<PAGE>
[LOGO] Annual Report for
Year Ended
January 31, 1995
MFS(r) HIGH INCOME FUND
A 6 1.4" by 8 1/4" photo of gears.
<PAGE>
MFS(R) HIGH INCOME FUND
<TABLE>
<CAPTION>
TRUSTEES CUSTODIAN
<S> <C>
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor; AUDITORS
Former Chairman and Director (until 1991), Deloitte & Touche LLP
Massachusetts Financial Services Company
INVESTOR INFORMATION
Peter G. Harwood - Former Financial Vice For MFS stock and bond market outlooks,
President, Treasurer and Director (until 1988), call toll-free: 1-800-637-4458 anytime from
Loomis, Sayles & Co., Inc. a touch-tone telephone.
J. Atwood Ives - Chairman and Chief Executive For information on MFS mutual funds
Officer, Eastern Enterprises call your financial adviser or, for an
information kit, call toll-free:
Lawrence T. Perera - Partner, Hemenway & Barnes 1-800-637-2929 any business day from
9 a.m. to 5 p.m. Eastern time (or, leave
William J. Poorvu - Adjunct Professor, Harvard a message anytime).
University Graduate School of Business
Administration INVESTOR SERVICE
MFS Service Center, Inc.
Charles W. Schmidt - Private Investor; P.O. Box 2281
Former Senior Vice President and Group Executive Boston, MA 02107-9906
(until 1990), Raytheon Company
For current account service, call toll free:
Arnold D. Scott* - Senior Executive Vice President, 1-800-225-2606 any business day from
Massachusetts Financial Services Company 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and Chief Equity For service to speech- or hearing-impaired,
Officer, Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Elaine R. Smith - Independent Consultant
For share prices, account balances and
David B. Stone - Chairman, North American exchanges, call toll free: 1-800-MFS-TALK
Management Corp. (Investment Advisers) (1-800-637-8255) anytime from a touch-tone
telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116-3741
PORTFOLIO MANAGER
Robert J. Manning*
TOP-RATED SERVICE
TREASURER
W. Thomas London* MFS was rated first when securities
firms evaluated the quality of service
ASSISTANT TREASURER they receive from 40 mutual fund
James O. Yost* companies. MFS got high marks for
answering calls quickly, processing
SECRETARY transactions accurately and sending
Stephen E. Cavan* statements out on time.
(Source: 1994 DALBAR Survey)
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Cover photo: Through their wide range of
investments, MFS mutual funds help you
*Affiliated with the Investment Adviser share in America's growth.
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
During the fiscal year ended January 31, 1995, Class A shares of the Fund
provided a total return of -3.95%. Over the same period, the total returns of
Class B and Class C shares were -4.77% and -4.51%, respectively. All of these
returns assume the reinvestment of distributions but exclude the effects of any
sales charges. The Fund's results underperformed the Lehman Brothers Corporate
Bond Index (the Lehman Index), which returned -3.76% during this same period.
Because the Fund's portfolio generally consists of lower-quality issues, its
results will not necessarily mirror those of the Lehman Index, which is an
unmanaged market-value weighted index comprised of all public fixed-rate,
non-convertible, investment-grade corporate debt. A discussion of performance
during 1994 as well as our outlook for the months ahead may be found in the
Portfolio Performance and Strategy section below.
Economic Outlook
The economic expansion, entering its fifth year, gained firmer underpinnings in
1994 as employers significantly stepped up hiring levels. Increased employment,
stronger capital spending by businesses, and strengthening overseas economies
resulted in 4% real (adjusted for inflation) gross domestic product growth last
year. Interest rates rose substantially over the past year, which should help
restrain, but not curtail, the economic expansion. Based on improving economic
fundamentals both here and abroad, we expect the business expansion to continue
well into 1995.
Interest Rates
Despite a stronger economy, inflation at the consumer level has remained
relatively benign at 2.7% in 1994, the fourth straight year of 3.0% or less. Due
to a prolonged period of below-trend-line growth and continued pressure on
corporations to emphasize effective cost controls, wage growth and unit labor
costs have remained subdued. However, as the economy has exhibited continuing
strength, various industrial commodity prices have been rising substantially
faster than consumer prices. Nevertheless, businesses have had difficulty
passing these price increases on to the consumer. With the economy continuing to
expand, we expect some upward movement in inflation from below 3% to the 3 1/2%
range. The Federal Reserve Board has shown a willingness to raise short-term
rates to slow the economy to dampen inflationary pressures. Most recently, it
raised the federal funds rate 50 basis points (0.50%) after a 75 basis-point
(0.75%) increase in November. We expect the Federal Reserve to raise short-term
rates again in the coming months if it believes that current efforts have not
been sufficient to dampen inflationary expectations. Although we believe
fundamentals are favorable for lower long-term rates sometime in 1995, this may
not occur until the Federal Reserve is comfortable that its policy toward
slowing the economic expansion has been successful. Thus, we believe that
long-term yields may move moderately higher in the near term.
Portfolio Performance and Strategy
During the past year, yield spreads in the high-yield market remained at 375
basis points (3.75%) over comparable U.S. Treasuries, but interest rates rose
dramatically due to increased economic activity which caused the Federal Reserve
to raise the federal funds rate several times in an attempt to alleviate
inflationary pressures. On a relative basis, the high-yield market outperformed
high-grade bonds as well as Treasuries, although it is important to remember
that principal value and interest on Treasury securities are guaranteed by the
U.S. government if held to maturity. Technicals in the high-yield market remain
uncertain due to volatile cash flows experienced by high-yield mutual funds,
which account for roughly half the market's assets and more than two-thirds of
daily trading volume. As we move into 1995, the new-issue calendar stands
significantly below last year's levels due to the banking industry's
aggressiveness in trying to lend money to many companies which otherwise would
utilize the high-yield bond market for funds.
While new-issue quality declined last year, the average credit quality in the
market improved as continued economic expansion created an environment for
companies to pay down their debt by either increased cash flows or equity
issuance. During the year, the portfolio remained significantly overweighted in
economically sensitive companies (paper, metal or general industrial firms), and
underweighted in industries with no pricing leverage due to excess capacity, or
with a high exposure to consumer demand, such as general retailing,
transportation and utilities companies. During 1995, we expect the economic
climate to continue to be very healthy for the types of companies we own and,
thus, we have not significantly changed our strategy. We will continue to focus
on fundamental credit research, which is the main factor in determining our
investment selection.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
A 1 1/2" by 1 5/8" photo of A. Keith Brodkin, Chairman and President.
A 1 1/2" by 1 5/8" photo of Robert J. Manning, Portfolio Manager.
A. Keith Brodkin Robert J. Manning
Chairman and President Portfolio Manager
February 28, 1995
PORTFOLIO MANAGER PROFILE
Robert Manning began his career at MFS in 1984 as a Research Analyst in the High
Yield Bond Department. A graduate of the University of Lowell and Boston
College's Graduate School of Management, he was named Vice President -
Investments in 1988, Senior Vice President in 1993 and Portfolio Manager of MFS
High Income Fund in 1994.
OBJECTIVE AND POLICIES
The objective of the Fund is to provide high current income through investment
primarily in a professionally managed, diversified portfolio of fixed-income
securities. Capital growth, if any, is a consideration incidental to the
objective of high current income.
The Fund seeks to achieve this objective by investing primarily in fixed- income
securities which are in the lower rating categories. The Fund may also invest in
foreign fixed-income securities, purchase fixed-income securities on a
"when-issued" basis and enter into options, futures transactions and forward
foreign currency exchange contracts. The Fund will seek to reduce risk through
full-time management of a broadly diversified portfolio, credit analysis and
attention to current developments and trends in both the economy and financial
markets.
PERFORMANCE
The information below and on the following page illustrates the historical
performance of MFS High Income Fund Class A shares in comparison to various
market indicators. Class A share results reflect the deduction of the 4.75%
maximum sales charge; benchmark comparisons are unmanaged and do not reflect any
fees or expenses. You cannot invest in an index. All results reflect the
reinvestment of all dividends and capital gains.
Class B shares were offered effective September 27, 1993. Information on Class B
share performance appears on the next page.
Class C shares were offered effective January 3, 1994. Information on Class C
share performance appears on the next page.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(Over the 5-Year Period Ended January 31, 1995)
Line graph representing the growth of a $10,000 investment for the 5-year period
ended Janaury 31, 1995. The graph is scaled from $5,000 to $30,000 in $5,000
segments. The years are marked from 1990 to 1995. There are three lines drawn to
scale. One is a solid line representing MFS High Income Fund (Class A), a second
line of short dashes represents the Lehman Brothers corporate Bond Index, and a
third line of long dashes represents the consumer Price Index.
MFS High Income Fund (Class A) $17,066
Lehman Brothers Corporate Bond Index $15,364
Consumer Price Index $11,797
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (Over the 10-Year Period Ended
January 31, 1995)
Line graph representing the growth of a $10,000 investment for the 10-year
period ended Janaury 31, 1995. The graph is scaled from $5,000 to $30,000 in
$5,000 segments. The years are marked from 1985 to 1995. There are three lines
drawn to scale. One is a solid line representing MFS High Income Fund (Class A),
a second line of short dashes represents the Lehman Brothers corporate Bond
Index, and a third line of long dashes represents the consumer Price Index.
MFS High Income Fund (Class A) $23,811
Lehman Brothers Corporate Bond Index $27,242
Consumer Price Index $14,244
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------
MFS High Income Fund (Class A)
including 4.75% sales charge -8.45% +7.96% +11.28% + 9.06%
- ------------------------------------------------------------------------------
MFS High Income Fund (Class A) at net
asset value -3.95% +9.70% +12.36% + 9.59%
- ------------------------------------------------------------------------------
MFS High Income Fund (Class B) with
CDSC+ -8.29% -- -- - 1.28%*
- ------------------------------------------------------------------------------
MFS High Income Fund (Class B) without
CDSC -4.77% -- -- + 1.45%*
- ------------------------------------------------------------------------------
MFS High Income Fund (Class C) -4.51% -- -- - 2.22%**
- ------------------------------------------------------------------------------
Average high current yield fund -5.31% +9.27% +11.32% + 9.52%
- ------------------------------------------------------------------------------
Lehman Brothers Corporate Bond Index -3.76% +6.59% + 8.97% +10.54%
- ------------------------------------------------------------------------------
Consumer Price Index(S) +2.80% +2.86% + 3.36% + 3.60%
- ------------------------------------------------------------------------------
* For the period from the commencement of offering of Class B shares,
September 27, 1993 to January 31, 1995.
+ The return reflects the current maximum Class B contingent deferred sales
charge (CDSC) of 4%.
(S) The Consumer Price Index is a popular measure of change in prices.
** For the period from the commencement of offering of Class C shares, January
3, 1994 to January 31, 1995.
In the above table, we have included the average annual total returns of all
high current yield funds (including the Fund) tracked by Lipper Analytical
Services, Inc. (an independent firm which reports mutual fund performance) for
the applicable time periods (94, 64, 61 and 32 funds for the 1-, 3-, 5- and
10-year periods ended January 31, 1995, respectively). Because these returns do
not reflect any applicable sales charges, we have also included the Fund's
results at net asset value (no sales charge) for comparison.
All results are historical and, therefore, are not an indication of future
results. The principal value and income return of an investment in a mutual fund
will vary with changes in market conditions, and shares, when redeemed, may be
worth more or less than their original cost. Class C shares have no initial
sales charge or CDSC but, along with Class B shares, have higher annual fees and
expenses than Class A shares.
All Class A share results reflect the applicable expense subsidy which is
explained in the Notes to Financial Statements. Had the subsidy not been in
effect, the results would have been less favorable. The subsidy may be rescinded
at any time.
TAX FORM SUMMARY
In January 1995, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1994.
<PAGE>
PORTFOLIO OF INVESTMENTS - January 31, 1995
Non-Convertible Bonds - 85.6%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Financial Institutions - 3.4%
American Annuity Group, Inc., 11.125s, 2003 $ 5,600 $ 5,544,000
American Financial Corp., 9.75s, 2004 5,703 5,211,116
American Life Holdings Co., 11.25s, 2004 3,250 3,201,250
Americo Life, Inc., 9.25s, 2005 4,750 4,037,500
GPA Delaware, Inc., 8.75s, 1998 2,000 1,470,000
ICH Corp., 11.25s, 1996 2,000 1,360,000
Tiphook Finance Corp., 7.125s, 1998 1,000 730,000
Tiphook Finance Corp., 8s, 2000 8,353 6,097,690
-------------
$ 27,651,556
- -----------------------------------------------------------------------------
Foreign - Non-U.S. Dollar Denominated - 0.4%
United Kingdom
Mexico-United Mexican States, 16.5s, 2008|| GBP 950 $ 1,966,345
Pemex (Petroleau Mexicanos), 14.5s, 2006|| 800 1,398,641
-------------
$ 3,364,986
- -----------------------------------------------------------------------------
Foreign - U.S. Dollar Denominated - 0.5%
Mexico-United Mexican States, 6.69s, 2019 $ 5,750 $ 3,881,250
Republic of Argentina, Discounted Notes, due 2005 500 266,250
-------------
$ 4,147,500
- -----------------------------------------------------------------------------
Industrials - 78.1%
Apparel and Textiles - 0.1%
Guess, Inc., 9.5s, 2003 $ 1,000 $ 930,000
- -----------------------------------------------------------------------------
Automotive - 1.7%
Harvard Industries, Inc., 12s, 2004 $ 8,250 $ 8,311,875
SPX Corp., 11.75s, 2002 2,850 2,871,375
Venture Holdings Trust, 9.75s, 2004 3,000 2,535,000
-------------
$ 13,718,250
- -----------------------------------------------------------------------------
Building - 5.0%
American Standard, Inc., 0s, 2005 $16,625 $ 10,972,500
Atlantic Gulf Communities Corp., 12s, 1996 1,078 916,555
Atlantic Gulf Communities Corp., 13s, 1998 1,078 593,065
Congoleum Corp., 9s, 2001 2,300 2,127,500
Lone Star Industries, Inc., 10s, 2003 1,000 960,000
Nortek, Inc., 9.875s, 2004 8,750 7,743,750
Schuller International Group, 10.875s, 2004 5,250 5,387,813
UDC Homes, Inc., 11.75s, 2003# 3,650 2,336,000
USG Corp., 9.25s, 2001 10,250 9,840,000
-------------
$ 40,877,183
- -----------------------------------------------------------------------------
Chemicals - 5.5%
Arcadian Partners L.P., 10.75s, 2005## $ 5,350 $ 5,216,250
Huntsman Corp., 10.625s, 2001 6,750 6,918,750
Koppers Industries, Inc., 8.5s, 2004 1,500 1,320,000
NL Industries, Inc., 11.75s, 2003 7,100 7,135,500
OSI Specialties Holding Co., 0s, 2004 6,800 4,216,000
OSI Specialties, Inc., 9.25s, 2003 5,000 4,650,000
Rexene Corp., 11.75s, 2004 5,150 5,253,000
UCC Investors Holdings, Inc., 10.5s, 2002 3,250 3,205,313
UCC Investors Holdings, Inc., 0s, 2005 10,250 6,803,437
-------------
$ 44,718,250
- -----------------------------------------------------------------------------
Conglomerates - 0.6%
Bell & Howell Co., 10.75s, 2002 $ 3,800 $ 3,610,000
Figgie International, Inc., 9.875s, 1999 1,450 1,283,250
-------------
$ 4,893,250
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<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Non-Convertible Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Industrials - continued
Construction Services - 0.1%
United States Home Corp., 9.75s, 2003 $ 1,300 $ 1,147,250
- -----------------------------------------------------------------------------
Consumer Goods and Services - 7.3%
ADT Operations, Inc., 9.25s, 2003 $ 1,550 $ 1,445,375
Bibb Co., 14s, 1999 3,088 1,605,760
Calmar Spraying Systems, Inc., 12s, 1997 2,025 2,045,250
Calmar Spraying Systems, Inc., 14s, 1999 8,900 8,989,000
Consolidated Cigar Corp., 10.5s, 2003 4,750 4,346,250
Fieldcrest Cannon, Inc., 11.25s, 2004 3,800 3,819,000
International Semi-Tech
Microelectronics, Inc., 0s, 2003 8,000 3,440,000
Ithaca Industries, Inc., 11.125s, 2002 3,800 3,496,000
MAFCO, Inc., 11.875s, 2002 200 188,500
Protection One Alarm, 12s, 2003 2,600 2,457,000
Remington Arms, Inc., 9.5s, 2003## 2,000 1,660,000
Revlon, Inc., 10.5s, 2003 13,350 11,748,000
Revlon Worldwide Corp., 0s, 1998 8,450 4,901,000
Sealy Corp., 9.5s, 2003 650 614,250
Westpoint Stevens, Inc., 9.375s, 2005 9,350 8,391,625
-------------
$ 59,147,010
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Containers - 11.2%
Container Corp. of America, 10.75s, 2002 $ 7,000 $ 7,070,000
Gaylord Container Co., 0s, 2005 17,450 15,530,500
Ivex Packaging Corp., 12.5s, 2002 5,350 5,350,000
Owens-Illinois, Inc., 11s, 2003 6,300 6,599,250
Owens-Illinois, Inc., 9.75s, 2004 5,250 4,961,250
Owens-Illinois, Inc., 9.95s, 2004 500 477,500
Plastic Containers, Inc., 10.75s, 2001 6,750 6,699,375
Riverwood International Corp., 11.25s, 2002 9,950 10,323,125
S.D. Warren Co., 12s, 2004## 7,200 7,452,000
Silgan Corp., 11.75s, 2002 6,710 6,978,400
Stone Consolidated Corp., 10.25s, 2000 3,850 3,773,000
Stone Container Corp., 9.875s, 2001 16,350 15,328,125
Stone Container Corp., 10.75s, 2002 650 643,500
-------------
$ 91,186,025
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Entertainment - 4.4%
ACT III Theatres, Inc., 11.875s, 2003 $ 3,300 $ 3,432,000
Ballys Grand, Inc., 10.375s, 2003 9,650 8,685,000
Casino America, Inc., 11.5s, 2001 3,250 2,860,000
Elsinore Corp., 12.5s, 2000 2,850 1,510,500
Elsinore Corp., 12.5s, 2000 1,000 522,500
Imax Corp., 7s, 2001 1,500 1,237,500
Maritime Group Ltd., 13.5s, 1997#**## 3,319 1,692,652
Resorts International, Inc., 0s, 2000 4,400 3,740,000
SCI Television, Inc., 11s, 2005 9,500 9,571,250
Sam Houston Race Park, Inc., 11.75s, 1999** 3,225 483,750
Spectravision, Inc., 0s, 2001 1,750 770,000
United Artist Theater Circuit, Inc., 11.5s, 2002 1,500 1,556,250
-------------
$ 36,061,402
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<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Non-Convertible Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Industrials - continued
Food and Beverage Products - 2.1%
Amstar Corp., 11.375s, 1997 $ 1,300 $ 1,296,750
Envirodyne Industries, Inc., 10.25s, 2001 2,752 2,091,520
PMI Acquisition Corp., 10.25s, 2003 1,295 1,210,825
Specialty Foods Corp., 10.25s, 2001 8,000 7,320,000
Texas Bottling Group, Inc., 9s, 2003 5,750 5,088,750
-------------
$ 17,007,845
- -----------------------------------------------------------------------------
Forest and Paper Products - 1.4%
Fort Howard Corp., 11s, 2002 $ 2,529 $ 2,566,812
Pacific Lumber Co., 10.5s, 2003 9,500 8,835,000
-------------
$ 11,401,812
- -----------------------------------------------------------------------------
Machinery - 0.4%
Fairfield Manufacturing, 11.375s, 2001 $ 1,750 $ 1,627,500
Thermadyne Industries Holdings Corp.,
10.25s, 2002 2,000 1,900,000
-------------
$ 3,527,500
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 2.1%
Community Health System, 10.25s, 2003 $ 3,500 $ 3,473,750
Healthtrust, Inc., 10.25s, 2004 100 107,250
Integrated Health Services, Inc., 10.75s, 2004 5,000 5,075,000
OrNda Healthcorp., 12.25s, 2002 7,800 8,326,500
-------------
$ 16,982,500
- -----------------------------------------------------------------------------
Metals and Minerals - 1.4%
Easco Corp., 10s, 2001 $ 4,100 $ 3,813,000
Jorgensen (Earle M.) Co., 10.75s, 2000 4,200 4,095,000
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 3,550 3,328,125
-------------
$ 11,236,125
- -----------------------------------------------------------------------------
Oil Services - 1.7%
Falcon Drilling, Inc., 9.75s, 2001# $ 3,100 $ 2,945,000
Ferrell Gas L.P., 10s, 2001 4,200 4,137,000
Giant Industries, Inc., 9.75s, 2003 3,500 3,185,000
Tuboscope Vetco International, Inc., 10.75s, 2003 3,200 3,184,000
-------------
$ 13,451,000
- -----------------------------------------------------------------------------
Oils - 1.5%
Gulf Canada, 9.25s, 2004 $ 6,000 $ 5,520,000
Mesa Capital Corp., 0s, 1998 7,650 6,665,063
-------------
$ 12,185,063
- -----------------------------------------------------------------------------
Printing and Publishing - 0.4%
Western Publishing Group, 7.65s, 2002 $ 350 $ 263,375
World Color Press, Inc., 9.125s, 2003 2,750 2,564,375
-------------
$ 2,827,750
- -----------------------------------------------------------------------------
Restaurants and Lodging - 2.0%
Casino America, Inc., 11.5s, 2001 $ 600 $ 550,500
Four Seasons Hotels, Inc., 9.125s, 2000## 7,750 7,207,500
Hacienda Resorts, Inc., 10.25s, 1998 2,000 1,900,000
Kloster, Inc., 13s, 2003 4,250 3,315,000
Station Casinos, Inc., 9.625s, 2003 3,750 3,150,000
-------------
$ 16,123,000
- -----------------------------------------------------------------------------
Special Products and Services - 10.0%
Alabama Outdoor Advertising, Inc., 10s, 1996+ $ 468 $ 350,957
Ampex Group, Inc., 13.25s, 1996** 2,300 138,000
Astrum International Corp., 11.5s, 2003 4,038 4,078,380
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Non-Convertible Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Industrials - continued
Special Products and Services - continued
Buckeye Cellulose Corp., 10.25s, 2001 $ 2,700 $ 2,598,750
Eagle Industries, Inc., 0s, 2003 20,450 13,190,250
Gillett Holdings, Inc., 12.25s, 2002 7,496 7,646,376
IMO Industries, Inc., 12s, 2001 8,250 8,322,188
Idex Corp., 9.75s, 2002 1,260 1,222,200
Inter-City Products Corp., 9.75s, 2000 4,650 4,336,125
Interlake Corp., 8s, 1996 2,544 2,366,232
Interlake Corp., 12.125s, 2002 9,400 9,024,000
Interlake Revolver, 5.75s, 1997 2,639 2,401,714
K & F Industries, Inc., 11.875s, 2003 6,475 6,345,500
Maxxam, Inc., 12.5s, 1999 1,762 1,792,631
Newflo Corp., 13.25s, 2002 3,850 3,773,000
Polymer Group, Inc., 12.75s, 2002 6,750 6,615,000
Spendthrift Farm, Inc., 12.5s, 1999** 3,552 1,776
Spreckels Industries, Inc., 11.5s, 2000 3,900 3,783,000
Talley Manufacturing & Technology,
Inc., 10.75s, 2003 3,500 3,080,000
Wolverine Tube, Inc., 10.125s, 2002 400 406,000
-------------
$ 81,472,079
- -----------------------------------------------------------------------------
Steel - 4.0%
AK Steel Holdings Corp., 10.75s, 2004 $ 5,500 $ 5,486,250
Bayou Steel Corp., 10.25s, 2001 2,100 1,890,000
Geneva Steel Co., 9.5s, 2004 8,750 7,350,000
Sheffield Steel Corp., 12s, 2001 2,300 2,173,500
Stelco, Inc., 10.4s, 2009|| CAD 4,100 2,675,936
Ucar Global Enterprises, Inc., 12s, 2005## $ 8,500 8,712,500
Wheeling Pittsburgh, 9.375s, 2003 5,000 4,387,500
-------------
$ 32,675,686
- -----------------------------------------------------------------------------
Stores - 2.3%
Eckerd (Jack) Corp., 9.25s, 2004 $ 2,775 $ 2,691,750
Finlay Enterprises, Inc., 0s, 2005 5,700 3,420,000
Finlay Enterprises, Inc., 12s, 2005 4,450 2,714,500
Finlay Fine Jewelry, 10.625s, 2003 1,000 920,000
Payless Cashways, Inc., 9.125s, 2003 1,850 1,646,500
Thrifty Payless, Inc., 12.25s, 2004 600 562,500
Woodward & Lothrop, Inc., 12s, 1995** 3,996 2,797,485
Woodward & Lothrop, Inc., 14.75s, 1995** 12,600 3,591,000
-------------
$ 18,343,735
- -----------------------------------------------------------------------------
Supermarkets - 1.3%
Kroger Co., 9.25s, 2005 $ 3,800 $ 3,800,000
Pathmark Stores, Inc., 11.625s, 2002 700 675,500
Purity Supreme, Inc., 11.75s, 1999 2,000 1,650,000
Ralphs Grocery Co., 10.25s, 2002 1,850 1,785,250
Safeway Stores, Inc., 9.875s, 2007 2,750 2,832,500
-------------
$ 10,743,250
- -----------------------------------------------------------------------------
Telecommunications - 11.6%
ACT III Broadcasting, 9.625s, 2003 $ 1,925 $ 1,790,250
Albritton Communications Corp., 11.5s, 2004 7,600 7,600,000
American Telecasting, 0s, 2004* 5,200 2,223,000
C.F. Cable Television, 11.625s, 2005 3,000 3,000,000
Cablevision Industries Corp., 10.75s, 2002 8,900 9,033,500
Cablevision Systems Corp., 10.75s, 2004 6,705 6,772,050
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Non-Convertible Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Industrials - continued
Telecommunications - continued
Century Communications Corp., 9.75s, 2002 $ 5,300 $ 5,114,500
Century Communications Corp., 0s, 2003 4,750 1,923,750
Century Communications Corp., 11.875s, 2003 2,250 2,334,375
Falcon Holdings Group, Inc., 11s, 2003 9,966 8,670,442
Infinity Broadcasting Corp., 10.375s, 2002 350 351,750
Jones Intercable, Inc., 11.5s, 2004 5,450 5,668,000
Jones Intercable, Inc., 10.5s, 2008 5,650 5,579,375
K-III Communications Corp., 10.625s, 2002 3,305 3,271,950
MFS Communications, Inc., 0s, 2004 13,500 8,285,625
Mobilemedia Communications, Inc., 0s, 2003 5,900 3,186,000
Paging Network, Inc., 8.875s, 2006 6,150 5,135,250
Rogers Cablesystems, Inc., 9.625s, 2002 3,500 3,333,750
Rogers Cablesystems, Inc., 10.125s, 2012 8,050 7,687,750
USA Mobile Communications, 9.5s, 2004 4,000 3,300,000
-------------
$ 94,261,317
- -----------------------------------------------------------------------------
Total Industrials $634,917,282
- -----------------------------------------------------------------------------
Mortgage-Backed Pass-Throughs - 0.4%
Merrill Lynch Mortgage Investors, Inc.,
1994-M1, "F", 8.227s, 2023+ $ 4,500 $ 3,076,740
- -----------------------------------------------------------------------------
Transportation - 0.4%
Continental Airlines, Inc., 11.75s, 1995** $ 5,250 $ 413,438
Continental Airlines, Inc., 12.125s, 1996** 10,000 575,000
Moran Transportation Co., 11.75s, 2004 2,300 2,190,750
Pan American World Airways, Inc., 13.5s, 2003** 9,484 0
-------------
$ 3,179,188
- -----------------------------------------------------------------------------
Utilities - Electric - 2.1%
Kenetech Corp., 12.75s, 2002 $ 8,250 $ 8,703,750
Midland Funding Corp., "A", 11.75s, 2005 7,600 6,995,344
Midland Funding Corp., "B", 13.25s, 2006 1,350 1,324,917
-------------
$ 17,024,011
- -----------------------------------------------------------------------------
Miscellaneous - 0.3%
Reeves Industries, Inc., 11s, 2002 $ 2,300 $ 2,323,000
- -----------------------------------------------------------------------------
Total Non-Convertible Bonds (Identified Cost, $757,368,801) $695,684,263
- -----------------------------------------------------------------------------
Convertible Bond - 0.1%
- -----------------------------------------------------------------------------
Rotorex Corp., 5s, 1996 (Identified Cost, $251,250) $ 500 $ 465,000
- -----------------------------------------------------------------------------
Common Stocks and Warrants - 3.0%
- -----------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------------
Automotive - 0.3%
Borg-Warner Automotive, Inc.*+ 101,621 $ 2,299,175
- -----------------------------------------------------------------------------
Building
Atlantic Gulf Communities Corp., Warrants* 9,637 $ 10,842
- -----------------------------------------------------------------------------
Chemicals
OSI Specialties, Inc., Warrants* 3,750 $ 7,500
- -----------------------------------------------------------------------------
Conglomerates
Insilco Corp.* 7,104 $ 170,053
- -----------------------------------------------------------------------------
Construction Services - 0.2%
Calton, Inc.*++ 2,009,444 $ 1,507,082
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks and Warrants - continued
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Consumer Goods and Services - 0.1%
Protection One, Warrants* 72,800 $ 273,000
Ranger Industries, Inc.*++ 266,768 33,346
-------------
$ 306,346
- -----------------------------------------------------------------------------
Entertainment - 0.1%
Casino America, Inc., Warrants* 1,958 $ 2
Elsinore Corp., Warrants* 192,682 0
Grand Palais Casinos, Inc., Warrants* 111,660 1,060,773
Hemmeter Entertainment, Warrants* 111,660 167,490
Sam Houston Race Park, Inc., Warrants* 12,900 0
-------------
$ 1,228,265
- -----------------------------------------------------------------------------
Medical and Health Products
Republic Health Corp., Warrants* 2,500 $ 625
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 0.5%
OrNda Healthcorp., Inc.* 312,252 $ 4,527,654
- -----------------------------------------------------------------------------
Oil Services - 0.1%
Digicon, Inc., Warrants* 21,287 $ 5,322
ICO, Inc., Warrants* 706,250 459,063
-------------
$ 464,385
- -----------------------------------------------------------------------------
Oils - 0.3%
Crystal Oil Co., $0.075, Warrants* 3,954,527 $ 40
Crystal Oil Co., $0.10, Warrants* 3,455,042 0
Crystal Oil Co., $0.125, Warrants* 4,107,411 0
Crystal Oil Co., $0.15, Warrants* 4,041,943 0
Crystal Oil Co., $0.25, Warrants* 4,041,943 0
Edisto Resources Corp.* 310,230 1,938,938
Forest Oil Corp., Warrants* 28,335 12,397
Ironstone Group, Inc.* 2,674 535
Reunion Resources Co.* 46,515 238,389
TGX Corp.* 24,931 1,558
Wolverine Exploration Co.* 135,041 31,650
-------------
$ 2,223,507
- -----------------------------------------------------------------------------
Pollution Control
Envirosource, Inc.*+ 1,666 $ 5,415
- -----------------------------------------------------------------------------
Printing and Publishing - 0.1%
Triton Group Ltd.* 588,876 $ 883,314
- -----------------------------------------------------------------------------
<PAGE>
Special Products and Services - 1.3%
Alabama Outdoor Holdings, Inc.*+ 1,500 $ 15
Borg-Warner Security Corp.*+ 150,000 1,218,750
Gillett Holdings, Inc.*+ 85,019 1,742,889
Mayflower Group, Inc.*++ 783,919 7,251,251
Patrick Media Group Holdings, Inc.*+ 32,320 2,586
Thermadyne Industries Holdings Corp.* 21,463 254,873
Thermadyne Industries Holdings Corp., "B"*+ 336,000 3,360
-------------
$ 10,473,724
- -----------------------------------------------------------------------------
Stores
Federated Department Stores, Inc., Warrants* 118,723 $ 89,042
Thrifty Payless Holdings, "C"* 42,750 149,625
-------------
$ 238,667
- -----------------------------------------------------------------------------
Telecommunications
American Telecasting, Warrants* 26,000 $ 52,000
- -----------------------------------------------------------------------------
Total Common Stocks and Warrants
(Identified Cost, $51,023,643) $ 24,398,554
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Preferred Stocks - 2.4%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Airlines
Eastern Airlines, Inc., $2.84* 75,493 $ 2,359
Eastern Airlines, Inc., $3.24* 24,940 249
-------------
$ 2,608
- -----------------------------------------------------------------------------
Special Products and Services - 0.9%
K-III Communications Corp.* 74,371 $ 7,046,631
UDC Homes, Inc., Cv.* 103,742 389,033
-------------
$ 7,435,664
- -----------------------------------------------------------------------------
Supermarkets - 1.5%
Supermarkets General Holdings Corp., $3.52* 569,098 $ 12,235,773
- -----------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost,
$19,988,464) $ 19,674,045
- -----------------------------------------------------------------------------
Short-Term Obligations - 7.9%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., due
2/01/95 - 2/21/95 $24,230 $ 24,196,389
Federal National Mortgage Assn.,
due 2/01/95 - 3/03/95 18,100 18,054,522
Ford Motor Credit, due 2/17/95 - 2/24/95 21,860 21,792,135
- -----------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized
Cost $ 64,043,046
- -----------------------------------------------------------------------------
Total Investments (Identified Cost,
$892,675,204) $804,264,908
Other Assets, Less Liabilities - 1.0% 8,587,564
- -----------------------------------------------------------------------------
Net Assets - 100.0% $812,852,472
- -----------------------------------------------------------------------------
* Non-income producing security.
** Non-income producing security - in default.
# Payment-in-kind security.
## SEC Rule 144A restriction.
+ Restricted security.
++ Affiliated issuers are those in which the Fund's holdings of an issuer
represent 5% or more of the outstanding voting securities of the issuer.
|| The principal amount of each non-U.S. dollar denominated security is stated
in the currency in which the bond is denominated. GBP = British Pounds.
CAD = Canadian Dollars.
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
January 31, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $869,980,202) $ 795,473,229
Affiliated issuers (identified cost, $22,695,002) 8,791,679
--------------
Total investments, at value (identified
cost, $892,675,204) $ 804,264,908
Cash 39,155
Receivable for investments sold 6,017,492
Receivable for Fund shares sold 338,396
Interest receivable 17,824,366
Other assets 14,034
--------------
Total assets $ 828,498,351
--------------
Liabilities:
Distributions payable $ 2,452,348
Payable for investments purchased 11,574,597
Payable for Fund shares reacquired 1,114,608
Payable to affiliates -
Management fee 31,964
Shareholder servicing agent fee 11,500
Distribution fee 167,072
Accrued expenses and other liabilities 293,790
--------------
Total liabilities $ 15,645,879
--------------
Net assets $ 812,852,472
==============
Net assets consist of:
Paid-in capital $1,150,975,470
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (88,402,072)
Accumulated net realized loss on investments and foreign
currency transactions (249,658,152)
Accumulated distributions in excess of net
investment income (62,774)
--------------
Total $ 812,852,472
==============
Shares of beneficial interest outstanding 167,783,387
==============
Class A shares:
Net asset value and redemption price per share
(net assets of $523,625,676 / 108,084,812 shares of
beneficial interest outstanding) $4.84
=====
Offering price per share (100/95.25) $5.08
=====
Class B shares:
Net asset value, redemption price, and offering price per
share (net assets of $285,802,126 / 58,992,349 shares of
beneficial interest outstanding) $4.84
=====
Class C shares:
Net asset value, redemption price, and offering price per
share (net assets of $3,424,670 / 706,226 shares of
beneficial interest outstanding) $4.85
=====
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 and
Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended January 31, 1995
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 79,788,140
Dividends 170,746
-------------
Total investment income $ 79,958,886
-------------
Expenses -
Management fee $ 3,756,072
Trustees' compensation 56,278
Shareholder servicing agent fee (Class A) 789,656
Shareholder servicing agent fee (Class B) 651,780
Shareholder servicing agent fee (Class C) 3,689
Distribution and service fee (Class A) 1,704,627
Distribution and service fee (Class B) 2,960,079
Distribution and service fee (Class C) 24,572
Custodian fee 182,485
Postage 163,979
Auditing fees 93,045
Printing 85,269
Legal fees 65,361
Miscellaneous 763,170
-------------
Total expenses $ 11,300,062
Reduction of expenses by distributor (531,614)
-------------
Net expenses $ 10,768,448
-------------
Net investment income $ 69,190,438
-------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions (including net loss of $449,882
from transactions with affiliated issuers) $ (24,472,882)
Foreign currency transactions 113,075
-------------
Net realized loss on investments $ (24,359,807)
=============
Change in unrealized appreciation (depreciation) -
Investments $ (82,743,050)
Translation of assets and liabilities in foreign
currencies (13,720)
-------------
Net unrealized loss on investments $ (82,756,770)
-------------
Net realized and unrealized loss on investments
and foreign currency $(107,116,577)
=============
Decrease in net assets from operations $ (37,926,139)
=============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended January 31, 1995 1994
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 69,190,438 $ 59,395,682
Net realized gain (loss) on
investments and foreign
currency transactions (24,359,807) 3,390,642
Net unrealized gain (loss) on
investments and foreign currency (82,756,770) 63,846,940
-------------- --------------
Increase (decrease) in net assets
from operations $ (37,926,139) $ 126,633,264
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (45,268,326) $ (50,801,002)
From net investment income (Class B) (22,704,630) (8,593,908)
From net investment income (Class C) (189,767) (772)
In excess of net investment income
(Class A) (929,038) (6,675,316)
In excess of net investment income
(Class B) (466,221) (592,977)
In excess of net investment income
(Class C) (3,895) (104)
-------------- --------------
Total distributions declared to
shareholders $ (69,561,877) $ (66,664,079)
-------------- --------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 394,133,456 $ 278,465,305
Net asset value of shares issued in
connection with the acquisition of
MFS Lifetime High Income Fund -- 323,106,233
Net asset value of shares issued to
shareholders in reinvestment of
distributions 36,319,705 37,118,854
Cost of shares reacquired (526,384,411) (267,850,701)
-------------- --------------
Increase (decrease) in net assets
from Fund share transactions $ (95,931,250) $ 370,839,691
-------------- --------------
Total increase (decrease) in
net assets $ (203,419,266) $ 430,808,876
Net assets:
At beginning of period 1,016,271,738 585,462,862
-------------- --------------
At end of period (including
accumulated distributions in
excess of net investment income of
$1,399,154 and $1,027,715,
respectively) $ 812,852,472 $1,016,271,738
============== ==============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31, 1995 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value- beginning of period $ 5.50 $ 5.11 $ 4.89 $ 3.71 $ 4.85 $ 6.04
------- ------- ------- ------- -------- -------
Income from investment operations<F3> -
Net investment income<F4> $ 0.44 $ 0.40 $ 0.51 $ 0.56 $ 0.65 $ 0.69
Net realized and unrealized gain (loss) on investments (0.66) 0.48 0.24 1.21 (1.08) (1.13)
------- ------- ------- ------- -------- -------
Total from investment operations $ (0.22) $ 0.88 $ 0.75 $ 1.77 $ (0.43) $ (0.44)
------- ------- ------- ------- -------- -------
Less distributions declared to shareholders -
From net investment income $ (0.43) $ (0.42) $ (0.51) $ (0.56) $ (0.71) $ (0.75)
In excess of net investment income (0.01) (0.07) -- -- -- --
From paid-in capital -- -- (0.02) (0.03) -- --<F2>
------- ------- ------- ------- -------- -------
Total distributions declared to shareholders $ (0.44) $ (0.49) $ (0.53) $ (0.59) $ (0.71) $ (0.75)
------- ------- ------- ------- -------- -------
Net asset value - end of period $ 4.84 $ 5.50 $ 5.11 $ 4.89 $ 3.71 $ 4.85
======= ======= ======= ======= ======== =======
Total return<F1> (3.95)% 18.13% 16.36% 49.64% (10.99)% (9.18)%
Ratios (to average net assets)/Supplemental data<F4>:
Expenses 0.99% 1.00% 1.03% 1.10% 1.05% 0.87%
Net investment income 8.65% 8.22% 10.21% 11.59% 14.97% 12.17%
Portfolio turnover 59% 68% 75% 28% 24% 25%
Net assets at end of period
(000,000 omitted) $ 524 $ 645 $ 585 $ 556 $ 380 $ 574
<FN>
<F1> Total returns do not include the applicable sales charge (except for the
reinvestment of dividends prior to March 1, 1991). If the charge had been
included, the results would have been lower.
<F2> Includes a per share distribution from paid-in capital of $0.004.
<F3> Per share data for the period subsequent to January 31, 1994 is based on
average shares outstanding.
<F4> The distributor waived a portion of its distribution fee for the years
indicated. If this fee had been incurred by the Fund, the net investment
income per share and the ratios would have been:
Net investment income $ 0.43 $ 0.40 -- -- -- --
Ratios (to average net assets):
Expenses 1.09% 1.04% -- -- -- --
Net investment income 8.55% 8.18% -- -- -- --
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31, 1989 1988 1987 1986 1995 1994<F1> 1995 1994<F2>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -
beginning of period $ 6.17 $ 7.11 $ 7.14 $ 6.84 $ 5.50 $ 5.27 $ 5.50 $ 5.41
------- ------- ------- ------- ------ ------- ------- --------
Income from investment
operations<F4> -
Net investment income $ 0.76 $ 0.77 $ 0.93 $ 0.87 $ 0.39 $ 0.15 $ 0.41 --
Net realized and unrealized
gain (loss) on investments (0.09) (0.83) 0.07 0.37 (0.65) 0.22 (0.66) 0.09
------- ------- ------- ------- ------ ------- ------- --------
Total from investment
operations $ 0.67 $ (0.06) $ 1.00 $ 1.24 $(0.26) $ 0.37 $ (0.25) $ 0.09
------- ------- ------- ------- ------ ------- ------- --------
Less distributions
declared to shareholders -
From net
investment income $ (0.75) $ (0.87) $ (0.93) $ (0.94) $(0.39) $(0.13) $ (0.39) $ --<F5>
In excess of net
investment income -- -- -- -- (0.01) (0.01) (0.01) --<F5>
From net realized
gain on investments (0.05) (0.01) (0.10) -- -- -- -- --
From paid-in capital --<F7> -- -- -- -- -- -- --
------- ------- ------- ------- ------ ------- ------- --------
Total distributions
declared to shareholders $ (0.80) $ (0.88) $ (1.03) $ (0.94) $(0.40) $(0.14) $ (0.40) --
------- ------- ------- ------- ------ ------- ------- --------
Net asset value -
end of period $ 6.04 $ 6.17 $ 7.11 $ 7.14 $ 4.84 $ 5.50 $ 4.85 $ 5.50
======= ======= ======= ======= ====== ======= ======= ========
Total return<F6> 10.68% (1.94)% 14.03% 18.34% (4.77)% 20.29%<F3> (4.51)% 20.94%<F3>
Ratios (to average net assets)/
Supplemental data:
Expenses 0.87% 0.75% 0.71% 0.80% 1.85% 1.79%<F3> 1.79% 1.36%<F3>
Net investment income 12.44% 11.49% 12.49% 12.47% 7.79% 6.94%<F3> 8.01% 5.92%<F3>
Portfolio turnover 34% 28% 46% 49% 59% 68% 59% 68%
Net assets at end of period
(000,000 omitted) $ 880 $ 1,001 $ 1,232 $ 581 $ 286 $ 371 $ 3 $ 1
<FN>
<F1> For the period from the commencement of offering of Class B shares,
September 27, 1993 to January 31, 1994.
<F2> For the period from the commencement of offering of Class C shares, January
3, 1994 to January 31, 1994.
<F3> Annualized.
<F4> Per share data for the period subsequent to January 31, 1994 is based on
average shares outstanding.
<F5> Includes per share distributions from net investment income and in excess
of net investment income of $0.004 and $0.001, respectively.
<F6> Total returns for Class A shares do not include the applicable sales charge
(except for the reinvestment of dividends prior to March 1, 1991). If the
charge had been included, the results would have been lower.
<F7> Includes a per share distribution from paid-in capital of $0.0006.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS High Income Fund (the Fund) is a diversified series of MFS Series Trust III
(the Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
(2) Significant Accounting Policies
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration given 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 value.
Non-U.S. dollar denominated short-term obligations are valued at amortized cost
as calculated in the base currency and translated into U.S. dollars at the
closing daily exchange rate. Futures contracts, options and options on futures
contracts listed on commodities exchanges are valued at closing settlement
prices. Over-the-counter options are valued by brokers through the use of a
pricing model which takes into account closing bond valuations, implied
volatility and short-term repurchase rates. Equity securities listed on
securities exchanges or reported through the NASDAQ system are valued at last
sale prices. Unlisted equity securities or listed equity securities for which
last sale prices are not available are valued at last quoted bid prices.
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.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
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 and 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 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.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as part of an income-producing strategy reflecting the view of the
Fund's management on the direction of interest rates.
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of securities, currency or contracts based on financial indices
at a fixed price on a future date. In entering such contracts, the Fund is
required to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received by
the Fund each day, depending on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes as
unrealized gains or losses by the Fund. The Fund's investment in interest rate
futures contracts is designed to hedge against anticipated future changes in
interest rates. The Fund may also invest in exchange rate and securities futures
contracts for non-hedging purposes. For example, interest rate futures may be
used in modifying the duration of the portfolio without incurring the additional
transaction costs involved in buying and selling the underlying securities.
Should interest or exchange rates or securities prices move unexpectedly, the
Fund may not achieve the anticipated benefits of the financial futures contracts
and may realize a loss.
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund would also continue to earn income on the
securities loaned. At January 31, 1995, the Fund had no securities on loan.
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 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. The Fund may enter into contracts to deliver or
receive foreign currency it will receive from or require for its normal
investment activities. It may also use contracts in a manner intended to protect
foreign currency denominated securities from declines in value due to
unfavorable exchange rate movements. The forward foreign currency exchange
contracts are adjusted by the daily exchange rate of the underlying currency and
any gains or losses are recorded for financial statement purposes as unrealized
until the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the value
of the security on such date.
The Fund has approximately 86% of its portfolio invested in high-yield
securities rated below investment grade. Investments in high-yield securities
are accompanied by a greater degree of credit risk and the risk tends to be more
sensitive to economic conditions than that of higher-rated securities.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are considered workout expenses and are reported as realized
losses. Ongoing costs incurred to protect or enhance an investment, or costs
incurred to pursue other claims or legal actions, are reported as operating
expenses.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Foreign taxes have been provided for on interest
and dividend income earned on foreign investments in accordance with the
applicable country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income.
Distributions to shareholders are recorded on the ex-dividend date. The Fund
distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a return of capital.
Differences in the recognition or classification of income between the financial
statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended January 31, 1995, accumulated net realized loss on
investments and foreign currency transactions increased by $14,784,014,
accumulated distributions in excess of net investment income decreased by
$1,336,380, and paid-in capital decreased by $13,447,634 due to differences
between book and tax accounting for non-income producing securities and capital
losses acquired in fund mergers. This change had no effect on the net assets or
net asset value per share. At January 31, 1995, cumulative tax-basis income
exceeded book-basis income due to differences in accounting for non-income
producing securities and losses deferred for tax purposes. These differences are
considered temporary and are expected to reverse in future years.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees.
Shareholders of each class also bear certain expenses that pertain only to that
particular class. All shareholders bear the common expenses of the Fund pro rata
based on the settled shares outstanding 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, including
distribution and shareholder servicing fees.
(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, computed daily and paid monthly at an effective annual rate of
0.20% of average daily net assets and 2.88% of investment income, amounted to
$3,756,072.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees. Included in Trustees' compensation is a net
periodic pension expense of $19,892 for the year ended January 31, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$105,333 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate distribution plans for each class of
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class A Distribution Plan provides that the Fund will pay MFD up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that MFD may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with MFD of up to 0.25% per annum
(currently reduced to 0.15% for shares purchased prior to March 1, 1991) of the
Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to MFD of up to 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares,
commissions to dealers and payments to MFD wholesalers for sales at or above a
certain dollar level, and other such distribution-related expenses that are
approved by the Fund. MFD is currently waiving the 0.10% distribution fee for an
indefinite period, which amounted to $531,614 and is shown as a reduction of
expenses on the Statement of Operations. Fees incurred under the distribution
plan during the year ended January 31, 1995, net of waiver, were 0.22% of
average daily net assets attributable to Class A shares on an annualized basis
and amounted to $1,173,013 (of which MFD retained $284,649).
The Class B and Class C Distribution Plans provide that the Fund will pay MFD a
monthly distribution fee, equal to 0.75% per annum, and a quarterly 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 each securities dealer that enters
into a sales agreement with MFD all or a portion of the service fee attributable
to Class B and Class C shares, and will pay to such securities dealers all of
the distribution fee attributable to Class C shares. The service fee is intended
to be additional consideration for services rendered by the dealer with respect
to Class B and Class C shares. Fees incurred under the distribution plans during
the year ended January 31, 1995 were 1.00% of average daily net assets
attributable to Class B and Class C shares on an annualized basis and amounted
to $2,960,079 and $24,572, respectively (of which MFD retained $83,028 and $759
for Class B and Class C shares, respectively).
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within twelve months following the share purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class B shares in
the event of a share redemption within six years of purchase. MFD receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended January 31, 1995 were $303 and $578,443 for Class A and
Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$789,656, $651,780 and $3,689 for Class A, Class B and Class C shares,
respectively, for its services as shareholder servicing agent. The fee is
calculated as a percentage of the average daily net assets of each class of
shares at an effective annual rate of up to 0.15%, up to 0.22% and up to 0.15%
attributable to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities Purchases and sales of investments, other than U.S.
government securities, purchased option transactions and short-term obligations,
aggregated $467,033,436 and $599,003,642, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $ 892,675,204
--------------
Gross unrealized depreciation $(102,982,053)
Gross unrealized appreciation 14,571,757
--------------
Net unrealized depreciation $ (88,410,296)
==============
At January 31, 1995, the Fund, for federal income tax purposes, had a capital
loss carryforward of $236,557,241, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration. The Fund's carryforward losses expire as shown in the following
table.
Year Ending January 31, Amount
- ------------------------------------------------------------------------------
1997 $ 3,134,316
1998 30,407,582
1999 91,805,710
2000 64,105,312
2001 16,884,352
2003 30,219,969
------------
Total $236,557,241
============
(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:
Class A Shares
Year Ended 1995 1994
January 31, --------------------------- ---------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 41,588,518 $ 207,747,317 36,435,001 $192,579,433
Shares issued to
shareholders in
reinvestment of
distributions 5,157,706 25,825,727 6,179,895 32,620,016
Shares reacquired (55,887,292) (285,808,664) (39,921,437) (211,136,348)
----------- ------------- ----------- ------------
Net increase
(decrease) (9,141,068) $ (52,235,620) 2,693,459 $ 14,063,101
=========== ============= =========== ============
Class B Shares
Year Ended 1995 1994*
January 31, --------------------------- ---------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 35,621,772 $ 179,566,752 15,799,194 $ 84,858,031
Shares issued in
connection with
the acquisition
of MFS Lifetime
High Income Fund -- -- 61,287,768 323,106,233
Shares issued to
shareholders in
reinvestment of
distributions 2,069,901 10,362,543 830,692 4,498,106
Shares reacquired (46,104,410) (236,279,771) (10,512,568) (56,714,347)
----------- ------------- ----------- ------------
Net increase
(decrease) (8,412,737) $ (46,350,476) 67,405,086 $355,748,023
=========== ============= =========== ============
* For the period from the commencement of offering of Class B shares, September
27, 1993 to January 31, 1994.
Class C Shares
Year Ended 1995 1994+
January 31, --------------------------- ---------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 1,348,486 $ 6,819,387 187,755 $ 1,027,841
Shares issued to
shareholders in
reinvestment of
distributions 26,459 131,435 133 732
Shares reacquired (856,606) (4,295,976) (1) (6)
----------- ------------- ----------- ------------
Net increase 518,339 $ 2,654,846 187,887 $ 1,028,567
=========== ============= =========== ============
+ For the period from the commencement of offering of Class C shares, January
3, 1994 to January 31, 1994.
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended January 31, 1995 was $13,109.
(7) Transactions in Securities of Affiliated Issuers
Affiliated issuers, as defined under the Investment Company Act of 1940, are
those in which the Fund's holdings of an issuer represent 5% or more of the
outstanding voting securities of the issuer. A summary of the Fund's
transactions in the securities of these issuers during the year ended January
31, 1995 is set forth below.
<TABLE>
<CAPTION>
Acquisitions Dispositions Interest
Beginning ------------------- --------------------- Ending Realized and
Share Share Share Share Gain Dividend Ending
Affiliate Amount Amount Cost Amount Cost Amount (Loss) Income Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Calton, Inc. 1,822,240 271,804 $443,041 84,600 $ 233,159 2,009,444 $(149,032) $ -- $1,507,082
Mayflower Group, Inc. 915,919 -- -- 132,000 1,713,799 783,919 (300,850) -- 7,251,251
Ranger Industries, Inc. 266,768 -- -- -- -- 266,768 -- -- 33,346
-------- ----------- ---------- -------- ----------
$443,041 $ 1,946,958 $(449,882) $ 0 $8,791,679
======== =========== ========== ======== ==========
</TABLE>
(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 January 31, 1995, the
Fund owned the following restricted securities (constituting 5.0% 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 supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees. Certain of these securities may be offered and sold
to "qualified institutional buyers" under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Date of Share/Par
Description Acquisition Amount Cost Value
- --------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Alabama Outdoor Advertising, Inc., 10s, 1996 3/28/91 467,943 $ 423,639 $ 350,957
Alabama Outdoor Holdings, Inc. 3/28/91 1,500 15 15
Arcadian Partners L.P., 10.75s, 2005<F1> 5/9/93 5,350,000 5,311,850 5,216,250
Borg-Warner Automotive, Inc. 1/27/93 101,621 355,673 2,299,175
Borg-Warner Security Corp. 1/27/93 150,000 975,000 1,218,750
Envirosource, Inc. 5/15/91 1,666 7,289 5,415
Four Seasons Hotels, Inc., 9.125s, 2000<F1> 6/23/93 7,750,000 7,700,788 7,207,500
Gillett Holdings, Inc. 2/27/92 85,019 872,850 1,742,889
Maritime Group Ltd., 13.5s, 1997<F1> 2/9/94 3,318,926 3,000,000 1,692,652
Merill Lynch Mortgage Investors, Inc.,
1994-M1, 8.227s, 2023 6/22/94 4,500,000 3,119,063 3,076,740
Patrick Media Group Holdings, Inc. 3/28/91 32,320 1,616 2,586
Remington Arms, Inc., 9.5s, 2003<F1> 11/19/93 2,000,000 1,987,500 1,660,000
S.D. Warren Co., 12s, 2004<F1> 12/13/94 7,200,000 7,200,000 7,452,000
Thermadyne Industries Holdings Corp., "B" 4/12/89 336,000 241,920 3,360
Ucar Global Enterprises, Inc., 12s, 2005<F1> 1/20/95 8,500,000 8,500,000 8,712,500
-----------
$40,640,789
===========
<FN>
<F1>SEC Rule 144A restriction.
</TABLE>
(9) Acquisitions
At close of business on September 24, 1993, the Fund acquired all of the assets
and liabilities of MFS Lifetime High Income Fund (LHI). The acquisition was
accomplished by a tax-free exchange of 61,287,768 Class B shares of the Fund
(valued at $323,106,233) for 51,812,122 shares of LHI. LHI's net assets on that
date ($323,106,233), including $4,314,234 of unrealized appreciation, were
combined with those of the Fund. The aggregate net assets of the Fund and LHI
immediately before the acquisition were $587,580,833 and $323,106,233,
respectively. The aggregate net assets of the Fund immediatley after the
acquisition were $910,687,066.
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust III and Shareholders of MFS High Income
Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS High Income Fund (one of the series
constituting MFS Series Trust III) as of January 31, 1995, the related statement
of operations for the year then ended, the statement of changes in net assets
for the years ended January 31, 1995 and January 31, 1994, and the financial
highlights for each of the years in the ten-year period ended January 31, 1995.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
January 31, 1995 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 High Income Fund
at January 31, 1995, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 3, 1995
---------------------------------------------
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.
<PAGE>
MFS HIGH BULK RATE
INCOME FUND [LOGO] U.S. POSTAGE
PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
[LOGO]
MHI-2 3/95 74M 18/218/318
