<PAGE>
[Logo] M F S (R)
INVESTMENT MANAGEMENT SEMIANNUAL REPORT
We invented the mutual fund(R) MAY 31, 2000
[Graphic Omitted]
MFS(R) CHARTER INCOME FUND
<PAGE>
<TABLE>
MFS(R) CHARTER INCOME FUND
<S> <C>
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 Cardiac State Street Bank and Trust Company
Surgery, Brigham and Women's Hospital;
Professor of Surgery, Harvard Medical School INVESTOR INFORMATION
For information on MFS mutual funds, call your
The Hon. Sir J. David Gibbons, KBE+ - Chief investment professional or, for an information kit,
Executive Officer, Edmund Gibbons Ltd.; call toll free: 1-800-637-2929 any business day
Chairman, Colonial Insurance Company, Ltd. from 9 a.m. to 5 p.m. Eastern time (or leave a
message anytime).
Abby M. O'Neill+ - Private Investor
INVESTOR SERVICE
Walter E. Robb, III+ - President and Treasurer, MFS Service Center, Inc.
Benchmark Advisors, Inc. (corporate financial P.O. Box 2281
consultants); President, Benchmark Boston, MA 02107-9906
Consulting Group, Inc. (office services)
For general information, call toll free:
Arnold D. Scott* - Senior Executive 1-800-225-2606 any business day from 8 a.m. to
Vice President, Director, and Secretary, 8 p.m. Eastern time.
MFS Investment Management
For service to speech- or hearing-impaired,
Jeffrey L. Shames* - Chairman and Chief call toll free: 1-800-637-6576 any business day
Executive Officer, MFS Investment from 9 a.m. to 5 p.m. Eastern time. (To use
Management this service, your phone must be equipped with
a Telecommunications Device for the Deaf.)
J. Dale Sherratt+ - President, Insight Resources
Inc. (acquisition planning specialists) For share prices, account balances, exchanges,
or stock and bond outlooks, call toll free:
Ward Smith+ - Former Chairman (until 1994), 1-800-MFS-TALK (1-800-637-8255) anytime from a
NACCO Industries (holding company) touch-tone telephone.
INVESTMENT ADVISER WORLD WIDE WEB
Massachusetts Financial Services Company www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
CHAIRMAN AND PRESIDENT
Jeffrey L. Shames*
PORTFOLIO MANAGER
James T. Swanson*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
+ Independent Trustee
* MFS Investment Management
</TABLE>
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders,
I'm sure you've noticed that whenever financial markets suffer a large
decline, as they did very dramatically this past spring, there's a flurry of
information on "how to deal with market volatility" -- both in the popular
press and from those of us in the investment business. Our own thinking on
this is that, first, for long-term investors volatility is not necessarily
something to be feared; occasional volatility may in fact be healthy for the
markets.
Second, our experience has been that when markets begin to fall, it's often
too late to act. The best response may be to do nothing -- if you're properly
prepared with a long-term plan, created with the help of your investment
professional. To help you create or update that plan and take market
volatility in stride, here are some points you may want to consider the next
time you talk with your
investment professional.
1. VOLATILITY CAN BE A GOOD THING
We would argue that the markets today are much healthier than they were before
the period of volatility this past spring, in the sense that stock prices have
returned to more reasonable levels and we have a stronger base for future
growth. Perhaps the worst of the market's wrath descended on companies with
very high stock prices, relative to their earnings, or with business concepts
that looked great in the euphoria of a booming market but in the end appeared
to have no fundamental backing. It has always been our view that one of the
best protections against market volatility is to invest in stocks and bonds of
fundamentally good companies selling at reasonable prices. When discussing
potential investments with your investment professional, you may want to ask
how they fared in previous periods of volatility, as well as in the good
times.
2. INVEST FOR THE LONG TERM
You've heard that before, but we think it's still probably the most important
concept in investing. Time is one of an investor's greatest allies. Over
nearly all long-term periods -- five, 10, 20 years, and more -- stock and bond
returns, as represented by most common indices, have been positive and have
considerably outpaced inflation. Investing is the best way we know of to make
your money work for you while you're doing something else.
Where investors can get into trouble is by confusing investing with trading.
In our view, traders who buy securities with the intention of selling them at
a profit in a matter of hours, days, or weeks are gambling. We believe this
seldom turns out to be a good strategy for increasing your wealth.
3. INVEST REGULARLY
Waiting for the "right time" to invest is almost always a poor strategy,
because only in retrospect do we know when that right time really was. Periods
of volatility are probably the worst times to make an investment decision.
Faced with turmoil in the markets, many investors have opted to simply stay on
the sidelines.
On the other hand, we think one of the best techniques for investing is
through automatic monthly or quarterly deductions from a checking or savings
account. This approach has at least three major benefits. First, you can
formulate a long-term plan -- how much to invest, how often, and into which
portfolios -- in a calm, rational manner, working with your investment
professional. Second, with this approach you invest regularly without
agonizing over the decision each time you buy shares.
4. DIVERSIFY
One of the dangers of not having an investment plan is that you may be tempted
to simply chase performance, by moving money into whatever asset class appears
to be outperforming at the moment -- small, mid, or large cap; growth or
value; United States or international; stocks or bonds. The problem with this
approach is that by the time a particular area is generally recognized as
"hot," you may have already missed some of the best performance.
International investing offers a case in point. In the 1980s, international
investments, as represented by the Morgan Stanley Capital International (MSCI)
Europe, Australia, Far East (EAFE) Index, outperformed U.S. investments, as
represented by the Standard & Poor's 500 Composite Index (S&P 500), in seven
out of 10 years.(2) For the decade, the MSCI EAFE's average annual performance
was 23%, compared to 18% for the S&P 500. Going into the 1990s, then, an
investor looking only at recent performance might have favored international
investments over U.S. investments.
But the 1990s turned out to be virtually a mirror image of the '80s. Domestic
investments outperformed international investments in seven out of 10 years,
with the S&P 500 returning an average of 18% annually for the decade and the
MSCI EAFE returning a 7% annual average. Looking ahead, however, we are
optimistic about international markets because we feel that many of the same
forces that propelled the current U.S. economic boom -- deregulation,
restructuring, and increased adoption of technology -- have taken root
overseas.
The lesson to be learned is that nobody really knows what asset class will be
the next to outperform or how long that performance will be sustained. We
would suggest that one way to potentially profit from swings in the market --
to potentially be invested in various asset classes before the market shifts
in their favor -- is with a diversified portfolio covering several asset
classes.
If you haven't already done so, we encourage you to discuss these thoughts
with your investment professional and factor them into your long-range
financial planning. Hopefully, the next time the markets appear to be going
wild, you'll feel confident enough in your plan to view periods of volatility
as a time of potential opportunity -- or perhaps just a time to sit back and
do nothing.
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)
June 15, 2000
-------------
(1) Source: Lipper Inc. Decade performance: '80s -- 12/31/79-12/31/89,
'90s -- 12/31/89-12/31/99. The MSCI EAFE Index is an unmanaged,
market-capitalization-weighted total return index that measures the
performance of the same developed-country global stock markets included in
the MSCI World Index but excludes the United States, Canada, and the South
African mining component. The S&P 500 is a popular, unmanaged index of
common stock total return performance. It is not possible to invest directly
in an index. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
A prospectus containing more complete information on any MFS product,
including all charges and expenses, can be obtained from your investment
professional. Please read it carefully before you invest or send money.
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 six months ended May 31, 2000, the fund provided a total return of
-0.86%. This return assumes the reinvestment of any distributions but excludes
the effects of any sales charges. During the same period, the average
multisector income fund tracked by Lipper Inc., an independent firm that
reports mutual fund performance, returned -0.91%. The fund's return also
compares to a -4.61% 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 2.46% return for the Lehman Brothers Government Bond Index,
an unmanaged index of U.S. Treasury and government-agency obligations.
The fund benefited from maintaining a relatively long duration in its U.S.
government holdings. Duration is a measure of interest-rate sensitivity; the
longer the duration, the more sensitive the fund is to changes in interest
rates. During the period, two main factors helped push yields on most
government bonds lower -- and their prices higher -- in spite of the fact that
the Federal Reserve Board (the Fed) continued to raise short-term interest
rates in an attempt to control growth and inflation. First, the U.S. Treasury
instituted a program of using the federal budget surplus to buy back 30-year
bonds. Reduced supply and added demand helped push bond prices higher and
yields lower on these securities. Second, improvements in productivity helped
reassure investors that inflation would not be a major problem going forward.
In the U.S. government portion of the fund, Treasury securities predominated,
although we maintained a substantial weighting in mortgage-backed securities.
We favored Treasuries over mortgages because we felt that declining interest
rates for Treasury securities would lead to better price appreciation.
(Principal value and interest on Treasury securities are guaranteed by the
U.S. government if held to maturity.) That strategy worked. The fund's
mortgage-backed holdings were focused on those issued by the Government
National Mortgage Association (Ginnie Maes), the Federal Home Loan Corporation
(Freddie Macs), and the Federal National Mortgage Association (Fannie Maes).
While prices for Fannie Maes were hurt somewhat by questions in the U.S.
Congress over their implied government backing, they rebounded toward the end
of the period.
High-yield bonds encountered some difficulties during the period, but the
selections made by our strong research did not decline as much as those of the
overall market. We largely avoided cyclical companies -- whose prospects rise
and fall with the economy -- and instead targeted well-known names in the
telecommunications industry. These bonds held up much better than the rest of
that sector when it struggled late in the first quarter and early in the
second quarter.
On the international front, we concentrated our investments in European
countries that are expected to join the European monetary union (EMU) but have
not yet done so. We chose countries such as the United Kingdom, Denmark,
Greece, and Sweden, which we believe have put their economic houses in order
in terms of fiscal prudence and debt control. We maintained an allocation in
the EMU countries of France and Germany because we felt those economies are
growing so fast that their interest rates are expected to rise. The fund was
not invested in Japan because we found yields there to be too low. Overall,
international bonds performed poorly due to the perception that growth is
strong and will cause interest rates to rise.
Looking ahead, we believe yields on long-term Treasury bonds will continue to
decline. With no major signs of inflation on the horizon, we think the Fed is
nearing the end of its program of interest-rate hikes. When that program ends,
we believe interest rates should trend downward, so we plan to maintain a
relatively long duration in that portion of the portfolio. In the high-income
area, we intend to avoid cyclical companies because we feel it appears the U.S.
economy is slowing. Instead, we'll rely on our research staff to find
higher-quality companies with solid balance sheets. Finally, our international
strategy will be to keep duration of that portion of the portfolio relatively
short because we believe overseas interest rates will rise. At the same time, we
think the dollar will begin to weaken against foreign currencies, a trend from
which we hope to benefit.
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.
It is not possible to invest directly in an index.
The portfolio is actively managed, and current holdings may be different.
PERFORMANCE SUMMARY
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for
the applicable time periods. Investment results reflect the percentage change
in net asset value, including reinvestment of dividends. (See Notes to
Performance Summary.)
TOTAL RATES OF RETURN THROUGH MAY 31, 2000
<TABLE>
CLASS J
<CAPTION>
6 Months 1 Year Life*
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge -0.86% -2.48% -1.82%
--------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge -- -2.48% -0.96%
--------------------------------------------------------------------------------------------
Average Annual Total Return Including Sales Charge -- -7.11% -3.46%
--------------------------------------------------------------------------------------------
* For the period from the commencement of the fund's investment operations, July 6, 1998,
through May 31, 2000.
</TABLE>
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. MORE RECENT
RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. 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>
<TABLE>
PORTFOLIO OF INVESTMENTS (Unaudited) - May 31, 2000
Bonds - 89.8%
-----------------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 64.3%
Aerospace - 1.0%
BE Aerospace, Inc., 8s, 2008 $ 100 $ 79,000
-----------------------------------------------------------------------------------------------------
Automotive - 2.3%
Hayes Wheels International, Inc., 9.125s, 2007 $ 200 $ 179,000
-----------------------------------------------------------------------------------------------------
Broadcasting - 1.8%
Granite Broadcasting Corp., 10.375s, 2005 $ 150 $ 143,625
-----------------------------------------------------------------------------------------------------
Chemicals - 2.0%
NL Industries, Inc., 11.75s, 2003 $ 150 $ 154,500
-----------------------------------------------------------------------------------------------------
Computer Software - Systems - 2.3%
Psinet, Inc., 11s, 2009 $ 200 $ 181,000
-----------------------------------------------------------------------------------------------------
Containers - 2.1%
Gaylord Container Corp., 9.75s, 2007 $ 200 $ 162,000
-----------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation - 8.0%
FHLMC, 6.875s, 2005 $ 500 $ 489,295
FHLMC, 7.5s, 2029 149 144,943
----------
$ 634,238
-----------------------------------------------------------------------------------------------------
Federal National Mortgage Association - 5.8%
FNMA, 7s, 2029 $ 480 $ 455,638
-----------------------------------------------------------------------------------------------------
Financial Institutions - 1.1%
Natexis Ambs Co. LLC, 8.44s, 2049## $ 100 $ 90,749
-----------------------------------------------------------------------------------------------------
Government National Mortgage Association - 1.9%
GNMA, 8s, 2030 $ 150 $ 150,265
-----------------------------------------------------------------------------------------------------
Media - 5.3%
Chancellor Media Corp., 8.125s, 2007 $ 300 $ 298,500
CSC Holdings, Inc., 9.25s, 2005 125 122,500
----------
$ 421,000
-----------------------------------------------------------------------------------------------------
Oils - 2.4%
Ocean Energy, Inc., 8.875s, 2007 $ 200 $ 193,000
-----------------------------------------------------------------------------------------------------
Steel - 1.5%
AK Steel Holdings Corp., 9.125s, 2006 $ 125 $ 117,812
-----------------------------------------------------------------------------------------------------
Telecommunications - 6.0%
Crown Castle International Corp., 9s, 2011 $ 175 $ 161,000
Level 3 Communications, Inc., 9.125s, 2008 175 150,500
NTL Communications Corp., 0s to 2003, 12.375s, 2008 250 160,000
----------
$ 471,500
-----------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 20.8%
U.S. Treasury Bonds, 9.875s, 2015 $ 53 $ 70,589
U.S. Treasury Bonds, 6.125s, 2029 160 159,250
U.S. Treasury Notes, 8s, 2001 50 50,547
U.S. Treasury Notes, 5.875s, 2004 450 437,485
U.S. Treasury Notes, 5.5s, 2008 500 471,015
U.S. Treasury Notes, 4.25s, 2010 152 152,764
U.S. Treasury Notes, 6.5s, 2010 300 304,407
----------
$1,646,057
-----------------------------------------------------------------------------------------------------
Total U.S. Bonds $5,079,384
-----------------------------------------------------------------------------------------------------
Foreign Bonds - 25.5%
Denmark - 1.2%
Kingdom of Denmark, 7s, 2007 DKK 717 $ 96,326
-----------------------------------------------------------------------------------------------------
France - 1.4%
Republic of France, 4s, 2009 EUR 133 $ 112,134
-----------------------------------------------------------------------------------------------------
Germany - 5.1%
Federal Republic of Germany, 4.75s, 2008 EUR 103 $ 93,123
Federal Republic of Germany, 4.5s, 2009 95 84,288
Federal Republic of Germany, 5.375s, 2010 237 223,673
----------
$ 401,084
-----------------------------------------------------------------------------------------------------
Greece - 6.7%
Hellenic Republic, 8.9s, 2003 GRD 30,000 $ 88,826
Hellenic Republic, 8.7s, 2005 115,000 351,708
Hellenic Republic, 6s, 2006 20,000 54,978
Hellenic Republic, 5.75s, 2008 EUR 39 36,303
----------
$ 531,815
-----------------------------------------------------------------------------------------------------
Italy - 1.0%
Republic of Italy, 5.5s, 2010 EUR 88 $ 82,299
-----------------------------------------------------------------------------------------------------
Netherlands - 1.1%
United Pan Europe Communications, 10.875s, 2009 (Cable
Television) EUR 100 $ 83,000
-----------------------------------------------------------------------------------------------------
New Zealand - 2.4%
Government of New Zealand, 8s, 2006 NZD 200 $ 95,993
Government of New Zealand, 7s, 2009 206 94,256
----------
$ 190,249
-----------------------------------------------------------------------------------------------------
Sweden - 1.8%
Kingdom of Sweden, 9s, 2009 SEK 1,000 $ 140,905
-----------------------------------------------------------------------------------------------------
United Kingdom - 4.8%
United Kingdom Treasury, 6.75s, 2004 GBP 204 $ 317,049
United Kingdom Treasury, 7.25s, 2007 35 57,793
----------
$ 374,842
-----------------------------------------------------------------------------------------------------
Total Foreign Bonds $2,012,654
-----------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $7,608,538) $7,092,038
-----------------------------------------------------------------------------------------------------
Call Options Purchased
-----------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED)
-----------------------------------------------------------------------------------------------------
Japanese Yen/June/103 (Premiums Paid, $687) JPY 25,258 $ --
-----------------------------------------------------------------------------------------------------
Short-Term Obligations - 3.6%
-----------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED)
-----------------------------------------------------------------------------------------------------
Federal National Mortgage Association Discount Notes,
due 6/01/00, at Amortized Cost $ 282 $ 282,000
-----------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $7,891,225) $7,374,038
-----------------------------------------------------------------------------------------------------
Call Options Written - (0.3)%
-----------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED) VALUE
-----------------------------------------------------------------------------------------------------
Australian Dollars/June/0.6 AUD 223 $ (10,750)
Australian Dollars/June/0.6 115 (5,568)
Australian Dollars/May/0.555 112 (3,140)
Euro/August/0.88 EUR 195 (547)
Japanese Yen/June/103 JPY 25,258 --
Japanese Yen/July/103 26,094 (913)
-----------------------------------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $14,887) $ (20,918)
-----------------------------------------------------------------------------------------------------
Put Options Written - (0.1)%
-----------------------------------------------------------------------------------------------------
Canadian Dollars/June/1.49 CAD 369 $ (2,056)
Euro/August/0.96 EUR 240 (3,179)
-----------------------------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $5,816) $ (5,235)
-----------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 7.0% 549,603
-----------------------------------------------------------------------------------------------------
Net Assets - 100.0% $7,897,488
-----------------------------------------------------------------------------------------------------
##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
DKK = Danish Kroner NZD = New Zealand Dollars
EUR = Euro SEK = Swedish Kronor
GBP = British Pounds
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
-----------------------------------------------------------------------------------------------------------------------
MAY 31, 2000
-----------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $7,891,225) $7,374,038
Cash 4,744
Foreign currency, at value (identified cost, $10,235) 10,303
Net receivable for forward foreign currency exchange contracts to sell 37,749
Receivable for Fund shares sold 370,800
Interest receivable 148,471
Receivable from investment adviser 2,473
Other assets 32
----------
Total assets $7,948,610
----------
Liabilities:
Net payable for forward foreign currency exchange contracts subject to
master netting agreements $ 8,007
Net payable for forward foreign currency exchange contracts to purchase 8,775
Payable for Fund shares repurchased 917
Written options outstanding, at value (premiums received, $20,703) 26,153
Payable to affiliates -
Management fee 193
Administrative fee 4
Distribution and service fee 6,918
Shareholder servicing agent fee 20
Accrued expenses and other liabilities 135
----------
Total liabilities $ 51,122
----------
Net assets $7,897,488
==========
Net assets consist of:
Paid-in capital $8,422,853
Unrealized depreciation on investments and translation of asset and liabilities in foreign currencies (502,167)
Accumulated undistributed net realized loss on investments and foreign
currency transactions (180,469)
Accumulated undistributed net investment income 157,271
----------
Total $7,897,488
==========
Shares of beneficial interest outstanding 854,717
=======
Net asset value and redemption price per share
(net assets of $7,897,488 / 854,717 shares of beneficial interest outstanding) $9.24
=====
Offering price per share (100 / 95.25) $9.70
=====
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Operations (Unaudited)
-------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED MAY 31, 2000
-------------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Interest $ 285,928
---------
Expenses -
Management fee $ 33,860
Shareholder servicing agent fee 3,760
Administrative fee 502
Trustees' compensation 19,117
Distribution and service fee 13,168
Custodian fee 9,612
Printing 583
Auditing fees 7,200
Postage 728
Legal fees 10,606
Miscellaneous 2,047
---------
Total expenses $ 101,183
Fees paid indirectly (803)
Reduction of expenses by investment adviser (25,135)
---------
Net expenses $ 75,245
---------
Net investment income $ 210,683
---------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(160,030)
Foreign currency transactions 70,343
---------
Net realized loss on investments and foreign currency transactions $ (89,687)
---------
Change in unrealized depreciation -
Investments $(172,887)
Written options (5,450)
Translation of assets and liabilities in foreign currencies (7,483)
---------
Net unrealized loss on investments and foreign currency translation $(185,820)
---------
Net realized and unrealized loss on investments and foreign currency $(275,507)
---------
Decrease in net assets from operations $ (64,824)
=========
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
-------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY 31, 2000 NOVEMBER 30, 1999
(UNAUDITED)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 210,683 $ 309,370
Net realized loss on investments and foreign currency
transactions (89,687) (110,881)
Net unrealized loss on investments and foreign currency
translation (185,820) (398,130)
---------- ----------
Decrease in net assets from operations $ (64,824) $ (199,641)
---------- ----------
Distributions declared to shareholders -
From net investment income $ (188,450) $ (207,665)
---------- ----------
Net increase in net assets from Fund share transactions $ 697,946 $2,525,163
---------- ----------
Total increase in net assets $ 444,672 $2,117,857
Net assets:
At beginning of period 7,452,816 5,334,959
---------- ----------
At end of period (including undistributed net investment
income of $157,271 and $135,038, respectively) $7,897,488 $7,452,816
========== ==========
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 2000 ---------------------------
(UNAUDITED) 1999 1998*
-----------------------------------------------------------------------------------------------------------------------------
CLASS J
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.56 $10.25 $10.00
------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.26 $ 0.49 $ 0.17
Net realized and unrealized gain (loss) on investments and
foreign currency transactions (0.34) (0.83) 0.08
------ ------ ------
Total from investment operations $(0.08) $(0.34) $ 0.25
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.24) $(0.35) $ --
------ ------ ------
Net asset value - end of period $ 9.24 $ 9.56 $10.25
====== ====== ======
Total return(+) (0.86)%++ (3.38)% 2.50%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.02%+ 2.30% 2.98%+
Net investment income 5.59%+ 4.98% 4.23%+
Portfolio turnover 86% 195% 92%
Net assets at end of period (000 omitted) $7,897 $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 $ 0.23 $ 0.35 $ 0.03
Ratios (to average net assets):
Expenses## 2.68%+ 3.52% 6.60%+
Net investment income 4.93%+ 3.76% 0.61%+
* 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 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.
See notes to financial statements.
</TABLE>
<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.
The Fund can invest up to 50% of its portfolio in high-yield securities rated
below investment grade. Investments in high-yield securities involve greater
degrees of credit and market risk than investments in higher-rated securities
and tend to be more sensitive to economic conditions.
The Fund 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 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 in good faith, at fair value, 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 option 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 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 total 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 net 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.
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. 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, 2000, aggregate unreimbursed expenses amounted to $115,947.
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. At May 31, 2000, 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 Trustees' compensation is a net periodic pension expense of $6,025
for the period ended May 31, 2000.
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 incurs an administrative fee at
the following annual percentages of the Fund's average daily net assets:
First $2 billion 0.0175%
Next $2.5 billion 0.0130%
Next $2.5 billion 0.0005%
In excess of $7 billion 0.0000%
The Trustees have adopted a distribution plan for Class J shares 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. A portion of the distribution fee equal to 0.10% per annum of the
Fund's average daily net assets attributable 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, 2000 were 0.35% of average
daily net assets attributable to Class J shares on an annualized basis. An
additional amount of 0.275% of average daily net assets is paid by MFS to MLJ as
compensation. MFD retains the distribution and service fees for accounts not
attributable to MLJ, which amounted to $7,324 for the period ended May 31, 2000.
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, 2000, 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%.
(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 $5,080,512 $4,540,684
---------- ----------
Investments (non-U.S. government securities) $1,560,509 $1,462,309
---------- ----------
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 $7,903,730
----------
Gross unrealized depreciation $ (558,343)
Gross unrealized appreciation 28,651
----------
Net unrealized depreciation $ (529,692)
==========
(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:
<TABLE>
Class J Shares
<CAPTION>
SIX MONTHS ENDED MAY 31, 2000 YEAR ENDED NOVEMBER 30, 1999
------------------------------ ----------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 93,250 $867,233 282,210 $2,743,996
Shares issued to shareholders in
reinvestment of distributions 11,458 106,909 15,448 151,284
Shares reacquired (29,720) (276,196) (38,530) (370,117)
------- -------- ------- ----------
Net increase 74,988 $697,946 259,128 $2,525,163
======= ======== ======= ==========
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $1.1 billion unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
Borrowings may be made for temporary financing needs. 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 six months ended May
31, 2000, was $1. 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 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 CONTRACTS PREMIUMS
-------------------------------------------------------------------------------
Outstanding, beginning of period -- $ --
Options written 8 20,703
------ -------
Outstanding, end of period 8 $20,703
====== =======
At May 31, 2000, the Fund had sufficient cash and/or securities at least equal
to the value of the written options.
Forward Foreign Currency Exchange Contracts
NET
UNREALIZED
SETTLEMENT CONTRACTS TO IN EXCHANGE CONTRACTS APPRECIATION
DATE DELIVER/RECEIVE FOR AT VALUE (DEPRECIATION)
-------------------------------------------------------------------------------
Sales 06/16/00 AUD 375,213 $ 228,446 $ 214,106 $ 14,340
06/16/00 CAD 381,400 261,222 254,802 6,420
06/16/00 DKK 829,705 108,354 103,802 4,552
06/16/00 EUR 788,433 725,807 736,042 (10,235)
06/16/00 GBP 39,434 58,961 59,023 (62)
06/16/00 JPY 50,694,712 477,974 472,000 5,974
06/16/00 NZD 442,920 212,673 202,553 10,120
06/16/00 SEK 1,851,573 213,069 206,429 6,640
---------- ---------- --------
$2,286,506 $2,248,757 $ 37,749
========== ========== ========
Purchases 06/16/00 EUR 253,642 $ 229,698 $ 236,787 $ 7,089
06/16/00 JPY 59,387,356 568,798 552,934 (15,864)
---------- ---------- --------
$ 798,496 $ 789,721 $ (8,775)
========== ========== ========
At May 31, 2000, forward foreign currency purchases and sales under master
netting agreements excluded above amounted to a net receivable of $20,931 with
First Boston and a net payable of $20,940 with Deutsche Bank and $7,998 with
Merrill Lynch.
At May 31, 2000, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
<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-3 7/00 700 034/234/334/834
