<PAGE>
[LOGO: M F S SEMIANNUAL REPORT
THE FIRST NAME IN MUTUAL FUNDS] APRIL 30, 1995
MFS(R) STRATEGIC INCOME FUND
[GRAPHIC OMITTED: photo of window with 2 people talking]
<PAGE>
MFS(R) STRATEGIC INCOME FUND
<TABLE>
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor; AUDITORS
Former Chairman and Director (until 1991), Ernst & Young LLP
Massachusetts Financial Services Company
INVESTOR INFORMATION
Marshall N. Cohan - Private Investor For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime from
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery, a touch-tone telephone.
Brigham and Women's Hospital; Professor of
Surgery, Harvard Medical School For information on MFS mutual funds,
call your financial adviser or, for an
The Hon. Sir J. David Gibbons, KBE - Chief information kit, call toll free:
Executive Officer, Edmund Gibbons Ltd.; 1-800-637-2929 any business day from
Chairman, Bank of N.T. Butterfield & Son Ltd. 9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Abby M. O'Neill - Private Investor;
Director, Rockefeller Financial Services, Inc. INVESTOR SERVICE
(Investment Advisers) MFS Service Center, Inc.
P.O. Box 2281
Walter E. Robb, III - President and Treasurer, Boston, MA 02107-9906
Benchmark Advisors, Inc. (Corporate Financial
Consultants) For general information, call toll free:
1-800-225-2606 any business day from
Arnold D. Scott* - Senior Executive Vice President 8 a.m. to 8 p.m. Eastern time.
and Secretary, Massachusetts Financial Services Company
For service to speech- or hearing-impaired,
Jeffrey L. Shames* - President, Massachusetts call toll free: 1-800-637-6576 any business
Financial Services Company day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be
J. Dale Sherratt - President, Insight Resources, Inc. equipped with a Telecommunications
(Acquisition Planning Specialists) Device for the Deaf.)
Ward Smith - Former Chairman (until 1994), For share prices, account balances and
NACCO Industries; Director, Sundstrand exchanges, call toll free: 1-800-MFS-TALK
Corporation (1-800-637-8255) anytime from a touch-tone
telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street -------------------------------------------
Boston, Massachusetts 02116-3741 TOP-RATED SERVICE
[SEAL] MFS was rated first when securities
PORTFOLIO MANAGER firms evaluated the quality of
James T. Swanson* service they receive from 40
mutual fund companies. MFS got
TREASURER high marks for answering calls
W. Thomas London* quickly, processing transactions
accurately and sending statements
ASSISTANT TREASURER out on time.
James O. Yost* (Source: 1994 DALBAR Survey)
-------------------------------------------
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
The decline in interest rates during the past six months has enabled the Fund
to enjoy favorable performance. During the period from November 1, 1994
through April 30, 1995, Class A shares of the Fund provided a total return of
+6.16%, Class B shares +5.77%, and Class C shares +5.76%. These returns assume
the reinvestment of distributions but exclude the effects of any sales
charges. A discussion of these results may be found in the Portfolio
Performance and Strategy section of this letter.
U.S. Outlook
As the economy enters its fifth year of expansion, it is evidencing a
decidedly decelerating trend from its robust pace of 1994, when gross domestic
product expanded by 4.1%. Estimated growth in this year's first quarter
diminished to an annual rate of 2.8%. Consumer spending slowed considerably
during the quarter and was accompanied by a correspondingly large increase in
inventories. As we begin the year's second quarter, the evidence suggests that
the economy has entered a phase of less-than-full-potential growth, as the
April unemployment rate showed a second consecutive monthly increase. We
expect the economy to continue to grow at this more subdued pace. We do not
anticipate that the slowdown will deteriorate into a recession and,
conversely, we remain mindful of the potential for a reliquified consumer
sector to reassert itself as the year progresses.
Global Outlook
Economic recoveries in both Europe and Japan have been inhibited somewhat by
the yen's and deutsche mark's strengthening against the U.S. dollar.
Industrial companies in these export-led expansions are struggling to compete
in a global marketplace in which their products are less competitively priced.
At home, the consumer sectors in these economies have been impaired by
relatively high unemployment rates and continued low growth in domestic money
supplies. The central banks of both Germany and Japan have recently lowered
interest rates in an effort to stimulate domestic demand as well as to arrest
the strength of their currencies against the dollar. Our view is that these
expansions remain intact, although at a somewhat sluggish pace. Inflationary
pressures in overseas economies remain even more favorable than those in the
U.S., providing fixed-income investors with opportunities to obtain relatively
attractive real (adjusted for inflation) rates of interest. While we view
emerging markets with caution, opportunities exist in both bond and equity
markets on a selected basis, particularly at the more attractive prices
resulting from sell-offs in many of these markets last year. Recently, the
dollar has stabilized in world currency markets. Although we believe that over
the long term the dollar continues to represent a sound store of value, in the
near term its relative strength will be restrained by the large U.S. current-
account deficit.
Interest Rates
As evidence of a slowdown has continued to mount, the fixed-income markets
have become increasingly convinced that the Federal Reserve Board has
concluded its monetary-tightening initiatives. Furthermore, as the economy has
diminished in its ability to create jobs and in its usage of available
productive capacity, apprehension concerning a cyclical upturn in inflation
has receded. As a result, long-term U.S. Treasury bond yields have declined to
near 7.00% as of April 30, 1995, down from 7.87% at the beginning of the year
and from their cyclical peak of 8.15% in November 1994. Despite higher costs
at the crude and intermediate stages of production, prices have not increased
appreciably at the consumer level. For the 12 months ended in April of this
year, the Consumer Price Index, a popular measure of change in prices,
increased by a still moderate 3.1%. Continued benign growth in labor costs and
the inability of many businesses to effectively raise prices have combined to
extend the favorable price environment. Nevertheless, we do anticipate a minor
cyclical pickup in inflationary pressure this year to the 3% - 3 1/2% range.
The decline in interest rates has been particularly precipitous during the
past month, leaving the market potentially vulnerable to a near-term correction.
However, we believe continuing moderate growth will result in interest rates
trending near to, and possibly somewhat lower than, present levels during the
balance of this year.
Stock Market
The stock market has rebounded from its uninspiring performance during 1994,
posting its strongest quarterly results in four years. Recently, stock prices
have responded to growing confidence that the Federal Reserve is nearing the
end of its tightening initiatives and that gains in corporate earnings may
remain substantial. Although we expect the economy to slow in 1995, our
outlook for corporate earnings growth remains favorable.
Portfolio Performance and Strategy
As we indicated in our annual report to shareholders dated October 31, 1994,
we anticipated increasing our exposure to the U.S. government market early
this year because we believed much of the decline in government bond prices
had occurred. Since that time, we have added to our holdings in U.S.
treasuries and agency securities, which have performed well as the pace of
economic growth has slowed and inflation fears have subsided. At present,
approximately 5% of the Fund's total net assets is allocated to this sector.
The average credit quality of high-yield bonds has improved during the past
six months as the continuation of the economic expansion allowed companies to
pay down their debt. The high-yield corporate bond market has provided
consistent performance for the Fund, as investments in this sector have
benefited from improved earnings and favorable supply and demand ratios. We have
not significantly changed our strategy of focusing on fundamental credit
research when selecting securities for this portion of the portfolio. We expect
to reduce our holdings in this sector as the economic expansion matures.
Earlier this year, we started to increase our holdings in emerging market
debt. This segment of the market has started to produce very favorable results
for the Fund and now represents about 21% of the Fund's total net assets. Our
holdings in this area include bonds of Argentina, Brazil, Mexico and Poland. All
of these investments are U.S. dollar denominated. Our investments in other
international bond markets have done well, particularly those in Japan and many
European countries. The gains we have experienced in currency and in bond prices
have helped to enhance the Fund's total return during the period.
Finally, as we indicated in the annual report, we continued to reduce our
holdings in equity securities and invested the proceeds of these investments
into various sectors of the fixed-income market. This change has enabled the
Fund to increase its monthly distributions during the past six months.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
- -------------------------- -----------------------
A 1 1/2" x 1 5/8" photo A 1 1/2" x 1 5/8" photo
of A. Keith Brodkin, of James T. Swanson,
Chairman and President. Portfolio Manager.
- -------------------------- -----------------------
/s/ A. Keith Brodkin /s/ James T. Swanson
---------------------- -----------------------
A. Keith Brodkin James T. Swanson
Chairman and President Portfolio Manager
May 17, 1995
PORTFOLIO MANAGER PROFILE
James Swanson has been a member of the MFS investment staff since 1985. A
graduate of Colgate University and the Harvard University Graduate School of
Business Administration, he began his career at MFS as Vice President -
Investments and was named Senior Vice President in 1989. In 1991, he became
Portfolio Manager of MFS Strategic Income Fund.
OBJECTIVE AND POLICIES
The Fund's investment objective is to provide high current income by investing
in fixed-income securities. In addition, the Fund will seek to take advantage
of opportunities to realize significant capital appreciation while maintaining
a high level of current income.
The Fund seeks to achieve its objective by allocating the portfolio's assets
among various categories of fixed-income securities, including securities
issued or guaranteed by the U.S. government, its agencies, authorities or
instrumentalities, and foreign government and U.S. and foreign corporate
fixed-income securities. In addition, the Fund may invest in bank obligations
and municipal obligations. The Fund may also invest up to 25% of its net
assets in equity securities, including securities of established companies and
emerging growth companies. The Fund may also enter into options and futures
transactions and forward foreign currency exchange contracts and purchase
securities on a "when-issued" basis.
PERFORMANCE SUMMARY
Because mutual funds like MFS Strategic Income Fund are designed for investors
with long-term goals, we have provided cumulative results as well as the
average annual total returns for Class A, Class B, and Class C shares for the
applicable time periods.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
Class A Investment Results
(net asset value change including reinvested distributions)
10/29/87<F3> -
6 Months 1 Year 5 Years 4/30/95
- ------------------------------------------------------------------------------
Cumulative Total Return<F1> +6.16% +8.09% +56.35% +86.48%
- ------------------------------------------------------------------------------
Average Annual Total Return<F1> -- +8.09% + 9.35% + 8.66%
- ------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the
most recent calendar quarter as required by the Securities and Exchange
Commission (the SEC), with all distributions reinvested and reflecting the
maximum sales charge of 4.75% for the 1- and 5-year periods ended March 31,
1995 and for the period from October 29, 1987<F3> to March 31, 1995, were
- -1.52%, +7.55% and +7.51%, respectively.
Class B Investment Results
(net asset value change including reinvested distributions)
9/07/93<F3> -
6 Months 1 Year 4/30/95
- ------------------------------------------------------------------------------
Cumulative Total Return<F2> +5.77% + 7.14% + 2.74%
- ------------------------------------------------------------------------------
Average Annual Total Return<F2> -- + 7.14% + 1.66%
- ------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the
most recent calendar quarter as required by the SEC, with all distributions
reinvested and reflecting the current maximum contingent deferred sales charge
(CDSC) of 4% for the 1-year period ended March 31, 1995 and for the period
from September 7, 1993<F3> to March 31, 1995, were -1.35% and -2.92%,
respectively.
Class C Investment Results
The cumulative total return from September 1, 1994<F3> to April 30, 1995 was
+7.06%. The cumulative total return, calculated for the period ended as of the
most recent calendar quarter as required by the SEC, with all distributions
reinvested for the period from September 1, 1994<F3> to March 31, 1995 was
+3.33%. Class C shares have no initial sales charge or CDSC but, along with
Class B shares, have higher annual fees and expenses than Class A shares.
All results represent past performance and are not necessarily an indication
of future results. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost. All
Fund results reflect the applicable expense subsidy which is explained in the
Notes to Financial Statements. Had the subsidy not been in effect, the results
would have been less favorable. The subsidy may be rescinded by MFS at any
time.
<F1> These results do not include the sales charge. If the charge had been
included, the results would have been lower.
<F2> These results do not include any CDSC. If the charge had been included, the
results would have been lower.
<F3> Commencement of offering of this class of shares.
<PAGE>
PORTFOLIO OF INVESTMENTS - April 30, 1995
Bonds - 94.4%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
U.S. Dollar Denominated - 69.5%
Foreign - U.S. Dollar Denominated - 21.0%
Federal Republic of Brazil, 0s, 2001 $ 15 $ 11,022
Federal Republic of Brazil, 0s, 2006 500 285,000
Federal Republic of Brazil, 0s, 2009 250 128,437
Federal Republic of Brazil, 0s, 2024 500 273,125
Federal Republic of Brazil, 4s, 2024 5,000 1,987,500
Hidroelectrica Alicura, 8.375s, 1999<F5> 500 405,000
Mexico Discount Notes, 0s, 2019 2,500 1,650,000
Mexico Discount Notes, 0s, 2019 500 330,000
Mexico Discount Notes, 0s, 2019 850 561,000
Mexico UMS Par CL A, 6.25s, 2019 250 130,937
Poland Discount Notes, 0s, 2014 2,000 937,500
Poland Discount Notes, 0s, 2024 1,500 1,040,625
Republic of Argentina, 0s, 2005 4,000 2,385,000
------------
$10,125,146
- -----------------------------------------------------------------------------
Industrials - 31.3%
Automotive - 1.1%
Harvard Industries, Inc., 12s, 2004 $ 500 $ 520,000
- -----------------------------------------------------------------------------
Building - 2.0%
American Standard, Inc., 0s, 2005 $ 1,000 $ 732,500
Atlantic Gulf Communities Corp., 12s, 1996 156 133,110
Atlantic Gulf Communities Corp., 13s, 1998 156 86,130
------------
$ 951,740
- -----------------------------------------------------------------------------
Chemicals - 2.6%
NL Industries, Inc., 11.75s, 2003 $ 250 $ 265,625
Rexene Corp., 11.75s, 2004 250 268,437
UCC Investors Holdings, Inc., 0s, 2005<F1> 1,000 725,000
------------
$ 1,259,062
- -----------------------------------------------------------------------------
Conglomerates - 0.2%
Bell & Howell Co., 10.75s, 2002 $ 100 $ 105,000
- -----------------------------------------------------------------------------
Consumer Goods and Services - 3.9%
Calmar Spraying Systems, Inc., 14s, 1999 $ 250 $ 255,000
Fieldcrest Cannon, Inc., 11.25s, 2004 250 261,250
Ithaca Industries, Inc., 11.125s, 2002 100 93,000
Revlon, Inc., 10.5s, 2003 950 914,375
Revlon Worldwide Corp., 0s, 1998<F1> 200 127,500
Westpoint Stevens, Inc., 9.375s, 2005 250 237,500
------------
$ 1,888,625
- -----------------------------------------------------------------------------
Containers - 2.4%
Container Corp. of America, 9.75s, 2003 $ 700 $ 703,500
Ivex Packaging Corp., 12.5s, 2002 100 106,500
Riverwood International Corp., 11.25s, 2002 100 107,250
Stone Container Corp., 9.875s, 2001 250 248,750
------------
$ 1,166,000
- -----------------------------------------------------------------------------
Entertainment - 1.2%
SCI Television, Inc., 11s, 2005 $ 455 $ 473,200
United Artist Theater Circuit, Inc., 11.5s, 2002 100 107,500
------------
$ 580,700
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
U.S. Dollar Denominated - continued
Industrials - continued
Food and Beverage Products - 1.2%
Canandaigua Wine, Inc., 8.75s, 2003 $ 200 $ 194,000
Envirodyne Industries, Inc., 10.25s, 2001 438 359,160
------------
$ 553,160
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 0.2%
Integrated Health Services, Inc., 10.75s, 2004 $ 100 $ 105,250
- -----------------------------------------------------------------------------
Metals and Minerals - 0.9%
Jorgensen Earle ( M.) Co., 10.75s, 2000 $ 150 $ 145,125
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 300 291,750
------------
$ 436,875
- -----------------------------------------------------------------------------
Oil Services - 1.1%
Ferrellgas, Inc., 10s, 2001 $ 200 $ 207,000
Giant Industries, Inc., 9.75s, 2003 250 231,250
Tuboscope Vetco International, Inc., 10.75s, 2003 100 100,500
------------
$ 538,750
- -----------------------------------------------------------------------------
Oils - 1.2%
Mesa Capital Corp., 0s, 1998 $ 612 $ 587,520
- -----------------------------------------------------------------------------
Special Products and Services - 4.6%
Astrum International Corp., 11.5s, 2003 $ 209 $ 219,450
Gillett Holdings, Inc., 12.25s, 2002 591 611,176
IMO Industries, Inc., 12s, 2001 128 131,840
K & F Industries, Inc., 11.875s, 2003 250 253,125
Mark IV Industries, Inc., 8.75s, 2003 500 492,500
Polymer Group, Inc., 12.75s, 2002 500 495,000
------------
$ 2,203,091
- -----------------------------------------------------------------------------
Steel - 3.0%
AK Steel Holdings Corp., 10.75s, 2004 $ 500 $ 522,500
Bayou Steel Corp., 10.25s, 2001 500 460,000
Wheeling Pittsburgh, 9.375s, 2003 500 440,000
------------
$ 1,422,500
- -----------------------------------------------------------------------------
Stores - 2.1%
Payless Cashways, Inc., 9.125s, 2003 $ 200 $ 168,000
Woodward & Lothrop, Inc., 12s, 1995<F2> 1,001 841,043
------------
$ 1,009,043
- -----------------------------------------------------------------------------
Telecommunications - 3.6%
Cablevision Industries Corp., 9.25s, 2008 $ 100 $ 99,250
Century Communications Corp., 9.5s, 2005 400 389,000
Falcon Holdings Group, Inc., 11s, 2003<F4> 184 165,920
Infinity Broadcasting Corp., 10.375s, 2002 250 258,750
Jones Intercable, Inc., 10.5s, 2008 500 512,500
Marcus Cable Operations Co., 0s, 2004 250 148,750
Mobilemedia Communications, Inc., 0s, 2003 275 160,875
------------
$ 1,735,045
- -----------------------------------------------------------------------------
Total Industrials $15,062,361
- -----------------------------------------------------------------------------
Transportation - 1.7%
Continental Airlines, Inc., 11.75s, 1995<F2> $ 500 $ 38,750
Moran Transportation Co., 11.75s, 2004 100 97,000
Roadmaster Industries, Inc., 11.75s, 2002 500 481,250
Tiphook Finance Corp., 8s, 2000 250 190,000
------------
$ 807,000
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
U.S. Dollar Denominated - continued
Utilities - Electric - 15.5%
BVPS II Funding Corp., 8.89s, 2017 $ 500 $ 442,375
CMS Energy Corp., 0s, 1999<F1> 750 741,900
First PV Funding Corp., 10.3s, 2014 1,000 1,012,500
First PV Funding Corp., 10.15s, 2016 600 597,000
Maxus Energy Corp., 9.375s, 2003 500 445,000
Maxus Energy Corp., 11.25s, 2013 1,000 925,000
Midland Cogeneration Venture Funding Corp.,
10.33s, 2002 212 211,658
Midland Funding Corp., 11.75s, 2005 350 349,930
Niagara Mohawk Power Corp., 8.77s, 2018 1,000 901,520
PNPP II Funding Corp., 9.12s, 2016 650 577,187
Texas & New Mexico Power Co., 10.75s, 2003 725 757,625
TransTexas Gas Corp., 10.5s, 2000 500 527,500
------------
$ 7,489,195
- -----------------------------------------------------------------------------
Total U.S. Dollar Denominated $33,483,702
- -----------------------------------------------------------------------------
Foreign - Non-U.S. Dollar Denominated - 19.5%
Australian Dollars - 1.8%
Queensland Treasury Corp., 6.25s, 1999 AUD 1,325 $ 871,622
- -----------------------------------------------------------------------------
British Pounds - 4.0%
Czech Electric, 16.5s, 1998 GBP 30,000 $ 1,233,927
United Kingdom Treasury, 6s, 1999 485 718,131
------------
$ 1,952,058
- -----------------------------------------------------------------------------
Danish Kroner - 1.3%
Kingdom of Denmark, 9s, 2000 DKK 3,220 $ 609,763
- -----------------------------------------------------------------------------
Dutch Guilders - 2.5%
Dutch State Loan, 6.25s, 1998 NLG 100 $ 64,744
Dutch State Loan, 7s, 1999 510 337,090
Netherlands Gov't, Dutch State Loan,
7.5s, 1999 450 303,080
Netherlands Gov't, Dutch State Loan,
7.75s, 2005 710 477,278
------------
$ 1,182,192
- -----------------------------------------------------------------------------
French Francs - 1.1%
Government of France, 8s, 1998 FRF 1,140 $ 236,661
Government of France, 7s, 1999 950 190,270
Government of France, 7.75s, 2000 480 98,818
------------
$ 525,749
- -----------------------------------------------------------------------------
German Marks - 4.5%
Republic of Germany, 8.5s, 2000 DEM 600 $ 470,486
Republic of Germany, 6.5s, 2003 2,260 1,575,892
German Unity Fund, 8.5s, 2001 200 156,757
------------
$ 2,203,135
- -----------------------------------------------------------------------------
Italian Lire - 0.2%
Republic of Italy, 9.5s, 1999 ITL 190,000 $ 101,661
- -----------------------------------------------------------------------------
New Zealand Dollars - 2.0%
Government of New Zealand, 9s, 1996 NZD 1,400 $ 948,794
- -----------------------------------------------------------------------------
Thai Baht - 2.1%
Siam Commercial Bank, 7s, 1995<F3> THB 25,000 $ 1,016,168
- -----------------------------------------------------------------------------
Total Foreign - Non-U.S. Dollar Denominated $ 9,411,142
- -----------------------------------------------------------------------------
U.S. Treasury Bond - 5.4%
U.S. Treasury Bond, 7.625s, 2025 $ 2,500 $ 2,584,775
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $45,700,738) $45,479,619
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - 1.1%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
American Media, Inc.<F1> 27,000 $ 4,219
Ampex Corp., Class A<F1> 26,636 49,942
Gillett Holdings, Inc.<F1> 22,594 497,068
- -----------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $531,518) $ 551,229
- -----------------------------------------------------------------------------
Convertible Preferred Stock
- -----------------------------------------------------------------------------
UDC Homes, Inc. (Identified Cost, $31,890) 5,542 $ 8,313
- -----------------------------------------------------------------------------
Warrants - 0.1%
- -----------------------------------------------------------------------------
Warrants
- -----------------------------------------------------------------------------
Atlantic Gulf Communities Corp.<F1> 3,109 $ 3,109
Forest Oil Corp.<F1> 2,250 844
ICO, Inc.<F1> 62,500 40,625
- -----------------------------------------------------------------------------
Total Warrants (Identified Cost, $4,664) $ 44,578
- -----------------------------------------------------------------------------
Call Options Purchased - 0.2%
- -----------------------------------------------------------------------------
Principal Amount
of Contracts
Expiration Month/Strike Price (000 Omitted)
- -----------------------------------------------------------------------------
Canadian Dollars
July/1.375 CAD 212 $ 2,436
Japanese Government Bonds
May/110.07 JPY 49,000 147
June/110.154 57,000 627
July/110.164 62,000 5,642
August/100.304 45,000 37,305
August/100.97 64,000 48,128
- -----------------------------------------------------------------------------
Total Call Options Purchased
(Premiums Paid, $33,435) $ 94,285
- -----------------------------------------------------------------------------
Put Option Purchased
- -----------------------------------------------------------------------------
Deutsche Marks/British Pounds
July/2.29 (Premiums Paid, $1,080) DEM/GBP 180 $ 905
- -----------------------------------------------------------------------------
Short-Term Obligation - 0.8%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted)
- -----------------------------------------------------------------------------
IFCT Thailand, due 5/02/95,
at Amortized Cost THB 10,000 $ 400,814
- -----------------------------------------------------------------------------
Repurchase Agreement - 4.9%
- -----------------------------------------------------------------------------
Lehman Brothers, dated 4/28/95, due 5/01/95,
total to be received $2,337,149 (secured by
$2,445,000 U.S. Treasury Bonds, 7.125s, due
2/15/23, market value $2,386,815), at cost $ 2,336 $ 2,336,000
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $49,040,139) $48,915,743
- -----------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - continued
Call Options Written - (0.3)%
- -----------------------------------------------------------------------------
Principal Amount
of Contracts
Expiration Month/Strike Price (000 Omitted) Value
- -----------------------------------------------------------------------------
British Pounds
September/1.64 GBP 557 $ (10,480)
Deutsche Marks
July/1.42 DEM 1,254 (31,292)
July/2.1139 166 (324)
Japanese Government Bonds
August/100.35 JPY 45,000 (37,035)
Japanese Yen
March/78 60,276 (27,968)
July/84 162,962 (55,244)
- -----------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $121,461) $ (162,343)
- -----------------------------------------------------------------------------
Put Options Written - (0.1)%
- -----------------------------------------------------------------------------
Australian Dollars
September/1.53 AUD 242 $ (2,789)
British Pounds
September/1.53 GBP 520 (5,583)
Japanese Government Bonds
May/110.07 JPY 49,000 (10,585)
Japanese Yen
March/93 71,868 (7,689)
- -----------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $30,401) $ (26,646)
- -----------------------------------------------------------------------------
Other Assets, Less Liabilities - (1.1)% $ (536,962)
- -----------------------------------------------------------------------------
Net Assets - 100.0% $48,189,792
- -----------------------------------------------------------------------------
<F1> Non-income producing security.
<F2> Non-income producing security - in default.
<F3> Restricted security.
<F4> Payment-in-kind bond.
<F5> SEC Rule 144A restrictions.
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 IEP = Irish Punts
CAD = Canadian Dollars ITL = Italian Lire
CHF = Swiss Francs JPY = Japanese Yen
DEM = Deutsche Marks NLG = Dutch Guilders
DKK = Danish Kroner NZD = New Zealand Dollars
ESP = Spanish Pesetas SEK = Swedish Kronor
FRF = French Francs THB = Thai Baht
GBP = British Pounds
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
April 30, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $49,040,139) $ 48,915,743
Net receivable for forward foreign currency exchange
contracts purchased 939,229
Net receivable for forward foreign currency exchange contracts 39,025
Premium receivable on options written 3,084
Receivable for Fund shares sold 31,282
Receivable for investments sold 141,935
Interest and dividends receivable 1,190,757
Receivable from investment adviser 209,673
Other assets 2,090
------------
Total assets $ 51,472,818
------------
Liabilities:
Payable for investments purchased $ 1,996,026
Payable for Fund shares reacquired 148,377
Written options outstanding, at value
(premiums received, $151,862) 188,989
Net payable for forward foreign currency exchange
contracts sold 818,175
Cash overdraft 5,518
Payable to affiliates -
Management fee 2,977
Shareholder servicing agent fee 632
Distribution fee 11,528
Accrued expenses and other liabilities 110,804
------------
Total liabilities $ 3,283,026
------------
Net assets $ 48,189,792
------------
Net assets consist of:
Paid-in capital $ 49,257,587
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 27,726
Accumulated net realized loss on investments and foreign
currency transactions (1,127,910)
Accumulated undistributed net investment income 32,389
------------
Total $ 48,189,792
------------
Shares of beneficial interest outstanding 6,234,890
------------
Class A shares:
Net asset value and redemption price per share
(net assets of $41,366,616 / 5,347,709 shares of
beneficial interest outstanding) $7.74
-----
Offering price per share (100/95.25 of net asset value
per share) $8.13
-----
Class B shares:
Net asset value, offering price, and redemption price
per share (net assets of $6,319,772 / 821,602 shares
of beneficial interest outstanding) $7.69
-----
Class C shares:
Net asset value, offering price, and redemption price
per share (net assets of $503,404 / 65,579 shares of
beneficial interest outstanding) $7.68
-----
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A
and Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Six Months Ended April 30, 1995
- ------------------------------------------------------------------------------
Net investment income:
Interest income $ 2,194,762
-----------
Expenses -
Management fee $ 269,981
Trustees' compensation 19,160
Shareholder servicing agent fee (Class A) 30,536
Shareholder servicing agent fee (Class B) 6,383
Shareholder servicing agent fee (Class C) 128
Distribution and service fee (Class A) 71,176
Distribution and service fee (Class B) 29,015
Distribution and service fee (Class C) 851
Registration fees 41,665
Custodian fee 27,529
Auditing fees 25,813
Postage 17,101
Printing 14,231
Legal fees 249
Miscellaneous 29,418
-----------
Total expenses $ 583,236
Reduction of expenses by investment adviser (209,673)
-----------
Net expenses $ 373,563
-----------
Net investment income $ 1,821,199
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (695,533)
Written option transactions 140,508
Foreign currency transactions 78,547
Futures contracts (164,103)
-----------
Net realized loss on investments $ (640,581)
-----------
Change in unrealized appreciation -
Investments $ 1,281,683
Written options 160,306
Translation of assets and liabilities in foreign currencies 125,591
-----------
Net unrealized gain on investments $ 1,567,580
-----------
Net realized and unrealized gain on investments and
foreign currency $ 926,999
-----------
Net increase in net assets from operations $ 2,748,198
-----------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Six Months Ended Year Ended
April 30, October 31,
1995 1994
- --------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 1,821,199 $ 3,180,267
Net realized loss on investments and foreign
currency transactions (640,581) (3,757,716)
Net unrealized gain (loss) on investments and
foreign currency transactions 1,567,580 (1,180,502)
------------ ------------
Increase (decrease) in net assets from
operations $ 2,748,198 $ (1,757,951)
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A)
$ (1,550,320) $ --
From net investment income (Class B) (194,664) --
From net investment income (Class C) (5,948) --
In excess of net investment income (Class A) -- (374,304)
In excess of net investment income (Class B) -- (12,010)
In excess of net realized gain on investments
and foreign currency transactions (Class A) -- (242,005)
In excess of net realized gain on investments
and foreign currency transactions (Class B) -- (7,765)
From paid-in capital (Class A) -- (2,631,670)
From paid-in capital (Class B) -- (133,652)
From paid-in capital (Class C) -- (80)
------------ ------------
Total distributions declared to shareholders $ (1,750,932) $ (3,401,486)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 3,704,916 $ 9,558,938
Net asset value of shares issued to shareholders
in reinvestment of distributions 583,725 949,565
Cost of shares reacquired (6,491,081) (16,339,414)
------------ ------------
Decrease in net assets from Fund share
transactions $ (2,202,440) $ (5,830,911)
------------ ------------
Total decrease in net assets $ (1,205,174) $(10,990,348)
Net assets:
At beginning of period 49,394,966 60,385,314
------------ ------------
At end of period (including accumulated
undistributed net investment income
(accumulated distributions in excess of net
investment income) of $32,389 and $(37,878),
respectively) $ 48,189,792 $ 49,394,966
------------ ------------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------
Six Months
Ended Year Ended October 31,
April 30, --------------------------------------------------------------------
1995 1994<F3> 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value -
beginning of period $ 7.57 $ 8.34 $ 8.00 $ 8.12 $ 7.56 $ 8.93
------ ------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.29<F5> $ 0.48<F5> $ 0.52<F5> $ 0.63<F5> $ 0.73<F5> $ 0.86<F5>
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 0.16 (0.74) 0.42 0.08 0.95 (1.03)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.45 $(0.26) $ 0.94 $ 0.71 $ 1.68 $(0.17)
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment income $(0.28) $ -- $(0.24) $(0.56) $(0.73) $(0.82)
From net realized gain on
investments and foreign
currency transactions -- -- (0.32) -- -- --
In excess of net investment
income -- (0.06) -- -- -- --
In excess of net realized gain
on investments and foreign
currency transactions -- (0.04) -- -- -- --
From paid-in capital -- (0.41) (0.04) (0.27) (0.39) (0.38)
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.28) $(0.51) $(0.60) $(0.83) $(1.12) $(1.20)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 7.74 $ 7.57 $ 8.34 $ 8.00 $ 8.12 $ 7.56
------ ------ ------ ------ ------ ------
Total return<F2> 6.16%<F4> (3.15)% 12.36% 9.02% 23.78% (1.62)%
Ratios (to average net assets)/
Supplemental data:
Expenses 1.51%<F1><F5> 1.71%<F5> 1.98%<F5> 2.02%<F5> 1.87%<F5> 1.47%<F5>
Net investment income 7.88%<F1><F5> 6.11%<F5> 5.92%<F5> 7.47%<F5> 9.26%<F5> 10.42%<F5>
Portfolio turnover 122% 153% 275% 423% 671% 400%
Net assets at end of period
(000 omitted) $41,367 $44,032 $60,120 $77,487 $76,312 $74,555
<FN>
<F1> Annualized.
<F2> Total returns do not include the applicable sales charge. If the charge had been included, the results would have
been lower.
<F3> Per share data for the periods subsequent to October 31, 1993 were calculated using the average share method.
<F4> Not annualized.
<F5> The investment adviser did not impose a portion of its management fee for the periods indicated. If this fee had
been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.26 $ 0.44 $ 0.49 $ 0.61 $ 0.71 $ 0.83
Ratios (to average net assets):
Expenses 2.40%<F1> 2.21% 2.14% 2.21% 2.16% 1.81%
Net investment income 6.98%<F1> 5.62% 5.76% 7.55% 8.97% 10.08%
</FN>
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Year Ended Six Months
Year Ended October 31, Ended October 31, Ended Year Ended
----------------------------------- April 30, ---------------------- April 30, October 31,
1989 1988 1987<F1> 1995<F6> 1994 1993<F2> 1995<F6> 1994<F6><F3>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 9.60 $ 9.21 $ 9.35 $ 7.53 $ 8.33 $ 8.28 $ 7.53 $ 7.53
------ ------ -------- ------ ------ ------ ------ ------
Income from investment
operations -
Net investment income $ 0.94 $ 0.93 $ 0.0025 $ 0.26<F8> $ 0.45<F8> $ 0.04 $ 0.25<F8> $ 0.12<F8>
Net realized and
unrealized gain (loss) on
investments and foreign
currency transactions (0.38) 0.56 (0.1425) 0.15 (0.78) 0.05 0.17 (0.03)
------ ------ -------- ------ ------ ------ ------ ------
Total from investment
operations $ 0.56 $ 1.49 $(0.1400) $ 0.41 $(0.33) $ 0.09 $ 0.42 $ 0.09
------ ------ -------- ------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment income $(1.18) $ (0.69) $ -- $(0.25) $ -- $(0.03) $(0.27) $ --
From net realized gain on
investments and foreign
currency transactions -- (0.41) -- -- -- (0.01) -- --
In excess of net
investment income -- -- -- -- (0.05) -- -- --
In excess of net realized
gain on investments and
foreign currency
transactions -- -- -- -- (0.03) -- -- --
From paid-in capital (0.05) -- -- -- (0.39) -- -- (0.09)
------ ------ -------- ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(1.23) $(1.10) $ 0.00 $(0.25) $(0.47) $(0.04) $(0.27) $(0.09)
------ ------ -------- ------ ------ ------ ------ ------
Net asset value - end of
period $ 8.93 $ 9.60 $ 9.21 $ 7.69 $ 7.53 $ 8.33 $ 7.68 $ 7.53
------ ------ -------- ------ ------ ------ ------ ------
Total return<F5> 5.85% 16.60% (1.50)% 5.77%<F7> (3.97)% 1.15% 5.76%<F7> 1.23%
Ratios (to average net assets)/Supplemental data:
Expenses 1.82% 1.75% 0.57%<F4> 2.23%<F4><F8> 2.43%<F8> 3.03%<F4> 2.23%<F4><F8> 2.16%<F4><F8>
Net investment income 10.05% 9.74% 4.88%<F4> 7.20%<F4><F8> 5.97%<F8> 5.22%<F4> 7.92%<F4><F8> 8.99%<F4><F8>
Portfolio turnover 157% 270% 0% 122% 153% 275% 122% 153%
Net assets at end of period
(000 omitted) $87,978 $93,819 $78,479 $6,320 $5,350 $ 265 $ 503 $ 13
<FN>
<F1> For the period from October 29, 1987 (commencement of investment operations) to October 31, 1987.
<F2> For the period from the commencement of offering of Class B shares, September 7, 1993 to October 31, 1993.
<F3> For the period from the commencement of offering of Class C shares, September 1, 1994 to October 31, 1994.
<F4> Annualized.
<F5> Total returns do not include the applicable sales charge. If the charge had been included, the results would have
been lower.
<F6> Per share data for the periods subsequent to October 31, 1993 were calculated using the average share method.
<F7> Not annualized.
<F8> The investment adviser did not impose a portion of its management fee for the periods indicated. If this fee had
been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income -- -- -- $ 0.23 $ 0.41 -- $ 0.22 $ 0.11
Ratios (to average net
assets):
Expenses -- -- -- 3.13%<F4> 2.92% -- 3.12%<F4> 2.65%<F4>
Net investment income -- -- -- 6.31%<F4> 5.48% -- 7.02%<F4> 8.50%<F4>
</FN>
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Strategic Income Fund (the Fund) is a non-diversified series of MFS Series
Trust VIII (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. The Fund was originally
organized as a closed-end investment company. Effective May 16, 1994 the
Trustees of the Fund voted to changed its name from MFS Income & Opportunity
Fund to MFS Strategic Income Fund.
(2) Significant Accounting Policies
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 value. Non-U.S. dollar denominated short-term
obligations are valued at amortized cost as calculated in the base currency
and translated into U.S. dollars at the closing daily exchange rate. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options
are valued by brokers through the use of a pricing model which takes into
account closing bond valuations, implied volatility and short-term repurchase
rates. Equity securities listed on securities exchanges or reported through
the NASDAQ system are valued at last sale prices. Unlisted equity securities
or listed equity securities for which last sale prices are not available are
valued at last quoted bid prices. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund requires
that the securities purchased in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the Fund to obtain those
securities in the event of a default under the repurchase agreement. The Fund
monitors, on a daily basis, the value of the securities transferred to ensure
that the value, including accrued interest, of the securities under each
repurchase agreement is greater than amounts owed to the Fund under each such
repurchase agreement.
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 and 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 covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a 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 a part of an income producing strategy reflecting the view
of the Fund's management on the direction of interest rates.
Futures Contracts - The Fund may enter into financial futures contracts for
the delayed delivery of securities, currency or contracts based on financial
indices at a fixed price on a future date. In entering such contracts, the
Fund is required to deposit either in cash or securities an amount equal to a
certain percentage of the contract amount. Subsequent payments are made or
received by the Fund each day, depending on the daily fluctuations in the
value of the underlying security, and are recorded for financial statement
purposes as unrealized gains or losses by the Fund. The Fund's investment in
financial futures contracts is designed only to hedge against anticipated
future changes in interest or exchange rates or securities prices. For
example, interest rate futures may be used in modifying the duration of the
portfolio without incurring the additional transaction costs involved in
buying and selling the underlying securities. Should interest or exchange
rates or securities prices move unexpectedly, the Fund may not achieve the
anticipated benefits of the financial futures contracts and may realize a
loss.
Security Loans - The Fund may lend its securities to member banks of the
Federal Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of
securities loaned. As with other extensions of credit, the Fund may bear the
risk of delay in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. The Fund receives compensation
for lending its securities in the form of fees or from all or a portion of the
income from investment of the collateral. The Fund would also continue to earn
income on the securities loaned. At April 30, 1995, the Fund had no securities
on loan.
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 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 will 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. It 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 for financial statement purposes as unrealized until
the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the value
of the security on such date.
The Fund has approximately 46.59% of its portfolio invested in high-yield
corporate securities rated below investment grade. Investments in high-yield
corporate securities are accompanied by a greater degree of credit risk and the
risk tends to be more sensitive to economic conditions than that of higher-rated
securities.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are considered workout expenses and are reported as realized
losses. Ongoing costs incurred to protect or enhance an investment, or costs
incurred to pursue other claims or legal actions, are reported as operating
expenses.
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.
The Fund files a tax return annually using tax accounting methods required
under provisions of the Code which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the amount of net investment income and net realized
gain reported on these financial statements may differ from that reported on
the Fund's tax return and, consequently, the character of distributions to
shareholders reported in the financial highlights may differ from that
reported to shareholders on Form 1099-DIV. Foreign taxes have been provided
for on interest and dividend income earned on foreign investments in
accordance with the applicable country's tax rates and to the extent
unrecoverable are recorded as a reduction of investment income. Distributions
to shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between
the financial statement and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are reported as
distributions in excess of net investment income or accumulated net realized
gains.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. Class B and Class C shares were first offered to
the public on September 7, 1993 and September 1, 1994, respectively. The three
classes of shares differ in their respective shareholder servicing agent,
distribution and service fees. Shareholders of each class also bear certain
expenses that pertain only to that particular class. All shareholders bear the
common expenses of the Fund pro rata based on the average daily net assets of
each class, without distinction between share classes. Dividends are declared
separately for each class. No class has preferential dividend rights;
differences in per share dividend rates are generally due to differences in
separate class expenses, including distribution and shareholder service fees.
(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, computed daily and paid monthly at an effective annual rate of
0.50% of average daily net assets and 7.14% of investment income, amounted to
$269,981 for the six months ended April 30, 1995. The investment adviser did
not impose a portion of its fee, ($209,673), which is reflected as a
preliminary reduction of expenses in the Statement of Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain of the officers
and Trustees of the Fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Fund has an
unfunded defined benefit plan for all its independent Trustees. Included in
Trustees' compensation is a net periodic pension expense of $5,160 for the six
months ended April 30, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$5,717 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate distribution plans for Class A, Class
B and Class C shares pursuant to Rule 12b-1 of the Investment Company Act of
1940 as follows:
The Class A Distribution Plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum (reduced to a maximum of 0.15% for shares purchased prior to
May 14, 1991) of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets
attributable to Class A shares, commissions to dealers and payments to MFD
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. Fees incurred
under the distribution plan during the six months ended April 30, 1995 were
0.35% of average daily net assets attributable to Class A shares on an
annualized basis and amounted to $71,176 (of which MFD retained $10,718).
The Class B and Class C Distribution Plans provide that the Fund will pay MFD
a monthly distribution fee, equal to 0.75% per annum, and a service fee of up
to 0.25% per annum, of the Fund's average daily net assets attributable to
Class B and Class C shares. MFD will pay to securities dealers that enter into
a sales agreement with MFD all or a portion of the service fee attributable to
Class B and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended
to be additional consideration for services rendered by the dealer with
respect to Class B and Class C shares. Fees incurred under the distribution
plans for the six months ended April 30, 1995 were 1.00% of average daily net
assets attributable to Class B and Class C shares on an annualized basis and
amounted to $29,015 and $851, respectively (of which MFD retained $190 and $6,
respectively).
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within 12 months following the share purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class B shares
in the event of a shareholder redemption within six years of purchase. MFD
receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the six months ended April 30, 1995 were $0 and $10,641
for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$30,536, $6,383 and $128 for Class A, Class B and Class C shares,
respectively, for its services as shareholder servicing agent. The fee is
calculated as a percentage of the average daily net assets of each class of
shares at an effective annual rate of up to 0.15%, up to 0.22% and up to 0.15%
attributable to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
Purchases Sales
- ------------------------------------------------------------------------------
U.S. government securities $12,875,161 $ 4,726,302
----------- -----------
Investments (non-U.S. government securities) $40,637,232 $48,419,144
----------- -----------
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $49,040,139
-----------
Gross unrealized depreciation $(1,571,596)
Gross unrealized appreciation 1,447,200
-----------
Net unrealized depreciation $ (124,396)
-----------
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<PAGE>
<TABLE>
<CAPTION>
Class A Shares Six Months Ended Year Ended
April 30, 1995 October 31, 1994
--------------------- -----------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 217,454 $ 1,611,557 461,520 $ 3,566,190
Shares issued to shareholders in
reinvestment of distributions 63,070 464,903 96,409 749,696
Shares reacquired (753,014) (5,556,443) (1,946,056) (15,444,256)
-------- ----------- ---------- ------------
Net decrease (472,490) $(3,479,983) (1,388,127) $(11,128,370)
-------- ----------- ---------- ------------
<CAPTION>
Class B Shares Six Months Ended Year Ended
April 30, 1995 October 31, 1994
--------------------- -----------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 222,240 $ 1,629,796 768,786 $ 5,979,512
Shares issued to shareholders in
reinvestment of distributions 15,823 116,113 25,130 199,850
Shares reacquired (126,972) (934,635) (115,220) (895,151)
-------- ----------- ---------- ------------
Net increase 111,091 $ 811,274 678,696 $ 5,284,211
-------- ----------- ---------- ------------
<CAPTION>
Class C Shares Six Months Ended Year Ended
April 30, 1995 October 31, 1994
--------------------- -----------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 63,455 $ 463,563 1,754 $ 13,236
Shares issued to shareholders in
reinvestment of distributions 370 2,709 2 19
Shares reacquired (1) (3) (1) (7)
-------- ----------- ---------- ------------
Net increase 63,824 $ 466,269 1,755 $ 13,248
-------- ----------- ---------- ------------
*For the period from the commencement of offering of Class C shares, September
1, 1994 to October 31, 1994.
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $350 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each Fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average
daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated
to the Fund for the six months ended April 30, 1995 was $358.
(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. A
summary of obligations under these financial instruments at April 30, 1995, is
as follows:
<PAGE>
<TABLE>
<CAPTION>
Written Option Transactions 1995 Calls 1995 Puts
-------------------------------- ------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- ---------------------------------------------------------------------------------------------
OUTSTANDING, BEGINNING OF PERIOD -
<S> <C> <C> <C> <C>
Deutsche Marks 4,865 $ 61,779 2,611 $ 7,461
Japanese Yen 244,913 33,372 156,000 16,766
Options written -
Australian Dollars 360 2,745 1,035 12,504
British Pounds 557 9,619 520 9,619
Canadian Dollars -- -- 1,074 4,389
Deutsche Marks 6,551 25,063 10,978 87,172
Deutsche Marks/British Pounds 166 1,080 2,011 6,876
Italian Lire/Deutsche Marks 1,215,570 11,124 -- --
Japanese Yen 470,238 117,853 835,478 72,373
Swiss Francs/Deutsche Marks 671 2,825 -- --
Spanish Pesetas/Deutsche Marks -- -- 51,950 3,404
Swedish Kronor/Deutsche Marks 1,832 1,384 -- --
Options terminated in closing transactions -
Australian Dollars (360) (2,745) (793) (9,174)
Canadian Dollars -- -- (1,074) (4,389)
Deutsche Marks (1,948) (9,670) (10,978) (87,172)
Deutsche Marks/British Pounds -- -- (2,011) (6,876)
Japanese Yen (340,846) (32,298) (870,611) (71,687)
Swedish Kronor/Deutsche Marks (1,832) (1,384) -- --
Spanish Pesetas/Deutsche Marks -- -- (51,949) (3,404)
Options exercised -
Deutsche Marks (6,071) (65,637) -- --
Swiss Francs/Deutsche Marks (671) (2,825) -- --
Options expired -
Deutsche Marks (2,143) (2,835) (2,611) (7,461)
Italian Lire/Deutsche Marks (1,215,570) (11,124) -- --
Japanese Yen (106,067) (16,865) -- --
---------- -------- -------- --------
OUTSTANDING, END OF PERIOD 270,215 $121,461 121,630 $ 30,401
---------- -------- -------- --------
OPTIONS OUTSTANDING AT END OF
PERIOD CONSIST OF -
Australian Dollars -- -- 242 $ 3,330
---------- -------- -------- --------
British Pounds 557 $ 9,619 520 $ 9,619
---------- -------- -------- --------
Deutsche Marks
1,254 $ 8,701 -- $ --
---------- -------- -------- --------
Deutsche Marks/British Pounds 166 $ 1,080 -- $ --
---------- -------- -------- --------
Japanese Yen 268,238 $102,061 120,868 $ 17,452
---------- -------- -------- --------
- ------------
</TABLE>
<PAGE>
At April 30, 1995, the Fund had sufficient cash and/or securities at least equal
to the value of the written options.
<TABLE>
Forward Foreign Currency Exchange Contracts
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 6/09/95 - 7/05/95 AUD 1,284,995 $ 952,340 $ 931,499 $ 20,841
6/09/95 CHF 397,690 323,779 346,980 (23,201)
5/02/95 - 7/13/95 DEM 17,116,623 12,049,288 12,364,662 (315,374)
5/08/95 DKK 5,229,814 953,424 960,283 (6,859)
7/05/95 - 7/10/95 ESP 130,416,000 991,663 1,051,163 (59,500)
5/02/95 - 8/02/95 FRF 8,363,157 1,662,767 1,695,810 (33,043)
5/05/95 - 7/07/95 GBP 732,944 1,161,960 1,179,754 (17,794)
5/04/95 IEP 543,686 859,024 887,267 (28,243)
5/02/95 - 7/10/95 JPY 213,272,085 2,268,463 2,552,607 (284,144)
5/04/95 - 6/26/95 NLG 2,201,290 1,393,396 1,419,826 (26,430)
6/09/95 NZD 1,311,356 835,371 878,749 (43,378)
7/13/95 SEK 692,265 93,567 94,617 (1,050)
----------- ----------- ---------
$23,545,042 $24,363,217 $(818,175)
----------- ----------- ---------
Purchases 7/05/95 AUD 402,932 $ 306,349 $ 291,816 $ (14,533)
7/07/95 - 8/01/95 CAD 500,376 357,592 367,324 9,732
6/09/95 - 7/10/95 CHF 399,458 354,643 348,526 (6,117)
5/02/95 - 8/07/95 DEM 22,819,805 16,226,410 16,482,974 256,564
6/08/95 DKK 1,812,955 329,000 332,699 3,699
7/05/95 - 7/10/95 ESP 118,233,224 924,392 952,966 28,574
5/02/95 - 5/04/95 FRF 5,165,943 1,051,056 1,049,304 (1,752)
6/21/95 GBP 286,697 456,500 461,426 4,926
5/04/95 IEP 543,686 880,282 887,267 6,985
5/02/95 - 7/24/95 JPY 614,194,446 6,694,338 7,341,040 646,702
5/04/95 NLG 874,952 558,950 563,154 4,204
7/13/95 SEK 692,265 94,372 94,617 245
----------- ----------- ---------
$28,233,884 $29,173,113 $ 939,229
----------- ----------- ---------
</TABLE>
Forward foreign currency exchange contract purchases and sales under master
netting arrangements and closed forward foreign currency exchange contracts,
excluded above, amounted to a net receivable of $39,025 at April 30, 1995.
At April 30, 1995, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At April 30, 1995, the
Fund owned the following restricted securities (constituting 2.9% of net assets)
which may not be publicly sold without registration under the Securities Act of
1933. The Fund does not have the right to demand that such seucrities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees. Certain of these securities may be offered and sold
to "qualified institutional buyers" under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Description Date of Acquisition Share/Par Amount Cost Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hidroelectrica Alicura, 8.375s, 1999 4/08/94 500,000 $475,767 $ 405,000
Siam Commercial Bank, 7s, 1995 9/01/94 25,000,000 975,819 1,016,168
----------
$1,421,168
----------
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust VIII and Shareholders of MFS Strategic
Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Strategic Income Fund (previously MFS Income & Opportunity Fund), including the
schedule of portfolio investments as of April 30, 1995, the related statement of
operations for the six-month period then ended, and the statement of changes in
net assets and financial highlights for the six-month period then ended and for
the year ended October 31, 1994. 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. The financial highlights for each of the six years in the
period ended October 31, 1993 and for the period October 29, 1987 (commencement
of investment operations) to October 31, 1987 for Class A shares, and for the
period from September 7, 1993 (commencement of investment operations) to October
31, 1993 for Class B shares, were audited by other auditors whose report dated
December 16, 1993 expressed an unqualified opinion on those statements and
financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of April
30, 1995, 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
Strategic Income Fund as of April 30, 1995, the results of its operations for
the six-month period then ended, and the changes in its net assets and financial
highlights for the six-month period then ended and for the year ended October
31, 1994, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
June 2, 1995
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
THE MFS FAMILY OF FUNDS(R)
AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or, leave a message any
time). This material should be read carefully before investing or sending money.
<TABLE>
<CAPTION>
<S> <C>
STOCK LIMITED MATURITY BOND
Massachusetts Investors Trust MFS(R) Government Limited Maturity Fund
Massachusetts Investors Growth Stock Fund MFS(R) Limited Maturity Fund
MFS(R) Capital Growth Fund MFS(R) Municipal Limited Maturity Fund
MFS(R) Emerging Growth Fund WORLD
MFS(R) Gold & Natural Resources Fund MFS(R) World Asset Allocation Fund
MFS(R) Growth Opportunities Fund MFS(R) World Equity Fund
MFS(R) Managed Sectors Fund MFS(R) World Governments Fund
MFS(R) OTC Fund MFS(R) World Growth Fund
MFS(R) Research Fund MFS(R) World Total Return Fund
MFS(R) Value Fund NATIONAL TAX-FREE BOND
STOCK AND BOND MFS(R) Municipal Bond Fund
MFS(R) Total Return Fund MFS(R) Municipal High Income Fund
MFS(R) Utilities Fund (closed to new investors)
BOND MFS(R) Municipal Income Fund
MFS(R) Bond Fund STATE TAX-FREE BOND
MFS(R) Government Mortgage Fund Alabama, Arkansas, California, Florida,
MFS(R) Government Securities Fund Georgia, Louisiana, Maryland, Massachusetts,
MFS(R) High Income Fund Mississippi, New York, North Carolina,
MFS(R) Intermediate Income Fund Pennsylvania, South Carolina, Tennessee, Texas,
MFS(R) Strategic Income Fund Virginia, Washington, West Virginia
(formerly MFS(R) Income & Opportunity Fund) MONEY MARKET
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
</TABLE>
<PAGE>
MFS(R) STRATEGIC -------------
INCOME FUND [LOGO: NUMBER 1 DALBAR BULK RATE
TOP-RATED SERVICE] U.S. POSTAGE
PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
-------------
[LOGO: M F S
THE FIRST NAME IN MUTUAL FUNDS]
MSI-3 6/95/12M 34/234/334
