<PAGE>
[Logo] M F S(R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
[graphic omitted]
MFS(R) TOTAL RETURN FUND
ANNUAL REPORT o SEPTEMBER 30, 1998
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 12
Financial Statements ...................................................... 32
Notes to Financial Statements ............................................. 40
Independent Auditors' Report .............................................. 47
Trustees and Officers ..................................................... 49
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HIGHLIGHTS
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o FOR THE 12 MONTHS ENDED SEPTEMBER 30, 1998, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 6.98%, CLASS B SHARES 6.22%,
CLASS C SHARES 6.27%, AND CLASS I SHARES 7.35%. (SEE PERFORMANCE SUMMARY
FOR MORE INFORMATION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.)
o THE FUND HAS BENEFITED FROM ITS MORE-DEFENSIVE POSITIONS, INCLUDING AN
INCREASED WEIGHTING IN UTILITY STOCKS AS WELL AS DOMESTICALLY ORIENTED
COMPANIES THAT ARE LESS LIKELY TO FEEL THE IMPACT OF INTERNATIONAL ECONOMIC
TURMOIL.
o ON THE FIXED-INCOME SIDE, THE FUND HAS CONTINUED TO FOCUS ON
HIGHER-QUALITY, INVESTMENT-GRADE CORPORATE BONDS, THAT IS, BONDS RATED
"BBB" OR HIGHER BY STANDARD & POOR'S CORPORATION.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
In the coming year, MFS will celebrate its 75th anniversary. In 1924, our
Massachusetts Investors Trust, the nation's first mutual fund, opened to the
public and helped launch a revolution in investing that continues today. In the
75 years since, MFS has grown with its investors not only through bear markets,
economic and political turmoil, wars, and oil shortages, but also through long
periods of growth and prosperity. We are very proud of our record of investment
management and service to shareholders throughout our history.
One of the best ways for us to serve our shareholders is to help them understand
some of the reasons behind developments in the investment markets and, when
necessary, to take a more cautious outlook. This is particularly important
during periods of market volatility such as we are experiencing this year, when
equity prices do not follow a straight course. In light of this volatility, it
is clear that equity valuations have risen to a point at which stock prices have
become vulnerable to changes in the investment environment such as a slowing
economy, earnings disappointments, and global economic and political turmoil.
While we continue to hold a favorable long-term outlook for the equity markets,
we also believe that the recent market correction was overdue but was also a
healthy near-term event that should rid the financial system of excesses that
have developed.
Currently, equity investors seem to be focused on the slowdown in corporate
earnings and, more recently, on the continuing uncertainty overseas,
particularly in Russia and some of the emerging markets. In the second
quarter, for example, average earnings growth for companies in the Standard &
Poor's 500 Composite Index (the S&P 500), a popular, unmanaged index of common
stock total return performance, was about 3%, well below what people were
expecting a year ago. As a result of this and continuing concerns about Asia
and emerging markets, the stock markets pulled back from the record-high
levels set in mid-July. Although the U.S. stock market has responded
positively to reductions in interest rates by the Federal Reserve Board, the
market's retreat helped correct some -- but not all -- of the overvaluations
that had been building for some time. Prior to July, equity prices had been
rising without a corresponding increase in corporate earnings. As a result,
price-to-earnings (P/E) ratios, or the amount investors paid for stocks in
relation to companies' earnings per share, also went up. If this year's
downturn helps create more reasonable valuations, we believe it could provide
a sounder long-term foundation for the equity markets. On another positive
note, interest rates have begun to decline as inflation has remained low. In
an environment of low interest rates, stocks become more attractive than most
fixed-income investments, while low inflation helps control companies' costs.
Internationally, the economic turmoil in Asia continues to be a concern to us,
while Russia is facing political and economic uncertainty and Latin American
economies are feeling substantial pressure. We believe the United States has
yet to see the full impact of this crisis. There have been brief periods of
improvement in a few countries and countries such as Japan and Brazil have
taken positive steps toward economic reform but, for the most part, most of
these economies are still very weak. At the same time, the Asian turmoil has
had the beneficial effect of moderating U.S. growth and keeping inflation in
check, which has helped establish a favorable interest-rate environment.
Countering the situation in Asia has been the growing strength of European
economies, although European equity markets have also seen some volatility this
year. But as these countries move toward economic union, they are benefiting
from a convergence of interest rates to lower levels, a rapid expansion of
manufacturing and service businesses, and an increasingly strong consumer
sector. This has helped American exporters offset some of their Asian losses
while providing investment opportunities in developed and emerging European
markets.
Given the uncertainty arising from these conflicting developments, we believe
that it is prudent to remind investors of the need to take a long-term view
and to diversify their investments across a range of asset classes. This
includes portfolios that focus on bond and international investments as well
as on the U.S. stock market. At MFS, we also believe our decades-long
commitment to original, company-by-company research gives us an advantage by
helping us find companies that we think can keep growing
or gain market share during periods of turmoil. To help fulfill this
commitment and to provide the broadest possible coverage of industry sectors
and individual companies, MFS continues to increase its number
of full-time research analysts, who thoroughly investigate each company's
earnings potential and position in its industry as well as the overall
prospects for that industry.
We also use active portfolio management on the fixed-income side, using our
extensive research and credit analysis to help reduce the potential for price
declines and enhance the opportunity for appreciation. Every year, both fixed-
income and equity managers meet with thousands of credit issuers and
companies. They also attend many presentations, closely follow sources of
industry research, and keep track of competitors.
As we have for 75 years, we will continue to apply this discipline of
thorough, bottom-up research to both the equity and fixed-income markets
because we believe it offers the best potential for providing favorable long-
term performance for our shareholders -- regardless of changes in the overall
market environment.
We appreciate your confidence and welcome any questions or comments you may
have.
Respectfully,
\s\ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
October 14, 1998
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of David M. Calabro]
David M. Calabro
For the 12 months ended September 30, 1998, Class A shares of the Fund
provided a total return of 6.98%, Class B shares 6.22%, Class C shares 6.27%,
and Class I shares 7.35%. These returns assume the reinvestment of
distributions but exclude the effects of any sales charges and compare to a
9.05% return for the S&P 500 for the same period. The Fund's returns also
compare to a 12.87% return for the Lehman Brothers Government/Corporate Bond
Index (the Lehman Index), an unmanaged, market-value-weighted index of U.S.
Treasury and government-agency securities, excluding mortgage-backed
securities.
Q. HOW HAS THE PORTFOLIO BEEN PERFORMING DURING THE MARKET VOLATILITY OF THE
PAST FEW MONTHS?
A. Actually, the portfolio has been positioned defensively for some time, so
it's done very well relative to its balanced-portfolio peer group as
tracked by Lipper Analytical Services, Inc., an independent firm that
reports investment company performance. We have been buying a lot of
utility stocks, and they have tended to perform very well over the past few
months. That's because their steady income helps their relative performance
in times of market downturns. For example, we've added to positions in
Carolina Power & Light and New Century Energies in electrics and Bell
Atlantic and SBC in communications. We have also benefited from a lower-
than-normal allocation to equities in the portfolio.
Q. COULD YOU TALK ABOUT SOME SECTORS IN WHICH YOU'VE REDUCED POSITIONS?
A. We have reduced our weighting in banks. That's partly because we think
their prices fully reflect their current valuations, and we're concerned
about their ability to achieve their earnings estimates. We also sold
chemical companies due to earnings concerns. Our weighting in drug stocks
has also been reduced. While we think the fundamentals are great for
pharmaceutical companies, we believe these fundamentals are fully
discounted in their stock prices.
Q. DOES THAT MEAN YOU DON'T SEE ANY BUYING OPPORTUNITIES?
A. Not necessarily. As I said, we've been buying utilities because they have
tended to do better when the economy slows. Also, we think consumer
companies such as General Mills, Newell, and Rubbermaid look interesting,
while the agricultural company Archer-Daniels-Midland is also attractive.
We believe these companies should offer good relative earnings growth in
1999, which should lead to stock price appreciation.
Q. WHAT IS YOUR CURRENT INTERNATIONAL EXPOSURE?
A. We've toned it down to about 7%. We reduced positions in a number of
companies in Europe, which turned out to be a good move. Companies such as
Henkel in Germany and Akzo Nobel in the Netherlands have seen a decrease in
demand for the chemicals they manufacture. While we think both are fine
companies, we reduced our positions given greater uncertainty about their
1999 earnings prospects.
Q. WHAT ABOUT THE BOND POSITION?
A. The fixed-income side of the portfolio continues to reflect our reasonably
favorable outlook, given what we view as an extremely positive environment
for inflation -- slower U.S. economic growth and weak economic prospects in
Asia and Latin America. This outlook is reflected in the portfolio's
duration, or sensitivity to changes in interest rates, of 6.0 years, which
is 20% longer than the 4.8-year duration for the Lehman Index. With credit
quality still rather strong, we have continued to focus on investment-grade
corporate bonds, that is, bonds rated "BBB" or higher by Standard & Poor's.
Roughly half of the portfolio is invested in these bonds, with holdings
concentrated in the more-defensive utility, media, and entertainment
sectors, which historically tend to perform well in all economic
environments.
Q. DO YOU SEE THE CURRENT INVESTMENT ENVIRONMENT CONTINUING?
A. I don't think corporate earnings are going to show much improvement over
the next several quarters. Therefore, we believe that we are going to be in
this type of environment for a while. There is also a lot of economic and
political turmoil around the world, so profit growth from any region,
whether it's Asia, Russia, or Latin America, is going to be hard to come
by. Finally, despite the fact that bond yields are declining, I don't
necessarily think that means price-to-earnings multiples for stocks are
going to rise. Normally, that's what happens: interest rates go down, and
multiples go up. But I think investors are still concerned about
profitability and the global economic and political situation. So we still
believe buying defensive companies with good yields, like utilities, is a
good way to go.
/s/ David M. Calabro
David M. Calabro
Lead Portfolio Manager
(on behalf of the MFS Total Return Team)
The opinions expressed in this report are those of the lead portfolio manager
and are only through the end of the period of the report as stated on the
cover. The manager's views are subject to change at any time based on market
and other conditions, and no forecasts can be guaranteed.
<PAGE>
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PORTFOLIO MANAGERS' PROFILES
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DAVID M. CALABRO, SENIOR VICE PRESIDENT; GEOFFREY L. KURINSKY, SENIOR
VICE PRESIDENT; CONSTANTINOS MOKAS, VICE PRESIDENT; LISA B. NURME,
SENIOR VICE PRESIDENT; AND MAURA A. SHAUGHNESSY, SENIOR 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. MR. MOKAS REPLACED JUDITH LAMB AS THE
MANAGER OF THE FUND'S CONVERTIBLE SECURITIES ON APRIL 1, 1998, AND HAS
BEEN EMPLOYED BY MFS SINCE 1990. 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.
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This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
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FUND FACTS
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OBJECTIVE: SEEKS ABOVE-AVERAGE INCOME (COMPARED TO A PORTFOLIO
ENTIRELY INVESTED IN STOCKS) CONSISTENT WITH THE
PRUDENT EMPLOYMENT OF CAPITAL. THE FUND ALSO SEEKS
GROWTH OF CAPITAL AND INCOME.
COMMENCEMENT OF
INVESTMENT OPERATIONS: OCTOBER 6, 1970
CLASS INCEPTION: CLASS A OCTOBER 6, 1970
CLASS B AUGUST 23, 1993
CLASS C AUGUST 1, 1994
CLASS I JANUARY 2, 1997
SIZE: $5.8 BILLION NET ASSETS AS OF SEPTEMBER 30, 1998
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PERFORMANCE SUMMARY
The following information illustrates the historical performance of the Fund's
original share class in comparison to various market indicators. Performance
results include the deduction of the maximum applicable sales charge and
reflect the percentage change in net asset value, including reinvestment of
dividends. Benchmark comparisons are unmanaged and do not reflect any fees or
expenses. The performance of other share classes will be greater than or less
than the line shown. (See Notes to Performance Summary for more information.)
It is not possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year period ended September 30, 1998)
MFS S&P 500 Lehman Brothers Consumer
Total Return Composite Government/Corporate Price Index
Fund - Class A Index Bond Index - U.S.
- -----------------------------------------------------------------------------
9/93 $ 9,527 $ 10,000 $ 10,000 $ 10,000
9/94 9,425 10,369 9,586 10,296
9/95 11,155 13,453 10,962 10,558
9/96 12,661 16,188 11,455 10,875
9/97 15,861 22,736 12,554 11,110
9/98 16,968 24,792 14,169 11,275
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended September 30, 1998)
MFS S&P 500 Lehman Brothers Consumer
Total Return Composite Government/Corporate Price Index
Fund - Class A Index Bond Index - U.S.
- -----------------------------------------------------------------------------
9/88 $ 9,521 $ 10,000 $ 10,000 $ 10,000
9/90 11,144 12,072 11,884 11,077
9/92 15,294 17,583 15,590 11,795
9/94 17,903 20,602 16,655 12,471
9/96 24,050 32,165 19,903 13,172
9/98 32,230 49,261 24,618 13,656
AVERAGE ANNUAL TOTAL RETURNS THROUGH SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
CLASS A
1 Year 3 Years 5 Years 10 Years/Life
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Annual Total Return + 6.98% +15.00% +12.23% +12.97%
- ------------------------------------------------------------------------------------------------------------
SEC Results + 1.90% +13.15% +11.14% +12.42%
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
1 Year 3 Years 5 Years 10 Years/Life
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Annual Total Return + 6.22% +14.16% +11.37% +12.52%
- ------------------------------------------------------------------------------------------------------------
SEC Results + 2.43% +13.39% +11.11% +12.52%
- ------------------------------------------------------------------------------------------------------------
CLASS C
1 Year 3 Years 5 Years 10 Years/Life
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Annual Total Return + 6.27% +14.20% +11.61% +12.65%
- ------------------------------------------------------------------------------------------------------------
SEC Results + 5.32% +14.20% +11.61% +12.65%
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS I
1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C>
Average Annual Total Return + 7.35% +15.25% +12.38% +13.04%
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<CAPTION>
COMPARATIVE INDICES
1 Year 3 Years 5 Years 10 Years/Life
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lehman Brothers Government/Corporate Bond Index+ +12.87% + 8.93% + 7.22% + 9.43%
- ------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index+ + 9.05% +22.60% +19.91% +17.29%
- ------------------------------------------------------------------------------------------------------------
Consumer Price Index+# + 1.49% + 2.21% + 2.43% + 3.17%
- ------------------------------------------------------------------------------------------------------------
+ Source: CDA/Wiesenberger.
# The Consumer Price Index is published by the U.S. Bureau of Labor Statistics and measures the cost of
living (inflation).
</TABLE>
<PAGE>
NOTES TO PERFORMANCE SUMMARY
Class A share ("A") SEC results include the maximum 4.75% sales charge. Class
B share ("B") SEC results reflect the applicable contingent deferred sales
charge (CDSC), which declines over six years from 4% to 0%. Class C shares
("C") have no initial sales charge but, like B, have higher annual fees and
expenses than A. C SEC results reflect the 1% CDSC applicable to shares
redeemed within 12 months. Class I shares ("I") have no sales charge or Rule
12b-1 fees and are only available to certain institutional investors.
B and C results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of A for periods prior to the inception of B and C.
Because operating expenses of B and C are higher than those of A, B and C
performance generally would have been lower than A performance. The A
performance included in the B and C SEC performance has been adjusted to
reflect the CDSC generally applicable to B and C rather than the initial sales
charge generally applicable to A.
I results include the performance and the operating expenses (e.g., Rule
12b-1 fees) of A for periods prior to the inception of I. Because operating
expenses of A are greater than those of I, I performance generally would have
been higher than A performance. The A performance included in the
I performance has been adjusted to reflect the fact that I have no initial
sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details. All
results are historical and assume the reinvestment of dividends and
capital gains.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PAST PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS.
PORTFOLIO CONCENTRATION AS OF SEPTEMBER 30, 1998
FIVE LARGEST STOCK SECTORS
UTILITIES & COMMUNICATIONS 22.4%
FINANCIAL SERVICES 21.2%
ENERGY 9.9%
CONSUMER STAPLES 9.1%
HEALTH CARE 6.1%
<TABLE>
TOP 10 STOCK HOLDINGS
<S> <C>
BRITISH PETROLEUM PLC, ADR 2.3% COASTAL CORP. 1.3%
Oil exploration and production company Oil exploration and production company
PHILIP MORRIS COS., INC. 2.1% SBC COMMUNICATIONS, INC. 1.3%
Tobacco, food, and beverage conglomerate Integrated telecommunications company
NATIONAL CITY CORP. 2.0% LINCOLN NATIONAL CORP. 1.3%
Central U.S. bank Multi-line insurance company
INTERNATIONAL BUSINESS MACHINES CORP. 1.7% ARCHER-DANIELS-MIDLAND CO. 1.3%
Computer and business equipment company Agricultural products processor
GTE CORP. 1.5% RITE AID CORP. 1.3%
Telecommunications company Drug store chain
Portfolio information is as of September 30, 1998. The portfolio is actively
managed, and current holdings may be different.
</TABLE>
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS -- September 30, 1998
Stocks - 46.0%
<CAPTION>
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ISSUER SHARES VALUE
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<S> <C> <C>
U.S. Stocks - 41.5%
Aerospace - 1.8%
Allied Signal, Inc. 995,900 $ 35,229,963
General Dynamics Corp. 320,300 16,075,056
Lockheed-Martin Corp. 296,737 29,914,799
Raytheon Co., "A" 144,803 7,502,605
Raytheon Co., "B" 154,500 8,333,344
United Technologies Corp. 98,448 7,525,119
--------------
$ 104,580,886
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Airlines
AMR Corp.* 37,300 $ 2,067,819
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Automotive - 0.7%
Federal Mogul Corp. 183,000 $ 8,555,250
Ford Motor Co. 60,677 2,848,027
TRW, Inc. 641,400 28,462,125
--------------
$ 39,865,402
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Banks and Credit Companies - 2.1%
Bank of New York, Inc. 449,308 $ 12,299,806
National City Corp. 900,000 59,343,750
NationsBank Corp. 98,400 5,264,400
Northern Trust Corp. 112,000 7,644,000
Norwest Corp. 276,520 9,902,873
PNC Bank Corp. 337,700 15,196,500
St. George Bank Ltd.## 24,000 1,140,000
Washington Mutual, Inc. 374,400 12,636,000
--------------
$ 123,427,329
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Business Machines - 1.2%
International Business Machines Corp. 401,400 $ 51,379,200
Sun Microsystems, Inc.* 120,000 5,977,500
Xerox Corp. 164,600 13,949,850
--------------
$ 71,306,550
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Cellular Telephones - 0.1%
Telephone & Data Systems, Inc. 105,860 $ 3,691,867
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Chemicals - 0.1%
E. I. du Pont de Nemours & Co. 100,600 $ 5,646,175
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Conglomerate - 0.3%
Eastern Enterprises 368,400 $ 15,518,850
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Consumer Goods and Services - 3.0%
International Flavours & Fragrances, Inc. 236,400 $ 7,801,200
Kimberly-Clark Corp. 898,900 36,405,450
Philip Morris Cos., Inc. 1,365,000 62,875,312
Revlon, Inc., "A"* 291,700 9,279,706
Rubbermaid, Inc. 925,300 22,149,369
Service Corp. International 357,889 11,407,712
Tyco International Ltd. 474,142 26,196,346
--------------
$ 176,115,095
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Containers - 0.1%
Jefferson Smurfit Corp.* 200,000 $ 2,300,000
Stone Container Corp.* 681,600 5,878,800
--------------
$ 8,178,800
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Electrical Equipment - 0.8%
Cooper Industries, Inc. 36,300 $ 1,479,225
Emerson Electric Co. 548,700 34,156,575
General Electric Co. 130,044 10,346,626
--------------
$ 45,982,426
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Electronics - 0.3%
AMP, Inc. 245,000 $ 8,758,750
Analog Devices, Inc.* 1 16
Intel Corp. 125,000 10,718,750
--------------
$ 19,477,516
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Entertainment - 0.7%
Time Warner, Inc. 246,566 $ 21,589,935
Viacom, Inc., "B"* 374,300 21,709,400
--------------
$ 43,299,335
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Financial Institutions - 1.2%
American Express Co. 122,000 $ 9,470,250
Associates First Capital Corp., "A" 135,355 8,831,914
Edwards (A.G.), Inc. 239,900 7,271,969
Federal Home Loan Mortgage Corp. 680,400 33,637,275
Federal National Mortgage Assn 50,000 3,212,500
Federated Investors, Inc., "A" 12,400 178,250
First Union Corp. 121,500 6,219,281
Morgan (J.P.) & Co. 9,700 820,862
--------------
$ 69,642,301
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Food and Beverage Products - 1.8%
Anheuser Busch Cos., Inc. 32,000 $ 1,728,000
Archer-Daniels-Midland Co. 2,294,762 38,437,264
General Mills, Inc. 151,700 10,619,000
Hershey Foods Corp. 447,100 30,598,406
Hubbell, Inc. 338,000 11,999,000
McCormick & Co., Inc. 154,100 4,478,531
Nabisco Holdings Corp., "A" 200,689 7,212,261
--------------
$ 105,072,462
- --------------------------------------------------------------------------------------------------
Forest and Paper Products - 0.4%
Champion International Corp. 246,000 $ 7,702,875
Weyerhaeuser Co. 405,000 17,085,937
--------------
$ 24,788,812
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Insurance - 4.5%
Allstate Corp. 159,400 $ 6,644,988
American General Corp. 215,200 13,745,900
Chubb Corp. 553,300 34,857,900
CIGNA Corp. 31,500 2,082,938
Conseco, Inc. 151,350 4,625,634
Equitable Cos., Inc. 459,582 19,015,205
Hartford Financial Services Group, Inc. 311,800 14,791,012
Hartford Life, Inc., "A" 101,700 4,296,825
Jefferson Pilot Corp. 390,900 23,649,450
Life Re Corp. 59,400 5,461,088
Lincoln National Corp. 477,000 39,233,250
Provident Cos., Inc. 464,000 15,660,000
ReliaStar Financial Corp. 420,300 16,391,700
Torchmark Corp. 711,200 25,558,750
Transamerica Corp. 355,500 37,683,000
Travelers Group, Inc. 2 75
--------------
$ 263,697,715
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Machinery - 0.3%
Deere & Co., Inc. 20,200 $ 611,050
Lear Corp.* 299,100 13,085,625
York International Corp. 27,400 914,475
--------------
$ 14,611,150
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Manufacturing - 0.2%
Illinois Tool Works, Inc. 212,500 $ 11,581,250
- --------------------------------------------------------------------------------------------------
Medical and Health Products - 0.9%
American Home Products Corp. 373,200 $ 19,546,350
Baxter International, Inc. 73,000 4,343,500
Bristol-Myers Squibb Co. 141,800 14,729,475
Pharmacia & Upjohn, Inc. 249,900 12,541,856
--------------
$ 51,161,181
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Medical and Health Technology and Services - 0.7%
Columbia/HCA Healthcare Corp. 1,000,100 $ 20,064,506
HealthSouth Corp.* 617,400 6,521,288
MedPartners, Inc.* 350,000 1,137,500
Tenet Healthcare Corp.* 238,500 6,856,875
United Healthcare Corp. 156,900 5,491,500
--------------
$ 40,071,669
- --------------------------------------------------------------------------------------------------
Metals and Minerals - 0.6%
Aluminum Co. of America 249,800 $ 17,735,800
Phelps Dodge Corp. 49,400 2,578,063
USEC, Inc.* 1,115,000 17,212,812
--------------
$ 37,526,675
- --------------------------------------------------------------------------------------------------
Oil Services - 0.3%
Burlington Resources, Inc. 197,700 $ 7,389,037
Schlumberger Ltd. 141,400 7,114,188
--------------
$ 14,503,225
- --------------------------------------------------------------------------------------------------
Oils - 3.1%
Amoco Corp. 331,800 $ 17,875,725
Atlantic Richfield Co. 24,400 1,730,875
Coastal Corp. 1,180,300 39,835,125
Exxon Corp. 488,551 34,290,173
Mobil Corp. 312,100 23,700,094
Texaco, Inc. 455,800 28,572,962
Unocal Corp. 588,450 21,331,313
USX-Marathon Group 488,510 17,311,573
--------------
$ 184,647,840
- --------------------------------------------------------------------------------------------------
Photographic Products - 0.6%
Eastman Kodak Co. 437,700 $ 33,839,681
- --------------------------------------------------------------------------------------------------
Pollution Control - 0.2%
Browning Ferris Industries, Inc. 414,400 $ 12,535,600
- --------------------------------------------------------------------------------------------------
Printing and Publishing - 0.5%
Gannett Co., Inc. 443,900 $ 23,776,394
New York Times Co. 245,000 6,737,500
--------------
$ 30,513,894
- --------------------------------------------------------------------------------------------------
Railroads - 0.3%
Burlington Northern Santa Fe Railway Co. 333,900 $ 10,684,800
Norfolk Southern Corp. 269,900 7,843,969
--------------
$ 18,528,769
- --------------------------------------------------------------------------------------------------
Real Estate Investment Trusts - 1.6%
Arden Realty, Inc. 221,900 $ 4,951,144
Boston Properties, Inc. 102,800 2,929,800
CBL & Associates Properties, Inc. 187,900 4,838,425
Equity Office Properties Trust 169,200 4,145,400
Equity Residential Properties Trust 181,800 7,669,687
Federal Realty Investment Trust 175,000 3,959,375
Highwoods Properties, Inc. 381,200 10,578,300
Hospitality Properties Trust 267,400 7,955,150
Kilroy Realty Corp. 210,800 4,848,400
Mack-Cali Realty Corp. 142,200 4,266,000
Mid-America Apartment Communities, Inc. 156,900 4,059,788
Patriot American Hospitality, Inc. 200,000 2,550,000
Prime Group Realty Trust 191,948 3,215,129
SL Green Realty Corp. 394,800 8,290,800
Starwood Hotels and Resorts 39,200 1,195,600
TriNet Corporate Realty Trust, Inc. 593,400 19,359,675
--------------
$ 94,812,673
- --------------------------------------------------------------------------------------------------
Restaurants and Lodging - 0.1%
McDonalds Corp. 111,800 $ 6,673,062
- --------------------------------------------------------------------------------------------------
Stores - 1.4%
American Stores Co. 446,300 $ 14,365,281
Dayton-Hudson Corp. 204,700 7,318,025
Penney (J.C.) Co. 265,000 11,908,438
Rite Aid Corp. 1,064,140 37,776,970
Sears, Roebuck & Co. 168,700 7,454,431
--------------
$ 78,823,145
- --------------------------------------------------------------------------------------------------
Supermarkets - 1.2%
Albertsons, Inc. 257,200 $ 13,920,950
Kroger Co.* 353,200 17,660,000
Meyer (Fred), Inc.* 598,650 23,272,519
Safeway, Inc.* 265,300 12,303,287
--------------
$ 67,156,756
- --------------------------------------------------------------------------------------------------
Telecommunications - 3.2%
Alltel Corp. 220,000 $ 10,422,500
Ameritech Corp. 116,200 5,504,975
AT&T Corp. 245,200 14,328,875
Bell Atlantic Corp. 632,092 30,616,956
GTE Corp. 816,500 44,907,500
Intermedia Communications, Inc.* 465 11,422
Lucent Technologies, Inc. 2 138
MCI Worldcom, Inc.* 220,889 10,795,950
SBC Communications, Inc. 894,048 39,729,258
Sprint Corp. 454,900 32,752,800
--------------
$ 189,070,374
- --------------------------------------------------------------------------------------------------
Utilities - Electric - 5.0%
AES Corp.* 88,800 $ 3,291,150
Atmos Energy Corp. 137,100 3,915,919
CalEnergy Co., Inc.* 334,700 8,869,550
Carolina Power & Light Co. 615,800 28,442,262
Cinergy Corp. 563,230 21,543,547
CMS Energy Corp. 358,200 15,604,087
DPL, Inc. 735,000 14,424,375
Florida Progress Corp. 230,000 9,961,875
FPL Group, Inc. 28,600 1,993,063
GPU, Inc. 500,600 21,275,500
Houston Industries, Inc. 155,000 4,824,375
Illinova Corp. 340,000 9,753,750
New Century Energies, Inc. 645,150 31,410,741
Nipsco Industries, Inc. 320,000 10,520,000
Pacificorp 334,400 6,416,300
Peco Energy Co. 266,300 9,736,594
Pinnacle West Capital Corp. 419,000 18,776,437
Public Service Co. of New Mexico 282,600 6,270,188
Scana Corp. 300,800 10,095,600
Sempra Energy 587,200 15,303,900
Sierra Pacific Resources 315,600 12,249,225
Southern Co. 486,500 14,321,344
Texas Utilities Co. 262,600 12,227,312
--------------
$ 291,227,094
- --------------------------------------------------------------------------------------------------
Utilities - Gas - 2.2%
Columbia Energy Group, Inc. 583,120 $ 34,185,410
Consolidated Natural Gas Co. 90,000 4,905,000
El Paso Energy Corp. 142,100 4,609,369
Enron Corp. 188,200 9,939,313
KN Energy, Inc. 425,300 21,796,625
Marketspan Corp. 375,000 10,757,812
National Fuel Gas Co. 159,500 7,496,500
NICOR, Inc. 237,900 9,857,981
Questar Corp. 400,000 7,700,000
UGI Corp. 475,000 10,984,375
Williams Cos., Inc. 64,636 1,858,285
--------------
$ 124,090,670
- --------------------------------------------------------------------------------------------------
Total U.S. Stocks $2,423,734,048
- --------------------------------------------------------------------------------------------------
Foreign Stocks - 4.5%
Bermuda - 0.3%
Ace Ltd. (Insurance) 425,100 $ 12,753,000
EXEL Ltd., "A" (Insurance) 76,795 4,838,085
--------------
$ 17,591,085
- --------------------------------------------------------------------------------------------------
Canada - 0.3%
Canadian National Railway Co. (Railroads) 345,300 $ 15,409,013
- --------------------------------------------------------------------------------------------------
Chile - 0.1%
Chilectra S.A., ADR (Utilities - Electric) 271,700 $ 4,447,729
- --------------------------------------------------------------------------------------------------
France - 0.5%
Alcatel Alsthom Compagnie, ADR
(Telecommunications) 394,700 $ 6,709,900
Sanofi S.A. (Medical and Health Products) 83,500 12,301,146
Thomson CSF (Aerospace and Defense) 382,800 11,703,073
--------------
$ 30,714,119
- --------------------------------------------------------------------------------------------------
Netherlands - 0.7%
Akzo Nobel N.V. (Chemicals) 251,870 $ 8,970,015
ING Groep N.V. (Financial Services) 357,964 16,154,331
Royal Dutch Petroleum Co., ADR (Oils) 401,300 19,111,913
--------------
$ 44,236,259
- --------------------------------------------------------------------------------------------------
Sweden - 0.2%
Volvo AB, ADR (Automotive) 540,800 $ 13,046,800
- --------------------------------------------------------------------------------------------------
Switzerland - 0.3%
Nestle SA (Food and Beverage Products) 8,500 $ 16,986,431
- --------------------------------------------------------------------------------------------------
United Kingdom - 2.1%
British Petroleum PLC, ADR (Oils) 802,844 $ 70,048,139
Diageo PLC (Food and Beverage Products) 124,169 1,181,045
Glaxo Wellcome PLC, ADR (Medical and Health
Products) 569,100 32,509,838
SmithKline-Beecham PLC, ADR (Medical and Health
Products) 190,300 10,418,925
Zeneca Group (Medical and Health Products) 234,900 8,298,732
--------------
$ 122,456,679
- --------------------------------------------------------------------------------------------------
Total Foreign Stocks $ 264,888,115
- --------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $2,454,674,924) $2,688,622,163
- --------------------------------------------------------------------------------------------------
Convertible Preferred Stocks - 3.2%
- --------------------------------------------------------------------------------------------------
Agricultural Products
Case Corp., $4.50 13,000 $ 698,750
- --------------------------------------------------------------------------------------------------
Banks and Credit Companies - 0.2%
McKesson Financing Trust, 5% *## 91,320 $ 11,346,510
National Australia Bank Ltd., 7.875% 35,000 931,875
--------------
$ 12,278,385
- --------------------------------------------------------------------------------------------------
Business Services - 0.1%
Central Parking Finance Trust, 5.25%*## 49,850 $ 1,302,331
EVI, Inc., 5%*## 92,300 3,080,513
--------------
$ 4,382,844
- --------------------------------------------------------------------------------------------------
Computer Software - Services
Cendant Corp., 7.5% 29,900 $ 747,500
- --------------------------------------------------------------------------------------------------
Consumer Goods and Services - 0.4%
Newell Financial Trust Co., 5.25%*## 365,700 $ 20,524,913
Readers Digest, $1.9336 99,700 2,075,006
--------------
$ 22,599,919
- --------------------------------------------------------------------------------------------------
Containers - 0.1%
Sealed Air Corp., $2.00 206,000 $ 7,441,750
- --------------------------------------------------------------------------------------------------
Entertainment - 0.6%
CBS Radio, Inc., 7%## 2,750 $ 4,482,500
Chancellor Media Corp.,$3.00* 10,000 721,250
Mediaone Group, Inc., 6.25%* 458,100 25,596,337
Royal Caribbean Cruises Ltd., 7.25% 41,000 3,487,563
--------------
$ 34,287,650
- --------------------------------------------------------------------------------------------------
Financial Institutions - 0.3%
Finova Finance Trust, 5.5% 129,160 $ 8,976,620
Jefferson Pilot Corp., 7.25% 25,000 2,375,000
Merrill Lynch & Co., Inc., 6.25% 25,000 553,125
Salomon, Inc., 6.25% 38,300 1,934,150
Salomon, Inc., 7.625% 100,000 4,000,000
Tosco Financing Trust, 5.75%## 34,000 1,470,500
--------------
$ 19,309,395
- --------------------------------------------------------------------------------------------------
Food and Beverage Products - 0.1%
Ralston Purina Co., 7% 45,000 $ 2,745,000
Suiza Capital Trust II, 5.5%*## 23,200 754,000
--------------
$ 3,499,000
- --------------------------------------------------------------------------------------------------
Insurance - 0.5%
American Heritage Life Investment Corp., 8.5% 27,400 $ 1,726,200
Conseco, Inc., 7%* 324,100 10,604,552
Frontier Financing Trust, 6.25%*## 45,000 1,912,500
Lincoln National Corp., 7.75%* 509,900 12,556,288
SunAmerica, Inc., $3.10 7,000 1,190,000
SunAmerica, Inc., $3.188 40,000 2,052,500
--------------
$ 30,042,040
- --------------------------------------------------------------------------------------------------
Metals and Minerals
Timet Capital Trust, 6.625%##* 46,600 $ 1,409,650
- --------------------------------------------------------------------------------------------------
Special Products and Services
Fleetwood Capital Trust, 6%*## 34,900 $ 1,640,300
- --------------------------------------------------------------------------------------------------
Steel
USX-Marathon Group, 6.75%* 70,000 $ 1,365,000
- --------------------------------------------------------------------------------------------------
Stores - 0.1%
AnnTaylor Finance Trust, 8.5% 20,000 $ 1,170,000
TJX Cos., Inc., $7.00 4,000 1,000,000
--------------
$ 2,170,000
- --------------------------------------------------------------------------------------------------
Telecommunications
Intermedia Communications, Inc., 7%*## 39,900 $ 1,356,600
- --------------------------------------------------------------------------------------------------
Utilities - Electric - 0.8%
CalEnergy Capital Trust III, 6.5%* 10,000 $ 405,000
CalEnergy Capital Trust III, 6.5%*## 247,700 10,031,850
Devon Financing Trust, $3.25*## 45,000 2,677,500
Houston Industries, Inc., 7.00% 145,000 11,065,312
Texas Utilities Co., 0.50% 178,700 8,488,250
Texas Utilities Co., 9.25% 182,000 10,237,500
--------------
$ 42,905,412
- --------------------------------------------------------------------------------------------------
Total Convertible Preferred Stocks (Identified
Cost, $176,316,897) $ 186,134,195
- --------------------------------------------------------------------------------------------------
Preferred Stocks - 0.6%
- --------------------------------------------------------------------------------------------------
Aerospace
Loral Space & Communications, 6%* 42,500 $ 1,742,500
- --------------------------------------------------------------------------------------------------
Automotive - 0.2%
Federal Mogul Financing Trust, 7.00%* 57,100 $ 3,147,638
Tower Automotive Capital Trust, 6.75%*## 179,800 7,731,400
--------------
$ 10,879,038
- --------------------------------------------------------------------------------------------------
Banks and Credit Companies - 0.1%
NB Capital Corp., 8.35%* 6,700 $ 7,296,300
- --------------------------------------------------------------------------------------------------
Insurance - 0.1%
Lincoln National Corp. 1.85%* 171,200 $ 3,488,200
Philadelphia Consolidated Holding Corp, 0.50%* 228,400 1,998,500
--------------
$ 5,486,700
- --------------------------------------------------------------------------------------------------
Media - 0.1%
Primedia, Inc., 8.625%* 20,000 $ 1,880,000
- --------------------------------------------------------------------------------------------------
Medical and Health Technology and Services
MedPartners, Inc., 6.5% 150,000 $ 909,375
- --------------------------------------------------------------------------------------------------
Special Products and Services
Budget Group Capital Trust, 6.25%* 40,000 $ 1,840,000
- --------------------------------------------------------------------------------------------------
Telecommunications
ICG Funding LLC, 6.75%* 24,900 $ 1,369,500
- --------------------------------------------------------------------------------------------------
Utilities - Gas - 0.1%
El Paso Tennessee Pipeline Co., 8.25% 50,000 $ 2,787,500
MCN Corp., 8.75% 55,200 1,028,100
--------------
$ 3,815,600
- --------------------------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $38,809,611) $ 35,219,013
- --------------------------------------------------------------------------------------------------
Bonds - 37.0%
- --------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- --------------------------------------------------------------------------------------------------
U.S. Bonds - 36.2%
Aerospace - 0.1%
Northrup Grumman Corp., 9.375s, 2024 $ 4,000 $ 4,663,280
- --------------------------------------------------------------------------------------------------
Airlines - 0.9%
Continental Airlines, Inc., 9.5s, 2001 $ 11,190 $ 11,567,662
Jet Equipment Trust, 9.41s, 2010## 3,365 4,192,622
Jet Equipment Trust, 8.64s, 2012## 3,186 3,729,365
Jet Equipment Trust, 11.44s, 2014## 4,700 6,483,556
Jet Equipment Trust, 10.69s, 2015## 1,250 1,623,700
Northwest Airlines, Inc., 7.625s, 2005 10,190 9,691,709
Northwest Airlines, Inc., 8.7s, 2007 4,550 4,695,827
United Airlines Pass-Through Trust, 7.27s,
2013+ 9,552 10,095,634
--------------
$ 52,080,075
- --------------------------------------------------------------------------------------------------
Apparel and Textiles - 0.2%
Burlington Industries, Inc. New, 7.25s, 2027 $ 3,050 $ 3,117,588
Jones Apparel Group, Inc., 6.25s, 2001## 10,700 10,713,375
--------------
$ 13,830,963
- --------------------------------------------------------------------------------------------------
Automotive - 0.3%
Federal Mogul Corp., 7.5s, 2004 $ 7,335 $ 7,410,184
Federal Mogul Corp., 7.75s, 2006 2,530 2,578,095
Ford Motor Co. Delaware, 8.9s, 2032 6,770 8,663,705
--------------
$ 18,651,984
- --------------------------------------------------------------------------------------------------
Banks and Credit Companies - 1.3%
BCI US Funding Trust 1, 8.01s, 2049## $ 10,500 $ 10,080,000
Beaver Valley Funding Corp., 9s, 2017 12,340 14,173,847
BT Institutional Capital Trust, 7.75s, 2026## 5,000 5,545,650
Capital One Financial Corp., 7.25s, 2003 4,845 5,093,113
Colonial Capital II, 8.92s, 2027 5,010 5,866,760
First Chicago NBD Institutional Capital, 7.95s,
2026## 2,600 2,794,532
MBNA Capital, 8.278s, 2026 19,130 20,004,241
Riggs National Corp., 8.5s, 2006 2,025 2,121,309
State Street Bank & Trust I, 7.94s, 2026## 5,000 5,768,050
Washington Mutual Capital I, 8.375s, 2027 4,590 5,078,651
--------------
$ 76,526,153
- --------------------------------------------------------------------------------------------------
Building - 0.4%
McDermott, Inc., 9.375s, 2002 $ 20,305 $ 21,919,857
Owens Corning Fiberglass Corp., 9.9s, 2015## 2,329 2,439,297
--------------
$ 24,359,154
- --------------------------------------------------------------------------------------------------
Business Services
Magna International, Inc., 4.875s, 2005## $ 2,000 $ 2,012,500
- --------------------------------------------------------------------------------------------------
Cellular Telephones - 0.2%
Airtouch Communications, Inc., 6.65s, 2008 $ 9,840 $ 10,625,822
- --------------------------------------------------------------------------------------------------
Chemicals - 0.2%
Solutia, Inc., 7.375s, 2027 $ 8,655 $ 8,509,596
- --------------------------------------------------------------------------------------------------
Conglomerates - 0.7%
News America Holdings, Inc., 8s, 2016 $ 17,980 $ 19,870,058
News America Holdings, Inc., 9.5s, 2024 5,410 6,882,656
News America Holdings, Inc., 10.125s, 2012 10,000 11,767,700
--------------
$ 38,520,414
- --------------------------------------------------------------------------------------------------
Construction Services - 0.2%
Georgia Pacific Corp., 9.875s, 2021 $ 8,310 $ 9,478,802
- --------------------------------------------------------------------------------------------------
Consumer Goods and Services - 0.5%
Fingerhut Cos., Inc., 7.375s, 1999 $ 3,000 $ 3,045,150
Hilfiger (Tommy) USA, Inc., 6.5s, 2003 7,415 7,463,197
Hilfiger (Tommy) USA Inc., 6.85s, 2008 5,125 5,191,984
Protection One Alarm Monit Inc., 7.375s, 2005## 12,090 12,247,049
--------------
$ 27,947,380
- --------------------------------------------------------------------------------------------------
Corporate Asset Backed - 3.9%
Advanta Credit Card Master Trust II, 5.69s, 2004 $ 15,000 $ 14,953,050
AT&T Universal Card Master Trust, 5.778s, 2004 12,000 11,992,440
Banamex Credit Card Merchant Voucher, 6.25s, 2003## 5,650 5,697,672
BCF LLC, 7.75s, 2026## 4,354 4,316,199
Charming Shoppes Master Trust, 7s, 1999 10,011 10,089,186
Contimorgage Home Equity, 6.13s, 2013 19,000 19,172,140
Continental Airlines Pass-Through Trust, Inc.,
6.41s, 2007 2,225 2,303,965
Continental Airlines Pass-Through Trust, Inc.,
7.461s, 2015 1,487 1,644,107
Continental Airlines Pass-Through Trust, Inc.,
6.648s, 2019 5,475 5,813,464
Continental Airlines, Inc., 9.5s, 2013 3,816 4,590,415
Continental Airlines, Inc., 10.22s, 2014 8,896 11,432,933
Criimi Mae Commercial Mortgage Trust, 7s, 2011 5,500 5,726,875
Cwabs, Inc., 6.5s, 2013 11,111 11,204,909
Discover Card Mount I, 5.68s, 2005 15,000 14,953,050
Ford Credit Auto Owner Trust, 5.8s, 2000 13,050 13,066,312
MBNA Master Credit Card Trust II, 5.798s, 2005 9,800 9,784,614
Merrill Lynch Mortgage Investors, Inc., 9s, 2011 263 269,380
Merrill Lynch Mortgage Investors, Inc., 9.25s, 2011 67 67,634
Merrill Lynch Mortgage Investors, Inc., 8.1s, 2022+ 4,000 3,966,875
Navistar Financial Owner Trust, 5.956s, 2000 4,839 4,878,007
Peoples Bank Credit Card Master Trust, 5.71s, 2004 21,015 20,883,656
Residential Accredit Lns, Inc., 7s, 2028 9,068 9,355,626
SLM Student Loan Trust, 5.823s, 2007 25,000 24,859,375
Time Warner Pass-Through Asset Trust, 6.1s, 2001## 17,130 17,433,886
--------------
$ 228,455,770
- --------------------------------------------------------------------------------------------------
Electrical Equipment
Honeywell, Inc., 6.625s, 2028 $ 2,530 $ 2,581,258
- --------------------------------------------------------------------------------------------------
Energy
Wiser Oil Co., 9.5s, 2007 $ 375 $ 292,500
- --------------------------------------------------------------------------------------------------
Entertainment - 1.7%
Circus Circus Enterprises, Inc., 7s, 2036 $ 11,100 $ 10,150,950
Hearst Argyle Television, Inc., 7s, 2018 3,525 3,552,601
Hearst Argyle Television, Inc., 7.5s, 2027 7,905 8,173,928
Paramount Communications, Inc., 5.875s, 2000 3,500 3,538,850
Time Warner Entertainment Company LP, 8.375s, 2033 21,720 26,513,604
Time Warner, Inc., 8.3s, 2036 17,848 5,906,617
Time Warner, Inc., 9.15s, 2023 10,398 13,479,032
Viacom, Inc., 6.75s, 2003 27,830 28,574,452
--------------
$ 99,890,034
- --------------------------------------------------------------------------------------------------
Financial Institutions - 2.7%
Banponce Trust I, 8.327s, 2027 $ 5,000 $ 5,112,800
Capital One Bank, 6.7s, 2008 12,780 12,812,589
Contifinancial Corp., 7.5s, 2002 3,814 3,679,976
Donaldson Lufkin & Jenrette, 6.5s, 2008 5,780 5,754,857
First Empire Capital Trust I, 8.234s, 2027 11,525 12,339,126
First Merchants Acceptance Corp.**, 9.5s, 2006 2,000 800,000
Goldman Sachs Group LP, 5.9s, 2003 5,300 5,452,693
GS Escrow Corp., 6.75s, 2001## 28,610 28,292,143
GS Escrow Corp., 7.125s, 2005## 20,130 19,894,680
Lehman Brothers, Inc., 7.375s, 2007 8,055 8,132,569
Lehman Brothers, Inc., 6.5s, 2008 8,095 7,698,426
Lehman Brothers, Inc., 7.5s, 2026 10,608 10,799,899
Leucadia Capital Trust, 8.65s, 2027 2,606 2,900,765
Natexis Ambs Co. LLC, 8.44s, 2049## 5,100 4,743,000
Providian National Bank, 6.7s, 2003 7,850 8,236,613
Riggs Capital II, 8.875s, 2027 3,730 3,987,780
Salton Sea Funding Corp., 7.37s, 2005 4,890 5,214,494
Salton Sea Funding Corp., 7.84s, 2010 7,270 8,568,640
Salton Sea Funding Corp., 8.3s, 2011 2,500 2,905,450
United Cos. Financial Corp., 7.7s, 2004 2,650 2,524,231
--------------
$ 159,850,731
- --------------------------------------------------------------------------------------------------
Food Products - 0.3%
Heinz(HJ) Co., 6.375s, 2028 $ 9,710 $ 10,048,005
Nabisco, Inc., 6.375s, 2035 4,856 4,942,874
--------------
$ 14,990,879
- --------------------------------------------------------------------------------------------------
Forest and Paper Products - 0.3%
Georgia Pacific Corp., 7.25s, 2028 $ 9,990 $ 9,881,009
Waterford 3 Funding Corp., 8.09s, 2017 6,860 7,607,260
--------------
$ 17,488,269
- --------------------------------------------------------------------------------------------------
Industrial - 0.7%
Interace Inc., 7.3s, 2008 $ 7,200 $ 7,749,000
Lowes Cos., Inc., 6.875s, 2028 2,700 2,796,282
Owens Illinois, Inc., 7.35s, 2008 8,920 9,381,967
Owens Illinois, Inc., 7.5s, 2010 7,420 7,916,546
Owens Illinois, Inc., 7.8s, 2018 11,220 11,538,648
Network Associates, Inc., 5.692s, 2018## 7,470 2,838,448
--------------
$ 42,220,891
- --------------------------------------------------------------------------------------------------
Insurance - 1.3%
Atlantic Mutual Insurance Co., 8.15s, 2028## $ 16,283 $ 17,844,703
Conseco, Inc., 6.4s, 2001 8,910 8,976,736
Fairfax Financial Holdings Limited, 7.375s, 2018 6,650 6,485,811
NGC Corp. Capital Trust I, 8.316s, 2027 3,255 3,841,779
Providian Capital I, 9.525s, 2027## 9,350 10,514,168
Safeco Capital Trust I, 8.072s, 2037 27,823 29,205,247
--------------
$ 76,868,444
- --------------------------------------------------------------------------------------------------
Medical and Health Products - 0.2%
Bausch & Lomb, Inc., 6.5s, 2005 $ 4,895 $ 5,004,110
Bausch & Lomb, Inc., 7.125s, 2028 4,895 5,289,194
Tenet Healthcare Corp., 7.625s, 2008## 1,950 1,969,500
--------------
$ 12,262,804
- --------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.7%
Columbia/HCA Healthcare Corp., 6.5s, 1999 $ 4,059 $ 4,058,635
Columbia/HCA Healthcare Corp., 6.875s, 2001 2,250 2,276,932
Columbia/HCA Healthcare Corp., 7.69s, 2025 16,118 14,113,243
HealthSouth Corp., 3.25s, 2003 1,994 1,520,425
HealthSouth Corp., 6.875s, 2005## 11,030 11,646,246
Tenet Healthcare Corp., 8s, 2005 4,850 4,922,750
Tenet Healthcare Corp., 8.625s, 2007 857 889,138
--------------
$ 39,427,369
- --------------------------------------------------------------------------------------------------
Oil Services - 0.1%
KCS Energy, Inc., 8.875s, 2008 $ 2,670 $ 2,189,400
Ultramar Diamond Shamrock Corp., 7.2s, 2017 5,030 5,020,644
--------------
$ 7,210,044
- --------------------------------------------------------------------------------------------------
Oils - 0.9%
Gulf Canada, 9.25s, 2004 $ 1,785 $ 1,852,598
Husky Oil Ltd., 8.9s, 2028## 12,785 12,593,225
Lasmo USA, Inc., 7.125s, 2003 2,673 2,756,531
Lasmo USA, Inc., 6.75s, 2007 7,380 7,300,518
Lasmo USA, Inc., 8.375s, 2023 1,000 1,079,340
Lasmo USA, Inc., 7.3s, 2027 6,324 5,915,153
Oryx Energy Co., 8.375s, 2004 3,740 4,002,473
Petroleum Geo Services, 7.125s, 2028 12,015 11,594,475
Transocean Offshore, Inc., 8s, 2027 4,050 4,483,593
--------------
$ 51,577,906
- --------------------------------------------------------------------------------------------------
Restaurants and Lodging - 0.1%
Circus Circus Enterprises, Inc., 6.7s, 2096 $ 4,500 $ 4,250,250
- --------------------------------------------------------------------------------------------------
Retail - 0.1%
Dillards, Inc., 7.13s, 2018 $ 4,875 $ 5,094,375
- --------------------------------------------------------------------------------------------------
Stores
Rite Aid Corp., 5.25s, 2002## $ 2,000 $ 2,380,000
- --------------------------------------------------------------------------------------------------
Telecommunications - 1.6%
Continental Cablevision, Inc., 11s, 2007 $ 19,020 $ 20,639,743
MCI Worldcom, Inc., 7.55s, 2004 2,695 2,935,125
TCI Communications Financing III, 9.65s, 2027 14,400 18,436,896
TCI Communications, Inc., 8s, 2005 4,085 4,668,420
TCI Communications, Inc., 7.125s, 2028 5,025 5,491,521
Tele Communications, Inc., 7.375s, 2000 20,000 20,521,800
Tele Communications, Inc., 7.875s, 2013 6,520 7,588,432
TKR Cable, Inc., 10.5s, 2007 7,500 8,251,275
Turner Broadcasting Systems, Inc., 8.375s, 2013 1,245 1,416,673
WorldCom, Inc., 8.875s, 2006 5,000 5,484,800
--------------
$ 95,434,685
- --------------------------------------------------------------------------------------------------
Transportation - 0.1%
Federal Express Corp., 7.65s, 2014 $ 4,286 $ 4,692,884
- --------------------------------------------------------------------------------------------------
U.S. Federal Agencies - 1.1%
Federal National Mortgage Assn., 6.5s, 2001 - 2099 $ 65,112 $ 66,474,548
- --------------------------------------------------------------------------------------------------
U.S. Government Guaranteed - 11.1%
Government National Mortgage Association - 4.5%
GNMA, 7s, 2027 - 2028 $ 11,496 $ 11,865,933
GNMA, 7.5s, 2023 - 2028 141,816 147,005,560
GNMA, 8s, 2007 - 2099 99,588 103,874,938
--------------
$ 262,746,431
- --------------------------------------------------------------------------------------------------
Small Business Administration
SBA, 8.8s, 2011 $ 431 $ 487,497
- --------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 6.6%
U.S. Treasury Bonds, 12.375s, 2004 $ 25,000 $ 34,754,000
U.S. Treasury Bonds, 9.875s, 2015 28,500 44,059,290
U.S. Treasury Bonds, 6.125s, 2027 31,776 36,631,690
U.S. Treasury Bonds, 6.375s, 2027 12,615 14,944,833
U.S. Treasury Bonds, 6.625s, 2027 75,250 91,428,750
U.S. Treasury Bonds, 5.5s, 2028 24,665 26,661,385
U.S. Treasury Notes, 5.5s, 2008 12,000 12,980,640
U.S. Treasury Notes, 5.625s, 2008 28,575 31,253,906
U.S. Treasury Notes, 6.5s, 2005 - 2006 74,395 84,358,734
U.S. Treasury Notes, 7.875s, 2004 4,655 5,510,356
--------------
$ 382,583,584
- --------------------------------------------------------------------------------------------------
Total U.S. Government Guaranteed $ 645,817,512
- --------------------------------------------------------------------------------------------------
Utilities - Electric - 3.8%
CalEnergy Co., Inc., 9.875s, 2003 $ 5,835 $ 6,443,124
CalEnergy Co., Inc., 7.23s, 2005 4,780 4,872,732
CalEnergy Co., Inc., 7.63s, 2007 3,500 3,620,050
CalEnergy Co., Inc., 7.52s, 2008 7,185 7,347,309
Cleveland Electric Illuminating Co., 7.43s, 2009 8,485 9,226,674
Cleveland Electric Illuminating Co., 7.88s, 2017 11,110 11,565,399
Cleveland Electric Illuminating Co., 9s, 2023 9,118 9,835,130
Comed Financing II, 8.5s, 2027## 4,400 4,741,176
Commonwealth Edison Co., 7.625s, 2007 3,605 4,004,650
Commonwealth Edison Co., 6.95s, 2018 8,640 8,855,741
Connecticut Light & Power Co., 6.125s, 2004 3,000 2,970,540
Connecticut Light & Power Co., 8.59s, 2003 7,800 8,166,600
Connecticut Light & Power Co., 7.875s, 2024 6,000 6,386,220
Edison Mission Energy, 7.33s, 2008## 1,450 1,627,611
El Paso Electric Co., 8.9s, 2006 3,810 4,355,554
Ggib Funding Corp., 7.43s, 2011 22,767 24,131,407
Long Island Lighting Co., 7.5s, 2007 14,976 15,522,774
Long Island Lighting Co., 8.2s, 2023 5,950 6,726,118
Midland Cogeneration Venture Corp., 10.33s, 2002 8,526 9,267,562
Midland Funding Corp. II, "A", 11.75s, 2005 1,750 2,170,822
Midland Funding Corp., "B", 13.25s, 2006 4,070 5,270,813
Montana Power Co., 7.875s, 2026 2,275 2,711,254
Niagara Mohawk Power Corp., 7.75s, 2006 6,125 6,747,361
Niagara Mohawk Power Corp., 8.75s, 2022 7,190 7,656,847
Niagara Mohawk Power Corp., 8.5s, 2023 4,650 5,182,285
North Atlantic Energy, 9.05s, 2002 4,846 5,048,950
Northeast Utilities, 8.58s, 2006 3,355 3,640,580
Seabrook Station, 7.83s, 2019 5,037 5,797,940
Texas & New Mexico Power Co., 12.5s, 1999 10,485 10,674,149
Texas Utilities Co., 6.375s, 2008 9,890 10,066,339
Toledo Edison Co., 7.875s, 2004 7,275 7,886,173
--------------
$ 222,519,884
- --------------------------------------------------------------------------------------------------
Utilities - Gas - 0.5%
Coastal Corp., 6.5s, 2008 $ 6,940 $ 7,109,128
Coastal Corp., 7.42s, 2037 3,200 3,282,144
Louis Dreyfus Natural Gas Corp., 6.875s, 2007 5,590 5,484,908
Tennessee Gas Pipeline Co., 7.625s, 2037 5,932 6,202,558
Texas Gas Transmission Corp., 7.25s, 2027 5,300 5,417,289
--------------
$ 27,496,027
- --------------------------------------------------------------------------------------------------
Total U.S. Bonds $2,114,483,187
- --------------------------------------------------------------------------------------------------
Foreign Bonds - 0.8%
Argentina - 0.1%
Hidroelectrica Alicura, 8.375s, 1999##
(Utilities - Electric) $ 6,244 $ 5,994,240
- --------------------------------------------------------------------------------------------------
Chile - 0.1%
Empresa Nacional de Electric, 7.325s, 2037
(Utilities - Electric) $ 5,114 $ 4,571,456
- --------------------------------------------------------------------------------------------------
Colombia - 0.1%
Republic of Colombia, 8.75s, 1999 (Government) $ 3,640 $ 3,476,200
Republic of Columbia, 8.82s, 2005 (Government) 4,352 3,612,160
--------------
$ 7,088,360
- --------------------------------------------------------------------------------------------------
Finland - 0.1%
Upm Kymmene Corp., 7.45s, 2027## (Forest and
Paper Products) $ 6,760 $ 7,625,145
- --------------------------------------------------------------------------------------------------
Mexico - 0.1%
Banco Commercial S.A., 8.25s, 2007## (Financial
Services) $ 2,710 $ 2,303,500
- --------------------------------------------------------------------------------------------------
Norway - 0.1%
Union Bank Norway, 1s, 2049## (Banks and Credit
Cos.) $ 2,273 $ 2,352,487
- --------------------------------------------------------------------------------------------------
Supra National
Corporacion Andina de Fomento, 7.1s, 2003
(Banks and Credit Cos.) $ 1,184 $ 1,135,101
- --------------------------------------------------------------------------------------------------
Thailand
Jasmine Submarine Telecom Ltd., 8.483s, 2011##
(Industrial) $ 2,447 $ 1,810,961
- --------------------------------------------------------------------------------------------------
United Kingdom
Colt Telecom Group, 7.625s, 2008
(Telecommunications) $ 3,910 $ 2,062,953
- --------------------------------------------------------------------------------------------------
Venezuela - 0.2%
Cerro Negro Finance Ltd., 7.9s, 2020 (Financial
Institutions)## $ 12,238 $ 10,118,378
- --------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 45,062,581
- --------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $2,095,279,637) $2,159,545,768
- --------------------------------------------------------------------------------------------------
Convertible Bonds - 1.7%
- --------------------------------------------------------------------------------------------------
U.S. Bonds - 1.6%
Advertising
Omnicom Group, Inc., 4.25s, 2007## $ 1,700 $ 2,607,375
- --------------------------------------------------------------------------------------------------
Aerospace
Hexcel Corp., 7s, 2003 $ 2,000 $ 1,862,500
- --------------------------------------------------------------------------------------------------
Business Machines - 0.2%
Xerox Corp., 0s, 2018## $ 16,400 $ 9,184,000
- --------------------------------------------------------------------------------------------------
Business Services - 0.1%
Concentra Managed Care, Inc., 4.5s, 2003 $ 2,000 $ 1,240,000
Personnel Group of America, Inc., 5.75s, 2004## 1,994 1,797,093
--------------
$ 3,037,093
- --------------------------------------------------------------------------------------------------
Chemicals - 0.1%
Sepracor, Inc., 6.25s, 2005## $ 1,998 $ 3,104,393
- --------------------------------------------------------------------------------------------------
Computer Software - Services
Affiliated Computer Services, Inc., 4s, 2005## $ 1,495 $ 1,383,809
- --------------------------------------------------------------------------------------------------
Computer Software - Systems
EMC Corp., 3.25s, 2002 $ 500 $ 1,277,500
SCI Systems Inc., 5s, 2006## 750 910,313
--------------
$ 2,187,813
- --------------------------------------------------------------------------------------------------
Electronics
Photronics, Inc., 6s, 2004 $ 639 $ 532,766
- --------------------------------------------------------------------------------------------------
Financial Institutions - 0.2%
ADT Operations, Inc., 0s, 2010 $ 6,940 $ 10,297,225
- --------------------------------------------------------------------------------------------------
Financial Services - 0.1%
Bell Atlantic Financial Services, Inc., 4.25s, 2005## $ 6,590 $ 6,392,300
- --------------------------------------------------------------------------------------------------
Industrial
Waste Management, Inc., 4s, 2002 $ 1,746 $ 2,138,850
- --------------------------------------------------------------------------------------------------
Medical and Health Products - 0.1%
Roche Holdings, Inc., 0s, 2010 (Medical and
Health Technology and Services)## $ 4,230 $ 2,580,300
Ventritex, Inc., 5.75s, 2001 880 900,900
--------------
$ 3,481,200
- --------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.1%
HealthSouth Corp., 3.25s, 2003## $ 3,900 $ 2,973,750
National Health Investors, Inc., 7.75s, 2001 500 484,375
Quintiles Transnational Corp., 4.25s, 2000## 1,250 1,550,000
Quintiles Transnational Corp., 4.25s, 2000 400 496,000
Sunrise Assisted Living, Inc., 5.5s, 2002## 1,000 1,091,250
--------------
$ 6,595,375
- --------------------------------------------------------------------------------------------------
Oil Services - 0.1%
Diamond Offshore Drilling, Inc., 3.75s, 2007 $ 2,760 $ 2,321,850
Key Energy, 5s, 2004## 1,985 1,255,512
Parker Drilling Co., 5.5s, 2004 2,494 1,776,975
Seacorp Holdings, Inc., 5.375s, 2006## 2,000 1,827,500
--------------
$ 7,181,837
- --------------------------------------------------------------------------------------------------
Pharmaceuticals
Omnicare, Inc., 5s, 2007## $ 1,497 $ 1,562,494
- --------------------------------------------------------------------------------------------------
Pollution Control - 0.1%
Sanifill, Inc., 5s, 2006 $ 1,250 $ 2,154,688
USA Waste Services, Inc., 7.125s, 2007 1,500 1,634,595
--------------
$ 3,789,283
- --------------------------------------------------------------------------------------------------
Real Estate
Liberty Property Ltd. Partnership, 8.4s, 2001 $ 2,300 $ 3,030,250
- --------------------------------------------------------------------------------------------------
Restaurants and Lodging
Marriot International, Inc., 0s, 2011## $ 3,000 $ 1,796,250
- --------------------------------------------------------------------------------------------------
Special Products and Services - 0.1%
United Waste Systems, Inc., 4.5s, 2001## $ 2,250 $ 3,757,500
- --------------------------------------------------------------------------------------------------
Stores - 0.1%
Office Depot, Inc., 0s, 2008 $ 1,750 $ 1,168,125
Rite Aid Corp., 5.25s, 2002 610 725,900
Saks Holdings, Inc., 5.5s, 2006 2,245 2,228,162
Staples, Inc., 4.5s, 2000## 500 937,500
--------------
$ 5,059,687
- --------------------------------------------------------------------------------------------------
Telecommunications - 0.2%
Global Telesystems Group, Inc., 5.75s, 2010 $ 4,000 $ 3,132,500
Jacor Communications, Inc., 0s, 2011 3,500 2,563,750
Tele Communications International, Inc., 4.5s, 2006 2,420 2,314,125
World Access, Inc., 4.5s, 2002## 1,990 1,611,900
--------------
$ 9,622,275
- --------------------------------------------------------------------------------------------------
Utilities - Electric - 0.1%
AES Corp., 4.5s, 2005 $ 5,170 $ 4,698,238
- --------------------------------------------------------------------------------------------------
Total U.S. Bonds $ 93,302,513
- --------------------------------------------------------------------------------------------------
Foreign Bonds - 0.1%
Netherlands - 0.1%
Daimler Benz, 0s, 2017 (Automotive)## $ 2,440 $ 1,152,900
Koninklojke Ahold Nv, 3s, 2003 (Food and
Beverage Products) 4,000 2,216,552
--------------
$ 3,369,452
- --------------------------------------------------------------------------------------------------
Switzerland
Swiss Life Finance Ltd., 1.5s, 2003 (Finance) $ 1,382 $ 1,565,115
- --------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 4,934,567
- --------------------------------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $89,430,335) $ 98,237,080
- --------------------------------------------------------------------------------------------------
Municipal Bonds - 0.2%
- --------------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 0.2%
Long Island Power Authority, NY, 5.125s, 2022 $ 7,500 $ 7,598,700
Long Island Power Authority, NY, 5.25s, 2026 1,550 1,576,381
--------------
$ 9,175,081
- --------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $8,875,297) $ 9,175,081
- --------------------------------------------------------------------------------------------------
Rights - 0.3%
- --------------------------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------------------------
CVS Corp.* (Identified Cost, $15,615,239) 219,900 $ 17,921,850
- --------------------------------------------------------------------------------------------------
Short-Term Obligations - 9.8%
- --------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- --------------------------------------------------------------------------------------------------
Federal Farm Credit Bank, due 10/01/98 - 10/21/98 $ 28,000 $ 27,922,614
Federal Home Loan Bank, due 10/09/98 - 1/04/99 75,700 75,333,307
Federal Home Loan Mortgage Corp., due 10/01/98 - 12/15/98 317,499 316,337,103
Federal National Mortgage Assn., due 10/05/98 - 11/24/98 133,099 132,927,915
General Electric Capital Corp., due 10/01/98 20,000 20,000,000
- --------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 572,520,939
- --------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $5,451,522,879) $5,767,376,089
Other Assets, Less Liabilities - 1.2% 72,063,635
- --------------------------------------------------------------------------------------------------
Net Assets - 100.0% $5,839,439,724
- --------------------------------------------------------------------------------------------------
* Non-income producing security.
** Non-income producing security-in default.
## SEC Rule 144A restriction.
+ Restricted security.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
SEPTEMBER 30, 1998
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $5,451,522,879) $5,767,376,089
Cash 2,471,558
Receivable for Fund shares sold 9,920,111
Receivable for investments sold 119,521,543
Dividends and interest receivable 41,518,217
Other assets 56,031
--------------
Total assets $5,940,863,549
--------------
Liabilities:
Distributions payable $ 2,187,397
Payable for Fund shares reacquired 15,469,306
Payable for investments purchased 82,294,802
Payable for forward currency exchange contracts closed
or subject to master netting agreements 40,735
Payable for daily variation margin on futures contracts 319,131
Payable to affiliates -
Management fee 48,676
Shareholder servicing agent fee 18,129
Distribution and service fee 97,736
Administrative fee 1,027
Accrued expenses and other liabilities 946,886
--------------
Total liabilities $ 101,423,825
--------------
Net assets $5,839,439,724
==============
Net assets consist of:
Paid-in capital $4,776,117,743
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 315,823,922
Accumulated undistributed net realized gain on
investments and foreign currency transactions 753,458,252
Accumulated distributions in excess of net investment
income (5,960,193)
--------------
Total $5,839,439,724
==============
Shares of beneficial interest outstanding 363,638,825
===========
Class A shares:
Net asset value per share
(net assets of $3,502,752,437 / 218,137,383 shares of
beneficial interest outstanding) $16.06
======
Offering price per share (100 / 95.25) $16.86
======
Class B shares:
Net asset value and offering price per share
(net assets of $1,983,771,316 / 123,572,332 shares of
beneficial interest outstanding) $16.05
======
Class C shares:
Net asset value and offering price per share
(net assets of $335,596,447 / 20,850,631 shares of
beneficial interest outstanding) $16.10
======
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $17,319,524 / 1,078,479 shares of
beneficial interest outstanding) $16.06
======
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B, and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations
- -------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1998
- -------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 166,982,484
Dividends 76,150,741
Foreign taxes withheld (882,584)
-------------
Total investment income $ 242,250,641
-------------
Expenses -
Management fee $ 19,252,268
Trustees' compensation 158,631
Shareholder servicing agent fee 6,481,832
Distribution and service fee (Class A) 11,988,833
Distribution and service fee (Class B) 18,619,719
Distribution and service fee (Class C) 2,578,174
Administrative fee 350,854
Custodian fee 1,105,998
Printing 158,259
Postage 715,655
Auditing fees 54,352
Legal fees 20,079
Miscellaneous 2,778,296
-------------
Total expenses $ 64,262,950
Fees paid indirectly (816,884)
-------------
Net expenses $ 63,446,066
-------------
Net investment income $ 178,804,575
-------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 800,383,488
Futures contracts (3,890,786)
Foreign currency transactions (239,034)
-------------
Net realized gain on investments and foreign
currency transactions $ 796,253,668
-------------
Change in unrealized appreciation (depreciation) -
Investments $(634,001,993)
Futures contracts (108,836)
Translation of assets and liabilities in foreign currencies (20,170)
-------------
Net unrealized loss on investments and foreign
currency translation $(634,130,999)
-------------
Net realized and unrealized gain on investments
and foreign currency transactions $ 162,122,669
-------------
Increase in net assets from operations $ 340,927,244
=============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1998 1997
- -------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 178,804,575 $ 161,888,144
Net realized gain on investments and
foreign currency transactions 796,253,668 422,224,799
Net unealized gain (loss) on
investments and foreign currency
translation (634,130,999) 422,172,260
-------------- --------------
Increase in net assets from
operations $ 340,927,244 $1,006,285,203
-------------- --------------
Distributions declared to shareholders --
From net investment income (Class A) $ (121,499,301) $ (109,704,957)
From net investment income (Class B) (54,239,945) (46,073,857)
From net investment income (Class C) (7,497,888) (4,116,016)
From net investment income (Class I) (682,347) (494,322)
From net realized gain on investments
and foreign currency transactions
(Class A) (261,131,649) (182,350,658)
From net realized gain on investments
and foreign currency transactions
(Class B) (141,020,364) (93,208,564)
From net realized gain on investments
and foreign currency transactions
(Class C) (16,513,122) (6,625,287)
From net realized gain on investments
and foreign currency transactions
(Class I) (1,386,719) --
In excess of net investment income
(Class A) (2,862,953) --
In excess of net investment income
(Class B) (1,278,085) --
In excess of net investment income
(Class C) (176,677) --
In excess of net investment income
(Class I) (16,078) --
-------------- --------------
Total distributions declared to
shareholders $ (608,305,128) $ (442,573,661)
-------------- --------------
Net increase in net assets from Fund
share transactions $ 994,203,939 $ 613,016,871
-------------- --------------
Total increase in net assets $ 726,826,055 $1,176,728,413
Net assets:
At beginning of period 5,112,613,669 3,935,885,256
-------------- --------------
At end of period (including
accumulated distributions in excess
of net investment income and
undistributed net investment income
of $5,960,193 and $5,114,906,
respectively) $5,839,439,724 $5,112,613,669
============== ==============
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights
<CAPTION>
- -------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
CLASS A
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $16.92 $15.03 $14.46 $12.80 $13.70
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.57 $ 0.60 $ 0.64 $ 0.64 $ 0.54
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 0.53 2.94 1.21 1.64 (0.69)
------ ------ ------ ------ ------
Total from investment operations $ 1.10 $ 3.54 $ 1.85 $ 2.28 $(0.15)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.58) $(0.59) $(0.62) $(0.61) $(0.54)
From net realized gain on investments
and foreign currency transactions (1.37) (1.06) (0.66) (0.01) (0.10)
In excess of net investment income (0.01) -- -- -- --
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- -- (0.11)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(1.96) $(1.65) $(1.28) $(0.62) $(0.75)
------ ------ ------ ------ ------
Net asset value - end of period $16.06 $16.92 $15.03 $14.46 $12.80
====== ====== ====== ====== ======
Total return++ 6.98% 25.27% 13.50% 18.36% (1.07)%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.90% 0.93% 0.91% 0.87% 0.85%
Net investment income 3.44% 3.84% 4.35% 4.82% 4.26%
Portfolio turnover 126% 143% 140% 102% 91%
Net assets at end of period (000,000 omitted) $3,503 $3,199 $2,568 $2,242 $1,857
# Per share data for the periods subsequent to September 30, 1993, are 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.
++ 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.
(S) The distributor did not impose a portion of its distribution fee for the periods indicated. If the
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%
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- -------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------
CLASS A
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $12.42 $11.82 $10.25 $11.58 $10.13
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.45 $ 0.65 $ 0.67 $ 0.64 $ 0.65
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 1.74 0.75 1.57 (1.25) 1.71
------ ------ ------ ------ ------
Total from investment operations $ 2.19 $ 1.40 $ 2.24 $(0.61) $ 2.36
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income** $(0.59) $(0.66) $(0.61) $(0.66) $(0.63)
From net realized gain on investments
and foreign currency transactions (0.32) (0.14) (0.06) (0.06) (0.28)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.91) $(0.80) $(0.67) $(0.72) $(0.91)
------ ------ ------ ------ ------
Net asset value - end of period $13.70 $12.42 $11.82 $10.25 $11.58
====== ====== ====== ====== ======
Total return++ 18.32% 12.26% 22.25% (5.59)% 23.46%
Ratios (to average net assets)/Supplemental data:
Expenses 0.84% 0.84% 0.87% 0.85% 0.72%
Net investment income 4.51% 5.40% 5.89% 5.71% 5.97%
Portfolio turnover 95% 84% 74% 50% 53%
Net assets at end of period (000,000 omitted) $1,702 $1,198 $909 $707 $628
**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
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1998 1997 1996 1995 1994 1993*
- ------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $16.92 $15.02 $14.46 $12.80 $13.70 $13.53
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.46 $ 0.50 $ 0.52 $ 0.53 $ 0.39 $ 0.06
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.53 2.95 1.21 1.64 (0.65) 0.16
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.99 $ 3.45 $ 1.73 $ 2.17 $(0.26) $ 0.22
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.48) $(0.49) $(0.51) $(0.50) $(0.43) $(0.05)
From net realized gain on investments
and foreign currency transactions (1.37) (1.06) (0.66) -- -- --
In excess of net investment income (0.01) -- -- (0.01) (0.10) --
From paid in capital -- -- -- -- (0.11) --
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(1.86) $(1.55) $(1.17) $(0.51) $(0.64) $(0.05)
------ ------ ------ ------ ------ ------
Net asset value - end of period $16.05 $16.92 $15.02 $14.46 $12.80 $13.70
====== ====== ====== ====== ====== ======
6.22% 24.51% 12.49% 17.46% (1.93)% 15.24%++
Ratios (to average net assets)/Supplemental data:
Expenses## 1.55% 1.60% 1.67% 1.71% 1.70% 1.75%+
Net investment income 2.80% 3.17% 3.56% 3.97% 3.45% 3.98%+
Portfolio turnover 126% 143% 140% 102% 91% 95%
Net assets at end of period
(000,000 omitted) $1,984 $1,707 $1,284 $1,005 $843 $532
* For the period from the inception of Class B, August 23, 1993, through September 30, 1993.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to September 30, 1993, are 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.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1998 1997 1996 1995 1994**
- ---------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $16.96 $15.06 $14.49 $12.80 $12.92
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.46 $ 0.50 $ 0.53 $ 0.54 $ 0.08
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 0.53 2.95 1.22 1.66 (0.13)
------ ------ ------ ------ ------
Total from investment operations $ 0.99 $ 3.45 $ 1.75 $ 2.20 $(0.05)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.47) $(0.49) $(0.52) $(0.50) $(0.07)
From net realized gain on investments
and foreign currency transactions (1.37) (1.06) (0.66) (0.01) --
In excess of net investment income (0.01) -- -- -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(1.85) $(1.55) $(1.18) $(0.51) $(0.07)
------ ------ ------ ------ ------
Net asset value - end of period $16.10 $16.96 $15.06 $14.49 $12.80
====== ====== ====== ====== ======
Total return 6.27% 24.39% 12.67% 17.66% (0.41)%++
Ratios (to average net assets)/Supplemental data:
Expenses## 1.55% 1.60% 1.63% 1.67% 1.76%+
Net investment income 2.80% 3.16% 3.67% 4.14% 4.08%+
Portfolio turnover 126% 143% 140% 102% 91%
Net assets at end of period (000,000 omitted) $336 $190 $83 $23 $1
** For the period from the inception of Class C, August 1, 1994, through September 30, 1994.
+ Annualized.
++ Not annualized.
# Per share data are 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.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- ---------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997***
- ---------------------------------------------------------------------------------------------
CLASS I
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $16.92 $14.70
------ ------
Income from investment operations# -
Net investment income $ 0.63 $ 0.48
Net realized and unrealized gain on investments and
foreign currency transactions 0.53 2.23
------ ------
Total from investment operations $ 1.16 $ 2.71
------ ------
Less distributions declared to shareholders -
From net investment income $(0.64) $(0.49)
From net realized gain on investments and foreign
currency transactions (1.37) --
In excess of net investment income (0.01) --
------ ------
Total distributions declared to shareholders $(2.02) $(0.49)
------ ------
Net asset value - end of period $16.06 $16.92
====== ======
Total return 7.35% 18.69%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.55% 0.60%+
Net investment income 3.79% 4.16%+
Portfolio turnover 126% 143%
Net assets at end of period (000,000 omitted) $17 $16
*** For the period from the inception of Class I, January 2, 1997, through September 30, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
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 reported at market value using last
sale prices. Unlisted equity securities or listed equity securities for which
last sale prices are not available are reported at market value using last
quoted bid prices. 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. Futures contracts listed on commodities exchanges are reported at
market value using closing settlement prices. 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.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or 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 with the broker 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 contract, 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. Investments in interest rate futures
for purposes other than hedging may be made to modify the duration of the
portfolio without incurring the additional transaction costs involved in
buying and selling the underlying securities. Investments in currency futures
for purposes other than hedging may be made to change the Fund's relative
position in one or more currencies without buying and selling portfolio
assets. Investments in equity index contracts or contracts on related options
for purposes other than hedging, may be made when the Fund has cash on hand
and wishes to participate in anticipated market appreciation while the cash is
being invested. 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.
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. The Fund may also use contracts in a manner intended to
protect foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains
or losses on foreign currency transactions.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All discount
is accreted for financial statement and tax reporting purposes as required by
federal income tax regulations. Dividends received in cash are recorded on the
ex-dividend date. Dividend and interest payments received in additional
securities are recorded on the ex-dividend or ex-interest date in an amount
equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. 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.
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 net realized gains. During
the year ended September 30, 1998, distributions in excess of net investment
income was increased by $1,626,400, the accumulated net realized gain on
investments was increased by $904,035, and paid-in-capital was increased by
$722,365 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 multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on 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. Class B shares will convert to Class A
shares approximately eight years after purchase.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at the following annual
rates:
BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME
- ------------------------------------------ ---------------------------------
First $200 million 0.250% First $14 million 3.57%
In excess of $200 million 0.212% In excess of $14 million 3.04%
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has an unfunded
defined benefit plan for all of its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of
$50,056 for the year ended September 30, 1998.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$1,401,379 for the year ended September 30, 1998, as its portion of the sales
charge on sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A, Class B, and Class
C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Fund's distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
paid to each securities dealer that enters into a sales agreement with MFD of
up to 0.25% per annum of the Fund's average daily net assets attributable to
Class A shares which are attributable to that securities dealer and a
distribution fee to MFD of up to 0.10% per annum of the Fund's average daily
net assets attributable to Class A shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $1,142,409
for the year ended September 30, 1998. Fees incurred under the distribution
plan during the year ended September 30, 1998, were 0.35% of average daily net
assets attributable to Class A shares on an annualized basis.
The Fund's distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B and
Class C shares. MFD will pay to securities dealers that enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class B
and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended
to be consideration for services rendered by the dealer with respect to Class
B and Class C shares. MFD retains the service fee for accounts not
attributable to a securities dealer, which amounted to $220,757 and $67,115
for Class B and Class C shares, respectively, for the year ended September 30,
1998. Fees incurred under the distribution plan during the year ended
September 30, 1998, were 1.00% of average daily net assets attributable to
both Class B and Class C shares.
Certain Class A shares and Class C shares are subject to a contingent deferred
sales charge in the event of a shareholder redemption within 12 months
following purchase. A contingent deferred sales charge is imposed on
shareholder redemptions of Class B shares in the event of a shareholder
redemption within six years of purchase. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the year ended
September 30, 1998, were $39,263, $2,278,545, and $71,068 for Class A, Class
B, and Class C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the Fund's average daily net assets at an effective annual
rate of 0.1125%. Prior to January 1, 1998, the fee was calculated as a
percentage of the average daily net assets at an effective annual rate of
0.13%.
(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 $1,820,087,069 $1,499,481,790
-------------- --------------
Investments (non-U.S. government securities) $4,934,252,140 $5,108,471,527
-------------- --------------
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $5,458,901,882
--------------
Gross unrealized appreciation $ 479,437,698
Gross unrealized depreciation (170,963,491)
--------------
Net unrealized appreciation $ 308,474,207
==============
(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>
Class A Shares
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998 YEAR ENDED SEPTEMBER 30, 1997
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 55,504,066 $912,117,694 45,594,446 $706,971,591
Shares issued to shareholders in
reinvestment of distributions 21,559,401 342,963,749 16,846,895 254,622,294
Shares transferred to Class I -- -- (1,095,793) (16,108,156)
Shares reacquired (47,976,585) (789,009,468) (43,162,914) (672,300,086)
---------- ------------ ---------- ------------
Net increase 29,086,882 $466,071,975 18,182,634 $273,185,643
========== ============ ========== ============
</TABLE>
<TABLE>
Class B Shares
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998 YEAR ENDED SEPTEMBER 30, 1997
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 30,797,677 $506,466,396 23,925,156 $372,473,531
Shares issued to shareholders in
reinvestment of distributions 11,311,499 179,658,588 8,414,036 126,899,049
Shares reacquired (19,450,599) (317,610,824) (16,916,364) (262,016,405)
---------- ------------ ---------- ------------
Net increase 22,658,577 $368,514,160 15,422,828 $237,356,175
========== ============ ========== ============
</TABLE>
<TABLE>
Class C Shares
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998 YEAR ENDED SEPTEMBER 30, 1997
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 10,590,618 $174,414,769 6,270,431 $ 97,948,906
Shares issued to shareholders in
reinvestment of distributions 1,346,898 21,473,802 619,727 9,399,041
Shares reacquired (2,309,571) (38,044,926) (1,207,600) (18,986,771)
---------- ------------ ---------- ------------
Net increase 9,627,945 $157,843,645 5,682,558 $ 88,361,176
========== ============ ========== ============
</TABLE>
<TABLE>
Class I Shares
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998 PERIOD ENDED SEPTEMBER 30, 1997*
----------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 158,035 $ 2,631,813 67,857 $ 1,043,322
Shares issued to shareholders in
reinvestment of distributions 130,950 2,085,279 28,182 440,472
Shares transferred to Class I -- -- 1,095,793 16,108,156
Shares reacquired (177,735) (2,942,933) (224,603) (3,478,073)
---------- ------------ ---------- ------------
Net increase 111,250 $ 1,774,159 967,229 $ 14,113,877
========== ============ ========== ============
</TABLE>
*For the period from the inception of Class I, January 2, 1997, through
September 30, 1997.
(6) Line of Credit
The Fund and other affiliated funds participate in a $805 million unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended September 30, 1998, was $37,776.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include forward foreign currency exchange contracts and 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.
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net payable of $40,735 with Merrill Lynch & Co.
at September 30, 1998.
At September 30, 1998, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At September 30,
1998, the Fund owned the following restricted securities (constituting 0.24%
of net assets) which may not be publicly sold without registration under the
Securities Act of 1933. The Fund does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations furnished by dealers or by a pricing service, or if not available,
are valued at fair value as determined in good faith by or at the direction of
the Trustees.
<TABLE>
<CAPTION>
PRINCIPAL
DATE OF AMOUNT
DESCRIPTION ACQUISITION (000 OMITTED) COST VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Merrill Lynch Mortgage Investors, Inc.
8.1s, 2022 June 1994 $4,000 $2,772,500 $ 3,966,875
United Airlines Pass-Through Trust, January 1996,
7.27s, 2013 April 1997 &
July 1997 9,552 9,550,127 10,095,634
-----------
$14,062,509
===========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust V and Shareholders of MFS Total Return Fund:
We have audited the accompanying statements of assets and liabilities, including
the portfolio investments, of MFS Total Return Fund (one of the series
constituting MFS Series Trust V) as of September 30, 1998, the related
statements of operations for the year then ended, the statement of changes in
net assets for the years ended September 30, 1998 and 1997, and the financial
highlights for each of the years in the ten-year period ended September 30,
1998. 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 and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1998, 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, 1998, and the results its operations, the changes in net
assets, and financial highlights for the respective stated periods, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 6, 1998
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
- --------------------------------------------------------------------------------
IN JANUARY 1999, SHAREHOLDERS WILL BE MAILED A FORM 1099 REPORTING THE
FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR YEAR
1998.
THE FUND HAS DESIGNATED $313,008,742 AS A CAPITAL GAIN DIVIDEND.
FOR THE YEAR ENDED SEPTEMBER 30, 1998, THE AMOUNT OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS RECEIVED DEDUCTION FOR
CORPORATIONS TO 21.32%.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
MFS(R) TOTAL RETURN FUND
<S> <C>
TRUSTEES SECRETARY
Richard B. Bailey* - Private Investor; Stephen E. Cavan*
Former Chairman and Director (until
1991), MFS Investment Management ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Peter G. Harwood - Private Investor
CUSTODIAN
J. Atwood Ives - Chairman and Chief State Street Bank and Trust Company
Executive Officer, Eastern Enterprises
(diversified services company) AUDITORS
Deloitte & Touche LLP
Lawrence T. Perera - Partner, Hemenway
& Barnes (attorneys) INVESTOR INFORMATION For MFS stock and
bond market outlooks, call toll free:
William J. Poorvu - Adjunct Professor, 1-800-637-4458 anytime from a
Harvard University Graduate School of touch-tone telephone.
Business Administration
For information on MFS mutual funds,
Charles W. Schmidt - Private Investor call your financial adviser or, for an
information kit, call toll free:
Arnold D. Scott* - Senior Executive 1-800-637-2929 any business day from 9
Vice President, Director, and a.m. to 5 p.m. Eastern time (or leave a
Secretary, MFS Investment Management message anytime).
Jeffrey L. Shames* - Chairman, Chief INVESTOR SERVICE
Executive Officer, and Director, MFS MFS Service Center, Inc.
Investment Management P.O. Box 2281
Boston, MA 02107-9906
Elaine R. Smith - Independent
Consultant David B. Stone - Chairman For general information, call toll
and Director, North American Management free: 1-800-225-2606 any business day
Corp. (investment advisers) from 8 a.m. to 8 p.m. Eastern time.
INVESTMENT ADVISER For service to speech- or
Massachusetts Financial Services Company hearing-impaired, call toll free:
500 Boylston Street 1-800-637-6576 any business day from 9
Boston, MA 02116-3741 a.m. to 5 p.m. Eastern time. (To use
this service, your phone must be
DISTRIBUTOR equipped with a Telecommunications
MFS Fund Distributors, Inc. Device for the Deaf.)
500 Boylston Street
Boston, MA 02116-3741 For share prices, account balances, and
exchanges, call toll free:
LEAD PORTFOLIO MANAGER 1-800-MFS-TALK (1-800-637-8255) anytime
David M. Calabro* from a touch-tone telephone.
TREASURER WORLD WIDE WEB
W. Thomas London* www.mfs.com
Assistant Treasurers
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
----------------
MFS(R) TOTAL RETURN FUND Bulk Rate
U.S. Postage
[Logo] M F S(R) Paid
INVESTMENT MANAGEMENT MFS
We invented the mutual fund(R) ----------------
500 Boylston Street
Boston, MA 02116-3741
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MTR-2 11/98 388M 15/215/315/815
