MFS HIGH INCOME FUND
500 BOYLSTON STREET o BOSTON o MASSACHUSETTS 02116-3741
617 o 954-5000
September 25, 1995
VIA EDGAR
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549
Re: MFS Series Trust III (File No. 811-2794), on Behalf of
MFS High Income Fund
Ladies and Gentlemen:
Pursuant to the requirements of Section 30(b) of the Investment Company Act
of 1940 and Rule 30b2-1, we hereby file a copy of the Semiannual Report to
Shareholders dated July 31, 1995 of MFS High Income Fund.
Very truly yours,
JOHN MCNAMARA
John McNamara
Production Editor
<PAGE>
[MFS LOGO] Semiannual Report
THE FIRST NAME IN MUTUAL FUNDS July 31, 1995
MFS(R) High Income Fund
[A photo of two men sitting at a window.]
<PAGE>
MFS(R) HIGH INCOME FUND
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive
Officer, Eastern Enterprises
Lawrence T. Perera - Partner,
Hemenway & Barnes
William J. Poorvu - Adjunct Professor,
Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive
Vice President and Secretary, Massachusetts
Financial Services Company
Jeffrey L. Shames* - President, Massachusetts
Financial Services Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American
Management Corp. (Investment Advisers)
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, Massachusetts 02116-3741
Portfolio Manager
Robert J. Manning*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
Custodian
State Street Bank and Trust Company
Auditors
Deloitte & Touche LLP
Investor Information
For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime
from a touch-tone telephone.
For information on MFS mutual funds,
call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929
any business day from 9 a.m. to 5 p.m.
Eastern time (or leave a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For current account service, call toll free:
1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call
toll free: 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time. (To use this
service, your phone must be equipped with a
Telecommunications Device for the Deaf.)
For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone telephone.
- -------------------------------------------------
[Dalbar logo] TOP-RATED SERVICE
MFS was rated first when securities firms
evaluated the quality of service they receive
from 40 mutual fund com panies. MFS got high
marks for answering calls quickly, processing
transactions accurately and sending
statements outon time.
(Source: 1994 DALBAR Survey)
- -------------------------------------------------
<PAGE>
Letter to Shareholders
Dear Shareholders:
For the six months ended July 31, 1995, Class A shares of the Fund provided a
total return of +11.54%. Over the same period, the total returns of Class B and
Class C shares were +11.08% and +10.88%, respectively. All of these returns
assume the reinvestment of distributions but exclude the effects of any sales
charges. With the exception of Class C shares, the Fund's results outperformed
the Lehman Brothers Corporate Bond Index (the Lehman Index), which returned
+10.95% during the same period. Because the Fund's portfolio generally consists
of lower-rated 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 thus far in 1995 as well as our outlook for the months
ahead may be found in the Portfolio Performance and Strategy section of this
letter.
Economic Outlook
Moderate, but sustainable, growth appears to be the hallmark of the economic
expansion's fifth year. Consumer spending and homebuying showed only modest
gains through July 31, while businesses continued to work off excess inventories
and reduce factory output. Meanwhile, overseas economies, particularly those of
Germany and Japan, have not recovered as expected, limiting U.S. export growth.
However, we believe the Federal Reserve Board's consistent and, so far,
successful efforts to fight inflation seem to be giving consumers and businesses
enough confidence to help maintain 2 1/2% to 3% real (adjusted for inflation)
growth in gross domestic product through 1995.
Interest Rates
Although the Federal Reserve implemented a one-quarter percentage point decrease
in short-term interest rates in July, the effects of its seven rate increases,
which began in late 1993 and ended in February of this year, are still being
felt throughout the economy. While there have been some increases in commodity
prices, companies have not been able to pass along most of those higher costs,
partly because of the need to keep fighting for market share, but also because
wages and benefits of U.S. workers continue to grow at rates that are near or
perhaps below the inflation rate, limiting consumer buying power. At the end of
July, the nation's employment cost index had risen at a rate of just 2.8% over
the previous year, helping to contain cost pressures. At the same time, however,
the bond markets have perceived isolated signs of more rapid eco nomic growth as
possible harbingers of increasing inflation, and have slightly bid up
longer-term interest rates. Although previous monetary easing by the Federal
Reserve has been followed by additional rate reductions, prospects for further
decreases in the current environment are uncertain. Still, with long-term
1
<PAGE>
Letter to Shareholders -- continued
government bonds yielding approximately 7%, in an environment of 2 1/2% to 3%
inflation, we believe real rates of return in the fixed-income markets could
remain relatively attractive.
Portfolio Performance and Strategy
Over the past six months, yield spreads in the high-yield market have ranged
from 350 basis points (3.50%) to 400 basis points (4.00%) over comparable U.S.
Treasuries. Currently, we believe that the high-yield market is fairly valued,
rela tive to 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. As we entered 1995, the portfolio was more heavily weighted
toward cyclical companies that, in our opinion, stood to benefit from a stronger
economy, including those in the steel, paper, and chemical industries. Although
many companies are enjoying the benefits of an improving economy and stronger
balance sheets, we have become somewhat more selective, anticipating the
possibility of slower growth. Volume in the new-issue market has continued to
decline, in part because of the banking industry's aggressiveness in lending
money to many companies which would otherwise use the high-yield market for
funds. New-issue volume has also been affected by the strength of the equity
markets, which have proven to be an attractive place to raise capital. Also,
companies' improved cash flows have reduced their need for debt financing.
For the remainder of 1995, we expect the economy to continue growing,
albeit at a somewhat slower pace compared with the past six to 12 months.
Because of our outlook for more modest economic growth, we have taken a more
defensive position, favoring the stronger companies in the high-yield universe,
particularly those generating significant levels of free cash flow which are
able to reduce debt levels in spite of slower sales or pricing pressures. We are
also increasing our exposure to non-cyclical businesses, such as paging, cable
television and selected supermarket companies. We will continue to focus on
fundamental credit research, which is the main criterion in determining our
investment selection.
We appreciate your support and welcome any suggestions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin /s/ Robert J. Manning
A. Keith Brodkin Robert J. Manning
Chairman and President Portfolio Manager
August 10, 1995
2
<PAGE>
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, some of which may involve equity features. Capital growth, if any,
is a consideration incidental to the objective of high current income.
The Fund seeks to achieve its 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 Summary
Because mutual funds like MFS High Income Fund are designed for investors with
long-term goals, we have provided cumulative results as well as the average
annual total returns for Class A, Class B and Class C shares for the applicable
time periods.
Average Annual and Cumulative Total Rates of Return
Class A Investment Results
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Cumulative Total Return* +11.54% +13.28% +90.03% +155.07%
- --------------------------------------------------------------------------------
Average Annual Total Return* -- +13.28% +13.70% +9.82%
- --------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the most
recent calendar quarter as required by the Securities and Exchange Commission
(the SEC), with all distributions reinvested and reflecting the maximum sales
charge of 4.75% on the initial investment for the 1-, 5- and 10-year periods
ended June 30, 1995, were +5.79%, +12.64% and +9.21%, respectively.
*These results do not include the sales charge. If the charge had been included,
the results would have been lower.
3
<PAGE>
Average Annual and Cumulative Total Rates of Return - continued
Class B Investment Results
(net asset value change including reinvested distributions)
9/27/93+-
6 Months 1 Year 7/31/95
- --------------------------------------------------------------------------------
Cumulative Total Return++ +11.08% +12.32% +13.25%
- --------------------------------------------------------------------------------
Average Annual Total Return++ -- +12.32% +6.99%
- --------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the most
recent calendar quarter as required by the SEC, with all distributions
reinvested and reflecting the current maximum contingent deferred sales charge
(CDSC) of 4% for the 1-year period ended June 30, 1995 and for the period from
September 27, 1993+ to June 30, 1995, were +6.16% and +3.77%, respectively.
Class C Investment Results
(net asset value change including reinvested distributions)
1/03/94+-
6 Months 1 Year 7/31/95
- --------------------------------------------------------------------------------
Cumulative Total Return* +10.88% +12.17% +8.23%
- --------------------------------------------------------------------------------
Average Annual Total Return* -- +12.17% +5.16%
- --------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the most
recent calendar quarter as required by the SEC, with all distributions
reinvested for the 1-year period ended June 30, 1995 and for the period from
January 3, 1994+ to June 30, 1995, were +10.45% and +3.90%, respectively.
All results represent past performance and are not necessarily an indication of
future results. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost. 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 by MFS at
any time.
+ Commencement of offering of this class of shares.
++ These results do not include any CDSC. If the charge had been included, the
results would have been lower.
* 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.
4
<PAGE>
Portfolio of Investments - July 31, 1995
Non-Convertible Bonds - 91.0%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial Institutions - 3.3%
American Annuity Group, Inc., 11.125s, 2003 $ 5,600 $ 5,824,000
American Life Holdings Co., 11.25s, 2004 3,250 3,412,500
Americo Life, Inc., 9.25s, 2005 4,200 3,874,500
GPA Delaware, Inc., 8.75s, 1998 4,000 3,620,000
ICH Corp., 11.25s, 1996 2,000 1,560,000
Tiphook Finance Corp., 7.125s, 1998 5,200 4,212,000
Tiphook Finance Corp., 8s, 2000 8,353 6,682,400
--------------
$ 29,185,400
- -----------------------------------------------------------------------------------------------------------------
Foreign Denominated - 0.2%
United Kingdom
Mexico-United Mexican States, 16.5s, 2008+++ GBP $ 950 $ 1,496,778
- -----------------------------------------------------------------------------------------------------------------
Industrials - 84.2%
Aerospace - 0.1%
Haynes International, Inc., 11.25s, 1998 $ 1,000 $ 960,000
- -----------------------------------------------------------------------------------------------------------------
Apparel and Textiles - 0.1%
Guess, Inc., 9.5s, 2003 $ 1,000 $ 1,005,000
- -----------------------------------------------------------------------------------------------------------------
Automotive - 1.9%
Exide Corp., 10s, 2005## $ 3,900 $ 4,046,250
Harvard Industries, Inc., 12s, 2004 8,250 8,621,250
SPX Corp., 11.75s, 2002 4,050 4,232,250
--------------
$ 16,899,750
- -----------------------------------------------------------------------------------------------------------------
Building - 5.5%
American Standard, Inc., 10.5s, 2005 $ 17,625 $ 13,923,750
Atlantic Gulf Communities Corp., 12s, 1996 1,106 923,359
Atlantic Gulf Communities Corp., 13s, 1998 1,078 576,891
Congoleum Corp., 9s, 2001 2,300 2,254,000
Lone Star Industries, Inc., 10s, 2003 4,542 4,587,420
Nortek, Inc., 9.875s, 2004 8,750 8,050,000
Schuller International Group, Inc., 10.875s, 2004 5,250 5,735,625
USG Corp., 9.25s, 2001 11,750 12,161,250
--------------
$ 48,212,295
- -----------------------------------------------------------------------------------------------------------------
Chemicals - 5.4%
Arcadian Partners L.P., 10.75s, 2005## $ 5,350 $ 5,617,500
Huntsman Corp., 10.625s, 2001 4,750 5,058,750
INDSPEC Chemical Corp., 0s, 2003 3,700 2,405,000
Koppers Industries, Inc., 8.5s, 2004 1,500 1,455,000
NL Industries, Inc., 11.75s, 2003 10,600 11,395,000
OSI Specialties Holding Co., 0s, 2004 6,800 4,896,000
Rexene Corp., 11.75s, 2004 5,150 5,703,625
UCC Investors Holdings, Inc., 10.5s, 2002 3,250 3,339,375
UCC Investors Holdings, Inc., 0s, 2005 10,250 7,661,875
--------------
$ 47,532,125
- -----------------------------------------------------------------------------------------------------------------
Conglomerates - 0.5%
Bell & Howell Co., 10.75s, 2002 $ 3,800 $ 4,047,000
- -----------------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 7.9%
Calmar Spraying Systems, Inc., 12s, 1997 $ 2,025 $ 2,065,500
</TABLE>
5
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Industrials - continued
Consumer Goods and Services - continued
Calmar Spraying Systems, Inc., 14s, 1999 $ 8,900 $ 9,078,000
Consolidated Cigar Corp., 10.5s, 2003 4,750 4,750,000
Fieldcrest Cannon, Inc., 11.25s, 2004 3,800 3,961,500
International Semi-Tech Microelectronics, Inc., 0s, 2003 8,000 4,260,000
Ithaca Industries, Inc., 11.125s, 2002 3,800 3,610,000
Remington Arms, Inc., 10s, 2003## 2,000 1,840,000
Revlon, Inc., 10.5s, 2003 13,350 13,416,750
Revlon Worldwide Corp., 0s, 1998 1,350 961,875
Samsonite Corp., 11.125s, 2005## 8,750 8,925,000
Sealy Corp., 9.5s, 2003 3,900 3,880,500
Westpoint Stevens, Inc., 9.375s, 2005 12,850 12,657,250
--------------
$ 69,406,375
- -----------------------------------------------------------------------------------------------------------------
Containers - 12.3%
Atlantis Group, Inc., 11s, 2003 $ 5,000 $ 4,877,500
Container Corp. of America, 10.75s, 2002 7,000 7,455,000
Gaylord Container Co., 0s, 2005 19,450 19,693,125
Ivex Packaging Corp., 12.5s, 2002 5,350 5,697,750
Owens-Illinois, Inc., 11s, 2003 10,600 11,686,500
Owens-Illinois, Inc., 9.75s, 2004 3,250 3,347,500
Owens-Illinois, Inc., 9.95s, 2004 500 517,500
Plastic Containers, Inc., 10.75s, 2001 6,750 7,020,000
RXI Holdings, Inc., 14s, 2002## 3,500 3,543,750
Riverwood International Corp., 11.25s, 2002 8,651 9,429,590
S.D. Warren Co., 12s, 2004 7,200 7,992,000
Silgan Corp., 11.75s, 2002 6,710 7,045,500
Stone Consolidated Corp., 10.25s, 2000 3,850 4,052,125
Stone Container Corp., 9.875s, 2001 16,350 16,431,750
--------------
$ 108,789,590
- -----------------------------------------------------------------------------------------------------------------
Defense Electronics - 0.6%
Alliant Techsystems, Inc., 11.75s, 2003 $ 5,150 $ 5,562,000
- -----------------------------------------------------------------------------------------------------------------
Entertainment - 3.7%
ACT III Theatres, Inc., 11.875s, 2003 $ 3,300 $ 3,580,500
Bally's Grand, Inc., 10.375s, 2003 9,650 9,505,250
Griffin Gaming & Entertainment, 0s, 2000 4,400 3,960,000
Maritime Group Ltd., 13.5s 1997##**# 3,319 1,493,517
SCI Television, Inc., 11s, 2005 11,250 11,742,187
Sam Houston Race Park, Inc., 11.75s, 1999**+ 3,225 806,250
United Artist Theater Circuit, Inc., 11.5s, 2002 1,500 1,627,500
--------------
$ 32,715,204
- -----------------------------------------------------------------------------------------------------------------
Food and Beverage Products - 2.2%
Amstar Corp., 11.375s, 1997 $ 1,300 $ 1,326,000
Envirodyne Industries, Inc., 10.25s, 2001 2,752 2,187,840
PMI Acquisition Corp., 10.25s, 2003 2,495 2,563,612
Specialty Foods Corp., 10.25s, 2001 8,000 7,840,000
Texas Bottling Group, Inc., 9s, 2003 5,750 5,692,500
--------------
$ 19,609,952
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Industrials - continued
Forest and Paper Products - 1.3%
Pacific Lumber Co., 10.5s, 2003 $ 9,500 $ 8,882,500
Repap New Brunswick, Inc., 10.625s, 2005 2,500 2,600,000
--------------
$ 11,482,500
- -----------------------------------------------------------------------------------------------------------------
Machinery - 0.4%
Fairfield Manufacturing, 11.375s, 2001 $ 1,750 $ 1,653,750
Thermadyne Industries Holdings Corp., 10.25s, 2002 2,000 1,970,000
--------------
$ 3,623,750
- -----------------------------------------------------------------------------------------------------------------
Medical and Health Products - 1.1%
Tenet Healthcare Corp., 10.125s, 2005 $ 9,500 $ 10,070,000
- -----------------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 2.6%
Community Health System, Inc., 10.25s, 2003 $ 3,500 $ 3,727,500
Genesis Health Ventures, 9.75s, 2005 3,000 3,090,000
Integrated Health Services, Inc., 10.75s, 2004 7,000 7,507,500
OrNda Healthcorp., 12.25s, 2002 7,800 8,619,000
--------------
$ 22,944,000
- -----------------------------------------------------------------------------------------------------------------
Metals and Minerals - 1.3%
Easco Corp., 10s, 2001 $ 4,100 $ 4,141,000
Jorgensen (Earle M.) Co., 10.75s, 2000 4,200 4,116,000
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 3,550 3,585,500
--------------
$ 11,842,500
- -----------------------------------------------------------------------------------------------------------------
Oil Services - 1.9%
Amerigas Partners L.P., 10.125s, 2007 $ 3,400 $ 3,621,000
Ferrell Gas L.P., 10s, 2001 4,700 4,876,250
Global Marine, Inc., 12.75s, 1999 4,400 4,856,500
Tuboscope Vetco International, Inc., 10.75s, 2003 3,200 3,288,000
--------------
$ 16,641,750
- -----------------------------------------------------------------------------------------------------------------
Oils - 1.2%
Gulf Canada, 9.25s, 2004 $ 6,000 $ 5,985,000
Mesa Capital Corp., 12.75s, 1998 4,950 4,479,750
--------------
$ 10,464,750
- -----------------------------------------------------------------------------------------------------------------
Printing and Publishing - 0.6%
Day International Group, Inc., 11.125s, 2005## $ 2,100 $ 2,173,500
World Color Press, Inc., 9.125s, 2003 2,750 2,722,500
--------------
$ 4,896,000
- -----------------------------------------------------------------------------------------------------------------
Restaurants and Lodging - 3.1%
Boomtown, Inc., 11.5s, 2003 $ 3,270 $ 2,943,000
Boyd Gaming Corp., 10.75s, 2003 5,900 6,077,000
Four Seasons Hotels, Inc., 9.125s, 2000## 7,750 7,595,000
Hacienda Resorts, Inc., 10.25s, 1998 1,710 1,624,500
Harrahs Operating, Inc., 10.875s, 2002 2,000 2,155,000
Kloster, Inc., 13s, 2003 4,750 3,562,500
Station Casinos, Inc., 9.625s, 2003 3,750 3,543,750
--------------
$ 27,500,750
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Industrials - continued
Special Products and Services - 10.7%
Alabama Outdoor Advertising, Inc., 10s, 1996+ $ 422 $ 316,749
Buckeye Cellulose Corp., 10.25s, 2001 2,700 2,700,000
Eagle Industries, Inc., 0s, 2003 13,700 10,377,750
Gillett Holdings, Inc., 12.25s, 2002 7,496 7,796,304
IMO Industries, Inc., 12s, 2001 8,250 8,538,750
Idex Corp., 9.75s, 2002 1,260 1,316,700
Interlake Corp., 12s, 2001 5,200 5,408,000
Interlake Corp., 12.125s, 2002 9,200 9,292,000
Interlake Revolver, 5.75s, 1997 1,672 1,646,714
K & F Industries, Inc., 11.875s, 2003 6,475 6,734,000
Maxxam, Inc., 12.5s, 1999 1,762 1,792,632
Newflo Corp., 13.25s, 2002 3,850 3,888,500
OSI Specialties, Inc., 9.25s, 2003 5,000 5,125,000
Polymer Group, Inc., 12.75s, 2002## 8,250 8,415,000
Spreckels Industries, Inc., 11.5s, 2000 3,900 3,880,500
Synthetic Industries, Inc., 12.75s, 2002 11,755 11,872,550
Talley Manufacturing & Technology, Inc., 10.75s, 2003 4,500 4,500,000
Wolverine Tube, Inc., 10.125s, 2002 400 426,000
--------------
$ 94,027,149
- -----------------------------------------------------------------------------------------------------------------
Steel - 3.5%
AK Steel Holdings Corp., 10.75s, 2004 $ 6,500 $ 6,995,625
Geneva Steel Co., 9.5s, 2004 1,000 780,000
Sheffield Steel Corp., 12s, 2001 2,300 2,190,750
UCAR Global Enterprises, Inc., 12s, 2005 9,250 10,175,000
WCI Steel, Inc., 10.5s, 2002 6,350 6,302,375
Weirton Steel Corp., 10.75s, 2005## 3,200 3,048,000
Wheeling Pittsburgh Corp., 9.375s, 2003 1,200 1,128,000
--------------
$ 30,619,750
- -----------------------------------------------------------------------------------------------------------------
Stores - 2.1%
Finlay Enterprises, Inc., 0s, 2005 $ 10,150 $ 7,003,500
Finlay Fine Jewelry, 10.625s, 2003 1,000 970,000
Wherehouse Entertainment, Inc., 13s, 2002 2,250 675,000
Woodward & Lothrop, Inc., 12s, 1995** 3,996 4,715,761
Woodward & Lothrop, Inc., 14.75s, 1995** 13,100 5,240,000
--------------
$ 18,604,261
- -----------------------------------------------------------------------------------------------------------------
Supermarkets - 2.3%
Dominick's Finer Foods, Inc., 10.875s, 2005## $ 5,450 $ 5,613,500
Eagle Food Centers, Inc., 8.625s, 2000 1,500 660,000
Pathmark Stores, Inc., 11.625s, 2002 700 745,500
Ralphs Grocery Co., 11s, 2005 9,450 9,072,000
Safeway Stores, Inc., 9.875s, 2007 1,500 1,665,000
Stop & Shop Cos., Inc., 9.75s, 2002 2,000 2,150,000
--------------
$ 19,906,000
- -----------------------------------------------------------------------------------------------------------------
Telecommunications - 11.9%
ACT III Broadcasting, 9.625s, 2003 $ 1,925 $ 1,953,875
Albritton Communications Corp., 11.5s, 2004 6,350 6,762,750
</TABLE>
8
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Industrials - continued
Telecommunications - continued
American Telecasting Unit, 12.5s, 2004 $ 1,060 $ 649,250
Cablevision Industries Corp., 10.75s, 2002 8,900 9,701,000
Cablevision Systems Corp., 10.75s, 2004 5,705 6,132,875
Century Communications, 9.5s, 2005 3,800 3,847,500
Comcast Corp., 9.375s, 2005 2,000 2,027,500
Continental Cablevision, Inc., 8.875s, 2005 1,000 1,030,000
Falcon Holdings Group, Inc., 11s, 2003# 10,514 9,988,449
Jones Intercable, Inc., 11.5s, 2004 5,450 5,967,750
Jones Intercable, Inc., 10.5s, 2008 5,650 6,073,750
K-III Communications Corp., 10.625s, 2002 3,305 3,486,775
MFS Communications, Inc., 0s, 2004 14,000 10,080,000
Mobilemedia Communications, Inc., 0s, 2003 5,900 3,953,000
Paging Network, Inc., 8.875s, 2006 12,850 12,111,125
Pronet, Inc., 11.875s, 2005## 5,500 5,720,000
Rogers Cablesystems Ltd., 9.625s, 2002 3,500 3,605,000
Rogers Cablesystems Ltd., 10.125s, 2012 8,050 8,311,625
USA Mobile Communication, 9.5s, 2004 4,000 3,640,000
--------------
$ 105,042,224
- -----------------------------------------------------------------------------------------------------------------
Total Industrials $ 742,404,675
- -----------------------------------------------------------------------------------------------------------------
Mortgage-Backed Pass-Throughs - 0.4%
Merrill Lynch Mortgage Investors, Inc., 1994-M1, "F",
8.152s, 2023+ $ 4,500 $ 3,390,255
- -----------------------------------------------------------------------------------------------------------------
Transportation - 0.6%
Continental Airlines, Inc., 11.75s, 1995** $ 5,250 $ 735,000
Continental Airlines, Inc., 12.125s, 1996** 10,000 1,050,000
Moran Transportation Co., 11.75s, 2004 2,300 2,093,000
PDV America, Inc., 7.875s, 2003 1,850 1,675,656
--------------
$ 5,553,656
- -----------------------------------------------------------------------------------------------------------------
Utilities - Electric - 1.9%
Kenetech Corp., 12.75s, 2002 $ 8,250 $ 8,085,000
Midland Funding Corp., "A", 11.75s, 2005 7,600 7,866,532
Midland Funding Corp., "B", 13.25s, 2006 1,350 1,372,883
--------------
$ 17,324,415
- -----------------------------------------------------------------------------------------------------------------
Miscellaneous - 0.4%
Reeves Industries, Inc., 11s, 2002 $ 3,250 $ 3,420,625
- -----------------------------------------------------------------------------------------------------------------
Total Non-Convertible Bonds (Identified Cost, $797,133,532) $ 802,775,804
- -----------------------------------------------------------------------------------------------------------------
Common Stocks and Warrants - 1.1%
- -----------------------------------------------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------------------------------------------------
Automotive - 0.4%
Borg-Warner Automotive, Inc.*+ 101,621 $ 3,302,683
- -----------------------------------------------------------------------------------------------------------------
Building
Atlantic Gulf Communities Corp., Warrants* 9,637 $ 4,818
- -----------------------------------------------------------------------------------------------------------------
Chemicals
OSI Specialties, Inc., Warrants* 3,750 $ 7,500
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Portfolio of Investments - continued
Common Stocks and Warrants - continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Construction Services - 0.1%
Calton, Inc.* 946,244 $ 473,122
- -----------------------------------------------------------------------------------------------------------------
Consumer Goods and Services
Protection One, Inc.* 43,680 $ 289,380
Ranger Industries, Inc.*++ 266,768 16,673
--------------
$ 306,053
- -----------------------------------------------------------------------------------------------------------------
Entertainment - 0.1%
Grand Palais Casinos, Inc., Warrants*## 111,660 $ 251,236
Hemmeter Entertainment, Warrants* 111,660 0
Palace Casinos, Warrants* 36,000 0
Sam Houston Race Park, Inc., Warrants* 12,900 80,625
--------------
$ 331,861
- -----------------------------------------------------------------------------------------------------------------
Medical and Health Products
Republic Health Corp., Warrants* 2,500 $ 625
- -----------------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.1%
OrNda Healthcorp., Inc.* 51,999 $ 1,033,480
- -----------------------------------------------------------------------------------------------------------------
Oil Services - 0.1%
Digicon, Inc., Warrants* 21,287 $ 7,983
ICO, Inc., Warrants* 706,250 459,062
--------------
$ 467,045
- -----------------------------------------------------------------------------------------------------------------
Oils
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
Forest Oil Corp., Warrants* 28,335 10,626
Ironstone Group, Inc.* 2,674 535
TGX Corp.* 24,931 1,558
--------------
$ 12,759
- -----------------------------------------------------------------------------------------------------------------
Pollution Control
Envirosource, Inc.*+ 1,666 $ 5,623
- -----------------------------------------------------------------------------------------------------------------
Printing and Publishing - 0.1%
Triton Group Ltd.* 588,876 $ 1,177,752
- -----------------------------------------------------------------------------------------------------------------
Special Products and Services - 0.2%
Gillett Holdings, Inc. 85,019 $ 1,870,418
Thermadyne Industries Holdings Corp.* 21,463 338,042
Thermadyne Industries Holdings Corp., "B"*+ 336,000 3,360
--------------
$ 2,211,820
- -----------------------------------------------------------------------------------------------------------------
Stores
Finlay Enterprises, Inc.* 7,600 $ 118,750
Thrifty Payless Holdings, "C"* 42,750 160,313
--------------
$ 279,063
- -----------------------------------------------------------------------------------------------------------------
Telecommunications
American Telecasting, Warrants* 5,300 $ 5,300
- -----------------------------------------------------------------------------------------------------------------
Total Common Stocks and Warrants (Identified Cost, $22,467,704) $ 9,619,504
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Portfolio of Investments - continued
Preferred Stocks - 2.6%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.* 78,756 $ 7,481,790
UDC Homes, Inc., Cv.** 30,272 41,624
--------------
$ 7,523,414
- -----------------------------------------------------------------------------------------------------------------
Supermarkets - 1.7%
Supermarkets General Holdings Corp., $3.52 569,098 $ 15,365,646
- -----------------------------------------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $19,158,422) $ 22,891,668
- -----------------------------------------------------------------------------------------------------------------
Short-Term Obligations - 2.9%
- -----------------------------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank, due 8/07/95 $ 6,800 $ 6,793,631
Federal National Mortgage Assn., due 8/09/95 - 8/15/95 10,635 10,616,027
Student Loan Marketing Corp., due 8/01/95 8,110 8,110,000
- -----------------------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 25,519,658
- -----------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $864,279,316) $ 860,806,634
Other Assets, Less Liabilities - 2.4% 21,180,638
- -----------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $ 881,987,272
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
See notes to financial statements
11
<PAGE>
Financial Statements
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
July 31, 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $857,055,397) $ 860,789,961
Affiliated issuers (identified cost, $7,223,919) 16,673
---------------
Total investments, at value (identified cost, $864,279,316) $ 860,806,634
Cash 32,470
Receivable for investments sold 7,403,151
Receivable for Fund shares sold 1,089,526
Interest receivable 19,675,521
Other assets 10,854
---------------
Total assets $ 889,018,156
---------------
Liabilities:
Distributions payable $ 2,570,675
Payable for investments purchased 3,007,800
Payable for Fund shares reacquired 863,003
Payable to affiliates -
Management fee 33,109
Shareholder servicing agent fee 12,128
Distribution fee 178,110
Accrued expenses and other liabilities 366,059
---------------
Total liabilities $ 7,030,884
---------------
Net assets $ 881,987,272
---------------
Net assets consist of:
Paid-in capital $ 1,163,893,795
Unrealized depreciation on investments and translation
of assets and liabilities in foreign currencies (3,467,134)
Accumulated net realized loss
on investments and foreign currency transactions (279,281,788)
Accumulated undistributed net investment income 842,399
---------------
Total $ 881,987,272
---------------
Shares of beneficial interest outstanding 170,682,416
---------------
Class A shares:
Net asset value and redemption price per share
(net assets of $591,824,491 / 114,533,627 shares of beneficial interest outstanding) $ 5.17
---------------
Offering price per share (100/95.25) $ 5.43
---------------
Class B shares:
Net asset value and offering price per share
(net assets of $282,319,184 / 54,632,756 shares of beneficial interest outstanding) $ 5.17
---------------
Class C shares:
Net asset value, offering price and redemption price per share
(net assets of $7,843,597 / 1,516,033 shares of beneficial interest outstanding) $ 5.17
---------------
</TABLE>
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
12
<PAGE>
Financial Statements - continued
Statement of Operations
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Six Months Ended July 31, 1995
- -------------------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Interest income $ 43,430,759
------------
Expenses -
Management fee $ 1,998,301
Trustees' compensation 25,849
Shareholder servicing agent fee (Class A) 408,588
Shareholder servicing agent fee (Class B) 327,692
Shareholder servicing agent fee (Class C) 5,749
Distribution and service fee (Class A) 891,072
Distribution and service fee (Class B) 1,489,512
Distribution and service fee (Class C) 38,326
Postage 85,804
Custodian fee 62,786
Printing 60,169
Legal fees 45,348
Auditing fees 39,000
Miscellaneous 471,946
------------
Total expenses $ 5,950,142
Reduction of expenses by distributor (284,655)
------------
Net expenses $ 5,665,487
------------
Net investment income $ 37,765,272
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(29,626,958)
Foreign currency transactions 3,322
------------
Net realized loss on investments and foreign currency transactions $(29,623,636)
------------
Change in unrealized appreciation (depreciation) -
Investments $ 84,937,614
Translation of assets and liabilities in foreign currencies (2,676)
------------
Net unrealized gain on investments $ 84,934,938
------------
Net realized and unrealized gain on
investments and foreign currency $ 55,311,302
------------
Increase in net assets from operations $ 93,076,574
------------
</TABLE>
See notes to financial statements
13
<PAGE>
Financial Statements - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Six Months Ended Year Ended
July 31, 1995 January 31, 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 37,765,272 $ 69,190,438
Net realized loss on investments and
foreign currency transactions (29,623,636) (24,359,807)
Net unrealized gain (loss) on investments and
foreign currency translation 84,934,938 (82,756,770)
--------------- ---------------
Increase (decrease) in net assets
from operations $ 93,076,574 $ (37,926,139)
--------------- ---------------
Distributions declared to shareholders -
From net investment income (Class A) $ (24,657,590) $ (45,268,326)
From net investment income (Class B) (11,895,889) (22,704,630)
From net investment income (Class C) (306,620) (189,767)
In excess of net investment income (Class A) -- (929,038)
In excess of net investment income (Class B) -- (466,221)
In excess of net investment income (Class C) -- (3,895)
--------------- ---------------
Total distributions declared to shareholders $ (36,860,099) $ (69,561,877)
--------------- ---------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 250,986,361 $ 394,133,456
Net asset value of shares issued to shareholders
in reinvestment of distributions 20,882,517 36,319,705
Cost of shares reacquired (258,950,553) (526,384,411)
--------------- ---------------
Increase (decrease) in net assets from
Fund share transactions $ 12,918,325 $ (95,931,250)
--------------- ---------------
Total increase (decrease) in net assets $ 69,134,800 $ (203,419,266)
Net assets:
At beginning of period 812,852,472 1,016,271,738
--------------- ---------------
At end of period (including accumulated
undistributed (distributions in excess of)
net investment income of $842,399 and
$(62,774), respectively) $ 881,987,272 $ 812,852,472
--------------- ---------------
</TABLE>
See notes to financial statements
14
<PAGE>
Financial Statements - continued
Financial Highlights
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
Six Months Ended ------------------------------------------------------------------
July 31, 1995 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 4.84 $ 5.50 $ 5.11 $ 4.89 $ 3.71 $ 4.85
------- ------- ------- ------- ------- -------
Income from investment operations# -
Net investment income* $ 0.23 $ 0.44 $ 0.40 $ 0.51 $ 0.56 $ 0.65
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.32 (0.66) 0.48 0.24 1.21 (1.08)
------- ------- ------- ------- ------- -------
Total from investment
operations $ 0.55 $ (0.22) $ 0.88 $ 0.75 $ 1.77 $ (0.43)
------- ------- ------- ------- ------- -------
Less distributions declared
to shareholders -
From net investment income $ (0.22) $ (0.43) $ (0.42) $ (0.51) $ (0.56) $ (0.71)
In excess of net investment income -- (0.01) (0.07) -- -- --
From paid-in capital -- -- -- (0.02) (0.03) --
------- ------- ------- ------- ------- -------
Total distributions declared
to shareholders $ (0.22) $ (0.44) $ (0.49) $ (0.53) $ (0.59) $ (0.71)
------- ------- ------- ------- ------- -------
Net asset value -
end of period $ 5.17 $ 4.84 $ 5.50 $ 5.11 $ 4.89 $ 3.71
------- ------- ------- ------- ------- -------
Total return++ 11.54%++ (3.95)% 18.13% 16.36% 49.64% (10.99)%
Ratios (to average net assets)/Supplemental data*:
Expenses 1.01%+ 0.99% 1.00% 1.03% 1.10% 1.05%
Net investment income 9.01%+ 8.65% 8.22% 10.21% 11.59% 14.97%
Portfolio turnover 25% 59% 68% 75% 28% 24%
Net assets at end of period
(000,000 omitted) $ 592 $ 524 $ 645 $ 585 $ 556 $ 380
</TABLE>
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
++ 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.
* The distributor did not impose a portion of its distribution fee for the
periods indicated. If this fee had been incurred by the Fund, the net
investment income per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment income $ 0.23 $ 0.43 $ 0.40 -- -- --
Ratios (to average net asssets):
Expenses 1.11%+ 1.09% 1.04% -- -- --
Net investment income 8.91%+ 8.55% 8.18% -- -- --
</TABLE>
See notes to financial statements
15
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Year Ended January 31, 1990 1989 1988 1987 1986
- --------------------------------------------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 6.04 $ 6.17 $ 7.11 $ 7.14 $ 6.84
--------- --------- --------- --------- ---------
Income from investment operations -
Net investment income $ 0.69 $ 0.76 $ 0.77 $ 0.93 $ 0.87
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (1.13) (0.09) (0.83) 0.07 0.37
--------- --------- --------- --------- ---------
Total from investment
operations $ (0.44) $ 0.67 $ (0.06) $ 1.00 $ 1.24
--------- --------- --------- --------- ---------
Less distributions declared to shareholders -
From net investment income $ (0.75) $ (0.75) $ (0.87) $ (0.93) $ (0.94)
From net realized gain on investments -- (0.05) (0.01) (0.10) --
From paid-in capital --### --## -- -- --
--------- --------- --------- --------- ---------
Total distributions declared to
shareholders $ (0.75) $ (0.80) $ (0.88) $ (1.03) $ (0.94)
--------- --------- --------- --------- ---------
Net asset value -
end of period $ 4.85 $ 6.04 $ 6.17 $ 7.11 $ 7.14
--------- --------- --------- --------- ---------
Total return++ (9.18)% 10.68% (1.94)% 14.03% 18.34%
Ratios (to average net assets)/Supplemental data:
Expenses 0.87% 0.87% 0.75% 0.71% 0.80%
Net investment income 12.17% 12.44% 11.49% 12.49% 12.47%
Portfolio turnover 25% 34% 28% 46% 49%
Net assets at end of period (000,000 omitted) $ 574 $ 880 $ 1,001 $ 1,232 $ 581
</TABLE>
## Includes a per share distribution from paid-in capital of $0.0006.
### Includes a per share distribution from paid-in capital of $0.004.
++ 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
16
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
Six Months January 31, Six Months January 31,
Ended -------------------- Ended -------------------
July 31, 1995 1995 1994* July 31, 1995 1995 1994**
- ------------------------------------------------------------------------------------------------------------------------------
Class B Class C
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 4.84 $ 5.50 $ 5.27 $ 4.85 $ 5.50 $ 5.41
------- ------- ------- ------- ------- -------
Income from investment operations# -
Net investment income $ 0.20 $ 0.39 $ 0.15 $ 0.22 $ 0.41 $ --
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.33 (0.65) 0.22 0.30 (0.66) 0.09
------- ------- ------- ------- ------- -------
Total from investment
operations $ 0.53 $ (0.26) $ 0.37 $ 0.52 $ (0.25) $ 0.09
------- ------- ------- ------- ------- -------
Less distributions declared
to shareholders -
From net investment income $ (0.20) $ (0.39) $ (0.13) $ (0.20) $ (0.39) $ -- +++
In excess of net
investment income -- (0.01) (0.01) -- (0.01) -- +++
------- ------- ------- ------- ------- -------
Total distributions declared
to shareholders $ (0.20) $ (0.40) $ (0.14) $ (0.20) $ (0.40) $ --
------- ------- ------- ------- ------- -------
Net asset value - end of period $ 5.17 $ 4.84 $ 5.50 $ 5.17 $ 4.85 $ 5.50
------- ------- ------- ------- ------- -------
Total return 11.08%++ (4.77)% 20.29%+ 10.88%++ (4.51)% 20.94%+
Ratios (to average net assets)/Supplemental data:
Expenses 1.86%+ 1.85% 1.79%+ 1.80%+ 1.79% 1.36%+
Net investment income 8.16%+ 7.79% 6.94%+ 8.33%+ 8.01% 5.92%+
Portfolio turnover 25% 59% 68% 25% 59% 68%
Net assets at end of period
(000,000 omitted) $ 282 $ 286 $ 371 $ 8 $ 3 $ 1
</TABLE>
* For the period from the commencement of offering of Class B shares,
September 27, 1993 to January 31, 1994.
** For the period from the commencement of offering of Class C shares, January
3, 1994 to January 31, 1994.
+ Annualized.
++ Not annualized.
+++ Includes per share distributions from net investment income and in excess of
investment income of $0.004 and $0.001, respectively.
# Per share data for the periods subsequent to January 31, 1994 is based on
average shares outstanding.
See notes to financial statements
17
<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, 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. 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. 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.
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 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.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend and interest payments received in additional securities are recorded on
the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
The Fund can invest up to 100% of its portfolio in high-yield securities rated
below investment grade. Investments in high-yield securities involve greater
degrees of credit and market risk than investments in higher-rated securities,
and tend to be more sensitive to economic conditions.
18
<PAGE>
Notes to Financial Statements - continued
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 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 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 distri butions 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.
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
------------
19
<PAGE>
Notes to Financial Statements - continued
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with Massa
chu setts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate of
0.19% of average daily net assets and 2.66% of investment income.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $8,439 for the six months
ended July 31, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$63,107 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate distribution plans for Class A, Class B
and Class C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940
as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum (reduced to a maximum of 0.15% per annum for an indefinite
period) of the Fund's average daily net assets attributable to Class A shares
which are attributable to that securities dealer, a distribution fee to MFD of
up to 0.10% per annum of the Fund's average daily net assets attributable to
Class A shares, commissions to dealers and payments to MFD wholesalers for sales
at or above a certain dollar level, and other such distribution-related expenses
that are approved by the Fund. MFD retains the service fee for accounts not
attributable to a securities dealer, which amounted to $137,019 for the six
months ended July 31, 1995. MFD is waiving the 0.10% distribution fee for an
indefinite period. Fees incurred under the distribution plan during the six
months ended July 31, 1995 were 0.22% of average daily net assets attributable
to Class A shares on an annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. MFD will pay to securities dealers that enter into a sales agreement
20
<PAGE>
Notes to Financial Statements - continued
with MFD all or a portion of the service fee attributable to Class B and Class C
shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $34,784 and $500 for Class B and Class C
shares, respectively, for the six months ended July 31, 1995. Fees incurred
under the distribution plans during the six months ended July 31, 1995 were
1.00% of average daily net assets attributable to Class B and Class C shares on
an annualized basis.
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
shareholder redemption within 12 months following the share 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 six months ended July 31, 1995 were $583 and $248,158
for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15% attributable
to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$239,120,280 and $207,511,868, 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 $ 864,279,316
-------------
Gross unrealized depreciation $ (44,171,084)
Gross unrealized appreciation 40,698,402
-------------
Net unrealized depreciation $ (3,472,682)
-------------
21
<PAGE>
Notes to Financial Statements - continued
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares Six Months Ended July 31, 1995 Year Ended January 31, 1995
------------------------------ ---------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 26,160,711 $ 131,815,204 41,588,518 $ 207,747,317
Shares issued to shareholders in
reinvestment of distributions 2,910,973 14,687,179 5,157,706 25,825,727
Shares reacquired (22,622,869) (114,558,824) (55,887,292) (285,808,664)
------------- ------------- ------------- -------------
Net increase (decrease) 6,448,815 $ 31,943,559 (9,141,068) $ (52,235,620)
------------- ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Six Months Ended July 31, 1995 Year Ended January 31, 1995
------------------------------ ---------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 21,574,992 $ 108,051,444 35,621,772 $ 179,566,752
Shares issued to shareholders in
reinvestment of distributions 1,190,825 6,003,311 2,069,901 10,362,543
Shares reacquired (27,125,410) (137,029,952) (46,104,410) (236,279,771)
------------- ------------- ------------- -------------
Net decrease (4,359,593) $ (22,975,197) (8,412,737) $ (46,350,476)
------------- ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class C Shares Six Months Ended July 31, 1995 Year Ended January 31, 1995
------------------------------ ---------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,239,257 $ 11,119,713 1,348,486 $ 6,819,387
Shares issued to shareholders in
reinvestment of distributions 38,073 192,027 26,459 131,435
Shares reacquired (1,467,523) (7,361,777) (856,606) (4,295,976)
------------- ------------- ------------- -------------
Net increase 809,807 $ 3,949,963 518,339 $ 2,654,846
------------- ------------- ------------- -------------
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the six months ended July
31, 1995 was $5,525.
22
<PAGE>
Notes to Financial Statements - continued
(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 six months ended July
31, 1995 is set forth below.
<TABLE>
<CAPTION>
Acquisition Disposition
----------- -----------
Beginning Ending Realized
Share Share Share Share Gain Ending
Affiliate Amount Amount Cost Amount Cost Amount (Loss) Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ranger Industries, Inc. 266,768 --- -- --- -- 266,768 -- $ 16,673
----- ----- ----- --------
$ -- -- -- $ 16,673
----- ----- ----- --------
</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 July 31, 1995, the
Fund owned the following restricted securities (constituting 7.50% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933 (the 1933 Act). 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
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alabama Outdoor Advertising, Inc., 10s, 1996 3/28/91 422,332 $ 381,264 $ 316,749
Arcadian Partners L.P., 10.75s, 2005+ 5/09/93 5,350,000 5,311,850 5,617,500
Borg-Warner Automotive, Inc. 1/27/93 101,621 355,673 3,302,683
Day International Group, Inc.,
11.125s, 2005+ 5/26/95 2,100,000 2,099,000 2,173,500
Dominick's Finer Foods, Inc., 10.875s, 2005+ 4/27/95 5,450,000 5,499,625 5,613,500
Envirosource, Inc. 5/15/91 1,666 7,288 5,623
Exide Corp., 10s, 2005+ 4/21/95 3,900,000 3,919,250 4,046,250
Four Seasons Hotels, Inc., 9.125s, 2000+ 6/23/93 7,750,000 7,700,787 7,595,000
Grand Palais Casinos, Inc., Warrants+ 1/14/94 111,660 0 251,236
Maritime Group Ltd., 13.5s, 1997+ 2/09/94 3,318,926 3,000,000 1,493,517
Merrill Lynch Mortgage Investors, Inc.,
1994-M1, "F", 8.152s, 2023 6/22/94 4,500,000 3,119,062 3,390,255
Polymer Group, Inc., 12.75s, 2002+ 6/17/94 8,250,000 8,280,625 8,415,000
Pronet, Inc., 11.875s, 2005+ 6/12/95 5,500,000 5,460,565 5,720,000
RXI Holdings, Inc., 14s, 2002+ 4/28/95 3,500,000 3,517,500 3,543,750
Remington Arms, Inc., 10s, 2003+ 11/19/93 2,000,000 1,987,500 1,840,000
Sam Houston Race Park, Inc., 11.75s, 1999 6/23/93 3,225,000 3,000,200 806,250
Samsonite Corp., 11.125s, 2005+ 7/07/95 8,750,000 8,750,000 8,925,000
Thermadyne Industries Holdings
Corp., "B" 4/12/89 336,000 241,920 3,360
Weirton Steel Corp., 10.75s, 2005+ 6/05/95 3,200,000 3,152,377 3,048,000
-----------
$66,107,173
-----------
</TABLE>
+ SEC Rule 144A restriction.
23
<PAGE>
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 as of July 31, 1995, the
related statement of operations for the six months then ended, the statement of
changes in net assets for the six months then ended and the year ended January
31, 1995, and the financial highlights for the six months ended July 31, 1995
and 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 July
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 July 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
September 8, 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.
24
<PAGE>
A Word About MFS Products and Services
Making Additional Investments at Your Convenience
There are several easy ways to make additional single investments of at
least $50:
o send a check with the lower portion of your account statement
o contact your financial adviser to purchase shares on your behalf
o wire additional investments through your bank; call us first for
instructions.
Making Additional Investments Automatically
By investing a set amount at regular intervals, over time you will buy more
shares when prices are low, and fewer shares when prices are high. Because
dollar cost averaging involves periodic purchases regardless of fluctuating
share prices, you should consider your financial ability to continue investing
in periods of low prices. MFS offers two dollar-cost-averaging programs. See the
prospectus for further details. Dollar cost averaging does not assure a profit
or avoid a loss.
The Automatic Investment Plan offers a simple way to make regular investments of
at least $50 through automatic withdrawals from your checking account.
The Automatic Exchange Plan automatically exchanges shares from any MFS fund
with $5,000 or more into the same class of shares in up to four other MFS funds.
You choose the amounts of the exchanges (as little as $50) and their frequency.
A HYPOTHETICAL EXAMPLE OF AUTOMATIC MONTHLY INVESTING
COMPOUNDING AT 8% YEAR
Amount 5 Years 10 15 20 25
----------------------------------------------------------------
$50 3,671 9,064 16,989 28,633 45,742
$75 5,506 13,596 25,483 42,950 68,613
$100 7,341 18,128 33,978 57,266 91,484
$200 14,683 36,257 67,956 114,532 182,968
For illustration only. Not indicative of future performance of any MFS fund.
For applications or further information call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
If you are a participant in a retirement plan, check with your plan sponsor
regarding the availability of these options.
25
<PAGE>
MFS Investment Opportunities
Mutual Funds
The MFS Family of Funds(R), shown on the facing page, falls into the eight
general categories below. All offer full-time professional management, a
diversified portfolio, and a wide array of shareholder services.
Stock funds seek growth of capital rather than income through investments in
stocks.
Stock and bond funds seek current income and growth of capital through
investments in both stocks and bonds.
Bond funds seek current income through investments in debt securities.
World funds seek stock, balanced, and bond fund objectives through investments
in U.S. and foreign stocks and bonds.
Limited-maturity funds seek current income and preservation of capital through
investments in debt securities with remaining maturities of five years or less.
National tax-free bond funds seek current income exempt from federal income tax
through investments in debt securities issued by states and municipalities.(1)
State tax-free bond funds seek current income exempt from federal and state
income taxes through investments in debt securities issued by a single state and
its municipalities.(1)
Money market funds seek preservation of capital and current income through
investments in short-term debt securities.(2)
To determine which MFS fund may be appropriate for you, please contact your
financial adviser, who can help you relate these investment opportunities to
your financial goals. If you prefer, you may call MFS Investor Information for
literature(3) on MFS products and services: 1-800-637-2929, from 9 a.m. to 5
p.m. Eastern time any business day (leave a message anytime).
(1) A small portion of the income may be subject to federal, state and/or
alternative minimum tax.
(2) Investments in money market funds are not issued or guaranteed by the U.S.
government and there is no assurance that the fund will be able to maintain
a stable net asset value.
(3) Including a prospectus containing more complete information including
charges and expenses. Read the prospectus carefully before investing.
26
<PAGE>
The MFS Family of Funds(R)
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or, leave a message any
time). This material should be read carefully before investing or sending money.
Stock
- --------------------------------------------------------------------------------
Massachusetts Investors Trust
- --------------------------------------------------------------------------------
Massachusetts Investors Growth Stock Fund
- --------------------------------------------------------------------------------
MFS(R) Capital Growth Fund
- --------------------------------------------------------------------------------
MFS(R) Emerging Growth Fund
- --------------------------------------------------------------------------------
MFS(R) Gold & Natural Resources Fund
- --------------------------------------------------------------------------------
MFS(R) Growth Opportunities Fund
- --------------------------------------------------------------------------------
MFS(R) Managed Sectors Fund
- --------------------------------------------------------------------------------
MFS(R) OTC Fund MFS(R) Research Fund
- --------------------------------------------------------------------------------
MFS(R) Value Fund
- --------------------------------------------------------------------------------
Stock and Bond
- --------------------------------------------------------------------------------
MFS(R) Total Return Fund
- --------------------------------------------------------------------------------
MFS(R) Utilities Fund
- --------------------------------------------------------------------------------
Bond
- --------------------------------------------------------------------------------
MFS(R) Bond Fund
- --------------------------------------------------------------------------------
MFS(R) Government Mortgage Fund
- --------------------------------------------------------------------------------
MFS(R) Government Securities Fund
- --------------------------------------------------------------------------------
MFS(R) High Income Fund
- --------------------------------------------------------------------------------
MFS(R) Intermediate Income Fund
- --------------------------------------------------------------------------------
MFS(R) Strategic Income Fund
(formerly MFS(R) Income & Opportunity Fund)
- --------------------------------------------------------------------------------
Limited Maturity Bond
- --------------------------------------------------------------------------------
MFS(R) Government Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS(R) Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS(R) Municipal Limited Maturity Fund
- --------------------------------------------------------------------------------
World
- --------------------------------------------------------------------------------
MFS(R) World Asset Allocation Fund
- --------------------------------------------------------------------------------
MFS(R) World Equity Fund
- --------------------------------------------------------------------------------
MFS(R) World Governments Fund
- --------------------------------------------------------------------------------
MFS(R) World Growth Fund
- --------------------------------------------------------------------------------
MFS(R) World Total Return Fund
- --------------------------------------------------------------------------------
National Tax-Free Bond
- --------------------------------------------------------------------------------
MFS(R) Municipal Bond Fund
- --------------------------------------------------------------------------------
MFS(R) Municipal High Income Fund
(closed to new investors)
- --------------------------------------------------------------------------------
MFS(R) Municipal Income Fund
- --------------------------------------------------------------------------------
State Tax-Free Bond
- --------------------------------------------------------------------------------
Alabama, Arkansas, California, Florida,
Georgia, Louisiana, Maryland,
Massachusetts, Mississippi, New York,
North Carolina, Pennsylvania,
South Carolina, Tennessee, Texas, Virginia,
Washington, West Virginia
- --------------------------------------------------------------------------------
Money Market
- --------------------------------------------------------------------------------
MFS(R) Cash Reserve Fund
- --------------------------------------------------------------------------------
MFS(R) Government Money Market Fund
- --------------------------------------------------------------------------------
MFS(R) Money Market Fund
- --------------------------------------------------------------------------------
<PAGE>
It's Easy to Contact Us
[GRAPHIC OMITTED]
MFS Automated Information
Account Information:
Call 1-800-MFS-TALK (1-800-637-8255)
anytime.
Market Outlook:
Call 1-800-637-4458 any time for the MFS outlook
on the bond and stock markets.
[GRAPHIC OMITTED]
MFS Personal Service
Account Service:
Call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
Product Information:
Call 1-800-637-2929 any business day
from 9 a.m. to 5 p.m. Eastern time.
IRA Service:
Call 1-800-637-1255 any business day
from 8 a.m. to 6 p.m. Eastern time.
Service for the Hearing-Impaired:
Call 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time (TDD required).
[GRAPHIC OMITTED]
MFS Mailing Addresses
For Personal Accounts:
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For IRA Accounts:
MFS Service Center, Inc.
J.W. McCormack Station
P.O. Box 4501
Boston, MA 02101-9817
28
<PAGE>
MFS(R) High [Dalbar logo] Bulk Rate
Income Fund U.S. Postage
PAID
Permit #55638
500 Boylston Street Boston, MA
Boston, MA 02116
[MFS Logo]
THE FIRST NAME IN MUTUAL FUNDS
MHI-3/95 64M 18/218/318
