<PAGE>
[Logo] M F S(R)
INVESTMENT MANAGEMENT ANNUAL REPORT
WE INVENTED THE MUTUAL FUND(R) NOVEMBER 30, 1999
[graphic omitted]
MFS(R) CHARTER INCOME FUND
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 5
Portfolio of Investments .................................................. 6
Financial Statements ...................................................... 9
Notes to Financial Statements ............................................. 13
Independent Auditors' Report .............................................. 18
MFS' Year 2000 Readiness Disclosure ....................................... 20
Trustees and Officers ..................................................... 21
MFS ORIGINAL RESEARCH(R)
RESEARCH HAS BEEN CENTRAL TO INVESTMENT MANAGEMENT AT MFS
SINCE 1932, WHEN WE CREATED ONE OF THE FIRST IN-HOUSE
RESEARCH DEPARTMENTS IN THE MUTUAL FUND (SM)
INDUSTRY. ORIGINAL RESEARCH(SM) AT MFS IS MORE ORIGINAL RESEARCH
THAN JUST CRUNCHING NUMBERS AND CREATING
ECONOMIC MODELS: IT'S GETTING TO KNOW MFS
EACH SECURITY AND EACH COMPANY PERSONALLY.
MAKES A DIFFERENCE
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders,
One could easily argue that the Internet represents the greatest technological
development most of us may see in our lifetimes. There is no disputing that this
new communication medium is changing forever the way we work, play, and shop.
One might also argue that investing in this new technology represents the
investment opportunity of a lifetime. The question for any investor is whether
and how to take advantage of it.
The popular press, it seems, would have us believe that by surfing the Web, we
can learn everything we need to know about investing. Indeed, there is no doubt
that Internet-delivered information and brokerage services enable individual
investors to be well-informed and to trade at bargain prices. But we believe the
numbers and facts argue that, for most of us, mutual funds purchased through a
financial professional will continue to be one of the best products for
long-term investing in this new millennium.
According to a survey by the Investment Company Institute, a national
association of American investment companies, 44% of American households own
stock or bond mutual funds, while only 25.5% own individual stocks.(1) Of course
that doesn't tell us how well they did owning those funds or stocks, but another
statistic gives us a clue. In the third quarter of 1999, during a period of
volatility in the greatest bull market in history, a quarter of the 7,500 stocks
tracked by Morningstar, a popular rating service, lost more than 20% of their
value. But during the same period, less than 1% of the mutual funds tracked by
Morningstar -- 6 out of 10,000 funds -- were down by a similar amount.(2) So,
with all things being equal, an investor's chance of picking one of those losing
stocks was about 25 times greater than his or her chance of picking an equally
losing fund.
The numbers also show that a majority of Americans seek professional advice when
buying mutual funds. Outside of employer-sponsored retirement plans,
approximately 68% of fund shareholders state that their primary method of
purchasing shares is through a financial professional.(1)
Why do we at MFS(R) believe that mutual funds plus professional advice will
continue to define the best course of action for many investors? Let's look at
some of the characteristics of a successful long-term investment approach:
o HAVING A PLAN AND STICKING TO IT: Our experience is that successful
investors -- those whose lives are enriched by the fruits of their investing
-- share two characteristics. They have a plan for reaching their monetary
goals, and they stick with that plan through up markets and down ones. And
for many investors, working with a financial professional may be the best
way to develop a plan. Although the Internet abounds with calculators for
developing all sorts of investment plans, none has your broker or
consultant's high level of experience and an understanding of your unique
situation. And no calculator can counsel you during a down market, when you
may be tempted to abandon your goals and your plan.
o DIVERSIFICATION: Few investors can afford to own a large number of holdings,
so poor performance of one company can potentially drag down their entire
portfolio. This is especially true when investing in volatile new areas such
as the Internet. On the other hand, a diversified mutual fund that owns
dozens or even hundreds of holdings is better positioned to survive a
disappointment in one or several investments.
o GOOD IN A DOWN MARKET: As we enter the tenth year of the greatest bull
market in history, it's easy to forget that market downturns are an almost
inevitable part of investing. Few mutual funds, of course, are going to be
up when the overall market is down. But as the numbers above from the third
quarter of 1999 demonstrate, mutual funds may be less likely to suffer the
extreme downturns experienced by a large number of individual holdings when
the market heads south.
o MFS ORIGINAL RESEARCH(R): The Internet is one of the greatest research tools
ever invented, but it's still not the same as being eyeball to eyeball with
the management of a company and discussing their plans for their firm's
future.
o GOOD PERFORMANCE AT AN ACCEPTABLE LEVEL OF RISK: Investing in individual
stocks or bonds does indeed offer the potential of exhilarating performance
that few mutual funds even attempt. The downside is that the most exciting
investments are also likely to be the ones that give you sleepless nights.
The diversification and professional management of mutual funds help make
them inherently less risky than individual stock picking, and funds are
available in a wide range of risk profiles.
We believe that now, more than ever, mutual funds sold by an investment
professional may offer many investors the best way to participate in whatever
investment opportunities the new millennium may bring. The combination of
professional portfolio management and professional advice recognizes the key
reason that investors give us their money: because they don't want to make a
hobby or a second profession out of investing; they simply want their money to
work for them so they have a better likelihood of realizing their dreams.
As always, we appreciate your confidence in MFS 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)
December 15, 1999
(1) Source: Investment Company Institute.
(2) Source: Morningstar CEO Don Phillips' keynote address at The Baltimore Sun's
Dollars and Sense Conference, 10/99. In the period 7/1/99 through 9/30/99,
of the 7,500 stocks tracked by Morningstar, 1,865 lost 20% or more; of the
10,000 mutual funds tracked by Morningstar, six lost 20% or more. Mutual
fund results are at net asset value; if sales charges had been reflected,
results would have been lower.
Investments in mutual funds will fluctuate and may be worth more or less upon
redemption.
The opinions expressed in this letter are those of Jeffrey L. Shames, and no
forecasts can be guaranteed.
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
Dear Shareholders,
For the 12 months ended November 30, 1999, the Fund provided a total return of
- -3.38%. This return assumes the reinvestment of any distributions but excludes
the effects of any sales charges.
During the period, the average multisector income fund tracked by Lipper
Analytical Services, Inc., an independent firm that reports mutual fund
performance, returned 1.24%. The Fund's return also compares to a -3.44% return
for the J.P. Morgan Non-Dollar Government Bond Index, an unmanaged index of
actively traded government bonds issued by 12 countries, excluding the United
States, with remaining maturities of at least one year, and to a -1.38% return
for the Lehman Brothers Government Bond Index, an unmanaged index of U.S.
Treasury and government-agency obligations.
The Fund benefited from certain high-yield corporate holdings, particularly in
the telecommunications and media industries, as well as from investments in
mortgages and in non-European monetary union (EMU) countries. However, the
Fund's U.S. government holdings did not fare well as the Federal Reserve Board
repeatedly raised interest rates to slow down U.S. economic growth.
Emerging markets performed extremely well this year. Their strong recovery
during the period was largely due to worldwide economic growth, stabilization in
Asia, and more demand for emerging market country exports. Another factor
contributing to the strength of emerging markets was a significant rise in oil
prices, which helped oil-exporting countries like Mexico, Argentina, and
Indonesia.
The high-yield corporate bond sector also performed well, benefiting from the
surprising strength of the U.S. economy. Low inflation and low supply of these
bonds also drove their prices up and has helped this market outperform other
bond markets. In the high-yield sector, we found some of our best investments in
communications and media -- industries that have been bolstered by the strength
of the economy and by discretionary spending. Some of our strongest-performing
holdings included Level 3 Communications, Granite Broadcasting, and Chancellor
Media Corporation.
In terms of international investments, what has worked well was our strong
weightings in New Zealand and non-EMU countries such as the United Kingdom,
Denmark, Sweden, and Greece. As an export economy, New Zealand benefited from
rising commodity prices throughout the world and an increased demand for
exports. Our investments in non-EMU countries did well because these countries
are expected to eventually join EMU. To do so, they've been working to control
inflation and bring their interest rates in line with current EMU members. This
brought their bond yields down and prices up.
Looking ahead, we believe interest rates will decline over the long run;
however, we think that in the next six months we'll get bad inflation numbers
that could hurt the bond markets temporarily. As a result, we won't position the
Fund's portfolio for longer-term rates for at least another quarter. And, we'll
likely rearrange the Fund's U.S. government portfolio, structuring it for
flattening trade and a short-term rise in interest rates. With respect to
corporate bonds, we're still very positive on the high-yield sector,
particularly the telecommunications industry, given the consolidation and many
general improvement stories there. Finally, in Europe, we plan to favor non-EMU
countries, given their recent favorable performance.
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.
<PAGE>
PORTFOLIO MANAGER'S PROFILE
James T. Swanson is Senior Vice President of MFS Investment Management(R). He is
portfolio manager of MFS(R) Strategic Income Fund, MFS(R) Global Governments
Fund, MFS(R) Charter Income Fund, MFS(R) Global Governments Series (part of
MFS(R) Variable Insurance Trust(SM)), the Strategic Income Series offered
through MFS(R)/Sun Life annuity products, and two closed-end funds, MFS(R)
Charter Income Trust and MFS(R) Multimarket Income Trust.
Mr. Swanson joined MFS in 1985 as Vice President and was named Senior Vice
President in 1989.
He is a graduate of Colgate University and the Harvard University Graduate
School of Business Administration. Mr. Swanson is a Chartered Financial
Analyst.
All portfolio managers at MFS Investment Management(R) are supported by an
investment staff of over 100 professionals utilizing MFS Original Research(R), a
global, company-oriented, bottom-up process of selecting securities.
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. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial consultant, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
PERFORMANCE SUMMARY
The following information illustrates the historical performance of the Fund in
comparison to various market indicators. Performance results reflect the
percentage change in net asset value, including reinvestment of dividends.
Benchmark comparisons are unmanaged and do not reflect any fees or expenses.
(See Notes to Performance Summary.) It is not possible to invest directly in an
index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from the commencement of the Fund's investment operations,
July 6, 1998, through November 30, 1999. Index information is from July 1,
1998.)
J.P. Morgan
Non-Dollar Lehman Brothers
MFS Charter Income Government Government
Fund - Class J Bond Index Bond Index
- --------------------------------------------------------------------------------
7/98 $9,525 $10,000 $10,000
11/98 9,763 11,210 10,521
11/99 9,433 10,825 10,376
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN THROUGH NOVEMBER 30, 1999
CLASS J
1 Year Life*
- --------------------------------------------------------------------------------
Cumulative Total Return Excluding Sales Charge -3.38% -0.97%
- --------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge -3.38% -0.69%
- --------------------------------------------------------------------------------
Average Annual Total Return Including Sales Charge -7.97% -4.08%
- --------------------------------------------------------------------------------
COMPARATIVE INDICES
1 Year Life*
- --------------------------------------------------------------------------------
Average multisector income fund+(+) +1.24% +0.04%
- --------------------------------------------------------------------------------
J.P. Morgan Non-Dollar Government Bond Index#(+) -3.44% +5.75%
- --------------------------------------------------------------------------------
Lehman Brothers Government Bond Index#(+) -1.38% +2.64%
- --------------------------------------------------------------------------------
* For the period from the commencement of the Fund's investment operations,
July 6, 1998, through November 30, 1999.
Index information is from July 1, 1998.
+ Source: Lipper Analytical Services, Inc.
(+) Average annual rates of return.
# Source: Standard & Poor's Micropal, Inc.
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 - November 30, 1999
Bonds - 90.8%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- --------------------------------------------------------------------------------
U.S. Bonds - 60.2%
Aerospace - 1.1%
BE Aerospace, Inc., 8s, 2008 $ 100 $ 82,500
- --------------------------------------------------------------------------------
Automotive - 2.6%
Hayes Wheels International, Inc., 9.125s, 2007 $ 200 $ 193,500
- --------------------------------------------------------------------------------
Broadcasting - 2.0%
Granite Broadcasting Corp., 10.375s, 2005 $ 150 $ 152,250
- --------------------------------------------------------------------------------
Chemicals - 2.1%
NL Industries, Inc., 11.75s, 2003 $ 150 $ 154,500
- --------------------------------------------------------------------------------
Computer Software - Systems - 2.7%
Psinet Inc., 11s, 2009 $ 200 $ 204,500
- --------------------------------------------------------------------------------
Consumer Goods and Services - 1.3%
Revlon Consumer Products Corp., 8.125s, 2006 $ 125 $ 97,813
- --------------------------------------------------------------------------------
Containers - 2.6%
Gaylord Container Corp., 9.75s, 2007 $ 200 $ 190,500
- --------------------------------------------------------------------------------
Federal National Mortgage Association - 6.7%
FNMA, 6.5s, 2004 $ 500 $ 498,280
- --------------------------------------------------------------------------------
Financial Institutions - 1.3%
Natexis Ambs Co. LLC, 8.44s, 2049## $ 100 $ 94,650
- --------------------------------------------------------------------------------
Government National Mortgage Association - 6.3%
GNMA, 6.5s, 2029 $ 496 $ 471,373
- --------------------------------------------------------------------------------
Media - 5.7%
Chancellor Media Corp., 8.125s, 2007 $ 300 $ 297,000
CSC Holdings, Inc., 9.25s, 2005 125 128,125
-----------
$ 425,125
- --------------------------------------------------------------------------------
Telecommunications - 6.9%
Crown Castle International Corp., 9s, 2011 $ 175 $ 171,062
Level 3 Communications, Inc., 9.125s, 2008 175 165,375
NTL Communications Corp., 0s to 2003,
12.375s, 2008 250 173,750
-----------
$ 510,187
- --------------------------------------------------------------------------------
U.S. Treasury Obligations - 18.9%
U.S. Treasury Bonds, 9.875s, 2015 $ 53 $ 69,687
U.S. Treasury Bonds, 5.25s, 2028 250 211,015
U.S. Treasury Notes, 8s, 2001 250 256,952
U.S. Treasury Notes, 5.875s, 2004 400 396,124
U.S. Treasury Notes, 5.5s, 2008 500 476,095
-----------
$1,409,873
- --------------------------------------------------------------------------------
Total U.S. Bonds $4,485,051
- --------------------------------------------------------------------------------
Foreign Bonds - 30.6%
Australia - 5.9%
Commonwealth of Australia, 7.5s, 2005 AUD 655 $ 436,159
- --------------------------------------------------------------------------------
Canada - 3.0%
Government of Canada, 5s, 2004 CAD 349 $ 226,523
- --------------------------------------------------------------------------------
Denmark - 1.4%
Kingdom of Denmark, 7s, 2007 DKK 717 $ 106,850
- --------------------------------------------------------------------------------
France - 0.9%
Republic of France, 4s, 2009 EUR 74 $ 67,540
- --------------------------------------------------------------------------------
Germany - 2.1%
Allgemeine Hypothekenbank AG, 5s, 2009
(Banks & Credit Cos.) EUR 30 $ 29,119
Federal Republic of Germany, 4.75s, 2008 103 101,065
Federal Republic of Germany, 4.5s, 2009 28 26,867
-----------
$ 157,051
- --------------------------------------------------------------------------------
Greece - 7.0%
Hellenic Republic, 8.9s, 2003 GRD 30,000 $ 97,435
Hellenic Republic, 8.7s, 2005 98,000 326,827
Hellenic Republic, 6s, 2006 20,000 59,306
Hellenic Republic, 5.75s, 2008 EUR 39 39,426
-----------
$ 522,994
- --------------------------------------------------------------------------------
Netherlands - 1.4%
United Pan Europe, 10.875s, 2009## $ 100 $ 102,500
- --------------------------------------------------------------------------------
New Zealand - 1.7%
Government of New Zealand, 8s, 2006 NZD 200 $ 107,364
Government of New Zealand, 7s, 2009 40 20,249
-----------
$ 127,613
- --------------------------------------------------------------------------------
Sweden - 2.7%
Kingdom of Sweden, 5s, 2004 SEK 500 $ 58,232
Kingdom of Sweden, 9s, 2009 1,000 145,619
-----------
$ 203,851
- --------------------------------------------------------------------------------
United Kingdom - 4.5%
United Kingdom Treasury, 6.75s, 2004 GBP 204 $ 335,341
- --------------------------------------------------------------------------------
Total Foreign Bonds $2,286,422
- --------------------------------------------------------------------------------
Total Bonds (Identified Cost, $7,113,373) $6,771,473
- --------------------------------------------------------------------------------
Warrants
- --------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------
Republic of Argentina, Expire 09/19/2027
(Identified Cost, $2,400)* 100 $ --
- --------------------------------------------------------------------------------
Short-Term Obligations - 6.2%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- --------------------------------------------------------------------------------
Federal Home Loan Mortgage Discount Notes,
due 12/01/ 99, at Amortized Cost $ 460 $ 460,000
- --------------------------------------------------------------------------------
Total Investments (Identified Cost, $7,575,773) $7,231,473
Other Assets, Less Liabilities - 3.0% 221,343
- --------------------------------------------------------------------------------
Net Assets - 100.0% $7,452,816
- --------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
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
CHF = Swiss Francs NOK = Norwegian Krone
DKK = Danish Kroner NZD = New Zealand Dollars
EUR = Euro SEK = Swedish Kronor
GBP = British Pounds
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- -------------------------------------------------------------------------------
NOVEMBER 30, 1999
- -------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $7,575,773) $7,231,473
Cash 2,985
Foreign currency, at value (identified cost, $22,493) 22,279
Net receivable for forward foreign currency exchange
contracts to sell 30,462
Net receivable for forward foreign currency exchange
contracts to purchase 4,346
Receivable for Fund shares sold 38,647
Interest receivable 134,723
Receivable from investment adviser 30,197
Other assets 32
----------
Total assets $7,495,144
----------
Liabilities:
Net payable for forward foreign currency exchange contracts
subject to master netting agreements $ 4,809
Payable to affiliates -
Management fee 545
Distribution and service fee 6,129
Shareholder servicing agent fee 61
Accrued expenses and other liabilities 30,784
----------
Total liabilities $ 42,328
----------
Net assets $7,452,816
==========
Net assets consist of:
Paid-in capital $7,724,907
Unrealized depreciation on investments and translation
of assets and liabilities in foreign currencies (316,347)
Accumulated undistributed net realized loss on
investments and foreign currency transactions (90,782)
Accumulated undistributed net investment income 135,038
----------
Total $7,452,816
==========
Shares of beneficial interest outstanding 779,729
=======
Net asset value and redemption price per share
(net assets of $7,452,816 / 779,729 shares of
beneficial interest outstanding) $ 9.56
======
Offering price per share (100 / 95.25) $10.04
======
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- -------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1999
- -------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 451,979
----------
Expenses -
Management fee $ 55,905
Shareholder servicing agent fee 6,255
Administrative fee 802
Trustees' compensation 39,875
Distribution and service fee 21,740
Custodian fee 9,367
Printing 20,376
Auditing fees 14,219
Postage 31,216
Legal fees 13,801
Miscellaneous 20,143
----------
Total expenses $ 233,699
Fees paid indirectly (278)
Reduction of expenses by investment adviser (90,812)
----------
Net expenses $ 142,609
----------
Net investment income $ 309,370
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (106,210)
Written option transactions 11,606
Foreign currency transactions (16,277)
----------
Net realized loss on investments and foreign currency
transactions $ (110,881)
----------
Change in unrealized appreciation (depreciation) -
Investments $ (439,668)
Written options (1,775)
Translation of assets and liabilities in foreign currencies 43,313
----------
Net unrealized loss on investments and foreign
currency translation $ (398,130)
----------
Net realized and unrealized loss on
investments and foreign currency $ (509,011)
----------
Decrease in net assets from operations $ (199,641)
==========
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
NOVEMBER 30, 1999 NOVEMBER 30, 1998*
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 309,370 $ 79,567
Net realized loss on investments and foreign currency
transactions (110,881) (26,135)
Net unrealized gain (loss) on investments and foreign
currency translation (398,130) 81,783
---------- ----------
Increase (decrease) in net assets from operations $ (199,641) $ 135,215
---------- ----------
Distributions declared to shareholders from net investment income $ (207,665) $ --
---------- ----------
Net increase in net assets from Fund share transactions $2,525,163 $5,199,744
---------- ----------
Total increase in net assets $2,117,857 $5,334,959
Net assets:
At beginning of period 5,334,959 --
---------- ----------
At end of period (including undistributed net investment
income of $135,038 and $54,785, respectively) $7,452,816 $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
- -----------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
NOVEMBER 30, 1999 NOVEMBER 30, 1998*
- -----------------------------------------------------------------------------------------------------------------
CLASS J
- -----------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C>
Net asset value - beginning of period $ 10.25 $ 10.00
--------- ---------
Income from investment operations# -
Net investment income(S) $ 0.49 $ 0.17
Net realized and unrealized gain (loss) on investments and
foreign currency transactions (0.83) 0.08
--------- ---------
Total from investment operations $ (0.34) $ 0.25
--------- ---------
Less distributions declared to shareholders from net investment
income $ (0.35) $ --
--------- ---------
Net asset value - end of period $ 9.56 $ 10.25
========= =========
Total return(+) (3.38)% 2.50%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.30% 2.98%+
Net investment income 4.98% 4.23%+
Portfolio turnover 195% 92%
Net assets at end of period (000 Omitted) $ 7,453 $ 5,335
(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 $ 0.35 $ 0.03
Ratios (to average net assets):
Expenses## 3.52% 6.60%+
Net investment income 3.76% 0.61%+
* For the period from the inception of Class J shares, July 6, 1998, through November 30, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) Total returns do not include the applicable sales charge. If the charge had been included, the results would have
been lower.
</TABLE>
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Charter Income Fund (the Fund) is a nondiversified 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. The Fund can
invest in foreign securities. 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 and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics, and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short- term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates market value.
Options listed on commodity 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 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. Dividends received in cash are recorded on the
ex-dividend date. 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.
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.
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 be 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. During
the year ended November 30, 1999, $21,452 was reclassified from accumulated
undistributed net investment income to accumulated undistributed net realized
gain on investments and foreign currency transactions due to differences between
book and tax accounting for currency transactions. This change had no effect on
the net assets or net asset value per share.
At November 30, 1999, the Fund, for federal income tax purposes, had a capital
loss carryforward of $83,144 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on November 30, 2006, ($1,353) and November 30, 2007, ($81,791).
(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 November 30, 1999, the aggregate
unreimbursed expenses owed to MFS by the Fund for this arrangement amounted to
$90,812. 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 compensation 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 payments of such reimbursable expenses by MFS
or June 30, 2001. At November 30, 1999, the aggregate unreimbursed expenses owed
to MFS by the Fund for this arrangement amounted to $67,968.
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 the Trustees'
compensation is a net periodic pension expense of $9,837 for the year ended
November 30, 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 sold
through MLJ. Fees incurred under the distribution plan during the period ended
November 30, 1999, were 0.35% of average daily net assets attributable to Class
J shares on an annualized basis. MFD retains the distribution and service fees
for accounts not attributable to MLJ, which amounted to $15,128 for the year
ended November 30, 1999.
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 year ended November 30, 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 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 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 $ 3,358,833 $2,372,908
----------- ----------
Investments (non-U.S. government securities) $10,335,620 $8,773,074
----------- ----------
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 $7,588,278
----------
Gross unrealized appreciation $ 22,883
Gross unrealized depreciation (379,688)
----------
Net unrealized depreciation $ (356,805)
==========
(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
YEAR ENDED PERIOD ENDED
NOVEMBER 30, 1999 NOVEMBER 30, 1998*
-------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------
Shares sold 282,210 $2,743,996 520,601 $5,199,744
Shares issued to shareholders
in reinvestment of
distributions 15,448 151,284 -- --
Shares reacquired (38,530) (370,117) -- --
------- ---------- ------- ----------
Net increase 259,128 $2,525,163 520,601 $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 an $820 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 year ended November 30, 1999, was $0. The Fund had no
borrowings during the year.
(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 and forward foreign currency exchange
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.
Written Option Transactions
NUMBER OF CONTRACT PREMIUMS
- -------------------------------------------------------------------------------
Outstanding, beginning of period 1 $ 2,265
Options written 13 20,419
Options terminated in closing transactions (7) (11,010)
Options exercised (2) (3,097)
Options expired (5) (8,577)
--------
Outstanding, end of period $ --
========
At November 30, 1999, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
Forward Foreign Currency Exchange Contracts
NET
IN UNREALIZED
CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE FOR AT VALUE (DEPRECIATION)
- ------------------------------------------------------------------------------
Sales 12/01/99 AUD 940,418 $ 603,878 $ 598,661 $ 5,217
12/01/99 CAD 199,478 135,020 135,591 (571)
12/03/99 CHF 67,376 44,228 42,396 1,832
12/01/99 DKK 1,659,409 231,850 225,659 6,191
12/01/99 EUR 252,003 262,473 253,878 8,595
12/01/99 GBP 56,838 92,246 90,623 1,623
12/01/99 GRD 20,393,850 64,281 62,569 1,712
12/01/99 JPY 42,435,206 405,251 417,085 (11,834)
12/03/99 NOK 347,586 43,857 43,141 716
12/01/99 NZD 974,836 514,185 497,204 16,981
---------- ---------- --------
$2,397,269 $2,366,807 $ 30,462
========== ========== ========
Purchases 12/01/99 AUD 650,022 $ 414,924 $ 413,416 $ (1,508)
12/02/99 CAD 64,810 44,229 44,054 (175)
12/03/99 CHF 67,376 43,428 42,396 (1,032)
12/01/99 DKK 829,705 114,568 112,456 (2,112)
12/01/99 EUR 181,397 188,543 182,750 (5,793)
12/03/99 GBP 26,916 44,228 42,916 (1,312)
12/01/99 JPY 61,164,411 581,918 601,906 19,988
12/03/99 NOK 347,586 44,229 43,141 (1,088)
12/01/99 NZD 699,849 359,405 356,783 (2,622)
---------- ---------- --------
$1,835,472 $1,839,818 $ 4,346
========== ========== ========
At November 30, 1999, forward foreign currency purchases and sales under master
netting agreements excluded above amounted to a net receivable of $13,451 with
Deutsche Bank and $8,657 with First Boston, and a net payable of $26,917 with
Merrill Lynch.
At November 30, 1999, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust II and Shareholders of
MFS Charter Income Fund
We have audited the accompanying statement of assets and liabilities of MFS
Charter Income Fund, including the schedule of portfolio investments as of
November 30, 1999, and the related statement of operations, and the statement of
changes in net assets and the financial highlights for the year then ended and
for the period from July 6, 1998 (commencement of operations) to November 30,
1998. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of November 30, 1999, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Charter Income Fund at November 30, 1999, the results of its operations for the
period then ended, and the changes in its net assets and the financial
highlights for the period then ended and for the period from July 6, 1998
(commencement of operations) to November 30, 1999, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
January 6, 2000
<PAGE>
FEDERAL TAX INFORMATION
In January 2000, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 1999.
<PAGE>
MFS' YEAR 2000 READINESS DISCLOSURE
MFS Investment Management(R), as an investment adviser and
on behalf of the MFS funds, is committed to the effective
use of technology in managing our portfolio investments,
delivering high-quality service to MFS fund shareholders, [Graphic Omitted]
retirement plan participants, and MFS' institutional
clients, and supporting the financial consultants who sell
our products.
MFS can now say that it is ready for the Year 2000. Our testing has demonstrated
that MFS' computer hardware and software will recognize "00" as the Year 2000
and will not confuse those digits with 1900. All of our critical business
applications and processes have been successfully tested, and we have adopted
companywide policies that will help us maintain our readiness through the
remainder of the year. Any new technology that is brought into the company
before the end of the year will be held to the same stringent standards as our
current technology. We have also developed a vendor readiness survey, contacted
over 700 of our vendors, and established an ongoing process to review responses,
as well as to review readiness statements of new vendors and products.
MFS recognizes that fund shareholders and institutional clients also are
concerned about whether the companies whose securities are held in their
portfolios are addressing Y2K issues. As part of the MFS Original Research(R)
process of evaluating portfolio investments, one of the many relevant factors
that MFS' portfolio managers and research analysts may consider is a company's
Y2K readiness.
Y2K readiness is an enormously complex, worldwide issue. No company or
institution can guarantee that it will be unaffected by the Y2K issue. While MFS
is taking significant steps to protect the integrity of its internal systems,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on MFS fund shareholders, retirement plan participants, or
institutional clients.
If you have further questions regarding MFS' Year 2000 Readiness Program, please
visit our Web site at www.mfs.com, call our toll-free line, 1-800-637-4406, or
write to the MFS Year 2000 Program Management Office by e-mail at [email protected] or
by letter at 500 Boylston Street, Boston, MA 02116-3741.
<PAGE>
MFS(R) Charter Income Fund
TRUSTEES SECRETARY
Richard B. Bailey+ - Private Investor; Stephen E. Cavan*
Former Chairman and Director (until
1991), MFS Investment Management(R) ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Marshall N. Cohan+ - Private Investor
CUSTODIAN
Lawrence H. Cohn, M.D.+ - Chief of State Street Bank and Trust Company
Cardiac Surgery, Brigham and Women's
Hospital; Professor of Surgery, AUDITORS
Harvard Medical School Ernst & Young LLP
The Hon. Sir J. David Gibbons, KBE+ - INVESTOR INFORMATION
Chief Executive Officer, Edmund For information on MFS mutual funds,
Gibbons Ltd.; Chairman, Colonial call your financial consultant or,
Insurance Company, Ltd. for an information kit, call toll
free: 1-800-637-2929 any business
Abby M. O'Neill+ - Private Investor day from 9 a.m. to 5 p.m. Eastern
time (or leave a message anytime).
Walter E. Robb, III+ - President and
Treasurer, Benchmark Advisors, Inc. INVESTOR SERVICE
(corporate financial consultants); MFS Service Center, Inc.
President, Benchmark Consulting Group, P.O. Box 2281
Inc. (office services) Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive For general information, call toll
Vice President, Director, and free: 1-800-225-2606 any business
Secretary, MFS Investment Management day from 8 a.m. to 8 p.m. Eastern
time.
Jeffrey L. Shames* - Chairman and
Chief Executive Officer, 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) exchanges, or stock and bond
outlooks, call toll free:
INVESTMENT ADVISER 1-800-MFS-TALK (1-800-637-8255)
Massachusetts Financial Services Company anytime from a touch-tone telephone.
500 Boylston Street
Boston, MA 02116-3741 WORLD WIDE WEB
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*
+ Independent Trustee
* MFS Investment Management
<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)2000 MFS Investment Management(R).
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116
MCIJ-2 01/00 16M 034/234/334/834
