<PAGE>
MFS HIGH INCOME FUND
500 BOYLSTON STREET o BOSTON o MASSACHUSETTS 02116-3741
617 o 954-5000
March 22, 1996
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 thereunder, we hereby file a copy of the Annual
Report to Shareholders dated January 31, 1996 of MFS High Income Fund.
Very truly yours,
JOHN McNAMARA
John McNamara
Production Editor
/jm
<PAGE>
[MFS Logo] ANNUAL REPORT FOR
The first name in Mutual Funds YEAR ENDED
JANUARY 31, 1996
MFS [Registration Mark] HIGH INCOME FUND
[Cover Photo: A picture of steel drums]
<PAGE>
MFS [Registration Mark] 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; Director, Cambridge Bancorp;
Director, Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive Officer, Eastern Enterprises
Lawrence T. Perera - Partner, Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director, Massachusetts Financial Services
Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management Corp. (investment adviser)
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Robert J. Manning*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
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.
TOP-RATED SERVICE
For the second year in a row, MFS earned a #1 ranking in DALBAR, Inc.'s
Broker/Dealer Survey, Main Office Operations Service Quality category. The firm
achieved a 3.49 overall score - on a scale of 1 to 4 - in the 1995 survey. A
total of 71 firms responded, offering input on the quality of service they
receive from 36 mutual fund companies nationwide. The survey contained questions
about service quality in 17 categories, including "knowledge of phone service
contacts," "accuracy of transaction processing," and "overall ease of doing
business with the firm."
*Affiliated with the Investment Adviser
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
For the 12 months ended January 31, 1996, Class A shares of the Fund provided a
total return of +17.97%, while Class B and Class C shares provided total returns
of +16.98% and +17.03%, respectively. All of these returns assume the
reinvestment of distributions but exclude the effects of any sales charges. The
Fund underperformed the Lehman Brothers Corporate Bond Index (the Lehman Index),
which returned +20.48% 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 the Fund's performance for the past 12 months as
well as our outlook for the months ahead may be found in the Portfolio
Performance and Strategy section of this letter.
Economic Environment
We believe the U.S. economy will continue to grow in 1996 - although "subdued"
may be the best way to describe this growth. One factor holding growth in check
is the continued sluggishness of the consumer sector, an area that represents
approximately two-thirds of the economy. Going into this year, consumers have
been left in a somewhat weakened position, due in part to an increase in
consumer installment debt of some 30% over the past two years. A second reason
for the economy's weakness is the "lag effect" of increases in short-term
interest rates by the Federal Reserve Board in 1994 and into 1995. This lag
effect can last up to two years, although a series of reductions in short-term
rates by the Fed, which began late last year, could provide some support to the
economy through 1996. A third reason for weakness is the ongoing economic
doldrums in Europe and Japan, important markets for U.S. exports. Here again, we
are seeing a few signs, particularly in Japan, of modest recoveries that could
lead to improved prospects for U.S. exporters. Also, we believe lower interest
rates will give a boost to the U.S. housing market, an important segment of the
economy since it also affects such industries as major appliances, furniture,
and building-supply companies. Finally, although the first few weeks of 1996 saw
some signs of inflationary pressures, caused primarily by rising energy prices
and followed by an upward movement in gold, we believe inflation will remain
under control this year, due mainly to the subdued level of economic growth.
Interest Rates
Persistent signs of economic weakness led to decreases in short-term interest
rates by the Federal Reserve in late 1995 and early 1996 and, we believe, will
lead to some additional reductions as the year progresses. In the beginning of
the year, bond markets were trading in a narrow range as investors shifted
between concern about the lack of a budget resolution in Washington and hopes
that
<PAGE>
LETTER TO SHAREHOLDERS - continued
sluggish economic reports and low inflation might lead to lower interest rates.
Barring an unexpected shock, we believe that the still-cheap dollar, low
interest rates, and strong total employment will likely cushion the economy from
a sharp decline. Still, we believe that the subdued state of the economy makes
it unlikely that long-term interest rates will test the high end of 5.75% to
6.75%. However, in an environment of 2% to 3% inflation, this still leaves real
(adjusted for inflation) rates of return in the fixed-income markets at
relatively attractive levels.
Portfolio Performance and Strategy
During the past year, spreads in the high-yield market widened from
approximately 350 basis points (3.5%) to 425 basis points (4.25%) over
Treasuries, primarily due to a decline in interest rates triggered by slightly
weaker economic activity (although principal value and interest on Treasury
securities are guaranteed by the U.S. government if held to maturity). Also,
during the second half of 1995 the default rate rose modestly as credit problems
began to surface, particularly in the retail and gaming sectors of the market.
The default rate still remains below its historic average, but the trend toward
higher defaults has also caused spreads to widen. Cash flows into high-yield
mutual funds, which represent almost half of the market, remained positive all
year and helped absorb the new-issue market. New issuance totaled $45 billion
for the year and registered the second highest level of activity in the history
of the high-yield market.
Our strategy calls for continued selectivity in the new-issue market
because we believe that overall credit quality has declined. Consequently, we
are finding the secondary market more attractive for opportunities to earn
higher risk-adjusted returns. For the remainder of 1996, we believe the economy
will continue to grow at a slower pace than it did in 1995, so we have
positioned our portfolio more defensively by raising our positions in
non-cyclical companies such as paging and cable television, and by swapping into
more senior bonds in the capital structures of the companies in which we invest.
Lastly, we also have a bias toward the stronger, market-leading companies
in the high-yield universe. We believe these companies can generate
significant free cash flows in the current economic environment, enabling them
to deleverage their balance sheets, which can lead to an improvement in credit
quality. As always, our discipline is focused on fundamental credit research,
the driving influence in determining our overall investment strategy.
2
<PAGE>
LETTER TO SHAREHOLDERS - continued
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[A Photo of A. Keith Brodkin] [A Photo of Robert J. Manning]
[Signature of A. Keith Brodkin] [Signature of Robert J. Manning]
A. Keith Brodkin Robert J. Manning
Chairman Portfolio Manager
February 14, 1996
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.
3
<PAGE>
OBJECTIVE AND POLICIES - continued
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
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. Fund results in the graph 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.
Please note that effective January 3, 1994, Class C shares were offered.
Information on Class C share performance appears on the next page.
Please note that the performance of other classes will be greater than or less
than the line shown, based on the differences in loads and fees paid by share-
holders investing in the different classes.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-Year Period Ended January 31, 1996)
[PLOT POINTS FOR GRAPH]
MFS High Lehman Brothers
Days Income Fund-A Corporate Bond Index CPI
- --------------------------------------------------------------------------------
2/1/91 0 9,525 10,000 10,000
- --------------------------------------------------------------------------------
1/31/92 365 14,330 11,557 10,260
- --------------------------------------------------------------------------------
1/31/93 730 16,674 13,016 10,594
- --------------------------------------------------------------------------------
1/31/94 1095 19,697 14,543 10,862
- --------------------------------------------------------------------------------
1/31/95 1460 18,919 13,996 11,166
- --------------------------------------------------------------------------------
1/31/96 1825 22,319 16,862 11,471
- --------------------------------------------------------------------------------
4
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period Ended January 31, 1996)
[PLOT POINTS]
MFS High Lehman Brothers
Days Income Fund-A Corporate Bond Index CPI
- --------------------------------------------------------------------------------
2/1/86 0 9,525 10,000 10,000
- --------------------------------------------------------------------------------
1/31/87 365 10,966 11,820 10,143
- --------------------------------------------------------------------------------
1/31/88 730 10,857 12,328 10,554
- --------------------------------------------------------------------------------
1/31/89 1095 12,123 13,149 11,047
- --------------------------------------------------------------------------------
1/31/90 1460 11,116 14,598 11,621
- --------------------------------------------------------------------------------
1/31/91 1825 10,011 16,025 12,278
- --------------------------------------------------------------------------------
1/31/92 2189 15,081 18,520 12,597
- --------------------------------------------------------------------------------
1/31/93 2556 17,458 20,859 13,008
- --------------------------------------------------------------------------------
1/31/94 2921 20,730 23,306 13,336
- --------------------------------------------------------------------------------
1/31/95 3286 19,911 22,429 13,710
- --------------------------------------------------------------------------------
1/31/96 3651 23,490 27,022 14,084
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
=====================================================================================================
<S> <C> <C> <C> <C>
MFS High Income Fund (Class A) including
4.75% sales charge +12.40% + 8.47% +17.42% + 8.92%
- -----------------------------------------------------------------------------------------------------
MFS High Income Fund (Class A) at net asset value +17.97% +10.21% +18.60% + 9.45%
- -----------------------------------------------------------------------------------------------------
MFS High Income Fund (Class B) with CDSC+ +12.98% -- -- + 6.65%*
- -----------------------------------------------------------------------------------------------------
MFS High Income Fund (Class B) without CDSC +16.98% -- -- + 7.80%*
- -----------------------------------------------------------------------------------------------------
MFS High Income Fund (Class C) +17.03% -- -- + 6.62%**
- -----------------------------------------------------------------------------------------------------
Average high current yield fund# +18.03% + 9.86% +16.61% + 9.56%
- -----------------------------------------------------------------------------------------------------
Lehman Brothers Corporate Bond Index# +20.48% + 9.01% +11.02% +10.45%
- -----------------------------------------------------------------------------------------------------
Consumer Price Index[ss]# + 2.73% + 2.69% + 2.78% + 3.48%
- -----------------------------------------------------------------------------------------------------
<FN>
+ These returns reflect the current Class B contingent deferred sales charge
(CDSC) of 4% for the 1-year period and 3% for the period commencing
September 27, 1993.
* For the period from the commencement of offering of Class B shares,
September 27, 1993 to January 31, 1996.
** For the period from the commencement of offering of Class C shares, January
3, 1994 to January 31, 1996. 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.
# Source: Lipper Analytical Services, Inc.
[ss] The Consumer Price Index is a popular measure of change in prices.
</FN>
</TABLE>
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 rates mutual fund performance) for the
applicable time periods. 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 are not an indication of future results. The
investment return and principal value 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.
5
<PAGE>
PORTFOLIO OF INVESTMENTS - January 31, 1996
<TABLE>
<CAPTION>
Non-Convertible Bonds - 89.6%
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Aerospace - 0.5%
CHC Helicopter, 11.5s, 2002 $ 4,000 $ 3,570,000
Haynes International, Inc., 11.25s, 1998 1,000 1,000,000
------------
$ 4,570,000
- -------------------------------------------------------------------------------------------
Automotive - 2.2%
Exide Corp., 10s, 2005 $ 3,900 $ 4,192,500
Harvard Industries, Inc., 12s, 2004 8,250 8,827,500
Harvard Industries, Inc., 11.125s, 2005 2,550 2,639,250
SPX Corp., 11.75s, 2002 4,050 4,343,625
------------
$ 20,002,875
- -------------------------------------------------------------------------------------------
Building - 5.5%
American Standard, Inc., 0s, 2005 $ 19,625 $ 17,098,281
Congoleum Corp., 9s, 2001 1,950 1,891,500
Lone Star Industries, Inc., 10s, 2003 4,542 4,598,775
Nortek, Inc., 9.875s, 2004 8,750 8,334,375
Schuller International Group, Inc., 10.875s, 2004 5,250 5,906,250
UDC Homes, Inc., 0s, 2000* 30 15,136
USG Corp., 9.25s, 2001 11,750 12,660,625
------------
$ 50,504,942
- -------------------------------------------------------------------------------------------
Chemicals - 4.4%
Arcadian Partners L.P., 10.75s, 2005 $ 5,350 $ 5,938,500
INDSPEC Chemical Corp., 0s, 2003 5,450 4,632,500
Koppers Industries, Inc., 8.5s, 2004 1,500 1,470,000
NL Industries, Inc., 11.75s, 2003 10,600 11,342,000
Rexene Corp., 11.75s, 2004 5,150 5,407,500
UCC Investors Holdings, Inc., 10.5s, 2002 3,250 3,396,250
UCC Investors Holdings, Inc., 0s, 2005 10,250 8,148,750
------------
$ 40,335,500
- -------------------------------------------------------------------------------------------
Conglomerates - 0.4%
Bell & Howell Co., 10.75s, 2002 $ 3,800 $ 3,990,000
- -------------------------------------------------------------------------------------------
Consumer Goods and Services - 6.1%
Consolidated Cigar Corp., 10.5s, 2003 $ 4,750 $ 4,963,750
Fieldcrest Cannon, Inc., 11.25s, 2004 3,800 3,648,000
International Semi-Tech Microelectronics,
Inc., 0s, 2003 8,000 4,680,000
Ithaca Industries, Inc., 11.125s, 2002** 3,800 1,710,000
Reeves Industries, Inc., 11s, 2002 3,250 2,937,188
Remington Arms, Inc., 9.5s, 2003## 2,000 1,640,000
Revlon, Inc., 10.5s, 2003 13,350 13,817,250
Samsonite Corp., 11.125s, 2005 5,500 5,417,500
Sealy Corp., 9.5s, 2003 3,400 3,451,000
Westpoint Stevens, Inc., 9.375s, 2005 14,100 14,135,250
------------
$ 56,399,938
- -------------------------------------------------------------------------------------------
Containers - 9.0%
Atlantis Group, Inc., 11s, 2003 $ 7,500 $ 6,675,000
Calmar, Inc., 11.5s, 2005 8,000 8,100,000
Container Corp. of America, 10.75s, 2002 5,000 5,137,500
Gaylord Container Co., 0s, 2005 12,000 11,880,000
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Non-Convertible Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Containers - continued
Ivex Packaging Corp., 12.5s, 2002 $ 5,350 $ 5,684,375
Owens-Illinois, Inc., 11s, 2003 10,600 12,004,500
Owens-Illinois, Inc., 9.75s, 2004 3,250 3,461,250
Owens-Illinois, Inc., 9.95s, 2004 500 532,500
Plastic Containers, Inc., 10.75s, 2001 6,750 6,918,750
RXI Holdings, Inc., 14s, 2002 3,500 3,080,000
SD Warren Co., 12s, 2004 4,700 5,076,000
Silgan Corp., 11.75s, 2002 6,710 7,213,250
Stone Consolidated Corp., 10.25s, 2000 3,850 4,138,750
Stone Container Corp., 9.875s, 2001 2,950 2,854,125
------------
$ 82,756,000
- -------------------------------------------------------------------------------------------
Defense Electronics - 0.5%
Alliant Techsystems, Inc., 11.75s, 2003 $ 4,350 $ 4,785,000
- -------------------------------------------------------------------------------------------
Entertainment - 4.2%
ACT III Theatres, Inc., 11.875s, 2003 $ 3,300 $ 3,580,500
Ballys Grand, Inc., 10.375s, 2003 9,650 10,060,125
Grand Casinos, Inc., 10.125s, 2003 5,725 6,197,313
Griffin Gaming & Entertainment, 0, 2000 4,400 4,136,000
Maritime Group Ltd., 13.5s, 1997** 3,319 597,407
SCI Television, Inc., 11s, 2005 11,250 11,953,125
Sam Houston Race Park, Inc., 11s, 2001**# 1,613 645,000
United Artist Theater Circuit, Inc., 11.5s, 2002 1,500 1,620,000
------------
$ 38,789,470
- -------------------------------------------------------------------------------------------
Financial Institutions - 3.5%
American Annuity Group, Inc., 11.125s, 2003 $ 5,600 $ 6,104,000
American Life Holdings Co., 11.25s, 2004 3,250 3,445,000
Americo Life, Inc., 9.25s, 2005 3,800 3,705,000
GPA Delaware, Inc., 8.75s, 1998 9,480 9,029,700
Tiphook Finance Corp., 7.125s, 1998 5,200 3,848,000
Tiphook Finance Corp., 8s, 2000 8,353 6,243,867
------------
$ 32,375,567
- -------------------------------------------------------------------------------------------
Food and Beverage Products - 1.7%
PMI Acquisition Corp., 10.25s, 2003 $ 2,495 $ 2,594,800
Specialty Foods Corp., 10.25s, 2001 8,000 7,480,000
Texas Bottling Group, Inc., 9s, 2003 5,750 5,836,250
------------
$ 15,911,050
- -------------------------------------------------------------------------------------------
Forest and Paper Products - 1.3%
Fort Howard Corp., 9.25s, 2001 $ 650 $ 672,750
Pacific Lumber Co., 10.5s, 2003 9,500 9,072,500
Repap New Brunswick, Inc., 10.625s, 2005 2,500 2,425,000
------------
$ 12,170,250
- -------------------------------------------------------------------------------------------
Machinery - 0.8%
Fairfield Manufacturing, 11.375s, 2001 $ 2,850 $ 2,842,875
Thermadyne Industries, 10.75s, 2003 1,720 1,685,600
Thermadyne Industries Holdings Corp., 10.25s, 2002 3,300 3,300,000
------------
$ 7,828,475
- -------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Non-Convertible Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Medical and Health Products - 1.2%
Tenet Healthcare Corp., 10.125s, 2005 $ 9,500 $ 10,640,000
- -------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 2.5%
Community Health System, 10.25s, 2003 $ 3,500 $ 3,815,000
Integrated Health Services, Inc., 10.75s, 2004 6,750 7,458,750
OrNda Healthcorp, 12.25s, 2002 7,800 8,599,500
Quorum Health Group, Inc., 8.75s, 2005 2,750 2,921,875
------------
$ 22,795,125
- -------------------------------------------------------------------------------------------
Metals and Minerals - 1.3%
Easco Corp., 10s, 2001 $ 1,000 $ 1,020,000
Jorgensen (Earle M.) Co., 10.75s, 2000 7,200 6,876,000
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 3,550 3,700,875
------------
$ 11,596,875
- -------------------------------------------------------------------------------------------
Mortgage-Backed Pass-Throughs - 0.4%
Merrill Lynch Mortgage Investors, Inc.,
1994-M1, 8.22s, 2021 $ 4,500 $ 3,535,312
- -------------------------------------------------------------------------------------------
Oil Services - 2.1%
Amerigas Partners L.P., 10.125s, 2007 $ 3,400 $ 3,638,000
Ferrell Gas L.P., 10s, 2001 4,700 5,052,500
Global Marine, Inc., 12.75s, 1999 4,400 4,884,000
Kelley Oil & Gas Corp., 13.5s, 1999 2,400 2,388,000
Tuboscope Vetco International, Inc., 10.75s, 2003 3,200 3,416,000
------------
$ 19,378,500
- -------------------------------------------------------------------------------------------
Oils - 1.2%
Gulf Canada, 9.25s, 2004 $ 6,000 $ 6,270,000
Mesa Capital Corp., 12.75s, 1998 4,950 4,430,250
------------
$ 10,700,250
- -------------------------------------------------------------------------------------------
Printing and Publishing - 0.5%
Day International Group, Inc., 11.125s, 2005 $ 2,100 $ 2,178,750
Western Publishing Group, 7.65s, 2002 3,000 2,220,000
------------
$ 4,398,750
- -------------------------------------------------------------------------------------------
Restaurants and Lodging - 4.2%
Boomtown, Inc., 11.5s, 2003 $ 6,070 $ 5,220,200
Boyd Gaming Corp., 10.75s, 2003 7,900 8,393,750
Coast Hotels and Casino, 13s, 2002## 3,625 3,547,969
Four Seasons Hotels, Inc., 9.125s, 2000## 7,750 7,750,000
Harrah's Operating, Inc., 10.875s, 2002 7,355 7,980,175
Station Casinos, Inc., 9.625s, 2003 5,850 5,893,875
------------
$ 38,785,969
- -------------------------------------------------------------------------------------------
Special Products and Services - 8.6%
Alabama Outdoor Advertising, Inc., 10s, 1996** $ 422 $ 316,749
Buckeye Cellulose Corp., 8.5s, 2005 2,000 2,090,000
Gillett Holdings, Inc., 12.25s, 2002 4,009 4,209,325
Howmet Corp., 10s, 2003## 2,850 3,021,000
IMO Industries, Inc., 12s, 2001 10,050 10,301,250
Idex Corp., 9.75s, 2002 1,260 1,345,050
Interlake Corp., 12s, 2001 5,200 5,330,000
Interlake Corp., 12.125s, 2002 9,200 8,740,000
</TABLE>
8
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Non-Convertible Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Special Products and Services - continued
Interlake Revolver, "B'', 5.75s, 1997## $ 1,663 $ 1,654,193
K & F Industries, Inc., 11.875s, 2003 6,475 7,009,188
Maxxam, Inc., 12.5s, 1999 1,762 1,788,227
Newflo Corp., 13.25s, 2002 3,850 4,023,250
Polymer Group, Inc., 12.25s, 2002 8,250 8,538,750
Spreckels Industries, Inc., 11.5s, 2000 3,900 3,958,500
Synthetic Industries, Inc., 12.75s, 2002 11,755 12,048,875
Talley Manufacturing & Technology, Inc., 10.75s, 2003 4,500 4,545,000
Wolverine Tube, Inc., 10.125s, 2002 400 424,000
------------
$ 79,343,357
- -------------------------------------------------------------------------------------------
Steel - 2.3%
AK Steel Holdings Corp., 10.75s, 2004 $ 6,500 $ 7,239,375
Armco, Inc., 11.375s, 1999 2,875 3,004,375
UCAR Global Enterprises, Inc., 12s, 2005 4,935 5,773,950
WCI Steel, Inc., 10.5s, 2002 4,825 4,794,844
------------
$ 20,812,544
- -------------------------------------------------------------------------------------------
Stores - 2.0%
Finlay Enterprises, Inc., 0s, 2005 $ 10,150 $ 6,775,125
Finlay Fine Jewelry, 10.625s, 2003 1,000 965,000
Parisian, Inc., 9.875s, 2003 5,190 4,424,475
Woodward & Lothrop, Inc., 14.75s, 1995** 13,100 6,419,000
------------
$ 18,583,600
- -------------------------------------------------------------------------------------------
Supermarkets - 3.1%
Brunos, Inc., 10.5s, 2005 $ 3,250 $ 3,201,250
Dominick's Finer Foods, Inc., 10.875s, 2005 5,950 6,426,000
Grand Union Co., 12s, 2004 6,225 5,197,875
Pathmark Stores, Inc., 9.625s, 2003 700 682,500
Purity Supreme, Inc., 11.75s, 1999 2,000 2,180,000
Ralphs Grocery Co., 10.45s, 2004 10,450 10,397,750
------------
$ 28,085,375
- -------------------------------------------------------------------------------------------
Telecommunications - 17.9%
Albritton Communications Corp., 11.5s, 2004 $ 6,350 $ 6,746,875
American Communications Services, 13s, 2005*## 3,100 1,751,500
Bell Cablemedia PLC, 0s, 2005 6,250 4,125,000
Cablevision Industries Corp., 10.75s, 2002 7,850 8,576,125
Cablevision Systems Corp., 10.75s, 2004 4,705 4,999,063
Cablevision Systems Corp., 9.25s, 2005 7,350 7,699,125
Century Communications Corp., 9.5s, 2005 2,600 2,704,000
Comcast Corp., 9.375s, 2005 6,500 6,825,000
Continental Cablevision, Inc., 8.875s, 2005 1,000 1,052,500
Continental Cablevision, Inc., 8.3s, 2006## 9,150 9,207,187
Diamond Cable Communications PLC, 0s, 2005 4,250 2,592,500
Echostar Communications Corp., 0s, 2004 4,000 2,980,000
Falcon Holdings Group, Inc., 11s, 2003# 11,092 10,815,125
Granite Broadcasting Corp., 10.375s, 2005 1,500 1,560,000
Jones Intercable, Inc., 11.5s, 2004 5,450 6,049,500
Jones Intercable, Inc., 10.5s, 2008 5,650 6,271,500
</TABLE>
9
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Non-Convertible Bonds - continued
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Telecommunications - continued
K-III Communications Corp., 10.625s, 2002 $ 3,305 $ 3,528,087
MFS Communications, Inc., 0s, 2004 6,250 4,953,125
MFS Communications, Inc., 0s, 2006 22,000 14,410,000
Marcus Cable Operating Co., 0s, 2004 4,000 3,010,000
Metrocall, Inc., 10.375s, 2007 3,000 3,225,000
Mobile Telecommunication Technologies Corp., 13.5s, 2002 3,900 4,338,750
Mobilemedia Communications, Inc., 0s, 2003 8,900 7,120,000
Paging Network, Inc., 8.875s, 2006 12,975 13,429,125
ProNet, Inc., 11.875s, 2005 5,500 6,105,000
Rifkin Acquisition Partners L.P., 11.125s, 2006## 3,000 3,060,000
Rogers Cablesystems Ltd., 9.625s, 2002 750 804,375
Rogers Cablesystems Ltd., 10.125s, 2012 5,000 5,412,500
USA Mobile Communication, 9.5s, 2004 4,000 4,020,000
Le Group Videotron Ltd., 0s, 2005 11,550 7,507,500
------------
$164,878,462
- -------------------------------------------------------------------------------------------
Transportation - 0.6%
Continental Airlines Holdings, Inc., 12.125s, 1996**$ 10,000 $ 1,400,000
Continental Airlines, Liquidating Trust, 11.75s, 1999** 5,250 525
Moran Transportation Co., 11.75s, 2004 2,300 2,236,750
PDV America, Inc., 7.875s, 2003 1,850 1,796,572
------------
$ 5,433,847
- -------------------------------------------------------------------------------------------
Utilities - 1.6%
Kenetech Corp., 12.75s, 2002 $ 8,250 $ 3,506,250
Midland Funding Corp. II, "A'', 11.75s, 2005 2,850 3,019,946
Westinghouse Electric Co., 8.375s, 2002 5,250 5,531,137
Westinghouse Electric Co., 6.875s, 2003 2,700 2,631,393
------------
$ 14,688,726
- -------------------------------------------------------------------------------------------
Total Non-Convertible Bonds (Identified Cost, $817,767,359) $824,075,759
- -------------------------------------------------------------------------------------------
Common Stocks and Warrants - 0.7%
===========================================================================================
Shares
- -------------------------------------------------------------------------------------------
Aerospace
CHC Helicopters, Warrants* 16,000 $ 8,000
- -------------------------------------------------------------------------------------------
Automotive - 0.3%
Borg-Warner Automotive, Inc. 101,621 $ 2,947,009
- -------------------------------------------------------------------------------------------
Building
Atlantic Gulf Communities Corp.* 690 $ 4,658
Atlantic Gulf Communities Corp., Warrants* 9,637 301
------------
$ 4,959
- -------------------------------------------------------------------------------------------
Consumer Goods and Services
Ranger Industries, Inc.* 266,768 $ 26,677
- -------------------------------------------------------------------------------------------
Containers
RXI Holdings, Inc., Warrants* 3,500 $ 25,375
- -------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Common Stocks and Warrants - continued
===========================================================================================
Issuer Shares Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Entertainment
Grand Palais Casinos, Warrants*## 111,660 $ 0
Hemmeter Entertainment, Warrants* 111,660 0
Palace Casinos, Warrants* 36,000 360
Sam Houston Race Park, Inc.* 481 2,405
------------
$ 2,765
- -------------------------------------------------------------------------------------------
Medical and Health Products
Republic Health Corp., Warrants* 2,500 $ 625
- -------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.1%
OrNda Healthcorp, Inc.* 51,999 $ 1,312,975
- -------------------------------------------------------------------------------------------
Oil Services - 0.1%
ICO, Inc., Warrants* 706,250 $ 459,062
- -------------------------------------------------------------------------------------------
Oils
Crystal Oil Co., $0.075, Warrants* 3,954,527 $ 0
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
------------
$ 0
- -------------------------------------------------------------------------------------------
Pollution Control
Envirosource, Inc.* 1,666 $ 6,039
- -------------------------------------------------------------------------------------------
Printing and Publishing
Triton Group Ltd.* 588,876 $ 294,438
- -------------------------------------------------------------------------------------------
Special Products and Services - 0.2%
Gillett Holdings, Inc.* 85,019 $ 1,785,399
- -------------------------------------------------------------------------------------------
Total Common Stocks and Warrants (Identified Cost, $12,978,170) $ 6,873,323
- -------------------------------------------------------------------------------------------
Preferred Stocks - 2.6%
===========================================================================================
Special Products and Services - 0.9%
K-III Communications Corp.# 83,400 $ 8,673,566
- -------------------------------------------------------------------------------------------
Supermarkets - 1.7%
Supermarkets General Holdings Corp., $3.52 Exch.* 569,098 $ 15,365,646
- -------------------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $16,773,399) $ 24,039,212
- -------------------------------------------------------------------------------------------
Convertible Preferred Stock - 0.2%
===========================================================================================
Entertainment
Granite Broadcasting, Cv. Pfd., 1.938
(Identified Cost, $1,988,688) 33,000 $ 1,608,750
- -------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
<CAPTION>
Short-Term Obligations - 3.3%
===========================================================================================
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Bank, due 2/01/96 $ 8,495 $ 8,495,000
Federal National Mortgage Assn.,
due 2/05/96 - 2/13/9621,485 21,458,209
Total Short-Term Obligations, at Amortized Cost $29,953,209
- -------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $879,460,825) $886,550,253
Other Assets, Less Liabilities - 3.6% 33,237,944
- -------------------------------------------------------------------------------------------
Net Assets - 100.0% $919,788,197
- -------------------------------------------------------------------------------------------
<FN>
* 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.
</FN>
</TABLE>
See notes to financial statements
12
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
================================================================================
January 31, 1996
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $872,236,906) $ 886,523,576
Affiliated issuers (identified cost, $7,223,919) 26,677
-------------
Total investments, at value
(identified cost, $879,460,825) $ 886,550,253
Cash 35,255
Receivable for investments sold 29,700,543
Receivable for Fund shares sold 1,302,595
Interest receivable 18,872,685
Other assets 10,854
-------------
Total assets $ 936,472,185
-------------
Liabilities:
Distributions payable $ 2,577,203
Payable for investments purchased 12,965,067
Payable for Fund shares reacquired 584,103
Payable to affiliates -
Management fee 11,207
Shareholder servicing agent fee 1,068
Distribution fee 160,749
Accrued expenses and other liabilities 384,591
-------------
Total liabilities $ 16,683,988
-------------
Net assets $ 919,788,197
-------------
Net assets consist of:
Paid-in capital $1,187,087,740
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 7,089,428
Accumulated net realized loss on investments
and foreign currency transactions (271,652,470)
Distributions in excess of net investment income 2,736,501
-------------
Total $ 919,788,197
=============
Shares of beneficial interest outstanding 175,512,084
=============
Class A shares:
Net asset value and redemption price per share
(net assets of $620,273,897 / 118,365,548 shares
of beneficial interest outstanding) $5.24
=====
Offering price per share (100/95.25) $5.50
=====
Class B shares:
Net asset value, redemption price, and offering price
per share (net assets of $283,209,968 / 54,039,504
shares of beneficial interest outstanding) $5.24
=====
Class C shares:
Net asset value, redemption price, and offering price
per share (net assets of $16,304,332 4 3,107,032 shares
of beneficial interest outstanding) $5.25
=====
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
13
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
================================================================================
Year Ended January 31, 1996
- --------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 86,970,012
Dividends 16,574
Foreign taxes withheld (35,947)
------------
Total investment income $ 86,950,639
------------
Expenses -
Management fee $ 4,031,708
Trustees' compensation 61,516
Shareholder servicing agent fee (Class A) 846,031
Shareholder servicing agent fee (Class B) 640,165
Shareholder servicing agent fee (Class C) 14,471
Distribution and service fee (Class A) 1,239,712
Distribution and service fee (Class B) 2,909,842
Distribution and service fee (Class C) 96,472
Custodian fee 343,967
Postage 158,913
Printing 136,635
Auditing fees 86,550
Legal fees 52,213
Miscellaneous 794,714
------------
Total expenses $ 11,412,909
Fees paid indirectly (208,205)
------------
Net expenses $ 11,204,704
------------
Net investment income $ 75,745,935
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions (including loss of $6,527,829 from
transactions with affiliated issuers) $(28,303,751)
Foreign currency transactions 3,322
------------
Net realized loss on investments $(28,300,429)
------------
Change in unrealized appreciation -
Investments $ 95,499,724
Translation of assets and liabilities in
foreign currencies (8,224)
------------
Net unrealized gain on investments $ 95,491,500
Net realized and unrealized gain on
investments and foreign currency $ 67,191,071
------------
Increase in net assets from operations $142,937,006
============
See notes to financial statements
14
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
================================================================================
Year Ended January 31, 1996 1995
- --------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 75,745,935 $ 69,190,438
Net realized loss on investments and
foreign currency transactions (28,300,429) (24,359,807)
Net unrealized gain (loss) on
investments and foreign currency 95,491,500 (82,756,770)
------------- --------------
Increase (decrease) in net assets
from operations $ 142,937,006 $ (37,926,139)
------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (50,453,186) $ (45,268,326)
From net investment income (Class B) (22,802,500) (22,704,630)
From net investment income (Class C) (756,472) (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 $ (74,012,158) $ (69,561,877)
------------- --------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 435,560,671 $ 394,133,456
Net asset value of shares issued to
shareholders in reinvestment
of distributions 42,125,341 36,319,705
Cost of shares reacquired (439,675,135) (526,384,411)
------------- --------------
Increase (decrease) in net assets
from Fund share transactions $ 38,010,877 $ (95,931,250)
------------- --------------
Total increase (decrease)
in net assets $ 106,935,725 $ (203,419,266)
Net assets:
At beginning of period 812,852,472 1,016,271,738
------------- --------------
At end of period (including distributions
in excess of net investment income of
$(2,736,501) and $(62,774), respectively $ 919,788,197 $ 812,852,472
------------- -------------
See notes to financial statements
15
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
====================================================================================================================================
Year Ended January 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 4.84 $ 5.50 $ 5.11 $ 4.89 $ 3.71
-------- -------- -------- -------- --------
Income from investment operations# -
Net investment income[ss] $ 0.45 $ 0.44 $ 0.40 $ 0.51 $ 0.56
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.39 (0.66) 0.48 0.24 1.21
-------- -------- -------- -------- --------
Total from investment operations $ 0.84 $ (0.22) $ 0.88 $ 0.75 $ 1.77
-------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (0.44) $ (0.43) $ (0.42) $ (0.51) $ (0.56)
In excess of net investment income -- (0.01) (0.07) -- --
From paid-in capital -- -- -- (0.02) (0.03)
======== ======== ======== ======== ========
Total distributions declared to
shareholders $ (0.44) $ (0.44 $ (0.49) $ (0.53) $ (0.59)
======== ======== ======== ======== ========
Net asset value - end of period $ 5.24 $ 4.84 $ 5.50 $ 5.11 $ 4.89
-------- -------- -------- -------- --------
Total return++ 17.97% (3.95)% 18.13% 16.36% 49.64%
Ratios (to average net assets)/Supplemental data[ss]:
Expenses## 1.00% 0.99% 1.00% 1.03% 1.10%
Net investment income (loss) 8.83% 8.65% 8.22% 10.21% 11.59%
Portfolio turnover 59% 59% 68% 75% 28%
Net assets at end of period (000,000 omitted) $ 620 $ 524 $ 645 $ 585 $ 556
<FN>
++ Total returns for Class A shares do not include the applicable sales charge (except for reinvestment of dividends prior to
March 1, 1991). If the charge had been included, the results would have been lower.
# Per share data for the period subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
[ss] 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 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% -- --
</FN>
</TABLE>
See notes to financial statements
16
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
==============================================================================================================
Year Ended January 31, 1991 1990 1989 1988 1987
- --------------------------------------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 4.85 $ 6.04 $ 6.17 $ 7.11 $ 7.14
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.65 $ 0.69 $ 0.76 $ 0.77 $ 0.93
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions (1.08) (1.13) (0.09) (0.83) 0.07
------ ------ ------ ------ ------
Total from investment operations $(0.43) $(0.44) $ 0.67 $(0.06) $ 1.00
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.71) $(0.75) $(0.75) $(0.87) $(0.93)
From net realized gain on investments
and foreign currency transactions -- -- (0.05) (0.01) (0.10)
From paid-in capital -- -- --** --* --
====== ====== ====== ====== ======
Total distributions declared to
shareholders $(0.71) $(0.75) $(0.80) $(0.88) $(1.03)
------ ------ ------ ------ ------
Net asset value - end of period $ 3.71 $ 4.85 $ 6.04 $ 6.17 $ 7.11
------ ------ ------ ------ ------
Total return++ (10.99)% (9.18)% 10.68% (1.94)% 14.03%
Ratios (to average net assets)/Supplemental data:
Expenses ## 1.05% 0.87% 0.87% 0.75% 0.71%
Net investment income 14.97% 12.17% 12.44% 11.49% 12.49%
Portfolio turnover 24% 25% 34% 28% 46%
Net assets at end of period (000,000 omitted) $ 380 $ 574 $ 880 $1,001 $1,232
<FN>
++ Total returns for Class A shares do not include the applicable sales charge (except for reinvestment of dividends prior to
March 1, 1991). If the charge had been included, the results would have been lower.
# Per share data for the period subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
* Includes a per share distribution from paid-in capital of $0.0006.
** Includes a per share distribution from paid-in capital of $0.0004.
</FN>
</TABLE>
See notes to financial statements
17
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
====================================================================================================================================
Year Ended January 31, 1996 1995 1994* 1996 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 $ 0.41 $ 0.39 $ 0.15 $ 0.41 $ 0.41 $ --
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.39 (0.65) 0.22 0.39 (0.66) 0.09
------- ------- ------- ------- ------- -------
Total from investment operations $ 0.80 $ (0.26) $ 0.37 $ 0.80 $ (0.25) $ 0.09
------- ------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.40) $ (0.39 $ (0.13) $ (0.40) $ (0.39) $ -- ++
In excess of net investment income -- (0.01) (0.01) -- (0.01) -- ++
------- ------- ------- ------- ------- -------
Total distributions declared to
shareholders $ (0.40) $ (0.40) $ (0.14) $ (0.40) $ (0.40) $ --
------- ------- ------- ------- ------- -------
Net asset value - end of period $ 5.24 $ 4.84 $ 5.50 $ 5.25 $ 4.85 $ 5.50
------- ------- ------- ------- ------- -------
Total return 16.98% (4.77)% 20.29%+ 17.03% (4.51)% 20.94%+
Ratios (to average net assets)/Supplemental data:
Expenses ## 1.85% 1.85% 1.79% 1.77% 1.79% 1.36%+
Net investment income 7.99% 7.79% 6.94% 8.02% 8.01% 5.92%+
Portfolio turnover 59% 59% 68% 59% 59% 68%
Net assets at end of period (000,000 omitted) $ 283 $ 286 $ 371 $ 16 $ 3 $ 1
<FN>
** 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.
# Per share data for the periods subsequent to January 31, 1994 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
++ Includes per share distributions from net investment income and in excess of net investment income of $0.004 and $0.001,
respectively.
</FN>
</TABLE>
See notes to financial statements
18
<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 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.
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.
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.
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.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
deposited with the custodian by the Fund. This amount is shown as a reduction of
expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return, and consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. 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, 1996, $4,407,504 was reclassified from
accumulated undistributed net investment income to accumulated net realized loss
on investments and $1,898,607 was reclassified from paid-in-capital to net
realized loss on investments, due to differences between book and tax accounting
for defaulted securities and distributions. This change had no effect on the net
assets or net asset value per share. At January 31, 1996, accumulated
undistributed net investment income under book accounting was different from tax
accounting due to temporary differences in accounting for distributions and
accruing interest income.
At January 31, 1996, the Fund, for federal income tax purposes, had a capital
loss carryforward of $272,253,863 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 30,373,319
2004 35,661,057
------------
Total $272,371,648
============
20
<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.
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 average daily net assets of each class, without distinction between
share classes. Dividends are declared separately for each class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services and general office facilities. The
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 gross 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 of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $22,646 for the year ended
January 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$136,238 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%
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 (currently reduced to a maximum of 0.15% per annum 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 retains the
service fee for accounts not attributable to a securities dealer which amounted
to $279,857 for the year ended January 31, 1996. Fees incurred under the
distribution plan during the year ended January 31, 1996, were 0.21% of average
daily net assets attributable to Class A shares on an annualized basis.
21
<PAGE>
Notes to Financial Statements - continued
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
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 $66,724 and $1,136 for Class B and Class C
shares, respectively, for the year ended January 31, 1996. Fees incurred under
the distribution plans during the year ended January 31, 1996, were 0.25% and
1.00% of average daily net assets attributable to Class B and Class C shares on
an annualized basis, 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
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 year ended January 31, 1996, were $1,729 and $490,067
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
$522,465,395 and $487,516,995, 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 $ 879,632,558
=============
Gross unrealized appreciation $ 49,316,805
Gross unrealized depreciation (42,399,110)
-------------
Net unrealized appreciation $ 6,917,695
=============
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares 1996 1995
---------------------------- -----------------------------
Year Ended January 31, Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Shares sold 43,551,810 $ 222,082,736 41,588,518 $ 207,747,317
Shares issued to shareholders in
reinvestment of distributions 5,871,784 30,043,510 5,157,706 25,825,727
Shares reacquired (39,142,858) (200,253,761) (55,887,292) (285,808,664)
----------- ------------ ----------- ------------
Net increase (decrease) 10,280,736 $ 51,872,485 (9,141,068) $ (52,235,620)
=========== ============ =========== =============
</TABLE>
<TABLE>
<CAPTION>
Class B Shares 1996 1995
---------------------------- -----------------------------
Year Ended January 31, Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Shares sold 37,144,640 $ 188,766,014 35,621,772 $ 179,566,752
Shares issued to shareholders in
reinvestment of distributions 2,276,017 11,631,868 2,069,901 10,362,543
Shares reacquired (44,373,502) (226,482,750) (46,104,410) (236,279,771)
----------- ------------ ----------- ------------
Net decrease (4,952,845) $ (26,084,868) (8,412,737) $ (46,350,476)
=========== ============ =========== =============
</TABLE>
<TABLE>
<CAPTION>
Class C Shares 1996 1995
---------------------------- -----------------------------
Year Ended January 31, Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Shares sold 4,854,733 $ 24,711,921 1,348,486 $ 6,819,387
Shares issued to shareholders in
reinvestment of distributions 87,659 449,963 26,459 131,435
Shares reacquired (2,541,586) (12,938,624) (856,606) (4,295,976)
----------- ------------ ----------- ------------
Net increase 2,400,806 $ 12,223,260 518,339 $ 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 year ended January 31,
1996 was $11,099.
23
<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 year ended January
31, 1996 is set forth below:
<TABLE>
<CAPTION>
Acquisitions Dispositions
Beginning ----------------- ---------------------- Ending Interest and
Share/Par Share/Par Share/Par Share/Par Realized Dividend Ending
Affiliate Amount Amount Cost Amount Cost Amount (Loss) Income Value
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Calton, Inc. 2,009,444 -- 2,009,444 $ 5,293,207 -- $(4,479,193) $ -- $ --
Mayflower
Group, Inc. 783,919 -- 783,919 10,177,876 -- (2,048,636) --
Ranger
Industries,
Inc. 266,768 -- -- -- -- 266,768 -- 26,677
---- --------- ----------- ------- ----------- ------ --------
-- $15,471,083 $(6,527,829) -- $ 26,677
==== ========= =========== ======= =========== ====== ========
</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, 1996, the
Fund owned the following restricted securities (constituting 4.05% 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 $ 354,068 $ 316,749
American Communications Services, Inc., 13s, 2005+ 11/09/95 3,100,000 1,658,965 1,751,500
Coast Hotels and Casino, 13s, 2002+ 1/23/96 3,625,000 3,505,049 3,547,969
Continental Cablevision, Inc., 8.3s, 2006+ 12/08/95 9,150,000 9,120,628 9,207,187
Envirosource, Inc. 5/15/91 1,666 7,289 6,039
Four Seasons Hotels, Inc., 9.125s, 2000+ 6/23/93 7,750,000 7,700,788 7,750,000
Gillett Holdings, Inc. 2/27/92 85,019 872,850 1,785,399
Grand Palais Casinos, Warrant+ 111,660 -- --
Howmet Corp. 10s, 2003+ 11/95-1/96 2,850,000 2,966,000 3,021,000
Interlake Revolver, "B'', 5.75s, 1997+ 1,662,506 1,484,262 1,654,193
Merrill Lynch Mortgage Investors, Inc.,
1994-M1, 8.07s, 2023 6/22/94 4,500,000 3,119,063 3,535,312
Remington Arms, Inc., 9.5s, 2003+ 11/19/93 2,000,000 1,987,500 1,640,000
Rifkin Acquisition Partners LP, 11.125s, 2006+ 1/26/96 3,000,000 3,000,000 3,060,000
-----------
$37,275,348
===========
</TABLE>
+ SEC Rule 144A restriction.
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust III and the Shareholders of MFS High
Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS High Income Fund as of January 31, 1996,
the related statement of operations for the year then ended, the statement of
changes in net assets for the years ended January 31, 1996 and 1995, and the
financial highlights for each of the years in the ten-year period ended January
31, 1996. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
January 31, 1996 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS High Income Fund
at January 31, 1996, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE llp
Boston, Massachusetts
March 1, 1996
------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
25
<PAGE>
A FINANCIAL ADVISER CAN HELP YOU BE A BETTER INVESTOR
Financial advisers can be valuable resources for their clients, providing
ongoing education and guidance about investments, as well as a wide range of
services. Here are just some of the ways your financial adviser may be able to
help you be a better investor:
# Day-to-day monitoring of your portfolio
# Tax recordkeeping
# In-depth information on fund managers, their track records and their tenure
# Risk/reward analyses of current or potential holdings
# Asset allocation advice
# Construction of a detailed personal financial profile
# Order and confirmation processing
# Information on a fund group's range of shareholder services
# Portfolio adjustments based on lifestyle changes
# Assistance with business retirement planning
# Evaluation of lump-sum distribution options
# Recommendations on a selection of fund groups
# Specialized research and investment information not readily available to
individuals
# In-depth knowledge of markets and products, kept current by ongoing tracking
# Estate, tax, insurance, and business planning
# Help with possible savings on sales charges through breakpoints, rights of
accumulation, and letters of intent
26
<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.
27
<PAGE>
MFS INVESTMENT OPPORTUNITIES
MUTUAL FUNDS
The MFS Family of Funds, 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.
28
<PAGE>
THE MFS FAMILY OF FUNDS [Registration Mark]
AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime). This material should be read carefully before investing or sending
money.
STOCK
================================================================================
Massachusetts Investors Trust
- --------------------------------------------------------------------------------
Massachusetts Investors Growth Stock Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Capital Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Emerging Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Gold & Natural Resources Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Growth Opportunities Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Managed Sectors Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] OTC Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Research Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Value Fund
- --------------------------------------------------------------------------------
STOCK AND BOND
================================================================================
MFS [Registration Mark] Total Return Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Utilities Fund
- --------------------------------------------------------------------------------
BOND
================================================================================
MFS [Registration Mark] Bond Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Mortgage Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Securities Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] High Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Intermediate Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Strategic Income Fund
- --------------------------------------------------------------------------------
LIMITED MATURITY BOND
================================================================================
MFS [Registration Mark] Government Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal Limited Maturity Fund
- --------------------------------------------------------------------------------
WORLD
================================================================================
MFS [Registration Mark]/Foreign & Colonial Emerging Market Equity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial International Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial International Growth and Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Asset Allocation Fund [Service Mark]
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Equity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Governments Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Total Return Fund
- --------------------------------------------------------------------------------
NATIONAL TAX-FREE BOND
================================================================================
MFS [Registration Mark] Municipal Bond Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal High Income Fund
(closed to new investors)
- --------------------------------------------------------------------------------
MFS [Registration Mark] 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 [Registration Mark] Cash Reserve Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Money Market Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Money Market Fund
- --------------------------------------------------------------------------------
<PAGE>
MFS [Registration Mark] High [Dalbar Logo] Bulk Rate
Income Fund U.S. Postage
PAID
500 Boylston Street Permit #55638
Boston, MA 02116 Boston, MA
[MFS LOGO]
The first name in Mutual Funds
MHI-2 3/96 66M 18/218/318
