[front cover]
[MFS logo] Annual Report
INVESTMENT MANAGEMENT for Year Ended
September 30, 1996
MFS(R) Total Return Fund
[photo of scale with weights on it]
America learns how "We invented the mutual fund", (see page 40)
<PAGE>
Table of Contents
Letter from the Chairman 1
A Discussion with the Fund Manager 3
Performance Summary 6
Fund Facts 8
Portfolio of Investments 9
Financial Statements 24
Notes to Financial Statements 31
Independent Auditors' Report 38
MFS Family of Funds 39
Trustees and Officers 41
[screened box]
Highlights
[bullet] For the year ended September 30, 1996, Class A shares of this balanced
Fund provided a total return of 13.50%, Class B shares 12.49%, and
Class C shares 12.67%. These returns assume the reinvestment of
distributions but exclude the effects of any sales charges.
[bullet] About 57% of the Fund's assets are invested in stocks, preferred
stocks, and convertible bonds, with the remainder in a blend of
corporate bonds and U.S. Treasuries.
[bullet] Two of the Fund's major equity sectors are financial services and
energy, which include companies that we feel have earnings prospects or
asset values equal to or greater than the overall market.
[bullet] Bank stocks have done well, a reflection of their steady rise in
earnings and an increase in merger activity that has made most banks
more valuable.
[end screened box]
<PAGE>
Letter from the Chairman
[photo of A. Keith Brodkin]
Dear Shareholders:
As we enter the last quarter of 1996, the U.S. economy appears to have
settled into a pattern of moderate growth and inflation -- two factors that
we think can be important contributors to a favorable long-term investment
climate. During the first quarter of 1996, real (inflation-adjusted) economic
growth was 2.3% on an annualized basis, followed by a rate of 4.7% in the
second quarter. Real growth in gross domestic product has surpassed our
expectations this year, and we now expect growth for all of 1996 could exceed
2.5%. Although individual consumers appear to be carrying an excessive debt
load, the consumer sector itself, which represents two-thirds of the economy,
continues to be impressive in its support of the automobile and housing
markets. Consumer spending has also been positively impacted by widespread
job growth and, more recently, increasing wages. However, the latest
statistics appear to be showing signs of a slowdown in consumer spending.
This is particularly true when considering overall retail sales, which have
been flat for several months. Furthermore, the economies of Europe and Japan
continue to be in the doldrums, weakening U.S. export markets while subduing
the capital spending plans of American corporations. While economic growth
should continue, we expect it could slacken toward the end of the year.
While we do not anticipate the U.S. stock market to match the
extraordinary performance of 1995, we continue to be positive about the
equity market this year. Although we believe the equity market represents
fair value at current levels, the expected slowdown in corporate earnings
growth and the increases in interest rates earlier in the year have raised
some near-term concerns, as was seen in July's stock market correction.
Further increases in interest rates, and an acceleration of inflation coupled
with an additional slowdown in corporate earnings growth, could have a
negative effect on the stock market in the near term. However, to the extent
that some earnings disappointments are taken as a sign that the economy is
not overheating, this may prove beneficial for the longer-term health of the
equity market. We also believe that many of the technology-driven
productivity gains that U.S. companies have made in recent years will
continue to enhance corporate America's competitiveness and profitability.
While we have some near-term concerns, we remain quite constructive on the
long-term equity market.
1
<PAGE>
Letter from the Chairman - continued
In the bond market, persistent signs of economic weakness led to decreases
in short-term interest rates by the Federal Reserve Board in late 1995 and
early 1996. Should signs of more rapid economic growth and, particularly, of
higher inflation resurface, we would expect the Fed to maintain its
anti-inflationary stance. In the beginning of the year, the bond market
traded in a narrow range as investors shifted between concern for the lack of
a budget resolution in Washington and hope that sluggish economic reports and
low inflation might lead to lower interest rates. Later, the fixed-income
market began reacting to conflicting signals regarding the economy's strength
with more volatile trading patterns marked by an upward bias in interest
rates. Interest rates may move even higher over the coming months, but we
believe the current rise in bond yields is reaching a point where the
fixed-income market is equitably valued.
Finally, as you may notice, this report to shareholders incorporates a
number of changes which we hope you will find informative and useful.
Following a discussion with the Fund Manager, we have added new information
on the Fund's holdings, including a chart illustrating the portfolio's
concentration in the types of investments that meet its criteria. Near the
back of the report, telephone numbers and addresses are listed if you would
like to contact MFS.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/A. Keith Brodkin
A. Keith Brodkin
Chairman and President
October 10, 1996
2
<PAGE>
A Discussion with the Fund Manager
[photo of David M. Calabro]
For the year ended September 30, 1996, Class A shares of this balanced Fund
provided a total return of 13.50%, Class B shares 12.49%, and Class C shares
12.67%. These returns assume the reinvestment of distributions but exclude
the effects of any sales charges.
Q. What do you think were some of the reasons for this performance, David?
A. As a balanced fund, we have a large portion of our assets in both stocks
and bonds. In addition, we own preferred stocks and convertible bonds, which
in many cases provide similar returns to stocks, with less risk. Over the
past 12 months, the portfolio held about 57% of its assets in stocks,
preferred stocks, and convertible bonds. This allocation provided the bulk of
the return for the total portfolio for the past year as equities benefited
from a 20.32% increase as measured by the Standard & Poor's 500 Composite
Index (the S&P 500), a popular, unmanaged index of common stock performance.
The remainder of the portfolio was invested in a blend of corporate and
U.S. Treasury bonds with an overall duration between five and six years. This
fixed-income sector provided positive returns, but the magnitude was far less
than that of the stock portion. For example, the Lehman Brothers Government
Corporate Bond Index, which is representative of our fixed-income sector,
gained 4.50% over the past year. (The Lehman Index is an unmanaged,
market-value weighted index of U.S. Treasury and government-agency
securities, excluding mortgage-backed securities.)
Q. Could you describe the business and economic environment you faced over
the past year, particularly as it relates to the Fund?
A. During the first part of the fiscal year, economic activity declined,
pulling interest rates lower. As the year progressed, the U.S. economy picked
up steam and posted a surprisingly strong 4.7% growth rate in the second
quarter of the calendar year. This pushed interest rates higher and focused
the market on whether or not the Federal Reserve Board would continue the
tightening trend.
This improving economic climate gave investors confidence that the
excellent earnings growth of corporate America had staying power, and stock
prices moved up. However, the high interest rates hurt bond prices, reducing
the overall returns in fixed-income securities.
3
<PAGE>
A Discussion with the Fund Manager - continued
Q. Would you say your current stock/bond allocation is conservative,
aggressive, or somewhere in between? And why are you at that allocation?
A. We would describe our current allocation as slightly conservative. Our
allocation to stocks, preferred stocks, and convertible bonds has been in the
57% to 58% range. We would consider 60% neutral and 65% to 70% aggressive.
We have remained somewhat conservative because we believe equities offer
less value now than they have historically. In particular, the dividend yield
on the S&P 500 is just 2.2%.
Q. We noticed that financial services and energy are two of your major equity
sectors. What is it you like about these sectors more than others?
A. We like to own companies that we feel have earnings prospects equal to or
higher than the overall market (as measured by the S&P 500). We also like to
pay a price (as measured by P/E ratio, dividend yield, price/book) that is
below the market. We have found these characteristics in the financial
services and energy sectors over the past 12 months.
Q. What other sectors do you like?
A. We like the health care sector, where strong earnings and consolidation
are benefiting the outlook for many stocks. We also like the aerospace and
defense area, which we think will benefit from a cyclical increase in the
number of aircraft being built over the next three years as well as strong
free cash flow generation.
Q. Can you tell us about some sectors you might be avoiding, and why?
A. We have been avoiding the technology sector, where many of the stocks have
high growth prospects but also high valuations, which means they often carry
greater risk. We are also underweighted in consumer companies because many of
them are still unable to raise prices. The U.S. consumer continues to demand
more value at lower prices.
Q. Can you name some stocks or sectors that performed as well as or better
than expected and tell us why you think they did well?
A. Bank stocks have done particularly well because earnings have risen
steadily and an increase in merger activity has made nearly all banks more
valuable. Drug company stocks and aerospace and defense stocks have also done
well for very similar reasons.
4
<PAGE>
A Discussion with the Fund Manager - continued
Q. Now, how about some stocks or sectors that did not perform as well as you
expected?
A. The telephone stocks have been a big disappointment. While we still
believe the telecommunications sector is a dynamic growth area, deregulation
activity and continued long-distance pricing battles for long-distance
service have hurt most of the major participants.
Q. What can you tell us about your bond position, in terms of types of bonds
in the portfolio and their average duration, or interest rate sensitivity?
A. About 65% of our bond portfolio is corporate bonds and 35% is Treasuries
and mortgages. The average duration is a little more than five years.
Q. As you look ahead, what changes do you see in the overall market or
economic environment, particularly as it relates to your Fund, and how are
you positioning the Fund to try and take advantage of those changes?
A. We see a modest growth rate in the U.S. economy over the next 12 months.
However, over the near term, we believe the Federal Reserve will keep a close
watch on wage inflation and general economic activity, and may raise interest
rates should the economic numbers suggest a stronger-than-expected economy.
Given where equity valuations are today, we feel comfortable with our
asset allocation. However, should the stock market experience a meaningful
correction, we would be looking to buy stocks.
/s/David M. Calabro
David M. Calabro
(On behalf of the MFS Total Return Team)
[screened box]
Fund Managers' Profiles
David M. Calabro, Vice President; Geoffrey L. Kurinsky, Senior Vice President;
Judith N. Lamb, Vice President; Lisa B. Nurme, Vice President; and Maura A.
Shaughnessy, Vice President, are the Fund's portfolio managers. Mr. Calabro is
the head of this portfolio management team and a manager of the common stock
portion of the Fund's portfolio. Mr. Calabro has been employed by MFS since
1992. Mr. Kurinsky, the manager of the Fund's fixed-income securities, has been
employed by MFS since 1987. Ms. Lamb, the manager of the Fund's convertible
securities, has been employed by MFS since 1992. Ms. Nurme, a manager of the
common stock portion of the Fund's portfolio, has been employed by MFS since
1987. Ms. Shaughnessy, also a manager of the common stock portion of the Fund's
portfolio, has been employed by MFS since 1991.
[end screened box]
5
<PAGE>
Performance Summary
The information below and on the following page illustrates the historical
performance of MFS Total Return Fund Class A shares in comparison to various
market indicators. Class A share results reflect the deduction of the 4.75%
maximum sales charge; benchmark comparisons are unmanaged and do not reflect
any fees or expenses. You cannot invest in an index. All results reflect the
reinvestment of all dividends and capital gains.
Class B shares were offered effective August 23, 1993. Information on Class B
share performance appears on the next page. Class C shares were offered
effective August 1, 1994. Information on Class C share performance appears on
the next page.
Growth of a Hypothetical $10,000 Investment
(For the 5-Year Period Ended September 30, 1996)
[typeset representation of line chart]
MFS Total Consumer Lehman
Return Fund Price Brothers S&P 500
Class A Index--U.S. Gov't/Corp. Composite
9/91 9525 10000 10000 10000
9/92 10692 10299 11272 11099
9/93 12651 10576 12199 12542
9/94 12516 10889 11997 13000
9/95 14813 11166 13351 16850
9/96 16813 11486 14036 20260
[end line chart]
Growth of a Hypothetical $10,000 Investment
(For the 10-Year Period Ended September 30, 1996)
[typeset representation of line chart]
MFS Total Lehman Consumer
Return Fund S&P 500 Brothers Price
Class A Composite Gov't/Corp. Index--U.S.
9/86 9522 10000 10000 10000
9/87 12128 14335 9962 10430
9/88 11693 12555 11234 10866
9/89 14497 16684 12506 11337
9/90 13686 15139 13350 12036
9/91 16732 19849 15467 12444
9/92 18783 22030 17514 12815
9/93 22224 24893 19519 13160
9/94 21987 25803 18710 13550
9/95 26022 33445 21395 13895
9/96 29536 40213 22359 14293
[end line chart]
6
<PAGE>
Performance Summary - continued
<TABLE>
<CAPTION>
Average Annual Total Returns 1 Year 3 Years 5 Years 10 Years
- ---------------------------------------- --------- --------- --------------------
<S> <C> <C> <C> <C>
MFS Total Return Fund (Class A)
at net asset value +13.50% +9.94% +12.03% +11.98%
- ---------------------------------------- --------- --------- --------------------
MFS Total Return Fund (Class A)
including 4.75% sales charge +8.12% +8.18% +10.95% +11.44%
- ---------------------------------------- --------- --------- --------------------
MFS Total Return Fund (Class B)
without CDSC +12.49% +9.02% +11.45% +11.69%
- ---------------------------------------- --------- --------- --------------------
MFS Total Return Fund (Class B)
with CDSC +8.49% +8.17% +11.19% +11.69%
- ---------------------------------------- --------- --------- --------------------
MFS Total Return Fund (Class C)
without CDSC +12.67% +9.40% +11.70% +11.82%
- ---------------------------------------- --------- --------- --------------------
MFS Total Return Fund (Class C)
with CDSC +11.67% +9.40% +11.70% +11.82%
- ---------------------------------------- --------- --------- --------------------
Average balanced fund** +12.46% +10.11% +10.90% +11.07%
- ---------------------------------------- --------- --------- --------------------
Lehman Brothers Government Corporate
Bond Index +4.50% +4.63% +7.65% +8.38%
- ---------------------------------------- --------- --------- --------------------
Standard & Poor's 500 Composite Index +20.32% +17.34% +15.17% +14.93%
- ---------------------------------------- --------- --------- --------------------
Consumer Price Index* +2.85% +2.79% +2.81% +3.64%
- ---------------------------------------- --------- --------- --------------------
</TABLE>
*The Consumer Price Index is a popular measure of change in prices.
**Source: Lipper Analytical Services Inc.
Class A SEC results include the maximum 4.75% sales charge. Class B SEC
results reflect the applicable contingent deferred sales charge (CDSC), which
declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. See the
prospectus for details. Class C shares have no initial sales charge, but
along with Class B shares, have higher annual fees and expenses than Class A
shares. Class C share purchases made on or after April 1, 1996 will be
subject to a 1% CDSC if redeemed within 12 months of purchase.
Class B and Class C share performance includes the performance of the Fund's
Class A shares for periods prior to the commencement of offering of Class B
shares on August 23, 1993 and of Class C shares on August 1, 1994. Sales
charges and operating expenses for Class A, Class B, and Class C shares
differ. The Class A share performance, which is included within the Class B
and Class C share SEC performance, has been adjusted to reflect the CDSC
generally applicable to Class B and Class C shares rather than the initial
sales charge generally applicable to Class A shares. Class B and Class C
share performance has not been adjusted, however, to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares.
7
<PAGE>
Performance Summary - continued
All results are historical and therefore, are not an indication of future
results. The principal value and income return of an investment in a mutual
fund will vary with changes in market conditions, and shares, when redeemed,
may be worth more or less than their original cost.
[screened box]
Tax Form Summary
In January 1997, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1996.
For the year ended September 30, 1996, the amount of distributions from income
eligible for the 70% dividends-received deduction for corporations came to
32.8%.
Federal Income Tax Information on Distributions
For the year ended September 30, 1996, distributions from long-term capital
gains were $121,623,591.
[end screened box]
[screen box]
Fund Facts
Strategy: The Fund's primary objective is to provide
above-average current income consistent with prudent
employment of capital.
Commencement of
investment operations: October 6, 1970
Size: $3.9 billion as of September 30, 1996
[end screened box]
8
<PAGE>
Portfolio Concentration
Top Ten Equity Holdings
<TABLE>
<S> <C>
United Technologies General Electric Co.
Aerospace, defense, and building equipment Diversified manufacturing and services
company conglomerate
Royal Dutch Petroleum National City Bankshares
Oil exploration and production company Central U.S. Bank
Chase Manhattan Corp. Eastman Kodak Company
Money center bank Photographic equipment and supplies
Philip Morris Companies, Inc. SmithKline Beecham
Tobacco, food, and beverage conglomerate Pharmaceutical products company
British Petroleum CSX Corp.
Oil exploration and production company Railroad, shipping, and distribution company
</TABLE>
Largest Sectors
[typeset representation of pie chart]
Other 31.5%
Financial Services 20.3%
Energy 17.0%
Industrial Goods
and Services 12.3%
Utilities and
Communications 10.8%
Health Care 8.1%
[end pie chart]
9
<PAGE>
Portfolio of Investments - September 30, 1996
<TABLE>
<CAPTION>
Non-Convertible Bonds - 38.6%
- ------------------------------------------------------------------------------------------ --------------- ----------------
Principal Amount
Issuer (000 Omitted) Value
----------------------------------------------------------------------------------------- ---------------- ---------------
<S> <C> <C>
Banks and Credit Companies - 1.0%
Advanta Corp., 7.47s, 2001 $ 9,395 $ 9,477,206
Capital One Bank, 6.875s, 2000 17,765 17,652,903
Export-Import Bank of Korea, 6.375s, 2006 3,000 2,775,000
First National Bank of Boston, 7.375s, 2006 2,500 2,503,125
Union Bank of Switzerland, 7.25s, 2006 5,000 5,012,500
---------------
$ 37,420,734
----------------------------------------------------------------------------------------- ---------------- ---------------
Corporate Asset Backed - 2.1%
Beneficial Mortgage Corp. 96-2, 5.585s, 2026 $25,000 $ 25,000,000
Chevy Chase Master Credit Card Trust, 96-A, 5.619s, 2001 32,500 32,500,000
Continental Air, 96-2, 10.22s, 2014## 5,875 6,792,969
First Union Corp., 5.482s, 2003 12,500 12,515,625
Merrill Lynch Mortgage Investors, Inc., 9.7s, 2010 253 257,845
Merrill Lynch Mortgage Investors, Inc., 91-C, "B", 8.9s, 2011 1,953 1,965,792
Merrill Lynch Mortgage Investors, Inc., 9s, 2011 702 720,946
Merrill Lynch Mortgage Investors, Inc., 9.25s, 2011 242 248,984
Merrill Lynch Mortgage Investors, Inc., 94-M1, 8.073s, 2022+ 4,000 2,985,000
---------------
$ 82,987,161
----------------------------------------------------------------------------------------- ---------------- ---------------
Financial Institutions - 1.7%
Alex Brown, Inc., 7.625s, 2005 $ 4,215 $ 4,225,158
Auburn Hills Trust, 12s, 2020 7,795 11,393,250
Bankers Trust of New York Corp., 7.375s, 2008 12,913 12,734,543
Contifinancial Corp., 8.375s, 2003 3,800 3,790,500
Fairfax Financial Holdings, 8.3s, 2026 5,225 5,263,665
HubCo., Inc., 8.2s, 2006## 1,965 1,994,829
Lehman Brothers, Inc., 7.5s, 2026 15,600 15,799,056
Salton Sea Funding Corp., 7.37s, 2005 5,250 5,130,405
Salton Sea Funding Corp., 7.84s, 2010 5,250 5,155,710
Salton Sea Funding Corp., 8.3s, 2011 2,500 2,531,800
---------------
$ 68,018,916
----------------------------------------------------------------------------------------- ---------------- ---------------
Foreign - U.S. Dollar Denominated - 1.0%
Domtar, Inc., 9.5s, 2016 $ 2,700 $ 2,821,500
Financiera Energetica Nacional S.A., 6.625s, 1996## 5,360 5,360,000
Financiera Energetica Nacional S.A., 9.375s, 2006## 1,360 1,366,800
Hidroelectrica Alicura, 8.375s, 1999## 6,244 6,009,850
Naples, Italy, 7.52s, 2006 4,725 4,780,755
Ocensa, 9.35s, 2005## 3,500 3,468,637
Province of Quebec, Canada, 6.5s, 2006 3,125 2,948,466
Province of Saskatchewan, Canada, 9.375s, 2020 500 593,810
Republic of Argentina, 9.25s, 2001 3,000 2,943,750
Republic of Colombia, 8.75s, 1999 3,640 3,744,650
Republic of Colombia, 8.7s, 2016 7,610 6,991,688
---------------
$ 41,029,906
----------------------------------------------------------------------------------------- ---------------- ---------------
Industrials - 5.1%
Building - 0.2%
Owens Corning Fiberglass Corp., 8.875s, 2002 $ 5,390 $ 5,755,819
Owens Corning Fiberglass Corp., 9.9s, 2015## 2,500 2,725,000
---------------
$ 8,480,819
----------------------------------------------------------------------------------------- ---------------- ---------------
10
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Principal Amount
Issuer (000 Omitted) Value
----------------------------------------------------------------------------------------- ---------------- ---------------
Industrials - continued
Consumer Goods and Services - 0.3%
Fingerhut Cos., 7.375s, 1999## $ 3,000 $ 2,996,250
Philip Morris Cos., Inc., 7.25s, 2001 2,150 2,158,063
Philip Morris Cos., Inc., 7.65s, 2008 2,970 2,968,307
Tupperware Financial, 7.25s, 2006 3,500 3,494,330
---------------
$ 11,616,950
----------------------------------------------------------------------------------------- ---------------- ---------------
Entertainment - 1.1%
Paramount Communications, 5.875s, 2000 $ 3,558 $ 3,395,969
Time Warner, Inc., 7.45s, 1998 12,460 12,594,443
Time Warner, Inc., 7.95s, 2000 6,850 7,007,619
Time Warner, Inc., 8.375s, 2023 21,540 21,261,057
---------------
$ 44,259,088
----------------------------------------------------------------------------------------- ---------------- ---------------
Food and Beverage Products - 0.9%
Borden, Inc., 0s, 1997## $10,000 $ 9,564,900
Coca-Cola Enterprises, 7s, 2026 4,750 4,740,785
Nabisco, Inc., 7.55s, 2015 9,160 8,688,535
RJR Nabisco, Inc., 8.75s, 2005 6,800 6,673,248
RJR Nabisco, Inc., 8.75s, 2007 6,075 5,907,148
---------------
$ 35,574,616
----------------------------------------------------------------------------------------- ---------------- ---------------
Forest and Paper Products - 0.6%
Canadian Pacific Forest, 9.25s, 2002 $11,840 $ 12,541,638
Georgia Pacific Corp., 9.875s, 2021 8,215 8,892,655
Stone Container Corp., 9.875s, 2001 1,875 1,884,375
---------------
$ 23,318,668
----------------------------------------------------------------------------------------- ---------------- ---------------
Medical and Health Products - 0.1%
Fisher Scientific, Inc., 7.125s, 2005 $ 4,595 $ 4,391,809
----------------------------------------------------------------------------------------- ---------------- ---------------
Medical and Health Technology and Services - 0.1%
Tenet Healthcare, 8.625s, 2003 $ 2,835 $ 2,948,400
----------------------------------------------------------------------------------------- ---------------- ---------------
Oils - 0.8%
Mitchell Energy & Development, 5.1s, 1997 $11,350 $ 11,305,281
Mitchell Energy & Development, 9.25s, 2002 2,375 2,491,779
Oryx Energy Co., 10s, 2001 3,800 4,127,142
Oryx Energy Co., 8s, 2003 3,650 3,638,576
Oryx Energy Co., 8.375s, 2004 8,390 8,484,388
---------------
$ 30,047,166
----------------------------------------------------------------------------------------- ---------------- ---------------
Printing and Publishing - 0.3%
News America Holdings, Inc., 10.125s, 2012 $10,000 $ 11,239,600
----------------------------------------------------------------------------------------- ---------------- ---------------
Restaurants and Lodging - 0.1%
RHG Finance Corp., 8.875s, 2005 $ 4,125 $ 4,284,845
----------------------------------------------------------------------------------------- ---------------- ---------------
Special Products and Services - 0.4%
Loewen Group International, Inc., 8s, 2001## $ 5,540 $ 5,533,075
Mark IV Industries, Inc., 7.75s, 2006 8,800 8,481,000
---------------
$ 14,014,075
----------------------------------------------------------------------------------------- ---------------- ---------------
Steel - 0.1%
USX-Marathon Group, 9.8s, 2001 $ 5,000 $ 5,520,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Stores - 0.1%
Price/Costco, Inc., 7.125s, 2005 $ 4,585 $ 4,465,882
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Industrials $ 200,161,918
--------------------------------------------------------------------------------------- ---------------- ---------------
11
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Principal Amount
Issuer (000 Omitted) Value
----------------------------------------------------------------------------------------- ---------------- ---------------
Insurance - 1.8%
American Life Holdings Co., 11.25s, 2004 $ 4,880 $ 5,477,800
Liberty Mutual Insurance Co., 8.2s, 2007## 20,120 21,048,739
Manufacturers' Life Insurance, 7.875s, 2005## 12,770 13,117,983
Massachusetts Mutual Life, 7.625s, 2023## 2,500 2,429,625
Metropolitan Life Insurance, 7.7s, 2015## 4,750 4,597,786
Nationwide Mutual Insurance, 7.5s, 2024## 10,925 9,966,004
New York Life Insurance Co., 7.5s, 2023 3,600 3,379,176
PennCorp Financial Group, Inc., 9.25s, 2003 1,500 1,537,500
Phoenix Re Corp., 9.75s, 2003 1,000 1,055,000
Travelers' Group, Inc., 7.875s, 2025 8,685 8,749,964
---------------
$ 71,359,577
----------------------------------------------------------------------------------------- ---------------- ---------------
Real Estate - 0.2%
Taubman Realty Group, 8s, 2001 $ 7,580 $ 7,876,152
--------------------------------------------------------------------------------------- ---------------- ---------------
Telecommunications - 1.0%
360 Communications Co., 7.5s, 2006 $ 2,293 $ 2,228,957
TCI Communications, Inc., Floating Rate, 2003 8,250 8,250,000
Tele-Communications, Inc., 7.375s, 2000 2,500 2,500,900
Tele-Communications, Inc., 7.38s, 2001 5,250 5,245,065
Tele-Communications, Inc., 10.125s, 2022 6,000 6,511,980
Tele-Communications, Inc., 9.25s, 2023 12,047 11,724,261
Viacom, Inc., 7.625s, 2016 3,540 3,130,280
---------------
$ 39,591,443
----------------------------------------------------------------------------------------- ---------------- ---------------
Transportation - 1.4%
AMR Corp., 9.75s, 2021 $ 3,755 $ 4,409,346
Continental Airlines, 9.5s, 2013 3,970 4,373,431
Delta Air Lines, Inc., 9.75s, 2021 2,420 2,793,914
Delta Air Lines, Inc., 10.375s, 2022 9,450 11,509,911
Jet Equipment Trust, 9.41s, 2010## 3,365 3,810,290
Jet Equipment Trust, 11.44s, 2014## 4,700 5,268,747
Jet Equipment Trust, 8.64s, 2015## 3,339 3,557,974
Jet Equipment Trust, 10.69s, 2015## 1,250 1,498,900
Qantas Airways, Ltd., 7.5s, 2003## 5,690 5,693,471
US Air, Inc., 6.76s, 2008 3,000 2,868,750
United Airlines, 9.125s, 2012 2,500 2,692,500
United Airlines, 96, 7.27s, 2013 5,000 4,758,750
---------------
$ 53,235,984
----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Government Agencies - 2.5%
Federal Home Loan Mortgage Corporation - 0.3%
FHLMC, 8.5s, 2025 $10,613 $ 10,897,774
----------------------------------------------------------------------------------------- ---------------- ---------------
Federal National Mortgage Association - 2.2%
FNMA, 7s, 2026 $15,942 $ 15,379,309
FNMA, 7.5s, 2010 - 2011 50,239 50,537,150
FNMA, 8.5s, 2003 - 2010 20,917 21,677,978
FNMA, 9s, 2001 - 2006 1,394 1,448,820
---------------
$ 89,043,257
----------------------------------------------------------------------------------------- ---------------- ---------------
Total U.S. Government Agencies $ 99,941,031
--------------------------------------------------------------------------------------- ---------------- ---------------
12
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Principal Amount
Issuer (000 Omitted) Value
----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Government Guaranteed - 16.5%
Small Business Administration
SBA, 8.8s, 2011 $ 519 $ 556,814
----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Treasury Obligations - 16.5%
U.S. Treasury Notes, 8.5s, 1997 $32,750 $ 33,317,885
U.S. Treasury Notes, 6s, 1998 2,000 1,996,406
U.S. Treasury Notes, 7.25s, 1998 44,000 44,715,000
U.S. Treasury Notes, 8.875s, 1998 38,900 40,972,592
U.S. Treasury Notes, 6s, 1999 1,165 1,156,810
U.S. Treasury Notes, 9.125s, 1999 77,010 82,292,115
U.S. Treasury Notes, 6.875s, 2000 1,000 1,015,780
U.S. Treasury Notes, 8.5s, 2000 71,980 76,591,039
U.S. Treasury Notes, 6.25s, 2001 38,000 37,697,140
U.S. Treasury Notes, 6.5s, 2001 26,470 26,450,700
U.S. Treasury Notes, 6.625s, 2001 41,000 41,249,690
U.S. Treasury Notes, 7s, 2006 71,833 73,325,690
U.S. Treasury Bonds, 12s, 2005 18,675 25,065,398
U.S. Treasury Bonds, 12s, 2013 35,070 49,317,188
U.S. Treasury Bonds, 11.25s, 2015 9,200 13,212,028
U.S. Treasury Bonds, 6s, 2026 63,787 56,052,826
U.S. Treasury Bonds, 6.75s, 2026 46,520 45,465,857
---------------
$ 649,894,144
----------------------------------------------------------------------------------------- ---------------- ---------------
Total U.S. Government Guaranteed $ 650,450,958
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Electric - 3.3%
Arkansas Power & Light Co., 8.75s, 2026 $ 2,150 $ 2,154,687
Central Maine Power Co., 7.98s, 1996 5,000 5,000,350
Central Maine Power Co., 7.5s, 1997 1,000 1,004,970
Central Maine Power Co., 7.45s, 1999 2,500 2,470,275
Cleveland Electric Illumination, 8.68s, 2001 3,500 3,563,980
DQU II Funding Corp., 8.7s, 2016 6,475 6,676,632
Edelnor S.A., 7.75s, 2006## 1,915 1,905,119
El Paso Electric Co., 8.25s, 2003 7,000 6,930,000
First PV Funding Corp., 10.3s, 2014 7,810 8,288,363
First PV Funding Corp., 10.15s, 2016 8,993 9,532,580
Long Island Lighting Co., 8.75s, 1997 8,000 8,071,120
Long Island Lighting Co., 7.625s, 1998 8,150 8,162,470
Long Island Lighting Co., 7.125s, 2005 4,000 3,553,640
Long Island Lighting Co., 8.9s, 2019 10,575 9,894,076
Long Island Lighting Co., 9.75s, 2021 7,000 6,980,820
Long Island Lighting Co., 9.625s, 2024 16,390 16,333,455
Louisiana Power & Light Co., 10.67s, 2017 3,065 3,279,866
Louisiana Power & Light Co., 8.75s, 2026 1,075 1,053,500
Midland Cogeneration Venture Corp., 10.33s, 2002 3,098 3,253,041
Midland Funding Corp. II, "A", 11.75s, 2005 2,220 2,391,895
Midland Funding Corp., "B", 13.25s, 2006 3,970 4,522,306
Niagara Mohawk Power Co., 8s, 2004 3,835 3,587,259
Pacificorp Holdings, 7.2s, 2006## 8,320 8,093,779
Texas & New Mexico Power Co., 12.5s, 1999 2,848 3,104,548
---------------
$ 129,808,731
----------------------------------------------------------------------------------------- ---------------- ---------------
13
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Principal Amount
Issuer (000 Omitted) Value
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Gas - 1.0%
California Energy Co., 0s, 2004 $ 5,005 $ 5,080,075
Coastal Corp., 10.25s, 2004 6,000 6,977,280
Coastal Corp., 7.75s, 2035 11,390 10,948,638
Gulf Canada Resources Ltd., 8.35s, 2006 4,420 4,418,895
Louis Dreyfus Natural Gas, 9.25s, 2004 2,925 3,012,750
NGC Corp., 6.75s, 2005 2,000 1,909,580
Southern Union Co., 7.6s, 2024 5,165 4,905,201
Texas Eastern Corp., 9s, 1997 1,000 1,008,750
---------------
$ 38,261,169
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Non-Convertible Bonds (Identified Cost, $1,530,985,099) $1,520,143,680
----------------------------------------------------------------------------------------- ---------------- ---------------
Convertible Bonds - 2.5%
----------------------------------------------------------------------------------------- ---------------- ---------------
Aerospace - 0.1%
Hexcel Corp., 7s, 2003 $ 1,500 $ 2,113,125
----------------------------------------------------------------------------------------- ---------------- ---------------
Automotive
Pep Boys--Manny, Moe, Jack, 0s, 2011 $ 1,000 $ 563,750
----------------------------------------------------------------------------------------- ---------------- ---------------
Building
Continental Homes, 6.875s, 2002 $ 500 $ 490,625
----------------------------------------------------------------------------------------- ---------------- ---------------
Business Services
CS First Boston, Inc., 3s, 2001## $ 500 $ 505,000
Protection One Alarm, 6.75s, 2003 500 486,875
---------------
$ 991,875
----------------------------------------------------------------------------------------- ---------------- ---------------
Chemicals - 0.2%
Sandoz, 2s, 2002## $ 1,450 $ 1,609,500
Valhi, Inc., 0s, 2007 16,719 7,335,461
---------------
$ 8,944,961
----------------------------------------------------------------------------------------- ---------------- ---------------
Computer Software - Personal Computers
Synoptics Communications, 5.25s, 2003## $ 750 $ 712,500
----------------------------------------------------------------------------------------- ---------------- ---------------
Computer Software - Systems - 0.1%
3Com Corp., 10.25s, 2001## $ 250 $ 475,314
S3, Inc., 5.75s, 2003## 1,000 1,233,750
Safeguard Scientific, 6s, 2006## 1,500 1,991,250
SCI System, Inc., 5s, 2006## 750 988,125
Solectron Corp., 6s, 2006## 1,000 1,017,500
---------------
$ 5,705,939
----------------------------------------------------------------------------------------- ---------------- ---------------
Conglomerates - 0.1%
Cooper Industries, 7.05s, 2015 $ 2,000 $ 2,192,500
----------------------------------------------------------------------------------------- ---------------- ---------------
Consumer Goods and Services - 0.1%
Coleman Worldwide Corp., 0s, 2013 $ 3,000 $ 873,750
Fieldcrest Cannon Industries, 6s, 2012 1,860 1,339,200
---------------
$ 2,212,950
----------------------------------------------------------------------------------------- ---------------- ---------------
Electrical Equipment
National Semiconductor, 6.5s, 2002## $ 1,500 $ 1,318,125
----------------------------------------------------------------------------------------- ---------------- ---------------
Electronics - 0.1%
ADT Operations, Inc., 0s, 2010 $ 2,000 $ 1,120,000
Dovatron International, Inc., 6s, 2002## 500 443,125
Thermo-Electron, 4.25s, 2003## 1,250 1,523,439
Xilinx, Inc., 5.25s, 2002## 500 492,500
---------------
$ 3,579,064
--------------------------------------------------------------------------------------- ---------------- ---------------
14
<PAGE>
Portfolio of Investments - continued
Convertible Bonds - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Principal Amount
Issuer (000 Omitted) Value
----------------------------------------------------------------------------------------- ---------------- ---------------
Financial Institutions
Cityscape, 6s, 2006## $ 1,000 $ 1,080,000
RAC Financial Group, 7.25s, 2003## 500 677,500
---------------
$ 1,757,500
----------------------------------------------------------------------------------------- ---------------- ---------------
Food and Beverage Products - 0.1%
Grand Metropolitan Public Ltd., 6.5s, 2000## $ 2,000 $ 2,317,500
----------------------------------------------------------------------------------------- ---------------- ---------------
Insurance - 0.3%
Equitable Cos., Inc., 6.125s, 2024 $ 8,000 $ 9,310,000
Italy Rep, 5s, 2001 1,000 1,015,000
---------------
$ 10,325,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Medical and Health Products - 0.3%
Alza Corp., 0s, 2014 $ 7,000 $ 2,913,750
North American Vaccine, 6.5s, 2003## 2,250 2,688,750
Roche Holdings, Inc., 0s, 2008## 5,000 3,750,000
Roche Holdings, Inc., 0s, 2010 4,230 1,829,475
Ventritex, Inc., 5.75s, 2001 1,300 1,517,750
---------------
$ 12,699,725
----------------------------------------------------------------------------------------- ---------------- ---------------
Medical and Health Technology and Services - 0.1%
National Health Investors, 7.75s, 2001 $ 500 $ 526,875
Omega Healthcare Investors, 8.5s, 2001 500 524,375
Quintiles Transnational, 4.25s, 2000## 1,250 1,351,562
---------------
$ 2,402,812
----------------------------------------------------------------------------------------- ---------------- ---------------
Oils - 0.1%
Pogo Producing, 5.5s, 2006## $ 2,000 $ 2,060,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Oil Services
Nabors Industries, 5s, 2006 $ 1,350 $ 1,358,438
----------------------------------------------------------------------------------------- ---------------- ---------------
Pollution Control - 0.2%
Sanifill, Inc., 5s, 2006 $ 1,250 $ 1,612,500
Thermo Terratech, 4.625s, 2003## 500 480,000
U.S. Filter, 6s, 2005## 2,000 3,852,500
United Waste Systems, Inc., 4.5s, 2001## 2,000 2,385,000
---------------
$ 8,330,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Real Estate Investment Trusts - 0.1%
Liberty Property Trust, 8s, 2001 $ 3,930 $ 4,259,138
----------------------------------------------------------------------------------------- ---------------- ---------------
Restaurants and Lodging - 0.1%
HFS, Inc., 4.75s, 2003 $ 250 $ 288,125
Hilton Hotels Corp., 5s, 2006 750 802,500
Marriott, Inc., 0s, 2011## 2,000 1,120,000
---------------
$ 2,210,625
----------------------------------------------------------------------------------------- ---------------- ---------------
Special Products and Services - 0.2%
Cemex S.A., 4.25s, 1997## $ 5,500 $ 5,273,125
Checkpoint Systems, 5.25s, 2005 500 730,625
---------------
$ 6,003,750
----------------------------------------------------------------------------------------- ---------------- ---------------
Stores - 0.2%
Federated Department Stores, 5s, 2003 $ 1,000 $ 1,123,750
Home Depot, Inc., 3.25s, 2001 400 406,000
Men's Wearhouse, Inc., 5.25s, 2003 750 736,875
Office Depot, Inc., 0s, 2008 3,000 1,852,500
Saks Holdings, Inc., 5.5s, 2006 2,245 2,365,668
Staples, Inc., 4.5s, 2000## 500 581,875
15
<PAGE>
Portfolio of Investments - continued
Convertible Bonds - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Principal Amount
Issuer (000 Omitted) Value
----------------------------------------------------------------------------------------- ---------------- ---------------
Stores - continued
U.S. Office Products Co., 5.5s, 2001 $ 500 $ 620,000
U.S. Office Products Co., 5.5s, 2003 1,500 1,395,000
---------------
$ 9,081,668
----------------------------------------------------------------------------------------- ---------------- ---------------
Telecommunications - 0.1%
Broadband Technologies, 5s, 2001## $ 250 $ 199,063
Jacor Communications, 0s, 2011 2,000 1,025,000
Tele-Communications, 4.5s, 2006 2,420 1,963,225
Turner Broadcasting Systems, Inc., 0s, 2007## 3,000 1,443,750
---------------
$ 4,631,038
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Convertible Bonds (Identified Cost, $84,494,454) $ 96,262,608
----------------------------------------------------------------------------------------- ---------------- ---------------
Preferred Stocks - 0.3%
---------------------------------------------------------------------------------------------------------------------------
Shares
----------------------------------------------------------------------------------------- ---------------- ---------------
Insurance - 0.1%
Aetna Capital LLC. 9.5%, MIPS 171,400 $ 4,649,225
----------------------------------------------------------------------------------------- ---------------- ---------------
Metals and Minerals
Conagra Capital, "A", 9% 35,900 $ 933,400
----------------------------------------------------------------------------------------- ---------------- ---------------
Steel - 0.2%
USX Capital LLC, 8.75% 277,100 $ 6,892,863
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Preferred Stocks (Identified Cost, $11,934,330) $ 12,475,488
----------------------------------------------------------------------------------------- ---------------- ---------------
Common Stocks - 50.9%
---------------------------------------------------------------------------------------------------------------------------
U.S. Stocks - 49.3%
Aerospace - 2.9%
Allied Signal, Inc. 265,000 $ 17,456,875
General Dynamics Corp. 81,000 5,578,875
Lockheed Martin Corp. 126,000 11,355,750
McDonnell Douglas Co. 160,000 8,400,000
Raytheon Co. 353,500 19,663,438
United Technologies Corp. 425,324 51,092,046
---------------
$ 113,546,984
----------------------------------------------------------------------------------------- ---------------- ---------------
Agricultural Products - 0.3%
AGCO Corp. 300,000 $ 7,650,000
Case Corp. 100,000 4,875,000
---------------
$ 12,525,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Airlines - 0.1%
America West Airlines, "B"* 424,800 $ 4,991,400
----------------------------------------------------------------------------------------- ---------------- ---------------
Apparel and Textiles - 0.4%
Springs Industries, Inc. 45,000 $ 2,002,500
VF Corp. 202,700 12,187,337
---------------
$ 14,189,837
----------------------------------------------------------------------------------------- ---------------- ---------------
Automotive - 1.7%
Dana Corp. 200,000 $ 6,050,000
Ford Motor Co. 530,677 16,583,656
General Motors Corp. 186,669 8,960,113
Goodrich (B.F.) Co. 566,000 25,540,750
Goodyear Tire & Rubber Co. 76,600 3,533,175
Volvo Aktiebolaget, "B", ADR 210,000 4,515,000
---------------
$ 65,182,694
----------------------------------------------------------------------------------------- ---------------- ---------------
16
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Stocks - continued
Business Machines - 0.7%
Digital Equipment Corp.* 430,000 $ 15,372,500
International Business Machines Corp. 45,000 5,602,500
Texas Instruments, Inc. 34,500 1,901,813
Xerox Corp. 105,000 5,630,625
---------------
$ 28,507,438
----------------------------------------------------------------------------------------- ---------------- ---------------
Business Services - 0.1%
Storage Trust Realty 250,000 $ 5,437,500
----------------------------------------------------------------------------------------- ---------------- ---------------
Cellular Telephones - 0.1%
Telephone & Data Systems, Inc. 90,860 $ 3,657,115
----------------------------------------------------------------------------------------- ---------------- ---------------
Chemicals - 2.3%
Air Products & Chemicals, Inc. 86,600 $ 5,044,450
Betzdearborn, Inc. 70,000 3,675,000
Dexter Corp. 270,000 8,066,250
Dow Chemical Co. 148,900 11,949,225
du Pont (E.I.) de Nemours, Inc. 235,000 20,738,750
PPG Industries, Inc. 80,000 4,350,000
Praxair, Inc. 380,100 16,344,300
Rohm & Haas Co. 184,000 12,052,000
Witco Corp. 299,010 9,829,954
---------------
$ 92,049,929
----------------------------------------------------------------------------------------- ---------------- ---------------
Conglomerates - 0.2%
Eastern Enterprises 215,000 $ 8,116,250
----------------------------------------------------------------------------------------- ---------------- ---------------
Construction Services - 0.2%
Champion International Corp. 125,000 $ 5,734,375
----------------------------------------------------------------------------------------- ---------------- ---------------
Consumer Goods and Services - 2.7%
American Brands, Inc. 222,200 $ 9,387,950
Colgate-Palmolive Co. 156,300 13,578,563
Gillette Co. 85,600 6,173,900
Olin Corp. 149,200 12,532,800
Philip Morris Cos., Inc. 455,400 40,872,150
Rubbermaid, Inc. 171,300 4,196,850
Sherwin Williams Co. 152,400 7,067,550
UST, Inc. 405,000 11,998,125
---------------
$ 105,807,888
----------------------------------------------------------------------------------------- ---------------- ---------------
Electrical Equipment - 2.0%
Alcatel Alsthom Compagnie, ADR 92,480 $ 1,560,600
Cooper Industries 150,000 6,487,500
Emerson Electric Co. 83,000 7,480,375
General Electric Co. 442,372 40,255,852
Honeywell, Inc. 387,000 24,429,375
---------------
$ 80,213,702
----------------------------------------------------------------------------------------- ---------------- ---------------
Electronics
Analog Devices, Inc.* 59,900 $ 1,624,788
----------------------------------------------------------------------------------------- ---------------- ---------------
Financial Institutions - 6.7%
Advanta Corp., Class "B" 91,300 $ 3,903,075
American Express Co. 290,000 13,412,500
Associates First Capital, "A" 61,800 2,533,800
Bank of Boston Corp. 475,300 27,507,988
Bank of New York, Inc. 842,504 24,748,555
17
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Issuer Shares Value
----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Stocks - continued
Financial Institutions - continued
Bank United Corp., "A"* 138,800 $ 3,452,650
Barnett Banks, Inc. 120,000 4,050,000
Beneficial Corp. 120,000 6,900,000
Chase Manhattan Corp. 517,848 41,492,571
Comerica, Inc. 30,000 1,545,000
Corestates Financial Corp. 128,817 5,571,335
Crestar Financial Corp. 100,000 5,900,000
Federal Home Loan Mortgage Corp. 202,700 19,839,262
Fleet Financial Group, Inc. 328,900 14,636,050
National City Corp. 856,300 36,071,638
NationsBank Corp. 251,000 21,805,625
Northern Trust Co. 114,000 7,495,500
Republic of New York Corp. 65,200 4,506,950
Southern National Corp. 357,000 11,870,250
Union Planters Corp. 175,000 6,212,500
Wells Fargo & Co. 2 520
---------------
$ 263,455,769
----------------------------------------------------------------------------------------- ---------------- ---------------
Food and Beverage Products - 1.0%
Anheuser-Busch Cos., Inc. 100,000 $ 3,762,500
Dimon, Inc. 172,200 3,293,325
General Mills, Inc. 358,000 21,614,250
McCormick & Co. Inc. 83,700 1,956,488
PepsiCo, Inc. 298,400 8,429,800
---------------
$ 39,056,363
----------------------------------------------------------------------------------------- ---------------- ---------------
Forest and Paper Products - 0.4%
Kimberly Clark Corp. 113,500 $ 10,002,188
Weyerhaeuser Co. 126,700 5,844,038
---------------
$ 15,846,226
----------------------------------------------------------------------------------------- ---------------- ---------------
Insurance - 2.0%
Aetna, Inc. 40,300 $ 2,836,113
Allstate Corp. 298,800 14,715,900
CIGNA Corp. 183,800 22,033,025
Conseco, Inc. 40,000 1,970,000
GCR Holdings Ltd. 183,200 4,419,700
ITT Hartford Group, Inc. 39,300 2,318,700
St. Paul Cos., Inc. 198,000 10,989,000
Torchmark Corp. 222,000 10,184,250
Travelers, Inc. 183,854 9,031,803
---------------
$ 78,498,491
----------------------------------------------------------------------------------------- ---------------- ---------------
Machinery - 0.6%
Deere & Co., Inc. 290,000 $ 12,180,000
Sundstrand Corp. 146,000 5,694,000
York International Corp. 147,000 7,111,125
---------------
$ 24,985,125
----------------------------------------------------------------------------------------- ---------------- ---------------
Medical and Health Products - 3.4%
American Home Products Corp. 431,000 $ 27,476,250
Baxter International, Inc. 391,800 18,316,650
Lilly (Eli) & Co. 252,600 16,292,700
18
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Issuer Shares Value
----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Stocks - continued
Medical and Health Products - continued
Pharmacia & Upjohn 345,575 $ 14,254,969
Rhone-Poulenc Rorer, Inc. 298,500 21,977,062
Schering Plough Corp. 10,000 615,000
Smithkline Beecham PLC, ADR 480,100 29,226,089
Warner-Lambert Co. 60,000 3,960,000
---------------
$ 132,118,720
----------------------------------------------------------------------------------------- ---------------- ---------------
Medical and Health Technology and Services - 0.3%
Pacificare Health Systems, Inc., "B"* 75,000 $ 6,487,500
St. Jude Medical, Inc.* 125,000 5,046,875
---------------
$ 11,534,375
----------------------------------------------------------------------------------------- ---------------- ---------------
Metals and Minerals - 0.6%
Aluminum Companies of America 204,800 $ 12,083,200
Phelps Dodge Corp. 187,560 12,027,285
---------------
$ 24,110,485
----------------------------------------------------------------------------------------- ---------------- ---------------
Oils - 5.7%
Amoco Corp. 199,800 $ 14,085,900
Atlantic Richfield Co. 175,500 22,376,250
British Petroleum PLC, ADR 323,586 40,448,190
Exxon Corp. 202,936 16,894,422
Mobil Corp. 242,000 28,011,500
Occidental Petroleum Corp. 949,600 22,196,900
Reading & Bates Corp.* 51,106 1,386,250
Repsol S.A., ADR 145,580 4,822,338
Royal Dutch Petroleum Co., ADR 272,000 42,466,000
Sun, Inc. 84,582 1,945,386
Ultramar Corp. 95,000 2,873,750
USX-Marathon Group 1,197,400 25,893,775
---------------
$ 223,400,661
----------------------------------------------------------------------------------------- ---------------- ---------------
Oil Services - 0.4%
Schlumberger Ltd. 209,112 $ 17,669,964
----------------------------------------------------------------------------------------- ---------------- ---------------
Photographic Products - 0.8%
Eastman Kodak Co. 409,500 $ 32,145,750
----------------------------------------------------------------------------------------- ---------------- ---------------
Pollution Control - 0.3%
Browning-Ferris Industries, Inc. 180,700 $ 4,517,500
Laidlaw One, Inc. 44,000 1,881,000
WMX Technologies, Inc. 137,400 4,517,025
---------------
$ 10,915,525
----------------------------------------------------------------------------------------- ---------------- ---------------
Printing and Publishing - 0.7%
Gannett Co., Inc. 225,000 $ 15,834,375
Tribune Co., Inc. 162,750 12,694,500
---------------
$ 28,528,875
----------------------------------------------------------------------------------------- ---------------- ---------------
Railroads - 1.6%
Burlington Northern Santa Fe 288,000 $ 24,300,000
CSX Corp. 576,000 29,088,000
Illinois Central Corp. 348,500 11,021,313
---------------
$ 64,409,313
----------------------------------------------------------------------------------------- ---------------- ---------------
19
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Issuer Shares Value
----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Stocks - continued
Restaurants and Lodging - 0.2%
Felcor Suite Hotels, Inc. 185,600 $ 5,985,600
----------------------------------------------------------------------------------------- ---------------- ---------------
Real Estate Investment Trusts - 1.0%
Beacon Properties Corp. 93,100 $ 2,699,900
First Industrial Realty 79,500 2,057,062
Hong Kong Land Holdings 1,750,000 4,077,500
Hospitality Properties Trust 514,000 13,749,500
Meditrust Corp. 254,800 8,822,450
National Health Investors, Inc. 210,200 7,015,425
Public Storage, Inc. 71,400 1,615,425
---------------
$ 40,037,262
----------------------------------------------------------------------------------------- ---------------- ---------------
Special Products and Services - 0.2%
Stanley Works 299,600 $ 8,426,250
--------------------------------------------------------------------------------------- ---------------- ---------------
Stores - 1.4%
May Department Stores Co. 315,560 $ 15,344,105
Office Depot, Inc.* 126,200 2,981,475
Sears, Roebuck & Co. 582,400 26,062,400
Talbots, Inc. 150,000 4,500,000
Wal-Mart Stores, Inc. 185,700 4,897,838
---------------
$ 53,785,818
----------------------------------------------------------------------------------------- ---------------- ---------------
Telecommunications - 0.3%
Lucent Technologies 19,600 $ 899,150
Telefonica del Peru, "B", ADR 422,045 9,654,279
---------------
$ 10,553,429
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Electric - 2.8%
Allegheny Power System 160,000 $ 4,640,000
Carolina Power & Light Co. 164,800 5,685,600
Cinergy Corp. 345,000 10,651,875
CMS Energy Corp. 330,000 9,941,250
DPL, Inc. 108,000 2,524,500
Duke Power Co. 80,000 3,730,000
FPL Group, Inc. 470,000 20,327,500
Pacific Gas & Electric Co. 78,400 1,705,200
PECO Energy Co. 118,100 2,804,875
Pinnacle West Capital Corp. 315,000 9,331,875
Portland General Corp. 564,000 21,643,500
Scana Corp. 100,000 2,625,000
Sierra Pacific Resources 315,000 8,150,625
Texas Utilities Co. 166,000 6,577,750
---------------
$ 110,339,550
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Gas - 3.1%
Coastal Corp. 366,400 $ 15,114,000
Columbia Gas System, Inc. 100,000 5,600,000
K N Energy, Inc. 138,100 4,868,025
Pacific Enterprises 188,400 5,699,100
Panenergy Corp. 683,000 23,648,875
Questar Corp. 120,000 4,245,000
Sonat, Inc. 516,800 22,868,400
Tenneco, Inc. 107,400 5,383,425
20
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Issuer Shares Value
----------------------------------------------------------------------------------------- ---------------- ---------------
U.S. Stocks - continued
Utilities - Gas - continued
UGI Corp. 435,000 $ 10,222,500
Westcoast Energy, Inc. 50,000 800,000
Williams Cos., Inc. 425,012 21,675,612
---------------
$ 120,124,937
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Telephone - 2.1%
Ameritech Corp. 307,416 $ 16,177,767
AT&T Corp. 44,000 2,299,000
BellSouth Corp. 448,500 16,594,500
GTE Corp. 611,000 23,523,500
MCI Communications Corp. 891,000 22,831,875
---------------
$ 81,426,642
----------------------------------------------------------------------------------------- ---------------- ---------------
Total U.S. Stocks $1,938,940,030
----------------------------------------------------------------------------------------- ---------------- ---------------
Foreign Stocks - 1.6%
Canada - 0.2%
Canadian National Railway (Railroad) 355,600 $ 7,289,800
----------------------------------------------------------------------------------------- ---------------- ---------------
New Zealand - 0.2%
Lion Nathan Ltd. (Beverages) 3,008,500 $ 7,484,245
----------------------------------------------------------------------------------------- ---------------- ---------------
Spain - 0.1%
Acerinox (Iron and Steel) 28,800 $ 3,353,792
----------------------------------------------------------------------------------------- ---------------- ---------------
Switzerland - 0.6%
Ciba-Geigy AG (Pharmaceuticals) 17,700 $ 22,632,971
----------------------------------------------------------------------------------------- ---------------- ---------------
United Kingdom - 0.5%
PowerGen PLC (Utilities - Electric) 2,879,000 $ 21,841,246
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Foreign Stocks $ 62,602,054
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Common Stocks (Identified Cost, $1,494,901,539) $2,001,542,084
----------------------------------------------------------------------------------------- ---------------- ---------------
Convertible Preferred Stocks - 3.5%
----------------------------------------------------------------------------------------- ---------------- ---------------
Agricultural Products - 0.5%
Case Corp., $4.50 153,200 $ 18,613,800
----------------------------------------------------------------------------------------- ---------------- ---------------
Airlines
Continental Air Finance Trust, 8.5%## 10,000 $ 560,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Apparel and Textiles - 0.1%
Owens Corning Capital, 6.5%## 50,000 $ 2,600,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Banks and Credit Companies - 0.2%
First Chicago Corp., "B", 5.75% 91,000 $ 6,893,250
Washington Mutual, Inc., "D", $6.00 12,800 1,875,200
---------------
$ 8,768,450
----------------------------------------------------------------------------------------- ---------------- ---------------
Business Services - 0.1%
ALCO Standard Corp., $5.04 30,000 $ 2,730,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Computer Software - Systems
Wang Labs, Inc., "B", 6.5%## 25,000 $ 1,175,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Consumer Goods and Services - 0.1%
Corning Delaware LP, 6% 50,000 $ 2,825,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Entertainment - 0.2%
American Radio Systems Co., 7%## 55,000 $ 2,970,000
Bally Entertainment Corp., 8%, Prides 60,000 1,590,000
Golden Books Financing, 8.75%## 35,000 1,968,750
---------------
$ 6,528,750
----------------------------------------------------------------------------------------- ---------------- ---------------
21
<PAGE>
Portfolio of Investments - continued
Convertible Preferred Stocks - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Issuer Shares Value
----------------------------------------------------------------------------------------- ---------------- ---------------
Financial Institutions - 0.5%
American Express Co., DECS 10,000 $ 670,000
Cox Communications, 6% 43,000 860,000
First USA, Inc., 6.25% 10,000 475,000
Greenfield Capital Trust, 6%, Prides## 28,000 1,204,000
Jefferson Pilot Co., 7.25% 35,000 2,948,750
Merrill Lynch & Co., 6.25% 77,500 3,119,375
Merrill Lynch & Co., 6.5% 60,000 3,660,000
Penncorp Financial Group, $3.50## 79,900 4,554,300
Salomon, Inc., 7.625% 95,000 2,683,750
---------------
$ 20,175,175
----------------------------------------------------------------------------------------- ---------------- ---------------
Food and Beverage Products - 0.1%
Chiquita Brands, $3.75 10,000 $ 520,000
Dole Food Co., 7% 40,000 1,680,000
RJR Nabisco Holdings, 9.25%, "C" 604,700 3,250,263
---------------
$ 5,450,263
----------------------------------------------------------------------------------------- ---------------- ---------------
Insurance - 0.4%
Conseco, Inc., 7%, Prides 121,000 $ 10,738,750
St. Paul Capital LLC, 6%, MIPS 101,700 5,466,375
SunAmerica, Inc., $3.10, "E" 15,000 1,278,750
---------------
$ 17,483,875
----------------------------------------------------------------------------------------- ---------------- ---------------
Medical and Health Technology and Services - 0.1%
SCI Finance LLC, $3.125, "A" 35,000 $ 3,587,500
U.S. Surgical Corp., $2.20 15,000 620,625
---------------
$ 4,208,125
----------------------------------------------------------------------------------------- ---------------- ---------------
Metals and Minerals
Reynolds Metals Co., $3.31 13,000 $ 599,625
----------------------------------------------------------------------------------------- ---------------- ---------------
Oils - 0.1%
Atlantic Richfield Co., 9% 30,500 $ 716,750
Occidental Petroleum Corp., $3.00 10,000 587,500
Occidental Petroleum Corp., $3.875## 10,800 619,650
---------------
$ 1,923,900
----------------------------------------------------------------------------------------- ---------------- ---------------
Pollution Control - 0.1%
Browning-Ferris Industries, 7.25%, ACES* 80,000 $ 2,280,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Precious Metals and Minerals - 0.1%
Freeport-McMoRan Copper & Gold, Inc., 5% 95,000 $ 2,636,250
----------------------------------------------------------------------------------------- ---------------- ---------------
Real Estate Investment Trusts
Security Capital, $1.75, "A" 29,000 $ 757,625
----------------------------------------------------------------------------------------- ---------------- ---------------
Restaurants and Lodging
Wendy's Financing, Inc., 5% 20,000 $ 1,030,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Special Products and Services
Ceridian Corp., 5.5% 7,500 $ 810,000
Vanstar Financing Trust, 6.75%## 10,000 500,000
---------------
$ 1,310,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Steel - 0.1%
AK Steel Holdings Corp., 7% 141,600 $ 5,327,700
----------------------------------------------------------------------------------------- ---------------- ---------------
Stores - 0.1%
K Mart Financing, Inc., 7.75% 15,000 $ 733,125
TJX Cos., Inc., $7.00, "E" 11,000 2,197,250
---------------
$ 2,930,375
----------------------------------------------------------------------------------------- ---------------- ---------------
22
<PAGE>
Portfolio of Investments - continued
Convertible Preferred Stocks - continued
- ------------------------------------------------------------------------------------------ --------------- ----------------
Issuer Shares Value
----------------------------------------------------------------------------------------- ---------------- ---------------
Telecommunications
Cablevision Systems Corp., 8.5% 30,000 $ 738,750
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Electric - 0.1%
Devon Financing Trust, $3.25## 40,000 $ 2,040,000
Williams Cos., Inc., $3.50## 38,000 3,078,000
---------------
$ 5,118,000
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Gas - 0.5%
Enron Corp., 6.25% 319,200 $ 7,581,000
MCN Corp., 8.75%, Prides 55,200 1,545,600
Unocal Corp., 6.25% 212,040 11,317,635
---------------
$ 20,444,235
----------------------------------------------------------------------------------------- ---------------- ---------------
Utilities - Telephone - 0.1%
Cointel, 7%, Prides## 49,700 $ 2,547,125
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Convertible Preferred Stocks
(Identified Cost, $118,936,694) $ 138,762,023
----------------------------------------------------------------------------------------- ---------------- ---------------
Short-Term Obligations - 3.7%
---------------------------------------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
----------------------------------------------------------------------------------------- ---------------- ---------------
Abbott Labs, due 10/22/96 $ 10,500 $ 10,467,905
Disney (Walt) Co., due 10/07/96 12,720 12,708,870
du Pont (E.I.) de Nemours, Inc., due 10/03/96 12,000 11,996,513
Federal Farm Credit Bank, due 10/01/96 11,980 11,980,000
Federal Home Loan Bank, due 10/08/96 - 10/28/96 11,952 11,928,098
Federal Home Loan Mortgage Corp., due 10/10/96 - 10/23/96 54,300 54,158,166
Heinz (H.J.) Co., due 10/24/96 13,900 13,852,400
Hershey Foods, Inc., due 10/15/96 9,000 8,981,660
PepsiCo., Inc., due 11/08/96 10,000 9,944,266
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Short-Term Obligations, at Amortized Cost $ 146,017,878
----------------------------------------------------------------------------------------- ---------------- ---------------
Total Investments (Identified Cost, $3,387,269,994) $3,915,203,761
Other Assets, Less Liabilities - 0.5% 20,681,495
- ----------------------------------------------------------------------------------------------------------- ---------------
Net Assets - 100.0% $3,935,885,256
----------------------------------------------------------------------------------------- ---------------- ---------------
</TABLE>
*Non-income producing security.
+Restricted security.
##SEC Rule 144A restriction.
See notes to financial statements
23
<PAGE>
Financial Statements
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------- ---------------
September 30, 1996
------------------------------------------------------------------------------------- ---------------
<S> <C>
Assets:
Investments, at value (identified cost, $3,387,269,994) $3,915,203,761
Cash 3,635
Receivable for daily variation margin on open futures contracts 109,500
Receivable for Fund shares sold 5,318,951
Receivable for investments sold 49,133,876
Interest and dividends receivable 35,651,499
Other assets 71,968
---------------
Total assets $4,005,493,190
---------------
Liabilities:
Distributions payable $ 12,738,854
Payable for Fund shares reacquired 4,299,612
Payable for investments purchased 49,940,446
Payable to affiliates -
Management fee 103,101
Shareholder servicing agent fee 21,089
Distribution fee 79,026
Accrued expenses and other liabilities 2,425,806
---------------
Total liabilities $ 69,607,934
---------------
Net assets $3,935,885,256
---------------
Net assets consist of:
Paid-in capital $3,168,174,568
Unrealized appreciation on investments and translation of assets and liabilities in
foreign currencies 527,782,661
Accumulated undistributed net realized gain on investments and foreign currency
transactions 235,692,844
Accumulated undistributed net investment income 4,235,183
---------------
Total $3,935,885,256
---------------
Shares of beneficial interest outstanding 261,898,922
---------------
Class A shares:
Net asset value per share
(net assets of $2,568,010,072 / 170,867,867 shares of beneficial interest
outstanding) $15.03
---------------
Offering price per share (100/95.25) $15.78
---------------
Class B shares:
Net asset value and offering price per share
(net assets of $1,284,456,516 / 85,490,927 shares of beneficial interest
outstanding) $15.02
---------------
Class C shares:
Net asset value and offering price per share
(net assets of $83,418,668 / 5,540,128 shares of beneficial interest outstanding) $15.06
---------------
</TABLE>
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
24
<PAGE>
Financial Statements - continued
Statement of Operations
<TABLE>
<CAPTION>
--------------------------------------------------------------------------- ---------------
Year Ended September 30, 1996
--------------------------------------------------------------------------- ---------------
<S> <C>
Net investment income:
Income -
Interest $120,797,212
Dividends 69,999,748
Foreign taxes withheld (1,027,783)
---------------
Total investment income $189,769,177
---------------
Expenses -
Management fee $ 13,607,772
Trustees' compensation 109,577
Shareholder servicing agent fee (Class A) 2,635,299
Shareholder servicing agent fee (Class B) 2,195,380
Shareholder servicing agent fee (Class C) 73,157
Distribution and service fee (Class A) 7,883,575
Distribution and service fee (Class B) 11,488,260
Distribution and service fee (Class C) 487,605
Custodian fee 662,530
Postage 640,642
Printing 255,071
Auditing fees 49,300
Legal fees 18,162
Miscellaneous 2,266,420
---------------
Total expenses $ 42,372,750
Fees paid indirectly (330,229)
---------------
Net expenses $ 42,042,521
---------------
Net investment income $147,726,656
---------------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions $288,895,323
Foreign currency transactions 39,960
Futures contracts 1,307,705
---------------
Net realized gain on investments and foreign currency transactions $290,242,988
---------------
Change in unrealized appreciation (depreciation) -
Investments $ 5,219,111
Translation of assets and liabilities in foreign currencies (20,217)
Futures contracts (131,616)
---------------
Net unrealized gain on investments $ 5,067,278
---------------
Net realized and unrealized gain on investments and foreign currency $295,310,266
---------------
Increase in net assets from operations $443,036,922
---------------
</TABLE>
See notes to financial statements
25
<PAGE>
Financial Statements - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Year Ended September 30, 1996 1995
----------------------------------------------- --------------- ---------------
<S> <C> <C>
Increase in net assets:
From operations -
Net investment income $ 147,726,656 $ 131,402,134
Net realized gain on investments and foreign
currency transactions 290,242,988 120,786,908
Net unrealized gain on investments and foreign
currency translation 5,067,278 242,624,905
--------------- ---------------
Increase in net assets from operations $ 443,036,922 $ 494,813,947
--------------- ---------------
Distributions declared to shareholders -
From net investment income (Class A) $ (103,128,807) $ (91,296,492)
From net investment income (Class B) (40,140,247) (33,884,609)
From net investment income (Class C) (1,719,502) (302,945)
From net realized gain on investments and
foreign currency transactions (Class A) (104,083,151) (1,471,111)
From net realized gain on investments and
foreign currency transactions (Class B) (47,213,572) (672,401)
From net realized gain on investments and
foreign currency transactions (Class C) (1,295,700) (2,050)
--------------- ---------------
Total distributions declared to shareholders $ (297,580,979) $ (127,629,608)
--------------- ---------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 883,738,695 $ 620,581,586
Net asset value of shares issued to
shareholders in reinvestment of distributions 250,392,788 108,185,007
Cost of shares reacquired (614,411,016) (526,677,345)
--------------- ---------------
Increase in net assets from Fund share
transactions $ 519,720,467 $ 202,089,248
--------------- ---------------
Total increase in net assets $ 665,176,410 $ 569,273,587
Net assets:
At beginning of period 3,270,708,846 2,701,435,259
--------------- ---------------
At end of period (including accumulated
undistributed net investment income of
$4,235,183 and $1,522,351, respectively) $3,935,885,256 $3,270,708,846
--------------- ---------------
</TABLE>
See notes to financial statements
26
<PAGE>
Financial Statements - continued
Financial Highlights
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994 1993 1992
- ----------------------------------------------------- --------- --------- --------- --------- ----------
Class A
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 14.46 $12.80 $13.70 $12.42 $11.82
--------- --------- --------- --------- ----------
Income from investment operations# -
Net investment income[S.] $ 0.64 $ 0.64 $ 0.54 $ 0.45 $ 0.65
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.21 1.64 (0.69) 1.74 0.75
--------- --------- --------- --------- ----------
Total from investment operations $ 1.85 $ 2.28 $(0.15) $ 2.19 $ 1.40
--------- --------- --------- --------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.62) $(0.61) $(0.54) $(0.59) $(0.66)
From net realized gain on investments and foreign
currency transactions (0.66) (0.01) (0.10) (0.32) (0.14)
In excess of net realized gain on investments and
foreign currency transactions -- -- (0.11) -- --
--------- --------- --------- --------- ----------
Total distributions declared to shareholders $ (1.28) $(0.62) $(0.75) $(0.91) $(0.80)
--------- --------- --------- --------- ----------
Net asset value - end of period $ 15.03 $14.46 $12.80 $13.70 $12.42
--------- --------- --------- --------- ----------
Total return++ 13.50% 18.36% (1.07)% 18.32% 12.26%
Ratios (to average net assets)/Supplemental data[S.]:
Expenses## 0.91% 0.87% 0.85% 0.84% 0.84%
Net investment income 4.35% 4.82% 4.26% 4.51% 5.40%
Portfolio turnover 140% 102% 91% 95% 84%
Average commission rate### $0.0547 -- -- -- --
Net assets at end of period (000,000 omitted) $ 2,568 $2,242 $1,857 $1,702 $1,198
[S.]The distributor did not impose a portion of its distribution fee for the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income -- $ 0.63 $ 0.52 -- --
Ratios (to average net assets):
Expenses## -- 0.97% 0.95% -- --
Net investment income -- 4.72% 4.16% -- --
</TABLE>
# Per share data for the periods subsequent to September 30, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
[S.] For the years ended September 30, 1992 and 1991, $0.0508 and $0.0596,
respectively, of per share distributions from net investment income have
been redesignated as distributions from capital gains.
++ Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
See notes to financial statements
27
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Year Ended September 30, 1991 1990 1989 1988 1987
- ---------------------------------------------------- --------- --------- --------- --------- ----------
Class A
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.25 $11.58 $10.13 $11.47 $ 9.77
--------- --------- --------- --------- ----------
Income from investment operations -
Net investment income $ 0.67 $ 0.64 $ 0.65 $ 0.62 $ 0.56
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.57 (1.25) 1.71 (1.07) 2.07
--------- --------- --------- --------- ----------
Total from investment operations $ 2.24 $(0.61) $ 2.36 $(0.45) $ 2.63
--------- --------- --------- --------- ----------
Less distributions declared to shareholders -
From net investment income[S.] $(0.61) $(0.66) $(0.63) $(0.60) $(0.56)
From net realized gain on investments and foreign
currency transactions (0.06) (0.06) (0.28) (0.08) (0.36)
From paid-in capital -- -- -- (0.21) (0.01)
--------- --------- --------- --------- ----------
Total distributions declared to shareholders $(0.67) $(0.72) $(0.91) $(0.89) $(0.93)
--------- --------- --------- --------- ----------
Net asset value - end of period $11.82 $10.25 $11.58 $10.13 $11.47
--------- --------- --------- --------- ----------
Total return++ 22.25% (5.59)% 23.46% (3.93)% 26.81%
Ratios (to average net assets)/Supplemental data:
Expenses 0.87% 0.85% 0.72% 0.71% 0.63%
Net investment income 5.89% 5.71% 5.97% 6.06% 5.05%
Portfolio turnover 74% 50% 53% 52% 58%
Net assets at end of period (000,000 omitted) $ 909 $ 707 $ 628 $ 508 $ 551
</TABLE>
[S.] For the years ended September 30, 1992 and 1991, $0.0508 and $0.0596,
respectively, of per share distributions from net investment income have
been redesignated as distributions from capital gains.
++ Total returns for Class A shares do not include the applicable sales
charge (except for reinvested dividends prior to October 1, 1989). If
the charge had been included, the results would have been lower.
See notes to financial statements
28
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994 1993*
- ---------------------------------------------------- --------- --------- -------------------
Class B
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 14.46 $12.80 $13.70 $13.53
--------- --------- -------------------
Income from investment operations# -
Net investment income $ 0.52 $ 0.53 $ 0.39 $ 0.06
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.21 1.64 (0.65) 0.16
--------- --------- -------------------
Total from investment operations $ 1.73 $ 2.17 $(0.26) $ 0.22
--------- --------- -------------------
Less distributions declared to shareholders -
From net investment income $ (0.51) $(0.50) $(0.43) $(0.05)
From net realized gain on investments and foreign
currency transactions (0.66) -- -- --
In excess of net investment income -- (0.01) (0.10) --
From paid-in capital -- -- (0.11) --
--------- --------- -------------------
Total distributions declared to shareholders $ (1.17) $(0.51) $(0.64) $(0.05)
--------- --------- -------------------
Net asset value - end of period $ 15.02 $14.46 $12.80 $13.70
--------- --------- -------------------
Total return 12.49% 17.46% (1.93)% 15.24%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.67% 1.71% 1.70% 1.75%+
Net investment income 3.56% 3.97% 3.45% 3.98%+
Portfolio turnover 140% 102% 91% 95%
Averaage commission rate### $0.0547 $ -- $ -- $ --
Net assets at end of period (000,000 omitted) $ 1,284 $1,005 $ 843 $ 532
</TABLE>
* For the period from the commencement of offering of Class B shares,
August 23, 1993 to September 30, 1993.
+ Annualized.
# Per share data for the periods subsequent to September 30, 1993 is based
on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years
beginning on or after September 1, 1995.
See notes to financial statements
29
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994*
- ---------------------------------------------------- --------- --------- ----------
Class C
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 14.49 $12.80 $12.92
--------- --------- ----------
Income from investment operations# -
Net investment income $ 0.53 $ 0.54 $ 0.08
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.22 1.66 (0.13)
--------- --------- ----------
Total from investment operations $ 1.75 $ 2.20 $(0.05)
--------- --------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.52) $(0.50) $(0.07)
From net realized gain on investments and foreign
currency transactions (0.66) (0.01) --
--------- --------- ----------
Total distributions declared to shareholders $ (1.18) $(0.51) $(0.07)
--------- --------- ----------
Net asset value - end of period $ 15.06 $14.49 $12.80
--------- --------- ----------
Total return 12.67% 17.66% (0.41%)
Ratios (to average net assets)/Supplemental data:
Expenses## 1.63% 1.67% 1.76%+
Net investment income 3.67% 4.14% 4.08%+
Portfolio turnover 140% 102% 91%
Average commission rate### $0.0547 -- --
Net assets at end of period (000,000 omitted) $ 83 $ 23 $ 1
</TABLE>
* For the period from the commencement of offering of Class C shares,
August 1, 1994 to September 30, 1994.
+ Annualized.
# Per share data for the periods subsequent to September 30, 1993 is based
on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years
beginning on or after September 1, 1995.
See notes to financial statements
30
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Total Return Fund (the Fund) is a diversified series of MFS Series Trust
V (the Trust). The Trust is organized as a Massachusetts business trust and
is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. 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 - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are
not available are valued at last quoted bid prices. Debt securities (other
than short-term obligations which mature in 60 days or less), including
listed issues and forward contracts, are valued on the basis of valuations
furnished by dealers or by a pricing service with consideration to factors
such as institutional-size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics and
other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the
Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
31
<PAGE>
Notes to Financial Statements - continued
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 will enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Fund may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. It 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 for financial statement purposes as unrealized until
the contract settlement date.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities, currency, or contracts based on financial indices at
a fixed price on a future date. In entering such contracts, the Fund is
required to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received
by the Fund each day, depending on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes as
unrealized gains or losses by the Fund. The Fund's investment in futures
contracts is designed to hedge against anticipated future changes in interest
or exchange rates or securities prices. Should interest or exchange rates or
securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the futures contracts and may realize a loss.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. 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.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on
the Fund's average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Fund with the
32
<PAGE>
Notes to Financial Statements - continued
custodian and with the dividend disbursing agent. This amount is shown as a
reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. The Fund files a tax return
annually using tax accounting methods required under provisions of the Code
which may differ from generally accepted accounting principles, the basis on
which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial
statements may differ from that reported on the Fund's tax return and,
consequently, the character of distributions to shareholders reported in the
financial highlights may differ from that reported to shareholders on Form
1099-DIV. Foreign taxes have been provided for on interest and dividend
income earned on foreign investments in accordance with the applicable
country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. Distributions to shareholders are recorded on
the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return
of capital. Differences in the recognition or classification of income
between the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains. During the year ended September 30, 1996, $25,268 was
reclassified to accumulated undistributed net realized gain on investments
from accumulated undistributed net investment income due to differences
between book and tax accounting for mortgage-backed securities and currency
transactions. This change had no effect on the net assets or net asset value
per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the
average daily net assets of each class, without distinction between share
classes. Dividends are declared separately for each class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(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
33
<PAGE>
Notes to Financial Statements - continued
management fee is computed and paid monthly at an effective annual rate of
0.21% of average daily net assets and 3.09% of investment income.
The Fund pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain of the officers
and Trustees of the Fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Fund has an
unfunded defined benefit plan for all its independent Trustees and Mr.
Bailey. Included in Trustees' compensation is a net periodic pension expense
of $35,302 for the year ended September 30, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$1,144,503 for the year ended September 30, 1996, as its portion of the sales
charge on sales of Class A shares of the Fund.
The Trustees have adopted separate distribution plans for Class A, Class B,
and Class C shares pursuant to Rule 12b-1 of the Investment Company Act of
1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service
fee to each securities dealer that enters into a sales agreement with MFD of
up to 0.25% per annum of the Fund's average daily net assets attributable to
Class A shares which are attributable to that securities dealer, a
distribution fee to MFD of up to 0.10% per annum of the Fund's average daily
net assets attributable to Class A shares, commissions to dealers and
payments to MFD wholesalers for sales at or above a certain dollar level, and
other such distribution-related expenses that are approved by the Fund. MFD
retains the service fee for accounts not attributable to a securities dealer
which amounted to $809,019 for the year ended September 30, 1996. Fees
incurred under the distribution plan during the year ended September 30, 1996
were 0.33% of average daily net assets attributable to Class A shares on an
annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD
a distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B and
Class C shares. MFD will pay to securities dealers who enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class
B and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended
to be additional consideration for services rendered by the dealer with
respect to Class B and Class C shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $138,385
and $5,233 for Class B and
34
<PAGE>
Notes to Financial Statements - continued
Class C shares, respectively, for the year ended September 30, 1996. Fees
incurred under the distribution plans during the year ended September 30,
1996 were 1.00% and 1.00% of average daily net assets attributable to Class B
and Class C shares on an annualized basis, respectively.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the
event of a shareholder redemption within 12 months following such 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. A contingent deferred sales charge is imposed on shareholder
redemptions of Class C shares in the event of a shareholder redemption within
twelve months of purchases made on or after April 1, 1996. MFD receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended September 30, 1996 were $13,595, $1,500,543 and $3,178
for Class A, Class B and Class C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15%
attributable to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
Purchases Sales
- ---------------------------------------------- --------------- ---------------
U.S. government securities $2,288,572,918 $1,617,796,684
Investments (non-U.S. government securities) $2,909,176,637 $3,087,843,253
The cost and unrealized appreciation or depreciation in value of the
invest-ments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $3,390,188,400
---------------
Gross unrealized appreciation $ 564,473,842
Gross unrealized depreciation (39,458,481)
---------------
Net unrealized appreciation $ 525,015,361
---------------
35
<PAGE>
Notes to Financial Statements - continued
(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 (without par
value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
1996 1995
-------------------------------- --------------------------------
Year Ended September 30, Shares Amount Shares Amount
------------------------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 32,544,619 $ 475,330,763 27,571,191 $ 366,257,248
Shares issued to shareholders
in reinvestment of
distributions 11,900,327 171,688,507 5,805,766 77,216,013
Shares reacquired (28,608,019) (418,045,276) (23,436,000) (309,567,243)
--------------- ---------------- --------------- ----------------
Net increase 15,836,927 $ 228,973,994 9,940,957 $ 133,906,018
--------------- ---------------- --------------- ----------------
Class B Shares
1996 1995
-------------------------------- --------------------------------
Year Ended September 30, Shares Amount Shares Amount
------------------------------- --------------- ---------------- --------------- ----------------
Shares sold 23,526,173 $ 343,774,175 17,488,663 $ 232,234,181
Shares issued to shareholders
in reinvestment of
distributions 5,276,202 76,064,908 2,308,539 30,683,046
Shares reacquired (12,818,714) (187,231,460) (16,113,302) (214,915,122)
--------------- ---------------- --------------- ----------------
Net increase 15,983,661 $ 232,607,623 3,683,900 $ 48,002,105
--------------- ---------------- --------------- ----------------
Class C Shares
1996 1995
-------------------------------- --------------------------------
Year Ended September 30, Shares Amount Shares Amount
------------------------------- --------------- ---------------- --------------- ----------------
Shares sold 4,404,959 $ 64,633,757 1,619,700 $ 22,090,157
Shares issued to shareholders
in reinvestment of
distributions 182,264 2,639,373 20,825 285,948
Shares reacquired (624,347) (9,134,280) (163,091) (2,194,980)
--------------- ---------------- --------------- ----------------
Net increase 3,962,876 $ 58,138,850 1,477,434 $ 20,181,125
--------------- ---------------- --------------- ----------------
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to
each fund, based on its borrowings, at a rate equal to the bank's base rate.
In addition, a commitment fee, based on the average daily unused portion of
the line of credit, is allocated among the participating funds at the end of
each quarter. The commitment fee allocated to the Fund for the year ended
September 30, 1996 was $40,695.
36
<PAGE>
Notes to Financial Statements - continued
(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. These financial instruments include
futures 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.
Futures Contracts
Unrealized
Expiration Contracts Position Depreciation
- ---------------------------- --------- -------- -------------
U.S. Treasury Notes 12/31/96 584 Short $(131,616)
*At September 30, 1996, the Fund had sufficient cash and/or securities
to cover margin requirements on open future contracts.
(8) Restricted Security
The Fund may invest not more than 15% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At September 30,
1996, the Fund owned the following restricted security (constituting 0.08% of
net assets). The value of this security is determined by valuations supplied
by a pricing service or brokers.
<TABLE>
<CAPTION>
Description Date of Acquisition Par Amount Cost Value
- ------------------------ -------------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Merrill Lynch Mortgage
Investors, Inc.,
94-M1, 8.073s, 2022 6/22/94 $4,000,000 $2,772,500 $2,985,000
------------
</TABLE>
37
<PAGE>
Independent Auditors' Report
To the Trustees of MFS Series Trust V and Shareholders of
MFS Total Return Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Total Return Fund (one of the
series constituting MFS Series Trust V) as of September 30, 1996, the related
statement of operations for the year then ended, the statement of changes in
net assets for the years ended September 30, 1996 and 1995, and the financial
highlights for each of the years in the ten-year period ended September 30,
1996. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned at September 30, 1996 by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Total Return
Fund at September 30, 1996, the results of its operations, the changes in its
net assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 1, 1996
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
38
<PAGE>
The MFS Family of Funds(R)
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime). This material should be read carefully before investing or sending
money.
<TABLE>
<S> <C>
Stock World
- ------------------------------------- ------------------------------------------
Massachusetts Investors Trust MFS(R)/Foreign & Colonial Emerging Markets
Equity Fund
Massachusetts Investors Growth Stock Fund
MFS(R)/Foreign & Colonial International
MFS(R) Capital Growth Fund Growth Fund
MFS(R) Emerging Growth Fund MFS(R)/Foreign & Colonial International
Growth and Income Fund
MFS(R) Gold & Natural Resources Fund
MFS(R) World Asset Allocation Fund (SM)
MFS(R) Growth Opportunities Fund
MFS(R) World Equity Fund
MFS(R) Managed Sectors Fund
MFS(R) World Governments Fund
MFS(R) OTC Fund
MFS(R) World Growth Fund
MFS(R) Research Fund
MFS(R) World Total Return Fund
MFS(R) Value Fund
Stock and Bond National Tax-Free Bond
- --------------------------------------- -------------------------------------------
MFS(R) Total Return Fund MFS(R) Municipal Bond Fund
MFS(R) Utilities Fund MFS(R) Municipal High Income Fund
Bond MFS(R) Municipal Income Fund
- ---------------------------------------
MFS(R) Bond Fund State Tax-Free Bond
--------------------------------------------
MFS(R) Government Mortgage Fund Alabama, Arkansas, California, Florida,
Georgia, Maryland, Massachusetts,
MFS(R) Government Securities Fund Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Tennesse
e,
MFS(R) High Income Fund Virginia, West Virginia
MFS(R) Intermediate Income Fund
Money Market
MFS(R) Strategic Income Fund --------------------------------------------
MFS(R) Cash Reserve Fund
Limited Maturity Bond
- --------------------------------------- MFS(R) Government Money Market Fund
MFS(R) Government Limited Maturity Fund
MFS(R) Money Market Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
</TABLE>
39
<PAGE>
Ads Illustrate MFS' Unparalleled Experience
[round box]
MERCURY GEMINI APOLLO MFS
[long-distance shot of moon]
MFS' new advertisements look back at some of the most important events of the
twentieth century to demonstrate a simple point -- no other fund company can
match MFS' experience. MFS has been managing money for investors since 1924 when
we "invented" the nation's first fund, Massachusetts Investors Trust.
Print and broadcast ads will offer dramatic portraits of what that 72 years'
worth of experience means. By the time the Apollo rockets began taking off for
the moon, for example, MFS had already been exploring the universe of stocks for
more than four decades. The company was also on the scene, as other ads will
illustrate, when Louis Armstrong was redefining jazz and when the great
racehorse Whirlaway was galloping to a Triple Crown victory.
As MFS Chairman Keith Brodkin emphasizes, in today's increasingly competitive
mutual fund industry, it's important to have a recognizable brand name. The
goal of the MFS ad campaign is to increase public awareness of the company and
its unique role in the industry as the inventor of the mutual fund.
The across-the-board strength of the MFS Family of Funds(R) will be highlighted
in the print ads, which cite the performance results and Morningstar ratings of
various MFS funds.
The broadcast ads appear on a number of cable and network television news and
sports programs. The print ads appear in newspapers such as The Wall Street
Journal and USA Today; in financial magazines such as Kiplinger's Personal
Finance and Money, and in leisure magazines such as Golf Digest and Tennis.
(The cost of the campaign is being underwritten by MFS. It is neither a fund
shareholder nor an annuity contractholder expense.)
40
<PAGE>
MFS(R) Total Return Fund
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor; Former Chairman and Director (until
1991), Massachusetts Financial Services Company; Director, Cambridge Bancorp;
Director, Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive Officer, Eastern Enterprises
Lawrence T. Perera - Partner, Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management Corp. (investment
advisers)
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Fund Managers*
David M. Calabro
Geoffrey L. Kurinsky
Judith N. Lamb
Lisa B. Nurme
Maura A. Shaughnessy
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
Custodian
Investors Bank & Trust Co.
Auditors
Deloitte & Touche LLP
Investor Information
For MFS stock and bond market outlooks, call toll free: 1-800-637-4458
anytime from a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m.
to 5 p.m. Eastern time (or leave a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free: 1-800-225-2606 any business day from
8 a.m to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576
any business day from 9 a.m. to 5 p.m. Eastern time. (To use this service,
your phone must be equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances and exchanges, call toll free:
1-800-MFS-TALK (1-800-637-8255) anytime from a touch-tone telephone.
Web Site
http://www.mfs.com
[Dalbar logo]
For the third year in a row, MFS earned a #1 ranking in the DALBAR, Inc.
Broker/Dealer Survey, Main Office Operations Service Quality Category. The firm
achieved a 3.48 overall score on a scale of 1 to 4 in the 1996 survey. A total
of 110 firms responded, offering input on the quality of service they received
from 29 mutual fund companies nationwide. The survey contained questions about
service quality in 15 categories, including "knowledge of phone service
contacts," "accuracy of transaction processing," and "overall ease of doing
business with the firm."
41
<PAGE>
[back cover]
MFS(R) Total [Dalbar logo] Bulk Rate
Return Fund U.S. Postage
P A I D
500 Boylston Street Permit #55638
Boston, MA 02116 Boston, MA
[MFS logo]
(C) 1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MTR-2-11/96 277M 15/215/315
