<PAGE>
[Logo] M F S(R)
INVESTMENT MANAGEMENT SEMIANNUAL REPORT
75 YEARS MAY 31, 1999
WE INVENTED THE MUTUAL FUND(R)
[graphic omitted]
MFS(R) CHARTER INCOME FUND
<PAGE>
MFS(R) CHARTER INCOME FUND
TRUSTEES SECRETARY
Richard B. Bailey* - Private Stephen E. Cavan*
Investor; Former Chairman and
Director (until 1991), MFS Investment ASSISTANT SECRETARY
Management(R) James R. Bordewick, Jr.*
Marshall N. Cohan - Private Investor CUSTODIAN
State Street Bank and Trust Company
Lawrence H. Cohn, M.D. - Chief of
Cardiac Surgery, Brigham and Women's INVESTOR INFORMATION
Hospital; Professor of Surgery, For MFS stock and bond market
Harvard Medical School outlooks, call toll free:
1-800-637-4458 anytime from a
The Hon. Sir J. David Gibbons, KBE - touch-tone telephone.
Chief Executive Officer, Edmund
Gibbons Ltd.; Chairman, Colonial For information on MFS mutual funds,
Insurance Company, Ltd. call your financial adviser or, for
an information kit, call toll free:
Abby M. O'Neill - Private Investor 1-800-637-2929 any business day from
9 a.m. to 5 p.m. Eastern time (or
Walter E. Robb, III - President and leave a message anytime).
Treasurer, Benchmark Advisors, Inc.
(corporate financial consultants); INVESTOR SERVICE
President, Benchmark Consulting MFS Service Center, Inc.
Group, Inc. (office services) P.O. Box 2281
Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive
Vice President, Director, and For general information, call toll
Secretary, MFS Investment Management free: 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - Chairman, Chief
Executive Officer, and Director, MFS For service to speech- or
Investment Management hearing-impaired, call toll free:
1-800-637-6576 any business day from
J. Dale Sherratt - President, Insight 9 a.m. to 5 p.m. Eastern time. (To
Resources Inc. (acquisition planning use this service, your phone must be
specialists) equipped with a Telecommunications
Device for the Deaf.)
Ward Smith - Former Chairman (until
1994), NACCO Industries (holding For share prices, account balances,
company) and exchanges, call toll free:
1-800-MFS-TALK (1-800-637-8255)
INVESTMENT ADVISER anytime from a touch-tone telephone.
Massachusetts Financial Services Company
500 Boylston Street WORLD WIDE WEB
Boston, MA 02116-3741 www.mfs.com
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
James T. Swanson*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders,
It has been almost two years since financial turmoil began to rock markets in
Asia, Russia, and Latin America. Even developed markets such as Europe and the
United States were not immune. In the U.S. equity market, for example, investors
focused on a narrow group of 50 of the largest-company growth stocks because
they seemed to offer less volatility in uncertain times. Fixed-income investors
also became more concerned about risk, moving money into U.S. Treasury
securities and out of corporate and municipal bonds and mortgage-backed
securities.
The narrowness of the market was just one of three broad issues that dominated
the U.S. equity market until recently. The other two were a slowdown in
corporate earnings growth and high valuations, with stocks of many companies
selling at extremely high prices relative to their earnings.
Although these have been challenging issues, we now see signs that we feel
demonstrate each one is changing for the better. Today, we believe the markets
are presenting more opportunities for investors to diversify, for our portfolio
managers to find good values, and for us to show the benefits of staying with
our long-term objectives and strategies. Investors seem to be regaining
confidence in a wider range of companies. Stocks of some small and mid-sized
companies, as well as some large industrial companies, have begun to perform
better in the past few months than they had for the previous year or so. These
companies appear to have benefited from early signs of stability in emerging
markets and a continuation of economic growth in the United States.
U.S. companies also have produced better earnings. Corporate earnings were, on
average, relatively flat in 1998. However, we expect earnings to grow 12% to 14%
this year because more companies have benefited from the strong economy and from
aggressive consolidation and cost-cutting measures they have taken over the past
several years.
Based on their earnings projections, our analysts estimate that the U.S. stock
market is still about 30% overvalued. While there has been some shift to a wider
group of stocks, many investors are still focusing on the large-company stocks.
As a result, most of the overvaluation is in the 50 largest stocks in the
Standard & Poor's 500 Composite Index (the S&P 500), a popular, unmanaged index
of common stock total return performance. That means about 450 stocks are
selling at more attractive prices, particularly given what we see as the
improved earnings outlooks for these and many small and mid-sized companies not
in the S&P 500. These companies also benefit from consolidation, cost cutting,
and global growth. Because they are smaller, they may be able to respond to
changes more quickly, and thus they have the potential to grow faster than the
big companies.
The fixed-income markets, meanwhile, seem to be approaching the level of
relative stability they enjoyed before the Asian turmoil. Some credit for this
stability goes to the Federal Reserve Board (the Fed), which has reassured
investors that it will act to prevent rapid economic growth from causing higher
inflation and reduced purchasing power. Also, once investors saw that the
overseas turmoil had little, if any, effect on the financial strength of most
domestic bond issuers, the major non-Treasury markets -- corporate, municipal,
and mortgage -- began to rebound. Our portfolio managers are now finding more
opportunities to buy bonds with relatively stable prices and attractive yields.
The past two years have challenged investors. However, we believe we are well
positioned for the current environment because our analysts and portfolio
managers continue to rely on MFS(R) Original Research(SM) to help evaluate the
long-term investment potential of each holding being considered for our
portfolios. Also, we believe our discipline of maintaining diversified
portfolios and of staying with our funds' clearly defined investment strategies
can help us offer investment products with the potential to sustain returns over
a variety of market cycles.
We appreciate your confidence and welcome any questions or comments you may
have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
June 17, 1999
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
Dear Shareholders,
For the six months ended May 31, 1999, the Fund provided a total return of
- -1.78%, including the reinvestment of distributions but excluding the effects of
any sales charges. During the same period, the average multisector income fund
tracked by Lipper Analytical Services, Inc., an independent firm that reports
mutual fund performance, returned 0.60%.
The Fund's returns also compare to a -4.55% return for the J.P. Morgan Non-
Dollar Government Bond Index (the Morgan Index) and to a -1.85% return for the
Lehman Brothers Government Bond Index (the Lehman Index). The Morgan Index is an
unmanaged index of actively traded government bonds issued by 12 countries
(excluding the United States) with remaining maturities of at least one year.
The Lehman Index is an unmanaged index of all publicly issued debt obligations
of the U.S. Treasury, U.S. government agencies, quasi-federal corporations, and
corporate debt guaranteed by the U.S. government.
The Fund seeks to generate steady income through investments in U.S. government
securities, U.S. high-yield corporate bonds, and international government debt.
The Fund generally seeks bonds in the higher credit range in each of the three
segments.
The Fund's Treasury position has underperformed over the past six months because
of concerns of rising inflation in the United States, which have produced higher
interest rates and lower prices for Treasuries. (Principal value and interest on
Treasury securities are guaranteed by the U.S. government if held to maturity.)
Also, this year's apparent stabilization of Asian, Latin American, and other
emerging markets has made them more attractive to investors, putting additional
pressure on Treasury bond prices.
The U.S. high-yield sector, meanwhile, has been one of the best-performing
fixed-income asset classes. Companies issuing high-yield bonds have benefited
from the strong economy, which has boosted corporate earnings and given
companies the capital they need to meet debt payments. There also have been
several takeovers in the high-yield market, particularly in the media and
telecommunications sectors, with investment-grade companies acquiring lower-
rated ones. These takeovers have resulted in upgrades of the weaker companies'
bond ratings and lowered their risk profile.
Finally, the Fund's international government debt position has underperformed
similar securities in the United States. Concerns about inflation in Europe have
caused an increase in yields and a decrease in European government bond prices.
However, the Fund's positions in commodity-exporting countries such as
Australia, New Zealand, and Canada have performed well this year because renewed
global growth has increased demand for commodities.
Respectfully,
/s/ James T. Swanson
James T. Swanson
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and are
current only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
The portfolio is actively managed, and holdings are subject to change.
It is not possible to invest directly in an index.
<PAGE>
PERFORMANCE SUMMARY
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results for the applicable time periods. Investment results
reflect the percentage change in net asset value, including reinvestment of
dividends. (See Notes to Performance Summary for more information.)
AVERAGE CUMULATIVE TOTAL RATES OF RETURN THROUGH MAY 31, 1999
CLASS J
6 Months 10 Years/Life*
- -----------------------------------------------------------------------------
Cumulative Total Return -1.78% +0.67%
- -----------------------------------------------------------------------------
* For the period from the commencement of the Fund's investment operations,
July 6, 1998, through May 31, 1999.
NOTES TO PERFORMANCE SUMMARY
INVESTMENT RETURNS 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.
Investments in foreign and emerging market securities may provide superior
returns but also involve greater risk than U.S. investments. Investments in
foreign and emerging market securities may be favorably or unfavorably affected
by changes in interest rates and currency exchange rates, market conditions, and
the economic and political conditions of the countries where investments are
made. These risks may increase share price volatility. See the prospectus for
details.
<PAGE>
PORTFOLIO OF INVESTMENTS (Unaudited) - May 31, 1999
Bonds - 98.6%
- ----------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ----------------------------------------------------------------------------
U.S. Bonds - 65.5%
Aerospace - 1.6%
BE Aerospace, Inc., 8s, 2008 $ 100 $ 96,500
- ----------------------------------------------------------------------------
Automotive - 3.3%
Hayes Wheels International, Inc., 9.125s, 2007 $ 200 $ 202,000
- ----------------------------------------------------------------------------
Broadcasting - 2.6%
Granite Broadcasting Corp., 10.375s, 2005 $ 150 $ 156,000
- ----------------------------------------------------------------------------
Chemicals - 2.6%
NL Industries, Inc., 11.75s, 2003 $ 150 $ 159,000
- ----------------------------------------------------------------------------
Consumer Goods and Services - 2.0%
Revlon Consumer Products Corp., 8.125s, 2006 $ 125 $ 124,375
- ----------------------------------------------------------------------------
Containers - 3.2%
Gaylord Container Corp., 9.75s, 2007 $ 200 $ 194,500
- ----------------------------------------------------------------------------
Financial Institutions - 1.6%
Natexis Ambs Co. LLC, 8.44s, 2049 $ 100 $ 98,250
- ----------------------------------------------------------------------------
Media - 2.2%
CSC Holdings, Inc., 9.25s, 2005 $ 125 $ 133,125
- ----------------------------------------------------------------------------
Telecommunications - 10.7%
Century Communications Corp., 0s, 2008 $ 375 $ 169,687
Lenfest Communications, Inc., 10.5s, 2006 125 147,500
Level 3 Communications, Inc., 9.125s, 2008 175 170,625
NTL, Inc., 0s to 2003, 12.375s to 2008## 250 167,500
----------
$ 655,312
- ----------------------------------------------------------------------------
U.S. Treasury Obligations - 35.7%
U.S. Treasury Bonds, 5.25s, 2028 $ 250 $ 226,328
U.S. Treasury Bonds, 9.875s, 2015 1,053 1,460,711
U.S. Treasury Notes, 5.5s, 2008 500 492,185
----------
$2,179,224
- ----------------------------------------------------------------------------
Total U.S. Bonds $3,998,286
- ----------------------------------------------------------------------------
Foreign Bonds - 33.1%
Australia - 3.5%
Commonwealth of Australia, 6.75s, 2006 AUD 315 $ 215,642
- ----------------------------------------------------------------------------
Brazil - 2.2%
Federal Republic of Brazil, 11.625s, 2004 $ 150 $ 136,125
- ----------------------------------------------------------------------------
Canada - 4.2%
Repap New Brunswick, Inc., 9s, 2004
(Forest and Paper Products) $ 175 $ 166,250
Government of Canada, 5s, 2004 CAD 134 89,333
----------
$ 255,583
- ----------------------------------------------------------------------------
Denmark - 1.1%
Kingdom of Denmark, 7s, 2007 DKK 387 $ 64,058
- ----------------------------------------------------------------------------
Greece - 2.7%
Hellenic Republic, 5.75s, 2008 EUR 39 $ 43,621
Republic of Greece, 8.7s, 2005 GRD 4,000 14,473
Republic of Greece, 8.9s, 2003 30,000 104,695
----------
$ 162,789
- ----------------------------------------------------------------------------
Malaysia - 1.8%
Tenaga Nasional Berhad, 7.5s, 2096 (Utilities)+ $ 150 $ 110,285
- ----------------------------------------------------------------------------
Mexico - 2.1%
Groupo Minero Mexico S.A. De C.V., 8.25s, 2008
(Metals and Minerals) $ 150 $ 126,000
- ----------------------------------------------------------------------------
New Zealand - 6.5%
Government of New Zealand, 7s, 2009 NZD 280 $ 157,721
Government of New Zealand, 8s, 2004 210 122,341
Government of New Zealand, 8s, 2006 200 118,657
----------
$ 398,719
- ----------------------------------------------------------------------------
Poland - 2.7%
Republic of Poland, 4s, 2024 $ 250 $ 165,625
- ----------------------------------------------------------------------------
Sweden - 2.0%
Kingdom of Sweden, 5s, 2004 SEK 500 $ 60,769
Kingdom of Sweden, 9s, 2009 400 62,556
----------
$ 123,325
- ----------------------------------------------------------------------------
United Kingdom - 4.3%
United Kingdom Treasury, 6.75s, 2004 GBP 151 $ 261,859
- ----------------------------------------------------------------------------
Total Foreign Bonds $2,020,010
- ----------------------------------------------------------------------------
Total Bonds (Identified Cost, $6,216,172) $6,018,296
- ----------------------------------------------------------------------------
Warrants
- ----------------------------------------------------------------------------
SHARES
- ----------------------------------------------------------------------------
Republic of Argentina, Expire 09/19/2027*
(Identified Cost, $2,400) 100 $ 750
- ----------------------------------------------------------------------------
Total Investments (Identified Cost, $6,218,572) $6,019,046
Other Assets, Less Liabilities - 1.4% 84,578
- ----------------------------------------------------------------------------
Net Assets - 100.0% $6,103,624
- ----------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
+ Restricted security.
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. dollar. A list of abbreviations is shown below.
AUD = Australian Dollars GRD = Greek Drachma
CAD = Canadian Dollars JPY = Japanese Yen
DKK = Danish Kroner NZD = New Zealand Dollars
EUR = Euro SEK = Swedish Kronor
GBP = British Pounds
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Assets and Liabilities (Unaudited)
- ---------------------------------------------------------------------------------------
MAY 31, 1999
- ---------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $6,218,572) $6,019,046
Foreign currency, at value (identified cost, $12,599) 12,450
Net receivable for forward foreign currency exchange contracts subject to
master netting agreements 15,009
Receivable for Fund shares sold 72,381
Interest receivable 81,031
Receivable from investment adviser 32
----------
Total assets $6,199,949
----------
Liabilities:
Payable to custodian $ 78,286
Net payable for forward foreign currency exchange contracts to sell 4,141
Net payable for forward foreign currency exchange contracts to purchase 7,074
Payable to affiliates -
Management fee 597
Distribution and service fee 6,181
Accrued expenses and other liabilities 46
----------
Total liabilities $ 96,325
----------
Net assets $6,103,624
==========
Net assets consist of:
Paid-in capital $6,140,131
Unrealized depreciation on investments and translation of asset and
liabilities in foreign currencies (196,167)
Accumulated undistributed net realized gain on investments and foreign
currency transactions 43,298
Accumulated undistributed net investment income 116,362
----------
Total $6,103,624
==========
Shares of beneficial interest outstanding 613,940
=======
Net asset value and redemption price per share (net assets of
$6,103,624/613,940 shares of beneficial interest
outstanding) $ 9.94
======
Offering price per share (100/95.25 of net asset value) $10.44
======
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations (Unaudited)
- ------------------------------------------------------------------------------
SIX MONTHS ENDED MAY 31, 1999
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 206,129
---------
Total investment income $ 206,129
---------
Expenses -
Management fee $ 25,710
Trustees' compensation 14,500
Shareholder servicing agent fee 2,853
Distribution and service fee 9,996
Administrative fee 298
Custodian fee 4,720
Printing 5,631
Auditing fees 6,696
Postage 449
Legal fees 4,990
Registration fees 13,000
Miscellaneous 1,535
---------
Total expenses $ 90,378
Fees paid indirectly (917)
Reduction of expenses by investment adviser (13,954)
---------
Net expenses $ 75,507
---------
Net investment income $ 130,622
---------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 41,730
Written option transactions 3,592
Foreign currency transactions (671)
---------
Net realized gain on investments and foreign
currency transactions $ 44,651
---------
Change in unrealized appreciation (depreciation) -
Investments $(294,894)
Written options (1,775)
Translation of assets and liabilities in foreign currencies 18,719
---------
Net unrealized loss on investments and foreign
currency translation $(277,950)
---------
Net realized and unrealized loss on investments and
foreign currency $(233,299)
---------
Decrease in net assets from operations $(102,677)
=========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
MAY 31, 1999 NOVEMBER 30, 1998*
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets:
From operations -
Net investment income $ 130,622 $ 79,567
Net realized gain (loss) on investments and foreign
currency transactions 44,651 (26,135)
Net unrealized gain (loss) on investments and foreign
currency translation (277,950) 81,783
---------- ----------
Increase (decrease) in net assets from operations $ (102,677) $ 135,215
---------- ----------
Distributions declared to shareholders -
From net investment income $ (69,045) --
---------- ----------
Net increase in net assets from Fund share transactions $ 940,387 $5,199,744
---------- ----------
Total increase in net assets $ 768,665 $5,334,959
Net assets:
At beginning of period 5,334,959 --
---------- ----------
At end of period (including undistributed net investment
income of $116,362 and $54,785, respectively) $6,103,624 $5,334,959
========== ==========
* For the period from the commencement of the Fund's investment operations, July 6, 1998, through
November 30, 1998.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ----------------------------------------------------------------------------------------------------------
PERIOD ENDED
-------------------------------------
MAY 31, 1999 NOVEMBER 30, 1998*
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
CLASS J
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.25 $10.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.23 $ 0.17
Net realized and unrealized gain (loss) on investments and foreign
currency transactions (0.41) 0.08
------ ------
Total from investment operations $(0.18) $ 0.25
------ ------
Less distributions declared to shareholders -
From net investment income $(0.13) $ --
------ ------
Net asset value - end of period $ 9.94 $10.25
====== ======
Total return(+) (1.78)%++ 2.50%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.68%+ 2.98%+
Net investment income 4.51%+ 4.23%+
Portfolio turnover 136% 92%
Net assets at end of period (000 omitted) $6,104 $5,335
* For the period from the commencement of the Fund's investment operations, July 6, 1998, through November 30, 1998.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(+) Total returns do not include the applicable sales charge. If the charge had been included, the results would have been
lower.
(S) Subject to reimbursement, the investment adviser has agreed to bear the Fund's "start up costs," which are defined to
include legal and other costs associated with initial registration and preparation of the Fund's registration
statements and prospectuses, and any registration fees in connection therewith during the period ended November 30,
1998. Subject to reimbursement, the Fund's investment adviser agreed to bear certain of the Fund's other expenses
beginning April 13, 1999. If these fees had been incurred by the Fund, the net investment income per share and the
ratios would have been:
Net investment income $ 0.20 $ 0.03
Ratios (to average net assets):
Expenses## 3.17%+ 6.60%+
Net investment income 4.02%+ 0.61%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS Charter Income Fund (the Fund) is a non-diversified series of MFS Series
Trust II (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. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, forward contracts, and swap
agreements, 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. Options listed on commodities exchanges are reported at market
value using closing settlement prices. Over-the-counter options on securities
are valued by brokers. Over-the-counter currency options are valued through the
use of a pricing model which takes into account foreign currency exchange spot
and forward rates, implied volatility, and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Written Options - The Fund may write call or put options in exchange for a
premium. The premium is initially recorded as a liability which is subsequently
adjusted to the current value of the options contract. When a written option
expires, the Fund realizes a gain equal to the amount of the premium received.
When a written call option is exercised or closed, the premium received is
offset against the proceeds to determine the realized gain or loss. When a
written put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as part of an income producing strategy reflecting the view of the
Fund's management on the direction of interest rates.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Fund may enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Fund may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. The Fund may also use contracts in a manner intended to protect
foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains or
losses on foreign currency transactions.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All discount is
accreted for financial statement and tax reporting purposes as required by
federal income tax regulations. Interest payments received in additional
securities are recorded on the ex-interest date in an amount equal to the value
of the security on such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an arrangement
that measures 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.
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 distributions from paid-in
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 net realized gains.
(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 0.90% of
the Fund's average daily net assets.
The Fund has a temporary expense reimbursement agreement whereby MFS has
voluntarily agreed to pay all of the Fund's operating expenses, exclusive of
management, distribution, and service fees ("other expenses"), beginning April
13, 1999. The Fund in turn will pay MFS an expense reimbursement fee not greater
than 0.75% of average daily net assets. To the extent that the expense
reimbursement fee exceeds the Fund's actual expenses, the excess will be applied
to amounts paid by MFS in prior years. At May 31, 1999, the aggregate
unreimbursed expenses owed to MFS by the Fund for this arrangement amounted to
$13,954. The obligation of MFS to bear the Fund's other expenses and the Fund's
obligation to pay the expense reimbursement fee to MFS terminates on the earlier
of the date on which the amount of such reimbursement payments by the Fund equal
the prior payment of such reimbursable expenses by MFS or June 30, 2000.
Subject to termination or revision at the sole discretion of MFS, MFS has agreed
to bear the Fund's "start up costs," which are defined to include legal and
other costs associated with initial registration and preparation of the Fund's
registration statements and prospectuses, and any registration fees in
connection therewith. The payments made by MFS of the Fund's start up costs are
reimbursable by the Fund but only if and so long as the Fund's "other expenses,"
which are defined to include all expenses of the Fund (after taking into effect
any compensating balances and offset arrangements) except for management fees,
distribution and service fees, taxes, extraordinary expenses, and brokerage and
transaction costs, do not exceed 0.60% per annum of the average net assets of
the Fund (the "Maximum Percentage"). The Fund's obligation to pay the
reimbursement fee to MFS terminates on the earlier of the date on which payments
made by the Fund equal the prior payment of such reimbursable expenses by MFS or
June 30, 2001.
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 officers and Trustees of the
Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD), and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $500 for the period ended May
31, 1999.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee at
the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - The Trustees have adopted a distribution plan for Class J pursuant
to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD a distribution
fee of up to 0.10% per annum and a service fee of up to 0.25% per annum of the
Fund's average daily net assets attributable to Class J shares. Class J shares
are available for distribution through Merrill Lynch Japan Securities Co.
("MLJ") and its network of financial intermediaries. MLJ also serves as the
Fund's Agent Securities Company in Japan, and in that capacity represents the
Fund before Japanese regulatory authorities. MFD will pay to MLJ all of the
service fee and all of the distribution fee attributable to Class J shares. A
portion of the distribution fee equal to 0.10% per annum of the Fund's average
daily net assets atrributable to Class J shares is paid to MLJ to cover its
services as the Fund's Agent Securities Company. Fees incurred under the
distribution plan during the period ended May 31, 1999, were 0.35% of average
daily net assets attributable to Class J shares on an annualized basis.
Certain Class J shares are subject to a contingent deferred sales charge in the
event of a shareholder redemption within 12 months following purchase. MFD
receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the period ended May 31, 1999, were $0 for Class J
shares.
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
0.10%. Prior to April 1, 1999, the fee was calculated as a percentage of the
Fund's average daily net assets at an effective annual rate of 0.1125%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
PURCHASES SALES
- -------------------------------------------------------------------------------
U.S. government securities $1,723,601 $1,016,250
---------- ----------
Investments (non-U.S. government securities) $7,072,556 $6,267,513
---------- ----------
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the Fund, as computed on a federal income tax basis, are as
follows:
Aggregate cost $6,219,182
----------
Gross unrealized depreciation $ (212,882)
----------
Gross unrealized appreciation 12,746
----------
Net unrealized depreciation $ (200,136)
==========
(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. Transactions in
Fund shares were as follows:
Class J Shares
PERIOD ENDED PERIOD ENDED
MAY 31, 1999 NOVEMBER 30, 1999*
----------------- --------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 90,590 $912,667 520,601 $5,199,744
Shares issued to shareholders in
reinvestment of distributions 5,509 55,471 -- --
Shares reacquired (2,760) (27,751) -- --
------ -------- ------- ----------
Net increase 93,339 $940,387 520,601 $5,199,744
====== ======== ======= ==========
* For the period from the commencement of the Fund's investment operations,
July 6, 1998, through November 30, 1998.
(6) Line of Credit
The Fund and other affiliated funds participate in a $720 million unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
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 May 31, 1999, was $0. The Fund had no borrowings during the period.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include written options, forward foreign currency exchange
contracts, swap agreements, and futures contracts. The notional or contractual
amounts of these instruments represent the investment the Fund has in particular
classes of financial instruments and does not necessarily represent the amounts
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered.
<TABLE>
<CAPTION>
Written Option Transactions
1999 CALLS 1999 PUTS
------------------------------------ ------------------------------------
PRINCIPAL AMOUNTS PRINCIPAL AMOUNTS
OF CONTRACTS OF CONTRACTS
(000 OMITTED) PREMIUMS (000 OMITTED) PREMIUMS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING, BEGINNING OF PERIOD -
Japanese Yen 19,621 $ 2,265 -- $ --
OPTIONS WRITTEN -
Australian Dollars 116 1,158 -- --
Euro 224 2,098 -- --
Euro/Great British Pounds 102 1,176 98 540
Japanese Yen 19,621 3,059 22,296 2,488
OPTIONS TERMINATED IN CLOSING TRANSACTIONS -
Australian Dollars (116) (1,158) -- --
Euro (224) (2,098) -- --
Euro/Great British Pounds (102) (1,176) (98) (540)
Japanese Yen (19,621) (2,265) -- --
OPTIONS EXPIRED -
Japanese Yen (19,621) (3,059) (22,296) (2,488)
------------ ------------
OUTSTANDING, END OF PERIOD $ -- $ --
============ ============
<CAPTION>
Forward Foreign Currency Exchange Contracts
NET
UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 06/16/99 AUD 556,077 $ 357,933 $ 362,902 $ (4,969)
06/16/99 DKK 463,131 68,136 65,034 3,102
06/16/99 JPY 17,689,575 144,804 146,710 (1,906)
06/16/99 NZD 743,206 397,823 398,191 (368)
---------- ---------- -------------
$ 968,696 $ 972,837 $ (4,141)
========== ========== =============
Purchases 06/16/99 AUD 379,678 $ 245,287 $ 247,781 $ 2,494
06/16/99 GBP 309,763 503,711 496,156 (7,555)
06/16/99 JPY 9,686,861 82,352 80,339 (2,013)
---------- ---------- -------------
$ 831,350 $ 824,276 $ (7,074)
========== ========== =============
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net payable of $1,785 with Deutsche Bank and a net
receivable of $4,393 with First Boston and $12,401 with Morgan Stanley at May
31, 1999.
At May 31, 1999, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
(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 May 31, 1999, the
Fund owned the following restricted securities (constituting 1.8% 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 furnished
by dealers or by a pricing service, or if not available, are valued at fair
value as determined in good faith by the Trustees.
<TABLE>
<CAPTION>
DESCRIPTION DATE OF ACQUISITION PAR AMOUNT COST VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tenaga Nasional Berhard 7.5s, 2096 April 14, 1999 $150,000 $114,765 $110,285
--------
</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. Please read it carefully before investing
or sending money.
<PAGE>
MFS(R) CHARTER INCOME FUND
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 BOYLSTON STREET
BOSTON, MA 02116-3741
(C)1999 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MCIJ-3 7/99 700 034/234/334/834
