<PAGE>
MFS(SM)
INVESTMENT MANAGEMENT
SEMIANNUAL REPORT
JULY 31, 1996
MFS(R) HIGH INCOME FUND
[GRAPHIC OMITTED: TWO MEN SITTING IN FRONT OF A WINDOW]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
Fund Manager's Overview .................................................... 3
Fund Manager's Profile ..................................................... 4
Performance Summary ........................................................ 5
Fund Facts ................................................................. 6
Portfolio of Investments ................................................... 7
Financial Statements .......................................................15
Notes to Financial Statements ..............................................22
MFS Family of Funds(R) .....................................................28
Trustees and Officers ......................................................29
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HIGHLIGHTS
* FOR THE PAST SIX MONTHS, CLASS A SHARES OF THE FUND PROVIDED A TOTAL
RETURN OF 3.07%, WHILE CLASS B AND CLASS C SHARES PROVIDED TOTAL RETURNS
OF 2.67% AND 2.51%, RESPECTIVELY, ALL OF WHICH OUTPERFORMED THE LEHMAN
BROTHERS CORPORATE BOND INDEX, WHICH RETURNED -2.58% OVER THE SAME
PERIOD.
* SO FAR THIS YEAR, NEW-ISSUE FLOWS HAVE BEEN DOUBLE THE VOLUME FOR
THE SAME PERIOD LAST YEAR. IF CURRENT TRENDS CONTINUE, OVER $75
BILLION OF HIGH-YIELD SECURITIES WILL BE ISSUED IN 1996, SETTING A
NEW RECORD FOR THIS MARKET.
* DEMAND AND SUPPLY HAVE BEEN DRIVEN BY A HEALTHY ECONOMIC ENVIRONMENT
CHARACTERIZED BY MODERATE GROWTH AND INFLATION AND LOW DEFAULT
RATES.
* HOWEVER, WE BELIEVE WE ARE IN THE LATTER STAGES OF AN ECONOMIC
RECOVERY, WHICH COULD PUSH THE DEFAULT RATE HIGHER. ALSO, WE ARE
SEEING AN UNSETTLING AMOUNT OF SPECULATION IN THE NEW-ISSUE MARKET
DUE TO ITS STRONG ECONOMIC AND TECHNICAL FACTORS.
* THE FUND REMAINS OVERWEIGHTED IN GENERAL INDUSTRIAL AND CONSUMER
PRODUCT COMPANIES THAT TEND TO BE MARKET LEADERS IN THEIR RESPECTIVE
INDUSTRIES, WHILE BEING UNDERWEIGHTED IN INDUSTRIES WITH NO PRICING
POWER DUE TO OVERCAPACITY SUCH AS UTILITIES, RETAIL, AND
TRANSPORTATION.
- --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
With over half of 1996 behind us, the U.S. economy appears to have settled
into a pattern of fairly reasonable growth and moderate inflation - two
factors that we think can be important contributors to a favorable long-term
investment climate. During the first quarter of 1996, real (inflation-
adjusted) economic growth was 2.3% on an annualized basis, followed by a rate
of 4.2% in the second quarter. Thus, while real growth in gross domestic
product has exceeded our expectations so far this year, we continue to believe
that growth from quarter to quarter will be uneven, but may accelerate
slightly to exceed 2.5% by the end of 1996. Although individual consumers
appear to be carrying an excessive debt load, the consumer sector itself,
which represents two-thirds of the economy, continues to be impressive as the
automobile and housing markets remain resilient. Consumer spending has also
been positively impacted by widespread job growth. At the same time, however,
the economies of Europe and Japan continue to be in the doldrums, weakening
U.S. export markets while subduing the capital spending plans of American
corporations.
In the bond markets, persistent signs of economic weakness led to decreases
in short-term interest rates by the Federal Reserve Board in late 1995 and
early 1996. However, should signs of economic growth and, particularly, of
higher inflation continue, we would expect the Fed to maintain its anti-
inflationary stance. 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 sluggish economic reports and
low inflation might lead to lower interest rates. Later, fixed-income markets
began reacting to conflicting signals regarding the strength of the economy
with more volatile trading patterns marked by an upward bias in interest
rates. Interest rates may move even higher over the coming months, but we
believe the current rise in bond yields is reaching a point where fixed-income
markets are fairly valued.
Finally, as you may have noticed, this report to shareholders incorporates a
number of changes which we believe will make it more informative and useful to
you. Following the Fund Manager's Overview, you will find new information on
the Fund's holdings, including charts illustrating the portfolio's
concentration in the different types of investments that meet its criteria.
Near the back of the report, you will find a list of telephone numbers and
addresses in case you need to contact MFS. We hope to hear from you.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
- ---------------------------------
A. Keith Brodkin
Chairman and President
August 14, 1996
<PAGE>
FUND MANAGER'S OVERVIEW
[Photo of Robert J. Manning]
Dear Shareholders:
A strengthening economy and moderate inflation have helped create a favorable
environment of low default rates and near-record supplies of new issues for
the high-yield bond market. For the six months ended July 31, 1996, Class A
shares of the Fund provided a total return of 3.07%, while Class B and Class C
shares provided total returns of 2.67% and 2.51%, respectively. All of these
returns assume the reinvestment of distributions but exclude the effects of
any sales charges. The Fund outperformed the Lehman Brothers Corporate Bond
Index (the Lehman Index), which had a return of -2.58% 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.
Spreads in the high-yield market have remained at approximately 350 basis
points (3.5%) over U.S. Treasuries during the past six months. During that
time, high-yield mutual funds have gathered a tremendous amount of assets as
fund flows have remained positive, averaging between $500 million and $1.5
billion per month. On the new-issue side, deal flows have been equally large,
as new issuance thus far in 1996 is double the volume for the same period last
year. If these trends continue, over $75 billion of high-yield securities will
be issued in 1996, which would set a new record for this market.
Both demand and supply have been driven by a healthy economic environment
characterized by relatively slow growth and moderately low inflation. Default
rates, which are used as a measurement of risk, are, by historic standards,
extremely low (although 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 default rate thus
far this year is less than one-quarter of one percent, which means that the
market yield of 3.5% over Treasuries has more than adequately compensated
investors for the additional credit risk (although principal value and
interest on Treasury securities are guaranteed by the U.S. government if held
to maturity).
Although the economic environment has been ideal for high-yield bonds, we
remain cautious with our portfolio for the following reasons. First, we
believe we are in the latter stages of an economic recovery and that most of
the good news is behind us. This means that the default rate could move higher
over the coming year. Second, although average credit quality in the high-
yield market remains high relative to the past, we continue to see an
unsettling amount of speculation in the new-issue market due to the strong
technical factors mentioned previously. It is our opinion that many of these
speculative deals may create future problems, and we are therefore avoiding
such issues in our portfolio. Two industries that have exploited the
opportunity to raise capital in this environment are wireless communications
and gaming companies.
Because of our outlook, we have included in the portfolio many higher-
quality companies which are generating free cash flow sufficient to allow them
to pay down debt and improve their credit standings over time. Many of these
companies, such as American Standard and Owens Illinois, are market leaders in
their industries, and we believe they may prove to be more resilient in
uncertain times.
Our portfolio remains overweighted in general industrial and consumer
product companies that tend to be market leaders in their respective
industries. We have also underweighted industries with no pricing power due to
overcapacity such as utilities, retail, and transportation. As always, our
discipline is focused on fundamental credit research, which remains the
driving influence in determining our overall investment strategy.
Respectfully,
/s/ Robert J. Manning
-------------------------------
Robert J. Manning
Fund Manager
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FUND MANAGER'S 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 FUND
MANAGER OF MFS HIGH INCOME FUND IN 1994.
- --------------------------------------------------------------------------------
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 +3.07% +9.02% +81.65% +138.92%
- -------------------------------------------------------------------------------
Average Annual Total Return -- +9.02% +12.68% + 9.10%
- -------------------------------------------------------------------------------
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, 1996, were +5.50%, +12.12%, and +8.30%,
respectively.
CLASS B INVESTMENT RESULTS
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------
Cumulative Total Return +2.67% +8.13% +77.34% +133.28%
- -------------------------------------------------------------------------------
Average Annual Total Return -- +8.13% +12.14% + 8.84%
- -------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the
most recent calendar quarter as required by the SEC, and with all
distributions reinvested and reflecting the current maximum contingent
deferred sales charge (CDSC) of 4%, -2% and 0% for the 1-, 5-, and 10-year
periods ended June 30, 1996 were +5.79%, +12.45%, and +8.57%, respectively.
CLASS C INVESTMENT RESULTS
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------
Cumulative Total Return +2.51% +8.19% +77.89% +133.93%
- -------------------------------------------------------------------------------
Average Annual Total Return -- +8.19% +12.21% + 8.87%
- -------------------------------------------------------------------------------
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-, 5-, and 10-year periods ended June 30, 1996, were
+8.64%, +12.76%, and +8.61%, 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.
Class B and Class C share performance includes the performance of the Fund's
Class A shares for periods prior to the commencement of offering of Class B
shares on September 27, 1993 and of Class C shares on January 3, 1994. Sales
charges and operation expenses for Class A, Class B, and Class C shares
differ. The Class A share performance, which is included within the Class B
and Class C share SEC performance, has been adjusted to reflect the CDSC
generally applicable to Class B and Class C shares rather than the initial
sales charge generally applicable to Class A shares. Class B and Class C share
performance has not been adjusted, however, to reflect differences in
operating expenses (e.g., Rule 12b-1 fees).
- --------------------------------------------------------------------------------
FUND FACTS
STRATEGY: SEEKS HIGH CURRENT INCOME BY INVESTING PRIMARILY IN
FIXED-INCOME SECURITIES RATED BELOW-INVESTMENT-GRADE
(BBB).
COMMENCEMENT OF
INVESTMENT
OPERATIONS: FEBRUARY 17, 1978
SIZE: $912.1 MILLION AS OF JULY 31, 1996
- --------------------------------------------------------------------------------
PORTFOLIO STRUCTURE
AS OF JULY 31, 1996
High-Yield Cash Equity
87.9% 6.6% 5.5%
<PAGE>
PORTFOLIO OF INVESTMENTS (Unaudited) - July 31, 1996
Non-Convertible Bonds - 87.9%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Aerospace - 1.5%
CHC Helicopter, 11.5s, 2002 $ 4,975 $ 4,751,125
Haynes International, Inc., 11.25s,
1998 2,635 2,766,750
Haynes International, Inc., 13.5s,
1999 6,000 6,090,000
--------------
$ 13,607,875
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Airlines - 1.5%
Airplane Pass-Through Trust (GPA
Group Lease),
10.875s, 2019 $ 5,250 $ 5,433,750
Moog, Inc., 10s, 2006## 8,590 8,611,475
--------------
$ 14,045,225
- -----------------------------------------------------------------------------
Automotive - 2.2%
Exide Corp., 10s, 2005 $ 3,900 $ 3,822,000
Harvard Industries, Inc., 12s, 2004 6,400 6,240,000
Harvard Industries, Inc., 11.125s,
2005 1,600 1,496,000
Hayes Wheels International, Inc.,
11s, 2006 4,350 4,426,125
SPX Corp., 11.75s, 2002 4,050 4,323,375
--------------
$ 20,307,500
- -----------------------------------------------------------------------------
Building - 5.3%
American Standard, Inc., 10.5s, 2005* $ 11,625 $ 10,171,875
Building Materials Corp., 0s to 1999,
11.7s to 2004* 11,525 8,672,563
Lone Star Industries, Inc., 10s, 2003 4,542 4,598,775
Nortek, Inc., 9.875s, 2004 8,750 8,400,000
Schuller International Group, Inc.,
10.875s, 2004 5,250 5,670,000
UDC Homes, Inc., 14.5s, 2000 30 15,136
USG Corp., 9.25s, 2001 10,250 10,557,500
--------------
$ 48,085,849
- -----------------------------------------------------------------------------
Cellular Telephones - 0.5%
Millicom International Cellular, 0s,
2006##* $ 8,625 $ 4,441,875
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Chemicals - 3.2%
Arcadian Partners L.P., 10.75s, 2005 $ 550 $ 594,000
INDSPEC Chemical Corp., 0s to 1998,
11.5s to 2003* 5,450 4,687,000
Koppers Industries, Inc., 8.5s, 2004 1,500 1,428,750
NL Industries, Inc., 11.75s, 2003 10,600 10,865,000
UCC Investors Holdings, Inc., 10.5s,
2002 4,750 5,011,250
UCC Investors Holdings, Inc., 0s,
2005* 7,500 6,393,750
--------------
$ 28,979,750
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Conglomerates - 0.3%
Westinghouse Electric Co., 6.875s, 2003 $ 2,700 $ 2,466,018
- -----------------------------------------------------------------------------
Consumer Goods and Services - 6.6%
Consolidated Cigar Corp., 10.5s, 2003 $ 4,750 $ 4,928,125
FoodBrands America, Inc., 10.75s,
2006 4,330 4,351,650
Genmar Holdings, 13.5s, 2001 1,450 1,283,250
International Semi-Tech
Microelectronics, Inc.,
0s, 2003* 8,000 4,520,000
Ithaca Industries, Inc., 11.125s,
2002** 3,800 1,871,500
Pierce Leahy Corp., 11.125s, 2006## 4,850 4,971,250
Reeves Industries, Inc., 11s, 2002 5,200 4,472,000
Remington Arms, Inc., 10s, 2003## 2,000 1,830,000
Revlon Consumer Products Corp.,
10.5s, 2003 8,175 8,297,625
Revlon Worldwide Corp., 0s, 1998* 6,925 5,791,031
Samsonite Corp., 11.125s, 2005 5,500 5,610,000
Sealy Corp., 9.5s, 2003 2,650 2,577,125
Westpoint Stevens, Inc., 9.375s, 2005 10,350 10,117,125
--------------
$ 60,620,681
- -----------------------------------------------------------------------------
Containers - 5.6%
Atlantis Group, Inc., 11s, 2003 $ 7,500 $ 7,425,000
Calmar, Inc., 11.5s, 2005 8,000 7,840,000
Ivex Packaging Corp., 12.5s, 2002 5,350 5,617,500
Owens-Illinois, Inc., 11s, 2003 7,850 8,458,375
Owens-Illinois, Inc., 9.75s, 2004 2,500 2,506,250
Owens-Illinois, Inc., 9.95s, 2004 500 502,500
Plastic Containers, Inc., 10.75s,
2001 6,750 6,783,750
RXI Holdings, Inc., 14s, 2002 3,500 2,450,000
Silgan Corp., 11.75s, 2002 6,710 6,810,650
Stone Container Corp., 10.75s, 2002 2,500 2,537,500
--------------
$ 50,931,525
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Defense Electronics - 0.5%
Alliant Techsystems, Inc., 11.75s,
2003 $ 4,350 $ 4,703,438
- -----------------------------------------------------------------------------
Electronics - 0.5%
Clark-Schwebel, Inc., 10.5s, 2006## $ 4,675 $ 4,803,563
- -----------------------------------------------------------------------------
Entertainment - 5.6%
ACT-III Theatres, Inc., 11.875s, 2003 $ 3,300 $ 3,588,750
Albritton Communications Corp.,
11.5s, 2004 6,350 6,540,500
American Skiing Corp., 12s, 2006## 5,300 5,127,750
Bally's Grand, Inc., 10.375s, 2003 9,650 10,518,500
Grand Casinos, Inc., 10.125s, 2003 4,725 4,606,875
Griffin Gaming & Entertainment,
8.15s, 2000 4,400 4,092,000
Marvel Holdings, Inc., 0s, 1998* 4,408 3,569,550
SCI Television, Inc., 11s, 2005 9,750 10,432,500
Sam Houston Race Park, Inc., 11s,
2001 1,714 685,926
United Artist Theater Circuit, Inc.,
11.5s, 2002 1,500 1,590,000
--------------
$ 50,752,351
- -----------------------------------------------------------------------------
Financial Institutions - 1.9%
American Life Insurance Holdings Co.,
11.25s, 2004 $ 3,250 $ 3,396,250
Americo Life, Inc., 9.25s, 2005 3,550 3,337,000
GPA Delaware, Inc., 8.75s, 1998 1,221 1,213,369
Tiphook Finance Corp., 7.125s, 1998 5,200 3,640,000
Tiphook Finance Corp., 8s, 2000 8,353 5,847,100
--------------
$ 17,433,719
- -----------------------------------------------------------------------------
Food and Beverage Products - 1.7%
Keebler Corp., 10.75s, 2006 $ 2,500 $ 2,593,750
PMI Acquisition Corp., 10.25s, 2003 2,495 2,420,150
Specialty Foods Corp., 10.25s, 2001 5,000 4,550,000
Texas Bottling Group, Inc., 9s, 2003 5,750 5,635,000
--------------
$ 15,198,900
- -----------------------------------------------------------------------------
Forest and Paper Products - 2.9%
Gaylord Container Co., 12.75s, 2005 $ 12,000 $ 12,750,000
Pacific Lumber Co., 10.5s, 2003 9,675 9,481,500
Stone Container Corp., 9.875s, 2001 4,000 3,900,000
--------------
$ 26,131,500
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Machinery - 1.6%
AGCO Corp., 8.5s, 2006## $ 5,000 $ 4,962,500
Fairfield Manufacturing, 11.375s,
2001 3,700 3,792,500
Thermadyne Industries Holdings Corp.,
10.25s, 2002 4,150 4,108,500
Thermadyne Industries Holdings Corp.,
10.75s, 2003 1,720 1,702,800
--------------
$ 14,566,300
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 1.7%
Beverly Enterprises, Inc., 9s, 2006 $ 3,500 $ 3,272,500
Quorum Health Group, Inc., 8.75s,
2005 2,750 2,681,250
Tenet Healthcare Corp., 10.125s, 2005 8,750 9,275,000
--------------
$ 15,228,750
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Metals and Minerals - 1.0%
Jorgensen (Earle M.) Co., 10.75s,
2000 $ 4,575 $ 4,529,250
Renco Metals, Inc., 11.5s, 2003 3,650 3,723,000
Ryderson Tull, Inc., 9.125s, 2006 850 846,812
--------------
$ 9,099,062
- -----------------------------------------------------------------------------
Mortgage-Backed Pass-Throughs - 0.4%
Merrill Lynch Mortgage Investors,
Inc., 8.227s,
2021+ $ 4,500 $ 3,320,156
- -----------------------------------------------------------------------------
Oil Services - 2.7%
Amerigas Partners L.P., 10.125s, 2007 $ 3,400 $ 3,468,000
Chesapeake Energy Corp., 9.125s, 2006 2,100 2,058,000
Falcon Drilling Co., 8.875s, 2003 3,725 3,576,000
Ferrell Gas L.P., 10s, 2001 4,700 4,817,500
Mesa Operating Co., 10.625s, 2006 1,700 1,738,250
Noble Drilling Corp., 9.125s, 2006 3,650 3,650,000
Nuevo Energy Co., 9.5s, 2006 2,575 2,523,500
Tuboscope Vetco International, Inc.,
10.75s, 2003 3,200 3,320,000
--------------
$ 25,151,250
- -----------------------------------------------------------------------------
Oils - 0.9%
Gulf Canada, 9.25s, 2004 $ 6,000 $ 5,985,000
Kelley Oil & Gas Corp., 13.5s, 1999 2,400 2,568,000
--------------
$ 8,553,000
- -----------------------------------------------------------------------------
Printing and Publishing - 1.2%
Day International Group, Inc.,
11.125s, 2005 $ 2,100 $ 2,163,000
Golden Books Publishing, Inc., 7.65s,
2002 5,000 4,200,000
Newsquest Capital PLC, 11s, 2006## 4,500 4,545,000
--------------
$ 10,908,000
- -----------------------------------------------------------------------------
Restaurants and Lodging - 5.2%
Argosy Gaming Co., 13.25s, 2004## $ 950 $ 926,250
Aztar Corp., 11s, 2002 5,500 5,610,000
Boomtown, Inc., 11.5s, 2003 3,865 3,768,375
Boyd Gaming Corp., 10.75s, 2003 4,400 4,554,000
Coast Hotels and Casino Resorts, 13s,
2002## 3,625 3,878,750
El Dorado Resorts, LLC, 10.5s, 2006## 4,275 4,285,688
Four Seasons Hotels, Inc., 9.125s,
2000## 7,750 7,701,562
Harrah's Jazz Co., 14.25s, 2001 4,950 2,574,000
Harrah's Operating, Inc., 8.75s, 2000 5,950 5,994,625
Harvey's Casino Resorts, 10.625s,
2006 2,850 2,907,000
Station Casinos, Inc., 9.625s, 2003 5,850 5,564,812
--------------
$ 47,765,062
- -----------------------------------------------------------------------------
Special Products and Services - 9.0%
Aff-McQuay, Inc., 8.875s, 2003 $ 8,325 $ 7,992,000
Buckeye Cellulose Corp., 8.5s, 2005 2,000 1,905,000
Howmet Corp., 10s, 2003## 4,850 5,116,750
IMO Industries, Inc., 11.75s, 2006## 9,100 9,304,750
Idex Corp., 9.75s, 2002 1,260 1,297,800
Inter-City Products Corp., 9.75s,
2000 980 933,450
Interlake Corp., 12s, 2001 5,200 5,460,000
Interlake Corp., 12.125s, 2002 9,200 9,223,000
Interlake Revolver, "B", 5.75s,
1997## 1,661 1,645,073
K&F Industries, Inc., 11.875s, 2003 6,475 6,960,625
Maxxam, Inc., 12.5s, 1999 1,761 1,744,182
Newflo Corp., 13.25s, 2002 3,850 4,235,000
Polymer Group, Inc., 12.25s, 2002 4,167 4,458,690
Spreckels Industries, Inc., 11.5s,
2000 3,900 4,056,000
Synthetic Industries, Inc., 12.75s,
2002 11,755 12,401,525
Talley Manufacturing & Technology,
Inc., 10.75s, 2003 4,500 4,590,000
Wolverine Tube, Inc., 10.125s, 2002 400 412,000
--------------
$ 81,735,845
- -----------------------------------------------------------------------------
Steel - 2.5%
AK Steel Holdings Corp., 10.75s, 2004 $ 2,350 $ 2,543,875
Armco, Inc., 11.375s, 1999 2,875 2,946,875
Carbide/Graphite Group, 11.5s, 2003 500 532,500
Kaiser Aluminum & Chemical Corp.,
9.875s, 2002 3,550 3,479,000
Republic Engineered Steels, 9.875s,
2001 6,975 6,451,875
WCI Steel, Inc., 10.5s, 2002 7,175 7,282,625
--------------
$ 23,236,750
- -----------------------------------------------------------------------------
Stores - 1.6%
Finlay Enterprises, Inc., 0s to 1998,
12s to 2005* $ 10,150 $ 8,094,625
Finlay Fine Jewelry, 10.625s, 2003 1,000 987,500
Parisian, Inc., 9.875s, 2003 5,190 5,112,150
Woodward & Lothrop, Inc., 0s to 1995,
14.75s to 1999** 13,100 655,000
--------------
$ 14,849,275
- -----------------------------------------------------------------------------
Supermarkets - 3.0%
Carr-Gottstein Foods Co., 12s, 2005 $ 1,500 $ 1,530,000
Dominick's Finer Foods, Inc.,
10.875s, 2005 5,500 5,843,750
Fleming (Cos.), Inc., 10.625s, 2001 1,800 1,624,500
Grand Union Co., 12s, 2004 4,425 4,342,031
Pathmark Stores, Inc., 9.625s, 2003 700 659,750
Ralph's Grocery Co., 10.45s, 2004 6,550 6,419,000
Smith's Food & Drug Centers, 11.25s,
2007 6,900 7,072,500
--------------
$ 27,491,531
- -----------------------------------------------------------------------------
Telecommunications - 15.5%
American Communications Services, 0s,
2006* $ 750 $ 376,875
American Radio Systems Corp., 9s,
2006 3,150 3,000,375
Bell Cablemedia PLC, 0s, 2005* 6,250 3,875,000
Brooks Fiber Properties, 0s, 2006##* 3,300 1,732,500
Cablevision Systems Corp., 9.25s,
2005 7,350 6,817,125
Charter Communications So. East L.P.,
11.25s, 2006## 5,150 5,047,000
Comcast Corp., 9.375s, 2005 8,900 8,722,000
Continental Cablevision, Inc., 8.3s,
2006 675 683,438
Diamond Cable Communications PLC, 0s
to 2000,
11.75s to 2005* 4,250 2,528,750
EchoStar, 0s, 2004* 4,900 3,577,000
EchoStar Satellite Broadcasting, 0s,
2004* 8,500 5,270,000
Falcon Holdings Group, Inc., 11s to
2003#* 8,452 8,072,156
Intelcom Group (USA), Inc., 0s,
2006##* 8,500 4,590,000
Intermedia Capital Partners, 11.25s,
2006## 4,450 4,461,125
Jones Intercable, Inc., 9.625s, 2002 4,050 4,131,000
Jones Intercable, Inc., 11.5s, 2004 1,125 1,209,375
Jones Intercable, Inc., 10.5s, 2008 5,650 5,847,750
K-III Communications Corp., 10.625s,
2002 3,305 3,387,625
MFS Communications, Inc., 0s to 2001,
8.875s to 2006* 14,500 8,518,750
Marcus Cable Operating Co., 0s, 2004* 4,000 2,880,000
Mobile Telecommunication Technologies
Corp.,
13.5s, 2002 4,400 4,642,000
Mobilemedia Communications, Inc., 0s,
2003* 5,650 3,969,125
Mobilemedia Corp., 9.375s, 2007 3,250 2,868,125
Paging Network, Inc., 8.875s, 2006 12,975 11,872,125
Park Broadcasting, Inc., 11.75s,
2004## 3,850 4,427,500
ProNet, Inc., 11.875s, 2005 5,500 5,335,000
Rifkin Acquisition Partners L.P.,
11.125s, 2006 3,000 2,977,500
Rogers Cablesystems Ltd., 9.625s,
2002 750 744,375
Rogers Cablesystems Ltd., 10.125s,
2012 5,000 4,850,000
Teleport Communications Group,
9.875s, 2006 3,000 2,880,000
Teleport Communications Group, 0s,
2007* 9,000 4,950,000
USA Mobile Communication, 9.5s, 2004 2,500 2,350,000
Videotron Holdings PLC, 0s to 2000,
11s to 2005* 6,850 4,469,625
--------------
$141,063,219
- -----------------------------------------------------------------------------
Transportation - 0.6%
Continental Airlines, Inc., 11.75s,
1999** $ 5,250 $ 525
Moran Transportation Co., 11.75s,
2004 3,500 3,482,500
PDV America, Inc., 7.875s, 2003 1,850 1,788,894
--------------
$ 5,271,919
- -----------------------------------------------------------------------------
Utilities - Electric - 1.2%
El Paso Electric Co., 8.9s, 2006 $ 3,750 $ 3,703,125
Kenetech Corp., 12.75s, 2002** 2,520 1,713,600
Westinghouse Electric Corp., 8.375s,
2002 5,250 5,207,790
--------------
$ 10,624,515
- -----------------------------------------------------------------------------
Total Non-Convertible Bonds (Identified Cost, $802,329,588) $801,374,403
- -----------------------------------------------------------------------------
Common Stocks and Warrants - 0.5%
- -----------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------------
Aerospace
CHC Helicopters, Warrants* 16,000 $ 8,000
- -----------------------------------------------------------------------------
Building
Atlantic Gulf Communities
Corp.*+ 690 $ 4,054
- -----------------------------------------------------------------------------
Consumer Goods and Services
Ranger Industries,
Inc.*++ 266,768 $ 24,009
- -----------------------------------------------------------------------------
Containers
RXI Holdings, Inc., Warrants* 3,500 $ 6,125
- -----------------------------------------------------------------------------
Entertainment
Grand Palais Resorts, Warrants*## 111,660 $ 0
Hemmeter Entertainment, Warrants* 111,660 0
Palace Casinos, Warrants* 36,000 360
Sam Houston Race Park Equity, Inc.* 481 2,405
--------------
$ 2,765
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 0.1%
OrNda Healthcorp., Inc.* 31,999 $ 735,977
OrNda Healthcorp., Inc., Warrants* 2,500 625
--------------
$ 736,602
- -----------------------------------------------------------------------------
Oil Services
ICO, Inc., Warrants* 706,250 $ 459,063
- -----------------------------------------------------------------------------
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 $ 6,455
- -----------------------------------------------------------------------------
Printing and Publishing
Triton Group Ltd.* 588,876 $ 404,852
- -----------------------------------------------------------------------------
Special Products and Services - 0.3%
Gillett Holdings,
Inc.*+ 85,019 $ 2,210,494
IMO Industries, Inc.* 28,000 154,000
--------------
$ 2,364,494
- -----------------------------------------------------------------------------
Telecommunications - 0.1%
American Communications Services,
Warrants* 2,100 $ 126,000
CS Wireless Systems, Inc.* 350 700,000
--------------
$ 826,000
- -----------------------------------------------------------------------------
Total Common Stocks and Warrants (Identified Cost,
$11,575,480) $ 4,842,419
- -----------------------------------------------------------------------------
<PAGE>
Preferred Stocks - 4.8%
- -----------------------------------------------------------------------------
Cablevision Systems Corp.
(Telecommunications)## 81,308 $ 7,561,644
El Paso Electric Co. (Utilities -
Electric)* 21,200 2,257,800
K-III Communications Corp.
(Special Products and
Services)*++ 88,318 8,522,643
Supermarkets General Holdings Corp.,
$3.52 Exch. (Supermarkets)*++ 569,098 14,085,175
Time Warner, Inc. (Entertainment)*## 11,122 11,038,585
- -----------------------------------------------------------------------------
Total Preferred Stocks (Identified
Cost, $37,573,399) $ 43,465,847
- -----------------------------------------------------------------------------
Convertible Preferred Stock - 0.2%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Granite Broadcasting Corp.
(Entertainment) (Identified Cost,
$1,988,688) 33,000 $ 2,140,875
- -----------------------------------------------------------------------------
Short-Term Obligations - 4.8%
- -----------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -----------------------------------------------------------------------------
Federal Farm Credit Bank, due 8/01/96 $ 7,000 $ 7,000,000
Federal Home Loan Mortgage Corp.,
due 8/02/96 - 8/12/96 26,865 26,835,283
Federal National Mortgage Assn., due
8/13/96 10,140 10,122,154
- -----------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 43,957,437
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $897,424,592) $895,780,981
Other Assets, Less Liabilities - 1.8% 16,313,349
- -----------------------------------------------------------------------------
Net Assets - 100.0% $912,094,330
- -----------------------------------------------------------------------------
*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.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- --------------------------------------------------------------------------------
July 31, 1996
- --------------------------------------------------------------------------------
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $873,427,273) $ 873,149,154
Affiliated issuers (identified cost, $23,997,319) 22,631,827
--------------
Total investments, at value (identified cost,
$897,424,592) 895,780,981
Cash 234,272
Receivable for Fund shares sold 2,403,801
Receivable for investments sold 627,905
Interest receivable 18,910,902
Other assets 9,602
--------------
Total assets $ 917,967,463
--------------
Liabilities:
Distributions payable $ 2,796,210
Payable for Fund shares reacquired 799,880
Payable for investments purchased 1,784,598
Payable to affiliates -
Management fee 9,473
Shareholder servicing agent fee 4,177
Distribution fee 190,889
Accrued expenses and other liabilities 287,906
--------------
Total liabilities $ 5,873,133
--------------
Net assets $ 912,094,330
==============
Net assets consist of:
Paid-in capital $1,192,110,652
Unrealized depreciation on investments (1,643,611)
Accumulated net realized loss on investments and
foreign currency transactions (277,855,059)
Accumulated distributions in excess of net
investment income (517,652)
---------------
Total $ 912,094,330
===============
Shares of beneficial interest outstanding 176,504,970
===============
Class A shares:
Net asset value price per share
(net assets of $606,587,215 / 117,392,570 shares of
beneficial interest outstanding) $5.17
=====
Offering price per share (100/95.25) $5.42
=====
Class B shares:
Net asset value and offering price per share
(net assets of $284,425,712 / 55,037,884 shares of
beneficial interest outstanding) $5.17
=====
Class C shares:
Net asset value and offering price per share
(net assets of $21,081,403 / 4,074,516 shares of
beneficial interest outstanding) $5.17
=====
On sales of $100,000 or more, the offering price of Class A shares is
reduced. A contingent deferred sales charge may be imposed on redemptions of
Class A, Class B, and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations (Unaudited)
- ------------------------------------------------------------------------------
Six Months Ended July 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 45,740,172
Dividends 31,969
------------
Total investment income $ 45,772,141
------------
Expenses -
Management fee $ 2,074,497
Trustees' compensation 23,923
Shareholder servicing agent fee (Class A) 434,304
Shareholder servicing agent fee (Class B) 296,616
Shareholder servicing agent fee (Class C) 13,984
Distribution and service fee (Class A) 855,917
Distribution and service fee (Class B) 1,348,255
Distribution and service fee (Class C) 93,224
Custodian fee 155,019
Postage 99,270
Auditing fees 25,438
Printing 13,154
Miscellaneous 200,077
------------
Total expenses $ 5,633,678
Fees paid indirectly (120,333)
------------
Net expenses $ 5,513,345
------------
Net investment income $ 40,258,796
------------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) on investment
transactions $ (6,202,589)
------------
Change in unrealized depreciation on investments (8,733,039)
------------
Net realized and unrealized loss on investments $(14,935,628)
------------
Increase in net assets from operations $ 25,323,168
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Six Months Ended Year Ended
July 31, 1996 January 31,
(Unaudited) 1996
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 40,258,796 $ 75,745,935
Net realized loss on investments and
foreign currency transactions (6,202,589) (28,300,429)
Net unrealized gain (loss) on investments
and foreign currency translation (8,733,039) 95,491,500
------------- -------------
Increase in net assets from operations $ 25,323,168 $ 142,937,006
------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (26,452,011) $ (50,453,186)
From net investment income (Class B) (10,834,493) (22,802,500)
From net investment income (Class C) (753,443) (756,472)
------------- -------------
Total distributions declared to
shareholders $ (38,039,947) $ (74,012,158)
------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 247,367,462 $ 435,560,671
Net asset value of shares issued to
shareholders in reinvestment
of distributions 21,241,789 42,125,341
Cost of shares reacquired (263,586,339) (439,675,135)
------------- -------------
Increase in net assets from Fund share
transactions $ 5,022,912 $ 38,010,877
------------- -------------
Total increase (decrease) in net
assets $ (7,693,867) $ 106,935,725
Net assets:
At beginning of period 919,788,197 812,852,472
------------- -------------
At end of period (including distributions
in excess of net investment income of
$517,652 and $2,736,501, respectively) $ 912,094,330 $ 919,788,197
============= =============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - Continued
Financial Highlights
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Six Months
Ended Year Ended January 31,
July 31, 1996 -------------------------------------------------
(Unaudited) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 5.24 $ 4.84 $ 5.50 $ 5.11 $ 4.89 $ 3.71
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.24 $ 0.45 $ 0.44 $ 0.40 $ 0.51 $ 0.56
Net realized and unrealized
gain (loss) on investments (0.08) 0.39 (0.66) 0.48 0.24 1.21
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.16 $ 0.84 $(0.22) $ 0.88 $ 0.75 $ 1.77
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.23) $(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 $(0.23) $(0.44) $(0.44) $(0.49) $(0.53) $(0.59)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 5.17 $ 5.24 $ 4.84 $ 5.50 $ 5.11 $ 4.89
====== ====== ====== ====== ====== ======
Total return++ 3.07%++ 17.97% (3.95)% 18.13% 16.36% 49.64%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.01%+ 1.00% 0.99% 1.00% 1.03% 1.10%
Net investment income 9.32%+ 8.83% 8.65% 8.22% 10.21% 11.59%
Portfolio turnover 41% 59% 59% 68% 75% 28%
Net assets at end of period
(000,000 omitted) $ 607 $ 620 $ 524 $ 645 $ 585 $ 556
+Annualized.
++Not annualized.
+++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 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.
(S)The distributor did not impose a portion of its distribution fee for the
periods indicated. If this fee had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income $ -- $ -- $ 0.43 $ 0.40 $ -- $ --
Ratios (to average net assets):
Expenses -- -- 1.09% 1.04% -- --
Net investment income -- -- 8.55% 8.18% -- --
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Year Ended January 31,
-------------------------------------------------
1991 1990 1989 1988 1987
- ---------------------------------------------------------------------------------------
Class A
- ---------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
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
----- ----- ----- ------ ------
(0.43) $(0.44) $ 0.67 $(0.06) $ 1.00
Total from investment operation ----- ----- ------ ------ ------
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
</TABLE>
+++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.
*Includes a per share distribution from paid-in capital of $0.0006.
**Includes a per share distribution from paid-in capital of $0.0004.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ----------------------------------------------------------------------------------------
Six Months
Ended Year Ended January 31,
July 31, 1996 --------------------------------------
(Unaudited) 1996 1995 1994*
- ----------------------------------------------------------------------------------------
Class B
- ----------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 5.24 $ 4.84 $ 5.50 $ 5.27
------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.22 $ 0.41 $ 0.39 $ 0.15
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions (0.08) 0.39 (0.65) 0.22
------ ------ ------ ------
Total from investment
operations $ 0.14 $ 0.80 $(0.26) $ 0.37
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.21) $(0.40) $(0.39) $(0.13)
In excess of net investment income -- -- (0.01) (0.01)
------ ------ ------ ------
Total distributions declared to
shareholders $(0.21) $(0.40) $(0.40) $(0.14)
------ ------ ------ ------
Net asset value - end of period $ 5.17 $ 5.24 $ 4.84 $ 5.50
====== ====== ====== ======
Total return 2.67%++ 16.98% (4.77)% 20.29%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.80%+ 1.85% 1.85% 1.79%+
Net investment income 8.53%+ 7.99% 7.79% 6.94%+
Portfolio turnover 41% 59% 59% 68%
Net assets at end of period
(000,000 omitted) $ 284 $ 283 $ 286 $ 371
</TABLE>
*For the period from the commencement of offering of Class B shares, September
27, 1993 to January 31, 1994.
+Annualized.
++Not 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.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Six Months
Ended Year Ended January 31,
July 31, 1996 ------------------------------------
(Unaudited) 1996 1995 1994**
- --------------------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 5.25 $ 4.85 $ 5.50 $ 5.41
------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.22 $ 0.41 $ 0.41 $ --
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions (0.09) 0.39 (0.66) 0.09
------ ------ ------ ------
Total from investment operations $ 0.13 $ 0.80 $(0.25) $ 0.09
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.21) $(0.40) $(0.39) --
In excess of net investment income -- -- (0.01) --
------ ------- ------- ------
Total distributions declared to
shareholders $ (0.21) $(0.40) $(0.40) --
------- ------- ------- ------
Net asset value - end of period $ 5.17 $ 5.25 $ 4.85 $ 5.50
======= ======= ======= ======
Total return 2.51%++ 17.03% (4.51)% 20.94%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.73%+ 1.77% 1.79% 1.36%+
Net investment income 8.60%+ 8.02% 8.01% 5.92%+
Portfolio turnover 41% 59% 59% 68%
Net assets at end of period
(000,000 omitted) $ 21 $ 16 $ 3 $ 1
</TABLE>
**For the period from the commencement of offering of Class C shares,
January 3, 1994 to January 31, 1994.
+Annualized.
++Not annualized.
#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.
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(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
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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. 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 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 deposited with the custodian by the
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of
net investment income and net realized gain reported on these financial
statements may differ from that reported on the Fund's tax return and,
consequently, the character of distributions to shareholders reported in the
financial highlights may differ from that reported to shareholders on Form
1099-DIV. 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.
At January 31, 1996, the Fund, for federal income tax purposes, had a capital
loss carryforward of $272,371,648 which may be applied against any net
taxable realized gains of each succeeding year until the earlier of its
utilization or expiration on January 31, 1997 ($3,134,316), January 31, 1998
($30,407,582), January 31, 1999 ($91,805,710), January 31, 2000 ($64,105,312),
January 31, 2001 ($16,884,352), January 31, 2003 ($30,373,319), and January
31, 2004 ($35,661,057).
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution, and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the
average daily net assets of each class, without distinction between share
classes. Dividends are declared separately for each class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate
of 0.187% 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 its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of $4,878
for the period ended July 31,1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$87,008 for the period ended July 31, 1996, as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted separate
distribution plans for Class A, Class B, and Class C shares pursuant to Rule
12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets
attributable to Class A shares, commissions to dealers and payments to MFD
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. A portion of the
Class A distribution fee, equal to 0.05%, is currently being paid by the Fund.
Payment of the remaining portion of the distribution fee will become payable
on such date as the Trustees of the Trust may determine. MFD retains the
service fee for accounts not attributable to a securities dealer which
amounted to $156,734 for the period ended July 31, 1996. Fees incurred under
the distribution plan during the period ended July 31, 1996 were 0.28% 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 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 $36,882
and $1,252 for Class B and Class C shares, respectively, for the period ended
July 31, 1996. Fees incurred under the distribution plans during the period
ended July 31, 1996 were 1.00% of average daily net assets attributable to
Class B and Class C shares on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the
event of a shareholder redemption within 12 months following such purchases. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class C shares in the event of a shareholder redemption within
twelve months of purchases made on or after April 1, 1996. MFD receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the period ended July 31, 1996 were $2,999, $247,467, and $128 for
Class A, Class B, and Class C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15% attributable
to Class A, Class B, and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$355,284,488 and $352,084,486, 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 $ 897,424,592
=============
Gross unrealized depreciation $ (30,483,844)
Gross unrealized appreciation 28,840,233
-------------
Net unrealized depreciation $ (1,643,611)
=============
(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 Year Ended
July 31, 1996 Janury 31, 1996
-------------------------- -----------------------------
Shares Amount Shares Amount
----------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 27,906,351 $ 145,056,822 43,551,810 $ 222,082,736
Shares issued to shareholders in
reinvestment of distributions 2,950,602 15,306,425 5,871,784 30,043,510
Shares reacquired (31,829,931) (165,335,142) (39,142,858) (200,253,761)
---------- ------------- --------- -------------
Net increase (decrease) (972,978) $ (4,971,895) 10,280,736 $ 51,872,485
========== ============== ========== =============
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Six Months Ended Year Ended
July 31, 1996 Janury 31, 1996
-------------------------- -----------------------------
Shares Amount Shares Amount
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 17,228,026 $ 89,391,726 37,144,640 $ 188,766,014
Shares issued to shareholders in
reinvestment of distributions 1,054,922 5,474,155 2,276,017 11,631,868
Shares reacquired (17,284,568) (89,919,168) (44,373,502) (226,482,750)
---------- ---------- ---------- -------------
Net increase (decrease) 998,380 $ 4,946,713 (4,952,845) $ (26,084,868)
========== ============= ========== =============
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
Six Months Ended Year Ended
July 31, 1996 Janury 31, 1996
-------------------------- -----------------------------
Shares Amount Shares Amount
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,482,644 $ 12,918,915 4,854,733 $ 24,711,921
Shares issued to shareholders in
reinvestment of distributions 88,803 461,209 87,659 449,963
Shares reacquired (1,603,963) (8,332,030) (2,541,586) (12,938,624)
---------- ---------- ---------- -------------
Net increase 967,484 $ 5,048,094 2,400,806 $ 12,223,260
========== ============= ========== =============
</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 period ended July
31, 1996 was $6,667.
(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 period ended July
31, 1996 is set forth below.
<TABLE>
<CAPTION>
Acquisitions
Beginning ------------------------- Ending Interest and
Shares/Par Shares/Par Shares/Par Dividend Ending
Affiliate Amount Amount Cost Amount Income Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
K-III Communications Corp. 83,400 4,918 -- 88,318 $ -- 8,522,643
Ranger Industries, Inc. 266,768 -- -- 266,768 -- 24,009
Supermarkets General Holdings
Corp., $3.52 Exch. 569,098 -- -- 569,098 -- 14,085,175
--- ----- ----------
-- $ -- 22,631,827
=== ===== ==========
</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, 1996,
the Fund owned the following restricted securities (constituting 0.6% of net
assets) which may not be publicly sold without registration under the
Securities Act of 1933. The Fund does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations supplied by a pricing service or brokers or, if not available, in
good faith by or at the direction of the Trustees.
<PAGE>
<TABLE>
<CAPTION>
Share
Description Date of Acquisition Amount Cost Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlantic Gulf Communities Corp. 9/25/95 690 -- $ 4,054
EnviroSource, Inc. 5/15/91 1,666 7,289 6,455
Gillett Holdings, Inc. 2/27/92 85,019 872,850 2,210,494
Merrill Lynch Mortgage Investors, Inc. 6/22/94 4,500,000 3,119,063 3,320,156
----------
$5,541,159
==========
</TABLE>
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
<TABLE>
<CAPTION>
MFS(R) HIGH INCOME FUND
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and State Street Bank & Trust Company
President
Richard B. Bailey* - Private Investor; INVESTOR INFORMATION
Former Chairman and Director (until 1991), For MFS stock and bond market outlooks,
Massachusetts Financial Services Company; call toll free: 1-800-637-4458 anytime from
Director, Cambridge Bancorp; Director, a touch-tone telephone.
Cambridge Trust Company
For information on MFS mutual funds,
Peter G. Harwood - Private Investor call your financial adviser or, for an
information kit, call toll free:
J. Atwood Ives - Chairman and Chief 1-800-637-2929 any business day from
Executive Officer, Eastern Enterprises 9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Lawrence T. Perera - Partner,
Hemenway & Barnes INVESTOR SERVICE
MFS Service Center, Inc.
William J. Poorvu - Adjunct Professor, P.O. Box 2281
Harvard University Graduate School of Boston, MA 02107-9906
Business Administration
For general information, call toll free:
Charles W. Schmidt - Private Investor 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive
Vice President, Director and Secretary, For service to speech- or hearing-impaired,
Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, (To use this service, your phone must
Massachusetts Financial Services Company be equipped with a Telecommunications
Device for the Deaf.)
Elaine R. Smith - Independent Consultant
For share prices, account balances and
David B. Stone - Chairman, North American exchanges, call toll free: 1-800-MFS-TALK
Management Corp. (investment advisers) (1-800-637-8255) anytime from a
touch-tone telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company WEB SITE
500 Boylston Street http://www.mfs.com
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc. [DALBAR For the second year in a row,
500 Boylston Street LOGO] MFS earned a #1 ranking in
Boston, MA 02116-3741 TOP RATED SERVICE DALBAR, Inc.'s Broker/Dealer
Survey, Main Office Operations
PORTFOLIO MANAGER Service Quality category. The
Robert J. Manning* firm achieved a 3.49 overall score - on a
scale of 1 to 4 - in the 1995 survey. A total
TREASURER of 71 firms responded, offering input on the
W. Thomas London* quality of service they receive from 36
mutual fund companies nationwide. The survey
ASSISTANT TREASURER contained questions about service quality in
James O. Yost* 17 categories, including "knowledge of phone
service contracts," "accuracy of transaction
SECRETARY processing," and "overall ease of doing
Stephen E. Cavan* business with the firm."
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
</TABLE>
*Affiliated with the Investment Adviser
<PAGE>
MFS(R) HIGH -------------
INCOME
FUND [DALBAR BULK RATE
LOGO] U.S. POSTAGE
TOP-RATED SERVICE P A I D
PERMIT #55638
500 Boylston Street BOSTON, MA
Boston, MA 02116 -------------
[LOGO]
MFS(SM)
INVESTMENT MANAGEMENT
MHI-3 9/96 58M 18/218/318
