340,000 1,092,100
- -------------------------------------------------------------------------------------------------
$17,554,647
- -------------------------------------------------------------------------------------------------
Containers - 2.4%
- -------------------------------------------------------------------------------------------------
Crown European Holdings S.A., 10.875%, 2013 $3,265,000 $3,828,213
- -------------------------------------------------------------------------------------------------
Greif, Inc., 8.875%, 2012 540,000 596,700
- -------------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.875%, 2009 685,000 740,656
- -------------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.75%, 2012 1,765,000 1,963,563
- -------------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.25%, 2013 765,000 831,938
- -------------------------------------------------------------------------------------------------
Owens-Illinois, Inc., 7.8%, 2018 785,000 816,400
- -------------------------------------------------------------------------------------------------
Plastipak Holdings, Inc., 10.75%, 2011 755,000 849,375
- -------------------------------------------------------------------------------------------------
Pliant Corp., 13%, 2010 2,055,000 2,013,900
- -------------------------------------------------------------------------------------------------
Pliant Corp., 0% to 2006, 11.125% to 2009 1,020,000 948,600
- -------------------------------------------------------------------------------------------------
Portola Packaging, Inc., 8.25%, 2012 870,000 713,400
- -------------------------------------------------------------------------------------------------
$13,302,745
- -------------------------------------------------------------------------------------------------
Defense Electronics - 0.2%
- -------------------------------------------------------------------------------------------------
L-3 Communications Holdings, Inc., 6.125%, 2014 $1,065,000 $1,086,300
- -------------------------------------------------------------------------------------------------
Electronics - 0%
- -------------------------------------------------------------------------------------------------
Magnachip Semiconductor S.A., 8%, 2014## $160,000 $167,000
- -------------------------------------------------------------------------------------------------
Emerging Market Quasi-Sovereign - 1.6%
- -------------------------------------------------------------------------------------------------
Gazprom OAO, 8.625%, 2034## $1,975,000 $2,315,688
- -------------------------------------------------------------------------------------------------
Pemex Master Trust, 9.5%, 2027## 3,401,000 4,353,280
- -------------------------------------------------------------------------------------------------
Pemex Project Funding Master Trust, 8.625%, 2022 1,418,000 1,683,875
- -------------------------------------------------------------------------------------------------
Petroliam Nasional Berhad, 7.75%, 2015 733,000 898,247
- -------------------------------------------------------------------------------------------------
$9,251,090
- -------------------------------------------------------------------------------------------------
Emerging Market Sovereign - 11.6%
- -------------------------------------------------------------------------------------------------
Central Bank of Argentina, 2%, 2018 ARS 4,695,954 $1,288,500
- -------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 8%, 2014 $12,899,397 13,205,758
- -------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 8.875%, 2019 - 2024 5,522,000 5,672,150
- -------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 3.0625%, 2024 1,617,000 1,471,470
- -------------------------------------------------------------------------------------------------
Republic of Argentina, 2.008%, 2012 3,181,000 2,722,936
- -------------------------------------------------------------------------------------------------
Republic of Colombia, 11.75%, 2020 1,997,000 2,526,205
- -------------------------------------------------------------------------------------------------
Republic of Ecuador, 8%, 2030 2,200,000 2,029,500
- -------------------------------------------------------------------------------------------------
Republic of El Salvador, 8.25%, 2032 1,475,000 1,508,188
- -------------------------------------------------------------------------------------------------
Republic of Panama, 9.375%, 2023 - 2029 3,848,000 4,533,195
- -------------------------------------------------------------------------------------------------
Republic of Panama, 8.875%, 2027 719,000 798,090
- -------------------------------------------------------------------------------------------------
Republic of Peru, 9.125%, 2012 319,000 366,850
- -------------------------------------------------------------------------------------------------
Republic of Peru, 5%, 2017 982,960 933,812
- -------------------------------------------------------------------------------------------------
Republic of Peru, 8.75%, 2033 783,000 837,810
- -------------------------------------------------------------------------------------------------
Republic of Philippines, 9.375%, 2017 1,740,000 1,853,100
- -------------------------------------------------------------------------------------------------
Republic of Philippines, 9.5%, 2030 260,000 258,375
- -------------------------------------------------------------------------------------------------
Republic of South Africa, 8.5%, 2017 1,198,000 1,518,465
- -------------------------------------------------------------------------------------------------
Republic of Turkey, 7.25%, 2015 313,000 322,390
- -------------------------------------------------------------------------------------------------
Republic of Turkey, 11.875%, 2030 1,509,000 2,157,870
- -------------------------------------------------------------------------------------------------
Republic of Turkey, 8%, 2034 3,743,000 3,864,648
- -------------------------------------------------------------------------------------------------
Republic of Ukraine, 7.65%, 2013 1,775,000 1,948,063
- -------------------------------------------------------------------------------------------------
Republic of Venezeula, 8.5%, 2014 1,451,000 1,476,393
- -------------------------------------------------------------------------------------------------
Republic of Vietnam, 3.75%, 2028 950,000 698,250
- -------------------------------------------------------------------------------------------------
Russian Federation, 3%, 2008 - 2011 5,129,000 4,479,627
- -------------------------------------------------------------------------------------------------
Russian Federation, 11%, 2018 1,710,000 2,430,081
- -------------------------------------------------------------------------------------------------
Russian Ministry of Finance, 12.75%, 2028 2,904,000 4,882,205
- -------------------------------------------------------------------------------------------------
State of Qatar, 9.75%, 2030 976,000 1,459,120
- -------------------------------------------------------------------------------------------------
$65,243,051
- -------------------------------------------------------------------------------------------------
Energy - Independent - 2.0%
- -------------------------------------------------------------------------------------------------
Belden & Blake Corp., 8.75%, 2012## $1,435,000 $1,443,969
- -------------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 7%, 2014 427,000 452,620
- -------------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 6.375%, 2015## 635,000 647,700
- -------------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 6.875%, 2016 2,765,000 2,875,600
- -------------------------------------------------------------------------------------------------
Encore Acquisition Co., 6.25%, 2014 1,395,000 1,391,513
- -------------------------------------------------------------------------------------------------
Newfield Exploration Co., 6.625%, 2014## 1,055,000 1,113,025
- -------------------------------------------------------------------------------------------------
Plains Exploration & Production Co., 7.125%, 2014 1,490,000 1,635,275
- -------------------------------------------------------------------------------------------------
Venoco, Inc., 8.75%, 2011## 1,805,000 1,823,050
- -------------------------------------------------------------------------------------------------
$11,382,752
- -------------------------------------------------------------------------------------------------
Energy - Integrated - 0.5%
- -------------------------------------------------------------------------------------------------
Amerada Hess Corp., 7.3%, 2031 $1,470,000 $1,706,873
- -------------------------------------------------------------------------------------------------
Siberian Oil Co., 10.75%, 2009 633,000 693,926
- -------------------------------------------------------------------------------------------------
Tyumen Oil Co., 11%, 2007 289,000 328,015
- -------------------------------------------------------------------------------------------------
$2,728,814
- -------------------------------------------------------------------------------------------------
Entertainment - 1.9%
- -------------------------------------------------------------------------------------------------
AMC Entertainment, Inc., 9.5%, 2011 $396,000 $408,870
- -------------------------------------------------------------------------------------------------
AMC Entertainment, Inc., 8.625%, 2012## 1,000,000 1,085,000
- -------------------------------------------------------------------------------------------------
AMF Bowling Worldwide, Inc., 10%, 2010 675,000 702,000
- -------------------------------------------------------------------------------------------------
Loews Cineplex Entertainment Corp., 9%, 2014## 1,955,000 2,047,863
- -------------------------------------------------------------------------------------------------
Marquee Holdings, Inc., 0% to 2009, 12% to 2014## 2,585,000 1,744,875
- -------------------------------------------------------------------------------------------------
Six Flags, Inc., 9.75%, 2013 3,030,000 2,886,075
- -------------------------------------------------------------------------------------------------
Universal City Florida Holding Co., 8.375%, 2010## 1,760,000 1,830,400
- -------------------------------------------------------------------------------------------------
$10,705,083
- -------------------------------------------------------------------------------------------------
Food & Non-Alcoholic Beverages - 1.1%
- -------------------------------------------------------------------------------------------------
Burns, Philp & Co. Ltd., 9.75%, 2012 $1,805,000 $1,967,450
- -------------------------------------------------------------------------------------------------
Cosan S.A., 9%, 2009## 320,000 330,400
- -------------------------------------------------------------------------------------------------
Merisant Co., 9.5%, 2013## 905,000 796,400
- -------------------------------------------------------------------------------------------------
Michael Foods, Inc., 8%, 2013 750,000 789,375
- -------------------------------------------------------------------------------------------------
Seminis Vegetable Seeds, Inc., 10.25%, 2013 1,000,000 1,195,000
- -------------------------------------------------------------------------------------------------
United Biscuits Finance PLC, 10.625%, 2011 EUR 650,000 902,971
- -------------------------------------------------------------------------------------------------
$5,981,596
- -------------------------------------------------------------------------------------------------
Forest & Paper Products - 2.8%
- -------------------------------------------------------------------------------------------------
Abitibi-Consolidated, Inc., 8.55%, 2010 $2,000,000 $2,147,500
- -------------------------------------------------------------------------------------------------
Buckeye Technologies, Inc., 8%, 2010 875,000 877,188
- -------------------------------------------------------------------------------------------------
Durango Corp. S.A. de C.V., 13.125%, 2006* 126,000 92,610
- -------------------------------------------------------------------------------------------------
Durango Corp. S.A. de C.V., 13.5%, 2008* 49,000 36,015
- -------------------------------------------------------------------------------------------------
Durango Corp. S.A. de C.V., 13.75%, 2009##* 1,614,000 1,186,290
- -------------------------------------------------------------------------------------------------
Georgia Pacific Corp., 9.375%, 2013 2,505,000 2,883,881
- -------------------------------------------------------------------------------------------------
Graphic Packaging International, Inc., 9.5%, 2013 1,105,000 1,232,075
- -------------------------------------------------------------------------------------------------
JSG Funding LLC, 11.5%, 2015## EUR 1,200,000 1,565,280
- -------------------------------------------------------------------------------------------------
MDP Acquisitions PLC, 9.625%, 2012 $755,000 834,275
- -------------------------------------------------------------------------------------------------
MDP Acquisitions PLC, 15.5%, 2013# 630,067 741,904
- -------------------------------------------------------------------------------------------------
Newark Group, Inc., 9.75%, 2014 2,240,000 2,346,400
- -------------------------------------------------------------------------------------------------
Norske Skog Canada Ltd., 7.375%, 2014 645,000 651,450
- -------------------------------------------------------------------------------------------------
Sino Forest Corp., 9.125%, 2011## 333,000 366,716
- -------------------------------------------------------------------------------------------------
Stone Container Corp., 7.375%, 2014 840,000 865,200
- -------------------------------------------------------------------------------------------------
$15,826,784
- -------------------------------------------------------------------------------------------------
Gaming & Lodging - 3.7%
- -------------------------------------------------------------------------------------------------
Aztar Corp., 7.875%, 2014 $1,000,000 $1,100,000
- -------------------------------------------------------------------------------------------------
Boyd Gaming Corp., 6.75%, 2014 2,000,000 2,050,000
- -------------------------------------------------------------------------------------------------
Caesars Entertainment, Inc., 8.125%, 2011 2,000,000 2,290,000
- -------------------------------------------------------------------------------------------------
Grupo Posadas S.A. de C.V., 8.75%, 2011## 216,000 231,120
- -------------------------------------------------------------------------------------------------
Grupo Posadas S.A. de C.V., 8.75%, 2011## 202,000 216,140
- -------------------------------------------------------------------------------------------------
Herbst Gaming, Inc., 7%, 2014## 150,000 150,750
- -------------------------------------------------------------------------------------------------
Host Marriott LP, 7.125%, 2013 1,045,000 1,099,863
- -------------------------------------------------------------------------------------------------
MGM Mirage, Inc., 8.375%, 2011 2,455,000 2,749,600
- -------------------------------------------------------------------------------------------------
MGM Mirage, Inc., 5.875%, 2014 1,975,000 1,935,500
- -------------------------------------------------------------------------------------------------
Mandalay Resort Group, 9.375%, 2010 1,000,000 1,147,500
- -------------------------------------------------------------------------------------------------
Meristar Hospitality Corp., 10.5%, 2009 310,000 335,575
- -------------------------------------------------------------------------------------------------
NCL Corp., 10.625%, 2014## 2,140,000 2,150,700
- -------------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc., 8.25%, 2012 1,145,000 1,219,425
- -------------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc., 8.75%, 2013 300,000 324,750
- -------------------------------------------------------------------------------------------------
Resorts International Hotel & Casino, Inc., 11.5%, 2009 1,600,000 1,876,000
- -------------------------------------------------------------------------------------------------
Scientific Games Corp., 6.25%, 2012## 295,000 299,425
- -------------------------------------------------------------------------------------------------
Starwood Hotels & Resorts Worldwide, Inc.,
7.875%, 2012 1,500,000 1,710,000
- -------------------------------------------------------------------------------------------------
$20,886,348
- -------------------------------------------------------------------------------------------------
Industrial - 2.8%
- -------------------------------------------------------------------------------------------------
Amsted Industries, Inc., 10.25%, 2011## $1,365,000 $1,535,625
- -------------------------------------------------------------------------------------------------
Da Lite Screen Co., Inc., 9.5%, 2011 895,000 988,975
- -------------------------------------------------------------------------------------------------
Eagle-Picher Industries, Inc., 9.75%, 2013 825,000 726,000
- -------------------------------------------------------------------------------------------------
General Binding Corp., 9.375%, 2008 1,480,000 1,465,200
- -------------------------------------------------------------------------------------------------
JohnsonDiversey Holding, Inc., "B", 9.625%, 2012 925,000 1,031,375
- -------------------------------------------------------------------------------------------------
JohnsonDiversey Holding, Inc., 0% to 2007,
10.67% to 2013 2,560,000 2,220,800
- -------------------------------------------------------------------------------------------------
Knowledge Learning Corp., 7.75%, 2015## 815,000 819,075
- -------------------------------------------------------------------------------------------------
Milacron Escrow Corp., 11.5%, 2011 2,665,000 2,851,550
- -------------------------------------------------------------------------------------------------
Rexnord Industries, Inc., 10.125%, 2012 760,000 851,200
- -------------------------------------------------------------------------------------------------
Williams Scotsman, Inc., 9.875%, 2007 3,360,000 3,360,000
- -------------------------------------------------------------------------------------------------
$15,849,800
- -------------------------------------------------------------------------------------------------
Machinery & Tools - 2.1%
- -------------------------------------------------------------------------------------------------
Case New Holland, Inc., 9.25%, 2011## $1,425,000 $1,556,813
- -------------------------------------------------------------------------------------------------
Columbus McKinnon Corp., 8.5%, 2008 1,370,000 1,370,000
- -------------------------------------------------------------------------------------------------
Manitowoc Co., Inc., 10.375%, 2011 EUR 835,000 1,217,152
- -------------------------------------------------------------------------------------------------
Manitowoc Co., Inc., 10.5%, 2012 $231,000 265,650
- -------------------------------------------------------------------------------------------------
Sun Sage B.V., 8.25%, 2009## 1,500,000 1,605,000
- -------------------------------------------------------------------------------------------------
United Rentals, Inc., 6.5%, 2012 690,000 677,925
- -------------------------------------------------------------------------------------------------
United Rentals, Inc., 7.75%, 2013 4,680,000 4,551,300
- -------------------------------------------------------------------------------------------------
United Rentals, Inc., 7%, 2014 565,000 525,450
- -------------------------------------------------------------------------------------------------
$11,769,290
- -------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 2.6%
- -------------------------------------------------------------------------------------------------
CDRV Investors, Inc., 0% to 2010, 9.625% to 2015## $2,100,000 $1,254,750
- -------------------------------------------------------------------------------------------------
Fisher Scientific International, Inc., 8.125%, 2012 1,000,000 1,103,750
- -------------------------------------------------------------------------------------------------
HCA, Inc., 7.875%, 2011 2,000,000 2,198,706
- -------------------------------------------------------------------------------------------------
HCA, Inc., 6.375%, 2015 740,000 744,350
- -------------------------------------------------------------------------------------------------
Healthsouth Corp., 8.5%, 2008 600,000 620,250
- -------------------------------------------------------------------------------------------------
InSight Health Services Corp., 9.875%, 2011 2,480,000 2,467,600
- -------------------------------------------------------------------------------------------------
Tenet Healthcare Corp., 6.5%, 2012 1,495,000 1,330,550
- -------------------------------------------------------------------------------------------------
Tenet Healthcare Corp., 9.875%, 2014## 1,955,000 2,028,313
- -------------------------------------------------------------------------------------------------
U.S. Oncology, Inc., 10.75%, 2014## 2,050,000 2,342,125
- -------------------------------------------------------------------------------------------------
Universal Hospital Services, Inc., 10.125%, 2011 700,000 724,500
- -------------------------------------------------------------------------------------------------
$14,814,894
- -------------------------------------------------------------------------------------------------
Medical Equipment - 0.6%
- -------------------------------------------------------------------------------------------------
Warner Chilcott Corp., 8.75%, 2015## $3,055,000 $3,139,013
- -------------------------------------------------------------------------------------------------
Metals & Mining - 1.3%
- -------------------------------------------------------------------------------------------------
Doe Run Resources Corp., 11.75%, 2008# $3,154,553 $2,965,279
- -------------------------------------------------------------------------------------------------
Foundation PA Coal Co., 7.25%, 2014## 885,000 927,038
- -------------------------------------------------------------------------------------------------
Ispat Inland ULC, 9.75%, 2014 1,060,000 1,306,450
- -------------------------------------------------------------------------------------------------
Oregon Steel Mills, Inc., 10%, 2009 740,000 821,400
- -------------------------------------------------------------------------------------------------
Peabody Energy Corp., 5.875%, 2016 1,000,000 995,000
- -------------------------------------------------------------------------------------------------
SGL Carbon International S.A., 8.5%, 2012## EUR 400,000 583,067
- -------------------------------------------------------------------------------------------------
$7,598,234
- -------------------------------------------------------------------------------------------------
Natural Gas - Pipeline - 2.2%
- -------------------------------------------------------------------------------------------------
ANR Pipeline Co., 8.875%, 2010 $210,000 $233,625
- -------------------------------------------------------------------------------------------------
ANR Pipeline Co., 9.625%, 2021 1,415,000 1,768,750
- -------------------------------------------------------------------------------------------------
El Paso Energy Corp., 7%, 2011 4,755,000 4,778,775
- -------------------------------------------------------------------------------------------------
El Paso Energy Corp., 7.75%, 2013 1,575,000 1,638,000
- -------------------------------------------------------------------------------------------------
Intergas Finance B.V., 6.875%, 2011## 1,337,000 1,373,768
- -------------------------------------------------------------------------------------------------
Markwest Energy Partners LP, 6.875%, 2014## 760,000 763,800
- -------------------------------------------------------------------------------------------------
Williams Cos., Inc., 7.125%, 2011 1,600,000 1,740,000
- -------------------------------------------------------------------------------------------------
$12,296,718
- -------------------------------------------------------------------------------------------------
Oil Services - 0.5%
- -------------------------------------------------------------------------------------------------
GulfMark Offshore, Inc., 7.75%, 2014## $1,000,000 $1,050,000
- -------------------------------------------------------------------------------------------------
Hanover Compressor Co., 9%, 2014 1,120,000 1,232,000
- -------------------------------------------------------------------------------------------------
Ocean Rig Norway S.A., 10.25%, 2008 650,000 669,500
- -------------------------------------------------------------------------------------------------
$2,951,500
- -------------------------------------------------------------------------------------------------
Oils - 0.3%
- -------------------------------------------------------------------------------------------------
Hurricane Finance B.V., 9.625%, 2010 $1,160,000 $1,267,300
- -------------------------------------------------------------------------------------------------
Premcor Refining Group, Inc., 7.75%, 2012 420,000 456,750
- -------------------------------------------------------------------------------------------------
$1,724,050
- -------------------------------------------------------------------------------------------------
Pollution Control - 0.7%
- -------------------------------------------------------------------------------------------------
Allied Waste North America, Inc., 7.875%, 2013 $20,000 $19,850
- -------------------------------------------------------------------------------------------------
Allied Waste North America, Inc., 6.125%, 2014 4,205,000 3,816,038
- -------------------------------------------------------------------------------------------------
$3,835,888
- -------------------------------------------------------------------------------------------------
Precious Metals & Minerals - 0.3%
- -------------------------------------------------------------------------------------------------
Freeport-McMoRan Copper & Gold, Inc., 6.875%, 2014 $1,876,000 $1,876,000
- -------------------------------------------------------------------------------------------------
Printing & Publishing - 2.1%
- -------------------------------------------------------------------------------------------------
Cenveo Corp., 9.625%, 2012 $520,000 $559,000
- -------------------------------------------------------------------------------------------------
Cenveo Corp., 7.875%, 2013 1,250,000 1,093,750
- -------------------------------------------------------------------------------------------------
Dex Media East LLC, 12.125%, 2012 650,000 778,375
- -------------------------------------------------------------------------------------------------
Dex Media West LLC, 9.875%, 2013 610,000 691,588
- -------------------------------------------------------------------------------------------------
Dex Media, Inc., 0% to 2008, 9% to 2013 3,835,000 2,885,838
- -------------------------------------------------------------------------------------------------
Hollinger, Inc., 11.875%, 2011## 821,000 942,098
- -------------------------------------------------------------------------------------------------
Houghton Mifflin Co., 0% to 2008, 11.5% to 2013 2,615,000 1,778,200
- -------------------------------------------------------------------------------------------------
Lighthouse International Co. S.A., 8%, 2014## EUR 1,200,000 1,616,152
- -------------------------------------------------------------------------------------------------
WDAC Subsidiary Corp., 8.375%, 2014## 1,295,000 1,262,625
- -------------------------------------------------------------------------------------------------
$11,607,626
- -------------------------------------------------------------------------------------------------
Restaurants - 0.4%
- -------------------------------------------------------------------------------------------------
Carrols Holdings Corp., 9%, 2013## $835,000 $870,488
- -------------------------------------------------------------------------------------------------
Uno Restarant Corp., 10%, 2011## 1,645,000 1,626,543
- -------------------------------------------------------------------------------------------------
$2,497,031
- -------------------------------------------------------------------------------------------------
Retailers - 1.9%
- -------------------------------------------------------------------------------------------------
Couche-Tard, Inc., 7.5%, 2013 $1,795,000 $1,898,213
- -------------------------------------------------------------------------------------------------
Dollar General Corp., 8.625%, 2010 1,535,000 1,780,600
- -------------------------------------------------------------------------------------------------
Duane Reade, Inc., 9.75%, 2011## 1,480,000 1,339,400
- -------------------------------------------------------------------------------------------------
Eye Care Centers of America, Inc., 10.75%, 2015## 1,355,000 1,344,838
- -------------------------------------------------------------------------------------------------
Mothers Work, Inc., 11.25%, 2010 880,000 888,800
- -------------------------------------------------------------------------------------------------
Rite Aid Corp., 9.25%, 2013 505,000 502,475
- -------------------------------------------------------------------------------------------------
Rite Aid Corp., 6.875%, 2013 1,665,000 1,506,825
- -------------------------------------------------------------------------------------------------
Rite Aid Corp., 7.7%, 2027 905,000 726,263
- -------------------------------------------------------------------------------------------------
Saks, Inc., 7%, 2013 1,000,000 1,025,000
- -------------------------------------------------------------------------------------------------
$11,012,414
- -------------------------------------------------------------------------------------------------
Supermarkets - 0.1%
- -------------------------------------------------------------------------------------------------
Roundy's, Inc., 8.875%, 2012 $775,000 $837,000
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireless - 5.2%
- -------------------------------------------------------------------------------------------------
Alamosa Holdings, Inc., 11%, 2010 $260,000 $302,900
- -------------------------------------------------------------------------------------------------
Alamosa Holdings, Inc., 0% to 2005, 12% to 2009 978,000 1,053,795
- -------------------------------------------------------------------------------------------------
American Tower Corp., 9.375%, 2009 189,000 198,686
- -------------------------------------------------------------------------------------------------
American Tower Corp., 7.125%, 2012## 665,000 668,325
- -------------------------------------------------------------------------------------------------
American Tower, Inc., 7.25%, 2011 930,000 971,850
- -------------------------------------------------------------------------------------------------
Centennial Communications Corp., 10.125%, 2013 2,460,000 2,785,950
- -------------------------------------------------------------------------------------------------
Crown Castle International Corp., 7.5%, 2013 840,000 891,450
- -------------------------------------------------------------------------------------------------
Dobson Cellular Systems, Inc., 8.375%, 2011## 300,000 315,750
- -------------------------------------------------------------------------------------------------
Dobson Communications Corp., 8.875%, 2013 1,225,000 903,438
- -------------------------------------------------------------------------------------------------
IWO Escrow Co., 6.32%, 2012## 155,000 155,000
- -------------------------------------------------------------------------------------------------
Inmarsat Finance II PLC, 0% to 2008, 10.375% to 2012 3,245,000 2,352,625
- -------------------------------------------------------------------------------------------------
Innova S. de R.L., 9.375%, 2013 800,000 908,000
- -------------------------------------------------------------------------------------------------
MetroPCS, Inc., 10.75%, 2011 1,665,000 1,781,550
- -------------------------------------------------------------------------------------------------
Mobile TeleSystems OJSC, 9.75%, 2008## 333,000 357,975
- -------------------------------------------------------------------------------------------------
Mobile TeleSystems OJSC, 8.375%, 2010## 272,000 282,200
- -------------------------------------------------------------------------------------------------
Nextel Communications, Inc., 7.375%, 2015 6,835,000 7,535,588
- -------------------------------------------------------------------------------------------------
Rogers Wireless, Inc., 8%, 2012## 265,000 283,550
- -------------------------------------------------------------------------------------------------
Rogers Wireless, Inc., 6.375%, 2014 640,000 644,800
- -------------------------------------------------------------------------------------------------
Rogers Wireless, Inc., 7.5%, 2015## 570,000 611,325
- -------------------------------------------------------------------------------------------------
Rural Cellular Corp., 9.75%, 2010 2,223,000 2,145,195
- -------------------------------------------------------------------------------------------------
Rural Cellular Corp., 9.875%, 2010 100,000 106,500
- -------------------------------------------------------------------------------------------------
U.S. Unwired, Inc., 10%, 2012 1,210,000 1,349,150
- -------------------------------------------------------------------------------------------------
Ubiquitel Operating Co., 9.875%, 2011 965,000 1,063,913
- -------------------------------------------------------------------------------------------------
Vimpel-Communications, 10.45%, 2005## 425,000 429,250
- -------------------------------------------------------------------------------------------------
Vimpel-Communications, 10%, 2009## 1,160,000 1,244,100
- -------------------------------------------------------------------------------------------------
$29,342,865
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireline - 3.9%
- -------------------------------------------------------------------------------------------------
AT&T Corp., 7.3%, 2011 $470,000 $545,200
- -------------------------------------------------------------------------------------------------
Axtel S.A. de C.V., 11%, 2013## 1,000,000 1,073,750
- -------------------------------------------------------------------------------------------------
Axtel S.A. de C.V., 11%, 2013 1,559,000 1,673,976
- -------------------------------------------------------------------------------------------------
Cincinnati Bell, Inc., 8.375%, 2014 1,175,000 1,192,625
- -------------------------------------------------------------------------------------------------
Citizens Communications Co., 9.25%, 2011 1,225,000 1,430,188
- -------------------------------------------------------------------------------------------------
Citizens Communications Co., 6.25%, 2013 560,000 558,600
- -------------------------------------------------------------------------------------------------
GCI, Inc., 7.25%, 2014 1,325,000 1,318,375
- -------------------------------------------------------------------------------------------------
MCI, Inc., 6.908%, 2007 740,000 756,650
- -------------------------------------------------------------------------------------------------
MCI, Inc., 7.688%, 2009 825,000 861,094
- -------------------------------------------------------------------------------------------------
Qwest Capital Funding, Inc., 7.25%, 2011 1,070,000 1,027,200
- -------------------------------------------------------------------------------------------------
Qwest Corp., 14%, 2010## 4,190,000 4,975,625
- -------------------------------------------------------------------------------------------------
Qwest Corp., 7.875%, 2011## 1,400,000 1,498,000
- -------------------------------------------------------------------------------------------------
Qwest Corp., 9.125%, 2012## 1,370,000 1,558,375
- -------------------------------------------------------------------------------------------------
Time Warner Telecom Holdings, Inc., 10.125%, 2011 2,285,000 2,239,300
- -------------------------------------------------------------------------------------------------
Time Warner Telecom Holdings, Inc., 9.25%, 2014 1,275,000 1,306,875
- -------------------------------------------------------------------------------------------------
$22,015,833
- -------------------------------------------------------------------------------------------------
Telephone Services - 0.1%
- -------------------------------------------------------------------------------------------------
Global Crossing Ltd., 10.75%, 2014## $770,000 $760,375
- -------------------------------------------------------------------------------------------------
Tire & Rubber - 0%
- -------------------------------------------------------------------------------------------------
Cooper-Standard Automotive Group, 8.375%, 2014## $155,000 $147,250
- -------------------------------------------------------------------------------------------------
Transportation - Services - 0.4%
- -------------------------------------------------------------------------------------------------
Stena AB, 7.5%, 2013 $615,000 $625,763
- -------------------------------------------------------------------------------------------------
TFM S.A. de C.V., 10.25%, 2007 292,000 311,710
- -------------------------------------------------------------------------------------------------
TFM S.A. de C.V., 11.75%, 2009 598,000 602,485
- -------------------------------------------------------------------------------------------------
TFM S.A. de C.V., 12.5%, 2012 650,000 757,250
- -------------------------------------------------------------------------------------------------
$2,297,208
- -------------------------------------------------------------------------------------------------
Utilities - Electric Power - 5.1%
- -------------------------------------------------------------------------------------------------
AES Corp., 8.75%, 2013## $325,000 $364,000
- -------------------------------------------------------------------------------------------------
AES Corp., 9%, 2015## 1,285,000 1,452,050
- -------------------------------------------------------------------------------------------------
Allegheny Energy Supply Co. LLC, 8.25%, 2012## 1,940,000 2,158,250
- -------------------------------------------------------------------------------------------------
Calpine Corp., 8.5%, 2008 2,730,000 2,006,550
- -------------------------------------------------------------------------------------------------
Calpine Corp., 8.75%, 2013## 3,400,000 2,584,000
- -------------------------------------------------------------------------------------------------
DPL, Inc., 6.875%, 2011 1,580,000 1,713,501
- -------------------------------------------------------------------------------------------------
Dynegy Holdings, Inc., 6.875%, 2011 1,030,000 957,900
- -------------------------------------------------------------------------------------------------
Empresa Nacional de Electricidad S.A., 8.35%, 2013 997,000 1,168,989
- -------------------------------------------------------------------------------------------------
Enersis S.A., 7.375%, 2014 782,000 848,604
- -------------------------------------------------------------------------------------------------
FirstEnergy Corp., 6.45%, 2011 1,095,000 1,188,299
- -------------------------------------------------------------------------------------------------
FirstEnergy Corp., 7.375%, 2031 1,030,000 1,197,686
- -------------------------------------------------------------------------------------------------
Midwest Generation LLC, 8.75%, 2034 2,555,000 2,855,213
- -------------------------------------------------------------------------------------------------
Mission Energy Holding Co., 13.5%, 2008 1,275,000 1,590,563
- -------------------------------------------------------------------------------------------------
NGC Corp. Capital Trust, 8.316%, 2027 1,975,000 1,619,500
- -------------------------------------------------------------------------------------------------
NorthWestern Corp., 5.875%, 2014## 1,225,000 1,260,665
- -------------------------------------------------------------------------------------------------
PSEG Energy Holdings LLC, 8.625%, 2008 760,000 817,950
- -------------------------------------------------------------------------------------------------
PSEG Power LLC, 7.75%, 2011 815,000 951,371
- -------------------------------------------------------------------------------------------------
Reliant Energy, Inc., 6.75%, 2014 530,000 516,750
- -------------------------------------------------------------------------------------------------
Reliant Resources, Inc., 9.25%, 2010 785,000 873,313
- -------------------------------------------------------------------------------------------------
Sierra Pacific Resources, 8.625%, 2014 1,540,000 1,711,325
- -------------------------------------------------------------------------------------------------
Texas Genco LLC, 6.875%, 2014## 1,105,000 1,143,675
- -------------------------------------------------------------------------------------------------
$28,980,154
- -------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $495,402,017) $518,281,409
- -------------------------------------------------------------------------------------------------
Stocks - 1.4%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
Apparel Manufacturers - 0%
- -------------------------------------------------------------------------------------------------
Sind Holdings, Inc.* 385 $37,884
- -------------------------------------------------------------------------------------------------
Automotive - 0.2%
- -------------------------------------------------------------------------------------------------
Magna International, Inc., "A" 12,600 $954,324
- -------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 0.4%
- -------------------------------------------------------------------------------------------------
NTL, Inc.* 12,137 $825,680
- -------------------------------------------------------------------------------------------------
Sinclair Broadcast Group, Inc., "A" 75,683 622,871
- -------------------------------------------------------------------------------------------------
Telewest Global, Inc.* 30,109 507,337
- -------------------------------------------------------------------------------------------------
$1,955,888
- -------------------------------------------------------------------------------------------------
Engineering - Construction - 0.1%
- -------------------------------------------------------------------------------------------------
Intergrated Electrical Services, Inc. 185,000 $736,300
- -------------------------------------------------------------------------------------------------
Natural Gas - Distribution - 0.5%
- -------------------------------------------------------------------------------------------------
Ferrell Gas Partners LP 40,712 $867,980
- -------------------------------------------------------------------------------------------------
Northwestern Corp.* 70,951 2,012,170
- -------------------------------------------------------------------------------------------------
$2,880,150
- -------------------------------------------------------------------------------------------------
Pharmaceuticals - 0.2%
- -------------------------------------------------------------------------------------------------
Merck & Co., Inc. 49,000 $1,374,450
- -------------------------------------------------------------------------------------------------
Specialty Chemicals - 0%
- -------------------------------------------------------------------------------------------------
Sterling Chemicals, Inc.* 7 $277
- -------------------------------------------------------------------------------------------------
Telephone Services - 0%
- -------------------------------------------------------------------------------------------------
VersaTel Telecom International N.V.* 2,616 $6,927
- -------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $8,677,326) $7,946,200
- -------------------------------------------------------------------------------------------------
Convertible Preferred Stocks - 0.2%
- -------------------------------------------------------------------------------------------------
Automotive - 0.2%
- -------------------------------------------------------------------------------------------------
Ford Motor Co. Capital Trust II, 6.5% 28,036 $1,401,239
- -------------------------------------------------------------------------------------------------
Hayes Lemmerz International, Inc., "A", 8% 59 4,528
- -------------------------------------------------------------------------------------------------
Total Convertible Preferred Stocks
(Identified Cost, $1,488,965) $1,405,767
- -------------------------------------------------------------------------------------------------
Portfolio of Investments - continued
Preferred Stocks - 0.7%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 0.6%
- -------------------------------------------------------------------------------------------------
Paxson Communications Corp., 14.25% 142 $1,164,400
- -------------------------------------------------------------------------------------------------
Spanish Broadcasting Systems, Inc., "B", 10.75% 1,874 2,033,290
- -------------------------------------------------------------------------------------------------
$3,197,690
- -------------------------------------------------------------------------------------------------
Printing & Publishing - 0.1%
- -------------------------------------------------------------------------------------------------
PRIMEDIA, Inc., 8.625% 5,050 $477,225
- -------------------------------------------------------------------------------------------------
Real Estate - 0%
- -------------------------------------------------------------------------------------------------
HRPT Properties Trust, 8.75% 1,375 $37,400
- -------------------------------------------------------------------------------------------------
Telephone Services - 0%
- -------------------------------------------------------------------------------------------------
PTV, Inc., "A", 10% 12 $37
- -------------------------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $3,687,679) $3,712,352
- -------------------------------------------------------------------------------------------------
Warrants - 0%
- -------------------------------------------------------------------------------------------------
STRIKE FIRST
ISSUER PRICE EXERCISE SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
Grande Communications Holdings (Broadcast & Cable TV)* $0.01 10/01/04 1,695 $170
- -------------------------------------------------------------------------------------------------
Pliant Corp. (Containers)##* 0.01 5/25/00 815 8
- -------------------------------------------------------------------------------------------------
Sterling Chemicals, Inc. (Specialty Chemicals)* 52.00 12/31/02 11 20
- -------------------------------------------------------------------------------------------------
Thermadyne Holdings Corp. (Machinery & Tools)* 20.78 5/29/03 338 169
- -------------------------------------------------------------------------------------------------
XM Satellite Radio, Inc. (Broadcast & Cable TV)* 45.24 9/16/00 300 22,500
- -------------------------------------------------------------------------------------------------
XO Communications, Inc., "A" (Telephone Services)* 6.25 5/27/03 470 202
- -------------------------------------------------------------------------------------------------
XO Communications, Inc., "B" (Telephone Services)* 7.50 5/27/03 352 148
- -------------------------------------------------------------------------------------------------
XO Communications, Inc., "C" (Telephone Services)* 10.00 5/27/03 352 95
- -------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $143,262) $23,312
- -------------------------------------------------------------------------------------------------
Repurchase Agreement - 5.6%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
Morgan Stanley, 2.48%, dated 01/31/05, due 02/01/05,
total to be received $31,622,178 (secured by various
U.S. Treasury and Federal Agency obligations in a
jointly traded account), at Cost $31,620,000 $31,620,000
- -------------------------------------------------------------------------------------------------
Total Investments - (Identified Cost, $541,019,249) (+) $562,989,040
- -------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.4% 2,276,951
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $565,265,991
- -------------------------------------------------------------------------------------------------
* Non-income producing security.
(+) As of January 31, 2005, the fund had 1 security representing $37,884 and
0.01% of net assets that was fair valued in accordance with the policies
adopted by the Board of Trustees.
# Payment-in-kind security.
## SEC Rule 144A restriction.
^^ Interest only 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:
ARS = Argentine Peso
EUR = Euro
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets
and liabilities composing the total value of the fund.
AT 1/31/05
ASSETS
Investments, at value, (identified cost, $541,019,249) $562,989,040
- -----------------------------------------------------------------------------------------------------
Cash 1,710,391
- -----------------------------------------------------------------------------------------------------
Foreign currency, at value (identified cost, $256,884) 255,630
- -----------------------------------------------------------------------------------------------------
Receivable for forward foreign currency exchange
contracts 39,515
- -----------------------------------------------------------------------------------------------------
Receivable for investments sold 3,674,773
- -----------------------------------------------------------------------------------------------------
Receivable for fund shares sold 3,033,548
- -----------------------------------------------------------------------------------------------------
Interest and dividends receivable 10,252,880
- -----------------------------------------------------------------------------------------------------
Total assets $581,955,777
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Distributions payable $1,562,479
- -----------------------------------------------------------------------------------------------------
Payable for forward foreign currency exchange contracts 101,623
- -----------------------------------------------------------------------------------------------------
Payable for investments purchased 13,755,768
- -----------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 1,218,329
- -----------------------------------------------------------------------------------------------------
Payable to affiliates
- -----------------------------------------------------------------------------------------------------
Management fee 23,081
- -----------------------------------------------------------------------------------------------------
Distribution and service fee 28,506
- -----------------------------------------------------------------------------------------------------
Total liabilities $16,689,786
- -----------------------------------------------------------------------------------------------------
Net assets $565,265,991
- -----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $543,354,327
- -----------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation) on investments
and translation of assets and liabilities in foreign
currencies 21,906,951
- -----------------------------------------------------------------------------------------------------
Accumulated undistributed net realized gain (loss) on
investments and foreign currency transactions 1,249,903
- -----------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment
income (1,245,190)
- -----------------------------------------------------------------------------------------------------
Net assets $565,265,991
- -----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 74,046,175
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class A shares
Net assets $278,885,514
- -----------------------------------------------------------------------------------------------------
Shares outstanding 36,552,645
- -----------------------------------------------------------------------------------------------------
Net asset value per share $7.63
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/95.25X$7.63) $8.01
- -----------------------------------------------------------------------------------------------------
Class B shares
Net assets $151,711,413
- -----------------------------------------------------------------------------------------------------
Shares outstanding 19,827,256
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $7.65
- -----------------------------------------------------------------------------------------------------
Class C shares
Net assets $101,113,097
- -----------------------------------------------------------------------------------------------------
Shares outstanding 13,282,306
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $7.61
- -----------------------------------------------------------------------------------------------------
Class I shares
Net assets $33,555,967
- -----------------------------------------------------------------------------------------------------
Shares outstanding 4,383,968
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $7.65
- -----------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------
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.
YEAR ENDED 1/31/05
NET INVESTMENT INCOME
Income
- -----------------------------------------------------------------------------------------------------
Interest $37,096,362
- -----------------------------------------------------------------------------------------------------
Dividends 622,052
- -----------------------------------------------------------------------------------------------------
Foreign taxes withheld (718)
- -----------------------------------------------------------------------------------------------------
Total investment income $37,717,696
- -----------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------
Management fee $2,882,560
- -----------------------------------------------------------------------------------------------------
Trustees" compensation 11,565
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 702,722
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 702,957
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 1,428,085
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 903,130
- -----------------------------------------------------------------------------------------------------
Administrative fee 35,907
- -----------------------------------------------------------------------------------------------------
Custodian fee 199,517
- -----------------------------------------------------------------------------------------------------
Printing 58,232
- -----------------------------------------------------------------------------------------------------
Postage 37,265
- -----------------------------------------------------------------------------------------------------
Auditing fees 59,769
- -----------------------------------------------------------------------------------------------------
Legal fees 9,867
- -----------------------------------------------------------------------------------------------------
Miscellaneous 135,305
- -----------------------------------------------------------------------------------------------------
Total expenses $7,166,881
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (23,440)
- -----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (1,842,074)
- -----------------------------------------------------------------------------------------------------
Net expenses $5,301,367
- -----------------------------------------------------------------------------------------------------
Net investment income $32,416,329
- -----------------------------------------------------------------------------------------------------
Statement of Operations - continued
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) (identified cost basis)
- -----------------------------------------------------------------------------------------------------
Investment transactions $8,501,767
- -----------------------------------------------------------------------------------------------------
Foreign currency transactions (549,453)
- -----------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions $7,952,314
- -----------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- -----------------------------------------------------------------------------------------------------
Investments $(1,158,226)
- -----------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign
currencies (105,761)
- -----------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation $(1,263,987)
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency $6,688,327
- -----------------------------------------------------------------------------------------------------
Change in net assets from operations $39,104,656
- -----------------------------------------------------------------------------------------------------
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.
FOR YEARS ENDED 1/31 2005 2004
CHANGE IN NET ASSETS
FROM OPERATIONS
Net investment income $32,416,329 $23,586,816
- -------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions 7,952,314 13,934,431
- -------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation (1,263,987) 29,433,499
- ------------------------------------------------------------- -------------- ------------
Change in net assets from operations $39,104,656 $66,954,746
- ------------------------------------------------------------- -------------- ------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income
- -------------------------------------------------------------------------------------------------------
Class A $(15,729,828) $(10,400,791)
- -------------------------------------------------------------------------------------------------------
Class B (10,299,301) (8,831,107)
- -------------------------------------------------------------------------------------------------------
Class C (6,505,024) (4,977,549)
- -------------------------------------------------------------------------------------------------------
Class I (854,209) (318,334)
- -------------------------------------------------------------------------------------------------------
From net realized gain on investments and foreign
currency transactions
- -------------------------------------------------------------------------------------------------------
Class A (2,177,440) --
- -------------------------------------------------------------------------------------------------------
Class B (1,431,789) --
- -------------------------------------------------------------------------------------------------------
Class C (928,293) --
- -------------------------------------------------------------------------------------------------------
Class I (119,179) --
- -------------------------------------------------------------------------------------------------------
Total distributions declared to shareholders $(38,045,063) $(24,527,781)
- ------------------------------------------------------------- -------------- ------------
Change in net assets from fund share transactions $185,426,549 $152,480,828
- ------------------------------------------------------------- -------------- ------------
Redemption fees $20,643 $--
- ------------------------------------------------------------- -------------- ------------
Total change in net assets $186,506,785 $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 $1,245,190 and
$1,246,256, respectively) $565,265,991 $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 past 5 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. This information has been audited by the fund's
independent registered public accounting firm, whose report, together with the fund's financial statements, are included in
this report.
YEARS ENDED 1/31
---------------------------------------------------------------------------------
CLASS A 2005 2004 2003 2002 2001
Net asset value, beginning of period $7.65 $6.61 $7.08 $7.96 $8.79
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.57 $0.60 $0.62 $0.80 $0.92
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 0.08 1.05 (0.43) (0.85) (0.67)
- ---------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $0.65 $1.65 $0.19 $(0.05) $0.25
- ---------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS
From net investment income $(0.59) $(0.61) $(0.66) $(0.82) $(0.95)
- -----------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
and foreign currency transactions (0.08) -- -- -- (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 $(0.67) $(0.61) $(0.66) $(0.83) $(1.08)
- ---------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to
paid-in capital# $0.00+++ $-- $-- $-- $--
- -------------------------------------------------------- ------ ------ ------ ------
Net asset value, end of period $7.63 $7.65 $6.61 $7.08 $7.96
- -------------------------------------------------------- ------ ------ ------ ------
Total return (%)(+)& 8.98 26.04 2.95 (0.30) 3.28
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 1/31
---------------------------------------------------------------------------------
CLASS A (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 0.87 1.01 1.01 1.01 1.02
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.62 8.21 9.35 11.18 11.43
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 69 98 104 133 147
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $278,886 $150,334 $70,892 $37,187 $19,982
- -----------------------------------------------------------------------------------------------------------------------------
(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 and certain other fees and expenses. In addition, the
investment adviser contractually waived a portion of its fee for certain of the periods indicated. Effective June 7, 2004,
the investment adviser also has voluntarily agreed to reimburse the fund for its porportional share of substantially all
of Independent Chief Compliance Officer service fees paid to Tarantino LLC. To the extent actual expenses were over this
limitation and the waiver/reimbursement had not been in place, the net investment income per share and the ratios would
have been:
Net investment income $0.54 $0.57 $0.60 $0.77 $0.88
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.29 1.34 1.37 1.46 1.53
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.20 7.88 8.99 10.73 10.92
- -----------------------------------------------------------------------------------------------------------------------------
(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.
+++ 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.
& From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
(+) Total returns 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
YEARS ENDED 1/31
---------------------------------------------------------------------------------
CLASS B 2005 2004 2003 2002 2001
Net asset value, beginning of period $7.67 $6.63 $7.09 $7.98 $8.81
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.53 $0.55 $0.58 $0.77 $0.89
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 0.07 1.06 (0.43) (0.87) (0.69)
- ---------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $0.60 $1.61 $0.15 $(0.10) $0.20
- ---------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.54) $(0.57) $(0.61) $(0.78) $(0.90)
- -----------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
and foreign currency transactions (0.08) -- -- -- (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 $(0.62) $(0.57) $(0.61) $(0.79) $(1.03)
- ---------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to
paid-in capital# $0.00+++ $-- $-- $-- $--
- ---------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $7.65 $7.67 $6.63 $7.09 $7.98
- ---------------------------------------------- -------- ------ ------ ------ ------
Total return (%)& 8.28 25.19 2.43 (1.07) 2.63
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 1/31
---------------------------------------------------------------------------------
CLASS B (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.52 1.66 1.66 1.66 1.67
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.03 7.61 8.75 10.59 10.83
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 69 98 104 133 147
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $151,711 $140,348 $72,321 $41,481 $26,031
- -----------------------------------------------------------------------------------------------------------------------------
(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 and certain other fees and expenses. In addition, the
investment adviser contractually waived a portion of its fee for certain of the periods indicated. Effective June 7, 2004,
the investment adviser also has voluntarily agreed to reimburse the fund for its porportional share of substantially all
of Independent Chief Compliance Officer service fees paid to Tarantino LLC. To the extent actual expenses were over this
limitation and the waiver/reimbursement had not been in place, the net investment income per share and the ratios would
have been:
Net investment income $0.50 $0.53 $0.56 $0.73 $0.85
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.94 1.99 2.02 2.11 2.18
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 6.61 7.28 8.39 10.14 10.32
- -----------------------------------------------------------------------------------------------------------------------------
(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.
+++ 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.
& From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 1/31
---------------------------------------------------------------------------------
CLASS C 2005 2004 2003 2002 2001
Net asset value, beginning of period $7.63 $6.60 $7.07 $7.95 $8.78
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.52 $0.54 $0.57 $0.77 $0.89
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 0.08 1.06 (0.43) (0.86) (0.69)
- ---------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $0.60 $1.60 $0.14 $(0.09) $0.20
- ---------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS
From net investment income $(0.54) $(0.57) $(0.61) $(0.78) $(0.90)
- -----------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
and foreign currency transactions (0.08) -- -- -- (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 $(0.62) $(0.57) $(0.61) $(0.79) $(1.03)
- ---------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to
paid-in capital# $0.00+++ $-- $-- $-- $--
- ---------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $7.61 $7.63 $6.60 $7.07 $7.95
- ---------------------------------------------- -------- ------ ------ ------ ------
Total return (%)& 8.28 25.10 2.29 (0.94) 2.64
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 1/31
---------------------------------------------------------------------------------
CLASS C (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.52 1.66 1.66 1.66 1.67
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.01 7.56 8.67 10.62 10.90
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 69 98 104 133 147
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $101,113 $84,643 $38,130 $17,518 $11,221
- -----------------------------------------------------------------------------------------------------------------------------
(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 and certain other fees and expenses. In addition, the
investment adviser contractually waived a portion of its fee for certain of the periods indicated. Effective June 7, 2004,
the investment adviser also has voluntarily agreed to reimburse the fund for its porportional share of substantially all
of Independent Chief Compliance Officer service fees paid to Tarantino LLC. To the extent actual expenses were over this
limitation and the waiver/reimbursement had not been in place, the net investment income per share and the ratios would
have been:
Net investment income $0.49 $0.52 $0.55 $0.74 $0.84
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.94 1.99 2.02 2.11 2.18
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 6.59 7.23 8.31 10.17 10.39
- -----------------------------------------------------------------------------------------------------------------------------
(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.
+++ 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.
& From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 1/31
--------------------------------------------------------------------------------
CLASS I 2005 2004 2003 2002 2001
Net asset value, beginning of period $7.68 $6.64 $7.10 $8.04 $8.85
- --------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.55 $0.63 $0.64 $0.59 $1.07
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency 0.12 1.05 (0.42) (0.67) (0.77)
- --------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $0.67 $1.68 $0.22 $(0.08) $0.30
- --------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS
From net investment income $(0.62) $(0.64) $(0.68) $(0.85) $(0.98)
- --------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
and foreign currency transactions (0.08) -- -- -- (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 $(0.70) $(0.64) $(0.68) $(0.86) $(1.11)
- --------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to
paid-in capital# $0.00+++ $-- $-- $-- $--
- --------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $7.65 $7.68 $6.64 $7.10 $8.04
- --------------------------------------------- ------ ------ ------ ------ ------
Total return (%)& 9.23 26.41 3.45 (0.74) 3.88
- --------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 1/31
--------------------------------------------------------------------------------
CLASS I (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 0.51 0.66 0.66 0.66 0.67
- --------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.75 8.66 9.76 10.25 11.75
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 69 98 104 133 147
- --------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $33,556 $3,434 $2,508 $155 $0++++
- --------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually agreed under a temporary expense agreement to pay all of the fund's operating
expenses, exclusive of management fees and certain other fees and expenses. In addition, the investment adviser
contractually waived a portion of its fee for certain of the periods indicated. Effective June 7, 2004, the investment
adviser also has voluntarily agreed to reimburse the fund for its porportional share of substantially all of Independent
Chief Compliance Officer service fees paid to Tarantino LLC. To the extent actual expenses were over this limitation and
the waiver/ reimbursement had not been in place, the net investment income per share and the ratios would have been:
Net investment income $0.52 $0.61 $0.62 $0.56 $1.02
- --------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 0.93 0.99 1.02 1.11 1.18
- --------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.33 8.33 9.40 9.80 11.24
- --------------------------------------------------------------------------------------------------------------------------
(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.
+++ 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 reductions from fees paid indirectly.
& From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(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 July 1, 2004 and before April
1, 2005, the fund will charge a 2% redemption fee (which is retained by the
fund) on proceeds from Class A, Class B, Class C, and Class I shares redeemed
or exchanged within 30 calendar days following their acquisition (either by
purchase or exchange). Effective April 1, 2005, the fund will charge a 1%
redemption fee on proceeds from Class A, Class B, Class C, and Class I shares
redeemed or exchanged within 30 calendar days following their acquisition. The
fund may change the redemption fee period in the future, including in
connection with Securities and Exchange Commission rule developments. See the
fund's prospectus for details. Any redemption 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.
The fund may receive proceeds from litigation settlements involving its
portfolio holdings. Any proceeds received are reflected in realized gain/loss
in the Statement of Operations, or in unrealized gain/loss if the security is
still held by the fund.
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 year ended January 31, 2005, 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 foreign currency transactions, defaulted bonds, wash sales, and
amortization and accretion on debt securities.
The tax character of distributions declared for the years ended January 31,
2005
and January 31, 2004 was as follows:
1/31/05 1/31/04
Distributions declared from:
Ordinary income: $36,308,924 $24,527,781
- -----------------------------------------------------------------------
Long-term capital gain 1,736,139 --
- -----------------------------------------------------------------------
Total distributions declared $38,045,063 $24,527,781
- -----------------------------------------------------------------------
During the year ended January 31, 2005, accumulated distributions in excess of
net investment income decreased by $973,099, accumulated undistributed net
realized gain on investments and foreign currency transactions decreased by
$2,114,069, and paid-in capital increased by $1,140,970 due to differences
between book and tax accounting for foreign currency transactions,
amortization and accretion on debt securities, defaulted bonds and treating a
portion of the proceeds from redemptions as a distribution from realized gains
for tax purposes. This change had no effect on the net assets or net asset
value per share.
As of January 31, 2005, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $4,006,475
---------------------------------------------------------
Undistributed long-term capital gain 1,684,363
---------------------------------------------------------
Unrealized appreciation (depreciation) 19,914,484
---------------------------------------------------------
Other temporary differences (3,693,658)
---------------------------------------------------------
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. As part of a settlement agreement with
the New York Attorney General concerning market timing and related matters
(See Legal Proceedings footnote), 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. Management
fees incurred for the year ended January 31, 2005 were an effective rate of
0.51% 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, distribution and service fees and certain other fees
and expenses. This is reflected as a reduction of expenses in the Statement
of Operations.
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 current Independent Trustees. Included in
Trustees" compensation is a net increase of $991 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 $(2) for retired Independent
Trustees for the year ended January 31, 2005.
This fund and certain other MFS funds (the "funds") have entered into a
services agreement (the "Agreement") which provides for payment of fees by the
funds to Tarantino LLC in return for the provision of services of an
Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is an
officer of the funds and the sole member of Tarantino LLC. MFS has agreed to
reimburse each of the funds for a proportional share of substantially all of
the payments made by the funds to Tarantino LLC and also to provide office
space and other administrative support and supplies to the ICCO. The 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. The
fund paid MFS an administrative fee up to the following annual percentage
rates of the fund's average daily net assets:
BEGINNING OF
PERIOD 4/01/04
EFFECTIVE DATE THROUGH 3/31/04 THROUGH 2/28/05 3/01/05
First $2 billion 0.0175% 0.01120% 0.01626%
- -----------------------------------------------------------------------------
Next $2.5 billion 0.0130% 0.00832% 0.01206%
- -----------------------------------------------------------------------------
Next $2.5 billion 0.0005% 0.00032% 0.00056%
- -----------------------------------------------------------------------------
In excess of $7 billion 0.0000% 0.00000% 0.00000%
- -----------------------------------------------------------------------------
The March 1, 2005 rates were not effective during the current reporting
period. For the year ended January 31, 2005, the fund paid MFS $35,907,
equivalent to 0.0081% 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
$253,973 for the year ended January 31, 2005, 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 as compensation for services provided by MFD and financial
intermediaries in connection with the distribution and servicing of its
shares. One component of the plan is a distribution fee and another is a
service fee paid by MFD to financial intermediaries that enter into sales or
service agreements with MFD or its affiliates based on the average daily net
assets of accounts attributable to such intermediaries. The 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 may retain all or a portion of the service fee, including for accounts for
which there is no financial intermediary of record. Service fees retained by
MFD for the year ended January 31, 2005 amounted to:
CLASS A CLASS B CLASS C
Service Fee Retained by MFD $11,644 $105 $202
- -------------------------------------------------------------------------
Fees incurred under the distribution plan during the year ended January 31, 2005
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 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 of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended January 31, 2005 were as
follows:
CLASS A CLASS B CLASS C
Contingent Deferred Sales
Charges Imposed $7,169 $352,062 $38,503
- ----------------------------------------------------------------------------
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 was set at 0.10% of the fund's average daily net assets. For
the period July 1, 2004 through December 31, 2004, the fund was charged up to
0.0861% of its average daily net assets. For the period January 1, 2005
through February 28, 2005, the fund is charged up to 0.1035% of its average
daily net assets. For the year ended January 31, 2005, the fund paid MFSC a
fee of $412,756 for shareholder services which equated to 0.0931% of the
fund's average daily net assets. Effective March 1, 2005, the fund is charged
up to 0.1159% of its average daily net assets. Shareholder service costs
include out of pocket expenses and sub accounting services expenses paid by
MFSC on behalf of the fund and subsequently reimbursed to MFSC which amounted
to $219,511 and other costs paid by the fund directly to unaffiliated vendors
for the year ended January 31, 2005.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$439,564,855 and $286,853,422 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 $543,062,589
----------------------------------------------------------
Gross unrealized appreciation $25,289,864
----------------------------------------------------------
Gross unrealized depreciation (5,363,413)
----------------------------------------------------------
Net unrealized appreciation (depreciation) $19,926,451
----------------------------------------------------------
(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:
Year ended 1/31/05 Year ended 1/31/04
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 23,742,389 $178,434,555 27,456,728 $195,473,132
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 1,476,078 11,090,161 664,118 4,744,679
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (8,322,365) (62,222,536) (19,186,218) (138,572,646)
- -----------------------------------------------------------------------------------------------------------
Net change 16,896,102 $127,302,180 8,934,628 $61,645,165
- -----------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 7,090,726 $53,277,877 10,876,216 $77,359,062
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 927,114 6,974,876 637,819 4,573,131
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (6,492,439) (48,594,938) (4,123,693) (29,593,159)
- -----------------------------------------------------------------------------------------------------------
Net change 1,525,401 $11,657,815 7,390,342 $52,339,034
- -----------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 5,457,312 $40,854,541 8,268,232 $59,030,965
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 522,999 3,914,613 334,711 2,387,318
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (3,789,810) (28,215,092) (3,290,683) (23,353,436)
- -----------------------------------------------------------------------------------------------------------
Net change 2,190,501 $16,554,062 5,312,260 $38,064,847
- -----------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 4,179,938 $31,749,708 215,466 $1,485,020
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 28,756 217,139 5,254 38,029
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (271,921) (2,054,355) (151,468) (1,091,267)
- -----------------------------------------------------------------------------------------------------------
Net change 3,936,773 $29,912,492 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 Federal
Reserve funds 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 year ended January 31, 2005 was $2,336 and is
included in miscellaneous expense. The fund had no significant borrowings
during the year ended January 31, 2005.
(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 and purchases in the table below are netted by currency.
- -------------
SALES
- -------------
NET UNREALIZED
CONTRACTS TO IN EXCHANGE CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE FOR AT VALUE (DEPRECIATION)
2/24/05 ARS 3,672,240 $1,249,061 $1,260,295 $(11,234)
2/14/05 - 2/28/05 EUR 9,670,823 12,589,931 12,617,266 (27,335)
----------- ----------- --------
$13,838,992 $13,877,561 $(38,569)
=========== =========== ========
- -------------
PURCHASES
- -------------
2/14/05 EUR 700,613 $937,575 $914,039 $(23,536)
2/14/05 SEK 313,806 44,976 44,973 (3)
----------- ----------- --------
$982,551 $959,012 $(23,539)
=========== =========== ========
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.
SEK = Swedish Kronor
ARS = Argentinian Peso
EUR = Euro
At January 31, 2005, 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. The SEC settlement
order states that MFS failed to adequately disclose to the Boards of 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 intermediaries who support the sale of MFS fund shares. 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. The final distribution plan
was approved by the SEC on January 21, 2005, and the affected MFS Funds received
the payment on February 16, 2005.
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 open-end retail fund ("MFS retail funds")
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 they prohibited market
timing, MFS did not limit trading activity in 11 domestic large cap stock, high
grade bond and money market retail funds. MFS" former Chief Executive Officer
and former President 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. These individuals
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, MFS Fund Distributors, Inc., MFS Service Center, Inc.,
MFS Corporation Retirement Committee, Sun Life Financial Inc., various MFS
funds, certain current and/or former 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 ERISA actions by
participants in certain retirement plan accounts on behalf of those 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, Allianz Dresdner), No. 1:04-md-15863
(transfer began March 19, 2004)). The market timing cases related to the MFS
complex are Riggs v. MFS et al., Case No. 04-cv-01162-JFM (direct), Hammerslough
v. MFS et al., Case No. 04-md-01620 (derivative) and Anita Walker v. MFS et al.,
Case No. 1:04-CV-01758 (ERISA). The plaintiffs in these consolidated lawsuits
generally seek injunctive relief including removal of the named Trustees,
adviser and distributor, rescission of contracts and 12b-1 Plans, disgorgement
of fees and profits, monetary damages, punitive damages, attorney's fees and
costs and other equitable and declaratory relief. 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 (GAO) (May 4, 2004); and Koslow v. Sun Life Financial Inc., et al.,
No. 04cv11019 (GAO) (May 20, 2004)). The plaintiffs in these lawsuits generally
seek compensatory damages, punitive damages, recovery of fees, rescission of
contracts, an accounting, restitution, declaratory relief, equitable and/or
injunctive relief and attorney's fees and costs. The various 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, (ii) received
excessive compensation as fiduciaries to the MFS funds, or (iii) 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. 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 certain 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 distributed $50 million 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.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
To the Trustees of MFS Series Trust III and the Shareholders of MFS High Yield
Opportunities Fund:
We have audited the accompanying statement of assets and liabilities of MFS
High Yield Opportunities Fund (the "Fund") (a fund of MFS Series Trust III),
including the portfolio of investments, as of January 31, 2005, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Fund's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of January 31, 2005, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
High Yield Opportunities Fund as of January 31, 2005, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 24, 2005
- ------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- ------------------------------------------------------------------------------------------------------
The Trustees and officers of the trust, as of March 1, 2005, 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 DURING
POSITION(s) HELD TRUSTEE/OFFICER THE PAST FIVE YEARS &
NAME, DATE OF BIRTH WITH FUND SINCE(1) OTHER DIRECTORSHIPS(2)
-----------------------------
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair of February 1992 Private investor; Eastern
(born 05/01/36) Trustees 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
(born 09/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman
Michael Hegarty Trustee December 2004 Retired; AXA Financial
(born 12/21/44) (financial services and
insurance), Vice Chairman and
Chief Operating Officer
(until May 2001); The
Equitable Life Assurance
Society (insurance),
President and Chief Operating
Officer (until May 2001)
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
(born 06/23/35) (attorneys), Partner
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
(born 04/25/46) industry consultant
OFFICERS
Robert J. Manning(3) Advisory Trustee and December 2004 Massachusetts Financial
(born 10/20/63) President (Advisory Services Company, Chief
Trustee); Executive Officer, President,
February-December Chief Investment Officer and
2004 (Trustee) Director
James R. Bordewick, Jr.(3) Assistant Secretary September 1990 Massachusetts Financial
(born 03/06/59) and Assistant Clerk Services Company, Senior Vice
President and Associate
General Counsel
Jeffrey N. Carp(3) Secretary and Clerk September 2004 Massachusetts Financial
(born 12/01/56) Services Company, Executive
Vice President, General
Counsel and Secretary (since
April 2004); Hale and Dorr
LLP (law firm), Partner
(prior to April 2004)
Stephanie A. DeSisto(3) Assistant Treasurer May 2003 Massachusetts Financial
(born 10/01/53) Services 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)
James F. DesMarais(3) Assistant Secretary September 2004 Massachusetts Financial
(born 03/09/61) and Assistant Clerk Services Company, Assistant
General Counsel
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial
(born 08/29/58) Services 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)
Brian T. Hourihan(3) Assistant Secretary September 2004 Massachusetts Financial
(born 11/11/64) and Assistant Clerk Services Company, Vice
President, Senior Counsel and
Assistant Secretary (since
June 2004); Affiliated
Managers Group, Inc., Chief
Legal Officer/Centralized
Compliance Program (January
to April 2004); Fidelity
Research & Management
Company, Assistant General
Counsel (prior to January
2004)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial
(born 11/13/57) Services Company, Vice
President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance Officer compliance 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
(born 06/12/60) Services Company, Senior Vice
President
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. Messrs. Ives and Sherratt and Ms. Lane are
members of the trust's Audit Committee.
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 99 funds within the MFS Family of
Funds.
In addition, the Trustees have appointed Robert J. Manning, Robert C. Pozen and Laurie J. Thomsen as
Advisory Trustees and have nominated each to be elected as Trustees by shareholders. If elected,
Messrs. Manning and Pozen would serve as interested Trustees while Ms. Thomsen would serve as an
independent Trustee. Information relating to Messrs. Manning and Pozen and Ms. Thomsen is continued in
the table below. The trust will hold a shareholders meeting in 2005 and at least once every five years
thereafter to elect Trustees.
ADVISORY TRUSTEES
Robert J. Manning(3) Advisory Trustee and December 2004 Massachusetts Financial
(born 10/20/63) President (Advisory Services Company, Chief
Trustee); Executive Officer, President,
February-December Chief Investment Officer and
2004 (Trustee) Director
Robert C. Pozen(3) Advisory Trustee December 2004 Massachusetts Financial
(born 08/08/46) (Advisory Services Company, Chairman
Trustee); (since February 2004);
February-December Harvard Law School
2004 (Trustee) (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; Medtronic, Inc.
(medical technology),
Director; Telesat (satellite
communications), Director
Laurie J. Thomsen Advisory Trustee December 2004 Private investor; Prism
(born 08/05/57) Venture Partners (venture
capital), Co-founder and
General Partner (until June
2004); St. Paul Travelers
Companies (commercial
property liability
insurance), Director
- ------------------
(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, as
a result of position with MFS. The address of MFS is 500 Boylston Street, Boston, Massachusetts
02116.
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 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
MFS Fund Distributors, Inc. Deloitte & Touche LLP
500 Boylston Street, Boston, MA 02116-3741 200 Berkeley Street, Boston, MA 02116
PORTFOLIO MANAGERS
John F. Addeo
Scott B. Richards
- -------------------------------------------------------------------------------
PROXY VOTING POLICIES AND INFORMATION
- -------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
QUARTERLY PORTFOLIO DISCLOSURE
- -------------------------------------------------------------------------------
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 1-800-SEC-0330. 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
mfs.com.
- ------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2006, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2005.
For the year ended January 31, 2004, the amount of distributions from income
eligible for the 70% dividends received deduction for corporations is 1.65%.
The fund hereby designates the maximum amount allowable as qualified dividend
income eligible for a maximum tax rate of 15%, as provided for by the Jobs and
Growth Tax Relief Reconciliation Act of 2003. Complete information will be
reported in conjunction with your 2005 Form 1099-DIV.
The fund has designated $2,656,616 as a capital gain dividend for the year
ended January 31, 2005.
- --------------------------------------------------------------------------------
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.
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
- --------------------------------------------------------------------------------
M F S(SM)
INVESTMENT MANAGEMENT(R)
(C) 2005 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
HYO-ANN-03/05 45M
MFS(R) HIGH INCOME FUND 1/31/05
ANNUAL REPORT
- -------------------------------------------------------------------------------
M F S(SM)
INVESTMENT MANAGEMENT(R)
THIS REPORT HAS BEEN PREPARED FOR THE GENERAL INFORMATION TO SHAREHOLDERS. IT
IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY WHEN PRECEDED OR
ACCOMPANIED BY A CURRENT PROSPECTUS.
ANNUAL REPORT
LETTER FROM THE CEO 1
------------------------------------------------------
PORTFOLIO COMPOSITION 4
------------------------------------------------------
MANAGEMENT REVIEW 5
------------------------------------------------------
PERFORMANCE SUMMARY 7
------------------------------------------------------
EXPENSE TABLE 12
------------------------------------------------------
PORTFOLIO OF INVESTMENTS 14
------------------------------------------------------
FINANCIAL STATEMENTS 30
------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 49
------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 64
------------------------------------------------------
TRUSTEES AND OFFICERS 65
------------------------------------------------------
PROXY VOTING POLICIES AND INFORMATION 69
------------------------------------------------------
QUARTERLY PORTFOLIO DISCLOSURE 69
------------------------------------------------------
FEDERAL TAX INFORMATION 70
------------------------------------------------------
CONTACT INFORMATION BACK COVER
------------------------------------------------------
- --------------------------------------------------------------------------------
LETTER FROM THE CEO
- --------------------------------------------------------------------------------
Dear Contract Owners,
[Photo of Robert J. Manning]
Last summer and fall, I wrote to you about enhancements that MFS(R) was making
to its investment process. Our goal, as always, was to deliver strong
performance across all asset classes. I am now happy to report to you that
2004 was a very successful year for MFS, relative to our peers in the mutual
fund industry. While there will always be room for improvement, we believe the
enhancements we have made to our investment process resulted in significantly
improved performance across the MFS Family of Funds(R).
You may remember some of the enhancements I outlined last year.
They included
o increasing collaboration and information sharing among our investment
personnel across asset classes, through an Investment Management Committee
with members from our Domestic Equity, International Equity, Fixed Income,
and Quantitative Research teams
o increasing the number of analysts supporting our portfolio managers and
doubling the average investment experience of our domestic equity analyst
staff
o making additional use of our most-seasoned portfolio managers to mentor
research analysts
o combining more quantitative, top-down risk control and security analysis
with our traditional bottom-up research process
o opening a research office in Mexico City to complement our existing staff
in Boston, London, Singapore, and Tokyo
The effect of these enhancements, I believe, is evident in the 2004 performance
of our funds. For the 12 months ended December 31, 2004, 80% of MFS domestic
equity funds, 100% of MFS international equity funds, and 80% of MFS fixed-
income funds delivered results in the top half of their Lipper peer groups.
Our longer-term performance also benefited from our ongoing commitment to the
MFS Original Research(R) process: more than 75% of MFS funds were in the top
half of their respective Lipper categories over the 3-, 5-, and 10-year periods
ended December 31, 2004.
Of course, I cannot offer any guarantees that our performance will repeat
itself. Still, I am confident that the recent enhancements to our investment
process will continue to benefit shareholders in 2005 and beyond.
What I can tell you with certainty is that the way you manage your investments
will determine how well you take advantage of the performance that financial
markets deliver. Historically, individual investors have tended to underperform
the markets. For example, a 2003 study by DALBAR, Inc. showed that over the
nearly two decades from 1984 through 2002, the average U.S. stock investor
earned a 2.6% average annual return at a time when U.S. stocks, as measured by
the Standard & Poor's 500 Stock Index, delivered a 12.2% average annual
return.(1)
This huge discrepancy, in our view, occurred because nonprofessional investors
generally did not adhere to the basic principles followed by most professional
investors: allocate among asset classes, diversify within each asset class, and
rebalance one's portfolio on a routine schedule. I elaborated on this "ADR"
theme in fund reports over the last few months of 2004. For more information on
how to apply a Disciplined Diversification(SM) strategy to your portfolio using
the principles of ADR, I would urge you to contact your own investment
professional. You may also want to refer to information on the subject on our
Web site, MFS.COM.
As always, we appreciate your confidence in MFS, and you can be sure of our
continued commitment to do the best we can to help you pursue your long-term
financial goals.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
March 15, 2005
It is not possible to invest directly in an index.
Lipper rankings and performance are based on historical average annual returns
of Class A shares, and do not include any sales charges. Past performance is
no guarantee of future results.
Asset allocation and diversification cannot guarantee a profit or protect
against a loss.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
(1) Source: DALBAR July 2003 update to its Quantitative Analysis of Investment
Behavior; DALBAR, Inc., is a financial-services market research firm
headquartered in Boston, MA.
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
PORTFOLIO STRUCTURE
Bonds 96.1%
Cash & Other Net Assets 1.7%
Stocks 1.3%
Preferred 0.6%
Convertible Preferred 0.3%
TOP FIVE INDUSTRIES*
Utilities-Electric Power 9.2%
------------------------------------------------
Telecom-Wireline 6.1%
------------------------------------------------
Chemicals 5.8%
------------------------------------------------
Gaming & Lodging 5.6%
------------------------------------------------
Wireless Communications 4.8%
------------------------------------------------
CREDIT QUALITY OF BONDS**
AAA 0.3%
------------------------------------------------
A 0.1%
------------------------------------------------
BBB 2.4%
------------------------------------------------
BB 29.5%
------------------------------------------------
B 47.7%
------------------------------------------------
CCC 16.8%
------------------------------------------------
CC 1.6%
------------------------------------------------
D 0.4%
------------------------------------------------
Not Rated 1.2%
------------------------------------------------
PORTFOLIO FACTS
Average Duration 4.5
-----------------------------------------------
Average Life 7.9 yrs.
-----------------------------------------------
Average Maturity*** 8.5 yrs.
-----------------------------------------------
Average Quality B
-----------------------------------------------
Average Quality Short Term Bonds A-1
-----------------------------------------------
* For purposes of this graphical presentation, the bond component includes
both accrued interest amounts and the equivalent exposure from any
derivative holdings, if applicable.
** Credit quality ratings are based on a weighted average of each security's
ratings 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. Percentages
are based on market value of investments as of 1/31/05.
*** The average maturity shown is calculated using the final stated maturity on
the portfolio's holdings without taking into account any holdings which
have been pre-refunded to an earlier date or which have a mandatory put
date prior to the stated maturity. The average life shown takes into
account these earlier dates.
Percentages are based on net assets as of 1/31/05 unless otherwise noted.
The portfolio is actively managed, and current holdings may be different.
- -------------------------------------------------------------------------------
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
SUMMARY OF RESULTS
For the twelve months ended January 31, 2005, Class A shares of the MFS High
Income Fund provided a total return of 7.74%, not including sales charges. In
comparison, the fund's benchmark, the Lehman Brothers High Yield Index returned
8.91%. The fund's investment objective is to provide high current income by
investing primarily in a professionally managed, diversified portfolio of fixed
income securities, some of which may involve equity features. The fund invests,
under normal market conditions, at least 80% of its net assets in high income
fixed-income securities. MFS focuses on bonds issued by companies our analysts
believe have solid or improving credit fundamentals.
MARKET ENVIRONMENT
At the start of the period, we believed that markets were concerned about the
sustainability of the economic recovery. Fixed-income markets had finished
strongly in 2003. This bond-friendly environment was interrupted by strong U.S.
employment and economic data in the second quarter of 2004, which we believe
precipitated a bond market selloff. Accelerating domestic demand in the first
half of the period, coupled with rising inflation and a very accommodative
monetary stance caused the U.S. Federal Reserve Board to begin raising
short-term rates in June. Despite four more rate hikes in the second half of
the period, we believe U.S. economic conditions contributed to a decline in
longer maturity bond yields, while corporate and emerging bond yields narrowed
to U.S. Treasuries. (The principal value and interest of U.S. Treasury
securities are guaranteed by the U.S. government if held to maturity.) Under
this scenario the yield curve flattened - interest rates on the short end of
the curve moved up while rates on the long end decreased slightly.
The high yield sector continued its rally through most of the 12-month period
that ended January 31, 2005. We believe the sector was bolstered by strong
demand from investors searching for yield and continued evidence of an economic
recovery. A reduction in the rate of defaults and improving balancing sheets
also aided the high yield market.
DETRACTORS FROM PERFORMANCE
Our underweighted positions in some of the more speculative lower-rated sectors
of the high yield market, which generated above average returns for the period,
held back relative results. Several of our specific holdings hurt relative
returns during the period, including broadcasting company Pegasus
Communications*, regional wireless services provider Dobson Communications,
Worldcom Inc.* (now MCI), and textile manufacturer Westpoint Stevens*.
CONTRIBUTORS TO PERFORMANCE
Several individual holdings that performed well during the period and boosted
relative performance included chemical company Rhodia, corrective eyewear and
sunglasses maker Safilo, mining company Doe Run Resources, American Skiing
Company*, Texas energy company El Paso Corp, and retail energy firm Mirant
Americas*.
Respectfully,
/s/ John F. Addeo /s/ Scott B. Richards
John F. Addeo Scott B. Richards
Portfolio Manager Portfolio Manager
* Security was not held in the portfolio at period-end.
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.
- -------------------------------------------------------------------------------
PERFORMANCE SUMMARY THROUGH 1/31/05
- -------------------------------------------------------------------------------
The following chart illustrates the historical performance of the fund's
original share class in comparison to its benchmark. Performance results
include the deduction of the maximum applicable sales charge and reflect the
percentage change in net asset value, including reinvestment of dividends and
capital gains distributions. Benchmark comparisons are unmanaged and do not
reflect any fees or expenses. The performance of other share classes will be
greater than or less than the line shown. (See Notes to Performance Summary.)
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. HIGH
SHORT-TERM RETURNS FOR ANY PERIOD MAY BE AND LIKELY WERE ATTRIBUTABLE TO
FAVORABLE MARKET CONDITIONS DURING THAT PERIOD, WHICH MAY NOT BE REPEATABLE.
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.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
MFS High Lehman Brothers
Income Fund -- High Yield
Class A Index
1/95 $ 9,525 $10,000
1/96 11,237 11,965
1/97 12,531 13,221
1/98 14,364 15,030
1/99 14,516 15,263
1/00 15,148 15,333
1/01 15,049 15,583
1/02 14,221 15,369
1/03 14,554 15,548
1/04 17,877 19,777
1/05 19,261 21,539
TOTAL RETURNS
- ----------------------
Average annual
without sales charge
- ----------------------
Class
Share class inception date 1-yr 3-yr 5-yr 10-yr
- ------------------------------------------------------------------------------
A 2/17/78 7.74% 10.64% 4.92% 7.30%
- ------------------------------------------------------------------------------
B 9/27/93 7.10% 9.81% 4.21% 6.53%
- ------------------------------------------------------------------------------
C 1/03/94 7.10% 9.80% 4.17% 6.54%
- ------------------------------------------------------------------------------
I 1/02/97 8.17% 10.92% 5.21% 7.55%
- ------------------------------------------------------------------------------
R1 12/31/02 7.63% 10.44% 4.80% 7.24%
- ------------------------------------------------------------------------------
R2 10/31/03 7.37% 9.92% 4.27% 6.56%
- ------------------------------------------------------------------------------
529A 7/31/02 7.53% 10.32% 4.74% 7.20%
- ------------------------------------------------------------------------------
529B 7/31/02 6.57% 9.41% 3.98% 6.42%
- ------------------------------------------------------------------------------
529C 7/31/02 6.84% 9.49% 3.99% 6.45%
- ------------------------------------------------------------------------------
- ----------------------
Average annual
- ----------------------
Comparative benchmarks
- ------------------------------------------------------------------------------
Average high current yield bond
fund+ 8.00% 10.32% 5.10% 6.58%
- ------------------------------------------------------------------------------
Lehman Brothers High Yield Index# 8.91% 11.91% 7.03% 7.97%
- ------------------------------------------------------------------------------
- ----------------------
Average annual
with sales charge
- ----------------------
Share class
- ------------------------------------------------------------------------------
A 2.62% 8.86% 3.91% 6.77%
- ------------------------------------------------------------------------------
B 3.10% 8.98% 3.93% 6.53%
- ------------------------------------------------------------------------------
C 6.10% 9.80% 4.17% 6.54%
- ------------------------------------------------------------------------------
529A 2.42% 8.54% 3.72% 6.68%
- ------------------------------------------------------------------------------
529B 2.58% 8.57% 3.70% 6.42%
- ------------------------------------------------------------------------------
529C 5.84% 9.49% 3.99% 6.45%
- ------------------------------------------------------------------------------
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
- ----------------------
Share class 1-yr 3-yr 5-yr 10-yr
- ------------------------------------------------------------------------------
A 7.74% 35.44% 27.15% 102.21%
- ------------------------------------------------------------------------------
B 7.10% 32.42% 22.87% 88.29%
- ------------------------------------------------------------------------------
C 7.10% 32.38% 22.63% 88.40%
- ------------------------------------------------------------------------------
I 8.17% 36.46% 28.91% 106.97%
- ------------------------------------------------------------------------------
R1 7.63% 34.69% 26.45% 101.09%
- ------------------------------------------------------------------------------
R2 7.37% 32.82% 23.24% 88.85%
- ------------------------------------------------------------------------------
529A 7.53% 34.25% 26.03% 100.44%
- ------------------------------------------------------------------------------
529B 6.57% 30.97% 21.53% 86.22%
- ------------------------------------------------------------------------------
529C 6.84% 31.25% 21.58% 86.78%
- ------------------------------------------------------------------------------
+ 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 universe of non-investment
grade, fixed rate debt. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues
from countries designated as emerging markets (e.g., Argentina, Brazil,
Venezuela, etc.) are excluded.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
Class A and 529A results including sales charge reflect the deduction of the
maximum 4.75% sales charge. Class B and 529B 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 and 529C results
including sales charge (assuming redemption within one year from the end of the
prior month of purchase) reflect 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, 529C shares are only available in conjunction with
qualified tuition programs, such as the MFS 529 Savings Plan. There also is an
additional annual fee, which is detailed in the program description, on
qualified tuition programs. If this fee was reflected, the performance for
Class 529 shares would have been lower. This annual fee is waived for Oregon
residents and for those accounts with assets of $25,000 or more.
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 class 529C shares includes the performance
of the fund's Class C shares for periods prior to their offering. This 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.
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.
From time to time the fund may receive proceeds from litigation settlements,
without which performance would be lower.
KEY RISK CONSIDERATIONS
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to risks relating to interest rates, currency exchange
rates, economic, and political conditions.
The portfolio may invest in high yield or lower-rated securities (non-rated,
below "BBB"), which may provide greater returns but are subject to greater-
than-average risk.
The portfolio will allocate its investments among various segments of the fixed
income markets based upon judgments made by MFS. The portfolio could miss
attractive investment opportunities by underweighting markets where there are
significant returns, and could lose value by overweighting markets where there
are significant declines.
When interest rates rise, the prices of fixed income securities in the
portfolio will generally fall. Conversely, when interest rates fall, the prices
of fixed income securities in the portfolio will generally rise.
Interest rate risk will generally affect the price of a fixed income security
more if the security has a longer maturity. Fixed income securities with longer
maturities will therefore be more volatile than other fixed income securities
with shorter maturities. Conversely, fixed income securities with shorter
maturities will be less volatile but generally provide lower returns than fixed
income securities with longer maturities. The average maturity of the
portfolio's fixed income investments will affect the volatility of the
portfolio's share price.
Credit risk is the risk that the issuer of a fixed income security will not be
able to pay principal and interest when due. Rating agencies assign credit
ratings to certain fixed income securities to indicate their credit risk. The
price of a fixed income security will generally fall if the issuer defaults on
its obligation to pay principal or interest, the rating agencies downgrade the
issuer's credit rating or other news affects the market's perception of the
issuer's credit risk.
The fixed income securities purchased by the portfolio may be traded in the
over-the-counter market rather than on an organized exchange and are subject to
liquidity risk. This means that they may be harder to purchase or sell at a
fair price. The inability to purchase or sell these fixed income securities at
a fair price could have a negative impact on the portfolio's performance.
Please see the prospectus for further information regarding these and other
risk considerations.
- -------------------------------------------------------------------------------
EXPENSE TABLE
- -------------------------------------------------------------------------------
FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM
AUGUST 1, 2004, THROUGH JANUARY 31, 2005.
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, August 1, 2004 through January 31,
2005.
ACTUAL EXPENSES
The first line for each share class in the table on the following page 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 on the following page
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* 8/01/04-
Ratio 8/01/04 1/31/05 1/31/05
- --------------------------------------------------------------------------------
Actual 0.96% $1,000 $1,075 $5.02
A ------------------------------------------------------------------------
Hypothetical 0.96% $1,000 $1,020 $4.89
- --------------------------------------------------------------------------------
Actual 1.66% $1,000 $1,070 $8.66
B -------------------------------------------------------------------------
Hypothetical 1.66% $1,000 $1,017 $8.44
- --------------------------------------------------------------------------------
Actual 1.66% $1,000 $1,070 $8.66
C ------------------------------------------------------------------------
Hypothetical 1.66% $1,000 $1,017 $8.44
- --------------------------------------------------------------------------------
Actual 0.65% $1,000 $1,078 $3.40
I ------------------------------------------------------------------------
Hypothetical 0.65% $1,000 $1,022 $3.31
- --------------------------------------------------------------------------------
Actual 1.15% $1,000 $1,073 $6.01
R1 ------------------------------------------------------------------------
Hypothetical 1.15% $1,000 $1,019 $5.85
- --------------------------------------------------------------------------------
Actual 1.49% $1,000 $1,071 $7.78
R2 ------------------------------------------------------------------------
Hypothetical 1.49% $1,000 $1,018 $7.58
- --------------------------------------------------------------------------------
Actual 1.27% $1,000 $1,075 $6.64
529A ------------------------------------------------------------------------
Hypothetical 1.27% $1,000 $1,019 $6.46
- --------------------------------------------------------------------------------
Actual 2.05% $1,000 $1,069 $10.69
529B ------------------------------------------------------------------------
Hypothetical 2.05% $1,000 $1,015 $10.41
- --------------------------------------------------------------------------------
Actual 1.96% $1,000 $1,069 $10.22
529C ------------------------------------------------------------------------
Hypothetical 1.96% $1,000 $1,015 $9.95
- --------------------------------------------------------------------------------
* 5% class return per year before expenses.
** 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.
- -----------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - 1/31/05
- -----------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your fund. It is
categorized by broad-based asset classes.
Bonds - 94.2%
- -----------------------------------------------------------------------------------------------
ISSUER PAR VALUE $ VALUE
- -----------------------------------------------------------------------------------------------
Advertising & Broadcasting - 3.8%
- -----------------------------------------------------------------------------------------------
Allbritton Communications Co., 7.75%, 2012 $7,010,000 $7,220,300
- -----------------------------------------------------------------------------------------------
DIRECTV Holdings LLC, 8.375%, 2013 2,790,000 3,142,237
- -----------------------------------------------------------------------------------------------
Echostar DBS Corp., 6.375%, 2011 7,100,000 7,250,875
- -----------------------------------------------------------------------------------------------
Emmis Operating Co., 6.875%, 2012 3,475,000 3,561,875
- -----------------------------------------------------------------------------------------------
Granite Broadcasting Corp., 9.75%, 2010 7,855,000 7,560,437
- -----------------------------------------------------------------------------------------------
Intelsat Ltd., 7.7938%, 2012## 2,080,000 2,142,400
- -----------------------------------------------------------------------------------------------
Intelsat Ltd., 8.625%, 2015## 4,495,000 4,680,419
- -----------------------------------------------------------------------------------------------
Lamar Media Corp., 7.25%, 2013 2,700,000 2,902,500
- -----------------------------------------------------------------------------------------------
PRIMEDIA, Inc., 8.875%, 2011 2,900,000 3,059,500
- -----------------------------------------------------------------------------------------------
Panamsat Holding Corp., 0% to 2009, 10.375% to 2014## 6,525,000 4,355,438
- -----------------------------------------------------------------------------------------------
Paxson Communications Corp., 0% to 2006,
12.25% to 2009 12,215,000 11,787,475
- -----------------------------------------------------------------------------------------------
$57,663,456
- -----------------------------------------------------------------------------------------------
Aerospace - 1.7%
- -----------------------------------------------------------------------------------------------
ASPropulsion Capital B.V., 9.625%, 2013## EUR 400,000 $600,024
- -----------------------------------------------------------------------------------------------
Argo Tech Corp., 9.25%, 2011 $4,265,000 4,670,175
- -----------------------------------------------------------------------------------------------
BE Aerospace, Inc., 8.875%, 2011 5,715,000 5,829,300
- -----------------------------------------------------------------------------------------------
Hexcel Corp., 9.75%, 2009 6,075,000 6,333,187
- -----------------------------------------------------------------------------------------------
K&F Acquisition, Inc., 7.75%, 2014## 1,270,000 1,263,650
- -----------------------------------------------------------------------------------------------
Standard Aero Holdings, Inc., 8.25%, 2014## 2,145,000 2,305,875
- -----------------------------------------------------------------------------------------------
TransDigm Holding Co., 8.375%, 2011 4,230,000 4,483,800
- -----------------------------------------------------------------------------------------------
$25,486,011
- -----------------------------------------------------------------------------------------------
Airlines - 1.1%
- -----------------------------------------------------------------------------------------------
Continental Airlines, Inc., 7.568%, 2006 $4,000,000 $3,092,707
- -----------------------------------------------------------------------------------------------
Continental Airlines, Inc., 6.9%, 2017 1,373,222 1,092,174
- -----------------------------------------------------------------------------------------------
Continental Airlines, Inc., 6.748%, 2017 2,812,794 2,262,500
- -----------------------------------------------------------------------------------------------
Continental Airlines, Inc., 6.795%, 2018 9,523,362 7,829,504
- -----------------------------------------------------------------------------------------------
Continental Airlines, Inc., 7.566%, 2020 2,035,225 1,648,217
- -----------------------------------------------------------------------------------------------
$15,925,102
- -----------------------------------------------------------------------------------------------
Asset Backed & Securitized- 2.7%
- -----------------------------------------------------------------------------------------------
Airplane Pass-Through Trust, 10.875%, 2019* $5,185,425 $15,556
- -----------------------------------------------------------------------------------------------
Anthracite CDO Ltd., 6%, 2037## 5,148,000 4,395,362
- -----------------------------------------------------------------------------------------------
Asset Securitization Corp., 8.2899%, 2029 2,786,991 2,915,211
- -----------------------------------------------------------------------------------------------
Asset Securitization Corp., 8.7799%, 2029## 2,000,000 1,730,312
- -----------------------------------------------------------------------------------------------
Commercial Mortgage Acceptance Corp., 5.44%, 2013## 5,000,000 5,057,658
- -----------------------------------------------------------------------------------------------
Deutsche Mortgage & Asset Receiving Corp., 7.5%, 2031 4,500,000 4,241,123
- -----------------------------------------------------------------------------------------------
Falcon Franchise Loan LLC, 3.54%, 2025^^ 18,196,165 3,233,505
- -----------------------------------------------------------------------------------------------
First Union National Bank Commercial Mortgage Corp.,
6.75%, 2032 2,000,000 1,890,828
- -----------------------------------------------------------------------------------------------
First Union-Lehman Brothers Commercial Mortgage Trust,
7.5%, 2029 4,000,000 4,675,080
- -----------------------------------------------------------------------------------------------
GMAC Commercial Mortgage Securities, Inc., 6.02%, 2033 4,000,000 3,824,371
- -----------------------------------------------------------------------------------------------
Lehman Brothers Commercial Conduit Mortgage Trust,
1.1511%, 2030^^ 49,182,578 1,666,060
- -----------------------------------------------------------------------------------------------
Morgan Stanley Capital I, Inc., 1.5911%, 2039^^## 23,489,233 1,786,802
- -----------------------------------------------------------------------------------------------
Mortgage Capital Funding, Inc., 7.214%, 2007 2,500,000 2,617,920
- -----------------------------------------------------------------------------------------------
Nationslink Funding Corp., 5%, 2009 2,500,000 2,537,774
- -----------------------------------------------------------------------------------------------
$40,587,562
- -----------------------------------------------------------------------------------------------
Automotive - 2.1%
- -----------------------------------------------------------------------------------------------
Affinia Group, Inc., 9%, 2014## $4,415,000 $4,547,450
- -----------------------------------------------------------------------------------------------
Dana Corp., 7%, 2029 6,015,000 5,975,084
- -----------------------------------------------------------------------------------------------
Metaldyne Corp., 11%, 2012 2,050,000 1,701,500
- -----------------------------------------------------------------------------------------------
Metaldyne Corp., 10%, 2013## 3,225,000 3,015,375
- -----------------------------------------------------------------------------------------------
Navistar International Corp., 7.5%, 2011 5,420,000 5,785,850
- -----------------------------------------------------------------------------------------------
TRW Automotive, Inc., 9.375%, 2013 753,000 847,125
- -----------------------------------------------------------------------------------------------
TRW Automotive, Inc., 11%, 2013 3,676,000 4,300,920
- -----------------------------------------------------------------------------------------------
TRW Automotive, Inc., 11.75%, 2013 EUR 895,000 1,412,600
- -----------------------------------------------------------------------------------------------
Tenneco Automotive, Inc., 10.25%, 2013 $2,160,000 2,538,000
- -----------------------------------------------------------------------------------------------
Tenneco Automotive, Inc., 8.625%, 2014## 1,415,000 1,471,600
- -----------------------------------------------------------------------------------------------
$31,595,504
- -----------------------------------------------------------------------------------------------
Basic Industry - 0.2%
- -----------------------------------------------------------------------------------------------
Thermadyne Holdings Corp., 9.25%, 2014 $2,840,000 $2,754,800
- -----------------------------------------------------------------------------------------------
Broadcast & Cable TV - 3.9%
- -----------------------------------------------------------------------------------------------
Adelphia Communications Corp., 9.25%, 2002* $1,245,000 $1,036,462
- -----------------------------------------------------------------------------------------------
Adelphia Communications Corp., 10.25%, 2011* 110,000 98,725
- -----------------------------------------------------------------------------------------------
CCO Holdings LLC, 8.75%, 2013 2,560,000 2,598,400
- -----------------------------------------------------------------------------------------------
CSC Holdings, Inc., 8.125%, 2009 4,730,000 5,191,175
- -----------------------------------------------------------------------------------------------
CSC Holdings, Inc., 6.75%, 2012## 3,855,000 4,047,750
- -----------------------------------------------------------------------------------------------
Cablevision Systems Corp., 8%, 2012## 6,430,000 6,952,437
- -----------------------------------------------------------------------------------------------
Charter Communications, Inc., 8.625%, 2009 13,435,000 10,748,000
- -----------------------------------------------------------------------------------------------
Charter Communications, Inc., 9.92%, 2011 12,050,000 9,579,750
- -----------------------------------------------------------------------------------------------
Charter Communications, Inc., 8.375%, 2014## 2,130,000 2,183,250
- -----------------------------------------------------------------------------------------------
FrontierVision Holdings LP, 11.875%, 2007* 250,000 323,750
- -----------------------------------------------------------------------------------------------
Frontiervision Operating Partners LP, 11%, 2006* 6,575,000 8,350,250
- -----------------------------------------------------------------------------------------------
Mediacom Broadband LLC, 9.5%, 2013 3,095,000 3,087,263
- -----------------------------------------------------------------------------------------------
Mediacom Broadband LLC, 11%, 2013 1,420,000 1,530,050
- -----------------------------------------------------------------------------------------------
Rogers Cable, Inc., 8.75%, 2032 2,775,000 3,163,500
- -----------------------------------------------------------------------------------------------
$58,890,762
- -----------------------------------------------------------------------------------------------
Brokerage & Asset Managers - 0.2%
- -----------------------------------------------------------------------------------------------
Refco Finance Holdings LLC, 9%, 2012## $3,005,000 $3,275,450
- -----------------------------------------------------------------------------------------------
Building - 1.2%
- -----------------------------------------------------------------------------------------------
Building Materials Corp. of America, 7.75%, 2014## $7,280,000 $7,352,800
- -----------------------------------------------------------------------------------------------
Interface, Inc., 10.375%, 2010 3,822,000 4,395,300
- -----------------------------------------------------------------------------------------------
Jacuzzi Brands, Inc., 9.625%, 2010 1,580,000 1,761,700
- -----------------------------------------------------------------------------------------------
Nortek, Inc., 8.5%, 2014## 4,265,000 4,382,288
- -----------------------------------------------------------------------------------------------
$17,892,088
- -----------------------------------------------------------------------------------------------
Business Services - 1.7%
- -----------------------------------------------------------------------------------------------
Iron Mountain, Inc., 8.625%, 2013 $815,000 $861,862
- -----------------------------------------------------------------------------------------------
Iron Mountain, Inc., 7.75%, 2015 5,460,000 5,582,850
- -----------------------------------------------------------------------------------------------
Lucent Technologies, Inc., 5.5%, 2008 4,780,000 4,851,700
- -----------------------------------------------------------------------------------------------
Nortel Networks Ltd., 6.125%, 2006 5,425,000 5,499,594
- -----------------------------------------------------------------------------------------------
Northern Telecom Corp., 7.875%, 2026 1,500,000 1,481,250
- -----------------------------------------------------------------------------------------------
Xerox Corp., 7.625%, 2013 7,090,000 7,639,475
- -----------------------------------------------------------------------------------------------
$25,916,731
- -----------------------------------------------------------------------------------------------
Chemicals - 5.7%
- -----------------------------------------------------------------------------------------------
ARCO Chemical Co., 9.8%, 2020 $2,670,000 $3,017,100
- -----------------------------------------------------------------------------------------------
Acetex Corp., 10.875%, 2009 3,800,000 4,113,500
- -----------------------------------------------------------------------------------------------
BCP Caylux Holdings Luxembourg S.A., 9.625%, 2014## 2,495,000 2,769,450
- -----------------------------------------------------------------------------------------------
Crystal U.S. Holdings LLC, 0% to 2009, 10.5% to 2014## 6,610,000 4,486,537
- -----------------------------------------------------------------------------------------------
Crystal U.S. Holdings LLC, 0% to 2010, 10% to 2014## 1,905,000 1,323,975
- -----------------------------------------------------------------------------------------------
Equistar Chemicals LP, 10.625%, 2011 6,045,000 6,951,750
- -----------------------------------------------------------------------------------------------
Hercules, Inc., 6.75%, 2029 4,270,000 4,376,750
- -----------------------------------------------------------------------------------------------
Huntsman International LLC, 10.125%, 2009 5,371,000 5,639,550
- -----------------------------------------------------------------------------------------------
Huntsman International LLC, 0%, 2009 975,000 547,219
- -----------------------------------------------------------------------------------------------
Huntsman International LLC, 7.375%, 2015## 4,235,000 4,213,825
- -----------------------------------------------------------------------------------------------
IMC Global, Inc., 10.875%, 2013 5,085,000 6,190,987
- -----------------------------------------------------------------------------------------------
KI Holdings, Inc., 0% to 2009, 9.875% to 2014## 4,655,000 2,909,375
- -----------------------------------------------------------------------------------------------
Kronos International, Inc., 8.875%, 2009 EUR 300,000 422,626
- -----------------------------------------------------------------------------------------------
Lyondell Chemical Co., 9.5%, 2008 $3,590,000 3,877,200
- -----------------------------------------------------------------------------------------------
Lyondell Chemical Co., 11.125%, 2012 2,580,000 3,031,500
- -----------------------------------------------------------------------------------------------
Nalco Co., 7.75%, 2011 1,810,000 1,941,225
- -----------------------------------------------------------------------------------------------
Nalco Co., 8.875%, 2013 1,360,000 1,482,400
- -----------------------------------------------------------------------------------------------
Nalco Financial Holdings LLC, 0% to 2009, 9% to 2014 4,754,000 3,577,385
- -----------------------------------------------------------------------------------------------
Nova Chemicals Corp., 6.5%, 2012 4,525,000 4,722,969
- -----------------------------------------------------------------------------------------------
Resolution Performance Products LLC, 13.5%, 2010 2,680,000 2,954,700
- -----------------------------------------------------------------------------------------------
Rhodia S.A., 8.875%, 2011 8,965,000 9,189,125
- -----------------------------------------------------------------------------------------------
Rockwood Specialties Group, Inc., 10.625%, 2011 3,815,000 4,349,100
- -----------------------------------------------------------------------------------------------
Rockwood Specialties Group, Inc., 7.5%, 2014## 820,000 844,600
- -----------------------------------------------------------------------------------------------
Sovereign Specialty Chemicals, Inc., 11.875%, 2010 2,965,000 3,142,900
- -----------------------------------------------------------------------------------------------
$86,075,748
- -----------------------------------------------------------------------------------------------
Conglomerates - 0.6%
- -----------------------------------------------------------------------------------------------
Invensys PLC, 9.875%, 2011## $4,090,000 $4,524,562
- -----------------------------------------------------------------------------------------------
SPX Corp., 7.5%, 2013 4,060,000 4,455,850
- -----------------------------------------------------------------------------------------------
$8,980,412
- -----------------------------------------------------------------------------------------------
Construction - 1.1%
- -----------------------------------------------------------------------------------------------
D.R. Horton, Inc., 8%, 2009 $5,315,000 $5,940,666
- -----------------------------------------------------------------------------------------------
Technical Olympic USA, Inc., 9%, 2010 1,475,000 1,585,625
- -----------------------------------------------------------------------------------------------
Technical Olympic USA, Inc., 7.5%, 2011 1,745,000 1,745,000
- -----------------------------------------------------------------------------------------------
Technical Olympic USA, Inc., 7.5%, 2015## 2,990,000 2,900,300
- -----------------------------------------------------------------------------------------------
WCI Communities, Inc., 7.875%, 2013 4,210,000 4,494,175
- -----------------------------------------------------------------------------------------------
$16,665,766
- -----------------------------------------------------------------------------------------------
Consumer Cyclical - 0.5%
- -----------------------------------------------------------------------------------------------
Corrections Corp. of America, 9.875%, 2009 $1,610,000 $1,771,000
- -----------------------------------------------------------------------------------------------
Corrections Corp. of America, 7.5%, 2011 1,850,000 1,967,937
- -----------------------------------------------------------------------------------------------
KinderCare Learning Centers, Inc., 9.5%, 2009 3,050,000 3,057,625
- -----------------------------------------------------------------------------------------------
$6,796,562
- -----------------------------------------------------------------------------------------------
Consumer Goods & Services - 2.4%
- -----------------------------------------------------------------------------------------------
Bombardier Recreational Products, Inc., 8.375%, 2013 $3,120,000 $3,299,400
- -----------------------------------------------------------------------------------------------
Church & Dwight Co., Inc., 6%, 2012## 2,540,000 2,565,400
- -----------------------------------------------------------------------------------------------
Integrated Electrical Services, Inc., 9.375%, 2009 2,645,000 2,473,075
- -----------------------------------------------------------------------------------------------
K2, Inc., 7.375%, 2014 4,175,000 4,482,906
- -----------------------------------------------------------------------------------------------
Remington Arms Co., Inc., 10.5%, 2011 2,180,000 2,098,250
- -----------------------------------------------------------------------------------------------
Revlon Consumer Products Corp., 8.625%, 2008 5,380,000 4,801,650
- -----------------------------------------------------------------------------------------------
Safilo Capital International S.A., 9.625%, 2013## EUR 7,015,000 9,379,125
- -----------------------------------------------------------------------------------------------
Samsonite Corp., 8.875%, 2011 $4,220,000 4,541,775
- -----------------------------------------------------------------------------------------------
Werner Holding Co., Inc., 10%, 2007 3,180,000 2,591,700
- -----------------------------------------------------------------------------------------------
$36,233,281
- -----------------------------------------------------------------------------------------------
Containers - 2.8%
- -----------------------------------------------------------------------------------------------
Crown European Holdings S.A., 10.875%, 2013 $11,120,000 $13,038,200
- -----------------------------------------------------------------------------------------------
Greif, Inc., 8.875%, 2012 4,125,000 4,558,125
- -----------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.875%, 2009 4,310,000 4,660,188
- -----------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.75%, 2012 7,185,000 7,993,313
- -----------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.25%, 2013 165,000 179,438
- -----------------------------------------------------------------------------------------------
Owens-Illinois, Inc., 7.8%, 2018 3,035,000 3,156,400
- -----------------------------------------------------------------------------------------------
Plastipak Holdings, Inc., 10.75%, 2011 3,015,000 3,391,875
- -----------------------------------------------------------------------------------------------
Pliant Corp., 13%, 2010 3,926,000 3,847,480
- -----------------------------------------------------------------------------------------------
Pliant Corp., 0% to 2006, 11.125% to 2009 525,000 488,250
- -----------------------------------------------------------------------------------------------
$41,313,269
- -----------------------------------------------------------------------------------------------
Defense Electronics - 0.5%
- -----------------------------------------------------------------------------------------------
L-3 Communications Holdings, Inc., 6.125%, 2014 $4,600,000 $4,692,000
- -----------------------------------------------------------------------------------------------
L-3 Communications Holdings, Inc., 5.875%, 2015## 3,270,000 3,253,650
- -----------------------------------------------------------------------------------------------
$7,945,650
- -----------------------------------------------------------------------------------------------
Electronics - 0.4%
- -----------------------------------------------------------------------------------------------
Flextronics International Ltd., 6.5%, 2013 $4,720,000 $4,779,000
- -----------------------------------------------------------------------------------------------
Magnachip Semiconductor S.A., 8%, 2014## 560,000 584,500
- -----------------------------------------------------------------------------------------------
$5,363,500
- -----------------------------------------------------------------------------------------------
Emerging Market Quasi-Sovereign - 0.5%
- -----------------------------------------------------------------------------------------------
Gazprom OAO, 9.625%, 2013## $2,140,000 $2,546,600
- -----------------------------------------------------------------------------------------------
Gazprom OAO, 8.625%, 2034## 3,897,000 4,569,232
- -----------------------------------------------------------------------------------------------
$7,115,832
- -----------------------------------------------------------------------------------------------
Emerging Market Sovereign - 0.8%
- -----------------------------------------------------------------------------------------------
Federal Republic of Brazil, 8%, 2014 $1,558,668 $1,595,686
- -----------------------------------------------------------------------------------------------
Federal Republic of Brazil, 8.875%, 2019 4,283,000 4,422,197
- -----------------------------------------------------------------------------------------------
Republic of Panama, 9.375%, 2023 - 2029 2,935,000 3,445,860
- -----------------------------------------------------------------------------------------------
Russian Ministry of Finance, 12.75%, 2028 1,759,000 2,957,231
- -----------------------------------------------------------------------------------------------
$12,420,974
- -----------------------------------------------------------------------------------------------
Energy - Independent - 2.1%
- -----------------------------------------------------------------------------------------------
Belden & Blake Corp., 8.75%, 2012## $4,025,000 $4,050,156
- -----------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 8.125%, 2011## 2,770,000 2,991,600
- -----------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 7%, 2014 4,327,000 4,586,620
- -----------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 6.375%, 2015## 2,305,000 2,351,100
- -----------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 6.875%, 2016 6,500,000 6,760,000
- -----------------------------------------------------------------------------------------------
Encore Acquisition Co., 8.375%, 2012 725,000 799,312
- -----------------------------------------------------------------------------------------------
Encore Acquisition Co., 6.25%, 2014 3,020,000 3,012,450
- -----------------------------------------------------------------------------------------------
Newfield Exploration Co., 6.625%, 2014## 2,890,000 3,048,950
- -----------------------------------------------------------------------------------------------
Plains Exploration & Production Co., 7.125%, 2014 4,105,000 4,505,238
- -----------------------------------------------------------------------------------------------
$32,105,426
- -----------------------------------------------------------------------------------------------
Energy - Integrated - 0.3%
- -----------------------------------------------------------------------------------------------
Amerada Hess Corp., 7.3%, 2031 $4,035,000 $4,685,192
- -----------------------------------------------------------------------------------------------
Entertainment - 1.4%
- -----------------------------------------------------------------------------------------------
AMC Entertainment, Inc., 9.5%, 2011 $2,542,000 $2,624,615
- -----------------------------------------------------------------------------------------------
AMC Entertainment, Inc., 8.625%, 2012## 5,590,000 6,065,150
- -----------------------------------------------------------------------------------------------
Intrawest Corp., 7.5%, 2013## 1,285,000 1,349,250
- -----------------------------------------------------------------------------------------------
Loews Cineplex Entertainment Corp., 9%, 2014## 4,350,000 4,556,625
- -----------------------------------------------------------------------------------------------
Six Flags, Inc., 9.75%, 2013 6,000,000 5,715,000
- -----------------------------------------------------------------------------------------------
$20,310,640
- -----------------------------------------------------------------------------------------------
Food & Non-Alcoholic Beverages - 1.6%
- -----------------------------------------------------------------------------------------------
Burns, Philp & Co. Ltd., 9.75%, 2012 $6,655,000 $7,253,950
- -----------------------------------------------------------------------------------------------
Merisant Co., 9.75%, 2013## 1,730,000 1,522,400
- -----------------------------------------------------------------------------------------------
Michael Foods, Inc., 8%, 2013 3,805,000 4,004,763
- -----------------------------------------------------------------------------------------------
Seminis Vegetable Seeds, Inc., 10.25%, 2013 4,215,000 5,036,925
- -----------------------------------------------------------------------------------------------
Smithfield Foods, Inc., 7%, 2011 1,215,000 1,292,456
- -----------------------------------------------------------------------------------------------
Smithfield Foods, Inc., 7%, 2011## 3,205,000 3,409,319
- -----------------------------------------------------------------------------------------------
United Biscuits Finance PLC, 10.625%, 2011 EUR 1,000,000 1,389,186
- -----------------------------------------------------------------------------------------------
$23,908,999
- -----------------------------------------------------------------------------------------------
Forest & Paper Products - 4.2%
- -----------------------------------------------------------------------------------------------
Abitibi-Consolidated, Inc., 8.55%, 2010 $2,075,000 $2,228,031
- -----------------------------------------------------------------------------------------------
Abitibi-Consolidated, Inc., 7.75%, 2011 4,970,000 5,143,950
- -----------------------------------------------------------------------------------------------
Buckeye Technologies, Inc., 8.5%, 2013 4,580,000 4,923,500
- -----------------------------------------------------------------------------------------------
Durango Corp. S.A. de C.V., 13.125%, 2006* 69,000 50,715
- -----------------------------------------------------------------------------------------------
Durango Corp. S.A. de C.V., 13.5%, 2008* 27,000 19,845
- -----------------------------------------------------------------------------------------------
Durango Corp. S.A. de C.V., 13.75%, 2009##* 6,463,000 4,750,305
- -----------------------------------------------------------------------------------------------
Georgia Pacific Corp., 9.375%, 2013 11,220,000 12,917,025
- -----------------------------------------------------------------------------------------------
Graphic Packaging International, Inc., 9.5%, 2013 5,230,000 5,831,450
- -----------------------------------------------------------------------------------------------
JSG Funding LLC, 11.5%, 2015## EUR 1,990,000 2,595,756
- -----------------------------------------------------------------------------------------------
Jefferson Smurfit Corp., 8.25%, 2012 $4,110,000 4,356,600
- -----------------------------------------------------------------------------------------------
MDP Acquisitions PLC, 9.625%, 2012 5,315,000 5,873,075
- -----------------------------------------------------------------------------------------------
Newark Group, Inc., 9.75%, 2014 3,750,000 3,928,125
- -----------------------------------------------------------------------------------------------
Norske Skog Canada Ltd., 8.625%, 2011 3,885,000 4,098,675
- -----------------------------------------------------------------------------------------------
Norske Skog Canada Ltd., 7.375%, 2014 2,815,000 2,843,150
- -----------------------------------------------------------------------------------------------
Stone Container Corp., 7.375%, 2014 2,995,000 3,084,850
- -----------------------------------------------------------------------------------------------
$62,645,052
- -----------------------------------------------------------------------------------------------
Gaming & Lodging - 5.4%
- -----------------------------------------------------------------------------------------------
Aztar Corp., 7.875%, 2014 $4,275,000 $4,702,500
- -----------------------------------------------------------------------------------------------
Boyd Gaming Corp., 6.75%, 2014 6,145,000 6,298,625
- -----------------------------------------------------------------------------------------------
Caesars Entertainment, Inc., 8.875%, 2008 1,550,000 1,745,688
- -----------------------------------------------------------------------------------------------
Caesars Entertainment, Inc., 8.125%, 2011 7,715,000 8,833,675
- -----------------------------------------------------------------------------------------------
Herbst Gaming, Inc., 7%, 2014## 565,000 567,825
- -----------------------------------------------------------------------------------------------
Hilton Hotels Corp., 7.625%, 2012 2,465,000 2,893,634
- -----------------------------------------------------------------------------------------------
Host Marriott LP, 7.125%, 2013 4,225,000 4,446,812
- -----------------------------------------------------------------------------------------------
Isle Capri Casinos, Inc., 7%, 2014 4,295,000 4,348,687
- -----------------------------------------------------------------------------------------------
MGM Mirage, Inc., 8.5%, 2010 3,075,000 3,482,438
- -----------------------------------------------------------------------------------------------
MGM Mirage, Inc., 8.375%, 2011 8,115,000 9,088,800
- -----------------------------------------------------------------------------------------------
MGM Mirage, Inc., 5.875%, 2014 1,720,000 1,685,600
- -----------------------------------------------------------------------------------------------
Mandalay Resort Group, 9.375%, 2010 3,525,000 4,044,938
- -----------------------------------------------------------------------------------------------
Meristar Hospitality Corp., 10.5%, 2009 1,355,000 1,466,788
- -----------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc., 8.25%, 2012 4,855,000 5,170,575
- -----------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc., 8.75%, 2013 2,195,000 2,376,088
- -----------------------------------------------------------------------------------------------
Royal Caribbean Cruises Ltd., 6.875%, 2013 4,415,000 4,801,313
- -----------------------------------------------------------------------------------------------
Scientific Games Corp., 6.25%, 2012## 1,480,000 1,502,200
- -----------------------------------------------------------------------------------------------
Starwood Hotels & Resorts Worldwide, Inc., 7.875%, 2012 8,840,000 10,077,600
- -----------------------------------------------------------------------------------------------
Station Casinos, Inc., 6.5%, 2014 4,215,000 4,341,450
- -----------------------------------------------------------------------------------------------
$81,875,236
- -----------------------------------------------------------------------------------------------
Industrial - 4.2%
- -----------------------------------------------------------------------------------------------
Amsted Industries, Inc., 10.25%, 2011## $6,520,000 $7,335,000
- -----------------------------------------------------------------------------------------------
Da Lite Screen Co., Inc., 9.5%, 2011 4,285,000 4,734,925
- -----------------------------------------------------------------------------------------------
General Binding Corp., 9.375%, 2008 11,950,000 11,830,500
- -----------------------------------------------------------------------------------------------
JohnsonDiversey Holding, Inc., "B", 9.625%, 2012 5,140,000 5,731,100
- -----------------------------------------------------------------------------------------------
JohnsonDiversey Holding, Inc., 0% to 2007,
10.67% to 2013 10,450,000 9,065,375
- -----------------------------------------------------------------------------------------------
Knowledge Learning Corp., 7.75%, 2015## 2,615,000 2,628,075
- -----------------------------------------------------------------------------------------------
Milacron Escrow Corp., 11.5%, 2011 5,580,000 5,970,600
- -----------------------------------------------------------------------------------------------
Rexnord Industries, Inc., 10.125%, 2012 3,960,000 4,435,200
- -----------------------------------------------------------------------------------------------
Valmont Industries, Inc., 6.875%, 2014 4,285,000 4,413,550
- -----------------------------------------------------------------------------------------------
Williams Scotsman, Inc., 9.875%, 2007 6,050,000 6,050,000
- -----------------------------------------------------------------------------------------------
Williams Scotsman, Inc., 10%, 2008 1,120,000 1,220,800
- -----------------------------------------------------------------------------------------------
$63,415,125
- -----------------------------------------------------------------------------------------------
Machinery & Tools - 2.6%
- -----------------------------------------------------------------------------------------------
Case Corp., 7.25%, 2016 $1,480,000 $1,457,800
- -----------------------------------------------------------------------------------------------
Case New Holland, Inc., 9.25%, 2011## 3,900,000 4,260,750
- -----------------------------------------------------------------------------------------------
JLG Industries, Inc., 8.25%, 2008 4,745,000 4,982,250
- -----------------------------------------------------------------------------------------------
Joy Global, Inc., 8.75%, 2012 3,953,000 4,427,360
- -----------------------------------------------------------------------------------------------
Manitowoc Co., Inc., 10.375%, 2011 EUR 4,650,000 6,778,152
- -----------------------------------------------------------------------------------------------
Manitowoc Co., Inc., 10.5%, 2012 $614,000 706,100
- -----------------------------------------------------------------------------------------------
Terex Corp., 10.375%, 2011 6,405,000 7,109,550
- -----------------------------------------------------------------------------------------------
United Rentals, Inc., 6.5%, 2012 3,175,000 3,119,438
- -----------------------------------------------------------------------------------------------
United Rentals, Inc., 7.75%, 2013 3,480,000 3,384,300
- -----------------------------------------------------------------------------------------------
United Rentals, Inc., 7%, 2014 3,400,000 3,162,000
- -----------------------------------------------------------------------------------------------
$39,387,700
- -----------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 3.6%
- -----------------------------------------------------------------------------------------------
AmerisourceBergen Corp., 7.25%, 2012 $4,260,000 $4,696,650
- -----------------------------------------------------------------------------------------------
CDRV Investors, Inc., 0% to 2010, 9.625% to 2015## 7,510,000 4,487,225
- -----------------------------------------------------------------------------------------------
Extendicare Health Services, Inc., 6.875%, 2014 2,590,000 2,622,375
- -----------------------------------------------------------------------------------------------
Fisher Scientific International, Inc., 8.125%, 2012 2,628,000 2,900,655
- -----------------------------------------------------------------------------------------------
HCA, Inc., 7.875%, 2011 9,860,000 10,839,621
- -----------------------------------------------------------------------------------------------
HCA, Inc., 6.375%, 2015 6,910,000 6,950,624
- -----------------------------------------------------------------------------------------------
InSight Health Services Corp., 9.875%, 2011 7,295,000 7,258,525
- -----------------------------------------------------------------------------------------------
Tenet Healthcare Corp., 6.5%, 2012 4,690,000 4,174,100
- -----------------------------------------------------------------------------------------------
Tenet Healthcare Corp., 9.875%, 2014## 4,265,000 4,424,938
- -----------------------------------------------------------------------------------------------
U.S. Oncology, Inc., 10.75%, 2014## 3,640,000 4,158,700
- -----------------------------------------------------------------------------------------------
Universal Hospital Services, Inc., 10.125%, 2011 1,160,000 1,200,600
- -----------------------------------------------------------------------------------------------
$53,714,013
- -----------------------------------------------------------------------------------------------
Medical Equipment - 0.3%
- -----------------------------------------------------------------------------------------------
Warner Chilcott Corp., 8.75%, 2015## $4,700,000 $4,829,250
- -----------------------------------------------------------------------------------------------
Metals & Mining - 2.3%
- -----------------------------------------------------------------------------------------------
Century Aluminum Co., 7.5%, 2014## $3,475,000 $3,709,562
- -----------------------------------------------------------------------------------------------
Doe Run Resources Corp., 11.75%, 2008# 3,430,857 3,225,005
- -----------------------------------------------------------------------------------------------
Foundation PA Coal Co., 7.25%, 2014## 4,060,000 4,252,850
- -----------------------------------------------------------------------------------------------
Ispat Inland ULC, 9.75%, 2014 3,195,000 3,937,837
- -----------------------------------------------------------------------------------------------
Oregon Steel Mills, Inc., 10%, 2009 3,495,000 3,879,450
- -----------------------------------------------------------------------------------------------
Peabody Energy Corp., 5.875%, 2016 7,810,000 7,770,950
- -----------------------------------------------------------------------------------------------
Russel Metals, Inc., 6.375%, 2014 4,660,000 4,660,000
- -----------------------------------------------------------------------------------------------
SGL Carbon International S.A., 8.5%, 2012## EUR 1,800,000 2,623,801
- -----------------------------------------------------------------------------------------------
$34,059,455
- -----------------------------------------------------------------------------------------------
Natural Gas - Distribution - 0.4%
- -----------------------------------------------------------------------------------------------
AmeriGas Partners LP, 8.875%, 2011 $5,030,000 $5,432,400
- -----------------------------------------------------------------------------------------------
Natural Gas - Pipeline - 3.3%
- -----------------------------------------------------------------------------------------------
ANR Pipeline Co., 9.625%, 2021 $6,515,000 $8,143,750
- -----------------------------------------------------------------------------------------------
El Paso Energy Corp., 7.625%, 2010 4,255,000 4,669,862
- -----------------------------------------------------------------------------------------------
El Paso Energy Corp., 7%, 2011 10,380,000 10,431,900
- -----------------------------------------------------------------------------------------------
El Paso Energy Corp., 7.75%, 2013 7,995,000 8,314,800
- -----------------------------------------------------------------------------------------------
Enterprise Products Operating LP, 6.375%, 2013 2,125,000 2,303,961
- -----------------------------------------------------------------------------------------------
Enterprise Products Operating LP, 5.6%, 2014## 4,047,000 4,146,989
- -----------------------------------------------------------------------------------------------
Markwest Energy Partners LP, 6.875%, 2014## 3,035,000 3,050,175
- -----------------------------------------------------------------------------------------------
Williams Cos., Inc., 7.125%, 2011 8,293,000 9,018,638
- -----------------------------------------------------------------------------------------------
$50,080,075
- -----------------------------------------------------------------------------------------------
Oil Services - 1.4%
- -----------------------------------------------------------------------------------------------
GulfMark Offshore, Inc., 7.75%, 2014## $3,635,000 $3,816,750
- -----------------------------------------------------------------------------------------------
Hanover Compressor Co., 9%, 2014 4,085,000 4,493,500
- -----------------------------------------------------------------------------------------------
Ocean Rig Norway S.A., 10.25%, 2008 4,605,000 4,743,150
- -----------------------------------------------------------------------------------------------
Petroleum Geo-Services A.S.A., 8%, 2006 5,000,000 5,100,000
- -----------------------------------------------------------------------------------------------
Pride International, Inc., 7.375%, 2014 2,785,000 3,063,500
- -----------------------------------------------------------------------------------------------
$21,216,900
- -----------------------------------------------------------------------------------------------
Oils - 0.3%
- -----------------------------------------------------------------------------------------------
Premcor Refining Group, Inc., 7.75%, 2012 $3,585,000 $3,898,688
- -----------------------------------------------------------------------------------------------
Pollution Control - 0.6%
- -----------------------------------------------------------------------------------------------
Allied Waste North America, Inc., 7.875%, 2013 $6,200,000 $6,153,500
- -----------------------------------------------------------------------------------------------
Allied Waste North America, Inc., 6.125%, 2014 2,795,000 2,536,462
- -----------------------------------------------------------------------------------------------
$8,689,962
- -----------------------------------------------------------------------------------------------
Precious Metals & Minerals - 0.3%
- -----------------------------------------------------------------------------------------------
Freeport-McMoRan Copper & Gold, Inc., 6.875%, 2014 $4,602,000 $4,602,000
- -----------------------------------------------------------------------------------------------
Printing & Publishing - 2.5%
- -----------------------------------------------------------------------------------------------
Cenveo Corp., 7.875%, 2013 $3,630,000 $3,176,250
- -----------------------------------------------------------------------------------------------
Dex Media East LLC, 12.125%, 2012 2,421,000 2,899,147
- -----------------------------------------------------------------------------------------------
Dex Media West LLC, 9.875%, 2013 3,096,000 3,510,090
- -----------------------------------------------------------------------------------------------
Dex Media, Inc., 0% to 2008, 9% to 2013 11,015,000 8,288,787
- -----------------------------------------------------------------------------------------------
Dex Media, Inc., 0% to 2008, 9% to 2013 3,370,000 2,535,925
- -----------------------------------------------------------------------------------------------
Hollinger, Inc., 12.875%, 2011## 1,381,000 1,584,697
- -----------------------------------------------------------------------------------------------
Lighthouse International Co. S.A., 8%, 2014## EUR 3,400,000 4,579,096
- -----------------------------------------------------------------------------------------------
Mail-Well Corp., 9.625%, 2012 $1,650,000 1,773,750
- -----------------------------------------------------------------------------------------------
MediaNews Group, Inc., 6.875%, 2013 4,185,000 4,164,075
- -----------------------------------------------------------------------------------------------
WDAC Subsidiary Corp., 8.375%, 2014## 4,915,000 4,792,125
- -----------------------------------------------------------------------------------------------
$37,303,942
- -----------------------------------------------------------------------------------------------
Railroad & Shipping - 0.1%
- -----------------------------------------------------------------------------------------------
Kansas City Southern Railway Co., 7.5%, 2009 $2,000,000 $2,080,000
- -----------------------------------------------------------------------------------------------
Restaurants - 0.2%
- -----------------------------------------------------------------------------------------------
Carrols Holdings Corp., 9%, 2013## $3,015,000 $3,143,137
- -----------------------------------------------------------------------------------------------
Retailers - 2.1%
- -----------------------------------------------------------------------------------------------
Couche-Tard, Inc., 7.5%, 2013 $6,840,000 $7,233,300
- -----------------------------------------------------------------------------------------------
Dollar General Corp., 8.625%, 2010 4,780,000 5,544,800
- -----------------------------------------------------------------------------------------------
Duane Reade, Inc., 9.75%, 2011## 2,915,000 2,638,075
- -----------------------------------------------------------------------------------------------
Finlay Fine Jewelry Corp., 8.375%, 2012 4,085,000 4,105,425
- -----------------------------------------------------------------------------------------------
Rite Aid Corp., 9.25%, 2013 6,035,000 6,004,825
- -----------------------------------------------------------------------------------------------
Rite Aid Corp., 6.875%, 2013 2,205,000 1,995,525
- -----------------------------------------------------------------------------------------------
Saks, Inc., 7%, 2013 4,025,000 4,125,625
- -----------------------------------------------------------------------------------------------
$31,647,575
- -----------------------------------------------------------------------------------------------
Supermarkets - 0.5%
- -----------------------------------------------------------------------------------------------
Roundy's, Inc., 8.875%, 2012 $6,875,000 $7,425,000
- -----------------------------------------------------------------------------------------------
Telecommunications - Wireless - 4.6%
- -----------------------------------------------------------------------------------------------
Alamosa Holdings, Inc., 11%, 2010 $1,280,000 $1,491,200
- -----------------------------------------------------------------------------------------------
Alamosa Holdings, Inc., 0% to 2005, 12% to 2009 4,280,000 4,611,700
- -----------------------------------------------------------------------------------------------
American Tower Corp., 9.375%, 2009 194,000 203,942
- -----------------------------------------------------------------------------------------------
American Tower Corp., 7.125%, 2012## 2,935,000 2,949,675
- -----------------------------------------------------------------------------------------------
American Tower, Inc., 7.25%, 2011 1,905,000 1,990,725
- -----------------------------------------------------------------------------------------------
Centennial Communications Corp., 10.125%, 2013 5,415,000 6,132,487
- -----------------------------------------------------------------------------------------------
Crown Castle International Corp., 7.5%, 2013 3,975,000 4,218,469
- -----------------------------------------------------------------------------------------------
Dobson Cellular Systems, Inc., 8.375%, 2011## 1,140,000 1,199,850
- -----------------------------------------------------------------------------------------------
Dobson Communications Corp., 8.875%, 2013 2,040,000 1,504,500
- -----------------------------------------------------------------------------------------------
IWO Escrow Co., 6.32%, 2012## 565,000 565,000
- -----------------------------------------------------------------------------------------------
Innova S. de R.L., 9.375%, 2013 3,750,000 4,256,250
- -----------------------------------------------------------------------------------------------
Nextel Communications, Inc., 7.375%, 2015 18,690,000 20,605,725
- -----------------------------------------------------------------------------------------------
Rogers Wireless, Inc., 8%, 2012## 1,005,000 1,075,350
- -----------------------------------------------------------------------------------------------
Rogers Wireless, Inc., 6.375%, 2014 2,900,000 2,921,750
- -----------------------------------------------------------------------------------------------
Rogers Wireless, Inc., 7.5%, 2015## 2,145,000 2,300,513
- -----------------------------------------------------------------------------------------------
Rural Cellular Corp., 9.875%, 2010 4,095,000 4,361,175
- -----------------------------------------------------------------------------------------------
U.S. Unwired, Inc., 10%, 2012 4,330,000 4,827,950
- -----------------------------------------------------------------------------------------------
Ubiquitel Operating Co., 9.875%, 2011 4,215,000 4,647,038
- -----------------------------------------------------------------------------------------------
$69,863,299
- -----------------------------------------------------------------------------------------------
Telecommunications - Wireline - 6.0%
- -----------------------------------------------------------------------------------------------
AT&T Corp., 7.3%, 2011 $6,127,000 $7,107,320
- -----------------------------------------------------------------------------------------------
Cincinnati Bell, Inc., 8.375%, 2014 4,305,000 4,369,575
- -----------------------------------------------------------------------------------------------
Citizens Communications Co., 9.25%, 2011 7,791,000 9,095,992
- -----------------------------------------------------------------------------------------------
Citizens Communications Co., 6.25%, 2013 2,140,000 2,134,650
- -----------------------------------------------------------------------------------------------
Eircom Funding PLC, 8.25%, 2013 5,070,000 5,538,975
- -----------------------------------------------------------------------------------------------
GCI, Inc., 7.25%, 2014 4,345,000 4,323,275
- -----------------------------------------------------------------------------------------------
MCI, Inc., 6.908%, 2007 3,415,000 3,491,838
- -----------------------------------------------------------------------------------------------
MCI, Inc., 7.688%, 2009 4,845,000 5,056,969
- -----------------------------------------------------------------------------------------------
MCI, Inc., 8.735%, 2014 1,360,000 1,487,500
- -----------------------------------------------------------------------------------------------
Qwest Capital Funding, Inc., 7.25%, 2011 4,685,000 4,497,600
- -----------------------------------------------------------------------------------------------
Qwest Corp., 7.875%, 2011## 6,125,000 6,553,750
- -----------------------------------------------------------------------------------------------
Qwest Corp., 8.875%, 2012## 5,985,000 6,807,938
- -----------------------------------------------------------------------------------------------
Qwest Services Corp., 13.5%, 2010## 18,295,000 21,725,313
- -----------------------------------------------------------------------------------------------
Time Warner Telecom Holdings, Inc., 10.125%, 2011 3,590,000 3,518,200
- -----------------------------------------------------------------------------------------------
Time Warner Telecom Holdings, Inc., 9.25%, 2014 4,025,000 4,125,625
- -----------------------------------------------------------------------------------------------
$89,834,520
- -----------------------------------------------------------------------------------------------
Tire & Rubber - 0%
- -----------------------------------------------------------------------------------------------
Cooper-Standard Automotive Group, 8.375%, 2014## $560,000 $532,000
- -----------------------------------------------------------------------------------------------
Tobacco - 0.3%
- -----------------------------------------------------------------------------------------------
R.J. Reynolds Tobacco Holdings, Inc., 7.25%, 2012 $3,715,000 $3,845,025
- -----------------------------------------------------------------------------------------------
Transportation - Services - 0.7%
- -----------------------------------------------------------------------------------------------
CHC Helicopter Corp., 7.375%, 2014 $2,830,000 $2,964,425
- -----------------------------------------------------------------------------------------------
Stena AB, 7.5%, 2013 1,785,000 1,816,238
- -----------------------------------------------------------------------------------------------
Stena AB, 7%, 2016## 3,425,000 3,313,688
- -----------------------------------------------------------------------------------------------
TFM S.A. de C.V., 12.5%, 2012 2,050,000 2,388,250
- -----------------------------------------------------------------------------------------------
$10,482,601
- -----------------------------------------------------------------------------------------------
Utilities - Electric Power - 9.0%
- -----------------------------------------------------------------------------------------------
AES Corp., 8.75%, 2013## $1,660,000 $1,859,200
- -----------------------------------------------------------------------------------------------
AES Corp., 9%, 2015## 10,055,000 11,362,150
- -----------------------------------------------------------------------------------------------
Allegheny Energy Supply Co. LLC, 8.25%, 2012## 5,920,000 6,586,000
- -----------------------------------------------------------------------------------------------
CMS Energy Corp., 8.5%, 2011 3,830,000 4,275,237
- -----------------------------------------------------------------------------------------------
Calpine Corp., 8.5%, 2008 3,565,000 2,620,275
- -----------------------------------------------------------------------------------------------
Calpine Corp., 8.75%, 2013## 13,125,000 9,975,000
- -----------------------------------------------------------------------------------------------
CenterPoint Energy, Inc., 7.25%, 2010 4,117,000 4,582,715
- -----------------------------------------------------------------------------------------------
DPL, Inc., 6.875%, 2011 4,435,000 4,809,731
- -----------------------------------------------------------------------------------------------
Dynegy Holdings, Inc., 9.875%, 2010## 3,960,000 4,336,200
- -----------------------------------------------------------------------------------------------
Dynegy Holdings, Inc., 6.875%, 2011 1,620,000 1,506,600
- -----------------------------------------------------------------------------------------------
Dynegy Holdings, Inc., 10.125%, 2013## 2,555,000 2,852,780
- -----------------------------------------------------------------------------------------------
Edison Mission Energy, 7.73%, 2009 4,100,000 4,346,000
- -----------------------------------------------------------------------------------------------
Empresa Nacional de Electricidad S.A., 8.35%, 2013 4,661,000 5,465,055
- -----------------------------------------------------------------------------------------------
FirstEnergy Corp., 6.45%, 2011 6,673,000 7,241,573
- -----------------------------------------------------------------------------------------------
FirstEnergy Corp., 7.375%, 2031 2,905,000 3,377,940
- -----------------------------------------------------------------------------------------------
Midwest Generation LLC, 8.75%, 2034 8,000,000 8,940,000
- -----------------------------------------------------------------------------------------------
Mission Energy Holding Co., 13.5%, 2008 1,975,000 2,463,813
- -----------------------------------------------------------------------------------------------
NRG Energy, Inc., 8%, 2013## 7,447,000 8,024,143
- -----------------------------------------------------------------------------------------------
Nevada Power Co., 6.5%, 2012 935,000 984,088
- -----------------------------------------------------------------------------------------------
Nevada Power Co., 5.875%, 2015## 2,480,000 2,486,200
- -----------------------------------------------------------------------------------------------
NorthWestern Corp., 5.875%, 2014## 4,425,000 4,553,829
- -----------------------------------------------------------------------------------------------
PSEG Energy Holdings LLC, 8.625%, 2008 6,240,000 6,715,800
- -----------------------------------------------------------------------------------------------
PSEG Power LLC, 7.75%, 2011 505,000 589,500
- -----------------------------------------------------------------------------------------------
Reliant Energy, Inc., 6.75%, 2014 1,875,000 1,828,125
- -----------------------------------------------------------------------------------------------
Reliant Resources, Inc., 9.25%, 2010 3,710,000 4,127,375
- -----------------------------------------------------------------------------------------------
Sierra Pacific Power Co., 6.25%, 2012 2,115,000 2,199,600
- -----------------------------------------------------------------------------------------------
Sierra Pacific Resources, 8.625%, 2014 3,275,000 3,639,344
- -----------------------------------------------------------------------------------------------
TXU Corp., 5.55%, 2014## 7,680,000 7,671,252
- -----------------------------------------------------------------------------------------------
Teco Energy, Inc., 7%, 2012 1,705,000 1,841,400
- -----------------------------------------------------------------------------------------------
Texas Genco LLC, 6.875%, 2014## 4,090,000 4,233,150
- -----------------------------------------------------------------------------------------------
$135,494,075
- -----------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $1,368,910,968) $1,415,405,747
- -----------------------------------------------------------------------------------------------
Stocks - 1.3%
- -----------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -----------------------------------------------------------------------------------------------
Apparel Manufacturers - 0.1%
- -----------------------------------------------------------------------------------------------
Sind Holdings, Inc.* 13,126 $1,291,574
- -----------------------------------------------------------------------------------------------
Automotive - 0.3%
- -----------------------------------------------------------------------------------------------
Magna International, Inc., "A" 59,800 $4,529,252
- -----------------------------------------------------------------------------------------------
Broadcast & Cable TV - 0.6%
- -----------------------------------------------------------------------------------------------
NTL, Inc.* 44,345 $3,016,790
- -----------------------------------------------------------------------------------------------
Sinclair Broadcast Group, Inc., "A" 393,554 3,238,949
- -----------------------------------------------------------------------------------------------
Telewest Global, Inc.* 204,105 3,439,169
- -----------------------------------------------------------------------------------------------
$9,694,908
- -----------------------------------------------------------------------------------------------
Pharmaceuticals - 0.3%
- -----------------------------------------------------------------------------------------------
Merck & Co., Inc. 145,400 $4,078,470
- -----------------------------------------------------------------------------------------------
Specialty Chemicals - 0%
- -----------------------------------------------------------------------------------------------
Sterling Chemicals, Inc.* 539 $21,291
- -----------------------------------------------------------------------------------------------
Telephone Services - 0%
- -----------------------------------------------------------------------------------------------
Manitoba Telecom Services, Inc. 3,718 $140,143
- -----------------------------------------------------------------------------------------------
VersaTel Telecom International N.V.* 19,740 52,270
- -----------------------------------------------------------------------------------------------
$192,413
- -----------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $27,833,416) $19,807,908
- -----------------------------------------------------------------------------------------------
Convertible Preferred Stocks - 0.3%
- -----------------------------------------------------------------------------------------------
Automotive - 0.3%
- -----------------------------------------------------------------------------------------------
Ford Motor Co. Capital Trust II, 6.5% 88,220 $4,409,236
- -----------------------------------------------------------------------------------------------
Hayes Lemmerz International, Inc., "A", 8%* 522 40,063
- -----------------------------------------------------------------------------------------------
Total Convertible Preferred Stocks
(Identified Cost, $1,957,076) $4,449,299
- -----------------------------------------------------------------------------------------------
Preferred Stocks - 0.6%
- -----------------------------------------------------------------------------------------------
Broadcast & Cable TV - 0.1%
- -----------------------------------------------------------------------------------------------
Spanish Broadcasting Systems, Inc., "B", 10.75%* 1,930 $2,094,050
- -----------------------------------------------------------------------------------------------
Printing & Publishing - 0.5%
- -----------------------------------------------------------------------------------------------
PRIMEDIA, Inc., 8.625% 74,390 $7,029,855
- -----------------------------------------------------------------------------------------------
Real Estate - 0%
- -----------------------------------------------------------------------------------------------
HRPT Properties Trust, 8.75% 4,500 $122,400
- -----------------------------------------------------------------------------------------------
Telephone Services - 0%
- -----------------------------------------------------------------------------------------------
PTV, Inc., "A", 10% 98 $304
- -----------------------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $9,425,490) $9,246,609
- -----------------------------------------------------------------------------------------------
Warrants - 0%
- -----------------------------------------------------------------------------------------------
ISSUER STRIKE PRICE 1st EXERCISE SHARES $ VALUE
- -----------------------------------------------------------------------------------------------
Loral Space & Communications Ltd.
(Business Services)* $0.14 1/28/97 5,000 $0
- -----------------------------------------------------------------------------------------------
Loral Space & Communications Ltd.
(Business Services)* 0.14 1/28/97 11,775 0
- -----------------------------------------------------------------------------------------------
Pliant Corp. (Containers)##* 0.01 5/25/00 6,795 68
- -----------------------------------------------------------------------------------------------
Sterling Chemicals, Inc. (Specialty
Chemicals)* 52.00 12/31/02 876 1,577
- -----------------------------------------------------------------------------------------------
Thermadyne Holdings Corp. (Machinery &
Tools)* 20.78 5/29/03 21,743 10,872
- -----------------------------------------------------------------------------------------------
XM Satellite Radio, Inc. (Broadcast &
Cable TV)* 45.24 9/16/00 4,020 301,500
- -----------------------------------------------------------------------------------------------
XO Communications, Inc., "A" (Telephone
Services)* 6.25 5/27/03 2,640 1,135
- -----------------------------------------------------------------------------------------------
XO Communications, Inc., "B" (Telephone
Services)* 7.50 5/27/03 1,980 832
- -----------------------------------------------------------------------------------------------
XO Communications, Inc., "C" (Telephone
Services)* 10.00 5/27/03 1,980 535
- -----------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $1,658,845) $316,519
- -----------------------------------------------------------------------------------------------
Repurchase Agreement - 2.4%
- -----------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -----------------------------------------------------------------------------------------------
Goldman Sachs, 2.48%, dated 1/31/05, due 2/01/05, total
to be received $35,250,428 (secured by various U.S.
Treasury and Federal Agency obligations in a jointly
traded account), at Cost $35,248,000 $35,248,000
- -----------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,445,033,795)(S) $1,484,474,082
- -----------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 1.2% 18,704,322
- -----------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,503,178,404
- -----------------------------------------------------------------------------------------------
* Non-income producing security.
^^ Interest only security.
# Payment-in-kind security.
## SEC Rule 144A restriction.
(S) As of January 31, 2005, the fund had one securitiy representing $1,291,574 and 0.09% of
net assets that was fair valued in accordance with the policies adopted by the Board of
Trustees.
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
SEK = Swedish Krone
SEE NOTES TO FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
- ---------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets
and liabilities composing the total value of the fund.
AT 1/31/05
ASSETS
Investments, at value (identified cost, $1,445,033,795) $1,484,474,082
- ---------------------------------------------------------------------------------------------------
Cash 5,876,069
- ---------------------------------------------------------------------------------------------------
Receivable for forward foreign currency exchange
contracts 116,332
- ---------------------------------------------------------------------------------------------------
Receivable for investments sold 9,565,853
- ---------------------------------------------------------------------------------------------------
Receivable for fund shares sold 2,695,355
- ---------------------------------------------------------------------------------------------------
Interest and dividends receivable 28,259,301
- ---------------------------------------------------------------------------------------------------
Other assets 7,569
- ---------------------------------------------------------------------------------------------------
Total assets $1,530,994,561
- ---------------------------------------------------------------------------------------------------
LIABILITIES
Distributions payable $2,765,825
- ---------------------------------------------------------------------------------------------------
Payable for forward foreign currency exchange contracts 313,522
- ---------------------------------------------------------------------------------------------------
Payable for investments purchased 21,223,205
- ---------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 2,776,576
- ---------------------------------------------------------------------------------------------------
Payable to affiliates
- ---------------------------------------------------------------------------------------------------
Management fee 50,545
- ---------------------------------------------------------------------------------------------------
Shareholder servicing costs 163,659
- ---------------------------------------------------------------------------------------------------
Distribution and service fee 62,793
- ---------------------------------------------------------------------------------------------------
Administrative fee 1,304
- ---------------------------------------------------------------------------------------------------
Program manager fee 95
- ---------------------------------------------------------------------------------------------------
Administrative service fee 6
- ---------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 458,627
- ---------------------------------------------------------------------------------------------------
Total liabilities $27,816,157
- ---------------------------------------------------------------------------------------------------
Net assets $1,503,178,404
- ---------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $1,886,347,839
- ---------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation) on investments
and translation of assets and liabilities in foreign
currencies 39,241,722
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments and
foreign currency transactions (419,528,356)
- ---------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment
income (2,882,801)
- ---------------------------------------------------------------------------------------------------
Net assets $1,503,178,404
- ---------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 377,464,649
- ---------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class A shares
Net assets $799,651,084
- ---------------------------------------------------------------------------------------------------
Shares outstanding 201,044,861
- ---------------------------------------------------------------------------------------------------
Net asset value per share $3.98
- ---------------------------------------------------------------------------------------------------
Offering price per share (100/95.25X$3.98) $4.18
- ---------------------------------------------------------------------------------------------------
Class B shares
Net assets $379,253,325
- ---------------------------------------------------------------------------------------------------
Shares outstanding 95,061,028
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per share $3.99
- ---------------------------------------------------------------------------------------------------
Class C shares
Net assets $148,073,372
- ---------------------------------------------------------------------------------------------------
Shares outstanding 37,040,151
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per share $4.00
- ---------------------------------------------------------------------------------------------------
Class I shares
Net assets $170,678,914
- ---------------------------------------------------------------------------------------------------
Shares outstanding 42,931,974
- ---------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $3.98
- ---------------------------------------------------------------------------------------------------
Class R1 shares
Net assets $4,020,705
- ---------------------------------------------------------------------------------------------------
Shares outstanding 1,009,454
- ---------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $3.98
- ---------------------------------------------------------------------------------------------------
Class R2 shares
Net assets $246,395
- ---------------------------------------------------------------------------------------------------
Shares outstanding 61,921
- ---------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $3.98
- ---------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class 529A shares
Net assets $768,270
- ---------------------------------------------------------------------------------------------------
Shares outstanding 193,181
- ---------------------------------------------------------------------------------------------------
Net asset value per share $3.98
- ---------------------------------------------------------------------------------------------------
Offering price per share (100/95.25X$3.98) $4.18
- ---------------------------------------------------------------------------------------------------
Class 529B shares
Net assets $139,033
- ---------------------------------------------------------------------------------------------------
Shares outstanding 34,995
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per share $3.97
- ---------------------------------------------------------------------------------------------------
Class 529C shares
Net assets $347,306
- ---------------------------------------------------------------------------------------------------
Shares outstanding 87,084
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per share $3.99
- ---------------------------------------------------------------------------------------------------
On sales of $100,000 or more, the offering price of Class A and Class 529A
shares are reduced. A contingent deferred sales charge may be imposed on
redemptions of Class A, Class B, Class 529B, Class C and Class 529C shares.
SEE NOTES TO FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS 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.
YEAR ENDED 1/31/05
NET INVESTMENT INCOME
Income
- --------------------------------------------------------------------------------------------------
Interest $124,531,551
- --------------------------------------------------------------------------------------------------
Dividends 1,738,930
- --------------------------------------------------------------------------------------------------
Foreign taxes withheld (5,419)
- --------------------------------------------------------------------------------------------------
Total investment income $126,265,062
- --------------------------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------------------------
Management fee $6,994,123
- --------------------------------------------------------------------------------------------------
Trustees' compensation 48,504
- --------------------------------------------------------------------------------------------------
Shareholder servicing costs 2,314,848
- --------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 2,472,707
- --------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 4,106,511
- --------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 1,585,707
- --------------------------------------------------------------------------------------------------
Distribution and service fee (Class R1) 13,034
- --------------------------------------------------------------------------------------------------
Distribution and service fee (Class R2) 570
- --------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529A) 1,698
- --------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529B) 1,248
- --------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529C) 2,939
- --------------------------------------------------------------------------------------------------
Program manager fee (Class 529A) 1,213
- --------------------------------------------------------------------------------------------------
Program manager fee (Class 529B) 312
- --------------------------------------------------------------------------------------------------
Program manager fee (Class 529C) 735
- --------------------------------------------------------------------------------------------------
Administrative service fee (Class R2) 285
- --------------------------------------------------------------------------------------------------
Administrative fee 132,511
- --------------------------------------------------------------------------------------------------
Custodian fee 382,036
- --------------------------------------------------------------------------------------------------
Printing 99,171
- --------------------------------------------------------------------------------------------------
Postage 79,327
- --------------------------------------------------------------------------------------------------
Auditing fees 52,731
- --------------------------------------------------------------------------------------------------
Legal fees 9,730
- --------------------------------------------------------------------------------------------------
Miscellaneous 423,505
- --------------------------------------------------------------------------------------------------
Total expenses $18,723,445
- --------------------------------------------------------------------------------------------------
Fees paid indirectly (47,622)
- --------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (54,937)
- --------------------------------------------------------------------------------------------------
Net expenses $18,620,886
- --------------------------------------------------------------------------------------------------
Net investment income $107,644,176
- --------------------------------------------------------------------------------------------------
Statement of Operations - continued
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) (identified cost basis)
- --------------------------------------------------------------------------------------------------
Investment transactions $904,873
- --------------------------------------------------------------------------------------------------
Foreign currency transactions (1,584,448)
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions $(679,575)
- --------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- --------------------------------------------------------------------------------------------------
Investments $(945,633)
- --------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign
currencies (599,669)
- --------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation $(1,545,302)
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency $(2,224,877)
- --------------------------------------------------------------------------------------------------
Change in net assets from operations $105,419,299
- --------------------------------------------------------------------------------------------------
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.
FOR YEARS ENDED 1/31 2005 2004
CHANGE IN NET ASSETS
FROM OPERATIONS
Net investment income $107,644,176 $125,664,382
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions (679,575) 24,710,165
- --------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and
foreign currency translation (1,545,302) 183,154,584
- ----------------------------------------------------- ------------- -------------
Change in net assets from operations $105,419,299 $333,529,131
- ----------------------------------------------------- ------------- -------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income
- --------------------------------------------------------------------------------------------------
Class A $(63,583,514) $(75,068,442)
- --------------------------------------------------------------------------------------------------
Class B (28,196,919) (34,094,049)
- --------------------------------------------------------------------------------------------------
Class C (10,895,326) (15,414,624)
- --------------------------------------------------------------------------------------------------
Class I (10,153,961) (4,495,135)
- --------------------------------------------------------------------------------------------------
Class R1 (193,334) (41,217)
- --------------------------------------------------------------------------------------------------
Class R2 (8,204) (769)*
- --------------------------------------------------------------------------------------------------
Class 529A (35,337) (18,677)
- --------------------------------------------------------------------------------------------------
Class 529B (8,278) (4,480)
- --------------------------------------------------------------------------------------------------
Class 529C (19,515) (7,816)
- --------------------------------------------------------------------------------------------------
Total distributions declared to shareholders $(113,094,388) $(129,145,209)
- ----------------------------------------------------- ------------- -------------
Change in net assets from fund share transactions $(206,558,888) $122,504,832
- ----------------------------------------------------- ------------- -------------
Redemption fees $17,850 $--
- ----------------------------------------------------- ------------- -------------
Total change in net assets $(214,216,127) $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 income of
$2,882,801 and $7,248,903, respectively) $1,503,178,404 $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 past 5 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. This information has
been audited by the fund's independent registered public accounting firm, whose report, together with the fund's
financial statements, are included in this report.
YEARS ENDED 1/31
--------------------------------------------------------------------------------
CLASS A 2005 2004 2003 2002 2001
Net asset value, beginning of period $3.98 $3.52 $3.78 $4.44 $4.95
- --------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.29 $0.30 $0.33 $0.41 $0.47
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency 0.01^ 0.46 (0.25) (0.65) (0.51)
- ------------------------------------------ ------ ------ ------ ------ ------
Total from investment operations $0.30 $0.76 $0.08 $(0.24) $(0.04)
- ------------------------------------------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS
From net investment income $(0.30) $(0.30) $(0.34) $(0.41) $(0.47)
- --------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- (0.01) (0.00)+++
- ------------------------------------------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.30) $(0.30) $(0.34) $(0.42) $(0.47)
- ------------------------------------------ ------ ------ ------ ------ ------
Redemption fees added to
paid-in capital $0.00+++ $-- $-- $-- $--
- ------------------------------------------ ------ ------ ------ ------ ------
Net asset value, end of period $3.98 $3.98 $3.52 $3.78 $4.44
- ------------------------------------------ ------ ------ ------ ------ ------
Total return (%)(+)& 7.74 22.83 2.34 (5.50) (0.65)
- --------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 1/31
--------------------------------------------------------------------------------
CLASS A (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA:
Expenses## 0.99 0.99 1.00 1.06 1.00
- --------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.31 7.87 9.32 10.12 10.07
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 68 81 80 72 64
- --------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $799,651 $934,958 $769,069 $746,096 $785,256
- --------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition, effective
June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
substantially all of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these fees had been
incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income $0.29** $-- $-- $-- $--
- --------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 0.99** -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net investment income(S) 7.31** -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
(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.
+++ 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.
& From time to time the fund may receive proceeds from litigation settlements, without which performance would be
lower.
(+) Total returns do not include the applicable sales charge. If the charge had been included, the results would have
been lower.
** The waiver impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
^ The per share amount is not in accordance with the net realized and unrealized gain/loss for the period because
of the timing of sales of fund shares and the amount of per share realized and unrealized gains and losses at
such time.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 1/31
--------------------------------------------------------------------------------
CLASS B 2005 2004 2003 2002 2001
Net asset value, beginning of period $3.99 $3.53 $3.79 $4.44 $4.95
- --------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.26 $0.27 $0.31 $0.38 $0.44
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency 0.01^ 0.47 (0.26) (0.64) (0.51)
- ------------------------------------------ ------ ------ ------ ------ ------
Total from investment operations $0.27 $0.74 $0.05 $(0.26) $(0.07)
- ------------------------------------------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS
From net investment income $(0.27) $(0.28) $(0.31) $(0.38) $(0.44)
- --------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- (0.01) (0.00)+++
- ------------------------------------------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.27) $(0.28) $(0.31) $(0.39) $(0.44)
- ------------------------------------------ ------ ------ ------ ------ ------
Redemption fees added to
paid-in capital $0.00+++ $-- $-- $-- $--
- ------------------------------------------ ------ ------ ------ ------ ------
Net asset value, end of period $3.99 $3.99 $3.53 $3.79 $4.44
- ------------------------------------------ ------ ------ ------ ------ ------
Total return (%)& 7.10 21.65 1.64 (5.94) (1.35)
- --------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 1/31
--------------------------------------------------------------------------------
CLASS B (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA:
Expenses## 1.69 1.69 1.70 1.76 1.69
- --------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 6.63 7.18 8.65 9.45 9.37
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 68 81 80 72 64
- --------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $379,253 $471,520 $411,533 $439,987 $463,638
- --------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition, effective
June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
substantially all of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these fees had been
incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income $0.26** $-- $-- $-- $--
- --------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.69** -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net investment income(S) 6.63** -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
(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.
+++ 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.
& From time to time the fund may receive proceeds from litigation settlements, without which performance would
be lower.
** The waiver impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
^ The per share amount is not in accordance with the net realized and unrealized gain/loss for the period because
of the timing of sales of fund shares and the amount of per share realized and unrealized gains and losses at
such time.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 1/31
--------------------------------------------------------------------------------
CLASS C 2005 2004 2003 2002 2001
Net asset value, beginning of period $4.00 $3.54 $3.80 $4.45 $4.97
- --------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.26 $0.27 $0.30 $0.38 $0.44
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency 0.01^ 0.47 (0.25) (0.64) (0.52)
- ------------------------------------------ ------ ------ ------ ------ ------
Total from investment operations $0.27 $0.74 $0.05 $(0.26) $(0.08)
- ------------------------------------------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS
From net investment income $(0.27) $(0.28) $(0.31) $(0.38) $(0.44)
- --------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- (0.01) (0.00)+++
- ------------------------------------------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.27) $(0.28) $(0.31) $(0.39) $(0.44)
- ------------------------------------------ ------ ------ ------ ------ ------
Redemption fees added to
paid-in capital $0.00+++ $-- $-- $-- $--
- ------------------------------------------ ------ ------ ------ ------ ------
Net asset value, end of period $4.00 $4.00 $3.54 $3.80 $4.45
- ------------------------------------------ ------ ------ ------ ------ ------
Total return (%)& 7.10 21.61 1.64 (5.91) (1.55)
- --------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 1/31
--------------------------------------------------------------------------------
CLASS C (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA:
Expenses## 1.69 1.69 1.70 1.76 1.69
- --------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 6.63 7.18 8.59 9.39 9.38
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 68 81 80 72 64
- --------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $148,073 $214,915 $183,364 $160,798 $128,567
- --------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition, effective
June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
substantially all of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these fees had been
incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income $0.26** $-- $-- $-- $--
- --------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.69** -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net investment income(S) 6.63** -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
(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.
+++ 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.
& From time to time the fund may receive proceeds from litigation settlements, without which performance would
be lower.
** The waiver impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
^ The per share amount is not in accordance with the net realized and unrealized gain/loss for the period because
of the timing of sales of fund shares and the amount of per share realized and unrealized gains and losses at
such time.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 1/31
--------------------------------------------------------------------------------
CLASS I 2005 2004 2003 2002 2001
Net asset value, beginning of period $3.98 $3.52 $3.78 $4.43 $4.95
- --------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.29 $0.30 $0.33 $0.42 $0.48
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency 0.02^ 0.47 (0.24) (0.64) (0.52)
- ------------------------------------------ ------ ------ ------ ------ ------
Total from investment operations $0.31 $0.77 $0.09 $(0.22) $(0.04)
- ------------------------------------------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS
From net investment income $(0.31) $(0.31) $(0.35) $(0.42) $(0.48)
- --------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- (0.01) (0.00)+++
- ------------------------------------------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.31) $(0.31) $(0.35) $(0.43) $(0.48)
- ------------------------------------------ ------ ------ ------ ------ ------
Redemption fees added to
paid-in capital $0.00+++ $-- $-- $-- $--
- ------------------------------------------ ------ ------ ------ ------ ------
Net asset value, end of period $3.98 $3.98 $3.52 $3.78 $4.43
- ------------------------------------------ ------ ------ ------ ------ ------
Total return (%)& 8.17 22.88 2.66 (4.99) (0.57)
- --------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 1/31
--------------------------------------------------------------------------------
CLASS I (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA:
Expenses## 0.68 0.69 0.70 0.76 0.70
- --------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 7.55 8.03 9.58 10.43 10.39
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 68 81 80 72 64
- --------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $170,679 $93,887 $26,373 $19,352 $22,128
- --------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition, effective
June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
substantially all of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these fees had been
incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income $0.29** $-- $-- $-- $--
- --------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 0.68** -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net investment income(S) 7.55** -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
(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.
+++ 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.
& From time to time the fund may receive proceeds from litigation settlements, without which performance would
be lower.
** The waiver impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
^ The per share amount is not in accordance with the net realized and unrealized gain/loss for the period because
of the timing of sales of fund shares and the amount of per share realized and unrealized gains and losses at
such time.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 1/31
------------------------- PERIOD ENDED
CLASS R1 2005 2004 1/31/03*
Net asset value, beginning of period $3.98 $3.52 $3.51###
- ------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.28 $0.28 $0.02
- ------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 0.01^ 0.48 0.02
- --------------------------------------------------------- ------ ------ ------
Total from investment operations $0.29 $0.76 $0.04
- --------------------------------------------------------- ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.29) $(0.30) $(0.03)
- ------------------------------------------------------------------------------------------------------------
Redemption fees added to paid-in capital $0.00+++ $-- $--
- --------------------------------------------------------- ------ ------ ------
Net asset value, end of period $3.98 $3.98 $3.52
- --------------------------------------------------------- ------ ------ ------
Total return (%)& 7.63 22.29 1.03++###
- ------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA:
Expenses## 1.18 1.20 1.20+
- ------------------------------------------------------------------------------------------------------------
Net investment income 7.06 7.46 7.97+
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover 68 81 80
- ------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $4,021 $1,359 $40
- ------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition,
effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of substantially all of Independent Chief Compliance Officer service fees paid to
Tarantino LLC. If these fees had been incurred by the fund, the net investment income per share and the
ratios would have been:
Net investment income $0.28** $-- $--
- ------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.18** -- --
- ------------------------------------------------------------------------------------------------------------
Net investment income(S) 7.06** -- --
- ------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31, 2002, through January 31, 2003.
** The waiver impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
+ 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.
### The net asset value and total return previously reported as $3.50 and 1.32%, respectively, have been
revised to reflect the net asset value from the day prior to the class' inception date. The net asset
value and total return previously reported were from inception date, the date the share class was first
available to public shareholders.
& From time to time the fund may receive proceeds from litigation settlements, without which performance
would be lower.
^ The per share amount is not in accordance with the net realized and unrealized gain/loss for the period
because of the timing of sales of fund shares and the amount of per share realized and unrealized gains
and losses at such time.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED PERIOD ENDED
CLASS R2 1/31/05 1/31/04*
Net asset value, beginning of period $3.98 $3.85
- ------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.25 $0.07
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 0.03^ 0.13^
- --------------------------------------------------------------- ------ ------
Total from investment operations $0.28 $0.20
- --------------------------------------------------------------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.28) $(0.07)
- --------------------------------------------------------------- ------ ------
Redemption fees added to paid-in capital $0.00+++ $--
- --------------------------------------------------------------- ------ ------
Net asset value, end of period $3.98 $3.98
- ------------------------------------------------------------------------------------------------------
Total return (%)& 7.37 5.32++
- ------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA:
Expenses## 1.49 1.43+
- ------------------------------------------------------------------------------------------------------
Net investment income 6.58 7.07+
- ------------------------------------------------------------------------------------------------------
Portfolio turnover 68 81
- ------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $246 $42
- ------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In
addition, effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the
fund for its proportional share of substantially all of Independent Chief Compliance Officer service
fees paid to Tarantino LLC. If these fees had been incurred by the fund, the net investment income
per share and the ratios would have been:
Net investment income $0.25** $--
- ------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.49** --
- ------------------------------------------------------------------------------------------------------
Net investment income(S) 6.58** --
- ------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R2 shares, October 31, 2003, through January 31, 2004.
** The waiver impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
+ 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.
& From time to time the fund may receive proceeds from litigation settlements, without which
performance would be lower.
^ The per share amount is not in accordance with the net realized and unrealized gain/loss for the
period because of the timing of sales of fund shares and the amount of per share realized and
unrealized gains and losses at such time.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 1/31
-------------------------- PERIOD ENDED
CLASS 529A 2005 2004 1/31/03*
Net asset value, beginning of period $3.98 $3.52 $3.42###
- ------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.27 $0.28 $0.13
- ------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 0.02^ 0.47 0.13
- --------------------------------------------------------- ------ ------ ------
Total from investment operations $0.29 $0.75 $0.26
- --------------------------------------------------------- ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.29) $(0.29) $(0.16)
- --------------------------------------------------------- ------ ------ ------
Redemption fees added to paid-in capital $0.00+++ $-- $--
- --------------------------------------------------------- ------ ------ ------
Net asset value, end of period $3.98 $3.98 $3.52
- --------------------------------------------------------- ------ ------ ------
Total return (%)(+)& 7.53 22.16 7.70++###
- ------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA:
Expenses## 1.29 1.30 1.30+
- ------------------------------------------------------------------------------------------------------------
Net investment income 6.97 7.42 8.66+
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover 68 81 80
- ------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $768 $406 $53
- ------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition,
effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of substantially all of Independent Chief Compliance Officer service fees paid to
Tarantino LLC. If these fees had been incurred by the fund, the net investment income per share and the
ratios would have been:
Net investment income $0.27** $-- $--
- ------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.29** -- --
- ------------------------------------------------------------------------------------------------------------
Net investment income(S) 6.97** -- --
- ------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529A shares, July 31, 2002, through January 31, 2003.
** The waiver impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
+ 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.
### The net asset value and total return previously reported as $3.43 and 7.39%, respectively, have been
revised to reflect the net asset value from the day prior to the class' inception date. The net asset
value and total return previously reported were from inception date, the date the share class was
first available to public shareholders.
(+) Total returns do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
& From time to time the fund may receive proceeds from litigation settlements, without which performance
would be lower.
^ The per share amount is not in accordance with the net realized and unrealized gain/loss for the
period because of the timing of sales of fund shares and the amount of per share realized and
unrealized gains and losses at such time.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 1/31
------------------------------- PERIOD ENDED
CLASS 529B 2005 2004 1/31/03*
Net asset value, beginning of period $3.98 $3.52 $3.42###
- ------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.25 $0.25 $0.11
- ------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 0.00+++^ 0.48 0.14
- --------------------------------------------------------- ------ ------ ------
Total from investment operations $0.25 $0.73 $0.25
- --------------------------------------------------------- ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.26) $(0.27) $(0.15)
- --------------------------------------------------------- ------ ------ ------
Redemption fees added to paid-in capital $0.00+++ $-- $--
- --------------------------------------------------------- ------ ------ ------
Net asset value, end of period $3.97 $3.98 $3.52
- --------------------------------------------------------- ------ ------ ------
Total return (%)& 6.57 21.39 7.35++###
- ------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA:
Expenses## 2.01 1.95 1.95+
- ------------------------------------------------------------------------------------------------------------
Net investment income 6.29 6.80 8.37+
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover 68 81 80
- ------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $139 $119 $31
- ------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition,
effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of substantially all of Independent Chief Compliance Officer service fees paid to
Tarantino LLC. If these fees had been incurred by the fund, the net investment income per share and the
ratios would have been:
Net investment income $0.25** $-- $--
- ------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.01** -- --
- ------------------------------------------------------------------------------------------------------------
Net investment income(S) 6.29** -- --
- ------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529B shares, July 31, 2002, through January 31, 2003.
** The waiver impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
+ 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.
### The net asset value and total return previously reported as $3.43 and 7.04%, respectively, have been
revised to reflect the net asset value from the day prior to the class' inception date. The net asset
value and total return previously reported were from inception date, the date the share class was
first available to public shareholders.
& From time to time the fund may receive proceeds from litigation settlements, without which performance
would be lower.
^ The per share amount is not in accordance with the net realized and unrealized gain/loss for the
period because of the timing of sales of fund shares and the amount of per share realized and
unrealized gains and losses at such time.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 1/31
-------------------------- PERIOD ENDED
CLASS 529C 2005 2004 1/31/03*
Net asset value, beginning of period $3.99 $3.53 $3.43###
- ------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.25 $0.26 $0.13
- ------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 0.01^ 0.47 0.12
- --------------------------------------------------------- ------ ------ ------
Total from investment operations $0.26 $0.73 $0.25
- --------------------------------------------------------- ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.26) $(0.27) $(0.15)
- --------------------------------------------------------- ------ ------ ------
Redemption fees added to paid-in capital $0.00+++ $-- $--
- --------------------------------------------------------- ------ ------ ------
Net asset value, end of period $3.99 $3.99 $3.53
- --------------------------------------------------------- ------ ------ ------
Total return (%)& 6.84 21.35 7.33++###
- ------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA:
Expenses## 1.97 1.95 1.95+
- ------------------------------------------------------------------------------------------------------------
Net investment income 6.31 6.79 8.05+
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover 68 81 80
- ------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $347 $189 $43
- ------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition,
effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of substantially all of Independent Chief Compliance Officer service fees paid to
Tarantino LLC. If these fees had been incurred by the fund, the net investment income per share and the
ratios would have been:
Net investment income $0.25** $-- $--
- ------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.97** -- --
- ------------------------------------------------------------------------------------------------------------
Net investment income(S) 6.31** -- --
- ------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529C shares, July 31, 2002, through January 31, 2003.
** The waiver impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
+ 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.
### The net asset value and total return previously reported as $3.44 and 7.02%, respectively, have been
revised to reflect the net asset value from the day prior to the class' inception date. The net asset
value and total return previously reported were from inception date, the date the share class was
first available to public shareholders.
& From time to time the fund may receive proceeds from litigation settlements, without which performance
would be lower.
^ The per share amount is not in accordance with the net realized and unrealized gain/loss for the
period because of the timing of sales of fund shares and the amount of per share realized and
unrealized gains and losses at such time.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS High Income Fund (the fund) is a diversified series of MFS Series Trust III
(the trust). The trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The preparation of financial statements in conformity with 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 July 1, 2004 and before April
1, 2005, the fund will charge a 2% redemption fee (which is retained by the
fund) on proceeds from Class A, Class B, Class C, and Class I shares redeemed
or exchanged within 30 calendar days following their acquisition (either by
purchase or exchange). Effective April 1, 2005, the fund will charge a 1%
redemption fee on proceeds from Class A, Class B, Class C, and Class I shares
redeemed or exchanged within 30 calendar days following their acquisition. The
fund may change the redemption fee period in the future, including in
connection with Securities and Exchange Commission rule developments. See the
fund's prospectus for details. Any redemption 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. The fund may receive proceeds from litigation
settlements involving its portfolio holdings. Any proceeds received are
reflected in realized gain/loss in the statement of operations, or in
unrealized gain/loss if the security is still held by the fund. 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. During the year ended January 31, 2005, the fund's custodian fees were
reduced by $47,522 under this arrangement. The fund has entered into a
commission recapture agreement, under which certain brokers will credit the
fund a portion of the commissions generated, to offset certain expenses of the
fund. For the year ended January 31, 2005, the fund's miscellaneous expenses
were reduced by $100 under this agreement. These amounts are 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 foreign currency transactions, wash sales, defaulted bonds and
amortization and accretion on debt securities.
The tax character of distributions declared for the years ended January 31,
2005 and January 31, 2004 was as follows:
1/31/05 1/31/04
Distributions declared from:
------------------------------------------------------------
Ordinary income $113,094,388 $129,145,209
------------------------------------------------------------
During the year ended January 31, 2005, accumulated distributions in excess of
net investment income decreased by $9,816,314, accumulated net realized loss
on investments and foreign currency transactions increased by $12,472,531 and
paid-in capital increased by $2,656,217 due to differences between book and
tax accounting for foreign currency transactions, amortization and accretion
on debt securities and defaulted bonds. This change had no effect on the net
assets or net asset value per share.
As of January 31, 2005, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $10,966,728
----------------------------------------------------------
Capital loss carryforward (368,985,012)
----------------------------------------------------------
Unrealized appreciation (depreciation) (11,121,601)
----------------------------------------------------------
Other temporary differences (14,029,550)
----------------------------------------------------------
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 as follows:
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)
----------------------------------------------------------
January 31, 2013 (19,318,197)
----------------------------------------------------------
Total $(368,985,012)
----------------------------------------------------------
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 of $1.4 billion of average net assets 0.44%
----------------------------------------------------------
As part of a settlement agreement with the New York Attorney General concerning
market timing and related matters (See Legal Proceedings footnote), 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 which is shown as a reduction of total expenses in the Statement of
Operations. 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.
Management fees incurred for the year ended January 31, 2005 were an effective
rate of 0.46% of average daily net assets on an annualized basis.
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 current Independent Trustees. Included in
Trustees' compensation is a net increase of $6,117 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 $9,604 for retired Independent
Trustees for the year ended January 31, 2005.
This fund and certain other MFS funds (the "funds") have entered into a
services agreement (the "Agreement") which provides for payment of fees by the
funds to Tarantino LLC in return for the provision of services of an
Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is an
officer of the funds and the sole member of Tarantino LLC. MFS has agreed to
reimburse each of the funds for a proportional share of substantially all of
the payments made by the funds to Tarantino LLC and also to provide office
space and other administrative support and supplies to the ICCO. The 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. The
fund paid MFS an administrative fee up to the following annual percentage rates
of the fund's average daily net assets:
BEGINNING OF
PERIOD 4/01/04
EFFECTIVE DATE THROUGH 3/31/04 THROUGH 2/28/05 3/01/05
First $2 billion 0.0175% 0.01120% 0.01626%
- ------------------------------------------------------------------------------
Next $2.5 billion 0.0130% 0.00832% 0.01206%
- ------------------------------------------------------------------------------
Next $2.5 billion 0.0005% 0.00032% 0.00056%
- ------------------------------------------------------------------------------
In excess of $7 billion 0.0000% 0.00000% 0.00000%
- ------------------------------------------------------------------------------
The March 1, 2005 rates were not effective during the current reporting period.
For the year ended January 31, 2005, the fund paid MFS, $132,511 equivalent to
0.0087% 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
$134,530 and $1,087 for the year ended January 31, 2005, 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 as compensation for services provided by MFD and financial
intermediaries in connection with the distribution and servicing of its shares.
One component of the plan is a distribution fee and another is a service fee
paid by MFD to financial intermediaries that enter into sales or service
agreements with MFD or its affiliates based on the average daily net assets of
accounts attributable to such intermediaries. The 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 may retain all or a portion of the service fee, including for accounts for which there is no financial
intermediary of record. Service fees retained by MFD for the year ended January 31, 2005 amounted to:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Service Fee Retained by MFD $76,721 $2,056 $964 $125 $213
- -----------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Service Fee Retained by MFD $227 $15 $90
- -----------------------------------------------------------------------------------------------------------------------
Fees incurred under the distribution plan during the year ended January 31, 2005 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.
Assets attributable to Class A shares sold prior to March 1, 1991 are subject
to a service fee of 0.15% per annum.
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 Class
529C shares, the first year 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 of purchase. MFD receives
all contingent deferred sales charges. Contingent deferred sales charges
imposed during the year ended January 31, 2005 were as follows:
CLASS A CLASS B CLASS C CLASS 529B CLASS 529C
Contingent Deferred Sales Charges
Imposed $33,849 $996,203 $35,896 $480 $129
- -----------------------------------------------------------------------------------------------------------------------
The fund has and may from time to time enter into contracts with program
managers and other parties that 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 was set at 0.10% of the fund's average daily net assets. For the period
July 1, 2004 through December 31, 2004, the fund was charged up to 0.0861% of
its average daily net assets. For the period January 1, 2005 through February
28, 2005, the fund is charged up to 0.1035% of its average daily net assets.
For the year ended January 31, 2005, the fund paid MFSC a fee of $1,441,274 for
shareholder services which equated to 0.0947% of the fund's average daily net
assets. Effective March 1, 2005, the fund is charged up to 0.1159% of its
average daily net assets. Shareholder service costs include out of pocket
expenses and sub accounting services expenses paid by MFSC on behalf of the
fund and subsequently reimbursed to MFSC which amounted to $586,917, and other
costs paid by the fund directly to unaffiliated vendors for the year ended
January 31, 2005.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$1,001,074,772 and $1,227,440,477, 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 $1,495,594,308
- -------------------------------------------------------------------------------
Gross unrealized depreciation $(30,906,766)
- -------------------------------------------------------------------------------
Gross unrealized appreciation 19,786,540
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) $(11,120,226)
- -------------------------------------------------------------------------------
(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:
Year ended 1/31/05 Year ended 1/31/04
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 49,940,117 $195,588,296 263,429,037 $975,201,278
- --------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 11,800,931 46,380,896 13,148,655 49,086,946
- --------------------------------------------------------------------------------------------------------
Shares reacquired (95,320,762) (372,376,173) (260,225,852) (975,175,194)
- --------------------------------------------------------------------------------------------------------
Net change (33,579,714) $(130,406,981) 16,351,840 $49,113,030
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 11,988,099 $47,146,590 39,953,134 $148,493,538
- --------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 4,485,634 17,644,656 5,260,172 19,632,842
- --------------------------------------------------------------------------------------------------------
Shares reacquired (39,553,420) (154,823,486) (43,703,120) (164,021,969)
- --------------------------------------------------------------------------------------------------------
Net change (23,079,687) $(90,032,240) 1,510,186 $4,104,411
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 11,232,803 $44,104,669 39,363,788 $146,852,010
- --------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 1,858,994 7,333,640 2,695,233 10,072,343
- --------------------------------------------------------------------------------------------------------
Shares reacquired (29,784,248) (116,926,550) (40,186,145) (150,393,766)
- --------------------------------------------------------------------------------------------------------
Net change (16,692,451) $(65,488,241) 1,872,876 $6,530,587
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 19,961,981 $78,328,710 16,395,513 $61,976,872
- --------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 2,663,323 10,454,551 1,011,179 3,809,085
- --------------------------------------------------------------------------------------------------------
Shares reacquired (3,298,517) (12,799,669) (1,299,110) (4,861,745)
- --------------------------------------------------------------------------------------------------------
Net change 19,326,787 $75,983,592 16,107,582 $60,924,212
- --------------------------------------------------------------------------------------------------------
CLASS R1 SHARES
Shares sold 923,723 $3,647,261 378,986 $1,440,673
- --------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 50,560 198,940 8,675 33,018
- --------------------------------------------------------------------------------------------------------
Shares reacquired (305,933) (1,203,026) (57,996) (219,929)
- --------------------------------------------------------------------------------------------------------
Net change 668,350 $2,643,175 329,665 $1,253,762
- --------------------------------------------------------------------------------------------------------
Year ended 1/31/05 Period ended 1/31/04*
SHARES AMOUNT SHARES AMOUNT
CLASS R2 SHARES
Shares sold 51,117 $199,781 10,394 $40,020
- --------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 2,130 8,424 135 527
- --------------------------------------------------------------------------------------------------------
Shares reacquired (1,855) (7,376) -- --
- --------------------------------------------------------------------------------------------------------
Net change 51,392 $200,829 10,529 $40,547
- --------------------------------------------------------------------------------------------------------
Year ended 1/31/05 Year ended 1/31/04
SHARES AMOUNT SHARES AMOUNT
CLASS 529A SHARES
Shares sold 103,438 $412,576 91,513 $344,021
- --------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 9,573 37,541 4,463 16,834
- --------------------------------------------------------------------------------------------------------
Shares reacquired (21,958) (84,833) (8,855) (35,102)
- --------------------------------------------------------------------------------------------------------
Net change 91,053 $365,284 87,121 $325,753
- --------------------------------------------------------------------------------------------------------
CLASS 529B SHARES
Shares sold 7,162 $28,051 20,449 $77,682
- --------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 2,268 8,894 1,044 3,939
- --------------------------------------------------------------------------------------------------------
Shares reacquired (4,340) (16,951) (386) (1,493)
- --------------------------------------------------------------------------------------------------------
Net change 5,090 $19,994 21,107 $80,128
- --------------------------------------------------------------------------------------------------------
CLASS 529C SHARES
Shares sold 42,089 $165,359 33,329 $125,486
- --------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 5,205 20,480 1,873 7,079
- --------------------------------------------------------------------------------------------------------
Shares reacquired (7,613) (30,139) (41) (163)
- --------------------------------------------------------------------------------------------------------
Net change 39,681 $155,700 35,161 $132,402
- --------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R2, October 31, 2003, through January 31, 2004.
The fund is one of several MFS mutual funds in which the MFS Asset Allocation
Funds may invest. The MFS Asset Allocation Funds do not invest in the
underlying MFS funds for the purpose of exercising management or control. At
the end of the period, the MFS Moderate Allocation Fund and MFS Growth
Allocation Fund were the owners of record of approximately 5% and 5%,
respectively, of the total outstanding shares.
(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 Federal
Reserve funds 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 year ended January 31, 2005 was $9,420, and is
included in miscellaneous expense. The fund had no significant borrowings
during the year ended January 31, 2005.
(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 and purchases in the table below are netted by currency.
- --------------
SALES
- --------------
NET
UNREALIZED
CONTRACTS TO IN EXCHANGE CONTRACTS APPRECIATION
DELIVER/RECEIVE FOR AT VALUE (DEPRECIATION)
SETTLEMENT DATE
2/14/05 - 2/28/05 EUR 26,958,897 $35,069,154 $35,172,684 $(103,530)
=========== =========== =========
- --------------
PURCHASES
- --------------
2/14/05 EUR 4,791,336 $6,351,150 $6,250,910 $(100,240)
3/10/05 GBP 788,716 1,474,900 1,481,530 6,630
2/14/05 SEK 5,253,248 752,920 752,870 (50)
----------- ----------- ---------
$8,578,970 $8,485,310 $(93,660)
=========== =========== =========
At January 31, 2005, 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. The SEC
settlement order states that MFS failed to adequately disclose to the Boards of
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 intermediaries who support the sale of MFS
fund shares. 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. The
final distribution plan was approved by the SEC on January 21, 2005, and the
affected MFS Funds received the payment on February 16, 2005.
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 open-end retail fund ("MFS
retail funds") 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 they
prohibited market timing, MFS did not limit trading activity in 11 domestic
large cap stock, high grade bond and money market retail funds. MFS' former
Chief Executive Officer and former President 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. These individuals 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, MFS Fund Distributors, Inc., MFS Service Center,
Inc., MFS Corporation Retirement Committee, Sun Life Financial Inc., various
MFS funds, certain current and/or former 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 ERISA
actions by participants in certain retirement plan accounts on behalf of those
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, Allianz Dresdner),
No. 1:04-md-15863 (transfer began March 19, 2004)). The market timing cases
related to the MFS complex are Riggs v. MFS et al., Case No. 04-cv-01162-JFM
(direct), Hammerslough v. MFS et al., Case No. 04-md-01620 (derivative) and
Anita Walker v. MFS et al., Case No. 1:04-CV-01758 (ERISA). The plaintiffs in
these consolidated lawsuits generally seek injunctive relief including removal
of the named Trustees, adviser and distributor, rescission of contracts and
12b-1 Plans, disgorgement of fees and profits, monetary damages, punitive
damages, attorney's fees and costs and other equitable and declaratory relief.
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 (GAO) (May 4, 2004); and Koslow v.
Sun Life Financial Inc., et al., No. 04cv11019 (GAO) (May 20, 2004)). The
plaintiffs in these lawsuits generally seek compensatory damages, punitive
damages, recovery of fees, rescission of contracts, an accounting, restitution,
declaratory relief, equitable and/or injunctive relief and attorney's fees and
costs. The various 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, (ii) received excessive compensation as fiduciaries to
the MFS funds, or (iii) 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. 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 certain 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 distributed $50 million 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.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
To the Trustees of MFS Series Trust III and the Shareholders of
MFS High Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
High Income Fund (the "Fund") (a fund of MFS Series Trust III), including the
portfolio of investments, as of January 31, 2005, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended. These financial statements
and financial highlights are the responsibility of the Series' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Funds' internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of January 31, 2005, by correspondence with the custodian.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
High Income Fund as of January 31, 2005, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended, in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 24, 2005
- ---------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- ---------------------------------------------------------------------------------------------------------
The Trustees and officers of the trust, as of March 1, 2005, 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 DURING
POSITION(s) HELD TRUSTEE/OFFICER THE PAST FIVE YEARS &
NAME, DATE OF BIRTH WITH FUND SINCE(1) OTHER DIRECTORSHIPS(2)
----------------------------------
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair February 1992 Private investor; Eastern
(born 05/01/36) of Trustees 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
Michael Hegarty Trustee December 2004 Retired; AXA Financial (financial
(born 12/21/44) services and insurance), Vice
Chairman and Chief Operating
Officer (until May 2001); The
Equitable Life Assurance Society
(insurance), President and Chief
Operating Officer (until May 2001)
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
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) Advisory Trustee December 2004 Massachusetts Financial Services
(born 10/20/63) and President (Advisory Company, Chief Executive Officer,
Trustee); President, Chief Investment
February-December Officer and Director
2004 (Trustee)
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
Jeffrey N. Carp(3) Secretary and September 2004 Massachusetts Financial Services
(born 12/01/56) Clerk Company, Executive Vice President,
General Counsel and Secretary
(since April 2004); Hale and Dorr
LLP (law firm), Partner (prior to
April 2004)
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)
James F. DesMarais(3) Assistant September 2004 Massachusetts Financial Services
(born 03/09/61) Secretary and Company, Assistant General Counsel
Assistant Clerk
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)
Brian T. Hourihan(3) Assistant September 2004 Massachusetts Financial Services
(born 11/11/64) Secretary and Company, Vice President, Senior
Assistant Clerk Counsel and Assistant Secretary
(since June 2004); Affiliated
Managers Group, Inc., Chief Legal
Officer/Centralized Compliance
Program (January to April 2004);
Fidelity Research & Management
Company, Assistant General Counsel
(prior to January 2004)
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, as a
result of position with MFS. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
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. Messrs. Ives and Sherratt and Ms. Lane are members
of the trust's Audit Committee.
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 99 funds within the MFS Family of Funds.
In addition, the Trustees have appointed Robert J. Manning, Robert C. Pozen and Laurie J. Thomsen as
Advisory Trustees and have nominated each to be elected as Trustees by shareholders. If elected, Messrs.
Manning and Pozen would serve as interested Trustees while Ms. Thomsen would serve as an independent
Trustee. Information relating to Messrs. Manning and Pozen and Ms. Thomsen is continued in the table
below. The trust will hold a shareholders meeting in 2005 and at least once every five years thereafter to
elect Trustees.
ADVISORY TRUSTEES
Robert J. Manning(3) Advisory Trustee December 2004 Massachusetts Financial Services
(born 10/20/63) and President (Advisory Company, Chief Executive Officer,
Trustee); President, Chief Investment
February-December Officer and Director
2004 (Trustee)
Robert C. Pozen(3) Advisory Trustee December 2004 Massachusetts Financial Services
(born 08/08/46) (Advisory Company, Chairman (since February
Trustee); 2004); Harvard Law School
February-December (education), John Olin Visiting
2004 (Trustee) 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;
Medtronic, Inc. (medical
technology), Director; Telesat
(satellite communications),
Director
Laurie J. Thomsen Advisory Trustee December 2004 Private investor; Prism Venture
(born 08/05/57) Partners (venture capital), Co-
founder and General Partner (until
June 2004); St. Paul Travelers
Companies (commercial property
liability insurance), Director
- ------------------
(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, as a
result of position with MFS. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
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 225 Franklin Street, Boston, MA 02110
02116-3741
J.P. Morgan Chase Bank
DISTRIBUTOR One Chase Manhattan Plaza
MFS Fund Distributors, Inc. New York, NY 10081
500 Boylston Street, Boston, MA
02116-3741 INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
PORTFOLIO MANAGERS Deloitte & Touche LLP
John F. Addeo 200 Berkeley Street, Boston, MA 02116
Scott B. Richards
- -------------------------------------------------------------------------------
PROXY VOTING POLICIES AND INFORMATION
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
QUARTERLY PORTFOLIO DISCLOSURE
- -------------------------------------------------------------------------------
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 1-800-SEC-0330. 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
mfs.com.
- ------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2006, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2005.
For the year ended January 31, 2005, the amount of distributions from income
eligible for the 70% dividends received deduction for corporations is 1.46%.
The fund hereby designates the maximum amount allowable as qualified dividend
income eligible for a maximum tax rate of 15%, as provided for the Jobs and
Growth Tax Relief Reconciliation Act of 2003.
- --------------------------------------------------------------------------------
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.
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
- -------------------------------------------------------------------------------
M F S(SM)
INVESTMENT MANAGEMENT(R)
(C) 2005 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
MFH-ANN-03/05 87M
MFS(R) MUNICIPAL HIGH INCOME FUND 1/31/05
ANNUAL REPORT
- -------------------------------------------------------------------------------
M F S(SM)
INVESTMENT MANAGEMENT(R)
THIS REPORT HAS BEEN PREPARED FOR THE GENERAL INFORMATION TO SHAREHOLDERS. IT IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY WHEN PRECEDED OR
ACCOMPANIED BY A CURRENT PROSPECTUS.
ANNUAL REPORT
LETTER FROM THE CEO 1
------------------------------------------------------
PORTFOLIO COMPOSITION 4
------------------------------------------------------
MANAGEMENT REVIEW 5
------------------------------------------------------
PERFORMANCE SUMMARY 7
------------------------------------------------------
EXPENSE TABLE 12
------------------------------------------------------
PORTFOLIO OF INVESTMENTS 14
------------------------------------------------------
FINANCIAL STATEMENTS 42
------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 52
------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 66
------------------------------------------------------
TRUSTEES AND OFFICERS 67
------------------------------------------------------
PROXY VOTING POLICIES AND INFORMATION 71
------------------------------------------------------
QUARTERLY PORTFOLIO DISCLOSURE 71
------------------------------------------------------
FEDERAL TAX INFORMATION 71
------------------------------------------------------
CONTACT INFORMATION BACK COVER
------------------------------------------------------
- ------------------------------------------------------------------------------
LETTER FROM THE CEO
- ------------------------------------------------------------------------------
Dear Shareholders,
[Photo of Robert J. Manning]
Last summer and fall, I wrote to you about enhancements that MFS(R) was making
to its investment process. Our goal, as always, was to deliver strong
performance across all asset classes. I am now happy to report to you that 2004
was a very successful year for MFS, relative to our peers in the mutual fund
industry. While there will always be room for improvement, we believe the
enhancements we have made to our investment process resulted in significantly
improved performance across the MFS Family of Funds(R).
You may remember some of the enhancements I outlined last year.
They included
o increasing collaboration and information sharing among our investment
personnel across asset classes, through an Investment Management Committee
with members from our Domestic Equity, International Equity, Fixed Income,
and Quantitative Research teams
o increasing the number of analysts supporting our portfolio managers and
doubling the average investment experience of our domestic equity analyst
staff
o making additional use of our most-seasoned portfolio managers to mentor
research analysts
o combining more quantitative, top-down risk control and security analysis
with our traditional bottom-up research process
o opening a research office in Mexico City to complement our existing staff
in Boston, London, Singapore, and Tokyo
The effect of these enhancements, I believe, is evident in the 2004
performance of our funds. For the 12 months ended December 31, 2004, 80% of MFS
domestic equity funds, 100% of MFS international equity funds, and 80% of MFS
fixed- income funds delivered results in the top half of their Lipper peer
groups.
Our longer-term performance also benefited from our ongoing commitment to the
MFS Original Research(R) process: more than 75% of MFS funds were in the top
half of their respective Lipper categories over the 3-, 5-, and 10-year periods
ended December 31, 2004.
Of course, I cannot offer any guarantees that our performance will repeat
itself. Still, I am confident that the recent enhancements to our investment
process will continue to benefit shareholders in 2005 and beyond.
What I can tell you with certainty is that the way you manage your investments
will determine how well you take advantage of the performance that financial
markets deliver. Historically, individual investors have tended to underperform
the markets. For example, a 2003 study by DALBAR, Inc. showed that over the
nearly two decades from 1984 through 2002, the average U.S. stock investor
earned a 2.6% average annual return at a time when U.S. stocks, as measured by
the Standard & Poor's 500 Stock Index, delivered a 12.2% average annual
return.(1)
This huge discrepancy, in our view, occurred because nonprofessional investors
generally did not adhere to the basic principles followed by most professional
investors: allocate among asset classes, diversify within each asset class, and
rebalance one's portfolio on a routine schedule. I elaborated on this "ADR"
theme in fund reports over the last few months of 2004. For more information on
how to apply a Disciplined Diversification(SM) strategy to your portfolio using
the principles of ADR, I would urge you to contact your own investment
professional. You may also want to refer to information on the subject on our
Web site, MFS.COM.
As always, we appreciate your confidence in MFS, and you can be sure of our
continued commitment to do the best we can to help you pursue your long-term
financial goals.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
March 15, 2005
It is not possible to invest directly in an index.
Lipper rankings and performance are based on historical average annual returns
of Class A shares, and do not include any sales charges. Past performance is no
guarantee of future results.
Asset allocation and diversification cannot guarantee a profit or protect
against a loss.
The opinions expressed in this letter are those of MFS, and no forecasts can be
guaranteed.
(1) Source: DALBAR July 2003 update to its Quantitative Analysis of Investment
Behavior; DALBAR, Inc., is a financial-services market research firm
headquartered in Boston, MA.
- -----------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -----------------------------------------------------------------------------
PORTFOLIO STRUCTURE*
Bonds 96.6%
Cash & Other Net Assets 0.4%
TOP FIVE BOND INDUSTRIES*
Health care/Hospitals 22.5%
------------------------------------------------
Health care/Long Term Care 11.9%
------------------------------------------------
Invest or Owned Utilities 5.8%
------------------------------------------------
Toll Roads l4.8%
------------------------------------------------
IDB Paper 4.0%
------------------------------------------------
CREDIT QUALITY OF BONDS**
AAA 18.3%
------------------------------------------------
AA 2.5%
------------------------------------------------
A 6.8%
------------------------------------------------
BBB 27.2%
------------------------------------------------
BB 10.5%
------------------------------------------------
B 4.1%
------------------------------------------------
CCC 3.2%
------------------------------------------------
CC 0.3%
------------------------------------------------
Not Rated 27.1%
------------------------------------------------
PORTFOLIO FACTS
Average Duration 6.6
------------------------------------------------
Average Life 16.4 yrs.
------------------------------------------------
Average Maturity*** 18.8 yrs.
------------------------------------------------
Average Quality BBB+
------------------------------------------------
Average Quality Short Term Bonds A-1
------------------------------------------------
* For purposes of this graphical presentation, the bond component includes
both accrued interest amounts and the equivalent exposure from any
derivative holdings, if applicable.
** Credit quality ratings are based on a weighted average of each security's
ratings 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. Percentages are
based on market value of investments as of 1/31/05.
*** The average maturity shown is calculated using the final stated maturity on
the portfolio's holdings without taking into account any holdings which
have been pre-refunded to an earlier date or which have a mandatory put
date prior to the stated maturity. The average life shown takes into
account these earlier dates.
Percentages are based on net assets as of 1/31/05 unless otherwise noted.
The portfolio is actively managed, and current holdings may be different.
- -------------------------------------------------------------------------------
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
SUMMARY OF RESULTS
For the twelve months ended January 31, 2005, Class A shares of the fund
provided a total return of 7.16%, not including sales charges, outperforming the
4.86% return of its benchmark, the Lehman Brothers Municipal Bond Index (the
Lehman Index). The fund's investment objective is to provide high current income
exempt from federal income taxes by investing primarily in municipal bonds and
notes which may be of medium and lower quality. The fund invests, under normal
market conditions, at least 80% of its net assets in securities and other
investments, the interest on which is exempt from federal income tax. To meet
this policy, the fund may invest in municipal securities which are bonds or
other debt obligations of a U.S. state or political subdivision, such as a
county, city, town, village or authority.
MARKET ENVIRONMENT
At the start of the period, we believed that markets were concerned about the
sustainability of the economic recovery. Fixed-income markets had finished
strongly in 2003. This bond-friendly environment was interrupted by strong U.S.
employment and economic data in the second quarter of 2004, which we believe
precipitated a bond market selloff. Accelerating domestic demand in the first
half of the period, coupled with rising inflation and a very accommodative
monetary stance caused the U.S. Federal Reserve Board to begin raising
short-term rates in June. Despite four more rate hikes in the second half of the
period, we believe U.S. economic conditions contributed to a decline in longer
maturity bond yields, while corporate and emerging bond yields narrowed to U.S.
Treasuries. Under this scenario the yield curve flattened - interest rates on
the short end of the curve moved up while rates on the long end decreased
slightly.
Compared to 2003, where we believed a large number of states and municipalities
issued debt in order to take advantage of historically low interest rates, the
rate of new bond issuance fell in 2004. However, demand for municipal bonds did
not decline with issuance. In our view, this supply- demand scenario aided
municipal bond performance over the period.
CONTRIBUTORS TO PERFORMANCE
The fund benefited from its exposure to lower-quality debt relative to the
Lehman Index. During an improving economic environment where high-yield bonds
tended to outperform, the fund's larger relative position in "BBB"-rated and
below-investment-grade debt (bonds rated lower than "BBB") enhanced relative
returns. (The Lehman Index is composed primarily of higher-grade securities with
no bonds rated lower than "BBB".)
Strong security selection in the utilities sector also enhanced relative
returns. In the health care sector, a combination of security selection and an
overweighted position in the group contributed to results.
In addition, yield curve positioning aided relative results. (A yield curve
graphically depicts the yields of different maturity bonds of the same credit
quality and type. A normal yield curve is upward sloping, with short-term rates
lower than long-term rates.) An underweighted position in the short-term part of
the curve (represented by bonds with durations of 0-to-4 years) enhanced
performance as rates in that area experienced the largest rate increases.
Similarly an overweighted position in the intermediate to long-term part of the
curve (represented by bonds with durations of 14-to-25 years) contributed as
rates in that area decreased slightly over the period.
DETRACTORS FROM PERFORMANCE
The fund's duration positioning relative to the Lehman Index held back results.
At certain points during the period, the portfolio had a slightly higher overall
duration - or sensitivity to interest rates - relative to the benchmark. This
duration positioning held back performance as rising interest rates across parts
of the yield curve negatively impacted the prices for some of the fund's bond
positions.
Respectfully,
/s/ Geoffrey L. Schecter
Geoffrey L. Schecter
Portfolio Manager
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.
- ------------------------------------------------------------------------------
PERFORMANCE SUMMARY THROUGH 1/31/05
- ------------------------------------------------------------------------------
The following chart illustrates the historical performance of the fund's
original share class in comparison to its benchmark. Performance results include
the deduction of the maximum applicable sales charge and reflect the percentage
change in net asset value, including reinvestment of dividends and capital gains
distributions. Benchmark comparisons are unmanaged and do not reflect any fees
or expenses. The performance of other share classes will be greater than or less
than the line shown. (See Notes to Performance Summary.)
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. HIGH
SHORT-TERM RETURNS FOR ANY PERIOD MAY BE AND LIKELY WERE ATTRIBUTABLE TO
FAVORABLE MARKET CONDITIONS DURING THAT PERIOD, WHICH MAY NOT BE REPEATABLE. 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.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
MFS Municipal High Lehman Brothers
Income Fund Municipal
- Class A Bond Index
1/95 $ 9,525 $10,000
1/96 10,851 11,505
1/97 11,163 11,947
1/98 12,369 13,155
1/99 13,055 14,029
1/00 12,390 13,520
1/01 13,510 15,316
1/02 14,338 16,220
1/03 15,050 17,431
1/04 16,251 18,509
1/05 17,415 19,407
TOTAL RETURNS
- --------------------
Average Annual
without sales charge
- --------------------
Class
Share class inception date 1-yr 3-yr 5-yr 10-yr
- ------------------------------------------------------------------------------
A 2/24/84 7.16% 6.69% 7.05% 6.22%
- ------------------------------------------------------------------------------
B 9/07/93 6.47% 5.87% 6.21% 5.34%
- ------------------------------------------------------------------------------
C 9/25/98 6.10% 5.63% 5.98% 5.19%
- ------------------------------------------------------------------------------
- --------------------
Average Annual
- --------------------
Comparative benchmarks
- ------------------------------------------------------------------------------
Average high-yield municipal
debt fund+ 6.13% 6.23% 6.30% 5.61%
- ------------------------------------------------------------------------------
Lehman Brothers Municipal Bond
Index# 4.86% 6.16% 7.50% 6.86%
- ------------------------------------------------------------------------------
- --------------------
Average Annual
with sales charge
- --------------------
Share class
- ------------------------------------------------------------------------------
A 2.07% 4.98% 6.01% 5.70%
- ------------------------------------------------------------------------------
B 2.47% 4.97% 5.89% 5.34%
- ------------------------------------------------------------------------------
C 5.10% 5.63% 5.98% 5.19%
- ------------------------------------------------------------------------------
- --------------------
Cumulative
without sales charge
- --------------------
- ------------------------------------------------------------------------------
A 7.16% 21.46% 40.55% 82.84%
- ------------------------------------------------------------------------------
B 6.47% 18.66% 35.14% 68.18%
- ------------------------------------------------------------------------------
C 6.10% 17.88% 33.70% 65.88%
- ------------------------------------------------------------------------------
+ Source: Lipper Inc., an independent firm that reports mutual fund performance.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITION
Lehman Brothers Municipal Bond Index - a rules-based, market-value-weighted
index representative of the tax-exempt 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 (assuming
redemption within one year from the end of the prior 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. This 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.
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.
From time to time the fund may receive proceeds from litigation settlements,
without which performance would be lower.
KEY RISK CONSIDERATIONS
The portfolio may invest in municipal bonds that are general obligations backed
by the full faith and credit of the municipal issuer. The portfolio may also
invest in municipal bonds called revenue obligations which are subject to a
higher degree of credit risk than general obligations. Revenue obligations
finance specific projects, such as building a hospital, and are not backed by
the full faith and credit of the municipal issuer. The portfolio may invest in
assets in revenue bonds relating to any one specific industry (e.g., housing,
health care, water and sewer, etc.). Because revenue obligations are repaid from
the revenues from a facility, they are subject to a risk of default in payments
of principal and interest if the facility does not generate enough income.
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 project 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 significantly in value.
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 may invest in high yield or lower-rated securities (non-rated,
below "BBB"), which may provide greater returns but are subject to greater-
than-average risk.
The portfolio may invest a relatively high percentage of its assets in a small
number of issuers or even in a single issuer. This makes the portfolio's value
more sensitive to developments associated with the issuer and the overall
market.
The fixed income securities purchased by the fund may be traded in the over-
the-counter market rather than on an organized exchange and are subject to
liquidity risk. This means that they may be harder to purchase or sell at a fair
price. The inability to purchase or sell these fixed income securities at a fair
price could have a negative impact on the fund's performance.
As with any fixed income security, the prices of municipal securities in the
fund's portfolio will generally fall when interest rates rise. Conversely, when
interest rates fall, the prices of municipal securities in the fund's portfolio
will generally rise.
Interest rate risk will generally affect the price of a municipal security more
if the security has a longer maturity. Municipal securities with longer
maturities will therefore be more volatile than other fixed income securities
with shorter maturities. Conversely, municipal securities with shorter
maturities will be less volatile but generally provide lower returns than
municipal securities with longer maturities. The average maturity of the fund's
municipal security investments will affect the volatility of the fund's share
price.
Credit risk is the risk that the issuer of a municipal security will not be able
to pay principal and interest when due. Rating agencies assign credit ratings to
certain municipal securities to indicate their credit risk. The price of a
municipal security will generally fall if the issuer defaults on its obligation
to pay principal or interest, the rating agencies downgrade the issuer's credit
rating or other news affects the market's perception of the issuer's credit
risk. A participation interest is also subject to the risk of default by the
issuing bank.
Please see the prospectus for further information regarding these and other risk
considerations.
- -------------------------------------------------------------------------------
EXPENSE TABLE
- -------------------------------------------------------------------------------
FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM AUGUST 1, 2004,
THROUGH JANUARY 31, 2005.
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, August 1, 2004 through January 31, 2005.
ACTUAL EXPENSES
The first line for each share class in the table on the following page 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 on the following page 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
Annualized Beginning Ending Paid During
Expense Account Value Account Value Period**
Ratio 8/01/04 1/31/05 8/01/04-1/31/05
- -------------------------------------------------------------------------------
Actual 0.71% $1,000 $1,061 $3.69
A ----------------------------------------------------------------------------
Hypothetical* 0.71% $1,000 $1,022 $3.62
- -------------------------------------------------------------------------------
Actual 1.47% $1,000 $1,057 $7.62
B ----------------------------------------------------------------------------
Hypothetical* 1.47% $1,000 $1,018 $7.48
- -------------------------------------------------------------------------------
Actual 1.71% $1,000 $1,056 $8.86
C ----------------------------------------------------------------------------
Hypothetical* 1.71% $1,000 $1,017 $8.69
- -------------------------------------------------------------------------------
* 5% class return per year before expenses.
** 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.
- -----------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - 1/31/05
- -----------------------------------------------------------------------------------------------
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 - 97.9%
- -----------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -----------------------------------------------------------------------------------------------
Airport & Port Revenue - 0.8%
- -----------------------------------------------------------------------------------------------
Chicago, IL, O'Hare International Airport Rev., RITES,
FSA, 8.98%, 2022+(+) $6,250,000 $7,642,125
- -----------------------------------------------------------------------------------------------
Denver, CO, City & County Airport Rev., RITES, AMBAC,
9.84%, 2017+(+) 2,500,000 3,062,450
- -----------------------------------------------------------------------------------------------
$10,704,575
- -----------------------------------------------------------------------------------------------
Chemicals - 0.4%
- -----------------------------------------------------------------------------------------------
Red River Authority, TX, Pollution Control Rev.
(Celanese Project), 6.7%, 2030 $5,380,000 $5,509,550
- -----------------------------------------------------------------------------------------------
General Obligations - General Purpose - 3.1%
- -----------------------------------------------------------------------------------------------
Cranston, RI, FGIC, 6.375%, 2014 $855,000 $1,005,121
- -----------------------------------------------------------------------------------------------
Delaware County, OH, 6.25%, 2010(++) 1,000,000 1,180,940
- -----------------------------------------------------------------------------------------------
Hidalgo County, TX, AMBAC, 6%, 2016 1,010,000 1,156,763
- -----------------------------------------------------------------------------------------------
Houston County, AL, AMBAC, 6.25%, 2019 3,500,000 4,099,725
- -----------------------------------------------------------------------------------------------
Little Rock, AR, Capital Improvement Rev., 5.7%, 2018 810,000 838,423
- -----------------------------------------------------------------------------------------------
Los Angeles, CA, RITES, FGIC, 8.0721%, 2015+(+) 5,310,000 6,876,981
- -----------------------------------------------------------------------------------------------
New York City, NY, 6.125%, 2006(++) 5,000,000 5,267,950
- -----------------------------------------------------------------------------------------------
New York City, NY, FGIC, 5.875%, 2024 7,000,000 7,443,450
- -----------------------------------------------------------------------------------------------
New York City, NY, FGIC, 6.125%, 2025 8,000,000 8,739,586
- -----------------------------------------------------------------------------------------------
State of Florida, Department of Transportation, RITES,
7.5606%, 2017+(+) 2,300,000 2,648,588
- -----------------------------------------------------------------------------------------------
State of Massachusetts, ROLS, 8.792%, 2017+(+) 2,000,000 2,501,120
- -----------------------------------------------------------------------------------------------
West Warwick, RI, 7.45%, 2013 495,000 508,895
- -----------------------------------------------------------------------------------------------
$42,267,542
- -----------------------------------------------------------------------------------------------
General Obligations - Improvement - 0.5%
- -----------------------------------------------------------------------------------------------
Bergen County, NJ, Improvement Authority School District
Rev. (Township of Wyckoff Board of Education), 5%, 2032 $540,000 $569,911
- -----------------------------------------------------------------------------------------------
Birmingham, AL, 5.75%, 2019 1,000,000 1,123,480
- -----------------------------------------------------------------------------------------------
District of Columbia, "A", 6%, 2007(++) 5,000,000 5,505,550
- -----------------------------------------------------------------------------------------------
$7,198,941
- -----------------------------------------------------------------------------------------------
General Obligations - Schools - 3.0%
- -----------------------------------------------------------------------------------------------
Chicago, IL, Board of Education, RITES, 8.0375%, 2020+
(+) $7,910,000 $10,272,242
- -----------------------------------------------------------------------------------------------
Forsyth County, GA, School District, 6%, 2010(++) 1,700,000 1,972,833
- -----------------------------------------------------------------------------------------------
Fort Bend, TX, Independent School District, "A", PSF,
5.25%, 2027 2,825,000 3,051,396
- -----------------------------------------------------------------------------------------------
Houston, TX, Independent School District, RITES, PSF,
8.049%, 2017+(+) 5,000,000 5,804,500
- -----------------------------------------------------------------------------------------------
Kane Cook & Dupage Counties, IL, FSA, 6.5%, 2011(++) 1,355,000 1,600,431
- -----------------------------------------------------------------------------------------------
Kane Cook & Dupage Counties, IL, FSA, 6.375%, 2011(++) 1,255,000 1,472,441
- -----------------------------------------------------------------------------------------------
Lake County, IL, FGIC, 6%, 2008(++) 2,500,000 2,763,475
- -----------------------------------------------------------------------------------------------
Leander, TX, Independent School District, PSF, 0%, 2029 7,310,000 1,889,343
- -----------------------------------------------------------------------------------------------
Leander, TX, Independent School District, PSF, 0%, 2030 6,480,000 1,574,770
- -----------------------------------------------------------------------------------------------
McHenry & Lake County, IL, FSA, 6.125%, 2018 1,700,000 1,940,482
- -----------------------------------------------------------------------------------------------
State of Florida, Board of Education, RITES, FGIC,
8.0836%, 2012+(+) 1,500,000 1,882,470
- -----------------------------------------------------------------------------------------------
State of Florida, Board of Education, RITES, FGIC,
8.0836%, 2013+(+) 5,000,000 6,342,300
- -----------------------------------------------------------------------------------------------
$40,566,683
- -----------------------------------------------------------------------------------------------
Healthcare Revenue - Hospitals - 21.9%
- -----------------------------------------------------------------------------------------------
Allegheny County, PA, Hospital Development Authority
Rev. (South Hills Health Systems), 6.75%, 2025 $1,200,000 $1,280,892
- -----------------------------------------------------------------------------------------------
Allegheny County, PA, Hospital Development Authority
Rev. (West Penn Allegheny Health), 9.25%, 2022 3,360,000 3,920,414
- -----------------------------------------------------------------------------------------------
Allegheny County, PA, Hospital Development Authority
Rev. (West Penn Allegheny Health), 9.25%, 2030 6,100,000 7,120,652
- -----------------------------------------------------------------------------------------------
Athens County, OH, Hospital Facilities Rev. (O'Bleness
Memorial Hospital), 7.125%, 2033 2,500,000 2,595,025
- -----------------------------------------------------------------------------------------------
Baldwin County, AL, Eastern Shore Health Care Authority
Rev. (Thomas Hospital), 6.75%, 2015 500,000 516,105
- -----------------------------------------------------------------------------------------------
Baldwin County, AL, Eastern Shore Health Care Authority
Rev. (Thomas Hospital), 5.75%, 2027 1,600,000 1,593,872
- -----------------------------------------------------------------------------------------------
Brookhaven, NY, Industrial Development Agency Rev.
(Memorial Hospital Medical Center Inc.), 8.25%, 2030 2,500,000 2,688,725
- -----------------------------------------------------------------------------------------------
California Valley Health Systems, COP, 6.875%, 2023 2,240,000 2,251,200
- -----------------------------------------------------------------------------------------------
Chautauqua County, NY, Industrial Development Agency,
Civic Facilities Rev. (Women's Christian Assn.), "A",
6.35%, 2017 1,270,000 1,296,835
- -----------------------------------------------------------------------------------------------
Chautauqua County, NY, Industrial Development Agency,
Civic Facilities Rev. (Women's Christian Assn.), "A",
6.4%, 2029 3,430,000 3,346,034
- -----------------------------------------------------------------------------------------------
Chemung County, NY, Civic Facilities Rev. (St. Joseph's
Hospital-Elmira), 6%, 2013 1,995,000 2,020,596
- -----------------------------------------------------------------------------------------------
Chemung County, NY, Civic Facilities Rev. (St. Joseph's
Hospital-Elmira), 6.35%, 2013 1,460,000 1,503,625
- -----------------------------------------------------------------------------------------------
Chester County, PA, Health & Educational Facilities Rev.
(Chester County Hospital), 6.75%, 2031 2,500,000 2,653,625
- -----------------------------------------------------------------------------------------------
Citrus County, FL, Hospital Development Authority Rev.
(Citrus Memorial Hospital), 6.25%, 2023 985,000 1,048,168
- -----------------------------------------------------------------------------------------------
Coffee County, GA, Hospital Authority Rev. (Coffee
Regional Medical Center, Inc.), 5%, 2026 110,000 111,210
- -----------------------------------------------------------------------------------------------
Colorado Health Facilities Authority Rev. (Parkview
Hospital), 6%, 2005(++) 4,695,000 4,892,284
- -----------------------------------------------------------------------------------------------
Colorado Health Facilities Authority Rev. (Parkview
Hospital), 6%, 2016 2,305,000 2,400,750
- -----------------------------------------------------------------------------------------------
Colorado Health Facilities Authority Rev. (Parkview
Medical Center), 6.5%, 2020 770,000 860,521
- -----------------------------------------------------------------------------------------------
Colorado Health Facilities Authority Rev. (Portercare
Adventist Health Systems), 6.625%, 2026 2,200,000 2,460,766
- -----------------------------------------------------------------------------------------------
Comal County, TX, Health Facilities Development Rev.
(McKenna Memorial Hospital), 6.125%, 2022 2,000,000 2,077,360
- -----------------------------------------------------------------------------------------------
Crittenden County, AR, Hospital Rev., Refunding &
Improvement, 7.15%, 2025 1,165,000 1,175,671
- -----------------------------------------------------------------------------------------------
Cullman, AL, Cullman Medical Park South, Medical Clinic
Board Rev. (Cullman Regional Medical Center), 6.5%, 2013 1,280,000 1,289,613
- -----------------------------------------------------------------------------------------------
Cuyahoga County, OH, Hospital Facilities Rev. (Canton,
Inc.), 7.5%, 2030 5,020,000 5,672,148
- -----------------------------------------------------------------------------------------------
Denver, CO, Health & Hospital Authority Rev., 5.375%,
2018 3,700,000 3,811,333
- -----------------------------------------------------------------------------------------------
Denver, CO, Health & Hospital Authority Rev., 5.375%,
2028 950,000 956,945
- -----------------------------------------------------------------------------------------------
Denver, CO, Health & Hospital Authority Rev., "A", 6%,
2023 750,000 777,945
- -----------------------------------------------------------------------------------------------
District of Columbia, Health & Hospital Authority Rev.
(Medstar University Hospital), "D", 6.875%, 2007(++) 3,875,000 4,221,580
- -----------------------------------------------------------------------------------------------
Gaylord, MI, Hospital Finance Authority Rev. (Otsego
Memorial Hospital), 6.2%, 2025 750,000 747,225
- -----------------------------------------------------------------------------------------------
Gaylord, MI, Hospital Finance Authority Rev. (Otsego
Memorial Hospital), 6.5%, 2031 865,000 865,900
- -----------------------------------------------------------------------------------------------
Grand Forks, ND, Health Care Authority Rev. (Altru
Health Systems Obligation Group), 7.125%, 2024 2,250,000 2,473,965
- -----------------------------------------------------------------------------------------------
Highlands County, FL, Health Facilities Authority Rev.
(Adventist/Sunbelt Hospital), 6%, 2031 3,000,000 3,269,640
- -----------------------------------------------------------------------------------------------
Illinois Health Facilities Authority Rev. (Sinai
Health), 5.15%, 2037 2,500,000 2,585,400
- -----------------------------------------------------------------------------------------------
Indiana Health Facilities Financing Authority, Hospital
Rev. (Munster Medical Research Foundation, Inc.),
6.375%, 2031 8,950,000 9,319,635
- -----------------------------------------------------------------------------------------------
Indiana Health Facilities Financing Authority, Hospital
Rev. (Munster Medicial Research Foundation, Inc.),
6.375%, 2021 3,300,000 3,442,428
- -----------------------------------------------------------------------------------------------
Indiana Health Facilities Financing Authority, Hospital
Rev. (Riverview Hospital), 6.125%, 2031 3,750,000 3,943,688
- -----------------------------------------------------------------------------------------------
Joplin, MO, Industrial Development Authority Health
Facilities Rev. (Freeman Health Systems), 5.5%, 2029 1,290,000 1,343,032
- -----------------------------------------------------------------------------------------------
Joplin, MO, Industrial Development Authority Health
Facilities Rev. (Freeman Health Systems), 5.75%, 2035 1,395,000 1,491,325
- -----------------------------------------------------------------------------------------------
Kentucky Economic Development Finance Authority,
Health Systems Rev. (Norton Healthcare, Inc.), 6.5%,
2020 5,000,000 5,475,650
- -----------------------------------------------------------------------------------------------
Kentucky Economic Development Finance Authority,
Health Systems Rev. (Norton Healthcare, Inc.), 6.625%,
2028 2,000,000 2,164,220
- -----------------------------------------------------------------------------------------------
Knox County, TN, Health Educational Housing Facilities
Board, Hospital Facilities Rev. (Baptist Health
Systems), 6.5%, 2031 5,350,000 5,434,530
- -----------------------------------------------------------------------------------------------
Lufkin, TX, Health Facilities Rev. (Memorial Health
System of East Texas), 6.875%, 2026 1,305,000 1,366,961
- -----------------------------------------------------------------------------------------------
Lufkin, TX, Health Facilities Rev. (Memorial Health
System of East Texas), 5.7%, 2028 3,305,000 3,405,274
- -----------------------------------------------------------------------------------------------
Macomb County, MI, Hospital Finance Authority Rev.
(Mount Clemens General Hospital), 5.75%, 2025 2,000,000 1,924,360
- -----------------------------------------------------------------------------------------------
Macomb County, MI, Hospital Finance Authority Rev.
(Mount Clemens General Hospital), 5.875%, 2034 4,345,000 4,200,181
- -----------------------------------------------------------------------------------------------
Maryland Health & Higher Educational Facilities
Authority Rev. (University of Maryland Medical System),
6.75%, 2030 1,000,000 1,142,210
- -----------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (Caritas Christi), 6.5%, 2012 1,500,000 1,680,195
- -----------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (Caritas Christi), 5.7%, 2015 3,500,000 3,637,480
- -----------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (Jordan Hospital), 5.25%, 2018 4,600,000 4,368,344
- -----------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (Milford Whitinsville Hospital), 6.35%, 2032 1,450,000 1,545,454
- -----------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (North Adams Regional Hospital), 6.625%, 2018 1,405,000 1,439,001
- -----------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (Northern Berkshire Health), "B", 6.375%, 2034 1,510,000 1,520,464
- -----------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (Saints Memorial Medical Center), 6%, 2023 12,530,000 12,608,939
- -----------------------------------------------------------------------------------------------
Massachusetts Health & Educational Facilities Authority
Rev. (University of Massachusetts Memorial Hospital),
6.5%, 2021 500,000 549,875
- -----------------------------------------------------------------------------------------------
Mecosta County, MI, General Hospital Rev., 6%, 2018 1,200,000 1,204,344
- -----------------------------------------------------------------------------------------------
Miami Beach, FL, Health Facilities Rev. (Mount Sinai
Medical Center), 6.75%, 2029 2,490,000 2,679,439
- -----------------------------------------------------------------------------------------------
Miami Beach, FL, Health Facilities Rev. (Mount Sinai
Medical Center), "A", 6.7%, 2019 3,505,000 3,745,303
- -----------------------------------------------------------------------------------------------
Michigan Hospital Finance Authority Rev. (Memorial
Healthcare Center), 5.875%, 2021 1,000,000 1,072,840
- -----------------------------------------------------------------------------------------------
Mississippi Business Finance Corp., Health Facilities
Rev. (Rush Medical Foundation, Inc.), 5.375%, 2015 700,000 690,802
- -----------------------------------------------------------------------------------------------
Mississippi Business Finance Corp., Health Facilities
Rev. (Rush Medical Foundation, Inc.), 5.625%, 2023 250,000 244,450
- -----------------------------------------------------------------------------------------------
Montgomery, AL, Special Care Facilities, Financing
Authority Rev. (Baptist Health), "C", 5.25%, 2029 2,240,000 2,272,346
- -----------------------------------------------------------------------------------------------
New Hampshire Health & Educational Facilities Authority
Rev. (Covenant Health), 6.5%, 2017 4,445,000 5,037,296
- -----------------------------------------------------------------------------------------------
New Hampshire Higher Educational & Health Facilities
Authority Rev. (Catholic Medical Center), 6.125%, 2032 1,500,000 1,565,445
- -----------------------------------------------------------------------------------------------
New Hampshire Higher Educational & Health Facilities
Authority Rev. (Littleton Regional Hospital), 5%, 2008 780,000 764,189
- -----------------------------------------------------------------------------------------------
New Hampshire Higher Educational & Health Facilities
Authority Rev. (Littleton Regional Hospital), 5.9%, 2018 1,750,000 1,728,020
- -----------------------------------------------------------------------------------------------
New Jersey Health Care Facilities, Financing Authority
Rev. (Palisades Medical Center), 6.625%, 2031 1,115,000 1,202,884
- -----------------------------------------------------------------------------------------------
New Jersey Health Care Facilities, Financing Authority
Rev. (St. Peter's University Hospital), 6.875%, 2030 4,000,000 4,453,600
- -----------------------------------------------------------------------------------------------
New York City, NY, Industrial Development Agency, Civic
Facilities Rev. (Staten Island University Hospital),
6.375%, 2031 500,000 492,115
- -----------------------------------------------------------------------------------------------
New York City, NY, Industrial Development Agency, Civic
Facilities Rev. (Staten Island University Hospital),
6.375%, 2031 1,480,000 1,456,660
- -----------------------------------------------------------------------------------------------
New York City, NY, Industrial Development Agency, Civic
Facilities Rev. (Staten Island University Hospital),
6.45%, 2032 940,000 933,984
- -----------------------------------------------------------------------------------------------
Ohio County, WV, County Commission Health System Rev.
(Ohio Valley Medical Center), 5.75%, 2013 5,000,000 4,737,350
- -----------------------------------------------------------------------------------------------
Oklahoma Development Finance Authority Rev. (Comanche
County Hospital), 6%, 2014 2,400,000 2,599,200
- -----------------------------------------------------------------------------------------------
Oklahoma Development Finance Authority Rev. (Comanche
County Hospital), 6.6%, 2031 4,720,000 5,024,629
- -----------------------------------------------------------------------------------------------
Peninsula Ports Authority Rev. (Whittaker Memorial),
FHA, 8.7%, 2023 490,000 592,645
- -----------------------------------------------------------------------------------------------
Rhode Island Health & Education Building Rev., Hospital
Financing (Lifespan Obligated Group), 6.5%, 2032 9,000,000 10,047,780
- -----------------------------------------------------------------------------------------------
Richardson, TX, Hospital Authority Rev. (Baylor-
Richardson), 5.25%, 2013 1,500,000 1,554,390
- -----------------------------------------------------------------------------------------------
Royston, GA, Hospital Authority Rev. (Ty Cobb Healthcare
Systems, Inc.), 6.375%, 2014 1,395,000 1,404,905
- -----------------------------------------------------------------------------------------------
Royston, GA, Hospital Authority Rev. (Ty Cobb Healthcare
Systems, Inc.), 6.5%, 2027 1,855,000 1,835,096
- -----------------------------------------------------------------------------------------------
Russell, KY (Franciscan Sisters of the Poor), 8.1%, 2006(++) 310,000 333,923
- -----------------------------------------------------------------------------------------------
Shelby County, TN, Educational & Housing Facilities
Board Hospital Rev. (Methodist Healthcare), 6%, 2012(++) 750,000 885,315
- -----------------------------------------------------------------------------------------------
Shelby County, TN, Educational & Housing Facilities
Board Hospital Rev. (Methodist Healthcare), 6%, 2012(++) 1,255,000 1,481,427
- -----------------------------------------------------------------------------------------------
Shelby County, TN, Educational & Housing Facilities
Board Hospital Rev. (Methodist Healthcare),
6.25%, 2012(++) 1,250,000 1,496,338
- -----------------------------------------------------------------------------------------------
Shelby County, TN, Educational & Housing Facilities
Board Hospital Rev. (Methodist Healthcare), ETM, 6%,
2016(++) 450,000 525,042
- -----------------------------------------------------------------------------------------------
Shelby County, TN, Educational & Housing Facilities
Board Hospital Rev. (Methodist Healthcare), ETM, 6%,
2017(++) 745,000 865,995
- -----------------------------------------------------------------------------------------------
Shelby County, TN, Educational & Housing Facilities
Board Hospital Rev. (Methodist Healthcare), ETM, 6.25%,
2018(++) 750,000 879,825
- -----------------------------------------------------------------------------------------------
Sierra View, CA, Local Health Care District Rev., 5.4%,
2022 3,000,000 3,058,710
- -----------------------------------------------------------------------------------------------
South Carolina Jobs & Economic Development Authority,
Hospital Facilities Rev. (Palmetto Health Alliance),
6.25%, 2031 2,725,000 2,919,456
- -----------------------------------------------------------------------------------------------
South Carolina Medical University, Hospital Facilities
Rev, "A", MBIA, 5%, 2031 1,995,000 2,060,655
- -----------------------------------------------------------------------------------------------
Southwestern Illinois Development Authority Rev.
(Anderson Hospital), 5.375%, 2015 885,000 939,357
- -----------------------------------------------------------------------------------------------
Southwestern Illinois Development Authority Rev.
(Anderson Hospital), 5.5%, 2020 1,625,000 1,710,361
- -----------------------------------------------------------------------------------------------
Southwestern Illinois Development Authority Rev.
(Anderson Hospital), 5.625%, 2029 3,200,000 3,304,448
- -----------------------------------------------------------------------------------------------
Springfield, TN, Health & Educational Facilities Rev.
(Northcrest Medical Center), 5.25%, 2018 3,500,000 3,496,640
- -----------------------------------------------------------------------------------------------
Springfield, TN, Health & Educational Facilities Rev.
(Northcrest Medical Center), 5.375%, 2024 4,000,000 3,940,640
- -----------------------------------------------------------------------------------------------
State of Arkansas, Development Finance Authority Rev.
(Washington Regional Medical Center), 7.25%, 2020 2,500,000 2,786,375
- -----------------------------------------------------------------------------------------------
Suffolk County, NY, Industrial Development Agency Rev.
(Southampton Hospital), 7.25%, 2020 3,360,000 3,398,539
- -----------------------------------------------------------------------------------------------
Suffolk County, NY, Industrial Development Agency Rev.
(Southampton Hospital), 7.625%, 2030 1,480,000 1,517,207
- -----------------------------------------------------------------------------------------------
Tallahassee, FL, Health Facilities Rev. (Tallahassee
Memorial Healthcare), 6.25%, 2020 4,500,000 4,686,390
- -----------------------------------------------------------------------------------------------
Texas Metro Health Facilities Development Corp., Metro
Health Facilities Development Rev. (Wilson N. Jones
Memorial Hospital), 7.2%, 2021 4,300,000 4,409,263
- -----------------------------------------------------------------------------------------------
Texas Metro Health Facilities Development Corp., Metro
Health Facilities Development Rev. (Wilson N. Jones
Memorial Hospital), 7.25%, 2031 2,000,000 2,042,920
- -----------------------------------------------------------------------------------------------
Tom Green County, TX, Health Facilities Rev. (Shannon
Health System), 6.75%, 2021 3,150,000 3,388,361
- -----------------------------------------------------------------------------------------------
Upper Illinois River Valley Development, Health
Facilities Rev. (Morris Hospital), 6.625%, 2031 1,900,000 2,053,501
- -----------------------------------------------------------------------------------------------
Valley, AL, Financing Authority Rev. (Lanier Memorial
Hospital), 5.45%, 2011 1,175,000 1,189,594
- -----------------------------------------------------------------------------------------------
Wapello County, IA, Hospital Authority Rev. (Ottumwa
Regional Health Center), 6.25%, 2022 2,000,000 2,107,900
- -----------------------------------------------------------------------------------------------
Wapello County, IA, Hospital Authority Rev. (Ottumwa
Regional Health Center), 6.375%, 2031 2,595,000 2,750,129
- -----------------------------------------------------------------------------------------------
Weirton, WV, Municipal Hospital Building, Commission
Rev. (Weirton Hospital Medical Center), 6.375%, 2031 3,885,000 3,911,224
- -----------------------------------------------------------------------------------------------
Weslaco, TX, Health Facilities Rev. (Knapp Medical
Center), 6.25%, 2032 4,000,000 4,267,920
- -----------------------------------------------------------------------------------------------
West Plains, MO, Industrial Development Authority Rev.
(Ozarks Medical Center), 6.75%, 2024 810,000 835,199
- -----------------------------------------------------------------------------------------------
West Shore Pennsylvania, Hospital Authority Rev. (Holy
Spirit Hospital), 6.2%, 2026 4,500,000 4,828,320
- -----------------------------------------------------------------------------------------------
Wichita, KS, Hospital Authority Rev. (Via Christi Health
System), 6.25%, 2020 2,500,000 2,826,350
- -----------------------------------------------------------------------------------------------
Wisconsin Health & Educational Facilities Authority
(Aurora Health Care), 5.625%, 2029 1,100,000 1,122,396
- -----------------------------------------------------------------------------------------------
Wisconsin Health & Educational Facilities Authority Rev.
(Aurora Health Care, Inc.), 6.875%, 2030 2,250,000 2,614,545
- -----------------------------------------------------------------------------------------------
Yonkers, NY, Industrial Development Agency, Civic
Facilities Rev. (St. John's Riverside Hospital), 6.8%,
2016 1,670,000 1,746,737
- -----------------------------------------------------------------------------------------------
Yonkers, NY, Industrial Development Agency, Civic
Facilities Rev. (St. John's Riverside Hospital), 7.125%,
2031 2,000,000 2,076,960
- -----------------------------------------------------------------------------------------------
Yonkers, NY, Industrial Development Agency, Civic
Facilities Rev. (St. John's Riverside Hospital), "A",
7.125%, 2031 1,495,000 1,552,528
- -----------------------------------------------------------------------------------------------
Yonkers, NY, Industrial Development Agency, Civic
Facilities Rev. (St. Joseph's Hospital), 6.15%, 2015 2,000,000 1,717,300
- -----------------------------------------------------------------------------------------------
Yonkers, NY, Industrial Development Agency, Civic
Facilities Rev. (St. Joseph's Hospital), "C", 6.2%, 2020 250,000 206,813
- -----------------------------------------------------------------------------------------------
$294,379,595
- -----------------------------------------------------------------------------------------------
Healthcare Revenue - Long Term Care - 11.4%
- -----------------------------------------------------------------------------------------------
Abilene, TX, Health Facilities Development Co.,
Retirement Facilities Rev. (Sears Methodist Retirement),
7%, 2033 $1,155,000 $1,219,853
- -----------------------------------------------------------------------------------------------
Arizona Health Facilities Authority Rev. (The Terraces
Project), 7.75%, 2033+ 2,250,000 2,370,195
- -----------------------------------------------------------------------------------------------
Bell County, TX, Health Facilities Development Rev.
(Advanced Living Technology), 7.75%, 2006 175,000 169,411
- -----------------------------------------------------------------------------------------------
Bell County, TX, Health Facilities Development Rev.
(Advanced Living Technology), 8.125%, 2016 1,415,000 1,246,148
- -----------------------------------------------------------------------------------------------
Bell County, TX, Health Facilities Development Rev.
(Advanced Living Technology), 8.5%, 2026 3,145,000 2,730,520
- -----------------------------------------------------------------------------------------------
Cambria County, PA, Industrial Development Authority
Rev. (Beverly Enterprises, Inc.), 10%, 2012 660,000 732,818
- -----------------------------------------------------------------------------------------------
Chester County, PA, Industrial Development Authority
Rev. (RHA Nursing Home), 8.5%, 2032 1,190,000 1,171,853
- -----------------------------------------------------------------------------------------------
Clarion, PA, Industrial Development Authority Rev.
(Beverly Enterprises, Inc.), 7.5%, 2012 1,950,000 1,995,065
- -----------------------------------------------------------------------------------------------
Colorado Health Facilities Authority Rev. (Covenant
Retirement Communities, Inc.), 6.125%, 2033 1,500,000 1,567,935
- -----------------------------------------------------------------------------------------------
Colorado Health Facilities Authority Rev. (National
Benevolent), 7.125%, 2030* 1,300,000 1,277,250
- -----------------------------------------------------------------------------------------------
Contra Costa County, CA, Residential Rental Facilities
Rev. (Cypress Meadows), 7%, 2028* 3,000,000 3,014,190
- -----------------------------------------------------------------------------------------------
Cumberland County, PA, Retirement Community Rev. (Wesley
Affiliated Services), 7.25%, 2035 2,725,000 2,894,740
- -----------------------------------------------------------------------------------------------
Daphne, AL, Special Care Facilities Financing Authority
(1st Mortgage Presbyterian), 0%, 2008(++) 29,975,000 26,729,307
- -----------------------------------------------------------------------------------------------
Daphne, AL, Special Care Facilities Financing Authority
(2nd Mortgage Presbyterian), 0%, 2008(++) 4,500,000 4,012,740
- -----------------------------------------------------------------------------------------------
Daphne, AL, Special Care Facilities Financing Authority
(Presbyterian Hospital), 0%, 2008(++) 48,475,000 12,267,084
- -----------------------------------------------------------------------------------------------
Fulton County, GA, Residential Care Facilities
(Canterbury Court), "A", 6.125%, 2034 1,020,000 1,044,715
- -----------------------------------------------------------------------------------------------
Grand Prairie, TX, Housing Finance Corp., Independent
Senior Living Center Rev., 7.5%, 2017 1,900,000 1,914,687
- -----------------------------------------------------------------------------------------------
Illinois Health Facilities Authority Rev. (Lutheran
Senior Ministries), 7.375%, 2031 2,700,000 2,792,853
- -----------------------------------------------------------------------------------------------
Iowa Finance Authority, Health Care Facilities Rev.
(Care Initiatives Project), 5.75%, 2018 2,520,000 2,406,852
- -----------------------------------------------------------------------------------------------
Iowa Finance Authority, Health Care Facilities Rev.
(Care Initiatives Project), 9.25%, 2025 5,675,000 6,925,316
- -----------------------------------------------------------------------------------------------
Jacksonville, FL, Health Facilities Authority,
Industrial Development Rev. (National Benevolent), 6.4%,
2016* 1,625,000 1,596,563
- -----------------------------------------------------------------------------------------------
Jacksonville, FL, Health Facilities Authority,
Industrial Development Rev. (National Benevolent), 7%,
2022* 1,000,000 982,500
- -----------------------------------------------------------------------------------------------
Jefferson County, KY, Health Care Authority Rev.
(Beverly Enterprises, Inc.), 5.875%, 2007 115,000 115,457
- -----------------------------------------------------------------------------------------------
Lenexa, KS, Health Care Facilities Rev. (Lakeview
Village, Inc.), 6.25%, 2026 1,500,000 1,527,060
- -----------------------------------------------------------------------------------------------
Lenexa, KS, Health Care Facilities Rev. (Lakeview
Village, Inc.), 6.875%, 2032 1,250,000 1,331,575
- -----------------------------------------------------------------------------------------------
Loves Park, IL (Hoosier Care), 7.125%, 2034 1,925,000 1,659,389
- -----------------------------------------------------------------------------------------------
Luzerne County, PA, Industrial Development Authority
Rev. (Beverly Enterprise, Inc.), 6.75%, 2008 905,000 906,783
- -----------------------------------------------------------------------------------------------
Maine Health & Higher Educational Facilities Rev. (Piper
Shores), 7.5%, 2009(++) 1,500,000 1,726,500
- -----------------------------------------------------------------------------------------------
Massachusetts Industrial Finance Agency Rev. (GF/Revere,
Inc.), 8.875%, 2025 7,005,000 7,247,723
- -----------------------------------------------------------------------------------------------
Massachusetts Industrial Finance Agency Rev. (Glenmeadow
Retirement Community), 8.375%, 2006(++) 2,300,000 2,485,518
- -----------------------------------------------------------------------------------------------
Massachusetts Industrial Finance Agency Rev. (Glenmeadow
Retirement Community), 8.625%, 2006(++) 3,520,000 3,812,864
- -----------------------------------------------------------------------------------------------
Massachusetts Industrial Finance Agency Rev. (Metro
Health Foundation, Inc.), 6.75%, 2027 5,720,000 5,672,066
- -----------------------------------------------------------------------------------------------
Millbrae, CA, Residential Facilities Rev. (Magnolia of
Millbrae), 7.375%, 2027 7,230,000 7,626,782
- -----------------------------------------------------------------------------------------------
Monongalia County, WV, Health Facilities Rev. (Beverly
Enterprises, Inc.), 5.875%, 2007 270,000 271,072
- -----------------------------------------------------------------------------------------------
Montgomery County, PA, Higher Education & Health
Authority Rev. (AHF/Montgomery), 10.5%, 2020 2,220,000 2,279,518
- -----------------------------------------------------------------------------------------------
Montgomery County, PA, Industrial Development
Authority Rev. (Whitemarsh Continuing Care), 6.125%,
2028 750,000 753,975
- -----------------------------------------------------------------------------------------------
Montgomery County, PA, Industrial Development
Authority Rev. (Whitemarsh Continuing Care), 6.25%, 2035 2,050,000 2,069,147
- -----------------------------------------------------------------------------------------------
New Hampshire Industrial Development Authority (Tall
Pines), 11.25%, 2016* 1,265,000 20,240
- -----------------------------------------------------------------------------------------------
New Jersey Economic Development Authority Rev.
(Courthouse Convalescent Center), 8.7%, 2014 1,350,000 1,358,019
- -----------------------------------------------------------------------------------------------
New Jersey Economic Development Authority Rev., First
Mortgage Gross Rev. (Wanaque Convalescent Center), 8.5%,
2009 700,000 706,237
- -----------------------------------------------------------------------------------------------
New Jersey Economic Development Authority Rev., First
Mortgage Gross Rev. (Wanaque Convalescent Center), 8.6%,
2011 1,000,000 1,009,190
- -----------------------------------------------------------------------------------------------
New Jersey Health Care Facilities Financing Authority
Rev. (Cherry Hill), 8%, 2027 4,000,000 3,856,520
- -----------------------------------------------------------------------------------------------
Norfolk, VA, Redevelopment & Housing Authority Rev.
(First Mortgage Retirement Community), "A", 6%, 2025 375,000 379,350
- -----------------------------------------------------------------------------------------------
Norfolk, VA, Redevelopment & Housing Authority Rev.
(First Mortgage Retirement Community), "A", 6.125%, 2035 260,000 261,542
- -----------------------------------------------------------------------------------------------
Oklahoma Development Finance Authority Rev. (Inverness
Village), 8%, 2032 750,000 604,238
- -----------------------------------------------------------------------------------------------
Reedley, CA, Certificate of Participation (Mennonite
Home), 7.5%, 2026 4,940,000 5,119,026
- -----------------------------------------------------------------------------------------------
Santa Fe, NM, Industrial Development Rev. (Casa Real
Nursing Home), 9.75%, 2013 1,460,000 1,468,497
- -----------------------------------------------------------------------------------------------
Shelby County, TN, Health Educational Rev. (Germantown
Village), 7.25%, 2034 2,470,000 2,591,549
- -----------------------------------------------------------------------------------------------
Shelby County, TN, Nursing Home Rev. (Beverly
Enterprises, Inc.), 7.4%, 2006(++) 840,000 920,976
- -----------------------------------------------------------------------------------------------
State of Hawaii, Department of Budget & Finance, Special
Purpose Rev. (Kahala Nui Senior Living Community), 8%,
2033 1,500,000 1,666,185
- -----------------------------------------------------------------------------------------------
State of Nevada Department Business & Industry (Las
Ventanas Retirement Project), "A", 7%, 2034 2,240,000 2,243,494
- -----------------------------------------------------------------------------------------------
Sterling, IL (Hoosier Care), 7.125%, 2034 1,345,000 1,159,417
- -----------------------------------------------------------------------------------------------
Waterford Township, MI, Economic Development Corp. Rev.
(Canterbury Health), 6%, 2039 3,055,000 2,286,637
- -----------------------------------------------------------------------------------------------
Wilkinsburg, PA, Municipal Authority Health Rev.
(Monroeville Christian/Judea), 8.25%, 2027 7,000,000 7,004,620
- -----------------------------------------------------------------------------------------------
$153,203,761
- -----------------------------------------------------------------------------------------------
Human Services - 1.7%
- -----------------------------------------------------------------------------------------------
California Statewide Communities Development Authority
(Prides Industries), 7.125%, 2016 $1,665,000 $1,737,011
- -----------------------------------------------------------------------------------------------
Cheneyville, LA, Westside Habilitation Center Rev.,
8.375%, 2013 4,590,000 4,649,165
- -----------------------------------------------------------------------------------------------
Lehigh County, PA, General Purpose Authority (Kidspeace
Obligation Group), 6%, 2018 3,550,000 3,412,154
- -----------------------------------------------------------------------------------------------
Montgomery County, PA, Industrial Development Authority
(Wordsworth Academy), 8%, 2024 2,850,000 2,867,784
- -----------------------------------------------------------------------------------------------
New Hampshire Higher Educational & Health Facilities
Authority Rev. (Child & Family Services), 6.125%, 2019 1,210,000 1,248,321
- -----------------------------------------------------------------------------------------------
New York City Industrial Development Agency Rev.
(Special Needs Facilities Pooled Program), 6.1%, 2012 1,955,000 2,042,389
- -----------------------------------------------------------------------------------------------
Orange County, FL, Health Facilities Authority Rev.
(GF/Orlando Project), 8.875%, 2021 1,925,000 1,958,072
- -----------------------------------------------------------------------------------------------
Orange County, FL, Health Facilities Authority Rev.
(GF/Orlando Project), 9%, 2031 2,185,000 2,241,307
- -----------------------------------------------------------------------------------------------
Osceola County, FL, Industrial Development Authority
Rev. (Community Provider), 7.75%, 2017 946,000 952,026
- -----------------------------------------------------------------------------------------------
Philadelphia, PA, Industrial Development Authority Rev.
(Caring People Alliance), 6.125%, 2019 1,430,000 1,058,157
- -----------------------------------------------------------------------------------------------
$22,166,386
- -----------------------------------------------------------------------------------------------
Industrial Revenue - Airlines - 1.9%
- -----------------------------------------------------------------------------------------------
Alliance Airport Authority, Inc., Special Facilities
Rev. (AMR Corp.), 7.5%, 2029 $5,035,000 $3,663,164
- -----------------------------------------------------------------------------------------------
Dallas Fort Worth, TX, International Airport Facility
Improvement Corp. (American Airlines, Inc.), 7.25%, 2030 890,000 629,675
- -----------------------------------------------------------------------------------------------
Dallas Fort Worth, TX, International Airport Facility
Improvement Corp. (American Airlines, Inc.), 6.375%,
2035 6,810,000 4,265,444
- -----------------------------------------------------------------------------------------------
Dallas Fort Worth, TX, International Airport Facility
Improvement Corp. (American Airlines, Inc.) "B", 6.05%,
2029 1,910,000 1,877,014
- -----------------------------------------------------------------------------------------------
Houston, TX, Airport Systems Rev. (Continental, Inc.)
"E", 6.75%, 2029 2,000,000 1,681,700
- -----------------------------------------------------------------------------------------------
Los Angeles, CA, Regional Airport Lease Rev. (American
Airlines, Inc.), 7%, 2012 1,700,000 1,652,706
- -----------------------------------------------------------------------------------------------
Los Angeles, CA, Regional Airport Lease Rev. (AMR
Corp.), 7.5%, 2024 3,800,000 3,766,674
- -----------------------------------------------------------------------------------------------
Metropolitan Knoxville, TN, Airport Authority Special
Purpose Rev. (Northwest Airlines), 8%, 2032 1,385,000 1,392,008
- -----------------------------------------------------------------------------------------------
New Jersey Economic Development Authority, Special
Facilities Rev. (Continental Airlines, Inc.), 6.25%,
2019 3,205,000 2,698,802
- -----------------------------------------------------------------------------------------------
New Jersey Economic Development Authority, Special
Facilities Rev. (Continental Airlines, Inc.), 6.25%,
2029 2,220,000 1,755,398
- -----------------------------------------------------------------------------------------------
New York City, NY, Industrial Development Agencies Rev.
(Continental Airlines, Inc.), 7.25%, 2008 615,000 612,128
- -----------------------------------------------------------------------------------------------
New York City, NY, Industrial Development Agencies Rev.
(Continental Airlines, Inc.), 8%, 2012 950,000 902,833
- -----------------------------------------------------------------------------------------------
$24,897,546
- -----------------------------------------------------------------------------------------------
Industrial Revenue - Chemicals - 0.8%
- -----------------------------------------------------------------------------------------------
Brazos River, TX, Harbor Navigation District (Dow
Chemical Co.), 5.7%, 2033 $5,000,000 $5,485,800
- -----------------------------------------------------------------------------------------------
Power County, ID, Pollution Control Rev. (FMC Corp.),
5.625%, 2014 1,000,000 1,019,380
- -----------------------------------------------------------------------------------------------
Sweetwater County, WY, Solid Waste Disposal Rev. (FMC
Corp.), "A", 7%, 2024 3,835,000 3,888,728
- -----------------------------------------------------------------------------------------------
$10,393,908
- -----------------------------------------------------------------------------------------------
Industrial Revenue - Environmental Services - 1.6%
- -----------------------------------------------------------------------------------------------
California Pollution Control Financing Authority, Solid
Waste Disposal Rev. (Browning Ferris, Inc.), 5.8%, 2016 $5,000,000 $4,800,850
- -----------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority, Solid Waste Rev.
(Waste Management, Inc.), 5.7%, 2018 540,000 576,331
- -----------------------------------------------------------------------------------------------
Henrico County, VA, Industrial Development Authority
Rev. (Browning Ferris, Inc.), 5.3%, 2011 3,000,000 3,017,220
- -----------------------------------------------------------------------------------------------
Henrico County, VA, Industrial Development Authority
Rev. (Browning Ferris, Inc.), 5.45%, 2014 2,000,000 1,888,120
- -----------------------------------------------------------------------------------------------
Massachusetts Development Finance Agency Rev.,
Resource Recovery Rev. (Waste Management, Inc.), 6.9%,
2029 1,700,000 1,934,124
- -----------------------------------------------------------------------------------------------
Nevada Department of Business (Republic Services, Inc.),
5.625%, 2026 2,000,000 2,171,200
- -----------------------------------------------------------------------------------------------
New Morgan, PA, Industrial Development Authority, Solid
Waste Disposal Rev. (New Morgan Landfill Co, Inc./
Browning Ferris, Inc.), 6.5%, 2019 2,500,000 2,468,425
- -----------------------------------------------------------------------------------------------
Ohio Solid Waste Rev., Ohio Water Development Authority
Rev. (Waste Management), 4.85%, 2022 3,000,000 3,114,510
- -----------------------------------------------------------------------------------------------
Schuylkill County, PA, Industrial Development Authority
Rev. (Waste Managment, Inc.), 5.1%, 2019 1,000,000 1,050,980
- -----------------------------------------------------------------------------------------------
Tooele County, UT, Pollution Control Rev. (Laidlaw
Environmental Services), 7.55%, 2027* 5,000,000 25,000
- -----------------------------------------------------------------------------------------------
$21,046,760
- -----------------------------------------------------------------------------------------------
Industrial Revenue - Metals - 0.6%
- -----------------------------------------------------------------------------------------------
Burns Harbor, IN, Solid Waste Disposal Facilities Rev.
(Bethlehem Steel), 8%, 2024* $10,455,000 $10,455
- -----------------------------------------------------------------------------------------------
Cambria County, PA, Industrial Development Authority
Rev. (Bethlehem Steel), 7.5%, 2015* 3,890,000 3,890
- -----------------------------------------------------------------------------------------------
Indiana Development Finance Authority Rev. (Inland
Steel), 7.25%, 2011 5,000,000 5,251,450
- -----------------------------------------------------------------------------------------------
Mobile County, AL, Industrial Development Authority Rev.
(Ipsco, Inc.), 6.875%, 2030 2,850,000 3,096,012
- -----------------------------------------------------------------------------------------------
$8,361,807
- -----------------------------------------------------------------------------------------------
Industrial Revenue - Other - 3.3%
- -----------------------------------------------------------------------------------------------
Gulf Coast, TX, Waste Disposal Rev. (Valero Energy
Corp.), 6.65%, 2032 $1,500,000 $1,637,460
- -----------------------------------------------------------------------------------------------
Hardeman County, TN, Correctional Facilities Rev.,
7.75%, 2017 6,500,000 6,805,825
- -----------------------------------------------------------------------------------------------
Janesville, WI, Industrial Development Rev. (Simmons
Manufacturing Co.), 7%, 2017 3,900,000 3,917,121
- -----------------------------------------------------------------------------------------------
New Jersey Economic Development Authority, Economic
Development Rev. (Holt Hauling & Warehousing), 8.4%,
2015**+ 4,000,000 2,260,000
- -----------------------------------------------------------------------------------------------
New Jersey Economic Development Authority, Economic
Development Rev. (Holt Hauling & Warehousing), 8.6%,
2017**+ 8,000,000 4,520,000
- -----------------------------------------------------------------------------------------------
Park Creek Metropolitan District, CO, Rev., Custodial
Receipts, 7.875%, 2032## 4,230,000 4,395,308
- -----------------------------------------------------------------------------------------------
Park Creek Metropolitan District, CO, Rev., Custodial
Receipts, "CR", 7.875%, 2032## 1,860,000 1,932,689
- -----------------------------------------------------------------------------------------------
Philadelphia, PA, Industrial Development Authority Rev.
(Host Marriott LP), 7.75%, 2017 2,000,000 2,038,020
- -----------------------------------------------------------------------------------------------
Port Corpus Christ, TX, Industrial Development Authority
Rev. (Citgo Petroleum Corp.), 8.25%, 2031 2,300,000 2,488,531
- -----------------------------------------------------------------------------------------------
Spirit Lake, IA, Industrial Development Rev. (Crystal
Tips, Inc.), 9.75%, 2008(++) 8,509,441 10,245,962
- -----------------------------------------------------------------------------------------------
Tooele County, UT, Hazardous Waste Treatment Rev. (Union
Pacific Corp.), 5.7%, 2026 3,895,000 4,059,447
- -----------------------------------------------------------------------------------------------
$44,300,363
- -----------------------------------------------------------------------------------------------
Industrial Revenue - Paper - 3.9%
- -----------------------------------------------------------------------------------------------
Arkansas State Development Finance Authority, Industrial
Facilities Rev. (Potlatch Corp.), "A", 7.75%, 2025 $1,200,000 $1,320,192
- -----------------------------------------------------------------------------------------------
Beauregard Parish, LA (Boise Cascade Corp.), 6.8%, 2027 3,250,000 3,561,220
- -----------------------------------------------------------------------------------------------
Butler, AL, Industrial Development Board, Solid Waste
Disposal Rev. (Georgia Pacific Corp.), 5.75%, 2028 1,510,000 1,527,456
- -----------------------------------------------------------------------------------------------
Courtland, AL, Solid Waste Disposal Rev. (Champion
International Corp.), 6.375%, 2029 2,500,000 2,509,425
- -----------------------------------------------------------------------------------------------
De Soto Parish, LA, Environmental Improvement Rev.
(International Paper Co.), 6.35%, 2025 1,650,000 1,758,785
- -----------------------------------------------------------------------------------------------
Delta County, MI, Economic Development Corp.,
Environmental Improvements Rev. (Mead Westvaco
Escanaba), 6.45%, 2023 1,100,000 1,232,022
- -----------------------------------------------------------------------------------------------
Delta County, MI, Economic Development Corp.,
Environmental Improvements Rev. (Mead Westvaco
Escanaba), 6.25%, 2027 3,100,000 3,484,958
- -----------------------------------------------------------------------------------------------
Florence County, SC, Industrial Development Rev. (Stone
Container Corp.), 7.375%, 2007 860,000 864,696
- -----------------------------------------------------------------------------------------------
Green Bay, WI, Redevelopment Authority, Industrial Rev.
(Fort James), 5.6%, 2019 1,000,000 1,028,150
- -----------------------------------------------------------------------------------------------
Hodge, LA, Utilities Rev. (Stone Container Corp.),
7.45%, 2024 3,000,000 3,606,000
- -----------------------------------------------------------------------------------------------
Maine Finance Authority, Solid Waste Recycling Facility
Rev. (Bowater, Inc.), 7.75%, 2022 8,500,000 8,529,240
- -----------------------------------------------------------------------------------------------
Onondaga County, NY, Industrial Development Authority
Rev., Solid Waste Disposal Rev. (Solvay Paperboard LLC),
6.8%, 2014 3,800,000 4,045,366
- -----------------------------------------------------------------------------------------------
Sabine River Authority Rev., Louisiana Water Facilities
(International Paper Co.), 6.2%, 2025 2,250,000 2,399,085
- -----------------------------------------------------------------------------------------------
Savannah, GA, Economic Development Authority Rev. (Stone
Container Corp.), 7.4%, 2026 7,500,000 7,762,950
- -----------------------------------------------------------------------------------------------
Wabash, IN, Solid Waste Disposal Rev. (Jefferson Smurfit
Corp.), 7.5%, 2026 2,000,000 2,076,820
- -----------------------------------------------------------------------------------------------
West Point, VA, Industrial Development Authority, Solid
Waste Disposal Rev. (Chesapeake Corp.), "A", 6.375%,
2019 800,000 808,104
- -----------------------------------------------------------------------------------------------
West Point, VA, Solid Waste Disposal Rev. (Chesapeake
Corp.), 6.25%, 2019 6,475,000 6,540,980
- -----------------------------------------------------------------------------------------------
$53,055,449
- -----------------------------------------------------------------------------------------------
Industrial Revenue - Retail - 0.2%
- -----------------------------------------------------------------------------------------------
Chester County, SC, Industrial Development Rev. (Springs
Industries, Inc.), 7.35%, 2014 $1,500,000 $1,510,500
- -----------------------------------------------------------------------------------------------
Chester County, SC, Industrial Development Rev. (Springs
Industries, Inc.), 7.8%, 2014 1,025,000 1,031,130
- -----------------------------------------------------------------------------------------------
$2,541,630
- -----------------------------------------------------------------------------------------------
Miscellaneous Revenue - Entertainment & Tourism - 1.6%
- -----------------------------------------------------------------------------------------------
California Statewide Communities Development Authority
Rev., East Valley Tourist (Cabazon Casino)"A", 9.25%,
2020## $3,845,000 $4,151,523
- -----------------------------------------------------------------------------------------------
Capital Trust Agency of Florida Rev. (Seminole Tribe
Convention), 10%, 2033 5,900,000 6,752,314
- -----------------------------------------------------------------------------------------------
Harris County-Houston, TX, Sports Authority Rev., MBIA,
0%, 2032 6,310,000 1,384,225
- -----------------------------------------------------------------------------------------------
Long Beach, CA (Aquarium of Pacific), 6.125%, 2005(++) 1,000,000 1,036,400
- -----------------------------------------------------------------------------------------------
Mississippi Development Bank, Special Obligation
(Diamond Lakes Utilities), 6.25%, 2017 3,400,000 3,515,498
- -----------------------------------------------------------------------------------------------
Nevada Department of Business & Industry Rev. (Las Vegas
Monorail), 7.375%, 2040 3,025,000 3,110,305
- -----------------------------------------------------------------------------------------------
Sandoval County, NM (Santa Ana Pueblo), 7.75%, 2015## 2,005,000 2,084,799
- -----------------------------------------------------------------------------------------------
$22,035,064
- -----------------------------------------------------------------------------------------------
Miscellaneous Revenue - Other - 1.1%
- -----------------------------------------------------------------------------------------------
Austin, TX, Convention Center (Convention Enterprises,
Inc.), 6.6%, 2021 $1,300,000 $1,412,853
- -----------------------------------------------------------------------------------------------
Austin, TX, Convention Center (Convention Enterprises,
Inc.), 6.7%, 2028 2,000,000 2,161,420
- -----------------------------------------------------------------------------------------------
Cleveland-Cuyahoga County, OH, Port Authority Rev.
(Myers University), "E", 5.6%, 2025 395,000 398,816
- -----------------------------------------------------------------------------------------------
Gallery Certificate Trust, PA, Parking Rev., FSA, 4.5%,
2013## 2,775,000 2,779,440
- -----------------------------------------------------------------------------------------------
New Jersey Economic Development Authority Rev. (Kapowski
Project), 6.8%, 2018 4,000,000 4,619,040
- -----------------------------------------------------------------------------------------------
Southwestern Illinois Development Authority Rev., Solid
Waste Disposal Rev., 5.9%, 2014 2,155,000 2,211,612
- -----------------------------------------------------------------------------------------------
St. Louis County, MO, Industrial Development Authority
Rev. (Kiel Center Multipurpose Arena), 7.875%, 2024 1,000,000 1,008,030
- -----------------------------------------------------------------------------------------------
$14,591,211
- -----------------------------------------------------------------------------------------------
Multi-Family Housing Revenue - 3.2%
- -----------------------------------------------------------------------------------------------
Alexandria, VA, Redevelopment & Housing Finance
Authority Rev. (Buckingham Village), 5.5%, 2029 $3,360,000 $3,387,653
- -----------------------------------------------------------------------------------------------
Alexandria, VA, Redevelopment & Housing Finance
Authority Rev. (Jefferson Village Apartments), "B", 9%,
2018 1,825,000 1,824,982
- -----------------------------------------------------------------------------------------------
Charter Mac Equity Issuer Trust, 6.625%, 2009 8,000,000 8,685,840
- -----------------------------------------------------------------------------------------------
Dallas Fort Worth, TX, Housing Corp., 8.5%, 2011 1,995,000 1,998,112
- -----------------------------------------------------------------------------------------------
Florida Multi-Family Housing Finance Agency Rev. (Center
Court Apartments), 8.5%, 2018 1,495,000 1,451,914
- -----------------------------------------------------------------------------------------------
GMAC Municipal Mortgage Trust, "B-1", 5.6%, 2039## 4,000,000 4,027,600
- -----------------------------------------------------------------------------------------------
Maplewood, RI, Housing Development Corp. (Terrace
Apartments), 6.9%, 2025 3,880,000 3,891,718
- -----------------------------------------------------------------------------------------------
Memphis, TN, Educational & Housing Facilities (Wesley
Highland Terrace), 8.5%, 2024 5,335,000 5,319,422
- -----------------------------------------------------------------------------------------------
Munimae TE Bond Subsidiary LLC, 6.875%, 2009 6,000,000 6,573,780
- -----------------------------------------------------------------------------------------------
Munimae TE Bond Subsidiary LLC, 5.4%, 2049## 2,000,000 1,985,000
- -----------------------------------------------------------------------------------------------
Ridgeland, MS, Urban Renewal (Northbrook I & III
Apartments), 6.5%, 2029** 5,000,000 2,400,000
- -----------------------------------------------------------------------------------------------
Texas Housing & Community Board (Harbors & Plumtree),
10%, 2026+ 1,660,000 1,582,727
- -----------------------------------------------------------------------------------------------
$43,128,748
- -----------------------------------------------------------------------------------------------
Parking - 0.1%
- -----------------------------------------------------------------------------------------------
Rail Connections, Inc., MA Rev., 0%, 2009(++) $375,000 $229,279
- -----------------------------------------------------------------------------------------------
Rail Connections, Inc., MA Rev., 0%, 2009(++) 450,000 257,436
- -----------------------------------------------------------------------------------------------
Rail Connections, Inc., MA Rev., 0%, 2009(++) 975,000 521,547
- -----------------------------------------------------------------------------------------------
Rail Connections, Inc., MA Rev., 0%, 2009(++) 1,235,000 618,735
- -----------------------------------------------------------------------------------------------
$1,626,997
- -----------------------------------------------------------------------------------------------
Sales & Excise Tax Revenue - 0.1%
- -----------------------------------------------------------------------------------------------
Illinois Sales Tax, 6.25%, 2015 $1,500,000 $1,738,320
- -----------------------------------------------------------------------------------------------
Single Family Housing - Local - 1.0%
- -----------------------------------------------------------------------------------------------
California Rural Home Mortgage Finance Authority Rev.,
GNMA, 6.55%, 2030 $760,000 $802,674
- -----------------------------------------------------------------------------------------------
Chicago, IL, Single Family Mortgage Rev., GNMA, 7.05%,
2030 110,000 111,092
- -----------------------------------------------------------------------------------------------
Cook County, IL, Single Family Mortgage Rev., "A", 0%,
2015 280,000 52,816
- -----------------------------------------------------------------------------------------------
Corpus Christi, TX, Housing Finance Authority Rev.,
MBIA, 0%, 2011 3,395,000 1,810,587
- -----------------------------------------------------------------------------------------------
Escambia County, FL, Single Family Housing Rev., GNMA,
6.95%, 2024 510,000 539,932
- -----------------------------------------------------------------------------------------------
Jefferson County, TX, Housing Finance Corp., MBIA, 0%,
2015 940,000 298,018
- -----------------------------------------------------------------------------------------------
Jefferson Parish, LA, Single Family Mortgage Rev., GNMA,
6.625%, 2023 710,000 772,572
- -----------------------------------------------------------------------------------------------
Jefferson Parish, LA, Single Family Mortgage Rev., GNMA,
7.5%, 2026 290,000 304,068
- -----------------------------------------------------------------------------------------------
Jefferson Parish, LA, Single Family Mortgage Rev., GNMA,
6.75%, 2030 840,000 896,692
- -----------------------------------------------------------------------------------------------
Lee County, FL, Housing Finance Authority Rev., "A",
GNMA, 7%, 2031 170,000 172,339
- -----------------------------------------------------------------------------------------------
New Castle County, DE, Single Family Mortgage Rev.,
FGIC, 0%, 2016 50,000 15,561
- -----------------------------------------------------------------------------------------------
Phoenix, AZ, Single Family Mortgage Rev., GNMA, 6.1%,
2028 175,000 186,902
- -----------------------------------------------------------------------------------------------
Pima County, AZ, Industrial Development Authority, GNMA,
7.05%, 2030 930,000 968,325
- -----------------------------------------------------------------------------------------------
Sedgwick & Shawnee Counties, KS, Single Family Housing
Rev., GNMA, 6.45%, 2029 570,000 619,807
- -----------------------------------------------------------------------------------------------
Sedgwick & Shawnee Counties, KS, Single Family Housing
Rev., GNMA, 6.45%, 2033 1,765,000 1,885,444
- -----------------------------------------------------------------------------------------------
Sedgwick & Shawnee Counties, KS, Single Family Housing
Rev., GNMA, 6%, 2035 1,885,000 2,047,185
- -----------------------------------------------------------------------------------------------
Sedgwick & Shawnee Counties, KS, Single Family Housing
Rev., GNMA, 5.25%, 6.875%, 2026 840,000 871,357
- -----------------------------------------------------------------------------------------------
Sedgwick & Shawnee Counties, KS, Single Family Housing
Rev., GNMA, 4%, 2036 1,100,000 1,182,643
- -----------------------------------------------------------------------------------------------
$13,538,014
- -----------------------------------------------------------------------------------------------
Single Family Housing - State - 1.8%
- -----------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 7.15%, 2014 $51,000 $51,806
- -----------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 6.75%, 2021 290,000 302,247
- -----------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 5.9%, 2023 825,000 855,261
- -----------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 6.1%, 2023 455,000 471,981
- -----------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 6.55%, 2025 202,000 202,517
- -----------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 7.4%, 2027 125,000 125,738
- -----------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 7.15%, 2030 170,000 171,125
- -----------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 6.6%, 2032 855,000 879,308
- -----------------------------------------------------------------------------------------------
Colorado Housing & Finance Authority Rev., 6.55%, 2033 515,000 538,196
- -----------------------------------------------------------------------------------------------
Delaware Single Family Housing Authority Rev., 6.75%,
2024 735,000 746,481
- -----------------------------------------------------------------------------------------------
Louisiana Housing Finance Agency, Single Family Mortgage
Rev., GNMA, 7.55%, 2031 720,000 773,381
- -----------------------------------------------------------------------------------------------
Mississippi Home Corp. Rev., GNMA, 6.1%, 2034 4,100,000 4,264,697
- -----------------------------------------------------------------------------------------------
Mississippi Home Corp. Rev., Single Family Rev., "A-2",
GNMA, 6.5%, 2032 4,100,000 4,339,358
- -----------------------------------------------------------------------------------------------
Missouri State Housing Development Commission, Single
Family Mortgage Rev. (Home Loan Program), 6.35%, 2032 715,000 749,177
- -----------------------------------------------------------------------------------------------
Missouri State Housing Development Commission, Single
Family Mortgage Rev. (Home Loan Program), GNMA, 6.7%,
2030 1,260,000 1,295,595
- -----------------------------------------------------------------------------------------------
Missouri State Housing Development Commission, Single
Family Mortgage Rev. (Home Loan Program), GNMA, 7.45%,
2031 195,000 202,513
- -----------------------------------------------------------------------------------------------
Missouri State Housing Development Commission, Single
Family Mortgage Rev. (Home Loan Program), GNMA, 6.85%,
2032 560,000 609,202
- -----------------------------------------------------------------------------------------------
Missouri State Housing Development Commission, Single
Family Mortgage Rev. (Home Loan Program), GNMA, 6.75%,
2034 585,000 604,761
- -----------------------------------------------------------------------------------------------
New Hampshire Housing Finance Authority Rev., 5.875%,
2030 540,000 554,882
- -----------------------------------------------------------------------------------------------
New Hampshire Housing Finance Authority Rev., 6.3%, 2031 525,000 535,925
- -----------------------------------------------------------------------------------------------
New Mexico Mortgage Finance Authority Rev., GNMA, 6.35%,
2033 940,000 979,386
- -----------------------------------------------------------------------------------------------
North Dakota Housing Finance Agency Rev., Housing
Finance, 5%, 2033 1,860,000 1,883,808
- -----------------------------------------------------------------------------------------------
Oklahoma Housing Finance Agency, Single Family, 7.55%,
2028 400,000 423,480
- -----------------------------------------------------------------------------------------------
Texas Housing & Community Affairs, Residential Mortgage
Rev., GNMA, 7.1%, 2021 2,995,000 3,064,274
- -----------------------------------------------------------------------------------------------
$24,625,099
- -----------------------------------------------------------------------------------------------
Solid Waste Revenue - 1.1%
- -----------------------------------------------------------------------------------------------
Delaware County, PA, Industrial Development Authority
Rev., Resource Recovery Facilities (American Ref-Fuel
Co.), "A", 6.2%, 2019 $3,900,000 $4,128,657
- -----------------------------------------------------------------------------------------------
Hudson County, NJ, Solid Waste System Rev., 6%, 2019 2,000,000 2,015,160
- -----------------------------------------------------------------------------------------------
Massachusetts Industrial Finance Agency Rev., Resource
Recovery Rev. (Ogden Haverhill Associates), 5.5%, 2013 2,475,000 2,524,253
- -----------------------------------------------------------------------------------------------
Massachusetts Industrial Finance Agency Rev., Resource
Recovery Rev. (Ogden Haverhill Associates), 5.6%, 2019 5,425,000 5,500,353
- -----------------------------------------------------------------------------------------------
$14,168,423
- -----------------------------------------------------------------------------------------------
State & Agency - Other - 0.3%
- -----------------------------------------------------------------------------------------------
West Virginia, Higher Education Facilities Rev., "B",
FGIC, 5%, 2034 $3,730,000 $3,894,157
- -----------------------------------------------------------------------------------------------
State & Local Agencies - 3.6%
- -----------------------------------------------------------------------------------------------
Alabama Building Renovation Authority, AMBAC, 6%, 2017 $1,805,000 $2,079,071
- -----------------------------------------------------------------------------------------------
Alabama Building Renovation Authority, AMBAC, 6%, 2018 1,155,000 1,329,290
- -----------------------------------------------------------------------------------------------
Chicago, IL, Public Building Commission Rev., RITES,
FGIC, 8.4058%, 2017+(+) 4,500,000 5,823,270
- -----------------------------------------------------------------------------------------------
College Park, GA (Civic Center), AMBAC, 5.75%, 2020 3,000,000 3,414,960
- -----------------------------------------------------------------------------------------------
Delaware Valley, PA, Regional Finance Authority, RITES,
AMBAC, 9.3044%, 2018(+) 7,000,000 9,458,260
- -----------------------------------------------------------------------------------------------
Essex County, NJ, RITES, FGIC, 9.2193%, 2020+(+) 6,000,000 7,731,240
- -----------------------------------------------------------------------------------------------
Golden State, CA, Tobacco Securitization Corp., Tobacco
Settlement Rev., Enhanced, "B", 5.375%, 2028 2,500,000 2,611,350
- -----------------------------------------------------------------------------------------------
Harris County, TX, 5.8%, 2014 1,438,437 1,447,485
- -----------------------------------------------------------------------------------------------
Harris County, TX, 5.625%, 2020 2,522,057 2,549,371
- -----------------------------------------------------------------------------------------------
Houston, TX, Certificates of Participation, 6.3%, 2020 5,000,000 5,441,450
- -----------------------------------------------------------------------------------------------
King George County, VA, Industrial Development Authority
Lease Rev., FSA, 5%, 2036 3,800,000 3,966,098
- -----------------------------------------------------------------------------------------------
Northumberland County, PA (Career and Arts Center),
6.65%, 2020 1,170,000 1,209,546
- -----------------------------------------------------------------------------------------------
Northumberland County, PA (Mountain View Manor), 7%,
2020 1,000,000 1,052,140
- -----------------------------------------------------------------------------------------------
Shawnee County, KS (Community Mental Health Center,
Inc.), 5.35%, 2019 250,000 241,795
- -----------------------------------------------------------------------------------------------
$48,355,326
- -----------------------------------------------------------------------------------------------
Student Loan Revenue - 0.5%
- -----------------------------------------------------------------------------------------------
Access to Loans for Learning, California Student Loan
Rev., 7.95%, 2030 $2,700,000 $2,866,887
- -----------------------------------------------------------------------------------------------
Arizona Student Loan Acquisition Authority, Student Loan
Rev., 6.15%, 2029 1,500,000 1,602,885
- -----------------------------------------------------------------------------------------------
South Dakota Student Loan Rev., Education Loans, Inc.,
5.6%, 2020 2,700,000 2,800,278
- -----------------------------------------------------------------------------------------------
$7,270,050
- -----------------------------------------------------------------------------------------------
Tax - Other - 0.7%
- -----------------------------------------------------------------------------------------------
Black Hawk, CO, Device Tax Rev., 5.625%, 2017 $2,750,000 $2,760,753
- -----------------------------------------------------------------------------------------------
New Jersey Economic Development Authority Rev. Cigarette
Tax, 5.5%, 2024 1,000,000 1,046,120
- -----------------------------------------------------------------------------------------------
New Jersey Economic Development Authority Rev. Cigarette
Tax, 5.75%, 2029 1,795,000 1,903,382
- -----------------------------------------------------------------------------------------------
New Jersey Economic Development Authority Rev. Cigarette
Tax, 5.5%, 2031 800,000 829,784
- -----------------------------------------------------------------------------------------------
New Jersey Economic Development Authority Rev. Cigarette
Tax, 5.75%, 2034 1,195,000 1,258,897
- -----------------------------------------------------------------------------------------------
Virgin Islands Public Finance Authority Rev., 6%, 2006 500,000 516,455
- -----------------------------------------------------------------------------------------------
Virgin Islands Public Finance Authority Rev., "E",
5.875%, 2018 1,500,000 1,563,480
- -----------------------------------------------------------------------------------------------
$9,878,871
- -----------------------------------------------------------------------------------------------
Tax Assessment - 3.8%
- -----------------------------------------------------------------------------------------------
Allegheny County, PA, Redevelopment Authority Rev.
(Pittsburgh Mills), 5.1%, 2014 $690,000 $710,631
- -----------------------------------------------------------------------------------------------
Allegheny County, PA, Redevelopment Authority Rev.
(Pittsburgh Mills), 5.6%, 2023 450,000 469,328
- -----------------------------------------------------------------------------------------------
Broadview, IL, Tax Increment Rev., 5.25%, 2012 4,180,000 4,363,293
- -----------------------------------------------------------------------------------------------
Broadview, IL, Tax Increment Rev., 5.375%, 2015 3,400,000 3,532,634
- -----------------------------------------------------------------------------------------------
Capital Region Community Development District of
Florida, Capital Improvement Rev., 5.95%, 2006 405,000 409,305
- -----------------------------------------------------------------------------------------------
Capital Region Community Development District of
Florida, Capital Improvement Rev., 6.85%, 2031 720,000 776,412
- -----------------------------------------------------------------------------------------------
Concorde Estates Community Development District, Florida
Capital Improvement Rev., "B", 5%, 2011 745,000 747,444
- -----------------------------------------------------------------------------------------------
Double Branch Community Development, District of
Florida, 5.6%, 2007 295,000 297,705
- -----------------------------------------------------------------------------------------------
Fishhawk Community Development District of Florida,
5.125%, 2009 3,080,000 3,110,800
- -----------------------------------------------------------------------------------------------
Greyhawk Landing Community Development, Florida Special
Assessment Rev., "B", 6.25%, 2009 745,000 765,659
- -----------------------------------------------------------------------------------------------
Heritage Harbour South Community, Development District
Florida Rev., Capital Improvement, "B", 5.4%, 2008 1,705,000 1,717,481
- -----------------------------------------------------------------------------------------------
Hyland Hills Metropolitan Park & Recreation District of
Colorado, 6.75%, 2015 2,500,000 2,639,525
- -----------------------------------------------------------------------------------------------
Katy, TX, Development Authority Rev., 5.8%, 2011 2,750,000 2,883,210
- -----------------------------------------------------------------------------------------------
Katy, TX, Development Authority Rev., 6%, 2018 4,600,000 4,818,040
- -----------------------------------------------------------------------------------------------
Killarney, FL, Community Development District, "B",
5.125%, 2009 1,130,000 1,140,181
- -----------------------------------------------------------------------------------------------
Lake Elsinore, CA, Public Financing Authority, 7.1%,
2020 2,330,000 2,517,682
- -----------------------------------------------------------------------------------------------
Lakes By The Bay South Community Development District,
Florida Special Assessment, "B", 5.3%, 2009 1,875,000 1,897,163
- -----------------------------------------------------------------------------------------------
Markham, IL, Tax Increment Rev., 9%, 2012 2,110,000 2,144,203
- -----------------------------------------------------------------------------------------------
Middle Village, FL, Community Development District Rev.,
"A", 5.8%, 2022 900,000 925,587
- -----------------------------------------------------------------------------------------------
Old Palm Community Development District, Special
Assessment (Palm Beach Gardens), "A", 5.9%, 2035 745,000 759,654
- -----------------------------------------------------------------------------------------------
Old Palm Community Development District, Special
Assessment (Palm Beach Gardens), "B", 5.375%, 2014 1,345,000 1,353,904
- -----------------------------------------------------------------------------------------------
Panther Trace, FL, Community Development District Rev.,
5.4%, 2008 1,430,000 1,443,857
- -----------------------------------------------------------------------------------------------
Panther Trace, FL, Community Development District Rev.,
"B", 6.5%, 2009 535,000 548,525
- -----------------------------------------------------------------------------------------------
Parkway Center, FL, Community Development District Rev.,
"B", 5.625%, 2014 3,705,000 3,787,955
- -----------------------------------------------------------------------------------------------
Preserve At Wilderness Lake, FL, 6.2%, 2008 680,000 695,150
- -----------------------------------------------------------------------------------------------
Renaissance Community Development of Florida, "B",
6.25%, 2008 1,800,000 1,860,462
- -----------------------------------------------------------------------------------------------
Reunion East Community Development District, FL, Special
Assessment, 5.9%, 2007 885,000 901,594
- -----------------------------------------------------------------------------------------------
Riverside County, CA, Public Financing Authority, Tax
Allocation Rev., XLCA, 5%, 2037 2,000,000 2,066,440
- -----------------------------------------------------------------------------------------------
Sterling Hill Community Development District of Florida,
Capital Improvement Rev., 5.5%, 2010 1,710,000 1,738,420
- -----------------------------------------------------------------------------------------------
$51,022,244
- -----------------------------------------------------------------------------------------------
Tobacco - 3.7%
- -----------------------------------------------------------------------------------------------
Badger Tobacco, WI (Asset Securitization Corp.), 6.125%,
2027 $9,850,000 $9,879,846
- -----------------------------------------------------------------------------------------------
California Statewide Financing Authority, Tobacco
Settlement, 5.625%, 2029 4,610,000 4,499,452
- -----------------------------------------------------------------------------------------------
District of Columbia, Tobacco Settlement, 6.25%, 2024 3,785,000 3,795,825
- -----------------------------------------------------------------------------------------------
Golden State Tobacco Securization, Tobacco Settlement,
7.8%, 2042 3,000,000 3,304,440
- -----------------------------------------------------------------------------------------------
Iowa Tobacco Settlement Authority, Tobacco Settlement
Rev., Asset Backed, "B", 5.3%, 2025 5,000,000 4,503,950
- -----------------------------------------------------------------------------------------------
Louisiana Tobacco Settlement Authority, 5.5%, 2030 4,915,000 4,726,657
- -----------------------------------------------------------------------------------------------
Louisiana Tobacco Settlement Financing Corp., Asset
Backed, "B", 5.875%, 2039 4,325,000 4,062,127
- -----------------------------------------------------------------------------------------------
New Jersey Tobacco Settlement Authority, 5.75%, 2032 8,025,000 7,777,750
- -----------------------------------------------------------------------------------------------
South Carolina Tobacco Settlement Authority, 6.375%,
2028 3,500,000 3,495,205
- -----------------------------------------------------------------------------------------------
Southern California Tobacco Settlement Authority, 5.25%,
2027 2,310,000 2,304,595
- -----------------------------------------------------------------------------------------------
Washington Tobacco Settlement Authority, 6.5%, 2026 1,105,000 1,125,100
- -----------------------------------------------------------------------------------------------
$49,474,947
- -----------------------------------------------------------------------------------------------
Toll Roads - 4.2%
- -----------------------------------------------------------------------------------------------
Arapahoe County, CO, Capital Improvement (Highway Rev.),
0%, 2005(++) $69,000,000 $14,218,830
- -----------------------------------------------------------------------------------------------
E-470 Public Highway Authority, Colorado Rev., Capital
Appreciation, "B", MBIA, 0%, 2027 12,305,000 3,757,332
- -----------------------------------------------------------------------------------------------
Foothill/Eastern Transportation Corridor Agency, CA,
Toll Road Rev., 7.15%, 2010(++) 5,000,000 6,104,450
- -----------------------------------------------------------------------------------------------
New Jersey Turnpike Authority, RITES, MBIA, 8.3336%,
2020+(+) 5,000,000 5,761,000
- -----------------------------------------------------------------------------------------------
Pocahontas Parkway Assn., VA, Toll Road Rev., 0%, 2011 2,700,000 1,455,138
- -----------------------------------------------------------------------------------------------
Pocahontas Parkway Assn., VA, Toll Road Rev., 0%, 2012 2,100,000 1,372,014
- -----------------------------------------------------------------------------------------------
Pocahontas Parkway Assn., VA, Toll Road Rev., 0%, 2012 1,700,000 862,495
- -----------------------------------------------------------------------------------------------
Pocahontas Parkway Assn., VA, Toll Road Rev., 0%, 2013 7,000,000 4,237,310
- -----------------------------------------------------------------------------------------------
Pocahontas Parkway Assn., VA, Toll Road Rev., 0%, 2014 5,100,000 2,911,080
- -----------------------------------------------------------------------------------------------
Pocahontas Parkway Assn., VA, Toll Road Rev., 0%, 2015 7,250,000 3,902,240
- -----------------------------------------------------------------------------------------------
Pocahontas Parkway Assn., VA, Toll Road Rev., 0%, 2016 2,000,000 1,026,520
- -----------------------------------------------------------------------------------------------
San Joaquin Hills, CA, Toll Road Rev. (Transportation
Corridor Agency), ETM, 0%, 2011(++) 13,400,000 10,917,516
- -----------------------------------------------------------------------------------------------
$56,525,925
- -----------------------------------------------------------------------------------------------
Transportation - Special Tax - 0.8%
- -----------------------------------------------------------------------------------------------
Telluride, CO (Gondola Transit Co.), 9%, 2006(++) $1,910,000 $2,060,241
- -----------------------------------------------------------------------------------------------
Telluride, CO, Real Estate Transfer Assessment Rev.
(Gondola Transit Co.), ETM, 11.5%, 2012(++) 6,000,000 8,860,140
- -----------------------------------------------------------------------------------------------
Texas Department of Transportation, 7%, 2012 147,898 150,477
- -----------------------------------------------------------------------------------------------
$11,070,858
- -----------------------------------------------------------------------------------------------
Universities - Colleges - 2.4%
- -----------------------------------------------------------------------------------------------
California Educational Facilities Authority Rev. (L.A.
College of Chiropractic), 5.6%, 2017 $2,000,000 $1,963,540
- -----------------------------------------------------------------------------------------------
Houston, TX, Community College Systems, MBIA, 7.875%,
2025 9,150,000 11,909,091
- -----------------------------------------------------------------------------------------------
Illinois Educational Facilities Authority Rev.
(Augustana College), "A", 5.625%, 2022 1,300,000 1,396,408
- -----------------------------------------------------------------------------------------------
Indiana State Educational Facilities Authority Rev.
(Manchester College), 5.75%, 2018 1,000,000 1,042,090
- -----------------------------------------------------------------------------------------------
Islip, NY, Community Development Agency Rev. (New York
Institute of Technology), 7.5%, 2006(++) 6,000,000 6,450,540
- -----------------------------------------------------------------------------------------------
Massachusetts Development Finance Agency Rev. (Eastern
Nazarene College), 5.625%, 2019 1,235,000 1,156,652
- -----------------------------------------------------------------------------------------------
New Hampshire Higher Educational & Health Facilities
Authority Rev. (Franklin Pierce Law Center), 5.5%, 2018 1,200,000 1,266,912
- -----------------------------------------------------------------------------------------------
New Hampshire Higher Educational & Health Facilities
Authority Rev. (New Hampshire College), 6.3%, 2016 1,690,000 1,766,270
- -----------------------------------------------------------------------------------------------
Savannah, GA, Economic Development Authority Rev.
(College of Art & Design, Inc.), 6.5%, 2009(++) 2,000,000 2,323,760
- -----------------------------------------------------------------------------------------------
Savannah, GA, Economic Development Authority Rev.
(College of Art & Design, Inc.), ETM, 6.2%, 2009(++) 820,000 897,326
- -----------------------------------------------------------------------------------------------
Massachusetts Development Finance Agency Rev. (Eastern
Nazarene College), 5.625%, 2029 1,250,000 1,118,550
- -----------------------------------------------------------------------------------------------
University of Arkansas, University Rev. (UAMS Campus),
"B", MBIA, 5%, 2034 890,000 930,451
- -----------------------------------------------------------------------------------------------
$32,221,590
- -----------------------------------------------------------------------------------------------
Universities - Dormitories - 0.1%
- -----------------------------------------------------------------------------------------------
Illinois Educational Facilities Authority, Educational
Advancement Fund (University Center Project), 6.625%,
2017 $1,500,000 $1,650,240
- -----------------------------------------------------------------------------------------------
Universities - Secondary Schools - 1.5%
- -----------------------------------------------------------------------------------------------
California Statewide Communities, Development Authority
Rev. (Escondido Charter High School), 7.5%, 2023 $1,965,000 $2,014,734
- -----------------------------------------------------------------------------------------------
California Statewide Communities, Development Authority
Rev. (Escondido Charter High School), 7.5%, 2036 3,485,000 3,579,931
- -----------------------------------------------------------------------------------------------
Illinois Development Finance Authority, Economic
Development Rev. (Latin School of Chicago), 5.6%, 2028 850,000 895,926
- -----------------------------------------------------------------------------------------------
Illinois Development Finance Authority, Economic
Development Rev. (Latin School of Chicago), 5.65%, 2028 1,730,000 1,756,227
- -----------------------------------------------------------------------------------------------
Massachusetts Development Finance Agency Rev. (Williston
Northampton School), 6.5%, 2028 1,400,000 1,507,366
- -----------------------------------------------------------------------------------------------
Michigan Municipal Bond Authority Rev. (Detroit Academy
of Arts & Sciences), 8%, 2031 2,700,000 2,861,109
- -----------------------------------------------------------------------------------------------
Michigan Municipal Bond Authority Rev. (YMCA Service
Learning Academy), 7.625%, 2021 550,000 593,720
- -----------------------------------------------------------------------------------------------
Michigan Municipal Bond Authority Rev. (YMCA Service
Learning Academy), 7.75%, 2031 2,450,000 2,642,472
- -----------------------------------------------------------------------------------------------
Pima County, AZ, Industrial Development Authority
Education Rev. (Arizona Charter Schools), 6.4%, 2013 1,065,000 1,118,751
- -----------------------------------------------------------------------------------------------
Pima County, AZ, Industrial Development Authority
Education Rev. (Arizona Charter Schools), "C", 6.75%,
2031 3,000,000 3,152,910
- -----------------------------------------------------------------------------------------------
$20,123,146
- -----------------------------------------------------------------------------------------------
Utilities - Cogeneration - 3.3%
- -----------------------------------------------------------------------------------------------
Alaska Industrial Development & Export Authority,
5.7%, 2012 $1,105,000 $1,087,320
- -----------------------------------------------------------------------------------------------
Alaska Industrial Development & Export Authority,
5.875%, 2032 1,800,000 1,651,122
- -----------------------------------------------------------------------------------------------
Carbon County, PA, Industrial Development Authority Rev.
(Panther Creek Partners), 6.65%, 2010 7,605,000 8,201,916
- -----------------------------------------------------------------------------------------------
Klamath Falls, OR, Electric Rev. (Klamath Cogeneration),
6%, 2025 6,765,000 6,831,432
- -----------------------------------------------------------------------------------------------
Mecklenburg County, VA, Industrial Development Authority
Rev. (UAE Mecklenburg, LP), 6.5%, 2017 2,800,000 3,147,228
- -----------------------------------------------------------------------------------------------
Ohio Water Development Authority (Bay Shore Power),
5.875%, 2020 1,900,000 1,915,352
- -----------------------------------------------------------------------------------------------
Pennsylvania Economic Development Financing Authority
Rev., Resources Recovery Rev. (Northampton Generating),
6.5%, 2013 2,300,000 2,330,291
- -----------------------------------------------------------------------------------------------
Pennsylvania Economic Development Financing Authority
Rev., Resources Recovery Rev. (Northampton Generating),
6.6%, 2019 5,000,000 5,056,850
- -----------------------------------------------------------------------------------------------
Pittsylvania County, VA, Industrial Development
Authority Rev. (Multi-trade of Pittsylvania), 7.55%,
2019 10,000,000 10,388,500
- -----------------------------------------------------------------------------------------------
Port Authority NY & NJ (KIAC), 6.75%, 2019 1,750,000 1,856,330
- -----------------------------------------------------------------------------------------------
Suffolk County, NY, Industrial Development Agency
(Nissequogue Cogen Partners Facility), 5.3%, 2013 1,750,000 1,754,340
- -----------------------------------------------------------------------------------------------
$44,220,681
- -----------------------------------------------------------------------------------------------
Utilities - Investor Owned - 5.7%
- -----------------------------------------------------------------------------------------------
Beaver County, PA, Pollution Control Rev. (Toledo
Edison), 7.75%, 2020 $1,500,000 $1,593,375
- -----------------------------------------------------------------------------------------------
Brazos River Authority, TX, Pollution Control Rev.
(Texas Utility Co.), 7.7%, 2033 2,225,000 2,631,485
- -----------------------------------------------------------------------------------------------
Brazos River Authority, TX, Pollution Control Rev.
(Texas Utility Co.), "B", 6.3%, 2032 1,250,000 1,346,750
- -----------------------------------------------------------------------------------------------
Brazos River Authority, TX, Pollution Control Rev.
(Texas Utility Co.), "C", 6.75%, 2038 2,505,000 2,742,123
- -----------------------------------------------------------------------------------------------
Calcasieu Parish, LA, Industrial Development Board,
Pollution Control Rev. (Entergy Gulf States, Inc.),
5.45%, 2010 4,800,000 4,902,672
- -----------------------------------------------------------------------------------------------
California Pollution Control Financing Authority,
Pollution Control Rev. (Southern California Edison Co.),
6.4%, 2024 4,000,000 4,015,360
- -----------------------------------------------------------------------------------------------
Clark County, NV, Industrial Development Rev. (Nevada
Power Co.), FGIC, 6.7%, 2022 4,000,000 4,067,880
- -----------------------------------------------------------------------------------------------
Farmington, NM, Pollution Control Rev. (Tucson Electric
Power Co.), 6.95%, 2020 3,000,000 3,164,070
- -----------------------------------------------------------------------------------------------
Farmington, NM, Pollution Control Rev. (New Mexico
Public Service), 5.8%, 2022 1,390,000 1,414,937
- -----------------------------------------------------------------------------------------------
Farmington, NM, Pollution Control Rev. (New Mexico
Public Service), 5.8%, 2022 4,500,000 4,580,730
- -----------------------------------------------------------------------------------------------
Farmington, NM, Pollution Control Rev. (New Mexico
Public Service), "A", 6.3%, 2016 3,240,000 3,494,210
- -----------------------------------------------------------------------------------------------
Forsyth, MT, Pollution Control Rev. (Portland General),
5.2%, 2033 770,000 817,062
- -----------------------------------------------------------------------------------------------
Forsyth, MT, Pollution Control Rev. (Puget Sound
Energy), " A", AMBAC, 5%, 2031 3,165,000 3,288,941
- -----------------------------------------------------------------------------------------------
Maricopa County, AZ, Pollution Control Rev. (El Paso
Electric), 6.375%, 2015 4,000,000 4,075,080
- -----------------------------------------------------------------------------------------------
Matagorda County, TX, Pollution Control Rev. (Central
Power & Light Co.), 4.55%, 2029 5,000,000 5,155,550
- -----------------------------------------------------------------------------------------------
Matagorda County, TX, Pollution Control Rev. (Reliant
Energy), 5.95%, 2030 3,095,000 3,143,375
- -----------------------------------------------------------------------------------------------
New Hampshire Industrial Development Authority,
Pollution Control Rev. (CT Light and Power), 5.9%, 2018 1,000,000 1,066,150
- -----------------------------------------------------------------------------------------------
Pennsylvania Economic Development Financing Authority
Rev. (Reliant Energy Seward), "A", 6.75%, 2036 3,385,000 3,567,079
- -----------------------------------------------------------------------------------------------
Pima County, AZ, Industrial Development Authority Rev.
(Tucson Electric Power Co.), 6.1%, 2025 2,000,000 2,000,240
- -----------------------------------------------------------------------------------------------
Pima County, AZ, Industrial Development Authority Rev.
(Tucson Electric Power Co.), 6%, 2029 6,845,000 6,845,205
- -----------------------------------------------------------------------------------------------
Pointe Coupee Parish, LA, Pollution Control Rev. (Gulf
States Utilities Co.), 6.7%, 2013 1,000,000 1,016,780
- -----------------------------------------------------------------------------------------------
Port Morrow, OR, Pollution Control Rev. (Portland
General Electric), 5.2%, 2033 1,900,000 2,016,128
- -----------------------------------------------------------------------------------------------
Trinity River Authority, TX, Pollution Control Rev. (TXU
Electric Co.), 6.25%, 2028 1,500,000 1,638,960
- -----------------------------------------------------------------------------------------------
West Feliciana Parish, LA, Pollution Control Rev.
(Energy Gulf States), 6.6%, 2028 3,335,000 3,405,002
- -----------------------------------------------------------------------------------------------
West Feliciana Parish, LA, Pollution Control Rev. (Gulf
States Utilities Co.), 7.7%, 2014 2,000,000 2,033,520
- -----------------------------------------------------------------------------------------------
West Feliciana Parish, LA, Pollution Control Rev. (Gulf
States Utilities Co.), 9%, 2015 2,500,000 2,534,525
- -----------------------------------------------------------------------------------------------
$76,557,189
- -----------------------------------------------------------------------------------------------
Utilities - Municipal Owned - 0.2%
- -----------------------------------------------------------------------------------------------
North Carolina Municipal Power Agency, Catawba Electric
Rev., 6.375%, 2013 $2,750,000 $3,096,500
- -----------------------------------------------------------------------------------------------
Southern California Public Power Authority (Transmission
Project Rev.), RIBS, 9.688%, 2012(+) 150,000 151,743
- -----------------------------------------------------------------------------------------------
$3,248,243
- -----------------------------------------------------------------------------------------------
Water & Sewer Utility Revenue - 2.0%
- -----------------------------------------------------------------------------------------------
Forsyth County, GA, Water & Sewage Authority,
6.25%, 2010(++) $1,000,000 $1,168,080
- -----------------------------------------------------------------------------------------------
Forsyth County, GA, Water & Sewer Authority Rev., 6.25%,
2010(++) 1,010,000 1,179,761
- -----------------------------------------------------------------------------------------------
Massachusetts Water Resources Authority, RITES, FGIC,
10.399%, 2019+(+) 765,000 1,131,450
- -----------------------------------------------------------------------------------------------
Michigan Municipal Bond Authority Rev., RITES, 8.5606%,
2009+(+), (++) 7,585,000 9,519,478
- -----------------------------------------------------------------------------------------------
New York City, NY, Municipal Water Finance Authority
Rev., 5.75%, 2007(++) 8,590,000 9,335,354
- -----------------------------------------------------------------------------------------------
Phoenix, AZ, FGIC, 6.25%, 2010(++) 1,000,000 1,172,980
- -----------------------------------------------------------------------------------------------
State of Virginia, Clean Water Rev., 5.75%, 2019 2,500,000 2,841,450
- -----------------------------------------------------------------------------------------------
$26,348,553
- -----------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $1,268,283,381) $1,317,908,392
- -----------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 0.9%
- -----------------------------------------------------------------------------------------------
Allegheny County, PA, Hospital Development Authority
Rev. (Presbyterian University Hospital), "A", 1.85%,
due 2/03/05 $130,000 $130,000
- -----------------------------------------------------------------------------------------------
Allegheny County, PA, Hospital Development Authority
Rev. (Presbyterian University Hospital), "B", 1.85%,
due 2/03/05 300,000 300,000
- -----------------------------------------------------------------------------------------------
Allegheny County, PA, Hospital Development Authority
Rev. (Presbyterian University Hospital), "D", 1.85%,
due 2/03/05 600,000 600,000
- -----------------------------------------------------------------------------------------------
Bay Area Toll Authority, California Toll Bridge Rev.,
"A", 1.79%, due 2/03/05 7,900,000 7,900,000
- -----------------------------------------------------------------------------------------------
Bell County, TX, Health Facilities Development Corp.
Rev. (Scott & White Memorial Hospital), "B-1", 1.9%,
due 2/01/05 300,000 300,000
- -----------------------------------------------------------------------------------------------
Chicago, IL, Midway Airport Rev., Second Lien, "A",
1.93%, due 2/01/05 300,000 300,000
- -----------------------------------------------------------------------------------------------
Illinois Health Facilities Authority Rev. (University of
Chicago Hospital), 1.9%, due 2/01/05 800,000 800,000
- -----------------------------------------------------------------------------------------------
Irvine, CA, Improvement Building Act 1915, 1.83%, due
2/02/05 200,000 200,000
- -----------------------------------------------------------------------------------------------
Missouri Development Finance, Board of Cultural
Facilities Rev. (Nelson Gallery), "B", 1.89%, due 2/01/05 200,000 200,000
- -----------------------------------------------------------------------------------------------
New York City, NY, 1.92%, due 2/01/05 100,000 100,000
- -----------------------------------------------------------------------------------------------
Pinellas County, FL, Health Facilities Authority Rev.,
Pooled Hospital Loan Program, 1.92%, due 2/01/05 700,000 700,000
- -----------------------------------------------------------------------------------------------
Sacramento, CA, Unified School District, District
Certification Partnership, 1.82%, due 2/03/05 100,000 100,000
- -----------------------------------------------------------------------------------------------
Sevier County, TN, Public Building Authority, 1.86%, due
2/03/05 50,000 50,000
- -----------------------------------------------------------------------------------------------
Sevier County, TN, Public Building Authority, 1.86%, due
2/03/05 100,000 100,000
- -----------------------------------------------------------------------------------------------
State of California, Department of Water Resources,
Power Supply Rev., "C-2", 1.82%, due 2/03/05 500,000 500,000
- -----------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at identified cost $12,280,000
- -----------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,280,563,381) $1,330,188,392
- -----------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 1.2% 16,301,986
- -----------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,346,490,378
- -----------------------------------------------------------------------------------------------
* Non-income producing security.
** Interest received was less than stated coupon rate.
+ Restricted security.
(+) Inverse floating rate security.
(++) Refunded bond.
## SEC Rule 144A restriction.
The following abbreviations are used in the Portfolio of Investments and are defined:
ETM = Escrowed to Maturity
Insurers
- -----------------------------------------------------------------------------------------------
AMBAC = AMBAC Indemnity Corp.
FGIC = Financial Guaranty Insurance Co.
FHA = Federal Housing Administration
FSA = Financial Security Assurance, Inc.
GNMA = Government National Mortgage Assn.
MBIA = Municipal Bond Investors Corp.
PSF = Permanent School Fund
XLCA = XL Capital Insurance Co.
Inverse Floaters
- -----------------------------------------------------------------------------------------------
RIBS = Residual Interest Bonds
RITES = Residual Interest Tax-Exempt Security
ROLS = Residual Option Longs
SEE NOTES TO FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
- ---------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets
and liabilities composing the total value of the fund.
AT 1/31/05
ASSETS
Investments, at value (identified cost, $1,280,563,381) $1,330,188,392
- ---------------------------------------------------------------------------------------------------
Cash 97,222
- ---------------------------------------------------------------------------------------------------
Receivable for investments sold 6,135,931
- ---------------------------------------------------------------------------------------------------
Receivable for fund shares sold 2,467,347
- ---------------------------------------------------------------------------------------------------
Interest receivable 19,094,813
- ---------------------------------------------------------------------------------------------------
Other assets 8,794
- ---------------------------------------------------------------------------------------------------
Total assets $1,357,992,499
- ---------------------------------------------------------------------------------------------------
LIABILITIES
Distributions payable $3,180,350
- ---------------------------------------------------------------------------------------------------
Payable for investments purchased 5,805,950
- ---------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 1,845,438
- ---------------------------------------------------------------------------------------------------
Unrealized depreciation on interest rate swap agreements 76,357
- ---------------------------------------------------------------------------------------------------
Payable to affiliates
- ---------------------------------------------------------------------------------------------------
Management fee 54,887
- ---------------------------------------------------------------------------------------------------
Shareholder servicing costs 114,662
- ---------------------------------------------------------------------------------------------------
Distribution and service fee 54,278
- ---------------------------------------------------------------------------------------------------
Administrative fee 1,229
- ---------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 368,970
- ---------------------------------------------------------------------------------------------------
Total liabilities $11,502,121
- ---------------------------------------------------------------------------------------------------
Net assets $1,346,490,378
- ---------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $1,405,586,119
- ---------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation) on investments 49,548,654
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (108,528,872)
- ---------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net
investment income (115,523)
- ---------------------------------------------------------------------------------------------------
Net assets $1,346,490,378
- ---------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 160,431,228
- ---------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class A shares
Net assets $977,415,743
- ---------------------------------------------------------------------------------------------------
Shares outstanding 116,488,279
- ---------------------------------------------------------------------------------------------------
Net asset value per share $8.39
- ---------------------------------------------------------------------------------------------------
Offering price per share (100/95.25X$8.39) $8.81
- ---------------------------------------------------------------------------------------------------
Class B shares
Net assets $283,360,049
- ---------------------------------------------------------------------------------------------------
Shares outstanding 33,739,906
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per share $8.40
- ---------------------------------------------------------------------------------------------------
Class C shares
Net assets $85,714,586
- ---------------------------------------------------------------------------------------------------
Shares outstanding 10,203,043
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per share $8.40
- ---------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------
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.
YEAR ENDED 1/31/05
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------------------------
Interest income $87,869,755
- --------------------------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------------------------
Management fee $8,090,536
- --------------------------------------------------------------------------------------------------
Trustees' compensation 33,875
- --------------------------------------------------------------------------------------------------
Shareholder servicing costs 1,727,960
- --------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 2,367,731
- --------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 789,692
- --------------------------------------------------------------------------------------------------
Administrative fee 117,047
- --------------------------------------------------------------------------------------------------
Custodian fee 291,857
- --------------------------------------------------------------------------------------------------
Printing 77,631
- --------------------------------------------------------------------------------------------------
Postage 53,923
- --------------------------------------------------------------------------------------------------
Auditing fees 44,606
- --------------------------------------------------------------------------------------------------
Legal fees 42,737
- --------------------------------------------------------------------------------------------------
Miscellaneous 313,728
- --------------------------------------------------------------------------------------------------
Total expenses $13,951,323
- --------------------------------------------------------------------------------------------------
Fees paid indirectly (12,753)
- --------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (1,230,725)
- --------------------------------------------------------------------------------------------------
Net expenses $12,707,845
- --------------------------------------------------------------------------------------------------
Net investment income $75,161,910
- --------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) (identified cost basis)
- --------------------------------------------------------------------------------------------------
Investment transactions $(5,269,215)
- --------------------------------------------------------------------------------------------------
Swap transactions (3,421,617)
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments $(8,690,832)
- --------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- --------------------------------------------------------------------------------------------------
Investments $21,010,276
- --------------------------------------------------------------------------------------------------
Swap transactions 1,879,300
- --------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments $22,889,576
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments $14,198,744
- --------------------------------------------------------------------------------------------------
Change in net assets from operations $89,360,654
- --------------------------------------------------------------------------------------------------
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.
FOR YEARS ENDED 1/31 2005 2004
CHANGE IN NET ASSETS
FROM OPERATIONS
Net investment income $75,161,910 $80,635,859
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (8,690,832) (11,194,131)
- --------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments 22,889,576 39,054,433
- ----------------------------------------------------------------------- -------
Change in net assets from operations $89,360,654 $108,496,161
- ------------------------------------------------------- -------------- --------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income
- --------------------------------------------------------------------------------------------------
Class A $(53,974,581) $(60,366,666)
- --------------------------------------------------------------------------------------------------
Class B (14,879,834) (17,673,877)
- --------------------------------------------------------------------------------------------------
Class C (3,631,704) (3,642,138)
- ------------------------------------------------------- -------------- --------------
Total distributions declared to shareholders $(72,486,119) $(81,682,681)
- ------------------------------------------------------- -------------- --------------
Change in net assets from fund share transactions $(89,758,493) $(84,770,683)
- ------------------------------------------------------- -------------- --------------
Redemption fees $6,610 --
- ------------------------------------------------------- -------------- --------------
Total change in net assets $(72,877,348) $(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 income of
$115,523 and $3,417,960, respectively) $1,346,490,378 $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 past 5 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. This information has been audited by the fund's independent
registered public accounting firm, whose report, together with the fund's financial statements, are included in this report.
YEARS ENDED 1/31
----------------------------------------------------------------------------------------
CLASS A 2005 2004 2003 2002 2001
Net asset value, beginning of period $8.28 $8.12 $8.23 $8.24 $8.06
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.48 $0.47 $0.48 $0.51 $0.51
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 0.09 0.17 (0.09) (0.02) 0.19
- ------------------------------------------------- --- --- --- ---
Total from investment operations $0.57 $0.64 $0.39 $0.49 $0.70
- ------------------------------------------------- --- --- --- ---
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS
From net investment income $(0.46) $(0.48) $(0.50) $(0.50) $(0.51)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net investment
income -- -- -- -- (0.01)
- ----------------------------------------- ----- ----- ----- ----- -----
Total distributions declared to
shareholders $(0.46) $(0.48) $(0.50) $(0.50) $(0.52)
- ----------------------------------------- ----- ----- ----- ----- -----
Redemption fees added to
paid-in capital# $0.00+ $-- $-- $-- $--
- ----------------------------------------- ----- ----- ----- ----- -----
Net asset value, end of period $8.39 $8.28 $8.12 $8.23 $8.24
- ----------------------------------------- ----- ----- ----- ----- -----
Total return (%)(+)& 7.16 7.98 4.96 6.13 9.04
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 1/31
----------------------------------------------------------------------------------------
CLASS A (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 0.71 0.79 0.79 0.76 0.76
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 5.82 5.80 5.88 6.11 6.29
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 13 9 20 17 22
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $977,416 $1,003,328 $1,050,204 $1,037,925 $981,580
- -----------------------------------------------------------------------------------------------------------------------------
(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 February 29, 2004 the management fee waiver was terminated. Effective March 1, 2004, the investment adviser
contractually waived a portion of its fee. In addition, effective June 7, 2004, the investment adviser has voluntarily
agreed to reimburse the fund for its proportional share of substantially all of Independent Chief Compliance Officer
service fees paid to Tarantino LLC. If this waiver/reimbursement had not been in place, the net investment income per share
and the ratios would have been:
Net investment income $0.47 $0.47* $0.48* $0.50 $0.51*
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 0.80 0.81 0.84 0.83 0.84
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 5.73 5.78 5.83 6.04 6.21
- -----------------------------------------------------------------------------------------------------------------------------
(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 accreting market discount 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.
* Waiver impact per share was less than $0.01.
+ 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.
& From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
(+) Total returns 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
YEARS ENDED 1/31
-----------------------------------------------------------------------------------
CLASS B 2005 2004 2003 2002 2001
Net asset value, beginning of period $8.28 $8.13 $8.24 $8.25 $8.07
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.42 $0.41 $0.42 $0.44 $0.45
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 0.10 0.16 (0.10) (0.01) 0.19
- ---------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $0.52 $0.57 $0.32 $0.43 $0.64
- ---------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS
From net investment income $(0.40) $(0.42) $(0.43) $(0.44) $(0.45)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- -- (0.01)
- ---------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.40) $(0.42) $(0.43) $(0.44) $(0.46)
- ---------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to
paid-in capital# $0.00+ $-- $-- $-- $--
- ---------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $8.40 $8.28 $8.13 $8.24 $8.25
- ---------------------------------------------- ------ ------ ------ ------ ------
Total return (%)& 6.47 7.15 4.01 5.28 8.17
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 1/31
-----------------------------------------------------------------------------------
CLASS B (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.48 1.57 1.58 1.56 1.54
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 5.05 5.02 5.09 5.29 5.50
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 13 9 20 17 22
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $283,360 $337,065 $355,602 $382,280 $343,841
- -----------------------------------------------------------------------------------------------------------------------------
(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 February 29, 2004 the management fee waiver was terminated. Effective March 1, 2004, the investment adviser
contractually waived a portion of its fee. In addition, effective June 7, 2004, the investment adviser has voluntarily
agreed to reimburse the fund for its proportional share of substantially all of Independent Chief Compliance Officer
service fees paid to Tarantino LLC. If this waiver/reimbursement had not been in place, the net investment income per share
and the ratios would have been:
Net investment income $0.41 $0.41* $0.41 $0.43 $0.44
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.57 1.59 1.63 1.63 1.62
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 4.96 5.00 5.04 5.22 5.42
- -----------------------------------------------------------------------------------------------------------------------------
(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 accreting market discount 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.
* Waiver impact per share was less than $0.01.
+ 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.
& From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 1/31
-----------------------------------------------------------------------------------
CLASS C 2005 2004 2003 2002 2001
Net asset value, beginning of period $8.29 $8.13 $8.24 $8.25 $8.07
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income(S) $0.39 $0.39 $0.40 $0.43 $0.43
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 0.10 0.17 (0.10) (0.02) 0.19
- ---------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $0.49 $0.56 $0.30 $0.41 $0.62
- ---------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS
From net investment income $(0.38) $(0.40) $(0.41) $(0.42) $(0.43)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- -- (0.01)
- ---------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.38) $(0.40) $(0.41) $(0.42) $(0.44)
- ---------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to
paid-in capital# $0.00+ $-- $-- $-- $--
- ---------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $8.40 $8.29 $8.13 $8.24 $8.25
- ---------------------------------------------- ------ ------ ------ ------ ------
Total return (%)& 6.10 6.91 3.92 5.07 7.95
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 1/31
-----------------------------------------------------------------------------------
CLASS C (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.71 1.79 1.79 1.76 1.76
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 4.80 4.78 4.86 5.07 5.27
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 13 9 20 17 22
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $85,715 $78,975 $71,519 $59,799 $25,413
- -----------------------------------------------------------------------------------------------------------------------------
(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 February 29, 2004 the management fee waiver was terminated. Effective March 1, 2004, the investment
adviser contractually waived a portion of its fee. In addition, effective June 7, 2004, the investment adviser has
voluntarily agreed to reimburse the fund for its proportional share of substantially all of Independent Chief Compliance
Officer service fees paid to Tarantino LLC. If this waiver/reimbursement had not been in place, the net investment
income per share and the ratios would have been:
Net investment income(S)(S) $0.39* $0.39* $0.39 $0.42 $0.42
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.80 1.81 1.84 1.83 1.84
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 4.71 4.76 4.81 5.00 5.19
- -----------------------------------------------------------------------------------------------------------------------------
(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 accreting market discount 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.
* Waiver impact per share was less than $0.01.
+ 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.
& From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
SEE NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(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 35% 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 July 1, 2004 and before April
1, 2005, the fund will charge a 2% redemption fee (which is retained by the
fund) on proceeds from Class A, Class B, and Class C shares redeemed or
exchanged within 30 calendar days following their acquisition (either by
purchase or exchange). Effective April 1, 2005, the fund will charge a 1%
redemption fee on proceeds from Class A, Class B, and Class C shares redeemed or
exchanged within 30 calendar days following their acquisition. The fund may
change the redemption fee period in the future, including in connection with
Securities and Exchange Commission rule developments. See the fund's prospectus
for details. Any redemption 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.
The fund may receive proceeds from litigation settlements involving its
portfolio holdings. Any proceeds received are reflected in realized gain/loss in
the statement of operations, or in unrealized gain/loss if the security is still
held by the fund.
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 year ended January 31, 2005, 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 defaulted bonds, amortization and accretion on debt securities,
market discount, derivatives, non-deductible pension expense, and expired
capital loss carryforwards.
The tax character of distributions declared for the years ended January 31, 2005
and January 31, 2004 was as follows:
1/31/05 1/31/04
Distributions declared from:
- ------------------------------------------------------------------------------
Tax-exempt income $71,656,306 $81,663,941
- ------------------------------------------------------------------------------
Ordinary income 829,813 18,740
- ------------------------------------------------------------------------------
Total distributions declared $72,486,119 $81,682,681
- ------------------------------------------------------------------------------
During the year ended January 31, 2005, accumulated distributions in excess of
net investment income decreased by $626,646, accumulated net realized loss on
investments decreased by $25,521,412, and paid-in capital decreased by
$26,148,058 due to differences between book and tax accounting for amortization
and accretion on debt securities, market discount, defaulted bonds, and an
expired capital loss carryforward. This change had no effect on the net assets
or net asset value per share.
As of January 31, 2005, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed tax-exempt income $7,879,627
----------------------------------------------------------
Undistributed ordinary income 273,910
----------------------------------------------------------
Capital loss carryforward (103,885,360)
----------------------------------------------------------
Unrealized gain (loss) 44,339,397
----------------------------------------------------------
Other temporary differences (7,703,315)
----------------------------------------------------------
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 as follows:
EXPIRATION DATE
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 (15,537,212)
----------------------------------------------------------
January 31, 2013 (3,190,630)
----------------------------------------------------------
Total $(103,885,360)
----------------------------------------------------------
The availability of a portion of these respective capital loss 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%
----------------------------------------------------------
Average net assets in excess of $1.4 billion 0.57%
----------------------------------------------------------
As part of a settlement agreement with the New York Attorney General concerning
market timing and related matters (See Legal Proceedings footnote), 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.
Management fees incurred for the year ended January 31, 2005 were an effective
rate of 0.51% of average daily net assets on an annualized basis.
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 $6,210 for retired Independent Trustees for
the year ended January 31, 2005.
This fund and certain other MFS funds (the "funds") have entered into a services
agreement (the "Agreement") which provides for payment of fees by the funds to
Tarantino LLC in return for the provision of services of an Independent Chief
Compliance Officer (ICCO) for the funds. The ICCO is an officer of the funds and
the sole member of Tarantino LLC. MFS has agreed to reimburse each of the funds
for a proportional share of substantially all of the payments made by the funds
to Tarantino LLC and also to provide office space and other administrative
support and supplies to the ICCO. The 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. The fund
paid MFS an administrative fee up to the following annual percentage rates of
the fund's average daily net assets:
BEGINNING OF
PERIOD 4/01/04
EFFECTIVE DATE THROUGH 3/31/04 THROUGH 2/28/05 3/01/05
First $2 billion 0.0175% 0.01120% 0.01626%
- -----------------------------------------------------------------------------
Next $2.5 billion 0.0130% 0.00832% 0.01206%
- -----------------------------------------------------------------------------
Next $2.5 billion 0.0005% 0.00032% 0.00056%
- -----------------------------------------------------------------------------
In excess of $7 billion 0.0000% 0.00000% 0.00000%
- -----------------------------------------------------------------------------
The March 1, 2005 rates were not effective during the current reporting period.
For the year ended January 31, 2005, the fund paid MFS $117,047, equivalent to
0.00869% 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
$308,156 for the year ended January 31, 2005, 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 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
as compensation for services provided by MFD and financial intermediaries in
connection with the distribution and servicing of its shares. One component of
the plan is a distribution fee and another is a service fee paid by MFD to
financial intermediaries that enter into sales or service agreements with MFD or
its affiliates based on the average daily net assets of accounts attributable to
such intermediaries. The 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 may retain all or a portion of the service fee, including for accounts for
which there is no financial intermediary of record. Service fees retained by MFD
for the year ended January 31, 2005 amounted to:
CLASS B CLASS C
Service Fee Retained by MFD $-- $28
- ------------------------------------------------------------------------------
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 year ended January 31, 2005
were as follows:
CLASS B CLASS C
Effective Annual Percentage Rates 0.77% 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 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 of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the year ended January 31, 2005
were as follows:
CLASS A CLASS B CLASS C
Contingent Deferred Sales Charges
Imposed $32,505 $523,733 $14,002
- ------------------------------------------------------------------------------
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
was set at 0.10% of the fund's average daily net assets. For the period July 1,
2004 through December 31, 2004, the fund was charged up to 0.0861% of its
average daily net assets. For the period January 1, 2005 through February 28,
2005, the fund is charged up to 0.1035% of its average daily net assets. For the
year ended January 31, 2005, the fund paid MFSC a fee of $1,274,544 for
shareholder services which equated to 0.0946% of the fund's average daily net
assets. Effective March 1, 2005, the fund is charged up to 0.1159% of its
average daily net assets. Shareholder service costs include out of pocket
expenses and sub accounting services expenses paid by MFSC on behalf of the fund
and subsequently reimbursed to MFSC which amounted to $357,600, and other costs
paid by the fund directly to unaffiliated vendors for the year ended January 31,
2005.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$175,441,204 and $232,263,655, 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 $1,285,772,638
----------------------------------------------------------
Gross unrealized appreciation $83,315,830
----------------------------------------------------------
Gross unrealized depreciation (38,900,076)
----------------------------------------------------------
Net unrealized appreciation (depreciation) $44,415,754
----------------------------------------------------------
(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:
Year ended 1/31/05 Year ended 1/31/04
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 14,994,428 $123,833,368 16,347,299 $133,584,017
- --------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 3,385,200 27,878,249 3,498,198 28,504,250
- --------------------------------------------------------------------------------------------------------
Shares reacquired (23,130,281) (190,008,514) (27,960,137) (227,975,544)
- --------------------------------------------------------------------------------------------------------
Net change (4,750,653) $(38,296,897) (8,114,640) $(65,887,277)
- --------------------------------------------------------------------------------------------------------
Year ended 1/31/05 Year ended 1/31/04
SHARES AMOUNT SHARES AMOUNT
CLASS B SHARES
Shares sold 2,085,133 $17,200,031 4,119,151 $33,652,826
- --------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 778,701 6,417,631 873,782 7,126,966
- --------------------------------------------------------------------------------------------------------
Shares reacquired (9,814,364) (80,771,810) (8,058,106) (65,735,798)
- --------------------------------------------------------------------------------------------------------
Net change (6,950,530) $(57,154,148) (3,065,173) $(24,956,006)
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 2,512,149 $20,799,666 2,990,402 $24,471,351
- --------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 222,096 1,831,569 212,339 1,732,691
- --------------------------------------------------------------------------------------------------------
Shares reacquired (2,062,006) (16,938,683) (2,468,888) (20,131,442)
- --------------------------------------------------------------------------------------------------------
Net change 672,239 $5,692,552 733,853 $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 Federal
Reserve funds 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 year ended January 31, 2005 was $6,126, and is
included in miscellaneous expense. The fund had no significant borrowings during
the year ended January 31, 2005.
(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.
Swap Agreements
Interest Rate Swaps
NOTIONAL PRINCIPAL UNREALIZED
AMOUNT OF CASH FLOWS PAID CASH FLOWS APPRECIATION
EXPIRATION CONTRACT BY THE FUND RECEIVED BY THE FUND (DEPRECIATION)
12/01/07 USD 22,000,000 Fixed - 3 Year BMA Floating - 7 day $(45,057)
Swap Index - 2.795% BMA Swap Index
- -------------------------------------------------------------------------------------------------------
4/20/15 USD 13,400,000 Fixed - 10 Year BMA Floating - 7 day (31,300)
Swap Index - 3.568% BMA Swap Index
- -------------------------------------------------------------------------------------------------------
$(76,357)
- -------------------------------------------------------------------------------------------------------
At January 31, 2005, the fund had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) RESTRICTED SECURITIES
At January 31, 2005, the fund owned the following securities which are subject
to legal or contractual restrictions on resale, excluding securities issued
under Rule 144A, constituting 6.52% 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
Arizona Health Facilities Authority Rev.
(The Terraces Project), 7.75%, 2033 10/17/03 2,250,000 $2,210,535 $2,370,195
- ------------------------------------------------------------------------------------------------------------
Chicago, IL, Board of Education, RITES,
8.0375%, 2020 2/09/00 7,910,000 6,211,881 10,272,242
- ------------------------------------------------------------------------------------------------------------
Chicago, IL, Public Building Commission
Rev., RITES, FGIC, 8.4058%, 2017 3/18/99 4,500,000 4,815,180 5,823,270
- ------------------------------------------------------------------------------------------------------------
Chicago, IL, O'Hare International Airport
Rev., RITES, FSA, 8.98%, 2022 8/21/03 6,250,000 6,664,625 7,642,125
- ------------------------------------------------------------------------------------------------------------
Denver, CO, City & County Airport Rev.,
RITES, AMBAC, 9.84%, 2017 8/28/00 2,500,000 2,683,700 3,062,450
- ------------------------------------------------------------------------------------------------------------
Essex County, NJ, RITES, FGIC,
9.2193%, 2020 4/06/00 6,000,000 5,968,080 7,731,240
- ------------------------------------------------------------------------------------------------------------
Houston, TX, Independent School District,
RITES, PSF, 8.049%, 2017 2/26/99 5,000,000 5,249,100 5,804,500
- ------------------------------------------------------------------------------------------------------------
Los Angeles, CA, RITES, FGIC,
8.0721%, 2015 7/21/99 5,310,000 5,563,924 6,876,981
- ------------------------------------------------------------------------------------------------------------
Massachusetts Water Resources Authority,
RITES, FGIC, 10.399%, 2019 3/16/00 765,000 904,780 1,131,450
- ------------------------------------------------------------------------------------------------------------
Michigan Municipal Bond Authority Rev,
RITES, 8.5606%, 2009 2/23/00 7,585,000 6,633,841 9,519,478
- ------------------------------------------------------------------------------------------------------------
New Jersey Economic Development Authority,
Economic Development Rev. (Holt Hauling &
Warehousing), 8.4%, 2015 1/31/97 4,000,000 4,197,120 2,260,000
- ------------------------------------------------------------------------------------------------------------
New Jersey Economic Development Authority,
Economic Development Rev. (Holt Hauling &
Warehousing), 8.6%, 2017 1/31/97 8,000,000 8,415,520 4,520,000
- ------------------------------------------------------------------------------------------------------------
New Jersey Turnpike Authority, RITES, MBIA,
8.3336%, 2020 4/19/00 5,000,000 4,637,900 5,761,000
- ------------------------------------------------------------------------------------------------------------
State of Florida, Board of Education, RITES,
FGIC, 8.0836%, 2012 2/25/02 1,500,000 1,756,860 1,882,470
- ------------------------------------------------------------------------------------------------------------
State of Florida, Board of Education, RITES,
FGIC, 8.0836%, 2013 2/25/02 5,000,000 5,791,400 6,342,300
- ------------------------------------------------------------------------------------------------------------
State of Florida, Department of
Transportation, RITES, 7.5606%, 2017 4/09/99 2,300,000 2,332,844 2,648,588
- ------------------------------------------------------------------------------------------------------------
State of Massachusetts, ROLS,
8.792%, 2017 8/28/01 2,000,000 2,226,440 2,501,120
- ------------------------------------------------------------------------------------------------------------
Texas Housing & Community Board (Harbors &
Plumtree), 10%, 2026 10/31/96 1,660,000 1,660,000 1,582,727
- ------------------------------------------------------------------------------------------------------------
Total: $87,732,136
- ------------------------------------------------------------------------------------------------------------
(9) CONCENTRATION OF CREDIT RISK
At January 31, 2005, 12.32% of securities in the portfolio of investments are
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 2.04% 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. The SEC settlement
order states that MFS failed to adequately disclose to the Boards of 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 intermediaries who support the sale of MFS fund shares. 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. The final distribution plan
was approved by the SEC on January 21, 2005, and the affected MFS Funds received
the payment on February 16, 2005.
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 open-end retail fund ("MFS retail funds")
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 they prohibited market
timing, MFS did not limit trading activity in 11 domestic large cap stock, high
grade bond and money market retail funds. MFS' former Chief Executive Officer
and former President 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. These individuals
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, MFS Fund Distributors, Inc., MFS Service Center, Inc.,
MFS Corporation Retirement Committee, Sun Life Financial Inc., various MFS
funds, certain current and/or former 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 ERISA actions by
participants in certain retirement plan accounts on behalf of those 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, Allianz Dresdner), No. 1:04-md-15863
(transfer began March 19, 2004)). The market timing cases related to the MFS
complex are Riggs v. MFS et al., Case No. 04-cv-01162-JFM (direct), Hammerslough
v. MFS et al., Case No. 04-md-01620 (derivative) and Anita Walker v. MFS et al.,
Case No. 1:04-CV-01758 (ERISA). The plaintiffs in these consolidated lawsuits
generally seek injunctive relief including removal of the named Trustees,
adviser and distributor, rescission of contracts and 12b-1 Plans, disgorgement
of fees and profits, monetary damages, punitive damages, attorney's fees and
costs and other equitable and declaratory relief. 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 (GAO) (May 4, 2004); and Koslow v. Sun Life Financial Inc., et al.,
No. 04cv11019 (GAO) (May 20, 2004)). The plaintiffs in these lawsuits generally
seek compensatory damages, punitive damages, recovery of fees, rescission of
contracts, an accounting, restitution, declaratory relief, equitable and/or
injunctive relief and attorney's fees and costs. The various 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, (ii) received
excessive compensation as fiduciaries to the MFS funds, or (iii) 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. 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 certain 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 distributed $50 million 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.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
To the Trustees of MFS Series Trust III and Shareholders of MFS Municipal High
Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Municipal High Income Fund (the Fund) (one of the portfolios constituting MFS
Series Trust III), including the portfolio of investments, as of January 31,
2005, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended and the financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Fund's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and financial
highlights, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our procedures included confirmation of securities owned as of January 31, 2005,
by correspondence with the custodian and brokers or by other appropriate
auditing procedures where replies from brokers were not received. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Municipal High Income Fund at January 31, 2005, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended and the financial highlights for each of the five years
in the period then ended, in conformity with U.S. generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
March 11, 2005
- ------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- ------------------------------------------------------------------------------------------------------
The Trustees and officers of the trust, as of March 1, 2005, 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 DURING
POSITION(s) HELD TRUSTEE/OFFICER THE PAST FIVE YEARS &
NAME, DATE OF BIRTH WITH FUND SINCE(1) OTHER DIRECTORSHIPS(2)
-----------------------------
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair February 1992 Private investor; Eastern
(born 05/01/36) of Trustees 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
Michael Hegarty Trustee December 2004 Retired; AXA Financial (financial
(born 12/21/44) services and insurance), Vice
Chairman and Chief Operating
Officer (until May 2001); The
Equitable Life Assurance Society
(insurance), President and Chief
Operating Officer (until May 2001)
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
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) Advisory Trustee December 2004 Massachusetts Financial Services
(born 10/20/63) and President (Advisory Company, Chief Executive Officer,
Trustee); President, Chief Investment
February-December Officer and Director
2004 (Trustee)
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
Jeffrey N. Carp(3) Secretary and September 2004 Massachusetts Financial Services
(born 12/01/56) Clerk Company, Executive Vice President,
General Counsel and Secretary
(since April 2004); Hale and
Dorr LLP (law firm), Partner
(prior to April 2004)
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)
James F. DesMarais(3) Assistant September 2004 Massachusetts Financial Services
(born 03/09/61) Secretary and Company, Assistant General Counsel
Assistant Clerk
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)
Brian T. Hourihan(3) Assistant September 2004 Massachusetts Financial Services
(born 11/11/64) Secretary and Company, Vice President, Senior
Assistant Clerk Counsel and Assistant Secretary
(since June 2004); Affiliated
Managers Group, Inc., Chief Legal
Officer/Centralized Compliance
Program (January to April 2004);
Fidelity Research & Management
Company, Assistant General Counsel
(prior to January 2004)
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
- ----------------
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. Messrs. Ives and Sherratt and Ms. Lane are members of the
trust's Audit Committee.
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 99 funds within the MFS Family of Funds.
In addition, the Trustees have appointed Robert J. Manning, Robert C. Pozen and Laurie J. Thomsen as Advisory
Trustees and have nominated each to be elected as Trustees by shareholders. If elected, Messrs. Manning and
Pozen would serve as interested Trustees while Ms. Thomsen would serve as an independent Trustee. Information
relating to Messrs. Manning and Pozen and Ms. Thomsen is continued in the table below. The trust will hold a
shareholders meeting in 2005 and at least once every five years thereafter to elect Trustees.
ADVISORY TRUSTEES
Robert J. Manning(3) Advisory Trustee December 2004 Massachusetts Financial Services
(born 10/20/63) and President (Advisory Company, Chief Executive Officer,
Trustee); President, Chief Investment
February-December Officer and Director
2004 (Trustee)
Robert C. Pozen(3) Advisory Trustee December 2004 Massachusetts Financial Services
(born 08/08/46) (Advisory Company, Chairman (since February
Trustee); 2004); Harvard Law School
February-December (education), John Olin Visiting
2004 (Trustee) 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;
Medtronic, Inc. (medical
technology), Director; Telesat
(satellite communications),
Director
Laurie J. Thomsen Advisory Trustee December 2004 Private investor; Prism Venture
(born 08/05/57) Partners (venture capital), Co-
founder and General Partner (until
June 2004); St. Paul Travelers
Companies (commercial property
liability insurance), Director
- ------------------
(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, as a result of
position with MFS. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
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
INDEPENDENT REGISTERED PUBLIC
DISTRIBUTOR ACCOUNTING FIRM
MFS Fund Distributors, Inc. Ernst & Young LLP
500 Boylston Street, Boston, MA 02116-3741 200 Clarendon Street, Boston, MA 02116
PORTFOLIO MANAGER
Geoffrey L. Schechter
- ------------------------------------------------------------------------------
PROXY VOTING POLICIES AND INFORMATION
- ------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
QUARTERLY PORTFOLIO DISCLOSURE
- ------------------------------------------------------------------------------
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 1-800-SEC-0330. 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
mfs.com.
- ------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2006, shareholders will be mailed a Form 1099-DIV, if applicable,
reporting the federal tax status of all distributions paid during the calendar
year 2005.
For federal income tax purposes, approximately 98.86% of total dividends paid by
the fund from net investment income during the year ended January 31, 2005, is
designated as an exempt interest dividend.
- --------------------------------------------------------------------------------
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.
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
- --------------------------------------------------------------------------------
M F S(SM)
INVESTMENT MANAGEMENT(R)
(C) 2005 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc., 500
Boylston Street, Boston, MA 02116.
MMH-ANN-03/05 48M
ITEM 2. CODE OF ETHICS.
The Registrant has adopted a Code of Ethics pursuant to Section 406 of the
Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the Registrant's
principal executive officer and principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Mr. J. Atwood Ives and Mses. Amy B. Lane and Laurie J. Thomsen, members of the
Audit Committee, have been determined by the Board of Trustees in their
reasonable business judgment to meet the definition of "audit committee
financial expert" as such term is defined in Form N-CSR. In addition, Mr. Ives
and Mses. Lane and Laurie J. Thomsen are "independent" members of the Audit
Committee as defined in Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
ITEMS 4(a) THROUGH 4(d) AND 4(g):
The Board of Trustees has appointed Deloitte & Touche LLP ("Deloitte") to serve
as independent accountants to certain series of the Registrant ("Funds") and
Ernst & Young LLP ("E&Y") to serve in the same capacity to certain other funds.
The tables below set forth the audit fees billed to the Funds as well as fees
for non-audit services provided to the Funds and/or to the Funds' investment
adviser, Massachusetts Financial Services Company ("MFS") and to various
entities either controlling, controlled by, or under common control with MFS
that provide ongoing services to the Fund ("MFS Related Entities").
For the fiscal years ended January 31, 2005 and 2004, audit fees billed to the
Fund by Deloitte were as follows:
Audit Fees
FEES BILLED BY DELOITTE: 2005 2004
---- ----
MFS High Income Fund $46,675 $42,150
MFS High Yield Opportunities Fund 47,625 43,050
------- -------
TOTAL $94,300 $85,200
Audit Fees
FEES BILLED BY E&Y: 2005 2004
---- ----
MFS Municipal High Income Fund $38,420 $35,000
------- -------
TOTAL $38,420 $35,000
For the fiscal years ended January 31, 2005 and 2004, fees billed by Deloitte
and E&Y for audit-related, tax and other services provided to the Funds and for
audit-related, tax and other services provided to MFS and MFS Related Entities
were as follows:
Audit-Related Fees(1) Tax Fees(2) All Other Fees(3)
FEES BILLED BY DELOITTE: 2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
To High Income Fund $0 $0 $11,600 $6,900 $0 $0
To High Yield
Opportunities Fund 0 0 10,100 5,500 0 0
--- --- ------ ----- --- ---
TOTAL FEES BILLED BY DELOITTE
TO ABOVE FUNDS $0 $0 $21,700 $12,400 $0 $0
To MFS and MFS Related
Entities of MFS High
Income Fund* $1,146,170 $356,150 $62,000 $55,000 $602,500 $0
To MFS and MFS Related
Entities of MFS High
Yield Opportunities Fund* 1,146,170 356,150 62,000 55,000 602,500 $0
AGGREGATE FEES FOR NON-AUDIT
SERVICES:
2005 2004
---- ----
To MFS High Income Fund,
MFS and MFS Related
Entities# $1,857,960 $521,245
To MFS High Yield
Opportunities Fund, MFS and
MFS Related Entities# 1,856,460 519,845
Audit-Related Fees(1) Tax Fees(2) All Other Fees(3)
FEES BILLED BY E&Y 2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
To Municipal High
Income Fund $38,420 $35,000 $11,715 $6,650 $471 $0
To MFS and MFS Related
Entities of MFS Municipal
High Income Fund* $0 $0 $0 $20,607 $37,500 $0
AGGREGATE FEES FOR NON-AUDIT
SERVICES:
2005 2004
---- ----
To MFS Municipal High
Income Fund, MFS and MFS
Related Entities# $56,686 $27,257
* This amount reflects the fees billed to MFS and MFS Related Entities for non-audit services relating directly to the
operations and financial reporting of the Funds (portions of which services also related to the operations and
financial reporting of other funds within the MFS Funds complex).
# This amounts reflects the aggregate fees billed by Deloitte or E&Y for non-audit services rendered to the Funds and
for non-audit services rendered to MFS and the MFS Related Entities.
(1) The fees included under "Audit-Related Fees" are fees related to assurance and related services that are reasonably
related to the performance of the audit or review of financial statements, but not reported under "Audit Fees,"
including accounting consultations, agreed-upon procedure reports, attestation reports, comfort letters and internal
control reviews.
(2) The fees included under "Tax Fees" are fees associated with tax compliance, tax advice and tax planning, including
services relating to the filing or amendment of federal, state or local income tax returns, regulated investment
company qualification reviews and tax distribution and analysis.
(3) The fees included under "All Other Fees" are fees for products and services provided by Deloitte or E&Y other than
those reported under "Audit Fees," "Audit-Related Fees" and "Tax Fees."
For periods prior to May 6, 2003, the amounts shown above under "Audit-Related
Fees," "Tax Fees" and "All Other Fees" relate to permitted non-audit services
that would have been subject to pre-approval if the Securities and Exchange
Commission's rules relating to pre-approval of non-audit services had been in
effect.
ITEM 4(e)(1):
Set forth below are the policies and procedures established by the Audit
Committee of the Board of Trustees relating to the pre-approval of audit and
non-audit related services: To the extent required by applicable law,
pre-approval by the Audit Committee of the Board is needed for all audit and
permissible non-audit services rendered to the Funds and all permissible
non-audit services rendered to MFS or MFS Related Entities if the services
relate directly to the operations and financial reporting of the Registrant.
Pre-approval is currently on an engagement-by-engagement basis. In the event
pre-approval of such services is necessary between regular meetings of the Audit
Committee and it is not practical to wait to seek pre-approval at the next
regular meeting of the Audit Committee, pre-approval of such services may be
referred to the Chair of the Audit Committee for approval; provided that the
Chair may not pre-approve any individual engagement for such services exceeding
$50,000 or multiple engagements for such services in the aggregate exceeding
$100,000 between such regular meetings of the Audit Committee. Any engagement
pre-approved by the Chair between regular meetings of the Audit Committee shall
be presented for ratification by the entire Audit Committee at its next
regularly scheduled meeting.
ITEM 4(e)(2):
None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and
All Other Fees paid by the Funds and MFS and MFS Related Entities relating
directly to the operations and financial reporting of the Registrant disclosed
above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C)
of Rule 2-01 of Regulation S-X (which permits audit committee approval after the
start of the engagement with respect to services other than audit review or
attest services, if certain conditions are satisfied).
ITEM 4(f): Not applicable.
ITEM 4(h): The Registrant's Audit Committee has considered whether the provision
by a Registrant's independent registered public accounting firm of non-audit
services to MFS and MFS Related Entities that were not pre-approved by the
Committee (because such services were provided prior to the effectiveness of SEC
rules requiring pre-approval or because such services did not relate directly to
the operations and financial reporting of the Registrant) was compatible with
maintaining the independence of the independent registered public accounting
firm as the Registrant's principal auditors.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to the Registrant.
ITEM 6. SCHEDULE OF INVESTMENTS
A schedule of investments 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. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to the Registrant.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no material changes to the procedures by which shareholders may send
recommendations to the Board for nominees to the Registrant's Board since the
Registrant last provided disclosure as to such procedures in response to the
requirements of Item 7(d)(2)(ii)(G) of Schedule 14A or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Act) 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 second fiscal quarter covered by the report that has materially
affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(1) Any code of ethics, or amendment thereto, 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: Code of Ethics attached hereto.
(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: March 24, 2005
--------------
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: March 24, 2005
--------------
By (Signature and Title)* RICHARD M. HISEY
-----------------------------------------------------
Richard M. Hisey, Treasurer (Principal Financial
Officer and Accounting Officer)
Date: March 24, 2005
--------------
* Print name and title of each signing officer under his or her signature.