Table of Contents
Letter from the Chairman ..................... 1
A Discussion with the Portfolio Manager ...... 2
Portfolio Manager's Profile .................. 5
Performance Summary ........................... 6
Fund Facts .................................... 8
Portfolio of Investments ..................... 9
Financial Statements ........................ 16
Notes to Financial Statements ............... 23
Independent Auditors' Report .................. 30
ABCs of Investing ........................... 31
Family of Funds .............................. 32
Trustees and Officers ........................ 33
Highlights
[bullet] For the year ended January 31, 1997, Class A shares of the Fund
provided a total return at net asset value of 11.52%, Class B shares
10.66%, and Class C shares 10.71%.
[bullet] A relatively stable economic environment, with moderate growth and low
inflation, has benefited investors reaching for a little extra yield
in high-yield corporate and emerging fixed-income markets.
[bullet] The overall credit quality of issuers in the high-yield market has
improved significantly in the 1990s, with dramatic reductions in
debt-to-cash flow ratios compared to the 1980s.
[bullet] However, the high-yield market is seeing an increase in the number of
speculative issues, particularly in the gaming and communications
industries, and we expect the rate of defaults to rise in 1997.
<PAGE>
Letter from the Chairman
[Picture of A. Keith Brodkin]
Dear Shareholders:
After more than six years of expansion, the U.S. economy appears headed
toward another year of at least moderate growth in 1997, although a few signs
point to the possibility of a modest rise in inflation during the year. On the
positive side, the pattern of moderate growth and inflation set over the past
few years now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Also, recent gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be seen
in the continuing high level of consumer debt and the attendant rise in personal
bankruptcies, as well as in the modestly disappointing level of holiday sales.
Also, the ongoing tightness in labor markets, and price rises in such important
sectors as energy, could add some inflationary pressures to the economy. Given
these somewhat conflicting indicators, we expect real (inflation-adjusted)
growth to revolve around 2% in 1997, which would represent a modest decline from
1996.
In the bond markets, conflicting signals over the strength of the economy
have created near-term volatility, while comments by Federal Reserve Chairman
Alan Greenspan late in 1996 and in February of this year created some
uncertainty over the Federal Reserve Board's next move. However, we expect the
Fed to maintain its anti-inflationary stance should signs of more rapid economic
growth and, particularly, of higher inflation resurface. While inflationary
forces largely remained in check in 1996, the continued strength in the labor
market and rising energy prices mean that a pickup in inflation is still
possible. At the same time, the U.S. budget deficit continues to decline and, as
a percentage of gross domestic product, is now less than 2%, which we consider a
positive development for the bond markets. Although interest rates may move
higher over the coming months, we believe that, at current levels, fixed-income
markets remain equitably valued.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
February 14, 1997
1
<PAGE>
A Discussion with the Portfolio Manager
[Picture of Robert J. Manning]
For the year ended January 31, 1997, Class A shares of the Fund provided a
total return of 11.52%, Class B shares 10.66%, and Class C shares 10.71%. All of
these returns assume the reinvestment of distributions but exclude the effects
of any sales charges, and they compare to a 2.76% return for the Lehman Brothers
Corporate Bond Index (the Lehman Index) 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, nonconvertible,
investment-grade corporate debt.
Q. What do you see as some of the reasons for this performance?
A. The environment for high-yield bonds has been quite favorable over the past
12 months, thanks in part to improved credit quality and a lower rate of
defaults compared to just a few years ago. Also, the Fund was more heavily
invested in the higher-quality segment of the high-yield market, and we believe
we were able to do a good job of credit selection, which helped the Fund's
overall performance.
Q. In general, how would you describe the fixed-income environment over the past
year?
A. It's been a relatively stable environment, with interest rates not moving in
any particular direction. With the economy growing moderately and inflation
remaining low, it has paid investors to reach for a little extra yield. This has
helped the performance of the "spread markets," that is, the high-yield
corporate and emerging fixed-income markets. The high-yield market, in
particular, has been extremely strong, with new issuance close to last year's
record volume of about $70 billion. However, the credit quality of the new-issue
market has started to deteriorate somewhat. Because of this, we've gotten even
more selective and have not let ourselves get caught up in some of the hype that
can accompany these issues. Also, the flow of money into high-yield mutual funds
has been quite strong, which has helped push up prices in this market just as
money flows into stock funds have helped drive the stock market.
Q. When a lot of people think of high-yield investing, they think of possible
defaults. How has the default picture changed in the past few years, and why?
2
<PAGE>
A Discussion with the Portfolio Manager - continued
A. Defaults are actually at historic lows. Over time, they average 2% to 3% of
the market, but in the past year the rate has been at less than 1.3%. However,
this is a lagging indicator, that is, we see credit losses going up - and the
prices of bonds trading down - long before the number of defaults increase. We
do expect the default rate to increase over the coming year.
Q. In spite of this, has the overall financial condition of the issuers in your
investment universe improved?
A. Yes. The overall credit quality of these issuers has improved dramatically in
the 1990s compared to the 1980s. In the late 1980s, debt-to-cash flow ratios
among issuers of high-yield bonds were 8 to 10 times, while interest-coverage
ratios were 1 to 1-1/2. (Debt-to-cash flow measures a company's total debt
divided by its cash flow, or revenues after operating expenses. Interest
coverage is the number of times a company's cash flow will cover its interest
expenses annually.) Today, debt-to-cash flow ratios have been cut to the 4 to 6
range, while interest-coverage ratios are usually at least 2. So generally the
companies that financed in the '80s were significantly more leveraged than the
companies that come to market today. However, we are seeing more speculation,
particularly in the gaming and communications industries. It's our job to
maintain discipline and not get caught up in the fever of the bull markets.
Q. In general, what characteristics or qualities do you look for in selecting
bonds for the Fund?
A. We start with management. We spend most of our time meeting with the managers
of the companies in the Fund. They're the people who know what's going on in
their businesses, what trends to watch, and how to position their companies for
any changes. We like to see managers have equity in their own companies, so if
something goes wrong they have something at stake. The second thing is stable
cash flow. Unlike equity fund managers, who stress earnings, we want to see how
much money is coming in, how much is going out, and how the company is meeting
its debt obligations. Third, we like companies to have tangible assets, like
machinery and equipment, that have value if something goes wrong. Finally, we
look for positive industry trends. We use MFS' equity analysts to leverage our
knowledge of what's going on in all industries to help us decide where we want
to be positioned for the future.
Q. Have you increased the Fund's weightings in any particular sectors, and why?
A. We've added to our industrial-company holdings. These tend to be strong
cash-flow generators, and several have been bought out by other
3
<PAGE>
A Discussion with the Portfolio Manager - continued
industrial companies as part of a consolidation trend. We have also found good
relative value in some gaming and cable companies, although neither of these
industries performed as well as expected last year.
Q. Have some segments of the high-yield bond market performed better than you
expected?
A. The telecommunications industry was helped by the passage of the
Telecommunications Act and an overall bull market in technology, while the
energy sector saw an upswing in prices that was unexpected. Meanwhile, a number
of cyclical industries also benefited from a stronger-than-expected economy.
Q. And have some segments of this market, or particular holdings, not performed
as well as you expected?
A. We saw underperformance in both the paging and supermarket sectors, as price
competition put downward pressure on profit margins in both industries.
Q. Did you reduce or eliminate your positions in some of these holdings as a
result?
A. We have reduced the Fund's position in paging. Although we don't see any
major change in fundamentals for this industry in the short term, we think
there's still some downside risk. We are, however, adding to our supermarket
holdings. There are some good franchises out there that we believe could do well
in a slowing economy, which we think is more probable now.
Q. Can you talk about any parts of this market you might be avoiding?
A. We've been staying away from utilities and retailing. Both have suffered from
overcapacity and lack of pricing power, and the utilities' performance has been
further hampered by deregulation. For instance, electric utilities have been
forced to compete with outside suppliers for the business of some of their
biggest customers, such as office buildings and factories.
Q. As you look ahead, what changes do you see in the overall market or economic
environment, particularly as it relates to the Fund, and how are you positioning
the Fund to try and take advantage of those changes?
A. We expected the economy to slow down in 1996 but it didn't. However, we
positioned the Fund defensively by increasing its overall credit quality. We
still believe we're at the end of an economic and credit cycle that began in
1991, and so it seems prudent to invest in the larger, well-capitalized
4
<PAGE>
A Discussion with the Portfolio Manager - continued
companies whose credits are more likely to perform better when the markets do
react to a slowdown. Currently, though, the high-yield market is yielding about
310 basis points (3.1%) more than comparable-maturity Treasuries, which is not a
very narrow range. (Principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity.) This indicates the
market is pricing in a fairly optimistic environment for the coming year. Still,
given the recent trend of lower-quality new issuance and the strong, almost
insatiable desire for yield, we believe it's more likely than not that something
will happen to cause a market correction, and we want to be positioned for it
when it happens. Given this environment, we believe disciplined credit
selection, and avoiding speculative risks, will become even more important in
the coming year.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Portfolio Manager
Portfolio Manager's Profile
Robert J. 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.
5
<PAGE>
Performance Summary
The information below and on the following pages illustrate the historical
performance of MFS High Income Fund - Class A shares in comparison to various
market indicators. Class A share performance results reflect the deduction of
the 4.75% maximum sales charge; benchmark comparisons are unmanaged and do not
reflect any fees or expenses. The performance of other share classes will be
greater than or less than the line shown, based on the differences in loads and
fees paid by shareholders investing in the different classes. It is not possible
to invest in an index. All results are historical and assume the reinvestment of
dividends and capital gains.
Growth of a Hypothetical $10,000 Investment
(For the 5-Year Period Ended January 31, 1997)
1/92 9532 10000 10000
1/93 11091 11263 10326
1/94 13102 12584 10587
1/95 12585 12111 10883
1/96 14847 14591 11174
1/97 16556 14995 11484
$20,000 $15,000 $10,000 $5,000
MFS High Income Fund - Class A $16,556
Lehman Brothers Corporate Bond Index $14,995
Consumer Price Index - U.S $11,484
1/92 1/93 1/94 1/95 1/96 1/97
Growth of a Hypothetical $10,000 Investment
(For the 10-Year Period Ended January 31, 1997)
2/87 9531 10000 10000
1/89 10430 10888 11124
1/91 8613 12102 13558
1/93 15097 12821 17648
1/95 17129 13513 18976
1/97 22535 14259 23494
$30,000 $25,000 $20,000 $15,000 $10,000 $5,000
Lehman Brothers Corporate Bond Index $23,494
MFS High Income Fund - Class A $22,535
Consumer Price Index - U.S. $14,259
2/87 1/89 1/91 1/93 1/95 1/97
6
<PAGE>
Performance Summary - continued
<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 + 6.24% +6.40% +10.59% +8.57%
- ----------------------------------------- --------- -------- --------- --------
MFS High Income Fund (Class A)
at net asset value +11.52% +8.11% +11.67% +9.10%
- ----------------------------------------- --------- -------- --------- --------
MFS High Income Fund (Class B) with CDSC + 6.66% +6.37% +10.80% +8.80%
- ----------------------------------------- --------- -------- --------- --------
MFS High Income Fund (Class B)
without CDSC +10.66% +7.22% +11.06% +8.80%
- ----------------------------------------- --------- -------- --------- --------
MFS High Income Fund (Class C) with CDSC + 9.71% +7.35% +11.17% +8.85%
- ----------------------------------------- --------- -------- --------- --------
MFS High Income Fund (Class C)
without CDSC +10.71% +7.35% +11.17% +8.85%
- ----------------------------------------- --------- -------- --------- --------
Average high current yield fund++ +12.49% +7.82% +11.57% +9.27%
- ----------------------------------------- --------- -------- --------- --------
Lehman Brothers Corporate Bond Index+ + 2.76% +6.02% + 8.44% +8.92%
- ----------------------------------------- --------- -------- --------- --------
Consumer Price Index*+ + 2.77% +2.75% + 2.81% +3.61%
- ----------------------------------------- --------- -------- --------- --------
</TABLE>
* The cost of living (inflation) is measured by the Consumer Price Index
published by the U.S. Bureau of Labor Statistics.
+ Source: CDA/Wiesenberger.
++ Source: Lipper Analytical Services.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
Class B results including the applicable contingent deferred sales charge
(CDSC), reflect the CDSC which declines over six years as follows: 4%, 4%, 3%,
3%, 2%, 1%, 0%. Class C shares have no initial sales charge but, along with
Class B shares, have higher annual fees and expenses than Class A shares. As of
April 1, 1996, Class C shares redeemed within 12 months of purchase will be
subject to a 1% CDSC.
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 operating 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 performance which reflects the sales charges, 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), which generally are lower for Class
A shares.
Fund results reflect any applicable expense subsidies and waivers, without which
the performance results would have been less favorable. Subsidies and waivers
may be rescinded at any time. See the prospectus for details.
7
<PAGE>
Fund Facts
Strategy: The Fund's investment objective is to seek high current
income by investing primarily in fixed-income securities
rated below investment grade (BBB).
Commencement of
investment operations: February 17, 1978
Size: $1.0 billion net assets as of January 31, 1997
Portfolio Concentration as of January 31, 1997
Portfolio Structure
[PIE GRAPH]
High Yield 88.0%
Equity 6.2%
Cash and Cash Equivalents 5.8%
<PAGE>
Portfolio of Investments - January 31, 1997
Non-Convertible Bonds - 87.5%
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Aerospace - 2.6%
BE Aerospace, Inc., 9.875s, 2006 $4,700 $4,911,500
CHC Helicopter Corp., 11.5s, 2002 6,675 6,942,000
Derlan Manufacturing, Inc., 10s, 2007## 2,775 2,795,812
Haynes International, Inc., 11.625s, 2004 10,825 11,799,250
-----------
$26,448,562
- -----------------------------------------------------------------------------------------
Airlines - 1.7%
Airplane Pass-Thru Trust, 10.875s, 2019 $5,250 $5,801,250
K & F Industries, Inc., 11.875s, 2003 1,925 2,079,000
Moog, Inc., 10s, 2006 8,590 9,019,500
-----------
$16,899,750
- -----------------------------------------------------------------------------------------
Automotive - 1.6%
Exide Corp., 10s, 2005## $2,950 $3,049,563
Harvard Industries, Inc., 11.125s, 2005 775 589,000
Harvard Industries, Inc., 12s, 2004 980 754,600
Hayes Wheels International, Inc., 11s, 2006 4,350 4,763,250
SPX Corp., 11.75s, 2002 3,950 4,394,375
Venture Holdings Trust, 9.75s, 2004 2,775 2,636,250
-----------
$16,187,038
- -----------------------------------------------------------------------------------------
Building - 5.1%
American Standard, Inc., 0s,1998, 10.5s, 2005 $10,625 $10,014,062
Building Materials Corp., 8.625s, 2006## 1,550 1,550,000
Building Materials Corp., 0s, 1999, 11.75s, 2004 11,775 10,303,125
Lone Star Industries, Inc., 10s, 2003 4,542 4,621,485
Nortek, Inc., 9.875s, 2004 9,750 9,896,250
Schuller International Group, Inc., 10.875s, 2004 4,000 4,420,000
UDC Homes, Inc., 2000 30 16,650
USG Corp., 9.25s, 2001 9,850 10,465,625
-----------
$51,287,197
- -----------------------------------------------------------------------------------------
Cellular Telephones - 0.7%
Millicom International Cellular Communications, 0s,
2001, 13.5s, 2006 $10,625 $6,932,813
- -----------------------------------------------------------------------------------------
Chemicals - 2.8%
INDESPEC Chemical Corp., 0s, 1998, 11.5s, 2003 $5,450 $5,014,000
NL Industries, Inc., 11.75s, 2003 8,725 9,204,875
Rexene Corp., 11.75s, 2004 2,235 2,508,787
UCC Investors Holdings, Inc., 10.5s, 2002 4,750 5,189,375
UCC Investors Holdings, Inc., 0s, 1998, 12s, 2005 7,500 6,750,000
-----------
$28,667,037
- -----------------------------------------------------------------------------------------
Consumer Goods and Services - 7.9%
Consolidated Cigar Corp., 10.5s, 2003 $4,750 $4,940,000
E & S Holdings Corp., 10.375s, 2006## 8,350 8,746,625
FoodBrands America, Inc., 10.75s, 2006 5,755 6,071,525
Genmar Holdings, Inc., 13.5s, 2001 2,940 2,851,800
International Semi-Tech Microelectronics, Inc.,
11.5s, 2003 10,450 6,165,500
Iron Mountain, Inc., 10.125s, 2006 7,000 7,420,000
Pierce Leahy Corp., 11.125s, 2006 5,350 5,871,625
</TABLE>
9
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
Consumer Goods and Services - continued
Reeves Industries, Inc., 11s, 2002 $5,565 $5,342,400
Remington Arms, Inc., 10s, 2003## 2,000 1,620,000
Revlon, Inc., 10.5s, 2003 8,175 8,624,625
Samsonite Corp., 11.125s, 2005 5,500 6,022,500
Sealy Corp., 9.5s, 2003 2,650 2,676,500
Westpoint Stevens, Inc., 9.375s, 2005 12,850 13,331,875
-----------
$79,684,975
- ----------------------------------------------------------------------------------
Containers - 4.8%
Atlantis Group, Inc., 11s, 2003 $7,500 $7,762,500
Calmar, Inc., 11.5s, 2005 8,000 8,420,000
Ivex Packaging Corp., 12.5s, 2002 5,350 5,791,375
Owens-Illinois, Inc., 9.75s, 2004 2,500 2,637,500
Owens-Illinois, Inc., 9.95s, 2004 500 528,750
Owens-Illinois, Inc., 11s, 2003 5,850 6,508,125
Plastic Containers, Inc., 10s, 2006## 950 978,500
RXI Holdings, Inc., 14s, 2002** 3,500 2,730,000
Silgan Corp., 11.75s, 2002 6,860 7,323,050
U.S. Can Corp., 10.125s, 2006## 5,100 5,355,000
-----------
$48,034,800
- ----------------------------------------------------------------------------------
Defense Electronics - 0.5%
Alliant Techsystem, Inc., 11.75s, 2003 $4,350 $4,872,000
- ----------------------------------------------------------------------------------
Electronics - 0.5%
Clark Schwebel, Inc., 10.5s, 2006 $4,675 $4,932,125
- ----------------------------------------------------------------------------------
Entertainment - 4.5%
Act III Theaters, Inc., 11.875s, 2003 $2,250 $2,452,500
Albritton Communications Corp., 11.5s, 2004 6,350 6,746,875
American Skiing Company, 12s, 2006 5,300 5,445,750
Cinemark USA, Inc., 9.625s, 2008 1,600 1,628,000
Grand Casinos, Inc., 10.125s, 2003 8,225 8,430,625
Griffin Gaming & Entertainment, Inc., 2000 4,400 4,290,000
Lodgenet Entertainment Corp., 10.25s, 2006## 2,525 2,512,375
Marvel Holdings, Inc., 0s, 1998** 12,635 2,116,363
Plitt Theatres, Inc., 10.875s, 2004 2,775 2,809,687
Sam Houston Race Park, Inc., 11s, 2001** 1,809 777,926
SCI Television, Inc., 11s, 2005 7,655 8,152,575
-----------
$45,362,676
- ----------------------------------------------------------------------------------
Financial Institutions - 0.7%
Americo Life, Inc., 9.25s, 2005 $3,550 $3,523,375
Americredit Corp., 9.25s, 2004## 2,000 1,994,900
GPA Delaware, 8.75s, 1998 1,221 1,236,263
-----------
$6,754,538
- ----------------------------------------------------------------------------------
Food and Beverage Products - 1.9%
Delta Beverage Group, Inc., 9.75s, 2003## $2,800 $2,884,000
Keebler Corp., 10.75s, 2006 2,500 2,700,000
PMI Acquisition Corp., 10.25s, 2003 2,495 2,569,850
Specialty Foods Corp., 10.25s, 2001 5,000 4,750,000
</TABLE>
10
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
Food and Beverage Products - continued
Texas Bottling Group, Inc., 9s, 2003 $5,750 $5,865,000
-----------
$18,768,850
- ----------------------------------------------------------------------------------
Forest and Paper Products - 2.3%
Gaylord Container Corp., 0s, 1996, 12.75s, 2005 $10,395 $11,460,487
Pacific Lumber Co., 10.5s, 2003 9,675 9,820,125
Specialty Paperboard, Inc., 9.375s, 2006## 2,150 2,182,250
-----------
$23,462,862
- ----------------------------------------------------------------------------------
Machinery - 1.7%
AGCO Corp., 8.5s, 2006 $5,000 $5,050,000
Fairfield Manufacturing Corp., 11.375s, 2001 3,700 3,885,000
Thermadyne Holdings Corp., 10.25s, 2002 4,150 4,316,000
Thermadyne Holdings Corp., 10.75s, 2003 4,045 4,206,800
-----------
$17,457,800
- ----------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.9%
Beverly Enterprises, Inc., 9s, 2006 $3,500 $3,508,750
Quorum Health Group, Inc., 8.75s, 2005 2,750 2,818,750
Tenet Healthcare Corp., 8s, 2005 11,550 11,506,688
Unilab Corp., 11s, 2006 1,610 1,110,900
-----------
$18,945,088
- ----------------------------------------------------------------------------------
Metals and Minerals - 0.5%
Jorgensen (Earle M.) Co., 10.75s, 2000 $4,575 $4,643,625
- ----------------------------------------------------------------------------------
Mortgage Backed Pass-Throughs - 0.4%
Merrill Lynch Mortgage Investors,
Inc., 8.142s, 2023+ $4,500 $3,622,500
- ----------------------------------------------------------------------------------
Oil Services - 2.1%
AmeriGas Partners, L.P., 10.125s, 2007 $3,400 $3,582,750
Clark USA, Inc., 10.875s, 2005 2,650 2,676,500
Falcon Drilling, Inc., 8.875s, 2003 3,725 3,892,625
Ferrell Gas L.P., 10s, 2001 4,700 4,935,000
Mesa Operating Co., 10.625s, 2006 1,700 1,840,250
Noble Drilling Corp., 9.125s, 2006 3,500 3,727,500
-----------
$20,654,625
- ----------------------------------------------------------------------------------
Oils - 0.6%
Gulf Canada, 9.25s, 2004 $6,000 $6,345,000
- ----------------------------------------------------------------------------------
Printing and Publishing - 1.3%
Day International Group, Inc., 11.125s, 2005 $2,350 $2,479,250
Golden Books Publishing, Inc., 7.65s, 2002 5,000 4,500,000
Newsquest Capital PLC, 11s, 2006 4,600 4,830,000
Newsquest Capital PLC, 11s, 2006## 1,500 1,575,000
-----------
$13,384,250
- ----------------------------------------------------------------------------------
Restaurants and Lodging - 5.2%
Aztar Corp., 11s, 2002 $5,175 $5,200,875
Boomtown, Inc., 11.5s, 2003 3,865 4,106,562
Coast Hotels & Casinos, Inc., 13s, 2002 3,625 4,032,813
Eldorado Resorts LLC, 10.5s, 2006## 4,455 4,722,300
Four Seasons Hotels, Inc., 9.125s, 2000## 7,750 7,934,062
Harrah's Jazz Co., 14.25s, 2001** 4,950 2,437,875
</TABLE>
11
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
Restaurants and Lodging - continued
Harrahs Operating, Inc., 8.75s, 2000 $3,500 $3,543,750
Harvey's Casinos Resorts, 10.625s, 2006 3,525 3,824,625
Red Roof Inns, Inc., 9.625s, 2003 8,260 8,383,900
Santa Fe Hotel, Inc., 11s, 2000 4,805 3,219,350
Station Casinos, Inc., 9.625s, 2003 4,350 4,393,500
-----------
$51,799,612
- ----------------------------------------------------------------------------------
Special Products and Services - 8.2%
AAF-McQuay, Inc., 8.875s, 2003 $8,325 $8,158,500
Buckeye Cellulose Corp., 8.5s, 2005 2,000 2,010,000
Howmet Corp., 10s, 2003 5,125 5,586,250
Idex Corp., 9.75s, 2002 1,260 1,313,550
IMO Industries, Inc., 11.75s, 2006 10,175 9,971,500
Interlake Corp., 12s, 2001 5,200 5,720,000
Interlake Corp., 12.125s, 2002 9,200 9,614,000
Interlake Revolver, "B", 5.75s, 1997## 1,135 1,123,681
International Knife & Saw, Inc., 11.375s, 2006## 5,360 5,520,800
K & F Industries, Inc., 10.375s, 2004 4,500 4,747,500
Mettler Toledo, Inc., 9.75s, 2006 1,620 1,701,000
Motors & Gears, Inc., 10.75s, 2006## 3,450 3,553,500
Newflow Corp., 13.25s, 2002 3,850 4,220,563
Polymer Group, Inc., 12.25s, 2002 4,817 5,298,700
Synthetic Industries, Inc., 12.75s, 2002 11,755 13,018,662
Wolverine Tube, Inc., 10.125s, 2002 400 422,000
-----------
$81,980,206
- ----------------------------------------------------------------------------------
Steel - 4.2%
AK Steel Corp., 9.125s, 2006## $3,950 $4,038,875
AK Steel Corp., 10.75s, 2004 960 1,041,600
Algoma Steel, Inc., 12.375s, 2005 675 744,187
Armco, Inc., 11.375s, 1999 2,875 3,018,750
Carbide/Graphite Group, Inc., 11.5s, 2003 500 545,000
Commonwealth Aluminum Corp., 10.75s, 2006 7,450 7,785,250
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 5,550 5,688,750
Kaiser Aluminum & Chemical Corp., 12.75s, 2003 8,050 8,734,250
Northwestern Steel & Wire Company, 9.5s, 2001 1,100 1,089,000
WCI Steel, Inc., 10s, 2004## 9,750 10,042,500
-----------
$42,728,162
- ----------------------------------------------------------------------------------
Stores - 1.6%
Finlay Enterprises, Inc., 0s, 1s, 2005 $10,750 $9,567,500
Finlay Fine Jewelry, 10.625s, 2003 1,000 1,060,000
Parisian, Inc., 9.875s, 2003 5,190 5,319,750
-----------
$15,947,250
- ----------------------------------------------------------------------------------
Supermarkets - 3.4%
Carr-Gottstein Foods Co., 12s, 2005 $1,500 $1,597,500
Dominick's Finer Foods Inc., 10.875s, 2005 4,425 4,878,562
Fleming Cos., Inc., 10.625s, 2001 1,800 1,845,000
Grand Union Co., 12s, 2004 4,425 4,436,063
Jitney Jungle Stores of America, Inc., 12s, 2006 4,765 5,074,725
</TABLE>
12
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Supermarkets - continued
Pathmark Stores, Inc., 9.625s, 2003 $ 700 $ 665,000
Ralph's Grocery Co., 10.45s, 2004 6,550 6,893,875
Smiths Food & Drug Centers, 11.25s, 2007 6,900 7,684,875
Star Market, Inc., 13s, 2004 750 847,500
-----------
$33,923,100
- -----------------------------------------------------------------------------------------
Telecommunications - 17.2%
American Radio Systems Corp., 9s, 2006 $10,650 $10,543,500
Bell Cablemedia PLC, 0s, 2000, 11.875s, 2005 7,750 6,180,625
Brooks Fiber Properties, Inc., 0s, 2001, 10.875, 2006 3,300 2,211,000
Brooks Fiber Properties, Inc., 0s, 2001, 11.875s, 2006## 7,000 4,055,387
Cablevision Systems Corp., 9.25s, 2005 6,000 5,932,500
Charter Communications Southeast L.P., 11.25s, 2006 4,775 5,061,500
Colt Telecommunications Group PLC, 0s, 2001, 12, 2006 6,800 4,216,000
Comcast Corp., 9.375s, 2005 4,950 5,073,750
Diamond Cable Communications Corp., 0s, 2000, 11.75s,
2005 8,450 5,957,250
Echostar Communications Corp., 0s, 1999, 12.875s, 2004 2,150 1,736,125
Echostar Satellite Broadcasting Corp., 0s, 2000, 13.125s,
2004 10,250 7,175,000
Esat Holdings Limited, 12.5s, 2007## 2,825 1,596,125
Falcon Holdings Group, Inc., 11s, 2003# 6,317 5,875,190
ICG Holdings, Inc., 0s, 2001, 12.5s, 2006 8,500 5,567,500
Intermedia Capital Partners LP, 11.25s, 2006 5,225 5,512,375
Jones Intercable, Inc., 9.625s, 2002 4,050 4,232,250
Jones Intercable, Inc., 10.5s, 2008 800 864,000
Jones Intercable, Inc., 11.5s, 2004 1,125 1,222,031
K-III Communications Corp., 10.625s, 2002 3,305 3,474,381
Lenfest Communications, Inc., 10.5s, 2006 9,750 10,261,875
Marcus Cable Operating Co., 0s, 1999, 13.5s, 2004 4,000 3,300,000
MFS Communications, Inc., 0s, 2001, 8.875s, 2006 14,450 10,620,750
Mobile Telecommunication Technologies Corp., 13.5s, 2002 2,765 2,709,700
Mobilemedia Communications, Inc., 10.5s, 2003 1,810 244,350
Mobilemedia Communications, Inc., 9.375s, 2007** 1,200 198,000
Orion Network Systems, Inc., 11.25s, 2007 5,000 5,000,000
Orion Network Systems, Inc., 12.5s, 2007 3,750 2,206,275
Paging Network, Inc., 8.875s, 2006 7,900 7,386,500
Park Broadcasting, Inc., 11.75s, 2004 2,503 3,028,630
ProNet, Inc., 11.875s, 2005 1,600 1,488,000
Rifkin Acquisition Partners, LP, 11.125s, 2006 50 52,625
Rogers Cablesystems Ltd., 9.625s, 2002 750 780,000
Rogers Cablesystems, Inc., 10.125s, 2012 5,000 5,200,000
Sprint Spectrum LP, 11s, 2006 6,750 7,256,250
Sprint Spectrum LP, 0s, 2001, 12.5s, 2006 4,000 2,680,000
Sygnet Wireless, Inc., 11.5s, 2006 5,000 5,162,500
Teleport Communications Group, Inc., 9.875s, 2006 3,000 3,172,500
Teleport Communications Group, Inc., 0s, 2001, 11.125s,
2007, 1s, 2007 9,000 6,165,000
</TABLE>
13
<PAGE>
Portfolio of Investments - continued
Non-Convertible Bonds - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Telecommunications - continued
Videotron Holdings PLC, 0s, 2000, 11s,2005, 1s, 2005 $ 6,850 $ 5,411,500
Western Wireless Corp., "A", 10.5s, 2007 3,600 3,739,500
------------
$172,550,444
- ---------------------------------------------------------------------------------------------
Transportation - 1.1%
Central Transport Rental Finance Corp., 9.5s, 2003 $ 7,724 $ 7,337,416
Moran Transportation Co., 11.75s, 2004 3,500 3,780,000
------------
$11,117,416
- ---------------------------------------------------------------------------------------------
Utilities - Electric - 0.5%
El Paso Electric Co., 8.9s, 2006 $ 2,550 $ 2,663,705
Kenetech Corp., 12.75s, 2002** 2,520 2,570,400
------------
$ 5,234,105
- ---------------------------------------------------------------------------------------------
Total Non-Convertible Bonds (Identified Cost, $852,746,597) $878,628,406
- ---------------------------------------------------------------------------------------------
Convertible Bond - 0.3%
- ---------------------------------------------------------------------------------------------
Exide Corporation, 2.9s, 2005##
(Identified Cost, $2,964,500) $ 4,900 $ 2,952,250
- ---------------------------------------------------------------------------------------------
Stocks - 0.8%
- ---------------------------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------------------------------
Apparel and Textiles - 0.2%
Ithaca Industries, Inc.** 304,000 $ 2,356,000
- ---------------------------------------------------------------------------------------------
Building
Atlantic Gulf Communities Corp., +* 690 $ 3,363
- ---------------------------------------------------------------------------------------------
Consumer Goods and Services
Ranger Industries, Inc., ++* 266,768 $ 66,692
- ---------------------------------------------------------------------------------------------
Pollution Control
Envirosource, Inc., +* 1,666 $ 3,228
- ---------------------------------------------------------------------------------------------
Printing and Publishing - 0.1%
Triton Group Ltd.* 588,876 $ 441,657
- ---------------------------------------------------------------------------------------------
Restaurants and Lodging - 0.3%
Vail Resorts, Inc. 85,019 $ 3,230,722
- ---------------------------------------------------------------------------------------------
Special Products and Services - 0.2%
Central Transport Rental Group PLC, ADR* 3,790,771 $ 2,132,309
IMO Industries, Inc. 28,000 101,500
------------
$ 2,233,809
- ---------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $16,901,190) $ 8,335,471
- ---------------------------------------------------------------------------------------------
Preferred Stocks - 5.1%
- ---------------------------------------------------------------------------------------------
Cablevision Systems Corp., 11.125s (Telecommunications)* 85,893 $ 7,794,790
El Paso Electric Company, 11.4 (Utilities-Electric)# 23,642 2,594,709
K-III Communications Corp., "B", 11.625s
(Specialty Products and Services) 93,526 9,071,992
Renaissance Cosmetics, Inc. (Consumer Goods and Services) + 5,475 5,584,500
Renaissance Cosmetics, Inc. (Consumer Goods and Services) ## 192 17,088
</TABLE>
14
<PAGE>
Portfolio of Investments - continued
Preferred Stocks - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Issuer Shares Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Supermarkets General Holdings Corp., $3.52 Exch.
(Supermarkets)* 569,098 $ 13,658,352
Time Warner, Inc., "K", 10.25s (Entertainment) 11,699 12,810,405
--------------
Total Preferred Stock (Identified Cost, $43,192,821) $ 51,531,836
- ---------------------------------------------------------------------------------------------
Convertible Preferred Stocks - 0.2%
- ---------------------------------------------------------------------------------------------
Granite Broadcasting Corp., Pfd, 1.938 (Entertainment)
(Identified Cost, $1,988,688) 33,000 $ 1,810,875
- ---------------------------------------------------------------------------------------------
Warrants - 0.1%
- ---------------------------------------------------------------------------------------------
CHC Helicopter Corp., Warrants* 16,000 $ 8,000
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
Grand Palais Resorts, Warrants*## 111,660 0
Hemmeter Entertainment, Warrants* 111,660 0
ICO, Inc. Warrants* 706,250 459,062
Republic Health Corp., Warrants* 2,500 0
RXI Holdings, Inc., Warrants* 3,500 35
Sam Houston Race Park, Inc., Warrants* 481 1,924
Vail Resorts, Inc., Warrants* 85,019 0
- ---------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $399,009) $ 469,021
- ---------------------------------------------------------------------------------------------
Short-Term Obligations - 2.9%
- ---------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
---------------
Federal Home Loan Mortgage Assn., due 02/06/97 $3,970 $ 3,967,050
Federal Home Loan Mortgage Corp., due 02/10/97 6,000 5,992,170
Federal Home Loan Mortgage Corp., due 02/03/97 9,475 9,472,242
Student Loan Marketing Assn., due 03/21/97 9,950 9,880,748
--------------
Total Short-Term Obligations, at Amortized Cost and Value $ 29,312,210
- ---------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $947,505,015) $ 973,040,069
Other Assets, Less Liabilities - 3.1% 31,257,289
=============================================================================================
Net Assets - 100.0% $1,004,297,358
- ---------------------------------------------------------------------------------------------
</TABLE>
*Non-income producing security.
**Non-income producing security - in default.
+Restricted security.
#Payment-in-kind security.
##SEC Rule 144A restriction.
++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
15
<PAGE>
Financial Statements
Statement of Assets and Liabilities
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 31, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $940,281,096) $ 972,973,377
Affiliated issuer (identified cost, $7,223,919) 66,692
-------------
Total investments, at value (identified cost, $947,505,015) $ 973,040,069
Cash 36,207
Receivable for investments sold 18,112,987
Receivable for Fund shares sold 8,785,319
Interest receivable 19,903,420
Other assets 9,602
-------------
Total assets $1,019,887,604
-------------
Liabilities:
Distributions payable $ 2,954,366
Payable for investments purchased 11,246,809
Payable for Fund shares reaquired 850,263
Payable to affiliates -
Management fee 5,314
Shareholder servicing agent fee 3,568
Distribution fee 7,078
Accrued expenses and other liabilities 522,848
-------------
Total liabilities $ 15,590,246
-------------
Net assets $1,004,297,358
=============
Net assets consist of:
Paid-in capital $1,251,191,564
Unrealized appreciation on investments 25,535,054
Accumulated net realized loss on investments and foreign currency transactions (274,106,492)
Accumulated undistributed net investment income 1,677,232
-------------
Total $1,004,297,358
=============
Shares of beneficial interest outstanding 187,692,891
=============
Class A shares:
Net asset value per share (net assets of $672,197,810 [divided by] 125,638,629 shares of
beneficial interest outstanding) $5.35
=====
Offering price per share (100 [divided by] 95.25) $5.62
=====
Class B shares:
Net asset value and offering price per share (net assets of $300,822,525 [divided by]
56,215,947 shares of beneficial interest outstanding) $5.35
=====
Class C shares:
Net asset value and offering price per share (net assets of $28,216,152 [divided by]
5,265,960 shares of beneficial interest outstanding) $5.36
=====
Class I shares:
Net asset value, offering price, and redemption price per share (net assets of
$3,060,871 [divided by] 572,355 shares of beneficial interest outstanding) $5.35
=====
</TABLE>
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B, and Class C shares.
See notes to financial statements
16
<PAGE>
Financial Statements - continued
Statement of Operations
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1997
- ---------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Interest $ 91,865,911
Dividend 135,769
-----------
Total investment income $ 92,001,680
-----------
Expenses -
Management fee $ 4,238,339
Trustees' compensation 50,757
Shareholder servicing agent fee (Class A) 813,558
Shareholder servicing agent fee (Class B) 574,765
Shareholder servicing agent fee (Class C) 29,004
Shareholder servicing agent fee 109,715
Distribution and service fee (Class A) 1,835,620
Distribution and service fee (Class B) 2,877,823
Distribution and service fee (Class C) 216,394
Custodian fee 330,844
Postage 172,092
Auditing fees 55,975
Printing 44,752
Legal fees 1,850
Miscellaneous 486,168
-----------
Total expenses $ 11,837,656
Fees paid indirectly (254,586)
-----------
Net expenses $ 11,583,070
-----------
Net investment income $ 80,418,610
-----------
Realized and unrealized gain on investments:
Net realized gain on investment transactions (identified cost basis) $ 1,477,653
Change in unrealized appreciation on investments $ 18,445,626
-----------
Net realized and unrealized gain on investments $ 19,923,279
-----------
Increase in net assets from operations $100,341,889
===========
</TABLE>
See notes to financial statements
17
<PAGE>
Financial Statements - continued
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 80,418,610 $ 75,745,935
Net realized gain (loss) on investments and
foreign currency transactions 1,477,653 (28,300,429)
Net unrealized gain on investments and
foreign currency 18,445,626 95,491,500
------------- -------------
Increase in net assets from operations $ 100,341,889 $ 142,937,006
------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (54,869,246) $ (50,453,186)
From net investment income (Class B) (23,285,081) (22,802,500)
From net investment income (Class C) (1,760,418) (756,472)
From net investment income (Class I) (21,807) --
------------- -------------
Total distributions declared to
shareholders $ (79,936,552) $ (74,012,158)
------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 487,463,015 $ 435,560,671
Net asset value of shares issued to
shareholders in reinvestment of
distributions 44,900,610 42,125,341
Cost of shares reacquired (468,259,801) (439,675,135)
------------- -------------
Increase in net assets from Fund share
transactions $ 64,103,824 $ 38,010,877
------------- -------------
Total increase in net assets $ 84,509,161 $ 106,935,725
Net assets:
At beginning of period 919,788,197 812,852,472
------------- -------------
At end of period (including accumulated
undistributed (distributions in excess of)
net investment income of $1,677,232 and
$(2,736,501), respectively) $1,004,297,358 $ 919,788,197
============= =============
</TABLE>
See notes to financial statements
18
<PAGE>
Financial Statements - continued
Financial Highlights
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1997 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------
Class A
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.24 $ 4.84 $ 5.50 $ 5.11 $ 4.89 $ 3.71
------ ------ ------ ------ ------ ------
Income (loss) from investment operations# -
Net investment income[sec] $ 0.47 $ 0.45 $ 0.44 $ 0.40 $ 0.51 $ 0.56
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.10 0.39 (0.66) 0.48 0.24 1.21
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.57 $ 0.84 $(0.22) $ 0.88 $ 0.75 $ 1.77
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.46) $(0.44) $(0.43) $(0.42) $(0.51) $(0.56)
From net realized gain on
investments and foreign
currency transactions -- -- (0.01) (0.07) -- --
From paid-in capital -- -- -- -- (0.02) (0.03)
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.46) $(0.44) $(0.44) $(0.49) $(0.53) $(0.59)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 5.35 $ 5.24 $ 4.84 $ 5.50 $ 5.11 $ 4.89
------ ------ ------ ------ ------ ------
Total return++ 11.52% 17.97% (3.95)% 18.13% 16.36% 49.64%
Ratios (to average net assets)/
Supplemental data
Expenses## 1.02% 1.00% 0.99% 1.00% 1.03% 1.10%
Net investment income 8.92% 8.83% 8.65% 8.22% 10.21% 11.59%
Portfolio turnover 87% 59% 59% 68% 75% 28%
Net assets, end of period
(000,000 omitted) $ 672 $ 620 $ 524 $ 645 $ 585 $ 556
++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.
[sec]
</TABLE>
See notes to financial statements
19
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1991 1990 1989 1988
- ------------------------------------------------------------------------------------
Class A
--------------------------------------------
<S> <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
-------- ------- ------ -------
Income (loss) from investment operations# -
Net investment income $ 0.65 $ 0.69 $ 0.76 $ 0.77
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions (1.08) (1.13) (0.09) (0.83)
-------- ------- ------ -------
Total from investment
operations $ (0.43) $ (0.44) $ 0.67 $ (0.06)
-------- ------- ------ -------
Less distributions declared to shareholders -
From net investment income $ (0.71) $ (0.75) $(0.75) $ (0.87)
From net realized gain on
investments and foreign
currency transactions -- -- (0.05) (0.01)
From paid-in capital -- -- --** --*
-------- ------- ------ -------
Total distributions declared to
shareholders $ (0.71) $ (0.75) $(0.80) $ (0.88)
-------- ------- ------ -------
Net asset value - end of period $ 3.71 $ 4.85 $ 6.04 $ 6.17
-------- ------- ------ -------
Total return++ (10.99)% (9.18)% 10.68% (1.94)%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.05% 0.87% 0.87% 0.75%
Net investment income 14.97% 12.17% 12.44% 11.49%
Portfolio turnover 24% 25% 34% 28%
Net assets, end of period
(000,000 omitted) $ 380 $ 574 $ 880 $1,001
++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.
*Includes a per share distribution from paid-in capital of $0.0006.
**Includes a per share distribution from paid-in capital of $0.0004.
</TABLE>
See notes to financial statements
20
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1997 1996 1995 1994*
- ---------------------------------------------------------------------------------
Class B
-----------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.24 $ 4.84 $ 5.50 $ 5.27
------ ------ ------- -------
Income (loss) from investment operations# -
Net investment income $ 0.43 $ 0.41 $ 0.39 $ 0.15
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.10 0.39 (0.65) 0.22
------ ------ ------- -------
Total from investment
operations $ 0.53 $ 0.80 $ (0.26) $ 0.37
------ ------ ------- -------
Less distributions declared to shareholders -
From net investment income $(0.42) $(0.40) $ (0.39) $ (0.13)
In excess of net investment income -- -- (0.01) (0.01)
------ ------ ------- -------
Total distributions declared to
shareholders $(0.42) $(0.40) $ (0.40) $ (0.14)
------ ------ ------- -------
Net asset value - end of period $ 5.35 $ 5.24 $ 4.84 $ 5.50
------ ------ ------- -------
Total return 10.66% 16.98% (4.77)% 20.29%+
Ratios (to average net assets)/
Supplemental data
Expenses## 1.79% 1.85% 1.85% 1.79%+
Net investment income 8.13% 7.99% 7.79% 6.94%+
Portfolio turnover 87% 59% 59% 68%
Net assets, end of period
(000,000 omitted) $ 301 $ 283 $ 286 $ 371
*For the period from the commencement of offering of Class B shares, September 27, 1993 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.
</TABLE>
See notes to financial statements
21
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1997 1996 1995 1994** 1997***
- ---------------------------------------------------------------------------------------------
Class C Class I
----------------------------------------- ---------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 5.25 $ 4.85 $ 5.50 $ 5.41 $ 5.34
------ ------ ------- ------- -------
Income (loss) from investment operations# -
Net investment income $ 0.43 $ 0.41 $ 0.41 $ -- $ 0.04
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.11 0.39 (0.66) 0.09 0.01
------ ------ ------- ------- -------
Total from investment
operations $ 0.54 $ 0.80 $ (0.25) $ 0.09 $ 0.05
------ ------ ------- ------- -------
Less distributions declared to shareholders -
From net investment income $(0.43) $(0.40) $ (0.39) $ -- $ (0.04)
In excess of net investment income -- -- (0.01) -- --
------ ------ ------- ------- -------
Total distributions declared to
shareholders $(0.43) $(0.40) $ (0.40) $ -- $ (0.04)
------ ------ ------- ------- -------
Net asset value - end of period $ 5.36 $ 5.25 $ 4.85 $ 5.50 $ 5.35
------ ------ ------- ------- -------
Total return 10.71% 17.03% (4.51)% 20.94%+ 0.91%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.72% 1.77% 1.79% 1.36%+ 0.59%+
Net investment income 8.16% 8.02% 8.01% 5.92%+ 8.70%+
Portfolio turnover 87% 59% 59% 68% 87%
Net assets, end of period
(000,000 omitted) $ 28 $ 16 $ 3 $ 1 $ 3
**For the period from the commencement of offering of Class C shares, January 3, 1994 to
January 31, 1994.
***For the period from the commencement of offering of Class I shares, January 1, 1997 to
January 31, 1997.
#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.
+Annualized.
++Not annualized.
</TABLE>
See notes to financial statements
22
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS High Income (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 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
23
<PAGE>
Notes to Financial Statements - continued
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.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended January 31, 1997, $3,931,675 was reclassified from
accumulated undistributed net investment income to accumulated net realized loss
on investments due to differences between book and tax accounting for defaulted
securities. This change had no effect on the net assets or net asset value per
share.
24
<PAGE>
Notes to Financial Statements - continued
At January 31, 1997, the Fund, for federal income tax purposes, had a capital
loss carryforward of $267,129,382 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration.
<TABLE>
<CAPTION>
Year Ending January 31, Amount
- ------------------------- ------------
<S> <C>
1998 $28,299,632
1999 91,805,710
2000 64,105,312
2001 16,884,352
2003 30,373,319
2004 35,661,057
2005 280,544
------------
Total $267,129,382
------------
</TABLE>
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, Class C and Class I shares. The four classes of shares differ in their
respective, distribution and service fees. All shareholders bear the common
expenses of the Fund pro rata based on average daily net assets of each class,
without distinction between share classes. Dividends are declared separately for
each class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses.
(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 annual rate of 0.19% of
average daily net assets and 2.64% 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 $15,147 for the year ended
January 31, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$193,347 for the year ended January 31, 1997, 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
25
<PAGE>
Notes to Financial Statements - continued
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 $335,369 for the year ended January 31, 1997. Payment of 0.05% of the 0.10%
per annum Class A distribution fee will commence on such date as the Trustees of
the Trust may determine. Fees incurred under the distribution plan during the
year ended January 31, 1997 were 0.30% 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 $83,911 and $5,874 for Class B and Class C
shares, respectively, for the year ended January 31, 1997. Fees incurred under
the distribution plans during the year ended January 31, 1997 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 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.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class C shares in the event of a shareholder redemption within 12 months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the year ended
January 31, 1997 were $24,467, $441,696 and $3,591 for Class A, Class B and
Class C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the Fund's average daily net assets at an effective annual rate of
26
<PAGE>
Notes to Financial Statements - continued
0.13%. Prior to January 1, 1997, the fee was calculated as a percentage of
average daily 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 purchased option transactions and
short-term obligations, aggregated $829,161,143 and $768,212,735, 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:
<TABLE>
<S> <C>
Aggregate cost $948,501,730
=============
Gross unrealized appreciation 54,284,000
Gross unrealized depreciation (29,745,661)
------------
Net unrealized appreciation $ 24,538,339
=============
</TABLE>
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
<TABLE>
<CAPTION>
Year Ended January 31, 1997 Year Ended January 31, 1996
------------------------------- -------------------------------
Shares Amount Shares Amount
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Shares sold 52,421,821 $ 275,165,167 43,551,810 $ 222,082,736
Shares issued to
shareholders in
reinvestment of
distributions 6,071,848 31,874,153 5,871,784 30,043,510
Shares reacquired (51,220,588) (268,276,630) (39,142,858) (200,253,761)
------------ ------------- ------------ -------------
Net increase 7,273,081 $ 38,762,690 10,280,736 $ 51,872,485
============ ============= ============ =============
</TABLE>
Class B Shares
<TABLE>
<CAPTION>
Year Ended January 31, 1997 Year Ended January 31, 1996
------------------------------- -------------------------------
Shares Amount Shares Amount
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Shares sold 35,443,924 $ 185,987,481 37,144,640 $ 188,766,014
Shares issued to
shareholders in
reinvestment of
distributions 2,271,608 11,933,444 2,276,017 11,631,868
Shares reacquired (35,539,089) (187,014,906) (44,373,502) (226,482,750)
------------ ------------- ------------ -------------
Net increase
(decrease) 2,176,443 $ 10,906,019 (4,952,845) $ (26,084,868)
============ ============= ============ =============
</TABLE>
27
<PAGE>
Notes to Financial Statements - continued
Class C Shares
<TABLE>
<CAPTION>
Year Ended January 31, 1997 Year Ended January 31, 1996
------------------------------- -------------------------------
Shares Amount Shares Amount
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Shares sold 4,433,093 $ 23,275,757 4,854,733 $ 24,711,921
Shares issued to
shareholders in
reinvestment of
distributions 203,510 1,071,206 87,659 449,963
Shares reacquired (2,477,675) (12,968,265) (2,541,586) (12,938,624)
----------- ------------ ----------- ------------
Net increase 2,158,928 $ 11,378,698 2,400,806 $ 12,223,260
============ ============ ============ ============
</TABLE>
Class I Shares
<TABLE>
<CAPTION>
Year Ended January 31, 1997*
----------------------------
Shares Amount
--------- ----------
<S> <C> <C>
Shares sold 568,279 $3,034,610
Shares issued to
shareholders in
reinvestment of
distributions 4,076 21,807
--------- ----------
Net increase 572,355 $3,056,417
--------- ----------
</TABLE>
*For the period from the commencement of offering of Class I shares, January 1,
1997, to January 31, 1997.
(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,
1997 was $9,829.
(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, 1997 is set forth on the following page.
28
<PAGE>
Notes to Financial Statements - continued
<TABLE>
<CAPTION>
Beginning Ending
Share Share Dividend Ending
Affiliate Amount Amount Income Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ranger Industries, Inc. 266,768 266,768 $ -- $66,692
</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, 1997 the
Fund owned the following restricted securities (constituting 0.92% 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.
<TABLE>
<CAPTION>
Share/Par
Amount
Description Date of Acquisition (000 Omitted) Cost Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlantic Gulf Communities
Corp. 9/25/95 690 $ -- $ 3,363
Envirosource, Inc. 5/15/91 1,666 7,289 3,228
Merrill Lynch Mortgage
Investors, Inc., 8.142s,
2023 6/22/94 4,500 3,119,063 3,622,500
Renaissance Cosmetics, Inc. 8/08/96 5,475 5,458,385 5,584,500
=========
$9,213,591
=========
</TABLE>
29
<PAGE>
Independent Auditors' Report
To the Trustees of MFS Series Trust III and Shareholders of
MFS High Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS High Income Fund (a series of MFS Series
Trust III) as of January 31, 1997, the related statement of operations for the
year then ended, the statement of changes in net assets for the years ended
January 31, 1997 and 1996, and the financial highlights for each of the years in
the ten-year period ended January 31, 1997. These financial statements and
financial highlights are the responsibility of the Trust'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, 1997 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, 1997, 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 6, 1997
--------------------------------------------------------------------
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.
30
<PAGE>
The MFS Family of Funds[RegTM]
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 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
Stock
- --------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS (R) Capital Growth Fund
MFS (R) Emerging Growth Fund
MFS (R) Gold & Natural Resources Fund
MFS (R) Growth Opportunities Fund
MFS (R) Managed Sectors Fund
MFS (R) OTC Fund
MFS (R) Research Fund
MFS (R) Research Growth and Income Fund
MFS (R) Value Fund
Stock and Bond
- --------------------------------------------
MFS (R) Total Return Fund
MFS (R) Utilities Fund
Bond
- --------------------------------------------
MFS (R) Bond Fund
MFS (R) Government Mortgage Fund
MFS (R) Government Securities Fund
MFS (R) High Income Fund
MFS (R) Intermediate Income Fund
MFS (R) Strategic Income Fund
Limited Maturity Bond
- --------------------------------------------
MFS (R) Government Limited Maturity Fund
MFS (R) Limited Maturity Fund
MFS (R) Municipal Limited Maturity Fund
World
- --------------------------------------------
MFS (R)/Foreign & Colonial Emerging
Markets Equity Fund
MFS (R)/Foreign & Colonial International
Growth Fund
MFS (R)/Foreign & Colonial International
Growth and Income Fund
MFS (R) World Asset Allocation Fund(SM)
MFS (R) World Equity Fund
MFS (R) World Governments Fund
MFS (R) World Growth Fund
MFS (R) World Total Return Fund
National Tax-Free Bond
- --------------------------------------------
MFS (R) Municipal Bond Fund
MFS (R) Municipal High Income Fund
MFS (R) Municipal Income Fund
State Tax-Free Bond
- --------------------------------------------
Alabama, Arkansas, California, Florida,
Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee,
Virginia, West Virginia
Money Market
- --------------------------------------------
MFS (R) Cash Reserve Fund
MFS (R) Government Money Market Fund
MFS (R) Money Market Fund
32
<PAGE>
MFS (R) High Income Fund
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor; Former Chairman and Director (until
1991), Massachusetts Financial Services Company; 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 advisers)
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 general information, 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.
World Wide Web
www.mfs.com
Dalbar Logo
For the third year in a row, MFS earned a #1 ranking in the DALBAR, Inc.
Broker/Dealer Survey, Main Office Operations Service Quality Category. The firm
achieved a 3.48 overall score on a scale of 1 to 4 in the 1996 survey. A total
of 110 firms responded, offering input on the quality of service they received
from 29 mutual fund companies nationwide. The survey contained questions about
service quality in 15 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
33
<PAGE>
COVER
[MFS LOGO] Annual Report
INVESTMENT MANAGEMENT for Year Ended
January 31, 1997
MFS (R) High Income Fund
[Picture on Cover of Documents and glasses.]
Learning financial basics the easy way (see page 31)
<PAGE>
BACK COVER
MFS (R) High Income
Fund
500 Boylston Street
Boston, MA 02116-3741
DALBAR LOGO #1
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
[MFS LOGO]
INVESTMENT MANAGEMENT
We invented the mutual fund (SM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MHI-2-3/97/72M 16/216
